Fighting for the pooling equilibrium

Citigroup , Bank of America and other
top banks took the rare step of borrowing $2 billion from the
U.S. Federal Reserve on Wednesday, in a bid to reassure markets
and remove the stigma associated with getting financing from
the central bank.

U.S. shares rose after the move, as the banks’ moves
signaled that battered credit markets may start to heal, though
bank stocks were mixed amid lingering concern about mortgages.

Borrowing money directly from the Fed has historically been
seen as a sign of weakness, but Bank of America, JPMorgan Chase
& Co, and Wachovia Corp said they did it for the sake of the
financial system. All four banks emphasized they have access to
other, cheaper funds.

Here is the story.  I don’t know if this will work, but it is a neat trick.  Imagine that you, as a smart person, went around saying stupid things, in an attempt to limit discrimination against the stupid.  You can come up with other analogies of your own.


The wisdom of George Bush!

" the banks' moves signaled that battered credit markets may start to heal..."

Just how short term can "business journalism" possibly be!? The non-crisis of the US economy has played out in the sweep of world-ending tragedy to healing stability in what, two weeks? Is this just me or does the mood swing of the news media seem particularly sharp these days?

haha, it does sound like Bush's wisdom, but it actually makes a lot of sense.

Banks, though competetive by business, probably have an incentive to make the central bank look good, because it is the only institution which has the ability to control them. So individually it is rational for them to make sure that the big brother looks good and is strong at all times, so that its position is not compromised at any point of time.

Does this logic work?

Er...Tyler, this is my strategy for the macro prelim.

Datacharmer, from what I can tell the banks are saying that they borrowed the money remove the negative stigma from borrowing from the central bank. This might make markets heal as now other financial institutions will not be punished for borrowing from the bank, removing a possible distortion from the credit market. However, as I said earlier I don't think that this sort of co-ordination could occur unless the banks were unable to get the funds elsewhere for significantly less (which they say they could). I think they needed the funds, and just decided to talk some crack so that the market didn't punish them.

So deep down, I agree with you datacharmer.

Interesting tactic, although I'm not sure that $2+ billion is all that much for Wachovia, BoA, Citi, Deutsche Bank, and JPMorgan. The article states that the US based banks each borrowed about $500 million; not chump change by any means but also not the king's ransom. Maybe this strategy is an effective signal just because they borrowed anything at all from the discount window, a previously taboo act.

Matt -

Not a chance. Citigroup, B of A, Wachovia, JPM, and Deutsche Bank individually and collectively are not having problems accessing capital. $500m is pocket change for them.

This was done, essentially, as an endorsement of the Fed's recent moves to try to clam the market. It's a smart move by which, if successful, the entire banking industry will benefit, mostly be the absence of worst-case or near worst case outcomes (which in this case is a liquidity and a credit crisis).

Hi Tyler,

Here's a eMail I sent you last week, with some follow-up thoughts instigated by /this/ article....


Hi Tyler,

Boy, I'm certainly one confused puppy... a couple of months ago I kept reading that the Fed was raising interest rates specifically to cool what they viewed as an impending trend toward inflation.

The last couple of days, however, I have been reading that the Fed has been adding "liquidity" to keep market rates close to the 5.25% target. But doesn't adding liquidity contribute to inflation? So which tail is wagging which dog?

Bow wow,
Jeff C.


The problem now appears to be that the emperor has no clothes. In other words, when we pull back the veil of banking, financial reporting, and Federal Reserve, there is *nothing* behind the curtain. Actors in the financial market will say whatever they need to say in order to manipulate impressions. Taken logically however none of it makes any sense.

The real risk to the financial system is LOSS OF CREDIBILITY.

Actions that banks have been taking recently tend to reinforce this speciousness.

Best regard,

The four banks didn't go to the discount window. They were arm-twisted to do so, in order to take some of the stigma off the practice. That way, the Fed hopes to prevent a run to the bank that will show up in actual need. It remained to be seen if the trick will work then.

Barry Ritholtz at The Big Picture economics blog, via Abnormal Returns:

I see the Fed trying to accomplish three primary tasks:

†¢ Restore Investor Psychology
†¢ Fix the seized up liquidity
†¢ Cushion the blows to a slowing economy

Believe it or not, those items are the easy part. Where the complication comes from is trying to accomplish the above while simultaneously avoiding:

†¢ Rekindling inflation
†¢ Resurrecting the Greenspan Put (i.e., "Moral Hazard")
†¢ Preventing a meltdown in the US Dollar

This is far from over...

It was largely "we're cooperating with the Fed" move to improve market psychology.
It does not hurt, and maybe it will help.

This Fortune article calls Wednesday's "nothing to see here" interpretation into question in light of subsequent events on Friday:

Indeed, this move to exempt Citigroup casts a whole new light on the discount window borrowing that was revealed earlier this week. At the time, the gloss put on the discount window advances was that they were orderly and almost symbolic in nature. But if that were the case, why the need to use these exemptions to rush the funds to the brokerages?

I have a post responding to this at

The answer to Prof. Cowen: Maybe the four banks are saying something stupid because their audience is the group of stupid people who would otherwise launch a run on the banks.

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