A Timely Article from Market Watch.com

The Fed cost me money again today, offering banks the opportunity to borrow 200 billion using the junk bonds the banks are gagging on as collateral. When those bonds become non-performing as well as unsellable, will the Fed issue margin calls?
Probably not, since the Fed's intention (hope)is to keep major banks from going bankrupt. Then, sinde the Fed is a private corporation, will it go bankrupt when it writes down all these mortgage backed securities on it's books and can't recover the loans from the banks? Probably not. They've probably got a deal with the Treasury to indemnify them against losses. And who authorized the Treasury to make this deal with the Fed? I didn't read of any cogressional action to authorize a deal like that.

As annoying as the Fed's manipulations on behalf of the big banks are, I have to smile at the mental image of Bernanke as the little Dutch boy trying to plug leaks in the dike, and quickly running out of fingers and reach).

If you believe the Fed is doing this to promote lower mortgage rates so folks caan buy homes, or keep the ones they've got, you haven't been paying attebtion. Giving away hundreds of billions each month is very - what do you call it?..Oh yeah, inflationary. And now class, what does inflation do to long term interest rates?
That's right - it makes them go up.

Oh and don't worry about my losses on the puts today, I made it back on my Gold Corp warrants - but I like it better when they both go up.



What will Fed try next to slay credit-crunch dragon?

Holding mortgage-backed securities on its balance sheet seen possible
By Greg Robb, MarketWatch

WASHINGTON (MarketWatch) - The Federal Reserve's battle with the credit-crunch dragon has been fierce and could go on for a while.

The Federal Reserve's principal weapon, cutting overnight interest rates, takes months to work. In order to buy time until the rate cuts and fiscal stimulus package can boost economic activity, the Fed has been creatively trying to use other alternative policy weapons to relieve strains in financing markets that have led to a virtual paralysis of lending.
Fed watchers believe the central bank still has other options up its sleeve.
The goal is not to avoid a recession. Rather, it is to keep the financial turmoil from creating a vicious downward spiral where a cutback in lending pushes down growth, which in turn leads to further lending cutbacks.
After Fed chief Ben Bernanke promised more "vigorous" efforts to combat the risk of a credit crunch, the Fed has announced a series of actions to inject cash into money markets.
At the same time, the Fed is constrained by the size of its balance sheet, the need to keep some of it in reserve, and the legal authorities it has.
The Fed still has plenty of room to operate. And already it's promised to provide up to $400 billion in short-term loans to a crippled system in a series of moves dating back to August.
The Fed has several programs to provide short-term funds and liquidity to its main clients: the big money-center banks and the primary dealers in the bond market. Typically, the Fed lends cash or high-quality Treasurys to the private sector, either overnight or for short periods of up to 28 days. The banks or dealers pay interest on the loans and they must provide high-quality collateral to the Fed. Repurchase agreements work in a similar way, with the Fed buying and selling securities, which are then repurchased by the borrower after a short period.
The Fed has added to its arsenal in recent months, expanding current programs to provide greater sums for longer periods in an effort to shake up the market's psychology. Most recently, last Friday, the central bank increased the size of its auctions to banks to $100 billion. It also said it would start $100 billion in term repurchase agreements with the Fed's primary bond dealers and accept agency mortgage-backed securities as collateral. See full story.
Finally, on Tuesday morning, the Fed announced a new lending program to allow participants in the bond markets to swap the private-label mortgage-backed securities that they can't currently sell for highly liquid Treasurys that they can. The new plan injects another $200 billion into the system and allows the central bank to lend Treasurys for 28 days instead of the previous overnight period. See full story.
Using its full authority
Fed watchers, worried about the central bank's stamina in the battle, believe the Fed has other options up its sleeve.
Several believe the next step could be for the Fed to purchase mortgage-backed assets and permanently hold them on its balance sheet.
Congress has already given the Fed the authority to buy securities issued by Fannie. But the power has not been used for anything other than short-term repurchase operations - like the program announced Tuesday -- in which the borrower eventually buys back the securities.
"The Fed has authority to buy high-quality mortgage-backed securities," said Lou Crandall, economist at Wrightson ICAP, in an interview. "That would be a huge step for them in terms of the institutional culture."
He noted that in the past when the Fed agreed to take mortgage-backed securities for repurchase agreements, the central bank only approved it on a temporary basis and that it took another three years to approve it on a permanent basis.
"I hope it doesn't come to that (purchasing mortgage-back securities) because circumstances would have to be more dire than they are today," Crandall said.
David Greenlaw, economist at Morgan Stanley, wrote in a note to clients, that the proposal to add mortgage-backed securities to the Fed's balance sheet "could receive serious consideration" at next week's FOMC meeting on March 18.
Crandall said a lesser step for the Fed would be to lengthen the maturity of its repurchase agreements with the primary dealers to an even longer period -- to three months from 28-days. Firms are still facing considerable difficulty in financing beyond 28 days.
"Twenty-eight day credit is nice, but three-month money would be better," Crandall said.
Other ideas that are floating around Wall Street include the Fed making direct loans to non-bank firms.
But Crandall downplayed this possibility, noting that the power hasn't been used since the 1930s.
"The perception issues would outweigh the modest benefit of direct funding," Crandall said.

Greg Robb is a senior reporter for MarketWatch in Washington.