Seth Sandronsky writes: >> When did the Fed begin to lend capital to banks?
Bill O'Connor wrote: > Since it was born in 1913, I didn't know that there was a time that they > *didn't*. This is confused. The "lender of last resort" facility -- which goes back to 1913 -- and later, more broadly-defined, discount loans is not about "lending capital." It's about a _temporary_ loan to help banks with liquidity (cash-flow) problems. The banks don't get this for free: they have to provide collateral and pay interest. In theory, this can help bank capital (by allowing the bank to get beyond a rough patch) but it's not the same thing as "lending capital." In fact, "lending capital" does not really make sense. To the extent that money is borrowed by a bank, it's not part of bank equity capital (i.e., assets - liabilities) since it raises liabilities. Instead of "lending capital," what's happened is that the Fed (or the U.S. Treasury) have given money to banks in exchange for "warrants," which give them the right to buy equity in the bank (claims on assets - liabilities, i.e., part ownership of the bank). I haven't had enough coffee, so I don't remember the extent to which the Fed (as opposed to the Treasury) has gained claims bank equity. I know that the Fed ended up with a bunch of bad Bear-Stearns stock in its portfolio, but beyond that I don't know. The "finance glossary" at http://www.financeglossary.net/definition/3607-Warrant defines a "warrant" as a > financial instrument that gives the holder the right, but not the obligation, to purchase a specified amount of an asset at a specified price during a specified period of time. A warrant may give its holder the right to buy shares of stock, bonds, currencies, or commodities. The major difference between warrants and options is that prices for warrants are usually published with lists of the prices for the underlying assets.< -- Jim Devine / "All science would be superfluous if the form of appearance of things directly coincided with their essence." -- KM _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
