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Fed Taking Equities As Collateral

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by Felix Salmon
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Sep 15 2008 6:55am EDT

Fed Taking Equities as Collateral

Is the Fed accepting equities as collateral? Bloomberg says yes, the WSJ says yes, Reuters says yes. So, yes. But if that's the case, why didn't it say so? Here's the relevant bit of the Fed statement:

The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.

Hardly crystal-clear. And as Yves Smith points out, why would any trading desk want to put up equities in the first place? It's not like they are sitting on large long-term stock-market investments which for some reason they don't want to sell. If you own equities and need to raise money, why don't you just sell the bloody things, rather than using them as collateral to borrow money from the Fed?

If this were Germany, where banks all have large cross-shareholdings in each other, I could see the point of this. But here? Not so much. In any case, a bit more clarity and transparency from the Fed, and a bit less in the way of obfuscatory prose, would be extremely welcome in times like these.

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