One set of alphabet soups lead to another

As the subprime crisis started to unfold , one got a list of fancy finance terms- ABS, CDO, ABX, NINJA Loans, No Doc loans etc. (see some explanation here). This was aptly called alphabet soup.

With the crisis, Fed has started another set of alphabet soup. These are the various new facilities launched to calm financial markets- TAF, TSLF, PDCF etc. Here is a brief summary:

  • TAF provides additional liquidity via auctions. The basic idea was firms were not willing to borrow at the discount window because of the stigma problem. Discount window provided a signal that this firms was in trouble. Moreover, in discount window the rate was known but amount was not.  In TAF it was opposite, Fed decided the amount and the rate of borrowing was determined via auction. TAF is open to depository institutions. Against the liquidity, the firms have to park collateralised securities with the Fed. Fed keeps revising the accepted securities
  • TSLF is another facility which helps exchange other securities for Treasury (Govt securities) and is available to the Primary Dealers. Basically two things happened which led to TSLF. One, it was seen Primary Dealers were as important as commercial banks and needed funding. PDs are organisations like Merrill, Lehman etc (see the entire list here. Two, the confidence wrt to other securities declined and markets only wanted government securities. So via this facility a PD could exchange other securities and get treasuries on its books.
  • PDCF is another facility available to PDs where they get overnight loans in exchange for a collateral. Unlike TSLF, this is an overnight loan

In sum TAF and PDCF provide liquidity and TSLF helps exchange collateral. Still confused? Nothing to worry most are.  Need to read it again and again.

In its recent move Fed has expanded the acceptable collateral in both PDCF and TSLF facilities.

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.

The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.

So Fed is accepting almost anything these firms have on their balance sheets. Newswire report that Fed is accepting equities as well but I Don;t see that in the statement. RGE Monitor has a superb post on the subject

Though, I am still confused.  As Fed revises these facilities, I always need to go back and revise what each facility means. May be Fed should also appoint a Chief Communications Officer like UBS to help understand this alphabet soup.

One Response to “One set of alphabet soups lead to another”

  1. Federal Reserve is broke now « Mostly Economics Says:

    […] How does it get the cash etc to bail out so many firms? Moreover, with Fed now accepting almost everything as collateral one was always going to question Fed’s balance sheet. […]

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