Not Great News
Aug 24th, 2007 at 10:08 pm by Susie
Apparently it’s bad enough that they’re breaking the rules to keep it under control:
NEW YORK (Fortune) — In a clear sign that the credit crunch is still affecting the nation’s largest financial institutions, the Federal Reserve agreed this week to bend key banking regulations to help out Citigroup (Charts, Fortune 500) and Bank of America (Charts, Fortune 500), according to documents posted Friday on the Fed’s web site.
[...] The regulations in question effectively limit a bank’s funding exposure to an affiliate to 10% of the bank’s capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, “that represents about 30% of Citibank’s total regulatory capital, which is no small exemption,” says Charlie Peabody, banks analyst at Portales Partners.
So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle.
These rules about keeping banks out of risky investments were some of those moldy old “depression era” laws and regulations that were recently done away with because we had advanced so far beyond the need for them.
They were enacted in the first place because back in the 20’s people were having their homes foreclosed when there was a business downturn and they couldn’t make the balloon payments on interest only mortgages. Banks were stuck with real estate instead of cash, depositors rushed the banks to get their savings out, and boom.
Did that just happen again?? Oops.