Dronestrikes over US Soil?

Flying into LaGuardia (NY) this weekend, at probably 2000 feet, I looked out the window to see the sun glint momentarily off a tiny metal object just a few feet below and a few hundred feet to our port side. It was a drone being flown by some idiot in some backyard in Queens.

If birdstrikes can bring down a passenger plane (remember "Sully"?) what do you think a hobbyist drone would do to an aircraft engine?

We have the technology to prevent that, and it would be criminally negligent to delay implementation of systems to protect our planes and people. Airports have radar monitoring of their column or airspace. It's probably not accurate enough to find a small hobbyist drone, so it needs to be improved. Once they are identified, the airports need lasers or laser-focused electro-magnetic pulses strong enough to disable a hobbyist drone. These weapons wouldn't be strong enough to hurt a plane (or even a military drone), but could prevent a dumb or malicious hobbyist. 

Goldman needs Privacy

At one point this week, the headline was:

Roiled by op-ed, Goldman loses $2.15 bn m-cap

Goldman didn't get where it was by being a public company. It was a partnership for the first 130 years before going public only 13 years ago. Those have been a pretty awful 13 years for the firm.

The latest round of headline-generators and talking head fodder would have never happened if Goldman were still private. The dude wouldn't have even had the motivation to publish the op-ed. The Times wouldn't have cared to print it. Nobody outside the firm would care to read it.

Instead, over the course of a few hours of stock trading, value was "destroyed" to the tune of ... well, more money than 99.999% of the world's population will see in their lifetimes. Actually, add a few more 9's after the decimal. Billions. With a "B." As in Buffett-sized.

Or was it? If a whiny Dear John to a former employer full of news (which, as Forbes pointed out, everybody already knew) can destroy billions of bucks, then maybe that value didn't really exist to begin with. Stepping back from the greater fool theory, perhaps GS should be valued based on the discounted cash flows it can generate. Novel concept, eh? Maybe I should write a book and teach at Wharton.

Then again, maybe my book should take a different approach. Perhaps Goldman should never have become GS in the first place. Perhaps a financial firm with ridiculous leverage ratios, a wacky capital structure, a penchant for mercenary dealings (AIG collateral call ring a bell?)  needs a small, concentrated, captive based of owners rather than a whole "street" of busybodies to answer to.

The only way Goldman's stock has impressed is in its volatility. It hasn't even doubled over the past 10 years. Hardly a good investment. The management has never been able to find an acceptable balance between staff incentives and shareholder value. Perhaps no such balance can exist for more than a few microseconds. Perhaps GS is an unstable element with a short halflife. Maybe they're in a constant state of containing the meltdown, hoping it wont Fukushima on them tomorrow ... or the next day. Perhaps this is distracting them from their "day jobs" of making deals with and on behalf of clients.

Nice adventure, guys, but it's time to take your marbles and go home. Cash in the chips and go private.

Follow Up 2: Less is More

The lead story in the August 6, 2011 Economist minces no words in their opinion of US politicians' "current uselessness" which the paper fears will be responsible for a double-dip recession. They specifically highlight the negative impact of the growing US governmental unpredictability:

Any hard decisionshave been given to a commission--a cop-out that condemns workers and firms to more crippling uncertainty about how the country's fiscal mess will be tackled. Would you build a factory today if you knew that taxes had to rise eventually, but had no idea which ones?

Worse, the poisonous politics of the past few weeks have created new sorts of uncertainty.

This was precisely my message in a January 2010, blog post:

Risk is equivalent to unpredictability. The more able one is to predict the future, the lower the risk and the more confidently one can make moves today which create a nice return tomorrow. Conversely, when the rules of the game may significantly change tomorrow or next year, risk is dramatically increased. This raises the risk-vs-reward bar such that fewer investment options are viable.

Its no wonder that corporations and banks are choosing to sit on "piles of cash" instead of launching big, strategic, long-term investments which would support long-term and largely high-skilled job creation ... and hopefully long-term profitability for the investors.

No, US federal policy currently discourages that type of thing. More precisely, it forces such investment offshore. When US businesses choose to NOT use their cash for investment in their own commercial projects, they must find something else to do with the cash. People say that Apple has umpteen-hundred-billion dollars "in the bank" but more accurately, Apple has this cash invested in non-apple projects in that Apple owns shares, CDs, bonds, and IOUs from other banks and companies who are not subject to the unpredictability and caprice of the US government.

As my blog post continued:

Governments can increase or decrease this risk. Those with the discipline to stick to a stable, sensible, transparent industrial policy over a long period build tremendous "trust equity" with investors ... Ideas become businesses become economic value ...Unfortunately, being based entirely on intangibles (consensus expectations), this trust equity is a very fragile thing. Governments can quickly sabotage themselves, their economies, and thus their citizens by giving off even the whiff of erratic or ill-advised behavior.

 The current lot in Washington reek of it. Like Renaissance French nobility, they slather themselves in ever-increasing amounts of perfume to cover it up, but the flies still swarm. Here's David Brooks:

"If you ask people, 'why aren't you investing? Why aren't you lending?' it all comes down to uncertainty ... If bankers and entrepreneurs don't have any sense of certainty, they're just not going to invest ... We've not only got this economic problem, but its compounded by a psychological problem, magnified by the fact that distrust of institutions is at its highest level in history." - David Brooks, Meet the Press 1/31/2010

The answer? Of course, it's complicated but a good start is in the title of this blog. The Economist is concerned that immediate fiscal austerity would thrust the economy deeper into trouble. They suggest that we wait a bit. They're half right. I'd listen to Greenspan, who has been a long proponent of using the economic power of "signalling." Without changing a single regulation or appropriation today, the government can clearly communicate what changes are coming when. If the message is credible, people will respond as though the change had happened today. Markets will rapidly price in the new information, and the trajectory of the whole economy will shift.

IF the government's message is credible. This is the rub, given the extent to which Washington has squandered that intangible "trust equity." Given this situation, I'd suggest Obama and Congress see a psychologist ... to better understand how to psychologically build trust in a population.

I'd suggest follow-though is key.

Breaking News: Market Share Stolen by Hackers!

A Wall Street Journal article today carries the following quote:

Chinese state television has broadcast footage of what two experts on the Chinese military say appears to be a military institute demonstrating software designed to attack websites in the U.S.

DailyTech blog captured screenshots including the image below.

This further supports my prediction in a January 2010 blog post What Will Tomorrow (Today?) Bring: Virtual War.

"Make no mistake, this is
Cyber Warfare."

It is now undeniable: we are engaged in a new Cyber Cold War which represents the most unconventional and asymmetric war the world has ever seen. Control is extremely decentralized. Weapons are easily acquired. The risk of retaliation is low. Battles are waged remotely. The prosecutors and victims of the war can be anyone or any group of people. Governments, individuals, and businesses are all players, like it or not.

The WSJ article shows, however, that more conventional power structures are now on the battlefield. Many in the LulzSec group may have simply been bored, over-caffeinated students who wanted some celebrity. However, security insiders increasingly see hard evidence to support the WSJ's case: governments, particularly those of Russia, China, and the US are quietly backing attacks.

Many people would laugh at the notion that a foreign military might wage an online attack on a US financial institution. Consider, however, two factors which might give them motivation:

1. Sovereign Wealth Funds (SWFs) increasingly own debt and equity of governments AND businesses. This gives them a financial interest in the success (or failure) of certain companies as well as economies. Hack a bank, leak a headline, and watch the share price drop until a buying opportunity has emerged.
2. Many emerging market countries have discovered that they don't have to create an economy as big as the US in order to have companies which compete on a global scale. These companies can be jump-started with some quiet government support. As a result, it has become common policy to support "national champions" which successfully compete against the largest and most mature global (though still mostly US-based) companies. Government-sponsored hackers might help these champions by hacking the competition and stealing trade information or by creating bad headlines.
   

Like it or not, we have to acknowledge that certain governments have the means, the motive, and the opportunity to commit cyber attacks against financial institutions. In all likelihood, this has been going on for at least several years. Consider a March 2009 Telegraph.co.uk article:

"A vast Chinese cyber-espionage network, codenamed GhostNet, has penetrated 103 countries and infects at least a dozen new computers every week, according to researchers ... [GhostNet] is the latest sign of China's determination to win a future 'information war'... In 2003, the Chinese army announced the creation of 'information warfare units'."

Fox News added to the story:

"The Chinese government on Monday denied it was behind GhostNet"

Banking has the notion of security at its core. Think of a bank branch and you'll instantly visualize vaults, armed guards and video surveillance. Behind the scenes, banks all have hardened ATMs, teller stick-up procedures, passwords and permissions. In other words, security is tightly integrated with their physical channels.

It is also tightly integrated into their physical products through watermarks, microdot printing on checks, serial numbers on other financial instruments, signature specimens, etc.

Ironically, banks have been dangerously slow to understand how this relates to the online world. Today's banks are dot-coms. Online banking is now a core product. Moreover, it is the "face of the bank" for many customers. It is the gateway or channel through which all other products and services are offered.

Dot-com execs have an advantage in the realm of security and fraud inasmuch as their core product is a piece of technology which intrinsically has a set of permissions and security controls built in. The tools their engineers use also have permissions and security controls at their core. Bank execs need to think like dot-commers. Online security and fraud prevention are just as intrinsic to their core products as signature cards, credit scores, personal relationships, and armed guards once were.

The logical conclusion is that banks need to be organized, staffed, and run more like dot-com businesses to survive in the current Cyber Cold War. Security must be "baked in" to everything they do, just as credit scores and ratings have been baked into lending and trading decisions for decades. Executives should make no mistake: on the current battlefield, market share is not stolen by a bank down the street who might lure customers away with better rates and free toasters. Market share is "stolen" by hackers who ruin the bank's reputation or steals clients' identities and thus causes customers to flee.

It is no longer a sci-fi fantasy that these hackers may be shadow agents of a competitor or even a government intent on manipulating markets, economies, or even specific businesses.

What Will Tomorrow Bring: Financial Utilities

The story of the financial industry is a breathless one. With all that money sloshing around, smart people know that there is profit to be made. Unfortunately, due to that same money (=liquidity) and profit potential, financial products and services get commoditized very quickly. Competitive advantage is fleeting. It's textbook hyper-competition. Constant, hostile, explosive innovation is necessary to survive.

Unfortunately, that also leads smart, sensible people to do horrifically stupid, risky, nonsensical things which relieve immediate (financial or political) pressures but which have been entirely "un-thunk" in terms of their end-state consequences.

Hyper-competition also intrinsically conflicts with hyper-regulation.

Last year I predicted that the weight of new regulations (written and unwritten), political instability, and economic realities would force financial institutions to give up their for-profit status to become utilities:

Financial Institutions will once again be lobotomized. Divided into two classes:
- Utilities (aka retail banking)
- Casinos (aka everything else)

"Utilities" are done for as a for-profit enterprise. Just like Amtrack and Con Ed, they will require permanent and heavy subsidy verging on nationalization to survive the tonnage of regulations which will be piled on.

Evidence continues to pour in to support this including:

• More than 8,000 entries in the OCC's list of sanctions here. They are just one of a half-dozen governmental agencies which take enforcement actions against banks
• 111 bank collapses in the past 12 months per the FDIC's Bank Failure website. Twenty-six banks collapsed between 2000 and the end of 2007
  
• Voluntary closure of a regional bank this week "in an extreme example of the frustration felt by many bankers as regulators toughen their oversight of the nation's financial institutions"
• According to a Marakon report (source of the chart above), "only four US banks, or 10% of banking equity capital, are expected to generate returns above the cost of equity; a staggering 90% of banking capital is not performing"

But you ain't seen nothing yet. The above are mostly smaller institutions. The financial titans (Titanics?) are better at fighting and delaying, but trust me they are also bending under the weight. Their stock prices are beginning to reflect it.

UCSD professor Frank Partnoy yesterday published his opinion in the Financial Times with a piece titled "The coming world of smaller banks." He highlights not only the unavoidable reductions in share prices and headcounts, but more damningly, the unavoidable extinction (or drastic evolution) of the standard banking business model:

If all of the world’s major banks had failed during 2007-08, and regulators had permitted Apple, Facebook, Google and Microsoft to take over the economy’s capital allocation function, how would employment numbers have changed? Surely any neo-bank would hire smart lenders, traders, analysts and advisers, the people who have the strongest relationships with, and knowledge of, the institutions that demand or supply capital. But would they have hired all of them? Half? How many people would a new bank really need? Hedge funds take on traditional bank functions with a fraction of the employees.

He concludes:

[Banks] will occupy a smaller place in the economy and they will be less profitable. In a decade, there will be fewer professionals working on Wall Street than there are today.

If I map his comments onto my own, it becomes clear where the job losses will be. The "Financial Utilities" will be characterized by a low-skill, low-innovation, low-margin, high-volume business model. Since capital and information are almost entirely digital these days, there is nary a barrier to massive automation. The remaining jobs will be the folks keeping the computers humming and the 'relationship' people in high-touch areas like customer complaints and regulatory relations.

Risk Free?

S&P's downgrade of US debt is not the first domino, nor will it be the last.

Traders and Brokers: wear rubber underwear Monday.

Thousands of funds are contractually required to hold a specified percentage of AAA debt. They ALL have a significant position in US Treasuries. Monday they will have to decide whether they go to their investors hat in hand requesting permission to hold non-AAA US debt or whether to dump their holdings. Furthermore, risk algorithms and valuation models used by nearly all financial institutions and investors are based on the US treasuries as the "risk free" rate of return. These models will have to be re-assessed ... and the consequence will be a shift in investments.

The charters of many countries and sovereign wealth funds require their central banks to hold AAA notes (or the currencies of those countries) for their national reserves. Thus, the US's reserve currency status may also be reviewed next week. FX markets, interest rate markets, swap markets ... wow - hold your hats, kiddos.

(update) Don't take my word for it. Mohammed el-Elrian echoed my comments in the Financial Times over the weekend.

The fact that yields on US debt have fallen all week speaks more to our ability to manipulate markets (in the short and medium term) than it does to confidence level. So don't go there.

This could have been avoided. Go ahead and fiddle, Congress. Washington is burning.

Less is More

From today's Meet the Press:

Kramer: The CEOs I talk to - they're hiring ... in Russia, they're hiring in Brazil, China ... its rather quizzical that we know what the Communists will give us, but we don't know what the capitalists will give us.

Greenspan: Investment occurs when you have a stable economy and when you can foresee what's going on in the future ... it's very critical that we get the uncertainties out of the system.

It's simple math, included in pretty much every good risk model - volatility is a multiplier on risk. Higher risk leads to lower willingness to invest at a given return. (Smart) investment is a multiplier on growth. Growth is a multiplier on income. Sustained income (without excessive debt) creates wealth.

Washington ... don'tcha want wealth? Think of all the new taxes you could levy.

Blog Shout Out: 4-Block World

Typically, Tom McMahon uses a 2x2 matrix to explain the world to us. This time, he only needed 1x1.




http://www.4-blockworld.com/2009/05/the-big-guys-always-pushed-the-merrygoround-for-the-little-kids.html

The Good, the Bad and the Ugly 2: Financial Re-regulation

All of the below come from Geithner's testimony at the Senate Banking Panel, followed by snark from me.

The Good:
Tim: We think that the best way to keep the system safe for innovation is to have stronger protections against risk with stronger capital buffers, greater disclosure so investors and consumers can make more informed financial decisions, and a system that is better able to evolve as innovation advances and the structure of the financial system changes.
Me: Exactly! More capital, more disclosure to investors and consumers so that they can make their own informed decisions (as opposed to the government telling them what they should do).

Tim: We do not believe that you can build a system based on banning individual products because the risks will simply emerge in new forms. Our approach is to let new products develop, but to bring them into a regulatory framework with the necessary safeguards. America’s tradition of innovation has been central to our prosperity.
Me: Bingo! Couldn'ta said it better myself.

Tim: This agency will be able to write rules that promote transparency, simplicity and fairness, including defining standards for “plain vanilla” products that have straightforward pricing.
Me: Hallelujah transparency. By that, he needs to mean, transparency to shareholders and customers, not to the government. Hallelujah simplicity. Financials have long made an art of turning something simple into something apparently complicated in order to eke out a few more basis points. Fairness ... well life's not fair. But he did save himself by giving regulators the task of "defining standards" as opposed to flat-out regulating these vanilla products.

Tim: We propose a new resolution authority ... that will reduce moral hazard by allowing the government to resolve failing institutions in ways that impose the costs on owners, creditors and counterparties, making them more vigilant and prudent.We must also minimize the moral hazard of institutions considered too big or too interconnected. No one should assume that the government will step in to bail them out if their firm fails.
Me: Can anyone be against reducing moral hazard? Yes, the cost should be on owners, you hypocrite.

The Bad:
Tim: lack of oversight led millions of Americans to make bad financial decisions that emerged at the heart of our current crisis.
Me: Totally disagree. It allowed perhaps, but then again many Americans (apparently excluding the current administration) believe that people are responsible for their own actions. If you believe that, then you do not believe laws should be made to save people from themselves.

The Ugly:
Tim: Most importantly, it will have the power to gather information from any firm or market to help identify emerging risks.
Me: Big Brother has achieved new heights. We need to be honest with ourselves: regulators already have access to a VAST sea of information from banks. Financials face a daily barrage of invasive info requests from various aspects of the government. Some is mandatory, but the really sticky bits are often given voluntarily by Financials in the name of fostering a good regulatory relationship. Firms are aware that that those who say "show me a subpoena" too often find themselves facing suffocating levels of government scrutiny in subsequent years. That cozy relationship is part of what got us into this mess. Its a sad statement on our lawmakers that financial regulation is worded soo ambiguously that enforcement is a matter of personal interpretation. Moreover, it's repugnant that the level of enforcement is based on how much a firm kisses their regulator's ass (ahem Chase!) rather than any objective criteria. What makes Tim's line so scary to me is that he's tossing aside any pretense that financials have any property rights over their own intellectual property (data). For any reason, from any firm, the government can gather any information. Period.

Photo credits: Tarptales.org, Sanfranciscochronicle.com, guardian.co.uk

Gears and Levers buried at the Roots

I can't help but stick my neck out here to clarify one thing. The root cause of our current predicament is not evil lenders, stupid homeowners, bad regulations, greedy bankers, "hocus pocus" derivatives, markets, meltdowns, mania, panic, capitalism (or any other ism), Glass-Steagall, Wall Street, Main Street, Countrywide, Lehman, Bernanke, Bush, or even Greenspan.

We would not be where we are today ... markets would not be dry ... banks would not be belly-up if we did not have the ridiculous current levels of ...

DEBT

aka leverage
aka mortgage
aka credit
aka gearing

Debt is a multiplier on both upside profit and downside losses. It's an inflator of risk ...

... as I've been trying to convince people for quite some time. For example:

April 18, 2008 Blog Entry:
An investment bank borrows heavily and throws the funds into risky investments. The investments go south, the bank can't pay its loans, and the whole market panics, making it impossible for other, sound banks to continue their activities... nationalizing is bad when Chavez and Castro do it. Bad when Musolini and Mao did it. Why, then, should it be any different for us?

April 13, 2008 Blog Entry:
I-Banker's bag-o-tricks: ... Leveraging: This must be the oldest trick in the bag. ... When in doubt, borrow to take risk. Even better - use the fail-safe "steroids for investments": borrow some money and dump it into your wimpy underperforming investment. Suddenly your measly 1% return on initial investment looks like 10%. As long as the interest you pay is less than the return you make, you look like Midas.

Thankfully, with tonight's announcement that Morgan Stanley and Goldman have been persuaded to become regulated as banks, their leverage ratios will climb down the stairway to heaven a bit, but the notion that we EVER had ANY firm (or individual) geared to 50x assets is ridiculous. If that's what it takes to get the life-blood of profit from their industry, then it has already turned to stone. Nouriel Rabini correctly called such arrangements a "Ponzi Game" "pyramid scheme" and "house of cards" back in a blog from January 2007 with help from Gillian Tett.

Nobody in the industry, the government, or the media can credibly say they weren't warned.

Regulator Cage Fight Round 1

I didn't want to sidetrack the earlier "Bailing Wire" post by getting into the passive-aggressive Fed-SEC situation, but in case you're interested, there's a pretty simple example of what drives them nuts. By now we all know and love mortgage-backed securities (MBS) and credit derivatives. Contrary to pop media, these are:

• NOT the root of all evils
• NOT black boxes of snake oil where banks hide their woes
• NOT miracles of math only understandable to Nobel laureates

They're simply contracts between two willing partners. At the risk of grossly over-simplifying:

• An MBS is where a bank says "Wanna go in together on some loans to people for their mortgages?"
• A credit derivative is insurance a bank buys in case one of their (corporate) customers can't pay back a loan.

The Fed always tries to see the above as basically mutated loans with some collateral. Not surprising since all their examination methods and risk math and prudence have root in loans and collateral. They recognize that banks do "the trading thing" but honestly I don't think I've ever seen a Fed regulator on a trading floor. Good thing I suppose - kinda like taking your grandma to a rave. When grandma & co show up at the bank, they want to know that the loan was given a credit rating, that the collateral is sitting in the vault, that the bank didn't discriminate on the basis of race in extending the loan, that the customer got checked against the OFAC list of druglords and terrorists.

The SEC guys, on the other hand, are clearly all ex-DJs who are most at home dancing sweatily at a club at 3am with plenty of foreign substances in their bloodstream. They come from a trading background and insist that everything they see is a security like a stock or bond. So, when they look at an MBS or a credit derivative, they see a bond. Their focus making sure that the bond got marked to market this week, that it was not subject to insider trading, that the salesdude's Series 7 license is current and that he has pissed in a cup recently, and that the required quarterly reports got filed (into the ether).

Notice that neither really "gets it." Neither is wrong, by the way, but they both have blind spots. Both, of course, are too smart not to pay lip service to the others' focus. "Yeah, we do that too" they'll assure. SEC guys are particularly good at beating their A-type chests in lieu of giving facts when their methods are questioned. When that doesn't work, they duck into their fortress of Ivy League lawyers. Fed guys prefer to hide behind politicians, but otherwise the behavior is just as bad.

Too bad they can't come together to look at the same instrument holistically and apply a comprehensive set of tests. Coming from a corporate banking background which became an i-bank via merger, I've had more than my share of banker-vs-trader fights where grown adults play a game of "Son, this is how the family has ALways done it!" vs. "Aww, Dad, that's so yesterday. This is how all the cool kids are doing it!" Having been on the side of the "dads" I always fought hard but secretly felt that the kids prolly were on to something. They, at least in their lip service, talk about multiple forms of risk:

• Counterparty Risk
• Liquidity Risk
• Interest Rate Risk
• Market Risk
• Country Risk
• Settlement Risk
• Credit Risk

They unfortunately neglect that last one most of the time. It's not sexy and they figure that nobody would ever actually hold a security long enough for it to actually spoil. Plus, if, perchance, they ever lose the perpetual game of asset hot potato, they just whip out their lawyers.

On the bank side, Europeans, unusually, are ahead of the curve in that they've long supported the Basel accord on capital adequacy. Basel II recognizes 3 types of risk:

• Market Risk - meant to take all of the above into account, but which they shortsightedly break into:
• Equity Risk
• Interest Rate Risk
• Currency Risk
• Commodity Risk
• Credit Risk
• Operational Risk

It challenges banks to be able to quantify and constantly measure their risk along the three axes. It's a start. Most US banks don't really "get it" either, but their banking execs round out the list above by talking about Reputational Risk and Regulatory Risk, both of which can arguably fall into the last category above.

I know "these things take time" and all that jazz. I'm chronically impatient. I don't understand why people spend man-years of time and energy fighting and blustering and sabotaging change when the answers are right in front of them. Seems straightforward to me that you can measure the risk quantitatively of an MBS along the various axes above and cover both the SEC and Fed viewpoints. It's just a question of weights and probabilities:

MBS RISK = [total $ value of MBS you hold] *
(chance you can't sell your MBS for what you want, when you want * weight of MBS market risk)
+ (chance the underlying mortgage goes belly-up and you can't sell the property for what you want, when you want * weight of mortgage market risk)
+ (chance the underlying mortgage goes belly-up * weight of mortgage credit risk)
+ (chance playing around with MBSes gets your name smeared in the news or gets you fined 'cause of something you did * weight of internal operational risk)
+ (chance playing around with MBSes gets your name smeared in the news or gets you fined 'cause of something that impacts the whole market * weight of external operational risk)

Follow-up: Move over eagle ...

I was remiss in neglecting one key component of the Bear Sterns fiasco in my earlier post: what's in it for the government.

Uncle Sam isn't just all warm-fuzzy altruistic here. True, their action drips with populism, but that's not their biggest bennie. Mark my words - the Treasury, and Federal Reserve, in orchestrating this, has effectively bought themselves greater involvement in the financial markets, especially corporate finance. Their take is most likely increased oversight, probably including approval authority in financial M&A transactions and OTC product markets.

This might have appeared to be an opportunistic grab had it not been one of a growing pattern of strategic moves by the Bernanke house to expand their pervue. Opening the discount window to i-banks and brokers was clear back scratching. See, currently the Fed has no involvement with these firms - it's the SEC's job. Over the past decade, with the relaxation of Glass-Steagal regulations, i-banks have weaseled their way into being allowed to carry credit on their alance sheets (=make loans in exchange for other juicier business). Basically, i-banks are acting more and more like real banks. The Fed's had their knickers in a bunch for years over this because they don't think the SEC understands how to regulate banking activities (more on this in my next blog). So the Fed does i-banks the "favor" of letting them borrow from the Fed cheaply (although they're not member firms) but the price of admission is that the i-banks must pledge collateral for those loans .... and (here's the juicy part) ... the Fed gets to scrutinize the collateral .... which is almost always .... (drum roll) ... loans. Through this keyhole, the Fed will be able to project a large portion of what goes on inside the firm. They can let the i-banks get hooked on cheap discount window money, and then progressively tighten the screws of oversight ... and eventually regulation. For one thing, this will give the Fed the data-driven ammo to prove that the SEC is clueless, at which point they can swoop in and save us all.