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In its role as lender of last resort, the Federal Reserve has the ability to lend money to the country's commercial banks, and uses the discount window to do so, in exchange for collateral posted by the banks. The Federal Reserve Act that gives the central bank its powers, however, allows the Fed to also lend money to nondeposit-taking institutions, mainly through two sections: 13(3) and 13(13).
When the Fed, following the Bear Stearns Cos. collapse, opened its discount window to broker-dealers, it used 13(3), which allows for loans to individuals, partnerships and corporations "under unusual and exigent circumstances." In the latest case, the Fed turned to 13(13), which allows for those same loans without the restrictions on circumstance, but only if the collateral posted in return consists of good-as-gold U.S. Treasuries and agency debt. Although a Federal Reserve spokeswoman declined to comment on the reasons behind the use of 13(13) in the case of the mortgage agencies' rescue this week, it is interesting to note the implications of the Fed's move. In effect, the Fed is saying that what is happening to Fannie Mae and Freddie Mac is not beyond the pale, maybe because the window is meant to be used only as a backstop, presumably if the U.S. Treasury can't prop up the tottering firms through a yet-to-be congressionally approved credit line and a potential equity investment. - Vipal Monga Dealscape: Ackman's rescue plan for Fannie, Freddie Dealscape: Bank watch: Fannie and Freddie lead decline in financials Dealscape: Treasury, Fed agree to shore up Fannie, Freddie Categories Deal Video
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Sunday's announcement by the Federal Reserve that it is opening its discount window to Fannie Mae and Freddie Mac to serve as a liquidity backstop was interesting, not only for its drama, but also because its terms differ from those governing the Fed's move earlier this year to open the window to investment banks.
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