Expensive and Beautiful Silk Panty Garments (or Discount Window Access)– for Everyone!

The two lessons we take away as standouts from the credit crisis are probably somewhat unconventional, but we think they are of great import.  First of all, "big" has a way of changing to "trivial" overnight when one is talking about government spending.  Second, the "biggest of the big" isn't summed up by large, complex models.  Instead, it gets added up on scratch paper.  Or via the calculator feature of a Blackberry.  Or scrawled on a cocktail napkin with a leaky pen.  Today, drawing from these lessons, we think that five simple lines portend something, well, big.

Section. 1118. Access to the Discount Window.
A financial holding company subject to stricter stand-
ards shall have the same access to the discount window
lending of an appropriate Federal Reserve bank as is
available to a member bank of such Federal Reserve bank.

What would this text be doing as an amendment to the Wall Street Reform and Consumer Protection Act of 2009?  That is, after all, a bill intended:

To provide for financial regulatory reform, to protect consumers and investors, to enhance Federal understanding of insurance issues, to regulate the over-the-counter derivatives markets, and for other purposes.

What exactly does Mr. Miller of North California (no legislative slouch, really) have in mind here?

Whatever it is, you can be pretty sure it is not likely to please any of the 18 primary dealers who hithertofore have enjoyed exclusive discount window access and to which they are able to pledge radioactive solids of just about any toxicity or half-life in exchange for loans of sweet, short term liquid elixir (read: cash) at vanishingly small interest rates.  Or if you prefer:

The Discount Window functions as a safety valve in relieving pressures in reserve markets; extensions of credit can help alleviate liquidity strains in a depository institution and in the banking system as a whole. It also helps ensure the basic stability of the payment system by supplying liquidity during times of systemic stress.

Right now that means just under $20 billion outstanding.  Expect that to change if this amendment becomes law.  The phrase "financial holding company subject to stricter standards" isn't defined in the single-sheet amendment text, but insofar as the discount window is primarily a tool for what might safely be called "emergency liquidity," one wonders why it would be necessary to grant access to this facility to even a moderately large fraction of the 565 Financial Holding Companies already in existence. 

Further, in the paperwork of corporate formation, becoming a financial holding corporation ranks in difficulty somewhere between creating a Delaware limited liability company and getting a canine breeder's license in Nebraska.  What benefit, exactly, is there to, say, the taxpayers, in giving Poca Valley Bancshares, Inc. (or the Royal Bank of Scotland Group, plc- no we aren't kidding- for that matter) unbridled access to this kind of emergency capital.  Or, perhaps, the Distinguished Gentleman from North Carolina knows something about the emergency liquidity needs of a large fraction of the financial institutions in the country that isn't quite public knowledge yet?  Is it the regionals that are an issue?  Or perhaps this is aimed at shoring up heretofore well concealed problems among insurance giants?

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