Fed Begins TAFfy Pull to Encourage Lending; New CDS Market Reported

Earlier today, in a move intended to “encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit,” the Federal Reserve Board announced that it will both start to pay interest on its depositories’ required and excess reserve balances and significantly increase the size of the Term Auction Facility (TAF) auctions, starting with today’s auction of 84-day credit. First implemented in December 2007, the TAF lets the Fed auction a set amount of funds to depository institutions against a wide range of collateral. The creation of the TAF was coordinated with the Bank of Canada, Bank of England, European Central Bank and Swiss National Bank. The TAF auctions let depository institutions borrow from the Federal Reserve for a fixed term against the same collateral accepted at the discount window. The rate is established by the auction, subject to a minimum set by the Fed. According to the announcement by the Fed, both the 28-day and 84-day TAF auctions will be boosted to $150 billion, effective with today’s auction. The increases will eventually bring to $600 billion the amounts outstanding under the regular TAF program. As originally authorized by the Financial Services Regulatory Relief Act of 2006, the payment of interest on required reserve and excess balances was not to have begun till Oct. 1, 2011. But the Emergency Economic Stabilization Act of 2008, enacted last week, moved that effective date to Oct. 1, 2008. The Federal Reserve Banks will therefore pay interest on required reserve balances (balances held to satisfy the depository institutions’ reserve requirements) and on excess balances (those balances held in excess of the required reserve balances and clearing balances). The interest paid on the required reserve balances is intended in part to “essentially eliminate the opportunity cost of holding required reserves, promoting efficiency in the banking sector,” according to the Fed. Meanwhile, CNBC is reporting that Fed officials will meet, possibly as soon as tomorrow, with “top executives from two commodities exchanges” and work to create a new exchange, or clearing house, for credit default swaps. The goal would be to build a marketplace where CDSs can be traded with a measure of federal oversight and with greater transparency, in contrast to the current over-the-counter market. The new marketplace could reportedly be in operation within weeks. In Washington, the first congressional hearings on the financial crisis saw Lehman Brothers under the spotlight. Documents cited at the hearings indicated that even as the investment bank was pleading for federal help–and was only days away from bankruptcy–executives were focused on nailing down millions in bonuses. Even as Lehman CEO Richard Fuld “was pleading with Secretary Paulson for a federal rescue, Lehman continued to squander millions on executive compensation,” said Rep. Henry Waxman ( D-Calif.), chairman of the House Oversight and Government Reform Committee. Waxman later asked Fuld directly whether it was fair that Fuld took home about $480 million in compensation since 2000. Looking uncomfortable, Fuld answered that his compensation in that period was in fact about $300 million, including about $60 million in cash. Fittingly, perhaps, a New York Times article today, about the role (partly symbolic, partly substantive) that world’s richest man Warren Buffett is playing in stabilizing the financial markets, highlighted a comment Buffett made during his recent TV interview with Charlie Rose. Calling on the federal government to help pay for the financial system bailout by raising taxes on the wealthy, Mr. Buffett said, “I’m paying the lowest tax rate that I’ve ever paid in my life. Now, that’s crazy.”