Wednesday, March 12, 2008
To: Chairman Bernanke
From: NY Fed Governor Geithner
Re: Alternative collateral
Date: March 11, 2008
We made the announcement today regarding the additonal measures we are taking, including the TSLF. Initial market reaction to the expansion of our lending program has been positive; stocks have done pretty well- hell, even Bear Stearns rallied today!
However, I believe that it would be prudent for us to make contingency plans in the event that the TSLF fails to relieve market stress. After all, initial reactions to the discount rate cut in August, the 2.25% of Fed cuts that we have put through since September, and the TAF were all positive.....and yet we are deeper in the mire than ever before.
I have consulted at length with staff here at the New York Fed, who in turn have spoken with their network of Wall Street contacts. We have reached the conclusion that the next step in our campaign to re-liquefy the system should be to accept a broader range of collateral for those seeking to borrow at either the TAF or TSLF auctions.
The staff has drawn up a list of recommended items that we should be prepared to accept as collateral in the event that the TSLF does not solve the problems that we are facing. I intend to submit this list for discussion at our next fortnightly meeting, but per our standing arrangment I am notifying you of its contents in this memo.
The staff recommends that the following be accepted as collateral:
1) The borrower's first-born child. The use of hostages to ensure compliance with a contract or treaty has been fairly common throughout human history, but has sadly fallen by the wayside in recent decades. The staff suggests that it could be effective in the current environment, however.
2) A T206 Honus Wagner card. These are among the scarcest securities in America, and should provide ample security for the borrowing of funds.
3) Gold Jewelry. It is the staff's understanding that pawn shops occasionally accept gold jewelry as collateral for funds. Given that the Federal Reserve's TAF and TSLF programs are beginning to resemble a financial pawn shop, it makes sense to start taking our cues from the original.
4) A copy of Shakespeare's First Folio. It's not as rare as the Honus Wagner card, but some might argue that it has slightly more cultural/historical significance.
5) A car. Staff report that the supply of autos on Bloomberg's CARS function is flourishing (see below.) Staff recommends that the Federal Reserve accept the Kelley Blue Book valuation for autos used in the US, and the What Car? valuations for foreign-used autos in determining the amount of funding to be granted.
6) A note from the borrower's mother. This tried-and-tested method works well in academia, and staff research suggests that it could easily be transferred to the Fed's auction prgrams. Staff findings suggest that a similar methodology underpinned certain segments of the housing market in the current decade.
7) A Barry Bonds home run ball. Given that the Federal Reserve is attempting to "juice up" the financial system, what collateral could possibly be more appropriate?
8) The Tales of Beedle the Bard. This is one of the rarest and most sought-after works in the world. Our international contacts suggest that the People's Bank of China would be particularly eager to accept it as collateral as part of a cross currency swap agreement.
9) Manure. While this is a bit unusual, staff feel that the bull market in soft commodities suggests that the value of fertilizing products is set to soar. Should manure prove unavailable, the Federal Reserve could consider accepting structured credit products, which share certain important characteristics with manure, instead.
10) Anything demoninated in euros. Man, have you seen EUR/USD?