Uncharted territory

I know it is a worn cliché, but the financial system really is in uncharted territory. The Fed’s actions over the weekend are unprecedented. First there is the degree of Fed involvement. According to the New York Times – Fed Acts to Rescue Financial Markets “In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk.”
Second is the expansion of assets accepted as collateral. As the Wall Street Journal – Central Bank Offers Loans To Brokers, Cuts Key Rate points out, “The loans will be secured solely by difficult-to-value assets inherited from Bear Stearns.” This is similar to the new lending facility the Fed created earlier.
Tracking how well the Fed deals with these “hard-to-value” assets will be important as the financial situation stabilizes. If it goes well, we may see an increased in the comfort level of the financial system to deal with these valuation issues, with systems possibly put in place to reduce the risk created by these issues. That would bode well for the use of intangibles in the financial system – which face obstacles because of valuation issues.

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