They say beggars can’t be choosers and that’s even a truer statement when said beggar is getting everything it wants and more.

Take the investment banks for instance. First the investment banks, also known as primary dealers, are invited to eat at the trough of the Discount Window. By the way, this window used to only be a safety valve for commercial banks and thrift institutions. Moreover, the loans were overnight in nature. That all changed last September when terms were extended to thirty days as the banking crisis intensified. Then on March 16, the term of these loans was extended again, this time to 90-days.

In addition primary dealers were invited to the party even though they didn’t (and still don’t have to) pass regulatory muster. The cherry on top: these primary dealers are able to use a wide range of collateral (read: crappy stuff that might otherwise fetch 22 cents on the dollar) to secure the loans. The deal was initially supposed be short-lived, but now it goes past the inauguration of the next administration. The Fed is pulling out all of the stops because banks are still too distrustful of one another to ensure liquidity in the system.

Add to the mix the protection provided by the Securities and Exchange Commission that shields 19 financial firms from naked shorting (the ban began on July 21) has been extended. By the way, all the stocks afforded short protection by the SEC are also primary dealers, except Freddie Mac (FRE) and Fannie Mae (FNM).

Fed Action

The Federal Reserve took several actions yesterday, including:
 

• The extension of the Primary Dealer Credit Facility (PDCO) and the Term Securities Lending Facility (TSLF) through January 30, 2009.
  
  
• The introduction of auctions of options on $50.0 billion of draws on the TSLF.
  
  
• The introduction of 84 day Term Auction Facility (TAF) loans as a complementary to 28 day TAF loans.
  
  
• An increase in the Federal Reserve’s swap line with the ECB to $55.0 billion from $50.0 billion.

Historically the discount rate was a full percentage point below Fed funds but that gap has closed significantly. While few anticipate the Fed will lower rates it would be interesting if the need to move liquidity into overdrive dictated interest rates rather than the economy or inflation.