We're All Bankers Now

There's a reason the Fed allowed Primary Dealers access to the Lending Window. With Interest Rate and Credit Default Swaps, Investment Banks do more banking than the Commercial banks.

If the swaps deals fail, as they have recently, it affects banks and then the money supply. The Fed has no choice but to allow these new bankers in the game. We're all bankers now, it seems.

Back in the early 80s the Interest Rate Swap was invented, allowing corporations to provide alternative lending services to each other. When the FHLB of Seattle did the first one with First Boston (now Credit Suisse) I was on the desk.

Since then, the market for swaps has exploded, and these unregulated securities threaten to destroy the world financial system. In the past these types of lending transactions were regulated, either by bank or securities regulators. No longer. The entire market is a mystery.

As the swaps industry progressed, interest rate and credit risk have been diffused across the economy, making every corporation a banker, and making the large investment banks a counterparty to each deal.

There is no doubt that the first task of the new regulators is to define these deals as securities and put the SEC on the case.