Macro Economic Trends and Risks
Can you Trust the Fed not to Act?

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By WendyBG
March 28, 2008

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

I bought some Lehman Preferred Stock in 2006. Lehman was one of the most respected investment banks on Wall Street. The preferred issue was rated A-. It was selling at par.

As the credit crisis evolved, in late 2007, the price of the issue dropped dramatically. I probably should have sold it right away. However, it still had its good rating...though I knew, from METAR, that many AAA rated issues were bogus.

A couple of weeks ago, Bear Stearns almost failed, practically overnight. Lehman's leverage and investments were similar, and several sources (including the WSJ) reported rumors that LEH would quickly go the way of BSC.

The LEH preferred dropped to half its par value. I gritted my teeth and sold, figuring that half was better than none. My loss was almost 0.5% of my investments. I hate losses. Grrrr!!!!

Then, the Federal Reserve swooped in. They engineered a rescue for BSC. Deus ex machina! The Fed made it look like they would rescue any investment bank that had significant entanglements, which includes LEH.

The LEH preferred has bounced back to what it was 2 weeks ago. I am really pissed off.

Now I know: don't fight the Fed! People say that, over and over. But, how was I supposed to know that they would change rules of the game in the middle?

What other rules are they about to change? Will Congress step in, and change back some of the (probably illegal) changes the Fed has made to the discount window over the past couple of weeks? What would that do?