[link|http://money.cnn.com/2007/08/24/magazines/fortune/eavis_citigroup.fortune/?postversion=2007082417|CNN Money]

In a clear sign that the credit crunch is still affecting the nation's largest financial institutions, the Federal Reserve agreed this week to bend key banking regulations to help out Citigroup (Charts, Fortune 500) and Bank of America (Charts, Fortune 500), according to documents posted Friday on the Fed's web site.

The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.

This is huge, something bordering a desperation move. This suspension is only known to apply to two banks, but if the Feds have lifted the rule for one then they probably did it for everybody that asked.

The rules that have been changed limit the amount of money that a bank can loan through their own mortgage division. It isn't a 100% suspension, rather the limit has been changed from 10% to 30% of the banks total capital. This is a huge change, something on the order of $25 billion each for the two known banks.

This is a very risky move in the long run, because at those levels if the banks mortgage division failed it could take the entire bank down easily. That is exactly the sort of risk the FED and the FDIC are supposed to prevent.

It is also a sign that the big banks are having huge problems with loans. As is often the case, the market has over reacted and the big banks can't sell any loans, no matter how good they are. This means that the banks don't have any money they can use to make loans, and the whole system begins to lock up.

Jay

It's early for that sort of panic. But I would say that if you have all you money in one bank, it might be a good idea to move part of your savings account to a different one. The way things are going it would surprise me if we don't loose a bank or two along the way.

I'm not worried about the FDIC failing to cover the money, but the FDIC can take quite a while to get your money to you. If you loose access to your checking, savings and your bank issued credit cards all at once and need months to get it back, it can wreck your life.

Jay