[palmer]

Um, the banks are issuing various margin calls to financial institutions they lent money to, with various financial securities held as collateral for those loans.

The Fed is allowing financial institutions to post those "securities" as "collateral" so they can meet margin calls using the T-Bills borrowed from the Fed. Otherwise there's no point in doing it.

[JasonC]

Actually, the point is T-bills don't require reserves under the Basel capital standards, when held by a bank, whereas other securities with credit risk do. So while it reduces their earnings (since T-bills earn less), it increases their free reserves. Treasuries are "on special" across the markets right now because of this factor - that is why treasury to corporate spreads are so wide, etc. It is all a symptom of the banks being overleveraged and undercapitalized, due to their losses on mortgages etc.

[Toddsterpatriot]

The Fed is allowing financial institutions to post those "securities" as "collateral" so they can meet margin calls using the T-Bills borrowed from the Fed.

Yes, if Merrill or Bear Stearns swapped some mortgage bonds for T-Bills, they can use a much higher % of the value to meet a margin call issued by say Citibank.