Questioning the Fed

Wall Street on Parade looks somewhat askance at our financial regulators. Their latest area of concern is the Fed's recent announcement that it would consider a “high quality liquid assets” - i.e, assets that could be easily liquidated if there was a run on the bank - U.S. Treasury securities and also corporate bonds and corporate common stocks in the Russell 1000 index.

It is the inclusion of corporate securities that really worries Wall Street on Parade because, in its opinion, the corporate bond market is quite illiquid. Studies show that - the aggregate illiquidity doubled from its pre-crisis average in August 2007, when the credit problem first broke out, and tripled in March 2008, during the collapse of Bear Stearns. By September 2008, during the Lehman default and the bailout of AIG, it was five times its pre-crisis average and over 12 standard deviations away". A translation of which is: you'll have a hard time selling corporate bonds at any sort of a reasonable price when the next panic hits.