There is an impressive piece over at Mish’s blog that helps to explain a few things.

When Citigroup, JP Morgan Chase, Bank of America,  and Wachovia all borrowed $500 million each ($2b in total) from the discount window, I was certainly scratching my head as to the real motivation for such a move.  Public relations on behalf of the Fed?  Maybe the Fed pushing the banks to go into the commercial paper markets to loosen the screws a bit on reasonably good businesses?

No… as Mish tells it, the banks were all motivated by an important rule change.  Mish quotes an article in the WSJ:

The Fed, in a letter sent to Citigroup Monday, exempted it from the limit on how much its bank unit, Citibank N.A., can lend to its affiliated broker-dealer, Citigroup Global Markets. In the letter, the Fed said it would permit Citibank to lend up to $25 billion to “market participants in need of short term liquidity to finance their holdings of certain mortgage loans and related assets,” and it could channel the transactions through Citigroup Global Markets in the form of offsetting repurchase agreements, which are short-term loans secured by financial assets.

In the interests of keeping things in the US out of harms way, whether it’s the home owner or the public companies that require a functioning financial system, the Fed is doing the right thing.  But, in the process, it is certainly treading on moral hazard in the worst possible way.