Bill,
I received an e-mail alerting me to view the following story in two parts regarding M3, and "Newbank".
Pt 1
http://www.stocktiming.com/Monday-DailyMarketUpdate.htm
Pt 2
http://www.stocktiming.com/Tuesday-DailyMarketUpdate.htm

I have nothing to do with this website other than reading the free daily reports.

Security Pacific left the business of clearing government securities when it was acquired by Bank of America. That left two banks. 9/11 tightened liquidity particularly in its impact on BONY which had much of its clearing operation within blocks of the WTC (110 Barclay and 1 Wall St.) Government securities are the collateral of choice for securities lending.

"It is our understanding that the two Clearing Banks [BONY and JPM Chase] each extend approximately $1 trillion in intraday credit to their dealer/clearing customers each day. " and "The liquidity of the Treasury market allows dealers to sell Treasuries without necessarily owning such securities because of the ability, under "normal" market conditions, to easily "cover" a short position through the cash, repo or securities lending markets."

This adds tremendously to liquidity in the market place and to M-3, in my opinion.

"Offering a specific asset class - such as long-term government bonds - with specific policy assurances that the government will keep the market liquid, can also be a useful way to maintain stability in some markets. This is accomplished by ensuring that a benchmark asset that the rest of the market relies on to price other risks and values will continue trading freely until confidence generally can be restored."

A "moral hazard", says James Grant.

The Request For Proposal is at: www.federalreserve.gov/BoardDocs/Press/other/2002/20020509/attachment.pdf

The response is: www.sec.gov/rules/concept/s71502/tcconnor1.htm

And the best explanation of how government securities and stocks have become entwined through securities lending is at: www.statestreet.com/securitiesfinance/en/resources/Dec2001_whitepaper.pdf