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Many people know that the Federal Reserve sets interest rates in order to loan money to other banks so they can keep cash flowing throughout the U.S. financial system. Mostly, this works great for everyone involved. But, sometimes, banks and thrifts need a little extra cash, mostly so they can meet the reserve requirement (the minimum amount of deposits banks need to be considered in good financial shape).
To meet the reserve, the Fed has what's known as the discount window, which allows banks to borrow money for a short period of time at a higher interest rate (called the discount rate) than the official Federal Funds rate.
It's called a window because it used to be an actual teller window, where banks would go to borrow from the federal government. Now, it's used more as a lender of last resort. In fact, banks prefer to borrow from one another than directly from the discount window, since the interest owed can be cheaper and going to the discount window tends to imply that the bank is in a spot of trouble.
The Fed, too, doesn't like banks borrowing this way, which is why the discount rate is always higher than the target rate. It also requires banks to collateralize the loans, meaning they have to turn over liquid assets, such as loans or CDs, to the Fed in order to get the money. As with any loan, the banks get the underlying collateral back when they pay off the balance.
Home / Markets / Business Leaders
Thursday, March 27, 2008
JetBlue Founder to Start Brazilian Airline
Associated Press
SAO PAULO, Brazil --The founder of JetBlue Airways (JBLU) announced plans Thursday for a new Brazilian airline that would begin operating next
year with three jets and eventually grow to a fleet of 76 planes flying nationwide.
JetBlue chairman David Neeleman
said the opportunity is clear: Latin America's largest nation has a growing passenger travel market dominated by two airlines
that face little domestic competition and charge high prices.
"The prices that people pay here in Brazil are 50%
higher than the prices people pay in the United States."
Neeleman said his new venture has no connection to JetBlue
Airways Corp., but some former JetBlue executives will join the venture. The new airline doesn't have a name yet, and will
use mid-size E-195 jets made by Brazil's Empresa Brasileira de Aeronatica SA.
The new airline has placed an order
for 36 of the 118-seat planes with Embraer, a purchase Neeleman valued at $1.4 billion. The carrier also has taken options
for 40 more planes that would give the overall deal a value of $3 billion.
The entry of the airline will bring
the first serious competition in years to Brazil's TAM Linhas Aereas SA and Gol Linhas Aereas Inteligentes SA, two carriers
that have dominated air travel in Brazil since the collapse several years ago of Varig, Brazil's former flagship carrier.
"Brazil is a country that needs more competition and a different kind of competition," Neeleman said.
Neeleman
also said he is discussing his future as chairman of JetBlue with members of the New York-based carrier's board, and suggested
that a decision on his departure from the post could come within several months.
"My attention needs to be here,"
he said at the Sao Paulo news conference.
"We are not privy to conversations that the board members have," said
JetBlue spokesman Bryan Baldwin, who earlier said the company was aware of no plans for a change in Neeleman's role as chairman.
Baldwin declined further comment, and said chief executive Dave Barger was unavailable for comment.
Neeleman
said that he has raised $150 million for the venture so far from investors in the United States and Brazil.
The
JetBlue founder was born in Brazil and holds Brazilian citizenship in addition to American citizenship. The fact that is he
Brazilian allows him to overcome a major hurdle for investors trying to enter Brazil's passenger airline market: A law stating
that foreigners can hold no more than 20% of Brazilian carriers.
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