The Federal Reserve Board opened the door this week for holding companies to buy debt that is already in default.
Approving an application by Norwest Corp. Tuesday, the Fed said buying this so-called junk debt is "closely related" to banking and thus permitted under Reg Y.
"Banks and bank holding companies provide services that are operationally or functionally so similar to the proposed services as to equip them particularly well to provide the proposed services," the Fed said in its order.
Norwest, through the Foothill Group Inc., Los Angeles, will acquire secured and unsecured bank loans, bonds, and other forms of debt that is in default. The bank will restructure the debts to get higher yields and better collateral.