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January 15, 2009

Comments

cathyf
Excess reserves at the Fed rose to yet another new high...
Gee, do you think that might have something to do with the Fed's inexplicable decision to start paying Interest on Reserves? I mean this is such a basic amateur error that you wonder how any fed employees are smart enough to find the parking lot!
matt

well, what do we do if the banks refuse to lend out the money they have been given by the Fed? That sort of defeats the whole purpose of the bail out, doesn't it? I can see some knuckleheaded Dem congressman from Marin trying to nationalize the banks de facto because of this.

glasater

matt~

Let's wait and watch to see what happens with CITI.

clarice

A perfect opportunity for Sam SCAM, the Loan Man."We Got Viggorish you could die from."---PUK?

bad

Why do we need more TARP funds if the banks aren't using the money they have?

Jane

The bad news - banks continue their boycott of the loan market.


Well I'm boycotting the banks. The hell with them.

Mel

Okay, I'm wading in, armed with somebody else's charts and a severe case of opinion.

I have linked (LUN) to Prof. Mark Perry's blog post on the All Time High Level Of Loans made by banks, as posted by the St. Louis Federal Reserve. This has been a series of his running for almost a year now, and I do follow the links back to the St. Louis Fed, to see if he's making this stuff up. He's not. Every time. So, then, where's the credit crunch everyone's talking about?

It started out between the banks themselves. The Big, New York-based, Money Center banks were lending to everyone, repackaging those loans, selling them, lending money to the buyers of those packages, and trying to make money trading those packages. But wait! There's more! Then they had to repackage loans that other institutions had made, good or bad, strip them apart, sell them to institutions that desperately needed yield to meet their defined benefit plans, say, a pension fund, or Calpers, they Always need yield. But wait! There's more!

What if, as a creator of these various "credit" obligations, you suddenly realise that those buyers, whom you've sold so much garbage over the years (going back into the '80's) might need a bit of "insurance" to "protect" them when, I mean "if", that's right "if" things go sour. Well, as a firm, we're not licensed to underwrite or sell insurance, so we'll call this product "Credit Default Swaps", we already sell people Swaps and swaptions to take advantage of various interest rate, or currency, valuations. What's the big deal if we market something that bets on the chances of a borrower turning turtle, we tell them the risks, make the market in this "insurance" to cover the exposure they might have to the garbage we loaded them up with, and walk away with a fresh commitment of cash. What's not to like?

A very small circle of banks did this amongst the hedge funds, some big pensions, and endowments. They lost their shirts, and then some, because they were using borrowed money to buy them in the first place. Bear Stearns was first, they had "borrowed amongst themselves" to the tune of about $37 for every $1.00 of actual cash that they had.They had borrowed about the most on Wall Street. Others were next.

See where this is going? (I have to go to dinner, but I'll be back for more of this later, and to hopefully finish my story.)

Meanwhile, cruise Prof. Perry's site. It's really good.

matt

leverage, baby...leverage! Some of the American banks were at 10:1...but some of the Europeans were at 20-25:1....

Mel

matt-

Bear was the worst in the US, at 36 or37:1.

The Europeans, whom are just starting to report (admit) their losses, got as high as 62:1 (Deutschebank, as I understand it.). That amount, by the way, is 80% of Germany's total GDP.


jimmyk

Re interest on reserves--I'm skeptical that's the reason. As I understand it, the rate they pay on reserves is set below the Fed Funds rate target, which presumably means they are not paying interest on reserves now at all, nor will they until the Fed Funds rate target gets up to around one percent. Banks are scared to make risky loans, and the rate on safe loans is so low that they may as well just hold reserves.

RichatUF

matt-

Here is an older CNN write up of the really bad Euro zone banks with a graphic on the right.

Since that article has been published-Fortis collapsed, ING got substantial aid, and RBS got a rescue package. Here is an Atlanta Fed paper I wish I would have discovered when it was published back in May 07. Its 47 pages and sleep inducing but a pretty good overview.

Mel

Thank you Rich-

I've been looking for that. I couldn't remember where I saw it. I do recall, although my accusatory leveraging of DBK, is a bit high, that their exposure was 80% of German GDP. I'll find the link and nail it to the board (here) tomorrow.

RichatUF

jimmyk-

It is FF-10 for required reserves and FF-75 for excess reserves, subject to "evolving market conditions"?

With FF targeted to 0 to 25 does that mean that banks are paying the fed to watch the money?

RichatUF

Mel-

I'm not doubing that it was that bad at DB. Fortis was well over 100% of Belgium GDP and required a multi-national bailout.

jimmyk

RichatUF--
I presume it's just a zero rate.

RichatUF

And as if there was any doubt, BAC got additional funds to digest Merrill. Link

$20 billion capital injection
$118 billion backstop

They'll probably be shoveling more money into Citi by weeks end as well.

lea

The idea that Merill guaranteed a bailout is ridiculous.

Rick Ballard

"They'll probably be shoveling more money into Citi by weeks end as well."

Rich,

It really isn't a very pretty corpse. Apparently they've taken our Barney Frank's advice and dismembered in order to better dispose of various parts. They're getting rid of more board deadweight as well - Rubin will have company. The stock may well break through $4 on the upside on the news.

I bet the feds get the nasty, yucky pieces as inauguration presents.

RichatUF

I bet the feds get the nasty, yucky pieces as inauguration presents.

Finally, a bit of honesty from the board and management, after they really don't have to worry about any legal fallout.

Ranger

I have a macro-economic quesiton here. How much of the current/pre-meltdown economy is/was based on "excess" consumption? In that I mean, does anyone really know what the "baseline" purchasing power of the economy is vs. the "easy credit" fuled purchasing power?

I ask this because I have thought for a long time that the economy is driven by a combination of basic/material fundimentals and mass/consumer psycology. The boom of the last 20 years or so seemed to be fuled by the 'wealth effect' of successive bubbles that let people feel they were on an ever assending financial incline. The result is that people have been buying more and better than they needed because they thought their improving situation would provide the wealth in the future to pay off what they were buying in the present. Now, with the bursting of the final bubble, I am thinking we are going to be entering into an economy driven by a 'poverty effect' where people see their situation as holding steady at best, if not decresing (when you buy a house for $300k and now it is only with $265k and the price keeps dropping for example). It seems to me that people are going to be focusing on paying off their credit cards and not buying a new car every other year or then newest model of big screen TV as soon as it comes out until they start seeing their 'wealth' improving again.

So, the question is, how much more can the economy shrink under those conditions?

Rick Ballard

"How much of the current/pre-meltdown economy is/was based on "excess" consumption?"

Who has what power to define 'excess'? Given the lethal enforcement power of a dictatorship the answer can be derived from examining China. A massive economy can be sustained at the level of $2,500 annual per capita. That suggests that somewhat more than 90% of our economy may safely be defined as 'excess'. By commies. Like Obama. 'Excess' belongs right next to 'sustainable' in the socialist/communist lexicon.

IMO - the algorithms used to determine the 'safe' number of rotten apples in a barrel by those extending credit (which is then securitized) have been made obsolete through the rise of a generation which considers everyone to be a philosopher king, capable of making correct choices, dependent upon the situation and related to personal preference of course. IOW - there is no 'safe' debt/income ratio when many customers are moral/ethical cretins completely lacking in character or virtue.

A study of society's reaction to the similar stupidity which insisted upon proffering multiple chances to violent criminals is in order. When it became blindingly obvious that the courts in their limitless ignorance were loosing too many predators, the three strikes legislation became quite popular and prison construction underwent a boom. Something similar will occur pertaining to the wanton abuse of credit. The last BK law revisions addressing credit card debt are an example of what may happen next.

If good, strong debt serf collars are not fashioned by law then I would not expect to see lending to individuals expand at all. A contraction of more than 10% would make much more sense than any expansion.

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