Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

The (much quieter) banking panic

by Jerome a Paris Thu Sep 25th, 2008 at 06:38:59 PM EST

The FT is (rightly) worried:


Banks are not to be trusted. This is not just the view of the public and policymakers, but that of the banks themselves.

And indeed, the most notable thing over the past year has been the general mistrust amongst banks, and their reluctance to lend to one another. This graph shows a direct indicator of the level of defiance between banks:


Via Mish


The TED spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the LIBOR rate reflects the credit risk of lending to commercial banks. As the TED spread increases, the risk of default (also known as counterparty risk) is considered to be increasing, and investors will have a preference for safe investments.

As the FT notes:


If lenders demand huge spreads for such short periods, they are either tightly constrained in their ability to lend, deeply concerned about the solvency of counterparties, or engaged in predatory behaviour. Whichever of these possibilities is true, credit to the economy will dry up.


As Mig (I think) noted a while ago, banks started looking at their balance sheets last August, suddenly decided they did not like what they saw, and went through the following process: "we've been wiser than others, so if our balance sheet stinks like this, we don't even want to know what those of other banks look like - but we'll stop lending to them." Interbank lending froze up then, and has never really recovered - it just gets worse at each new seizure of the markets, and the current situation can only be described as critical.


This one shows what's happening with euro bank credit risk

Banks are hoarding all the cash they can (avoiding new deals, not renewing facilities that come to an end and would in normal times be extended, and now even trying to find legal - if not necessarily very proper - ways to sneak out of existing commitments), both because they need it for their own basic needs, and because they simply don't trust the risk represented by other banks.

And given that at any time a bank makes a loan to a customer (at least for big corporate deals), it borrows the same amount of money on the markets, the fact that the interbank market, ie where that borrowing part takes place, is frozen can makes it difficult for banks to continue with the lending.

Those that still have access to liquidity are paying an increasingly high price for it (the above represents the price the best banks have to pay - it's even worse for most others). Others have to make do with ultra short central bank liquidity lending. but you cannot run your ordinary lending activities (which rely on 3-month or 6-month funds) on overnight funding at punitive rates.

Thus, credit to the economy is drying up. Corporations often had a good balance sheet, and lines of credit that were available to them at good conditions, but these are either used up or expiring as time goes by, and they are no longer renewed, and the pressure is building up for companies also to start scrounging for cash.

In the financial world, this is bringing about a grand de-leveraging (ie the infamous tide that supposedly lifted all boats is moving out rather brutally, and we're seeing, to mix maritime metaphors, who was naked under the water).

  • The players that had low risk, low cost funding, high volume investment strategies are stuck as the low cost bit has disappeared; they have to stop their business; some have come to trouble in the process, but this is a liquidity issue and they might be saved by central bank intervention;
  • those that had high risk, low cost funding, high(er) returns are quite dead as the high risks happen to have been (really) bad risks. The disappearance of low cost funding is, to a large extent, irrelevant to their situation.

The trouble is that the two cases are often hard to distinguish, because they are engaging in the same behaviour: they are trying to sell assets: in one case, to reduce their (now expensive) borrowing requirements, in the other to raise cash to plug holes in their balance sheet or to get rid of the toxic stuff.

And banks have realised that, in the best case, they belong in the first category (they are highly leveraged, borrowing amounts many times their own capital to onlend them again) and, it seems, in many cases they look like members of the second group - and there is no way to know which (and banks often don't even know in which category they are themselves!). rdf provides a good analogy for what financial products look like these days, and how hard it has become to truly understand what they're worth, but what is even scarier is that the underlying assets that underpin all the financial bets made about them are turning sour, as the housing markets continues to fall and the economy grinds down to a halt.

So, while banks have frozen in the fear that they no longer understand what they and their colleagues have been doing, their core assets are turning bad and, in a chain reaction, will pollute all the financial bets made on them, ensuring that the banks' current fears turn to reality.

Banks are paralysed because they don't know how much bad stuff they have. Can it be better when they know that they really have a lot?

Thus the Paulson plan is unlikely to help much if it does not deal with the assets at the bottom of the toxic waste pile: not even the mortgages, but the houses themselves. The only way to do this would be to actually buy the houses, to prop up their prices, but this would cost rather more than $700 billion, and would bankrupt, for real, the government.

Fundamentally, house prices are out of whack with any realistic capacity of people to pay for them, and these must converge again. Apart from falling house prices (and the ensuing collapsing house of cars built on top of it), the only way to do this is to increase incomes - not those of people that own several homes, but rather of those that are trying to own one.

The bottom for houses, and for the banks,  which fundamentally ride on them, will be reached when incomes - for the majority, not for the few - catch up with them. Governments should work on that, with simple ideas:

  • re-regulate labor markets, in particular with increases in minimum wages, and with actual enforcement of existing rules;
  • launch a massive public investment plan in, for instance, public transport infrastructure, housing thermal insulation and renewable energies;
  • make banking boring by limiting leverage and eliminating banks that are "too big to fail";
  • and increase marginal tax rates significantly to pay for it all.

Who knows, it might save a few banks - and investors - along the way.

Display:
http://www.dailykos.com/storyonly/2008/9/25/183422/929/674/610537

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Sep 25th, 2008 at 06:40:16 PM EST
Jerome, slightly off-topic, what do you think are the implications of this bailout bill failing?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Sep 25th, 2008 at 07:13:54 PM EST
[ Parent ]
except for bringing about the next "exciting" day on Wall St a few weeks (or days) earlier.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Sep 25th, 2008 at 07:35:56 PM EST
[ Parent ]
as unlikely as it is, torpedoing it, might even have helped McCain, as he can say now, he has killed the biggest cheque for Wallstreet ever.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Thu Sep 25th, 2008 at 07:39:32 PM EST
[ Parent ]
Hey, they're actually quite exciting for me.  I have no money, and it means I get to write "WHEEEEEEEEEEEE" to Mig a dozen or so times, as well as to my coworkers on the office instant messenger.

It's the little things in life, I tell you.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Sep 25th, 2008 at 07:50:21 PM EST
[ Parent ]
I get to write "WHEEEEEEEEEEEE" to Mig a dozen or so times

per day, that is...

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Sep 26th, 2008 at 04:29:09 AM EST
[ Parent ]
That's not the reason - I have some money saved up, even some invested in ISAs, but the reason I can trade wheeee's with you is that I have no debt.

I am not leveraged - I don't really care if my (meagre) assets get wiped out because of inflation or a market slump. My only real liability is a monthly rent that I can cancel on 2 months' notice, no questions asked, and move to where I can pay a cheaper rent.

If I had long-term, illiquid assets and liabilities of 5x my annual income (say, a house+mortgage), then I would be more circumspect.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Sep 26th, 2008 at 04:33:09 AM EST
[ Parent ]
The depression era solution - whether the bill fails or not - was for banks and credit card companies to call in their loans and overdrafts.

Depending how aggressively they do this, that would make 25-75% of the working population instant bankrupts, and would kill any business which is financed with bank money.

A smarter solution now would be to kill the banks and hedge funds and write off or write down the debt. The multiply leveraged CDOs and other paper are meaningless anyway. The obligations are never going to be repaid, and any attempt to realise their value is going to suck money out of the real economy, putting it into a death spiral.

With some tweaking you could probably hyperinflate just the CDOs, ring fencing the damage. Everyone who played with them take a vicious hit. Limiting the bankruptices to the casino economy would be a lot less toxic and dangerous than trying to make the real economy pay for the madness.

The real economy doesn't have the cash, and nothing anyone does is going to change that. And it should never have been put in this position anyway.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Sep 25th, 2008 at 07:39:46 PM EST
[ Parent ]
The real economy is going to pay one way or another as the credit markets continue to dry up.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Sep 25th, 2008 at 07:52:45 PM EST
[ Parent ]
Create the US Bank of Industrial Development -- if it doesn't already exist under some name -- and have it give loans to the the Real Economy.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Thu Sep 25th, 2008 at 09:08:36 PM EST
[ Parent ]
If instead of flushing $700 Billion to delay the inevitable, Congress were to create 438 new banks, one per congressional district, and advance each of them  $500 million against warrants for senior stock, even if they were required to hold 5% equity against loans, they each would have $10 billion loan capacity.  That is $4.38 Trillion in new loan capacity for a total of $216 billion in new money.  That should force existing, solvent banks back into the market to compete for market share.

Require these banks to operate on conservative lines and to fund Govt. guaranteed student loans, commercial loans to credit worthy borrowers, real estate loans that meet upgraded FHA requirements, etc.  Make bank officers accountable to the spirit of the regulations as well as the letter and make them liable to disgorgement of bonuses and salaries above a certain level on a declining , prorated basis should the institution fail within five years of their leaving it.  That should solve liquidity problems and return sanity  to banking.

Compared to the Paulson plan, it would leave a lot of bullets still in the gun to deal with problems that can be solved.    

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Sep 26th, 2008 at 02:05:00 PM EST
[ Parent ]
Depending how aggressively they do this, that would make 25-75% of the working population instant bankrupts, and would kill any business which is financed with bank money.

Hyperbole alert.

30-75% of the working population has it's "investment" or "wealth" locked into deferred tax schemes marketed by IRA, REIT, HSA, 401(*), TIEFF, etc. That means "bankruptcy" of unrealized income, "wealth" those people never had to spend except perhaps to securitize present value of DEBT.

Diversity is the key to economic and political evolution.

by Cat on Thu Sep 25th, 2008 at 08:58:00 PM EST
[ Parent ]
They're real savings. They're not 'unrealized' wealth, but rather money taken out of pre-tax salaries.
by MarekNYC on Thu Sep 25th, 2008 at 09:06:40 PM EST
[ Parent ]
They were real savings. As of now, it's anyone's guess what they are.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Sep 25th, 2008 at 10:54:13 PM EST
[ Parent ]
Is that money real savings if the pre-tax contributions are invested in mutual fund or corporate equities? And your portfolio manager rolls over dividend earnings, if any, in purchase of new securities?

Investment is expenditure, purchasing activity.

Principal --lump sum or cumulative constribution-- invested is not necessarily guaranteed returned by these schemes in the event investor closes his/her  account --s/he demands "deposits." At that point, capital is realized in the form of principal "deposited" for investment plus capital gains, if any, in currency.

Currency is (supposed to be) fungible; your $5 bill has the same value (or purchase power) as my $5 bill. Equities are not fungible. The transaction value (to currency) of each instrument varies by time and by demand.

Otherwise, investor holds interest/dividend bearing securities in perpetuity to benefit, to realize, distributions in currency. Sadly, those distributions are taxed. And, with the exception of costly preferred trust instrument, subject to termination or deflation in value at any time.

For these reasons, unions long ago lobbied the US government for pension insurance fund. 401(*) are not insured unless fund manager has purchased insurance (uh oh) on behalf of clients, probably with clients' capital rather than fund's OpEx. I really don't know "best practices" on fee structures.

(E.G. GOOG is my favorite poster child of the investment industry. This firm has never paid dividend. It's common share price floats around $400. To my knowledge, outstanding has never split (diluted); the firm has no new issues since IPO or buy-backs; there's no preferred stock outstanding, and employee compensation includes options. In order for "savers" to realize principal or capital gains, "saver" must sell GOOG equities. Perhaps to GOOG employees? At this point in time, profits are taken by earlier buyers, and volume trading by fund managers must be fractional.)

It is one thing to argue, as many financial advisors do, that the benefit of investment is forestalling tax obligation on capital. So the activity itself is a (temporary) "savings" (of tax). It is another argument altogether that investment activity saves capital.

Diversity is the key to economic and political evolution.

by Cat on Fri Sep 26th, 2008 at 07:38:24 AM EST
[ Parent ]
An excerpt from an article by Michael Hudson describes the fundamental, undisputed revenue source of finance capitalism. According to some sources, finance capitalism constitutes --materially-- some 30% of GDP, GDP being only a currecy valuation of total economic activity.

This [loans sold at a loss] is not what the magic of compound interest promised. But it is where it had to end up, with mathematical inevitability. It was an advertising come-on for Wall Street money managers and promoters of "pension-fund capitalism" (or "peoples' capitalism" as it was called in Chile by the Chicago Boys working for General Pinochet's murderous regime, and Margaret Thatcher's Conservatives in England). The promise is that if people consign these funds to individuals who make much, much more than they do but have the survival-of-the-fittest advantage of being much, much more greedy, they will receive a perpetual doubling of interest. That is how retirements for American workers are still supposed to be paid - by magic, not by direct investment. Prospective retirees are supposed to ensure a good life by investing savings in loans to corporate raiders who fire, lay off, downsize and outsource these very workers. The trick is to persuade employees to hand retirement funding over to financial managers whose idea was to make money off the economy by extracting interest and dividends off workers, homeowners and companies being bought on debt leverage. In the final analysis it is debt leverage by itself that is supposed to fuel capital gains.

My metaphor at ET, some time ago, for this "magic" was financial cannibalism. (That was in the context of news on RE vulture funds.) I suspect, you still "believe in" "investment savings." It is difficult to shake off Friedman ideology. But time has come nonetheless to abandon that concept of financed property rolled into one.

One day, do yourself a favor. Fire up xcel and begin listing dividend and interest bearing securities (stocks and bonds) you would like to buy --on the basis of reported quarterly distributions per share only. List the price and income per share beside each ticker symbol. Then calculate how many shares you need to purchase in order to secure annual income of $20,000 a/o tomorrow. (That $20,000 constraint is what's known in the biz as defined benefit of contributions.) Compare the total minimum "investment" required to the total contributions you've made thus far to interest and dividend bearing securities.

Diversity is the key to economic and political evolution.

by Cat on Fri Sep 26th, 2008 at 10:44:05 AM EST
[ Parent ]
Michael Hudson

Diversity is the key to economic and political evolution.
by Cat on Fri Sep 26th, 2008 at 10:48:41 AM EST
[ Parent ]
"Compare the total minimum "investment" required to the total contributions you've made thus far to interest and dividend bearing securities."

I don't understand what you are trying to prove.
I know the answer to your first question -you need for example around 13000-14000 France Télécom's shares to secure 20000€, so around 9000 for 20000$. That (9000) would cost 185000€, or about 275000$.

Now, what next? It's significantly more than the total contributions I've ever made indeed, but then I'm 32. On the other hand, that's pretty much the level I have now (compound interest and making maximum use of special prices for workers at the companies I've worked for sure helped ;-) ). That's far from enough to live off if my wife and I were to retire now, but I don't think you should have enough for retirement at our age (I know traders do but...).

So what exactly is the point? Maybe I'm missing it because in France we have a different retirement system.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Fri Sep 26th, 2008 at 12:00:00 PM EST
[ Parent ]
"That (9000) would cost 185,000€, or about 275,000$.
...

"It's significantly more than the total contributions I've ever made indeed, but then I'm 32."

That's the proof. Thank you for your demonstration of the ubiquitous sell-sheet --8% "return" (on principal; was 10% in the '90s) over 30+ years --barring anomalous share price and asset price movements that guarantee an "annuity" that is in the US a federal poverty level of income for <2 person HH. And where, theoretically, one would need to commit additionally the same level minimum investment to secure health care insurance of one's dotage. Everyone, male or female, should be so happy to rely on a wife's investments at that time. In the US a wife, much less other beneficiary, is not guaranteed distribution of deceased spouse's SS "annuity"!

Now can you find for us median portfolio value of US (vs French, if you like). This document tell us that in the US the number of participants in defined contribution plans increased from 22% to 58%, 1978-2004; 401(k) Balances Generally Increase the Longer Participants Work but Still May Not Fully Fund Retirement.

The median (cumulative) asset value for "Families" of the bottom 80% income class was in 2004 $37,761. Is it reasonable to assume that value would have doubled (return roughly 200%) annually to obtain today's minimum required investment in a US federal poverty level "annuity"?

If your investment plan began in 1978, you may have contributed a total $131,873 a/o 2004. That is not to say your "annuity" is today worth $131,873 in unearned income. Although you will have continued to work (or hedge investment instruments) for another 10-death years to conserve or increase your HH income extracted from other's and your own diminishing labor input.

In short, any social security strategy cannot be funded by individual financing alone. Transfer payments are a HUGE component of a living wage, regardless of age.

Diversity is the key to economic and political evolution.

by Cat on Fri Sep 26th, 2008 at 01:17:32 PM EST
[ Parent ]
I realise that most households don't have anywhere near enough assets in the US, but I'm not following your arguments and especially conclusion.

It cannot work to rely on the individual if he spends too much indeed. But why would I need to have a retirement ready after only 7 years of working? My investment plan did not begin in 1978 -I was 2 at the time- but in 2001.
Also, as I said I haven't contributed that much money, but my savings (that neglects my mortgage, admittedly) are around 185000€, so you don't actually need to contribute that amount to get it since you get compound interest. Also, in France we pay quite a lot of our salary to the retirement system -money that would have come on top of that otherwise.

Now, I am not typical in the least, as I have comparatively high income, and indeed my wife works (as in most households -that's how it should be). I realise that most people must manage on much less. But what makes it unsustainable is low salaries, not an actual impossibility. We tend to save 22% of our pre-tax income, because we don't believe in living on credit. My wife's parents have rather low salaries, but they save as well because when they started they had very little and know the value of things. They are both immigrants and at least my mother in law will not get a significant retirement because of that (the Laotian government will not send records of years worked before the revolution). But they will manage, because they saved.

If it were impossible to rely on savings, it would be impossible to rely on transfer. The wealth must be created somewhere. Where it must not be stored is in super volatile funds.
Transfer protects you against poor management, and anyway it is terribly unfair not to have redistribution. But that does not mean it could not theoretically work, and the need for redistribution arises because some wages are too low. Reduce inequalities during the working years and the need will be much reduced.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Fri Sep 26th, 2008 at 04:49:52 PM EST
[ Parent ]
Washington Mutual has been seized by the FDIC.

(Sorry to pollute your thread, Jerome.  Didn't think there would be that many comments above.)

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Sep 25th, 2008 at 07:56:39 PM EST
The biggest bank failure in history is almost a non-event, given what else has been going on...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Sep 26th, 2008 at 03:25:19 AM EST
[ Parent ]
Ah, interesting times. What fun.
by Colman (colman at eurotrib.com) on Fri Sep 26th, 2008 at 03:29:26 AM EST
[ Parent ]
Like I said when Lehman went bankrupt, I'm just numb. Deer-in-headlights, watching a slow-motion trainwreck...

It's like standing on a beach watching a Tsunami approach - why run for the hills? Just admire the spectacle.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Sep 26th, 2008 at 04:19:48 AM EST
[ Parent ]
is about right, yep.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Sep 26th, 2008 at 05:01:51 AM EST
[ Parent ]

JPMorgan acquires WaMu deposits

JPMorgan Chase has acquired the banking operations of Washington Mutual which was seized by US regulators on Thursday night in the biggest bank failure in US history.

Under the deal, which was brokered by government, JPMorgan will pay $1.9bn to the banking regulator, and acquire all insured and uninsured deposits, assets and some of the liabilities of WaMu's banking operations, including its troubled mortgage portfolio.

JPMorgan will not acquire claims by equity, subordinated and senior debt holders, said the Federal Deposit Insurance Corporation, which facilitated the transaction.

This sounds like a reasonable deal - JPM gets real assets in exchange for dubious liabilities (ie they will pay for the good assets over time), and not just the shareholders, but also the creditors of WaMu get wiped out, as they should.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Sep 26th, 2008 at 04:03:55 AM EST
[ Parent ]
...is not Washington Mutual!!!

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Sep 26th, 2008 at 04:17:38 AM EST
[ Parent ]
wrong header - but the content of the comment is correct.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Sep 26th, 2008 at 05:01:02 AM EST
[ Parent ]
Are you trying to talk down Wachovia's stock price, or something? :-P

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Sep 26th, 2008 at 05:21:26 AM EST
[ Parent ]
It was a Freudian slip - he's wachovian us

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 26th, 2008 at 07:32:10 AM EST
[ Parent ]
Wachovia approaches potential buyers

Wachovia approached potential buyers, including Citigroup, Wells Fargo and Spain's Banco Santander, on Friday after a 27 per cent plunge in its shares deepened fears over the future of the sixth-largest US bank.



Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Sep 27th, 2008 at 08:45:01 AM EST
[ Parent ]
And JPMorgan pulled a BoA -- purchased the "nice" assets (branches, service network and still performing mortgages) and "nice" liabilities (depositors). WM holding company (FSB) is left with the toxic book of subsidiaries.

Diversity is the key to economic and political evolution.
by Cat on Fri Sep 26th, 2008 at 07:48:46 AM EST
[ Parent ]
they're keeping a bunch of the toxic mortgages too.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Sep 26th, 2008 at 10:16:17 AM EST
[ Parent ]
JPMorgan expects to write-down some mortgage income, by as much as 58%, during a "severe recession" in CA. (64% in FL; Somewhere JPM assumptions define a period for "severe recession." Let me guess: 36 months of negative GDP growth? Good luck with that, NBER!)

Conference call including *.ppt presentation. (Not reviewed by me. Meh.) Then they'll own the properties for resale, no? Then the goal-seeking strategy to recover (break-even) is $1.9B. Given west coast RE primary market volatility, that goal could obtain on REO sales alone and much sooner than current "panic" implies. IIRC, median CA residential is still $350K - $400K.

One among many topics of asset-stripping that I find interesting though is how FDIC will liquidate the assets of WM's remaining subsidiaries. And which will the BHC attempt to reserve?

Diversity is the key to economic and political evolution.

by Cat on Fri Sep 26th, 2008 at 11:14:59 AM EST
[ Parent ]
Perhaps FDIC will need some of Paulson's $700 billion, if it hasn't already been given to MS and GS.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Sep 26th, 2008 at 02:20:30 PM EST
[ Parent ]
It now appears that FDIC managed to stick WaMu's holding company with all the toxic shit and has dodged an artillery shell here.  For once!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Sep 27th, 2008 at 10:18:14 AM EST
[ Parent ]
Banks are hoarding all the cash they can (avoiding new deals, not renewing facilities that come to an end and would in normal times be extended, and now even trying to find legal - if not necessarily very proper - ways to sneak out of existing commitments), both because they need it for their own basic needs, and because they simply don't trust the risk represented by other banks.
In addition, as credit sours, the (credit) assets they hold on their balance sheets become more risky, they get downgraded, and then the "capital adequacy requirements" become tighter and the banks don't just need to keep their cash: they need to raise more!

This is partly why the Central Banks have been trading Sovereign debt for crappy collateral: it helps relieve the regulatory caputal pressure on the banks. But they should be not just swapping assets but creating more money. (I know, I know, inflation - but is it inflation or anti-deflation in this case? No credit -> no money, in the fiat money system)

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Sep 26th, 2008 at 04:24:12 AM EST
needs to be fought on the way up, not just on the way down.

Banks were rather happy to be upgraded and have lower capital requirements when their balance sheets looked and smelled of fresh roses. The profits that these rules allowed then (and which were cashed in, no questions asked) cannot be forgotten today.

Accountants are standing firm on this right now (the similarly pro-cyclical mark-to-market rules), and they are right.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Sep 26th, 2008 at 05:00:40 AM EST
[ Parent ]
The profits that these rules allowed then (and which were cashed in, no questions asked) cannot be forgotten today.
Especially for those who cashed in in the last three years, time to make 'em puke!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Sep 26th, 2008 at 02:24:18 PM EST
[ Parent ]
FT.com: Central banks step in as bail-out fears mount
Moreover, the Bank said it will inject longer term money into the sterling markets, as banks had been pressing it to do. It said it will extend its long-term repurchase operations against extended collateral, including mortgages. As of September 29, it will offer £40bn for maturity on January 15, taking banks through the year end when cash is generally hoarded by banks.

Bankers welcomed the move. Stuart Gulliver, chief executive of Global Banking and Markets at HSBC, said: "It's what the market was looking for. It shows a willingness to listen and will alleviate stresses in the UK bank system right through year-end."

Money market rates have been distorted as banks parked money overnight, with overnight funds rates far below the Bank of England's 5.0 per cent rate. However, as of Thursday, money borrowed for three months on an unsecured basis was trading at a crisis high of about 1.5 percentage points above the three-month forward overnight rate, known as SONIA.



A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Sep 26th, 2008 at 04:38:18 AM EST


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