Fearful, you asked: “Do the numbers indicate anything special about the banking system, beyond simply that funds are being borrowed from the TAF?”
Here’s the short(er) answer (than above): That the TAF exists is worrisome, but no more worrisome than lots of other stuff. That the banks are availing themselves of the TAF is not particularly worrisome. It’s just a logical business decision.
An analogy: If Crazy Old Gramps wants to leave his $10 million estate to the Flat Earth Society, then that’s worrisome. But it’s probably no more worrisome than lots of other weird stuff in Crazy Old Gramps’ life. That the Flat Earth Society will gladly accept Crazy Old Gramps’ donation is just good business sense. Neither of these things change the facts that (1) Crazy Old Gramps is, well… crazy, and (2) the Flat Earth Society is in real trouble (Crazy Old Gramps’ donation ain’t gonna help a whole lot in the long term).
Wiley,
I don’t know. I think to some extent we are already seeing real losses (not just paper impairments) and are in the initial stages of a fairly widespread banking problem. The Big Banks (Citigroup, etc.) are on the front end because a lot of their losses are in the securities they hold. Market values drop, securities must be marked down. Most regional and community banks don’t hold particularly risky securities portfolios – they’re not trading entities and generally stick to plain vanilla stuff on the securities end of things. These banks hold mostly small- to medium-sized loans. And losses on these loans take longer to materialize than losses in securities because there’s no posted market price for them. For example, there are a LOT of bad construction loans out there that have not yet been put in the “non-performing” bucket (for technical reasons that I detailed in a previous thread a while back). So there are a LOT of loan losses that have not yet been recognized or realized at the regional and community bank level. I mean a LOT. These have started to trickle in over the last two quarters and we’ll see a tidal wave over the next two to three quarters. Particularly in the high-risk states of Florida, California, Nevada, etc.
So, that didn’t answer your question but at least you have a little color. I’ll guess and say that I think the deepest part of the banking crisis will occur this year, probably in the second half. There will be nowhere to hide by then. I suspect that even though things could fundamentally get worse in 2009, market participants will have accepted that fact and the inevitable recapitalizations (and in the case of some of the larger banks – “re”-recapitalizations) that occur will take that view into consideration. But I’ve been wrong before.
Yeah, I don’t think Karl and I disagree too much as to where this whole mess is going, although we may differ on degree. But I’m paid to be a stickler on these kinds of details. So I am. Don’t get me wrong, it’s good to be right. But it’s better to be right for the right reasons.
