Bank reserve requirements and the TAF

[barnaby33]

I was hoping Davelj would comment on this thread at Tickerforum, and be able to add some commentary as tot he validity of this line of thought.

In essence what Genesis is saying here is that the banks have run low enough on deposits that they have stopped initiating loans with hard money and instead are using money borrowed from the FED, via the TAF.

[davelj]

Yeah, basically this guy Genesis doesn’t have a clue as to what he’s talking about, which often happens when otherwise intelligent folks try to decipher the banking industry. As he kind of acknowledges at the beginning of his post: “Let me preface this by saying that I’m not at all certain I understand what I’m looking at here correctly.”

He got it right at the outset. There’s a post, apparently from someone over at Calculated Risk, that’s posted in the middle of the thread that’s approximately correct. (Most importantly, the poster correctly points out the difference between “liquidity reserves” and “capital,” two very different things.)

I’m not going to go through all of the balance sheet math here because it would take too long and wouldn’t accomplish very much. Suffice it to say that banks have five major sources of funding for loans: (1) Common Equity, (2) Trust Preferred and Sub Debt, (3) FHLB Borrowings, (4) Other “Fed-related” borrowings (such as the TAF, currently), and (5) Deposits. If the rates offered through the FHLB system or the TAF are as good or better than the terms that would have to be offered to depositors, then many banks will go with the past of least resistance – FHLB borrowings or the TAF. Remember, deposits not only cost money from the rate side of things but you also have to pay employees, etc. to process them; that is, deposits are “operationally expensive.” Sometimes it’s just cheaper and easier to use the “government’s money” (for lack of a better term), especially when Fed is practically throwing the money at them.

Merely the fact that the banks are availing themselves of the opportunity to use these funds doesn’t mean a whole lot. Nor is it really meaningful to look at liquidity reserves in relation to these funds. If the government gives warning that these funds will no longer be available as of “x” date, the banks will just raise deposit rates, take in sufficient deposits and repay the borrowed funds. Yeah, they’ll see a margin squeeze, but it’s not the end of the world.

Look, the regulators understand liquidity really well. This is a non-issue in the aggregate. The REAL issue is with capital and solvency. And regulators aren’t particularly good at that because it’s hard to analyze a loan portfolio that you didn’t underwrite yourself or a complex MBS portfolio that you didn’t purchase yourself. Liquidity will only become an issue AFTER more capital/solvency issues crop up, as in the recent case of Countrywide.

People should keep their eyes on the losses in the loan and securities’ portfolios. These FHLB/TAF borrowings, while not entirely unimportant, are a red herring.

[barnaby33]

Thanks Dave I appreciate the commentary and have posted a link to this on tickerform.

Josh

[barnaby33]

Thanks Dave I appreciate the commentary and have posted a link to this on tickerform.

Josh

[barnaby33]

Thanks Dave I appreciate the commentary and have posted a link to this on tickerform.

Josh

[barnaby33]

Thanks Dave I appreciate the commentary and have posted a link to this on tickerform.

Josh

[barnaby33]

Thanks Dave I appreciate the commentary and have posted a link to this on tickerform.

Josh

[JWM in SD]

JWM in SD

Old Karl is fun to read but tends to overstate and overshoot things.

You beat me to it Dave. I also read that post on CR as well this morning during breakfast. The more interesting part of that post was what they said about Bernanke and the Fed attempting to inflate to cover the borrowing and only up to that amount. I wouldn’t be surprised if this is true, but it seems like a long shot to me and I don’t think that the FED has the degree of control necessary to accomplish equilibrium between Hyper-Inflation and Deflation.

[Anonymous]

Yeah, ok. Nice try Dave.

Now for extra credit, how much did Citibank pay for their last round of “hard money” to apply to their Tier Capital?

That’d be a double-digit coupon from Abu Dhabi, right?

So yes, the TAF is cheaper. A lot cheaper. But let’s talk a bit about that.

Was there a lot of demand for the TAF? Hmmmm.. what was the “Bid To Cover” on the last TAF? Pretty poor, right?

The premise of my blog entry isn’t that banks are insolvent (and if you read it, you’d know that.) Its that commercial credit demand is collapsing, which is why The Fed is following that collapse down in rate (and will, in fact, likely all the way to zero) and even “sub-market” rates aren’t stimulating credit demand.

Why?

Several reasons, with the most important being a lack of good collateral to post for the loans that people might WANT.

Evidence? How are the sales of all that LBO debt that’s clogging up the bank balance sheets going? Oh, you mean its not selling so well, with bids coming in – when you can find them at all – at 90 at best?

Well now that’s the point, isn’t it?

“No Mas!” – or Guido-style terms being demanded for hard money, The Fed trying to push on a string via the TAF, and yet credit demand continues to collapse, because all the good collateral has already been margined (pledged).

We’re witnessing the velocity of credit creation heading for the ditch – sure, if you practice selective reporting you can find “ramping” areas, but those are the acts of desperate people (e.g. homeowners whacking on their plastic to try to take the place of HELOCs which no longer can be drawn) – and won’t last long.

Bottom line: The Fed is attempting to “restart” the credit creation engine, the attempt is failing, the TAF has replaced the hard money (which has left or demanded extremely high rates of return to come play) and yet even that “artificially-stimulated” demand is anemic and falling quickly.

This is how a deflationary credit collapse gets legs…..

Is it assured? No.

Not yet, anyway, but the markers are there.

http://tickerforum.org – Investing discussions

[JWM in SD]

JWM in SD

Hey Karl, thanks for stopping by 😉

[JWM in SD]

JWM in SD

Hey Karl, thanks for stopping by 😉

[JWM in SD]

JWM in SD

Hey Karl, thanks for stopping by 😉

[JWM in SD]

JWM in SD

Hey Karl, thanks for stopping by 😉

[JWM in SD]

JWM in SD

Hey Karl, thanks for stopping by 😉

[davelj]

Actually, Karl, I didn’t read your whole post or the entire thread. (Who’s got that kind of time?) However, here is a direct quote from your post, which I think cuts to the heart of your position:

“But what it does indicate is that the banks are continuing to lend into a locked “hard money” environment – that is, they are failing to attract capital against which to lend, and are instead borrowing from The Fed to keep the debt initiation cycle going.”

I happen to agree with a lot of what you wrote in your post. What I think you’re doing here, however, is creating causation where none exists. That is, “Because the banks are borrowing from the Fed and only maintaining “X” in liquidity then there’s a problem.”

My point is that there’s nothing sinister about borrowing from the Fed when the rates are (relatively) attractive. Anyone would do this almost regardless of the economic climate.

This is a SEPARATE issue, however, from paying a big price for equity capital which Citigroup – as you point out – and others are doing. The TAF is about liquidity; equity capital via Abu Dhabi (or whomever else) is about solvency. Two largely separate issues in the banking world… UNTIL there’s a run on the bank, as in the case of Countrywide.

Anyhow, I think we agree that the banking complex is in deep trouble. Where we disagree is that you think the Fed borrowing is indicative of something sinister going on while I do not. It’s merely expedient.

However, if you want to continue to believe this, it’s ok with me. No skin off my back. I mean, hell, if you’re bearish on banks – as I am – I think you’ll end up being right, even if it’s partially for the wrong reason. In investing, luck often trumps (faulty) reasoning. Fortunately.

Although I am curious, since you seem very sure of yourself on this topic, what’s your background in banking? Former CEO, CFO, loan officer, Director, private equity investor, examiner? Personally I’m generally wary of providing strong opinions outside of my very few areas of expertise, one of which is banking. But that’s just me.

[Anonymous]

Davelj,

Sure banks will take advantage of the TAF auction… who wouldn’t borrow money at negative real interest rates? And therein lies the problem. It’s not sinister in the sense that something is unethical or unlawful, but given there is no historical analogue for it in our history (not on this scale going back to the 60’s) it should be unnerving.

I guess it is “expedient” if by that, you mean it is the best (only?) tool the Fed has to ensure that banks can continue lend in amounts which will avert a massive credit contraction.

Maybe I am making too big of a deal of the TAF auctions/massive, negative non-borrowed reserves, but perhaps you’re not enough of it.

It’s like WaMu advertising for 6.5% savings accounts and 4.5% free checking. Reminds me of hot-money thrifts in the run-up to the S&L debacle. Banks that engage in huge negative interest margins are desperate and dangerous. I get the same feeling with TAF auctions. It’s a big deal.

[Anonymous]

There is no way to prevent the credit contraction at this point in time.

Look at the latest Fed Loan Officer report. Credit is being tightened across the board, despite very cheap money available via the TAF and the lower FFT.

Why? Because the collateral behind those loans has gone to hell, and without collateral to post borrowers can’t borrow.

We have so few people still alive who remember the last time this happened that all we can go by is the written literature. Such is the nature of long-cycle phenomena – people don’t make the same mistake that got them screwed the last time until most of those participants (or all) are dead.

The last time we saw this sort of speculative excess that exhausted the good collateral available to be posted was in the “Roaring 20s”, and we know how that ended.

We are headed for the same sort of crack-up; the deterioration in collateral is occurring at an insane rate, and is nowhere near over.

We can get a very good estimation of how bad this is going to get by simply looking at what happened during the boom in housing.

Home values went to ~5x annual incomes (medians); the historical average range is 2.5-3x. If we contract to only the historical mean, accounting for the actual monetary inflation (which runs about 2% annually and has for the last 100 years) we get a ~30% peak-to-trough contraction across the entire housing base.

Of course in places where you saw 400% gains in the last three years, you will see near-75% losses!

There is no way to “reflate” out of this – roughly $6 trillion has been MEWed out over the last four years and SPENT. Its gone. It was dumped into the GDP, which is great, but if you look at this in terms of percentages this augers for a 4-5% contraction in GDP! That’s enough to toss us into a very deep recession, and ignores the knock-on effects in industry (which of course were amplified on the way up, and will be on the way down.)

When looking at the aggregate value of the residential housing base, its a roughly $30 trillion number in the United States as of late ’06.

About 40% of that is simply going to disappear, as it was phantom appreciation, driven by speculative premia, not actual increase in value.

We could literally see 10% GDP contraction, which would be an all-on catastrophe.

Do I think it will get that bad? No, but I do think the “best fit” case at present is for a very deep and serious recession, and an utter smashing in the equity markets.

The Fed knows this, and they also know what’s coming – and that they’re powerless to stop it.

Have a gander at the slosh and EFF since the last “cut” – you will find that the EFF is behaving very poorly with very large SDs, which is yet more evidence of severe banking system stress. In addition The Fed is draining slosh in an attempt to prevent an all-out collapse in the EFF; if they cannot get their hands on this and stabilize it, there will be more intrameeting “cuts”, as it is the only option they will have.

Also, look at the MZM velocity rate-of-change – its terrifying. This is the “real deal” in a deflationary credit collapse – the velocity of money goes to near-zero and the funds target drops to zero in a futile attempt to encourage credit origination.

The problem is that there’s no clean collateral against which to lend, and therefore, it doesn’t matter what The Fed wants.

Until transparency – and thus trust – is restored, the system will not clear.

We can either get regulatory intervention to FORCE that transparency, or we will get it when the “infected” institutions go under. Or we can pull a Japan and try to hide all the bad sausage – but we won’t fare as well as they did (and they didn’t fare very well!) as we’re import-dependent, not export-rich.

The “hard money” folks – those with real money, not credit – are and will continue to leave the field with their cash, or demand an insane risk premium (against which it is impossible to make money) until that transparency returns.

PS: Former CEO, now retired. None of this is difficult to figure out if you approach it from an analytical basis and know how to read financial data.

http://tickerforum.org – Investing discussions

[davelj]

kdenninger,

You’re dragging this thing way off track. The original topic here was, in simple form, “Banks (over)using TAF funds – signs of imminent danger or not?” My point was, simply, that the TAF is a source cheap, easy capital so a logical banker will use the funds instead of paying more, both in rates and operating expenses, to raise deposits. Nothing wrong with this.

Now, before I address the TAF a bit more, let me say that I actually agree with a lot of your previous post (maybe I differ in degree – I’m bearish, but perhaps not as bearish as you are). But let’s stick to the topic, shall we?

Banks using TAF funds doesn’t bother me at all (again, it’s logical under the circumstances). However, the mere EXISTENCE of the TAF does bother me. But so does a 3% Fed Funds rate. As do all of these ridiculous “bailout” plans being proposed by our Congress. As did the now failed SIV Superfund. As does the idea of the monoline bailout. As does the $143 billion stimulus plan. As does the… and so on and so on…

My point is that the TAF is a tree. One single tree. And by itself it isn’t that important, frankly. It only has any meaning at all in the context of the forest, which is comprised of those issues in the previous paragraph and many many more. And even in the context of the forest, the TAF is one of the smaller trees. That’s why I’m suggesting that spending a lot of time on this one issue is not particularly worthwhile. If the TAF disappears tomorrow the banks can replace these funds with deposits, albeit they’ll probably have to pay an additional 100 – 150 bps to get the same money. So, yes, their margins will get hurt, but it’s not the end of the world. The TAF is an enabling mechanism but the banks can live without it… just less comfortably. So I’ll say it again, the TAF in the whole scheme of things is a bit of a red herring.

(Also, I didn’t ask whether you were a CEO. I asked whether you were the CEO (etc.) of a BANK. That’s pertinent as we’re discussing BANKING.)

stx,

I think I addressed your issues above as well.

kdenninger, you wrote above that: “None of this is difficult to figure out if you approach it from an analytical basis and know how to read financial data.”

I’m going to completely disagree with you here and explain why. I’ve found that any reasonably intelligent person can learn/understand about 90% of almost any industry fairly quickly. The economics, critical profit drivers, financials, etc. The problem is that the last 10% is the only part that matters. That’s what distinguishes real expertise from amateurs. There are a LOT of ninety percenters out there that don’t even know what they don’t know, although they will be quite dogmatic regarding those things that they think they know (but don’t). Personally, I’ve exceeded the 90% threshold in two industries, one of which is banking. If I’m really lucky that number might get to three (or maybe four) before I die. As Mark Twain once said, “It ain’t the things you don’t know that get you in trouble; it’s the things you know for sure that just ain’t so.” Just something to think about.

[Fearful]

I think the core question, which still hasn’t been answered, except perhaps indirectly:

Do the numbers indicate anything special about the banking system, beyond simply that funds are being borrowed from the TAF?

[barnaby33]

As with all of the questions that are getting asked about the core of our financial systems, there are no black and white answers. I feel really comfortable with Davelj’s answer that banks borrowing via TAF is normal given its the cheapest mechanism. I even asked this of Karl on Tickerforum.

I’d say that Karl is right on when is talking about credit contraction one of the symptoms of which is the anemic bid/ask spread on the latest TAF (I haven’t verified this myself.)

Ultimately Karl and Davelj, I don’t think that you guys really disagree about semantics, merely syntax, perhaps on degree and maybe even a bit on timing. Its like one of you saying, I’m bearish because of “X” and the other saying, hey no, Im bearish because of “X+2.”

I notice neither of you is arguing inflation

Oh and Karl there is another thread here in which Davelj and I discussed deflation vs a sh*tty asset crisis. You might read that, its highly informative. On the user of the term “Liquidity Crisis”

[Wiley]

Great explanation Dave.

How long do you thing it will take for the current banks balance sheet impairments to start becoming a real life banking problem and not just virtual loss problem. With reserve requirements so low I would think they are living on borrowed time not being able to roll their paper.

[davelj]

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.

[drunkle]

what i’m hearing from this thread is that the taf is indicative of a collapse in credit demand. that taf bids are lower than fed rate indicating a lack of demand, despite the annonymity that the taf provides over the discount window…

however, that conflicts with the fact of the existence of such demand for funds at all. that interbank lending is locked up and therefore last resort borrowing is being forced.

as for smaller banks not holding “risky” portfolios… triple a cdo’s weren’t risky at one point in time…

my question is, what is the fed’s authority to create the TAF? and who regulates it? the fed is exercising near autocratic power in simply conjuring up a money/junk bond laundering scheme.

and in a quick search for fdic premiums, it seems that the fdic does not charge for insurance for a majority of banks. bank failure being direct taxpayer bailout vs the fed throwing out a lifeline… either way the system is corrupt as all fck.

[drunkle]

what i’m hearing from this thread is that the taf is indicative of a collapse in credit demand. that taf bids are lower than fed rate indicating a lack of demand, despite the annonymity that the taf provides over the discount window…

however, that conflicts with the fact of the existence of such demand for funds at all. that interbank lending is locked up and therefore last resort borrowing is being forced.

as for smaller banks not holding “risky” portfolios… triple a cdo’s weren’t risky at one point in time…

my question is, what is the fed’s authority to create the TAF? and who regulates it? the fed is exercising near autocratic power in simply conjuring up a money/junk bond laundering scheme.

and in a quick search for fdic premiums, it seems that the fdic does not charge for insurance for a majority of banks. bank failure being direct taxpayer bailout vs the fed throwing out a lifeline… either way the system is corrupt as all fck.

[drunkle]

what i’m hearing from this thread is that the taf is indicative of a collapse in credit demand. that taf bids are lower than fed rate indicating a lack of demand, despite the annonymity that the taf provides over the discount window…

however, that conflicts with the fact of the existence of such demand for funds at all. that interbank lending is locked up and therefore last resort borrowing is being forced.

as for smaller banks not holding “risky” portfolios… triple a cdo’s weren’t risky at one point in time…

my question is, what is the fed’s authority to create the TAF? and who regulates it? the fed is exercising near autocratic power in simply conjuring up a money/junk bond laundering scheme.

and in a quick search for fdic premiums, it seems that the fdic does not charge for insurance for a majority of banks. bank failure being direct taxpayer bailout vs the fed throwing out a lifeline… either way the system is corrupt as all fck.

[drunkle]

what i’m hearing from this thread is that the taf is indicative of a collapse in credit demand. that taf bids are lower than fed rate indicating a lack of demand, despite the annonymity that the taf provides over the discount window…

however, that conflicts with the fact of the existence of such demand for funds at all. that interbank lending is locked up and therefore last resort borrowing is being forced.

as for smaller banks not holding “risky” portfolios… triple a cdo’s weren’t risky at one point in time…

my question is, what is the fed’s authority to create the TAF? and who regulates it? the fed is exercising near autocratic power in simply conjuring up a money/junk bond laundering scheme.

and in a quick search for fdic premiums, it seems that the fdic does not charge for insurance for a majority of banks. bank failure being direct taxpayer bailout vs the fed throwing out a lifeline… either way the system is corrupt as all fck.

[drunkle]

what i’m hearing from this thread is that the taf is indicative of a collapse in credit demand. that taf bids are lower than fed rate indicating a lack of demand, despite the annonymity that the taf provides over the discount window…

however, that conflicts with the fact of the existence of such demand for funds at all. that interbank lending is locked up and therefore last resort borrowing is being forced.

as for smaller banks not holding “risky” portfolios… triple a cdo’s weren’t risky at one point in time…

my question is, what is the fed’s authority to create the TAF? and who regulates it? the fed is exercising near autocratic power in simply conjuring up a money/junk bond laundering scheme.

and in a quick search for fdic premiums, it seems that the fdic does not charge for insurance for a majority of banks. bank failure being direct taxpayer bailout vs the fed throwing out a lifeline… either way the system is corrupt as all fck.

[davelj]

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.

[davelj]

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.

[davelj]

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.

[davelj]

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.

[Wiley]

Great explanation Dave.

How long do you thing it will take for the current banks balance sheet impairments to start becoming a real life banking problem and not just virtual loss problem. With reserve requirements so low I would think they are living on borrowed time not being able to roll their paper.

[Wiley]

Great explanation Dave.

How long do you thing it will take for the current banks balance sheet impairments to start becoming a real life banking problem and not just virtual loss problem. With reserve requirements so low I would think they are living on borrowed time not being able to roll their paper.

[Wiley]

Great explanation Dave.

How long do you thing it will take for the current banks balance sheet impairments to start becoming a real life banking problem and not just virtual loss problem. With reserve requirements so low I would think they are living on borrowed time not being able to roll their paper.

[Wiley]

Great explanation Dave.

How long do you thing it will take for the current banks balance sheet impairments to start becoming a real life banking problem and not just virtual loss problem. With reserve requirements so low I would think they are living on borrowed time not being able to roll their paper.

[barnaby33]

As with all of the questions that are getting asked about the core of our financial systems, there are no black and white answers. I feel really comfortable with Davelj’s answer that banks borrowing via TAF is normal given its the cheapest mechanism. I even asked this of Karl on Tickerforum.

I’d say that Karl is right on when is talking about credit contraction one of the symptoms of which is the anemic bid/ask spread on the latest TAF (I haven’t verified this myself.)

Ultimately Karl and Davelj, I don’t think that you guys really disagree about semantics, merely syntax, perhaps on degree and maybe even a bit on timing. Its like one of you saying, I’m bearish because of “X” and the other saying, hey no, Im bearish because of “X+2.”

I notice neither of you is arguing inflation

Oh and Karl there is another thread here in which Davelj and I discussed deflation vs a sh*tty asset crisis. You might read that, its highly informative. On the user of the term “Liquidity Crisis”

[barnaby33]

As with all of the questions that are getting asked about the core of our financial systems, there are no black and white answers. I feel really comfortable with Davelj’s answer that banks borrowing via TAF is normal given its the cheapest mechanism. I even asked this of Karl on Tickerforum.

I’d say that Karl is right on when is talking about credit contraction one of the symptoms of which is the anemic bid/ask spread on the latest TAF (I haven’t verified this myself.)

Ultimately Karl and Davelj, I don’t think that you guys really disagree about semantics, merely syntax, perhaps on degree and maybe even a bit on timing. Its like one of you saying, I’m bearish because of “X” and the other saying, hey no, Im bearish because of “X+2.”

I notice neither of you is arguing inflation

Oh and Karl there is another thread here in which Davelj and I discussed deflation vs a sh*tty asset crisis. You might read that, its highly informative. On the user of the term “Liquidity Crisis”

[barnaby33]

As with all of the questions that are getting asked about the core of our financial systems, there are no black and white answers. I feel really comfortable with Davelj’s answer that banks borrowing via TAF is normal given its the cheapest mechanism. I even asked this of Karl on Tickerforum.

I’d say that Karl is right on when is talking about credit contraction one of the symptoms of which is the anemic bid/ask spread on the latest TAF (I haven’t verified this myself.)

Ultimately Karl and Davelj, I don’t think that you guys really disagree about semantics, merely syntax, perhaps on degree and maybe even a bit on timing. Its like one of you saying, I’m bearish because of “X” and the other saying, hey no, Im bearish because of “X+2.”

I notice neither of you is arguing inflation

Oh and Karl there is another thread here in which Davelj and I discussed deflation vs a sh*tty asset crisis. You might read that, its highly informative. On the user of the term “Liquidity Crisis”

[barnaby33]

As with all of the questions that are getting asked about the core of our financial systems, there are no black and white answers. I feel really comfortable with Davelj’s answer that banks borrowing via TAF is normal given its the cheapest mechanism. I even asked this of Karl on Tickerforum.

I’d say that Karl is right on when is talking about credit contraction one of the symptoms of which is the anemic bid/ask spread on the latest TAF (I haven’t verified this myself.)

Ultimately Karl and Davelj, I don’t think that you guys really disagree about semantics, merely syntax, perhaps on degree and maybe even a bit on timing. Its like one of you saying, I’m bearish because of “X” and the other saying, hey no, Im bearish because of “X+2.”

I notice neither of you is arguing inflation

Oh and Karl there is another thread here in which Davelj and I discussed deflation vs a sh*tty asset crisis. You might read that, its highly informative. On the user of the term “Liquidity Crisis”

[Fearful]

I think the core question, which still hasn’t been answered, except perhaps indirectly:

Do the numbers indicate anything special about the banking system, beyond simply that funds are being borrowed from the TAF?

[Fearful]

I think the core question, which still hasn’t been answered, except perhaps indirectly:

Do the numbers indicate anything special about the banking system, beyond simply that funds are being borrowed from the TAF?

[Fearful]

I think the core question, which still hasn’t been answered, except perhaps indirectly:

Do the numbers indicate anything special about the banking system, beyond simply that funds are being borrowed from the TAF?

[Fearful]

I think the core question, which still hasn’t been answered, except perhaps indirectly:

Do the numbers indicate anything special about the banking system, beyond simply that funds are being borrowed from the TAF?

[davelj]

kdenninger,

You’re dragging this thing way off track. The original topic here was, in simple form, “Banks (over)using TAF funds – signs of imminent danger or not?” My point was, simply, that the TAF is a source cheap, easy capital so a logical banker will use the funds instead of paying more, both in rates and operating expenses, to raise deposits. Nothing wrong with this.

Now, before I address the TAF a bit more, let me say that I actually agree with a lot of your previous post (maybe I differ in degree – I’m bearish, but perhaps not as bearish as you are). But let’s stick to the topic, shall we?

Banks using TAF funds doesn’t bother me at all (again, it’s logical under the circumstances). However, the mere EXISTENCE of the TAF does bother me. But so does a 3% Fed Funds rate. As do all of these ridiculous “bailout” plans being proposed by our Congress. As did the now failed SIV Superfund. As does the idea of the monoline bailout. As does the $143 billion stimulus plan. As does the… and so on and so on…

My point is that the TAF is a tree. One single tree. And by itself it isn’t that important, frankly. It only has any meaning at all in the context of the forest, which is comprised of those issues in the previous paragraph and many many more. And even in the context of the forest, the TAF is one of the smaller trees. That’s why I’m suggesting that spending a lot of time on this one issue is not particularly worthwhile. If the TAF disappears tomorrow the banks can replace these funds with deposits, albeit they’ll probably have to pay an additional 100 – 150 bps to get the same money. So, yes, their margins will get hurt, but it’s not the end of the world. The TAF is an enabling mechanism but the banks can live without it… just less comfortably. So I’ll say it again, the TAF in the whole scheme of things is a bit of a red herring.

(Also, I didn’t ask whether you were a CEO. I asked whether you were the CEO (etc.) of a BANK. That’s pertinent as we’re discussing BANKING.)

stx,

I think I addressed your issues above as well.

kdenninger, you wrote above that: “None of this is difficult to figure out if you approach it from an analytical basis and know how to read financial data.”

I’m going to completely disagree with you here and explain why. I’ve found that any reasonably intelligent person can learn/understand about 90% of almost any industry fairly quickly. The economics, critical profit drivers, financials, etc. The problem is that the last 10% is the only part that matters. That’s what distinguishes real expertise from amateurs. There are a LOT of ninety percenters out there that don’t even know what they don’t know, although they will be quite dogmatic regarding those things that they think they know (but don’t). Personally, I’ve exceeded the 90% threshold in two industries, one of which is banking. If I’m really lucky that number might get to three (or maybe four) before I die. As Mark Twain once said, “It ain’t the things you don’t know that get you in trouble; it’s the things you know for sure that just ain’t so.” Just something to think about.

[davelj]

kdenninger,

You’re dragging this thing way off track. The original topic here was, in simple form, “Banks (over)using TAF funds – signs of imminent danger or not?” My point was, simply, that the TAF is a source cheap, easy capital so a logical banker will use the funds instead of paying more, both in rates and operating expenses, to raise deposits. Nothing wrong with this.

Now, before I address the TAF a bit more, let me say that I actually agree with a lot of your previous post (maybe I differ in degree – I’m bearish, but perhaps not as bearish as you are). But let’s stick to the topic, shall we?

Banks using TAF funds doesn’t bother me at all (again, it’s logical under the circumstances). However, the mere EXISTENCE of the TAF does bother me. But so does a 3% Fed Funds rate. As do all of these ridiculous “bailout” plans being proposed by our Congress. As did the now failed SIV Superfund. As does the idea of the monoline bailout. As does the $143 billion stimulus plan. As does the… and so on and so on…

My point is that the TAF is a tree. One single tree. And by itself it isn’t that important, frankly. It only has any meaning at all in the context of the forest, which is comprised of those issues in the previous paragraph and many many more. And even in the context of the forest, the TAF is one of the smaller trees. That’s why I’m suggesting that spending a lot of time on this one issue is not particularly worthwhile. If the TAF disappears tomorrow the banks can replace these funds with deposits, albeit they’ll probably have to pay an additional 100 – 150 bps to get the same money. So, yes, their margins will get hurt, but it’s not the end of the world. The TAF is an enabling mechanism but the banks can live without it… just less comfortably. So I’ll say it again, the TAF in the whole scheme of things is a bit of a red herring.

(Also, I didn’t ask whether you were a CEO. I asked whether you were the CEO (etc.) of a BANK. That’s pertinent as we’re discussing BANKING.)

stx,

I think I addressed your issues above as well.

kdenninger, you wrote above that: “None of this is difficult to figure out if you approach it from an analytical basis and know how to read financial data.”

I’m going to completely disagree with you here and explain why. I’ve found that any reasonably intelligent person can learn/understand about 90% of almost any industry fairly quickly. The economics, critical profit drivers, financials, etc. The problem is that the last 10% is the only part that matters. That’s what distinguishes real expertise from amateurs. There are a LOT of ninety percenters out there that don’t even know what they don’t know, although they will be quite dogmatic regarding those things that they think they know (but don’t). Personally, I’ve exceeded the 90% threshold in two industries, one of which is banking. If I’m really lucky that number might get to three (or maybe four) before I die. As Mark Twain once said, “It ain’t the things you don’t know that get you in trouble; it’s the things you know for sure that just ain’t so.” Just something to think about.

[davelj]

kdenninger,

You’re dragging this thing way off track. The original topic here was, in simple form, “Banks (over)using TAF funds – signs of imminent danger or not?” My point was, simply, that the TAF is a source cheap, easy capital so a logical banker will use the funds instead of paying more, both in rates and operating expenses, to raise deposits. Nothing wrong with this.

Now, before I address the TAF a bit more, let me say that I actually agree with a lot of your previous post (maybe I differ in degree – I’m bearish, but perhaps not as bearish as you are). But let’s stick to the topic, shall we?

Banks using TAF funds doesn’t bother me at all (again, it’s logical under the circumstances). However, the mere EXISTENCE of the TAF does bother me. But so does a 3% Fed Funds rate. As do all of these ridiculous “bailout” plans being proposed by our Congress. As did the now failed SIV Superfund. As does the idea of the monoline bailout. As does the $143 billion stimulus plan. As does the… and so on and so on…

My point is that the TAF is a tree. One single tree. And by itself it isn’t that important, frankly. It only has any meaning at all in the context of the forest, which is comprised of those issues in the previous paragraph and many many more. And even in the context of the forest, the TAF is one of the smaller trees. That’s why I’m suggesting that spending a lot of time on this one issue is not particularly worthwhile. If the TAF disappears tomorrow the banks can replace these funds with deposits, albeit they’ll probably have to pay an additional 100 – 150 bps to get the same money. So, yes, their margins will get hurt, but it’s not the end of the world. The TAF is an enabling mechanism but the banks can live without it… just less comfortably. So I’ll say it again, the TAF in the whole scheme of things is a bit of a red herring.

(Also, I didn’t ask whether you were a CEO. I asked whether you were the CEO (etc.) of a BANK. That’s pertinent as we’re discussing BANKING.)

stx,

I think I addressed your issues above as well.

kdenninger, you wrote above that: “None of this is difficult to figure out if you approach it from an analytical basis and know how to read financial data.”

I’m going to completely disagree with you here and explain why. I’ve found that any reasonably intelligent person can learn/understand about 90% of almost any industry fairly quickly. The economics, critical profit drivers, financials, etc. The problem is that the last 10% is the only part that matters. That’s what distinguishes real expertise from amateurs. There are a LOT of ninety percenters out there that don’t even know what they don’t know, although they will be quite dogmatic regarding those things that they think they know (but don’t). Personally, I’ve exceeded the 90% threshold in two industries, one of which is banking. If I’m really lucky that number might get to three (or maybe four) before I die. As Mark Twain once said, “It ain’t the things you don’t know that get you in trouble; it’s the things you know for sure that just ain’t so.” Just something to think about.

[davelj]

kdenninger,

You’re dragging this thing way off track. The original topic here was, in simple form, “Banks (over)using TAF funds – signs of imminent danger or not?” My point was, simply, that the TAF is a source cheap, easy capital so a logical banker will use the funds instead of paying more, both in rates and operating expenses, to raise deposits. Nothing wrong with this.

Now, before I address the TAF a bit more, let me say that I actually agree with a lot of your previous post (maybe I differ in degree – I’m bearish, but perhaps not as bearish as you are). But let’s stick to the topic, shall we?

Banks using TAF funds doesn’t bother me at all (again, it’s logical under the circumstances). However, the mere EXISTENCE of the TAF does bother me. But so does a 3% Fed Funds rate. As do all of these ridiculous “bailout” plans being proposed by our Congress. As did the now failed SIV Superfund. As does the idea of the monoline bailout. As does the $143 billion stimulus plan. As does the… and so on and so on…

My point is that the TAF is a tree. One single tree. And by itself it isn’t that important, frankly. It only has any meaning at all in the context of the forest, which is comprised of those issues in the previous paragraph and many many more. And even in the context of the forest, the TAF is one of the smaller trees. That’s why I’m suggesting that spending a lot of time on this one issue is not particularly worthwhile. If the TAF disappears tomorrow the banks can replace these funds with deposits, albeit they’ll probably have to pay an additional 100 – 150 bps to get the same money. So, yes, their margins will get hurt, but it’s not the end of the world. The TAF is an enabling mechanism but the banks can live without it… just less comfortably. So I’ll say it again, the TAF in the whole scheme of things is a bit of a red herring.

(Also, I didn’t ask whether you were a CEO. I asked whether you were the CEO (etc.) of a BANK. That’s pertinent as we’re discussing BANKING.)

stx,

I think I addressed your issues above as well.

kdenninger, you wrote above that: “None of this is difficult to figure out if you approach it from an analytical basis and know how to read financial data.”

I’m going to completely disagree with you here and explain why. I’ve found that any reasonably intelligent person can learn/understand about 90% of almost any industry fairly quickly. The economics, critical profit drivers, financials, etc. The problem is that the last 10% is the only part that matters. That’s what distinguishes real expertise from amateurs. There are a LOT of ninety percenters out there that don’t even know what they don’t know, although they will be quite dogmatic regarding those things that they think they know (but don’t). Personally, I’ve exceeded the 90% threshold in two industries, one of which is banking. If I’m really lucky that number might get to three (or maybe four) before I die. As Mark Twain once said, “It ain’t the things you don’t know that get you in trouble; it’s the things you know for sure that just ain’t so.” Just something to think about.

[Anonymous]

There is no way to prevent the credit contraction at this point in time.

Look at the latest Fed Loan Officer report. Credit is being tightened across the board, despite very cheap money available via the TAF and the lower FFT.

Why? Because the collateral behind those loans has gone to hell, and without collateral to post borrowers can’t borrow.

We have so few people still alive who remember the last time this happened that all we can go by is the written literature. Such is the nature of long-cycle phenomena – people don’t make the same mistake that got them screwed the last time until most of those participants (or all) are dead.

The last time we saw this sort of speculative excess that exhausted the good collateral available to be posted was in the “Roaring 20s”, and we know how that ended.

We are headed for the same sort of crack-up; the deterioration in collateral is occurring at an insane rate, and is nowhere near over.

We can get a very good estimation of how bad this is going to get by simply looking at what happened during the boom in housing.

Home values went to ~5x annual incomes (medians); the historical average range is 2.5-3x. If we contract to only the historical mean, accounting for the actual monetary inflation (which runs about 2% annually and has for the last 100 years) we get a ~30% peak-to-trough contraction across the entire housing base.

Of course in places where you saw 400% gains in the last three years, you will see near-75% losses!

There is no way to “reflate” out of this – roughly $6 trillion has been MEWed out over the last four years and SPENT. Its gone. It was dumped into the GDP, which is great, but if you look at this in terms of percentages this augers for a 4-5% contraction in GDP! That’s enough to toss us into a very deep recession, and ignores the knock-on effects in industry (which of course were amplified on the way up, and will be on the way down.)

When looking at the aggregate value of the residential housing base, its a roughly $30 trillion number in the United States as of late ’06.

About 40% of that is simply going to disappear, as it was phantom appreciation, driven by speculative premia, not actual increase in value.

We could literally see 10% GDP contraction, which would be an all-on catastrophe.

Do I think it will get that bad? No, but I do think the “best fit” case at present is for a very deep and serious recession, and an utter smashing in the equity markets.

The Fed knows this, and they also know what’s coming – and that they’re powerless to stop it.

Have a gander at the slosh and EFF since the last “cut” – you will find that the EFF is behaving very poorly with very large SDs, which is yet more evidence of severe banking system stress. In addition The Fed is draining slosh in an attempt to prevent an all-out collapse in the EFF; if they cannot get their hands on this and stabilize it, there will be more intrameeting “cuts”, as it is the only option they will have.

Also, look at the MZM velocity rate-of-change – its terrifying. This is the “real deal” in a deflationary credit collapse – the velocity of money goes to near-zero and the funds target drops to zero in a futile attempt to encourage credit origination.

The problem is that there’s no clean collateral against which to lend, and therefore, it doesn’t matter what The Fed wants.

Until transparency – and thus trust – is restored, the system will not clear.

We can either get regulatory intervention to FORCE that transparency, or we will get it when the “infected” institutions go under. Or we can pull a Japan and try to hide all the bad sausage – but we won’t fare as well as they did (and they didn’t fare very well!) as we’re import-dependent, not export-rich.

The “hard money” folks – those with real money, not credit – are and will continue to leave the field with their cash, or demand an insane risk premium (against which it is impossible to make money) until that transparency returns.

PS: Former CEO, now retired. None of this is difficult to figure out if you approach it from an analytical basis and know how to read financial data.

http://tickerforum.org – Investing discussions

[Anonymous]

There is no way to prevent the credit contraction at this point in time.

Look at the latest Fed Loan Officer report. Credit is being tightened across the board, despite very cheap money available via the TAF and the lower FFT.

Why? Because the collateral behind those loans has gone to hell, and without collateral to post borrowers can’t borrow.

We have so few people still alive who remember the last time this happened that all we can go by is the written literature. Such is the nature of long-cycle phenomena – people don’t make the same mistake that got them screwed the last time until most of those participants (or all) are dead.

The last time we saw this sort of speculative excess that exhausted the good collateral available to be posted was in the “Roaring 20s”, and we know how that ended.

We are headed for the same sort of crack-up; the deterioration in collateral is occurring at an insane rate, and is nowhere near over.

We can get a very good estimation of how bad this is going to get by simply looking at what happened during the boom in housing.

Home values went to ~5x annual incomes (medians); the historical average range is 2.5-3x. If we contract to only the historical mean, accounting for the actual monetary inflation (which runs about 2% annually and has for the last 100 years) we get a ~30% peak-to-trough contraction across the entire housing base.

Of course in places where you saw 400% gains in the last three years, you will see near-75% losses!

There is no way to “reflate” out of this – roughly $6 trillion has been MEWed out over the last four years and SPENT. Its gone. It was dumped into the GDP, which is great, but if you look at this in terms of percentages this augers for a 4-5% contraction in GDP! That’s enough to toss us into a very deep recession, and ignores the knock-on effects in industry (which of course were amplified on the way up, and will be on the way down.)

When looking at the aggregate value of the residential housing base, its a roughly $30 trillion number in the United States as of late ’06.

About 40% of that is simply going to disappear, as it was phantom appreciation, driven by speculative premia, not actual increase in value.

We could literally see 10% GDP contraction, which would be an all-on catastrophe.

Do I think it will get that bad? No, but I do think the “best fit” case at present is for a very deep and serious recession, and an utter smashing in the equity markets.

The Fed knows this, and they also know what’s coming – and that they’re powerless to stop it.

Have a gander at the slosh and EFF since the last “cut” – you will find that the EFF is behaving very poorly with very large SDs, which is yet more evidence of severe banking system stress. In addition The Fed is draining slosh in an attempt to prevent an all-out collapse in the EFF; if they cannot get their hands on this and stabilize it, there will be more intrameeting “cuts”, as it is the only option they will have.

Also, look at the MZM velocity rate-of-change – its terrifying. This is the “real deal” in a deflationary credit collapse – the velocity of money goes to near-zero and the funds target drops to zero in a futile attempt to encourage credit origination.

The problem is that there’s no clean collateral against which to lend, and therefore, it doesn’t matter what The Fed wants.

Until transparency – and thus trust – is restored, the system will not clear.

We can either get regulatory intervention to FORCE that transparency, or we will get it when the “infected” institutions go under. Or we can pull a Japan and try to hide all the bad sausage – but we won’t fare as well as they did (and they didn’t fare very well!) as we’re import-dependent, not export-rich.

The “hard money” folks – those with real money, not credit – are and will continue to leave the field with their cash, or demand an insane risk premium (against which it is impossible to make money) until that transparency returns.

PS: Former CEO, now retired. None of this is difficult to figure out if you approach it from an analytical basis and know how to read financial data.

http://tickerforum.org – Investing discussions

[Anonymous]

There is no way to prevent the credit contraction at this point in time.

Look at the latest Fed Loan Officer report. Credit is being tightened across the board, despite very cheap money available via the TAF and the lower FFT.

Why? Because the collateral behind those loans has gone to hell, and without collateral to post borrowers can’t borrow.

We have so few people still alive who remember the last time this happened that all we can go by is the written literature. Such is the nature of long-cycle phenomena – people don’t make the same mistake that got them screwed the last time until most of those participants (or all) are dead.

The last time we saw this sort of speculative excess that exhausted the good collateral available to be posted was in the “Roaring 20s”, and we know how that ended.

We are headed for the same sort of crack-up; the deterioration in collateral is occurring at an insane rate, and is nowhere near over.

We can get a very good estimation of how bad this is going to get by simply looking at what happened during the boom in housing.

Home values went to ~5x annual incomes (medians); the historical average range is 2.5-3x. If we contract to only the historical mean, accounting for the actual monetary inflation (which runs about 2% annually and has for the last 100 years) we get a ~30% peak-to-trough contraction across the entire housing base.

Of course in places where you saw 400% gains in the last three years, you will see near-75% losses!

There is no way to “reflate” out of this – roughly $6 trillion has been MEWed out over the last four years and SPENT. Its gone. It was dumped into the GDP, which is great, but if you look at this in terms of percentages this augers for a 4-5% contraction in GDP! That’s enough to toss us into a very deep recession, and ignores the knock-on effects in industry (which of course were amplified on the way up, and will be on the way down.)

When looking at the aggregate value of the residential housing base, its a roughly $30 trillion number in the United States as of late ’06.

About 40% of that is simply going to disappear, as it was phantom appreciation, driven by speculative premia, not actual increase in value.

We could literally see 10% GDP contraction, which would be an all-on catastrophe.

Do I think it will get that bad? No, but I do think the “best fit” case at present is for a very deep and serious recession, and an utter smashing in the equity markets.

The Fed knows this, and they also know what’s coming – and that they’re powerless to stop it.

Have a gander at the slosh and EFF since the last “cut” – you will find that the EFF is behaving very poorly with very large SDs, which is yet more evidence of severe banking system stress. In addition The Fed is draining slosh in an attempt to prevent an all-out collapse in the EFF; if they cannot get their hands on this and stabilize it, there will be more intrameeting “cuts”, as it is the only option they will have.

Also, look at the MZM velocity rate-of-change – its terrifying. This is the “real deal” in a deflationary credit collapse – the velocity of money goes to near-zero and the funds target drops to zero in a futile attempt to encourage credit origination.

The problem is that there’s no clean collateral against which to lend, and therefore, it doesn’t matter what The Fed wants.

Until transparency – and thus trust – is restored, the system will not clear.

We can either get regulatory intervention to FORCE that transparency, or we will get it when the “infected” institutions go under. Or we can pull a Japan and try to hide all the bad sausage – but we won’t fare as well as they did (and they didn’t fare very well!) as we’re import-dependent, not export-rich.

The “hard money” folks – those with real money, not credit – are and will continue to leave the field with their cash, or demand an insane risk premium (against which it is impossible to make money) until that transparency returns.

PS: Former CEO, now retired. None of this is difficult to figure out if you approach it from an analytical basis and know how to read financial data.

http://tickerforum.org – Investing discussions

[Anonymous]

There is no way to prevent the credit contraction at this point in time.

Look at the latest Fed Loan Officer report. Credit is being tightened across the board, despite very cheap money available via the TAF and the lower FFT.

Why? Because the collateral behind those loans has gone to hell, and without collateral to post borrowers can’t borrow.

We have so few people still alive who remember the last time this happened that all we can go by is the written literature. Such is the nature of long-cycle phenomena – people don’t make the same mistake that got them screwed the last time until most of those participants (or all) are dead.

The last time we saw this sort of speculative excess that exhausted the good collateral available to be posted was in the “Roaring 20s”, and we know how that ended.

We are headed for the same sort of crack-up; the deterioration in collateral is occurring at an insane rate, and is nowhere near over.

We can get a very good estimation of how bad this is going to get by simply looking at what happened during the boom in housing.

Home values went to ~5x annual incomes (medians); the historical average range is 2.5-3x. If we contract to only the historical mean, accounting for the actual monetary inflation (which runs about 2% annually and has for the last 100 years) we get a ~30% peak-to-trough contraction across the entire housing base.

Of course in places where you saw 400% gains in the last three years, you will see near-75% losses!

There is no way to “reflate” out of this – roughly $6 trillion has been MEWed out over the last four years and SPENT. Its gone. It was dumped into the GDP, which is great, but if you look at this in terms of percentages this augers for a 4-5% contraction in GDP! That’s enough to toss us into a very deep recession, and ignores the knock-on effects in industry (which of course were amplified on the way up, and will be on the way down.)

When looking at the aggregate value of the residential housing base, its a roughly $30 trillion number in the United States as of late ’06.

About 40% of that is simply going to disappear, as it was phantom appreciation, driven by speculative premia, not actual increase in value.

We could literally see 10% GDP contraction, which would be an all-on catastrophe.

Do I think it will get that bad? No, but I do think the “best fit” case at present is for a very deep and serious recession, and an utter smashing in the equity markets.

The Fed knows this, and they also know what’s coming – and that they’re powerless to stop it.

Have a gander at the slosh and EFF since the last “cut” – you will find that the EFF is behaving very poorly with very large SDs, which is yet more evidence of severe banking system stress. In addition The Fed is draining slosh in an attempt to prevent an all-out collapse in the EFF; if they cannot get their hands on this and stabilize it, there will be more intrameeting “cuts”, as it is the only option they will have.

Also, look at the MZM velocity rate-of-change – its terrifying. This is the “real deal” in a deflationary credit collapse – the velocity of money goes to near-zero and the funds target drops to zero in a futile attempt to encourage credit origination.

The problem is that there’s no clean collateral against which to lend, and therefore, it doesn’t matter what The Fed wants.

Until transparency – and thus trust – is restored, the system will not clear.

We can either get regulatory intervention to FORCE that transparency, or we will get it when the “infected” institutions go under. Or we can pull a Japan and try to hide all the bad sausage – but we won’t fare as well as they did (and they didn’t fare very well!) as we’re import-dependent, not export-rich.

The “hard money” folks – those with real money, not credit – are and will continue to leave the field with their cash, or demand an insane risk premium (against which it is impossible to make money) until that transparency returns.

PS: Former CEO, now retired. None of this is difficult to figure out if you approach it from an analytical basis and know how to read financial data.

http://tickerforum.org – Investing discussions

[Anonymous]

Davelj,

Sure banks will take advantage of the TAF auction… who wouldn’t borrow money at negative real interest rates? And therein lies the problem. It’s not sinister in the sense that something is unethical or unlawful, but given there is no historical analogue for it in our history (not on this scale going back to the 60’s) it should be unnerving.

I guess it is “expedient” if by that, you mean it is the best (only?) tool the Fed has to ensure that banks can continue lend in amounts which will avert a massive credit contraction.

Maybe I am making too big of a deal of the TAF auctions/massive, negative non-borrowed reserves, but perhaps you’re not enough of it.

It’s like WaMu advertising for 6.5% savings accounts and 4.5% free checking. Reminds me of hot-money thrifts in the run-up to the S&L debacle. Banks that engage in huge negative interest margins are desperate and dangerous. I get the same feeling with TAF auctions. It’s a big deal.

[Anonymous]

Davelj,

Sure banks will take advantage of the TAF auction… who wouldn’t borrow money at negative real interest rates? And therein lies the problem. It’s not sinister in the sense that something is unethical or unlawful, but given there is no historical analogue for it in our history (not on this scale going back to the 60’s) it should be unnerving.

I guess it is “expedient” if by that, you mean it is the best (only?) tool the Fed has to ensure that banks can continue lend in amounts which will avert a massive credit contraction.

Maybe I am making too big of a deal of the TAF auctions/massive, negative non-borrowed reserves, but perhaps you’re not enough of it.

It’s like WaMu advertising for 6.5% savings accounts and 4.5% free checking. Reminds me of hot-money thrifts in the run-up to the S&L debacle. Banks that engage in huge negative interest margins are desperate and dangerous. I get the same feeling with TAF auctions. It’s a big deal.

[Anonymous]

Davelj,

Sure banks will take advantage of the TAF auction… who wouldn’t borrow money at negative real interest rates? And therein lies the problem. It’s not sinister in the sense that something is unethical or unlawful, but given there is no historical analogue for it in our history (not on this scale going back to the 60’s) it should be unnerving.

I guess it is “expedient” if by that, you mean it is the best (only?) tool the Fed has to ensure that banks can continue lend in amounts which will avert a massive credit contraction.

Maybe I am making too big of a deal of the TAF auctions/massive, negative non-borrowed reserves, but perhaps you’re not enough of it.

It’s like WaMu advertising for 6.5% savings accounts and 4.5% free checking. Reminds me of hot-money thrifts in the run-up to the S&L debacle. Banks that engage in huge negative interest margins are desperate and dangerous. I get the same feeling with TAF auctions. It’s a big deal.

[Anonymous]

Davelj,

Sure banks will take advantage of the TAF auction… who wouldn’t borrow money at negative real interest rates? And therein lies the problem. It’s not sinister in the sense that something is unethical or unlawful, but given there is no historical analogue for it in our history (not on this scale going back to the 60’s) it should be unnerving.

I guess it is “expedient” if by that, you mean it is the best (only?) tool the Fed has to ensure that banks can continue lend in amounts which will avert a massive credit contraction.

Maybe I am making too big of a deal of the TAF auctions/massive, negative non-borrowed reserves, but perhaps you’re not enough of it.

It’s like WaMu advertising for 6.5% savings accounts and 4.5% free checking. Reminds me of hot-money thrifts in the run-up to the S&L debacle. Banks that engage in huge negative interest margins are desperate and dangerous. I get the same feeling with TAF auctions. It’s a big deal.

[davelj]

Actually, Karl, I didn’t read your whole post or the entire thread. (Who’s got that kind of time?) However, here is a direct quote from your post, which I think cuts to the heart of your position:

“But what it does indicate is that the banks are continuing to lend into a locked “hard money” environment – that is, they are failing to attract capital against which to lend, and are instead borrowing from The Fed to keep the debt initiation cycle going.”

I happen to agree with a lot of what you wrote in your post. What I think you’re doing here, however, is creating causation where none exists. That is, “Because the banks are borrowing from the Fed and only maintaining “X” in liquidity then there’s a problem.”

My point is that there’s nothing sinister about borrowing from the Fed when the rates are (relatively) attractive. Anyone would do this almost regardless of the economic climate.

This is a SEPARATE issue, however, from paying a big price for equity capital which Citigroup – as you point out – and others are doing. The TAF is about liquidity; equity capital via Abu Dhabi (or whomever else) is about solvency. Two largely separate issues in the banking world… UNTIL there’s a run on the bank, as in the case of Countrywide.

Anyhow, I think we agree that the banking complex is in deep trouble. Where we disagree is that you think the Fed borrowing is indicative of something sinister going on while I do not. It’s merely expedient.

However, if you want to continue to believe this, it’s ok with me. No skin off my back. I mean, hell, if you’re bearish on banks – as I am – I think you’ll end up being right, even if it’s partially for the wrong reason. In investing, luck often trumps (faulty) reasoning. Fortunately.

Although I am curious, since you seem very sure of yourself on this topic, what’s your background in banking? Former CEO, CFO, loan officer, Director, private equity investor, examiner? Personally I’m generally wary of providing strong opinions outside of my very few areas of expertise, one of which is banking. But that’s just me.

[davelj]

Actually, Karl, I didn’t read your whole post or the entire thread. (Who’s got that kind of time?) However, here is a direct quote from your post, which I think cuts to the heart of your position:

“But what it does indicate is that the banks are continuing to lend into a locked “hard money” environment – that is, they are failing to attract capital against which to lend, and are instead borrowing from The Fed to keep the debt initiation cycle going.”

I happen to agree with a lot of what you wrote in your post. What I think you’re doing here, however, is creating causation where none exists. That is, “Because the banks are borrowing from the Fed and only maintaining “X” in liquidity then there’s a problem.”

My point is that there’s nothing sinister about borrowing from the Fed when the rates are (relatively) attractive. Anyone would do this almost regardless of the economic climate.

This is a SEPARATE issue, however, from paying a big price for equity capital which Citigroup – as you point out – and others are doing. The TAF is about liquidity; equity capital via Abu Dhabi (or whomever else) is about solvency. Two largely separate issues in the banking world… UNTIL there’s a run on the bank, as in the case of Countrywide.

Anyhow, I think we agree that the banking complex is in deep trouble. Where we disagree is that you think the Fed borrowing is indicative of something sinister going on while I do not. It’s merely expedient.

However, if you want to continue to believe this, it’s ok with me. No skin off my back. I mean, hell, if you’re bearish on banks – as I am – I think you’ll end up being right, even if it’s partially for the wrong reason. In investing, luck often trumps (faulty) reasoning. Fortunately.

Although I am curious, since you seem very sure of yourself on this topic, what’s your background in banking? Former CEO, CFO, loan officer, Director, private equity investor, examiner? Personally I’m generally wary of providing strong opinions outside of my very few areas of expertise, one of which is banking. But that’s just me.

[davelj]

Actually, Karl, I didn’t read your whole post or the entire thread. (Who’s got that kind of time?) However, here is a direct quote from your post, which I think cuts to the heart of your position:

“But what it does indicate is that the banks are continuing to lend into a locked “hard money” environment – that is, they are failing to attract capital against which to lend, and are instead borrowing from The Fed to keep the debt initiation cycle going.”

I happen to agree with a lot of what you wrote in your post. What I think you’re doing here, however, is creating causation where none exists. That is, “Because the banks are borrowing from the Fed and only maintaining “X” in liquidity then there’s a problem.”

My point is that there’s nothing sinister about borrowing from the Fed when the rates are (relatively) attractive. Anyone would do this almost regardless of the economic climate.

This is a SEPARATE issue, however, from paying a big price for equity capital which Citigroup – as you point out – and others are doing. The TAF is about liquidity; equity capital via Abu Dhabi (or whomever else) is about solvency. Two largely separate issues in the banking world… UNTIL there’s a run on the bank, as in the case of Countrywide.

Anyhow, I think we agree that the banking complex is in deep trouble. Where we disagree is that you think the Fed borrowing is indicative of something sinister going on while I do not. It’s merely expedient.

However, if you want to continue to believe this, it’s ok with me. No skin off my back. I mean, hell, if you’re bearish on banks – as I am – I think you’ll end up being right, even if it’s partially for the wrong reason. In investing, luck often trumps (faulty) reasoning. Fortunately.

Although I am curious, since you seem very sure of yourself on this topic, what’s your background in banking? Former CEO, CFO, loan officer, Director, private equity investor, examiner? Personally I’m generally wary of providing strong opinions outside of my very few areas of expertise, one of which is banking. But that’s just me.

[davelj]

Actually, Karl, I didn’t read your whole post or the entire thread. (Who’s got that kind of time?) However, here is a direct quote from your post, which I think cuts to the heart of your position:

“But what it does indicate is that the banks are continuing to lend into a locked “hard money” environment – that is, they are failing to attract capital against which to lend, and are instead borrowing from The Fed to keep the debt initiation cycle going.”

I happen to agree with a lot of what you wrote in your post. What I think you’re doing here, however, is creating causation where none exists. That is, “Because the banks are borrowing from the Fed and only maintaining “X” in liquidity then there’s a problem.”

My point is that there’s nothing sinister about borrowing from the Fed when the rates are (relatively) attractive. Anyone would do this almost regardless of the economic climate.

This is a SEPARATE issue, however, from paying a big price for equity capital which Citigroup – as you point out – and others are doing. The TAF is about liquidity; equity capital via Abu Dhabi (or whomever else) is about solvency. Two largely separate issues in the banking world… UNTIL there’s a run on the bank, as in the case of Countrywide.

Anyhow, I think we agree that the banking complex is in deep trouble. Where we disagree is that you think the Fed borrowing is indicative of something sinister going on while I do not. It’s merely expedient.

However, if you want to continue to believe this, it’s ok with me. No skin off my back. I mean, hell, if you’re bearish on banks – as I am – I think you’ll end up being right, even if it’s partially for the wrong reason. In investing, luck often trumps (faulty) reasoning. Fortunately.

Although I am curious, since you seem very sure of yourself on this topic, what’s your background in banking? Former CEO, CFO, loan officer, Director, private equity investor, examiner? Personally I’m generally wary of providing strong opinions outside of my very few areas of expertise, one of which is banking. But that’s just me.

[Anonymous]

Yeah, ok. Nice try Dave.

Now for extra credit, how much did Citibank pay for their last round of “hard money” to apply to their Tier Capital?

That’d be a double-digit coupon from Abu Dhabi, right?

So yes, the TAF is cheaper. A lot cheaper. But let’s talk a bit about that.

Was there a lot of demand for the TAF? Hmmmm.. what was the “Bid To Cover” on the last TAF? Pretty poor, right?

The premise of my blog entry isn’t that banks are insolvent (and if you read it, you’d know that.) Its that commercial credit demand is collapsing, which is why The Fed is following that collapse down in rate (and will, in fact, likely all the way to zero) and even “sub-market” rates aren’t stimulating credit demand.

Why?

Several reasons, with the most important being a lack of good collateral to post for the loans that people might WANT.

Evidence? How are the sales of all that LBO debt that’s clogging up the bank balance sheets going? Oh, you mean its not selling so well, with bids coming in – when you can find them at all – at 90 at best?

Well now that’s the point, isn’t it?

“No Mas!” – or Guido-style terms being demanded for hard money, The Fed trying to push on a string via the TAF, and yet credit demand continues to collapse, because all the good collateral has already been margined (pledged).

We’re witnessing the velocity of credit creation heading for the ditch – sure, if you practice selective reporting you can find “ramping” areas, but those are the acts of desperate people (e.g. homeowners whacking on their plastic to try to take the place of HELOCs which no longer can be drawn) – and won’t last long.

Bottom line: The Fed is attempting to “restart” the credit creation engine, the attempt is failing, the TAF has replaced the hard money (which has left or demanded extremely high rates of return to come play) and yet even that “artificially-stimulated” demand is anemic and falling quickly.

This is how a deflationary credit collapse gets legs…..

Is it assured? No.

Not yet, anyway, but the markers are there.

http://tickerforum.org – Investing discussions

[Anonymous]

Yeah, ok. Nice try Dave.

Now for extra credit, how much did Citibank pay for their last round of “hard money” to apply to their Tier Capital?

That’d be a double-digit coupon from Abu Dhabi, right?

So yes, the TAF is cheaper. A lot cheaper. But let’s talk a bit about that.

Was there a lot of demand for the TAF? Hmmmm.. what was the “Bid To Cover” on the last TAF? Pretty poor, right?

The premise of my blog entry isn’t that banks are insolvent (and if you read it, you’d know that.) Its that commercial credit demand is collapsing, which is why The Fed is following that collapse down in rate (and will, in fact, likely all the way to zero) and even “sub-market” rates aren’t stimulating credit demand.

Why?

Several reasons, with the most important being a lack of good collateral to post for the loans that people might WANT.

Evidence? How are the sales of all that LBO debt that’s clogging up the bank balance sheets going? Oh, you mean its not selling so well, with bids coming in – when you can find them at all – at 90 at best?

Well now that’s the point, isn’t it?

“No Mas!” – or Guido-style terms being demanded for hard money, The Fed trying to push on a string via the TAF, and yet credit demand continues to collapse, because all the good collateral has already been margined (pledged).

We’re witnessing the velocity of credit creation heading for the ditch – sure, if you practice selective reporting you can find “ramping” areas, but those are the acts of desperate people (e.g. homeowners whacking on their plastic to try to take the place of HELOCs which no longer can be drawn) – and won’t last long.

Bottom line: The Fed is attempting to “restart” the credit creation engine, the attempt is failing, the TAF has replaced the hard money (which has left or demanded extremely high rates of return to come play) and yet even that “artificially-stimulated” demand is anemic and falling quickly.

This is how a deflationary credit collapse gets legs…..

Is it assured? No.

Not yet, anyway, but the markers are there.

http://tickerforum.org – Investing discussions

[Anonymous]

Yeah, ok. Nice try Dave.

Now for extra credit, how much did Citibank pay for their last round of “hard money” to apply to their Tier Capital?

That’d be a double-digit coupon from Abu Dhabi, right?

So yes, the TAF is cheaper. A lot cheaper. But let’s talk a bit about that.

Was there a lot of demand for the TAF? Hmmmm.. what was the “Bid To Cover” on the last TAF? Pretty poor, right?

The premise of my blog entry isn’t that banks are insolvent (and if you read it, you’d know that.) Its that commercial credit demand is collapsing, which is why The Fed is following that collapse down in rate (and will, in fact, likely all the way to zero) and even “sub-market” rates aren’t stimulating credit demand.

Why?

Several reasons, with the most important being a lack of good collateral to post for the loans that people might WANT.

Evidence? How are the sales of all that LBO debt that’s clogging up the bank balance sheets going? Oh, you mean its not selling so well, with bids coming in – when you can find them at all – at 90 at best?

Well now that’s the point, isn’t it?

“No Mas!” – or Guido-style terms being demanded for hard money, The Fed trying to push on a string via the TAF, and yet credit demand continues to collapse, because all the good collateral has already been margined (pledged).

We’re witnessing the velocity of credit creation heading for the ditch – sure, if you practice selective reporting you can find “ramping” areas, but those are the acts of desperate people (e.g. homeowners whacking on their plastic to try to take the place of HELOCs which no longer can be drawn) – and won’t last long.

Bottom line: The Fed is attempting to “restart” the credit creation engine, the attempt is failing, the TAF has replaced the hard money (which has left or demanded extremely high rates of return to come play) and yet even that “artificially-stimulated” demand is anemic and falling quickly.

This is how a deflationary credit collapse gets legs…..

Is it assured? No.

Not yet, anyway, but the markers are there.

http://tickerforum.org – Investing discussions

[Anonymous]

Yeah, ok. Nice try Dave.

Now for extra credit, how much did Citibank pay for their last round of “hard money” to apply to their Tier Capital?

That’d be a double-digit coupon from Abu Dhabi, right?

So yes, the TAF is cheaper. A lot cheaper. But let’s talk a bit about that.

Was there a lot of demand for the TAF? Hmmmm.. what was the “Bid To Cover” on the last TAF? Pretty poor, right?

The premise of my blog entry isn’t that banks are insolvent (and if you read it, you’d know that.) Its that commercial credit demand is collapsing, which is why The Fed is following that collapse down in rate (and will, in fact, likely all the way to zero) and even “sub-market” rates aren’t stimulating credit demand.

Why?

Several reasons, with the most important being a lack of good collateral to post for the loans that people might WANT.

Evidence? How are the sales of all that LBO debt that’s clogging up the bank balance sheets going? Oh, you mean its not selling so well, with bids coming in – when you can find them at all – at 90 at best?

Well now that’s the point, isn’t it?

“No Mas!” – or Guido-style terms being demanded for hard money, The Fed trying to push on a string via the TAF, and yet credit demand continues to collapse, because all the good collateral has already been margined (pledged).

We’re witnessing the velocity of credit creation heading for the ditch – sure, if you practice selective reporting you can find “ramping” areas, but those are the acts of desperate people (e.g. homeowners whacking on their plastic to try to take the place of HELOCs which no longer can be drawn) – and won’t last long.

Bottom line: The Fed is attempting to “restart” the credit creation engine, the attempt is failing, the TAF has replaced the hard money (which has left or demanded extremely high rates of return to come play) and yet even that “artificially-stimulated” demand is anemic and falling quickly.

This is how a deflationary credit collapse gets legs…..

Is it assured? No.

Not yet, anyway, but the markers are there.

http://tickerforum.org – Investing discussions

[JWM in SD]

JWM in SD

Old Karl is fun to read but tends to overstate and overshoot things.

You beat me to it Dave. I also read that post on CR as well this morning during breakfast. The more interesting part of that post was what they said about Bernanke and the Fed attempting to inflate to cover the borrowing and only up to that amount. I wouldn’t be surprised if this is true, but it seems like a long shot to me and I don’t think that the FED has the degree of control necessary to accomplish equilibrium between Hyper-Inflation and Deflation.

[JWM in SD]

JWM in SD

Old Karl is fun to read but tends to overstate and overshoot things.

You beat me to it Dave. I also read that post on CR as well this morning during breakfast. The more interesting part of that post was what they said about Bernanke and the Fed attempting to inflate to cover the borrowing and only up to that amount. I wouldn’t be surprised if this is true, but it seems like a long shot to me and I don’t think that the FED has the degree of control necessary to accomplish equilibrium between Hyper-Inflation and Deflation.

[JWM in SD]

JWM in SD

Old Karl is fun to read but tends to overstate and overshoot things.

You beat me to it Dave. I also read that post on CR as well this morning during breakfast. The more interesting part of that post was what they said about Bernanke and the Fed attempting to inflate to cover the borrowing and only up to that amount. I wouldn’t be surprised if this is true, but it seems like a long shot to me and I don’t think that the FED has the degree of control necessary to accomplish equilibrium between Hyper-Inflation and Deflation.

[JWM in SD]

JWM in SD

Old Karl is fun to read but tends to overstate and overshoot things.

You beat me to it Dave. I also read that post on CR as well this morning during breakfast. The more interesting part of that post was what they said about Bernanke and the Fed attempting to inflate to cover the borrowing and only up to that amount. I wouldn’t be surprised if this is true, but it seems like a long shot to me and I don’t think that the FED has the degree of control necessary to accomplish equilibrium between Hyper-Inflation and Deflation.

[davelj]

Yeah, basically this guy Genesis doesn’t have a clue as to what he’s talking about, which often happens when otherwise intelligent folks try to decipher the banking industry. As he kind of acknowledges at the beginning of his post: “Let me preface this by saying that I’m not at all certain I understand what I’m looking at here correctly.”

He got it right at the outset. There’s a post, apparently from someone over at Calculated Risk, that’s posted in the middle of the thread that’s approximately correct. (Most importantly, the poster correctly points out the difference between “liquidity reserves” and “capital,” two very different things.)

I’m not going to go through all of the balance sheet math here because it would take too long and wouldn’t accomplish very much. Suffice it to say that banks have five major sources of funding for loans: (1) Common Equity, (2) Trust Preferred and Sub Debt, (3) FHLB Borrowings, (4) Other “Fed-related” borrowings (such as the TAF, currently), and (5) Deposits. If the rates offered through the FHLB system or the TAF are as good or better than the terms that would have to be offered to depositors, then many banks will go with the past of least resistance – FHLB borrowings or the TAF. Remember, deposits not only cost money from the rate side of things but you also have to pay employees, etc. to process them; that is, deposits are “operationally expensive.” Sometimes it’s just cheaper and easier to use the “government’s money” (for lack of a better term), especially when Fed is practically throwing the money at them.

Merely the fact that the banks are availing themselves of the opportunity to use these funds doesn’t mean a whole lot. Nor is it really meaningful to look at liquidity reserves in relation to these funds. If the government gives warning that these funds will no longer be available as of “x” date, the banks will just raise deposit rates, take in sufficient deposits and repay the borrowed funds. Yeah, they’ll see a margin squeeze, but it’s not the end of the world.

Look, the regulators understand liquidity really well. This is a non-issue in the aggregate. The REAL issue is with capital and solvency. And regulators aren’t particularly good at that because it’s hard to analyze a loan portfolio that you didn’t underwrite yourself or a complex MBS portfolio that you didn’t purchase yourself. Liquidity will only become an issue AFTER more capital/solvency issues crop up, as in the recent case of Countrywide.

People should keep their eyes on the losses in the loan and securities’ portfolios. These FHLB/TAF borrowings, while not entirely unimportant, are a red herring.

[davelj]

Yeah, basically this guy Genesis doesn’t have a clue as to what he’s talking about, which often happens when otherwise intelligent folks try to decipher the banking industry. As he kind of acknowledges at the beginning of his post: “Let me preface this by saying that I’m not at all certain I understand what I’m looking at here correctly.”

He got it right at the outset. There’s a post, apparently from someone over at Calculated Risk, that’s posted in the middle of the thread that’s approximately correct. (Most importantly, the poster correctly points out the difference between “liquidity reserves” and “capital,” two very different things.)

I’m not going to go through all of the balance sheet math here because it would take too long and wouldn’t accomplish very much. Suffice it to say that banks have five major sources of funding for loans: (1) Common Equity, (2) Trust Preferred and Sub Debt, (3) FHLB Borrowings, (4) Other “Fed-related” borrowings (such as the TAF, currently), and (5) Deposits. If the rates offered through the FHLB system or the TAF are as good or better than the terms that would have to be offered to depositors, then many banks will go with the past of least resistance – FHLB borrowings or the TAF. Remember, deposits not only cost money from the rate side of things but you also have to pay employees, etc. to process them; that is, deposits are “operationally expensive.” Sometimes it’s just cheaper and easier to use the “government’s money” (for lack of a better term), especially when Fed is practically throwing the money at them.

Merely the fact that the banks are availing themselves of the opportunity to use these funds doesn’t mean a whole lot. Nor is it really meaningful to look at liquidity reserves in relation to these funds. If the government gives warning that these funds will no longer be available as of “x” date, the banks will just raise deposit rates, take in sufficient deposits and repay the borrowed funds. Yeah, they’ll see a margin squeeze, but it’s not the end of the world.

Look, the regulators understand liquidity really well. This is a non-issue in the aggregate. The REAL issue is with capital and solvency. And regulators aren’t particularly good at that because it’s hard to analyze a loan portfolio that you didn’t underwrite yourself or a complex MBS portfolio that you didn’t purchase yourself. Liquidity will only become an issue AFTER more capital/solvency issues crop up, as in the recent case of Countrywide.

People should keep their eyes on the losses in the loan and securities’ portfolios. These FHLB/TAF borrowings, while not entirely unimportant, are a red herring.

[davelj]

Yeah, basically this guy Genesis doesn’t have a clue as to what he’s talking about, which often happens when otherwise intelligent folks try to decipher the banking industry. As he kind of acknowledges at the beginning of his post: “Let me preface this by saying that I’m not at all certain I understand what I’m looking at here correctly.”

He got it right at the outset. There’s a post, apparently from someone over at Calculated Risk, that’s posted in the middle of the thread that’s approximately correct. (Most importantly, the poster correctly points out the difference between “liquidity reserves” and “capital,” two very different things.)

I’m not going to go through all of the balance sheet math here because it would take too long and wouldn’t accomplish very much. Suffice it to say that banks have five major sources of funding for loans: (1) Common Equity, (2) Trust Preferred and Sub Debt, (3) FHLB Borrowings, (4) Other “Fed-related” borrowings (such as the TAF, currently), and (5) Deposits. If the rates offered through the FHLB system or the TAF are as good or better than the terms that would have to be offered to depositors, then many banks will go with the past of least resistance – FHLB borrowings or the TAF. Remember, deposits not only cost money from the rate side of things but you also have to pay employees, etc. to process them; that is, deposits are “operationally expensive.” Sometimes it’s just cheaper and easier to use the “government’s money” (for lack of a better term), especially when Fed is practically throwing the money at them.

Merely the fact that the banks are availing themselves of the opportunity to use these funds doesn’t mean a whole lot. Nor is it really meaningful to look at liquidity reserves in relation to these funds. If the government gives warning that these funds will no longer be available as of “x” date, the banks will just raise deposit rates, take in sufficient deposits and repay the borrowed funds. Yeah, they’ll see a margin squeeze, but it’s not the end of the world.

Look, the regulators understand liquidity really well. This is a non-issue in the aggregate. The REAL issue is with capital and solvency. And regulators aren’t particularly good at that because it’s hard to analyze a loan portfolio that you didn’t underwrite yourself or a complex MBS portfolio that you didn’t purchase yourself. Liquidity will only become an issue AFTER more capital/solvency issues crop up, as in the recent case of Countrywide.

People should keep their eyes on the losses in the loan and securities’ portfolios. These FHLB/TAF borrowings, while not entirely unimportant, are a red herring.

[davelj]

Yeah, basically this guy Genesis doesn’t have a clue as to what he’s talking about, which often happens when otherwise intelligent folks try to decipher the banking industry. As he kind of acknowledges at the beginning of his post: “Let me preface this by saying that I’m not at all certain I understand what I’m looking at here correctly.”

He got it right at the outset. There’s a post, apparently from someone over at Calculated Risk, that’s posted in the middle of the thread that’s approximately correct. (Most importantly, the poster correctly points out the difference between “liquidity reserves” and “capital,” two very different things.)

I’m not going to go through all of the balance sheet math here because it would take too long and wouldn’t accomplish very much. Suffice it to say that banks have five major sources of funding for loans: (1) Common Equity, (2) Trust Preferred and Sub Debt, (3) FHLB Borrowings, (4) Other “Fed-related” borrowings (such as the TAF, currently), and (5) Deposits. If the rates offered through the FHLB system or the TAF are as good or better than the terms that would have to be offered to depositors, then many banks will go with the past of least resistance – FHLB borrowings or the TAF. Remember, deposits not only cost money from the rate side of things but you also have to pay employees, etc. to process them; that is, deposits are “operationally expensive.” Sometimes it’s just cheaper and easier to use the “government’s money” (for lack of a better term), especially when Fed is practically throwing the money at them.

Merely the fact that the banks are availing themselves of the opportunity to use these funds doesn’t mean a whole lot. Nor is it really meaningful to look at liquidity reserves in relation to these funds. If the government gives warning that these funds will no longer be available as of “x” date, the banks will just raise deposit rates, take in sufficient deposits and repay the borrowed funds. Yeah, they’ll see a margin squeeze, but it’s not the end of the world.

Look, the regulators understand liquidity really well. This is a non-issue in the aggregate. The REAL issue is with capital and solvency. And regulators aren’t particularly good at that because it’s hard to analyze a loan portfolio that you didn’t underwrite yourself or a complex MBS portfolio that you didn’t purchase yourself. Liquidity will only become an issue AFTER more capital/solvency issues crop up, as in the recent case of Countrywide.

People should keep their eyes on the losses in the loan and securities’ portfolios. These FHLB/TAF borrowings, while not entirely unimportant, are a red herring.

[Author]

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