Bank reserve requirements and the TAF

[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]

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.

[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]

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.

[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.

[Author]

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