Bank reserve requirements and the TAF

[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.

[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.

[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.

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