Obama Goes All Out For Dirty Banker Deal

[ucodegen]

[quote=DomoArigato]I’m not surprised that you are a supporter of one of the two major parties (Republican), because you are clearly clueless. JPM didn’t lend out that $390 billion. They just turned around and put it in Treasuries risk-free. Fractional-reserve lending has nothing to do with the massive bailouts the criminal banksters received.[/quote]
And you don’t belong to one or another of those two parties? We currently have a two party system here.. so there is not much choice beyond the two parties. I do wish the Independent party would field someone reasonable.

You also forgot “reserve” in “fractional reserve” banking. Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. The problem is that when things turn upside down, you are on heavy leverage. You now have 100mil in liquid assets in hand, 500mil in liabilities, but those loans are now sour and are worth lets say 250mil (probably less).

Your previous position was 100mil(reserve) +500mil(on held loans) – 500mil(obligations in the form of loans where you as a bank borrowed( for a net total of 100mil => meeting your reserve requirement of 20%.

Your current net position is 100mil(reserve) + 250mil(in held soured loans) – 500mil(obligations where you as a bank borrowed), for a net total of negative 150mil and not able to meet your reserve requirements. The net reserve you had, vaporized with the collapse of the housing ponzi.

To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension.. something has to offset the diff and re-establish balance and reserve. 250mil has to come from somewhere. Remember that previously their net worth was 100mil. This is how the loans from the fed end up being bigger than the previous market cap which is ‘net’ related. The ‘re-established’ reserve HAS to be held in safe securities, ie treasuries or cash (looking at the current gold rush, might have been better to be in gold than treasuries – though unwinding a gold commodities position of that size could be problematic).

PS: The situation is even nastier than I showed above.. I am just oversimplifying to make it easier to diagram/explain. By the way, the only treasuries that are currently yielding 3% or more are 20 and 30 year. There is a risk in holding such treasuries when rates go back up. Current yields are 1Mo=0%, 3Mo=0.01%, 6Mo=0.02%, 1Yr=0.09%, 2Yr=0.20%, 3Yr=0.33%, 5Yr=0.94%, 7Yr=1.52%, 10Yr=2.19%, 20Yr=3.13%, 30Yr=3.54%

What also has to be remembered is that banks are having to deal with the state and fed meddling in established loan contracts.. ie. the foreclosure forbearance and changing terms for when a bank can foreclose. Additionally, there is a potential for bankruptcies to yet again change the terms. So as a bank, it may be safer to not loan the money out.

It seems that people want to borrow, but when things get tough, they want the banks to eat it. Unfortunately these people ignore that the money the banks lend out actually belongs to someone else.. maybe even the pension of the person borrowing the money.

[davelj]

[quote=ucodegen][quote=DomoArigato]I’m not surprised that you are a supporter of one of the two major parties (Republican), because you are clearly clueless. JPM didn’t lend out that $390 billion. They just turned around and put it in Treasuries risk-free. Fractional-reserve lending has nothing to do with the massive bailouts the criminal banksters received.[/quote]
And you don’t belong to one or another of those two parties? We currently have a two party system here.. so there is not much choice beyond the two parties. I do wish the Independent party would field someone reasonable.

You also forgot “reserve” in “fractional reserve” banking. Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. The problem is that when things turn upside down, you are on heavy leverage. You now have 100mil in liquid assets in hand, 500mil in liabilities, but those loans are now sour and are worth lets say 250mil (probably less).

Your previous position was 100mil(reserve) +500mil(on held loans) – 500mil(obligations in the form of loans where you as a bank borrowed( for a net total of 100mil => meeting your reserve requirement of 20%.

Your current net position is 100mil(reserve) + 250mil(in held soured loans) – 500mil(obligations where you as a bank borrowed), for a net total of negative 150mil and not able to meet your reserve requirements. The net reserve you had, vaporized with the collapse of the housing ponzi.

To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension.. something has to offset the diff and re-establish balance and reserve. 250mil has to come from somewhere. Remember that previously their net worth was 100mil. This is how the loans from the fed end up being bigger than the previous market cap which is ‘net’ related. The ‘re-established’ reserve HAS to be held in safe securities, ie treasuries or cash (looking at the current gold rush, might have been better to be in gold than treasuries – though unwinding a gold commodities position of that size could be problematic).[/quote]

First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic. You are profoundly confused as to how a bank uses its balance sheet to make money and what it’s capable of doing vis-a-vis leveraging its equity to create loans. Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits. Contemplate these issues in the context of the discussion.

I apologize for being rude, but… I get irritated when people start blabbing (with such confidence!) about stuff about which they are clearly profoundly misinformed. And to be clear, this is not the realm of opinion – it’s basic accounting.

[quote=ucodegen]
PS: The situation is even nastier than I showed above.. I am just oversimplifying to make it easier to diagram/explain. By the way, the only treasuries that are currently yielding 3% or more are 20 and 30 year. There is a risk in holding such treasuries when rates go back up. Current yields are 1Mo=0%, 3Mo=0.01%, 6Mo=0.02%, 1Yr=0.09%, 2Yr=0.20%, 3Yr=0.33%, 5Yr=0.94%, 7Yr=1.52%, 10Yr=2.19%, 20Yr=3.13%, 30Yr=3.54%
[/quote]

Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.

[davelj]

[quote=ucodegen][quote=DomoArigato]I’m not surprised that you are a supporter of one of the two major parties (Republican), because you are clearly clueless. JPM didn’t lend out that $390 billion. They just turned around and put it in Treasuries risk-free. Fractional-reserve lending has nothing to do with the massive bailouts the criminal banksters received.[/quote]
And you don’t belong to one or another of those two parties? We currently have a two party system here.. so there is not much choice beyond the two parties. I do wish the Independent party would field someone reasonable.

You also forgot “reserve” in “fractional reserve” banking. Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. The problem is that when things turn upside down, you are on heavy leverage. You now have 100mil in liquid assets in hand, 500mil in liabilities, but those loans are now sour and are worth lets say 250mil (probably less).

Your previous position was 100mil(reserve) +500mil(on held loans) – 500mil(obligations in the form of loans where you as a bank borrowed( for a net total of 100mil => meeting your reserve requirement of 20%.

Your current net position is 100mil(reserve) + 250mil(in held soured loans) – 500mil(obligations where you as a bank borrowed), for a net total of negative 150mil and not able to meet your reserve requirements. The net reserve you had, vaporized with the collapse of the housing ponzi.

To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension.. something has to offset the diff and re-establish balance and reserve. 250mil has to come from somewhere. Remember that previously their net worth was 100mil. This is how the loans from the fed end up being bigger than the previous market cap which is ‘net’ related. The ‘re-established’ reserve HAS to be held in safe securities, ie treasuries or cash (looking at the current gold rush, might have been better to be in gold than treasuries – though unwinding a gold commodities position of that size could be problematic).[/quote]

First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic. You are profoundly confused as to how a bank uses its balance sheet to make money and what it’s capable of doing vis-a-vis leveraging its equity to create loans. Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits. Contemplate these issues in the context of the discussion.

I apologize for being rude, but… I get irritated when people start blabbing (with such confidence!) about stuff about which they are clearly profoundly misinformed. And to be clear, this is not the realm of opinion – it’s basic accounting.

[quote=ucodegen]
PS: The situation is even nastier than I showed above.. I am just oversimplifying to make it easier to diagram/explain. By the way, the only treasuries that are currently yielding 3% or more are 20 and 30 year. There is a risk in holding such treasuries when rates go back up. Current yields are 1Mo=0%, 3Mo=0.01%, 6Mo=0.02%, 1Yr=0.09%, 2Yr=0.20%, 3Yr=0.33%, 5Yr=0.94%, 7Yr=1.52%, 10Yr=2.19%, 20Yr=3.13%, 30Yr=3.54%
[/quote]

Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.

[davelj]

[quote=ucodegen][quote=DomoArigato]I’m not surprised that you are a supporter of one of the two major parties (Republican), because you are clearly clueless. JPM didn’t lend out that $390 billion. They just turned around and put it in Treasuries risk-free. Fractional-reserve lending has nothing to do with the massive bailouts the criminal banksters received.[/quote]
And you don’t belong to one or another of those two parties? We currently have a two party system here.. so there is not much choice beyond the two parties. I do wish the Independent party would field someone reasonable.

You also forgot “reserve” in “fractional reserve” banking. Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. The problem is that when things turn upside down, you are on heavy leverage. You now have 100mil in liquid assets in hand, 500mil in liabilities, but those loans are now sour and are worth lets say 250mil (probably less).

Your previous position was 100mil(reserve) +500mil(on held loans) – 500mil(obligations in the form of loans where you as a bank borrowed( for a net total of 100mil => meeting your reserve requirement of 20%.

Your current net position is 100mil(reserve) + 250mil(in held soured loans) – 500mil(obligations where you as a bank borrowed), for a net total of negative 150mil and not able to meet your reserve requirements. The net reserve you had, vaporized with the collapse of the housing ponzi.

To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension.. something has to offset the diff and re-establish balance and reserve. 250mil has to come from somewhere. Remember that previously their net worth was 100mil. This is how the loans from the fed end up being bigger than the previous market cap which is ‘net’ related. The ‘re-established’ reserve HAS to be held in safe securities, ie treasuries or cash (looking at the current gold rush, might have been better to be in gold than treasuries – though unwinding a gold commodities position of that size could be problematic).[/quote]

First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic. You are profoundly confused as to how a bank uses its balance sheet to make money and what it’s capable of doing vis-a-vis leveraging its equity to create loans. Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits. Contemplate these issues in the context of the discussion.

I apologize for being rude, but… I get irritated when people start blabbing (with such confidence!) about stuff about which they are clearly profoundly misinformed. And to be clear, this is not the realm of opinion – it’s basic accounting.

[quote=ucodegen]
PS: The situation is even nastier than I showed above.. I am just oversimplifying to make it easier to diagram/explain. By the way, the only treasuries that are currently yielding 3% or more are 20 and 30 year. There is a risk in holding such treasuries when rates go back up. Current yields are 1Mo=0%, 3Mo=0.01%, 6Mo=0.02%, 1Yr=0.09%, 2Yr=0.20%, 3Yr=0.33%, 5Yr=0.94%, 7Yr=1.52%, 10Yr=2.19%, 20Yr=3.13%, 30Yr=3.54%
[/quote]

Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.

[davelj]

[quote=ucodegen][quote=DomoArigato]I’m not surprised that you are a supporter of one of the two major parties (Republican), because you are clearly clueless. JPM didn’t lend out that $390 billion. They just turned around and put it in Treasuries risk-free. Fractional-reserve lending has nothing to do with the massive bailouts the criminal banksters received.[/quote]
And you don’t belong to one or another of those two parties? We currently have a two party system here.. so there is not much choice beyond the two parties. I do wish the Independent party would field someone reasonable.

You also forgot “reserve” in “fractional reserve” banking. Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. The problem is that when things turn upside down, you are on heavy leverage. You now have 100mil in liquid assets in hand, 500mil in liabilities, but those loans are now sour and are worth lets say 250mil (probably less).

Your previous position was 100mil(reserve) +500mil(on held loans) – 500mil(obligations in the form of loans where you as a bank borrowed( for a net total of 100mil => meeting your reserve requirement of 20%.

Your current net position is 100mil(reserve) + 250mil(in held soured loans) – 500mil(obligations where you as a bank borrowed), for a net total of negative 150mil and not able to meet your reserve requirements. The net reserve you had, vaporized with the collapse of the housing ponzi.

To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension.. something has to offset the diff and re-establish balance and reserve. 250mil has to come from somewhere. Remember that previously their net worth was 100mil. This is how the loans from the fed end up being bigger than the previous market cap which is ‘net’ related. The ‘re-established’ reserve HAS to be held in safe securities, ie treasuries or cash (looking at the current gold rush, might have been better to be in gold than treasuries – though unwinding a gold commodities position of that size could be problematic).[/quote]

First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic. You are profoundly confused as to how a bank uses its balance sheet to make money and what it’s capable of doing vis-a-vis leveraging its equity to create loans. Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits. Contemplate these issues in the context of the discussion.

I apologize for being rude, but… I get irritated when people start blabbing (with such confidence!) about stuff about which they are clearly profoundly misinformed. And to be clear, this is not the realm of opinion – it’s basic accounting.

[quote=ucodegen]
PS: The situation is even nastier than I showed above.. I am just oversimplifying to make it easier to diagram/explain. By the way, the only treasuries that are currently yielding 3% or more are 20 and 30 year. There is a risk in holding such treasuries when rates go back up. Current yields are 1Mo=0%, 3Mo=0.01%, 6Mo=0.02%, 1Yr=0.09%, 2Yr=0.20%, 3Yr=0.33%, 5Yr=0.94%, 7Yr=1.52%, 10Yr=2.19%, 20Yr=3.13%, 30Yr=3.54%
[/quote]

Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.

[davelj]

[quote=ucodegen][quote=DomoArigato]I’m not surprised that you are a supporter of one of the two major parties (Republican), because you are clearly clueless. JPM didn’t lend out that $390 billion. They just turned around and put it in Treasuries risk-free. Fractional-reserve lending has nothing to do with the massive bailouts the criminal banksters received.[/quote]
And you don’t belong to one or another of those two parties? We currently have a two party system here.. so there is not much choice beyond the two parties. I do wish the Independent party would field someone reasonable.

You also forgot “reserve” in “fractional reserve” banking. Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. The problem is that when things turn upside down, you are on heavy leverage. You now have 100mil in liquid assets in hand, 500mil in liabilities, but those loans are now sour and are worth lets say 250mil (probably less).

Your previous position was 100mil(reserve) +500mil(on held loans) – 500mil(obligations in the form of loans where you as a bank borrowed( for a net total of 100mil => meeting your reserve requirement of 20%.

Your current net position is 100mil(reserve) + 250mil(in held soured loans) – 500mil(obligations where you as a bank borrowed), for a net total of negative 150mil and not able to meet your reserve requirements. The net reserve you had, vaporized with the collapse of the housing ponzi.

To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension.. something has to offset the diff and re-establish balance and reserve. 250mil has to come from somewhere. Remember that previously their net worth was 100mil. This is how the loans from the fed end up being bigger than the previous market cap which is ‘net’ related. The ‘re-established’ reserve HAS to be held in safe securities, ie treasuries or cash (looking at the current gold rush, might have been better to be in gold than treasuries – though unwinding a gold commodities position of that size could be problematic).[/quote]

First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic. You are profoundly confused as to how a bank uses its balance sheet to make money and what it’s capable of doing vis-a-vis leveraging its equity to create loans. Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits. Contemplate these issues in the context of the discussion.

I apologize for being rude, but… I get irritated when people start blabbing (with such confidence!) about stuff about which they are clearly profoundly misinformed. And to be clear, this is not the realm of opinion – it’s basic accounting.

[quote=ucodegen]
PS: The situation is even nastier than I showed above.. I am just oversimplifying to make it easier to diagram/explain. By the way, the only treasuries that are currently yielding 3% or more are 20 and 30 year. There is a risk in holding such treasuries when rates go back up. Current yields are 1Mo=0%, 3Mo=0.01%, 6Mo=0.02%, 1Yr=0.09%, 2Yr=0.20%, 3Yr=0.33%, 5Yr=0.94%, 7Yr=1.52%, 10Yr=2.19%, 20Yr=3.13%, 30Yr=3.54%
[/quote]

Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.

[ucodegen]

[quote=davelj]
First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic.[/quote]

So how would you explain the reserve system and the risks it presents should the loans involved end up being ‘soured’ without going to 50 pages. It is a complex subject, particularly to non-accountant people. Remember that to non-accountant people, what gets considered as a credit vs debit can be very confusing and counter intuitive. I tried simplifying(see your second that you took from me w/ respect to rates – my first sentence was “I am just oversimplifying to..”).. maybe way too much, but I am open to your suggestion of how to explain it, demonstrate the risk and why it had to be ‘covered’.. but we don’t have 50 pages here..

[quote davelj]Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits.[/quote] which I basically hinted at in “To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension..”. The deposits are not the ‘banks’ money, but they are custodians of it. Correct me if I am wrong, but isn’t equity the net of assets – liabilities.. and asset, liabilities are the two columns.. not equity?

[quote davelj]
Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.[/quote]
The main point I was trying to address was that the money that was loaned to them from the fed is not making the banks millions/billions, and its primary purpose was to shore up the accounting and keeping the deposits safe as well as making the bank good on any interbank-loans. I was also trying to explain it outside of a pure S&L type of structure. There is a widely spread misconception that the banks are making a mint off the fed money. I tried to make it simple, maybe too simple.. and maybe ended up with foot-in-mouth(keyboard). I am very open to your description.

[ucodegen]

[quote=davelj]
First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic.[/quote]

So how would you explain the reserve system and the risks it presents should the loans involved end up being ‘soured’ without going to 50 pages. It is a complex subject, particularly to non-accountant people. Remember that to non-accountant people, what gets considered as a credit vs debit can be very confusing and counter intuitive. I tried simplifying(see your second that you took from me w/ respect to rates – my first sentence was “I am just oversimplifying to..”).. maybe way too much, but I am open to your suggestion of how to explain it, demonstrate the risk and why it had to be ‘covered’.. but we don’t have 50 pages here..

[quote davelj]Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits.[/quote] which I basically hinted at in “To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension..”. The deposits are not the ‘banks’ money, but they are custodians of it. Correct me if I am wrong, but isn’t equity the net of assets – liabilities.. and asset, liabilities are the two columns.. not equity?

[quote davelj]
Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.[/quote]
The main point I was trying to address was that the money that was loaned to them from the fed is not making the banks millions/billions, and its primary purpose was to shore up the accounting and keeping the deposits safe as well as making the bank good on any interbank-loans. I was also trying to explain it outside of a pure S&L type of structure. There is a widely spread misconception that the banks are making a mint off the fed money. I tried to make it simple, maybe too simple.. and maybe ended up with foot-in-mouth(keyboard). I am very open to your description.

[ucodegen]

[quote=davelj]
First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic.[/quote]

So how would you explain the reserve system and the risks it presents should the loans involved end up being ‘soured’ without going to 50 pages. It is a complex subject, particularly to non-accountant people. Remember that to non-accountant people, what gets considered as a credit vs debit can be very confusing and counter intuitive. I tried simplifying(see your second that you took from me w/ respect to rates – my first sentence was “I am just oversimplifying to..”).. maybe way too much, but I am open to your suggestion of how to explain it, demonstrate the risk and why it had to be ‘covered’.. but we don’t have 50 pages here..

[quote davelj]Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits.[/quote] which I basically hinted at in “To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension..”. The deposits are not the ‘banks’ money, but they are custodians of it. Correct me if I am wrong, but isn’t equity the net of assets – liabilities.. and asset, liabilities are the two columns.. not equity?

[quote davelj]
Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.[/quote]
The main point I was trying to address was that the money that was loaned to them from the fed is not making the banks millions/billions, and its primary purpose was to shore up the accounting and keeping the deposits safe as well as making the bank good on any interbank-loans. I was also trying to explain it outside of a pure S&L type of structure. There is a widely spread misconception that the banks are making a mint off the fed money. I tried to make it simple, maybe too simple.. and maybe ended up with foot-in-mouth(keyboard). I am very open to your description.

[ucodegen]

[quote=davelj]
First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic.[/quote]

So how would you explain the reserve system and the risks it presents should the loans involved end up being ‘soured’ without going to 50 pages. It is a complex subject, particularly to non-accountant people. Remember that to non-accountant people, what gets considered as a credit vs debit can be very confusing and counter intuitive. I tried simplifying(see your second that you took from me w/ respect to rates – my first sentence was “I am just oversimplifying to..”).. maybe way too much, but I am open to your suggestion of how to explain it, demonstrate the risk and why it had to be ‘covered’.. but we don’t have 50 pages here..

[quote davelj]Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits.[/quote] which I basically hinted at in “To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension..”. The deposits are not the ‘banks’ money, but they are custodians of it. Correct me if I am wrong, but isn’t equity the net of assets – liabilities.. and asset, liabilities are the two columns.. not equity?

[quote davelj]
Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.[/quote]
The main point I was trying to address was that the money that was loaned to them from the fed is not making the banks millions/billions, and its primary purpose was to shore up the accounting and keeping the deposits safe as well as making the bank good on any interbank-loans. I was also trying to explain it outside of a pure S&L type of structure. There is a widely spread misconception that the banks are making a mint off the fed money. I tried to make it simple, maybe too simple.. and maybe ended up with foot-in-mouth(keyboard). I am very open to your description.

[ucodegen]

[quote=davelj]
First of all, I have no dog in the Dem vs. Rep discussion here. Having said that… in the 5+ years I’ve been visiting this site I’ve seen some real whoppers of misunderstanding where banks, their balance sheets and reserves are concerned and… this has got to be the winner. You have absolutely no idea what you’re talking about here. I mean zero. Although I must admire the zeal and detail you provide in illuminating your misunderstanding of the topic.[/quote]

So how would you explain the reserve system and the risks it presents should the loans involved end up being ‘soured’ without going to 50 pages. It is a complex subject, particularly to non-accountant people. Remember that to non-accountant people, what gets considered as a credit vs debit can be very confusing and counter intuitive. I tried simplifying(see your second that you took from me w/ respect to rates – my first sentence was “I am just oversimplifying to..”).. maybe way too much, but I am open to your suggestion of how to explain it, demonstrate the risk and why it had to be ‘covered’.. but we don’t have 50 pages here..

[quote davelj]Anyhow, go back to the drawing board and begin with two important principles: (1) in a bank, equity is leveraged, NOT assets (leverage is applied to the right side of the balance sheet, not the left side), and (2) for a bank to leverage its equity it must have… drum roll please… deposits.[/quote] which I basically hinted at in “To not default on the banks creditors, which may be someones (possibly DomArigato’s) bank account or retirement or pension..”. The deposits are not the ‘banks’ money, but they are custodians of it. Correct me if I am wrong, but isn’t equity the net of assets – liabilities.. and asset, liabilities are the two columns.. not equity?

[quote davelj]
Despite the craziness posted above, this is a salient point that I’ve pointed out before. Banks don’t own 30-year treasuries. They don’t even own 5-year treasuries for the most part. Most risk-free securities on banks’ balance sheets have a maturity of less than one year. So, after receiving 15 bps on these ST securities and then paying out 40 bps on the deposits (or borrowings) that fund them… there’s either a negative spread or no spread left. So, while the Fed is certainly providing liquidity – which is important, don’t get me wrong – the banks don’t actually make any money off of it. But it does help in keeping the doors open in times of crisis.[/quote]
The main point I was trying to address was that the money that was loaned to them from the fed is not making the banks millions/billions, and its primary purpose was to shore up the accounting and keeping the deposits safe as well as making the bank good on any interbank-loans. I was also trying to explain it outside of a pure S&L type of structure. There is a widely spread misconception that the banks are making a mint off the fed money. I tried to make it simple, maybe too simple.. and maybe ended up with foot-in-mouth(keyboard). I am very open to your description.

[davelj]

[quote=ucodegen]
Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. (probably less).
[/quote]

Forget about your last post. You’re putting the cart before the horse. There’s no point in discussing this further until you have the VERY basics down. So, you’re going to figure this out for yourself because (a) I think it’s much more instructive than me simply explaining it to you, and (b) given the amount of virtual ink you’ve spilled on this subject, this should be simple for you – you clearly feel you understand all of this pretty well.

Above you discuss taking a $100 million-asset bank and – voila! – turning it into a $500 million-asset bank with “$100 million as reserve” and “borrow[ing] $500 million to loan out.” So, I want you to explain to me how this is done using a typical bank balance sheet.

So, begin with the typical $100-million asset bank’s balance sheet. Use 10-1 leverage to make the math easy and use the following balance sheet items: Cash & Equivalents, Securities, Loans, Other Assets, Deposits, Fed Borrowings, FHLB Borrowings, Other Liabilities, and Common Equity. We’re keeping it very simple here.

So, first show me what a typical $100 million-asset bank balance sheet looks – use your imagination (but not too much!). Second, explain to me how you convert it into a $500 million-asset bank.

And then we can get to the role of the Fed’s banking activities.

[davelj]

[quote=ucodegen]
Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. (probably less).
[/quote]

Forget about your last post. You’re putting the cart before the horse. There’s no point in discussing this further until you have the VERY basics down. So, you’re going to figure this out for yourself because (a) I think it’s much more instructive than me simply explaining it to you, and (b) given the amount of virtual ink you’ve spilled on this subject, this should be simple for you – you clearly feel you understand all of this pretty well.

Above you discuss taking a $100 million-asset bank and – voila! – turning it into a $500 million-asset bank with “$100 million as reserve” and “borrow[ing] $500 million to loan out.” So, I want you to explain to me how this is done using a typical bank balance sheet.

So, begin with the typical $100-million asset bank’s balance sheet. Use 10-1 leverage to make the math easy and use the following balance sheet items: Cash & Equivalents, Securities, Loans, Other Assets, Deposits, Fed Borrowings, FHLB Borrowings, Other Liabilities, and Common Equity. We’re keeping it very simple here.

So, first show me what a typical $100 million-asset bank balance sheet looks – use your imagination (but not too much!). Second, explain to me how you convert it into a $500 million-asset bank.

And then we can get to the role of the Fed’s banking activities.

[davelj]

[quote=ucodegen]
Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. (probably less).
[/quote]

Forget about your last post. You’re putting the cart before the horse. There’s no point in discussing this further until you have the VERY basics down. So, you’re going to figure this out for yourself because (a) I think it’s much more instructive than me simply explaining it to you, and (b) given the amount of virtual ink you’ve spilled on this subject, this should be simple for you – you clearly feel you understand all of this pretty well.

Above you discuss taking a $100 million-asset bank and – voila! – turning it into a $500 million-asset bank with “$100 million as reserve” and “borrow[ing] $500 million to loan out.” So, I want you to explain to me how this is done using a typical bank balance sheet.

So, begin with the typical $100-million asset bank’s balance sheet. Use 10-1 leverage to make the math easy and use the following balance sheet items: Cash & Equivalents, Securities, Loans, Other Assets, Deposits, Fed Borrowings, FHLB Borrowings, Other Liabilities, and Common Equity. We’re keeping it very simple here.

So, first show me what a typical $100 million-asset bank balance sheet looks – use your imagination (but not too much!). Second, explain to me how you convert it into a $500 million-asset bank.

And then we can get to the role of the Fed’s banking activities.

[davelj]

[quote=ucodegen]
Imagine if you are a bank and have 100mil in assets, you have to hold back a percentage.. ie 20% and can loan 80% (20% reserve). One way to do this is loan out the 80mil holding 20mil in safe securities, ie treasuries. The other approach is to use that 100mil as reserve and borrow 500mil to loan out. The 100mil becomes the reserve. (probably less).
[/quote]

Forget about your last post. You’re putting the cart before the horse. There’s no point in discussing this further until you have the VERY basics down. So, you’re going to figure this out for yourself because (a) I think it’s much more instructive than me simply explaining it to you, and (b) given the amount of virtual ink you’ve spilled on this subject, this should be simple for you – you clearly feel you understand all of this pretty well.

Above you discuss taking a $100 million-asset bank and – voila! – turning it into a $500 million-asset bank with “$100 million as reserve” and “borrow[ing] $500 million to loan out.” So, I want you to explain to me how this is done using a typical bank balance sheet.

So, begin with the typical $100-million asset bank’s balance sheet. Use 10-1 leverage to make the math easy and use the following balance sheet items: Cash & Equivalents, Securities, Loans, Other Assets, Deposits, Fed Borrowings, FHLB Borrowings, Other Liabilities, and Common Equity. We’re keeping it very simple here.

So, first show me what a typical $100 million-asset bank balance sheet looks – use your imagination (but not too much!). Second, explain to me how you convert it into a $500 million-asset bank.

And then we can get to the role of the Fed’s banking activities.

[Author]

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