http://research.stlouisfed.org/fred2...ax_630_378.png



Can anyone interpret that chart? It obviously looks extremely doomsdayish but it can't be that simple?

My understanding would be that the banks are in debt and without their depositors keeping their bank accounts with them, they would be busto as depositors are really lending money to the bank

took 5 minutes, but i got it.

this represents the new borrowing facilities:

those borrowings, according to the new facilities implemented by the fed. those jumped huge when implemented due to strife in the money markets.

these loans are backed by securities such as treasuries and other fed accepted securities (of which some small % are the newly accepted collateral of MBSs)

i think what may be causing this weird graph is that the new loans backed by MBSs or other things that were in SIVs, conduits or other off balance sheet vehicles were used to borrow from the fed as collateral so there wasn't an offsetting adjustment. i could be wrong here, thats just a temporary guess.

Barron

I think what you said makes sense. But what are the implications of this? I don't know enough about the subject to dilute this thread with my own opinions, but would love some input by some of the smarter traders here.

"An active market in reserves acts to redistribute reserves to those banks that need them. However banks cannot create reserves themselves. If the aggregate demand exceeds the existing supply of non-borrowed reserves, the banking system as a whole has no alternative but to borrow more reserves from the Fed."

http://blogs.wsj.com/economics/2008/...s-false-alarm/

Non-Borrowed Reserves: False Alarm

A number of people on Wall Street have noticed a recent plunge in non-borrowed reserves in the banking system and wondered it is a sign of distress in the banking system or of unusually stringent monetary policy.They dropped from $42 billion last November to negative $2 billion at the end of January.

It’s probably a false alarm, though. The drop is purely technical, a function of how the Fed has chosen to classify the money lent through its new Term Auction Facility.

looks like my temporary guess was pretty damned good

Barron

more food for thought:

according to this graph:




So this was not only caused by borrowed reserves going up - as you said - but also caused by a decrease in non-borrowed reserves? According to this graph, even if you DON'T subtract the new "borrowed reserves", you are still in negative territory just with the unborrowed reserves alone.

borrowed reserves + non-borrowed reserves ~= total reserves?

if so then your above post is...um...i can't really think of a nice way to put it.

if that equation is wrong, then you may be onto something.

Barron

yea just put it blunt if you have to. wow i'm an idiot...ignore my last post and let's just call it a brain freeze, for some reason i was thinking total ~= non-borrowed - borrowed.

The Fed is giving banks healthy US treasuries in exchange for dodgy MBS so that they can meet their reserve requirements. Without that swap the MBS would have to be written down and the IBs declare bankruptcy.

no, it is not.

Barron

Yes, it is. You need to start reading up on what all these auction facilities are accepting. And its not just MBS either, its all kind of garbage.

the term "giving" is where you are wrong. they are loaning based on collateral where the banks still owe the full value of the loan.

you need to be sure of what you're saying before you make claims...pawning it off on me needing to "read up on what all these auction facilities are accepting" doesn't make your case any better. there is no giving going on. period.

the banks are on the line for the value of the loan. if they bust, then it is the fed's problem.

they are not giving anything. it is a swap. methinks doth protests too much.

Barron

to be very clear: the fed is not "giving" anything "in exchange for" anything. it is loaning money with various securities as collateral. at no point is the fed taking ownership of the underlying collateral given the banks proffering that collateral do not default. there has never been a default on a fed loan to my knowledge. that doesn't mean it can't happen, but it is highly unlikely. i think the biggest worry is the $29bil backing bear. you should be concentrating on that rather than misstating something you seem to claim to know lots about and telling me to read up on it.

When the Fed engages in these swaps they are stuck with the securities they are given. If they default on the Fed then the Fed has to take the loss. Giving the worthless securities back to the banks would completely negate the entire purpose of the facilities. These swaps will never be called in. They will be rolled over every 28 days in perpetuity (or until such time many years from now when the Fed has inflated so much they are back at par, but that is another kind of default). In accounting when you engage in such a transaction its called an equity stake, so we are looking at defacto nationalization of the IBs.

You can follow the links in my politics thread: The Fed is Becoming Insolvent for all sorts of info on the garbage the Fed has put on its balance sheet on behalf of the banks.

would you liek to bet on the fed defaulting any time in the next, say, 3 - 5 years?

Barron

The Feds already hinting at a default. When the Fed defaults it does so though inflation. The Fed has requested the special ability to have the Treasury borrow more then it needs and give the extra Treasury bills to the Fed because they are running out. If the Fed does this it is acknowledgment of insolvency.

i can't defend the fed's actions at all. i think the bear debacle is the real issue though rather than the bank reserve lending you mentioned.

i'm all for timing the 10yr spike. i would jump in now just to be exposed but know that it'll be a little while before it happens. though this trade has little downside. further decreases in short rates are unlikely to force long rates down...on the other hand, there rae MANY MANY things that can push the yield up on that part of the curve.

Barron

They might not be "giving" per say, but, they're exchanging good paper, t-bills, for bad paper, MBS'. That sounds like a gift to me. At what point will these MBS' become good?

no they are not. define exchanging. who owns the thing that is being exchanged?

the banks CONTINUOUSLY own the MBSs. the fed never owns them. where is the exchange or gift?

Barron

Barron, your being thick headed. You need to read between the lines.

These swaps will never be called in. The entire purpose of the facilities is to take the losses off the banks books and not require them to mark to market. If they returned these securities to them after 28 days they'll have accomplished nothing. We are looking at a perpetual swap, which is no different then an equity stake in these banks (i.e. defacto nationalization).

This makes a lot more sense once you realize we are dealing with a solvency crises, not a liquidity crisis. A liquidity crisis implies that these securities are being undervalued because of a jittery market, and one only need let it calm down and then the securities can be sold at a better price. If this was a liquidity crises the swaps could be terminated after some period of time. However, this is a solvency crises. These instruments are genuinely worthless. Not only that, but once they are marked to market many of the large IBs will be bankrupt. One only need compare their shareholder equity to the size of their level 3 assets.

So if you've got a solvency crisis then these securities can never be returned to the banks to be written down. We are witnessing a back door nationalization of many of the nations largest banks through these perpetual swap facilities.

I'm not familiar with a lot of this, but I thought this was a good read that explains the de facto nationalization.

http://interfluidity.powerblogs.com/...04920896.shtml

Nationalization would mean that the gov't is taking over businesses. I see this as the other way around. Big business taking over the fed. Isn't the CEO of Chase also on the board of directors of the NY Fed?

http://www.ny.frb.org/aboutthefed/org_nydirectors.html

You can't take over something you created and owned from the start.

they didnt have the share of support from the fed that they had before or at least it wasnt clear