American Investment Banking on the Ropes - Lehman / Citigroup etc. - the 8.5 trillion Bailout

That article states that overnight lending rates went to 8.5%. This is the Fed Funds Rate. A while back I pointed out that the Fed sets a TARGET for the Fed Funds Rate. It is 2%. So the Fed moves to try to lower it as explained earlier by buying Bills in the market.

This action is what they are talking about just now when they say they flooded the system with 100 billion. It cost that much buying to bring it from 8.5% back close to 2%

The world's major central banks are making available nearly $200 billion of liquidity into the markets today www.bloomberg.com/

I didn't find anything strange about this until I went over to Pin for a visit and someone suggested that the Fed is bust, broke, zero dollars in the cuppard. However, confirmation that the Treasury is issueing $40 billion in new bonds seems to suggest that the Fed is broke.

Maybe Dan, or someone else, could explain in a bit more detail. Won't the spread for Fed debt widen with its attedant knock-on effects down the credit food chain? Is there an anticipated run, or acutal, on dollar denominated assets going on at the moment?

rockyracoon wrote:

The world's major central banks are making available nearly $200 billion of liquidity into the markets today www.bloomberg.com/

I didn't find anything strange about this until I went over to Pin for a visit and someone suggested that the Fed is bust, broke, zero dollars in the cuppard. However, confirmation that the Treasury is issueing $40 billion in new bonds seems to suggest that the Fed is broke.

Maybe Dan, or someone else, could explain in a bit more detail. Won't the spread for Fed debt widen with its attedant knock-on effects down the credit food chain? Is there an anticipated run, or acutal, on dollar denominated assets going on at the moment?

There is talk about 7% interest and higher on interbank borrowings. Did anyone else hear it said on RTE (Monday Prime Time) that the Allied Irish Bank had loans of 110 billion out on loan, of which 60 billion is property/construction loans. Please someone tell me I misheard.

Finfacts has a brief report on the same thing - 180 billion. Can we take it that both the dollar as a reserve currency and the finance banking system are gone?

http://www.finfacts.ie/irishfinancenews/article_1014751.shtml

Weimar USA, anyone? Here's a video from pvt citizen USA. He's be a bit OTT but if what he's saying is true. Hmmm . . . (this could deserve its own topic actually if his thesis is correct!)

https://www.youtube.com/watch?v=kqtAzRNhTTY

rockyracoon wrote:

The main question to my mind is do we continue to be subservient to money or do we become the masters of money. Money in and of itself is worthless. It is merely means of transacting business. A convenient method of paying for good and services and measuring the amount of wealth a society creates. We could use dried beans just as readily as dollars, Yen or Euros to transact business or measure wealth.

Yet we somehow have come to believe that banks create wealth. They do not and never have and never will. They appropriate wealth from wealth makers through the use of interest. Banks also dillute wealth by printing excess money when the economy doesn't require the money for proper infrastructural investments.

Until we, the people who are supposed to be the ultimate arbiters of government policy through elective processes, wake up to these simple facts nothing will ever change. Banks have a small part to play in a well functioning economy. They are there to accumulate the excess wealth of the economy through deposits and lend the accumulated wealth in a prudent manner to ventures that create new wealth mechanisms in industry, infrastructure or satisfy the growth needs of an expanding population. That any government on this globe pays interest on its loans for infrastructural projects is plain stupidy.

We are loathe to let governments print money but we feel comfortable letting independent central banks print money whose final clients interest lies with the viability of commercial banks. Surely it is not too hard to enshrine concrete laws into existence which will prohibit govts from printing money unless it is used for productive investment purposes. And, again, laws which require money to be taken out of the system which cannot be used productively. Yet we believe that the "free" market's ability to print money through central banks and commercial loan issuance is somehow more efficient when clearly events over the past year and further back in history show us that the banking free market model is often inefficient and often downright pernicious for the long term interests of society.

Good post. You've written here before about the general state of education of the population on banking and money but the change that is needed will hardly come from the ground up. I think there is a reason for interest rates but I think they might be generally too high and in the long run could they fall ?? In the case of government spending as you say above in bold - the people should pay no or very little interest on money. None preferably. I'm convinced that the Eurozone has funds printed like this - correct me if I'm wrong anyone who knows. I think we're lucky to have a prudent economic entity like Germany at the core of Europe and their thrust in spending is very often towards infrastructure which equals a country's wealth and assets without a doubt. So far the Lehman and Co. upheaval hasn't hit the Eurobanks so much but it could yet though in a smaller way.

As Squire has also said here, money made through speculation on the likes of games like currencies is perverted is it not. Money is a lubricant only - in itself it is valueless and only reflect production as you say. Yet a heavy element of speculation has crept in - gambling. If the oil is my car is a lubricant then do I try to leverage some use out of it other than lubrication?

And is Government the only way of trying to deal with this lubricant in a responsible way or do we try to rely on culture itself as well - perhaps education has a role to play in teaching us about the flows of money around in an economy? Certainly government should pay no interest in capital projects - maybe some current spending too if we could manage to get it right.

Quote :

There is talk about 7% interest and higher on interbank borrowings. Did anyone else here it said on RTE (Monday Prime Time) that the Allied Irish Bank had loans of 110 billion out on loan, of which 60 billion is property/construction loans. Please someone tell me I misheard.

I heard something like those very figures but did he say it was only AIB?

Pervenche Beres the EU Economic and Monetary Affairs Commitee is on now talking about better regulation...

The amount just authorised by the Fed for flushing into the system in dollars by the Central banks is 247 billion dollars.

Last roll of the dice?

johnfás wrote:

Last roll of the dice?

Time to plough up the lawns and plant the veg.

dam, snake eyes again. thats about 10 times this week alone!!!

Don't panic Mr Mannering.

This new 40 billion loan/bond issue by the Treasury to give to the Fed is something I never heard of before and as far as I can see neither has anyone else. I have some work and some sleep to get but I will get back to this later. The term inter bank lending is not used here but I assume it is the exact same as the LIBOR and Fed Funds Rate.

What has happened is the Fed has taken 247 billion and it has swapped this with the ECB and numerous central banks for their currencies so that the central banks can have cash to liquidify their own countries. Bear in mind that the shortage (which is driving up the overnight dollar rate) is of dollars so the likes of the ECB had to flood in dollars and not euros. The intention is that all this will be undone and this money will be redrawn from the market. It is different from bailouts and from monetization

There is a lot happening here but the most important for me is that gold is up about 110 dollars in the last 24 hours

youngdan wrote:

Don't panic Mr Mannering.

This new 40 billion loan/bond issue by the Treasury to give to the Fed is something I never heard of before and as far as I can see neither has anyone else. I have some work and some sleep to get but I will get back to this later. The term inter bank lending is not used here but I assume it is the exact same as the LIBOR and Fed Funds Rate.

What has happened is the Fed has taken 247 billion and it has swapped this with the ECB and numerous central banks for their currencies so that the central banks can have cash to liquidify their own countries. Bear in mind that the shortage (which is driving up the overnight dollar rate) is of dollars so the likes of the ECB had to flood in dollars and not euros. The intention is that all this will be undone and this money will be redrawn from the market. It is different from bailouts and from monetization

There is a lot happening here but the most important for me is that gold is up about 110 dollars in the last 24 hours

Thanks: I get that, what I don't get is why they want dollars - any thoughts?


Silver up too. Will you fry it or boil it youngdan?

Lloyds takeover of HBOS might result in 40,000 redundancies according to a few papers and sites today. Scaremongering or the upshot of all these movements going on between banks now?

The Telegraph wrote:

Work ground to a halt as employees, regardless of their seniority, switched their computers over to news web sites after being alerted in the calls from friends and family that Lloyds TSB had emerged as a surprise saviour.

There was an audible rumble up and down the eight storey building, near London's landmark Liverpool Street station, when the word spread that the rout of HBOS shares had been abruptly halted.

"I can't tell you how relieved people were that the red ink disappeared from the screens for the first time in two days and the price started climbing again," said one relieved IT specialist.

But the initial euphoria at the lifting of the immediate threat to the business was only short-lived as staff across all the HBOS centres in England and Scotland digested the implications of the creation of a new High Street banking monolith.
...
As rumours spread throughout the building that the job losses could be as high as 40,000, with 1,000 branch closures, the mood of optimism evaporated completely. The emergency statement from Unite, the trade union, pleading for no compulsory redundancies only served to heighten the sense of fear permeating the company's offices.

HBOS - Lloyds takeover: Relief turns to fear as staff fear 40,000 job losses - Telegraph


Long and negative analysis by Hamish McRae in the London Indo today

Quote :

beginnings of a deeper slide for the real economy? This week has been extraordinary. We were talking yesterday with some senior bankers and they agreed that the only similar time in terms of the febrile mood in London was the collapse of Burmah Oil and the plunge of equities at the beginning of 1975. For New York, well, what has been happening there is surely bigger than anything since the 1930s.

So those of us who thought that this period of financial stress was not as bad as that of several others post war have been proved wrong as far as the banking industry is concerned. Leave aside the Lehman Brothers business; what has happened to HBOS is seismic. If anyone had said in 2001 when the former great building society, the Halifax, merged with the proud Bank of Scotland (founded in 1695) that the two would within seven years be contemplating a forced marriage to save their skins – well it would have seemed absurd. So for bankers this has been a terrifying time.
...

Easy money won't help banks weather this global banking crisis

This is starting to make less sense than the Times crossword.

Are the dollars simply a move to try and stabilise currencies?

To my mind financial institutions should
1 Admit their mistakes and either sell or adjust down the value of the assets they bought with borrowed money. Can't proceed without investors and account holders having a clear view.
2 Pay off debt.
3 Try and rebuild their capital base.

Nothing magic about it and no different than any other business.

What they are all now learning is that property isn't a liquid asset. It can be very difficult to shift (even at a loss) when the market turns sour. A lesson I learnt in my teens, but no one listens when they think they are going to make a killing. I clearly remember being told how it was all packaged. That is another I must invite round for lunch some time.

Exactly what Paulson and Bernanke are doing and its ramifications are beyond me. At a guess bond holders are being protected, the risk for share holders has increased and much of the liability could land on the back of the average citizen. They are trying to stop the markets from ceasing up.

Just how long can this sort of intervention continue? How long does it need to continue?

When things get this complicated my gut reaction is walk. The best business model is one that can be written on the back of an A5 sheet of paper. This nonsense reminds me of Enron except the people involved have a printing press and 300 million surfs.

A cousin of mine works for HBOS in London. I would imagine he is fairly worried, must give him a text.

Should we ban short selling internationally?

johnfás wrote:

Should we ban short selling internationally?

and get the kgb (they're better than the cia) to assassinate all hedge fund managers.

I find the notion of short selling particularly abhorrant, not that I entirely understand it. It seems the antithesis of the capitalist system which we are encouraged to support. It seems to me that there should be buying and there should be selling. That each should be governed by two variables, supply and demand.

The notion that one could make money from people not wanting to buy seems to run against the system.

not only that, but they actually prey on weaknesses or percieved weaknesses in companies. like pirhanas, but with less personality/compassion.

what is really distasteful is that these hedge funds start rumours and actively try to rock companies after they've entered into the shortselling agreement.

i believe banks have covertly agreed not to lend to those funds anymore (banks were getting shafted with their own money they lent!)

A markt can not really function without short selling.

They need dollars because the problem was in dollars. There is a huge pool of dollars floating around the world because it being the reserve currency means that a lot of trade is conducted in dollar. These dollars in Europe used to be called Eurodollars. The interbank lending rate referred to means the rate banks were charging one another in Europe to borroe dollars from one another overnight.

Squire wrote:

This is starting to make less sense than the Times crossword.

Are the dollars simply a move to try and stabilise currencies?

To my mind financial institutions should
1 Admit their mistakes and either sell or adjust down the value of the assets they bought with borrowed money. Can't proceed without investors and account holders having a clear view.
2 Pay off debt.
3 Try and rebuild their capital base.

Nothing magic about it and no different than any other business.

Except that the banks have hundreds of thousands of highly complicated contracts based the value of those assets. The problem at the moment is that no-one can value the assets...so no-one knows who's worth what, and the deals themselves are so complicated that even ignoring the problem of not knowing what the base asset is worth it can still take a huge amount of time to work out who owes what to who when the deal is unwound.

When you do factor in the problem that the value of the underlying asset is uncertain, and that the extent of the risk involved is currently unquantifiable (because we're well outside the normal risk analysis envelope), you can see that simply "marking down the value of the assets" is actually impossible.

ibis wrote:

Squire wrote:

This is starting to make less sense than the Times crossword.

Are the dollars simply a move to try and stabilise currencies?

To my mind financial institutions should
1 Admit their mistakes and either sell or adjust down the value of the assets they bought with borrowed money. Can't proceed without investors and account holders having a clear view.
2 Pay off debt.
3 Try and rebuild their capital base.

Nothing magic about it and no different than any other business.

Except that the banks have hundreds of thousands of highly complicated contracts based the value of those assets. The problem at the moment is that no-one can value the assets...so no-one knows who's worth what, and the deals themselves are so complicated that even ignoring the problem of not knowing what the base asset is worth it can still take a huge amount of time to work out who owes what to who when the deal is unwound.

When you do factor in the problem that the value of the underlying asset is uncertain, and that the extent of the risk involved is currently unquantifiable (because we're well outside the normal risk analysis envelope), you can see that simply "marking down the value of the assets" is actually impossible.

The Gordian knot.

No I disagree. The bulk of the problem relates to property, take an educated guess at the likely fall required in that market and mark down the book value accordingly. Then if you are wrong you may be worth more than you guessed or the remaining liability less. You don't have to untangle all the myriad of complications. It is a matter of facing reality sooner rather than making excuses and delaying. Whilst they delay there can be little confidence, so money flows out and no one but the brave want to hold shares in Banks.

Cash flow ends more businesses than lack of profit.

Squire wrote:

The Gordian knot.

No I disagree. The bulk of the problem relates to property, take an educated guess at the likely fall required in that market and mark down the book value accordingly. Then if you are wrong you may be worth more than you guessed or the remaining liability less. You don't have to untangle all the myriad of complications. It is a matter of facing reality sooner rather than making excuses and delaying. Whilst they delay there can be little confidence, so money flows out and no one but the brave want to hold shares in Banks.

Cash flow ends more businesses than lack of profit.

These exotic leveraged mortgages have a book value somewhere despite the rumour that they are financed like shares from all over the place is it? Revaluing the mortgage means we pay the bank less for the mortgages we took out is it? Could this really happen?

The bit in bold is a central statement to this whole affair in my understanding.

1. I think alot of people are getting bogged down in detail and not the watching the story as it unfolds. 3 of the 5 major Wall street banks are gone. They are no more, they are defunct, they are gone to choir heavenly. The remaining two are under severe pressure. Now, some are blaming short sellers. What have short sellers got to do with the cash flow and financial viability of the 2 remaining ducks? Nothing. Nada. Short sellers are putting their bucks where their analysis is. Remember, for every seller there has to be a buyer on the opposite side of the transaction or the shares don't trade hands. There is no one putting a gun to the head of the buyers. These buyers think the shares are good value and buying them. If stock exchanges were to outlaw short selling tomorrow, they essentially be saying that you can only buy a stock on a rising price. This would be more distortive to markets than short selling ever was. This "hate and loathing" of short selling is nothing more than a smokescreen. (Btw, every financial transaction requires a buyer and a seller; one is going long an instrument while the other is taking a short position.)

2. The bad lending practices on loans issued, which underpin the "initials" (CDOs, etc.), have spread beyond the manufacturers of the "initials" into the insurance industry, and indeed into many other parts of the financial matrix. AIG is insolvent and has negative cash flow. From what I can gather, when the Fed essentially bought AIG, the Fed didn't have a dime in the coffers. However, AIG needed cash immediately so the Fed went and printed $40 billion dollars. It didn't sell Treasuriers in order to raise cash because the Fed didn't have any short term Treasuries to sell. (They have some long term Treasuries but that is a different kettle of fish.) So the Fed, like Zimbabwe just recently and like the Weimar Republic in the 1930's, has just stepped over the precipice. It has gone third world. It just turned on the printing pressses. If this is true, it dwarfs anything that has occured up to now.

3. Yesterday, I made a comment about the amount of lawyers working in the banking industry. I came across a UK site similar to the Pin. A person, who claims to work in the investment banking, stated in stark terms the methodology employed by IB'ers and their lawyers. There are hoards of lawyers sitting around figuring ways to subvert the rules and regulations set up by governments. They have so tied up and distorted the regulations and regulators that the explosion of off-balance sheet derivatives has been created which has poisoned the entire financial syste.

Imo, put the blame where the blame is due. It isn't short sellers, investors, speculators or any individuals who have created havoc in the financial system. The system has been undermined by those who are supposed to take care of the system. It's the bankers (including central bankers), the legal profession and the sheer stupidy of politicians that have allowed this situation to develop.

rockyracoon wrote:

From what I can gather, when the Fed essentially bought AIG, the Fed didn't have a dime in the coffers. However, AIG needed cash immediately so the Fed went and printed $40 billion dollars. It didn't sell Treasuriers in order to raise cash because the Fed didn't have any short term Treasuries to sell. (They have some long term Treasuries but that is a different kettle of fish.) So the Fed, like Zimbabwe just recently and like the Weimar Republic in the 1930's, has just stepped over the precipice. It has gone third world. It just turned on the printing pressses. If this is true, it dwarfs anything that has occured up to now.
.

What makes you think this is so?

rockyracoon wrote:

If stock exchanges were to outlaw short selling tomorrow...

They are doing so at midnight tonight

Quote :

Stock market speculators will not be allowed to profit
from the falling share prices of banks and insurance companies,
financial regulators have announced.
The Financial
Services Authority (FSA) unveiled an immediate crackdown on the
activities of hedge funds and other speculators after Gordon Brown said
the financial system needed to "clean up".
The City regulator introduced a ban on the
"short-selling" of banking and other financial shares on the London
stock market. Short-selling is essentially a form of betting; a
technique used by hedge funds and speculators to profit from falling
share prices.

The ban will remain in place until January.


The Telegraph