Bloomberg produced a useful itemization of the funds committed by the Treasury and the Federal Reserve to date. So far, much of this credit has not been actually spent and much of that has had little effect since the funds simply shuffle paper from one institutional folder to another. Says Dana Johnson, chief economist for Comerica Bank in Dallas,
“The comparison to GDP serves the useful purpose of underscoring how extraordinary the efforts have been to stabilize the credit markets,” said
“Everything the Fed, the FDIC and the Treasury do doesn’t always work out right but back in October we came within an eyelash of having a truly horrible collapse of our financial system, said Johnson, a former Fed senior economist. “They used their creativity to help the worst-case scenario from unfolding and I’m awfully glad they did it.”
A truly horrible collapse, is there any other kind?
Just like Lehman Brothers bankruptcy. Was that orchestrated by the Treasury and the Fed, to invite more moral hazard? wouldn’t it help to ease the path to more and more bailouts if the alternative is demonstrated to be a truly horrible collapse?
How about Paul Kanjorski’s description of the run on US money market securities shortly thereafter?
On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn’t be further panic out there.
If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.
We are no better off today than we were 3 months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment.
That also sounds like a truly horrible collapse … averted! How much of what happnen is really known? Not much, the whole thing sounds like a scam.
These are the Bloomberg figures:
===========================================================
--- Amounts (Billions)---
Limit Current
===========================================================
Total $12,798.14 $4,169.71
-----------------------------------------------------------
Federal Reserve Total $7,765.64 $1,678.71
Primary Credit Discount $110.74 $61.31
Secondary Credit $0.19 $1.00
Primary dealer and others $147.00 $20.18
ABCP Liquidity $152.11 $6.85
AIG Credit $60.00 $43.19
Net Portfolio CP Funding $1,800.00 $241.31
Maiden Lane (Bear Stearns) $29.50 $28.82
Maiden Lane II (AIG) $22.50 $18.54
Maiden Lane III (AIG) $30.00 $24.04
Term Securities Lending $250.00 $88.55
Term Auction Facility $900.00 $468.59
Securities lending overnight $10.00 $4.41
Term Asset-Backed Loan Facility $900.00 $4.71
Currency Swaps/Other Assets $606.00 $377.87
MMIFF $540.00 $0.00
GSE Debt Purchases $600.00 $50.39
GSE Mortgage-Backed Securities $1,000.00 $236.16
Citigroup Bailout Fed Portion $220.40 $0.00
Bank of America Bailout $87.20 $0.00
Commitment to Buy Treasuries $300.00 $7.50
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FDIC Total $2,038.50 $357.50
Public-Private Investment* $500.00 0.00
FDIC Liquidity Guarantees $1,400.00 $316.50
GE $126.00 $41.00
Citigroup Bailout FDIC $10.00 $0.00
Bank of America Bailout FDIC $2.50 $0.00
-----------------------------------------------------------
Treasury Total $2,694.00 $1,833.50
TARP $700.00 $599.50
Tax Break for Banks $29.00 $29.00
Stimulus Package (Bush) $168.00 $168.00
Stimulus II (Obama) $787.00 $787.00
Treasury Exchange Stabilization $50.00 $50.00
Student Loan Purchases $60.00 $0.00
Support for Fannie/Freddie $400.00 $200.00
Line of Credit for FDIC* $500.00 $0.00
-----------------------------------------------------------
HUD Total $300.00 $300.00
Hope for Homeowners FHA $300.00 $300.00
-----------------------------------------------------------
he FDIC’s commitment to guarantee lending under the
Legacy Loan Program and the Legacy Asset Program includes a $500
billion line of credit from the U.S. Treasury.
Yowza!!! Thatza Real Money!
Hussman rants the Geithner plan to recycle toxic bank assets screws depositors and taxpayers in favor of the various banks’ bond holders. The question is … why would Geithner promote this approach? Hussman believes the banks’ bondholders have the means to shoulder most if not all of the balance sheet heavy lifting since only a percentage of the loans in question are toxic. I don’t agree about that particular insight but I do know one thing:
Geithner will undoubtedly prevent yet another truly horrible collapse! Good thing for Geithner.
Hussman proposes a a more reasoned solution to the asset problem than Geithner’s, ‘Dump the Mess on the FDIC and Put It Out of Business Plan’:
Stabilize insolvent financial institutions through receivership if the bondholders of the institution are unwilling to swap debt for equity. In virtually all cases, the liabilities of these companies to their own bondholders are capable of fully absorbing all losses without the need for public funds to defend those bondholders. Receivership involves defending the customer assets, changing the management, wiping out the common stock and a portion of the bondholders’ claims, continuing the operation of the institution in receivership, and eventually selling or reissuing the company to private ownership, leaving the bondholders with the residual. Massive bailouts using public funds are unnecessary, as are disorganized Lehman-style failures.
The Hussman plan’s exposure of bondholders to bad loans contains an uncertainty. The real problem is it doesn’t provide any cheap theatrics, isn’t a version of ‘Three Card Monte’ and has been done expertly by Sheila Bair @ FDIC when she closed Washington Mutual. (Mentioned in the article) Consequently, this plan has zero- percent chance of being adopted. It also may explain why the FDIC is the fall guy for the Geithner plan.
Most of what is spooned to the public as policy in Washington is the manifestation of personal rivalries. I would have chosen Bair over Geithner and so would have many others … except for stockholders in Washington Mutual … and Larry Summers. One of whom – Summers or Geithner – is the other’s buttboy. Summers had to pull Obama’s knickers to get Geithner over his income tax flap- debacle. One more bit of evidence that the main players are strictly out for themselves and not the citizens. The public servant Geithner would have withdrawn his name from consideration … but he didn’t.
As for the uncertainty problem, Hussman includes a follow up on mortgage relief; he would restructure the finance companies that hold the loans under receivership. This restructuring would in effect allow the loan principal amounts to be reduced with any appreciation forward falling to the Treasury under an agreement between the homeowner and the Government. The Feds would enable the transaction and nothing else:
As with financial institutions, insolvent mortgages would best be addressed by a) voluntarily swapping debt for equity, or failing that; b) technical default and restructuring of the debt obligation.
From the standpoint of homeowners, a debt-equity swap is equivalent to writing down the mortgage principal, while at the same time giving the lender an equal and offsetting claim on the future appreciation of the home. As I noted in The Economy Needs Coordination, Not Money, From the Government,
“The most useful feature of government in resolving the foreclosure crisis is not its ability to squander taxpayer money, but its ability to provide coordinated action. I still believe that the best approach to foreclosure abatement would be for the Treasury to set up a special “conduit” fund to administer “property appreciation rights” or what I’ve called PARs.
“Suppose a $300,000 mortgage is in foreclosure (or the homeowner and lender can agree to the following arrangement outside of foreclosure court). A reasonable mortgage restructuring might be to cut the principal of the mortgage to $200,000, and to create a $100,000 property appreciation right. The homeowner would agree to pay off the PAR to the Treasury (and administered through the IRS) out of future price appreciation on the existing home or subsequent property. The homeowner would be excluded from taking on any home equity loans or executing any “cash out” refinancings until the PAR was satisfied. The maximum PAR obligation accepted by the Treasury would be based on the value of the home and the income of the homeowner.
It’s good thinking but unrealistic, the property appreciation aspect is pure fantasy. Hussman suggests the owner is a member of the community desiring to live in a particular house, but he is rather a speculator. The idea that a speculator would indenture himself to the US government for life for a shit- box suburban house in some miserable non- neighborhood is simply unbelievable. The homeowner would walk away. This devastating ‘Walking Attack’ on the banks would sour more and more loans and eventually destroy the banks’ balance sheets completely … then the bondholders. Since the entire house- building enterprise from the get- go was not building communities but rather bilking communities’ inhabitants, there is nobody to actually hold the bag. The Feds will wind up having to pay people to tear down all these houses.
Who would trust the government? Neither the bondholders (now) nor the homeowners would have confidence in any government intermediation after all the lies and fraud the government has been spewing over the past couple of years.
Lee Adler and Russ Winter @ Radio Free Wall Street suggest the Fed liquidity – including the vaunted ‘Trillion Dollar’ quantitative easing – is a shell game. The Fed is simply moving toxic Fannie Mae and Freddie Mac assets onto its own balance sheet. This does not add new money to the economy but shuffles paper between buildings. This is Adler’s theory, it is not well known; the impression that the Fed’s trillion- dollar- baby is going to help restore ‘growth’ is a lie.
Slimming down the GSE’s balance sheets is a great idea and the job of the Fed which is the receiver for them, but why present this as something else to the public? People in the business know what is going on. This adds to the queasy uncertainty of the rest who find in this action another reason to distrust the government and question its competence.
But … it could avert a truly horrific collapse! Adler also point out the government taking all the crap unto itself will likely cause a truly horrible collapse sometime in the indeterminate future. I believe them. I also believe this truly catastrophic collapse will be averted in the nick of time by Geithner and Bernanke riding to the rescue on white horses.
All this drama quite takes the breath away.
It is impossible to have any faith in marketplace activity. Between the Enron- like AIG and the averted collapses, real and imaginary … The vast oceans of money, the weekend bailouts, the Byzantine complexity of the various mind- numbing plans it is impossible to gain any sense OTHER than the players at the highest level have no other interest but to enrich themselves at the public expense. Like Hussman says, the government is good at coordinating … not giving handouts to Geithner’s and Summer’s Goldman- Sachs asshole amigos.
I suspect they believe that growth will start again and all of this intrigue will be forgotten. Unfortunately, growth will not start again. The USA will also not go out of business. All the crookedness will be exposed. This Obama administration is a caretaker or transition regime. It is the change prior to the Real Change. The next regime will be out to settle accounts with the Geithners and Bernankes and Thains and Paulsons … and all the rest.
A truly horrible collapse, indeed.