Ahrenl
join:2004-10-26
North Andover, MA | reply to amigo_boy
Re: Sweet!
Do you just make this stuff up in your free time? That's not what happened at all, banks have been shedding risk as fast as they can since August 2007. That's the definition of a credit crunch. |
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amigo_boy
join:2005-07-22
Tempe, AZ
 ·Cox HSI
 ·magicjack.com
| said by Ahrenl  :Do you just make this stuff up in your free time? That's not what happened at all, banks have been shedding risk as fast as they can since August 2007. That's the definition of a credit crunch. I can't tell what you were disputing, except generally from the post you replied to. The definition of a credit crunch is when banks stop lending to each other, and to corporations. There's nothing contradictory about that, and them taking Fed. Discount money (made available even through relatively unprecedented anonymous auctions) to trade in Credit Default Swaps.
Mark |
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Ahrenl
join:2004-10-26
North Andover, MA
 ·Verizon FIOS
| quote:
I agree. It's like a year ago when the Fed slashed interest rates as the credit crisis began. It was supposed to cause the banks to free up money for everyone else. Instead, banks created what's called a "carry trade." They borrowed the cheap Fed. Discount money and used it to invest in speculative (risky) investments to make money.
We, as a nation, have an uncanny way of giving money away to help business -- and at the same time claiming there can't be any societal expectation (to regulate how business uses the money) because that would violate "free market" principles. As if giving money to businesses is a "free market."
Mark
Sorry, I usually use qreply, and don't hit the Auto Quote button.
If banks were borrowing Fed Discount Money and investing it in term "risky investments" (which is a big no no) then we wouldn't have a credit crunch as assets (risky investments) would be in high demand.
The problem right now is that even non risky-assets are under stress because there are too many of them. Off balance sheet vehicles and SIV's created too much demand, and as their collateral is siezed it is sold at fire-sale prices by collateral holders who only need cents on the dollar to be whole, which further depresses asset prices. Thus banks are keeping large balances AT THE FED in order to keep large liquidity positions to offset market price marks on assets are that are economically sound.
The way the Fed cutting rates helps banks, is bank liabilities (The prices banks pay to depositors) are fixed to fed funds/treasuries/swaps etc. which they can purchase assets, or make loans at rates that are much higher. The higher that spread, the greater margin is available to create more capital organically. This is because banks can reprice the rates on their deposits more easily than loans/assets can be repriced. |
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amigo_boy
join:2005-07-22
Tempe, AZ
·Cox HSI
·magicjack.com
| said by Ahrenl :The way the Fed cutting rates helps banks, is bank liabilities (The prices banks pay to depositors) are fixed to fed funds/treasuries/swaps etc. I'm talking about the Fed. Discount rate, and the Discount money made available at the discount window (and through the relatively unprecedented anonymous auctions after banks were afraid to use the window for fear it would mean something about their condition).
The stories I read a few months ago (from reputable organizations, not kook sites) was that banks were borrowing this Discount money and trading things like Credit Default Swaps.
That's not inconsistent with anything you've said (concerning the Fed. Funds rate. Two different things.).
Mark |
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Ahrenl
join:2004-10-26
North Andover, MA
·Verizon FIOS
| The Discount rate and the fed funds rate are tied together. They typically cut or raise both together. I'd be interested in these stories; however I still find them dubious as it's an overnight borrowing available only to highly regulated institutions; most of which have permanent FED offices located within their headquarters. BANKS certainly weren't doing this as they'd lose their charter, and the ability to do business. There's a lot of FUD about banks going around now a-days. It was the unregulated mortgage originators, and largely unregulated broker-dealers (no longer in existance) which created the credit issues. |
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amigo_boy
join:2005-07-22
Tempe, AZ
·Cox HSI
·magicjack.com
3 edits | said by Ahrenl :it's an overnight borrowing available only to highly regulated institutions; most of which have permanent FED offices located within their headquarters. That's normally true. But, the Fed opened up its discount window to investment banks about 9 months ago. It was part of an unprecedented (if I recall correctly) move to treat these lessor-regulated banks as banks that had been under the control of the Fed.
I'm not saying it was a bad idea. Maybe it was the lessor of two evils -- making Discount money available to them, or bail them out when they failed (sooner). But, good intentions are always abused.
Edit: A couple links to stories about what I mentioned above:
»online.wsj.com/article/SB1205711···coverage
»www.tradingmarkets.com/.site/new···1891556/
And, an article about the Term Auction Facility being 28 and 84 days. This is a form of Discount Window cash offered by the Fed after banks were reluctant to use the Discount Window (after rates were slashed to encourage them) because it might signal to shareholders they were in trouble.
»www.federalreserve.gov/newsevent···730a.htm
The auctions were implemented Dec. 21, 2007:
»en.wikipedia.org/wiki/Term_auction_facility
Mark |
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Ahrenl
join:2004-10-26
North Andover, MA
·Verizon FIOS
| I'm aware they opened the window to investment banks, just before they all disappeared. None of them were leveraging up at that point. In fact the parts that are left in different forms are all still frantically deleveraging.
The TAF requires the counterparty to post collateral for cash, with haircuts based on collateral type. It's more of a repo with the fed. Again, not something you could do any term investing with.
Nowhere in the WSJ article did it state or imply that "banks were borrowing this Discount money and trading things like Credit Default Swaps." Typically this overnight cash is used to meet regulatory liquidity ratios, or in extreme cases, customer cash demands. The tradingmarkets.com article also does not make your assertion. |
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amigo_boy
join:2005-07-22
Tempe, AZ
·Cox HSI
·magicjack.com
| said by Ahrenl :I'm aware they opened the window to investment banks, just before they all disappeared. None of them were leveraging up at that point. In fact the parts that are left in different forms are all still frantically deleveraging. I think you're overstating things. Not all investment banks have disappeared. And, I'm sure you have no proof that they weren't leveraging. They have been de-leveraging. But, that's a relative term. If they can make some swing trades shorting their own financial sector (using cheap and renewable Fed Discount money) it can actually improve their balance sheet (overall quality of assets), making the process of de-leveraging appear to be further along than it really is.
said by Ahrenl :The TAF requires the counterparty to post collateral for cash, with haircuts based on collateral type. It's more of a repo with the fed. Again, not something you could do any term investing with. We both know the Fed has been playing fast and loose with the rules (and transparency), valuing assets, etc. The Term Auction Facility is anonymous. The whole goal is to get cash into their hands, not just ignoring that they're seriously over-leveraged (with toxic assets) -- but *because* of it.
It's difficult to imagine that the Fed would impose anything more than procedural (and creative) collateral requirements when every action of the Fed has been to get money into the hands of these institutions.
said by Ahrenl :Nowhere in the WSJ article did it state or imply that "banks were borrowing this Discount money and trading things like Credit Default Swaps." I wasn't proving that point. Just disproving your point that Discount money is overnight, and therefore couldn't create a "carry trade" (where the bank invests the money in higher-yielding instruments, and by definition, higher risk, pocketing the difference).
Mark |
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Ahrenl
join:2004-10-26
North Andover, MA
·Verizon FIOS
| Discount money is overnight. There's no way to disprove that as it's the state of reality.
Please name an investment bank that still exists. (I should note that Morgan Stanley and Goldman are now chartered banks, if those you were the ones you were thinking of.)
The TAF isn't anonymous to the FED, and the only thing they've been playing loose with is in redefining rules. You can be guaranteed that whatever rules they are setting they are sticking too. But if you want to call "voodoo" then, as always, there's no way to dispute suppositions based on no fact. |
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