US Fed releases $200bn as credit crisis hits new depths

Ekancone

This just keeps getting worse and worse, is anyone getting as worried as i am about the future of the financial system?

The global credit crisis plunged to new depths yesterday as persistent fears over the collapse of a large financial institution caused funding markets to dry up and forced the US Federal Reserve to make available up to $200 billion (£99.3 billion) of emergency financing.

The Fed said that a “rapid deterioration” in the credit markets in recent days had prompted it to begin a series of fresh cash injections in an effort to shore up the balance sheets of America’s stricken banks. Unemployment also shot up in the US last month, adding to the gloom. US stocks tumbled, dragging the Dow Jones industrial average down 138.40 points to 11.902.00. Treasury prices jumped and the dollar fell to record lows.

Bankers said that the moves underscored the deepening severity of the crisis, which was triggered last June by the collapse of the American sub-prime mortgage market and has got progressively worse since. One senior banker in London said: “This is the beginning of the real credit crisis and it’s not going to end without a major casualty.”

Sources said that the present crisis was triggered by cash-strapped banks starting to get tough with their hedge fund clients by making margin calls on loans and drastically raising interest rate payments overnight. The move has pushed the funds into the panic-selling of assets, mostly AAA-rated US mortgage securities, and several are thought to be on the brink of collapse. One of them, Carlyle Capital Corporation (CCC), said yesterday that overnight it had received “substantial additional margin calls” linked to its souring investments in US mortgages.

Thornburg, the US mortgage lender, exacerbated investor jitters when it said that it did not have enough cash to meet $610 million of margin calls. Last week Peloton, a London hedge fund, collapsed after it became unable to meet the banks’ demands.

Bankers said that the problem was related to a perceived increased risk surrounding the AAA-rated prime mortgages and to the consequences of dangerous overleveraging of the funds themselves. In the case of Carlyle, its CCC fund had leveraged its assets by $30 for every $1 of its own cash.

“The whole industry was created by cheap debt,” the banking source said. “It was really all just an illusion.”

Underlining the Fed’s desperate attempts to calm markets, for the first time it said that it would accept mortgage-backed assets as collateral from the banks for fresh loans. As the fear spread, the perceived risk of owning US corporate bonds - measured by the widening of credit spreads – also rose to its highest level.

Friedman, Billings, Ramsey, the US analyst firm, said that the US financial industry would need $1 trillion of permanent capital to maintain current pricing of mortgage assets. However, it added that the industry would not be able to obtain that amount.

Shares of Carlyle’s CCC fund were suspended in Amsterdam yesterday as it disclosed that it had received more default notices from its lenders and that some of those lenders had been forced to sell CCC’s mortgage assets in an effort to recover their loans. The dire forecast came only 24 hours after CCC said that it had been issued with $37 million of margin calls from lenders, having satisfied $60 million of calls only the week before.

Sean Egan, of the Egan-Jones Ratings Company, said: “When financial history is written, the Carlyle liquidation will go down as one of the single most major events. Carlyle has built an image as one of the smartest investors around, and to see one of its funds fall apart shows there is a fundamental problem with the market.”

http://business.timesonline.co.uk/tol/business/economics/article3508468.ece

Funnily enough, i think much of this crisis is a result of the Basel regulation, as it created incentives for banks to conduct more off balance sheet activities hence leading to the crisis we have today. I believe its time for a review of the current regulation we have and come up with a Basel III.

silverharp

need to get rid of central banks, they created the inflation in the first place. It is the height of arrogance that an organisation like the fed, or the priest like powers that the financial community bestow on its governors can manage the market, it's not possible. The market does the job anyway in that real interest rates are dictated by the market. Greenspan should be reviled for stoking the housing bubble in the US, since 2000, it's almost funny that a state bank in Germany can go bankrupt because of idiot mortgage lending in the US.

Minder

The Federal Reserve seems to be offering liquidity through new facilities on a weekly basis. If I have the chronology correct, in December 2007 the new Term Auction Facility (TAF) was introduced.

Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window. All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions. All advances must be fully collateralized. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.

This was billed as a temporary facility and the term of the loan was not to extend beyond 28 days. After 28 days either the loan is repaid or the facility rolls over.

In December 07, the Fed issued this piece of information

The Federal Reserve intends to conduct biweekly Term Auction Facility (TAF) auctions for as long as necessary to address elevated pressures in short-term funding markets. The Board of Governors will announce the sizes of the January 14 and January 28 TAF auctions at noon on January 4.

On 07th March 08, the Fed broadened the collateral requirements under which these loans can be secured, and it also increased the TAF facility to $100b.

First, the amounts outstanding in the Term Auction Facility (TAF) will be increased to $100 billion. The auctions on March 10 and March 24 each will be increased to $50 billion--an increase of $20 billion from the amounts that were announced for these auctions on February 29. The Federal Reserve will increase these auction sizes further if conditions warrant. To provide increased certainty to market participants, the Federal Reserve will continue to conduct TAF auctions for at least the next six months unless evolving market conditions clearly indicate that such auctions are no longer necessary.

Second, beginning today, the Federal Reserve will initiate a series of term repurchase transactions that are expected to cumulate to $100 billion. These transactions will be conducted as 28-day term repurchase (RP) agreements in which primary dealers may elect to deliver as collateral any of the types of securities--Treasury, agency debt, or agency mortgage-backed securities--that are eligible as collateral in conventional open market operations. As with the TAF auction sizes, the Federal Reserve will increase the sizes of these term repo operations if conditions warrant.

The new term repurchase agreements are TAF for those organisations that don't have access to TAF.

March 10, 2008. Federal Reserve will offer $50 billion in 28-day credit through its term auction facility today.

March 11, 2008. The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.

March 11, 2008. Federal Reserve announces results of auction of $50 billion in 28-day credit held on March 10, 2008.

So the Federal Reserve has bolstered the Banks by allowing tham to use AAA rated sub prime toxic waste as collateral against cash loans. As the banks require these liquidity injections in a time of crisis, it is unlikely that the Fed will call in the loan until the crisis is long averted. The plus side is that those organisations considered Too Big To Fail, don't fail and send a tsunami through the world markets.

Downside. Since the removal of the Steagall Glass protections, the banks have been allowed to play any and all kinds of roulette with deposits. Without the failure of a major bank, there is no accountibility. Moral Hazard - I am insured against risk, so I can afford to take that risk. Bernanke will always choose the path of least resistance - bail out the banks, print more money.

Monetary Inflation anyone?

OhNoYouDidn't

silverharp wrote: »

need to get rid of central banks, they created the inflation in the first place. It is the height of arrogance that an organisation like the fed, or the priest like powers that the financial community bestow on its governors can manage the market, it's not possible. The market does the job anyway in that real interest rates are dictated by the market. Greenspan should be reviled for stoking the housing bubble in the US, since 2000, it's almost funny that a state bank in Germany can go bankrupt because of idiot mortgage lending in the US.

Are you for real? In the absence of a central banking system, aside from no cash money being created, what will stop retail banks forming a cartel and charging consumers 35%? in a monetarist system, who do you propose would monitor and manipulate the aggregate balances?

You have a very limited understanding of economics if you believe banks in the market settle the real interest rate between them.

How is a german state bank (bulding society in Ireland) going belly up as a result of sub prime holdings the fault of the central banks?

Ekancone

OhNoYouDidn't wrote: »

Are you for real? In the absence of a central banking system, aside from no cash money being created, what will stop retail banks forming a cartel and charging consumers 35%? in a monetarist system, who do you propose would monitor and manipulate the aggregate balances?

You have a very limited understanding of economics if you believe banks in the market settle the real interest rate between them.

How is a german state bank (bulding society in Ireland) going belly up as a result of sub prime holdings the fault of the central banks?

No, 'they' invented inflation. You don't seem to understand, it is the lizard people.

silverharp

OhNoYouDidn't wrote: »

How is a german state bank (bulding society in Ireland) going belly up as a result of sub prime holdings the fault of the central banks?

well I would blame the fed for pumping up the housing bubble after the dot com meltdown. and I would blame other central banks for supporting the dollar which added fuel to the fire. basically the asian central banks were buying up dollars and investing in US bonds and treasuries keeping interest rates artifically low.

I have an Austrian perspective on economics which allows me to see very clearly the flaws in a fiat based money system. The rise in the price of gold since 2000 should be telling you that all is not well with a managed exchange rate system we are stuck with at the moment.

daveirl

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silverharp

daveirl wrote: »

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call it what you want but when central banks inflate the money has to go somewhere. if you look up any older definitions of inflation it was always defined as an increase in the money supply relative to goods and M3 in the US and Euro area have been in double digits for years. btw I bought gold in 2004 and although have recently sold (partly for the reasons you mentioned) as I expect a correction I believe gold will do very well in the years ahead.

nesf

silverharp wrote: »

need to get rid of central banks, they created the inflation in the first place.

I think you'd be throwing out the baby with the bathwater there.

silverharp

nesf wrote: »

I think you'd be throwing out the baby with the bathwater there.

I am of the view that floating exchange rates are a bad idea, the global economy would be more stable if money was backed by gold or equivalent. counties like the US would have to live within their means and you would dampen the financial speculation in the currency and bond markets which essentially is unproductive and a drag on the average individual. remember the US did fine without the Fed before 1913. and I go back to a previous point, central banks can no more manage markets for the good in the long term then they can affect the weather once you mess with the market you get a blowback somewhere in the future.

Ekancone

silverharp wrote: »

the US did fine without the Fed before 1913.

I want a legitimate, peer-reviewed paper that shows this is the case.

nesf

silverharp wrote: »

I am of the view that floating exchange rates are a bad idea, the global economy would be more stable if money was backed by gold or equivalent.

I disagree. Shall we leave it there?

daveirl

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silverharp

silverharp wrote: »

you would dampen the financial speculation in the currency and bond markets which essentially is unproductive and a drag on the average individual.

I am actually writing about this at the moment.. and although don't agree with what most of you are saying, the impact of speculation on the FOREX is quite murky..

silverharp

daveirl wrote: »

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gold is money and in times of hyperinflation or even a severe deflation it acts as safe haven, it is one of the few asset classes that is not someone elses liability. There are also economic cycles where the gold/Dow ratio goes 1 to 1, it happened in the depression, 1980 and I wager it will happen again in the next 2 to 3 years.

daveirl

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nesf

daveirl wrote: »

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Because it physically exists some people are more comfortable with it than the more abstract concept of fiat money. Fiat money has its issues but so did the gold standard tbh.

silverharp

daveirl wrote: »

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it can't be printed like fiat money. If you lived in a country where the gov. has a history of debasing their currency then gold is a great hedge, Ask someone in Zimbabwe if they wish they had some of their savings in gold.
I disagree with your shoeshine analogy, there will be a correction maybe down to 800$ but that is due to hedge funds selling dollars and buying all commodities including gold. very few people in the west own any investment gold also remember the 1980 high inflation adjusted would be over 2500$ per oz.

nesf

silverharp wrote: »

it can't be printed like fiat money. If you lived in a country where the gov. has a history of debasing their currency then gold is a great hedge, Ask someone in Zimbabwe if they wish they had some of their savings in gold.

Do you honestly think that the people in Zimbabwe would be better off with a gold standard? The government there would just find a different way to screw them over.

Ekancone

nesf wrote: »

Do you honestly think that the people in Zimbabwe would be better off with a gold standard? The government there would just find a different way to screw them over.

What i love is when people compare the US to Zimbabwe. Just goes to show how irrational one can get when they feverently (is that a word?) believe in an idea.

nesf

daithifleming wrote: »

What i love is when people compare the US to Zimbabwe. Just goes to show how irrational one can get when they feverently (is that a word?) believe in an idea.

It's just one step below comparing Ireland to China.

Ekancone

nesf wrote: »

It's just one step below comparing Ireland to China.

No, not comparing, saying that we should follow their lead!

daveirl

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silverharp

daveirl wrote: »

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if you are talking about where an individual should put their savings then no one should not have a large % in gold, maybe 5% and investors like Jim Rogers would advise owing a basket of commodities. it comes down to the view that gold is an insurance policy, buy some and hope it never works. you might have house insurance, it doesn't mean you want your house to burn down. however it doesnt take a genius to work out that the next 10 years will be less stable globally then the last.

daveirl

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Ekancone

daveirl wrote: »

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There are obvious reasons for this, too. But of course, the ECB are another 'Zimbabwe waiting to happen'.

:rolleyes:

nesf

daveirl wrote: »

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It's the more the idea that money lacks intrinsic value, i.e. a euro is only worth what another person is willing to sell you for it, that gets to some people. It's a minority of people, most think in terms of, I have to work X hard to get Y euros, and Y euros buys me Z amount of shiny things and don't get bothered about the piece of paper essentially being worthless in some fashion.

Ekancone

nesf wrote: »

It's the more the idea that money lacks intrinsic value, i.e. a euro is only worth what another person is willing to sell you for it, that gets to some people. It's a minority of people, most think in terms of, I have to work X hard to get Y euros, and Y euros buys me Z amount of shiny things and don't get bothered about the piece of paper essentially being worthless in some fashion.

In a sense the money is worthless, like you said its the expectation of future nice things that people work for, not the paper notes.