Runnin' Scared...

[c1ue]

Re: Runnin' Scared...

the deposits are liabilities for the institutions, not assets. i guess you could say that an intangible asset resides in the institution's ability to gather deposits, in general a very low cost of funding.

Indeed, to a bank a loan is an asset whereas on a household or corporation balance sheet a loan is a liability. Conversely, deposits in a bank account are assets to a household or corporation but a liability to the bank.

JK, Fred,

Your comments are absolutely correct in the FASB accounting sense.

However, you miss one important point: some level of deposits are required in order to generate the FASB assets - loans.

When times are good - specifically when reserve requirements are going down and or loan defaults are falling, then deposits are bad since they reduce theoretical maximum profitability (percentage).

However, when times are bad - i.e. when either reserve requirements are going up or bad loans are going up, then deposits are valuable since they preserve profitability (and survival).

This is what I mean when net deposits are negative: it is not that the deposits are not there, it is that the actual reserve position of many banks is very possibly negative when bad loans are taken into account because the losses on these loans detract from the bank's reserves.

The value of these banks then is affected by this reserve position. When the reserves go too low, then recapitalization must occur or the bank fails. We're seeing the recaps going on now, the failures will not be long in coming.

In fact, what might start happening is a large bank buying a very conservative smaller bank so that the overall reserve ratio is improved (for the acquirer). This assumes there are any such entities left.

After all, what is the intrinsic value of a bank violating reserve requirements? And with monstrous bad loan portfolios?

[FRED]

Re: Runnin' Scared...

JK, Fred,

Your comments are absolutely correct in the FASB accounting sense.

However, you miss one important point: some level of deposits are required in order to generate the FASB assets - loans.

When times are good - specifically when reserve requirements are going down and or loan defaults are falling, then deposits are bad since they reduce theoretical maximum profitability (percentage).

However, when times are bad - i.e. when either reserve requirements are going up or bad loans are going up, then deposits are valuable since they preserve profitability (and survival).

This is what I mean when net deposits are negative: it is not that the deposits are not there, it is that the actual reserve position of many banks is very possibly negative when bad loans are taken into account because the losses on these loans detract from the bank's reserves.

The value of these banks then is affected by this reserve position. When the reserves go too low, then recapitalization must occur or the bank fails. We're seeing the recaps going on now, the failures will not be long in coming.

In fact, what might start happening is a large bank buying a very conservative smaller bank so that the overall reserve ratio is improved (for the acquirer). This assumes there are any such entities left.

After all, what is the intrinsic value of a bank violating reserve requirements? And with monstrous bad loan portfolios?

We've made this point a dozen times over the past few years and challenged the deflationistas to explain it. So far, the challenge has been greeted with silence.

The chart below, again, is from the Fed. Note the spike in inflation in 1933. How was that possible if the banks were barely functioning and the economy was contracting? Simple, the dollar was deflated against gold when the government repriced gold in dollars.

Today the dollar is deflating against commodities – oil, wheat, silver, and gold again. This is a deliberate policy to prevent asset price deflation from spilling over into the P/C Economy from the FIRE Economy as occurred in the early 1930s and in Japan in the 1990s. The Fed's hope is that the macro-economic impact of the asset price deflation will at some point slow the economy to the point where the P/C Economy contracts, demand falls, and inflation abates. They are assuming that the process of dollar depreciation will tend toward a lower equilibrium and is not self-reinforcing. We think they are wrong.

[GRG55]

Re: Runnin' Scared...

Either that or he's as two-faced as they come. Just about fell out of my chair laughing when I read this.

Seems a tad late, doesn't it? Or am I missing something?

...``For market discipline to be effective, it is imperative that market participants not have the expectation that lending from the Fed, or any other government support, is readily available,'' Paulson said...

more...

Paulson's out of the country trying to scrounge money, so they sent Assistant Treasury Secretary for Economic Policy, Phillip Swagel to conduct Treasury's monthly economic briefing for the press.

The Washington Post's Dana Milbank has some fun with him on this short [3:17] video attached to this column.

On the surface it's quite funny. But I do wonder what does Treasury know that they aren't telling us... :p

[jk]

Re: Runnin' Scared...

i decided to google poor mr. swagel, found this:

Professional Experience
-Council of Economic Advisers, Senior Economist, 2000-2001; Chief of Staff, 2002-2005
-Economist, International Monetary Fund, 1996-2002
-Visiting Assistant Professor, Northwestern University, 1994-1996
-Economist, Federal Reserve Board, 1992-1994

Education
Ph.D., A.M., economics, Harvard University
A.B., magna cum laude, Princeton University

from the cea he went to aei as a resident fellow, to burnish his ideological credentials for his appointment as ass't secty of the treasury. i suppose we can view his history as a story of decline, with increasing assimilation to, and dependency on, the fire-inspired official hierarchy. a good mind debauched. perhaps as an idealistic youth, he valued intellectual rigor and honesty, now he's an object of ridicule in a punch and judy show.

[metalman]

Re: Runnin' Scared...

i decided to google poor mr. swagel, found this:

Professional Experience
-Council of Economic Advisers, Senior Economist, 2000-2001; Chief of Staff, 2002-2005
-Economist, International Monetary Fund, 1996-2002
-Visiting Assistant Professor, Northwestern University, 1994-1996
-Economist, Federal Reserve Board, 1992-1994

Education
Ph.D., A.M., economics, Harvard University
A.B., magna cum laude, Princeton University

from the cea he went to aei as a resident fellow, to burnish his ideological credentials for his appointment as ass't secty of the treasury. i suppose we can view his history as a story of decline, with increasing assimilation to, and dependency on, the fire-inspired official hierarchy. a good mind debauched. perhaps as an idealistic youth, he valued intellectual rigor and honesty, now he's an object of ridicule in a punch and judy show.

thanks very much for the homework. tough to be a bought and paid for fire economy flying monkey these days, ain't it? how long before they get rid of this internet thingy?

[bill]

Re: Runnin' Scared...

Sounds to me he’s requesting powers to facilitate an orderly collapse of financial firms.
Antispin: Powers are needed to control liquidation process of failed financial firms assets to be acquired by Paulson’s new found money source “SWF”.

http://www.bloomberg.com/news/av/
Audio/Video Reports


Paulson Calls for Process to Liquidate Failing Firms July 2 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson speaks in London about the global economy and financial market regulation. Paulson called for regulatory changes that would allow financial firms to fail without threatening broader market stability. (Source: Bloomberg) Watch

The powers of controlled liquidation have been exercised. Now that assets are controlled under our new bankruptcy judge “Paulson and Co.” whom will he choose for the liquidation buyers? Maybe obedient dollar supporters, politically correct, buddies that sold out last 2 years coming back and purchasing for dimes on the dollar, hungry sharks are swarming!

[bill]

Re: Runnin' Scared...

The powers of controlled liquidation have been exercised. Now that assets are controlled under our new bankruptcy judge “Paulson and Co.” whom will he choose for the liquidation buyers?

http://www.politico.com/news/stories/0908/13804.html

Hedge funds grab the spotlight on Wall St.

By EAMON JAVERS & VICTORIA MCGRANE & LISA LERER | 9/24/08 4:48 AM EDT

This was the week the hedge funds ate Wall Street.

Even as the storied financial names vanish — Lehman Brothers, Merrill Lynch and Bear Stearns — they’re being quietly replaced by less familiar ones: Cerberus Capital Management, Citadel Investment Group, SAC Capital Partners and the other biggest hedge funds and private equity shops in the world.

The consensus in Washington is that the Wall Street meltdown means an inevitable resurgence of regulatory authority over the financial sector. But what it may actually portend is just the opposite: the emergence of an almost entirely unregulated financial sector that replaces investment banks that were more rigorously regulated.

It has now become very clear to market insiders that the $2.1 trillion hedge fund industry is larger in terms of capital than the remnants of the investment banking sector.
.
.
The world as Rickards sees it now is this: “The classic investment bank has gone away, and hedge funds are increasingly taking on the functions of the investment banks. Except they are unregulated.”

At the end, it was the hedge funds whose aggressive short selling killed off the investment banks. They profited in the demise of their predecessors.

To be sure, plenty of hedge funds invested in the subprime mortgage sector, and some may collapse as a result. Sept. 30 represents an important milestone within the hedge fund industry — it’s one of the dates on which investors can demand their money back from underperforming hedge funds.

The ones that have already seen a large number of so-called redemption letters asking for money back will be scrambling to raise cash. But those investors who withdraw money from suffering hedge funds will have to reinvest it someplace else. So it’s a good bet that the biggest hedge funds will be the biggest recipients of the new cash, making them ever more powerful in a world where capital is scarce.

On Capitol Hill, that means that hedge funds will go from niche player to dominant industry. Even before the meltdown, they were already flexing their political muscle: Senate Banking Committee Chairman Chris Dodd’s Senate and presidential campaigns this year have collected more from the three big hedge funds, Cerberus, Citadel and SAC, than they collected from the investment banks Lehman, Merrill and Bear Stearns. Employees of the three hedge funds gave Dodd $295,500; employees and political action committees of the three investment banks gave him $221,650.

The other big winners this week are the private equity sector, which generally buys companies or large stakes in companies and holds them for a long-term investment, and the global sovereign wealth funds, foreign-owned pools of trillions of dollars in capital. Although sovereign wealth funds have shied away from pouring more money into the failing banks, analysts predict they will diversify their holdings with commercial real estate investments.

Private equity and sovereign wealth funds — once perceived as villains on Capitol Hill — could transform their political fortunes.On Monday, the Federal Reserve increased the size of the stake private equity firms can hold in banks without being subject to heightened disclosure rules.

The Service Employees International Union, a longtime opponent of the industry, slammed the Fed’s decision.

“Federal regulators remain out of step with the rest of the country,” said SEIU President Andy Stern. “Allowing secretive, unregulated private equity firms to own a bigger stake and a greater say in the nation’s banks now will only ensure less stability for our financial institutions — and permit conflicts of interest in the future.”

and..
http://online.wsj.com/article/SB1222...googlenews_wsj

SEPTEMBER 23, 2008
WASHINGTON -- The Federal Reserve, unleashing its latest attempt to inject more cash into the nation's ailing banks, loosened longstanding rules that had limited the ability of buyout firms and private investors to take big stakes in banks.
It marks the latest move by the Fed to rewrite the rulebook in response to the financial crisis. Regulators have grown worried about a shortage of capital at banks, in particular smaller thrifts and regional institutions. The Fed has been crafting this policy for at least two years, and private-equity firms have been aggressively lobbying for more lenient policies.

[GRG55]

Re: Runnin' Scared...

Either that or he's as two-faced as they come. Just about fell out of my chair laughing when I read this.

Seems a tad late, doesn't it? Or am I missing something?

...``For market discipline to be effective, it is imperative that market participants not have the expectation that lending from the Fed, or any other government support, is readily available,'' Paulson said...

more...

Bernanke's turn to make me fall out of my chair laughing...

...Responding to questions from lawmakers, Bernanke said...For the plan itself, ``I don't expect any effect on inflation,'' ...
Article link [Bloomberg]...

[bill]

Re: Runnin' Scared...

http://www.politico.com/news/stories/0908/13804.html

Hedge fund investors demanding funds back forcing liquidation?

Sept. 30 represents an important milestone within the hedge fund industry — it’s one of the dates on which investors can demand their money back from underperforming hedge funds.

[D-Mack]

Re: Runnin' Scared...

I don't understand how Bear Stearns basically had the bottom fall out from underneath it while all the other investment banks were falling in stock price in a semi-orderly semi-chaotic fashion. What did Bear Stearns do that was so different from what, say, Goldman Sachs or Merril Lynch was doing?

Why did Bear Stearns fail so early? Before the "orderly collapse" of all these other financial institutions? I mean, these investment banks, correct me if I'm wrong, all have the same business model.

Wasn't there something with Bear not wanting to participate in the LTCM bailout ?