Financial Crisis!
This is from a friend of mine in Malaysia.
Please read and consider what he says. It makes great sense.
Jimmy
ON THURSDAY, 17TH AUGUST 2007, THE FED ALSO ANNOUNCED THAT these new LOANS to banks CAN BE FOR A DURATION OF 30 DAYS and RENEWABLE!!!!!!!!!!!!
THE PRACTICE IS THAT BANKS MUST RE-PAY AT THE STIPULATED PERIOD – I.E. IF OVERNIGHT BORROWING, THIS MEANS THE NEXT BUSINESS DAY. HERE WE HAVE A 30 DAY LOAN PERIOD AND IF THEY CANNOT PAY, BANKS CAN EVEN ROLL OVER FOR ANOTHER 30 DAYS.
This is historic. It means that major banks of the USA are out of funds and are illiquid (insolvent) to the extent that even the normal over-night borrowings would not be able to meet withdrawals. Hence, the need to extend a credit term of 30 days AND RENEWABLE AS WELL. This is a SIGNAL TO THOSE WHO UNDERSTAND THE SITUATION, THAT THE BANKS ARE IN DEEP SHIT!
It will be most interesting to see WHICH BANK HAS GONE TO THE FED FOR THIS FACILITY AT THE NEW DISCOUNT RATE OF 5.75 AND FOR WHAT DURATION. These BANKs are IN DEEP SHIT.
IF YOU HAVE BOUGHT SHARES IN THESE BANKS, DUMP THEIR SHARES.
But there was a PR spin as to why they went to the FED for the loans. This was the statement issued by the BIG BOYS:
“Each have substantial liquidity and the capacity to borrow money elsewhere on more favourable terms … but wanted to demonstrate the potential value of the Fed’s primary credit facility to encourage its use by other financial institutions… the money are borrowed on a term basis.”
This is bull.
As I have stated in my previous article, the discount rate is the interest rate which the Fed (Central Bank) charges banks for borrowing monies overnight to meet reserve shortfalls.
If the banks were so liquid there was no need for the historic discount rate at 5.75 to be offered for 30 days renewable as per the Fed’s Press Release on the 17th August 2007.
When any bank goes to the Fed for this kind of funding there is always a stigma because it also reveals in a glaring way that the relevant bank is unable for one reason or another to borrow from another bank in the Inter-Bank Money Market – i.e. other banks don’t trust this bank’s credibility. Period!
Additionally, in the past only Treasury Securities are accepted for such overnight loans. Now the Fed says that even toxic waste which these banks can no longer con investors to buy can be pledged to the Fed for such loans.
WHO ARE THESE BANKS???
JP Morgan Chase
Bank of America
Wachovia Corp
Citibank
And this is no coincidence, as these 4 banks are the biggest gamblers and the top four banks in the Global Derivatives Market and Toxic Waste Fraud in the Credit Market
What these banks did to cover up the stigma is to borrow initially US$500 million each.
This was their effort to test the market reaction and to avoid a massive run on their banks. It is very likely that if a bank goes to the Fed to borrow massively, it would trigger a run on the bank, especially in the present climate of fear and panic that has gripped global financial markets.
US$500 million is nickel and dimes when exposures are in the trillions! Let me assure that they will come back to borrow more in staggered sums. They were caught between the devil and the deep blue sea. They had to borrow, but cannot borrow too much at this stage as otherwise it would trigger a run.
Had they went for the full liquidity bailout, they would have to pledge all the toxic waste in their portfolios, which would enable investors and global banks to know the extent of the shit they are in. As of today, there have been securities valued at just twenty (20) cents to the dollar.
Why have the other smaller banks not come forward?? They are already dead or dying and have no viable means whatsoever to even to continue the pretense that they are solvent.
ANTICIPATING THE DIE HARD GAMBLERS
They will spread rumours and false theories to mislead people to re-enter the market for slaughter again. Gamblers need sacrificial lambs to make money.
Foresee their arguments – “Don’t be silly, how can these renowned international banks be lying as to their intentions?”
They are the ones who created all these financial toxic waste and now being exposed for what they are – international fraudsters.
Read their statement again: “… borrowed money on a term basis.” It was really careless of them to state this. This is the give away. Attorneys will tell you that when cross-examining witnesses, they are always on a look out for such slips, and it is quite often that such evidence can turn a case in their advantage.
If the banks are that liquid and their actions so noble - to demonstrate the altruistic intentions of the Fed, why borrow a mere US$500 million each for 30 days as oppose to overnight when the exposures are in trillions>
This is the trillion dollar question.
Even this miserable amount, these banks want to repay on a term basis, i.e. 30 days!
Please pause and think.
[ Way back in 2005, these four banks liabilities exceeded their assets. What more today!
Rally in Markets Based on M&A Activities
Are All Hype – No Basis
After all down turns, there will be short rallies. This is because die hard gamblers and fraudsters want you to get back into the market for another killing. The Plunge Protection Team in Malaysia is pumping Billions of ringgit into the KL Stock Market [as the central banks in Europe and NY].
The latest spin is that because of the discount window has been opened by the Fed (i.e. reduction of the discount rate) liquidity is back in the market to fund the long queue of mergers and acquisitions which was temporarily held back by the recent plunge. [please see article by Krugman sent previously]
This is all bull!!!!
David Callaway of Market Watch just confirmed: “The M & A market as we’ve known it over the past three years is dead as of this summer. With US$300 billion in outstanding deals still hanging in the balance, there is going to be almost no appetite among corporations to do a deal right now.”
Implications? Shrinking M&A profits (or no profits) at the investment banks plus huge loses at their trading divisions and mortgage business divisions will have CEOs, CFOs etc resigning or being sacked. Barclay's’s top dog in Europe just disappeared recently. These rascals that have brought millions of homemakers, school teachers, self-employed into debt and are now being foreclosed and evicted from their homes. [The Fed wants to bail the crooks out, not the people they suckered in.]
This will dampen the market further, which means more spin and lies coming from the vested interests - financial news letters. These analysts need to spin “good news” to lure investors or else they too will lose their cushy jobs. Trust these liars and you deserve to be whacked.
Now we are witnessing a climate of fear. Given a few more scandals, bankruptcies of major financial institutions and the failure of the Fed’s Discount Window to calm the market, the fear factor will soon turn to full panic.
Blue chip Fitch Ratings (Remember, I am not saying this, they are) reported that “Banks world wide have US$981 billion at risk because of credit agreements on asset backed commercial paper programs.”
And Peter Gross of PIMCO (and if you still don’t know who is Peter Gross and PIMCO, if you have no business to be gambling in this market - google it) warned:
“Parts of the commercial paper market which has been among the hardest hit during the current credit crunch, may never recover even when things improve.”
Commercial papers are short term loans given to top corporations secured by assets of these corporations. When there are no takers of these commercial papers in this segment of the credit market, Corporate America is in the deep shits.
Its a Miserable Life
by Paul Krugman in the NYTimes
Last week the scene at branches of Countrywide Bank, with crowds of agitated depositors trying to withdraw their money, looked a bit like the bank run in the classic holiday movie “It’s a Wonderful Life.”
As it happens, Countrywide’s customers were overreacting. True, the bank is owned by Countrywide Financial, the nation’s largest mortgage lender — and mortgage lenders are in big trouble these days. But bank deposits up to $100,000 are protected by the Federal Deposit Insurance Corporation. Old-fashioned bank runs just don’t make sense these days.
New-fashioned bank runs, on the other hand, do make sense — and they’re at the heart of the current financial crisis.
The key to understanding what’s happening is taking a broad view of what constitutes a bank. From an economic perspective, a bank is any institution that offers people liquidity — the ability to convert their assets into cash on short notice — while still using their money to make long-term investments.
Traditional banks promise depositors the right to withdraw their funds at any time. Yet banks lend out most of the money depositors place in their care, keeping only a fraction in cash. The reason this works is that normally a bank’s depositors want to withdraw only a small proportion of their money on any given day.
Banks get in trouble, however, when some event, like a rumor that major loans have gone bad, leads many depositors to demand their money at the same time.
The scary thing about bank runs is that doubts about a bank’s soundness can be a self-fulfilling prophecy: a bank that should be safely in the black can nonetheless fail if it’s forced to sell assets in a hurry. And bank failures can have devastating economic effects. Many economists believe that the banking panic of the early 1930s, not the stock market crash of 1929, was the principal cause of the Great Depression.
That’s why bank deposits are now protected by a combination of guarantees and regulation. On one side, deposits are federally insured, and the Federal Reserve stands ready to rush cash to troubled banks if necessary. On the other side, banks are required to keep adequate reserves, have adequate capital and make conservative loans.
But these guarantees and regulations apply only to traditional banks. Meanwhile, a growing number of unregulated bank-like institutions have become vulnerable to the 21st-century version of bank runs.
Consider the case of KKR Financial Holdings, an affiliate of Kohlberg Kravis Roberts, a powerhouse Wall Street operator. KKR Financial raises money by issuing asset-backed commercial paper — a claim that’s sort of like a short-term C.D., used by large investors to temporarily park funds — and invests most of this money in longer-term assets. So the company is acting as a kind of bank, one that offers a higher interest rate than ordinary banks pay their clients.
It sounds like a great deal — except that last week KKR Financial announced that it was seeking to delay $5 billion in repayments. That’s the equivalent of a bank closing its doors because it’s running out of cash.
The problems at KKR Financial are part of a broader picture in which many investors, spooked by the problems in the mortgage market, have been pulling their money out of institutions that use short-term borrowing to finance long-term investments. These institutions aren’t called banks, but in economic terms what’s been happening amounts to a burgeoning banking panic.
On Friday, the Federal Reserve tried to quell this panic by announcing a surprise cut in the discount rate, the rate at which it lends money to banks. It remains to be seen whether the move will do the trick.
The problem, as many observers have noticed, is that the Fed’s move is largely symbolic. It makes more funds available to depository institutions, a k a old-fashioned banks — but old-fashioned banks aren’t where the crisis is centered. And the Fed doesn’t have any clear way to deal with bank runs on institutions that aren’t called banks.
Now, sometimes symbolic gestures are enough. The Fed’s surprise quarter-point interest rate cut in October 1998, at the height of the crisis caused by the implosion of the hedge fund Long-Term Capital Management, was similarly a case of providing money where it wasn’t needed. Yet it helped restore calm to the markets, by conveying the sense that policy makers were on top of the situation.
Friday’s cut might do the same thing. But if it doesn’t, it’s not clear what comes next.
Whatever happens now, it’s hard to avoid the sense that the growing complexity of our financial system is making it increasingly prone to crises — crises that are beyond the ability of traditional policies to handle. Maybe we’ll make it through this crisis unscathed. But what about the next one, or the one after that?
Click here to see the original Krugman article! (You must be a subscriber to the New York Times ‘TimesSelect‘ to read the original article)