Tuesday, October 16, 2007

US banks take $280bn onto books

Despite all the orchestrated efforts around the globe from central banks, regulators, politicians etc. the party or orgy :-) is over. The cracks are so obvious that no matter what kind of "bailout" attempt will happen next the real economy will take a significant hit. The times of easy credit are over. I think the biggest fear now is that the creditors will overshoot to the other side. The fact that foreigners are less willing to finance US assets will intensify this trend. I also recommend the excellent piece from Brad Setser The US trade deficit is falling, but not as fast as the world’s demand for US debt.

Trotz der konzertierten weltweiten Aktionen von den Zentralbanken, Aufsichtsbehörden, Politikern etc sind die Zeichen nicht zu übersehen das die Party oder Orgie :-) zu Ende ist. Die Einschläge sind so massiv das ganz egal was noch an neuen "Bailout" Versuchen auf die Agenda kommt die reale Wirtschaft darunter zu leiden haben wird. Die Zeiten des einfachen Zugangs zum Kreditmarkt sind Geschichte. Die größte Sorge die momentan vorherrscht ist sicher das die Kreditgeber von einem Extrem ins andere wechseln und es den Zugang über Gebühr erschweren. Die Tatsache das ausgerechnet jetzt die Ausländer aufwachen und immer weniger US Anleihen erwerben wird diesen Trend nur noch verstärken. Zu diesem Thema solltet ihr ebenfalls die Meinung von Brad Setser lesen The US trade deficit is falling, but not as fast as the world’s demand for US debt.

Big US commercial banks have seen $280bn of new debt come on to their balance sheets since the credit squeeze, threatening to undermine economic growth by inhibiting their ability to make new loans.

The banks have been forced to take on to their books large amounts of commercial paper and leveraged loans after investor demand for such assets dried up in the summer.

David Rosenberg, economist at Merrill Lynch, said that this amount had risen to $280bn since the start of August.

He added that according to data from the Federal Reserve, large bank capital – represented by net assets – had declined by $40bn since the beginning of August. “This has never happened before over such a short timeframe and this is rather serious because such a steep and sudden compression in large-bank capital has the potential to create a negative lending environment,” he said.

If left unchecked, this could “significantly inhibit” economic growth, he added.
> via Minyanville The Bernanke Put Defined

"Access to a backstop source of liquidity in turn reduces the incentives of banks to limit the credit they provide to their customers and counterparties."

Read that statement carefully. It's the one key sentence in the entire speech.

The misunderstanding that is perpetuated is that the Fed by "providing liquidity" is not actually "providing credit."

What Bernanke's statement means is that, in reality, the two are synonymous.

European banks are facing similar pressures with many observers expressing concern at the ability of some smaller lenders to handle the potential strain on their balance sheets.

Fears over the effect of the credit squeeze on US bank balance sheets was one factor behind the US Treasury’s encouragement of the creation of a "super fund" to take on the assets of troubled investment vehicles.

The three top US banks – Citigroup, JPMorgan Chase and Bank of America – this week unveiled plans for a fund that would buy up to $100bn of mortgage-backed assets from structured investment vehicles.

Citigroup, which manages $80bn of assets in such vehicles, has bought some of the vehicles’ commercial paper.
On Monday, Citi said it was suspending share buy-backs because its capital ratios had weakened partly due to the large amount of commercial paper and leveraged loans it had taken on.

According to Moody’s, the credit rating agency, assets held by bank-sponsored special investment vehicles fell to $320bn from $395bn in July.

“The large banks have been forced to take commercial paper back on their balance sheets and as a result are choking on assets they did not plan on having – thereby tying up regulatory capital and in turn possibly leading to a reduction in credit extension,” said Mr Rosenberg.

He pointed out that 30 per cent of the growth in the debt that US households took on was backed by asset-backed investors.

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Blogger jmf said...

Naked Capitalism

"The Financial Crisis – Why It May Last"

1:41 AM  
Anonymous Anonymous said...


I heard on CNBC this morning that a Japanese bank -- Mitsubishi UFJ, I think -- has more assets off its balance sheet than on.


2:34 AM  
Anonymous Anonymous said...


From your link:

He starts with a simple premise, that this crisis can't be about liquidity because aggressive injections of liquidity haven't yielded much improvement.

Yes, we have heard a lot about "liquidity", and the measures taken to increase it (supposedly). But I have also seen analyses like this one:

Bernanke and the Federal Open Market Committee (FOMC) have done something extraordinary. They have publicly lowered the FedFunds target rate, and have forced down the actual FedFunds rate to meet the target rate, while deflating the money supply.

I find all of this a bit confusing, especially since I really have no expertise myself in this area. Or maybe I just don't understand the meaning of 'money supply' vs 'liquidity'.


2:49 AM  
Blogger jmf said...



News like this are one of many reasons i like gold... :-)

The risk/reward for a new short position is looking better day by day.....

Maybe i will do something after today's CPI release.

Totally unusual for me to do almost nothing for 2-3 months....

2:56 AM  
Blogger jmf said...

Moin again,

it is indeed confusing (and i´m glad that i´m also no expert)

History has shown that the Fed has done almost everything (often indirect: reserve requirements, changing the collateral for repos, calculation CPI, "core" CPI, seeing a deflation scare during times when credit was growing at a double digit rate, etc) to pump/inflate up the credit market.

But this time i think the debt is just too big and i´m with Mish on this that the unwinding of this will be deflationary from an "Austrian" point of view.

4:37 AM  
Blogger jmf said...

In the meantime

MGIC Investment Corporation and Mortgage Guaranty Insurance Corporation (MGIC)

Given the company's expectations for paid losses, unless the cure rate and loss severity improves, the company does not foresee net income for the fourth quarter of 2007 and the full year 2008.

Needless to say that the consensus estimate was over $3....

5:00 AM  
Blogger jmf said...

Behind Subprime Woes,
A Cascade of Bad Bets

Page 1 WSJ including a nice interactive table

5:13 AM  
Blogger jmf said...

U.S. Sept. building permits lowest since July 1993

U.S. Sept. housing starts down 30.8% year-over-year

U.S. Sept. housing starts weakest since March 1993

5:33 AM  
Anonymous Anonymous said...

How likely is it that JPM only has only $340 million worth of CDOs that have lost value vs par? Value that will never be regained. Given such a (relatively) small amount, why is JPM interested in the new M-LEC?


5:54 AM  
Blogger jmf said...


i think their level 2 and level 3 department has worked overtime....

FT on Goldman earnings...

All that glitters? / FT

Goldman made a net gain of $2.94bn from level three booked derivatives. And $2.62bn of that gain was unrealized. The question now is, will it continue to be so?

Fortune speculates that there may have been “no way illiquid level 3 derivatives could be cashed out at the prices Goldman attached to them.”:

Indeed, if that level 3 derivatives gain does include the stupendously prescient bet against mortgages, it deepens the mystery over what type of institution is on the other side of that trade, effectively holding the losses. In other words, if hedge funds - which operate with thin capital and high leverage — are on the other side of a large part of this mortgage bet holding the losses, it may not be easy for Goldman collect all it is owed.

6:00 AM  
Blogger Yogi said...

Moin J-M,

I think "Suprefund" is the best name for MLEC conduit because the original Superfund was set up by the U.S. Environmental Protection Agency to clean up toxic waste dumps :)


8:48 AM  
Blogger jmf said...

Moin Yogi,


You cannot makes this up...... :-)

9:28 PM  
Anonymous Anonymous said...

Love Canal

Let's hope the key parallel here doesn't turn out to be government money.


11:45 PM  
Blogger jmf said...

Moin Eh,


Mish has done a piece on the $ including some charts showing
the fed is not directly printing

11:56 PM  
Anonymous Anonymous said...

Monetary Base


Currency M1

9:46 AM  

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