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Privatize the Gains, Socialize the Losses - Total Federal Bailout $900 BillionPosted by ahc99 on September 17th, 2008

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Photo by klynslis

That’s seems to be the mantra for Wall Street and the Government these days. Last night, the Federal Reserve decided to bail out the American Insurance Group, Inc. (AIG) to the tune of $85 billion. This is the largest single financial intervention in U.S. history. I think this undermarks the financial crisis America is facing today.

But when do these bailouts stop? We are starting to be known as Bailout Nation. And that is one title I don’t want America to hold. So far the bailout statistics show the taxpayers are on the hook for a total of $900 billion!!

• $300 billion for the Federal Housing Administration to refinance failing mortgage (part of the housing rescue bill)
• $200 billion for Freddie Mac and Fannie Mae (of course to be fair they each get $100 billion)
• $200 billion (probably more) of outstanding loans to banks through the Fed’s Term Auction Facility
• $85 billion for AIG
• $87 billion to JPMorgan Chase & Co to repay their financing to underpin trades with Lehman Brothers
• $29 billion to JPMorgan Chase & Co to finance their buyout of Bear Stearns & Co
• $4 billion in grants to local communities to upkeep the foreclosed homes

What’s next? I know that many other financial institutions are also struggling to stay afloat, including Washington Mutual and Wachovia. Are they going to bail them out too? If so, the automakers such as Ford Motor Co., General Motors, and Chrysler are in distress. Are we going to bail them out too? What’s the criteria and when does it stop? When will the government put its foot down and say “You took these risks so you need to suffer these consequences.” If they don’t then it gives a clear green light to risk-takers that they can make all the bad decisions they want and still get the government to help them out if need be. But of course if the odds end up in their favor, they get to reap all of the rewards.

I don’t know how much more the taxpayers can handle. But one thing is certain, either taxes or inflation is going up and neither will help our current economic situation.

Still say we’re not in a recession? I have some waterfront property in Nigeria I would like to sell you.

Is the Fed’s Extreme Lending to Banks a Cause for Alarm?Posted by ahc99 on September 17th, 2008

Recently the Federal Reserve Bank of St. Louis updated their data to reflect the total borrowings of depository institutions from the Federal Reserve. In layman terms, this data shows how much money the Federal Reserve has lend out to banks from 1/1/1919 all the way to 7/1/2008. As you can see from the below graph, the Federal Reserve has spiked up lending to banks to around the 170 billion level so far YTD 2008:

For a different perspective, in case people argue that this is not representative and require the Logarithmic version of the graph, here it is:

As you can see, there is a nasty spike at the end no matter if it is the linear or logarithmic version of the graph. Now, to me this is a very scary graph. Why all of a sudden has banks rushed to the Fed to borrow money? Does it mean that much of the assets on their financial statements are worthless? One good reason they need to borrow money is to keep afloat. If a lot of their assets (such as subprime mortgages or credit card IOUs from consumers) are worthless and they do not expect to get it back (and hence need to write off a large bad debt) then they would need to get money so that they can maintain solvent and have a good credit rating. Also, they need to have cash (after all cash is king) in case there is a mad rush by customers to the bank, which has happened to a few banks already. The Fed won’t reveal which banks are borrowing so much of the money though, which is understandable since they don’t want to start a panic. I have reason to believe Washington Mutual, Wachovia, Citibank, and Lehman are all participants in the borrowings due to their recent billion dollar write-offs.

However, playing the devil’s advocate is the Wall Street Journal, as you can see from this article, they believe it all to be a false alarm. In the article, they argue that the spike is just a technicality caused by how the Fed has chosen to classify the money lent through its new Term Auction Facility (TAF).

To give you a little background about what the TAF is, the article explains: the TAF enabled the Fed to lend a predetermined amount of funds to the banking system, with the interest rate at which they were lent determined through an auction process. But like the discount window, the money was lent directly to banks rather than primary dealers, and against a wide range of collateral rather than just Treasuries and agency securities. The TAF didn’t add to the money supply because for each dollar lent through the TAF the Fed was careful to liquidate a dollar of its holdings of Treasury bills and bonds to keep its overall balance sheet unchanged. But because the TAF is essentially discount window credit, the Fed decided to classify it as borrowed reserves.

The important part to note from the above definition is that the TAF allows banks to borrow money from the Fed and use a wide range of collateral to borrow against it, they do not require treasuries or agency securities as collateral. Thus, it is clear that the purpose of the TAF is to allow banks in a cash crisis to borrow from the Fed anonymously so as to avoid the stigma previously attached when banks borrowed during the discount window (which was not anonymous and would induce a public panic to withdraw funds). In addition, banks that borrow through TAF are allowed to post as collateral assets that cannot be sold in the current market (would you be willing to buy Subprime loans from banks?) and then get enough cash to meet their necessary reserves and maintain a good credit rating.

So, the Fed is lowering their lending standards…precisely the behavior that created the Subprime fiasco. And look how well that has turned out. But don’t be alarmed, it’s just a technicality like the Wall Street Journal says…just a matter of how you classify things.

Wall Street’s Monday MadnessPosted by ahc99 on September 15th, 2008

Photo by rajeshvj

OMG - Wall Street is suffering a triple punch today as the world’s banking sector went to hell in a handbasket:

Lehman Brothers have declared bankruptcy.

Merrill Lynch has been sold to Bank of America in a distress sale for $50 billion.

American International Group is asking the Federal Reserve for a $40 billion bailout.

Former United States Federal Reserve chief Alan Greenspan describes the financial turmoil that has demolished Indy Mac, Freddie Mac, Fannie Mae, Bear Sterns, Lehman Brothers, and Merrill Lynch as a ‘once in a century’ event and the ‘worst’ he has ever seen in his entire career.

It is mind reeling to think Lehman Brothers, a 158 year old company, has just declared Chapter 11 and put its 24,000 employees worldwide into the unemployment sector. Merrill Lynch barely scraped by with Bank of America agreeing to buy them out. It’ll be interesting to note whether the Fed will put its foot down and not bailout the American International Group.

Who’s next? Washington Mutual? Wachovia? Dare I say, Citibank?

It’s a brave new world out there.