As the Fed Runs Out of Money, Resolution Trust Plan Refloated

Some of the end games are quickly approaching

Per Tony Crescenzi on Realmoney.com:

The Fed had close to $800 billion of Treasuries at the start of the year. Last week the Fed had $479 billion in Treasuries, of which $200 billion was pledged to the term securities lending facility, the facility whereby the Fed lends its Treasuries to dealers in exchange for agencies, mortgage-backed securities and other non-Treasury collateral.

If the Fed lends $85 billion to AIG (AIG), the Fed's Treasury holdings will be down to $195 billion. The tally is so low that it is becoming imperative for the Fed to take actions to enlarge its balance sheet.

So how do you enlarge the balance sheet? You do emergency auctions of Treasuries

• The U.S. Treasury said it will sell bills to allow the Federal Reserve to expand its balance sheet, a day after the government agreed to take over American International Group Inc.
• ``The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve,'' the department said in a statement today. ``The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program.'' The new bill program ``will provide cash for use in the Federal Reserve initiatives,'' the Treasury said.

Gold is finally reacting, up 6%. But if this due to the printing presses working 24/7 in America or the "Armageddon" scenario, who knows. Pathetically the dollar is barely down. As we print more by the minute. Open question - what happens if Citigroup (C) fails? Morgan Stanley (MS) - down 24% today? Wachovia (WB) - down 21% today? All are "too big to fail" - where will the money come from? I think the market is starting to finally figure out there are not enough fingers to plug the springing links throughout the system. Bush should be on the phone with every country in the world who actually has cash and be on his knees asking for them to send their sovereign wealth funds in to help save the system. This is what debtors due when the bills finally come in - beg. Only this debtor has the power to print, print, print money out of thin air.

Folks, if you think this is bad, just wait until our Medicare obligations begin to overwhelm the system in about 15 years. This is why I keep bringing those up. This is all coming to a head now after years of neglect, greed, lack of regulation, and "kicking the can down the road". But this is just a preview of what is going to happen to America as a whole as our Medicare (Social Security is just a tiny issue in comparison) eats up a larger and larger part of the GDP. We are repeating the same mistakes there that we did here. But since today's politicians mostly won't be around when that hits the wall, no one even talks about it. We are too busy talking about lipstick. Check back in 15 years.

Also just as an aside, the federal deficit numbers are far worse then they are letting on. Why? Because the war costs are "off balance sheet" - meaning they are not part of the budget. Further, in the last week we've decided we are going to keep Fannie and Freddie off the balance sheet as well. Because the obligations are "only temporary". How sad. The war is only temporary too, so no need to count the costs there either. So this is like you buying 50 cars, on credit, and saying they don't count because you are not writing them into your official budget. That's what our government is doing.

• The director of the White House Budget Office on Friday said that operations of mortgage companies Fannie Mae and Freddie Mac seized by the government last week should not be treated as part of the federal budget.
• "While the GSEs (government-sponsored enterprises) will not be included in the budget at this time, I will continue to monitor closely the implementation of the government's arrangement ...and may revisit their budgetary status in the future, if conditions change," Office of Management and Budget director Jim Nussle said.
• On Tuesday, two days after the takeover, officials at the Congressional Budget Office announced that the deal had bound the government so tightly to the firms that their business operations, assets and liabilities should be included in the government's balance sheets. (this was ignored)

The next end game is the Resolution Trust ... it is now being floated. Basically the U.S. will end up buying the toxic assets from the banking system in a more comprehensive way then we've ALREADY been doing.

• Staring down the worst financial crisis in decades, U.S. lawmakers are strongly considering whether they need to dust off a 1980s-era plan to help save the banking industry and stabilize the economy more broadly. Both Democrats and Republicans have shown interest over the past two days in the idea of creating a government corporation to help deal with the toxic assets that have already brought down financial behemoths Bear Stearns Cos. and Lehman Bros., and forced the government to take over Fannie Mae and Freddie Mac.
• "I think we need to create an institution or a mechanism of a super-trustee to handle incredibly large institutions which may be allowed to fail and how those assets get managed and handled in an expeditious way so that it doesn't further exacerbate the economic ramifications of failure," said Rep. Paul Kanjorski (D., Pa.). "If we don't do that, we'll just go from one failure to another, and keep blossoming."
• Mr. Kanjorski's comments came the day after House Financial Services Chairman Barney Frank (D., Mass.) suggested that lawmakers need to consider creating a government entity akin to the Resolution Trust Corporation, which was formed amid the savings and loan crisis in the 1980s. The RTC, as it was known, resolved and liquidated the assets of 747 thrifts with total assets of $394 billion.

As an aside, this was nowhere to be found in yesterday's news while the punditry cried for AIG bailout. A small country by the name of Russia halted its stock market. Remember, folks - to Americans, if it does not happen in the United States of Subprime, it does not matter. Until it does. We had a  world emergency in 1997 due to the Thai Bhat of all things (Thai currency).

• Sept. 17 (Bloomberg) -- Russia poured $44 billion into its three largest banks and halted stock trading for a second day in a bid to stem the worst financial crisis since the devaluation and default a decade ago.
• The benchmark Micex stock index plunged as much as 10 percent, bringing its three-day decline to 25 percent.
• ``The bond market remains effectively closed and banks are reluctant to lend to one another,'' said Julian Rimmer, head of sales trading at UralSib Financial Corp. in London. ``The problems experienced by KIT Finance have heightened counterparty risk and reduced liquidity further.'' (sound familiar?)

Historic times. Things many have warned for a long time but were ignored as "silly sky is falling types" are falling like dominoes.

Again, what is happening now is nothing compared to when the U.S. will eventually default on its debt due to Medicare. That will be the epic.

Comments

[Rafael Grillo:]

The nature of the beast is so huge and convoluted, nobody really understands at this point exactly what is required to solve it. One thing is certain: we are all going to pay for this mess in one way or another. Americans can't have the cake and eat it too. For starters, I'd like for the presidential candidates to stop talking about tax cuts. This country will need tight fiscal discipline to be able to face the financial issues. Even the Government can run out of money, and continue borrowing will only create a more fragile and explosive economic situation in the long run. RTC should be funded with tax money. Second, the responsibles for this mess should to held accountable. Grossly incompetent CEOs who failed on their fiduciary duties are being let go just to enjoy their millionaire golden parachutes. In the meantime, trusting investors are seeing their investments disappear. Failing firms should be orderly liquidated and penalties imposed to pay for the costs imposed on the taxpayers. I'd even love to seek the recovery of unearned bonuses in those for the last 3-5 years, although I know that is next to impossible.

2008 Sep 17 11:28 PM