Reinko

Mike Mayo's Seven Deadly Sins of Banking

Can we take the writer Tyler Durden seriously?

His black and white picture looks like a seventeen year old, his writings are at best a 27 year old running on testorone.

There is only repetition on info that is already out, zero future stuff has been observed.

So Tyler; who are you & for example where is the US$ one year from now???

Citigroup's Derivatives Reduce Bailout to a Non-Event

My dear reader, the author Rakesh Saxena is talking about 'maturity mismatches' but do you know what that is?

For example before all those weird investment banks fell; up to 25% of their total balance 'asset value' had to be financed via 24 hour borrowed money.

The working model was as next:

We borrow out money for the long term, this creates high yields.
We finance this (since we have no money for ourselves) with short term borrowed money that is cheap cheap cheap.

In the end 25% of total balances were financed by one day borrowings,
that is 'maturity mismatch'.

It is not very rigid by the way.

Citigroup's Derivatives Reduce Bailout to a Non-Event

To 1977 degree C:

It could very well be that Citi has mostly those swap instruments on her derivative books. But this does not take away that worldwide there is over 600 trillion in nominal value in the OTC markets and that was bought and sold for about one US GDP (14.5 trillion).

The basic instability problem is as next:

As just a few percent of this 600 trillion has to be paid, money streams like one US GDP have to be there.

After my humble opnion this is a fairy tale world; no institution has a few trillion on the shelfs in case this need to be paid out...

Citigroup: Another Ad Hoc Bailout

Indeed, it is only one cent for three years.

And the fractional reserve banking is out of the window for some time now, see the next link from the FED AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS AND THE MONETARY BASE:

www.federalreserve.gov.../

In the third column (the 'non borrowed' column) you see the real reserves are negative...

Isn't it strange to name the real reserves the 'non borrowed' ones?

Paulson and Bernanke: A Conspiracy of Dunces

Your step 3 makes some sense; the banks complain that accountancy rule 157 is pro cyclical in nature.

But first the healing of rule 157 needs to set in.

Don't forget that a lot of banks used rule 157 in their benifit; they wrote down about 200 billion of their own debt obligations...

That is about the same size of the reported down writings in the first year of this credit crisis, of course it is rather strange to write down your own debt obligations. This lays the axe at the roots of your credit ratings but the banks did it anyway.

Furthermore, all attention is now on the normal bank balances. There is a large shadow bank system behind it where the Basel 1 rules for bank reserves simply do not apply.

The real shit is of course nicely parked in the shadow bank system...

Wachovia Deal: A Home Run for Citi

Is this for real?

Only 448 million US$ in deposits? (That is 0.4 billion by the way).
And 312 billion US$ in troubled Wachovia assets?

In other media files it is told that this costs the FDIC absolutely nothing...

In relation to the mark to market rule (accountancy rule 157) Barry Ritholtz has some details to share, link:

bigpicture.typepad.com...

It says:

Wachovia book value = 75 billion US$
Citi paid = 2 billion US$

While in the meantime the banks only complain about that stupid 157 rule because it makes 'no sense' to put prices on stuff that cannot be sold. But when you cannot sell this in a period of 15 months (the length of the credit crisis) what is the stuff actually worth?

It is mostly garbage, the banks did it all to themselves. It was garbage from the beginning and it is garbage now.

Where's the Bottom? Still Anybody's Guess

A fiat money system like we can can survive a long time if the money supply is under control. There even are some simple laws that guide what money growth should be:

M3 money growth = GDP growth + inflation growth.

But the US Federal Reserve stopped publishing M3 money growths years ago with the weird argument 'This number gives no additional economical insight' (or words like that).

Of course a fiat money system can blow itself up if it is too far in the debt, this is called a Ponzi financial unit.
In a Ponzi financial unit the debt is so high that even for the interest more borrowing is needed.

As soon as the debtors find this out, the plug will be pulled.

An example of such a Ponzi unit is the combined US financial sector;

Even this last year when the credit crisis started they borrowed over 1500 billion more, now the total debt is over 16,500 billion US$ and is growing 10% a year.

The whole problem only emerges when the speed of borrowing is far above GDP growth, this is the case for many years in the USA.

And that is simple to explain: Alan Greenspan never did see the dangers coming with entire sectors borrowing themselves to death...

Banks on the Verge of a Nervous Breakdown

Nice stuff, especcially the math remarks.

I myself have a degree in math (the queen of science they say but in practice it is the oil of science) and I was capable a long time ago to declare armageddon on the US financial sector.

So it is great news to observe that the Harvard Business School is trying to put elementary math on the curicculum...;)

Investment Banks: Through a Glass, Darkly

There are many ways to look at leverages but when you compare total market cap to total (borrowed and invested by others) assets, leverages are still climbing because of detoriating stock values.

And if the above way of leverage measuring is at 1:25 this simply means that a decline of 4% in assets wipes out all market cap...

So these kind of banks are still rather shaky structures. And it might well be that one of those banks (I think it was Goldman) was able to unscrew one of the structured investment vehicles but that was only a holding of long term debt financed with cheaper short term debt.
It makes we wonder: how the hell are they going to unscrew those collaterized debt obligation stuff?

I mean anyone can repair a bycicle but when your CDO yet engine explodes while you are flying you have some problem.

At last: Don't forget that at almost all investment banks Level 3 assets are still climbing.

Research Zeitgeist: Bank Capitalization Concerns Heat Up

And I forgot to mention that most US commercial bank reserves are not borrowed reserves;

They have negative real reserves and positive borrowed reserves, see the second column in the next file:

www.federalreserve.gov.../

The real reserves are now 130 billion US$ in the negative and what exactly the value of the pledged collateral is is not known right now.

Ha! In the past the Federal Reserve always did put a price on the pledged collateral but they now have programs where the primary dealers are placing a price on the pledged collateral...

All in all it still looks like the entire financial sector is sinking deeper and deeper.

In case how you want to see how all this pledging of collateral works on a day to day basis you can go to:

www.newyorkfed.org/mar...

In the last row you can find some links that track the daily details of the five 'providing liquidity' programs in place until now.

Research Zeitgeist: Bank Capitalization Concerns Heat Up

Also of interest since the latest Z1 release of the Federal Reserve is out:

Total debt of the US financial sector still above one US GDP while the financial sector as a whole picked up about 200 billion US$ Q on Q in new debt in Q1 2008.

Compared with the first quarter after the credit crisis broke out (over 500 billion US$ new debt in Q3 2007) we see the credit crisis actually works: New debt availability is still on the decline and so the profits of the entire financail sector will follow suit.

Source:

www.federalreserve.gov...

Since it is anybodies guess how the financial sector is going to pay back the 16 trillion of outstanding debt, let alone pay for the interest on it, we aren't out of the woods yet.

A Sensible and Refreshing Move from the Fed

To Promod Radhakrishnan.

Thanks for the reaction, I agree with you: a lot needs to be changed from the macro point of view. In principle the debt problems need to be dealt with and the size of that is already giant:

With the Z1 release in your hand and given the development of total debt over the last seven years, the US economy needs 4 trillion US$ more debt this year.

A light version would be: Pay the interest only (that is some unknown number between 2 and 3 trillion that is now borrowed and not really paid).

So in fact this credit crises is a welcome thing: It prevents building up more debt at a too fast speed.

That is what the USA, but also the UK, has to go through.
Yet you hear never anyone on this, for example that McCain republican figure only talks about lower taxes and dumb minded stuff like that. Well more debt is not the answer.
I don't think a new government will deal with the problems just like the present did not; in fact vice president Dick Cheney even has stated 'deficit's don't matter'.

At last: Don't take my words from my first comment too personnel, I am just annoyed that the discussion never goes about the real problems, not in politics and not in the media. So that has nothing to do with you as a person.

Yet it is wise to keep an eye on the Federal Reserve, her Z1 and H3 releases always bring much more wisdom than any newspaper can...

A Sensible and Refreshing Move from the Fed

For Tony Saprano:

Since when barrow you money instead of borrowing it?
I am from Holland and most of us live under sea level and I can tell you this: your banks are doomed no matter how much you USA folks try to barrow from fareighners.

A Sensible and Refreshing Move from the Fed

Not often you read an article written by somebody pretending to understand macro economics but who in fact is a Greenspan micro economic clone.

From the latest Federal Reserve Z1 release (never read by Promod Radhakrishnan of course) you can calculate that the entire US economy needs 4 trillion of new debt in the year 2008 in order to stay 'profitable'.

Here is a link to a light version of the Z1 release Promod Radhakrishnan:

www.federalreserve.gov...

But 4 trillion is about 30% of the gross domestic product and is far above the total profits of the entire US corporate sector...

No no, seldom you read such a dumb article with stuff like, quote:

We had the best day of the year by far Tuesday, with the Dow up more than 400 points!

Comment on the quote: It is well known that Wall Street traders neglect elementary macro economics, very likely they do not understand it...

Short Covering Helps Boost Stocks

As far as I know reality you need to cut and paste the entire aspx link in the above so you must include what is behind the 'story.aspx?guid' end of the link.

Of course it is not for nothing a website like this does not include the rest, for example when I try to visit nasdaq.com and I click a bit around my entire windows version included firewall and anti spy software breaks down.

It is weird but true: I can only visit nasdaq.com if afterwards I install a clone from before that visit...

Lets not forget their is more weird stuff in this world: For example the US has a strong economy... That's also weird when you study the obesity details, now these folks work hard...