Banks Could Face Dire Consequences Without Liquidity Help

[RedEarth]

Source: -(Dow Jones)-

Steep losses Monday in bank stocks reflect the dire straits the banking industry may face if politicians reach no agreement on the financial rescue package.

"All of us are just numb," said Frank J. Barkocy, the director of research at Mendon Capital Advisors Corp. Asked if he fears more big banks might not pull through the crisis, he said, "I just don't know," adding that the commercial paper market might freeze until some compromise appears.

He and other observers firmly believe that a way for the U.S. government to help will be found - because it needs to be found.

Much of the focus on banks has been on their capital strength. But the tension for banks is now focusing on their short-term liquidity - that is, their ability to fund their daily operations. The rescue plan could have helped unfreeze the markets for short-term capital. Without a plan, say some worried observers, the short-term funding crisis for some banks could become acute, leading to more forced takeovers.

Dimitri B. Papadimitriou, the president of the Jerome Levy Economics Institute of Bard College in Annadale-on-Hudson, N.Y., said if no action is taken "there will be a couple of sizable banks besides Wachovia that become headline news." Most likely, he said, the FDIC will sell assets in similar transactions - undertaken while a bank is alive but at the end of its rope - rather than outright failure. Bank failures along the line of Lehman Brothers Holdings Inc. (LEH) "would be catastrophic," he said.



Read more: http://money.cnn.com/news/newsfeeds/articles/djf500/200809291721DOWJONESDJONLINE000683_FORTUNE5.htm

[Newsjock]

1. Sun could fail to rise tomorrow

Pigs could fly
Horses could spontaneously combust
Xbox 360s could electrocute gamers

Then again, none of these things might happen. We don't know.

[DJ13]

2. What happened to the always open, 24/7 Fed Reserve Quickie Mart lending?

After hearing the Fed pumped over $600 billion in the financial markets today (outside of the bailout) it seems like these financial institutions are getting greedy.

[FarCenter]

7. The Fed balance sheet is almost tapped out

The Fed does not have unlimited ability to create assets.

Without raising the debt limit and getting the authorization to float more Treasury debt, the Fed is within days of being tapped out.

[roamer65]

8. The Fed balance sheet is unlimited.

They can create as much currency as they want and monetize as much of these assets as they want. I think they need to monetize $2T to $3T to start to turn this around.

[pnwmom]

24. Sure, and that can lead to runaway inflation, which is not a solution. n/t

[olddad56]

9. The Federal reserve is a big part of the problem.

They should have been raising interest rates long ago, but instead they kept them artifcially low and everyone borrowed. In addition to the fact that savings rates are so low that everyone put their money in the market, instead of into banks.

I think the Feds orchestated this whole fiasco, just in time for everyone to panic. Perfect for the Fed's counterpart, the corrupt admin to hold on to the country for at least 4 more years.

A $700 Billion bailout would only buy a little time for the rich to get out. The Credit derivates market is estimated to actaully have about 500 trillion in bogus debt.

And that about wraps this ball game up.

[orwell]

10. I've read...

...a Quadrillion in derivatives. Whoopie!

[Spiffarino]

12. The essence of "Greenspan's Fraud"

Read Ravi Batra's book. He saw all this coming a long time ago and he puts the blame squarely in "genius" Greenspan's lap.

This game was devised by Greenspan and Reagan's henchmen to break the government. They kept wage growth to zero while productivity increased. More goods and less money means deflation and they couldn't have that, so the Fed accommodated the markets by increasing the supply of super-cheap money that encouraged people to borrow, borrow, and borrow some more.

Trouble is, someday all that debt has to get paid back. Today's the day.

[ixion]

3. Ask yourself this simple question:

if you were insolvent, in financial straits, and needed help, would your bank bail you out?

I think we all know the answer to that one: HELL NO.

They would throw you to the dogs. You know that. I know that. They know that.

NO HANDOUTS for reckless businesses.

[sendero]

16. And ask yourself another question...

... is George Fuckup Bush is for this solution, how could it be a remotely fair or good idea.

[ixion]

17. exactly

if monkey boy likes it, we should be running like hell.

[Thor_MN]

28. * is looking for any solution, as long as it happens now.

He knows he gets the blame for the current situation, he would do anything to get part of the credit for a solution. That's what led to * and most of the Dems pulling for the bailout bill and the rethugs mostly saying no. A carefully considered bill would take too long for *'s purposes, he needs something, anything to happen now.

[Dover]

25. And over half the Dems.....

I'm asking myself questions alright!

[depakid]

18. Libertarian attitudes are part and parcel to the problem

[Trillo]

21. Oh, it's not only libertarian attitudes. I watched a vote today....

n/t

[Nihil]

26. Accusations like that are totally unwarranted.

The poster that you are smearing is simply pointing out the
gross, grasping hypocrisy of the banks.

> if you were insolvent, in financial straits, and needed help,
> would your bank bail you out?
> I think we all know the answer to that one: HELL NO.
> They would throw you to the dogs.
> You know that. I know that. They know that.
> NO HANDOUTS for reckless businesses.

This is not a "Libertarian attitude": it is a simple, straightforward
case of TRUTH.

I realise that certain parts of the financial world are feeling
more than desperate at the moment due to their own exposure (as a
result of their *own* decisions & actions) but that is no reason
to lash out at a DUer who objects to US taxpayers being expected
to dip into their own pockets to the tune of $2500 for the sake
of the profits of a small minority of professional gamblers.

Yes, the problem is serious.
Yes, the result of the gamblers' addiction will have a major impact
on everyone, directly or indirectly (i.e., it is not just the
fat cats that will see losses, it is everyone across the board).
No, it doesn't justify tarring an honest opinion as "libertarian".

[ixion]

30. thanks, Nihil

My goal is never party politics, as I'm rather apolitical by nature. Rather, I always look for the Truth.

Thanks for understanding. :hi:

[Vincardog]

4. We do know that when ever the * mis administration says "Hurry up this EMERGENCY requires IMMEDIATE

attention" it is time to slow down and read the fine print closely.

[high density]

5. What are they complaining about?

The Fed has been providing a record amount of "liquidity." And with that they certainly aren't loaning it out to people or businesses for the 2% or whatever they're borrowing it at.

[Igel]

13. The net worth of toxic assets dwarfs what the Fed's done.

However, everybody's fairly sure that the toxic assets are worth more than their current market value.

What's needed is a way to determine their value. Dumping money into the banking system doesn't do that, it's a short-term transient fix, one that will have to end fairly soon, I think. Having the Treasury Dept. buy up the assets and determine their value is a possible fix--not just for those bought up, but for the many, many hundreds of billions of dollars worth of toxic assets that aren't bought up by Treasury.

If the solution doesn't make sense perhaps it's because the problem isn't understood the same way by all those concerned.

[Thor_MN]

29. They are only worth what someone will buy them for.

If no one will buy them, they have no value. The problem is the damn derivatives, IMO. Nothing more than a bet on which way something will move. May as well be betting on which side of a table a cockroach will crawl off of. Once you have made your bet, how do you sell it to someone else?

I don't have a problem with them buying packages of mortgages, I do have a problem with them buying up people's lottery tickets. If no one will buy the toxic assets, their value is zero and it's time to call it a failure and move on.

[ozone_man]

6. If they are that exposed to derivatives

I think it's best to cut the line. It's like catching a fish that's bigger than the boat. It's not the job of taxpayers to pay for eight years of irresponsible derivative investment.

[mike_c]

that is an AWESOME analogy....

:thumbsup:

[aquart]

14. It IS our job to see that derivatives are outlawed.

Is anybody busy writing that legislation?

[aquart]

11. Didn't they just pull over $100 billion OUT of the system?

Could that have something to do with it?

[LatteLibertine]

15. Some

are saying we should have done the bailout because of what was lost on wall street today. Well, bailout = American taxpayers hit for 700billion plus. 50% of Americans are not involved in the stock market in any way shape or form. The people taking the largest losses are 1-10% of the most wealthy Americans.

Yes, the greed and irresponsibility of a few is going to hurt us all. Sadly, the bailout does nothing to address the things that brought us here. It's going to be painful and the privatize the profits social the losses crowd have got to be stopped.

[Phred42]

19. Then they had damn will better poney up.

[trthnd4jstc]

20. I do not want Paulson to have too much Power. n/t

[IndianaGreen]

22. There are better alternatives to the Paulson plan the Congress just rejected

What We Can Learn From Chile's Financial Crisis

You wouldn't know it from all the panicky headlines but the current turmoil on Wall Street is not the world's first financial crisis. Latin America has suffered more than a few, and many were on a larger scale relative to the economies they hit.

One was triggered by Chile's 1982 economic collapse. For a small country it was a lot worse than what is happening in the U.S. today. The Bush economic team could learn from how it was handled.

The Chilean plan helped the banks recapitalize and protected depositors. It also minimized moral hazard and kept the government's role from expanding. The intellectual support for economic liberty was preserved and this protected the market system, which over the past 25 years has not only survived but prospered.

<snip>

One alternative to the Paulson plan would be to provide secured loans to troubled institutions as a way to allow them to recapitalize. The collateral against the loans would be bank assets (presumably impaired assets) but the transaction would be similar to a "repurchase agreement." In this transaction, otherwise known as a "repo," the borrower is required to repurchase the securities, with interest, in the future in order to retire the loan.

Chile used such an instrument to recover from its 1983 banking crisis. It is true that the government intervened directly in two banks, wiping out shareholders, removing management and nationalizing the firms. Those banks were later re-privatized in a sale that gave tax incentives to encourage Chileans to participate in the offering.

The many other banks that were in trouble were handled differently. For those, the government provided loans that were secured by bank assets, with an agreement that the banks would later repurchase those assets.

http://online.wsj.com/article_email/SB122265260912184329-lMyQjAxMDI4MjIyOTYyNTkyWj.html

[bhikkhu]

23. The Fed just pumped in 650 Billion. Not enough?

They've been crying for months, and the Fed's been increasing the money supply at 16%+ for months...

[YankmeCrankme]

27. If certain banks are funding their day to day operations on short-term loans...

they have much deeper problems. My take is that only the real big banks that decided to go with trying to increase their profits playing the market, which until deregulation they were barred from doing. I'm sure many banks still make money the old fashion way, to borrow from John Houseman, by loaning money at interest.

The fact is, these banks that are in trouble are in trouble because the solvent banks don't want to loan them money. It's too risky, since they could fold at any time and, pfft, there goes their money. But, I would have to guess the solvent banks still need to make a profit, so they still have to loan money to people and businesses. Why would this change?

Seems the biggest problem is jobs. If people are working, people are buying things and loans will be made. If private industry isn't creating jobs, perhaps the government should be. We've left our infrastructure decline over the last 30 years, haven't invested in alternative energies, made education more difficult to afford, etc. 700 billion dollars would be better spend on our country and putting people to work then buying worthless investments banks used to have giga dollar profits and, correspondingly, giga bonuses because they thought they were smarter than anyone else.

Let's face it, if the US buys bad investments based on risky mortgages and if you don't help the mortgage holders not default, they will remain worthless. How does this really help?