Banks in miser mode send borrowing rates soaring

[superconnected]

Source: Associated Press

NEW YORK (AP) - Bank-to-bank lending rates jumped Tuesday and Treasury bill demand eased only slightly, a day after Congress' rejection of the bank bailout plan cast an even deeper freeze over the barely operational credit markets.

After the House's vote against the Bush administration's plan, investors pulled their money out of stocks and commodities Monday, sending the Dow plummeting 778 points and crude down more than $10 a barrel. That money got shoveled into Treasury bills, short-term debt issued by the U.S. government that's considered the safest investment around.

On Tuesday, the yield on the 3-month T-bill recovered to 0.90 percent from 0.14 percent late Monday as the Dow Jones industrial average rebounded by more than 260 points in midday trading.

The T-bill yield is still very low by historical measures, however - particularly when compared to lending rates between financial institutions.

Read more: http://www.komonews.com/news/business/29947629.html

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They're trying to create problems on purpose.

[aquart]

1. Well, someone has to pay for their mistakes.

And they sure don't want it to be them.

[JaneQPublic]

2. Silly me. I was hoping CD and other savings rates might raise because of this. (nt)

[question everything]

3. Yes, but, hey, many here still think that the market rising

is "evidence" that we are fine. Or they still think that the bailout is for fat cat CEOs.

How can people be so ill informed, or unwilling to be informed is beyond me.

[Davis_X_Machina]

5. It's interesting...

...to see what they choose, when the menu of choices is reduced to either a principled cardboard box under a principled railroad bridge, or a house with a mortgage bought by the feds from a dirty, corrupt propped-up bank.

[tama]

4. 630 billion that Fed pumped

and all that the other Central Banks pumped, not enough to revive the credit market?

Who could have thought!???

(in fact, plenty did think and even predicted this happening, central bankers loosing credibility and means to bail the system)

[whosinpower]

6. Banks invested in t-bills instead?

Seems to me they are holding America and the world hostage to get what they want....someone to buy up their crap that nobody else wants.

[amandabeech]

8. The banks could get a little more for mortgage-backed.

See my post, above, re: the mark to market rules.

[amandabeech]

7. There is a move afoot to convince or coerce the SEC and the FASB Accounting Board

to revise the "mark to market" rule for mortgage-backed and other collateralized debt securities.

Right now, there is no market for the stuff, so that banks can't show them on their books for much at all. They have to carry the stuff on their books at the price that they could get TODAY for the stuff if they were forced to sell.

If the rule were relaxed somewhat, and those securities that the bank doesn't have the intention of selling soon, for example in the next six months, could be marked to what the price might be in the future based on the default rate of the mortgages in the pool, for example, if that could be calculated. I'm thinking something between today's market and a 40% discount over face value.

Then, the banks would have more capital that they could use as the basis for loans, and some certainty might roll off into the interbank overnight market.

Combine that with the guarantees, and perhaps some relief for those smaller banks that held Fannie/Freddie preferred as part of their regulatory capital, and I think that you'd see some improvement in lending.

Any improvement in lending would mean that there would be less money thrown at Wall Street, and less money perhaps risked by the taxpayers.

The bailout bill could be scaled back to something that more people could accept.

If more fixes were needed later, say in an Obama administration, there would be more time to sort things out and come up with a reasonable, non-cramdown-emergency bill.

[bluestateguy]

9. Tighter credit can be a good thing

Too much borrowing and reckless and deceptive lending got us into this mess in the first place.

[Psephos]

10. You're applying retail consumer logic to interbank lending, and that dog don't hunt

Tight credit between banks (google LIBOR for a better understanding) shuts down routine business operations across the entire economy when companies are suddenly unable to use short-term borrowing to smooth out routine irregularities in cash flow. That hasn't happened in any currently living businessperson's lifetime. Inventories cannot be purchased, leaving nothing to sell. Equipment cannot be ordered, facilities cannot be constructed or re-tooled, payrolls cannot be met on time, consumer spending drops, wealth evaporates into thin air as stock prices dive, local and state governments cannot fund day-to-day operations, tax revenues plummet as the economy worsens and write-offs from losses offset any remaining tax liabilities, people withdraw their money from banks en masse until the bank fails, on and on and on.

It doesn't seem hard for many to grasp that global warming brings a cascade of effects that amplify the original causes, but few seem able to apply the same reasoning to the positive-feedback loop that illiquid credit markets create.

Catastrophe has become a distinct possibility. The kind of catastrophe that puts 30 million people out of work, and destroys any hope of implementing new social programs such as UHC or even of funding old ones like SS. It's not a probability yet, but we are playing cards with the Devil, and he plays to win.

[amandabeech]

12. The Fed is currently acting as intermediator for inter-bank loans.

It is cumbersome, but if the Fed can keep it up for a little while, perhaps things will calm down and the banks will start lending to one another, albeit in reduced amounts and at a higher rate.

Although the Fed is securitizing the lending with T-bills, the total Treasury outlay may be less in the long run.

[depakid]

11. Huh?

:shrug:

The OP discusses a completely different kind of lending.

From the actual article (which it would behoove people to read):

"The problem is, the general public doesn't understand this. Maybe we need to see a few payrolls fail at a few companies before they realize," he said. "This has a very direct impact on Main Street."

[silverojo]

13. Who the HELL can afford to borrow money at this point?

Seriously, people are losing their jobs faster than their dead skin cells. You'd have to be an idiot to go into debt at this point--what'll happen when you can't pay it back?

[Demeter]

14. The Banks Will Have To Lend Eventually==Or Dissolve

The bank's reason for existence is to lend money to credit-worthy borrowers for its investors.

Otherwise, it should disband and go home, because it won't make any money.

The reason why banks are balking:

They used to make tons of easy money doing stupid, worthless lending in the fancy new products. These products are what is causing the problem. But oh, the immediate profits were so sweet and lavish!

Well, tough! Time to go back to boring, fixed rate, hold and hold type lending. No glamor, no bonuses, no obscene fees and profits. Just a solid, regulated, stable business.

[YankmeCrankme]

15. I agree with you.

How about just prompting the banks to loan by insuring the loans they make to credit worthy businesses? They get a guarantee that they'll get repaid, good lending practices replace the old, bad ones and the government doesn't have to fork over money to badly run firms to cover their mistakes by buying bad debt.

From there congress can fix the regulations, prohibit banks from using assets to speculate, investigate and prosecute the perps, work to alleviate mortgage hardship, in other words, they can do their job.

There are many solutions that can be tried, many here have posted ideas. Why do we continue to push a variation of a horrible administration plan?

[Demeter]

16. This Administration Is a Bunch of Drunken Fools Who Want to Party, Party, Party

The party's over, it's time to call it a day and get back to sobriety.

[Supersedeas]

17. holding the American people hostage -- give us a Taxpayer bailout OR ELSE -- no soup for you.