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==> Extraordinary Times : The Fed is very close to being illiquid <==

 
Be Aware !
User ID: 511259
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09/28/2008 10:39 AM
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==> Extraordinary Times : The Fed is very close to being illiquid <==
Friday, 26 September 2008
Brad Setser: Extraordinary Times
Brad Setser has a fascinating insight to offer in his newest post, Extraordinary Times:


In the last two weeks — if I am reading the Federal Reserves’ balance sheet data correctly — the Fed has:

Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);

Increased its “other assets” by about $80b (from $98.67b to $183.89b);

Increased the securities it lends out to dealers by $60b (from $117.3b to $190.5b);

That works out to the provision of something like $370b of credit to the financial system in a two week period. And that is just what I saw on a cursory glance.

The most that the IMF ever lent out to cash strapped emerging economies in a year?

$30b, in the four quarters through September 1998 (i.e. the peak of the 97-98 crisis).

The most the IMF ever lend out over two years?

$40b, in the eight quarters through June 2003 (this covered crises in Argentina, Brazil, Uruguay and Turkey)

This is a very real crisis. The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lent out these kinds of sums over such a short-period.




My response:


Excellent and timely, Brad. I’ve been speculating all week that the pressure being used on the Congress to pass the Paulson Plan is the threat of Fed illiquidity. As of two weeks ago, the Fed had lent out more than $600 billion of its $800 billion balance sheet Treasuries against crap MBS collateral.

The Paulson Plan would have allowed the banks to unwind the repos putting the Treasuries back in the Fed, get cash for the crap MBS, and get more Treasuries from the issues financing the $700+ billion funding of the Plan. As a bonus, the Paulson mark-to-maturity price becomes the implicit Level 3 price for capitalisation of all the firms and banks in the system, giving them some breathing room to stay in business. Everyone wins except the poor American taxpayer.

The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.


Posted by London Banker at 01:33




[link to londonbanker.blogspot.com]
Anonymous Coward (OP)
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09/28/2008 10:40 AM
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Re: ==> Extraordinary Times : The Fed is very close to being illiquid <==


I'm not sure about the help which a bailout will provide, may be it will last a few weeks before starting to become hot again....



Anonymous Coward
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09/28/2008 10:42 AM
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Re: ==> Extraordinary Times : The Fed is very close to being illiquid <==
Stand down from red alert.

Repeat, stand down from red alert.
Truth
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09/28/2008 10:49 AM
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Re: ==> Extraordinary Times : The Fed is very close to being illiquid <==
The Fed is a front from more money than you can ever imagine. They will never run out and your fears are based upon what you see, not what you do NOT see. They cannot run out of money - only out of confidence. This is a faith game, and without belief in them - the game is over. But we are still fairly far away from that moment.
Anonymous Coward
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09/28/2008 10:50 AM
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Re: ==> Extraordinary Times : The Fed is very close to being illiquid <==
shadow banking system yes we need bailout

Monday, September 22, 2008


The shadow banking system is unravelling
by Dollars & Sense

A grim assessment from Nouriel Roubini of the Financial Times:

Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.

Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they carry the risk that an otherwise solvent but liquid institution may be subject to a self­fulfilling and destructive run on its ­liquid liabilities.

But unlike banks, which are sheltered from the risk of a run – via deposit insurance and central banks’ lender-of-last-resort liquidity – most members of the shadow system did not have access to these firewalls that ­prevent runs.
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