Can The US Federal Reserve Go Broke?

RGE Monitor

RGE Monitor

Can Central Banks Go Broke? Fed Refuses To Disclose Collateral Composition And Recipients Of $2.8 Trillion Loans

  • The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the U.S. GDP, to rescue the financial system since the credit markets seized up 15 months ago. Bernanke’s Fed is responsible for $4.4 trillion of pledges, or 60% of the total commitment of $7.4 trillion. The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions

  • The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 bn Troubled Asset Relief Program (TARP)–> Regulators refuse to disclose who is receiving how much while Congress starts pushing for transparency and give authority over taxpayer money back to elected officials.


  • see Cumberland Advisor’s real-time graph of Fed’s balance sheet and the contributions of different lending programs.
  • The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.
  • Buiter: Can the central bank become insolvent? How and by whom or by what institution should the central bank be recapitalized, if its capital were deemed insufficient? These are relevant questions today wherever central banks have taken on large exposures to private credit risk as in the U.S., the Eurozone, and the UK.
  • Nov 5, RGE: Fed Balance Sheet Expansion: Change in Formula for Interest Paid on Reserves –> banks are providing the reserves for the Fed’s balance sheet expansion themselves.
  • Sep 17: Treasury Announces Supplementary Financing Program to fund the Federal Reserve’s Liquidity Facilities and to manage the balance sheet impact of these efforts.

Go to:  http://www.rgemonitor.com for all the details. (Excellent Financial Site – You will recognize the writer, because he has been all over the TV recently.

Going for Broke – By ALAN ABELSON

MONDAY, SEPTEMBER 22, 2008
UP AND DOWN WALL STREET
Run and Hide

Run and Hide

Going for Broke

Uncle Sam plans to spend like there’s no tomorrow to cure what ails the credit markets and rev up investors. Will it work?

BABY, IT’S COLD OUT THERE. So let’s toss another billion on the fire.

What’s that make it? Well, let’s see: $29 billion for Bear Stearns, somewhere between $1 billion and $100 billion each for Fannie and Freddie (a nice narrow range), $85 billion for AIG, a couple of hundred billion to keep stray banks, brokers and their errant kin from asphyxiating themselves by swallowing toxic paper. And then there’s the proposed reincarnation of the Resolution Trust Corp., which all by itself may mean shelling out $800 billion, perhaps even as much as $1 trillion.

While we’re at it, we might as well include the $400 billion with which the Paulson-Bernanke grand plan envisages endowing the Federal Deposit Insurance Corp. so it can insure money-market funds.

But, please, understand those mind-boggling sums in no way, shape or form are to be construed as designed to aid and abet a bailout. Instead, they are merely the essential ingredients of an “intervention,” or, if you prefer, a “rescue” — just about anything, in other words, that’s semantically sweeter than bailout, with its ugly connotation of a sinking ship.

Besides, we have it on the best authority that none of this largess will cost the taxpayer a cent over the long run, which, if nothing else, speaks volumes about what constitutes the best authority these days. The reasoning is simple (or perhaps simple-minded is more accurate), namely that deep-pockets Uncle Sam can sell off the assets of the foundering companies on which he has bestowed that bounty and come out whole.

Surely, they jest. For a heap of those so-called assets might easily be confused with liabilities since even those that can be sold will likely fetch a feeble fraction of what their possessors now claim they’re worth.

This is not to say that until the powers-that-be pounded the panic button last week, the billions they had already thrown at the problem as well as taking a big step further and making the wretched companies soaking up those billion de facto vassals of the government were completely in vain. They undeniably had an instant impact. Unfortunately, an instant was about as long as the impact lasted, and it failed miserably to becalm the frantic credit markets or rekindle investor confidence.

The sad truth is that just about every one of Messrs. Paulson and Bernanke’s previous brainstorms — and they seemed to come with increasing frequency as Hank and Ben’s agitation mounted — touched off a brief spasm of exhilaration among investors, only to evaporate in very short order as the credit crisis resolutely morphed into a credit calamity. Or, to change the metaphor, what had been a slow-motion train wreck picked up demonic speed.

That little chart that adorns these gray columns offers an eloquent description of how bad things had gotten until the clouds parted and the sun finally came out as the week wore down. It depicts the yield on three-month Treasury bills going back to 1930. On last Wednesday, investors were so gripped with fear and desperate for a haven that they poured into the bills even though the yield was nonexistent. In effect, they were willing to pay the government for keeping their money safe. As a glance at the chart shows, that hasn’t happened since the Depression.

[chart]

Then, everything changed, at least for now. And the soaring rise in the stock market that began Thursday afternoon and extended through the final bell on Friday had Ben and Hank whooping with joy, exchanging high fives and just venting their pleasure with cat-that-swallowed-the-canary smiles, a welcome change from the funereal faces they had donned for the past few months.

While we’re in a generous mood, we might as well add Christopher Cox to the cheerful circle of celebrants. The SEC chief has been the target of a steady stream of slings and arrows directed his way by John McCain, which rather than nailing Cox’s inadequacies (and they’re bountiful) once again demonstrated that McCain and his advisers haven’t much of a clue how markets work.

Cox, in any case, deserves some of the credit for the smashing rally that boosted the Dow comfortably nearly 800 points in two sessions. For he proudly announced a ban on shorting 799 financial stocks and sparked talk of banning short selling entirely, and that scared the dickens out of the shorts who en masse rushed to cover. The resulting buying burst, we haven’t a scintilla of doubt, played a significant role in the great market lift-off.

Frankly, it seems to us, Cox, in taking out after the shorts — whom nobody loves except their immediate families (and we’re not even sure about them) — was more interested in covering his derrière than in protecting investors. As an early-warning sounder, keeping markets reasonably honest and offering a way to hedge against the inevitable mistakes or bad luck that investors are prey to — short selling serves a valuable function, and messing with it is apt to yield a lot more harm than good.

And we say that fully aware short selling has its quota of bad guys who do wicked things, but also aware that there are rules and regulations aplenty to curb untoward practices, if somebody would only enforce them.

But then, if regulators hadn’t been asleep, banks probably would have had real trouble finding ways to go belly-up, those innovative weapons of mass destruction called derivatives might have been defused long before they blew up, and those speculative bubbles, as in housing, might not have made the Guinness Book of Records for sheer size.

Just think of all the fun we’d have missed.

WILL THE GRAND PLAN WORK? Will piling on all those billions on billions atop a budget deficit that’s already a cinch to shoot up to over half a trillion next fiscal year allow the badly winded economy to start a sustainable recovery?

Ben, remember, vowed to use helicopters to drop money from the sky, but now he seems to be gearing up to use 747s. Can the Fed run its printing machine full-time to churn out all those billions without a substantial infusion from increasingly pinched taxpayers? And won’t priming the pump like mad drive the dollar back into the pits and force interest rates higher?

The plan, in all its extravagance, seems to have been thrown together on the fly, and once Congress gets a whack at it in the waning days before the lawmakers scurry off to the hustings, it may bear only passing resemblance, for better but probably for worse, to Paulson and Bernanke’s handiwork.

Obviously, the unknowns greatly outweigh the knowns, which make those and myriad other questions tough or downright impossible to answer.

We’re willing to concede that some forceful action was necessary, if only so the Fed can pay penance for its critical part in creating the incredible credit-cum-housing disaster.

As Merrill Lynch’s David Rosenberg observes, the fact that the government is suddenly so aggressive in coming to grips with an epic credit collapse is eloquent testimony to how the Fed and the Treasury “have consistently underestimated the severity of that collapse from the get-go.”

He reminds us, moreover, that the original Resolution Trust Corp. was strictly about buying bad mortgages. So he wonders whether the new incarnation will also undertake the purchase of Level 3 assets, whose value is extremely problematic and, in any case, more than a little difficult to gauge, and which are a sizable and not particularly desirable presence in many banks’ portfolios. And will the new RTC also buy credit-card debt, commercial real estate, leveraged loans “or the other mountains of bad debts out there?”

David cautions that the entire credit collapse to date has “reflected the unwind of the largest bubble of all time — residential real estate. Meanwhile, a consumer-led recession is taking hold this very quarter for the first time in 17 years, and every consumer recession in the past was followed by a negative credit cycle of its own.”

As to the euphoric market reaction, he thinks it’s a bit much. In their stampede to buy, investors seem to be ignoring the depressing fact that what prompted such drastic action was the sorry state of the financial system, which isn’t likely to change overnight no matter how vigorous the government exertion.

After the RTC was set up in 1989, he notes, it took two years for the economy to turn around, three years for housing to recover and a year for the stock market to bottom.

So what’s the rush?

The Price for Food and Fuel Will Only Go Up

Prepare for Tough Economic Times

Excerpts of Post:

“Our problem is a toxic U.S. dollar. Printing funny money steals from the poor and middle class.”

“As long as the Fed is allowed to wield its power at will, the prices for food and fuel will only go up.”

“Some are calling for gold and silver to go over $2,500 and $200 an ounce”

—————————————————————

Why the Rich Get Richer: Robert Kiyosaki

Most of us are aware of the sacrificial slaughter of Bear Sterns. Some people call it a bailout, but I call it a handout — a government handout to some of the richest people on Earth, paid for by American taxpayers.

It’s the survival of the richest, and the poorest be damned. There’s something dismal about a society that operates by those values.

The Economy on Life Support Continue reading

CNNMoney.com – Interest Rates Tumble

CNN Money

CNNMoney.com
The bond yield tumble, and the economy
Monday March 24, 7:15 am ET
By Paul R. La Monica, CNNMoney.com editor at large

Bond yields have plunged in the past few weeks. And even if you are not an active investor, you should care about what’s been going on in the bond markets lately. Here’s why.

The yield on the benchmark U.S. 10-year Treasury currently stands at about 3.33%, down from nearly 4% about a month ago. The rate on this long-term government note is a key factor behind what happens to fixed-rate mortgages.

If rates continue to fall, they could hit not only a new low for the year – the 10-year briefly touched 3.28% in January – but could come close to falling below the 3.07% level they hit in June 2003, which was a 45-year low at the time. Continue reading

Treasuries Rise on Speculation Credit-Market Losses to Deepen

Bloomberg News

March 6 (Bloomberg) — Treasuries rose and three-month bill rates fell to the lowest level since 2004 on concern that the Federal Reserve may be unable to prevent credit-market losses from deepening.

Investors sought the safety of government debt as Citigroup Inc. planned to pare its U.S. residential unit’s mortgage and home-equity holdings by about $45 billion over the next year. Bonds briefly pared gains as speculation increased that the government would have to guarantee mortgage agency securities before a Treasury spokesperson said the conjecture was untrue.

“Every day is like the 1987 stock market crash,” said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets in New York, the investment-banking arm of Canada’s biggest lender. “There isn’t a day when you’re not at the edge of your seat. The system is at daily risk.”

The yield on the two-year note fell 13 basis points, or 0.13 percentage point, to 1.50 percent at 4:32 p.m. in New York. The price of the 2 percent security due in February 2010 rose 1/4, or $2.50 per $1,000 face amount, to 100 31/32. The 10-year note’s yield decreased 10 basis points to 3.58 percent.

The three-month bill’s rate dropped 13 basis points to 1.36 percent after touching 1.31 percent, the lowest level since July 2004. The drop pushed the so-called TED spread, the difference between what banks and the government pay for three-month loans, to 1.64 percentage points, the widest amount since Dec. 27.

`Driven by Fear’

“The short end is really being driven by fear,” said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh.

The cost of exchanging fixed for floating interest-rate payments for two years climbed to a record high as investors sought to lock in rates. The spread between the rate on a two- year interest-rate swap, used to hedge against and speculate on interest-rate swings, and the Treasury two-year note yield, reached 110.06 basis points, the largest since at least November 1988, when Bloomberg began compiling data.

“This is the most illiquid market we’ve ever had, bar none, 9/11, any time in the history of the bond market,” said Thomas Roth, head of U.S. government bond trading at Dresdner Kleinwort in New York. “And it’s not getting better any time soon. We’re going to be living with this for a while.”

Merrill Lynch & Co.’s MOVE index, a measure of expectations for Treasury volatility, increased to 164.9 yesterday, the highest level since Jan. 28, two days before the central bank reduced its lending target by a half-percentage point.

`Screen Prices’

“There’s liquidity but not at the screen prices,” said Brant Carter, managing director of fixed-income retail trading for government and agency bonds in Memphis, Tennessee, at Morgan Keegan Inc. “By the time you make a quote and get an execution, the prices are, depending on the size of the transaction, a tick or a plus away to even more. That hasn’t happened in a long time.”

Ten-year securities yielded 2.07 percentage points more than two-year notes, the most in almost four years, on speculation further interest-rate cuts by the Fed will stoke inflation as commodity prices soar. Oil traded at a record of $105.97 a barrel in New York.

The difference in yield between 10-year notes and similar- maturity Treasury Inflation Protected Securities, or TIPS, climbed to 2.57 percentage points today, the most since August 2006. The difference reflects the rate of inflation traders expect for the next decade.

Negative Real Yield

The yield on two-year notes is almost 1 percentage point below the 2.5 percent annual rate of inflation excluding food and energy through January as reported by the Labor Department. The real yield for two-year Treasuries, or the difference between their interest rate and the pace of inflation, is negative 0.99 percentage point.

“This is not a value play in Treasuries,” said Richard Volpe, head of U.S. government bond trading in New York at Bear Stearns Cos., on Bloomberg Television. “This is about preservation of capital.”

Fed funds futures on the Chicago Board of Trade show a 72 percent chance the Fed will lower the 3 percent target rate for overnight lending between banks by three-quarters of a percentage point, compared with 54 percent odds yesterday. The balance of bets is for a cut of a half-percentage point.

Geithner on Stress

New York Fed President Timothy Geithner said the central bank may need to keep interest rates low for “some time” if financial markets remain under stress. The New York Fed president is a permanent voter on the rate-setting Federal Open Market Committee.

The cost of protecting corporate bonds from default rose, with credit-default swaps on the benchmark CDX North America Investment-Grade Index increasing 4 basis points to 170 basis points, according to broker Phoenix Partners Group.

Citigroup’s CitiMortgage division will decrease its total holdings mainly by making fewer loans that can’t be sold, CitiMortgage President Bill Beckmann said. Moody’s Investors Service downgraded bond insurer CIFG Guaranty four levels to A1, citing its “significant exposure to the mortgage sector.”

Bloomberg News By Daniel Kruger and Deborah Finestone

Greenspan’s Biggest Worry

greenspan-warning.jpgthreat_level_red_lg_clr.gif

The Maestro – Alan Greenspan speaks – watch video here – We are doomed.
http://money.cnn.com/video/#/video/fortune/2007/09/17/fortune.greenspan.medicare.fortune 

Greenspan Warning

The former Federal Reserve chairman Alan Greenspan has warned there is still a good chance the US economy will slip into a recession, despite this week’s cut to US interest rates.

Mr Greenspan said the odds of a recession remain somewhat more than one in three, with home prices likely to fall further and damage consumer spending.

Effects of Rate Cut

associated-press.gif

Investors Hunt for Effects of Rate Cut

NEW YORK (AP) — A big rate cut by the Federal Reserve and the stock market’s huge rally in response to that move has many on Wall Street wondering: Now what?

The Fed’s decision Tuesday to slash its benchmark federal funds rate by a larger-than-expected half percentage point sent stocks soaring and lifted the Dow Jones industrials nearly 336 points. It also raised questions about the Fed’s next step and how markets might fare in the coming months.

“I think it’s probably going to help stabilize things. It seems to me that the Fed had enough room on the inflation front to really get out ahead on this,” said Bruce McCain, head of strategy for Key Private Bank’s investment management unit.

Before the Fed’s decision and even with recent moves to cut the rate it charges to loan directly to banks — known as the discount rate — Fed Chairman Ben Bernanke left some investors asking whether the central bank would cut rates at all in the face of concerns about inflation.

With that question answered, investors rushed in and put stocks a good deal above their recent lows in August. The Dow’s jump — its biggest one-day point gain in almost five years — left the blue chip index only about 1.9 percent below its record close of 14,000.41 reached in mid-July.

Still, some on Wall Street will likely question whether the Fed’s rate cut signals a deeper unease at the bank about the effect of tightness in the credit markets and widespread weakness in the housing sector. Continue reading