Gary North..on the $200B Fed plan

[RockOn]

The Real Story About the FEDs $200 Billion Loan Facility. The Press Is Ignoring This.

I just came across this. Gary is discussing the liquidity/solvency issue. He asks for comments on whether he is seeing the problem correctly. Seems dire, what do you think?

 

[brewer12345]

I can hear the squealing from here.

Does he sell his own brand of tinfoil helmets?

 

[FIREd]

Do I understand that right?

Banks get to swap their bad assets for good assets temporarily, and in the mean time they can boast of healthy balance sheets and borrow against those good assets that they will eventually have to swap back for their bad assets? Isn't it like those people who lie about their income to get a mortgage? And if you knew they were lying, would you still lend them money? It seems like it does nothing to solve the solvency issue (banks that are failing will still fail, but later). It might get the credit machine rolling again, but quite frankly I am not so sure.

 

[brewer12345]

Wrong. The accounting for the transaction will be as for a secured borrowing, not a sale. So whatever the dealers post to the fed will remain on their balance sheet as an asset pledged to a counterparty, and the associated liability will be a repurchase agreement (or reverse repo, always get the two mixed up). This is about liquidity, not solvency.

 

[FIREd]

OK, got it. Thanks.

 

[RockOn]

Wrong. The accounting for the transaction will be as for a secured borrowing, not a sale. So whatever the dealers post to the fed will remain on their balance sheet as an asset pledged to a counterparty, and the associated liability will be a repurchase agreement (or reverse repo, always get the two mixed up). This is about liquidity, not solvency.

I'm sorry but that is difficult for me to understand. I do not see where Gary North indicated he thought it was a sale, to me he was describing a temporary swap of T-Bills for AAA paper that would have to be undone in 28 days. Could you be more descriptive on what part of Gary's interpretation of the plan is incorrect? I can see how the plan is a liquidity solution up front, but when the paper is returned after 28 days, doesn't it go back to being a possible solvency problem if the AAA paper is to be marked to market at a reduced value at some point in the future?

 

[camberiu]

Brewer REALLY does not like our piglet sodomizer friend, mr. Gary North. The funny thing is that every time Gary North writes something, Brewer comes forward and accuses the guy of saying or claiming things that, if you read the text carefully, are never mentioned at all. Despite all of what Brewer claims, I never saw mr. North write that we should all move to the mountains, stock up on ammunition and prepare to live on a crazy world that is a mixture of something out of Mad Max and Jericho.
The funny thing is, since I started reading Gary North about 3 years ago, he has been right on pretty much everything, such as predicting major inflationary pressures, credit crunches and problems with the banking system. Maybe he has been very very wrong before (I have not followed his writings for long), but at least over the past 3 years, he has been dead on on everything. Not bad for a piglet sodomizer IMHO.

 

[ladelfina]

What concerns me is, where is the "liquidity" going to come from after 28 days or 56 days or 84 days, etc.? From what I have read, the $200 billion is a significant chunk of what they have at their disposition to manage and deploy in this way.. so what happens when more hedge funds or investment banks come calling, hat in hand?

 

[chinaco]

What concerns me is, where is the "liquidity" going to come from after 28 days or 56 days or 84 days, etc.? From what I have read, the $200 billion is a significant chunk of what they have at their disposition to manage and deploy in this way.. so what happens when more hedge funds or investment banks come calling, hat in hand?

Good question. They could crank up the printing press. The feds could also step in and halt (or cap) trading and security sales (certain classes of securities) for a period.


If we have a melt-down over this... there will be hell to pay. The run would likely come from foreign investors.

 

[ladelfina]

Hmm block the markets? Wouldn't that be seen as a major Depression/9-11 emergency-type action? Outside of Sept. 11, has that ever happened in modern times in a controlled or limited way that came out positively, i.e., didn't trigger a larger run whether rational or irrational? We're not just talking about one firm, but many inter-connected ones, basically the whole financial sector good or bad because no one knows who's got what.

 

[chinaco]

Hmm block the markets? Wouldn't that be seen as a major Depression/9-11 emergency-type action? Outside of Sept. 11, has that ever happened in modern times in a controlled or limited way that came out positively, i.e., didn't trigger a larger run whether rational or irrational? We're not just talking about one firm, but many inter-connected ones, basically the whole financial sector good or bad because no one knows who's got what.

It would not be good!

Doubt it will happen. But the $USD is dwindling and if foreigners see the value of their investments further evaporate... they could begin trying to run for the exit... Why do you think the gov't threw $200B at the problem?

 

[brewer12345]

Brewer REALLY does not like our piglet sodomizer friend, mr. Gary North. The funny thing is that every time Gary North writes something, Brewer comes forward and accuses the guy of saying or claiming things that, if you read the text carefully, are never mentioned at all. Despite all of what Brewer claims, I never saw mr. North write that we should all move to the mountains, stock up on ammunition and prepare to live on a crazy world that is a mixture of something out of Mad Max and Jericho.
The funny thing is, since I started reading Gary North about 3 years ago, he has been right on pretty much everything, such as predicting major inflationary pressures, credit crunches and problems with the banking system. Maybe he has been very very wrong before (I have not followed his writings for long), but at least over the past 3 years, he has been dead on on everything. Not bad for a piglet sodomizer IMHO.

I was responding to FIREdreamer, actually. Get stuffed.

 

[Khan]

Brewer REALLY does not like our piglet sodomizer friend, mr. Gary North. The funny thing is that every time Gary North writes something, Brewer comes forward and accuses the guy of saying or claiming things that, if you read the text carefully, are never mentioned at all. Despite all of what Brewer claims, I never saw mr. North write that we should all move to the mountains, stock up on ammunition and prepare to live on a crazy world that is a mixture of something out of Mad Max and Jericho.
The funny thing is, since I started reading Gary North about 3 years ago, he has been right on pretty much everything, such as predicting major inflationary pressures, credit crunches and problems with the banking system. Maybe he has been very very wrong before (I have not followed his writings for long), but at least over the past 3 years, he has been dead on on everything. Not bad for a piglet sodomizer IMHO.

You need to read his dreck from before 2000; he was big on the total collapse of civilization with the Y2K rollover.

 

[dixonge]

Read the information that is out there. I stopped caring what North had to say about *anything* a long time ago:

Gary North - Wikipedia, the free encyclopedia

Gary North, Y2K, and Hidden Agendas

 

[HFWR]

The funny thing is, since I started reading Gary North about 3 years ago, he has been right on pretty much everything, such as predicting major inflationary pressures, credit crunches and problems with the banking system. Maybe he has been very very wrong before (I have not followed his writings for long), but at least over the past 3 years, he has been dead on on everything. Not bad for a piglet sodomizer IMHO.

Hell, I'm a dumb $hit, and even I could predict that stuff...

I'll defer to the experts who do this for a living, but here's my $0.02. The banking/financial system operates on margin, and when everyone wants their money at once, the [-]house of cards collapses[/-] system fails. Giving the system some leeway to stabilize will hopefully allow things to settle at a sane, albeit lower level, preventing the fire sale of "good" assets.

I'll now venture into the kitchen for more coffee...

 

[ziggy29]

If we have a melt-down over this... there will be hell to pay. The run would likely come from foreign investors.

Most foreign nations which have large investments in the U.S. are the same ones who would be the hardest hit by a major U.S. recession/depression. They may take a little off the table, but for many of these countries, bailing out of U.S. securities completely would hurt them as much as it would hurt us, perhaps even more in some cases.

 

[al_bundy]

Hell, I'm a dumb $hit, and even I could predict that stuff...

I'll defer to the experts who do this for a living, but here's my $0.02. The banking/financial system operates on margin, and when everyone wants their money at once, the [-]house of cards collapses[/-] system fails. Giving the system some leeway to stabilize will hopefully allow things to settle at a sane, albeit lower level, preventing the fire sale of "good" assets.

I'll now venture into the kitchen for more coffee...

only thing is the so called experts never tell you what they are thinking except months after the fact. that's because they have money at stake as well and need suckers to buy up their assets that they are monetizing as things turn bad

 

[barbarus]

There will be a good deal more squealing by the end of the week.

Bank earnings expected to crumble - Mar. 14, 2008


Yesterday I heard a phrase that I had not yet contemplated.

BANK HOLIDAY



We're in the money......

 

[nepo]

For a better analysis read this:

Econbrowser: TSLF

 

[RockOn]

I do not know about Gary North, I'm pretty sure he used to be a hard money guy. Lately he has said the FED is not inflating and to be careful about this gold rally. That doesn't sound like a rigid hard money guy. He had company being wrong on the Y2K so I will not hold that against himm too much. I do not have any strong opinions about him, don't really care about that.

I thought this particular article explained fairly clearly what is going on with the FED plan. When he says "the press is ignoring it" that's hype and journalism, but he does explain how the swap is taking place and what it may, or may not, accomplish. After all Bear Sterns did have a solvency (not just a liquidity) problem last week, did they not? That supports his views. The plan does address immediate liquidity, but in the long run the problem is one of solvency, at least I think that is correct.

If his article is wrong, I'm trying to understand why. Can anybody help with that?

 

[RockOn]

For a better analysis read this:

Econbrowser: TSLF

Thanks, I'll read it.

.....That's seems to be what Gary North was saying. However, what is different is that as long as the Treasury never asks for the swap to be undone, it is providing liquidity and avoiding solvency problems. Interesting that this article says this a "bailout" by the FED. Didn't Bush say we were not going to bail out speculators and investors? I guess he meant, unless the DOW Jones falls a few more percent.

It looks to me like the FED has decided to be responsible for the problem. They are not going to print money to solve it, just take the riskier assets from the bankers and put them on the books of taxpayers. If they eliminate the risk on those assets for banks, there is no problem. Hopefully it will be temporary and end at $200B, otherwise welcome Moral Hazard.

 

[Hamlet]

I think that there is a lot of debate on how risky these AAA assets are. I suspect that most of them are probably really secure, its just the panic in the markets has created an irrational fear that everyone is going to default on their mortgage.

In my neck of the woods (Minneapolis), it appears to me that the vast bulk of the foreclosures are either subprime, or speculators that bought with no money down and just bailed when the market went bad. Mixed in are some job losses and a few people that spent their home equity like it was free money.

I don't see a massive problem with the vast majority of average home owners, unless the economy gets really bad. 70s bad. That is possible of course, but anytime I'm not watching CNBC it seems pretty unlikely.

Thanks, I'll read it.

.....That's seems to be what Gary North was saying. However, what is different is that as long as the Treasury never asks for the swap to be undone, it is providing liquidity and avoiding solvency problems. Interesting that this article says this a "bailout" by the FED. Didn't Bush say we were not going to bail out speculators and investors? I guess he meant, unless the DOW Jones falls a few more percent.

It looks to me like the FED has decided to be responsible for the problem. They are not going to print money to solve it, just take the riskier assets from the bankers and put them on the books of taxpayers. If they eliminate the risk on those assets for banks, there is no problem. Hopefully it will be temporary and end at $200B, otherwise welcome Moral Hazard.

 

[RockOn]

I think that there is a lot of debate on how risky these AAA assets are. I suspect that most of them are probably really secure, its just the panic in the markets has created an irrational fear that everyone is going to default on their mortgage.


I also think most of them are not risky and the FED is not taking large risk taking them in. At least if things do not get much worse in the economy. The question is though, as I see it, are they worth 100% on the dollar, or 95%? That makes a big difference if you hold tons of AAA paper.

 

[ziggy29]

I also think most of them are not risky and the FED is not taking large risk taking them in. At least if things do not get much worse in the economy. The question is though, as I see it, are they worth 100% on the dollar, or 95%? That makes a big difference if you hold hold tons of AAA paper.

Maybe, but when there's a 2-3% yield spread between Treasuries and some AAA paper, you can take a 2-3% default rate and come out even with Treasuries. Plus, if the Fed can "borrow" securities with 5-6% yields and lend securities paying out only 3% or so, wouldn't the Fed be able to make up for at least some of the defaults with the arbitrage on interest rates here? Is the Fed getting the coupon for the AAA paper while they hold it?

Ultimately I see the risk here to the Fed AND to the economy overall as being MUCH lower than with letting these megabanks drown in illiquid paper that forces them to keep marking to market and leading to margin calls. At least the Fed has no margin calls, so they can get this paper off the market for a while as we try to stabilize things.

 

[nepo]

I also think most of them are not risky and the FED is not taking large risk taking them in. At least if things do not get much worse in the economy. The question is though, as I see it, are they worth 100% on the dollar, or 95%? That makes a big difference if you hold tons of AAA paper.

According to a commentator in the Econbrowser post, the non-agency AAA mortgage backed securities are worth 50 to 70 % on the dollar. That's a severe haircut that we wouldn't know if the Fed is applying.