Central Banks buying up the worlds stock markets

[Dari]

Not all mortgage debt was toxic, most was just caught up in the bubble and was affected on the margins. The problem with the mortgage debt was multifold and ranged from nest eggs to employment friction. The banks could have gone under and the problem would have been far worse for main street.

How?

Let's take the place I worked. We had a $6bn ABCP multi-seller conduit in place. During the crisis we couldn't fund it in the US CP market, at all. Even overnight, even at 2% overnight interest rates. What did we have in our conduit? Trade receivables for industrial companies, small business loans/leases, agriculture loans, agriculture leases, agriculture dealer floorplan, prime auto loans, small business loans. Bread and butter type stuff. However, we couldn't fund it. So the bank had to fund it on balance sheet.

What would have happened if the bank had gone under? $6bn of corporate assets would have lost funding, overnight. Those assets funded farmers, small businesses, multi-national corporations, everybody. Why would they have gone under? Because some DBs decided to use the money markets for their own securities arbitrage and a place to shove CDO^2s and icelandic bank bonds.

But it would have had a far-reaching impact. The whole thing would have fallen like dominos. The *only* thing that saved the ABCP market was CPFF, a Fed program to fund CP. It started liquidity again. The second thing was TALF - it started the ABS term market. Why did ABS shut down? Because people never knew if it was "the next shoe", even though pretty much no ABS deals defaulted. It didn't fund a bunch of trash, but was affected nonetheless.

Until TALF the market was shut down. A company like Avis couldn't get funding in the ABS term market, hence its stock price going from mid-teens to $.34. They almost went bankrupt, as did Dollar-Thrifty and Hertz. Even Enterprise, despite not being an ABS issuer, was affected.

Imagine if those 3 companies had fallen. That's tens of thousands out of work.

Then how many of those tens of thousands would have defaulted on mortgages?

It would have been a brutally vicious cycle and not all of it just because of subprime mortgages. Citi might have failed, but then their conduits were maybe 60bn in total. Ouch. Lehman and Bear weren't big players, so it wasn't nearly as big of an exposure.

To say it was just banks at risk is a logical fallacy perpetuated by people who either don't want to know the truth as to how our financial markets are interconnected, don't know because they haven't researched it, or don't care because they refuse to see reality.

It's the world we live in now.

This is all true. But it shouldn't have been this way. Now, the Federal Reserve is seen as an indispensable part of capital markets. They are in places they were never supposed to be in. Worse, they can't leave without shaking the foundation of capitalism.

 

[LegendKiller]

This is all true. But it shouldn't have been this way. Now, the Federal Reserve is seen as an indispensable part of capital markets. They are in places they were never supposed to be in. Worse, they can't leave without shaking the foundation of capitalism.

The Fed always was. It was intended to be the bank for banks in crisis.

 

[Kwatt]

The Fed always was. It was intended to be the bank for banks in crisis.

When will the crisis will end?

Why did no one face criminal charges?

Why would anyone trust the markets knowing that they are rigged and nothing is done about it?

These are my questions about it.

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[Dari]

The Fed always was. It was intended to be the bank for banks in crisis.

Yes, but it seems like, after every crisis, the Federal Reserve (FR) does a bit more in the regular economy than it's initial mandate and it never regresses. Sort of like the constantly increasing power of the federal government. If the federal reserve is running a program to help minorities (which is true) how soon until it start doing B to C? Also, Like the war on terror, no one knows or is willing to say when this crisis is over and that means that the FR will never wind down any of these programs.

 

[Kwatt]

...FR will never wind down any of these programs.

I don't see how it could be wound down. Maybe let it expire? At first there was talk of an "Exit Strategy" Now not so much. In order for unwinding it would have to be sold in the market. And everybody pretty much knows a lot of it is worthless. The mortgage backed stuff will expire in 30 years?...

Just a good thing the FR had 4+ trillion in the mattress to buy it up.

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