Originally posted by: Thump553
Only the government would label something negative non-borrowed reserves. My head hurts just trying to figure out what they mean-I assume it is borrowed reserves? Is that an oxymoron?
the web page it's on
http://research.stlouisfed.org/fred2/series/BOGNONBR
"Home > Economic Data - FRED® > Categories > Reserves and Monetary Base > Reserves > Series: BOGNONBR, Non-Borrowed Reserves of Depository Institutions"
in the 'old days', like 2007, banks had reserves (duh). there's some law that says, "banks must have X% of their loans in the form of reserves", where X is 5 to 10 percent.
anyway, banks have had to borrow a lot recently to cover their reserve requirements. it seems contradictory - they're borrowing money to achieve an agreed upon amount of financial health. if they have to borrow money to achieve the legal reserve requirements, that doesn't seem too healthy ! i agree, it's very contradictory.
if they got people to invest & buy more stock, it might dilute existing shares, but at least their reserves are - not borrowed
so all this time banks in the category of "Depository Institutions" have had reserves ranging up to $50 billion, from looking at the curve published by the Fed.
then, WHAM ! losses relating to mortgage backed securities (MBS). $3+ billion for Washington Mutual in losses last quarter. MBS losses to date, booked by various institutions around the world - $500 billion. from Bloomberg, total expected losses from MBS - 1.2 to 1.6 trillion. so they've waded about 40% of the way through the swamp.
one of the most educational papers i've seen about MBS'
*.pdf, Tilson Partners' Analysis of the Longshore MBS Product
The Longshore product is a bundle of mortgages that started out with a value of about $1.3 billion. the analysis of that security starts on page 118 of the PDF. the part before that is an introduction about credit derivatives.
in the analysis, they look at various 'tranches' of the security. it's a big collection of mortages, typically they bundle them in bundles of 1000 & re-sell them. so each of the loans involved, let's say if it's a police officer with seniority with good credit & put 20% down, that's in a higher tranch, might be labelled 'AA'. someone who has a fraudulent loan, the No Income No Job No Assets (Ninja loans) that were sold by companies like Home123, well that loan's not rated so high. if they had a low starter rate and the mortgage rate is about to reset to a much higher rate, trouble may lie ahead. it would be in a different 'tranch' than the police officer's home-loan.
the Tilson Partners presentation dissects the bundle of mortgages that was sold under the "Longshore" label.
and basically they conclude that that mortgage backed security is worth dimes on the dollar - for the highest tranch.
so, $trillions of these products were sold. it's too much to talk about in one post, but, in addition to THOSE mortgage backed securities, various Wall Street institutions got real creative and created all sorts of "Structured Investment Vehicles", and "CDO's" (credit derivative option ?). the estimates of the total number of those is mind-boggling, i have seen articles ranging $60 trillion to $1000 trillion. separate subject.
getting back to the regular mortgage backed security, every quarter the banks have to make some attempt to estimate the value of the mortgage backed securities they hold. one bank in Australia recently wrote off 100% of their MBS', declaring them to be worthless junk & taking the loss.
these are the kinds of products the government is taking on. they are talking about $700 billion in the media, but i'm not sure what that means. they're going to give the banks cash in exchange for those lower-valued securities ? i don't want to speculate, i'll wait till they have their plan spelled out more exactly.
it's a mess. if i was going to buy a share of a security like that using my own money, i would want to know about every mortgage in the bundle. i don't see how they can work through the details without, well, working through the details. paying people to dissect the securities, mortgage by mortgage. how else can you put a valuation on the security ?
so i guess the plan is to create a government organization that takes on the lower valued securities, analyzes them, nurtures them (nipple feeding allowed ?), and, what we are being told is, re-sells them. "when the dust has settled".
why wouldn't it have been cheaper for the government to just buy stock in each of the banks to bulk up their reserves ? $700 billion would have bought a lot of bank stock. Christ, Washington Mutual has had a stock market valuation of $4 to $8 billion for about 6 months now. so why didn't Hank Paulson propose to invest $200 billion in the troubled institutions, like Indymac & Wachovia ? that would have held them up through several quarters of $3 billion losses.
Facebook
Twitter