Wall Street Banks/Firms Borrowed $38 Billion Per Day Last Week

[rchiu]

Originally posted by: dullard

Originally posted by: rchiu
You guys need to understand that these "loans" from Primary Dealer Credit Facility has a maturity of ONE DAY. Meaning banks have to settle the loan by the end of next business day if they take out a loan from the PDCF. This is purely used for Wall St. to do their day to day business without incurring additional cost right now where credit is expensive. Once the credit crunch is gone, this will not be needed. So you don't need to worry about Wall St. being hooked on these loans.

Rchiu, the fed does offer 1-day loans to commercial banks. The fed has been doing that for ages. In a new move (ie the new loans that we are talking about here), the fed has starting offering 28-day loans to both commercial banks and investment banks. These aren't the old 1-day loans from the past.

So, we have three effects to consider. (1) Will the move from 1-day loans to 28-day loans have a possible "addictive" quality? (2) What effect will the loans to Wall Street that were previously not available have? (3) Can banks do damage in 28-days that they couldn't do in 1-day?

As far as I can see, the good outweighs the possible bad. But, I am no expert on this type of transaction.

The OP's article talked specifically about Primary Dealer Credit Facility. Here is a FAQ, quote:

What are the terms of the loan?

Loans will settle on the same business day and will mature the following business day.

The 28-days loan you are talking about is the $200 billion one time infusion into the system by Fed where commercial bank can use their less liquid Mortgage backed security as collateral and exchange it for T-bill. For this type of loan, the Fed will hold the MSB security for up to 28 days, and they will only take AAA rate MSB security. They are two totally different thing. The 1 day thing is for daily operation, and the 28 day thing is for those holding MSB security and couldn't sell it on the open market, but need cash right now.

 

[dmcowen674]

Originally posted by: Common Courtesy

Originally posted by: maddogchen

Originally posted by: Common Courtesy

Originally posted by: Linux23
So the banks have 28 days to repay? I'm a little confused on this. What if the banks don't have the money to repay? What happens then?

Do not pay and go out of business.

or borrow some more from someone else...

They would have to borrow from somewhere else to pay off the Feds.

Eventually, they will get into the borrow Peter to pay Paul situation and the interest payments will shaft them.

Pulling that stunt in the US will not succeed - they will have to get the $$ from overseas.

Where did this $7 billion come from exactly?

They are keeping it a secret.

How is that allowed for a publicly traded company?

4-8-2008 Washington Mutual raising $7 billion

WAMU said it would get the new capital from an investment group led by private equity group TPG, but will cut its dividend again and post both a wider loss and set aside more in loan loss provisions for the first quarter than had been expected. TPG founding partner David Bonderman, a former WaMu director, will also rejoin the board.

Shares of Washington Mutual, which had soared more than 29 percent Monday on news that a capital deal was near, fell $1.31, or 10 percent, to $11.84 on Tuesday.

WaMu's stock tumbled nearly 70 percent last year amid the mortgage and credit crises that have forced leaders of other financial institutions to step down. So far, Washington Mutual Chief Executive Kerry Killinger's job seems secure.

 

[miketheidiot]

Originally posted by: maddogchen

Originally posted by: Common Courtesy

Originally posted by: Linux23
So the banks have 28 days to repay? I'm a little confused on this. What if the banks don't have the money to repay? What happens then?

Do not pay and go out of business.

or borrow some more from someone else...

the fed is the last resort, that why its there. If a bank can't pay back the loan, then the fed seizes the banks or forces a merger with a solvent bank.

 

[Vic]

Just clearing something up, no taxpayer funds are being used here. Unless you want to count that ultimate regressive and hidden tax: inflation. And yes, banks that don't pay back the Fed don't stay in business.

 

[JS80]

They should have made it convertible into equity.

 

[Jhhnn]

From Evan Lieb-

The Fed is trying to keep them liquid, and these loans are doing that by increasing their cash flow. This helps them stay afloat so they can do business. This is basic finance 101, and gov't bail-outs are certainly nothing new. The scale it is being done at is just particularly high this time around. You have to be careful, obviously, but in terms of ensuring shareholders of their company's overall value, the banks have little incentive to borrow in excess from the Fed because, in the end, it'll show up on their balance sheets (which they are legally obligated to publicly report) under total current liabilities or long-term debt, depending on the terms of the loan. Investors will flee if their debt liabilities suddenly drastically outnumber their assets.

I think you've said more than you know. In a normal market scenario, banks would sell assets to cover small short term liquidity issues, or borrow modestly from the Fed or other banks. Right now, banks trust each other not at all, so that's out, and selling assets to cover the really, really large liquidity problems would drive down the value of the remaining assets in a mark to market scenario, fostering the investor flight you mention while reducing their ability to lend under the current regulated fractional reserve system. It's a lose-lose deal.

So the Fed has to step in, attempt to cover the gap to allow business as usual. And banks attempt to unwind their mark to market liabilities with accounting methods, short sales, or better yet, offloading them entirely to Fannie Mae, Freddie Mac, FHA, VA- anybody else, preferably an entity insured by the taxpayers...

How banks will fare is still an open question, but Vic's right about one thing, once again- strong inflation is an inevitable consequence. And while there's no taxpayer money involved at this point, that may well not hold true in the future, depending on how well federally insured entities fare with their new loans...

In a way, it's amusing to watch as usually smug financial entities and personalities sweat bullets, betrayed by the very thing that made them so self satisfied when they were on the way up- leverage. When it's good, it's very, very good, and when it's bad, it'll kick your ass...

And it's also tragic that so many will suffer in the process, and that we, as a nation, somehow allowed ourselves to be lured into this position...

However this correction unfolds, we need to look past it, and create better restraints to prevent drastic overextensions down the road. It wouldn't be called a "correction" if conditions leading up to it weren't incorrect... Right?

 

[LegendKiller]

Originally posted by: Jhhnn
From Evan Lieb-

The Fed is trying to keep them liquid, and these loans are doing that by increasing their cash flow. This helps them stay afloat so they can do business. This is basic finance 101, and gov't bail-outs are certainly nothing new. The scale it is being done at is just particularly high this time around. You have to be careful, obviously, but in terms of ensuring shareholders of their company's overall value, the banks have little incentive to borrow in excess from the Fed because, in the end, it'll show up on their balance sheets (which they are legally obligated to publicly report) under total current liabilities or long-term debt, depending on the terms of the loan. Investors will flee if their debt liabilities suddenly drastically outnumber their assets.

I think you've said more than you know. In a normal market scenario, banks would sell assets to cover small short term liquidity issues, or borrow modestly from the Fed or other banks. Right now, banks trust each other not at all, so that's out, and selling assets to cover the really, really large liquidity problems would drive down the value of the remaining assets in a mark to market scenario, fostering the investor flight you mention while reducing their ability to lend under the current regulated fractional reserve system. It's a lose-lose deal.

So the Fed has to step in, attempt to cover the gap to allow business as usual. And banks attempt to unwind their mark to market liabilities with accounting methods, short sales, or better yet, offloading them entirely to Fannie Mae, Freddie Mac, FHA, VA- anybody else, preferably an entity insured by the taxpayers...

How banks will fare is still an open question, but Vic's right about one thing, once again- strong inflation is an inevitable consequence. And while there's no taxpayer money involved at this point, that may well not hold true in the future, depending on how well federally insured entities fare with their new loans...

In a way, it's amusing to watch as usually smug financial entities and personalities sweat bullets, betrayed by the very thing that made them so self satisfied when they were on the way up- leverage. When it's good, it's very, very good, and when it's bad, it'll kick your ass...

And it's also tragic that so many will suffer in the process, and that we, as a nation, somehow allowed ourselves to be lured into this position...

However this correction unfolds, we need to look past it, and create better restraints to prevent drastic overextensions down the road. It wouldn't be called a "correction" if conditions leading up to it weren't incorrect... Right?

You are partially correct. However, you continually omit the part where they are trying to provide liquidity to the system in an attempt to get it to some base-level of operations, so mark to markets don't end up screwing the capital base of the companies.

Short-term problems are solved by liquidity.

 

[Jhhnn]

From LK-

You are partially correct. However, you continually omit the part where they are trying to provide liquidity to the system in an attempt to get it to some base-level of operations, so mark to markets don't end up screwing the capital base of the companies.

I didn't intend to omit that, LK. I thought I covered it with this statement-

So the Fed has to step in, attempt to cover the gap to allow business as usual.

I was, of course, referring to the gap in liquidity.

 

[First]

Originally posted by: Jhhnn
From Evan Lieb-

The Fed is trying to keep them liquid, and these loans are doing that by increasing their cash flow. This helps them stay afloat so they can do business. This is basic finance 101, and gov't bail-outs are certainly nothing new. The scale it is being done at is just particularly high this time around. You have to be careful, obviously, but in terms of ensuring shareholders of their company's overall value, the banks have little incentive to borrow in excess from the Fed because, in the end, it'll show up on their balance sheets (which they are legally obligated to publicly report) under total current liabilities or long-term debt, depending on the terms of the loan. Investors will flee if their debt liabilities suddenly drastically outnumber their assets.

I think you've said more than you know. In a normal market scenario, banks would sell assets to cover small short term liquidity issues, or borrow modestly from the Fed or other banks. Right now, banks trust each other not at all, so that's out, and selling assets to cover the really, really large liquidity problems would drive down the value of the remaining assets in a mark to market scenario, fostering the investor flight you mention while reducing their ability to lend under the current regulated fractional reserve system. It's a lose-lose deal.

So the Fed has to step in, attempt to cover the gap to allow business as usual. And banks attempt to unwind their mark to market liabilities with accounting methods, short sales, or better yet, offloading them entirely to Fannie Mae, Freddie Mac, FHA, VA- anybody else, preferably an entity insured by the taxpayers...

How banks will fare is still an open question, but Vic's right about one thing, once again- strong inflation is an inevitable consequence. And while there's no taxpayer money involved at this point, that may well not hold true in the future, depending on how well federally insured entities fare with their new loans...

In a way, it's amusing to watch as usually smug financial entities and personalities sweat bullets, betrayed by the very thing that made them so self satisfied when they were on the way up- leverage. When it's good, it's very, very good, and when it's bad, it'll kick your ass...

And it's also tragic that so many will suffer in the process, and that we, as a nation, somehow allowed ourselves to be lured into this position...

However this correction unfolds, we need to look past it, and create better restraints to prevent drastic overextensions down the road. It wouldn't be called a "correction" if conditions leading up to it weren't incorrect... Right?

Hum, not sure we disagreed on anything here. I'm aware of what the Fed's purpose is here; to provide short-term liquidity relief for banks and reignite their incentive to loan again, which they've been tentative to do, even between each other, as you touched upon. AFAIK that is the only purpose of the Fed loaning out these billions of dollars. My post was more a reply to the first few posts claiming that banks could borrow without much consequence, when in reality investors get to see exactly what their liabilities are anyway and that'll downwardly effect their stock price and put them out of business if they can't pay it back.

 

[Jhhnn]

I think maybe you're mischaracterizing the situation, Evan Lieb. It's not that banks need to have their incentive to lend reignited, it's that investors are wary of buying the bonds being sold to maintain bank liquidity. If banks can't sell their investment products, they won't have money to lend on the other end. Right now, they're holding securities they had planned on selling, which kills their liquidity and cashflow...

If investors continue to shun these products, then moves by the Fed will amount to a delaying action, rather than an actual solution...

 

[LegendKiller]

Originally posted by: Jhhnn
I think maybe you're mischaracterizing the situation, Evan Lieb. It's not that banks need to have their incentive to lend reignited, it's that investors are wary of buying the bonds being sold to maintain bank liquidity. If banks can't sell their investment products, they won't have money to lend on the other end. Right now, they're holding securities they had planned on selling, which kills their liquidity and cashflow...

If investors continue to shun these products, then moves by the Fed will amount to a delaying action, rather than an actual solution...

There's no "actual solution", other than giving people time to get over their paralysis.

 

[First]

Jhhnn, look what the article says:

"The scheme, called the Primary Dealer Credit Facility, is made available through the Federal Reserve Bank of New York and is designed to help big investment banks oil the wheels of the credit market so they can continue with business as usual, even though the credit crunch shows no signs of abating."

Financing constraints increase when banks become unable to serve as intermediaries between people (with cash) who want to save and businesses who have profitable investment ideas/projects but need to borrow from banks to invest. i.e. banks face a credit crunch when they can't raise funds, and some investors are forced to forgo potentially profitable investment projects. All this program is, is the Fed providing funds to banks so they'll loan again. Otherwise you have massively bad macroeconomic consequences; lower demand, lower investment, lower employment, lower production. It's the self-reinforcing nature of simple dollars and cents availability that has shaken up a couple Fed members, based on the latest March minutes report. The spiral can be quick and steep, but thankfully we have a particularly skilled Fed chairman who intimately studied the 1990 credit crunch.

 

[Jhhnn]

Heh. I offered the spin-free version, Evan Lieb.

Why are investment banks "unable to serve" as intermediaries, other than the reason I offered, above?

And , I doubt that time alone will will rekindle investor enthusiasm, LK. Events over time will. Investors have come to see risk as systemic rather than specific, due in part to the opacity of what they're offered and to well-earned lack of trust in the purveyors and the products themselves. Fundamentals underlying mortgage paper and private equity paper just aren't right, from their viewpoint, and haven't been for some time. So they'll get liquid, and stay that way until the situation improves. Getting straight to the point, they smell blood, and see liquidity as their best chance of not being eaten themselves.

Whether that happens as a long leisurely meal or as a feeding frenzy is still in question- depends on how well Fed efforts moderate market appetites...