Custom Search

Wednesday, October 22, 2008

Really Scary Fed Charts: OCT, Now Crazy Scary

“Policy makers are trying to prevent “Great Depression II” by stemming the financial industry's contraction.” –Jim Bianco, Bianco Research

Once a month I update and add to a regular series of posts I call Really Scary Fed Charts. I must confess, I missed the September update.

On September 11th in Really Scary Fed Charts About to Get Crazy Scary, I wrote:

“I can tell you right now that going forward these charts are about to go from just “really scary”, to “crazy scary”.

At the time the Federal Reserve was contemplating all sorts of fun new ways to increase the cash it provides to banks and brokers.

The most recent was announced yesterday:

Fed to Provide Up to $540 Billion to Aid Money Funds (Update6): “The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions.

“Short-term debt markets have been under considerable strain in recent weeks” as it got tougher for funds to meet withdrawal requests, the Fed said today in a statement in Washington. A Fed official said that about $500 billion has flowed since August out of prime money-market funds, which with other money-market mutual funds control $3.45 trillion.

The initiative is the third government effort to aid the funds, which usually provide a key source of financing for banks and companies. The exodus of investors, sparked by losses following the bankruptcy of Lehman Brothers Holdings Inc., contributed to the freezing of credit that threatens to tip the economy into a prolonged recession.”

Why the desperate move? Why do money market funds matter so much?

“U.S. money-market mutual funds held more than 63 percent of outstanding unsecured commercial paper and 39 percent of asset- backed commercial paper at the beginning of September, according to Alex Roever, a New York-based analyst at JPMorgan.”

Without liquid money market funds, companies won’t find willing buyers for their unsecured commercial paper and asset backed commercial paper. Companies that are unable to sell such paper may suddenly find themselves in a terrible liquidity crunch with receivables incoming, but too far out and unavoidable expenses such as payroll pending.

So how many different “facilities” does the Fed now employ?

(Want to know more? Click on “WTF?” beside each facility. Surprised? Confused? Angry? Click on “FAQ” beside each facility and have all your questions answered.)

1) Term Auction Facility (TAF) –WTF?FAQ
2) Primary Dealer Credit Facility (PDCF) –WTF?FAQ
3) Term Securities Lending Facility (TSLF) –WTF?FAQ
4) Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCP MMMF) –WTF?FAQ
5) Commercial Paper Funding Facility (CPFF) –WTF?FAQ

As you can imagine, all these facilities have made the Fed charts go from just scary, to crazy scary. To be honest, the worst charts are still to come because the month of October was the scariest and craziest to date, with the Fed intervening almost daily.

Non-Borrowed Reserves of Depository Institutions (BOGNONBR) continue to plummet. This makes sense as under capitalized banks continue to hemorrhage money via outright losses and write downs of over valued assets. The result is that these banks now have to borrow money from the Fed to maintain their reserves so that when you go to the ATM money actually comes out…

This also explains why all interbank lending rates from LIBOR and EURIBOR to HIBOR all did moonshots. You see, there were few banks capable of lending in any size, and even fewer willing.

Total Borrowings of Depository Institutions from the Federal Reserve (BORROW) is the obviously the opposite of BOGNONBR. The numbers are pretty close, plus or minus a couple of billion. Therefore, the borrowed money is clearly flowing straight into the banks where it is desperately needed to keep them liquid.

The BORROWvBOGNONBR chart illustrates the relationship on a single chart.

On top of that, Discount Window Borrowings of Depository Institutions from the Federal Reserve (DISCBORR) have only just recently spiked hard. Discount window borrowings are rapidly approaching $150 billion, despite holding steady at low levels throughout most of the crisis. Clearly, things are getting worse.

The Term Auction Credit (TERMAUC) facility has been capped at $150 billion since June. With nowhere else to turn, desperate banks may be turning to the discount window (DISCBORR). Just a theory…

Adding it all up (or as much of it as the Fed wants you to be able to add up) Total Borrowings of Depository Institutions from the Federal Reserve (TOTBORR) is about $450 billion. Put in context, the IMF, World Bank and CIA World Factbook list US GDP at about $13.8 trillion. That means, total borrowings stand at about 3% of GDP.

Don’t even worry about it though. The gubbermint has got everything under control…
The banks don’t trust each and rightly so. Each bank has marked their own toxic assets to fantasy and know full well all the others have done the same. Each bank knows they’ve overextended and over leveraged themselves during the credit bubble and know full well all the others have done the same.

With the passage of TARP came a small provision that allows the Fed to pay interest on deposits. So these scared banks have plowed back into the Fed banks all the cash they’ve been hoarding as can be seen by Reserve Balances with Federal Reserve Banks (WRESBAL)

An interesting debate took place in the post Really Scary Fed Charts: MAY, False Alarm? between Calculated Risk, MarketTicker and myself:

“Over at CalculatedRisk they are being interpreted as a “false alarm” in Non-Borrow Reserves and the Fed’s Balance Sheet.

Over at MarketTicker they are being interpreted as evidence that “the system as a whole is insolvent” in Tall Tale Tuesday.

While I’m not sure (yet) that “the whole system is insolvent”, I definitely do NOT think this is a “false alarm”.”

The clear winner, much to my dismay, would have to be MarketTicker.

The Really Scary Fed Charts Series:
1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Really Scary Fed Charts: MARCH
4) Really Scary Fed Charts: APRIL
5) Really Scary Fed Charts: MAY, False Alarm?
6) Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
7) Really Scary Fed Charts: JULY, More of the Same
8) Really Scary Fed Charts About to Get Crazy Scary

61 comments: