Two days ago I heard on Boomberg radio a very interesting observation. The total amount of lines of credit that US banks committed to the (mostly institutional) customers is $2.5 trillion dollars. Obviously, they never expected that clients will start tapping the credit at that amount, but the obligation exists. This is a pre-negotiated loan, similar to the home equity line of credit.
What does it mean? First (we did it before) we can compare the outstanding commercial paper and bank credit. Indeed, outstanding commercial paper contracted by $351 bln since July. The outstanding banking credit increased by $596 bln at the same period, so corporations and individuals are just tapping the promised credit lines at accelerated rate.
Once the credit is tapped the bank must provide actual funds within 2-5 days, but not the same day. So the banks are hoarding a lot of short-term loans but not not something that cannot be turned back to cash almost immediately. I think this is very important to understand the situation with Libor market and Ted spread. The Libor is the rate set in London for overnight loans and it fell substantially since December. Apparently, banks have plenty of cash that they are willing to lend overnight, because one day is how far they can plan their finances. All this extra cash it hitting Libor and moving it down.
But take a look at the not so liquid loans: the municipal bonds auction failed, the rates went up to as high as 20% (!!) for some issues. The corporate bonds are tumbling as well. I’m sure the knowledgeable person will provide plenty of links – 1-3 days credits yes-yes-yes, lon-term credits no-no-no!
When banks can, they will reduce their obligations on lines of credit. For example, Countrywide is cutting lines of credit for 122k customers.
It is hard to deny the credit to corporate customer, but when its rating is downgraded it is a contractual excuse for a bank to walk away. Watch any corporate downgrades – even a slight credit downgrade, which was no big deal for years, may kill a company within weeks, because it will cut oxygen.
Please watch today treasury bills auction around 1:30pm , it is a huge event, the treasury will be begging with a huge tin cup. I reduced my treasury holdings because I don’t feel so confident anymore. Something is happening with treasuries
The Theroxylandr in Flame 
February 14, 2008 at 1:22 pm
Sorry to go OT on first post roxy, but I really need some smart people to review Mtgspy’s theory. He basically said that the increase in the GSE conforming limit was a red herring and was only designed to shore-up capital reserves to stave off a complete GSE failure. This kind of makes sense to me because the requirements are very high (80% ltv fixed 30 and 15 only, and a bunch of other stuff) and the GSE’s will have real trouble raising cash via dilution. So the thought being that they really don’t expect too many people to take them up on it but perhaps they can build up some capital reserves in the mean time?
“So I asked, how would I know for sure that it’s not going to jumbo – and I mean 100% sure. I agree to volume is minimal, like $20B at most to FRE and FNM, which means just under $1B capital each.
First he said, the proof should be that OFHEO isn’t releasing the 30% capital surplus. That’s the first tell-tale a really big loss provision is building up.
Second, FRE and FNM preferred to common ratio is maxed out, about 20% at this time. Further capital issuance has to be done through COMMON stock. So if it’s common instead of preferred, you know the story is for real.
Also, watch the amount. If FNM (or FRE) issues common stock in amount $3B or more, that’s the confirmation. There simply aint no place to deploy that kind of capital.”
If this is even remotely true this is a huge big deal and would mean that we are very close to complete credit collapse, possibly triggered by a GSE failure.
http://www.tickerforum.org/cgi-ticker/akcs-www?post=28365
February 14, 2008 at 1:38 pm
can you clarify the last paragraph. what does the tin cup reference mean?in a flight to safety, where would you go if treasuries aren’t safe?
February 14, 2008 at 2:36 pm
This is very informative and I think something going wrong in this country period.Just like today congress passed the extra check for people to spend but its driving our deficit up further…
http://www.learnmarketingsuccess.com
February 14, 2008 at 3:42 pm
Anyone know what was the result of the auction ? Not able to find anything out so far , but have been following this story since Lee Adler starting commenting on this same topic recently . Thanks all !
February 14, 2008 at 4:04 pm
TLT (pool of long-maturity bonds) broke a trendline from June. I think this is big.
February 14, 2008 at 4:10 pm
Darth Toll, I think this is a very clever explanation. I would never imagine that myself.
I guess all we need now is to watch how Fannie will raise capital, as described in that post.
You also probably heard concerns that mixing jumbos into the pool will increase the interest investors will ask from the mortgage pool. So it could backfire unless Fannie will securitize everything above 417k as separate pools. Lets watch what they’ll do, I’m sure Calculated Risk will be all over it.
February 14, 2008 at 4:14 pm
gt80, oh no, they are safe. But they can drop now, so much better entry point could be ahead.
Any big increase of budget deficit means automatic decline of the dollar few years later and then inflation another few years later after that.
I think all this is building a very good case for inflation 5-10 years from now, but before inflation we’ll have deflation.
February 14, 2008 at 4:24 pm
Oh, thanks, that post on ticketforum reminded me about Quebecor bankruptcy. Yes, it was at those Boomdoomber radio show I’m mentioned, but I was unable to understand the company name from radio:
“””As an aside, I read that the BK of Quebecor was trigger by banks cutting them off. The irony is that Quebecor had a large unused line of credit that they did not drawdown. Compare this to CFC who quickly drew down the whole remaining $11B of their line of credit before it was shut off.”””
http://tickerforum.org/cgi-ticker/akcs-www?post=29101
Oh, and it’s not me who is posting articles from my blog on tickerforum. I’m trying to not advertise myself, this is mean. There is more then enough clicks coming in here, and I feel responsible for what I’m saying. Look at this idiot Cramer – every time he makes a bad call millions of people lose money. How he sleeps at night?
February 14, 2008 at 4:29 pm
So, if T-bonds are not safe, where do you put your money? T-Bills? TIPS? Foreign government bonds? Gold?
February 14, 2008 at 5:07 pm
I made the post on Ticker Forum
your site has been outstanding and the TF guys need to hear what you are saying.
Keep up the great work!
February 14, 2008 at 7:01 pm
Thanks for the great Blog thero.
Can you post on the outcome of this auction and your take on the implications?
It seems something big is happening today, the SLOSH has gone wild. Speculation is that one of the Big Boyz has hit the rocks hard and is sinking fast, no names yet.
Of course, with a long weekend approaching, I am sure any announcement will come at about 1 AM Sunday.
February 14, 2008 at 7:31 pm
I think this is big.
OK, I can’t resist: How big?
February 14, 2008 at 8:30 pm
Holy smokes, did you guys see this?!?!?
http://www.federalreserve.gov/releases/h3/Current/
Only a crater, a huge vortex where the banking system used to be. Bank runs are next…
February 14, 2008 at 9:31 pm
Darth, please explain how to read your link for me. I enjoy your posts here and at CR.
what number should I look at? I understand the TAF to some degree- just point me in a direction
February 14, 2008 at 11:23 pm
Darth – I agree this aggregate number is large relative to recent history but, I am struggling to put it into context. You would think we would see a U.S. “Northern Rock” by now. This long weekend should be interesting. Long the SKF and SDS ETFs.
Something interesting is looking at the Google Trends site to track the term “Bank Run” http://www.google.com/trends?q=bank+run
One would think more queries would source from the UK (i.e. Northern Rock) but the bulk of the queries source from the U.S. in Michigan. Why MI.?
The next President better start dusting off FDRs 1933 Inaugural speech!
What a speech and how appropriate today
http://historymatters.gmu.edu/d/5057/
To be honest this is the first time I have read the speech and have to say it is awe inspiring and wish we had this type of leadership in our Government today. I read it as honest and approaches the audience with sincerity and respect – certainly not found today in our Government representatives.
February 14, 2008 at 11:32 pm
Yes Darth please explain the numbers in your link. For us not so financialy educated but very worried about whats going on with the economy.
February 14, 2008 at 11:33 pm
Roxy, thanks for the intelligent and thought provoking blog!
February 15, 2008 at 2:00 am
Sorry guys, just saw your comments. Look at the non-borrowed reserves. See how in December things got real dicey and then the wheels just came off since then. Now we’re looking at a -$18B in non-borrowed reserves literally supporting the entire banking system! As ludicrous as this sounds, it is absolutely true.
What’s even more bizarre is to think that (thanks to fractional reserve banking) there are literally tens, if not hundreds, of trillions of dollars of fictitious capital credit floating around that are based upon this non-borrowed reserve number. Nobody really knows how much FC is actually floating out there, we can only guess. This is astounding and is literally unprecedented, and is similar to a giant inverted debt pyramid resting on the head of a (now negative) pin. Take a look at this chart, but I warn you, your head may fall off if you gaze upon it for any length of time:
PDF warning!
Click to access greenrush_dr_strangemath.pdf
Caroline Baum and various other naysayers have tried to pooh-pooh the non-borrowed reserves as being not a big deal, but her track record is poor. Read the commentary and the chart above and decide for yourself. My basic thought is that this has never happened so it is either a.) an outlier, statistical anomoly non-event or b.) something wicked this way comes…
February 15, 2008 at 2:08 am
Let me just close by saying that a hugely negative non-borrowed reserve number is another way of saying the banking system is insolvent and has no money – no actual capital. Thus my statement about bank runs being likely.
I think TechGuy would agree with me on this point.
February 15, 2008 at 8:27 am
If the banks are not safe, then the money should rushing into Treasuries, not out of them – unless you are expecting an apocalypse
February 15, 2008 at 1:07 pm
“the banking system is insolvent and has no money – no actual capital”
sure it does, it just happens to be entirely borrowed:)
fiat currency system in action. i say things are just getting warmed up, the Fed and congress will cause an unprecedented inflationary event in order to avoid a delfationary one. should be fun to watch. on an investment related note, get out of the US dollar, yesterday.
February 15, 2008 at 3:12 pm
jdllmcpa – what would be your currency of choice? YEN/AUD?
February 15, 2008 at 3:55 pm
yen, swiss franc, canadian dollar
February 15, 2008 at 4:40 pm
[…] no big deal, companies got downgraded all the time. But this time it could be different. Remember, I’ve said that banks have $2.5 trillion of commitments in credit lines and they would be happy to use any […]
February 15, 2008 at 6:16 pm
“If the banks are not safe, then the money should rushing into Treasuries, not out of them”
What money? It’s all gone, nothing but a huge crater where the banking system used to be. BTW, did you see Russ’ story about the billionaire shipping magnate that got “Aunt Millie’d?” LOL!
They put a quarter billion into Lehman and they were just told, “sorry you can’t have it back, there is no money”.
February 18, 2008 at 2:46 am
Please watch today treasury bills auction around 1:30pm , it is a huge event, the treasury will be begging with a huge tin cup. I reduced my treasury holdings because I don’t feel so confident anymore. Something is happening with treasuries
February 20, 2008 at 8:13 am
Darth Toll,
what do you think about this:
http://blogs.wsj.com/economics/2008/02/08/non-borrowed-reserves-false-alarm/
February 24, 2008 at 4:06 am
[…] is the money? Published in February 14th, 2008 Posted by in Uncategorized Where is the money? This is a pre-negotiated loan, similar to the home equity line of […]