We discussed for weeks already that broker-dealers are consistently bidding below 3% (and sometimes below 2%) at Fed TOMO auctions. For example today Feds were forced to lend at 2.87%. The suspicion was that they reduce the amount of credit they are willing to open for their clients.
Today the Russ Winter blog finally gave the confirmation of this theory from FT:
Hedge funds are beginning to close their doors or lay off teams of traders in response to the unprecedented gridlock in the debt markets which has led to losses and significantly reduced the amount of money banks are willing to lend their hedge fund clients
As explicit as it can get. In particular:
Credit hedge funds and so-called relative value funds are also having a hard time. To make profits from small discrepancies among prices, these funds use massive amounts of borrowed money. In the past they could borrow up to four times their own money. Now most are fortunate to get twice as much from banks.
“There has been a significant deleveraging of the business model,” said John Wickham, a managing director at Lehman Brothers with responsibility for financing hedge funds. He added that many hedge funds were forced to close out positions last year because they violated their credit agreements or faced margin calls they could not meet
Feds will need to push the string very hard to get money back into markets
The Theroxylandr in Flame 
February 11, 2008 at 7:17 pm
As one of your earlier posts pointed out I really don’t see what capital banks have to lend according to the extreme graph linked below. In recorded historical terms the graph illustrates an extreme event.
https://research.stlouisfed.org/fred2/series/NFORBRES?cid=123
Until the “banking stimulus package” err… I mean economic stimulus package is signed and checks deposited the banks will remain in desperate straits. Am I reading this incorrectly?
February 12, 2008 at 1:14 am
I, for one welcome our Hard Money overlords. Greetings and salutations, oh cash money man!
February 12, 2008 at 7:48 am
Glad to see that our corporate overlords have crashed the system, and then come looking to the taxpayers for a bailout.
Maybe some of these financial lemmings deserve to fail in a big big way to learn their lesson?
February 12, 2008 at 12:17 pm
Daryl,
When they lift the lid on the cookie jar and reach in, they’ll only find stale crumbs. There is no bailout — only deleveraging of debt.
Debt loads will crush those who attempted to engineer profits from easy, borrowed money.
King Cash is going to sit down in his throne and eat a pie! Yea!!! All hail the good King Cash!
February 12, 2008 at 2:43 pm
http://www.reuters.com/article/marketsNews/idUKN119247420080211?rpc=44
US Lenders Have Foreclosure Plan
“The lenders will unite under the program, dubbed “Project Lifeline,” to identify borrowers more than 90 days delinquent and stall any foreclosure proceedings while they try to develop new loan terms, the sources told Reuters.”
—
Lets see if I got this straight. Banks are delaying foreclosure for 30 days to negotiate new loan terms. So how does this apply to people walking away from upside down mortgages? Another 30-days of rent free living? Thirty days seems pointless, and the banks are digging themselves in deeper. In 30 days those homes will be even worth less. Its likely that the 30 days will go to 60 days, 180 days, and so on.
Project lifeline, seems just like re arranging the deck chairs, but the US equities are way up, and treasures are falling.
February 12, 2008 at 2:58 pm
Justenuf2bdangerous, I think too they have little to lend. Especially if you consider that most banks offer prime business and private customers so-called “credit lines”, i.e. the credit that is already negotiated and must be delivered at request.
Just to keep promises for those lines of credit they will kick out all not-worthy borrowers
This is where you keep a look at borrowings:
http://www.federalreserve.gov/Releases/H8/Current/
February 12, 2008 at 6:51 pm
Today junk bonds (SHIAX) broke below January minimum. I think this weakness will press the equity markets down. They don’t necessary tank, but will not fly either.
Usually stocks are a bit lagging bonds. Will see how much lagging they will be this time.
Also treasury dept. is selling more bonds to make funds for this support package that congress voted. Those funds are removed from other markets. It looks like they can sell tons of new treasuries without making a big spike in rates, they certainly can’t resist the temptation to borrow.
February 12, 2008 at 6:59 pm
Thero,
We haven’t even talked about how this little experiment impacts existing contract law, or how regulatory agencies will allow accounting variances for loans 90+ days past due and non-performing loans in single family and 1-4 family residential lending….
February 13, 2008 at 3:01 pm
Banks tighten, even freeze, home equity lines of credit – San Jose Mercury News
San Jose Mercury News reports “Bay Area residents accustomed to treating their homes like piggy banks could be in for unpleasant surprises as home prices decline in many areas. Not only are banks less willing to issue popular home equity lines of credit, but some of the nation’s biggest lenders are freezing existing loans. Countrywide Home Loans, for example, has sent letters to at least 122,000 homeowners nationwide informing them that they can no longer draw on their home equity lines of credit. Many homeowners rely on these pay-as-you-use-them loans to finance things like remodeling or college tuition, or to use for emergency expenses… Chase and Washington Mutual also have frozen the home equity lines of a much smaller number of customers in response to falling home values, said officials with the two banks. Wells Fargo said it “has not made large-scale decisions to restrict line of credit access for all customers in markets with declining real estate,” but is reviewing its home equity customers’ accounts more frequently than in past years. “Everybody’s going to have to do it,” said Guy Cecala, publisher of Inside Mortgage Finance. “We’re just at the beginning of this trend of lenders freezing home equity lines of credit.”… Nationwide, homeowners borrowed $355 bln worth of home equity loans and lines of credit in 2007, down from $430 bln in 2006, according to Inside Mortgage Finance… Until recently, some lenders were willing to make a combination of mortgages and equity lines of credit up to 100% of the home’s value. So the homeowner in the example above could have gotten a home equity line of $200,000 in addition to the $500,000 mortgage, bringing the debt obligation up to $700,000. But with home values falling and credit mkts still crunched, lenders have narrowed their lending criteria. Few will extend credit past 80% of a home’s value now. That would cut that homeowner’s equity line to $60,000, resulting in a total of $560,000 in mortgage debt. Lenders’ changes amount to a sort of hedge against the possibility of further price declines. “Across the board, every lender has been tightening up their guideline with regard to home equity lines,” said Mike Gallagher, president of mortgage broker Avantis Capital.
Countrywide cited falling property values as the reason for shutting off so many customers’ access to their equity, though lenders can also restrict borrowers’ access to their credit lines for other reasons, such as deteriorating credit scores. Experts called Countrywide’s mass mailing to freeze home equity lines unusual, but noted that in a declining mkt lenders need to protect themselves from avoidable losses…”
February 14, 2008 at 3:14 am
At this point there can really be no doubt that credit tightening and risk aversion has created a ‘liquidity problem’. But so far it’s not clear what the lasting effect on the equity markets will be. Which is certainly what I’m most concerned about.
I expect a spectacular decline within the next two months
I realize the two month period is not nearly up yet, but I wonder if the liquidity problem will worsen or lessen in the coming weeks, and if it lessens (it is not unreasonable to expect that measures taken to combat it may be effective), if this would mean the chance of a “spectacular decline” is also lessened.
Update: the optimal strategy for an institutional investor is to not sell into the first bear market downleg, because you may fall into fake bear market, sell, and then be forced to chase the market…The optimal strategy is to sit tight through the first downleg, then load-up at the bottom and ride the short covering. Then sell at the top. I don’t know how many institutions do like that, but some of them do…So far this optimal strategy failed only once, in 1929
Perhaps we will yet see this play out. But you have to admit that equities have held up/rebounded pretty well.
February 14, 2008 at 3:30 am
One last point about the equity markets: not only is it worth noting that there has been no “spectacular decline”, and that the markets have very quickly rebounded from what declines have occurred (e.g. that sizable decline after the services report has now been, in little more than one calendar week, almost completely retraced), but stocks rally on really no, or even worse, bogus ‘good news’. Examples: Buffett’s offer to the monolines, or increased consumer spending because gas prices have risen. A lot of genuinely bad news is just plain ignored. Which makes you wonder 1) if that will continue, and 2) what will happen if we get some genuinely good news.
February 14, 2008 at 11:16 am
Well, back in January 20 that was the worst first 20 days of the year on record, even worse than 1930-1931. I think it was spectacular 🙂
February 14, 2008 at 11:20 am
Theroxlandr: looks like winter is coming- time to get to cold hard cash?
February 14, 2008 at 11:12 pm
Exactly what I thought
February 15, 2008 at 11:31 pm
Interesting discussion. Its seems that until recently I had a misunderstanding of how all this banking stuff went, along with “money” and of course, integrity. I looked up Trilateral Commission, which I had seen in references to a “plan” for the “benefit” of the people. That led to the Bilderberg group, and finally, the Council on Foreign Relations. Seems they are all secret societies, yes, really. All headed by David Rockefeller. In searching all this out, there were references to a book written in the early 1900’s. And three experts talked about the issues:
“Jim Mars of Texas, author of “Rule by Secrecy”; Daniel Esheron, author of “The True History of the Bilderberger Club” and Alex Jones author of “Martial Law 911”.
They discussed the One World Order the Bilderbergers have been planning for all the rest of us, to include the Canamex Highway which would run straight from Mexico, through the U.S.A. up to Canada with no border inspections; transponders for taxation purposes to be placed in all new automobiles (which has already come up for discussion in the Texas legislature); the U.S.’s future of undefended borders which started only recently when the government backed down on a plan to spend $60 million to update all U.S. ports; a future where the Bilderbergers will appoint all world leaders and return to feudalism and a plan to reduce the world population by 80-90 percent, to name just a few.
How, you may ask, can a group of only about 300 individuals get control over the rest of us? One way is by placing microchips in individuals (recently done by the President of a large American bank to “allow him access to secret vaults and store rooms in his bank”), the International Monetary Fund’s Wolfowitz who will control the World Bank, the Federal Reserve Bank, all European banks, the Secretary General of NATO and therefore NATO itself; it includes the Tri-Lateral Commission’s plan, already in process, of NAFTA, the Euro Group and to include a group of Asian countries.”
Look up who belongs to the Clubs. It makes no difference if McCain, Hilary or Obama win, they are all in. I can’t tell you how astonished I was at all of this.
Even better is the money situation. There is only about one real federal reserve note for 600 dollars of electronic “money” which is really credit. Cash is King, eh? The plan that I have pieced together thus far, devalue the dollar to air, “pay off” our defici, then adopt the amero as currency. Having physical dollars may be a moot point in just a year or two.
And all the discussion about the truth from the banks. The president signed a law enabling him to issue a Presidential Directive authorizing the banks to deceive the public to “safeguard” us from financial disaster. No lie!
Reducing the population could start with a little help from bird flue, like weapons of mass destruction. Here though it would be just as easy to plant the virus in airports. Then martial law, no elections in such a crisis! Bush forever! Maybe it would be a blessing to not be here for the spring.
The only hope is that winter will pass, and spring will come. I just hope I can live to see it!
I sound like “Conspiracy Theory.” Bt before you groan and roll your eyes, Google.
February 17, 2008 at 11:36 pm
BJ, our prez definitely has a microchip! He is rebooted every 10 minutes, its very funny when you see that on TV. He is programmed to say stupid jokes when the main cpu is not functioning.