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Fed's Bill Dudley Explains Bank Runs, Discusses Collateral Risks, Suggests Way To Prevent Systemic Collapse

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An impressively comprehensive presentation by Bill Dudley before the Center for Economic Policy Studies Symposium earlier, discusses, and ties in, all the key concepts Zero Hedge has been discussing over the past several months, among these the tri-party repo system, bank runs (what and why), collateral, moral hazard, maturity mismatch, unsecured markets, Primary Dealer Credit Facility, Commercial Paper Funding Facility, and liquidity. In fact, at some points in the speech we get the feeling Mr. Dudley is indirectly refuting some of Zero Hedge's recent allegations vis-a-vis the Fed's actions and regulatory oversight. The presentation is largely devoid of bias except for some of the proposals on how to avoid future systemic meltdowns, which of course are moral hazard prevention lite and philosophy heavy. Not a lite piece of reading, yet recommended for all who want a grasp of the big picture from the Fed's perspective.

Without presenting much commentary, one thing to keep in mind when reading this speech is the Exter pyramid, which best explains the reasons behind every bubble collapse courtesy of a flawed Keynsian economic system. When one considers that there is roughly $1 quadrillion in shadow assets (and by implication liabilities), the one and only thing that happens each time there is a contraction of credit (not debt, but the confidence kind), the mythical assets end up collapsing to the lowest tangible asset value. Which is why Zero Hedge keyword of the year is "collateral." When counterparties do not trust each other further than they can throw one another, from providing turns and turns of leverage on a given fixed asset, suddenly the ratio drops to 1 or close thereby (not to mention that the purest of all tangible assets is gold, whose global estimated value is about $3 trillion). As such, if the Fed is ever incapable of terminating the collapse of Exter's "liquidity" pyramid to itself in a reverse Big Bank event, the one and only true asset that would remain, would be commodities, and specifically gold. And the less credit there is, the greater the worth of gold. Which is the main reason the Fed must be very concerned about gold's dramatic price appreciation, as it is the most obvious statement by the market that increasingly more investors are concerned about the credibility relationships between various liability classes. And is why the Fed is prevented from continuing the dollar's decline as very soon either the excess liquidity will push commodities to the stratosphere (oil at $150 will cause a revolution by the middle class) as well as gold well above $2,000, or the one-way "short dollar" trade will eventually reverse.


More Lessons from the Crisis [Highlights ours.]

William C.
, President and Chief Executive Officer

Remarks at the Center for Economic Policy Studies (CEPS) Symposium, Princeton, New Jersey

Thank you for having me here to speak today. It is a real pleasure to
have this opportunity to speak at CEPS again—this is a great forum to
talk about policy issues. Tonight I want to discuss some of the challenges
we face in making our financial system more robust. We have
learned a great deal over the past two years about our financial system and
its vulnerabilities. The task ahead is to put these lessons to good use. Our
goal must be to make the financial system more resilient to shocks. If
we can do that successfully, we should be able to reduce the risk of financial

In assessing the causes of this crisis, one clear culprit was the failure
of regulators and market participants alike to fully appreciate the strength
of the amplifying mechanisms that were built into our financial system. These
mechanics exacerbated the boom on the way up and the bust on the way down. Only
by better understanding the sources of these damaging dynamics can we construct
solutions that will strengthen our financial system and make it more robust.

Today, I am going to focus mainly on the extraordinary liquidity events that
played out during this crisis. I will tackle this topic in four
parts. I will begin by describing how funding dried up rapidly for firms
such as Bear Stearns, Lehman Brothers, and AIG. I then will propose
a conceptual framework that might prove helpful in better understanding what
went wrong on the liquidity front. With this conceptual framework in
hand, I will then suggest some concrete steps we might take toward making the
financial system more resilient—cautioning that there are no magic bullets. Finally,
I will talk about the major initiatives that are already underway to help reduce
the risk of future liquidity crises.

As always, my remarks reflect my own views and opinions and not necessarily
those of the Federal Reserve System.

At its most fundamental level, this crisis was caused by the rapid growth
of the so-called shadow banking system over the past few decades and its remarkable
collapse over the past two years.
Let me give you some figures to illustrate
the disparity between the growth of what I will call the “traditional” commercial
banking system and the shadow banking system in recent years. At
the end of 2006, the shadow banking system had grown so large that U.S. commercial
banks’ share of credit market assets had fallen to only 17.7 percent,
down from 27.3 percent in 1980.

With this shift in the composition of activity also came an important change
in the composition of funding, particularly in the middle part of this decade.
Commercial paper outstanding grew from $1.3 trillion at the end of 2003 to
a peak of about $2.3 trillion. Repo funding by dealers to nonbank financial
institutions—as measured by the reverse repos on primary dealer balance
sheets—grew from less than $1.3 trillion to a peak of nearly $2.8 trillion
over this period. In contrast, commercial bank retail deposits rose by
less than 30% in the four year period from 2003 to 2007.

Though the shadow banking system was often credited with better distributing
risk and improving the overall efficiency of the financial system, this system
ultimately proved to be much more fragile than we had anticipated.
the traditional banking system, the shadow banking system engaged in the maturity
transformation process in which structured investment vehicles (SIVs), conduits,
dealers, and hedge funds financed long-term assets with short-term funding.
much of the maturity transformation in the shadow system occurred without the
types of stabilizing backstops that are in place in the traditional banking

A key vulnerability turned out to be the misplaced assumption that securities
dealers and others would be able to obtain very large amounts of short-term
funding even in times of stress. Indeed, one particularly destabilizing
factor in this collapse was the speed with which liquidity buffers at the large
independent security dealers were exhausted.
To take just one illustrative
example, Bear Stearns saw a complete loss of its short-term secured funding
virtually overnight. As a consequence, the firm’s liquidity pool
dropped by 83 percent in a two-day span.1

These liquidity dynamics were driven by two main factors. The
first factor was the underlying stress on dealer balance sheets as the prices
on complex collateralized debt obligations (CDOs), private label residential
mortgage-backed securities (RMBS), and commercial real estate-related assets
fell sharply and uncertainty about underlying asset values rose sharply. The
uncertainty stemmed, in part, from the lack of transparency about what prices
these assets could be sold for, which, in turn stemmed from the difficulty
of valuing these extremely complex and heterogeneous securities.

The stress on underlying asset prices and the uncertainty about the valuations
of pools of illiquid assets caused investors to become concerned about the
solvency of some of the weaker dealers.2 These
concerns contributed to liquidity pressures, which, in turn, led to forced
asset sales by dealers and others.
These sales both further depressed
asset prices and increased asset price volatility.

The second factor contributing to the liquidity crisis was the dependence
of dealers on short-term funding to finance illiquid assets. This short-term
funding came mainly from two sources, the tri-party repo system and customer
balances in prime brokerage accounts. By relying on these sources of
funding, dealers were much more vulnerable to runs than was generally appreciated.

Consider first tri-party repo, a market in which money market funds, securities
lending operations, and other institutions finance assets mainly on an overnight
basis. As asset prices fell and volatility climbed during this period,
the financial condition of some dealers became more troubled. As a result,
some investors in this market became worried about the risk that they might
not get their cash returned in the morning, but instead might be stuck with
the collateral that secured their lending. Investors responded by increasing
their haircuts—that is the margin of extra collateral used to secure
their funding—and reducing the range of collateral they would accept
as security for their lending.
Of course, these very rational reactions
on the part of investors only further weakened the liquidity positions of the
major securities firms.

A similar dynamic occurred in the context of prime brokerage accounts. Some
institutions treated the free cash balances associated with these accounts
as if they were a stable source of funding. Implicitly, they assumed
that these balances would be “sticky” due to the strength of broader
business relationships and the cost incurred by customers in shifting the business
elsewhere. However, once markets became strained, this assumption of
stable funding proved to be false. Prime brokerage customers began to
withdraw their free credit balances and some moved their business elsewhere. Both
of these steps reduced dealer liquidity buffers and further tightened the funding

In the case of the tri-party repo market, the stress on repo borrowers was
exacerbated by the design of the underlying market infrastructure. In
this market, investors provide cash each afternoon to dealers in the form of
an overnight loan backed by securities collateral.

Each morning, under normal circumstances, the two clearing banks that operate
tri-party repo systems permit dealers to return the cash to their investors
and to retake possession of their securities portfolios by overdrawing their
accounts at the clearing banks. During the day, the clearing banks
finance the dealers’ securities inventories.

Usually, this arrangement works well. However, when a securities dealer
becomes troubled or is perceived to be troubled, the tri-party repo market
can become unstable.
In particular, if there is a material risk that
a dealer could default during the day, the clearing bank may not want to return
the cash to the tri-party investors in the morning because the bank does not
want to risk being stuck with a very large collateralized exposure that could
run into the hundreds of billions of dollars. Overnight investors, in
turn, don’t want to be stuck with the collateral.
So to avoid such
an outcome, they may decide not to invest in the first place. These self-protective
reactions on the part of the clearing banks and the investors can cause the
tri-party funding mechanism to rapidly unravel. This dynamic explains
the speed with which Bear Stearns lost funding as tri-party repo investors
pulled away quickly.

Despite the strains created by the collapse of Bear Stearns, the “rivets” of
the tri-party repo system held for several reasons. First, Bear Sterns
did not fail; instead it was acquired by JPMorgan Chase with assistance from
the Federal Reserve. Second, the Federal Reserve stepped in to support
the tri-party repo system by implementing the Primary Dealer Credit Facility
The PDCF essentially placed the Fed in the role of the tri-party
repo investor of last resort
thereby significantly reducing the risk to the
clearing banks that they might be stuck with the collateral. As a consequence,
the PDCF reassured end investors that they could safely keep investing. This,
in turn, significantly reduced the risk that a dealer would not be able to
obtain short-term funding through the tri-party repo system.3

Over much of this period preceding the failure of Lehman Brothers, U.S. commercial
banks were relatively insulated from the liquidity run dynamics that plagued
the securities dealers.4 This
relative stability was due, in part, to the broad access these commercial banks
had to the Fed’s discount window through the traditional primary credit
facility and through the Term Auction Facility (TAF), which had been introduced
earlier in the crisis in response to liquidity strains in the interbank market. The
fact that most commercial banks relied on insured deposits for significant
portions of their funding was also important. Not only were these insured
deposits stable sources of funding because they were guaranteed by the Federal
Deposit Insurance Corporation (FDIC), but also because they were unsecured;
these deposits freed up collateral that could be used by banks to secure borrowing
from the central bank and elsewhere.

However, once Lehman Brothers failed, many commercial banks and other financial
institutions encountered significant funding difficulties. News that
the Reserve Fund—a large money market mutual fund—had “broken
the buck” due to its holdings of Lehman Brothers paper led panicked investors
to withdraw their funds from money market mutual funds. This caused the
commercial paper market to virtually shut down. This hurt bank holding
companies and other large financial firms that depended on the commercial paper
market for short-term funding.

The result was a widespread loss of confidence throughout the money market
and interbank funding market. Investors became unwilling to lend even
to institutions that they perceived to be solvent because of worries that others
might not share the same opinion. Rollover risk—the risk that
an investor’s funds might not be repaid in a timely way—became
extremely high.

The extreme market illiquidity did not abate until a number of extraordinary
actions were taken by the Federal Reserve and others.
For example, the
Federal Reserve introduced the Commercial Paper Funding Facility (CPFF) to
reduce rollover risk in the commercial paper market, the Federal Reserve and
other central banks’ massively expanded the ability of banks to obtain
dollar funding through the TAF and associated foreign exchange swap programs;
the Treasury guaranteed money market mutual fund assets; and the FDIC increased
deposit insurance limits and set up the Temporary Liquidity Guarantee Program
(TLPG) to backstop bank and bank holding company debt issuance.

Having described “what” happened on the liquidity front during
the crisis, I next want to examine, in a bit more detail, “why” it
To do this, I will lay out a simple conceptual framework that I will
then use to assess what can be done to mitigate the risk of such runs occurring
in the future. As a starting point, I will talk about how unsecured
lenders react in a crisis, and then I will consider the behavior of secured

Unsecured liquidity providers run for two basic reasons. First, they
run because there is a risk that the company they are lending funds to is insolvent. In
other words, there is a risk that the assets will be worth less than the liabilities,
creating the potential for loss to the creditor. The second reason
that unsecured creditors run is the risk that they will not be repaid in a
timely way.
Even if the borrowing firm ultimately turns out to
be solvent, there may be a delay in a lender getting its funds back, and this
delay may prove to be unacceptably costly to the lender.

This second cause of liquidity runs—the risk of untimely repayment—is
significant because it means that expectations about the behavior of others,
or their “psychology”, can be important.
This is a classic
coordination problem. Even if a particular lender judges a firm to be solvent,
it might decide not to lend to that firm for fear that others might not share
the same assessment. The less certain any one lender is about the willingness
of other lenders to provide liquidity to a firm, the greater the risk that
too few loans will be extended to prevent liquidation. In that case, even if
the lender turns out to be correct in its judgment of the firm’s solvency,
there still will be a cost in terms of delay in receiving repayment.

A few pictures can help to illustrate these concepts. Figure 1 illustrates
what a creditor’s assessment of the net worth of a financial firm might
look like in normal times. Creditors have uncertainty about what that
value is, thus, the valuation is represented by a probability distribution. The
higher the degree of uncertainty, the greater is the degree of dispersion in
the probability distribution. As long as the probability distribution
is sufficiently far to the right—in other words—well within positive
territory so that there is virtually no risk that the firm is insolvent, lenders
will generally be willing to lend.

So what happens in a financial crisis? First, the probability
distribution shifts to the left as the financial environment deteriorates and
the financial firm takes losses that deplete its capital. Second, and
even more importantly, the dispersion of the probability distribution widens—lenders
become more uncertain about the value of the firm. These two phenomena
are shown together in Figure 2. A lack of transparency in the
underlying assets will exacerbate this increase in dispersion. As the
degree of dispersion widens, a portion of the probability distribution falls
into negative territory. This means that there is a real risk of
loss for unsecured creditors if the firm were forced to liquidate its assets.

Finally, in a crisis, unsecured lenders become more uncertain about others’ assessment
of the probability distribution.
For example, if creditor A believes
the probability distribution looks like Figure 1, but at the same time is concerned
that creditor B views the probability distribution as looking like Figure 2,
creditor A may pull back. If there is a risk creditor B and others will
not lend, the firm may not receive sufficient funding. In other words,
even if creditor A believes the firm is solvent, it may not lend because it
does not want to risk a delay in repayment.

So what can creditors do to mitigate these risks? First, they
can respond by charging a higher interest rate in compensation for the increase
in the risk of default. However, there are a number of difficulties
that limit how well this works in practice. Most significantly, by undermining
the firm’s profitability, the higher interest rates may increase the
risk of insolvency. If higher rates push insolvency risk up sharply,
then higher rates may not be sufficient to make lending—even at higher
rates—an attractive proposition.

In addition, some investors such as money market mutual funds may have a very
low tolerance for risk.
Thus, they may not be interested in trading off
higher rates as compensation for a non-negligible increase in insolvency risk. Finally,
paying higher rates may generate an adverse signal about the health of the
borrowing institution. This may cause investors to become more worried
about the risk of default.

Second, creditors can secure their lending—taking collateral valued
at more than the amount they lend.
However, this is not foolproof because
secured funding can be just as vulnerable to a run dynamic as unsecured funding. For
starters, the same types of uncertainties about the value of the firm may apply
to the liquidation value of the collateral. This is especially
the case if the collateral is lower quality and markets are already illiquid.
if creditors are left with the collateral instead of being repaid, fear of
widespread collateral liquidation might further erode collateral values. If
investors respond by seeking more collateral to ensure they will be secured—that
is, that they will be made whole in a liquidation scenario—the firm may
run out of high-quality collateral that the firm can borrow against. This
is a significant risk when a financial firm is highly leveraged and equity
is only a very small proportion of total assets.5

The risks of liquidity crises are also exacerbated by some structural sources
of instability in the financial system. Some of these sources are
endemic to the nature of the financial intermediation process and banking. Others
are more specific to the idiosyncratic features of our particular system. Both
types deserve attention because they tend to amplify the pressures that lead
to liquidity runs.

Turning first to the more inherent sources of instability, there are at least
two that are worthy of mention. The first instability stems from
the fact that most financial firms engage in maturity transformation—the
maturity of their assets is longer than the maturity of their liabilities.
need for maturity transformation arises from the fact that the preferred habitat
of borrowers tends toward longer-term maturities used to finance long-lived
assets such as a house or a manufacturing plant, compared with the preferred
habitat of investors, who generally have a preference to be able to access
their funds quickly.
Financial intermediaries act to span these preferences,
earning profits by engaging in maturity transformation—borrowing shorter-term
in order to finance longer-term lending.

If a firm engages in maturity transformation so that its assets mature more
slowly than its liabilities, it does not have the option of simply allowing
its assets to mature when funding dries up.
be rolled over, liquidity buffers will soon be weakened. Maturity transformation
means that if funding is not forthcoming, the firm will have to sell assets.
Although this is easy if the assets are high-quality and liquid, it is hard
if the assets are lower quality. In that case, the forced asset sales are likely
to lead to losses, which deplete capital and raise concerns about insolvency.6

The second inherent source of instability stems from the fact that firms are
typically worth much more as going concerns than in liquidation.
loss of value in liquidation helps to explain why liquidity crises can happen
so suddenly. Initially, no one is worried about liquidation. The
firm is well understood to be solvent as shown in Figure 1. But once
counterparties start to worry about liquidation, the probability distribution
can shift very quickly toward the insolvency line, as shown in Figure 2, because
the liquidation value is lower than the firm’s value as a going concern.

There are also a number of idiosyncratic sources of instability worthy of
mention, some of which are unique to our particular system. One source
of instability is the tri-party repo system that I discussed earlier. Another
is the convention of tying collateral calls to credit ratings. In this
case, if a firm’s credit rating is lowered, the firm may have to post
additional collateral to its counterparties, eliminating this collateral as
a potential source of funding. This phenomenon was a particularly important
problem for AIG, which lost its access to the commercial paper market and was
subject to increased collateral calls. Both factors caused the liquidity
of the AIG parent company to be depleted very quickly. Finally, if asset
volatility rises, haircuts can increase. This can lead to haircut spirals
in which higher haircuts lead to forced asset sales, increased volatility and
still higher haircuts.

These sources of instability create the risk of a cascade—of firms moving
rapidly from the situation represented in Figure 1 to that shown in Figure
2. Once the firm’s viability is in question and it is does not
have access to an insured deposit funding base, the next stop is often a full-scale
liquidity crisis that often cannot be stopped without massive government intervention.

Fortunately, there are ways to mitigate the risk of a cascade. First,
we can require that financial intermediaries hold more capital.
would push the probability distribution to the right in Figure 2. With
sufficient additional capital, the probability of insolvency could be reduced
to a low enough level that liquidity providers would not run.

Higher capital requirements work to reduce the risk of liquidity runs, but
potentially at the cost of making the process of financial intermediation much
more expensive. In particular, a requirement that firms must hold more
capital increases intermediation costs. Moreover, banks may respond to higher
capital requirements by taking on greater risk. If an increase in risk-taking
were to occur, the movement of the probability distribution to the right in
Figure 2 might be offset by an increase in the degree of dispersion. Thus,
higher capital requirements might not necessarily be sufficient to push all
of the probability distribution above zero.

Second, regulators could require greater liquidity buffers. These
buffers would help protect the firm against having to liquidate assets under
duress, and would therefore help prevent the probability distribution from
sliding left toward the zero line in Figure 2. But there is a
cost to the firm from holding greater liquidity buffers in terms of lower returns
on capital. So, requiring greater liquidity buffers would also tend to
drive up intermediation costs. And, just as in the case of higher
capital requirements, banks could respond by taking greater risks.

Third, regulators could implement changes that would reduce the degree of
dispersion in the potential value of a firm, pushing the right tail of the
distribution in Figure 2 to the left. For example, we could require greater
transparency about the composition and quality of the firm’s assets and
Or, regulators could increase transparency by forcing greater
disclosure of the sale price of assets and/or by pushing for greater homogeneity
and price discovery for products such as OTC derivatives. We could
improve the quality of regulation and supervision, which would increase confidence
in regulatory measures of capital and financial firms’ soundness.

Fourth, the central bank could provide a liquidity backstop to solvent firms. For
example, the central bank could commit to being the lender of last resort as
long as it judged the firm to be solvent and with sufficient collateral.
would reduce the coordination problem and the risk of panics sparked by uncertainty
among lenders about what other creditors think. If the central bank
is willing to provide backstop liquidity, then a lender that judges the financial
firm to be solvent should be willing to lend. The backstop liquidity ensures
timely repayment. The lender of last resort role eliminates the externality
in which the expectations about the willingness of one lender to lend influences
the decisions of others.

However, providing a liquidity backstop is not without its own set of problems. If
firms have liquidity backstops that are viewed as credible, then this creates
moral hazard.
Firms do not have to worry as much about what lenders think
about their capital adequacy or the size of their liquidity buffers. This
creates incentives to run leaner in terms of capital and liquidity, which increases
the risks to the backstop liquidity provider.

To mitigate such effects, the backstop liquidity provider could presumably
charge financial firms for the value of the backstop. But what fee would
be appropriate? It is difficult to assess the probability of financial panics
and the value of backstop liquidity facilities.7

Fifth, regulators could take steps to reduce the difference between the value
of the firm dead versus alive.
For example, we could improve the resolution
process so that less of a firm’s value is destroyed by the liquidation
process. If we could reduce the difference in value between a firm as
a going concern versus the same firm in liquidation we could reduce the severity
of the cascade effect when financial conditions deteriorate.

Sixth, we could make structural changes to the financial system to make it
more stable in terms of liquidity provision.
For example, consider the
three structural issues outlined earlier that amplified the crisis—tri-party
repo, collateral requirements tied to credit ratings, and haircut spirals. In
the case of tri-party repo, the amplifying dynamics could be reduced by enforcing
standards that limited the scope of eligible collateral or required more conservative
haircuts. Formal loss-sharing arrangements among tri-party repo borrowers,
investors, and clearing banks might reduce or eliminate any advantage that
might stem from running early. Eliminating the market’s reliance
on intraday credit provided by clearing banks could eliminate the tension between
the interests of clearing banks and investors when a dealer becomes troubled. In
the case of collateral requirements, collateral haircuts could be required
to be independent of ratings.

Many of these suggestions are already in the process of being implemented. For
example, the Basel Committee is in the process of strengthening bank capital
in four ways: 1) higher capital requirements; 2) higher quality capital;
3) more complete risk capture; and 4) capital conservation measures, including
the use of contingent capital instruments. With greater capital
buffers, the risk of liquidity runs should be reduced going forward. It
should be noted, however, that use of contingent capital instruments, or any
other potential changes to our current capital regime, does not obviate the
need for an improved resolution process.

Second, the Basel Committee is moving forward with its work in establishing
liquidity standards for large, complex financial institutions. These
liquidity standards would consist of two parts. First, there would be
a liquidity buffer made up of high-quality liquid assets that would be of sufficient
size so that the firm could manage a stress event caused by a short-term loss
of investor confidence. Second, there would be rules concerning the degree
of allowable maturity transformation. Long-term illiquid assets would
have to be largely funded by equity and longer-term borrowing, not by short-term
borrowing, such as tri-party repo.

Third, the Federal Reserve is working with
a broad range of private sector participants, including dealers, clearing banks,
and tri-party repo investors to eliminate the structural instability of the
tri-party repo system so that tri-party borrowers are less vulnerable
to runs. Exactly
how the mechanics of the tri-party repo system will be adjusted is still a
work in process.8

Fourth, the major U.S. securities dealers are now subject to supervision by
the Federal Reserve under the Bank Holding Company Act. This means that
their liquidity funding needs are subject to supervisory oversight, including
stress tests, to ensure that the firms can meet large funding drains.

Liquidity risk will never be eliminated, nor should it. The preferences
of borrowers to borrow long and of lenders to lend short means that the maturity
transformation process generates real benefits. However, we can do better
to make our system less prone to the types of liquidity runs that we have experienced. If
we remain committed to implementing the reforms that are already underway,
I am confident that we can dramatically reduce the risks of the type of liquidity
crises that we experienced all too recently.

Thank you for your kind attention. I would be happy to take a few questions.


1 The collapse of the shadow banking system, in turn, put
intense pressure on commercial banks. Off-balance- sheet items came
back on to bank balance sheets and the quality of bank assets fell
sharply. The end result was a sharp tightening in the availability of
credit that served to exacerbate the downward pressure on economic
2Some dealers were further weakened by having provided
significant amounts of funding to failed investment funds, which
reduced the amount of funding that was available to meet other needs.
One final factor that was important in exacerbating the funding crises
was the novation of over-the-counter (OTC) derivative exposures away
from a troubled dealer. In a novation, a customer asks a different
dealer to stand in between the customer and the distressed dealer. This
process results in the outflow of cash collateral from the distressed
dealer. The novation of OTC derivatives was an important factor behind
the liquidity crises at both Bear Stearns and Lehman Brothers.
There were funding strains prior to the Lehman Brothers failure and
these were most apparent in the elevated spreads evident in term LIBOR
funding compared with the federal funds rate.
Moreover, certain classes of investors such as money market mutual
funds do not take much comfort in collateral. Also, the headline risk
of having exposure to a troubled participant could subject investors
such as money market funds to liquidity pressures of their own.
Investors could withdraw funds before losses are realized.

6This problem has been largely addressed in the banking
sector by deposit insurance and by providing access to lender of last
resort facilities. In addition, supervisory and reporting requirements
address transparency issues.
Supervision could also be brought to bear to limit the tendency for
firms to reduce their capital and liquidity when provided with a
credible liquidity backstop.

8Work is also underway to shift the settlement of OTC
derivative trades to central counterparties (CCPs). This is important
because CCPs reduce risk exposures by netting out the offsetting
exposures among the CCP participants. Also, because the counterparty
risks move to the CCP rather than staying with the individual dealers,
the incentive to novate—move trades away from troubled dealers—is


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Fri, 11/13/2009 - 23:51 | Link to Comment waterdog
waterdog's picture

I've been blaming the wrong people all along. This guy may be the enemy, but he tells it so I can understand it. Jesus good Lord Christ, what the hell are we doing?

Sat, 11/14/2009 - 00:41 | Link to Comment Anonymous
Sat, 11/14/2009 - 13:15 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Any sophisticated criminal enterprise (including a Fed/government run Ponzi) will always be shrouded in mind numbing details, long convoluted corridors and dead ends. And plenty of supporters who might not be part of the actual crime but are involved for millions of reasons. This is why one must simplify in order to see what's going on. The details and red tape are it's natural defense, with it's supporters a second line of defense.

There's an old saying that the only competition to organized crime is the government. That statement contains so much truth it's painful. So we laugh, nod our heads in agreement and then change the subject.

This is high crimes and misdemeanors done out in the open and in the light of day. The problem is not "them" but our subservient behavior in the face of authority. Add in the deep capturing effect of having the vast majority of our wealth in direct jeopardy to their manipulations and you have a general population that will scream bloody murder in outrage and then proceed to Walgreen's and purchase K-Y by the case.

Because no one wishes to see themselves as impotent or powerless (examine the sales of Viagra for insight into our fear of another form of impotence) we justify and rationalize away our inaction. This creates an internal emotional imbalance that is deeply rooted in our inner ego and eventually explodes onto the surface as violence directed at anyone other than the real source of our frustration, these fucking bastards.

As long as we hide from what we are not talking about (our inaction and why) this will only get worse for we long ago disarmed ourselves. I leave you with a few thoughts. Dare to spend some time thinking about our role in this mess. Our problems begin and end with "We The People". Until we overcome our own impotence and our desire for others to fight our battles for us, we will continue to slowly sink into this black abyss.

Be that fearless toddler you once were as your parents urged you forward. Let go and take the first steps to your freedom by speaking about the unspoken and unspeakable.

"We are only as sick as our deepest darkest secrets. As long as they remain unspoken and hidden, they control us. But bring those dark secrets into the light of day and suddenly they become entirely manageable." - Anonymous

"In order to maintain our way of living, we must tell lies to each other and especially to ourselves." - Derrick Jensen

"Otherwise sane and rational people will go quietly and meekly into a gas chamber if only you will allow them to believe it's a bathroom."- Zygmunt Bauman

Sat, 11/14/2009 - 00:07 | Link to Comment andrew123
andrew123's picture

Tyler, you wrote in your opening that:

"Which is the main reason the Fed must be very concerned about gold's dramatic price appreciation, as it is the most obvious statement by the market that increasingly more investors are concerned about the credibility relationships between various liability classes."

Have you see any evidence, anywhere, that the current Fed really cares about the price of gold?  Has any of the Fed governors mentioned it in any of their presentations in the last year? I know some may conclude that they don't talk about it because it's rise is an indictment of their actions, but maybe they simply don't care.  Maybe they think it is a relatively small preoccupation or fetish that they don't need to worry about.  Unlike other commodities, it does not affect the price of consumer goods or services (they don't consider gold to be a consumer good), and the people who are really buying it at the margin don't count because they are a bunch of doomsayers and since they are confident that there will not be any inflation in the price of goods and services for the foreseeable future, they just view it as an interesting aberation (if some central banks that don't own a lot want to buy some to diversify, so be it, but it is not that big a deal).  I am not looking to argue this point (I personally don't believe), but I am wondering if there is any actual evidence that the rise in the price of gold concerns anyone at the Fed, and moreover, that they consider it at all in their policy deliberations?  I suspect that they view it as a distraction, but I would like to know if I'm wrong.  Thanks in advance for any response.



Sat, 11/14/2009 - 01:03 | Link to Comment tom a taxpayer
tom a taxpayer's picture

Ben Bernanke speech (Nov 21, 2002) exceprt:

"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."...

"Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation."

"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation."

Sun, 11/15/2009 - 13:26 | Link to Comment Anonymous
Sat, 11/14/2009 - 00:37 | Link to Comment LuisvonAhn
LuisvonAhn's picture

His points are very well taken, but what's so wrong for a higher cost of funding. Shouldn't market forces be the dictator of return on risk? Also, when glass-steagall was repealed a little thought into what actions these institutions were under taking would have saved the world about $13T or so. But hindsight is 20/20. The moral of the story is that no economic theory or statistical formula to date can compare with good old fashion greed and fear.

Sat, 11/14/2009 - 00:37 | Link to Comment Cistercian
Cistercian's picture

 This certainly does nothing for my piece of mind.They are taking a band-aid approach.And the risk taking by the banks is not addressed in a meaningful way.One large entity becoming overextended can still trigger the derivative deathstar.




Sat, 11/14/2009 - 00:37 | Link to Comment Anonymous
Sat, 11/14/2009 - 08:53 | Link to Comment duckweed
duckweed's picture

obsfucation, blah, blah, blah... the real problem is GREED, and the greediest have gained to much POWER. Save your breath.

Sat, 11/14/2009 - 11:46 | Link to Comment lookma
lookma's picture

And airplanes crash because of gravity.

Talking about greed is a nonstarter that reveals you have no realistic understanding of human nature.

No one argues we must to solve gravity to stop plane crashes.  Why?  Its a given.

The question is not how to stop a given, but how to act in light of this given truth. 

Sat, 11/14/2009 - 13:11 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Now we're cooking with gas. Bravo lookma! 

The secret to effective control and propaganda is to deflect and obscure the questions and to slide your basic premise underneath the conversation without being challenged. Do that and you have everyone by the balls.

Don't discuss the really important basic questions, such as why the Fed is even allowed to exist. Instead, get people to talk about how we can improve the Fed. Don't you want a better Fed?

Wake up people.

Sat, 11/14/2009 - 00:44 | Link to Comment tjfxh
tjfxh's picture


andrew 123, the folks running things aren't concerned about "the barbarous relic." They are concerned about the cost of petroleum. That is the real constraint on the US economy, because petroleum is a necessity and demand for it is inelastic. A dollar spent on gas is a dollar not spent elsewhere. Moreover, as gas and heating oil prices rise, even other high-priority maintenance goods suddenly turn into discretionary items, Oil is the alligator on our backs. In fact, Fed and Treasury economists are probably happy to see funds going into driving gold up and not oil.

Not that gold is irrelevant. But it's price is really more of a psychological factor than a financial indicator. A lot of people are reading way too much into gold's rise.

We'll know when the Fed is concerned. They will drain excess reserves in preparation to raise the overnight rate, which they have already made clear is not going to be anytime soon.


Sat, 11/14/2009 - 00:52 | Link to Comment tom a taxpayer
tom a taxpayer's picture


How dare Mr. Dudley pontificate about what regulators could do, and not mention the need to investigate and prosecute the regulators for their aiding and abetting the greatest financial crimes in U.S. history. The first step is to prosecute the regulators for flagrant conflict of interest, malfeasance in office, misconduct, etc. No regulatory system reform will work until Goldman Sachs friends, alumni, and lackeys are throw out of regulatory offices.

Prior to joining the Federal Reserve Bank in 2007, Mr. Dudley was a partner and managing director at Goldman, Sachs & Company. Mr. Dudley worked at Goldman Sachs from 1986 to 2007. Dudley was part of Geithner's NY Fed team that killed Goldman Sachs competitors and repeatedly save Goldman Sachs. Another part of the NY Fed team with Dudley and Geithner was Stephen Friedman, then Chairman of the Board of NY Fed, and at same time, Goldman Sachs Director and big stockholder of Goldman Sachs, who claimed he had no conflict of interest in regulating Goldman Sachs.

"When N.Y. Fed Chairman Stephen Friedman bought stock in the company that he once headed, and where he still serves as a director, he was already in violation of Federal Reserve policy and was hoping for a waiver to permit him to hold his existing multi-million-dollar stock stash and to remain on the Goldman board. The waiver was requested last October by Timothy Geithner, then the president of the N.Y. Fed and now Treasury secretary. Yet, without having received that waiver, Friedman went ahead in December and purchased 37,300 additional shares. With shares he added in January, after the waiver was granted, he ended up with 98,600 shares in Goldman Sachs, worth a total of $13,330,720 at the close of trading on Monday. Friedman was in violation of the Fed's policy because, thanks in part to the urging of Geithner and the N.Y. Fed, Goldman Sachs was allowed to become a bank holding company, making it eligible for government bailout funds (an option that Geithner had denied to Goldman rival Lehman Brothers)."


Geithner and Friedman worked to insure that William Dudley, former Goldman Sachs executive, got Geithner's job of NY Fed President. Stephen "no conflict of interest" Friedman was chairman of the search committee, and Geithner lobbied the NY Fed to appoint Dudley-do-right-by-Goldman-Sachs as NY Fed President.


Can U.S. Treasury Secretary Geithner be expected to investigate and prosecute the NY Federal Reserve Geithner and others for the dirty deals they made with AIG, Lehman, Bear Stearns/J.P.Morgan, Goldman Sachs, etc?


Could U.S. Treasury Secretary Paulson be expected to investigate and prosecute Goldman Sachs CEO Paulson?


How dare Mr. Dudley and the den of Goldman Sachs bootlickers at the NY Fed Reserve preach about "regulation".



Sat, 11/14/2009 - 01:17 | Link to Comment ARJ
ARJ's picture

Enough with the anti-GS diatribe. Can't someone post something interesting that happens to have been written by an ex-GS person without us having to hear all the conspiracy theories yet again?

Sat, 11/14/2009 - 03:00 | Link to Comment faustian bargain
faustian bargain's picture

probably not.

Sat, 11/14/2009 - 13:17 | Link to Comment Rainman
Rainman's picture

A daisy chain of startling coincidence does not indicate conspiracy to commit massive fraud. Even when Al Capone's soldiers were gunning down all of his bootlegging competitors, no one dared to accuse him of a murder conspiracy. Local "justice" was all paid off anyway.

It finally took a federal tax evasion rap to put him away. The very least of his crimes got him 11 years.

So the opposite dynamic would be true for the modern day financial thugs. Fed legislators and justice are all in the bag. Justice.....if it ever comes.....will have to come from the States.  

Sat, 11/14/2009 - 08:50 | Link to Comment duckweed
duckweed's picture

no, too much is never enough. workers unite! sit down, do not got to work, do not pay your usury, do not pay your mortgage and help your neighbor do the same. in ninety days or less this sucker will fall to the ground. GS, the FED, along with Corporate ameriKa, will fall to the ground and then they will be clear as to where their profit and windfalls, their very lifestyle, comes from. we the people!

Sat, 11/14/2009 - 05:09 | Link to Comment Tic tock
Tic tock's picture

To sum the argument put forth by the Mr. Dudley,

i) The TBTF make 'lending maturitization arbirtrage' possible throught the economy...which is the cornerstone of eficient capitalism

ii) Now that we know this, and even have the Fed looking at this, it probably won't be a big problem again

...and iii) what options are there anyway?

That's kind of funny, y'know, part four..the Fed backstopping credit to the real economy. if that would do any good when the problem is in the asset valuation near the base of the invest in the firms directly, at the level of printing we've been seein..certainly inflationary. Much better to throw money into every form of financial instrument, provide access to .25% money from the world's largest credit union and collect the important bits of the most assuredly non-performing loan instruments that 'the banks that make America great' have can buy/have bought- while they practise their risk assessment under the new 'normal'.

You can't make an omlette without breaking eggs, Fred.

And anyway, it seems a little too risky to monetize these arbritrage instruments by simply balancing 'collateral availability' against 'exposure', in general I mean, because the boat is going down, bow-first, or stern-first, it really doesn't matter.   


i) ring-fence Regional banking 'exotic' financial instrument ledgers

ii) extend credit to Regional banks straightaway     

iii) Pull money out of the system at New York, more than lots of it. There's far too many dollars and currently absolutely nowhere for them to go. If the Fed pulls money out the 'aunty' Banks need not get hit in revenue destruction depending on the soundness of their speculations. Yes, there will bea correction, but the Fed needs to build ammunition and there are still plenty of new common-sense dollars waiting on the buy-side. 


Sat, 11/14/2009 - 05:28 | Link to Comment windiepink
windiepink's picture

.....phantom of the monetary opera

act one.........(somewhere in Britian)


NEW YORK, June 15 1988/PRNewswire/ -- S&P plans soon to rate the first commercial paper issue collateralized by UK residential mortgages pending the satisfactory completion of final documentation.

United Mortgage Corp PLC (UMC)'s $350 million (about UK200 million) eurocommercial paper program is expected to be rated 'A-1'.

The funding of long-term mortgage assets by issuing commercial paper will increase the flexibility of UK mortgage lenders in the wholesale .............

act two.......................(somewhere in America)

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 7/9/98 --Standard & Poor's today raised its rating on Apreco Inc.'s asset-backed commercial paper program to 'A-1'-plus from 'A-1'.

Upon the request of the program administrator, Citicorp North America Inc., Standard & Poor's reviewed Apreco for the upgrade. The rating upgrade is based on 100% programwide backstop liquidity support and a partial 10% credit support provided by Citibank N.A. (rated A-1+) and a high quality underwriting standard that merits an A-1+ rating.

act three..........(the globe)

Bank Loan Report | September 17, 2007| Rozens, Aleksandrs) Concerns about credit quality and underwriting standards within the subprime mortgage market filtered through to the commercial paper market this summer where asset-backed commercial paper - 60% of the total commercial paper marketplace - saw a dramatic drop in liquidity. Wall Street dealer firms backed off from making markets and investors such as money market mutual funds, securities lenders, and corporate treasurers stepped to the sidelines to better survey the credit market chaos.

"At its most fundamental level, this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years." William C. Dudley, President and Chief Executive Officer


The Associated Press/New York/By Dan Seymour

Countrywide Financial Corp.'s move to take $11.5 billion in long-term bank loans points to emerging but serious troubles in the commercial paper market, which thousands of companies have relied on to finance their operations.

A key segment of this $2.13 trillion market has suffered an exodus of buyers, as investors decide how much risk they are willing to stomach. Stung by decaying credit quality, investors have soured on many of the mortgage financing markets ...

Thank you Tyler, Marla, and all commentators to Zerohedge, hope my comment on this subject is not to far off base. Its one in the morning and i have read threw mr dudley's ramble and i just could not help myself, this phantom of the monetary opera has been a huge sucess for the production companys. It has bagged billions! and has kept the presses working overtime.

Sat, 11/14/2009 - 06:06 | Link to Comment Jendrzejczyk
Jendrzejczyk's picture

"To mitigate such effects, the backstop liquidity provider (Insert your name here) could presumably charge financial firms for the value of the backstop. But what fee would be appropriate? It is difficult to assess (so let's give you $0) ...."


Sat, 11/14/2009 - 07:57 | Link to Comment Anonymous
Sat, 11/14/2009 - 08:16 | Link to Comment Zippyin Annapolis
Zippyin Annapolis's picture



I am from the New York Fed and I am here to help! It is not true that three of us here, two at the Fed in DC and two flunkies at Treasury actually control the government's economic policy and direction. Boy that would be a challenge if true!

So it is a total lie.


And as to GS, JPM, CS, Wells, UBS, well yeah we talk: they are sort of like our rich in laws and of course we take their calls and suck up whenever we can because after "giving back" we will still need a big job to "catch up"--all I can say is wouldn't you do the same??


Kisses--Bill D.

Sat, 11/14/2009 - 09:04 | Link to Comment duckweed
duckweed's picture

it is simple, this is how a member of the greedhead elite assuage whatever conscience they have left. You pretend that you're thinking about these things as you throw back a few drinks together, then you unmoor your yacht and sail over to cap d'antibes. what can one do for the poor little proles and plebs? we're doing Gods work.


Sat, 11/14/2009 - 09:37 | Link to Comment Anonymous
Sat, 11/14/2009 - 09:38 | Link to Comment boooyaaaah
boooyaaaah's picture
Pimco From Wikipedia, the free encyclopedia Jump to: navigation, search

The Pacific Investment Management Company, LLC (PIMCO), is an investment company and runs the Total Return fund, the world’s largest bond fund. Founded in 1971 in Newport Beach, California, with just US$12 million in assets under management at the time, it is now owned by Allianz, a global insurance company based in Munich, Germany.

Mohamed A. El-Erian is PIMCO's chief executive officer and co-chief investment officer along with co-founder William “Bill” Gross. Gross manages PIMCO's Total Return Fund, which has over $150 billion under management. As of March 31, 2009, PIMCO in total had over US$756 billion in assets under management and more than 1,200 employees.[1]

On May 16, 2007, former Federal Reserve Chairman Alan Greenspan was hired as a special consultant by PIMCO and he will participate in PIMCO’s quarterly economic forums and speak privately with the bond manager about Fed interest rate policy.[2]

Sat, 11/14/2009 - 14:07 | Link to Comment boooyaaaah
boooyaaaah's picture

excuse me

Did we bail out the shadow banking system?

We are good enough to bail out the shadow banking system through the depreciation of our dollar, but we are not good enough to be invited to Jackson Hole


The term "shadow banking system" is attributed to Paul McCulley of PIMCO, who coined it at the 2007 Jackson Hole conference, where he defined it as "the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures."[7][8][9]

The concept of credit growth by unregulated institutions, though not the term "shadow banking system", date at least to Prices and Production, by Friedrich Hayek, 1935, which includes:[10]

There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money.
The characteristic peculiarity of these forms of credit is that they spring up without being subject to any central control, but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided.
Sat, 11/14/2009 - 14:10 | Link to Comment boooyaaaah
boooyaaaah's picture

Excuse me,

Where is it written that we bail out the shadow banking system?

The shadow banking system also conducts an enormous amount of trading activity in the OTC derivatives market, which grew exponentially in the decade prior to the 2008 financial crisis, reaching upwards of $650 trillion dollars in notional contracts traded (see the Bank for International Standards ( bi-annual report). Credit derivatives in particular, collateralised debt obligations (CDOs), tranches of interest rate obligations derived from bundles of mortgage securities, a variety of customized or synthetic innovations on the CDO model, and credit default swaps (CDS's), a form of quasi-insurance against the default risk inherant in the assets underlying the CDO's, saw the most rapid and explosive growth in this shadow market. The market in CDS's, for example, rose from insignificantly small in 2004 to over $60 trillion dollars in a few short years[13]. Because credit default swaps were not regulated as actual insurance contracts, companies selling them were not required to maintain sufficient capital reserves to pay off on potential claims. Demands of settlement on hundreds of billions of dollars of credit default swaps contracts offered by a division of AIG, the largest insurance company in the world, led to their financial collapse. Despite the prevalence of this activity and the volume of contracts involved, it attracted little outside attention before 2007, and much of the activity was off-balance sheet for the entities affiliated banks. The uncertainty this created among counterparties was a contributing factor when credit conditions worsened.

Since then the shadow banking system has been blamed[1] for aggravating the subprime mortgage crisis and helping to transform it into a global credit crunch.[14


Sun, 11/15/2009 - 10:48 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Yup, if you wait around long enough, you'll see just about everything.

Including someone commenting on their comment on their comment. Call it the Comcast triple play. And they start with "Excuse me" as if they're refuting the prior comment. Talk about talking to yourself. Best not to do so in public, don't you think?

It's one thing for people to think you're an idiot, another to open your mouth and remove all doubt.

LOL funny.

Sat, 11/14/2009 - 10:23 | Link to Comment Anonymous
Sat, 11/14/2009 - 14:42 | Link to Comment deadhead
deadhead's picture

Let's hope that the ex GS (or current ones for that matter) employees with integrity that you reference will contact   tips at zerohedge dot com

Thank you in advance if you have information to share with ZH and are willing to do so.

Sat, 11/14/2009 - 12:31 | Link to Comment Pat Shuff
Pat Shuff's picture


  With 20-20 hindsight he says 'I can see clearly now, the rain is gone.'

  In foresight seating bumps on a log around the Open Market Committee

  conference table would have been a vast improvement over carrying in

  fissionable materials in their briefcases in acts of domestic terrorism

  threatening national security at a level Pakistani cavemen could only dream of.


  The lunatic fringe was saying all this years ago, Doug Noland for example.

  Who's lunatic now. Listening to this guy just might the lunatic you're looking for,
  turn out the light, don't try to save...


  He doesn't seem to comprehend that having consolidated all that junk from failed and failing institutions to save the system  is now held at the last banks standing, like his, and are vulnerable to exactly the panic process he describes but on an unfathomable scale, the mistrusting counterparties the size of sovereign nations, the rollovers in T's.


Yes, he can see clearly now the rain is gone. Less clear is what's coming down from the headwaters,

no pushing and shoving now, there's room for everyone on the Ark, leave Dudley Do-Right

babbling to his rubber just ducky bucky.  That's all he _gets_  in hot pursuit, trivializing the basic unit of trust.


Maybe just a failure of imagination, like standing in the Yellowstone caldera and seeing no dormant volcanoes anywhere.  


Sat, 11/14/2009 - 11:19 | Link to Comment heatbarrier
heatbarrier's picture

"At its most fundamental level, this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years."

You can't expect nothing less from the NY Fed. ABS is the future and it has been discredited from lack of regulation. Are we suppose to go back to banking? Read the history of banking crises since the invention of the banking model in the 12th century, endless crises, it is a flawed model, it survives only because it has coerced the State to support it.

Sat, 11/14/2009 - 12:58 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

I personally believe we'll soon begin to see the first signs of honesty from high(er) political and professional entities as they begin to see this mess is going to end badly and they wish to get their truth telling out and into the public before the riots and civil unrest begins.

Even the most ruthless fascists and other evil doers always have an emergency escape backpack prepacked and hidden under the bed or in the closet, to be grabbed on the way out of the door and used while still two steps in front of the ugly angry masses.

Sat, 11/14/2009 - 13:31 | Link to Comment Anonymous
Sat, 11/14/2009 - 18:34 | Link to Comment boooyaaaah
boooyaaaah's picture

Maybe this is the beginning of the fed turning on the shadow bankers

No honor among thieves. If there needs to be blame and punishment, then the Fed has the goods one the shadow bankers

Can they prove fraud, I think so

Sat, 11/14/2009 - 13:17 | Link to Comment SDRII
SDRII's picture

Yet another diatribe about how irrational markets make for irrational prices. Send this to the academy so they can finally discard the emh. Bd leaves out the part about how the securities like the GDP where never what they advertised hence the printing program to make up the difference. When is the claptrap about irrational markets and liquduty going to end. Merely an excuse to print snd backfill naked bank balance sheets. Very simple.

Sat, 11/14/2009 - 13:39 | Link to Comment buzzsaw99
buzzsaw99's picture

F$ck teh fed and Bill Dudley. Lube up Dudley, Dimon wants another hand job.

Sat, 11/14/2009 - 16:08 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture


As always, your command of the English language goes beyond brilliant. Always direct and to the point as opposed to my verbose pontifications. :>))

Hand jobs all around. More than enough for everyone, regardless of whether he (or she?) wants one. Plenty of bankers waiting. The line stretches around the block. Lube up that poor fellow standing over there, he looks like he hasn't had any loving in a long time.

buzzsaw99, why don't you run down to Walgreen's and pick up another case of K-Y for me? Looks like another long night in front of us. Ya know, doing God's work is never a chore but a real pleasure.

Hey, wait a minute, someone tackle that bastard before he makes it to the door.

Sat, 11/14/2009 - 14:47 | Link to Comment JR
JR's picture

Okay, let’s go back to the formation of the Federal Reserve System and the reasons given for its invention--to keep markets orderly, to prevent catastrophic economic occurrences and to support the moves toward robust economics. It was a lie when it was given. It was a lie through the decades that it was in operation.  And it is a lie now.  The system was designed by the financial oligarchs for their personal benefit and nothing else.  

Willam C. Dudley speaking to Princeton’s Center for Economic Policy Studies (CEPS) is like Willie Sutton explaining a failed bank robbery to his operatives and how he’ll do better in the future.

Dudley, chief economist at Goldman Sachs from 1987 to 2007, is president of the New York Federal Reserve Bank. Goldman Sachs controls the New York Federal Reserve Bank. The New York Federal Reserve Bank, i.e., Goldman, controls the Federal Reserve System and what the Fed intends to do with interest rates, the money supply and corporate “assistance.” As Matt Taibbi says, Bernanke and Geithner are its stooges.

Princeton University's Center for Economic Policy Studies is part of the financial smoke screen; a habitat for more of the paid stooges rotating in and out of the Fed, Treasury and Oval Office.  It was founded in 1989 “to support economic policy-related research... and to foster communication among experts in the academic, business, and government communities.” It ”sponsors a number of programs each academic to year to bring such leaders together” to disseminate obfuscatory manifestos to confuse and lull the public sheeple back to sleep.

This financial “crisis” was brought on by such self-appointed “stabilizers” and “regulators”  who have dragged us into the abyss of depression on one hand and inflation on the other—all getting out their tinker tools again to adjust what’s  left of any remaining equilibrium in America’s, and the world’s,  free-market mechanism of supply and demand.

1929 was made inevitable by vast bank credit expansion and fraud. This time around, America’s Wall Street Crime Family has gone global, having garnered the dollar as the world’s reserve currency at Bretton Woods in 1944, now tryng to defuse an underground derivatives time bomb 20 times the size of the physical economy of the U.S. that is shaking the economic timbers of the world.

The whole concept of a ”Council of Economic Advisors” serving special interests and sitting in the Oval Office should be swept away, along with the bankers' privately owned Federal Reserve System.  It is time for a rediscovery, a renaissance, of the classical theory of the business cycle and a massive retreat of investment-banker-controlled governance over the economic sphere.


 Co-Directors of the Center for Economic Policy Studies (CEPS ) are Alan S. Blinder and Harvey S. Rosen:

Alan S. Blinder:(Wiki:pedia: Blinder served on President Bill Clinton’s Council of Economic Advisors (Jan 1993 - June 1994), and as the Vice Chairman of the Board of Governors of the Federal Reserve System from June 1994 to January 1996. Blinder's recent academic work has focused particularly on monetary policy and central banking, as well as the "offshoring" of jobs… He has been a member of the board of the Council on Foreign Relations (since 1997). He was an adviser to Al Gore and John Kerryduring their respective presidential campaigns in 2000 and 2004. Blinder was an early advocate of a "Cash for Clunkers" program. Of the Keynesians, founded by John Maynard Keynes, he is listed as member of the “New Keynesians: Edmund Phelps · George Akerlof · Stanley Fischer · Olivier Blanchard · Alan Blinder · John B. Taylor · Robert J. Gordon · Joseph Stiglitz · Robert Shiller · Mark Gertler · Maurice Obstfeld · Paul Krugman · Kenneth Rogoff · Ben Bernanke · Lawrence Summers · Julio Rotemberg · Michael Woodford · Nobuhiro Kiyotaki· David Romer (husband of Christina Romer—25th chair of the Council of Economic Advisors) · N. Gregory Mankiw · Nouriel Roubini · Andrei Shleifer · Jordi Galí

Harvey S. Rosen:  (Wikipedia: Harvey S. Rosen is the John L. Weinberg Professor of Economics and Business Policy at Princeton Uniiversity.  His research focuses on public finance. Harvard professor and former chairman of the Council of Economic Advisers Greg Mankiw credits Rosen as one of four mentors who taught him how to practice economics, along with Alan Blinder,  Larry Summers, and Stanley Fischer, formerly of Citigroup, Bernanke’s Depression thesis advisor and now head of Israel’s central bank. He was a member of the Council of Economic Advisers from 2003-2005, and served as Chairman in 2005.)

Jon Corzine, former CEO of Goldman Sachs, is on the CEPS Advisory Board.

The current 38 members include Goldman Sachs & Co, Credit Suisse, Barclays Capital, Bloomberg, PNC Wealth Management…

Sun, 11/15/2009 - 14:02 | Link to Comment tom a taxpayer
tom a taxpayer's picture

Well said, JR!

Sat, 11/14/2009 - 16:08 | Link to Comment Anonymous
Mon, 11/16/2009 - 03:21 | Link to Comment MsCreant
MsCreant's picture

I am in a real similar boat. I proposed on another thread to run up just a couple of months of expenses on my card, and use cash to buy more gold. The thing is, it is going up at such a high rate that one could get caught in a price correction. If you are long that is okay. I have silver I bought all over the place pricewise, made most of it up.

The deflation thesis, where everything loses value, may mean your gold does not equal as many dollars. But if people lose faith in the system, deflation/inflation become irrelevant and we are talking currency crisis/govt. belief crisis. Gold and silver are a vote against the system.

Where I have come to is that I don't give a rats ass about a poor investment and a pull back, blah, blah, blah.


I have read so damn much trying to get up to speed and make the right call on all this, for me and my family (maybe some ego involved too, my grandmother pulled her money out of the banks three weeks before the stock market crashed, point of family pride for me to figure this out). Lots of great theories about what is to come. None of them lead to recovery, never mind speedy recovery. We have been doing crashes throughout history, dishonest businessmen trying to work the system to get one over, EVERYTIME. This is how they steer the damn plane we are all on. The history of the economy and what money really is should be taught in school.

The bottom line? No one knows what is going on and has all the right answers. We each stand alone with our decisions. It goes how it goes. When I pull out of "pride" and "getting as much money as I can out of this" logics,  I am left with my one vote, my vote with my dollars.

I am waiting to buy pms in the morning. I may be wrong. I will find a way to have peace with it if I am. Not everything is about maximizing individual gain.

Good luck

Sat, 11/14/2009 - 18:03 | Link to Comment Anonymous
Sat, 11/14/2009 - 18:09 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

On October 25, 2009 ZH stated

By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent.

On December 12, 2008 , this silly blogger stated
'Yes Virignia ... there is no collateral.

Bloomberg : The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site.'

Here we are a year later and we have no idea who got what for what and we have translated insolvent companies reimbursing a small part of our total largesse as proof they are vibrant concerns that can make tons of money in FICC when the money is easy and free.

Now here is a thought experiment for you, the expert opinion of many folks is the reason why the Fed did not want to be transparent at the time is that it would show what the potential losses might be on assets taken as collateral with the PDCF.

Gosh, given the Potemkin recovery, what is the harm of showing us the information now?

When Goldie took Trader Hank aside during one long weekend to inform him that AIG was systemic, it was clear that a tough hard decision had to be made to liquidate in order to forgive past debts ... unfortunately it turned out to be a bankster jubilee.

Yes Virignia, in order to stick their finger in, for certain transactions, there was no collateral.

Audit that!

Sat, 11/14/2009 - 18:09 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

On October 25, 2009 ZH stated

By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent.

On December 12, 2008 , this silly blogger stated
'Yes Virignia ... there is no collateral.

Bloomberg : The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site.'

Here we are a year later and we have no idea who got what for what and we have translated insolvent companies reimbursing a small part of our total largesse as proof they are vibrant concerns that can make tons of money in FICC when the money is easy and free.

Now here is a thought experiment for you, the expert opinion of many folks is the reason why the Fed did not want to be transparent at the time is that it would show what the potential losses might be on assets taken as collateral with the PDCF.

Gosh, given the Potemkin recovery, what is the harm of showing us the information now?

When Goldie took Trader Hank aside during one long weekend to inform him that AIG was systemic, it was clear that a tough hard decision had to be made to liquidate in order to forgive past debts ... unfortunately it turned out to be a bankster jubilee.

Yes Virignia, in order to stick their finger in, for certain transactions, there was no collateral.

Audit that!

Sat, 11/14/2009 - 18:09 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

On October 25, 2009 ZH stated

By doing so, the Federal Reserve effectively gave a Carte Blanche to primary dealers to purchase any and all equities they so desired, with such purchases immediately being funded by the US taxpayer, via the PDCF. In essence, this was equivalent to the Fed purchasing equities by itself through a Primary Dealer agent.

On December 12, 2008 , this silly blogger stated
'Yes Virignia ... there is no collateral.

Bloomberg : The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site.'

Here we are a year later and we have no idea who got what for what and we have translated insolvent companies reimbursing a small part of our total largesse as proof they are vibrant concerns that can make tons of money in FICC when the money is easy and free.

Now here is a thought experiment for you, the expert opinion of many folks is the reason why the Fed did not want to be transparent at the time is that it would show what the potential losses might be on assets taken as collateral with the PDCF.

Gosh, given the Potemkin recovery, what is the harm of showing us the information now?

When Goldie took Trader Hank aside during one long weekend to inform him that AIG was systemic, it was clear that a tough hard decision had to be made to liquidate in order to forgive past debts ... unfortunately it turned out to be a bankster jubilee.

Yes Virignia, in order to stick their finger in, for certain transactions, there was no collateral.

Audit that!

Sat, 11/14/2009 - 19:25 | Link to Comment boooyaaaah
boooyaaaah's picture

If you bet a hand in poker, take a risk, and loose you become illiquid

The fact that our shadow bankers became illiquid is no reason for the house (citizens) to keep supplying them chips.

For the Federal reserve to claim that it is in America's interest to supply the shadow banking system with chips --- so they can become liquid again --- Is fraudulent --Just because they show a bell curve and a shift to the right only means they are practicing finacial quackery and fraud

Wiki; In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and is also a civil law violation. Many hoaxes are fraudulent, although those not made for personal gain are not technically frauds. Defrauding people of money is presumably the most common type of fraud, but there have also been many fraudulent "discoveries" in art, archaeology, and


Quackery is a derogatory term used to describe unproven or fraudulent medical practices. Random House Dictionary describes a "quack" as a "fraudulent or ignorant pretender to medical skill" or "a person who pretends, professionally or publicly, to have skill, knowledge, or qualifications he or she does not possess; a charlatan."[1]

The word "quack" derives from the archaic word "quacksalver," of Dutch origin (spelled kwakzalver in contemporary Dutch), meaning "boaster who applies a salve."[2] In the Middle Ages the word quack meant "shouting". The quacksalvers sold their wares on the market shouting in a loud voice.[3]

"Health fraud" is often used as a synonym for quackery, but this use can be problematic, since quackery can exist without fraud, a word which implies deliberate deception.[4]


Sat, 11/14/2009 - 21:09 | Link to Comment Anonymous
Sat, 11/14/2009 - 21:26 | Link to Comment Anonymous
Sat, 11/14/2009 - 21:42 | Link to Comment Hephasteus
Hephasteus's picture

God's plan.

Perfecting fraud.


Appealing to god's higher self doesn't work. He has to appeal to yours which isn't AT ALL like his, it's not nearly as good or as noble. It's a really funny paradox. How to maintain authority and control over your betters.

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