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What Does The End Of Fed's Temporary Liquidity Facilities Mean?

Tyler Durden's picture





 

After the collapse of Lehman, the Fed stepped in to bail out the financial system by providing blanket guarantees on virtually all asset classes. The chaos was palpable: we now know the "thinking" behind just the $700 billion TARP component of the bailout, thanks to PIMCO's latest brain trust addition: Neel Kashkari, whose rocket science math he himself encapsulated as follows: "We have $11 trillion residential mortgages, $3 trillion commercial
mortgages. Total $14 trillion. Five percent of that is $700 billion. A
nice round number
." The same kind of back of the envelope math dominated Bernanke's decision to provide an explicit dollar for dollar guarantee for the entire ~$8 trillion in loans in the US financial system, and then some. By some estimates the Fed guaranteed in some form or another, up to $26 trillion. And while a lot was merely backstop funding, banks were happy to take advantage of actual funding to a material degree, approximately $1.6 trillion. The bulk of these funds came from by various "temporary" liquidity programs that the Fed adopted. It is precisely the bulk of these facilities that the Fed is now ending.

And just like we saw with Citigroup last night, the Fed is ending these facilities woefully early, merely to "demonstrate" how healthy the system is. Well, it isn't, and banks will come back running as soon as the CRE roll approaches (good luck getting securitization up to $250 billion a year by 2012). So why the charade? And why the hypocrisy, when the Fed has effectively replaced the liquidity programs' direct intervention by such other programs as Quantitative Easing whose UST and MBS/Agency purchases now total over $1.2 trillion and which at their peak on March 31, will have the same notional outstanding as the liquidity facilities, when these peaked in January 2009.

The chart below demonstrates the change in time of the two key parts of the Fed's current assets: on one hand the various liquidity facilities, the bulk of which will be eliminated by February 1, and the QE "Purchase Progoram" on the other hand.

Another way of visualizing the peak and current borrowings on the plethora of bailout facilities which were initiatied with the gifting of Bear Stearns to JPM is provided in the chart below:

What has been the outcome of this bailout orgy: simple, and you can see it in widening sovereign CDS spreads every day. Essentially the Fed has transferred private market risk for public sector risk. The associated "benefits" with this transaction we all know: a collapsing dollar, surging gold, balooning deficits which will be funded only so long as America agrees to be China's vassal state, increasingly disadvantageous trading terms for America with its key trading partners, and a disappearing middle class. The charts below encapsulate the four main consequences of the Fed's decision to have US taxpayers be on the hook for the entire US financial system.

What will be the cost? Nobody knows yet, however tens of trillions of budget shortfalls over the next decade is a sovereign crisis waiting to happen. As America has no hope of every funding these shortfalls organically, it will depend on financing more and more, and in a vicious circle, even more debt will need to be raised merely to fund the ever increasing interest expense, and yes, zero interest rates can only last so long.

 


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Thu, 12/17/2009 - 12:05 | Link to Comment jules from aus
jules from aus's picture

Has the US become it's own Pay Day Lender?

good luck

Thu, 12/17/2009 - 12:17 | Link to Comment truont
truont's picture

US House to vote on short-term debt limit hike-Just to avoid default!

US House to vote on short-term debt limit hike
Tue Dec 15, 2009 11:18am EST
http://www.reuters.com/article/idUSW...pe=marketsNews

WASHINGTON, Dec 15 (Reuters) - The U.S. House of Representatives will vote on a short-term boost to the debt limit this week to avoid a government default, House Democratic leader Steny Hoyer said on Tuesday.

Leaders are considering a hike of roughly $200 billion to $300 billion.
"Essentially that will get us an additional two months of fiscal ability," Hoyer told his weekly news conference.
(Reporting by Andy Sullivan, Editing by Chizu Nomiyam)

Thu, 12/17/2009 - 12:27 | Link to Comment TumblingDice
TumblingDice's picture

That will give them another couple of months to show their outrage...before avoiding default again. What a joke.

Thu, 12/17/2009 - 13:55 | Link to Comment Bear
Bear's picture

What's the CNBC spin on this ... there can be none, so just don't mention it.

Thu, 12/17/2009 - 12:07 | Link to Comment DaveyJones
DaveyJones's picture

ironic that a liquid orgy is nothing more than a dry fck 

Thu, 12/17/2009 - 12:17 | Link to Comment gmak
gmak's picture

That's not ironic. It's clever. It's irony as much as Alanis Morissette's song.

Thu, 12/17/2009 - 12:11 | Link to Comment the bohemian
the bohemian's picture

I wonder if the slow steady grind down is upon us

Thu, 12/17/2009 - 12:16 | Link to Comment Ripped Chunk
Ripped Chunk's picture

I think yes is a correct answer.

Thu, 12/17/2009 - 12:16 | Link to Comment TumblingDice
TumblingDice's picture

A giant compromise of sovereignty and other advatages that the US enjoys seems to be the prescription for this mess. We accept paying higher nominal debt and service costs while the rest of the world accepts the lower interest rates with shorter maturities. (this is a big "if") The result is more favorable trading terms for other countries. The test will be whether these countries can stomach these more favorable trading terms: are their economies liquid enough to accept the extra domestic consumption that must occur to replace exports? If it keeps going at this rate, they might just readjust. But probably not fast enough to reverse the trend of labour market deflation. I get the feeling that this has been thought out already, but the major factor that was underestimated was the contagion risk of the global job market. Will people quit the blatantly manipulated race to the bottom that we see thanks to globalization or will they simply accept lower paying jobs?

Either way, you don't hedge sovereign default with a goddamn CDS, you do it with gold, guns and ammo. Amateurs.

Thu, 12/17/2009 - 19:40 | Link to Comment MinnesotaNice
MinnesotaNice's picture

The UST's issued at ridiculously low interest rates and short maturities... are simply 'teaser rates'... and we are the ones doing the 'teasing' right now... but when it is time to roll these over... watch out for that phenomenol and unsustainable 'rate increase' buyers will demand once they find better ways to invest their money.  United States Treasuries are simply Option ARM's on a very large scale.  And I think we all know how well Option ARM's have faired in the grand deleveraging... so I don't imagine the United States as a whole will do any better.

Fri, 12/18/2009 - 01:42 | Link to Comment TumblingDice
TumblingDice's picture

Well, these option arm's can always print more money to create more option arm's. As long as well can keep creating option arms we should be golden. They're the lifeblood of our economy.

Thu, 12/17/2009 - 12:18 | Link to Comment Anonymous
Thu, 12/17/2009 - 12:29 | Link to Comment Assetman
Assetman's picture

In short, the Fed needed about $2 trillion in a hurry to save the system, and most of it came in the form of emergency loans.  Once the MBS purchase program launched, the Fed's buying of these crappy assets allowed the emergency loans to be paid back.

So the Fed has bought a year's worth of time and a $2 trillion subsidy to the banking system.  Does it end with the expiration of emergency lending programs and MBS purchases?

It will-- but just remember this.  Banks are still weak and will continue to report losses.  There's nothing that's stopping the Fed from re-initiating emergency loan programs and QE 2.0 to pay for the loans. 

As we get into 2010, the focus from our corrupt leaders is financing the enormous public debt.  The Euro crises was expected (if not a little late), and will help Treasury yields from exploding.  Banks will be forced to absorb losses, adding to more USD strength.  If the markets get in panic mode, the Fed will be back to emergency leading and starting the reflation game all over again.

It will be interesting to see how aggressive these Treasury auctions will be at the long end.  I think they will really ramp up between January and March.

Thu, 12/17/2009 - 16:26 | Link to Comment Mark Beck
Mark Beck's picture

Assetman, as per your statement;

"It will-- but just remember this.  Banks are still weak and will continue to report losses.  There's nothing that's stopping the Fed from re-initiating emergency loan programs and QE 2.0 to pay for the loans. "

A few points.

The FED can make loans, based on collateral, to member banks at any time. This is business as usually.

Using TARP to once again buy equity in these banks is being watched closely, and would not be politically acceptable unless the banking sector is once again exposed to systemic risk. IMHO, systemic risk cannot be sold to congress because of the FEDs backstopping and shoring up companies like Goldman and JPM. In the eyes of congress, these companies are not only strong, they can afford record bonuses. So in this respect the bankers should have showed restraint in how healthy they appear in the public eye. Because, for Treasury to once again request funds blaming systemic risk, will no longer be believed. You will not see TARP 2. TARP 1 will expire and Banks will be allowed to fail.

The FED also has a problem with QE 2. Which I am assuming you mean a similar program to the $300B long term treasury buy program. The problem is the FED is being watched closely by foreign banks as to the health of the dollar. To announce another T Buy would kill confidence in the dollar and severely impact T auctions. Practically, the FED is now sole captain of the Titanic. By this I mean they have been anointed with all of the real power in america, including international politics. Ben may not like it, but he is now ambassador to the world. Hilary can stay home and bake cookies, she is redundant.

----------

If you assume no illegal activities on the part of the FED, then you could map out the how the T auctions would have to proceed in 2010. If you have Treasuries data on debt churn, estimated inflows and outflows, and new T issue schedule, you could breakdown every auction week for 2010. Not only this you could do a risk analysis on sensitivity to yields and have a progressive yield and issue strategy.

Tyler has been tracking the T auctions very well. But, OK lets look one step beyond. What happens when the yields start to creep up and there are progressively less and less buyers? What Tyler should do is put together a scenario of T auction failure. What is the mechanism and progression of the crisis, and what actions does the Administration, Treasury and FED do?

Mark Beck

Thu, 12/17/2009 - 12:45 | Link to Comment Hero Protagonist
Hero Protagonist's picture

What am I missing? Everyone was scared and started pulling money out of money markets until the fed came in and backstopped them. With that backstop going away, what's to stop the same thing from happening again and everyone moving back into Treasuries at the conclusion of the backstop?

Thu, 12/17/2009 - 13:07 | Link to Comment I need more asshats
I need more asshats's picture

Nothing except, behold the power of Positive Thinking and anticipated rewards.

Confidence Team - 1
Tyler Team - 0

Thu, 12/17/2009 - 13:20 | Link to Comment Hero Protagonist
Hero Protagonist's picture

It's twighlight zone, parallel universe time.

My biggest regret is realizing that the public equity market has probably always been BS, that is, "A" has never equalled "A".  As an Angel Investor as well, I don't think I can stomach investments in private entities whose goals are based upon impressing the whims of perception instead of a simple profit.

Thu, 12/17/2009 - 13:15 | Link to Comment Assetman
Assetman's picture

You're missing all the equity (and faux equity) that was raised by financial firms to provide a cushion from future writedowns.

The only thing keeping the Fed out from its backstopping role is another (liquidity) crisis. We all know the system is insolvent. But it can stay liquid until the next major solvency event hits the liquidity shitter.

Keep in mind with sovereign debt crises unwinding elsewhere, we are seeing a movement back into Treasuries. If a backstop is needed, the Treasury market is likely to be flooded again. But isn't that just what the Treasury needs... you know, desperate buyers? I think they prefer to see crises unwind elsewhere than here in the US, though.

Thu, 12/17/2009 - 13:24 | Link to Comment Hero Protagonist
Hero Protagonist's picture

I guess when you have mutually assured destruction between all of the interested parties -- Central Banks, Governments, Wallstreet, etc. that no one will point out the debt gorilla in the room, so this can go on forever.  But if that's true, why did we have a "run" in 2008 in the first place?

Thu, 12/17/2009 - 13:32 | Link to Comment Assetman
Assetman's picture

Becuase central banks and governments were conned into believing that Wall street and the banking system had it all covered.

And the Piggy Bankers knew they would be backstopped in the face of financial catastrophe. And yeah, it could well happen all over again... though banks will be forced to go through a partial liquidation process.

Thu, 12/17/2009 - 20:14 | Link to Comment Anonymous
Thu, 12/17/2009 - 14:52 | Link to Comment Anonymous
Thu, 12/17/2009 - 13:13 | Link to Comment bugs_
bugs_'s picture

"plethora of bailout facilities"

 

Thu, 12/17/2009 - 13:26 | Link to Comment HEHEHE
HEHEHE's picture

You create a problem that only you have the magical powers to solve so that the sheeple will believe that you are needed.  Am I missing anything?

Thu, 12/17/2009 - 13:45 | Link to Comment Anonymous
Thu, 12/17/2009 - 14:57 | Link to Comment Anonymous
Thu, 12/17/2009 - 19:14 | Link to Comment Anonymous
Thu, 12/17/2009 - 22:10 | Link to Comment Squid-puppets a...
Squid-puppets a-go-go's picture

+ 1.

Anyone who takes issue with the welfare state is an idiot.

Firstly , as Mob said, there's plenty of wealth to go around . so much so that welfare takes a miniscule chunk out of a properly, equitably taxed and regulated nation

secondly, a basic safety net adds to productivity

US health system, case in point. how much productivity is lost because people are unable to afford basic medecins that restore their health and working fitness. how many healthy people work less hours than they could because they are the carers of others who would be health but for the health industry rort

how much additional wealth and productivity would be lost to crime if the poor had no safety net?

And if you think the poor are poor by their own merits, you're only one stock market crash and/or one serious illness away from learning that not everyone is a victim of their own making, and there is always, in this crazy life, an element of fortune to prosperity, that humbles you into, at the very least, not giving a fuck when welfare is made available

 

Thu, 12/17/2009 - 14:15 | Link to Comment Ripped Chunk
Ripped Chunk's picture

"Will people quit the blatantly manipulated race to the bottom that we see thanks to globalization or will they simply accept lower paying jobs?"

Or will they revolt? 

This too has been thought out already. The thought process is a culmination of a 30 year run up in middle class lifestyle in the US. By design and execution, the US citizenry has been processed by our corporations and government into a fat whining useless pile of shit that is now poised to be subjugated to a race of serfs occupying a 2nd rate nation.

They no longer have the will or stomach to revolt. This too has been factored into the long range plan.

 

Thu, 12/17/2009 - 14:20 | Link to Comment Anonymous
Thu, 12/17/2009 - 16:24 | Link to Comment Ripped Chunk
Ripped Chunk's picture

I plan to go down bloody.

If they jail me, I will escape and continue to fight. So they better kill me.

13:24 MST

It is a while later now and Anonymous poster 167712 has not responded so I assume that he is, as I suspected a crank piss ant with his hand on his cock.

Thu, 12/17/2009 - 18:06 | Link to Comment Anonymous
Thu, 12/17/2009 - 14:16 | Link to Comment Anonymous
Thu, 12/17/2009 - 14:18 | Link to Comment trav777
trav777's picture

they are doing what I said they were a few years ago when I used to post on TF, loading onto the public all the debts of the connected class.

This is the Argentina Model. 

The Fed lent to the banks because they didn't understand what was happening.  So now they are just taking the monies redeposited that were lent and buying the assets outright.  The Treasury eats the losses of the Fed.  Look at the monetization...4 times as much MBS held by banks than Treasuries.

The Fed's ENTIRE goal in this was to save THEIR BANKING SYSTEM.

They have no mandate to save US or anything of the kind.  OUR representatives VOTED to ALLOW them to load "We the People" up with the debts of the banks and the entire financial system.  This is precisely what the Menems and De La Rua's did with Argentina.  And, they took billions into their own pockets to do it.

Basically, the Congress was PAID, BRIBED to pass laws to adopt the debts of the richest.  Our government feeds the richest.

We need Andrew Jackson.  Throw the entire banking clan OUT, take the Hollywood establishment with them.  It's ok, most have another country they have citizenship in, not like they have nowhere to go.

Thu, 12/17/2009 - 14:38 | Link to Comment Assetman
Assetman's picture

Andrew Jackson was batshit crazy, dude.

Thu, 12/17/2009 - 14:42 | Link to Comment Ripped Chunk
Ripped Chunk's picture

And as racist as they come (in thy mercy oh Lord)

Thu, 12/17/2009 - 14:34 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

American Zeitgeist

'Your motto is God,guns,guts,and American.'-CNN interviewer 

'Actually its' God, guns,guts,and American pick-up trucks.' -Missouri car dealer that is giving away free AK-47s with purchase of a truck

'Some might wonder why God is included in a motto that also includes guns.'-CNN interviewer

'You don't have a problem with God do you?'-Missouri car dealer

Thu, 12/17/2009 - 14:34 | Link to Comment Dburn
Dburn's picture

What are the chances the banks will come back for more? 100%
Based on 3.9 foreclosures in 2009 vs 3.2 Million 2008.

Personal Bankruptcies up 32% Y over Y positioning 2010 to outdo 2005 when a record 2 Million bankruptcies were recorded prior to the implementation of The Govt backed taxpayer Indentured servitude program to banks. Which they seem to be backing up with Taxpayer indentured servitude to Insurance companies this year which will undoubtedly spike the bankruptcies as the Insurers cried , stomped their feet and threw temper tantrum over the special treatments given the banks. This is a time for insurers to take it to the banks with the taxpayers bent over right in the middle.
Govt shafts are impossible to take regardless of the KY allocation.

The article here stating there was a Shadow inventory of 7 Million in homes. Even if the author is off by significant amount. Anything over 2 Million is enough. As a Anecdote, I drove to Costco yesterday, I saw apartment complexes all over the place posting promotional signs for leases. A year ago they were all at capacity. Which means the new housing starts which consisted of multi-family dwellings are either acts of brilliant foresight when the market collapses again or destined to fail if the banks keep letting people live rent free.

Home buyers demand a 50% rebate in upfront cash on a discounted appraisal of 35%. The govt is in a quandary : Does helping the middle class help the banks? If they can't answer affirmatively which Timmy will ultimately be against. We will see a massive crash. That has to affect their capital by throwing a smaller black hole into that just sucks money. Timmy of course is shocked but the CDS buyers thank him profusely with "heckofajob Timmy"

The second leg down is not going to be better than the first leg down unless a few lucky ones are chosen for 100% face value on the numerous CDS bets placed on failure.

Uncle Ben;s pawn shop will be open for business with 23 new acronyms for lending programs.

Note: Those of you not familiar with Real Pawnshops , "Uncle" is the way many pawn shops start the name of the shop. I'm not sure if its because there is a real Uncle or it's nice way of saying that the broken and bleeding consumer has a place to go to cry uncle" I'm sure they were pleased when the banks cut their lines of credit down. I once asked a successful Pawnshop owner what his gross margins were; he said "It would just make you sick if I told you".

Thu, 12/17/2009 - 16:03 | Link to Comment Cursive
Cursive's picture

Maybe the FR is withdrawing the liquidity to force "hot" money back into Treasuries to fund the deficit.

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