Banks hoarding cash in preparation for something huge?

[seemslikeadream]

http://www.newmogul.com/item?id=803




Can someone explain what this means?
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3 points by gaika 2 hours ago | link
It means banks are hoarding cash in preparation for something huge.
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2 points by smu2 1 hour ago | link
They really should invest that money somewhere, inflation is eating it up. Possibly in these seized credit markets?
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2 points by gaika 1 hour ago | link
They do not have anything good to invest into. They must be preparing for huge losses coming up this year.
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2 points by smu2 1 hour ago | link
Sorry, I was trolling. We're screwed. Max Keiser's got me feeing the blues.
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2 points by gaika 43 minutes ago | link
http://www.federalreserve.gov/releases/h41/Current/ original source with breakdown. It started 3 weeks ago!
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4 points by byrneseyeview 3 hours ago | link
My jaw literally dropped.
By the way, nuclearphynance.com is a great site for anyone who likes the quantier side of things. Their culture takes a little getting used to, but there are some incredibly smart people on the site.

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2 points by nickb 2 hours ago | link
Wow! It's both stunning and terrifying at the same time. Great find gaika!
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[nadinbrzezinski]

1. They ARE hoarding cash... they are not lending to each other

what you have in front of you... is the lending freeze

That is what that means

[JackRiddler]

2. Yes, they're hoarding it...

In preparation for the moment when they admit it's not enough.

[Subdivisions]

3. LIBOR Short End Inverts 10/03

http://www.tickerforum.org/cgi-ticker/akcs-www?post=65587

Leraconteur wrote:

10/03

USD12M 4.022%
USD 6M 4.052%
USD 3M 4.210%

10/06 & 10/05

USD 12M LIBOR 4.057% 0.9% 4.022% 3.4
USD 6M LIBOR 4.131% 1.9% 4.052% 4.5%
USD 3M LIBOR 4.330% -0.1% 4.334%

Spreads widening.


Bluebird asks:

What does it mean? more fear? credit is frozen?


Leraconteur explains:

Bluebird:

What it means is that people distrust getting their money back in the future, so they want it sooner. Thus the 1-mo pays better than the 3-mo, which pays better than the 12-mo.

This also squicks the commercial paper market. Large businesses take out loans long term, finance A/R short term to customers, and pocket the difference. When that flips on the rate curve, they cannot do this. This is how the auto financing sector has ground to a halt in the past 2 weeks.

This is also a bad (Milky Way Galaxy explodes, 'bad') sign for the economy as a whole. If it costs more money to lend short term, then the yield curve moves from y=ln(x), then flattens to a line, or finally begins to look like y=1/(ln{x}). This can end with the yield curve becoming y=1/x. This is, literally, the death of a fiat currency, central bank, monetary system.

Credit stops. Velocity of money GDP/MZM goes to zero. New GDP per dollar of new credit goes to zero. People hoard cash, and keep it for as little time as possible, quickly exchanging it for commodities or harder currency.

Our system is based on money held longer pays more to offset inflation into the future. That changes, and the engine stops. The entire money system just stops functioning. All of it.

Have A Nice Day...


Leraconteur goes on to say:

Taken by itself, it doesn't portend TEOTWAWKI. So it can continue to invert, until one day it all crashes. When? Dunno. Uncharted territory. Currently LIBOR TED is lowering. By 'lowering', I mean it is at 369, not 395.

Taken with everything else, and the knowledge that the credit markets and ABCP markets have flat out stopped, and it is muy malo'. It fully inverted 10/03, partially inverted late last week. This is Day 3 of the Inversion.

Let's just say that if it stays inverted, you will want more lead, lentils, brass and steel.

If this continues for more than 1 or 2 days, financial entities will just cease to exist. Auto Financing is the leading indicator here. They began to have problems 2 weeks ago. Banks, IB's (oh, wait...), Insurance Companies, any firm that uses short-term ABCP or financing to smooth out the cashflow bumps - all die within a week or two.

They literally cannot pay for their bills, or make payroll, which in a service economy {cough} is the largest expense. So a FIRE economy is unusually susceptible to such a disruption, as they have nothing tangible to collaterise. Their lenders cannot lend, because they do so by borrowing long and lending short to Mrs. Businesswoman trying to make payroll. They will go broke doing so, so they cannot finance her payroll.

Bummer.

Receivables are worthless if they cannot be monetised through the credit markets, so that won't help a service business.

Yep, it is bad.

---------------------------------------------------------------------------

An interesting thread from people who live and breath this stuff...

[JackRiddler]

4. Very nice site you recommend...

They have a predictions thread from December 2007. A poster called Synthetik had the following:

DOW, 9840
SP500, 982
Nasdaq, 1745
^HSI, 16,200
Oil, $120
Gold, $1190
Silver, $19
Fed Funds Target Rate, 2.75%
Nationwide Median Home Price Drop since 2005, (-25%, inflation adj.)
Nationwide - Gallon of Regular Gas, $4.19
Nationwide - Unemployment Rate, 7%
New President Will Be? Obama
Stagflation!

The others were pollyanna. Synthetik's looking prescient, perhaps even on the optimistic side. He/she should have seen the oil price would drop with reduced demand (at least until November 5th!).

[JVS]

5. HUGH!

[Selatius]

6. It means they're hoarding cash in preparation for something yet to come.

The banks are in this bunker mentality mode at this point. If they stop lending, a lot of cash stops moving through the economy.

[tavalon]

8. So, should we be stuffing the mattress?

[Virginia Dare]

10. Won't do any good when the dollar finally implodes...n/t

[tavalon]

13. But my choosing to stock 50 lbs of dried beans and the same amount of rice is

probably a fair idea.

[Ghost Dog]

7. Very graphic, thanks.

Tue Oct 7, 2008 3:45am EDT LONDON, Oct 7 (Reuters) - Interbank money markets remained gummed up on Tuesday, with overnight lending rates indicated close to official policy targets but three-month borrowing still cripplingly expensive as European policymakers struggled to arrest the deepening financial crisis.

European Union finance ministers gathered in Luxembourg on Tuesday to discuss ways of protecting savers' deposits and counter the market turmoil that saw the region's stock markets suffer record losses on Monday.

Three-month dollar and euro funding on the interbank market, which now extends over the illiquid year-end holiday period, remained substantially higher anticipated official interest rates, a key measure of financial market stress.

But overnight lending rates were reasonably close to current policy rates, thanks to massive injections of short-term liquidity into the banking system from central banks. The European Central Bank and Bank of England were active in the money markets again early on Tuesday.

At 0740 GMT the interbank cost of borrowing dollars for three months was indicated at 5.29 percent, the upper end of a 3.7 and 5.5 percent range <USD3MD=> so far in London.

Monday's fixing of three-month London interbank offered rates by the British Bankers Association was 4.28875 percent <USD3MFSR=>, and ICAP's three-month dollar New York Funding Rate was 4.6350 percent <USNYFR3M=>.

Rates for three-month euros <EUR3MD=> were last around 5.3 percent. Earlier on Tuesday, they were indicated on Reuters screens as high as 5.38 percent, the highest since the launch of the euro almost a decade ago.

/... http://www.reuters.com/article/marketsNews/idINL771776020081007?rpc=44

This cannot be allowed to persist.

[ProgressiveEconomist]

9. On Friday, Credit Default Swap writers must make up to $400B in 'insurance' payments

they owe for Lehman's credit-based securities. IMO, this obligation, plus fear of runs on banks by frightened depositors, may account for most of the hoarding of bank cash. If I'm right, the credit crisis may ease a bit next week--for how long, nobody knows.

From http://ftalphaville.ft.com/blog/2008/10/06/16686/the-450-billion-payout :

"The $450 billion payout, by Felix Salmon 10/06/08

Panmure Gordon¡s Sandy Chen has this to say in a note out today: FT Alphaville » Blog Archive » The $450 billion payout

We think one of the key drivers has been the tremendous potential demand for cash from counterparties, related to the CDS (credit default swap) payouts on the recent major credit events. To recap, the FNM/FRE CDS settlement auction happens today (6 October), the LEH auction on 10 October (Friday), and WaMu on 23 October. In these settlement auctions, the reference price for the underlying bonds will be set, thus determining the payout levels.

We think that the CDS payouts related to these credit events will put tremendous strains on the financial counterparties that had written those CDS. We broadly estimate there could be US$50bn of payouts related to FNM/FRE CDS, and US$400bn of payouts related to LEH CDS. We think it highly likely that many counterparties, particularly hedge funds, will not be able to raise the cash to meet their ends of these bargains.

What will this mean? More failures amongst hedge funds, insurance companies and banks, and - given that CDS are largely OTC, meaning that there is limited visibility beyond the immediate counterparty - a lack of trust that translates into money markets remaining effectively shut. And whichever measure of financial stress/lack of liquidity is used - LIBOR-BaseRate gap, TED spread etc - it will remain at elevated levels as long as markets are worried about possible failures of counterparties (or counterparties¡ counterparties).

How cheery. But Chen is making a very good point. Counterparties may have protected themselves from one or two bankruptcies in the system but they would likely not have anticipated failure on the scale seen recently. For instance, if you bought a CDS to protect you on AIG but you bought it from Lehman Brothers, you're not protected. If you were smart you might have bought protection on Lehman from someone else, but you can't keep going forever. ..."

BTW, I found this story at the "Buzzflash" of financial economics blogs, http://abnormalreturns.com . I go there every day.

[Junkdrawer]

11. They don't trust each other. They know they're lying...they suspect others lie more....

I keep saying:

Balance Sheet Transparency, Limits on Leverage, Regulated Derivative Markets

..but I guess that doesn't make for a sexy discussion.

[Roland99]

12. They must have some awfully big mattresses to stuff that cash into!

[hvn_nbr_2]

14. What is "52 Momentum" and what are the units on the vertical axes?

These graphs are pretty meaningless to me. The word "cash" doesn't appear anywhere, nor any eco-speak synonyms for cash, so where does the "hoarding cash" come from. Assets is not the same as cash. "Federal reserve banks" and "banks" are not the same thing. Where are "banks" in this graph? For me, these graphs have no more meaning than kindergarten doodles, except that "something" happened recently. Is that "something" the $700B?

[OakCliffDem]

15. Kick