business community. The loans are declining as the banks have ony one real
the Federal government:
Here is his commentary in full:
What Are Banks Doing with Their Depositors' Money?
February 26, 2010 – There have been numerous reports about the sharp decline
in bank lending since the beginning of the financial crisis. The Wall
Street Journal, for example, on Wednesday reported in an article entitled
“Lending Falls at Epic Pace
also provided the following chart to clearly make its point.
So if the banks are not making loans, what are they doing with depositor
Well, they are still lending, but not to businesses and consumers. They are
lending to the federal government.
Banks don’t lend directly to the federal government of course, but buying US
government paper accomplishes the same thing in the end. Depositor money is
sent to the federal government, ether directly when banks purchase newly
issued government paper or indirectly when they purchase US government paper
from others, who in turn have used their dollars to purchase this paper.
If we mark the beginning of the financial crisis with the collapse of Bear
Stearns in March 2008, data from the Federal Reserve show that since then
bank lending has declined by $220 billion
period, banks increased the amount of US government paper they hold
The change is even more dramatic when viewed from the peak of bank lending
that occurred in the aftermath of the Lehman Brothers collapse. Companies
cut off from the commercial paper market in the financial turmoil then
prevailing turned to the banks for liquidity. By drawing down their credit
lines, they caused bank loans to surge. Bank loans have now declined $646
billion from their October 2008 peak, as illustrated in the following chart.
This significant shift in bank assets has implications for the economy and
the US dollar.
Instead of depositor money being used to stimulate economic activity in the
private sector by lending to businesses and consumers, the banks are helping
to fund the growing federal deficits. This re-allocation of resources has a
negative long-term impact on the economy. Depositor money is not being used
for productive purposes like building manufacturing plants and making other
investments that will create jobs and grow the economy. It is being spent
by the government, which consumes in the present and does not invest for the
This shift in bank assets also has negative implications for the dollar. As
the realization grows that the financial condition of the federal government
is not much different from Greece and the dozens of other over-indebted
countries, the value of US government paper declines as a consequence of the
US government’s deteriorating creditworthiness
that the quality of bank assets perforce determines the quality
the dollar, deterioration, i.e., debasement, of the dollar is inevitable as
banks funnel depositor money into US government paper instead of making
Lastly, the reduction in bank loans does not mean the money supply is
shrinking. Rather, it is simply changing. More and more dollars (i.e., the
liabilities on bank balance sheets) are being backed (i.e., the assets on
bank balance sheets) by US government debt instead of loans to the private
Gillian Tett has provided more input on the Greek bond problems.She has
correctly commented that there
is a huge amount of bonds that are sitting on the ECB shelves. When the ECB
announced its rescue pkg along with the usa,
it engaged in swaps. The ECB is gorged with this debt. The data is too
sensitive for the ECB to release the amount of bonds held.
Suffice it to day, the yield rise in Greek bonds and the warning that Moodys
and Standard and Poors have given to this ancient country speaks
mountains on his huge problems.
Here is this important paper:
ECB keeps lid on Greek bond data
By Gillian Tett
Published: February 25 2010 20:33 | Last updated: February 25 2010 20:33
Somewhere in the bowels of the mighty European Central Bank, there is a
number that many investors would give a lot of euros to see.
It refers to the volume of Greek government bonds that are now sitting in
the ECB’s coffers, after being lodged there by European banks through
central bank repo operations.
Sadly, the ECB considers this number far too “sensitive” to release, even
after a delay. Nevertheless, as fears about sovereign risk rise, those
hidden data are assuming ever-greater importance.
On Thursday, yields on Greek bonds rose sharply higher, after Moody’s warned
that it – like Standard & Poor’s – might soon downgrade Greek debt. The
yield on Greek two-year notes, for example, rose 74 basis points on Thursday
to 6.4 per cent.
But while that price swing was striking, what was equally notable was that
it occurred in secondary markets that have been surprisingly thin in recent
days. For notwithstanding all the recent attention on sovereign debt,
traders say the liquidity of secondary Greek bond markets – together with
other countries such as Portugal – has recently been very thin. And that, in
turn, has exacerbated the price volatility, such as the swing that occurred
on Thursday after the Moody’s news.
Here is an article from the famed James Rickerts as to how the contagion
James Rickards was the lawyer for the central banks in bailing out Long Term
Capital in 1998
How markets attacked the Greek piñata
By James Rickards
Published: February 11 2010 19:48 | Last updated: February 11 2010 19:48
Wall Street loves a piñata party – singling out a company or country, making
it the piñata, grabbing their sticks and banging it until it breaks. As in
the child’s game, the piñata is left in shreds. Unlike the child’s game, in
the Wall Street version the piñata is stuffed with money for the bankers to
scoop up with both hands, instead of sweets. We see this game being played
today, with Greece
Investors trying to understand why their portfolios have begun to melt down
for the second time in five years are becoming experts in the fiscal policy
of Greece. A look at the piñata party might make things clearer.
Greece’s travails are often measured by reference to the market in credit
(CDS), a kind of insurance against default by Greece. As with any insurance,
greater risks entail higher prices to buy the protection. But what happens
if the price of insurance is no longer anchored to the underlying risk?
When we look behind CDS prices, we don’t see an objective measure of the
public finances of Greece, but something very different. Sellers are
typically pension funds looking to earn an “insurance” premium and buyers
are often hedge funds looking to make a quick turn. In the middle you have
another large bank booking a fat spread.
Now the piñata party begins. Banks grab their sticks and start pounding
thinly traded Greek bonds and pushing out the spread between Greek and the
benchmark German CDS price. Step two is a call on the pension funds to put
up more margin, or security, as the price has moved in favour of the buyer.
The margin money is shovelled to the hedge funds, which enjoy the cash and
paper profits and the 20 per cent performance fees that follow. How
convenient when this happens in December in time for the annual accounts, as
was recently the case. This dynamic of pushing out spreads and calling in
margin is the same one that played out at Long-Term Capital Management in
1998 and AIG in 2008 and it is happening again, this time in Europe.
Eventually the money flow will be reversed, when a bail-out is announced,
but in the meantime pension funds earn premium, banks earn spreads, hedge
funds earn fees and everyone’s a winner – except the hapless hedge fund
investors, who suffer the fees on fleeting performance, and the unfortunate
inhabitants of the piñata. What does any of this have to do with Greece?
Very little. It is not much more than a floating craps game in an alley off
This is where the idea of CDS as insurance breaks down. For over 250 years,
insurance markets have required buyers to have an insurable interest;
another name for skin in the game. Your neighbour cannot buy insurance on
your house because they have no insurable interest in it. Such insurance is
considered unhealthy because it would cause the neighbour to want your house
to burn down – and maybe even light the match.
When the CDS market started in the 1990s the whiz-kid inventors neglected
the concept of insurable interest. Anyone could bet on anything, creating a
perverse wish for the failure of companies and countries by those holding
side bets but having no interest in the underlying bonds or enterprises. We
have given Wall Street huge incentives to burn down your house.
Let’s be clear, public finance
Greece is a mess. Statistics have been fudged, government pensions have been
inflated and reckless borrowing has been the norm. Drastic remedies are
required. But the crisis is manageable, and Europe has sent clear signals
that they will take care of their own house without help from China, America
or the International Monetary Fund. Unfortunately, a measured response does
no good to the dealers in CDS, who require volatility and even panic to make
their game a profitable one. If contagion spreads in uncontrollable ways, so
much the better for the traders in volatility, never mind the collateral
Until the CDS market is confined to buyers who have an underlying interest
in the risk being covered, and sellers who are regulated as insurance
companies with adequate reserves, this market will remain a reckless
enterprise bent on arson. Serious issues of sovereignty and stability are at
stake. Regulators have to stop ignoring the piñata party and start providing
The writer is a director of Omnis and former general counsel of Long-Term
Times Limited 2010. You may share using our article tools. Please don't cut
articles from FT.com and redistribute by email or post to the web.
And this from Monty Guild: the crisis continues: (from Jim Sinclair
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Market Commentary From Monty Guild
Posted: Feb 26 2010 By: Monty Guild Post Edited: February 26, 2010
at 5:36 pm
Filed under: Guild
THE GLOBAL BANKING CRISIS CONTINUES…
STAGE 2: EUROPEAN SOVEREIGN DEBT UNDER ATTACK
Taken together, the Icelandic and Greek financial crises can be seen as the
second stage of the larger global banking crisis. The first stage of the
global banking crisis, which began in late 2007, was centered in the
European and U.S. mortgage and mortgage derivative market. The second stage
began with Iceland’s monetary and fiscal crisis in 2009 and continues with
the current Greek crisis, and is centered in European sovereign debt.
The global crisis banking crisis is a multi-phase global economic crisis
caused by years of over-borrowing followed by the current deleveraging.
This deleveraging was, of course, set in place by all those who gambled with
their own and other people’s money. As time passes, more and more of these
gamblers will be unmasked and there will be more countries, companies,
industries, and individuals who will lose face and capital in coming months
and years. We anticipate that these problems will continue as various
sectors delever over the next six to eight years.
Many believe that the other European nations will act to bail out Greece,
and then perhaps Spain or other over-levered nations in Europe who
experience debt problems. We disagree. In our opinion, the International
Monetary Fund (IMF) is the lender who will bail out the damaged European
nations. In our opinion, it is too hard for European nations to go to their
taxpayers and tell them that they are directly or indirectly guaranteeing
the debt of a foreign country.
As is their custom, the IMF will extract a high price in terms of the deep
cuts in expenditures and increases in taxes demanded of the borrower. In
our opinion, the period of easy borrowing is over for the Greeks, and
probably for several other European nations whose debt will come under
attack in coming months and years.
The current chaos is creating substantial demand for gold and other precious
metals. Holders of Euros are seeking to acquire more gold, and holders of
other currencies such as the Japanese Yen and U.S. dollar are undoubtedly
thinking of following suit. Buying gold to hedge against the probability
that the Yen and U.S. Dollar will be under attack in the not too distant
future is not unwise.
THE FUTURE OF THE DELEVERAGING CRISIS
The coming phases of the deleveraging crisis will simply be different
flavors of one major phenomenon with one major cause. We are saying this
because we do not believe that most investors realize how long and pervasive
this deleveraging crisis will be. If this were a baseball game, we would
only be in the 2nd inning (for non baseball fans among you, that means we
are only 20-25 percent through the crisis).
Furthermore, crises are still brewing with respect to the solvency of U.S.
states, and the legal subdivisions within the countries in the European
Union. These crises have yet to become globally recognized. In order to
bail out the states and other governmental entities below the national
level, a huge quantitative easing (money printing) process will eventually
be instituted in many countries. The effect will be to keep the developed
nations economies (and their currencies) under pressure for years.
Governments are not alone. Many industries, such as banking, financial
services, and insurance remain under pressure to decrease their leverage and
Monty Guild and Tony Danaher
I hope you all have a grand weekend and I hope I did not load you up with a
see you on Monday