Posted by: Armel | March 10, 2008




From all indications, the situation in the banking system is not as calm as Bernanke looks on tv! For the past couple of years, overall banking lending was way too high. Banks were lending at low rates to anyone that asked for it. All the ratios went out of the windows in the race to securitization. Almost anything with an average of 6 months of payment history had to be pooled and sold off in a security. Now what?

Here is the problem, it now appears that local banks can no longer find where the steady flow of payments is going to come from. What that means is that there is nothing left to pool, no new security to sell and move off the balance sheet. They are stuck with all these “assets” they can’t get any money from. That’s one of the reason why banks are forced to borrow on the “low-low” from the Fed. They’ve already burnt all their reserves, and don’t want the public to know ! It could be chaotic out there if people were to find out that banks lent all the money they had and are forced to inject new cash because they still have to maintain the liquid reserve requirement.

How bad is it going to get before it’s over? Not soon, because as long as banks are using the Term Auction Facility (TAF) , it means that they are still struggling. And this is America, why wouldn’t the Fed Reserve want to disclose the names of the banks that are borrowing under the TAF? Probably because the street might start ditching those banks stocks or take their money out of there ( that’s for sure).

It’s getting interesting : Let’s look at the NonBorrowed Reserves which is a measure of the banking system reserves, consisting of Total Reserves (member bank deposits in Federal Reserve Banks, plus vault cash), less funds borrowed from the Federal Reserve Discount Window. This net NonBorrowed Reserves is now NEGATIVE by more than 15% ! Click here for the CHART…This hasn’t happen for a long long time.

 Armel Njeunou

Sources: UBS releases , Fed Reserve , BloombergFT, WSJ , Mish blog     Courtesy: Rowd-Master


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