RE: What a brutal dayWall Street bankers are facing a “systemic margin call” that may deplete
these banks of $US 325 Billion of capital due to deteriorating subprime US
mortgages, JPMorgan Chase & Co said in a report late on March 7.
The problem here is that these US banks do NOT have $US 325 Billion in
capital to meet the “call”.
The problem here is, that there is NO market for the US subprime paper.
Subprime-related losses at global financial institutions have to date totalled
up to $US 215 Billion, with about 55 percent of that coming from the
United States, the head of Japan's financial regulator said on March 10.
European losses totalled about $US 78.5 Billion, . Asia’s losses are at about $US
140 Billion. Europe and Asia can handle this.
What the Fed is trying to avoid is a cascade sell-off of US financial paper of all descriptions from stocks to bonds to US Treasuries.
To avoid any such cascade sell-off, the Fed has launched its Term Auction Facility. This is a program
which allows any US bank or savings and loan to bid for loans at what amounts to wholesale rates. It
allows them to pledge a wide variety of securities - including mortgage-backed securities that are not
tradable at the moment - as collateral! This is desperate. The Fed is turning itself into a garbage truck.
On March 12, the $US index (USDX) fell a huge 0.86 points on the day to close at another new all time low of 72.43.
In December 2007, the Fed set up the so-called “term auction facility” to lend funds to
banks in exchange for a wide variety of collateral, including toxic mortgage debt paper.On March 11, the Fed announced it will lend US Treasuries in a new program.
This “facility” will be known as the “term securities lending facility”. It will be available to all so-called
primary dealers, the banks and securities firms that can trade directly with the US central bank.
The Fed said it will lend US Treasuries for a 28-day period through this “term securities lending facility”.
The “collateral”? Debt paper, including AAA-rated mortgage securities as sold by Fannie Mae, Freddie
Mac and, of course, by US banks. Again, the system was saved and the Dow rallied a huge 417 points on
March 11. Whenever the US edifice of bad loans and an overvalued stock market seems on the verge of serious breakdown, out rolls the US Fed with another new “facility”.
With this new “facility”, US holders of assorted forms of financial toxic waste paper can roll this over to
the Fed and exchange it for US Treasuries! With these US Treasuries in hand for 28 days, the holders can
either use them as collateral for their own debt (much better collateral than toxic waste paper) or they can
actually sell the US Treasuries. That is something which cannot be said for the toxic wastepaper - which has no buyers and therefore no market.
Eventually, one “facility” will follow the next until just about everybody can no longer keep a straight face. At that point, the Fed’s whole house of cards falls over.It will then be realised that the Federal Reserve NOTE is
itself a debt instrument. It is a NOTE. Anybody who accepts it has thereby given credit to the Fed.
Giving credit to the Fed by accepting its NOTE always means that one has given a loan to the Fed.
Present circumstances have already brought a perception that all US financial paper is dangerous.
This perception has brought the US commercial banks into the global spotlight. With the torrent of bad
loans burning holes in their balance sheets, anxieties are now fast increasing as to whether it is safe to
keep one’s deposits with these banks. This is potential bank run territory. Were they to start, the lucky
ones would be those who leave US banks holding Federal Reserve Notes! But, what are they worth?
Some pretty scary stuff sent to me from pages of the Privateer Letter.
with some of the other previous letters coming to pass, it makes for some unsure times in the market and wht to be invested in.
A very,very negative read, but with his (the Privateer) accurate calling over months of the coming subprime mess and failures to happen, as Bear Stearns and the bailouts, its easy to give your head a few shakes and wonder.
Just curious if any of you have read any of the Privateer over the last 6 months??
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© 2008 - The Privateer