What Bank Reserves?
30 September 2008
The numbers for bank reserves reported in Barron’s this week are shocking.
Non-Borrowed Reserves have been plummeting since the end of December 2007.
To maintain their reserves, banks have borrowed over $250 billion since February 2008! These borrowed reserves are a temporary fix using other people’s money to stand in for the money that was lost. This is yet another pending crisis if the banks can’t pay this money back.
The underlying problem is that GSE, AAA rated mortgage and collateralized asset paper in hundreds of billions of dollars was allowed to be used as bank reserves. After all it was US government paper. The financial system, in full view of the congress and the regulators, lent huge sums of money to people with known bad credit profiles. The banks then sold these debts to Fannie and Freddie who then sold them back to the banks as AAA rated paper. When these habitual credit defaulters stopped servicing their debts, their debts became AAA worthless paper. This is how assets in the billions become liabilities worth nothing and why the banks are now in dire straights. Such worthless liabilities can not be used as reserves or sold for cash as only a fool would buy them. That is where the US Treasury was to come into all of this. These charts show that the American banking system has been borrowing from Peter to pay Paul. I don’t think Peter sleeps easily at night.
The hubris on Wall Street and in the US Congress for the past few decades has been historic. Even now these “policy makers” pushing for a bail out display their business as usual attitude in regards to the credit crisis. Don’t believe these vast sums being demanded from the US Treasury are even a fraction of what will be demanded before this is over. The “monetary policy makers” may have had their bailout shot down thanks to a heroic few in the house, but like the Terminator – “they’ll be back” after the November elections - if not before.
To be fair to local bank branch managers everywhere, the market they work in is regulated by the US Government. I know that our elected officials in Congress have forced bank officers to make loans based upon political considerations that went against the better instincts of loan officers everywhere. Our problem is not down the street but down Wall Street and Washington.
Let’s look at the US dollar’s balance sheet held by the US Federal Reserve.
This week’s data may have been a misprint by the Fed or Barron’s. I hope it is a misprint as if this really happen it is really bad for the future of the US dollar as an economic asset.
Late last December “US Securities Held Out-Right” by the Fed started to crash. The Fed was swapping their US Treasury securities for sub-prime debt and carried this junk credit at face value. This must be so as Total Fed Credit didn’t drop in the chart below with this loss of over 35% of their US Treasury securities.
In Barron’s 29 September 2008 issue we see that Total Fed Credit expanded by $200 billion dollars. This makes the gap between Total Fed Credit and the proportion of Total Fed Credit made up of US Treasury securities at its lowest point since 1953 with only 42.32% of the Fed’s own reserves being US Treasury paper. As pointed out by Mike G. (a reader of mine) this gap between Total Fed Credit and US Treasury securities is also very close to the $700 billion dollar asked for in the failed bail out.
So what makes up the other 57.68% of the reserves backing the US dollar? I can’t say for certain, but I suspect that it’s a small portion of the toxic waste that’s been gumming up Wall Street’s balance sheet for the last year. It seems that the big money center banks and GSE’s didn’t have time to sell these “assets” to my pension fund and insurance company before the August 2007 credit freeze up, so the Fed purchased them.
There would be no better way to restore confidence in the markets than to have a RICO criminal charge against the legislators and regulators who have oversight responsibilities for the financial system. Banking is an industry with several hundred years of history, everything we are seeing now was predictable. A price needs to be paid by those individuals in Washington, Wall Street and the university system that produced the likes of Greenspan, Bernanke, and career bureaucrats staffing the regulatory system with oversight authority over the credit markets that have corrupted the concept of fiduciary responsibility.
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