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<nettime> how to fix a liquidity crisis
t byfield on Thu, 13 Dec 2007 06:47:42 +0100 (CET)


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<nettime> how to fix a liquidity crisis


Until just a few months ago, received wisdom held that the "modern"
global financial system had become so complex and intertwingled that 
it had developed a de facto ability to absorb and dissipate almost
any financial shock. And it's true in a sense; the problem is that
the dissipation isn't homogeneous. So, as soon as we started hearing
about arctic villages in Norway losing about half their investment in 
collapsing Citigroup-originated "collateralized debt obligations" and
the like, the received wisdom crowd fell quiet. Now comes this, which
we'll be hearing much more about, I expect.

According to the 12 Dec 07 _Financial Times_ ("Bank co-ops keep US 
afloat," p.2,
<http://www.ft.com/cms/s/0/0a487d16-a857-11dc-9485-0000779fd2ac.html>):

     The latest Fed flow of funds data shows that FHLBs
     [Federal Home Loan Banks, "a little-known network of
     government-sponsored bank co-operatives founded during
     the Great Depression"] issued new loans at an
     unprecedented annualised rate of $746bn (EU508bn,
     UKP366bn) in the third quarter, up from practically
     nothing in the second quarter.

     FHLB loans helped depository institutions ramp up their
     acquisition of mortgages by almost $190bn, annualised
     to $312bn. This - along with record purchases of
     mortgages by better-known government sponsored
     enterprises Fannie Mae and Freddie Mac - offset a large
     part of the $512bn annualised decline in mortgage
     purchases by special investment vehicles (SIVs)
     conduits and other issuers of asset-backed securities
     at the epicentre of the crisis.

     As a result, US mortgage lending continued to grow
     right through the credit squeeze, increasing at an
     annualised rate of $732bn in the third quarter.

"Little-known" is no exaggeration. For example, searching the NYT's
1981+ web archives for "FHLB" turns up a paltry 34 references; the most 
recent is from twelve years ago, 23 Jan 95, and refs 11-34 span 2 Nov 89 
through 31 Jul 84. With the exception of the 2333-word 18 Oct 90 article 
"3 Senators Made Extreme Efforts for S&L Figure" -- Charles Keating -- 
"the average length of these articles was 91 words. The longer article 
"describes an effort involving Senator Dennis DeConcini of Arizona to 
"discredit the chairman of the FHLB Board:

     "The FHLB, under Edwin Gray, is a 'Mad Dog' turned
     loose in a police state effort," Mr. Keating wrote.
     "May I suggest a rat hole costing billions of dollars
     is a reason to investigate the actions and the results
     of FHLB policies."

According to the WSJ (27 Nov 07, "Countrywide Borrowing Triggers Call
for Review"):

     The home-loan banks were created by Congress in 1932 to
     prop up failing banks and provide money for housing.
     They borrow money through global bond issues on the
     strength of investors' belief that the U.S. government
     would rescue them in a crisis. The banks have taken on
     a larger-than-usual role over the past few months in
     providing funds for mortgages. They have stepped up
     their secured loans, known as advances, to mortgage
     lenders to fill a void created in August, when
     investors' fears of default shut off mortgage lenders'
     ability to raise money through commercial paper or
     other short-term borrowings.

According to the FT article, the top 10 FHLB loans as of 30 Sep 07 are:

          "Member"                 Advances       % of tot
          Citibank                 98.7bn         12.0%
          Countrywide Bank         51.1bn          6.2%
          Washington Mutual Bank   43.7bn          5.3%
          World Savings Bank       24.2bn          2.9%
          RBS Citizens             21.9bn          2.7%
          Sovereign Bank           21.1bn          2.6%
          Bank of America [RI]     19.6bn          2.4%
          World Savings Bank (Tx)  17.3bn          2.1%
          Bank of America [Cal]    14.8bn          1.8% 

And this when UBS writing down $10B on Monday grabbed headlines. One 
Senator, Chuck Schumer of NY, isn't happy about it: he's accused 
Countrywide of "treating the [FHLB] system like its personal ATM," 
and is

     concerned about the quality of the collateral partly
     because many of the loans held as investments by
     Countrywide are so-called pay-option adjustable-rate
     mortgages, or option ARMs. These loans allow borrowers
     to make minimal payments in the early years, resulting
     in far-higher ones later.

Apparently, he's unconcerned with Citibank taking an advance of close
to $100B -- but they're one of his constituents.

Interestingly, the Asia Times beat even FT to reporting this. Its 
11 Dec 07 Credit Bubble Bulletin column ("Wrong Call," Doug Noland, 
<http://www.atimes.com/atimes/Global_Economy/IL11Dj02.html>) offers 
a jaw-dropping litany of erratic data. For example:

     During the third quarter, total credit market
     borrowings (TCMB) increased at a record seasonally-
     adjusted and annualized rate (SAAR) of US$4.989
     trillion to $47.864 trillion. This was a significant
     acceleration from Q2's $3.811 trillion and compares to
     Q3 2006's $3.448 trillion. For perspective, growth in
     TCMB averaged $1.237 trillion annually during the
     nineties. For the seven years 2000 through 2006, TCMB
     growth averaged $2.803 trillion. Financial Sector
     Borrowings expanded at an unprecedented SAAR $2.321
     trillion during the quarter. This compares to a $494
     billion average during the nineties and the $981
     billion annually during the period 2000-2006. Total
     credit market debt has now ballooned 20% in two years.
     Since the beginning of 2003, total debt has surged 50%
     - rising from 298% of GDP to 343% - in the greatest
     credit inflation in history. 

     With Wall Street finance under heightened stress, bank
     assets expanded a record SAAR $1.586 trillion during
     the quarter, or a 16.2% rate to $10.873 trillion. To
     put the scope of this ballooning into perspective,
     recall that bank assets increased a record $897 billion
     during 2006, after expanding $763 billion during '05,
     $762 billion in '04 and $495 billion during 2003. Bank
     assets expanded, on average, $215 billion annually
     during the nineties. For the third quarter on the bank
     asset side, loans expanded a record SAAR $957 billion,
     up from Q2's $461 billion and Q3 '06's SAAR $411
     billion. In nominal dollars, bank loans expanded more
     during Q3 ($249 billion) than they did for the entire
     year 2003 ($215 billion). 

     [...]

     Breakneck banking system expansion was matched by
     (non-Wall Street-backed) structured finance. In the
     face of faltering marketplace liquidity, GSE assets
     expanded a record SAAR $617 billion, or a 20.7% rate.
     This compares to 2006's asset growth of $61 billion
     and 2005's contraction of $64 billion. GSE ballooning
     peaked at $344 billion during 2001. In nominal dollars,
     the $154 billion increase in GSE assets during Q3
     surpassed even the $137 billion increase during (the
     infamous LTCM reliquefication from) Q4 1998. The entire
     GSE expansion is explained by the unprecedented SAAR
     $759 billion surge in Federal Home Loan Bank (FHLB)
     loans and advances. In nominal dollars, the $180
     billion Q3 increase in FHLB loans and advances'
     amounted to a 112% growth rate, with y-o-y growth of
     27.7% to $822 billion. 

Randall W. Forsyth, "The 'B Word' Returns: Backdoor Bailouts of Bankruptcy
Candidates," Barron's notes: "FHLB obligations are not backed by the full 
faith and credit of the U.S. government, but what do you think would ever 
happen to an entity with "Federal" in its name?" <http://online.barrons.com/article/SB119488478165290127.html?mod=googlenews_barrons>

Oh, and the FHLB Board announced a new CEO today, effective 1 Jan 08:

     <http://www.reuters.com/article/bondsNews/idUSN1259323620071212>

Entirely unrelated, I'm sure. The current CEO has been their since 92.
The new one, John Fisk, "will also become chief operating officer and 
president of the Financing Corp (FICO) and the Resolution Funding Corp 
(REFCORP) on Jan 1." FICO was established in 87 to finance the Federal 
Savings & Loan Insurance Corporation (FSLIC); REFCORP was established 
in 1989 to bail out the S&L industry.

Cheers,
T



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