We have pointed out a few times that identifying a liquidity crisis and distinguishing it from a solvency crisis is something like an essential precursor to develop and execute a rescue plan (or to adopt “Plan B” if the first rescue plan fails to return the country and its many mistresses to the style to which they have grown accustomed).
Forgive us for nitpicking, but either market actors are so beyond reliable or rational function that they cannot bear price discovery, or solvency and liquidity are in equal measure gummed up all through the works.
“Quietly” injecting $650 billion of cash into the system, as the Fed decided to this week, may delay total chaos and prevent cats and dogs from living together before Easter, but it doesn’t solve the basic issue faced by most (heavily leveraged) finance institutions: their liabilities may well significantly exceed their (still deteriorating) assets. As if that’s not enough, almost no one knows how long and to what degree insolvency has been sloughing rotten skin off all over the new industrial ply carpet in various regional banks. Hopefully, this will limit the egg-splash to the first two rows around the dohyo, but certainly there is going to be some breakage. Here’s hoping one of the wrestlers doesn’t teeter over into the spectators.
Fed Pumps Further $630 Billion Into Financial System [Bloomberg]
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Actually, that’s not an “or” question.
ok
Ha! First. Anyway, yeah, the difference between a liquidity crisis and a solvency crisis is that injecting liquidity fixes a liquidity crisis. While Hammerin’ Hank’s ransom note bore no fruit, anybody who can say that CB worldwide have been stingy with liquidity is crazier than Sarah Palin at an atheists’ convention. So maybe it’s not a liquidity crisis after all, hm?
Read a decent take on things from this blog: http://stuffinvestmentbankerslike.blogspot.com/2008/09/45-recession.html
EP, thank you for identifing what everyone else seems to be hiding from. Many banks are currently insolvent. These banks do not want to sell their assets to Hank (or anybody) at “market” prices because if they did they’d be out of business. The reason we’re having a credit crunch between banks is that no one wants to lend to an insolvent bank. Since we’re not requiring that banks own up to what they’re really holding no one can tell who’s solvent and who’s not. We need to force insolvent banks into bankrupcy immediately, so the healthy banks can get on with life. Unfortunately, people running insolvent banks have no incentive to deal with the problems immediately, and would rather let the process drag out through inevitable share price declines, credit downgrades, etc. (please see bear, lehman, wamu, etc etc etc)
Bad banks must go out of business so the rest of us can move on.
5: You are assuming there are any solvent banks. Other than a few local credit unions and BB&T, this may be an unwarranted assumption.
6- Well assuming that the new big 4 cannot fail (JPM,BAC,C,WFC), it seems like there aren’t a ton of huge shoes left to drop. I mean does Nat City or Fifth Third or Regions going down really create the same systemic problems as Lehman Brothers?
01.01.01 AA
“First day After Armegeddon. Let’s check in and see what the post financial armegeddon world looks like today. DJIA up 250 points. Hmm… Hell does not look like I thought it would. You can text from here”
#5 – it is both. there aren’t too many banks that would be solvent if everything was marked to current (probably too low) market prices. if all those banks go out of business, then there aren’t going to be many loans to businessess, etc, and that is a liquidity problem. Loans TO banks are not the problem – it’s loans FROM banks.
Take commercial real estate – only 10% of the lending community is really in business (life co’s), so all the debt that will be maturing over the next year or two will have major issues refinancing, regardless of true asset values. that in turn will cause greater losses on loan portfolios and CMBS tranches that can’t get the principal repaid because the borrower is unable to refinance.
extend that scenario to commercial loans, and you have a credit lock-up.
Are you suggesting we shouldn’t be providing liquidity to insolvent institutions?
Brilliant!
7: They may be too big to fail, but that doesn’t mean that if the regulators force everybody to ‘fess up, that they won’t be technically insolvent. If they are and it’s revealed in black and white, the only option is another bailout that makes the one that failed yesterday look like lending your kid ten bucks to start a lemonade stand. Even if you’re BoA, if you’re insolvent, you’re insolvent, and no responsible counterparty will lend to you, especially in this environment. Their own shareholders (or whatever) would crucify them if they did.
And if my bank fails I will be PISSED. That’s a serious systemic problem right there. (I use one of the four you mentioned.)
@8
You’re definitely living up to your name. The DOW being up today means next to nothing. I bet you’re a buyer, too. Good luck with that. Equity markets have been in denial for too long. Bailout or not, we are in deep shit.
Isnt this why the “mark to market” subject is getting so much light right now.
And if this is true, allowing them to mark this crap artificially high to remain solvent will severely delay this crisis (Japan?)
Sorry guys — you’re not getting your bailout. Most taxpayers and congresscritters are saying “no” to bailing out rich Wall Street thieves.
As Rep. Hank Johnson, D-Ga., said when asked about the Dow dropping 777 points: “The stock market goes up, the stock market goes down, that’s not something that I am particularly concerned with. I believe that the market will get over this initial shock that the corporate bailout plan did not go through, and that it will recover.”
Navy Federal and USAA Savings Bank are practically BEGGING me to borrow money right now.
just sayin’
13, I agree with you. Ignoring market prices will only make things superficially better. In the meantime, the bank gets to continue taking deposits, borrowing money, making loans, etc, that they shouldn’t be in the first place. What that loan that should have been marked down early is finally declared non-performing, the bank still dies, but the cumulative damage is greater.
@12,
It was a joke, something your not obviously getting, or I am not saying very well. The only long position I taken this week is a VIX put @ 47, I sold my WB/dia/ecta puts yesterday.
I am having an absolutely dreadful day today, as the fear premium escapes from the rest of my baskets of puts, and the VIX “hedge” puts barely move, and any long small cap stocks still left in the port’s take another bullet to the head again.
Yesterday, was a green day, for context of my bias. I am green single digits MTD and double digits YTD, I just hate having a shitty day to end the month/quarter.
~SEG
@ 16 –
this is what I don’t get — the mess we’re in was a result of too many fucktarded loans being made. So now we’re supposed to take the crud off the banks’ hands… so they can make more of the same loans?
I think there’s a bigger problem here, and mortgaging the tax receipts from my great grandchildren probably isn’t the best way to go about this.
The Repub proposal wants to do away with mark to market. If we ignore reality, it will go away.
Not to get all Blodgett – but something like the Sweden/Buffett plan would make me feel better. Until I think about who would oversee it, the politics that would get involved, the clusterfuck it could turn out to be.
I don’t want Paulson or Buffett running it.
I want Einhorn.
The funny thing is that there’s a pretty easy solution to this whole mess:
knocking down houses.
If the govt spends $50 billion buying houses and just knocks them down, it puts the homebuilders back in business, drives home prices back up which in turn greatly reduces defaults.
If housing rallies then CMOs and MBS are worth far more than they are being marked at today. Too bad no one will ever propose this because it sounds so crazy.
20 Go to places like Palmdale, CA and youll see that the houses are about to fall down. Neighborhoods basically pockmarked with foreclosures.
ehh…if we keep house prices at their current levels than incomes need to rise, because the current house price/income ratio is non-sustainable without Tan Man-style lending
The Sept League Tables are out… http://www.techcrunch.com/wp-content/uploads/2008/09/septembermadnessb.jpg
place your bets…
~SEG
@20 – True story: A buddy of mine was in ‘Nam and worked at a shop where they fixed tanks. Somehow they ended up with two tank towers (basically another tank, only with a crane on top instead of a turret.) They were only supposed to have one. There would have been a big fuss if they’d been caught with two.
So they put a blade on the other hauler, dug a big hole, and buried the extra one.
This makes exactly as much sense as what you are proposing. It solves the problem in the absolutely, positively most wasteful way possible. I’d as soon give Paulson his blood money.
Calling this a liquidity crisis is like the black knight screaming flesh wound.
Just like everyone has said the problem is the asset valuations.
The bailout proposal is not so much injecting liquidity, as it is replacing dubious assets with transparent dollars. That will help create solvency, I mean, “stabilize” the markets.
SEG. Why not just sell your puts instead of getting cute and trying to hedge with the VIX?
@27, Because I didn’t know if yesterday was the first of a two day thumping or not. I didn’t want to flatten my short bias, but hoped to hedge the vol drop if this did happen.
VIX(en) screwed me, she was at historic high levels and it was worth trying to hedge at the top, it drops 12.8% and my puts went up about 6% or so at the bid. I am dumping them today…
I am obviously going to ignore the VIX(en) next time we have one of these events.