Fed staff discovered that one reason the federal-funds rate was behaving so abnormally was because money-market funds were building up cash in preparation for redemptions, leaving hoards of cash at their banks that the banks wouldn’t invest.
U.S. depositary institutions on average held excess reserves of $90 billion each day this week, estimates Lou Crandall, chief economist at Wrightson ICAP. This is cash the banks hold on the sidelines that does not earn any interest. That compares with an average of $2 billion, he says, noting he estimates banks held $190 billion in excess cash on Thursday, as they feared they’d have to meet many obligations at the same time.
Through Wednesday, money-market fund investors — including institutional investors such as corporate treasurers, pension funds and sovereign wealth funds — pulled out a record $144.5 billion, according to AMG Data Services. The industry had $7.1 billion in redemptions the week before.
Gosh, I wonder what the crisis next weekend will be!
{ 3 comments… read them below or add one }
RE Investor 09.23.08 at 5:04 pm
It’s the old saying “If you want a bank to fail, tell everyone the bank will fail, thus causing a run on the bank, and the bank will fail” The only problem is that now the “bank” is the entire economy. The new bailout being proposed is as much a psychological move as a financial move. If the market believes that the mess is being taken over, they won’t fear the unknown because it will be known. What is ironic is that the US government is being structured like a giant hedge fund. The only difference is that they have an unlimited balance sheet, and don’t need to leverage or answer to a margin call by anyone. If done correctly, this may go down in history as a very shrewd move as lender of last resort. The US stands to make a lot of money from this. However, like everything else, it all depends on whether they don’t screw it up.
The plan should go like this.
A: Buy all the junk at 30 cents on the dollar. Modify every mortgage to a 30 year fixed at 5% or 6%, then reduce the principal owed by at least 20%. This gives the homeowner (and government) immediate equity. The incentive to walk by the borrower is reduced greatly. The reason borrowers walk is either the impending rate reset, or not wanting to pay for a devalued asset. Both of those are taken out of the equation. Government now has a steady cash flow.
2. Because of far fewer foreclosures, market values stabilize (not just property values, CDO values) since the collateral is now worth more than fire sale prices. It also starts to form real comps, and not just panic sell or foreclosure comps.
3. Stable comps plus less balance sheet pressure allow banks to begin profiting again since they don’t have to hoard cash in fear of a ratings downgrade from Moody’s or S&P.
4. More stability gives people better reasons to buy. Not only since they don’t have to worry about catching a knife, but also they do not have to worry about losing their job tomorrow because of a crashing market and economy.
5. Gradually, as home values mend and (god dare I say) appreciate, the government can slowly begin selling these, now more valuable assets in to the market. At this point many will be clamouring for the new securities that have value. Taxpayer profits from a shrewd business decision in a time of panic.
Of course there is risk to this, however the biggest risk I see right now is our stupid elected officials muddying this up with earmarks and grand standing for the election cycle….There is a time for prudence, unfortunately that time was about 7 years ago when lending standards and mass securitization was not regulated by the very people that should have been minding the ship. Now is not the time to watch the patient bleed out, while debating whether or not to take him to intensive care.
John Wake - Real Estate 09.23.08 at 8:54 pm
Okay, I nominate RE Investor to chair the Federal Reserve.
I am very afraid that the current legislation or subsequent legislation will turn out to be a Christmas tree full of gifts for their favorite constituents.
Russ 09.24.08 at 9:58 pm
A trillion dollars will be spent and the depression caused by the wild-west lending/housing bubble will still have to play itself out. Thank you Easy Al G and the specuvestors with subprime IQs. We had a pretty good country going there for awhile, and now our economy has essentially been undone by hordes of failed flippers.
Note to Hank P, thanks but no thanks. We might need that cool trill for WPA version 2.0, or at least to clean the Hoovervilles now and again.