U.S. FEDERAL RESERVE OFFERING EMERGENCY FUNDING TO BRITISH BANKS
October 21st, 2007U.S. Dollar holders: Brace for impact.
Via: Telegraph:
The Fed’s board of governors wrote to both banks 10 days ago, granting them access to funds for customers “in need of short-term liquidity”.
The letter to RBS made particular reference to investors holding mortgage-backed securities – which have been at the centre of the sub-prime crisis.
The request from the two banks is a stark reminder that the global liquidity freeze is far from over.
It is similar to those offered to Citigroup, Bank of America, JPMorgan Chase and Deutsche Bank at the height of the credit crunch.
It is understood that neither Barclays nor RBS has had cause to use the Fed funding line yet. The credit line has been set up as a contingency, and may not need to be used at all, banking sources stressed last night.
Barclays has been given permission to borrow up to $20bn through the facility, while RBS can borrow up to $10bn. The banks would have to put up assets as collateral with the Fed to gain access to the cash. A spokesman for Barclays Capital said: “This secures another potential source of funding should our US clients seek it.”
A spokeswoman for RBS declined to comment.
The Fed governors wrote to Barclays on October 11 to reveal that it had agreed to a request from the British bank for access to the lifeline funds.
RBS received a letter the following day. Both letters were published on the Fed’s website last week.
It is unclear whether or not the two UK banks approached the Fed together, or if the timing was coincidental. RBS and Barclays are known to have been more critical than other major UK banks of the Bank of England’s reluctance to pump liquidity into the money markets at the height of the credit crisis.
In an interview with The Sunday Telegraph last month, Bob Diamond, the chief executive of Barclays Capital, made a thinly veiled plea for intervention.
He said it was “down to central banks” to provide liquidity. At the time the Bank was the only major central bank yet to introduce emergency measures. It subsequently did in the wake of the crisis at Northern Rock.
The move comes after a handful of Wall Street banks established a $75bn bail-out fund to buy assets from cash-strapped structured investment vehicles.
Citigroup, Bank of America and JPMorgan Chase unveiled the superfund – to be known as MLEC – last Monday.
It is understood that the founding banks are now trying to bring other Wall Street big hitters into the fund.
Some executives at Merrill Lynch and Lehman Brothers are believed to be pushing to join the scheme, but others have appeared more reticent.
The fund has been set up because some structured investment vehicles (SIVs) are still struggling to refinance short-term commercial paper loans because investors still have concerns about exposures to US sub-prime lending.
The US Treasury has backed the scheme, which it believes will prevent SIVs from being forced into selling good quality assets in order to stay afloat – which would run the risk of a fresh bout of contagion in global markets.
Research Credit: PD
Here’s a really good article that seems to explain what the Fed is really doing when it provides liquidity:
http://www.bullnotbull.com/bull/node/44
A few important points:
“1. The Fed did not give out money; it offered a temporary, collateralized loan.
2. The Fed did not inject liquidity; it offered it.
3. The Fed did not lend against worthless sub-prime mortgages; it lent against valuable mortgages issued by Fannie Mae (the Federal National Mortgage Association), Ginnie Mae (the Government National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation).
The New York Fed is also accepting “investment quality” commercial paper, which means highly liquid, valuable IOUs, not junk
As a result:
1. The Fed took almost no risk in the transactions.
2. The net liquidity it provided — after the repo agreements close — is zero.
3. The financial system is still choking on bad loans.
4. Banks and other lending institutions must sell other assets to raise cash to buy back their mortgages from the Fed.
These points are crucial to a proper understanding of the situation. The Fed is doing nothing akin to what most of the media claims; like McDonald’s, it is selling not so much sustenance as time, in this case time for banks to divest themselves of some assets. But in the Fed’s case, that’s all it’s selling; you don’t get any food in the bargain.
As I have said before, the Fed is a bank. It has private owners. The owners do not want to see their enterprise destroyed. Although Bernanke probably received distress calls from mortgage lenders, he probably also got calls from the Fed’s owners saying, ‘Don’t you dare buy any of that crap and put it in our long-term portfolio.'”
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Here’s what I’m thinking is the real meaning of banks borrowing from the Fed: They are like a real estate (or other small business person) agent who has hit a slow period–so slow that they may have to get out of the business. Do they mortgage their home so they’ll have “liquidity” to meet expenses, in hopes that sales will improve–and risk losing their chief personal asset? Or do they pack it in?
If you were a real estate agent right now, would you mortgage your home to tide you over until the market changed? If you owned a lumber-yard or home-improvement retail store right now, and you were losing money, would you mortgage your home to make payroll?
How would you decide? Chances are, you would borrow against your home ONLY if you felt SURE that sales were going to pick up soon–either real estate sales, if you were a realtor, or retail sales, if you owned a retail business.
This seems to be what Prechter is saying the banks are doing, in going to the Fed–borrowing against valuable assets in order to meet business expenses–and buy time in hopes that non-performing assets can either be unloaded or made to perform.
Are they wiser to go this route, or would they be wiser to close their doors?
The answer to that question is another question: Is there any realistic expectation that those non-performing assets will start performing–and soon–or can be unloaded without the banks taking too much of a beating?
I’d say the answer to this second question is “no.”
What happens when you throw good money after bad to stay afloat? When you borrow from the casino so you can stay in the game? Your losses go from serious to staggering. Instead of being just another guy or gal who failed in business (or lost at 3-card monte), you are actually beggared.
Looks like Barclays and RBS are going to have a run on cash deposits this week !