Thursday, April 28, 2011

Helicopter Ben, Part 9

Bary Ritholtz, at his The Big Picture, noted something about the first press conference for a Chairman of the Federal Reserve, ever -- in this case, 'Helicopter' Ben Bernanke -- and parsing the tea leaves to determine what the policy of the Federal Reserve Bank is going to be going forward.

Since I trust Ritholtz's analysis on this issue, and as it underlines what has already been reported about the true aftermath of the 2007-2008 Crash for America's financial institutions, I'm passing the information along:
At yesterday’s presser, Fed chief Ben Bernanke indicated an easy policy stance for the foreseeable future... I believe it is really to buy time to rehabilitate the bank’s balance sheets. They remain poorly capitalized.

Rather than put insolvent institutions into
[Chapter 13 Bankruptcy reorganization], we have allowed the 'hang on, slowly getting better' through a massive back door bailout: Borrowing from the Fed at near 0%, and lending it right back to Treasury at 2-3%. This is more politically acceptable than just writing them checks for $100s of billions of dollars.

Consider:

• Q1 2008: JPMorgan Chase had an average of $1.2 billion in outstanding Fed loans with a 2.1% interest rate while it held $2.2 billion in U.S. government securities with an average yield of 4.6%.

• Q4 2008, JPMorgan Chase had an average of $10.1 billion in outstanding Fed loans with a 0.6 % interest rate while it held $10.3 billion in U.S. government securities with an average yield of 1.7%.

• Q1 2009, JPMorgan Chase had an average of $29.2 billion in outstanding Fed loans with a 0.3% interest rate and held $34.6 billion in U.S. government securities with an average yield of 2.1%.

• Q2 2009, JPMorgan Chase had an average of $7.6 billion in outstanding Fed loans with an interest rate of 0.25% interest. Meanwhile, it held $34.6 billion in U.S. government securities with an average yield of 2.3%.

• Q1 2008, Citigroup received over $5.2 billion in Fed loans with a 3.3% interest rate and held $7.9 billion in U.S. Treasury Securities with an average yield of 4.4%.

• Q4 2008, Citigroup received $15.8 billion in Fed loans through the Fed’s Primary Dealer Credit Facility with a 1.2% interest rate; $11.6 billion in Term Auction Facility loans with a 1.1% interest rate; and $4.9 billion in Commercial Paper Funding Facility loans with a 2.7% interest rate. It simultaneously held $24 billion in U.S. government securities with an average yield of 3.1%.

• Q1 2009, Citigroup received over $12.1 billion in Fed loans with an interest rate of 0.5% while holding $14.3 billion in U.S. government securities with an average yield of 3.9%.

• Q2 2009, Citigroup received over $23 billion in Fed loans with an interest rate of 0.5% while holding $24.3 billion in U.S. government securities with an average yield of 2.3%.

• Q3 2009, Bank of America had an average of $2.9 billion in outstanding Fed loans with an interest rate of 0.25% while purchasing $23.5 billion in Treasury Securities with an average yield of 3.2%.

(Sources: Federal Reserve, US Senate)

Similar arbitrage has existed for the top 20 banks since the Fed took rates down to zero.

The bailout has always been about rescuing the banks, their management, shareholders, and most especially, their creditors and bond holders.

The American government has allowed banks to make money, from the government -- that is, from us. You and I are paying money to the U.S. Government, which makes it available, through the Federal Reserve, as loans to our major financial institutions. The interest rate to those institutions for the past three years has been nearly 0%: Nearly Free Money.

The banks then loan (some of) this money out to you and me for cars, business transactions; even the occasional home loan -- all at much higher rates of interest. They also loan that same money back to the U.S. government. In this, they receive a net profit of (as Ritholtz reported) around 2 to 3 per cent.

For that money loaned back to the government, it's a bit like 'trickle-charging' a battery; banks and investment houses very slowly make money to offset some of the bad debt they're carrying on their books: The securities backed by pools of bad home loans, and the mortgage loans themselves (if the CDOs were valued properly, the financial groups holding them would have to go bankrupt). That simply isn't going to be allowed to happen: We're Too Big To Fail. We'll Take The Rest Of The Global Economy Down With Us.

The alternative to a trickle-down approach is to just give the Banksters trainloads more money, openly -- but that would be "politically unpopular".

The 'money shot' in this article? The bailout has always been about rescuing the banks, their management, shareholders, and most especially, their creditors and bond holders.

This is just another aspect of "making private debt into public obligation": You and I are paying for this. We're paying for the large bonuses and wonderful, comfortable lifestyles of people you wouldn't want to leave your children alone with for five minutes, and their families.