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October 17, 2008


Is every company on earth hoarding cash against the Apocalypse, or what?

Is it too much to ask for, that while they are waiting out the plague in their isolated villas, somebody could put the time to good use by penning a literary masterpiece?

14th Century Italy produced Boccaccio's The Decameron.

We have lolfed.

That doesn't seem like much of a consolation.
OK, maybe if you throw if Fafblog we are getting a little closer.

But still.

Hm. If bankruptcies are on hold for the foreseeable future, GM might be stuck between a rock and a very hard place. There were a lot of rumors in the last month about their possibly entering bankruptcy, one way for them to shed their financial unit (something they needed to do about a year ago while it was still an apparent money-maker, but which is now by itself endangering the rest of their substantial manufacturing assets).

If regular companies are being denied bankruptcy financing, there damned sure won't be enough to handle a GM restructuring.

I'm constantly reminded these days of the old CP member who said to me in 1987, "I've thought again and again for the last fifty years that the system was going to be brought down by its contradictions, but it's so resilient." He died before the breakup of the Soviet Union and the wave of capitalist "end of history" triumphalism that brought on here. But I wonder...

Maybe they're as safe as you say but get tied up in the courts, and so aren't liquid enough? I could easily see a reluctance to do longer-term loans right now ... Maybe it's too hard to value tte assets that would secure them in this climate, especially for those types of companies most likely to be going under? Maybe it's that deleveraging business we've neen hearing about?

Since I just bought some GE notes, they are probably making prudent reserves against my interest payment:).

Assuming they are acting rationally, they have determined that they can not price in the probability of repayment, thus they can not set an interest rate that compensates for the risk of default. This is not a good sign. We can only hope that they are being irrational, or that the uncertainty will be reduced soon.

What exactly do you mean by assets? In an economy like this, people ask tough questions. If the firm has hard assets, how do we know they won't go the way of the housing market? If they have cash, where do they keep it? Even more important, what have they not disclosed?

Here we see the big problem with the whole Reaganomics/trickle down/supply side ideology that has dominated American (and world) politics and economics for almost thirty years. If your ideology favours the unrestrained pursuit of wealth, and treats the successful gambler as an equal with the wealth creator, you will build a society of risk takers. And in time, you will undermine the confidence in ordinary prudence that underpins the trust required for a capitalist economy to function.

And then you have what we have: a disaster.

Hm. I have some IBM stock of my father's that became mine when I turned 18, many moons ago. I've been just letting it sit there, but I wonder.

Is part of the problem that banks no longer have enough cash on hand to meet the reserve ratios to make new loans?

My understanding was that there were interbank lending issues? That the banks wouldn't lend money because nobody would lend money to them to smooh out the short-term cash-flow.

And then you have what we have: a disaster.

I find it amusing that capitalists point out that communism ruins countries because of the way human nature that makes people act in their own interest as individuals; and what we have now is the human nature that causes people to act collectively causing capitalism to ruin countries to the same extent. It seems human nature will find a way to ruin any rigid ideologically based system.

Small 'c' conservative money people do not like risk. Cash is now king, cheap money (credit) is now gone. The banking industry no longer trusts the banking industry and it is keeping its money in its mattress.
Henry Paulson and the Bush Adminstration do not inspire any confidence with unbaked bailout plans that were bought through a drive-up window.
The money men will wait for the election to be over and wait to learn who will become Treasury Secretary. If they approve, money will flow.
Just one person's opinion.

The strangest part of this lending crisis is that we haven't seen much change in the cost of borrowing, it's that we've seen fewer loans being made as the lending standards tighten up, even beyond the standards that were considered prudent a few decades ago.

GM already sold much of GMAC to Cerberus, one of the reasons it has been talking to them about roughly swapping the rest of GMAC for Chrysler (who pays what to whom has not been in any of the speculative articles). I can see why Cerberus would want to get rid of Chrysler, but I don't see what GM gets out of this.

With the marking of loans to market, there have been some problems for banks, problems that are being resolved very slowly with new capitalization investments, that has made it harder for them to originate new loans. More importantly, the collateralized debt market, often a regulatory grey market, is essentially shut down, something regulators should have done years ago. Add in Treasury borrowing and market fears and there isn't much available for anyone who doesn't appear to have zero credit risk.

My understanding is that banks aren't lending not because they are frightened of each other, but because they are paranoid about their own situations after seeing what a lack of liquidity did to these other investment banks.

As for General Electric:
"GE is potentially vulnerable to a credit squeeze because of GE Capital, whose global portfolio spans aircraft leasing, commercial real estate, credit cards and home mortgages. It no longer has a mortgage-lending operation in the United States, it has shunned exotic securities and GE retains its triple-A credit rating.

But GE has about $90 billion in commercial paper, which is short-term, low-cost borrowing made for as little as one month. Commercial paper costs have risen for GE, as it has for others, though it has been tapping that market throughout the crisis.

Yet if that lending market froze up in a panic, analysts say, GE would face a liquidity squeeze and probably be forced to pull back from some businesses in a forced shrinkage.

The new financing from Buffett and planned sale of shares to the public, plus its cash on hand and credit lines from banks, analysts say, add up to about $90 billion – effectively hedging the company's risk from a seize-up in the commercial paper market."


via Bloomberg:

"`Armageddon' Prices Fail to Lure Buyers Amid Selling (Update2)

By Pierre Paulden and Caroline Salas

Oct. 17 (Bloomberg) -- Credit markets have fallen so far that they are providing a ``once in a lifetime opportunity,'' and investors are still selling.

Prices of loans rated below investment grade declined to a record low 66.1 cents on the dollar, virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor's. Yields on corporate bonds show investors expect 5.6 percent of the market to go bust, the highest default rate since the Great Depression, according to Christopher Garman, chief executive officer of debt research firm Garman Research LLC in Orinda, California.

While central banks injected $3 trillion into the global economy, credit markets are tumbling because banks are clamping down on lending, forcing investors to unload assets they bought with borrowed money. The Federal Reserve said Aug. 11 that its quarterly survey shows most ``domestic institutions reported having tightened their lending standards and terms.''

``There has been widespread liquidation of assets that has nothing to do with fundamentals,'' said Scott D'Orsi, a partner at Boston-based Feingold O'Keeffe Capital, a hedge fund which has $1.3 billion in assets. ``Investors in bank debt are being presented with a vast number of extraordinary opportunities; opportunities that I would characterize as once in a lifetime.''

Isn't not looking at fundamentals what got us into this mess?

My understanding was that there were interbank lending issues? That the banks wouldn't lend money because nobody would lend money to them to smooh out the short-term cash-flow.

I think part of the reason for the crisis in interbank lending is that the Fed has opened up their lending facilities so wide, at such low rates, that there is no reason for a bank to go anywhere else looking for liquidity. We used to have a peer-to-peer architecture and now it has collapsed into a hub-and-spoke architecture, in terms of how liquidity flows through the bank system. The banking kulaks have been collectivized.

The other part of the answer is what Andrew said at the top of his 10:46 am comment. The banks are terrified of having somebody declare them insolvent, so they are hoarding both cash and information (i.e. they don't want to open their books up to scrutiny). The death of Lehman and Bear Stearns and the near-death experience of AIG did this.

Metaphorically speaking, the banks are like a group of friends who've come together to attend the funeral of friend who just died from AIDS, and they've all been sleeping with each other in an unsafe manner. Nobody knows exactly who is also infected and who isn't, but anybody who goes in to get tested will immediately have their health insurance canceled if the tests come back positive and thus lose their access to medication. The result: nobody wants to get tested and nobody wants to have anything to do with any of the others.

Or if you prefer a less modern metaphor, the banks are experiencing a Malthusian crisis of overpopulation and cash famine.

Isn't not looking at fundamentals what got us into this mess?

Pro-cyclical deleveraging is very difficult, perhaps impossible, to stop once it gets going. Positive feedback loops are like that, which is why we shouldn't allow them to get baked into the system to begin with.

"deleveraging is very difficult, perhaps impossible"

Yep. This whole thing will remain frozen while all the assets unwind. As it stands, nobody knows where everything (the netting) will lead, and no amount of risk can be assigned to a pure unknown.

I am confused by the metaphors, I think because I don't understand how the whole financing system is supposed to work. I keep thinking, banks still have money, people still have assets, why do banks not lend on the assets? This discussion makes it clear that the system is/was a lot more complicated than the Fed-->Banks-->Consumer model I learned as a non-econ major.

Can somebody explain in small non-jargon words, with examples? Or point to a good site for explanations?

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