Busted: Bankers and The Global Economy

April 14, 2008

Investment Banks Continue Borrowing from Fed

A central bank report said Wall Street Investment Bankers averaged $32.6 billion in daily borrowing over the past week. That compares with $38.1 billion in the previous week and $32.9 billion before that. The Fed said it would make as much as $200 billion worth of Treasuries available through weekly auctions. In the three auctions so far, the Fed has provided $133.95 billion worth of Treasury securities.

The CNN Media engine suggested that the central bank auctioned only $33.95B of the $50B in securities made available to investment banks, suggesting demand for super-safe government Treasury Bonds could be easing. You can see that very little change has occurred and that average levels are still in the $30 billions. The reality is that investment banks have not soaked up all the funds that they could have received. Whether this reality is a strength or weakness can be debated. The fact that investment banks are not using all the funds allowed could be considered as a strength. The fact that investment banks are using the Fed at all could be considered as a weakness.

Your stand depends on the position you want to take. Is the glass half-full or half-empty? Bernanke and Paulson built a new floor in the U.S. economy. The new financial floor stopped market panic, but cannot solve the internal banking crisis unless the Fed expects to buy most of securities from the banks at taxpayer expense. The taxpayer is the guarantor for the U.S. government.

The fact that banking institutions will not borrow from each other as the system is designed to do is problematic. The real problem lies in $213 billion in bad securities that have not been purged from the banking system. Bankers don’t want to get caught holding the bag. In the meantime, the stalemate continues, relieved by the Federal Reserve and the almighty American taxpayer.

Even though U.S. treasury bonds being exchanged are considered “super-safe”, what is the reality? The news media has already made the case that investment ratings companies have been off-the-mark for years. Part of the banking crisis is attributable to poor ratings reviews and credibility. The reality is that all is backed by the full faith and security of the United States government.

Be careful what you believe. Caution is justified. The saga isn’t over yet.


1 Comment

  1. I think the Fed should have let the investment banks take their hits. The economy would have hurt more in the short term, but survival of the fittest is good for banking. Bad business is bad business for banking too. Banks need to be able to fail if good reason is not used.

    Pingback by BettingOnMoney — April 14, 2008 @ 12:24 pm

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