Staðan … framhald

13. mars 2008 | Jóhannes Björn

Hvernig getur króna sem er studd með 13,75% stýrivöxtum og háum raunvöxtum hríðfallið? Bankakerfi heimsins er í slíku lamasessi að margir sem þurfa að standa við peningalegar skuldbindingar neyðast til þess að selja fjárfestingar sem auðvelt er að koma í verð. Þegar kreppir að bankakerfinu þá vitum við aðeins eitt með fullvissu—óvæntir hlutir byrja að gerast með stuttu millibili. Þess vegna er óþarfi að vera líka með heimatilbúinn vanda eins og okurvexti.

Bankakerfi Bandaríkjanna og Evrusvæðisins eru bæði farin að minna óþægilega mikið á gamla sovéska kerfið þar sem allt var þjóðnýtt. Seðlabankarnir eru farnir að lána hundruð milljarða út á ruslapappíra sem enginn frjáls markaður vill kaupa af bankakerfinu. Þegar svona lán eru látin rúlla áfram með endalausum framlengingum, þá fara þau að virka eins og þjóðnýting bankakerfisins. Steve Waldman skrifaði frábæra grein um þetta 8. mars.

The Fed announced that it would auction off $100B in loans this month rather than the previously announced $60B via its TAF facility. In the same press release, the FRB announced plans to offer $100B worth of 28 day loans via repurchase agreements against "any of the types of securities — Treasury, agency debt, or agency mortgage-backed securities — that are eligible as collateral in conventional open market operations".

Tveim dögum eftir að þessi grein var skrifuð hækkuðu lán seðlabankans upp í $200 milljarða.

The second announcement puzzled me. After all, the Fed conducts uses repos routinely in the open market operations by which they try to hold the interbank lending rate to the Federal Funds target. In aggregate, the quantity of funds that the Fed makes available is constrained by the Fed Funds target. So, what do we learn from this? Fortunately, the New York Fed provides more details:

“The Federal Reserve has announced that the Open Market Trading Desk will conduct a series of term repurchase (RP) transactions that are expected to cumulate to $100 billion outstanding... These transactions will be conducted as 28-day term RP agreements. When the Desk arranges its conventional RPs, it accepts propositions from dealers in three collateral “tranches.” In the first tranche, dealers may pledge only Treasury securities. In the second tranche, dealers have the option to pledge federal agency debt in addition to Treasury securities. In the third tranche, dealers have the option to pledge mortgage-backed securities issued or fully guaranteed by federal agencies in addition to federal agency debt or Treasury securities. With the special “single-tranche” RPs announced today, dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities. The Desk has arranged single-tranche transactions from time to time in the past.”

There are a couple of differences, then, between this new program and typical repo operations:

  1. The loans are of a longer-term than usual. Ordinarily, the Fed lends on terms ranging from overnight to two weeks in its "temporary open market operations". The Fed will now offer substantial funding on a 28 day term.
  2. The Fed is effectively broadening its collateral requirements by collapsing what are usually 3 distinct levels of collateral which are lent against at different rates to a single category within which no distinctions are made.

The Fed offered the first $15B of repo loans under the program today, so we can see how things are going to work. First, how did the Fed square the circle of ramping up its repos without pushing down the Federal Funds rate? Just as it had done with TAF, the Fed offset the "temporary" injection of funds with a "permanent open market operation". The Fed sold outright $10B of Treasury securities today at the same time as it offered $15B in exchange for mortgage-backed securities under the new program (at a low interest rate than in traditional repos against MBS collateral). The net cash injection was small, but the composition of securities on bank balance sheets changed markedly, as illiquid securities were exchanged for liquid Treasuries.

Nýir peningar sem fara í umferð í gegnum bankakerfið hafa margföldunaráhrif (bankinn lánar það aðilum sem leggja þá aftur inn í bankaerfið og kerfið lánar þá aftur og aftur) og seðlabankinn verður því að berjast við verðbólguna með því að taka peninga úr umferð með sölu ríkisskuldabréfa. Markaðurinn sýndi vantrú sína með því að fella dollarann

In James Hamilton's wonderful coinage, the Fed is conducting monetary policy on the asset side of the balance sheet. This is an innovation of the Bernanke Fed. Conventionally, monetary policy is about managing the quantity of the central bank's core liability, currency outstanding. When the Fed wants to loosen, it expands its liabilities by issuing cash in exchange for securities. When it wants to tighten, it redeems cash for securities, reducing Fed liabilities. The asset side is conventionally an afterthought, "government securities". But the Bernanke Fed has branched out. It has sought to lend against a wide-range of assets, actively seeking to replace securities about which the market seems spooked with safe-haven Treasuries on bank balance sheets without creating new cash. By doing this, the Fed hopes to square the circle of helping banks through their "liquidity crisis" without provoking a broad inflation.

"Monetary policy on the asset side of the balance sheet" is a bit too anodyne a description of what's going on here though. The Fed has gotten into an entirely new line of business, and on a massive scale. Prior to the introduction of TAF, direct loans from the Fed to banks, including the discount window lending and repos, amounted to less than $40B, the majority of which were repos collateralized by Treasury securities. By the end of this month, the Federal Reserve will have more than $200B of exposure in its new role as Wall Street's genial pawnbroker. Assuming the liability side of the Fed's balance sheet is held roughly constant, more than a fifth of the Fed's balance sheet will be direct loans to banks, almost certainly against collateral not backed by the full faith and credit of the US government (and beyond that we just don't know). This raises a whole host of issues.

Hlutirnir gerast hratt því núna eru um 25% verðmæta á efnahagsreikningi seðlabankans í útlánum.

Caroline Baum wrote a column last week poopooing concerns about the Fed taking on credit risk via TAF lending. (Hat tip Mark Thoma.) I usually enjoy Baum's work, but this column was poorly argued. In it, she points out that the Fed has all the tools it needs to manage credit risk. The Fed offers loans only against collateral, and requires that loans be overcollateralized. If the collateral has no clear market value or if there are questions about an asset's quality, the Fed has complete discretion to force a "haircut", writing down the asset (for the purpose of the loan) to whatever value it sees fit. And the Fed can always just say no to any collateral it deems sketchy.

All of that is quite true, and (as Baum snarkily points out) not hard to find on FRB websites. But it fails to address the core issue. Sure the Fed has all the tools it needs to manage credit risk. But does it have the will to use those tools? In word and deed, the Fed's primary concern since August has been to "restore normal functioning" to financial markets. The Fed has chosen to accept some inflation risk in its fight against macroeconomic meltdown. Why wouldn't it knowingly accept some credit risk as well? No one has suggested that the Fed is being "snookered". Skeptics think the Fed is intentionally taking on bank credit risk while still lending at very low rates. Some of us find that troubling.

Which brings us to the more postmodern issue of what credit risk even means to a lender with unlimited cash and an overt unwillingness to let those it lends to default. In a way, I agree with Baum. Until the current crisis is long past, I think it unlikely that any large bank will default and stiff the Fed with toxic collateral. Why not? Because for that to happen, the Fed would have to pull the trigger itself, by demanding payment on loans rather than offering to roll them over. Since TAF started last fall, on net, the Fed has not only rolled over its loans to the banking system, but has periodically increased banks' line of credit as well. In an echo of the housing bubble, there's no such thing as a bad loan as long as borrowers can always refinance to cover the last one.

The distinction between debt and equity is much murkier than many people like to believe. Arguably, debt whose timely repayment cannot be enforced should be viewed as equity. (Financial statement analysts perform this sort of reclassification all the time in order to try to tease the true condition of firms out of accounting statements.) If you think, as I do, that the Fed would not force repayment as long as doing so would create hardship for important borrowers, then perhaps these "term loans" are best viewed not as debt, but as very cheap preferred equity.

Let's go with that for a minute, and think about the implications. One much discussed story of the current crisis is the role of sovereign wealth funds in helping to capitalize struggling banks. Will they, won't they, should we worry? Sovereign wealth funds have invested about $24B in struggling US financials. Meanwhile, the Fed is quietly providing eight times that on much easier terms.

If we view TAF and the new 28-day, broad-collateral repos as equity, what fraction of bank capitalization would they represent? I haven't been able to find current numbers on aggregate bank capitalization in the US. In June of 2006, the accounting net worth of U.S. Commercial Banks, Thrift Institutions and Credit Unions was 1.25 trillion dollars. Putting together remarks by Fed Vice Chairman Donald Kohn and data on bank equity to total assets from the St. Louis Fed yields a more recent estimate of about 1.6 trillion. The average price to book among the top ten US banks is about 1.3. So, a reasonable estimate for the current market value of bank equity is 2 trillion dollars. The $200B in "equity" the Fed will have supplied by the end of March will leave the Federal Reserve owning roughly 9.1% of the total bank equity. Obviously, the Fed isn't investing in the entire bank sector uniformly. Some banks will be very substantially "owned" by the central bank, whereas others will remain entirely private sector entities. As Dean Baker points out, the Fed is giving us no information by which to tell which is which.

What we are witnessing is an incremental, partial nationalization of the US banking system. Northern Rock in the UK is peanuts compared to what the New York Fed is up to.

You may object, and I'm sure many of you will, that our little thought experiment is bunk, debt is debt and equity is equity, these are 28-day loans, and that's that. But notionally collateralized "term" loans that won't ever be redeemed unless and until it is convenient for borrowers are an odd sort of liability. Central banks are very familiar with the ruse of disguising equity as liability. Currency itself is formally a liability of the central bank, but in every meaningful sense fiat money is closer to equity.

I do not, by the way, object to nationalizing failing banks. There are (unfortunately) banks that are "too big to fail", whose abrupt disappearance could cause widespread disruption and harm. These should be nationalized when they fall to the brink. But they should be nationalized overtly, their equity written to zero, and their executives shamed. That sounds harsh. It is harsh. One hates to see bad things happen to nice people, and these are mostly nice people. But running institutions with trillion-dollar balance sheets is a serious business. Accountability matters. These people were not stupid. They knew, in Chuck Prince's now infamous words, that "when the music stops... things will be complicated.", and they kept dancing anyway.

But accountability has gone out of style. The Federal Reserve is injecting equity into failing banks while calling it debt. Citibank is paying 11% to Abu Dhabi for ADIA's small preferred equity stake, while the US Fed gets under 3% now for the "collateralized 28-day loans" it makes to Citi. Pace Accrued Interest (whom I much admire), I still think this all amounts to a gigantic bail-out. And that it is a brilliantly bad idea from which financial capitalism may have a hard time recovering. Like a well-meaning surgeon slicing up arteries to salvage the appendix, the Federal Reserve is only trying to help.

Eins lengi og pappírar sem bankarnir sitja uppi með halda áfram að falla í verði þá heldur bankakreppan áfram. Þetta graf bendir til þess að efnahagslægðin verði löng, en það sýnir upphæðirnar sem fólk hefur verið að slá út á húsin sín (eyðslufé). Bláu súlurnar sýna að einstaklingar voru að slá yfir $200 milljarða suma ársfjórunga en rauða strikið gefur til kynna hve há prósenta þetta var af eyðslutekjunum. Við höfum hér sex til sjö ára lánafyllerí, sem á eftir að jafna sig út með miklu lægri tölum til fjölda ára.

Þessi lán, venjulega annað eða þriðja veð, eru að lenda í vanskilum í vaxandi mæli.

Ef við lítum á seðlabanka sem sameign fólksins (nú mundi Rockefeller hlægja!) þá vaknar sú spurning hvort verið sé að þjóna hagsmunum samfélagsins með því að lána vandræðabönkum út á ruslabréf. Hvers vegna á fólkið að bjarga bönkum sem eru búnir að setja hagkerfi heimsins á annan endann með svikum? Tökum eitt dæmi:

Þetta þriggja herbergja 80 fermetra hús í friðsömu hverfi í Los Angeles seldist fyrir $363.000 þann 22. desember 2006. Í dag er hægt að kaupa það fyrir $180.000. Er eitthvað vit í að bankinn geti gengið inn í seðlabankann og tekið lán út á hærri upphæðina? Margfaldið síðan dæmið með milljónum húsa sem bera lán sem eru hærri en verðmiðinn sem þau bera í dag.

Í fyrsta skipti í sögunni eiga Bandaríkjamenn sem heild minna en 50% í húsunum sem þeir keyptu. Um 1950 áttu þeir 80% og lánakerfið ekki nema 20%. Samt hafði fjöldi hermanna tekið 100% lán eftir seinna stríð.

Þrátt fyrir þennan mikla peningamokstur þá eru langtímavextir að hækka.

March 11 (Bloomberg) -- Yields on agency mortgage securities relative to U.S. Treasuries traded near 22-year highs, as the Federal Reserve's plan to temporarily swap up to $200 billion of government debt for mortgage bonds failed to ease concern that a liquidity and capital crunch will continue to roil debt markets.

The difference in yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10- year government notes narrowed about 5 basis points, to 223 basis points, paring a larger decline. The spread helps determine the interest rate on new prime home mortgages of $417,000 or less.

The drop still left the spread about 87 basis points wider than on Jan. 15, the recent low, and higher than last week. Banks and securities firms last month launched a new round of demands for more collateral on loans secured by debt to investment funds including Thornburg Mortgage Inc. and Carlyle Capital Corp., forcing sales and eroding potential returns, and few buyers have emerged. The spread reached the highest since 1986 on March 5.

The new Fed program announced today ``prevents things from getting considerably worse, and it helps the broker-dealer community a fair amount,'' said Ajay Rajadhyaksha, head of fixed- income strategy at Barclays Capital. ``But by the end of the day people will realize it's not a silver bullet.''

Shares of Fannie Mae and Freddie Mac, the government- chartered companies that guarantee most agency mortgage securities and represent two of the largest holders the bonds and other mortgage debt, rallied after plunging to the lowest since 1995 yesterday. Spreads on the companies' own debt narrowed. Markit ABX indexes, which are used to create derivatives tied to the performance of subprime-loan securities, climbed, suggesting a rise in prices for some home-loan bonds off record lows.

Eins og áður hefur komið fram á þessari síðu þá getur seðlabanki auðveldlega gert hagkerfið sveigjanlegra, t.d. með eðlilegum vaxtalækkunum, reglum um lægri bindiskyldu banka, kaupum á ríkisskuldabréfum o.s.frv. En seðlabanki stendur ráðþrota þegar mikil verðmæti gufa upp á stuttum tíma. Bankakerfið vill ekki lána út á hús eða fyrirtæki sem eru að lækka í verði. Því fyrr sem botninum er náð, þeim mun betra. Þá fyrst taka markaðslögmálin við sér.

Seðlabankinn BNA er búinn að lækka stýrivexti niður fyrir verðbólgustigið og hefur þannig yfirgefið dollarann. Það hækkar heimsmarkaðsverð á hráefni. Gullið nálgast $1000 og olían virðist algjörlega óstöðvandi (gæti þó hæglega fallið um $20 í djúpri efnahagslægð).

Þessi síða byrjaði að spá miklum olíuhækkunum fyrir mörgum árum, en það er samt eitthvað ískyggilegt við að sjá tunnuna í $110. Vonandi eru ekki einhverjir braskarar með upplýsingar um væntanlegar loftárásir á Íran. Svoleiðis ævintýri gæti endað með kreppu um allan heim.