The Issue is Solvency Not Liquidity
New podcast posted. The Fed news on the new credit facility came about 2/3 of the way through, and we give our immediate reaction.   Radio Free Wall Street
Market observers continue to be confused about what they are falsely calling “liquidity problems”. As interbank rates like the Libor (quoted at 5.20% this morning) continue to fail to respond the central bank rate cuts, any thinking person ought to be able to connect the dots as to why. The reason: essentially no one is willing to make loans to dead men walking, or even the walking wounded at nominal low rates any more. The very definition of Ponzi finance is the borrowing of new funds to pay debt service on old debt that normal income does not support. Most lenders aren’t interested in unsound lending right now.
Despite this clear implication, the Fed grasps for new smoke and mirrors to provide a source of funds (called liquidity by the spinmeisters) so that lenders can continue to float bad loans. The latest looks like the Fed will get into the loan auction funding business. This in effect will allow lenders to bring fictitious capital to the table for low interest loans in which to buy the fictitious capital of other players. In otherwords it’s a circle jerk. Here’s how the scheme works.
The Fed said that commercial banks would be able to bid at auction for funds that would be drawn from the Temporary Auction Facility. The money would be intended to help cash-strapped banks raise money needed to keep making loans to businesses and consumers
The Fed said all banks judged to be in generally sound financial condition by their Fed regional bank would be eligible to participate in the auctions for funds. The first auction of $20 billion was scheduled for next Monday, followed by another auction of $20 billion on Dec. 20. The third and fourth auctions will be in January.
In otherwords instead of borrowing at the interbank rate, a little money (two a month for $20 billion) will be provided with fewer questions asked, to “qualified institutions” (probably loosely defined) to support a few Ponzi unit payments, or heaven forbid to make bids on Ponzi units themselves. The question is, how does this get into the hands of Joe Ultra Light Sixpack(JULS) to make payments on houses and cars? Or maybe on credit card asset backed? Does this provide more income for JULS to help support Ponzi units?
NEW YORK (AP) – Charge-off and delinquency rates continued to rise in November at Capital One Financial, the financial services company said in regulatory filings Wednesday. Net charge-offs of managed loans increased to 3.52 percent in November, from 3.36 the previous month and 3.27 during the same month a year ago. Charge-offs are loans being written off as not being repaid. Loans at least 30 days past due increased slightly to 3.68 percent in November from 3.64 in October. During Nov. 2006, 3.49 percent of loans managed were 30 days past due. Thirty-day delinquency rates were as low as 2.77 percent in April.
Since solvency is ultimately about JULS ability to service Ponzi units, how does this move help him deal with more basic issues such as bills and costs?
WASHINGTON (MarketWatch) — Driven by a weaker dollar and much higher prices for petroleum and natural gas, import prices surged 2.7% in November, the largest monthly increase in 17 years, the Labor Department reported Wednesday. Even excluding fuels, import prices rose 0.5%. Import prices have now risen 11.4% in the past year, the largest gain in the 25-year history of the import price index.
Will players borrow now to put bids in on Ponzi units, and if so, and at what level? The answer is most likely they won’t. Watch the commercial paper rates and Libor rates as these are market rates that determine confidence in other institutions, and confidence and solvency should trump liquidity availability.
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