Skip to content

Ahh, that’s how they’re doing it

Similarly with the announcement by the US Federal Reserve that it will provide as much funding as banks need to meet deposit withdrawals, with lodged collateral valued at par, not the seriously eroded value much of it now commands in the markets.

Banking aficionados will like that one. About time to start buying US banks again with guarantees like that….

7 thoughts on “Ahh, that’s how they’re doing it”

  1. Is this not a taxpayer bail out of the banks then? If the Fed swaps all the bonds at par will it not have massive losses on its books instead? Losses that will have to be met by someone, that someone probably being the US taxpayer eventually?

  2. You can read it that way. Tho’ not quite and totally. What the Fed is saying is that it will take bonds as security for a loan at par. At some point the .loan must be repaid of course, then the bonds are handed back. The losses will crystalise at some point, obviously. Either the bank goes bust at the Fed is holding bonds as security now worth less than the loan. Or, the bank survives, pays back the loan, gets the bonds back and the loss is on the bank balance sheet.

  3. So its a game of pass the toxic parcel then? The Fed is betting that the losses on the bonds will disappear as rates decline from their current levels, and they will be able to give them back to the banks when the loans are paid off (if they are).

    If the Fed was left holding a load of underwater bonds could they hold them to maturity and get par value that way, and thus suffer no losses?

  4. The loss has actually happened, obviously, because interest rates have changed. But whether they have to be recognised or not. If the Fed held to maturity then yes, there would be no loss booked.

  5. The US population/taxpayers will pay in the end. The explanation is in Zulu.

    Pvt. Cole : Why is it us? Why us?
    Colour Sergeant Bourne : Because we’re here, lad. Nobody else. Just us.

  6. OT but a while back I made the prediction (probably around the time of the BoE coup over Truss/Kwarteng) that the speed of the interest rate rises was going to break something in the financial system and the reaction of the central banks would be to stop rate rises to fight inflation (despite it still being way above target), stop any QT programs, and by the end of 2023 interest rates would be falling and QE would have been restarted.

    How’s that looking right now then? The banking system in the US is borked (and contagion is spreading to Europe, Credit Suisse looks like toast and other usual suspects (such as DB) could be dragged into it), the talk is that the Fed will now ‘pause’ rate increases that had been expected (despite red hot inflation figures), and the bank bailout in the US is effective QE, in that they are giving printed money to banks in return for assets not worth the value they are being assigned. This is in effect in injection of printed money straight into the economy – its not new taxes, its created out of thin air and shoved into the banking system. Yes it may be reversed at some point if (big if) the banks pay back their loans, but for the short term it is effectively more QE. I doubt the QT programs here or in the US will last long now either.

  7. @Jim

    Don’t underestimate the ability of one bit of the Fed (or any other central bank) to be selling off bonds at a loss while other bits of it are buying underwater bonds at face value.

Leave a Reply

Your email address will not be published. Required fields are marked *