Tuesday, August 26, 2008

Total Borrowings of Depository Institutions from the Federal Reserve

Though I've put up this chart before, I'd like to do so once again in the hope to answer one of my reader's questions and possibly explain, for those of you who don't understand, its overall significance.

Total Borrowings of Depository Institutions (Monthly)

The first obvious thing many of you will notice is historical precedence. Looking all the way back to the 20's, recent borrowing activity from the Fed has far surpassed anything in history.

One of my readers asked: " please explain that chart. Is "depository institutions" another name for banks? "

Answer: Depository institutions are financial institutions who obtain funds mainly through deposits from the public. This typically includes commercial banks, savings and loan associations, savings banks and credit unions. However, as of of 2008-03-20, this data also includes the primary dealer credit facility, and other credit extensions that were (also unprecedented in history) instituted by the fed to shore up the credit markets.

Another Question: "Why are they borrowing all this Money":

Answer: Because many of them are actually insolvent and need to shore up capital requirements... A bank or financial institution's capital, also known as equity, is the margin by which creditors are covered if their assets were liquidated. A measure of their financial health is its capital/asset ratio, which is required to be above a prescribed minimum...

Well, due to the mortgage crisis, falling home values, foreclosures and the like - and all the bad securitized paper that was sold to investors and held by banks/institutions - many of these financial institutions have had to come to grips with huge writedowns - writedowns that have impaired capital requirements - driving them below prescribed minimums.

Now, the only way to restore capital requirements above the minimums is to raise cash, which many times leads to borrowing. The problem is: No one is lending anymore and the Federal Reserve window has become one of the only cash spigots available!!!

Next question: "Where did the money go":

Answer: The Fed was hoping these banks/financial institutions would use this new money to generate new loan activity, but these institutions were much worse off than believed and the money was actually used to shore up balance sheets, improve capital ratios and prevent (slow down) insolvencies which could set off a cascade of dominoes -- financial implosions like Bear Stearns which HAD to be rescued - else risking financial Armageddon.

Next Question: "Are they supposed to pay that money back"

Answer: Yes, it's supposed to be paid back, but many of these institutions put up the required collateral - risking their toxic waste Commercial Paper that couldn't be offloaded elsewhere - in the event they can't pay it back (oh the poor souls!)

The "Hail Mary" hope for the Fed and all the players in this game of charades was: By temporarily providing all the necessary liquidity, confidence will be restored and the Securitization market (which is completely frozen) will somehow ease up - allowing this paper to once again sell at near par value.

As we've seen of late, with the credit contagion spreading, it has become apparent that this "Hail Mary" didn't work and the Fed is now growing worried -- worried that they too will be stuck with all this toxic garbage.

If you look at the next (weekly) chart, which narrows the span of time, yet stretches out to Aug 20, 2008, you will notice that the Fed is attempting to QUICKLY slow down the monetary Fed Window spigot. Maybe they have come to the realization their con game won't work?

Total Borrowings of Depository Institutions (Weekly)

Bottom Line: With no alternative lenders available, when the Fed finally Cuts off new credit (which they are starting to do) the game of charades is over... Therefore, I expect a cascade of financial implosion grenades to be set off quite soon...




Dave said...

I've seen that first chart many times and every time I still don't believe my eyes. It looks like a charting error or something.

Nevertheless, I read an article yesterday - I believe some others referred to it here yesterday - from Christopher Laird, titled "Credit Crisis II ... A World Financial Armageddon?" (http://www.gold-eagle.com/editorials_08/laird082508.html). That article made the staggering claim that the U.S. banking system has been borrowing $40 billion a week! For an entire year! That amounts to $2 trillion injected so far (plus the same amount in Europe). The $40 billion figure also agrees with your second chart.

According to Mr. Laird - and I'm inclined to agree - the worst is yet to come! All I can say is, "Holy implosion, Batman!"


Virgo said...

Randy, thank you so much for explaining the chart. So the banks have cut their subprime losses, the Fed is holding all the crap, and the banks aren't lending because no one is going to buy anymore crappy mortgages from them (like Fannie and Freddy- who are completely broke). So everyone is paralyzed with fear and it's time for Alt-A to reset. Right? So once Alt-A reset (and these mortgages are twice the value of sub-prime (?))& the banks start taking losses, the Fed isn't going to bail them out. So the banks go under and the FDIC has to bail them out- with money they have to borrow from the Treasury. So it looks like complete asset deflation (anything bought with credit- homes, cars- because there will be no credit) and monetary inflation (anything imported & priced in dollars, like oil and anything that requires oil, like food (oil for transport). So once other countries realize that the US is insolvent they will stop loaning us any money (which equals depression) or panic and start dumping treasuries on the market (which equals a hyperinflationary depression). So we're screwed, it's just a matter of time. And Kuwait is preparing for war. Did I get this right? Let me know; I'm off to buy a lot more peanut butter I'm stocking up.

Justin_n_IL said...
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Randy said...


Yes, that was a very good/scary article that explained (quite nicely) the likely outcome we can expect from this current mess.

BTW: I like your blog!

Virgo, BINGO!

You have perfectly tied many of the disparate, yet very interconnected pieces together.

Welcome to the < 1% club of those who know/understand far more about our economic condition than they should, yet who are completely helpless in changing the ultimate outcome.

It's pretty scary stuff to understand and a tremendous burdon to carry -- especially when the masses believe differently/fail to open their eyes and then consider you a nutjob for your "educated/enlightened" viewpoint.



Samadhi said...

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Arthur said...
This comment has been removed by a blog administrator.
www.castellon-3d.com said...

This will not truly have success, I consider so.


The federal reserve is to blame for the devaluation of the dollar.

Anonymous said...

Did anyone use this ahead of time to bail out of the stock market before it crashed? Luckily I was tracking this indicator, among others and bailed out of most of my investments from the stock market by early 2008, although I had no idea we were so close to a total market meltdown. I been using the "Total Borrowings of Depository Institutions from the Federal Reserve" historical data as one of my key leading indicators I track on a monthly basis. I've been using it since 2001. Besides reviewing the chart as you have displayed, if you review the raw data from a month to month basis and compare it to previous year data as a % change, might provide a more eye opening view. Charts are good too, but I prefer to look at numbers. For instance, the Borrowings really started to increase in December 2007 with a YoY change from previous December 2006 data by a 7,978%. Each month thereafter for about 12 months huge borrowings took place. Another example was February 2008 the borrowings had a 200,423% increase compared to February 2007 borrowings. Yes, that's a 200,424% change! Anyway, this chart you are showing is very good and could have helped a lot of investors realize something terrible was coming to the stock market. If you review other big market crashes such as the 1973-1974 years, borrowings also went up prior to the market crash. This indicator is great to use for the MOAMC (Mother of All Market Crashes) that might happen once every 10-15 years (seems like the time period is being condensed), so tracking this indicator month after month after month most of the time will seem like a waste of time and provide little value, that is until it does if/when borrowings go shooting back you suggesting another big crash is on the horizon so a person needs to be diligent and keep tracking it. ....of course do not just use this indicator to make decisions, but use it one of several data point econ indicators. Investors need to track a basket of indicators along with this one e.g. Yield Curve, S&P 500 P/E ratio etc.


The federal reserve stinks.