Wednesday, Mar 17, 2010
Another banking crisis loom
Greg Pytel: Is another liquidity crunch on the way?
It is somewhat frustrating that the pundits like Jeremy Warner (of The Daily Telegraph) and Robert Peston (of the BBC) write the obvious with such a long, long delay. Rather than reading Warner ("Another banking crisis loom" - blogs.telegraph.co.uk/finance/jeremywarner/100004314/another-banking-crisis-looms/) or Peston I suggest you (re)read Pytel’s blog post of July last year, “Is another liquidity crunch on the way?”
Posted by ant @ 09:54 AM (1530 views) Add Comment
36 Comments
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1. mark wadsworth said...
Yes.
Next question please.
2. Crunchy said...
Yes, another bail out request.
3. refusetobuy said...
Greg Pytel goes on and on about cash. Liquidity has nothing to do with cash, and everything to do with value. Its about being able to sell assets for what they are worth. You can sell 10 shares at the current market price, but you can't sell 10 million shares.
You might say there was a liquidity crisis in the housing market.
The graph that gets posted here regularly showing when option ARMs need to be reset shows why another liquidity crunch is on the way. This will be exacerbated if US interest rates rise.
4. ant said...
"Its about being able to sell assets for what they are worth." What a nonsense! This is a free market mate! You always sell assets, or anything, for what they are worth. And if you can sell them for only nil (zero) this is their value.
Liquidity has a lot to do with availability of cash as cash is an ultimate legal tender that you MUST BY LAW accept in discharge for any debt or transaction. If there is a shortage of cash then simply you may like the price but you have no money (cash) to settle the transaction. So under current legal set up a liquidity is almost all about cash. (Some dishonest ideas were already mooted by the bankers that banks are allowed to settled their debt by their shares. But we are not there yet.)
5. mark wadsworth said...
Ant: "Some dishonest ideas were already mooted by the bankers that banks are allowed to settled their debt by their shares."
*ahem*
That's what's called a debt-for-equity swap, which is the only sensible way to sort out banks - in any event, infintely preferable to taxpayer funded bail outs. By analogy, it's like the bank (a creditor) repo'ing a house. With a D4E, the creditors repo the whole bank.
*/ahem*
6. ant said...
@refusetobuy: you also wrote: "You can sell 10 shares at the current market price, but you can't sell 10 million shares." Is it anything to do with supply and demand? Similar to tomatoes, potatoes, cars, etc. That only shows that shares are not particularly liquid. And has it ever occurred to you that you "You can sell 10 dollars at the current market price (10 dollars), and you can also sell 10 million dollars at the market price (10 million dollars)." Availability of cash is an underlying factor of a liquidity position.
@mark wadsworth: pretty worrying.
7. ant said...
@mark wadsworth: debt-to-equity swap makes sense if it is voluntary arrangement. Otherwise your saving are likely to end up, against your will, as a huge pile of worthless toxic papers. If you are silly enough to agree to it, it is your own problem (in more ways than one:-). Pytel wrote about it in January: http://gregpytel.blogspot.com/2010/01/davis-2010-cunning-plan-how-we-will-all.html
8. mark wadsworth said...
Ant,
1. I never said that the government guarantee for the first £x,000 of each depositor's cash would be scrapped.
2. If you are a creditor of a business (or a mortgage borrower) and they can no longer pay, you have to do the best you can by repo'ing them and getting on with it. In the case of a business with some value (and banks still have a lot of value, just not as much as they pretended). Whether you call that 'voluntary' or 'involuntary' is up to you, but it sure as heck is a lot more voluntary than a taxpayer bail out.
PS, the new shares would not be a worthless pile of toxic papers. If they'd done a D4E with Northern Rock right at the start (when I told them to) the ordinary savers would not have lost a penny and bondholders would have crystallised losses of about 20p in the £ (unlike most people I looked at NR's balance sheet in detail and did proper grown uip calculations) - but those bonds were already trading at less than 80p in the £ so the D4E in itself would have improved their position. What's not to like?
9. mark wadsworth said...
The second sentence in bullet 2 should read:
"In the case of a business with some value it is not called 'repossession', it is called 'debt-for-equity swap' - the principles are exactly the same."
10. refusetobuy said...
If you can sell 1 asset for x, but can't sell 10 of the same asset for 10x then you aren't getting what it is worth. Liquidity is exactly the same as supply and demand.
Banks ran out of liquidity because they had assets that matured after the liabilities that they had due. The demand wasn't their to meet their supply. They may have been able to sell 10% of their assets for what they were 'worth' but they were still bankrupt.
Cash has excellent liquidity (until it starts to get printed), but is not the definition of liquidity. 10m of ten pound notes is a lot less liquid than a bond of 10m.
11. ant said...
Mark, In PS it is a matter of opinion. NR is not a good example as the bank is GUARANTEED by the state. I am depositing cash in a bank and expect cash back. If I cannot do it with a high street bank than Bank of England would have to provide such facility for me (and other individuals) like they do it for some institutions (including high street banks). And this may actually lead to high street banks collapse.
12. ant said...
@refusetobuy: "If you can sell 1 asset for x, but can't sell 10 of the same asset for 10x then you aren't getting what it is worth." It is a barking nonsense based on socialistic ideals. If you had ever collected stamps, you would have understood why. If you had been a farmer with experience of years of abundance and shortage of crop, you would have also understood why.
I am actually quite convinced that the current banking elite have intellects of communists some 30 - 40 years ago. You can learn why it is the case here: http://gregpytel.blogspot.com/2009/09/late-brezhnev-era-in-finance.html
13. icarus said...
How does banks' exchanging toxic waste for government-injected cash lead to lack of liquidity? Logically it's possible that the reserves that banks build up in that way will enable them to lend to the real economy. If they don't then that requires a separate explanation.
14. mark wadsworth said...
Ant, have you actually looked at NR's balance sheet as at middle of 2007? Have you worked out what their mortgage assets would have been after a hyper-cautious twenty per cent write down? Do you realise that even this lower figure would have been enough to repay depositors about four times over? Do you realise that the remaining value of assets (after repaying depositors) would have been about 80p in the £ for bondholders? This has nothing to do with state guarantees.
I assume not. However, I did, so until you brush up on actual facts and figures there is little point in continuing this debate.
PPS The irony is, that two years later, this is what the government actually did. The taxpayer loan has been largely repaid and the assets split into good bank (which starts again from scratch) and bad bank (which is owned by the bondholders, who take the losses on the chin).
15. ant said...
Mark, the problem is I am not interested in banks shares at all. I only keep cash in a bank and expect cash back. Under not circumstances I would have accepted D4E conversion. If this is not possible with a high street bank the Bank of England would have to provide such facility. This is really my entire argument.
Your example of mortgage is not really a good one, since a bank issuing a loan agrees to handle D4E if necessary (it's called repossession).
16. ant said...
@icarus: you wrote: "Logically it's possible that the reserves that banks build up in that way will enable them to lend to the real economy." Your logic excluded billions and billions paid in form of bonuses (and other payments). So before banks are able to lend money to the real economy, the money will get fizzed out to offshore account of our banking elite.
17. icarus said...
@ant - Is that the explanation? Why didn't Pytel say that?
18. mark wadsworth said...
Ant, may I reiterate, neither I, nor any other serious proponent of D4E has suggested that the government guarantee for normal deposits would be withdrawn (see my comment 7 bullt 1 above).
D4E applies to bondholders and other higher-risk investors. If you take the time and trouble to look at bank balance sheets, you will see that any point in time, they ALWAYS have enough assets to repay normal depositors, even the really badly run ones like HBOS or whatever.
It is a straight choice - D4E (via the bankruptcy courts if necessary) or taxpayer-funded bail outs. Tell me which you prefer There is no other option. "Allowing the bank to fail" is not an option - if it went to bankruptcy courts, it would still be sorted out by D4E.
19. ant said...
@icarus: don't expect Pytel to contain the entirety of his blog in every and each article. He actually provided something like this in an earlier article: http://gregpytel.blogspot.com/2009/08/is-another-loot-going-on-now.html And I am pretty sure there is more of that on his blog.
20. ant said...
Mark. I am not really saying that you are wrong. I am simply setting out my choice to which I am entitled. I want cash as cash 100% under any circumstances. If high street banks cannot provide such facility I want the government to enable me using BoE (like some institutions do).
21. uncle tom said...
This piece was written last July..
22. refusetobuy said...
I was merely defining what I meant by the word 'worth'. Value of many units is not the same as price of one unit. Stamps are an interesting example of liquidity. A rare stamp may be 'worth' 10x more than if 10 more existed in the world. Not sure your point. Storing grain for bad times has nothing to do with liquidity, which is about getting value from an asset at a specific point in time.
Your communism link had nothing to do with liquidity. But in return, here
http://www.riskmetrics.com/system/files/Research20090700.pdf
is an excellent article on liquidity.
I take it you are now happy that cash does not equal liquidity?
23. icarus said...
ant @18 - Why have a series of articles with explanations popping up here and there? In this article he says that government purchases of toxic waste from banks leads to lack of liquidity. If that's because bankers then steal the money he could have said so here, without requiring his readers to sift through his collected works for the rest of the reasoning.
24. ant said...
@icarus: this is the question for Pytel. However I share your point.
25. icarus said...
ant - so why did you post it?
26. ant said...
@icarus: why not? I follow Pytel's blog posts and like them. They are sometimes too tedious and longish ("anally retentive") but they really provide quite a coherent picture what's going on and a pretty good a reliable blueprint what's likely to happen.
27. icarus said...
ant - But this post doesn't stand alone and doesn't provide a coherent picture, doesn't answer the obvious question I posed at 11.04am.
28. ant said...
@icarus: but the blog does. It is about money multiplier
29. icarus said...
Then post something that passes this simple test.
30. ant said...
@icarus: could you spell out precisely what you mean by "simple test"?
31. icarus said...
ant - post 26. The article you posted doesn't stand alone. You had to add something else (after prompting) to answer a simple question that should have been answered in the original post/article (not that the answer is satisfactory to me, but let's not get into that at this point). Your liking for Pytel's stuff in general doesn't justify your posting this particular article.
32. ant said...
@icarus: no point to argue. For some like, like myself, this may be intuitive and straightforward (i.e. did not required further posting), for others, like you, it was necessary. I am not critical of you: just hope that additional information I gave cleared it up. And if it confused you at all, accept my apology.
33. icarus said...
My original post. "How does banks' exchanging toxic waste for government-injected cash lead to lack of liquidity? Logically it's possible that the reserves that banks build up in that way will enable them to lend to the real economy. If they don't then that requires a separate explanation."
So the 'separate explanation' is straightforward is it? And your answer is that the bankers steal the cash. Yep, that's pretty straightforward. Forgive those of us who lack your intuition.
34. ant said...
@icarus: indeed, you must be quite new to the world of banking
35. p. doff said...
Is this the 5 minute argument, or the full half hour?
36. jack c said...
p. doff - if you want the answer you'll have to pay for it