James Turk: Liquidity Won’t Help Insolvency

December 13th, 2007

Of course, James Turk has more riding on gold than just about anyone, but this is a good read anyway.

Via: Kitco:

The Federal Reserve today announced a new scheme to inject more liquidity into the money markets. It cobbled together a partnership arrangement, as the Canadian, UK and European central banks also agreed to participate in the scheme.

The process of ‘injecting liquidity’ is a euphemistic way of saying ‘creating money out of thin air.’ The Federal Reserve doesn’t need a printing press to do this. They simply create a book entry on its balance sheet, and presto, $40 billion (or whatever amount they deem appropriate) of new ‘money’ is created, which the Fed then lends to those bankers coming to it hat in hand.

Creating money this way is a barbaric process because it further debases the dollar, but is hailed by the banking insiders and their apologists as a brilliant maneuver to fight the worsening liquidity crunch. Of course it is a view of those with vested interests, and bluntly, is just their selling pitch to the masses. It is a view so horribly misguided these insiders obviously realize it is wrong. They must know that the problem impacting banks today is insolvency, not liquidity.

Years of reckless credit expansion are coming home to roost. The boom is over, and since this past summer we have been in the bust, which is worsening day-by-day. Solvency is a problem of asset quality, not access to sources of funding. For example, Citibank didn’t have any trouble raising $7 billion of funding from a sovereign wealth fund at the right price, which was 11% – a rate far above the rates Citibank is paying to its depositors. This 11% rate reflects the risk of dollar inflation and the risk that Citibank has a lot of bad loans and other inferior assets on its balance sheet that will never be repaid.

There are gaping ‘black holes’ on the asset side of bank balance sheets. These black holes cannot be filled by creating money out of thin air. These black holes were created by assets that have ‘disappeared’. In other words, bank balance sheets are loaded with assets that are not worth what they once were, or in the worst possible case, no longer have any value at all. The bank liabilities remain, but their assets have been reduced. If this gap is larger than bank capital, then bank solvency is called into question, and that is the process now being evaluated by the markets.

Even though they have already announced countless billions of write-offs, banks have a long way to go in toting up their total losses. They face a daunting task. Many – but in reality, probably most – of their assets are impossible to value.

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One Response to “James Turk: Liquidity Won’t Help Insolvency”

  1. Eileen says:

    I about swallowed my tongue when I heard this latest move by the Fed. See what this latest move did to the dollar?
    http://stockcharts.com/h-sc/ui?c=$usd,uu%5Bm,a%5Ddaolnyay%5Bdd%5D%5Bpb50!b200%5D%5Bvc60%5D%5Bilb14!lh14,3!la12,26,9%5D
    Lower than yesterday.
    I don’t care what it did to Wall Street.
    I care about what the Fed’s moves do to the dollar.
    Year-end or life-end for the banks?
    There is a new accounting standard that requires all going entities eg especially banks – to valuate what is on their books and they can’t use an internal valuation measure to do so. My understanding of this SAP is that it stems from the Enron debacle wherein they set their own value to just about everything on their books by the “because I said so” standard. I believe this standard was enacted early 2006, and will be in effect for 2007 financial statements.
    My take on this situation and the implementation of this standard is that ALL OF THE BANKS will be pulling down their underwear for all the world to see “what’s down there” come year end.
    Of course those financial reports don’t come out until about the end of the first quarter (March 08). And when many learn their bank is “bankruptured” it will be too late to run to the nearest teller near you. All the money will be “gone.” In truth, it was probably “gone” a long time ago.
    This is going to be a LIFE ending experience for many banks. James Turk is a lot smarter than I am but, for what’s its worth, I think he is HAH, on the money here.
    My advice to anyone in the U.S. who has their accounts in an INVESTMENT bank, move it out NOW.
    An investment bank is most likely to be ah, guess what? Leveraged to the hilt with subprime loans. Find a local credit union. Their accounts are insured. Credit unions for the most part provide home equity loans (and take an interest in the title to your house to give you one) but they cannot (at least I don’t think so)invest on Wall Street.
    And they usually pay better interest.
    Corporate bank account in PA savings interest =.01 percent.
    Credit union bank account = 2.00
    Bonus: that money is benefitting your local community.
    ASAP. Before 12/31/07.

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