Neither a Borrower nor a Lender Be: Banks Getting their Daily Fix from the Fed

Oh yes. This will surely work.

Keeping the insolvent Morgan Stanley and Goldman Sachs on life support, and paralyzing an entire economy and its banking system to cover their embarrassment.

Reuters
Banks borrow record $437.5 billion per day from Fed
Thu Oct 16, 2008 5:14pm EDT

NEW YORK (Reuters) - Financial institutions ran to their lender of last resort for record amounts of cash in the latest week, under extreme pressure from the worst global financial crisis in a generation, Federal Reserve data showed on Thursday.

Banks and dealers' overall direct borrowings from the Fed averaged a record $437.53 billion per day in the week ended October 15, topping the previous week's $420.16 billion per day.

Some analysts are concerned that banks' dependence on Fed lending might become long term and difficult to change.

"The banking system is going to become addicted to this very cheap money. Unwinding it will be very difficult," said Howard Simons, strategist with Bianco Research in Chicago.

"We have effectively allowed the central banks to disintermediate the banking system. Why would I want to borrow from you if I could do it with the central bank, because they can always print it up and say 'here'...and they are in the business now of making sure I stay in business," Simons said.

Primary credit discount window borrowings averaged a record $99.66 billion per day in the latest week, up from $75.0 billion per day the previous week.

Primary dealer and other broker dealer borrowings were $133.87 billion as of October 15, versus $122.94 billion on October 8.

"Other credit extensions", mostly reflecting loans to insurer AIG, were $82.86 billion as of October 15, versus $70.30 billion as of October 8.

The Fed's lending to banks to enable them to purchase asset-backed commercial paper from money market mutual funds was $122.76 billion as of October 15, versus $139.48 billion on October 8.

Proceeds from the U.S. Treasury's sales of Treasury bills in the Fed's supplementary financing account, which are helping to fund the Fed's support of financial institutions, were $499.13 billion as of October 15, versus $459.25 billion as of October 8.

Spreads Between the Central Commodity Markets and Market Prices Continue to Widen

One of the hallmarks of the centrally-planned economy is a discrepancy between prices on paper, and prices in the marketplace. The examples of this are all too familiar to students of the economy of the former Soviet Union.

For whatever reasons, the US is beginning to go down that path, and perhaps shockingly so. We think a great deal of this is a temporary market dislocation overall as funds unwind positions under duress.

However, in the case of silver, the huge short positions by three banks suggest this is central planning and price fixing, not price discovery tied to market demand.

Silver: Gap Between Paper and Physical Prices Widening Daily



The logical question is "why don't these large dealers simply purchase contracts on the COMEX and stand for delivery?"

One factor is the incremental cost of fabricating the large bars from COMEX into forms more palatable to the retail market, ie. 100 oz, 10 oz bar and 1 oz rounds.

Another could be the anecdotal stories of COMEX reluctance to settle in delivery, and pressuring traders to accept 'cash.'

A potentially explosive situation worth keeping an eye on, for sure.

We wonder in what other markets this condition might repeat. Gold looks likely. Oil? Housing?

Where does statism end once it becomes comfortable with setting market prices, as in the Wage and Price Controls of the 1970's which so many have forgotten about today.

Are the large commodity producing nations allowing the bank cartel to set the prices at which they can sell their goods? Strange, and shame on them if they do.

Its a Brave New World, with many vestiges of the all too familiar.

Charts in the Babson Style for the Morning of 16 October

The LAST hour of trading is proving to be the most important of the day.

The hedge funds are in a massive unwinding of positions.

The Paulson plan does nothing in the short term to help the economy or the markets.

It is more like an outsized 'perk' than an economic 'plan' with a narrow and somewhat selective list of recipients.

"Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood." Antony C. Sutton

Net Asset Value of Certain Precious Metal Funds and Trusts

Why do CEF and GTU carry such a premium over Net Asset Value?

Because this is the premium people are willing to pay for what they perceive to be 'real bullion' versus 'paper bullion.'

GLD tends to have a negative premium because it is a vehicle for traders, and particularly short sellers.

Deviations from NAV in themselves mean little, if the deviation is steady. It is in the fluctuations that information, and opportunities, are discovered.