Wednesday, March 12, 2008

The Glengarry Leads

In the cinema classic "Glengarry Glen Ross" real estate salesmen Jack Lemmon, Ed Harris and Alan Arkin beg office manager Kevin Spacey for access to the "Glengarry leads" the magical names and phone numbers containing potentially good prospects they believe can save them from financial disaster. Please imagine that a sequel to this film, "Glengarry Glen Ross 2" has just been released but that Fed Chairman Ben Bernanke has taken the place in Kevin Spacey in this updated version and that the CEO's of various Wall Street investment banks are filling in for Lemmon, Harris and Arkin. What's more, while Kevin Spacey refuses to give out the leads unless he is paid a generous bribe, no bribe is necessary in "Glengarry Glen Ross 2" for Ben Spacey to dole out the Glengarry leads in generous measure to the desparate investment bank CEO's.

The Glengarry leads are being doled out in the ongoing credit-cruch saga via the "term securities lending facility" announced before the start of Tuesday's trading in the U.S. As you are probably by now aware, the TSLF is a $200 billion line of credit in the form of U.S. Treasuries that the Fed will lend to Wall Street banks for up to 28 days. The "catch" is that the securities offered as collateral by the banks must be AAA/Aaa rated. Yes, the hard-ass Fed is putting their little foot down by insisting that only the banks best securities can be used as collateral for the banks to receive the Fed's oxygen. However, as Paul Krugman points out, the rating agencies have yet to cut the gilt ratings on the MBS securities issued by the banks even though virtually all of these securities are experiencing major losses. How thoughtful of the rating agencies!

In other words the Fed are going to exchange their golden Glengarry leads (otherwise known as U.S. treasuries) for Florida swampland (otherwise known as MBS paper). It will not take a genius to figure out that the banks are going to flood the Fed with the crap-de-la-crap they now hold. While this scheme may help ease lending conditions on the margin, the TSLF will unfortunately be unable to turn garbage into gold. As residential real estate continues to fall in value in the U.S., the value of this paper will continue to fall and, ultimately, this scheme will fail because borrowers will be unwilling or unable to borrow money to buy over-priced real estate assets regardless of how available or how cheap money becomes. The banks will ultimately have to dine on their crap.

This situation brings back memories of Japan in the mid-90's. The Japanese banks were then getting stuffed to their gills with non-performing loans and, with the problem growing bigger and bigger by the day, the financial authorities created an entity to allow the banks to get these NPL's off of their balance sheets for up to five years. The idea was that the real estate market would recover and the loans would nurse themselves back to health in the interim. This didn't happen and eventually the problem loans went back on the bank's balance sheets, in generally worse shape than they went in.

The same will happen here with the Wall Street bank's bad paper. What amuses this writer is that one sees over and over again in the western press how the Wall Street banks and U.S. financial authorities are dealing with this crisis far, far better than their Japanese counterparts did in the 1990's. Presumably, such wisdom (emmanating as it is from the unquestioned superiority of the U.S./Anglo financial model) will bring a "quick" resolution to the crisis as the banks "quickly recognize" their losses and the U.S. financial authorities act "quickly" to "eliminate" systemic risk. As usual ideology triumphs over reality; in the short run anyways. One can easily imagine, therefore, that the market's surge in response to Ben Spacey's generousity in passing out the Glengarry leads will be shortlived.

P.S. Michael Mandel offers the quote-of-the-day in his commentary on the TSLF. I repeat it here with the barest minimum of comment:

Bernanke's ability to pull new policy instruments out of his hat may throw a bit of fear into investors who are betting on a downturn. Just when the Fed looks boxed in, he comes up with a new way to pump out liquidity - while preserving his real silver bullets, the rate cuts."

Ah, yes, those silver bullets. "Hails of derisive laughter, Bruce!"

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