ECB in Emergency Liquidity Injection. €100bn. Take it NOW … fd2ac.html

and … refer=home

So the ould M3 musta gone very negative all of a sudden :open_mouth:

Except Austin. Austin is liquid!

As Bloomberg points out, overnight euro libor went to 4.31 from 4.11 and the dollar rate went to 5.86 from 5.35 - very dramatic.

I’m not sure - it seems the banks were relying on ongoing cash flow to finance various things, and when that slowed down, they found themselves with not enough in the kitty to meet their commitments.

Which is fine, they can after all borrow a huge amount from each other or from the ECB - but what happened here seems to be that every bank needed the cash at the same time (hence the euribor increase - lack of lenders) and the normal ECB bid system means that as more money is borrowed, the rate slowly increases - when every bank wanted to borrow at once, the ECB decided to offer a fixed price system as a temporary measure.

Seems like the banks were sailing too close to the wind liquidity / capitalisation wise, and got caught out.

Why were they sailing close to the wind?

Is this linked with the sub prime issues and the fact all institutions seem to be exposed in some form?

Or was it just a case of bad timing (which seems unlikely to me)…

Because that’s how you maximum ROI for your shareholders - every available cent must be earning money at all times. You don’t keep a big rainy day fund, since you can always ask either your peers, or the big bank upstairs. And since up till now every bank was looking for something to do with their spare capital, it didn’t seem likely that one bank would have any problems raising some extra money if it was needed.

It’s linked, in two ways at least.

First, all those banks involved in sub-prime have started to put together the rainy day fund to cover possible losses or even just cash-flow issues in sub-prime - this both soaks up any spare cash, reducing what they can lend to other banks, and increases their need to borrow from other banks.

Second, since some banks seem really in a corner over the sub-prime thing, other seeminly healthy banks are questioning each other’s credit-worthiness, and demanding a higher risk premium if they do lend.

Banks have started hoarding cash, because they feel the might need it, and because they’d rather have it themselves than trust each other with it.

Don’t think capitalisation has anything to do with it. This is a money market issue.

Banks always sail close to the wind as holding too much in cash is a good way to lower your profits - what seems to have happened is that banks increased the amount of money they want to hold (due to the nervousness about the ongoing credit spread widening) and the price spiked. You see the same thing at month-end/quarter-end (though rarely as big and not as worrisome as it is anticipated) but probably the reason the ECB stepped in was to calm nerves - banks desired more money cos they were worried, which drove up the price of money, which caused them to be more worried etc. The ECB was puttng a cap on such fears.

My 2c.


Don’t forget that most tracker mortgages are based on Libor…

The rumour I’m seeing is that a second big German bank is in trouble.

So much for the free market :wink: . And if the banks are nervous now about the toxic sludge sub prime mess amongst other things what are they likely to feel about things a week or a month from now (its not going away you know). Is the ECB in the process of taking up the torch of Helicopter Ben and the Bank of Japan?

Really? I didn’t know that. I thought they always referenced the ECB rate.

WestLB? Bundesbank has denied that they are trying to prop them up anyway.


I think once the market stabilises (even if it is at a gut wrenching level for those who were long sub-prime risk) then the issues will be over. The losses will be taken, hitting profitiability, but all the players will be comfortable that there is no systemic risk.

Doubt it. Big difference between injecting liquidity in the overnight market and “quantitative easing”, a la BoJ, or money from heaven, courtesy of Helicopter Ben (both of which were targetted at reinflating an economy not propping up any asset market).


The big big problem is that nobody trusts rating agencies and there is no objective way of measuring risk. AAA ratings mean nothing now, they have been found out .

Until this conundrum is solved there will be no stability.

So does this mean that it’s only when all these Frozen Funds are " Mark to Market" as opposed to “Mark to Model” that we find out who is really holding
the big ticking parcel?
Or have I got it wrong?

I think that is an overstatement. The rating agencies have pretty well established reputations and the historical data to back it up in rating many different types of bonds - government & corporate certainly and, though the time series is smaller, in more mature ABS such US CMBS, etc.

The rating agencies models mispriced correlation risk in one relatively narrow field of the bond market - bonds backed, ultimately, by sub prime debt. There have been mistakes before (their tardiness with Enron springs to mind) but usually their ratings square up reasonably favourably with historical default rates.


Pretty much southofdub . If some fool sells $1m of a $2bn bond and takes a bath selling it at 20% of face value then the holders of the OTHER $1.999Bn of the same bond should do the same …IE mark value as per that last sale .

So nobody is selling and taking the bath . Nor is there a transparent market for it.

The only functioning market is in insuring a lot of these debts, called Itraxx.

Itraxx charges you 4% of face value ( or so) to insure a bond that yields 9% ( or so) , thats nearly half of the income from the bond gone.

It was 1% not so long ago so its now 4 times riskier based on insurance.

And LTY, the growth in these ‘new instruments’ came about BECAUSE the ratings agencies would give them AAA ratings.

In the strictest sense yes - because you’d be hard pressed to find a wide investor base unless you had a rating. But that isn’t what you mean, is it? Are you suggesting that the rating agencies have systematically misrated all ABS over the last 30-40 years? Cos that just doesn’t seem to be borne out by the facts - to my knowledge no AAA US CMBS has ever defaulted, for instance.


Still a lot of US subprime and other variable rate mortgages are yet to cross the Rubicon of the reset. This problem is likely to get worse, maybe a lot worse before it gets better.

I have to agree, this is only the beginning.

I posted this in the central bank /Bear stearns thread. But since we are on this topic here, this video is worth a watch.

Keiser did a program on AL Jazeera english this week about the global credit bubble.

What happeened in ireland since 2001/2002 is he same thing that happened everywhere else since 2001/2 . There’s nothing unique about whathappened to us in the past 5 years.

No , there were areas where they could accurately quantify the risk and did. Sovereign AAA debt is sound .

The problem in recent years is that the banks that securitise ‘assets’ worked a way around the ratings agencies . This was because post .com crash the banks simply could not sell enough bonds and governments were not issuing them so someone else had to, themselves.

Synthetics such as CDOs with AAA ratings were often what the ratings agencies produced for these banks and thats why we have a sub prime mess.

Bill Gross of Pimco has said the banks ‘fooled’ the rating agencies with the CDOs but the ratings agencies saw easy money and went along with it.

now if you look at this article here … l-who.html

Yet these CDOs are worthless and not in default, they are paying their % every month or whatever and are still AAA rated. Nevertheless the asset you paid 100% for and get 10% interest on is actually pretty worthless. Nobody wants to buy it.

Never have so many AAA securities been reluctant to mark to market .

But thats if you sell them today and book a massive loss. Its easier to hold now and hope some secondary market magic appears to help you mark up . Meanwhile its credit crunch time. Some Corporate debt from LBO activity is equally sub prime and equally backed up in banks that cannot offload this debt either.

Well sub prime is residential so its RMBS . Sub prime was once the b- end of a pool from a bank including prime , then along came sub prime only lenders in recent years.

I am not disagreeing with your assertion LFY but I think that AAA rated sub prime will default on a large scale if issued in the past 2 or 3 years.

Many ‘reset’ in October as per the graph above. We will see how AAA they are then :frowning: