THERE IS A SURFEIT OF LIQUIDITY ON WALL STREET. IT GENERATES FEES AND SHORT TERM GAINS BUT HAS LITTLE SOCIAL WORTH. IT IS THE OPPOSITE OF USEFUL. IT DISAPPEARS WHEN MOST NEEDED AS IN THE 'FLASH CRASH' OF 2010, THUS EXACERBATING COLLAPSES." So wrote Mr. Eisinger and what he wrote is really important except he hadn't a clue.
The problem with folks like he they start their writing from a premise which is uniquely their own and all then follows whether correct or not. They are not reporters or educators in any sense but lecturers which is perfectly ok except when someone tries to apply like concepts to solve the wrong problem. Let me digress for just a bit to illustrate thepoint.
In late 2007, I called an old regulator buddy, since retired, on the subject of Goldman Sachs and their liquidity position. He told me that at the time he believed that Goldman had spare liquidity of over $100 billion dollars in committed facilities, meaning they were paying some sort of fee to insure availability. My comment was, "Until they need it." "Yeah," said he, "but nobody understands that." I don't think that Mr Eisinger does either because this little tale is merely the tip of the iceberg.
I've said something like this before but it bears repeating. Banking, at it's core is a pretty simple business. A bank takes deposits and makes loans profiting from what ever interset rate diffenential they can obtain. There is an old saying that banks "borrow short and lend long" meaning the duration of their deposit base is always shorter than the duration of the loan portfolio, and because of the duration difference they can borrow money (accept deposits) and a cheaper rate than that at which it is loaned back out. Of course that means that banks have to constantly roll over deposits for they fund the business and if they are smart, they put into place liquidity facilities to insure that they always have funding.
Over the centuries the business of banking has changed with new products, new business lines, even entirely new business, but what has not changed is that banks have to borrow money to fund all of these things and theydo BUT there are, today a hundred--well, perhaps not that many--way for banks to obtain funding. No longer does the banker rely upon Ma and Pa Kettle with their checking account, savings accound, certificate of deposit or Christmas Club. Today, bankers get their deposits from people and entities thousands of miles away and, if done through a broker or a money fund, people they do not know and will never meet. Whereas Ma and Pa's money was pretty much always there the duration of today's funding is often overnight and highly unreliable during any period of concern. But what of liquidity facilities such as the one over at Goldman you ask? When people get scared and you try to use them, committed or not, they aren't there. "But I Paid a Fee!" say you. "Sue Me," says the provider. Welcome to October 2008.
What Mr. Eisinger missed in his very interesting piece is the most important thing of all. The Volker Rule, indeed the whole pile of nonsense that is Dodd/Frank is supposed to regulate a multi-trillion dollar international banking system that is funded in exactly the same manner as was The Bank of New York at its founding in 1784! This is the risk on the street and not a word is devoted to it in Dodd/Frank. Good luck.
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Little Paulie Krugman was at it again in the Times this morning. Desperate to justify an increase in the national debt by $5 trillion in the past 3 years, he has been arguing that fiscal dicipline is the wrong way to go...just look at Europe. A few weeks ago he was effusive in his prais for Mario Draghi in opening the ECB with its version of Free Money For Everybody in order to stimulate the economy. Today, he tried to quote every Republican economist he could think of to support his case. Readers of this space will no doubt remember my opining that the real reason for Paulie's desperation was that the democratic socialism model of western Europe was about to end and with it The Leader's dreams for the U.S. Poor Little Paulie. While he was babbling away in the Times, Super Mario gave his first inerview in the Wall Street Journal. What did he say? Only that the European model had to end. Oops.
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