A RETURN TO BANKING?

Back in the good old days when bankers took deposits and made loans primarily for working capital purposes, we had what was known as a "Chinese Clean-up." Working capital is that thing that most of the business that operate in this country need to operate in that period when they have to pay their bills and all that is owed them hasn't yet arrived in the mail and who aren't sitting on $2trillion in cash...i.e. the little guys. The wise banker always knew that the best test for credit is for a borrower to repay you when asked. The credit and audit guys liked to see that as well not to mention the bank regulators. Problem is, some businesses simply don't fit the mold of those that are able to offer such a "clean up" and are in constant need of credit for one reason or another. So, being not completely unintelligent, the bankers of the time would have this sort of conversation;

"Myron, my boss and the bank examiner wants to see a clean up at the end of the year."

"Why, suddenly you don't trust me. After 25 years I'm a bum?"

"Myron, common work with me. I know you have the cash. For 30 days make me feel good."

"Maybe you know, maybe I know, but nobody else knows"

"Myron, you think the tax guy is stupid."

"Who said stupid? Know and stupid are two different things. If he sees, he knows, he doesn't see he don't know." He would be stupid to say he knows when he doesn't see so he says nothing which isn't stupid"

"Myron look. Let me call this nice young kid across the street. His name's Charlie and he's really looking for business. Go talk with him. I bet you can get a line from him and maybe use it for...ah...30 days a year?

"And what should I want another line of credit for?"

"Myron, Myron, Myron. Work with me, ok?"

"The kid is smart?"

"He's smart enough."

So maybe if he's really smart I should do my business with him."

"And maybe I should talk to the tax guy."

So Myron went across the street and Charlie opened an account, gave him a line and Charlie's competitor got cleaned up over the end of the year. Myron was happy, his banker was happy, the examiner was happy which made the boss happy. And that dear reader is what is known as a Chinese Clean-up.

Today the Federal reserve, as a result of the weak economic climate announced that they, with the proceeds they receive from the Fanny and Freddie guaranteed paper they hold, would increase their purchases of Treasuries in order to produce added monetary stimulation. Yesterday, Freddie announced that they had lost $2 billion last quarter. Fanny will soon announce what I assume will be an ever larger loss. All the money they have to pay the Fed comes from their unlimited line of credit from the Treasury and the Fed then takes that payment and........welcome Mr & Mrs. Taxpayer to the World of Suzi Wong. At least she was in a honorable profession, but for our purposes let's just refer to it as the Chinese Clean-up of 2010.


P.S. The Freddie loss is an operating loss. The also lost $3 billion in derivatives that went wrong. What derivatives, you ask? Gee I don't know. They weren't traded on an exchange and will not be in the future. You see. Neither Fanny nor Freddy are subject to Fin Reg written by Chris the Crook and Barney. They've only lost $150 Billion so far. Why bother.