The volume of prudential reserves held by each E-D bank presumably is dictated by “prudence” – not by any legal requirement administered by a monetary authority.

All prudential reserve banking systems have heretofore “come a cropper”. Money creation by private profit institutions is not self-regulatory- the “unseen hand” simply does not function in this area.

Invariably the systems created too much money, speculation became rampant, inflation distorted and destroyed economic relationships, confidence that the banks could meet their convertibility obligations eroded, “runs” on the banks caused mass banking failures, and entire economies were left in ruin.

To borrow here or abroad? The lending capacity of the member commercial banks in the U.S. is predicated on monetary policy, not the E-D market.

The Federal Reserve offsets or “sterilizes” any undesired change in U.S. bank reserves stemming from changes inconsistent with domestic policy objectives.

we’re paying out money to the counterparty bank each month…

Warnings signs:
No major move after major liquity.
The up in the market may be a short term thing cause the bond markets where not trading yesterday.
Look at what Japan did on captial injection, nothing, What do they know after 10+ years of problems that we dont.
More cash solves nothing.
Making easier to borrow from the goverment cause others not to lend and hoard cash.

Anyone got any ideas what’s going to happen to the old, un-guaranteed loans? Is that collection going to be divided into a part which is good enough in quality to be bought by guaranteed new loans, and a part which isn’t?

Maybe we’re not so far from RFC Take II, or the FDR Home Loan deal. As stuff with value gets picked off by those qualified for guaranteed new funds, it will be possible to distinguish what might have some future value from what has neither present nor future value.

There’s probably a name for such a process. It would have an interesting effect on derivative markets, especially interest rate swaps and stuff.

There does seem to be an international conference in the works perhaps like the one Munger mentions.

“Our argument is simply that as credit risks are transferred from the banks to the sovereigns, so too should the spread risk premia,” Williams added.

Analysts said corporates would be ignored in the initial stage of the rally and these credits would attract buying only if the recovery was a sustained one.

“I don’t think we are out of the woods yet. At this point I would sink my teeth into sovereigns and banks which would be supported by the government. I would not look at corporates,” said a Singapore-based credit analyst.”

The real takehome is that LIBOR currently reflects the wishes of the setting banks and not any actual market conditions. So no intervention into the credit markets will have any logical effect on LIBOR.

Fred here. Whether or not this is dilutive per GAAP is not the issue. It is not only ACCRETIVE per reality, it’s a free gift of over $100B that could quite readily at least in non-GAAP (OCBOA) be put on the balance sheet as paid-in surplus.

Explanation:

PLEASE do the math. If the warrants are truly worth what they are represented to be (15% of principal) then the amount invested as preferred is 90% of nominal.

If $25B of preferred goes into B then really $21.25B is allocable to the preferred.

That means the 5% accreting to 9% should be measured relative to the 85% notional principal allocated.

For the first years when its below 9%, we can ROUGHLY assume the deficit interest below 9% compensates for the net present value of the warrant (close enough).

So for arithmetic purposes, this is a perpetuity at 9%.

It is worth more or less than its face value depending whether the applicable discount rate for very long term investments of equivalent risk profile is less or more than 9%.

Right now, arguably, said discount rate is about 15%? Anybody? I assume we’d have to use something around B or CCC.

Thus we wuz robbed. We’re putting in $X and getting back paper worth maybe 1/2 $X.

BUT, if you believe that TOO BIG TO FAIL was always and will always be baked in the cake, you might use a different discount rate.

For me, given what Buffett got and given the realities, this is a free contribution amounting to almost 1/2 of 85% of $250B.

Incidentally, we were taught this math in 6th grade public schools when schools were schools:

Value of a perpetuity:

Present Value = Annual Pmt / Discount

Therefore, 9% perpetual paper is worth aobut 9/15 of its present value, said present value being whatever the warrants arent worth (I believe 85%?).

So we just gave away 6/15 or more of 85% of $250B.

As in GAVE IT AWAY.

VERY SERIOUSLY, I am a quantitative tax lawyer I specialize in this stuff including valuations of private placement securities and I guarantee you this is how the govt would value these investments at least for federal income tax purposes: if its preferred and not debt and its a near-bk business then you better believe you’d be required to presume a 15% comparable return.

As previously recommended, the central banks need to coordinate the simultaneous SALE of short-term securities and the PURCHASE of longer-term securities, a variation of what was known as “Operation Twist” during the Kennedy Administration.

This will lengthen the time horizon of market participants, which is what we need.

Matt Dubuque
mdubuque@yahoo.comP