Wednesday, December 17, 2008

"Mom, Ben Bernanke Likes Bankers Better than He Likes You"

Update: A reader email questioned the Fed loaning against sovereign debt. Sometime next year the Fed will start issuing debt denominated in foreign currencies. Having sovereign debt on their balance sheet is a natural hedge. Watch it happen.
Original post:
Savers are getting screwed as banks reliquify their balance sheets.
The ostensible reason short rates are now officially at 0.2% is to encourage banks to lend.
It's not going to happen. The banks are not taking on individual's or commercial's risk. Auto loans for a FICO score of less than 720 aren't being written.
So what are they doing? Carry-trade (say it like "Toga party").
For months, the borrow U.S. short, lend U.S. long has been used to rebuild banks balance sheets, destroyed by their former business practices.

Now with the Fed explicitly committed to lowering long rates (the 30-year trading at 2.63%, the 10-year at 2.144%), even borrowing at 0.2% doesn't give enough spread to run cash flow through the income statement and onto the bank's balance sheets.
What will the banks do? My guess is they will start buying sovereign debt for the yield, maybe even selling it to the Fed so they can take the money and do it all over again.
Right now Australian 15-years are priced at 4.20%.

Today, the American saver gets a pittance in a money market. It's really nothing but a wealth transfer racket.
Mom, we're going to Sydney.
Similar thoughts at "Investment Postcards from Cape Town":


...Hat tip: Mish, Global Economic Analysis

Sharing my sentiments, Bill King (The King Report) commented: “Ben Bernanke and the Fed just screwed everyone in the US, and some abroad, that played by the rules, was prudent and live on fixed incomes. Ben, just like Easy Al, is once again redistributing wealth from the prudent, the savers and retirees to the reckless and the boobs that created this mess. But the Fed, via its communiqué, is admitting that it is petrified of what is occurring in the economy and financial system so it is now in all-out money/credit dump mode.”

An e-mail just received from Bennet Sedacca (Atlantic Advisors Asset Management) said: The “Fed has declared war on prudence and savers and rekindled the ‘Moral Hazard Card’ – except this time, I believe they have created the largest moral hazard ever seen. Of note is that this intervention has occurred in the third week of the month (options expiry for the greatest impact – playing games with an already dysfunctional system that they created) and may force prudent, risk-avoidance types, to take risk, at precisely the wrong time....