Citi slamming the door on withdraws

[ronblack]

Quote from Aaron Copland:

Assets are what you own. Liabilities are what you owe. Equity is what’s left over.

What am I missing here.

You are missing nothing. You just refuse to look at things the correct way. Banks do NOT own deposits, the customers do. Not only that, they can withdraw deposits on demand, even CDs with a penalty.

Banks own the loans they make. In turn the borrowers owe the money to the banks.

If someone does not understand these basic notions, then he may think the banking system is broken when looking at the reports.

Also remember that the FED can always take care ANY banking problems by printing money while risking inflationary pressures. This is what it's done at this point. It will succeed because this happened at the beginning of a recession cycle, meaning that inflationary pressure will NOT be sustainable.

Many people do not understand that banking problems are harder to fix at the beginning of an expansion cycle than at the end, like in the current situation.

There is no banking problem that cannot be taken care of and the US Economy will be much stronger two years from now while the Dow Jones will climb to new highs.

Also you will be surprised to hear that the subprime story has positives and not only negatives. You mostly heard the negative side of it because those that lost money screamed loud.

I think subprime losses were part of a zero sum game and the net effect on the economy is, or will be, at the end of the day ZERO.

Ron

 

[Aaron Copland]

Quote from ronblack:

You are missing nothing. You just refuse to look at things the correct way. Banks do NOT own deposits, the customers do. Not only that, they can withdraw deposits on demand, even CDs with a penalty.

Banks own the loans they make. In turn the borrowers owe the money to the banks.

If someone does not understand these basic notions, then he may think the banking system is broken when looking at the reports.

Also remember that the FED can always take care ANY banking problems by printing money while risking inflationary pressures. This is what it's done at this point. It will succeed because this happened at the beginning of a recession cycle, meaning that inflationary pressure will NOT be sustainable.

Many people do not understand that banking problems are harder to fix at the beginning of an expansion cycle than at the end, like in the current situation.

There is no banking problem that cannot be taken care of and the US Economy will be much stronger two years from now while the Dow Jones will climb to new highs.

Also you will be surprised to hear that the subprime story has positives and not only negatives. You mostly heard the negative side of it because those that lost money screamed loud.

I think subprime losses were part of a zero sum game and the net effect on the economy is, or will be, at the end of the day ZERO.

Ron

"You are missing nothing. You just refuse to look at things the correct way"

Sounds like a contradiction.

 

[bellman]

They are not zero sum. Somebody makes a commission, there is some paperwork, their is a cost in making the loan. Only zero sum if you look at a much bigger picture, ie. energy is neither created nor destroyed, except for by the fed of course.

Quote from ronblack:

You are missing nothing. You just refuse to look at things the correct way. Banks do NOT own deposits, the customers do. Not only that, they can withdraw deposits on demand, even CDs with a penalty.

Banks own the loans they make. In turn the borrowers owe the money to the banks.

If someone does not understand these basic notions, then he may think the banking system is broken when looking at the reports.

Also remember that the FED can always take care ANY banking problems by printing money while risking inflationary pressures. This is what it's done at this point. It will succeed because this happened at the beginning of a recession cycle, meaning that inflationary pressure will NOT be sustainable.

Many people do not understand that banking problems are harder to fix at the beginning of an expansion cycle than at the end, like in the current situation.

There is no banking problem that cannot be taken care of and the US Economy will be much stronger two years from now while the Dow Jones will climb to new highs.

Also you will be surprised to hear that the subprime story has positives and not only negatives. You mostly heard the negative side of it because those that lost money screamed loud.

I think subprime losses were part of a zero sum game and the net effect on the economy is, or will be, at the end of the day ZERO.

Ron

 

[ronblack]

Quote from Aaron Copland:

"You are missing nothing. You just refuse to look at things the correct way"

Sounds like a contradiction.

Not at all. You are using the correct terms, assets and liabilities. You are not missing anything in that respect. But you use the terms the wrong way.

Ron

 

[ronblack]

Quote from bellman:

They are not zero sum. Somebody makes a commission, there is some paperwork, their is a cost in making the loan. Only zero sum if you look at a much bigger picture, ie. energy is neither created nor destroyed, except for by the fed of course.

Totally irrelevant. You can consider the players who make the commissions together with the players that win as one player. Same for losers.

Ron

 

[eusdaiki]

Quote from ronblack:


Also remember that the FED can always take care ANY banking problems by printing money while risking inflationary pressures. This is what it's done at this point. It will succeed because this happened at the beginning of a recession cycle, meaning that inflationary pressure will NOT be sustainable.

Inflation during a recession is sustainable.
Keynesian models will tell you that it is unsustainable, but those models were proven to be incomplete or wrong during the 1970's when recession and inflation hit at the same time.

 

[Eliot Hosewater]

Quote from ronblack:

It is because you do not know the proper meaning of the terms used in the banking industry. "Assets" in banking are the loans and "liabilities" are the deposits.

In a very simplified way, the profit of a bank is given by:

profit = interest received on loans - interest paid on deposits

Unless you understand the meaning of terms you wll be cofused and think the end of the world is near. Banks provide security and interest on deposits but they also apply some restrictions. One restriction is that they can delay withdraws so they can find funding for the GAP.

GAP = loans - deposits ( as a function of time period)

If there is a run on deposits the bank needs to find money to finance its issued loans. It must borrow from other banks. You must understand that deposits are drawn on demand but loans are made for a fixed period of time. When you demand that a bank provides a loan to you with a fixed interest rate for a fixed period of time, the bank reserved the right to limit withdraws in time and size until it balances its books.

I think it is fair.

Ron

So the funds that investors put into the hedge fund made their way into the banks reserve deposits?

 

[newguy05]

Quote from DeeDeeTwo:


The funds assets have not become worthless... just illiquid.

For example...
If you are forced to sell now you might get $0.30 on the dollar...
If you can wait 6 or 12 months...
You might get $0.80 on the dollar.

The major problem is lack of liquidity...
NOT assets that have gone to zero.

The value of your asset is how much others are willing to bid. If there is no bid(illiquid), your asset value is 0.

Yes i am sure in the subprime cdo case, the bid & liquidity will return down the road with the government and firms all pulling to resolve the problem as it's in everyone's best interest.

But just in general, the statement that asset value is somehow not tied to liquidity is false.

 

[Cutten]

Quote from ronblack:


I think subprime losses were part of a zero sum game and the net effect on the economy is, or will be, at the end of the day ZERO.

Ron

How can it be zero sum? Great amounts of labour and capital were employed to create services that have turned out to be, at best, of no value, and more likely to be of negative value (in the cases of fraud, deception, bad advice etc). Assets were created at a cost greater than their final market value. That is the epitome of negative sum.

 

[ronblack]

Quote from Eliot Hosewater:

So the funds that investors put into the hedge fund made their way into the banks reserve deposits?

You got it. Not only that. The Banks can loan the money back to other hedge funds.

Every hedge fund has one or more custodian bank. The money sits at the bank in an account in the name of the fund and it is a liability of the bank. The bank pays interest on the money to the fund and can loan it. Also, most funds trade with brokers using letters of credit.

Ron