Saturday, September 13, 2008

"Lacks Sufficient Capital"

"Recent developments highlight the extent to which the banking system as a whole lacks sufficient capital to comfortably navigate this period of sharp deleveraging."

Mohamed El-Erian, co-CEO of Pacific Investment Management Co (Pimco).

El-Erian was referring to the urgent talks going on to prevent Lehman Bros. from going under.

I don't know about you, but when the chief of the largest fixed-income asset manager in the world ($812 billion) says things like that I tend to get really, really concerned. The amplitude and frequency of the waves in the financial pond are both increasing, causing the keepers of the public purse (Paulson, Bernanke & Co.) serious nausea. It is time to "get off the boat" and let some big names flat-out fail.

Yes, the prospect of a domino effect is very real but this can be a great benefit, a la Cold War MAD nuclear doctrine (Mutual Assured Destruction). The fear of a total wipeout should bring people to their senses, sharply reducing their demands and expectations for what they will be left with after the ongoing credit contraction.


  1. That comment by Mr. El-Erian seems like a belated acknowledgment of that Fed graph showing Non-Borrowed Reserves going from ~$45B(pos) to more than $100B(neg). Maybe now that a mainstream figure is openly airing the issue some serious analysis of it can be pursued.

    What does it mean when the banking system as a whole has negative reserves on the order of more than $100B. To me that sounds like the number and size of healthy banks is woefully outweighed by the zombie banks awaiting a formal death certificate.

  2. Ike just may be the trigger that takes the whole financial complex down. I have already heard estimates of a 1 trillion dollar loss.

  3. Were is the saving glut when you need it!! another illusion gone, along with Santa and the tooth fairy.
    This is the big difference between the U.S. deflation and Japan-saving or the lack of it here in the U.S. We are quickly reaching a limit as to what the gov't can do to prevent it's nightmare but my take is that deflation has arrived but like cancer it can spread without the host understanding the extent of damage that has been done. The patient will be taken to surgery and will require extensive long term rehab.

  4. Hellasious,

    3 posts in such a short time? You are spoiling us!

    -Lone Gunman

  5. "Ike just may be the trigger"

    Didn't look too bad on CNN this morning. It simmered down to Cat 2 which seems to be within structural engineering tolerances.

    "the banking system as a whole has negative reserves on the order of more than $100B"

    Doesn't appear to be within financial engineering tolerances...

  6. Anything that could arrest the MAD doctrine, stop it dead in its tracks would come as a welcome surprise, not to mention relief.

    It wasn’t until 1914 when the British were basically financially (as well as morally) bust that the military imperium, i.e. the Empire began unravelling. As then former Prime Minister Harold Macmillan remarked in a lengthy radio interview in 1976, Britain at the close of WW1 was forced to liquidate nearly the whole of it’s North American interests to the paying off of it’s then war debt and half way through WW2 it was subsisting on Lend Lease.

    The German Imperial Army in 1918 was actually winning the war on the Western Front as well as every other front upon which they were engaged and then suddenly Germany went bankrupt and the war was effectively over. The Allies didn’t win, the Reich went bust.

    America will fare the same

  7. Hell, while I agree, I do keep wondering (worrying?)about corporate payroll deposits...

    If Mish is correct, 38% of all deposits in the US banking system ($2.6T) are uninsured and at risk of loss. Since almost all of this money is thought to be for things like corporate payroll, how would we handle the potential loss of these monies?

    A run on these assets would bring the entire banking system down instantly.

    (It is not just fat cat savings that are at risk).

    Or are you suggesting:
    1. "It is what it is" yet we still can't risk the dollar trying to protect these depositors


    2. It won't happen


    3. Something else I am missing...

  8. These bailouts are intended to prevent the big derivative-melt-down.

    They are in total panic mode.

    This whole system is going to collapse in October-November and we get a new world.

    BOOK IT!

    Joe M.

  9. Hell, you must be an woman - so unpredictable.

  10. If he were a woman he would never admit to having a 38" waist.

  11. Didn't Mellon say something like that in 1930? "Purge the rot from the system" or something. I think the gov't should let a few of 'em fail, but we don't need another Great Depression.

  12. I am just a housecat, but why the hell am I not rich?

    "system lacks sufficient capital". Who ever would have thought that?

    Next they'll be telling me that Enron lacked profits and water is still wet.

  13. Remember, the election is not until the first Monday after the second Wednesday in December. 156 electors have cast their votes for someone other than the official winner they were supposed to vote for. If the dollar drops 90% in the middle of November, all bets are off on who wins the election, whatever the totals on the voting machines.

  14. .
    Here in France all the press relates the end of Lehman and the difficulties of AIG. Most of them speak about the domino effect. But I wonder if they understand the real danger as none of them explains exactly what will happen in the next days/weeks.

    Fortunately as I read this Sudden Debt blog from the beginning, I can now explain better that these journalists what will happen.

    Lehman's liquidation and AIG's note downgrade will now trigger automatic large scale sales of hundreds of billions of dollars of assets and hence everyone will be hit by the fall of value of these assets. That means more devaluations and Basel ratio degradation, even for all of our banks who say that they are not exposed to Lehman Brothers.

  15. At heart this entire crisis is due to a lack of oversight from the SEC which under the oligarchic system present in the US, has been in bed with the federal government and allowed the wall street firms to run loose. In fact the whole problem with the economic system in the US is that corporations are the ones really running the federal government, ie big business in bed with big government. It's easier to bribe one big entity than 50 different ones at the state level.

  16. Hey brother can you spare a dime?

    Somebody is looking for cash. Have you guys see the TED spread today?

  17. And in the meantime, while all this financial mumbo-jumbo distracts us from other things- don't forget stuff like this can happen.

    Now how cool is that?