According to the latest biweekly numbers released last Thursday by the Federal Reserve, for the two weeks that ended January 16th American banks had negative $1.3 billion in non-borrowed reserves. This is, historically, extremely unusual; just two months ago they had $30 billion (positive, of course) in non-borrowed reserves. The only reason some banks haven’t been shut due to insufficient — negative! — reserve requirements is that the Federal Reserve is currently loaning them enough money through the brand new TAF (Term Auction Facility) program (also running in Canada and Europe) to make up their shortfalls. Today’s TAF press release says that 52 American banks or institutions are currently receiving loans totaling ~$40 billion — but the Fed refuses to name who they are. The banks’ collateral for these TAF loans are those same yucky hard-to-price CDO’s that caused the banks’ liquidity problems in the first place — and the Fed is purposely using outdated prices for the collateral to prevent their being marked-to-market and thus collapsing CDO prices and freezing matters even further. Not surprisingly, some economists see the creation of the TAF as a backdoor bailout of banks in trouble. But how much longer can this go on? [via]
Coincidentally (one hopes), the banking system in the virtual online world Second Life has just collapsed following a run on their banks due to inappropriate valuations and bad counterparty risk, wiping out many players’ real-world investments…
Original text: But if the vaults are empty, what will Scrooge McDuck swim in?