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Questionable Citigroup Loans from FHLB and Credit Suisse's Impending Impact on Eurodollar Network Raises Concerns.
Unrealized Bond Losses Spell Disaster For Regional Banks.
Here is what we will be getting into today:
Citigroup's Troubling Ties: The Federal Home Loan Bank System's Largest Borrower.
How Unrealized Bond Losses are Pushing Regional Banks to the Brink.
Credit Suisse's Impact On the Eurodollar Network.
Let's Dive In!
Website: Wall Street On Parade
Title: Citigroups Citibank Took the Largest Amount of Loans from the FHLB of NY in 2022, Reminiscent of FHLB Loans Taken by Silvergate, SVB, Signature, and First Republic Bank
Here are the key highlights:
The collapse of Silicon Valley Bank, one of the largest banks in the United States with $212 billion in assets as of 2022, has brought attention to the Federal Home Loan Bank (FHLB) system. The FHLB was created by Congress to provide affordable mortgages to low-income individuals, and these regional FHLBs are cooperatively owned by member financial institutions in their respective districts.
The FHLB bank of New York's 2022 annual report reveals that Citigroup's Citibank is the largest borrower, having outstanding loans of $19.25 billion. This constitutes a 267% increase from 2011 when Citibank's outstanding loans with the FHLB of New York were $5.25 billion. Moreover, during the 2007-2010 financial crisis, Citigroup secretly received over $2.5 trillion in cumulative loans from the emergency lending facility of the Federal Reserve, which was revealed in a 2011 audit report by the Government Accountability Office. In addition to this, Citigroup/Citibank had also received bailouts during the emergency bailout programs. Citigroup received $45 billion in capital as part of the Troubled Asset Relief Program (TARP).
These revelations paint a questionable picture of Citigroup's relationship with the government and the extent of its financial dealings, which have played a significant role in the bank's standing as the largest borrower from the FHLB of New York.
The collapse of Citigroup in 2009 is the focus of upcoming Senate and House hearings, with key witnesses including the current Chair of the Federal Deposit Insurance Corporation (FDIC), the Vice Chair for Supervision at the Federal Reserve, and the Undersecretary for Domestic Finance at the US Treasury. The collapse of Citigroup was not entirely unexpected as the bank was struggling with dubious assets and unsecured debts. Despite an order from President Obama to wind down Citigroup, it remained in operation due to reasons that remain in dispute.
Former Treasury Secretary Tim Geithner ignored a direct order from the President to wind down Citigroup. However, in his own book, Geithner disputes that the President never told him to pursue that path. Meanwhile, the House Financial Services Committee, tasked with investigating the collapse, will be led by Republican Patrick McHenry. The collapse brought up the schmoozing relationship that Citigroup had with executives at the New York Fed. As the date for the hearings draws near, there are growing calls for accountability and transparency, and the truth about the collapse of Citigroup.
In a recent hearing held by the House Financial Services Committee on March 29, executives were revealed to have donated dollars for the political campaign of one of its members. The member in question is McHenry, and the executives were not named. The scandal has led to questions about the credibility of the committee and the ethics of its members. In light of this revelation, it has been suggested that McHenry recuse himself from the committee immediately to avoid any conflicts of interest. This news raises concerns about the integrity of the financial services industry and the role of politics in shaping it.
Website: Zen Second Life
Title: WORST OF ALL CASE SCENARIOS
Here are the key highlights:
The pandemic triggered the largest fiscal and monetary bailout in history, with record stimulus flow from central banks and federal governments into local bank deposits. Banks parked that money into long-term Treasuries, creating a duration mismatch with their deposit base. Central banks were slow to withdraw stimulus believing that inflation was caused entirely by federal unemployment programs, however, inflation accelerated after these programs ended in September 2021.
In response to inflation accelerating, the Fed has raised interest rates at the fastest relative rate in history, now at 4.75%. Short-term rates have increased 200% over where they were pre-pandemic (1.5%). Mortgage rates doubled from pre-pandemic levels. Meanwhile, the Fed balance sheet remains double where it was pre-pandemic, which has kept asset markets and the CPI artificially inflated.
Consumer sentiment hit record lows in October 2022, and growth stocks were annihilated. Pending home sales are now at the lowest on record. Meanwhile, there is now a ticking time bomb on regional bank balance sheets with $600 billion of unrealized bond losses pushing many banks into technical default. However, the Dodd-Frank regulatory rollback of 2018 exempted many mid and smaller banks from mark to market rules, so regulators may have their hands tied. The banking industry faced an impending disaster due to the unrealized losses on securities which weakened their ability to meet unexpected liquidity needs. The FDIC pointed out this massive risk in the exact same week that Silicon Valley Bank failed. While the losses were significantly reduced, it still had a meaningful impact on the reported equity capital of the banking industry.
The unprecedented rise in interest rates in 2022 saw the largest and only net annual deposit outflow in U.S. history with deposits declining $565 billion annually. These unrealized losses weakened banks' future ability to meet unexpected liquidity needs as securities generated less cash than anticipated upon being sold, causing a reduction of regulatory capital. In response, the FDIC has implemented full depositor bailouts on a case by case basis, thereby rapidly depleting their reserves. This ad hoc approach has done nothing to stem the deposit exodus because no one knows what will happen once the FDIC insurance fund is depleted. Consider that the unrealized bond losses are six times larger than the FDIC insurance fund.
Ultimately, this whole mess will come down to a congressional vote. The first vote for the Troubled Asset Relief Program (TARP) didn’t pass. A week later the market collapsed. Despite a second successful vote, the damage had already been done.
YouTube Channel: Eurodollar University
Title: There really is serious systemic potential about Credit Suisse.
Here are the key highlights:
The Federal Reserve has been taking action to deal with the current economic situation, including making announcements about global central bank liquidity swaps or overseas dollar swaps. These dollar swaps have been used repeatedly during times of uncertainty, but the Federal Reserve has been struggling with liquidity backstops and has been changing the terms of these swaps.
Credit Suisse is a major bank involved in the Eurodollar network, and the merger with UBS can have significant impacts. The bank had a significant chunk of its business in the form of central bank fund-sold securities purchased under resale agreements and securities borrowing transactions, which are essentially repo transactions from the opposite perspective.
These transactions involve the bank buying securities from its clients today and then selling them back tomorrow, getting cash back with a little interest. This business model involves Credit Suisse lending to businesses throughout the globe, especially in short-term wholesale markets, and redistributing these Eurodollars through repo collateralized transactions.
With Credit Suisse reducing its dealer activities, there is concern over the Eurodollar redistribution function they were heavily involved in. There has been a bottleneck in March, resulting in less cash being lent and fewer securities flowing through the business. The Federal Reserve and other central banks have tried to cover it with dollar swaps, but this approach is not working. Global money dealers might be less willing to participate in re-sales and collateral securities lending after Credit Suisse, which could create problems as liquidity dries up and markets become less functionable.
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