bank run blog

The Associated Press reports that more and more college students are turning to local food banks seeking handouts. The AP quotes the creator of the Facebook website “I ain’t afraid to be on food stamps” Terry Capleton, who said, “Right now, the way things are, a lot of students just can’t afford to eat.”

The AP reports that food banks in Seattle, Denver and New Hampshire all report rising numbers of college students seeking assistance. Larry Brickner-Wood who runs the Cornucopia Food Pantry at the University of New Hampshire told the AP;

“More and more, its just the typical traditional college student, 18 to 22, that’s feeling the crunch…We’re seeing more and more students that have never used the pantry before.”

With the price of groceries climbing by 5 percent over the past year and some food staples rising by 30 percent and more, states like Washington have seen a rise in the number of students applying for food stamp relief. Currently 18 to 25 year-olds make up 8 percent of Washington’s food stamp users. The AP says that college students are eligible for the food stamp program if they qualify for a state or federally funded work-study program, work at least 20 hours per week or have a child under the age of 12.

Associated Press : Struggling college students turn to food banks

As financial institutions struggle to place the best spin on their appalling balance sheets, it is instructive to note that they have successfully lobbied to delay the imposition of new, stricter accounting standards until 2010. The New York Times reports :

“The Financial Accounting Standards Board, under pressure from banks and auditors, voted unanimously on Wednesday to delay a new accounting rule that is aimed at forcing banks to put more assets on their balance sheets rather than hide them in so-called special-purpose entities.

The board, reversing a decision it made on June 11, decided that the rule would go into effect for calendar-year companies in 2010, rather than a year earlier. The board said it still hoped to require additional disclosures of off-balance-sheet entities in 2009, even though the accounting for them would not change until the following year.

Accounting for special-purpose entities came under attack after Enron collapsed in 2001, in part because of the misuse of the rules then in effect. The rules were tightened, but criticism erupted again last year after some banks suffered large losses from structured investment vehicles and other entities that had been kept off balance sheets under the rule.”

According to an article in the Financial Times, legislators were involved in the effort to postpone the regulations, fearing a collapse in commercial and investment banking :

“In May, analysts at Citigroup forecast that banks could be forced to bring up to $5,000bn of assets back on to their balance sheets when the new rules came into force.

Lawmakers and banking industry groups have issued calls for a delay in recent weeks because of the potentially huge detrimental effect the changes could have on banks’ capital bases and their ability to raise new capital.”

New York Times : Accounting Board Delays an Asset Rule

Financial Times : US delays accounting changes

The Federal Reserve has announced an array of additional emergency actions to address concerns about widespread insolvency in large US financial firms. The extraordinary nature of the Fed’s intervention indicates the gravity of the situation, even as the stock market rallies and some traders profit from the extreme volatility of the fianancials. The Times reports this morning :

“The US Federal Reserve unveiled a barrage of measures yesterday to lend stressed financial institutions more funds, and for longer periods, as it stepped up its drive to limit the fallout from America’s housing slump and the global credit crunch.

In a signal of concern over the still-fragile state of world financial markets, highlighted only two days ago by the IMF, the Fed expanded its emergency lending scheme for Wall Street investment banks for the fourth time in five months.”

The Fed will also work with the European Central Bank, in an attempt to alleviate pressures that the US economic collapse is putting on EU nations :

“With revived market strains also evident in Europe, the European Central Bank (ECB) and the Swiss National Bank announced joint action with the Fed. They are to auction dollar loans to European institutions for 84-day terms, in addition to 28-day loans already available. To facilitate that, the Fed said it would extend a dollar swap line with the ECB and the Swiss bank.”

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The Financial Times considers the larger implications of yesterday’s announcement for monetary policy, in an article headlined Big step for Fed after resisting calls for longer-term funds. The extension of the liquidity measures represents something of an about-face for Fed chairman Ben Bernanke :

“Yesterday’s further barrage of liquidity support measures from the Federal Reserve broadens its tools to include options on liquidity and extends the maximum term of its regular operations from one month to three.

This is a significant step for the US central bank, which had resisted calls to provide longer-term funds.

But in recent weeks there has been growing evidence that money market strains were increasing at longer durations. Officials may have seen benefit in providing additional reassurance on access to longer-term funds at a time of extraordinary volatility in bank stocks.”

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As expected, the SEC extended its emergency order protecting an elite group of 19 financial institutions from naked shorting, acting at the 11th hour after the markets closed yesterday. According to the Wall Street Journal :

“The Securities and Exchange Commission voted to extend the temporary rules it put in place to restrict short-selling of a handful of financial stocks.

The SEC commissioners didn’t take additional steps opposed by Wall Street to expand the number of stocks affected by the rules or make them permanent.

The temporary rules were set to expire Tuesday, and the SEC extended the order on the 19 stocks until Aug. 12. It won’t be extended beyond then.”

The Journal acknowledges that there is considerable consternation among larger banks that have been excluded from the emergency protection order, and that a major lobbying effort is underway to pressure the SEC to expand the protections and make them permanent :

“By extending the order in duration alone, the SEC has rejected calls from banking associations and at least one lawmaker to extend the protections to include shares of large and regional banks, whose stocks have also been battered.

Mr. Cox has indicated that the SEC may propose rules ‘very soon’ to extend the restrictions to all stocks that trade in the U.S. In its announcement of the extension, which came shortly after 9 p.m., the SEC said that following the Aug. 12 expiration, the agency ‘will proceed immediately to consideration of rulemaking which would become effective after public notice and comment’ and would focus on the ‘broader market.’”

Wall Street Journal : SEC Extends Short-Selling Rules

CNN Money : SEC Extends Emergency Short-Sale Order Thru August 12

The significance of Merrill Lynch’s sale of CDOs is being grasped throughout the financial markets: the “assets” are being unloaded at 22 cents on the dollar. By marking these instruments to market, Merrill has posed a massive challenge to other overexposed financial institutions, most of which had hoped to avoid assigning a value to their CDOs at this time. The Associated Press is reporting :

“Merrill said late Monday it was selling repackaged mortgage-backed securities for $7 billion — just weeks after they had been worth $31 billion, giving them a current value of about 22 cents on the dollar. Analysts believe that sets a new and very low benchmark that other Wall Street banks — including Citigroup Inc., Lehman Brothers Holdings Inc., Morgan Stanley, and JPMorgan Chase & Co. — might have to meet when valuing their own investments.

Merrill sold assets including collateralized debt obligations, or CDOs, which are securities backed by pools of mortgages. While analysts believe Merrill has been one of the biggest holders of these securities that have plunged in value over the past year, other banks will also need to unload their portfolios.”

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The Times reports that the biggest losers will be Fannie Mae and Freddie Mac, the GSEs facing writedowns in excess of $100 billion :

“The banking industry will be forced to take hundreds of billions of dollars of further writedowns on mortgage-backed securities after Merrill Lynch sold $30.6 billion of collateralised debt obligations (CDOs) for only 22 per cent of their face value on Monday, according to a leading US ratings expert.

Freddie Mac and Fannie Mae, the financing groups that underpin America’s housing market and, in turn, its broader debt infrastructure, will be hit worst, as they are forced into a combined writedown of about $100 billion (£50.5 billion), the Egan Jones Ratings Company believes.

Mike Mayo, an analyst for Deutsche Bank, said that Citigroup would need to write down the value of its CDO portfolio by $8 billion in the third quarter, based on the Merrill sale price. At present Citigroup values the securities at 53 cents in the dollar, more than twice the Merrill sale price.”

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