Banks Doing Worse Than Saying

Whatever the banks say publicly about the credit crunch, it appears to be a lot worse. An article in the Financial Times of two days ago mentions how banks have been quietly borrowing a huge amount over the last few weeks - $50 billion - from the Fed under a new mechanism that the U.S. central bank introduced two months ago:

The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

US officials say the trend shows that financial authorities have become far more adept at channelling liquidity into the banking system to alleviate financial stress, after failing to calm money markets last year.

However, the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

It's not just in the US that there are signs of problems. The government of the U.K. decided to preemptively nationalize mortgage lender and bank Northern Rock. And now Credit Suisse has "revealed $2.85bn of losses on structured credit positions caused in part by “pricing errors” by some of the Swiss investment bank’s traders." That will mean re-examining 2007's stated financial results. And so central banks print more money - it has to coem from somewhere - while banks face just how badly they have been managed, as that's all you can describe the need to run for funds and the inability to see a multi-billion dollar loss in advance.