Unfortunately,everything is re-pricing and until things level off it's impossible to determine the current value the assets that secure the loan.

Unfortunately,everything is re-pricing and until things level off it's impossible to determine the current value of the assets that would secure the loans.

There is a 1:1000 lack of backing for financial value stated in books, that have no relation to real, transactionable value, now that inflated evaluations are being scrutinized.

And that's why everything has dried up. If someone was burning stacks of hundred-dollar bills, for several days and without stop, that individual would probably be committed. Probably after just a few stacks.
Financial institutions have burned pallets of "million dollar bills" -- and are still pretending they know what they are doing. Being 600 Trillion in the red actually means something, now that the smokes and mirrors game is over.

It's actually my fault: I'm hoarding cash. Sorry, guys. I didn't realize this was so important. I'll see what I can do about getting some of this back on to the streets tomorrow morning.

The longer they hold out and don't lend, the more likely they are to get some of that sweet gov't "liquidity". Some of it's real and some of it is gaming the system. Free gov't cash beats a good interest rate anyday.

The only thing the big commercial lenders seem to be trading in right now is Treasury Bills and at rates right near 0%. It's hide the money in the mattress time with the big lenders because post-Lehman and AIG, nobody really knows how much trouble anybody else is really in.

NPR's Planet Money is the single best resource I've found for keeping up with this stuff.

If banks are in the process of de-leveraging, they simply may not be legally able to make a loan until they are recapitalized.

If somebody knocked on my door and said they'd pay me 100% daily interest for a million dollar loan (and could demonstrate their ability to pay), I'd still have to turn them away because I don't have a million bucks laying around. For a bank in the middle of de-leveraging, it's the same. They aren't lending because legally, they don't have anything to lend.

It's not that people are hoarding cash. It's that with equity evaporating by the trillions, nobody has the cash they are legally required to have.

When you owe the bank $10,000, it's your problem. When you ow the bank $10,000,000, it's the banks problem. When you owe the bank $1,000,000,000 . . . it's everyone's problem.

jimBOB hit on the key point: the mortgage CDO shitpile is so big and so stinky that banks simply don't know, or can't say, if they have enough capital to back even the safest and shortest-term loans at this point. The problem is, not only do they not have enough capital, they really don't know how much they need, which is why even when the Treasury opens the floodgates, they just sit on the dough. Imagine not being able to log on to your bank account website, but suspecting strongly that you've been wiped out. How eager would you be to make a big new purchase. In the end, the Fed and Treasury are going to have to come up with some combination of buying up crappy CDOs in a way that allows banks to deleverage without collapsing while at the same time recapitalizing them so they can loan. $700 billion? Hah! We wish.

Object A (a package of loans, for instance) is presented to the market and sold on to interested buyers.

The financial institutions created an interesting game:

1. The initial broker of the loan got a cut of the transaction.
2. The bank or lending organization that accepted the loan also took a cut.
3. The entity that packaged the loans took a cut for its effort.
4. The entity that bought the package took another cut for its effort.
5. When selling it on, this entity took another cut, and the receiving entity calculated yet another.
6. Using the speed of computers, these packages were then retransacted, frequently, often many times a day. Each time, the transacting entities gave themselves a cut.
7. The packages were juggled and mixed together, split up, merged again with other packages. Traded each time - and with cuts resulting, of course.

8. To make this "work" - the value of the object was restated at each point of transaction, and always up. As long as housing prices were rising (because of easily available credit) the semblance that this was smart could be kept up - but once people sussed that this wasn't working, the base value of houses began falling, and overinflated balloons received pinpricks.

9. The winners are the people who took the cuts, they siphoned off money merrily all along. Goldman Sachs cut themselves a USD 20 billion bonus check in 2007 - maybe they should have spent that money on ensuring there would be an independent GS through 2008? But 20 billion divided on a few people taking lunches in well pressed suits is a fine reward. No wonder they're fretting now.

10. The absolute and total waste of money that's been going on is mind blowing, and obviously a habit that it's hard to kick, viz AIG exec's going the full pedicure route on bailout money.

11. Result: it's an enormous pyramid scheme, the initiators have gotten theirs, and there's nothing left for the crowds that joined.

That's why there is no cash around. The dollar in your hand is actually worth a couple of cents, just don't tell anyone.

Is every company on earth hoarding cash against the Apocalypse, or what?

Yes---but that's just part of the overall issue, and it's not even the better part of the whole. If you look at how the business virus---let's call it "Merger-itis"---has spread over the past several years, and how it was getting really bad during the weeks just before the entire financial/credit crisis hit and went global---what GE is doing is something that they're all eventually going to do: Rather than buy out the opposition, just leave 'em on the battlefield, and watch 'em bleed to death.

You think "pennies on the dollar" is a fire sale? Imagine paying just "pennies on the dollar" on that---it's called "Hyperdeflation," and when it boomerangs, the hyperinflation that occurs will be the shock of a monumental whiplash effect on the American economy.

Imagine the economies of Haiti and Zimbabwe---right here, right now, and what that would do to the United States. That's the worst-case scenario---but with an increasingly-desperate Bush administration and its business allies looking at the possibility of an Obama presidency, coupled with gains in both houses of Congress, trebled with the probability of replacing two or more aging SCOTUS justices, and "quantum-fied" by allowing tax-cut sunsets to take place while re-energizing federal regulatory practices on what deservedly could be an exponential level---a worst-case scenario becomes an ultimate temptation....

Is every company on earth hoarding cash against the Apocalypse, or what?

...perhaps GE is cross-promoting for its nukes division?

"I don't understand why no one is making these loans, if they get high interest rates, are the first to be repaid, and if the company seeking the loan has enough assets to make repayment likely."

As others have noted here, there is a fundamental problem affecting every aspect of business right now: nobody knows what anything -- ANYTHING -- is worth. Why? Because nobody can accurately track credit risk. It's been disguised and confused via derivatives and other shadow-banking functions, such that a normal, healthy-looking company could actually be mired in massive levels of debt that the company itself doesn't fully understand.

The only reason the stock market works at all is because people can agree on a price, usually based on fundamentals, but also on 'psychology'. Right now, the psychological price of almost everything is assumed to be zero, and that's not necessarily wrong given what's happened to financial companies like Bear Stearns, Lehman Bros. and AIG.

Until this hidden debt is gone -- like a financial pandemic -- people with assets (cash) are not going to expose themselves in the same way that you would not expose yourself unnecessarily to a raging life-threating plague.

NPR tried to distill the credit market restrictions this morning for the layman. An economist said picture you're in a room with 100 people and told to mingle. One person has a fatal disease and if you touch them you'll die. You won't want to associate with any of the 100 because of the risk. He said it's the same for banks. They don't want to lend to each other because they could do business with this one "Typhoid Mary" of a bank and fail because of it. Here's what I don't understand. If this bank that chooses to loan to 100 other banks ends up doing business with one really toxic institution isn't their business still spread out over the other 99 good institutions? Why does getting involved with someone toxic representing but a small fraction of your overall lending portfolio get you killed? Anyone?

Heading into a recession, I'd think it would be worth snagging perfectly good business opportunities. Is every company on earth hoarding cash against the Apocalypse, or what?

Could it be that they are hoarding for the boom instead? It could be that everybody is waiting to see when this whole thing is going to bottom out, how the government is going to use all that money, and what kind of values companies are going to have on their balance sheets. At that point there will be a mad scramble among healthy companies to buy, invest and re-position themselves for victory in the Darwinian shake-up to come. They will need all the capital they have. Why waste gas now driving to the store for a quart of milk when you are going to need a full tank to win the upcoming Death Race?

To Steve Duncan: Here's the deal--the other 99 institutions aren't necessarily in good shape, either. They might not be Typhoid Mary, but they're sick, too, and if they deal with the other sick banks, they might get even sicker.

At least that's what I surmise. It would be nice if all the bad banks could be put into quarantine. But I guess there's no way to quickly vet all the bad banks and the bad loans and the bad credit default swaps and all the other weird "financial products" (bets with other people's money) that are out there.

Steve Duncan:

You're in a room full of 100 people. They all want to have sex with you. One of them has AIDS.

Any more questions?

There's another reason why it's so dangerous to do business with the toxic bank: leverage, aka lack of reserves. Under normal circumstances, your reserves and the cash flow from doing business will cover one or two really bad losses (not the kind where you restructure and stretch out the payments, but the kind where - poof! -- the principal is just gone forever). But at this point, on more billion-dollar deal that turns out to be worth nothing wipes your shareholders out.

The other side of it is that banks and bank-like entities have gotten used to making huge piles of money by sitting between their customers and the credit market. Now that the price they're paying for cash has gone up, they're not as willing to do loans, even ones they know will pay off, because it's just not as profitable.

Yes.

Could it be that they are hoarding for the boom instead?

There's no boom at the end of this (unless you mean the big boom of colliding with an oncoming train). Even if the huge bailout/recapitalization works, we'll be looking at a big, nasty inflation problem from all the dollars created. The basic situation is that a huge amount of paper wealth has gone poof, and so our society as a whole is much poorer than we thought we were.

It's simple....The firms in question need credit in order to offer the credit to bankruptcies.

I only have a guess based on near total ignorance.

There are some weird features of the bankruptcy code related to financial derivatives. It seems that sometimes counterparties get to grab the money first before the most senior debt holders.

The change in the laws (old) and the increased use of derivatives (new) mean that bankruptcy proceedings are different and people who used to be protected aren't.

http://tinyurl.com/5r3j8n

The "reforms" aren't all Phil Gramm's fault.

other posters may have dealt with this, but the dirty secret that is not well-understood even by the pundit-class is that most banks that invested in unregulated derivatives do not have enough cash reserves now to meet even basic federal rules, let alone enough to make normal loans...it does appear that so many of these banks are in trouble (and since there is no transparency on this issue, even the banks don't know who's over-leveraged and under-capitalized) that cash is king, and they're not giving actual cash to anyone.

This shit can be laid right on Phil Gramm's doorstep, with a big assist from Greenspan, and a bunch of idiots in what's left of the federal regulatory apparatus. They all should be going to jail for corruption and incompetence..but mostly incompetence.

You can't blame the masters-of-the-universe yahoos..they can't help trying to screw everyone else. it's in their DNA. Anymore than you can blame a dog for wrecking the living room. They should have been neutered and leashed. That was the Feds responsibility, and they blew it totally.

other posters may have dealt with this, but the dirty secret that is not well-understood even by the pundit-class is that most banks that invested in unregulated derivatives do not have enough cash reserves now to meet even basic federal rules, let alone enough to make normal loans...it does appear that so many of these banks are in trouble (and since there is no transparency on this issue, even the banks don't know who's over-leveraged and under-capitalized) that cash is king, and they're not giving actual cash to anyone.

This shit can be laid right on Phil Gramm's doorstep, with a big assist from Greenspan, and a bunch of idiots in what's left of the federal regulatory apparatus. They all should be going to jail for corruption and incompetence..but mostly incompetence.

You can't blame the masters-of-the-universe yahoos..they can't help trying to screw everyone else. it's in their DNA. Anymore than you can blame a dog for wrecking the living room. They should have been neutered and leashed. That was the Feds responsibility, and they blew it totally.

If the banks don't have the required reserves, doesn't that make them insolvent? It doesn't sound like liquidity is the issue, solvency is. And maybe that's the reason banks aren't lending to each other--no one knows who is actually solvent.

The US is in a recession, consumers are cutting back discretionary spending, there is rampant overcapacity in every sector but energy, and there is no reason to go on a lending spree. Furthermore, there is no reason for any qualified buyer to want to borrow. Why would any responsible party want to expand in this environment? The only people who want to borrow significant sums of money now are the very people banks should not want to lend to. Thus the best thing banks can do with that money is sit on it.

John Mack yesterday in a CNBC interview said that the capital deployed by Treasury into the banks was going to rebuild their capital ratios - not be lent out. In other words, they intend to hoard it.

This means, bluntly, that not one nickel of benefit will be seen by Main Street, despite claims by Paulson, Bush and others that this bailout is necessary for "Main Street, not Wall Street."

Liars.

It's clear that no one wants the money going out, just coming in. And they'll all be waiting for the next government giveaway. George Bush cleaning out the treasury on his way back to Texas.