With the mad scramble of Citigroup (C), Ambac (ABK) , MBIA...

With the mad scramble of Citigroup (C), Ambac (ABK) , MBIA (MBI) and other corporations to raise cash, and with banks reluctant to even lend to each other overnight, inquiring minds just might be asking Where the Heck Is all the Cash? It's a good question too, so let's sneak a peak inside in the latest Fed report on Assets and Liabilities of Commercial Banks to see if we can find some clues. November 23, 2007 Asset HighlightsTotal Assets $10.734 TrillionLoans and Leases $6.698 Trillion BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? With the mad scramble of Citigroup (C), Ambac (ABK) , MBIA (MBI) and other corporations to raise cash, and with banks reluctant to even lend to each other overnight, inquiring minds just might be asking Transaction Deposit are deposit against which check may be withdrawn. This includes demand deposits, Negotiable Order of Withdrawal (NOW) saving accounts on which check may be withdrawn, Money Market Deposit (MMD)which have limited check writing privileges. Nontransaction Deposits are interest bearing account against which check can’t be written. This includes passbook savings accounts, small time deposits, and negotiable CDs. The balance spread between assets and liabilities seems healthy on the surface but such analysis presumes the value of the loans, property, etc were marked to market when the asset side was totaled. Demand deposits are checking accounts. They are called demand deposits because the money is supposed to be available 'on demand'. The above chart shows roughly $300+- billion in deposits. The assets and liabilities numbers at the top of this post show there is $300+- billion in cash. Sweeps are automated programs that 'sweep' funds from one type of account into another type of account automatically. In this case we are talking about programs that allow banks to 'sweep' funds from checking accounts to other types of accounts such as savings accounts that allow money to be lent out. Since January 1994, hundreds of banks and other depository financial institutions have implemented automated computer programs that reduce their required reserves by analyzing customers' use of checkable deposits (demand deposits, ATS, NOW, and other checkable deposits) and 'sweeping' such deposits into savings deposits (specifically, MMDA, or money market deposit accounts). Under the Federal Reserve's Regulation D, MMDA accounts are personal saving deposits and, hence, have a zero statutory reserve requirement. Retail sweep programs have substantially distorted the growth of M1, total reserves and the monetary base, as Chairman Greenspan noted in his July 1995 Humphrey-Hawkins Act testimony to the Congress. Retail deposit sweep programs increase bank earnings by reducing the amount of noninterest bearing deposits that banks hold at Federal Reserve banks. A bank's transaction deposits beyond approximately the first $50 million are subject to a 10 percent reserve requirement ratio, which is satisfied by holding vault cash or noninterest-bearing deposits at Federal Reserve banks. In contrast, savings deposits are subject to a zero percent ratio. Retail deposit sweep programs take advantage of this difference by 'sweeping' transaction deposits into savings deposits—that is, relabeling transaction deposits as savings deposits for reserve-requirement purposes. This 'win-win' experience with retail deposit sweep programs—higher bank earnings without increased federal funds rate volatility—has led some members of Congress to propose relaxing regulatory constraints on retail deposit sweeping. Such a change would be economically equivalent to reducing the reserve-requirement ratio to zero for banks with sweep programs—effectively, the end of binding statutory reserve requirements in the United States. Wow! Let's lend out every penny. Why not? Who needs cash? Savings deposits already have a reserve requirement of zero, checking accounts are the next logical extension. Inquiring minds are now asking 'How much money are we talking about?' That's a good question too. As stated, 100% of savings deposits have been lent out. If you have money in a savings account it simply isn't there. Savings deposit figures are readily available. However, checking deposit figures are grossly distorted by sweeps as discussed. . Scrolling to the bottom we see 759.8 billion in sweeps. That means only $300+- billion of $1.059+- trillion cash that should be available on demand is actually available on demand. Inquiring minds will note that the data is now 2 months old. It is never less than two months old. I have no idea why it takes the Fed 2-3 months to post this data. I suppose we should be grateful they publish it at all. When constructing the monetary aggregate I call M Prime (M') missing months are extrapolated because it is the best we can do. M' is essentially (but not exactly) what M1 used to be before Greenspan allowed sweeps. It's pretty absurd that we have to do this but what the heck, it gives me something to write about. By the way, it took nearly a year to figure this all out. As for savings accounts, none of it is actually in your account. Reserve requirement on savings accounts are zero. 100% has been lent out. As for checking accounts, most of the money you think is sitting in your checking account simply is not there either. Less than a third of it is there. Based on the 'win win' So where's the cash? You tell me. Perhaps it's sitting in SIVs, mortgages, lent to hedge funds, in asset backed commercial paper ABCP, or for conservative banks sitting in short term treasuries. By the way, the real extent of the problem is far worse that appears at first glance because with the miracle of fractional reserve lending, money that was 'borrowed into existence' was lent out over and over again. This was not a problem until now. As long as asset prices are rising banks have plenty of capital to lend. But now that bank balance sheets are impaired there is a mad scramble for cash but there isn't much cash anywhere except of course China, Japan, and the oil states, all sitting on huge US dollar reserves and not knowing what to do with them. The content on this site is provided as general information only and should not be taken as investment advice. 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