Commercial paper market still shrinking
Submitted by
CalculatedRisk on Thu, 08/30/2007 - 9:28am (52 comments)
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Today should be a big rollover day. Anybody hearing if anybody can't get it done.
concur -
Everytime I look at total CP market, I compare it to sp500ttm earnings...
not pretty...
Refinancing 1 trillion in the next few months will be, uhh, difficult.
It will be interesting to see how that plays out and as I am not very knowledgable in this topic, I will be interested to see proposed solutions and risk/benefit of same.
That asset-backed subcategory - that's another one of those "maybe they won't ease" bits of data. The Fed seems quite interested in getting more reasonable pricing of risk built back into financial markets. Conventional commercial paper is not a fun market right now, but it is not collapsing. The ABCP market is where most of the pain is. Foreign paper is also in rough shape (there is some overlap between the two). So it is possible to see this as "repricing of risk" instead of as evidence that markets are sick and in need of strong medicine. Same with conventional mortgages vs other types. Spreads between ARMs and conventionals are near zero - all of the risk of an ARM, without any of the cost break. Jumbo mortgages spreads have blown out. Conventionals are OK. We may see that as really bad news for housing, but it is not something the Fed will necessarily see as unnecessary.
More important, John Berry and Greg Ip both wrote "Fed wants to stand pat" articles today. Same day, same story, second time in 2 weeks. Doesn't some like a coincidence to me.
By the way, what's up with the underlining? Saw it, then it was gone.
"An estimated $1 trillion in commercial paper will mature in the next few months". Ominous sentence.
More needs to be discussed to clarify the consequences and the importance of:
Interesting article in AT- a bit and link:
Given the dearth of rated instruments in non-Group of Seven countries, financial institutions around the world reduced their credit staff and local assets - replacing them with rated instruments peddled by the investment-banking community. Sensing a unique opportunity, Wall Street distributed repackaged US consumer loans throughout the globe, creating a systemic time bomb that would eventually explode.
That is why, regardless of what the Federal Open Market Committee does on September 18, bank regulators, risk officers and boards of directors will think twice before buying another collateralized derivative obligation. Without limitless access to credit, US consumers will have to reduce spending, thus marking the onset of a global contraction.
Asia Times Online :: Asian news and current affairs - Your move, Mr Bernanke
OT Something really creepy is is happening in Phoenix, something I have never seen in my life, and I have lived in LA and Phoenix. A year ago you could not drive more than 10 miles an hour on the I-10 as it headed north into Phoenix from Tucson, now traffic is going over 75. I leave at the exact same time I have for the last several years, but the volume of traffic is off over 40% from last year. This is really strange and I know this is a sign the economy is much worse than they will ever admit.
The GDP number is not even close, is it any wonder that the amount of paper is falling.
k harris, agree on Ip and Berry - this seems like the Fed trying to signal "no cut" or at least that a cut is less likely than current expectations.
The underlining is Haloscan trying to make some money - as are the pay per click ads here - this has nothing to do with my blog.
Best to all.
OT: Bloomberg Radio has coverage from the Jackson Hole Fed symposium/love-fest this hour. Federal reserve people better be very circumspect at this meeting because the markets will be watching everything that is said closer than ever.
The 13 week T-bill is back down to 3.59%.
Y. S. Wayne, hasn't it been above 110 degrees for a record number of days or something? Maybe many people have had enough heat!
Best Wishes.
The 13 Week Treasury Bill is heading down again today but may be trying to find a bottom.
Yesterday's close: 3.85%
Today's low: 3.45%
Current: 3.65%
^IRX: Basic Chart for 13-WEEK TREASURY BILL - Yahoo! Finance
Here is some commentary on the CP action...
The Commercial Paper Crunch
Midmorning Cocktails and A View From The Buyside
[courtesy of DealBreaker]
[snip]
Its only after he pours a second round of martinis that he starts talking about commercial paper.
Im not buying any, he says. I buy this stuff to fill out the portfolio. Its short, short term. It's got the highest yield for a money market type deal. No real interest rate risk. You almost dont have to think about it. But now you do. You need to drill down into whats under the paper. Is it subprime? Is it marketable if Im selling it off? Frankly, Im not sure its worth the effort. And people are pissed that they werent warned about it before. Theyre pissed at the products people who are selling this stuff. Its a buyers strike.
I ask him about the article in this mornings Wall Street Journal about bank conduits that spin-off commercial paper and special investment vehicles run by private equity firms. Hes read it. He says its the most important thing you can read today.
[snip]
F. Frederson was the winner in today's "Post the T-Bill Rate" game.
Stranger and stranger. I drove to work today and saw: one construction project with about four worker's cars out front. One construction project completely abandoned. Just sitting there with a tumbleweed blowing through it. All of the sheetrock for the interior work was clearly visible inside, and it was all just sitting there. Maybe they stopped early for labor day weekend, maybe not.
Yay! What do I get?
From a comment at Dealbreaker, it sounds like people swapping the 13 week T-bill for the CP that was in their portfolios. Has anyone seen that kind of chatter on other boards (less gossipy ones, hopefully)?
The CP market is getting ink because it's public and measureable. But what about all the CP-lookalike stuff that is private? This would include: prime broker loans to hedge funds, Japanese bank yen carry loans to hedge funds, etc. I don't see the difference.
Wouldn't you think the banks and prime brokers would start pulling in these lines, especially if the collateral is asset-backed (e.g., mortgages, credit cards, etc.)?
Clearly, the yen is being dumped by somebody who listens to policymakers (PPT or BOJ) and wants to avoid panic yen carry unwind. So, I'm watching gold. When gold drops, you might suspect that credit lines to hedge funds are being called in. Gold gets dumped to buy cash and time.
CR,
My impression over the past few years has been that Fed officials respond when market pricing gets too far from their intentions. They want markets to get the right answer before they move. So far, Poole and Lacker have spoken in ways that do not encourage easing sentiments and the Ip/Berry/Beckner/Murray comments have all been along the lines that the Fed would rather not ease.
Don't know what Bernanke will do this weekend, but we may find out that we have focused on the wrong name. Bernanke doesn't want to be Greenspan - master of the economic univers. Bernanke wants to be the chairman among equals. Maybe we should pay attention to Mishkin, or to Fed guys on the sideline of the big speeches.
Anywho, Fed guys have so far acted as if they don't want markets pricing in high odds of an ease, but not many Fed have actually spoken.
Y. S. Wayne,
Maybe the military is testing a new weapon that makes people, literally, disappear (not just from statistics, but from reality!)?
Here's a view from the other side of the pound, um, I mean pond.
Pound falls on credit worries
Pound falls on credit worries |
Business |
guardian.co.uk
Money markets remained extremely tense tonight as the credit markets which oil the wheels of the global banking system remained all but seized up. With some banks across the world having already revealed big losses from exposure to the US sub-prime mortgage crisis, banks have become reluctant to lend to each other for fear of never seeing their money again.
"In such circumstances every institution is potentially guilty until proven innocent. With incomplete disclosure and a lack of transparency, those holding cash are unwilling to lend it for other than extremely short periods and then only against the highest quality collateral," said Nick Parsons, head of strategy at nabCapital.
...
The stress is now showing when banks want to borrow for three months or longer. The so-called 3-month Libor (London Inter-Bank Offered Rate) shot up from 6% to 6.6% in the middle of August and has remained there since. Traditionally, 3-month Libor is around 0.15% above base rate, which is currently at 5.75%. Now it is almost 1% over base.
Here's a link to the WSJ article about conduits mentioned above:
'Conduits' in Need of a Fix - WSJ.com
Looks like no subscription required.
JBA , haven't heard or seen anything today , but we did get the CP and ABCP numbers today which show the continuation of big drops in outstanding commercial paper as well as ABCP. The big issues include: lack of trust of the quality of assets underlying said paper ( coupled with complete distrust and disdain for the rating agencies ) ; investors' lack of trust of counterparties ; as a result of first two points , a buyers strike for CP and in particular ABCP whether domestic , europe or canadian flavors ; SIV blowups involving commercial and ABCP ; foreign investors revulsion of US subprime bonds / CDOs / CLOs ABCP /CP and anything else we want to peddle them.... once burned , twice shy.
I second CR and k harris's commentary. When I read the Ip article this morning, the light went on for me. Ip wouldn't write it without some guidance and it seems like they're trying to take the ease talk out of the market. 9/19 could be ugly if the market hasn't figured it out by then...
My bad - 9/18 in above post.
The GDP number is not even close, is it any wonder that the amount of paper is falling.
Y. S. Wayne | 08.30.07 - 2:23 pm | #
Y.S.,
Those numbers might be close. I work for a worldwide corp and from talking with people and seeing with my own eyes i have never seen us as busy as right now. Until 2 weeks ago. The business really dropped off fom what i hear in the last three weeks. August is usually sorta slow anyways so i realy want to see what our upcoming qtr loks like(Sep/Oct/Nov).
If business drops off pretty drastically next qtr give the economy about 6-9 months to take a hit...
Yes,you have heard of the company i work for...
Chris
JBA: Follow up comment : Forgot to mention the possible 43 billion of fire sale price liquidations from SIVs , Hedge funds collapses and fire sales like Cheyne Capital Management's blow up , HBOS's recent conduit related problems- they had to step in when the conduit ran into problems ( with 36+ billion of commercial paper ) , Carlyle Group , KKR , etc...... there is a universe of 1.3 trillion of ABCP of which 1.1 trillion is backed by funding lines. Imagine if all of those funding lines are drawn down ( or imagine what happens if the banks decline to fund--- that already happened with IKB in Germany and I believe Sachsen as well ? ) We shall see what happens over the next few months when this paper rolls or fails to roll over.
One month funding raised via currency arbitrage (eg. issue paper in Euros, swap it into Usd - very common in the bank and corporate funding world) is now trading over 6%, so this liquidity squeeze is starting to take on a life of it's own, like a bad horror movie. I think this current ramp up is related to a building month end panic, but I also don't think we'll being going all the way back to normal anytime soon. The data doesn't justify a rate cut, and the Fed appears to be signalling this, but I also don't think the Fed has a handle on just how much credit conditions have deteriorated, or just how quickly this is will be translated to the real economy.
I remember from the Enron book that when they were unable to roll their CP, they were able to call upon their super emergency guaranteed credit line with one of the major banks. Given the amount of cash that might be tied up in pier loans, could this force a quick trip to the Fed discount window by the bank extending the credit line?
Or am I just smoking the crack?
I'm a proud tin-foil hat man and have arranged my portfolio accordingly (way short esp. HBs). I expect, however that the central banks will try to fulfill their function of keeping markets functioning, getting as many of the walking wounded down the fire escapes as possible. I'm still of the opinion that they'll be moderately successful in this, and that the tainted ABCP will be replaced by bank lines, weak institutions will be shored up with someone else's capital (CFC, IKB) and that the recognition of losses will be managed and postponed, but ultimately realized. This all implies a lot of deleveraging, which may not be such a bad thing, but which should theoretically result in a repricing of risk. It is this reduction of cheap capital, combined with the necessary deflation of the real estate asset bubble that I feel will result in the pain for the "real economy". The government has a number of palliatives at hand, enumerated in Bernanke's letter yesterday, and can cushion some of the drop. But nothing, not 400 b.p. rate cuts, not increased FHA and GSE lending, not foreign reluctance to trash the dollar, can avoid the economic pain involved in marking housing assets back to a reasonable multiple of incomes or rents. The question in my mind is how vigorous the feedback loop from the r.e. repricing is to employment and gdp. Given the weakness of other sectors (e.g. autos) and similar RE problems in foreign economies, (UK, Spain, Eastern Europe, am I overestimating it? The fact that the homebuilders and mortgage heavy banks can rally in this market makes me doubt my sanity sometimes. Did Lord Keynes or Warren Buffett say that markets can stay irrational longer than you can stay solvent. But the martini party ought to be nearly over.
If Corp's are doing so well, with great profits etc. how come they have to borrow money for operating expenses?
OT
Here's a fun AP article:
Many Home Defaults Are From Investors
It references an MBA report that was released today. That article, and several others, point the finger really strongly at flippers (the title of the money.cnn.com article is "Flippers Fuel Foreclosure").
Unfortunately, both articles are light on numbers. Be interesting to see a more serious analysis of the report and to see how the flipper^H^H^Hinvestor numbers (total number of loans/default rates) compare to historical values.
mbarty: it was Keynes.
eli
if ur out there, what Opera version did u download for your Blackberry? website doesn't list a Blackberry version.
If Corp's are doing so well, with great profits etc. how come they have to borrow money for operating expenses?
Ella | 08.30.07 - 3:36 pm
no one wants to answer that...
destroys the bull case in 2 seconds flat
"The fact that the homebuilders and mortgage heavy banks can rally in this market makes me doubt my sanity sometimes."
Amen.
destroys the bull case in 2 seconds flat
Bob Pisani summed up the bull case rather well at the close today. He said that the stock market was range bound (traded within 1%). A drop of 50 points for the Dow isn't even significant any longer apparently and should be thought of as good news, lol.
He's talking again now. The market traded "very range bound".
I feel the need to extrapolate the Dow's -0.38% range bound activity 100 trading days into the future. Here's my tongue in cheek prediction.
13238.73 x (1 - 0.0038)^100 = 9046
Hmm. Maybe that isn't a tongue in cheek prediction the more I think about it. Maybe we'll range bound ourselves down below 10,000 in the coming months and range bound ourselves right into a recession. Who knows!
"eli
if ur out there, what Opera version did u download for your Blackberry? website doesn't list a Blackberry version."
idoc,
You need Opera Mini. Go to:
Opera Mini is the next generation mobile browser for any mobile phone.
You can also send a text message to your phone for install by going to:
Opera Mini - Download:
Though, if you use the browser on your blackberry.. it should automatically load the operamini page for you.
A year ago you could not drive more than 10 miles an hour on the I-10 as it headed north into Phoenix from Tucson, now traffic is going over 75. I leave at the exact same time I have for the last several years, but the volume of traffic is off over 40% from last year.
Y. S. Wayne
Perhaps all the construction workers who bought houses in Casa Grande & Maricopa to commute to new construction in Phoeenix got laid off.
If Corp's are doing so well, with great profits etc. how come they have to borrow money for operating expenses?
Ella
Economic theory would suggest they do it because they can find more productive uses for the cashflow(which made sense when spreads were so low.)
Methinks corps are buying back stock with that borrowed money.
Not a good use of shareholder money when multiples are at high risk. Great for bonuses though.
Maybe we'll range bound ourselves down below 10,000 in the coming months and range bound ourselves right into a recession.
I like to call it 'Dollar cost averaging down to zero.
I like to call it 'Dollar cost averaging down to zero.'
I both laugh and cringe at your comment, lol. cringe
"That article, and several others, point the finger really strongly at flippers"
Right, but then you get into a discussion of exactly what is a flipper - and the opinions vary widely on this. Even folks who didn't think of themselves as flippers actually are and they don't know it.
Take the example of someone who buys a starter house and plans on using the equity to become a move-up buyer in a couple of years. This is still a flipper. Are these "gambling investors" as Doug Duncan says? If so, there are a lot of people in this category (ie almost EVERY first time home buyer.)
Sounds like the Forbes article is trying more of that "subprime containment" propaganda and is trying to send the message that this is a flipper and flipper-only problem.
Speaking of tinfoil and headgear:
Around noon GMT the FT online had a headline article about the Fed injecting $5B through the discount window last night. When I went to post it, it was gone. OK, now I know it's easy to make a mistake, especially in an online environment and whatnot.
Then, around 6 PM the article reappeared. I was able to link to it, and quoted them reporting that the liquidity was $10B, with about 5.6B collateralized with mortgage paper. I guess they had just made a mistake earlier.
But wait! Now the article is gone, as if it never existed. I haven't seen anything about this anywhere else online, but there is this article:
Sterling falls on Banks emergency lending
Sterling lost ground on Thursday after the Bank of England revealed it had lent £1.6bn through its standing facility to an unnamed borrower, sparking renewed fears over liquidity in the wake of the recent turmoil on credit markets.
The Banks standing facility allows market participants to borrow unlimited amounts at a penalty rate of 1 percentage point over base rates, or 6.75 per cent.
The facility was last used on August 20 by Barclays, which borrowed £314m, although the bank said at the time that it was not related to liquidity concerns. Barclays declined to comment on Thursday, as did other leading banks including Royal Bank of Scotland, HSBC, Lloyds TSB and HBOS.
Now, one interesting thing about this story, about an hour ago there was a version which quoted unnamed sources at the BoE asking banks that used the facility not to disclose it, out of fear of propagating more fear. That comment is now gone, with only the "declined to comment" as a placeholder.
What a contrast to the proud "Come on down and get your money! See there isn't any stigma" of a couple days ago from the Fed. Instead, I have the feeling that I'm looking at one of those mysterious websites that appear and disappear to give Al Quaeda their instructions.
ratefink, I had found the article listed under the title "Bank warns emergency fund users." The text stated that the BOE did not want entities that used the facility to reveal that they did so, reminding them that this was part of the rules.
Perhaps the FT is just reacting to this.
The warning was here.. FT.com / UK - Bank warns emergency borrowers
So the banks own a lot of bridges to nowhere and plugged conduits. It sure would be fun to see a bank manager trying to handle a run It's a wonderful life style: See, your money isn't here, it's in a pier loan for Potter's LBO, it's in a plugged conduit full of Potter Bonds and Mortgages..."
Ok, we have a drain of $240 billion.
Who will be hit most? What are those corporations? Should be expect immediate bankruptcies?
Theo , we have a three week drain of 244 billion . The universe of ABCP is 1.3 trillion ( can't say whether that includes or doesn't include the 244 billion. ) 1.1 trillion of that has funding lines , which could be drawn down. Total universe of CP including ABCP is 3 trillion.... the problem is that there is a big time trust issue ... with the quality of assets backing the paper , with counterparties , with the ratings assigned to assets , with the rating agencies , with the US in general for making this mess.... I think we'll see outstanding commercial paper outstanding continue to drop... as to your question as to who has exposure , HBOS has a conduit with 36 billion+ in CP , Citigroup has has off balance sheet conduits with 77 billion in assets and liabilities and JP Morgan has off balance sheet conduits that have issued 54 billion in CP ( as per today's WSJ for C , HBOS and JP Morgan. ) Draw your own conclusions but I would think GS , SC , and Lehman have similar issues.
Mbartv,
As previously mentioned it was Keynes that you quoted, and it is interesting how he came about that maxim. Keynes complained about the effects of punitive sanctions upon Germany after WWI and how they would sink the mark. In 1920, he put his money where his mouth was and darn near lost his total fortune (22,000 pounds) on an early bet with thin margin that the mark would collapse. The mark did eventually collapse in 1923, long after Keynes thought it would.
A tale to remember for all who wish to speculate upon our current predicament.
Cheers
It sure would be fun to see a bank manager trying to handle a run It's a wonderful life style: See, your money isn't here, it's in a pier loan for Potter's LBO, it's in a plugged conduit full of Potter Bonds and Mortgages...
Don
Thanks, Don, that is priceless.
If Corp's are doing so well, with great profits etc. how come they have to borrow money for operating expenses?
Ella | 08.30.07 - 3:36 pm
Actually - as crazy as this sounds, being busy requires more short term borrowing than being slow. The development & operating capital costs are very severe in the 'growth phase' and require a lot of short term borrowing... Its only later after the business stabilizes at a plateau that the firm can comfortably 'milk the cash cow'...
I'm not saying that is what is happening but it does explain why folks are so rattled by tightening in short term money... If a firm were to land a lot of new business, where would the operating capital come from to execute the deal if not the CP market? Projects invariably demand more cash than companies hold day to day... do they walk away from a large multi-year program because they can't fund the tooling this month?
This situation is going to have a lot larger impact than just scare a few folks with money market funds.
As credit card and mortgage delinquencies rates rise, the cash flow from the credit card and mortgages will decrease. As the cash flow decreases, the collateral value of the credit card and mortgages will fall As the collateral value falls, either credit in terms of commercial paper will not be extended or will be extended at much higher interest rates. If these higher interest rates are effectively the input costs of lenders, then it seems likely that lenders will pass along the higher input costs to consumers because the lenders will be unable to make up in volume for reduced profit margins otherwise. If credit card interest rates and mortgage rates rise, then we're likely to see even higher credit card and mortgage delinquencies rates. It looks like a potential vicious cycle. What am I missing here?