I am told that "Lots of CP is being written nowdays with 10% of "real assets" behind it and the other 90% a swap written by some hedgie in an OTC transaction!" - this is from another BB.
Does anyone know if this true - some Canada based compnay maybe involved.
Delaying the inevitable is the point here. Giving the whole flying circus time to get back in formation and headed in for a landing. Fasten your seatbelts, though Betty - we're in for a bumpy ride. The Canadian lender in trouble is Coventree. This is more of what whas referred to in an earlier thread as the fed using "too big to fail" banks as their intermediary in parceling out liquidity.
Anyone notice that Thornburg is being sued for $5m by Wachovia - claiming they never paid back collateral from an interest rate swap trade? Thornburg says they will pay on Monday... Wachovia Sues Thornburg Mortgage - WSJ.com
The rating agencies determine of it is investment grade.
The Fed has been valuing subprime related at 85% of their value (probably a marked to model value). That 15% premium is steep, and these are loans. So I would not say it is a bailout.
On the other hand once could make a case that perhaps the Fed is providing too much liquidity.
This still looks like me like Bageho'ts Maxim: at time of crisis provide liquidity freely but at a premium.
On could perhaps take issue with the provide liquidity freely bit, but I don't see it as clear cut.
How much of a premium eliminates moral hazard is also open to debate.
The Way to Look at It
What the Fed is doing is confusing. Let's try to look at it simply.
The market has decided that credit was too easy. That is being reflected in wider credit spreads where institutions are paying more to borrow even though treasury rates have not risen, and in fact have fallen.
In normal times the Fed accepts only treasuries, risk-free paper as collateral when a banking institutions wants to borrow money from it. After all, the government issues treasuries when it wants to borrow money, so it should buy them back (repo) when it wants to lend (even though the public debt has been going up and up).
But when the Fed accepts risky collateral like mortgages when institutions want to borrow, what it is saying is the markets are wrong, that credit spreads should not be wider.
This is what I refer to as the socialization of markets (some call it nationalization): the Fed directly making decisions on credit, taking those decisions away from investors that have made their own decision. This is what some of us call moral hazard.
Reports say the ECRI does not currently forecast a recession a year out. The Economic Cycle Research Institute leading index apparently has one of the best recession forecasting records.
So are the pessimists wrong?
I imagine the ECRI uses trends in money supply, income, expenditures and job growth, plus inventories and business capex, to forecast changes in the real economy. What are those "trends" not picking up?
A year from now, if we have a recession, ECRI will say, "our models were surprised by the magnitude /influence of..."
Of what?
If you respond, pls. take it as a given that the folks at ECRI are not stupid or easily surprised...
Here's a relevant and worthwhile reading article on it.
OHN PARTRIDGE and BOYD ERMAN
Thursday, August 23, 2007
The freeze-up in short-term lending that is battering Canada's Coventree Inc. is spreading fast in the U.S. and Europe, raising concerns about slower economic growth and the strain on banks that have agreed to back the commercial paper that suddenly nobody wants to buy.
Thursday, the list of Canadian companies that have said they can't get the money they are owed after purchasing so-called asset-backed commercial paper (ABCP) from Coventree and other sources again got longer.
Among those that revealed exposure were the Greater Toronto Airports Authority, which has about $249-million of ABCP, some run by Coventree. Société générale de financement du Québec, the investment arm of the Quebec government, said it holds $137-million of non-bank ABCP, about 40 per cent of its cash, sold to it by National Bank. As well, Air Canada said it had $37-million of ABCP, out of $1.4-billion in total cash, and Russel Metals Inc. said it is owed $11-million.
The concern now is that companies whose cash balances are locked up in Coventree investments may be forced to delay spending, slowing economic growth. The problem would be compounded if companies that borrow directly in the commercial paper market to fund day-to-day operations are unable to find buyers. But bond salesmen say well-regarded borrowers are able to find takers for their short-term IOUs, though at a higher interest rate than a few weeks ago.
It doesn't take much of a hesitation on the part of businesses and spending or hiring to begin to show up in the economic data, Ted Carmichael of J.P. Morgan Securities Canada Inc. warned in an interview. As long as the commercial paper market remains seized up, the risks that the economy could slow down quite sharply are rising in both the U.S. and Canada.
So far companies caught with Coventree paper have said they have access to cash to keep operating, either through banks or what's available elsewhere on their balance sheets.
The crisis, which began to spread in mid-July when Coventree customers started to balk at buying paper backed in part by U.S. mortgages amid a housing slump there, has become a global problem. Issuers similar to Coventree have found buyers have vanished, with the Federal Reserve reporting that outstanding U.S. commercial paper fell 4.2 per cent in the past week, the biggest drop since 2000.
As a result, commercial paper investors who are due money are looking to banks to bail them out in accordance with backup agreements. Fitch Ratings estimates that banks have $891-billion (U.S.) of commitments to commercial paper investors who bought asset-backed commercial paper.
The problem for holders of Coventree paper is that banks balked at backing the securities, citing an out available only in Canada, and now under the so-called Montreal proposal the market has been effectively brought to a stand
"As a result, commercial paper investors who are due money are looking to banks to bail them out in accordance with backup agreements. Fitch Ratings estimates that banks have $891-billion (U.S.) of commitments to commercial paper investors who bought asset-backed commercial paper." This ties into the Fed "clarifying" the use of its discount window.
I just provided a link to a recession discussion that included someone from ECRI. He is saying that it is EXTREMELY difficult to forecast a recession 1 to 2 quarters out...never mind a full year.
Looks like this is the first step to the Fed accepting other "collateral" for newly minted dollars.
When do they start accepting CDOs, MBS, etc. And investment grade is in the eye of the beholder. We know what a AAA rating from Moody's or S&P is worth. But why bother with the charade. The Fed should say they'll accept any paper from Wall Street - that will keep all the prime financiers of political campaigns very happy and Bill Gross can keep his bond portfolios whole and enjoy his Bahamas and Aspen vacation homes. And Carlyle, KKR and Blackstone can do even bigger LBOs so we can achieve Wall Street nirvana.
181 billion drop in outstanding CP much of it ABCP in the last two weeks. 1.1 trillion in ABCP comes due over the next 90 days . Globally Banks have 891 billion at risk due to ABCP ( See Roubini blurb on his site for details .) Any questions why the Fed is accepting ABCP ?
Well, I only mentioned the recession discussion involving ECRI as a point of interest, but then my curiosity got the better of me. The WLI has been down for 5 weeks in a row, which COULD BE an inflection point. Now is the time to monitor the WLI closely. If it's growth rate goes negative (it's not right now) and stays that way for a few months this Fall, then the R word will come into play for 2008.
eli, I just found that out as my downloads allowed me one, then the other was not found. I, too, ultimately found the moved docs, but don't you find the move peculiar? Especially as the article from CNN-Fortune only came out 45 minutes ago. It seems as if the move occurred as the links were being used. Really amazing.
Quite the shell game the Fed has undertaken this time.
Here's an interview with Lakshman Achuthan from ECRI (mp3) describing what their leading indicators are telling them. In summary, he says that there's no immediate threat of a recession. Looking out a litter further, ECRI's long leading index is showing some softness in 2008, but it's far too soon to say it's recessionary.
Here's another video from today that you might be interested in. He talks about misconceptions of how recessions happen. Basically he describes that while shocks to the economy CAN cause a recession, what matters the most is WHEN the shocks occur. In order for a shock to cause a recession, the economy must be in a vulnerable phase of the business cycle. This is why things like the 1987 crash and the LTCM debacle didn't cause a recession even though they were tremendous shocks to the system. ECRI doesn't believe the economy is currently in a vulnerable phase of the business cycle.
Massive credit losses, that have so far been so far postponed by the Fed temporarily short-circuiting the price discovery necessity. They just are not there yet. This will hamper future economic activity as the survivors will be traumatized and others will drop dead.
Biggest asset out there? Time! And all this under the radar Fed activity and policy changes, and banks swapping unproven assets for dollars fresh off the printers, is so that the big boys can buy time before the feces hits the fan. The risk-takers have been giving a parachute more golden then ever before.
Indeed that does seem shocking (the Fed making 25% of bank capital available to brokerage divisions).
No doubt this has to do with the banks' prime brokerage balance sheets. These are margin loans to hedge funds that are financed not from deposits but from commercial paper and repo's. What's probably happening is hedge funds are pushing back on margin calls, saying, "if you force us to liquidate, you'll end up owning the stuff because we'll shut down." The banks want to avoid taking ownership of this stuff at all costs, and are probably allowing the hedge funds to wait it out. Only problem is they don't have the funds to repay short term obligations.
If the margin calls are what's behind the Fed move, the implication is truly startling: FDIC-insured deposits propping up hedge funds.
"ECRI doesn't believe the economy is currently in a vulnerable phase of the business cycle."
In the past, inverted yield curves almost always signaled a recession (exception: 2001). We've had one of those. As CR so succintly pointed out, a substantial drop in housing starts has preceded every recession in recent history (except 2001). Yep, had that too. Now we have credit issues (which typically precede a recession) with a liquidity crisis on top (which did happen in 2001).
If that isn't a vulnerable part of the business cycle, what is?
Reports say the ECRI does not currently forecast a recession a year out. The Economic Cycle Research Institute leading index apparently has one of the best recession forecasting records.
So are the pessimists wrong?
I imagine the ECRI uses trends in money supply, income, expenditures and job growth, plus inventories and business capex, to forecast changes in the real economy. What are those "trends" not picking up?
Perhaps their model doesn't account for credit markets in a way that would predict a recession based on a sudden crisis. Notice all the "shocked" hedge fund managers who lost money recently saying, "It's not my fault this was a 10-sigma event!"
Models by definition are an incomplete representation of reality. In a chaotic system like the economy, missing a single tiny element could potentially cause a wild divergence between model and reality.
It's also possible that ECRI has become a shill for the Wall Street money machine.
Okay, I don't have a clue what this all means, but I'm guessing that it's another tempest in a teapot, ala the previous one over the Fed accepting agency MBS in repos.
While industrial and financial issuers have been little affected, yields on the $1.2 trillion market for asset-backed commercial paper have been rising because the funds may have to liquidate assets quickly to pay back short-term debt. That may set off spiraling losses in the market for other structured finance.
About $125 billion in asset-backed commercial paper has been withdrawn from the market in the past two weeks, a sign that banks are stepping in to make good on the debt under liquidity agreements.
So-- 86% matures in a week? Sounds like a little breathing room rather than a huge bailout to me...
The ECRI won't be surprised by rising defaults, REO's, or an overall increase in corporate and consumer defaults. There are already "trends". Sure, maybe they don't see the non-linear aspect of the trends, but at least the linear extrapolation is discounted.
What haven't they discounted in all likelihood?
I think the answer is a surprising step-down in house prices occurring this fall. Every economist on Wall Street thinks, at most, we get a 5% decline in the next twelve months. If it looks to be a 15% decline, the markets will react violently, and more important, the attitude of "bail out or wait it out" will evaporate as deflationary fears grab hold.
Is it so unlikely? All the ingredients -- 10 months of inventory, rising pressure from REO's, falling credit availability -- are there. The cake just needs to bake a little longer.
Check out this link:http://www.itulip.com/forums/showthread.php?p=14679#post14679 for a clear look at what the FED is doing at the discount window. The four big banks are acting as a conduit for the Hedge funds, etc. to access funds. I think this explains the FED letters to the banks mentioned above.
What does one do if you don't want to play the game?
sit and watch your CASH or cash equivalents become more and more worthless each month, or throw them into a mutual or hedge fund or leverage them as well, and join the machine as it grinds down anyone else not in the game into poverty?
Here's a part of the itulip piece which I referenced above: Mechanically, here's how it works. The Fed will only do business directly with banks that maintained good loan practices and are the most credit-worthy. Lenders of various flavors such as investment banks and hedge funds that took on a lot of bad loans can only deal with the banks that deal directly with the Fed. They do not have access to the new and improved discount window on their own. The credit-worthy banks can use the weak creditors' assets as collateral to borrow from the Fed.
For example, a distressed hedge fund can't access the Fed directly but can take the mortgage-backed securities they hold and bring them to a credit-worthy bank that does have access to the Fed. That bank uses the paper as collateral for a one month loan. That's why Bank of America, Wachovia, Citigroup, and JP Morgan all hit up the discount window at the same time, each for the same $500 million amount yesterday, to let hedge funds and others know where to go to put up their asset backed securities and CDOs and other paper as collateral for loans. The banks borrow from the Fed, and the hedge funds borrow from the banks. Hedge funds and others can still fail, but in an orderly way versus a simultaneous dumping of assets into a frozen market. The Fed can turn the discount window knob as need to control the rate of failure, averting the dreaded "break in the chain of payments."
August 31 \t
Chairman Ben S. Bernanke
Housing and Monetary Policy
Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming
10:00 a.m.
CR going to the Hole?
I know they seem to have misplaced my invite- permanently.
Crisis must be over, Wall Street is back in gear and we have less than 100 visitors. The technical details of how the fed monetizes the crisis are unimportant in the long run- they have told us they will drop money out of helicopters to keep the party going, if necessary.
Back to the crisis cave for a month long snooze.
I see that this episode is contained.
But, the housing crash will continue without interruption until a new stability is reached with prices and buyers. For now, a buyer had better intend to live in it or be prepared to run away at the first sign of trouble.
"The banks borrow from the Fed, and the hedge funds borrow from the banks. Hedge funds and others can still fail, but in an orderly way versus a simultaneous dumping of assets into a frozen market. The Fed can turn the discount window knob as need to control the rate of failure, averting the dreaded "break in the chain of payments."
The problem of this is that when the hedge funds in the end still fail, the ABS will not be enough to cover the money those banks gave to these hedge funds, and so the banks will be in deeper trouble (vs not doing this 'favor' for the hedge funds).
The only way this make sense is that the value of ABS will bounce back within the next couple of months, but I doubt that.
What if the fed knew this was coming years ago. Instead of pricking the bubble then, they continued on borrowed time, with the full awareness of the serious banking system problems it would create.
Most of you people here probably think I'm crazy, but what if their only intent in the short term is to keep the general public unaware of the serious fundamental problems entangling the entire banking system, until such a time that an "event" occurs that the blame can be directed to.
At some point the USD index is going to break below 80. I think this will be the critical juncture that leads to foreign central banks selling treasuries with enough volume to cause spiking interest rates and inflation.
Massive bankruptcies, falling home values, rising unemployment, on top of the already rampant disgust in the political system could cause the people to get awfully disruptive.
SPP, Amero, operation endgame, possible war with iran, etc. What do you people think of these things in relation to the ongoing "credit crunch".
If the margin calls are what's behind the Fed move, the implication is truly startling: FDIC-insured deposits propping up hedge funds.
David Pearson
Exactly. As for the beginning of the upturn in the markets, it occurred midday Aug 16, after dropping badly in the morning. The date of hedge fund redemption requests was on Aug 15. So the news of immense redemptions drove this. The big De-leveraging has begun. It drove demand for the Yen, which caused even more de-levering. The initial panic was realized as huge by the Fed, and they confirmed verbally they would help keep it afloat while the rich hedge investors get to de-lever to sell off. Then everyone's pension can get hit with the actual costs after the insiders are out. Same as 1999-2002. Bailout of LTCM on a much larger scale. But the problem of the additional housing debt with negative HPA will also de-lever the consumption, which will de-lever...
And the hedgie gearing from carry trades and CDOs is the Ponzi-floater that has kept this ship from sinking (sorry, Tanta). The hedge fund de-gearing will take it down.
We should drag Henry Kaufman out of retirement to update this paper:
http://www.kc.frb.org/PUBLICAT/SYMPOS/1986/s86kaufm.pdf
He would probably have a heart attack to see what the current numbers are.
another great nugget:
The
question for the future is, "Can monetary policy do it alone the next
time around?"
Um, no. Proof is in this week's actions.
A real nugget that leads us to this years' fiasco:
"The third fundamental force has been the development of financial
theory, especially the theory of capital asset and options pricing.
Combined with technology, these advances in financial theory have
made it possible to develop a wide range of new financial instruments,
such as options, swaps, and asset-backed securities. These new instruments
liquify what were once illiquid assets, and make it possible
to separate the credit-risk, interest-rate risk, and exchange-rate risk
that were traditionally bundled into single financial instruments, such
as bank loans or corporate bonds. Thus, these new instruments permit
portfolio managers to manage and price risk more precisely." http://www.kc.frb.org/PUBLICAT/SYMPOS/1987/s87huert.PDF
Sometimes obscure quotes shed some light on where we have ended up.
The 1986 conference was obsessed with ending Glass-Steagal. Now we live with liquified capital.
And did you think the timing of Gen. Pace's suggestion to bring troops home was a little too conspicuous? Better get some troops home to settle the upcoming event. Why the sudden change of heart, Pete?
The revolution is here. It is just waiting for participants.
by the Fed allowing Citigroup and BAC to funnel funds from the Fed discount window to their brokerages they have committed moral hazard. i would advise everyone on this website to advise everyone they can get to listen to withdraw their deposits from these 2 banks ASAP. they have just increased their chances of becoming insolvent.
Helping hedge funds orchestrate an orderly unwind, also helps them prop up their 'sale' price. They should have to liquidate at fire sale prices. They should be allowed to get so desperate they turn to well-capitalized investor like Warren Buffet and take anything he is willing to give. Propping up prices prevents prudent investors from making big profits on distressed securities. This is the same as killing the shorts on options expiration day. It makes all us conservative investors vow to go in with reckless abandon next time. After all, it is my turn to get propped up by the FED.
Are Beanie Babies assets? I wanna know when I can take my collection down to 20th street and securitize them for some cold hard cash! I'll use the billions to provide some employment to my fellow Americans. Because my house will be so big, I'm sure I can employ large numbers of "workers".
Wellington - Another New Zealand finance company signalled it was in trouble on Friday following the collapse of five since last year, prompting calls for them to be as tightly regulated as trading banks. The New Zealand Stock Exchange announced that it had suspended trading in shares of Property Finance Group Limited, of Christchurch, whose directors said in a statement that they were "concerned about the company's ability to manage its current liquidity position given the significant changes being experienced in the financial markets."
Mark Weldon, the exchange's executive director, said that in light of volatility in the sector it had written to 15 listed finance companies demanding they admit to any problems by Monday morning.
Weldon said he would name any who did not respond and called on the Reserve Bank of New Zealand to restore confidence in the sector by regulating finance companies in the same way it did trading banks.
By the end of the day, 11 companies had told the stock exchange that there was nothing untoward in their business, with only PFG, a non-bank first mortgage lender, admitting that it had problems, the TV3 channel reported.
Earlier, PFG directors asked the exchange to suspend trading in its shares while they considered restructuring to deal with a lack of cash to pay debts during the global credit squeeze.
Promising to advise further on Monday, a board statement said, "Notwithstanding the continued good quality and value of its loan portfolio, directors deemed it necessary to take action to protect the interests of all stakeholders."
Nathans Finance New Zealand Limited, a finance company which reportedly raised 170 million New Zealand dollars (about 121 million US dollars) from mainly mum and dad debenture investors, collapsed on Monday.
The Bridgecorp group was placed in receivership in July owing nearly 500 million New Zealand dollars to 14,500 debenture investors and holders of capital notes.
Three other companies, National Finance 2000 Limited, Provincial Finance Limited and Western Bay Finance Limited, have collapsed in the last year owing investors almost 400 million New Zealand dollars.
I agree with you. I think the guys that got us into this mess should have to pay the price. But I think the FED knows just how big this mess is and they don't want the public to know for fear of a run on the banks. The FED action was timed to provide the most help to those long on the market and to crush the shorts just when they expected to make a killing. Very few things in life happen by accident. I think the market tanks in October, worse than in 1987.
This is not- new look at history. They did this "type" of action for LTCM. JP Morgan himself did this "type" of action. This is all within the FED's power.
It is a re-pricing of risk. The banks do not give 100% borrowing capacity and the instruments they are borrowing against have re-priced dramatically as well.
Financial calamity will be avoided on a Macro basis(ala systemic) BUT the consumer will slow dramatically(eventually) from the negative wealth effect. The housing market is in a severe recession already.
LTCM was not bailed out by the Fed. The Fed "strongly encouraged" the IB's to contribute funds to avert the crisis. i don't see this as a "re-pricing of risk". i see it maintaining the risk in the system by propping up prices that should be plummeting. we have no idea at what % their funding the par value. i'm sure its way higher than i would peg them at. this is precisely the reason the Fed needs to be abolished; they are tinkering with interest rates that should be set by the market.
Look at the volume of Sept. calls. This spike appeared two days ago so it's not a glitch. It cannot be a mistake because the total cost of buying/selling this many calls is 1.6B.
Also, here someone very very big sold deep ITM calls, because buying them on the expectation that S&P will go for the moon is ludicrous.
Now, these calls WILL get called 100%, so the expectation of a profit is based on a huge decline in S&P, which should be cause only by some sort of catastrophe. This means someone just put 1.7B dollars on a huge crash in S&P in the next three weeks!!!!!
Having lived in Houston until 1991 I have a bad feeling we are going to see a substantial increase in homeowner arson. It is always another option that people sadly choose. The Dallas Morning News has already run a piece about fires in Lake Ridge in Cedar Hill, TX a SW Dallas suburb.
Matt,
The FDIC would not have conducted massive RIFs and offered buyouts and early retirements in May thru Sept. 2005 if it knew this was coming. Asleep at the switch is the correct conclusion or in Texan: dumb asses.
At some point the USD index is going to break below 80. I think this will be the critical juncture that leads to foreign central banks selling treasuries with enough volume to cause spiking interest rates and inflation.
Matt, this idea comes up a lot and I have a number of problems with it:
Currency is a commodity. It is beholden to the rules of supply and demand. Inflation and currency devaluation is fundamentally about excesss supply (or economic collapse in extreme cases). By that metric the dollar is quite attractive. US money supply growth is comparatively very low. Where does the inflation come from?
What leads to a dollar crash at this point? I can think of some possibilities, but I don't know that they're immediate risks (unless we start a trade war with China or start printing money).
Friday afternoon, Wells Fargo branch in a small city in central OR. I am withdrawing a thousand in cash. The teller apologizes as she counts it out in fifties and twenties:
"I's sorry. We're out of hundreds and almost out of fifties."
This has never happened to me before, and I do this every month. Is it an isolated incident, or have the runs begun?
Here's a parsing of the Fed BofA letter (retyped as I couldn't get it to copy/paste):
What The Fed Approved:
"Bank proposes to extend credit to market participants in need of short term liquidity to finance their holdings of certain mortgage loans and highly rated mortgage backed and other asset-backed securities. For operational reasons, Bank proposes to channel these transactions through the Affiliated Broker Dealer."
Who are these "market participants"? Potentially hedge funds. The "operational reasons" could be that the Broker Dealer's prime brokerage operation has an existing margin agreement with the hedge fund client.
In fairness, there could be "operational reasons" for setting up repo facilities for the likes of Countrywide through the "Broker Dealer Affiliate". Among these are the Affiliates expertise in repo's and in valuing the securities.
well, some institutions must have been drinking that electrical kool-aid. look at those volumes, and the outstanding huge out of the money play, and it looks more like the last bet at Rick's Cafe Americain, if you get my drift. And those bets don't get made, unless Rick tells you to.
I imagine the ECRI uses trends in money supply, income, expenditures and job growth, plus inventories and business capex, to forecast changes in the real economy. What are those "trends" not picking up?
Every cycle is different. It's impossible to create a mix of well-known indicators to work every time.
At least they need to account for Kondratieff wave, so use different set of indicators for each period
But it is impossible to collect enough stats. The last time we were in the same Kondratieff wave period it was in the late 1920's, it's impossible to make data model and test it on something that didn't happen for the last 70 years
Job growth and business capex are strictly trailing indicators. They have zero value in predicting recessions. Inventories are coincident, have only limited value
Hey thero, how those long bonds going for you? Almost 50bps ahead of where I "took an interest in them". Also, did you notice the pressure on the long end today? I found it odd. Like somebody thinks the Fed might start monetizing long bonds to keep mortgage rates down. Hmmmm...
Here's the rest of the relevant sections from the Fed's BofA letter:
"Granting the exemption...would have significant public benefits. First, the exemption would enable Bank to provide a substantial amount of liquidity to the markets for the assets. Because of the operational advantages of Bank using the Affiliated Broker-Dealer as its conduit to convey funds to market participants, the exemption would allow Bank to provide the needed liquidity in the most rapid and cost-effective manner possible for Bank and market participants."
There you have it. The question is, and its an important one, "who are these market participants?"
Are they lenders like Countrywide? OK, set aside the issue of moral hazard; the public interest may be served. The function of the broker-dealer, in this case, may be honestly "operational" in nature.
Or are they hedge funds? In this case, the "Affiliate" may have trouble collecting on margin loans, and the bank capital is being put on the line to provide liquidity for the margin calls to be met (by selling the AAA assets of the hedge fund).
IMO, this is a major issue, and more disclosure needs to be provided. The reason its so important is that, while bank capital is not the same as insured deposits, it is a cushion that protects the depositor before insurance kicks in.
Hey thero, how those long bonds going for you? Almost 50bps ahead of where I "took an interest in them". Also, did you notice the pressure on the long end today? I found it odd. Like somebody thinks the Fed might start monetizing long bonds to keep mortgage rates down. Hmmmm...
I made nice profit on 30Y bonds (hope you too!) and sold 50% of my position.
Right now I'm deeply puzzled. Fundamentally I'm bullish, but the chart is slightly bearish. I don't know what to do, though I still have quite a large position...
Here's the rest of the relevant sections from the Fed's BofA letter:
"Granting the exemption...would have significant public benefits. First, the exemption would enable Bank to provide a substantial amount of liquidity to the markets for the assets. Because of the operational advantages of Bank using the Affiliated Broker-Dealer as its conduit to convey funds to market participants, the exemption would allow Bank to provide the needed liquidity in the most rapid and cost-effective manner possible for Bank and market participants."
There you have it. The question is, and its an important one, "who are these market participants?"
Are they lenders like Countrywide? OK, set aside the issue of moral hazard; the public interest may be served. The function of the broker-dealer, in this case, may be honestly "operational" in nature.
Or are they hedge funds? In this case, the "Affiliate" may have trouble collecting on margin loans, and the bank capital is being put on the line to provide liquidity for the margin calls to be met (by selling the AAA assets of the hedge fund).
IMO, this is a major issue, and more disclosure needs to be provided. The reason its so important is that, while bank capital is not the same as insured deposits, it is a cushion that protects the depositor before insurance kicks in.
David Pearson | 08.24.07 - 9:00 pm |
I'm not even going to pretend to be sophisticated enough to understand all the details of quants and hedge funds and other "innovations". But I don't think BoA is suicidal. Just because it was done behind the scenes doesn't indicate anything nefarious in BoA's intention, as it seems as if this was done to facilitate the rescue of CFC.
What if the fed knew this was coming years ago. Instead of pricking the bubble then, they continued on borrowed time, with the full awareness of the serious banking system problems it would create.
Most of you people here probably think I'm crazy, but what if their only intent in the short term is to keep the general public unaware of the serious fundamental problems entangling the entire banking system, until such a time that an "event" occurs that the blame can be directed to.
At some point the USD index is going to break below 80. I think this will be the critical juncture that leads to foreign central banks selling treasuries with enough volume to cause spiking interest rates and inflation.
Massive bankruptcies, falling home values, rising unemployment, on top of the already rampant disgust in the political system could cause the people to get awfully disruptive.
SPP, Amero, operation endgame, possible war with iran, etc. What do you people think of these things in relation to the ongoing "credit crunch".
The FED established how much of each class of security needed to be offered in return for money borrowed at the discount window. If they say for example "$1.2 of AAA MBS for each $1 borrowed, then they are establishing a floor price for this security. Who is to say they are not over paying? The market, and perhaps history when we finally know the default history for that tranche.
Sorry about the repeat post, must have been caused by hitting back after deciding not to post another comment.
ac and theroxylandr,
I fully understand that right now our cash money supply is contracting, and that makes sense. I really don't foresee a germany style hyperinflation. However, if central banks and investors begin to cash in treasuries and exchange them for other currencies, it will cause downward pressure on the value of the dollar.
If they cash them in and redeem them for commodities on global markets, then it will cause the dollar value of those commodities to increase.
This IS simply supply and demand.
This could all happen in the face of decreasing M1, M2, AND M3.
So, I'm arguing for PRICE INFLATION in the face of mass selling of treasuries. Monetary inflation has been ongoing since fiat started, and the relationship between the various measures of money supply and prices is extremely complicated, but not as important as the MSM wants you to believe.
If money supply growth is all going towards asset inflation through the creation of paper products, it isn't going to affect general price levels in the short term, however it has other serious affects, some of which we are just beginning to witness( in this cycle).
The other affect of mass selling of treasuries is rising interest rates. This would further reinforce the down cycle, and is also (PRICE) inflationary.
When and how fast treasuries begin to selloff is anybody's guess. Looking at the dollar index though paints an ugly picture, because if the dollar is expected to go down, then all those treasuries and other dollar paper is also losing money for foreign investors. I don't think the turmoil in the ABS/CDO markets are going to help keep the dollar up very long.
The underlying issue in the acceptance by the Fed Res or any lender is the inherent value of what has been graded as AAA.
We know the incompetence of the credit grading entities. And we know the current economic condition of the real estate markets, in real time, across both the country, the borrower type and the ultimate use...equity, construction, residential or commercial. (If you don't, go to HousingBubble.com and end the ignorance.)
So, let's not kid ourselves by ignoring underlying value depreciation at a stunning clip.
What was AAA last month is not AAA this month. The rating agencies are too frankly hidebound to be jack rabbit quick about recognizing true market value.
Meanwhile, we have major Fed Res member banks who are themselves strung out in terms of liquidity due to commitments taken prior to the credit freeze...LBO's, warehousings of various kinds, and lots of hedge fund ABCP.
If the Fed Res doesn't act, those banks are BANKRUPT. The consequences are dendritic. They and we all know this.
So, they tried infusion and found rapidly the major banks either used it themselves or would not pass it along to any other bank (no interbank lending!!whoo hoo!).
Their next course is the Discount Window. Through this, they think they can handle the stopgap, momentary needs for a goodly amount of systemic credit needs.
The impossibility drive here is that the system has I've read $10+ trillion of this type of paper, including its squareds, and there's a serious question whether the Feds can finance that because that effectively is a monetization of currency, and along the way, the external currency holders and the publics will dump dollars, impacting "reality", as in the store of value within the USA. The alternative, however, is systemic collapse via credit ARDS...aka, no liquidity.
The Feds are not charged with saving the value of the currency. They are charged with saving the integrity of the banking system, the liquidity.
So, it appears the Fed's gonna flood us with money, trading Positive Carry's paper for cash.
The outcome is twofold. No it's not as easy as one would hope, that there be "the" answer and be done with it. They're the obvious asset value contraction which places the Fed itself at real risk as the major bank, recognizing it will be bankrupt, will proffer Beelzebub himself to get the liquity they need. The Fed is now gambling the credit it holds for the loans it makes is solid as well as that the bank which offered it won't fail. (Wells Fargo, anyone?) Moreover, we have no idea what the true value of that recently AAA asset in fact is, but it means nobody needs to find out as long as the Feds hold it and have forked over 85% of its "market" value. (There is no "market", but nobody has told this to the Fed Res yet.) And secondly, we have a very, very high probablity that the investing public will throw in the towel, attempt to cash out of all but Treasuries, and
Now, these calls WILL get called 100%, so the expectation of a profit is based on a huge decline in S&P, which should be cause only by some sort of catastrophe. This means someone just put 1.7B dollars on a huge crash in S&P in the next three weeks!!!!!
But doesn't the transaction take a buyer and a seller? The entity who wrote the calls believes the opposite of the person who bought them. And both have very deep pockets.
US money supply growth is comparatively very low. Where does the inflation come from?-ac
trying to understand money supply growth, currency flows, and inflation/deflation in the US and comparatively to other countries is enough to make your head explode. some of the key factors that none of you have defined is how are you measuring money supply (M, M prime, M1, M2, or M3). ac your Economist graph doesn't specify. also how are u defining inflation (by price or money supply). in my mind we, as well as the rest of the world, are having tremendous inflation. just look at asset prices (housing and debatedly stocks). one can easily see it in the cost of health care, food, gas. if we weren't having significant inflation Wall st. wouldn't be leveraging up to the degree they have (GS at 25x) to speculate on LBO's, commodities, dervatives. i think that John Williams at Shadowstat has it right in measuring M3 b/c that includes not only your declining money stats (M1, M prime) but also all the Wildcat Financing (credit) as Russ Winters calls it. in that sense money supply is growing around 12-13% which would be consistent with the financial leveraging we are seeing today. this would also support Matts theory as to why we have seen the USD index dropping steadily.
another way to look at this is the yen carry trade. everyone knows this is massive and that a good part of it comes here to buy dollar denominated assets esp. treasuries (Japan is the largest holder). if the dollar money supply weren't being inflated above and beyond the carry trade demand for dollars, the USD value would be sky high! instead it is at all time lows. so no question in my mind we the USA are inflating away.
There is no "market", but nobody has told this to the Fed Res yet.
One problem I have with a lot of these scenarios, plausible as they may be, is the implication that the Fed, in the immortal words of one J. Cramer, "Has No Idea!!!"
I think they know exactly what's going on, and they're trying to fix it. Probably, they will. Whatever the cost. The alternative is something even the wearers of trendy aluminum haberdashery shouldn't wish for.
Meanwhile, we have major Fed Res member banks who are themselves strung out in terms of liquidity due to commitments taken prior to the credit freeze...LBO's, warehousings of various kinds, and lots of hedge fund ABCP.-GaudiaRay
are the IB's Fed Res member banks that can borrow directly from the discount window? i thought not.
Our unprovoked attack on Iran is certain. It will enable Bush and Cheney to wrap up our troubles in the American flag, even as it burnishes their bloodlust.
Their plot is tried and true. I invite documented challenges to my recollection that throughout Summer 2001, screechy denials gave way to a grudging consensus that recession was imminent.
The economic aftershock of 9/11 muddied that narrative, and how, like Alfred Hitchcock or Patricia Highsmith at the top of their game. The recession was belatedly admitted, dramatically backdated, and absurdly compressed.
Am I right, or am I wrong? Does anyone believe lightning won't strike twice?
The real beauty of this scheme is that Citi and BofA can get cash to floundering banks/hedge funds with the depositors/shareholders of said floundering entities none the wiser.
It might be more difficult (and possibly illegal) for the Fed to accomplish this task without these intermediaries.
Bottom line, we've got a nasty problem under the surface.
Now, these calls WILL get called 100%, so the expectation of a profit is based on a huge decline in S&P, which should be cause only by some sort of catastrophe. This means someone just put 1.7B dollars on a huge crash in S&P in the next three weeks!!!!!
Because they are in the money, for either party to make a profit, there doesn't need to be an expectation of a huge move, right?
Pavel--I think it's very interesting--are there any discussions on stock blogs?
Heck, what wouldn't they take at this point to get money out there? Helicopters, baby, helicopters . . . (Tanta, please notice the careful placement of spaces.)
In the Loop: On K Street
Wall Street Paying High Price to Keep Cash - The nascent fight over whether to raise taxes on Wall Street hot shots has become one of the year's biggest lobbying bonanzas.
So help me to understand how the mortgages were sold as securities. The loans were put together into packages of loans called CDOs. These CDOs were then sold on the market in tranches where some tranches were lower risk than others.
How is the default or foreclosure on a loan transferred to the holder of the tranch? If a bunch of foreclosures or refinances occur on the loans in a tranch how does the holder of the tranch feel that? So if many of these loans are refinanced is there a whole new set of CDOs created and sold on the market? Are we not creating two sets of securities on the same property, one that is performing and one that is not. Is not this a creation of a bunch of securities filled with non-performing loans? I have to be missing something here. Surely.
"Now, these calls WILL get called 100%, so the expectation of a profit is based on a huge decline in S&P, which should be cause only by some sort of catastrophe. This means someone just put 1.7B dollars on a huge crash in S&P in the next three weeks!!!!!
Because they are in the money, for either party to make a profit, there doesn't need to be an expectation of a huge move, right?
Pavel--I think it's very interesting--are there any discussions on stock blogs?"
Well, someone just made a crazy bet with supposedly insanely improbable odds (unless you know something others don't - i.e., you are so certain that expected event will happen you are ready to put 1.6B on it). They made it at whatever price on every option that was required to get enough buyers.
There are different pricing models for options and you can make an offer they will not be able to refuse
The American public for too long has never known panic. When panic finally arrives it may present itself in a hyper form due to the public's inablity to fully grasp or relate to grave financial ruin. Riots in the streets are certainly a possibilty given how disgusted the public is with Bush and Congress already. Anything is certainly possible in terms of public reaction including massive bank runs.
Yup, it would work. That is if somebody excepts it as 'credit'... for that particular transaction it would be as good as any other kind of money.
It is for this reason that no form of money will by itself be a guard against bubbles & mania. Metal, paper fiat, electronic fiat - doesn't matter. If people are going to go mad speculating there is nothing going to stop them. I think Alan & Ben can now testify to that.
U.S. News & World Report
Looking for Patterns in Political Blogs - A new site reads and analyzes the blogs so you don't have to...(Nixon would have loved this)
It is for this reason that no form of money will by itself be a guard against bubbles & mania. Metal, paper fiat, electronic fiat - doesn't matter. If people are going to go mad speculating there is nothing going to stop them. I think Alan & Ben can now testify to that.
The tulip mania, yup gold based currency. South Sea Bubble, like wise.
I suppose you could eliminate bubbles in a hard currency world if you required deliver of gold on each transaction, but once you have shares as evidence of equity and bonds/notes as evidence of debt, and are willing to swap gold for that paper or goods for that paper, then there is not any real agency to prevent the process to bubble.
Mish explains:
The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of PIMCO. Is it any wonder then that he is asking Bush to "Write some checks, bail em out, and prevent a destructive housing deflation that Ben Bernanke is unable to do."
The only thing Gross forgot to mention in his September Outlook was the return address on those checks needs to read "Bill Gross @ PIMCO".
"Our unprovoked attack on Iran is certain" - what do you call what Iran is doing in Iraq ? in Lebanon (arming Hizbula to attck Israeli civilians) ? In Gaza financing Hamas and the biggy: In dveloping nuke weapon. In my book each of these is a provokation. (not to mention the verabl ones: The call to anihilate israel)
Now should we attack Iran for these provokation - that is a different question altogether but the provokation exist 100%.
Yal, the way this works--okay, is supposed to work--is this: if the US has evidence that Iran is somehow attacking it, then the US takes that evidence to the UN Security Council, which can authorize the US to defend itself. Not its interests (as in economic or political), but itself.
The US does not get to wage war on a sovereign nation just because it perceives a "provocation." It is that kind of thinking that gets gang kids killed for alleged "dissing" by kids from another gang.
Yal, there is international law that covers situations like these. Law that the US helped write, following WWI. The US doesn't get to decide unilaterally that it has the right to invade, bomb, or insert special forces into another country unless the Security Council of the UN agrees it is warranted.
On an earlier thread I said that our administration had committed a "war crime" by invading Iraq. I got some flak for that. However, experts on international law fully support what I said. The only party insisting that the Iraq invasion was legitimate because of earlier resolutions by the UN Security Council is the party of GWB and Dick Cheney. Over and over again the question has been revisited by legal experts, and over and over again the answer is the same. Do a little research, use Google.
Incidentally, Iran is also being "provoked" by the US. It is no secret that our administration is doing all it can to destabilize Iran in hopes of "regime change."
Now, let's get back to the topic at hand. This is a financial blog.
"Level 1 means the values come from quoted prices in active markets. The balance-sheet changes then pass through the income statement each quarter as gains or losses. Call this mark-to-market.
"Level 2 values are measured using 'observable inputs,' such as recent transaction prices for similar items, where market quotes aren't available. Call this mark-to-model.
"Then there's Level 3. Under Statement 157, this means fair value is measured using 'unobservable inputs.' While companies can't actually see the changes in the fair values of their assets and liabilities, they're allowed to book them through earnings anyway, based on their own subjective assumptions. Call this mark-to-make-believe."
on that link, the video, "Probability of Recession" has Jeremy Siegel stating that cost of capital has not risen for investment grade companies.
This shows how out of touch most of these economists are and clearly explains their lack of ability to predict the liklihood of recession.
You cannot have a severe credit dislocation without huge repurcussions, the funniest thing about the claims that this is over is that the period we are about to enter should prove to be even more difficult.
It is more likely that we have not even begun to see the true effects of what lies ahead in the near future.
theroxylandr said: "1. Every cycle is different. It's impossible to create a mix of well-known indicators to work every time."
Well, yes and no. The trigger for a stock market crash or recession might be different in each cycle, but the same group of indicators can be used each time.
A contraction in manufacturing, inverted yield-curve (not the simple one, too many false signals), negative SP500 EPS growth, net loss of jobs in monthly nonfarm payrolls, etc., some or all of these occur when real trouble is brewing.
Whatever the catalyst (currency crisis, liquidity "event", overspeculation in the asset de jour) the problem will be reflected in the economy if it's significant enough to have a major negative impact on the economy.
That's why the recent "crisis" isn't nearly as big as it's being made out to be. The yield-curve(s) would both be inverted big-time, manufacturing would be contracting, earnings wouldn't be growing, etc., etc.
In response to me: "The yield-curve(s) would both be inverted big-ime."
sloooowwwwwmotion replied: "They already were."
No, they weren't. The simple yield-curve (10-year minus 3-month) inverted, but the yield-curve adjusted for the level of the Fed funds rate didn't, isn't there now, and the recession probability based on that indicator is down to 26% from a peak of only 46%.
The simple yield-curve has had more false signals than the adjusted one over the past 40 years, and this is another one.
The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of PIMCO.
That's too obvious. Bill would keep a low profile if Pimco was overweight. He's trying to hype the panic around mortgage securities, which will enhance the value of Pimcos portfolio.
Several states already in recession based on tax receipts. Didn't CR have a post on this a while back? In any event, tax receipts are one of the best, most reliable recession indicators because they aren't easily swayed by corrupt GDP/CPI calculations. The gubbermint can release all the tortured data they want, but it's hard to pretend when you have no money in the state coffers. You must come forward and say as much, and raise taxes/cut spending accordingly. About half of the states in the country are collecting less taxes than expected:
The FED as a market maker of last resort as well as a lender of last resort.
I am told that "Lots of CP is being written nowdays with 10% of "real assets" behind it and the other 90% a swap written by some hedgie in an OTC transaction!" - this is from another BB.
Does anyone know if this true - some Canada based compnay maybe involved.
I can see the reasons behind this, but I can't see anything good coming from it. Isn't the Fed just delaying the inevitable?
Nude - It's not inevitable if it can be delayed until after we are dead, or at least until some of us are very, very rich.
"ABCP for which the bank is a liquidity backstop," - what is this ?
A bailout by any other name would smell as sweet - at least to the hedgies and the markets. Perhaps not so much to the US Taxpayer.
Who determines if the paper used as collateral is 'investment-grade'? Or does it not matter all that much because these loans are always repaid?
Yal - meaning the bank has to take it if no one else will, I think.
Wonder if it will be valued at Par or Market Value?
Traditionally, the investment grade would be determined by the credit rating of the issuer or guarantor.
Delaying the inevitable is the point here. Giving the whole flying circus time to get back in formation and headed in for a landing. Fasten your seatbelts, though Betty - we're in for a bumpy ride. The Canadian lender in trouble is Coventree. This is more of what whas referred to in an earlier thread as the fed using "too big to fail" banks as their intermediary in parceling out liquidity.
OT-
Anyone notice that Thornburg is being sued for $5m by Wachovia - claiming they never paid back collateral from an interest rate swap trade? Thornburg says they will pay on Monday...
Wachovia Sues Thornburg Mortgage - WSJ.com
The rating agencies determine of it is investment grade.
The Fed has been valuing subprime related at 85% of their value (probably a marked to model value). That 15% premium is steep, and these are loans. So I would not say it is a bailout.
On the other hand once could make a case that perhaps the Fed is providing too much liquidity.
This still looks like me like Bageho'ts Maxim: at time of crisis provide liquidity freely but at a premium.
On could perhaps take issue with the provide liquidity freely bit, but I don't see it as clear cut.
How much of a premium eliminates moral hazard is also open to debate.
Until the markets take back their role of price discovery, the Fed is doing it for them.
Considering the volumes in todays market, I'd say that some folks are finally getting out to the Hamptons early.
1 more week of this and then everybody goes back to work and it's back to Mr. Toad's Wild Ride.
Tick tock.
Excellent discussion of recession forecasts on RealMoney for those of you who subscribe. ECRI is involved in it.
Here is link:
Financial Investments and Stock Market Tips for Real Money - TheStreet.com
CR,
You might be interested in these news from Forbes: "Fed bends rules to help two big banks"
Link: http://money.cnn.com/2007/08/24/magazines/fortune/eavis_citigroup.fortune/index.htm?postversion=2007082415
That's BofA and Citigroup, btw.
From John Succo:
The Way to Look at It
What the Fed is doing is confusing. Let's try to look at it simply.
The market has decided that credit was too easy. That is being reflected in wider credit spreads where institutions are paying more to borrow even though treasury rates have not risen, and in fact have fallen.
In normal times the Fed accepts only treasuries, risk-free paper as collateral when a banking institutions wants to borrow money from it. After all, the government issues treasuries when it wants to borrow money, so it should buy them back (repo) when it wants to lend (even though the public debt has been going up and up).
But when the Fed accepts risky collateral like mortgages when institutions want to borrow, what it is saying is the markets are wrong, that credit spreads should not be wider.
This is what I refer to as the socialization of markets (some call it nationalization): the Fed directly making decisions on credit, taking those decisions away from investors that have made their own decision. This is what some of us call moral hazard.
Sure, the Fed is buying time.
But, the market surely needs time to sort out good papers and bad papers.
It couldn't be that all the papers out there are bad, could it?
Warning: OT.
Reports say the ECRI does not currently forecast a recession a year out. The Economic Cycle Research Institute leading index apparently has one of the best recession forecasting records.
So are the pessimists wrong?
I imagine the ECRI uses trends in money supply, income, expenditures and job growth, plus inventories and business capex, to forecast changes in the real economy. What are those "trends" not picking up?
A year from now, if we have a recession, ECRI will say, "our models were surprised by the magnitude /influence of..."
Of what?
If you respond, pls. take it as a given that the folks at ECRI are not stupid or easily surprised...
Here's a relevant and worthwhile reading article on it.
OHN PARTRIDGE and BOYD ERMAN
Thursday, August 23, 2007
The freeze-up in short-term lending that is battering Canada's Coventree Inc. is spreading fast in the U.S. and Europe, raising concerns about slower economic growth and the strain on banks that have agreed to back the commercial paper that suddenly nobody wants to buy.
Thursday, the list of Canadian companies that have said they can't get the money they are owed after purchasing so-called asset-backed commercial paper (ABCP) from Coventree and other sources again got longer.
Among those that revealed exposure were the Greater Toronto Airports Authority, which has about $249-million of ABCP, some run by Coventree. Société générale de financement du Québec, the investment arm of the Quebec government, said it holds $137-million of non-bank ABCP, about 40 per cent of its cash, sold to it by National Bank. As well, Air Canada said it had $37-million of ABCP, out of $1.4-billion in total cash, and Russel Metals Inc. said it is owed $11-million.
The concern now is that companies whose cash balances are locked up in Coventree investments may be forced to delay spending, slowing economic growth. The problem would be compounded if companies that borrow directly in the commercial paper market to fund day-to-day operations are unable to find buyers. But bond salesmen say well-regarded borrowers are able to find takers for their short-term IOUs, though at a higher interest rate than a few weeks ago.
It doesn't take much of a hesitation on the part of businesses and spending or hiring to begin to show up in the economic data, Ted Carmichael of J.P. Morgan Securities Canada Inc. warned in an interview. As long as the commercial paper market remains seized up, the risks that the economy could slow down quite sharply are rising in both the U.S. and Canada.
So far companies caught with Coventree paper have said they have access to cash to keep operating, either through banks or what's available elsewhere on their balance sheets.
The crisis, which began to spread in mid-July when Coventree customers started to balk at buying paper backed in part by U.S. mortgages amid a housing slump there, has become a global problem. Issuers similar to Coventree have found buyers have vanished, with the Federal Reserve reporting that outstanding U.S. commercial paper fell 4.2 per cent in the past week, the biggest drop since 2000.
As a result, commercial paper investors who are due money are looking to banks to bail them out in accordance with backup agreements. Fitch Ratings estimates that banks have $891-billion (U.S.) of commitments to commercial paper investors who bought asset-backed commercial paper.
The problem for holders of Coventree paper is that banks balked at backing the securities, citing an out available only in Canada, and now under the so-called Montreal proposal the market has been effectively brought to a stand
The real important paragraph is the 2nd last.
"As a result, commercial paper investors who are due money are looking to banks to bail them out in accordance with backup agreements. Fitch Ratings estimates that banks have $891-billion (U.S.) of commitments to commercial paper investors who bought asset-backed commercial paper." This ties into the Fed "clarifying" the use of its discount window.
CR,
You might be interested in these news from Forbes: "Fed bends rules to help two big banks"
Paul,
That sure seems like a bad sign.. now the banks are able to stuff 30% of their cash into their brokerage arms (temporarily, of course)?
Also, Bank of America seems to be all over this stuff.. between this and the CFC mysteriousness.. or, well, maybe it's nothing.
David P:
I just provided a link to a recession discussion that included someone from ECRI. He is saying that it is EXTREMELY difficult to forecast a recession 1 to 2 quarters out...never mind a full year.
Looks like this is the first step to the Fed accepting other "collateral" for newly minted dollars.
When do they start accepting CDOs, MBS, etc. And investment grade is in the eye of the beholder. We know what a AAA rating from Moody's or S&P is worth. But why bother with the charade. The Fed should say they'll accept any paper from Wall Street - that will keep all the prime financiers of political campaigns very happy and Bill Gross can keep his bond portfolios whole and enjoy his Bahamas and Aspen vacation homes. And Carlyle, KKR and Blackstone can do even bigger LBOs so we can achieve Wall Street nirvana.
Anyone notice that Thornburg is being sued for $5m by Wachovia - claiming they never paid back collateral from an interest rate swap trade?
Ah, yes, counterparty solvency. Another Thorn in the ol' hoof.
With a name like Thornburg, it's got to be good.
181 billion drop in outstanding CP much of it ABCP in the last two weeks. 1.1 trillion in ABCP comes due over the next 90 days . Globally Banks have 891 billion at risk due to ABCP ( See Roubini blurb on his site for details .) Any questions why the Fed is accepting ABCP ?
In case anyone was searching for the source document on the "Fed bends rules to help two big banks" story, it was moved..
Here
is the link.
Looks like they decided it belonged in the "Federal Reserve Act" section instead of the "Bank Holding Companies/Change in Control" section.
It's the two August 20th letters.
CDO issuers knew. Back in 2003, already.
The Big Picture
Shocking move by FED.
The Great Loan Blog
OT warning: RE: ECRI WLI
Well, I only mentioned the recession discussion involving ECRI as a point of interest, but then my curiosity got the better of me. The WLI has been down for 5 weeks in a row, which COULD BE an inflection point. Now is the time to monitor the WLI closely. If it's growth rate goes negative (it's not right now) and stays that way for a few months this Fall, then the R word will come into play for 2008.
eli, I just found that out as my downloads allowed me one, then the other was not found. I, too, ultimately found the moved docs, but don't you find the move peculiar? Especially as the article from CNN-Fortune only came out 45 minutes ago. It seems as if the move occurred as the links were being used. Really amazing.
Quite the shell game the Fed has undertaken this time.
dotcommunist,
Who knows.. I mean, if they wanted to hide them, I guess they'd just take them down.
Either way, figured I'd post the proper links so people didn't have to fumble around looking for them.
Now, it's time read through and see what I think these letters mean.
Duceswild,
Here's an interview with Lakshman Achuthan from ECRI (mp3) describing what their leading indicators are telling them. In summary, he says that there's no immediate threat of a recession. Looking out a litter further, ECRI's long leading index is showing some softness in 2008, but it's far too soon to say it's recessionary.
Here's another video from today that you might be interested in. He talks about misconceptions of how recessions happen. Basically he describes that while shocks to the economy CAN cause a recession, what matters the most is WHEN the shocks occur. In order for a shock to cause a recession, the economy must be in a vulnerable phase of the business cycle. This is why things like the 1987 crash and the LTCM debacle didn't cause a recession even though they were tremendous shocks to the system. ECRI doesn't believe the economy is currently in a vulnerable phase of the business cycle.
Oops..."litter further" = "little further"
steve:
Thanks..I know and agree with all of that. Good series of articles by his colleague on RM covers all those topics
Here's a Citi letter of exemption on Reg T margin loans.
http://www.federalreserve.gov/BoardDocs/LegalInt/BHC_ChangeInControl/2007/20070615.pdf June 15
David Pearson, Surprised by...
Massive credit losses, that have so far been so far postponed by the Fed temporarily short-circuiting the price discovery necessity. They just are not there yet. This will hamper future economic activity as the survivors will be traumatized and others will drop dead.
Biggest asset out there? Time! And all this under the radar Fed activity and policy changes, and banks swapping unproven assets for dollars fresh off the printers, is so that the big boys can buy time before the feces hits the fan. The risk-takers have been giving a parachute more golden then ever before.
Totally OT: How will Castro's death affect Miami's 10 year supply of condos?
Jeff,
Indeed that does seem shocking (the Fed making 25% of bank capital available to brokerage divisions).
No doubt this has to do with the banks' prime brokerage balance sheets. These are margin loans to hedge funds that are financed not from deposits but from commercial paper and repo's. What's probably happening is hedge funds are pushing back on margin calls, saying, "if you force us to liquidate, you'll end up owning the stuff because we'll shut down." The banks want to avoid taking ownership of this stuff at all costs, and are probably allowing the hedge funds to wait it out. Only problem is they don't have the funds to repay short term obligations.
If the margin calls are what's behind the Fed move, the implication is truly startling: FDIC-insured deposits propping up hedge funds.
Steve, I find ECRI's comments amazing.
"ECRI doesn't believe the economy is currently in a vulnerable phase of the business cycle."
In the past, inverted yield curves almost always signaled a recession (exception: 2001). We've had one of those. As CR so succintly pointed out, a substantial drop in housing starts has preceded every recession in recent history (except 2001). Yep, had that too. Now we have credit issues (which typically precede a recession) with a liquidity crisis on top (which did happen in 2001).
If that isn't a vulnerable part of the business cycle, what is?
Reports say the ECRI does not currently forecast a recession a year out. The Economic Cycle Research Institute leading index apparently has one of the best recession forecasting records.
So are the pessimists wrong?
I imagine the ECRI uses trends in money supply, income, expenditures and job growth, plus inventories and business capex, to forecast changes in the real economy. What are those "trends" not picking up?
Perhaps their model doesn't account for credit markets in a way that would predict a recession based on a sudden crisis. Notice all the "shocked" hedge fund managers who lost money recently saying, "It's not my fault this was a 10-sigma event!"
Models by definition are an incomplete representation of reality. In a chaotic system like the economy, missing a single tiny element could potentially cause a wild divergence between model and reality.
It's also possible that ECRI has become a shill for the Wall Street money machine.
Or maybe they're actually right.
Never thought I'd see the Fed being an accessory to massive Wall St. Ponzi scheme.
Tells you how much this country has degenerated into a cesspool of endless corruption and wanton greed.
Okay, I don't have a clue what this all means, but I'm guessing that it's another tempest in a teapot, ala the previous one over the Fed accepting agency MBS in repos.
From Bloomberg: New York Fed Accepts Asset-Backed Paper as Collateral (Update3) - Bloomberg.com
About 86 percent of all asset-backed commercial paper comes due within seven days, and about 50 percent matures overnight, according to Fed data as of Aug. 22.
While industrial and financial issuers have been little affected, yields on the $1.2 trillion market for asset-backed commercial paper have been rising because the funds may have to liquidate assets quickly to pay back short-term debt. That may set off spiraling losses in the market for other structured finance.
About $125 billion in asset-backed commercial paper has been withdrawn from the market in the past two weeks, a sign that banks are stepping in to make good on the debt under liquidity agreements.
So-- 86% matures in a week? Sounds like a little breathing room rather than a huge bailout to me...
Re the ECRI:
The ECRI won't be surprised by rising defaults, REO's, or an overall increase in corporate and consumer defaults. There are already "trends". Sure, maybe they don't see the non-linear aspect of the trends, but at least the linear extrapolation is discounted.
What haven't they discounted in all likelihood?
I think the answer is a surprising step-down in house prices occurring this fall. Every economist on Wall Street thinks, at most, we get a 5% decline in the next twelve months. If it looks to be a 15% decline, the markets will react violently, and more important, the attitude of "bail out or wait it out" will evaporate as deflationary fears grab hold.
Is it so unlikely? All the ingredients -- 10 months of inventory, rising pressure from REO's, falling credit availability -- are there. The cake just needs to bake a little longer.
That's the surprise, IMO.
Check out this link:http://www.itulip.com/forums/showthread.php?p=14679#post14679 for a clear look at what the FED is doing at the discount window. The four big banks are acting as a conduit for the Hedge funds, etc. to access funds. I think this explains the FED letters to the banks mentioned above.
What does one do if you don't want to play the game?
sit and watch your CASH or cash equivalents become more and more worthless each month, or throw them into a mutual or hedge fund or leverage them as well, and join the machine as it grinds down anyone else not in the game into poverty?
Here's a part of the itulip piece which I referenced above: Mechanically, here's how it works. The Fed will only do business directly with banks that maintained good loan practices and are the most credit-worthy. Lenders of various flavors such as investment banks and hedge funds that took on a lot of bad loans can only deal with the banks that deal directly with the Fed. They do not have access to the new and improved discount window on their own. The credit-worthy banks can use the weak creditors' assets as collateral to borrow from the Fed.
For example, a distressed hedge fund can't access the Fed directly but can take the mortgage-backed securities they hold and bring them to a credit-worthy bank that does have access to the Fed. That bank uses the paper as collateral for a one month loan. That's why Bank of America, Wachovia, Citigroup, and JP Morgan all hit up the discount window at the same time, each for the same $500 million amount yesterday, to let hedge funds and others know where to go to put up their asset backed securities and CDOs and other paper as collateral for loans. The banks borrow from the Fed, and the hedge funds borrow from the banks. Hedge funds and others can still fail, but in an orderly way versus a simultaneous dumping of assets into a frozen market. The Fed can turn the discount window knob as need to control the rate of failure, averting the dreaded "break in the chain of payments."
I'm sure 'BB' will clear everything up next Fri.
August 31 \t
Chairman Ben S. Bernanke
Housing and Monetary Policy
Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming
10:00 a.m.
http://www.federalreserve.gov/calendar.htm
David Pearson said: "A year from now, if we have a recession, ECRI will say, "our models were surprised by the magnitude /influence of..."..."
Mine will not. There won't be a recession this year or in 2008.
Sebastia
CR going to the Hole?
I know they seem to have misplaced my invite- permanently.
Crisis must be over, Wall Street is back in gear and we have less than 100 visitors. The technical details of how the fed monetizes the crisis are unimportant in the long run- they have told us they will drop money out of helicopters to keep the party going, if necessary.
Back to the crisis cave for a month long snooze.
I see that this episode is contained.
But, the housing crash will continue without interruption until a new stability is reached with prices and buyers. For now, a buyer had better intend to live in it or be prepared to run away at the first sign of trouble.
Someday this war's gonna end...
But wait...why isn't 'BBs' Aug 31
Housing and Monetary Policy speech listed here ?
http://www.kc.frb.org/PUBLICAT/SYMPOS/SYMMAIN.HTM
Sebastian,
Nationwide we might not see a recession, but I can tell you from Arizona, we are all but guaranteed one.
So, in the vein that all politics is local, your recession is too.
Someday this war's gonna end...
bwana, nice. It's really is just a delay mechanism, since the leverage on top of the leveraged distressed collateral doesn't change.
And the markets are going up. Sept or Oct when we step over the abyss?
"The banks borrow from the Fed, and the hedge funds borrow from the banks. Hedge funds and others can still fail, but in an orderly way versus a simultaneous dumping of assets into a frozen market. The Fed can turn the discount window knob as need to control the rate of failure, averting the dreaded "break in the chain of payments."
The problem of this is that when the hedge funds in the end still fail, the ABS will not be enough to cover the money those banks gave to these hedge funds, and so the banks will be in deeper trouble (vs not doing this 'favor' for the hedge funds).
The only way this make sense is that the value of ABS will bounce back within the next couple of months, but I doubt that.
falling credit availability
Pearson, that's nicely understating it.
Hello,
What if the fed knew this was coming years ago. Instead of pricking the bubble then, they continued on borrowed time, with the full awareness of the serious banking system problems it would create.
FRB: Press Release--Federal Reserve Board endorses NewBank Implementation Working Group recommendation--December 15, 2005
Most of you people here probably think I'm crazy, but what if their only intent in the short term is to keep the general public unaware of the serious fundamental problems entangling the entire banking system, until such a time that an "event" occurs that the blame can be directed to.
At some point the USD index is going to break below 80. I think this will be the critical juncture that leads to foreign central banks selling treasuries with enough volume to cause spiking interest rates and inflation.
Massive bankruptcies, falling home values, rising unemployment, on top of the already rampant disgust in the political system could cause the people to get awfully disruptive.
SPP, Amero, operation endgame, possible war with iran, etc. What do you people think of these things in relation to the ongoing "credit crunch".
http://www.fas.org/irp/agency/dhs/endgame.pdf
If the margin calls are what's behind the Fed move, the implication is truly startling: FDIC-insured deposits propping up hedge funds.
David Pearson
Exactly. As for the beginning of the upturn in the markets, it occurred midday Aug 16, after dropping badly in the morning. The date of hedge fund redemption requests was on Aug 15. So the news of immense redemptions drove this. The big De-leveraging has begun. It drove demand for the Yen, which caused even more de-levering. The initial panic was realized as huge by the Fed, and they confirmed verbally they would help keep it afloat while the rich hedge investors get to de-lever to sell off. Then everyone's pension can get hit with the actual costs after the insiders are out. Same as 1999-2002. Bailout of LTCM on a much larger scale. But the problem of the additional housing debt with negative HPA will also de-lever the consumption, which will de-lever...
And the hedgie gearing from carry trades and CDOs is the Ponzi-floater that has kept this ship from sinking (sorry, Tanta). The hedge fund de-gearing will take it down.
Kind of a perfect storm for the Ponzi-toon.
And these little 'letters' are confirming that.
We should drag Henry Kaufman out of retirement to update this paper:
http://www.kc.frb.org/PUBLICAT/SYMPOS/1986/s86kaufm.pdf
He would probably have a heart attack to see what the current numbers are.
another great nugget:
The
question for the future is, "Can monetary policy do it alone the next
time around?"
Um, no. Proof is in this week's actions.
A real nugget that leads us to this years' fiasco:
"The third fundamental force has been the development of financial
theory, especially the theory of capital asset and options pricing.
Combined with technology, these advances in financial theory have
made it possible to develop a wide range of new financial instruments,
such as options, swaps, and asset-backed securities. These new instruments
liquify what were once illiquid assets, and make it possible
to separate the credit-risk, interest-rate risk, and exchange-rate risk
that were traditionally bundled into single financial instruments, such
as bank loans or corporate bonds. Thus, these new instruments permit
portfolio managers to manage and price risk more precisely."
http://www.kc.frb.org/PUBLICAT/SYMPOS/1987/s87huert.PDF
Sometimes obscure quotes shed some light on where we have ended up.
The 1986 conference was obsessed with ending Glass-Steagal. Now we live with liquified capital.
Someday this war's gonna end...
Matt, thanks for the very disturbing links.
And did you think the timing of Gen. Pace's suggestion to bring troops home was a little too conspicuous? Better get some troops home to settle the upcoming event. Why the sudden change of heart, Pete?
The revolution is here. It is just waiting for participants.
by the Fed allowing Citigroup and BAC to funnel funds from the Fed discount window to their brokerages they have committed moral hazard. i would advise everyone on this website to advise everyone they can get to listen to withdraw their deposits from these 2 banks ASAP. they have just increased their chances of becoming insolvent.
Bwana;
Helping hedge funds orchestrate an orderly unwind, also helps them prop up their 'sale' price. They should have to liquidate at fire sale prices. They should be allowed to get so desperate they turn to well-capitalized investor like Warren Buffet and take anything he is willing to give. Propping up prices prevents prudent investors from making big profits on distressed securities. This is the same as killing the shorts on options expiration day. It makes all us conservative investors vow to go in with reckless abandon next time. After all, it is my turn to get propped up by the FED.
Are Beanie Babies assets? I wanna know when I can take my collection down to 20th street and securitize them for some cold hard cash! I'll use the billions to provide some employment to my fellow Americans. Because my house will be so big, I'm sure I can employ large numbers of "workers".
Wellington - Another New Zealand finance company signalled it was in trouble on Friday following the collapse of five since last year, prompting calls for them to be as tightly regulated as trading banks. The New Zealand Stock Exchange announced that it had suspended trading in shares of Property Finance Group Limited, of Christchurch, whose directors said in a statement that they were "concerned about the company's ability to manage its current liquidity position given the significant changes being experienced in the financial markets."
Mark Weldon, the exchange's executive director, said that in light of volatility in the sector it had written to 15 listed finance companies demanding they admit to any problems by Monday morning.
Weldon said he would name any who did not respond and called on the Reserve Bank of New Zealand to restore confidence in the sector by regulating finance companies in the same way it did trading banks.
By the end of the day, 11 companies had told the stock exchange that there was nothing untoward in their business, with only PFG, a non-bank first mortgage lender, admitting that it had problems, the TV3 channel reported.
Earlier, PFG directors asked the exchange to suspend trading in its shares while they considered restructuring to deal with a lack of cash to pay debts during the global credit squeeze.
Promising to advise further on Monday, a board statement said, "Notwithstanding the continued good quality and value of its loan portfolio, directors deemed it necessary to take action to protect the interests of all stakeholders."
Nathans Finance New Zealand Limited, a finance company which reportedly raised 170 million New Zealand dollars (about 121 million US dollars) from mainly mum and dad debenture investors, collapsed on Monday.
The Bridgecorp group was placed in receivership in July owing nearly 500 million New Zealand dollars to 14,500 debenture investors and holders of capital notes.
Three other companies, National Finance 2000 Limited, Provincial Finance Limited and Western Bay Finance Limited, have collapsed in the last year owing investors almost 400 million New Zealand dollars.
Subprime CDO's:
Barry Ritholtz: CDO Insiders: "We Knew We Were Buying Time Bombs"
Lori,
I agree with you. I think the guys that got us into this mess should have to pay the price. But I think the FED knows just how big this mess is and they don't want the public to know for fear of a run on the banks. The FED action was timed to provide the most help to those long on the market and to crush the shorts just when they expected to make a killing. Very few things in life happen by accident. I think the market tanks in October, worse than in 1987.
This is not- new look at history. They did this "type" of action for LTCM. JP Morgan himself did this "type" of action. This is all within the FED's power.
It is a re-pricing of risk. The banks do not give 100% borrowing capacity and the instruments they are borrowing against have re-priced dramatically as well.
Financial calamity will be avoided on a Macro basis(ala systemic) BUT the consumer will slow dramatically(eventually) from the negative wealth effect. The housing market is in a severe recession already.
So it's not "business as usual".
Test
LTCM was not bailed out by the Fed. The Fed "strongly encouraged" the IB's to contribute funds to avert the crisis. i don't see this as a "re-pricing of risk". i see it maintaining the risk in the system by propping up prices that should be plummeting. we have no idea at what % their funding the par value. i'm sure its way higher than i would peg them at. this is precisely the reason the Fed needs to be abolished; they are tinkering with interest rates that should be set by the market.
In addition to the Fed news that was held in secret for the whole week and released in the after hours of Friday...
There is this:
SPY: Options for S&P DEP RECEIPTS - Yahoo! Finance
Look at the volume of Sept. calls. This spike appeared two days ago so it's not a glitch. It cannot be a mistake because the total cost of buying/selling this many calls is 1.6B.
Also, here someone very very big sold deep ITM calls, because buying them on the expectation that S&P will go for the moon is ludicrous.
Now, these calls WILL get called 100%, so the expectation of a profit is based on a huge decline in S&P, which should be cause only by some sort of catastrophe. This means someone just put 1.7B dollars on a huge crash in S&P in the next three weeks!!!!!
Pavel, The market could very well crash but I wouldn't read all that much into the SPY options. Sept or more likely Oct.
The way I view SPY options is they are used primarily as a hedge by institutions, either way.
found this:
m* - the long run equilibrium (elusive)
Having lived in Houston until 1991 I have a bad feeling we are going to see a substantial increase in homeowner arson. It is always another option that people sadly choose. The Dallas Morning News has already run a piece about fires in Lake Ridge in Cedar Hill, TX a SW Dallas suburb.
Matt,
The FDIC would not have conducted massive RIFs and offered buyouts and early retirements in May thru Sept. 2005 if it knew this was coming. Asleep at the switch is the correct conclusion or in Texan: dumb asses.
Oh! Sebastian...
At some point the USD index is going to break below 80. I think this will be the critical juncture that leads to foreign central banks selling treasuries with enough volume to cause spiking interest rates and inflation.
Matt, this idea comes up a lot and I have a number of problems with it:
Currency is a commodity. It is beholden to the rules of supply and demand. Inflation and currency devaluation is fundamentally about excesss supply (or economic collapse in extreme cases). By that metric the dollar is quite attractive. US money supply growth is comparatively very low. Where does the inflation come from?
What leads to a dollar crash at this point? I can think of some possibilities, but I don't know that they're immediate risks (unless we start a trade war with China or start printing money).
Friday afternoon, Wells Fargo branch in a small city in central OR. I am withdrawing a thousand in cash. The teller apologizes as she counts it out in fifties and twenties:
"I's sorry. We're out of hundreds and almost out of fifties."
This has never happened to me before, and I do this every month. Is it an isolated incident, or have the runs begun?
Here's a parsing of the Fed BofA letter (retyped as I couldn't get it to copy/paste):
What The Fed Approved:
"Bank proposes to extend credit to market participants in need of short term liquidity to finance their holdings of certain mortgage loans and highly rated mortgage backed and other asset-backed securities. For operational reasons, Bank proposes to channel these transactions through the Affiliated Broker Dealer."
Who are these "market participants"? Potentially hedge funds. The "operational reasons" could be that the Broker Dealer's prime brokerage operation has an existing margin agreement with the hedge fund client.
In fairness, there could be "operational reasons" for setting up repo facilities for the likes of Countrywide through the "Broker Dealer Affiliate". Among these are the Affiliates expertise in repo's and in valuing the securities.
Continued...
barely,
well, some institutions must have been drinking that electrical kool-aid. look at those volumes, and the outstanding huge out of the money play, and it looks more like the last bet at Rick's Cafe Americain, if you get my drift. And those bets don't get made, unless Rick tells you to.
ac, isn't the money supply growth in the US at about 13%? Isn't that almost triple the GDP growth rate?
unirealist: You should have told the teller to go the the Fed discount window for some more $100s.
>>> Sebastian | 08.24.07 - 6:28 pm |
Oh! Sebastian...
theroxylandr
Hey thero, how those long bonds going for you? Almost 50bps ahead of where I "took an interest in them". Also, did you notice the pressure on the long end today? I found it odd. Like somebody thinks the Fed might start monetizing long bonds to keep mortgage rates down. Hmmmm...
Money supply growth is negative (i.e. money are contracting):
St. Louis Fed: FRED Graph
This economy looks like 1931 Germany to me. The central bank monetizes debt, the current account deficit is unsustainable.
Here's the rest of the relevant sections from the Fed's BofA letter:
"Granting the exemption...would have significant public benefits. First, the exemption would enable Bank to provide a substantial amount of liquidity to the markets for the assets. Because of the operational advantages of Bank using the Affiliated Broker-Dealer as its conduit to convey funds to market participants, the exemption would allow Bank to provide the needed liquidity in the most rapid and cost-effective manner possible for Bank and market participants."
There you have it. The question is, and its an important one, "who are these market participants?"
Are they lenders like Countrywide? OK, set aside the issue of moral hazard; the public interest may be served. The function of the broker-dealer, in this case, may be honestly "operational" in nature.
Or are they hedge funds? In this case, the "Affiliate" may have trouble collecting on margin loans, and the bank capital is being put on the line to provide liquidity for the margin calls to be met (by selling the AAA assets of the hedge fund).
IMO, this is a major issue, and more disclosure needs to be provided. The reason its so important is that, while bank capital is not the same as insured deposits, it is a cushion that protects the depositor before insurance kicks in.
ac, isn't the money supply growth in the US at about 13%? Isn't that almost triple the GDP growth rate?
Here, read this article, it may explain the graph.
I made nice profit on 30Y bonds (hope you too!) and sold 50% of my position.
Right now I'm deeply puzzled. Fundamentally I'm bullish, but the chart is slightly bearish. I don't know what to do, though I still have quite a large position...
Hmm, I don't see that. Feds are draining all this week. Looks like they are fighting for the dollar pretty hard, economy the second priority.
"Monetize debt" means they will take overvalued collateral from insolvent institutions. I don't see that. Not a dollar.
theroxylandr:
That's M1. What about M3? (Yes, I know it is no longer officially stated, but it exists in principle.)
Here's the rest of the relevant sections from the Fed's BofA letter:
"Granting the exemption...would have significant public benefits. First, the exemption would enable Bank to provide a substantial amount of liquidity to the markets for the assets. Because of the operational advantages of Bank using the Affiliated Broker-Dealer as its conduit to convey funds to market participants, the exemption would allow Bank to provide the needed liquidity in the most rapid and cost-effective manner possible for Bank and market participants."
There you have it. The question is, and its an important one, "who are these market participants?"
Are they lenders like Countrywide? OK, set aside the issue of moral hazard; the public interest may be served. The function of the broker-dealer, in this case, may be honestly "operational" in nature.
Or are they hedge funds? In this case, the "Affiliate" may have trouble collecting on margin loans, and the bank capital is being put on the line to provide liquidity for the margin calls to be met (by selling the AAA assets of the hedge fund).
IMO, this is a major issue, and more disclosure needs to be provided. The reason its so important is that, while bank capital is not the same as insured deposits, it is a cushion that protects the depositor before insurance kicks in.
David Pearson | 08.24.07 - 9:00 pm |
I'm not even going to pretend to be sophisticated enough to understand all the details of quants and hedge funds and other "innovations". But I don't think BoA is suicidal. Just because it was done behind the scenes doesn't indicate anything nefarious in BoA's intention, as it seems as if this was done to facilitate the rescue of CFC.
Hello,
What if the fed knew this was coming years ago. Instead of pricking the bubble then, they continued on borrowed time, with the full awareness of the serious banking system problems it would create.
FRB: Press Release--Federal Reserve Board endorses NewBank Implementation Working Group recommendation--December 15, 2005
Most of you people here probably think I'm crazy, but what if their only intent in the short term is to keep the general public unaware of the serious fundamental problems entangling the entire banking system, until such a time that an "event" occurs that the blame can be directed to.
At some point the USD index is going to break below 80. I think this will be the critical juncture that leads to foreign central banks selling treasuries with enough volume to cause spiking interest rates and inflation.
Massive bankruptcies, falling home values, rising unemployment, on top of the already rampant disgust in the political system could cause the people to get awfully disruptive.
SPP, Amero, operation endgame, possible war with iran, etc. What do you people think of these things in relation to the ongoing "credit crunch".
http://www.fas.org/irp/agency/dhs/endgame.pdf
The FED established how much of each class of security needed to be offered in return for money borrowed at the discount window. If they say for example "$1.2 of AAA MBS for each $1 borrowed, then they are establishing a floor price for this security. Who is to say they are not over paying? The market, and perhaps history when we finally know the default history for that tranche.
Sorry about the repeat post, must have been caused by hitting back after deciding not to post another comment.
ac and theroxylandr,
I fully understand that right now our cash money supply is contracting, and that makes sense. I really don't foresee a germany style hyperinflation. However, if central banks and investors begin to cash in treasuries and exchange them for other currencies, it will cause downward pressure on the value of the dollar.
If they cash them in and redeem them for commodities on global markets, then it will cause the dollar value of those commodities to increase.
This IS simply supply and demand.
This could all happen in the face of decreasing M1, M2, AND M3.
So, I'm arguing for PRICE INFLATION in the face of mass selling of treasuries. Monetary inflation has been ongoing since fiat started, and the relationship between the various measures of money supply and prices is extremely complicated, but not as important as the MSM wants you to believe.
If money supply growth is all going towards asset inflation through the creation of paper products, it isn't going to affect general price levels in the short term, however it has other serious affects, some of which we are just beginning to witness( in this cycle).
The other affect of mass selling of treasuries is rising interest rates. This would further reinforce the down cycle, and is also (PRICE) inflationary.
When and how fast treasuries begin to selloff is anybody's guess. Looking at the dollar index though paints an ugly picture, because if the dollar is expected to go down, then all those treasuries and other dollar paper is also losing money for foreign investors. I don't think the turmoil in the ABS/CDO markets are going to help keep the dollar up very long.
Lori said,
"The market, and perhaps history when we finally know the default history for that tranche."
Right.
You normally wouldn't really know the "ultimate value" until the end of the term anyway.
theroxylandr and ac:
According to John Williams of Shadow Statistics.com, M3 was growing at 12.9% in April, and has averaged about 11% over the past five or six years.
Be nice to have real numbers. Or is there a reason why the gov't no longer counts M3? Maybe so M1 can continue to deceive?
The underlying issue in the acceptance by the Fed Res or any lender is the inherent value of what has been graded as AAA.
We know the incompetence of the credit grading entities. And we know the current economic condition of the real estate markets, in real time, across both the country, the borrower type and the ultimate use...equity, construction, residential or commercial. (If you don't, go to HousingBubble.com and end the ignorance.)
So, let's not kid ourselves by ignoring underlying value depreciation at a stunning clip.
What was AAA last month is not AAA this month. The rating agencies are too frankly hidebound to be jack rabbit quick about recognizing true market value.
Meanwhile, we have major Fed Res member banks who are themselves strung out in terms of liquidity due to commitments taken prior to the credit freeze...LBO's, warehousings of various kinds, and lots of hedge fund ABCP.
If the Fed Res doesn't act, those banks are BANKRUPT. The consequences are dendritic. They and we all know this.
So, they tried infusion and found rapidly the major banks either used it themselves or would not pass it along to any other bank (no interbank lending!!whoo hoo!).
Their next course is the Discount Window. Through this, they think they can handle the stopgap, momentary needs for a goodly amount of systemic credit needs.
The impossibility drive here is that the system has I've read $10+ trillion of this type of paper, including its squareds, and there's a serious question whether the Feds can finance that because that effectively is a monetization of currency, and along the way, the external currency holders and the publics will dump dollars, impacting "reality", as in the store of value within the USA. The alternative, however, is systemic collapse via credit ARDS...aka, no liquidity.
The Feds are not charged with saving the value of the currency. They are charged with saving the integrity of the banking system, the liquidity.
So, it appears the Fed's gonna flood us with money, trading Positive Carry's paper for cash.
The outcome is twofold. No it's not as easy as one would hope, that there be "the" answer and be done with it. They're the obvious asset value contraction which places the Fed itself at real risk as the major bank, recognizing it will be bankrupt, will proffer Beelzebub himself to get the liquity they need. The Fed is now gambling the credit it holds for the loans it makes is solid as well as that the bank which offered it won't fail. (Wells Fargo, anyone?) Moreover, we have no idea what the true value of that recently AAA asset in fact is, but it means nobody needs to find out as long as the Feds hold it and have forked over 85% of its "market" value. (There is no "market", but nobody has told this to the Fed Res yet.) And secondly, we have a very, very high probablity that the investing public will throw in the towel, attempt to cash out of all but Treasuries, and
...thereby cause a rapid dollar decline.
Gold, anyone?
Pavel Levin wrote:
Now, these calls WILL get called 100%, so the expectation of a profit is based on a huge decline in S&P, which should be cause only by some sort of catastrophe. This means someone just put 1.7B dollars on a huge crash in S&P in the next three weeks!!!!!
But doesn't the transaction take a buyer and a seller? The entity who wrote the calls believes the opposite of the person who bought them. And both have very deep pockets.
What am I missing?
Matt, ac, oxy,
US money supply growth is comparatively very low. Where does the inflation come from?-ac
trying to understand money supply growth, currency flows, and inflation/deflation in the US and comparatively to other countries is enough to make your head explode. some of the key factors that none of you have defined is how are you measuring money supply (M, M prime, M1, M2, or M3). ac your Economist graph doesn't specify. also how are u defining inflation (by price or money supply). in my mind we, as well as the rest of the world, are having tremendous inflation. just look at asset prices (housing and debatedly stocks). one can easily see it in the cost of health care, food, gas. if we weren't having significant inflation Wall st. wouldn't be leveraging up to the degree they have (GS at 25x) to speculate on LBO's, commodities, dervatives. i think that John Williams at Shadowstat has it right in measuring M3 b/c that includes not only your declining money stats (M1, M prime) but also all the Wildcat Financing (credit) as Russ Winters calls it. in that sense money supply is growing around 12-13% which would be consistent with the financial leveraging we are seeing today. this would also support Matts theory as to why we have seen the USD index dropping steadily.
another way to look at this is the yen carry trade. everyone knows this is massive and that a good part of it comes here to buy dollar denominated assets esp. treasuries (Japan is the largest holder). if the dollar money supply weren't being inflated above and beyond the carry trade demand for dollars, the USD value would be sky high! instead it is at all time lows. so no question in my mind we the USA are inflating away.
There is no "market", but nobody has told this to the Fed Res yet.
One problem I have with a lot of these scenarios, plausible as they may be, is the implication that the Fed, in the immortal words of one J. Cramer, "Has No Idea!!!"
I think they know exactly what's going on, and they're trying to fix it. Probably, they will. Whatever the cost. The alternative is something even the wearers of trendy aluminum haberdashery shouldn't wish for.
Meanwhile, we have major Fed Res member banks who are themselves strung out in terms of liquidity due to commitments taken prior to the credit freeze...LBO's, warehousings of various kinds, and lots of hedge fund ABCP.-GaudiaRay
are the IB's Fed Res member banks that can borrow directly from the discount window? i thought not.
Matt:
I agree with your posts.
Our unprovoked attack on Iran is certain. It will enable Bush and Cheney to wrap up our troubles in the American flag, even as it burnishes their bloodlust.
Their plot is tried and true. I invite documented challenges to my recollection that throughout Summer 2001, screechy denials gave way to a grudging consensus that recession was imminent.
The economic aftershock of 9/11 muddied that narrative, and how, like Alfred Hitchcock or Patricia Highsmith at the top of their game. The recession was belatedly admitted, dramatically backdated, and absurdly compressed.
Am I right, or am I wrong? Does anyone believe lightning won't strike twice?
The real beauty of this scheme is that Citi and BofA can get cash to floundering banks/hedge funds with the depositors/shareholders of said floundering entities none the wiser.
It might be more difficult (and possibly illegal) for the Fed to accomplish this task without these intermediaries.
Bottom line, we've got a nasty problem under the surface.
Pavel Levin wrote:
Now, these calls WILL get called 100%, so the expectation of a profit is based on a huge decline in S&P, which should be cause only by some sort of catastrophe. This means someone just put 1.7B dollars on a huge crash in S&P in the next three weeks!!!!!
Because they are in the money, for either party to make a profit, there doesn't need to be an expectation of a huge move, right?
Pavel--I think it's very interesting--are there any discussions on stock blogs?
Sebastian
I am with you,,,my model does not indicate bear market yet. It has been bull since 5/03.
How about my 5 year old grandson's IOUs?
Heck, what wouldn't they take at this point to get money out there? Helicopters, baby, helicopters . . . (Tanta, please notice the careful placement of spaces.)
... are the IB's Fed Res member banks that can borrow directly from the discount window? i thought not.
idoc
i too thought not. The Broker-Dealer is "in the negotiation" as well as the customer.
Blackstone and Carlyle don't just go out and make an offer. i thought not.
The news articles discussed recently how BS won't let the lenders out of their commitments. They are stuck warehousing unsaleable paper.
want some? i thought not.
But guess who's gonna devour a bunch of it?
got another way "out" for the illiquid, credit pledged FR member banks? i thought not.
Seb said,
"Mine will not. There won't be a recession this year or in 2008."
Sebastian you could be an economist (they are wrong all the time too) LOL just giving you a hard time (like everyoned else)
PS: Good luck with that "prediction"
Washingtonpost.com
In the Loop: On K Street
Wall Street Paying High Price to Keep Cash - The nascent fight over whether to raise taxes on Wall Street hot shots has become one of the year's biggest lobbying bonanzas.
Jeffrey H. Birnbaum - Wall Street Paying High Price to Keep Cash - washingtonpost.com
So help me to understand how the mortgages were sold as securities. The loans were put together into packages of loans called CDOs. These CDOs were then sold on the market in tranches where some tranches were lower risk than others.
How is the default or foreclosure on a loan transferred to the holder of the tranch? If a bunch of foreclosures or refinances occur on the loans in a tranch how does the holder of the tranch feel that? So if many of these loans are refinanced is there a whole new set of CDOs created and sold on the market? Are we not creating two sets of securities on the same property, one that is performing and one that is not. Is not this a creation of a bunch of securities filled with non-performing loans? I have to be missing something here. Surely.
R said,
"Now, these calls WILL get called 100%, so the expectation of a profit is based on a huge decline in S&P, which should be cause only by some sort of catastrophe. This means someone just put 1.7B dollars on a huge crash in S&P in the next three weeks!!!!!
Because they are in the money, for either party to make a profit, there doesn't need to be an expectation of a huge move, right?
Pavel--I think it's very interesting--are there any discussions on stock blogs?"
Well, someone just made a crazy bet with supposedly insanely improbable odds (unless you know something others don't - i.e., you are so certain that expected event will happen you are ready to put 1.6B on it). They made it at whatever price on every option that was required to get enough buyers.
There are different pricing models for options and you can make an offer they will not be able to refuse
The American public for too long has never known panic. When panic finally arrives it may present itself in a hyper form due to the public's inablity to fully grasp or relate to grave financial ruin. Riots in the streets are certainly a possibilty given how disgusted the public is with Bush and Congress already. Anything is certainly possible in terms of public reaction including massive bank runs.
Well, someone just made a crazy bet with supposedly insanely improbable odds
It's just a bet on the direction of the market, it is not a bet on a catastrophe.
Everything else may be nefarious and a crisis, but not this.
Helicopter crashes - I believe I can fly...
YouTube
- Broadcast Yourself.
There is an elaborate discussion of this here:
TickerForum Error - Unauthorized Request
Also see:
The Market Ticker
FDIC.gov
Press Releases
FDIC Makes Public June Enforcement Actions (a slow month)
FDIC: Press Releases - PR-70-2007 8/21/2007
How about my 5 year old grandson's IOUs?
Yup, it would work. That is if somebody excepts it as 'credit'... for that particular transaction it would be as good as any other kind of money.
It is for this reason that no form of money will by itself be a guard against bubbles & mania. Metal, paper fiat, electronic fiat - doesn't matter. If people are going to go mad speculating there is nothing going to stop them. I think Alan & Ben can now testify to that.
That is if somebody excepts it as 'credit'
That of course should be...
That is if somebody accepts it as 'credit'.
And 'yes' I phailed fonix.
U.S. News & World Report
Looking for Patterns in Political Blogs - A new site reads and analyzes the blogs so you don't have to...(Nixon would have loved this)
Looking for Patterns in Political Blogs - US News and World Report
It is for this reason that no form of money will by itself be a guard against bubbles & mania. Metal, paper fiat, electronic fiat - doesn't matter. If people are going to go mad speculating there is nothing going to stop them. I think Alan & Ben can now testify to that.
The tulip mania, yup gold based currency. South Sea Bubble, like wise.
I suppose you could eliminate bubbles in a hard currency world if you required deliver of gold on each transaction, but once you have shares as evidence of equity and bonds/notes as evidence of debt, and are willing to swap gold for that paper or goods for that paper, then there is not any real agency to prevent the process to bubble.
Mish explains:
The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of PIMCO. Is it any wonder then that he is asking Bush to "Write some checks, bail em out, and prevent a destructive housing deflation that Ben Bernanke is unable to do."
The only thing Gross forgot to mention in his September Outlook was the return address on those checks needs to read "Bill Gross @ PIMCO".
"Our unprovoked attack on Iran is certain" - what do you call what Iran is doing in Iraq ? in Lebanon (arming Hizbula to attck Israeli civilians) ? In Gaza financing Hamas and the biggy: In dveloping nuke weapon. In my book each of these is a provokation. (not to mention the verabl ones: The call to anihilate israel)
Now should we attack Iran for these provokation - that is a different question altogether but the provokation exist 100%.
Yal, the way this works--okay, is supposed to work--is this: if the US has evidence that Iran is somehow attacking it, then the US takes that evidence to the UN Security Council, which can authorize the US to defend itself. Not its interests (as in economic or political), but itself.
The US does not get to wage war on a sovereign nation just because it perceives a "provocation." It is that kind of thinking that gets gang kids killed for alleged "dissing" by kids from another gang.
Yal, there is international law that covers situations like these. Law that the US helped write, following WWI. The US doesn't get to decide unilaterally that it has the right to invade, bomb, or insert special forces into another country unless the Security Council of the UN agrees it is warranted.
On an earlier thread I said that our administration had committed a "war crime" by invading Iraq. I got some flak for that. However, experts on international law fully support what I said. The only party insisting that the Iraq invasion was legitimate because of earlier resolutions by the UN Security Council is the party of GWB and Dick Cheney. Over and over again the question has been revisited by legal experts, and over and over again the answer is the same. Do a little research, use Google.
Incidentally, Iran is also being "provoked" by the US. It is no secret that our administration is doing all it can to destabilize Iran in hopes of "regime change."
Now, let's get back to the topic at hand. This is a financial blog.
Unrealist,
I did not talked about waiging war. I talked about provokation from Iran - there is a clear provokation.
"Now, let's get back to the topic at hand. This is a financial blog."
unirealist | 08.25.07 - 7:09 am | #"
Thank you.
Looking at the commercial papers market I suspect that M3 is collapsing badly right now.
Regulators and new accounting rules fed the credit bubble. Banks may be
more leveraged than I thought.
A new article from Fleck.
How regulators fed the credit mess - MSN Money
"Level 1 means the values come from quoted prices in active markets. The balance-sheet changes then pass through the income statement each quarter as gains or losses. Call this mark-to-market.
"Level 2 values are measured using 'observable inputs,' such as recent transaction prices for similar items, where market quotes aren't available. Call this mark-to-model.
"Then there's Level 3. Under Statement 157, this means fair value is measured using 'unobservable inputs.' While companies can't actually see the changes in the fair values of their assets and liabilities, they're allowed to book them through earnings anyway, based on their own subjective assumptions. Call this mark-to-make-believe."
ella-
on that link, the video, "Probability of Recession" has Jeremy Siegel stating that cost of capital has not risen for investment grade companies.
This shows how out of touch most of these economists are and clearly explains their lack of ability to predict the liklihood of recession.
You cannot have a severe credit dislocation without huge repurcussions, the funniest thing about the claims that this is over is that the period we are about to enter should prove to be even more difficult.
It is more likely that we have not even begun to see the true effects of what lies ahead in the near future.
Probability of a Recession - MSN Video - Money
theroxylandr said: "1. Every cycle is different. It's impossible to create a mix of well-known indicators to work every time."
Well, yes and no. The trigger for a stock market crash or recession might be different in each cycle, but the same group of indicators can be used each time.
A contraction in manufacturing, inverted yield-curve (not the simple one, too many false signals), negative SP500 EPS growth, net loss of jobs in monthly nonfarm payrolls, etc., some or all of these occur when real trouble is brewing.
Whatever the catalyst (currency crisis, liquidity "event", overspeculation in the asset de jour) the problem will be reflected in the economy if it's significant enough to have a major negative impact on the economy.
That's why the recent "crisis" isn't nearly as big as it's being made out to be. The yield-curve(s) would both be inverted big-time, manufacturing would be contracting, earnings wouldn't be growing, etc., etc.
Sebastia
Risk Capital,
I concur. Every where I look I see high leverage based on shaky asset valuations.
This will take a while to unwind.
Seb said,
"The yield-curve(s) would both be inverted big-time"
They already were. If the FED does what I think they will do it will be inverted again real soon.
In response to me: "The yield-curve(s) would both be inverted big-ime."
sloooowwwwwmotion replied: "They already were."
No, they weren't. The simple yield-curve (10-year minus 3-month) inverted, but the yield-curve adjusted for the level of the Fed funds rate didn't, isn't there now, and the recession probability based on that indicator is down to 26% from a peak of only 46%.
The simple yield-curve has had more false signals than the adjusted one over the past 40 years, and this is another one.
Sebastia
The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of PIMCO.
That's too obvious. Bill would keep a low profile if Pimco was overweight. He's trying to hype the panic around mortgage securities, which will enhance the value of Pimcos portfolio.
Sebastian,
Several states already in recession based on tax receipts. Didn't CR have a post on this a while back? In any event, tax receipts are one of the best, most reliable recession indicators because they aren't easily swayed by corrupt GDP/CPI calculations. The gubbermint can release all the tortured data they want, but it's hard to pretend when you have no money in the state coffers. You must come forward and say as much, and raise taxes/cut spending accordingly. About half of the states in the country are collecting less taxes than expected:
Page not found
Luckily, these are just small states like California, Georgia, Florida, Michigan, Massachusetts, Illinois, New Jersey, and Virginia, LOL!!!