I am trying to understand how all this ties together, but when you start to have news articles telling people their money market funds may not be safe, people will worry.
Hopefully the money market funds have some good salesmen errr customer service reps when average joe starts calling and asking questions or for their money.
It's funny, but I was just wondering -- among the homebuilders most likely to fail first, which of them have a lot of commercial paper out. I wonder if anybody has done the research.
If money market mutual funds start "breaking the buck," the credit markets are really in trouble.
To me it looks like we have an integrity problem here.
No one believes anything our executive branch leaders say about the economy so we are leaving it to the Financial Markets to place a market price on what is going on with the economy.
Since the word is getting out that the Wall street guys are a bunch of crooks the public is slowly saying to them "I don't want you guys messing with my money anymore."
So far it is the big money people saying they don't want to play.
What will happen in the weeks to come when the general public realizes what's going on and they don't want to play anymore?
Here's the "what it invests in" for my stable asset fund:
Invests in a diversified group of high-quality, fixed-income investments. These investments will include high-quality debt securities including mortgage-backed securities, commercial mortgage-backed securities, asset-backed securities and corporate credit securities. The Fund also utilizes investment contracts issued by creditworthy life insurance companies, collective investments funds and short-term money market instruments that are consistent with the investment objectives of the Fund. Yield will vary.
I'm sure it isn't going to implode, but I can get better from a CD with no agita.
When I was a wee lad in school, I learned only investment grade corporations could issue commercial paper. That too, it appears, is no longer operative.
Black is down, up is white! Ignorance is strength, etc.
Bob_in_MA, I find this story a little puzzling. Is it a price problem? Or will are they getting no bid? J&J just increased the size of their bond offering with no problem.
just an alarmist thought:
If we have a systemic withdrawal from hedge funds (15aug notification date) and a massive liquidation of assets and potential banrupties of many more hedge funds,.....what happens to credit default swaps (many hedge funds are sellers of protection)???
As of May 31, 26% of Fidelity Cash Reserves Money Market $98.2 billion portfolio was in repurchase agreements with investment banks.
"Fidelity accepted billions of dollars worth of "mortgage-loan obligations" as collateral for the trades, although it doesn't note whether those are riskier "private label" mortgages, or the triple-A bonds guaranteed by Freddie Mac and Fannie Mae.
The money-management giant also has 1.7 percent in collateralized debt obligations, or bonds made from other bonds, a market that has seen billions of dollars of credit downgrades."
That particular fund is I believe the largest mutual fund around, of any type. It is the "core" fund for settling trades in Fidelity retirement accounts (e.g. IRA's). You can't use anything else apparently. What you can do is move funds to another mutual fund (e.g., Fidelity Treasury Money Market FDLXX) and then transfer funds back to the Cash Reserves fund if you need to cover stock/fund purchases.
Now obviously this fund probably will maintain a $1 NAV even if Fidelity had to cough up the difference, but 26% in repurchase agreements backed by unspecified mortgage obligations? That seems like a lot of reaching for yield. And it still yields only about 40 basis points above the Fidelity treasury MM fund.
Hmmm. Yields rose on the 1 & 3 mo treasuries that had collapsed last Thursday & Friday. I was thinking this marked a calming of the panic:
One Month:
Wed: 5.04
Thurs: 4.70
Fri: 4.38
Mon: 4.61
Three Month:
Wed: 4.95
Thurs: 4.81
Fri: 4.57
Mon: 4.74
I guess after this I need to watch them for a while longer....
CR, I think it is the nature of this particular company, although DBRS says others are having problems as well. This is from Coventree's website: Coventree is a niche investment bank specializing in structured finance using securitization-based funding technology. We provide structuring and funding solutions for our issuing clients in both the commercial paper and term debt markets. In the process, we create innovative investment products for our investing partners.
Nobody wants anything to do with innovative securitizations at the moment. Under the circumstances, it is not that surprising. From what I have seen, the problems in commercial debt are worse than the mortgage problems. It seemed like no one was paying attention to fundamentals.
Well, understanding the basic concepts ABCP wasn't that difficult. I also went to Coventre.ca's website and looked up one of the E-notes they are extending,the Aurora one:
I see no signs of tranching ( like in MBS) to create silk out of a sow's ear, nor the bundling of mid-tranches and waterfalling the interest to create even more silk out of pig-shit(CDO) - didn't they get that far in this financial product?
You'd think they are bound to have done this.
This is old technology it seems - at least 5 years old. something else apart from the innovative nature of the product is going on.
Sometimes I get the idea people writing stories there know even less than we do. They never seem too inquisitive. The video clip was "Tony Crescenzi of Miller Tabak Sees `Calm' in Money Markets."
In Randall Forsyth's column in this week's Barron's, he talks about this:
Nevertheless, the lack of transparency for the new esoteric instruments, such as collateralized debt obligations and collateralized loan obligations, has exacerbated the current nervousness because nobody knows what they're worth, he also notes.
In that, it appears some of the problem lies with asset-backed commercial paper "conduits" and so-called structured investment vehicles. These ABCP conduits and SIVs are used to fund the purchase of assets such as trade receivables, auto loans, credit cards, whole mortgage loans, as well as securities such as corporate debt, residential mortgage-backed securities and CDOs, according to a Bear Stearns report.
The ABCP conduits and the SIVs then are able to issue high-grade commercial paper to finance these assets, which are less the prime quality. ABCP now comprises over half the $2 trillion-plus commercial paper market, up from 20% in 1998, according to MacroMavens' Stephanie Pomboy. And, money market funds own 27% of all CP outstanding, she also notes.
According to the Bear report, some $38 billion-$43 billion RMBS and CDOs could be liquidated from ABCP conduits. Got that? In other words, a load of these assets is backing ABCP and may have to be sold into a less than receptive market.
It sounds like these things are a real stone soup and nobody really knows what's in any one of them, or at least it's time consuming to figure it out. And on top of it, they aren't sure if they know all that they should be looking for.
I have these preferred shares in MetLife, ABN Ambro and Royal Bank of Scotland and I'm even a little paranoid about those...
Off topic, but I need some advice. When closing on my loan about 2 years ago, they told me what my taxes and insurance would be and I have been paying it for the full two years. I recieved a letter last month saying that I was not paying the full amount for my PMI and I owed money, in addition, I would now have to pay the full amount. When I called they said the amont I have been paying was only an estimate and not guaranteed to be the correct amount. Is there anything I can do?
thanks.
I am trying to understand the scale of the mortgage market and the potential impact of the problems that seem to be developing. I would like to confirm a couple of points and ask a couple of questions.
The size of the aggregate of all residential mortgage debt is approximately 10 trillion. Is this correct?
The size of ARM resets for the next 18 months is 1.5 trillion?
On a base of 10 trillion, or whatever the correct number is, what would the normal expected severity of loss be for any year?
Given the seeming surge in foreclosures that looms on the horizon, what would be a reasonable rate of loss to anticipate?
Are the banks sufficiently reserved to take this hit?
I read something about that in today's WSJ: One worry: Banks have had problems in the past processing the trades they do in these contracts. Two years ago, the Federal Reserve Bank of New York demanded they clean up their act and clear a backlog of unconfirmed and unsettled trades. They made progress, but so many investors want to own the insurance now, new problems could crop up. Demand is so great for credit insurance that many banks are finding it is hard to keep up with it.
Another worry: Hedge funds account for 60% of all CDS trading, according to Greenwich Associates. Ironically, many of them are using borrowed money to make trades on credit turmoil. Plenty of hedge funds have earned great returns by betting on soaring CDS prices, but it's hard to know who's getting hurt on the other side of these bets. If it's other hedge funds, it could ripple through the CDS markets and amplify broader credit-market volatility.
It's also possible that winning bets in CDS could quickly become losers. While credit default swaps of broker dealers have surged, their corporate bonds haven't suffered nearly the same damage. That could be a sign that the big investors who hold those bonds -- often pension funds and mutual funds -- aren't as concerned about a financial meltdown as their jumpy hedge-fund counterparts.
That topic came up here before and I think sometimes there are swaps for ten times the underlying value of the bonds, that was a problem when Delphi defaulted.
ChrisM, your PMI (Private Mortgage Insurance) is not an "estimate" and it cannot go up.
Your property taxes and your homeowner's insurance can certainly go up. Your lender estimated what it would require for you to pay the next bill when due out of your escrow account, but if the tax bill or the insurance premium went up from last year, you'll have to start paying more each month to cover that.
Your servicer is required to send you an annual escrow account statement under RESPA. That should show you what is going on.
"...you might have expected the conservative-libertarian economic community to have decried the Federal Reserve money-market interventions. After all, if a few or more primary dealers had imprudent connections, even if they were once, twice or more removed, with the subprime market, their insolvency and bankruptcy could only have a proper disciplining effect on the market. The example of their misery and penury will act to ensure that future market participants eschew the next upcoming financial-market inanity.
Not on your life. While it's true that these economic conservatives are cradle-to-the-grave misanthropes who decry everything from government funding of infant inoculations to Meals on Wheels for elderly shut-ins, still they are proving themselves to be a lot more sanguine about the prospect of government assistance if the assistance is directed at members of their own elite class."
Let's not forget the CLO's people. These things are put together before they are sold to the equity investors...many of whom have pulled out recently. Of course the managers don't want to invest and be the equity in their own CLO since they're trying to capture a management fee for sitting on the junk they buy. Many CLO's that failed to be sold to their planned investors will likely need to be unwound, but to whom???
O CR and Tanta, might I beg you for an interpretation of this?
I keep my "lost my job!!" money in Vanguard's MM fund, and I also switched my rollover IRA to it late last year. If the share price drops below $1.00, I just might have to wrap my head in aluminum foil and start making barely-coherent posts about the PPT and other ancient financial conspiracies of the Dark Lords.
Posted this on the early thread. General perception according to this is that ABCP disruption is temporary and due to hedge funds delevering due to margin calls. Everything should be fine once all the leverage is out of the system. Heh.
Business Bypasses Stalled ABS Market: Investors close liquidity spigot on ABS, send ABCP on rollercoaster ride Securitization.Net
Dr. Strangemoney, there was something else. It wasn't you, but another guy. I think he was a new reader. I can't remember whether it was Saturday or Sunday, but I've been looking all over for it and can't find it.
MP , ABCP and SIV were part of a piece on FT Alphaville -- just w/i the last day or so ... should still be there tonight. It's a good Article .. it really shows you why the ECB moved last week and will continue to move this week to provide liquidity. Here's my take on what's going on : the epicenter for subprime exposure in Europe is Germany. BNP Paribus is a sideshow to the real problem facing Europr right now , although I think BNP should get some credit for being brutally frank about the problem of evaluating pure crappolla securities. Most folks are aware at this point that there was a problem in Germany with IKB which resulted allegedly in a bailout( please note that the bad trades have not been settled to date ) ... the problem is deeper though.. other german regional or landesbanks also made the same bad investment decisions as IKB ( Just like hedge funds crowd the same trades.) As a result , the total exposure in Germany to structured finance products is about 92 billion , of which a good portion is residing in the SIVs of these german regional banks . What we are now learning is that commercial paper is subject to contagion or even worse the risk of contagion.... help me, help me , but when did a money market fund lose money like the AXA fund did recently... by the way , they aren't alone. SO ..... , what's next ????
Take it for what it's worth. The rumor mill is spouting out that Countrywide, Thornburg, and WAMU are also having problems rolling their commercial paper. It really looks like Thornburg will get hit the most, but both CFC and WM's latest 10Q's warned of liquidity problems.
OT--another issue about mortgage loan application data. Today's Nightly Business Report quoted a mortgage broker saying that many borrowers are actually getting loans approved from two companies.
Borrowers are now concerned that between loan approval and closing, the mortgage company might: 1. Go bankrupt, or 2. Withdraw the loan offer (i.e., change conditions or discontinue the program. Seems like a lot of expense and hassle for both lenders and borrowers, but at least it might keep the employees of the lenders busy and employed.
last I checked Chuckie Schumer and Chris Dood, those noted conservative-libertarians, were among the loudest voices for bailing out their elite constituents.
In addition, the events of default declared under the master repurchase agreements described above caused a default to occur under the indenture relating to $90 million of the Company's 8.125% Convertible Senior Notes due 2027, in respect of which those notes may be declared to be immediately due and payable. Those events of default also caused a default to occur with respect to the asset-backed commercial paper issued by Luminent Star Funding Statutory Trust I, an affiliate of the Company, in respect of which that commercial paper has been declared to be immediately due and payable. As a result, the agent for the holders of that commercial paper has demanded immediate payment of approximately $580 million, calculated as of August 9, 2007.
i noticed a couple more aquisitions of reverse mortgage companies today. ur goin' down, old people! what are u, gonna drive away on ur rascal? we will hunt u down and securitize whatever you've got...what? no, i don't want any hard candy...no i don't know your grandson billy, sign the damn papers, granny!
is it just a coincidence that HECM sounds like that old guy who's always smoking who stands outside the corner store across the street from my apartment when he's coughing up his lung on the damn sidewalk everytime i walk past?
I suspect that many recent decisions have been based on emotion rather than accounting, but when it appears that the accounting is lies you may not have much more than your gut to go on.
I believe gng is commenting on the possibililty of a loss in value of his mm, not if it is insured in the event of a brokerage BK.
Correct. Although, I, personally, wouldn't react much to it, I'd imagine that MMFs dropping below $1.00 would be a big psychological shock to a lot of people and I have no idea how relevant this article is to that possibility.
To me it looks like we have an integrity problem here. Agreed. With the rating agencies having helped Wall Street defraud most of the rest of the financial world, I'm not sure what it will take to dig out. The BSC Everquest(?) IPO where they were going to put the toxic sludge from the failed hedge funds comes to mind. I fear that this is going to end badly sooner than I thought.
Why am I getting that same feeling I had when they uncovered those Enron traders laughing about how they rigged the electricity market in CA and ripped off the old grannies? And that feeling I got in the "Smartest Men In The Room" when they talked about mark to market...
Sick, sick, sick, I tell you. This actually needs to end badly, but in a way, since it won't change human nature, it will be an empty lesson, just like all the other bubbles and the corruption that goes along with them. It will at least be interesting to see over the next few years what slimy stuff was crawling under the rocks.
I would take out Countrywide and Wamu. Countrywide is a Mortgage lender and its demise would not cost the taxpaper. Wamu has a huge portfolio of risky loans, and is better off broken up and put out of its misery. The taxpayes may or may not have to take a hit to dispose of the Wamu's loans, since the retail operation has some value, and other lenders are involved. Bernanke is in a bad mood and wants to teach the market a lesson regarding "moral hazard".
I checked my TIAA/CREF money market fund and found that it was 80% invested in commercial paper. I will move most of it tomorrow to a FDIC protected bank savings account. Rather be safe than sorry.
PS: Even Vanguard MM funds that claim to be invested in US government securities can hold 20% of other stuff, as I read the prospectus. So I bypassed those.
In its last report, my Canadian MMF had 57% of its assets in commercial paper, much of which was the asset-backed variety (ABCP). Some of the issuers were Coventree conduits.
I was unable to get any answers early this afternoon from my broker when I asked what it now holds.
I sold it and will go to T-Bills.
This is no time to reach for yield.
Structured-finance debt seems to be everywhere, and it also seems to be opaque to all but the insiders.
I can't pretend to understand the situation, but it seems to me the problem is for people needing to float new CP, or renew the old stuff, not the people lending them money, at least at this point.
This is kind of bringing back memories of doom and gloom predictions about Y2K, e.g., "every electrical transformer in the country may go down!"
If every money market fund in the country is in danger, the helicopters definitely will be flying...
Commercial paper has already become infected. First evidence came from Germany with IKB and other regional banks similarly situated ( and there are a few with similar problems.) Coventree and also Ram ( an Australian mortgage company ) have shown the contagion has spread considerably. And if you can't turn over your commercial paper , basically you have problems as a going concern... IMHO. You might have noticed Treasury Knave Paulson has dropped references to financial problems being "contained " lately ! Info regarding Ram is on Bloomberg BTW .
Oh, come on. Does anyone who actually knows what they're talking about think that most MM funds are actually at risk of losing an amount that the average "consumer" investor cares about?
From what I understand (which is very little, and why I'd really appreciate some more info!) "commercial paper" is issued by lots of Large Financial Entities, and I don't see how a single company failing to sell its paper is "head to the bomb shelter" material. Admittedly, I have a feeble understanding of anything but personal finance, but maybe this indicates distrust of the company selling the paper more then anything else?
Clyde,
Too big to fail for the "borderline" size bank - in addition to size - always involves who is on the board of directors, the owners of the bank, the location of the main office, the degree of insider fraud (there is usually some) bad publicity and probably most important: are there any buyers for the bank among more sound competitors nationwide.
Clyde,
The fastest way FDIC will shut down a bank is if a run-on-the bank develops regardless of the bank's size. It is to prevent panic from spreading. The problem FDIC has now is the very small staff of FDIC bank closing personnel who are trained to payoff depositors. Many have retired or lost there jobs due to FDIC office closings, consolidations and reductions in force. The FDIC has been downsizing for a decade. It is ill prepared for any future bank closings.
I don't see how a single company failing to sell its paper is "head to the bomb shelter" material. Admittedly, I have a feeble understanding of anything but personal finance, but maybe this indicates distrust of the company selling the paper more then anything else?
If the company is in any industry other than finance you're correct...with the caveate that others in that same industry would be looked at askance for a while.
But financial institutions are so heavily interlocked and leveraged that they literally cannot survive without ready access to CP, then the risk is one drags down a counterparty which drags down their counterparties and so on.
gng- "Oh, come on. Does anyone who actually knows what they're talking about think that most MM funds are actually at risk of losing an amount that the average "consumer" investor cares about?"
At the moment, I donn't give a god damned what the consumer investor cares about. What matters is that Coventree, and other firms like it, can find financing. If they can't, they're toast, and that means that the people who work for them, sell to them, buy from them, and invest in them will share the pain.
As lender confidence goes down the LIBOR, which is used to base price commercial paper, will rise. Adjustable rate mortgages are linked to LIBOR. Think about that.
Nova: if your MM is not over $100 grand the fastest protection would be to put it into a bank savings account that has complete FDIC protection. You might get a slightly lower interest rate, but you could sleep soundly at night until this disaster blows over........when and if it does.
Are the chances of widespread MMF losses large? I don't think so.
Is it possible that isolated MMFs might suffer losses because of SIV defaults? After reading the FT article, it seems possible to me.
Can I tell which MMFs are most vulnerable? No.
Do I lose anything by moving out of my MMF and into a plain vanila bank savings account? Yes, a little interest. Also, now my counterparty is now just the bank. At least I understand that risk. What do I care if I lose out on a point or two.
Bottom line, I don't care if this is an ultra conservative decision to make, I am absolutely not going to take any risk, however marginal, of losing that principal. I will not be the person who funds Wall St. bonuses for the past three years if I can help it.
Another thing. From reading the FT article, these SIVs really do look like Enron SPVs in a lot of ways.
The SIVs hold ABS or CDOs or some other structured product and finance those assets through Commercial Paper.
Okay. But many are sponsored by banks, who not only set up the SIV, but set up funding agreements such as lines of credit that can be used in the event the SIV fails to roll over its CP. So, in the long run, the bank is really on the hook for the structured product collateral. I'm sure its all GAAP compliant, but it certainly sounds like a bit of a scam to me.
If things continue to unravel in Germany as it appears they will , we should see either West LB or Sachsen report massive subprime losses and / or commercial paper refinancing problems soon...Sachsen's situation seems particularly suspect and quite similar to IKB. There is about 15 billion of structured finance exposure and I don't believe they are in a different position than IKB. Time will tell I guess. The best signal will be another massive round of ECB liquidity injections ( above what the ECB has done so far this week. ) Keep an eye on Germany though... their banks have 92 billion in CDO and subprime exposure , which is notable amount of toxic waste with a lot of that waste concentrated in the Landesbanks.
Right after I read this on Bloomberg, I watched a video clip there of someone saying the commercial paper market was just fine...
One thing seems clear, no one has any idea how this will play out.
I am trying to understand how all this ties together, but when you start to have news articles telling people their money market funds may not be safe, people will worry.
Hopefully the money market funds have some good salesmen errr customer service reps when average joe starts calling and asking questions or for their money.
This is an extremely important development. Watch this space.
Now i'm scared,I thought this kind of paper was as safe as houses.
Well, I finally broke down and am liquidating my legacy 401-k and putting it into a rollover IRA, where it will park in a CD.
I already moved 80% into a stable asset fund last fall, but these days, I can't tell honestly how "stable" those assets are.
With a CD, I have a guaranteed return and iron-clad principal protection. And it won't be with "Countrywide bank", either.
It's funny, but I was just wondering -- among the homebuilders most likely to fail first, which of them have a lot of commercial paper out. I wonder if anybody has done the research.
If money market mutual funds start "breaking the buck," the credit markets are really in trouble.
To me it looks like we have an integrity problem here.
No one believes anything our executive branch leaders say about the economy so we are leaving it to the Financial Markets to place a market price on what is going on with the economy.
Since the word is getting out that the Wall street guys are a bunch of crooks the public is slowly saying to them "I don't want you guys messing with my money anymore."
So far it is the big money people saying they don't want to play.
What will happen in the weeks to come when the general public realizes what's going on and they don't want to play anymore?
Looks like lower stock and bond prices to me.
Here's the "what it invests in" for my stable asset fund:
Invests in a diversified group of high-quality, fixed-income investments. These investments will include high-quality debt securities including mortgage-backed securities, commercial mortgage-backed securities, asset-backed securities and corporate credit securities. The Fund also utilizes investment contracts issued by creditworthy life insurance companies, collective investments funds and short-term money market instruments that are consistent with the investment objectives of the Fund. Yield will vary.
I'm sure it isn't going to implode, but I can get better from a CD with no agita.
This is incredibly important.
CP has short maturities, if people start not being able to refinance/reissue it, there will be bankruptcies left and right.
Hark! I hear the sound of helicopters warming up.
When I was a wee lad in school, I learned only investment grade corporations could issue commercial paper. That too, it appears, is no longer operative.
Black is down, up is white! Ignorance is strength, etc.
Another day... another frontier of containment.
.
damnit... just when I had got the hang of what they'd done to good old-fashioned mortgages, now I have to learn about Asset backed Commercial Paper ?
O well, here are a couple of links I've found:
Asset-backed commercial paper programs | Federal Reserve Bulletin | Find Articles at BNET
Introduction
Any .gov or .org or .edu links that others find/recommend would be appreciated
-K
Bob_in_MA, I find this story a little puzzling. Is it a price problem? Or will are they getting no bid? J&J just increased the size of their bond offering with no problem.
Best Wishes.
Is this any reflection on the Canadian economy? Last I heard it was doing much better than U.S. Wonder if it is inevitable that it will wobble too?
I agree . . . this story is just Loonie.
Do not worry,
"Goldman Sach's Quinine-tative 150-Proof Shaken not Stirred Fund" will be stepping in to provide liquidity soon.
OOps they got liquidated themselves.
just an alarmist thought:
If we have a systemic withdrawal from hedge funds (15aug notification date) and a massive liquidation of assets and potential banrupties of many more hedge funds,.....what happens to credit default swaps (many hedge funds are sellers of protection)???
just a thought
This is not the first - it is "among" the first. Three ABCP programs extended last week.
JNJ got their bond issue off with no problem because it's AAA and probably a better credit than the US.
As of May 31, 26% of Fidelity Cash Reserves Money Market $98.2 billion portfolio was in repurchase agreements with investment banks.
"Fidelity accepted billions of dollars worth of "mortgage-loan obligations" as collateral for the trades, although it doesn't note whether those are riskier "private label" mortgages, or the triple-A bonds guaranteed by Freddie Mac and Fannie Mae.
The money-management giant also has 1.7 percent in collateralized debt obligations, or bonds made from other bonds, a market that has seen billions of dollars of credit downgrades."
SAFE HAVEN STRIFE - NYPOST.com
Here's the shorter version of the link
SAFE HAVEN STRIFE - NYPOST.com
That particular fund is I believe the largest mutual fund around, of any type. It is the "core" fund for settling trades in Fidelity retirement accounts (e.g. IRA's). You can't use anything else apparently. What you can do is move funds to another mutual fund (e.g., Fidelity Treasury Money Market FDLXX) and then transfer funds back to the Cash Reserves fund if you need to cover stock/fund purchases.
Now obviously this fund probably will maintain a $1 NAV even if Fidelity had to cough up the difference, but 26% in repurchase agreements backed by unspecified mortgage obligations? That seems like a lot of reaching for yield. And it still yields only about 40 basis points above the Fidelity treasury MM fund.
Hmmm. Yields rose on the 1 & 3 mo treasuries that had collapsed last Thursday & Friday. I was thinking this marked a calming of the panic:
One Month:
Wed: 5.04
Thurs: 4.70
Fri: 4.38
Mon: 4.61
Three Month:
Wed: 4.95
Thurs: 4.81
Fri: 4.57
Mon: 4.74
I guess after this I need to watch them for a while longer....
CR, I think it is the nature of this particular company, although DBRS says others are having problems as well. This is from Coventree's website:
Coventree is a niche investment bank specializing in structured finance using securitization-based funding technology. We provide structuring and funding solutions for our issuing clients in both the commercial paper and term debt markets. In the process, we create innovative investment products for our investing partners.
Nobody wants anything to do with innovative securitizations at the moment. Under the circumstances, it is not that surprising. From what I have seen, the problems in commercial debt are worse than the mortgage problems. It seemed like no one was paying attention to fundamentals.
The spread between good and bad paper shot up
Well, understanding the basic concepts ABCP wasn't that difficult. I also went to Coventre.ca's website and looked up one of the E-notes they are extending,the Aurora one:
Coventree.ca
I see no signs of tranching ( like in MBS) to create silk out of a sow's ear, nor the bundling of mid-tranches and waterfalling the interest to create even more silk out of pig-shit(CDO) - didn't they get that far in this financial product?
You'd think they are bound to have done this.
This is old technology it seems - at least 5 years old. something else apart from the innovative nature of the product is going on.
-K
CR,
Sometimes I get the idea people writing stories there know even less than we do. They never seem too inquisitive. The video clip was "Tony Crescenzi of Miller Tabak Sees `Calm' in Money Markets."
In Randall Forsyth's column in this week's Barron's, he talks about this:
Nevertheless, the lack of transparency for the new esoteric instruments, such as collateralized debt obligations and collateralized loan obligations, has exacerbated the current nervousness because nobody knows what they're worth, he also notes.
In that, it appears some of the problem lies with asset-backed commercial paper "conduits" and so-called structured investment vehicles. These ABCP conduits and SIVs are used to fund the purchase of assets such as trade receivables, auto loans, credit cards, whole mortgage loans, as well as securities such as corporate debt, residential mortgage-backed securities and CDOs, according to a Bear Stearns report.
The ABCP conduits and the SIVs then are able to issue high-grade commercial paper to finance these assets, which are less the prime quality. ABCP now comprises over half the $2 trillion-plus commercial paper market, up from 20% in 1998, according to MacroMavens' Stephanie Pomboy. And, money market funds own 27% of all CP outstanding, she also notes.
According to the Bear report, some $38 billion-$43 billion RMBS and CDOs could be liquidated from ABCP conduits. Got that? In other words, a load of these assets is backing ABCP and may have to be sold into a less than receptive market.
It sounds like these things are a real stone soup and nobody really knows what's in any one of them, or at least it's time consuming to figure it out. And on top of it, they aren't sure if they know all that they should be looking for.
I have these preferred shares in MetLife, ABN Ambro and Royal Bank of Scotland and I'm even a little paranoid about those...
Off topic, but I need some advice. When closing on my loan about 2 years ago, they told me what my taxes and insurance would be and I have been paying it for the full two years. I recieved a letter last month saying that I was not paying the full amount for my PMI and I owed money, in addition, I would now have to pay the full amount. When I called they said the amont I have been paying was only an estimate and not guaranteed to be the correct amount. Is there anything I can do?
thanks.
I am trying to understand the scale of the mortgage market and the potential impact of the problems that seem to be developing. I would like to confirm a couple of points and ask a couple of questions.
On a base of 10 trillion, or whatever the correct number is, what would the normal expected severity of loss be for any year?
Given the seeming surge in foreclosures that looms on the horizon, what would be a reasonable rate of loss to anticipate?
Are the banks sufficiently reserved to take this hit?
Thanks,
Peconic
Peconic, try the Rosner and Mason paper at Hudson.org.
That will have a lot of the answers you are seeking.
Alarmist,
I read something about that in today's WSJ:
One worry: Banks have had problems in the past processing the trades they do in these contracts. Two years ago, the Federal Reserve Bank of New York demanded they clean up their act and clear a backlog of unconfirmed and unsettled trades. They made progress, but so many investors want to own the insurance now, new problems could crop up. Demand is so great for credit insurance that many banks are finding it is hard to keep up with it.
Another worry: Hedge funds account for 60% of all CDS trading, according to Greenwich Associates. Ironically, many of them are using borrowed money to make trades on credit turmoil. Plenty of hedge funds have earned great returns by betting on soaring CDS prices, but it's hard to know who's getting hurt on the other side of these bets. If it's other hedge funds, it could ripple through the CDS markets and amplify broader credit-market volatility.
It's also possible that winning bets in CDS could quickly become losers. While credit default swaps of broker dealers have surged, their corporate bonds haven't suffered nearly the same damage. That could be a sign that the big investors who hold those bonds -- often pension funds and mutual funds -- aren't as concerned about a financial meltdown as their jumpy hedge-fund counterparts.
That topic came up here before and I think sometimes there are swaps for ten times the underlying value of the bonds, that was a problem when Delphi defaulted.
ChrisM, your PMI (Private Mortgage Insurance) is not an "estimate" and it cannot go up.
Your property taxes and your homeowner's insurance can certainly go up. Your lender estimated what it would require for you to pay the next bill when due out of your escrow account, but if the tax bill or the insurance premium went up from last year, you'll have to start paying more each month to cover that.
Your servicer is required to send you an annual escrow account statement under RESPA. That should show you what is going on.
HUD's consumer FAQ on escrows:
Unable to locate requested information
OT, but a nice read:
Central banks' easy virtue, easy money
By Julian Delasantellis
Asia Times Online :: Asian news and current affairs
"...you might have expected the conservative-libertarian economic community to have decried the Federal Reserve money-market interventions. After all, if a few or more primary dealers had imprudent connections, even if they were once, twice or more removed, with the subprime market, their insolvency and bankruptcy could only have a proper disciplining effect on the market. The example of their misery and penury will act to ensure that future market participants eschew the next upcoming financial-market inanity.
Not on your life. While it's true that these economic conservatives are cradle-to-the-grave misanthropes who decry everything from government funding of infant inoculations to Meals on Wheels for elderly shut-ins, still they are proving themselves to be a lot more sanguine about the prospect of government assistance if the assistance is directed at members of their own elite class."
Someone brought up the subject of asset backed commercial paper in one of the threads this weekend. I don't think this the same article.
I've skimmed through the comments section looking for the question and link, but just can't find it.
Does anyone else remembering reading it?
Let's not forget the CLO's people. These things are put together before they are sold to the equity investors...many of whom have pulled out recently. Of course the managers don't want to invest and be the equity in their own CLO since they're trying to capture a management fee for sitting on the junk they buy. Many CLO's that failed to be sold to their planned investors will likely need to be unwound, but to whom???
O CR and Tanta, might I beg you for an interpretation of this?
I keep my "lost my job!!" money in Vanguard's MM fund, and I also switched my rollover IRA to it late last year. If the share price drops below $1.00, I just might have to wrap my head in aluminum foil and start making barely-coherent posts about the PPT and other ancient financial conspiracies of the Dark Lords.
Will that be my fate? Is this a big deal?
Posted this on the early thread. General perception according to this is that ABCP disruption is temporary and due to hedge funds delevering due to margin calls. Everything should be fine once all the leverage is out of the system. Heh.
Business Bypasses Stalled ABS Market: Investors close liquidity spigot on ABS, send ABCP on rollercoaster ride
Securitization.Net
Tanta
Thanks for your help, as always, you seem to know everything.
mp,
Thanks, Will do.
Peconic
Dr. Strangemoney, there was something else. It wasn't you, but another guy. I think he was a new reader. I can't remember whether it was Saturday or Sunday, but I've been looking all over for it and can't find it.
Most money market funds have SPIC insurance. It's private insurance that covers brokerage accounts.
There isn't any rock big enough to hide under if the SPIC were to go broke.
Sorry, that's SIPC, not SPIC.
SIPC - Securities Investor Protection Corporation
MP , ABCP and SIV were part of a piece on FT Alphaville -- just w/i the last day or so ... should still be there tonight. It's a good Article .. it really shows you why the ECB moved last week and will continue to move this week to provide liquidity. Here's my take on what's going on : the epicenter for subprime exposure in Europe is Germany. BNP Paribus is a sideshow to the real problem facing Europr right now , although I think BNP should get some credit for being brutally frank about the problem of evaluating pure crappolla securities. Most folks are aware at this point that there was a problem in Germany with IKB which resulted allegedly in a bailout( please note that the bad trades have not been settled to date ) ... the problem is deeper though.. other german regional or landesbanks also made the same bad investment decisions as IKB ( Just like hedge funds crowd the same trades.) As a result , the total exposure in Germany to structured finance products is about 92 billion , of which a good portion is residing in the SIVs of these german regional banks . What we are now learning is that commercial paper is subject to contagion or even worse the risk of contagion.... help me, help me , but when did a money market fund lose money like the AXA fund did recently... by the way , they aren't alone. SO ..... , what's next ????
Take it for what it's worth. The rumor mill is spouting out that Countrywide, Thornburg, and WAMU are also having problems rolling their commercial paper. It really looks like Thornburg will get hit the most, but both CFC and WM's latest 10Q's warned of liquidity problems.
LUM is in default on its ABCP...
OT--another issue about mortgage loan application data. Today's Nightly Business Report quoted a mortgage broker saying that many borrowers are actually getting loans approved from two companies.
Borrowers are now concerned that between loan approval and closing, the mortgage company might: 1. Go bankrupt, or 2. Withdraw the loan offer (i.e., change conditions or discontinue the program. Seems like a lot of expense and hassle for both lenders and borrowers, but at least it might keep the employees of the lenders busy and employed.
Hey alo,
last I checked Chuckie Schumer and Chris Dood, those noted conservative-libertarians, were among the loudest voices for bailing out their elite constituents.
Here's the link to the story in FT Alphaville on ABCP/SIV's. If you're easily frightened, better not click it.
FT.com / Markets - Structured investment vehicles’ role in crisis
Over-Under on "too big to fail":
Citi
JPMorgan
BofA
Wells
WAMU
Countrywide
Bear
Goldman
Merrill
MorganStanley
Everyone else is on their own. Additions/Subtractions?
Thanks, gab, tranches, and the rest of you. It looks like the next barrage is coming by way of the commercial paper market this week.
so sayeth LUM:
In addition, the events of default declared under the master repurchase agreements described above caused a default to occur under the indenture relating to $90 million of the Company's 8.125% Convertible Senior Notes due 2027, in respect of which those notes may be declared to be immediately due and payable. Those events of default also caused a default to occur with respect to the asset-backed commercial paper issued by Luminent Star Funding Statutory Trust I, an affiliate of the Company, in respect of which that commercial paper has been declared to be immediately due and payable. As a result, the agent for the holders of that commercial paper has demanded immediate payment of approximately $580 million, calculated as of August 9, 2007.
kicker-
I believe gng is commenting on the possibililty of a loss in value of his mm, not if it is insured in the event of a brokerage BK.
If you're worried about your MMF:
TreasuryDirect
Something at FT about ABCP, sorry if someone already posted it....
Structured investment vehiclesÂ’ role in crisis
I knew that the German banks were deep into subprime securitizations, but I didn't realize they were THAT deep.
Who knows where and how, if possible, to check commercial paper rates on the net?
i noticed a couple more aquisitions of reverse mortgage companies today. ur goin' down, old people! what are u, gonna drive away on ur rascal? we will hunt u down and securitize whatever you've got...what? no, i don't want any hard candy...no i don't know your grandson billy, sign the damn papers, granny!
is it just a coincidence that HECM sounds like that old guy who's always smoking who stands outside the corner store across the street from my apartment when he's coughing up his lung on the damn sidewalk everytime i walk past?
I suspect that many recent decisions have been based on emotion rather than accounting, but when it appears that the accounting is lies you may not have much more than your gut to go on.
Clyde: Too big to Fail?
LEH ??
I believe gng is commenting on the possibililty of a loss in value of his mm, not if it is insured in the event of a brokerage BK.
Correct. Although, I, personally, wouldn't react much to it, I'd imagine that MMFs dropping below $1.00 would be a big psychological shock to a lot of people and I have no idea how relevant this article is to that possibility.
noticed a couple more aquisitions of reverse mortgage companies today
I've got a deal with my Mom sitting on her 1980 California property . . . she doesn't get a RM and I let her use my CC at Whole Foods etc.
Mbartv,
I would concur on Lehman, but I will also have to add Freddie & Fannie. Evidently the MSM has anointed them "saviors".
That's 13 firms.
CR, I think the expected recession is going to be deeper and longer lasting than anyone thinks.
Hot off the press, an additional item for everyone's reading enjoyment:
Premium content | Economist.com
Now I know why the ECB dumped $130 billion into their system on Friday. They genuinely needed it.
To me it looks like we have an integrity problem here. Agreed. With the rating agencies having helped Wall Street defraud most of the rest of the financial world, I'm not sure what it will take to dig out. The BSC Everquest(?) IPO where they were going to put the toxic sludge from the failed hedge funds comes to mind. I fear that this is going to end badly sooner than I thought.
The FT had a great article on this and Structured investment vehicles (first I'd heard of those sound like special purpose vehicles of Enron fame but now in banking!)
FT.com / Markets - Structured investment vehicles’ role in crisis
sorry see others got it up thread
Why am I getting that same feeling I had when they uncovered those Enron traders laughing about how they rigged the electricity market in CA and ripped off the old grannies? And that feeling I got in the "Smartest Men In The Room" when they talked about mark to market...
Sick, sick, sick, I tell you. This actually needs to end badly, but in a way, since it won't change human nature, it will be an empty lesson, just like all the other bubbles and the corruption that goes along with them. It will at least be interesting to see over the next few years what slimy stuff was crawling under the rocks.
In my 401k my mm seems to be nearly 50% in commercial paper.
I don't have a cash option.
What then, a bond fund? From what's written there it too has government and mortgage backed holdings.
Bond fund holdings:
Asset-Backed\t1.3%
Commercial Mortgage-Backed\t5.3%
Finance\t7.8%
Foreign\t2.5%
Government Mortgage-Backed\t37.1%
Industrial\t8.6%
Other\t0.9%
Treasury/Agency\t34.8%
Utilities\t1.7%
Total\t100.0%
For a laugh, I just had to correct a typo before sending. I had, "What then, a bong fund?"
I might be more safe in such a fund.
Thanks for the advice.
Clyde,
I would take out Countrywide and Wamu. Countrywide is a Mortgage lender and its demise would not cost the taxpaper. Wamu has a huge portfolio of risky loans, and is better off broken up and put out of its misery. The taxpayes may or may not have to take a hit to dispose of the Wamu's loans, since the retail operation has some value, and other lenders are involved. Bernanke is in a bad mood and wants to teach the market a lesson regarding "moral hazard".
Billy Hill writes:
"If you're worried about your MMF:
"http://treasurydirect.gov"
I've been wondering what might be a catalyst hook on which could hang a USD rebound from oversold.
This might help.
And in anticipation of a BenB helicopter riposte, it's possible that big "D" on crates being loaded might stand for Debt, not Dollar.
An interview with Marc Faber is headlined on Bloomberg.
"Colossal recession" in US in 3 to 6 months, he says.
His recommendation: cash, treasury bills. Don't try to make money, try not to lose it.
I checked my TIAA/CREF money market fund and found that it was 80% invested in commercial paper. I will move most of it tomorrow to a FDIC protected bank savings account. Rather be safe than sorry.
PS: Even Vanguard MM funds that claim to be invested in US government securities can hold 20% of other stuff, as I read the prospectus. So I bypassed those.
In its last report, my Canadian MMF had 57% of its assets in commercial paper, much of which was the asset-backed variety (ABCP). Some of the issuers were Coventree conduits.
I was unable to get any answers early this afternoon from my broker when I asked what it now holds.
I sold it and will go to T-Bills.
This is no time to reach for yield.
Structured-finance debt seems to be everywhere, and it also seems to be opaque to all but the insiders.
I can't pretend to understand the situation, but it seems to me the problem is for people needing to float new CP, or renew the old stuff, not the people lending them money, at least at this point.
This is kind of bringing back memories of doom and gloom predictions about Y2K, e.g., "every electrical transformer in the country may go down!"
If every money market fund in the country is in danger, the helicopters definitely will be flying...
Hark! I hear the sound of helicopters warming up.
Kevin L | 08.13.07 - 6:08 pm |
Kevin, after the things I've read this evening, the roar is becoming deafening.
RThomas,
But, but, but....taking out the largest mortgage lender would slow down the recovery process, no?
You agree on Morgan Stanley though? I am told they have the smallest capital cushion of the bulge bracket dealers.
Commercial paper has already become infected. First evidence came from Germany with IKB and other regional banks similarly situated ( and there are a few with similar problems.) Coventree and also Ram ( an Australian mortgage company ) have shown the contagion has spread considerably. And if you can't turn over your commercial paper , basically you have problems as a going concern... IMHO. You might have noticed Treasury Knave Paulson has dropped references to financial problems being "contained " lately ! Info regarding Ram is on Bloomberg BTW .
Oh, come on. Does anyone who actually knows what they're talking about think that most MM funds are actually at risk of losing an amount that the average "consumer" investor cares about?
From what I understand (which is very little, and why I'd really appreciate some more info!) "commercial paper" is issued by lots of Large Financial Entities, and I don't see how a single company failing to sell its paper is "head to the bomb shelter" material. Admittedly, I have a feeble understanding of anything but personal finance, but maybe this indicates distrust of the company selling the paper more then anything else?
(I genuinely don't know!)
When I look at that comment right after fredw's, it seems a bit harsh. Fredw, my last comment wasn't aimed at you.
Clyde,
Too big to fail for the "borderline" size bank - in addition to size - always involves who is on the board of directors, the owners of the bank, the location of the main office, the degree of insider fraud (there is usually some) bad publicity and probably most important: are there any buyers for the bank among more sound competitors nationwide.
Clyde,
The fastest way FDIC will shut down a bank is if a run-on-the bank develops regardless of the bank's size. It is to prevent panic from spreading. The problem FDIC has now is the very small staff of FDIC bank closing personnel who are trained to payoff depositors. Many have retired or lost there jobs due to FDIC office closings, consolidations and reductions in force. The FDIC has been downsizing for a decade. It is ill prepared for any future bank closings.
gng,
I don't see how a single company failing to sell its paper is "head to the bomb shelter" material. Admittedly, I have a feeble understanding of anything but personal finance, but maybe this indicates distrust of the company selling the paper more then anything else?
If the company is in any industry other than finance you're correct...with the caveate that others in that same industry would be looked at askance for a while.
But financial institutions are so heavily interlocked and leveraged that they literally cannot survive without ready access to CP, then the risk is one drags down a counterparty which drags down their counterparties and so on.
gng- "Oh, come on. Does anyone who actually knows what they're talking about think that most MM funds are actually at risk of losing an amount that the average "consumer" investor cares about?"
At the moment, I donn't give a god damned what the consumer investor cares about. What matters is that Coventree, and other firms like it, can find financing. If they can't, they're toast, and that means that the people who work for them, sell to them, buy from them, and invest in them will share the pain.
As lender confidence goes down the LIBOR, which is used to base price commercial paper, will rise. Adjustable rate mortgages are linked to LIBOR. Think about that.
FK FDIC,
What about examiners from the OTS, FDIC or Fed.?
FKFDIC
Make that OTS, OCC or Fed.
Nova: if your MM is not over $100 grand the fastest protection would be to put it into a bank savings account that has complete FDIC protection. You might get a slightly lower interest rate, but you could sleep soundly at night until this disaster blows over........when and if it does.
Are the chances of widespread MMF losses large? I don't think so.
Is it possible that isolated MMFs might suffer losses because of SIV defaults? After reading the FT article, it seems possible to me.
Can I tell which MMFs are most vulnerable? No.
Do I lose anything by moving out of my MMF and into a plain vanila bank savings account? Yes, a little interest. Also, now my counterparty is now just the bank. At least I understand that risk. What do I care if I lose out on a point or two.
Bottom line, I don't care if this is an ultra conservative decision to make, I am absolutely not going to take any risk, however marginal, of losing that principal. I will not be the person who funds Wall St. bonuses for the past three years if I can help it.
Another thing. From reading the FT article, these SIVs really do look like Enron SPVs in a lot of ways.
The SIVs hold ABS or CDOs or some other structured product and finance those assets through Commercial Paper.
Okay. But many are sponsored by banks, who not only set up the SIV, but set up funding agreements such as lines of credit that can be used in the event the SIV fails to roll over its CP. So, in the long run, the bank is really on the hook for the structured product collateral. I'm sure its all GAAP compliant, but it certainly sounds like a bit of a scam to me.
If things continue to unravel in Germany as it appears they will , we should see either West LB or Sachsen report massive subprime losses and / or commercial paper refinancing problems soon...Sachsen's situation seems particularly suspect and quite similar to IKB. There is about 15 billion of structured finance exposure and I don't believe they are in a different position than IKB. Time will tell I guess. The best signal will be another massive round of ECB liquidity injections ( above what the ECB has done so far this week. ) Keep an eye on Germany though... their banks have 92 billion in CDO and subprime exposure , which is notable amount of toxic waste with a lot of that waste concentrated in the Landesbanks.