"Fed, Treasury, FDIC Stymied By Lack of Data on Subprime Loans
By Craig Torres and Alison Vekshin
Nov. 29 (Bloomberg) -- Federal regulators, who met with bankers today at the Treasury Department in Washington, still lack reliable estimates on the extent of the subprime mortgage crisis.
Three months after they asked banks to modify loans for borrowers at risk of default, agencies have little data on what lenders and loan servicers have done, officials say. The authorities, including the Federal Reserve and the Federal Deposit Insurance Corp., want to stem a wave of defaults that are jeopardizing the six-year economic expansion.
..."
Andrew, thanks - I added that link. No bid? Call Citadel, I understand they pay 27 cents on the dollar! (apples to orange I know).
DAGMAN, that was the question when Orange County, CA was burned in the mid '90s. I believe Merrill Lynch ended up having to pay for selling inappropriate investments to OC.
Obviously the Lehman salesman does not remember what happened to the Merrill Lynch Orange County crew.....how could you not watch out for your biggest client ? Wow.
If the fund can't pay back all the money, is the FL taxpayer on the hook? Did the State require the local governments to put their money in the fund instead? That would seem to imply some type of guarentee the money would be there when the local governments needed the funds.
How many more States have similar arrangements? This could get real ugly for the other states because of fear of failure causing the failure of this type of fund.
"``There is no liquidity out there, there are no bids'' for those securities, he said.
"If a firm were to have a concentrated position in a risk that suddenly became illiquid, that would clearly be bad. However, much worse would be a concentrated position with negative convexity that suddenly became illiquid. That trifecta is a risk manager's nightmare, as there is little to do once the markets start moving adversely and liquidity goes away, other than to hope. And as one head trader wisely said recently, "Hope is a crappy hedge."
By far 2 of the best quotes seen anywhere today....
The fund may also adopt more conservative investment guidelines and focus on more easily tradable securities.
The fund hasn't bought any asset-backed commercial paper this month and expects its exposure to this troubled part of the short-term borrowing market to be under 15% by the end of this year, the board said in its statement on Wednesday.
You can start to understand the monster treasury we've had of late reading stuff like this.
Remember, you don't really have to worry about the US government defaulting on its debt since they can always just print dollars to pay it off.
Glad that something I posted was finally timely and useful CR.
BTW - in case anyone wants to see it there's a video interview on the sidebar of the special report area with an Orange County, FL. official on why they pulled out of the fund and into treasuries.
It's a bit of an amazing statement to me of how much fear and paranoia has spread. Admittedly this is over subprime/abcp money market funds, but when was the last time you had the spectre of possible default and counter-party risk arising between state and local government?
Asset-Backed Securities
Asset-backed securities entitle the purchaser to receive a share of the cash flows from a pool of assets such as principal and interest repayments from a pool of mortgages (such as CMOs), small business loans, or credit card receivables.
U.S. $1,841.137 million As of: 09/30/07
August -$205.4
September - $52.7
October - $38.4
November - $59.2
(November through 28 November 2007)
So November's decline in ABCP is second only to the August decline. Also, it appears that the maturity distribution is shortening again though I didn't dig into the recent numbers, anyone want to tackle that?
I seem to recall that someone posted a bloomberg(?) article (I'll have to see if I can find the link)a month or two ago on the continued selling of ABCP/CDOs/etc. to state and local government financial administrators as low risk AAA investments even as serious doubts were being raised on these instruments. I guess the other shoe has finally dropped. I wonder how many of these state/local financial officers are going to be answering awkward questions and/or losing their jobs in the near future.
It's a bit of an amazing statement to me of how much fear and paranoia has spread. Admittedly this is over subprime/abcp money market funds, but when was the last time you had the spectre of possible default and counter-party risk arising between state and local government?
If we had a gold-backed currency I would be legitimately concerned about a possible depression due to the growing magnitude of this credit crunching.
With a gold-backed currency the Fed would only have a limited ability to add liquidity to markets or ultimately prop up the value of imperiled assets to some arbitrary amount (since you can't print or fractionally reservify new gold).
It's hard to know whether such a thing is a blessing or a curse.
At least the US economy survived the Great Depression. Who knows, with a fiat currency the government might have printed money in response and in the end destroyed the economy outright with a hyperinflationary breakdown.
thanks - was just looking at the period totals and coming to a similar conclustion - total contraction in ABCP from the end of July is -$362.3 billion in the space of sixteen weeks or a 30.5% decline.
Just a silly question... did the 137 billion pension fund for the State of Florida invest in SIVs , CDOs and CDO squared products , CMBS , RMBS , ABCP and CLOs ? I ask that question because the same folks that run the Pension Fund also ran the Investment Pool in question.... why wouldn't they invest on behalf of the Pension Fund in these same vehicles that jammed up the State Investment Pool.... weren't they also chasing yield ???? And if so , what's the exposure of the 137 billion dollar Pension Fund to these very dicey asset classes ? Just wondering ?
This is one of those news items where the reaction swiftly transitions from idle rubbernecking to real worry. I have family members whose retirement plans are invested in state-sponsored funds; this is a serious, serious issue.
For what it's worth, the biggest risk I see going forward is counterparty risk. The one question that has not been asked on countless obligations is whether or not the other party will be able to pay.
That is the elephant in the room - with interlocking obligations so there is the potential for one default to trigger a cascade of defaults - I believe that is what is called the 'global interlocking credit derivative meltdown' scenario.
On BloombergTV, the CFO from Jefferson cnty Fla cant get money from the closed investment pool for teacher payrolls due tomorrow. Hes obviously scared. It feels like things are spinning out of control doesnt it?
I had dinner last night with a guy who runs a very small ($600 million) hedge fund and we were talking about the "no bids" situations. He was amazed at the folks he had previously thought as sophisticated not understanding that no bid means NO BID. That it ain't about price. His take? It gets worse for the next 6-8 months in the mortgage market and folks who are presently liquid will ultimately make a killing on the super senior stuff. Good conversation. On another topic, he thinks China is trying to do too much too fast and is going to have some real issues. Good conversation.
Peripheral Visionary, that is highly likely to be the case. The same assets that were sold to the money market investment pool were sold to the state and local pension funds (if not worse, the pension funds were probably not restricted to the money market equivalents that the short-term investment pool probably was). It is also entirely likely that private pensions and endowments were sold the same things and are also going to take a hit.
They were both wined and dined by the same Wall Street investment bankers. A (bloomberg?) article that talked about one of those investment conferences where these were sold to the state and local government/pension folk even as it was obvious that things were circling the drain (that I recall was posted here in the comments a month or two ago) is what I'm currently trying to find.
i also had a conversation with a hedge fund manager 6 mo ago who said he thought the dollar was gonna turn around and take off upwards. wrong.
i also routinely speak with a former hedge fund manager who made a killing in 98/99 from the tech boom and retired thereafter at age 31. he thinkis we're heading into a recession. i also routinely speak to a former investment banker for MS, who made a killing and is retired, and he too thinks the dollar is toast and that we're heading into recession.
No bid as in folks don't answer the phone if they think you are calling regarding that (whatever it may be) topic. The folks who think the markets for junk bonds, let alone the really esoteric stuff are efficient are simply incorrect. When "sentiment" turns bad on something, all John Q. Hedge Funds' investors' often want to hear is "we're not involved." They don't want to know about the potential for profit by buying at a steep discount.
Um........perhaps you are supposing that I was doing something more that simply recounting a conversation some might find interesting? If so you're incorrect. As for the MS guy, that's my story too and I offer him a nod and a well done.
seriously, hedge fund managers i've come to know don't have any greater insight to the mkts than we have here. in fact sometimes less b/c they HAVE to believe in bull mkts and financial alchemy. its the reason for their existence and the perpetuation of that existence. so many of them are on the wrong side of the trade now that they are throwing the Hail Mary right now just as we're entering recession.
Open your eyes people, the ten year treasury has outperformed the s&p 500 for nine years running - very soon to be ten years. Houston, we have a problem. When wall street was selling large cap, tech and ipo's they were a bad investment be it the late 1920's, late 1960's or the late 1990's. Same with so many other wall street sales products. The public at large are suckers, especially large state pension plans. Wall street has even figured out a way to sucker people on the safest of all investments - a house. Smell the coffee people.
It's a bit of an amazing statement to me of how much fear and paranoia has spread
It's been there all along, buried, hidden. It pervades the culture, quietly, but it's detectable in many areas. I first noticed it almost two years, in the job market, and lately in the romance department.
There is a level of distrust and dishonesty through the culture.
It was regarding equity tranches in CDOs. But the other point was that pension fund managers are suckers on Wall Street.
Teachers, firefighters, and police officers: you are not just the sucker at the table here. You are the sucker at the table of the suckers in the big casino of suckers. Your "managers" of your pension money just took the "opportunity" to assume the risk that Wall Street does not want to keep because it doesn't think a "20% return" is worth it.
If I dared make a currency prediction at some point and I happened to be correct? That is a quintessential blind squirrel story.
On another topic, each day MLEC continues to be pursued, when it seems to me it is already obsolete, your "single point of failure" argument gains plausibility.
Sorry about that. All that was was supposed to be me walking into a familiar bar, looking at the financial screens and news and acknowledging to the guys I sat next to things were tough. It was unrelated to the dinner story. Or supposed to be anyway.
The folks who think the markets for junk bonds, let alone the really esoteric stuff are efficient are simply incorrect.
Heck, I used to work on IT systems for one of the stock exchanges. I don't have any illusions about the efficiency of equities markets, much less a market that still relies on calling up three or four people to get a price.
I guess the market sentiment as turned against the market's sediment.
been wondering where you've been. the boys have been pretty hard on you during the decline and i was worried you'd gotten tired of us. you're truly a great contributor here.
You have any color commentary on the CP markets? Just curious, seems like it will have to pinch profits and generally reduce the velocity of money what with a 15% contraction in total CP in sixteen weeks (that's 30.5% of the ABCP gone away). Also, I had the impression that the maturity distribution was shortening again though I just glanced at that and there may be some funky end of year stuff going on...
Zoe Cruz out at Morgan Stanley. When you need to lighten the load you ditch the women first. LOL
NEW YORK - Morgan Stanley said Thursday that co-President Zoe Cruz, one of the most powerful women on Wall Street, will leave in the latest investment bank management shakeup since the summer's credit turmoil.
Robert Scully, who was named co-President along with Cruz last year, will remain at the firm in a new capacity. He will join a newly created Office of the Chairman, and will focus on Morgan Stanley's sovereign investors.
Cruz had been with Morgan Stanley for the past 25 years, and rose to her current title after former chief executive Philip Purcell promoted her in a move to consolidate power. There had been expectations that John Mack, the current CEO, would at some point place someone else in the job.
Florida? No one could have predicted this. These are the folks whose third-world government incompetence gave us GWB.
Couldn't happen to a sweller bunch as far as I'm concerned.
Ooops, did I say that?
What I meant was, I'll take over for the optimists' club today.
What are you people complaining about? Inflation is low and oil is down. Treasuries are stabilizing. The market is up. Employment is great. New home sales are great. Cats and dogs are sleeping together (wait a minute, is that a bull thing or a bear thing?). The Arabs and the Isrealis are on the verge of a peace deal.
I'm willing to bet you the Florida situations and other commercial paper/SIV state fund fiascos won't be the BIG story in muni losses.
I'll bet there are govts. out there that hold a lot of CDOs, as yet unreported, in their long-term (pension) funds. For big govts., pension fund losses might not be death. But for small govts. caught in a bubble market or downturn, it could be. The way today's muni bond market is, even a modest size govt. that gets trapped in a big CDO loss could set off fireworks. Just watch!
Yes, Banker, please keep posting despite the occasional flak. I learn something from almost every post you make. Is anyone calling you about participating in a rescue team for one or more of the distressed IB's? Maybe they should be.
Just been away from the internet travelling for the holidays etc. So I haven't even read anyhting here for about a week. I'm gettin hammered huh? Oh well. 4.9% third quarter was pretty good and clealry we are slowing, but the story will end up being no recession in 2007.
I will say that I said pretty early on in August that the important impact of the credit mess would be duration rather than depth. It is getting pretty long now. Consumers will get increasingly spooked, corporate boards will begin to pull in their horns etc. The outlook for 2008 is pretty wide open in my view. I bet against recessions only because 7-8 years it makes me right
Energyecon,
I really haven't been paying much attention for the past week in general, sorry.
[i]Federal regulators, who met with bankers today at the Treasury Department in Washington, still lack reliable estimates on the extent of the subprime mortgage crisis.
[/i]
So, all that talk earlier in the summer about subprime being 'contained' and the problems 'bottomed' were known lies.
Thanks but the available folks today, Spector, Maheras, Barker...ok, maybe not Barker, as well as truly special folks like Michael Klein at Citi, Bob Scully at Morgan are several cuts above me in terms of talent, creativity and overall excellence.
Man's gotta know his limitations
-Dirty Harry Callaha
"Federal regulators, who met with bankers today at the Treasury Department in Washington, still lack reliable estimates on the extent of the subprime mortgage crisis."
Solution: give each man, woman and child $1,000,000 in cash and be done with the lending industry.
the CFO from Jefferson cnty Fla cant get money from the closed investment pool for teacher payrolls due tomorrow
Jefferson is a fairly small county (relatively speaking). Monticello (county seat) has 2 grocery stores (neither very large). I bet both of them would accept post dated checks if any of the school system employees were in a jam. That doesn't solve the problems with mortgage, car loan, or other misc payments. I bet the banks over there are holding their collective breath tonight.
This kind of thing could ricochet in unexpected directions.
So many posts today . . . poor JJ couldn't keep up. My crack tech squad is working on the JasBot, which will pop in on each and every thread multiple times to accuse CR of being too bullish.
Trouble so far is, we haven't been able to make it grating enough.
Specifically, the no bid part of the conversation related to the super senior tranches of one particular CDO being marked in the low 90's and wondering did folks really believe that 65-70% of the underlying mortgages/loans were going to default with mimimal recovery? That's what the mark implies in that particular case.
Crispy, I think cashflow issues, such as the county CFO from FL wondering if he is going to be able to make the teacher payroll, are going to be the least of the state and local government worries. Cashflow, like illiquidity, may be painful but can be worked out over time. Insolvency hurts a lot more and isn't as easily fixed. Remember, state and local government don't have to conform to GAAP, a fact that politician's have used for years to juggle the books. This is made a little more palatable in that they usually always have had the ability to raise taxes to get themselves out of trouble (and if bungled big enough, typically resulting in the removal of said imprudent politician(s) by the taxee's in the next election).
This is going to be interesting seeing play out. Interesting in the bad sense. For example, as I recall, many state and local (and private) pension plans are already technically insolvent in that they can't actuarily cover all expected future benefits. Having to cover losses on supposedly safe instruments is not going to make that task easier and could probably really start making the masses panicky if the word gets out.
I bid four mils per thousand for anything that was originally A or better!!!
Call me, I just got an advance from my Citibank Credit Card- 3.9 till I pay it off!!!
Just a silly question... did the 137 billion pension fund for the State of Florida invest in....And if so , what's the exposure of the 137 billion dollar Pension Fund to these very dicey asset classes ?
fredw,
Don't worry.. they have the pension funds in other assets.. that they think are riskier than the ones in the MMF.
yawhawhaw.
Hopefully, they are as bad at picking risky assets as they are at picking safe assets.
Specifically, the no bid part of the conversation related to the super senior tranches of one particular CDO being marked in the low 90's and wondering did folks really believe that 65-70% of the underlying mortgages/loans were going to default with mimimal recovery?
Sigh, the retail investors can never get a seat at the good carcasses. I'd take that particular bet and would be happy to hold it till maturity.
I'm guessing that there are a lot of professional money managers who feel the same what, what's holding them back? Worried about inflation? Or are all of them leveraged so high that there isn't any dry powder?
how can the most senior tranches be selling at rates like that?? makes zero sense. how many defaults would it take to eat all the way up into that slice?
of course the ABX gets used in ways that don't always necessarily reflect fundamentals dont they i.e. index trades for hedging purposes?
you're holding the actual paper so short the index for protection?
Several small townships in northern Norway went along with a securities firm's advice and invested as much as NOK 4 billion in complicated American commercial paper sold by Citibank. They now risk losing it all.
The lights have been burning late at Terra Group's office in Oslo, after the firm sold Citibank products to Norwegian townships that have gone bad.
What is holding them back is not having to take the "Why are you in cdo's/mortgages, GET OUT, GET OUT!!!" call from investors or their bosses, both of whom probably can't be convinced of any trade in this market. In the short-term, sentiment can be, and often is irrational. Waddya gonna do
It's also why in 10 years we are going to be talking about Leon Black II (whomever it may be).
Marking them down and writing them off are two different things. They are being marked down because in a no bid market I suppose you gotta do something It doesn't necessarily reflect their judgement about the long-term value.
An analogy from the past may help. When Drexel crashed the secondary junk market crashed as well. As just one example, you had cable TV companies (all below IG at the time)with billions of dollars in public market equity values and bonds (in a relatively stable rate environment) trading in the 50's and 60's. Now a rational investor would say those two things shouldn't co-oexist. Weren't the distressed level bonds indicating the underlying equity had only option value? Yes if both markets were reasonably efficient. The junk market wasn't. It was broken. What happened? Folks who bought cable junk bonds did exceedingly well when the market returned to some semblance of normalcy in the early 1990's.
"If a firm were to have a concentrated position in a risk that suddenly became illiquid, that would clearly be bad. However, much worse would be a concentrated position with negative convexity that suddenly became illiquid. That trifecta is a risk manager's nightmare, as there is little to do once the markets start moving adversely and liquidity goes away, other than to hope. And as one head trader wisely said recently, "Hope is a crappy hedge."
And as E-Trade gave proof today, it is worth about 27 cents on the dollar.
Bernanke said he expects consumer spending will continue to grow and suggested the country can withstand the current problems without falling into a recession.
Just what is the basis of those expectations? Where is exactly is the US consumer going to get all that extra cash to spend?
Equity market bubble? Tax cuts? Cash out the homestead? Tap savings? Credit cards?
Already been done, can you really do it again?
Maybe tax free withdrawls of your 401K to re-finance? AELOC (Auto-equity line of credit)? CDS (Consumer Default Swaps) where CitiBank pays you money to hedge against you defaulting on your credit cards? FIC (Forward Income Contract) where investors give you a lump sum in exchange for a slice of your future income?
Or maybe the CEOs will be extra generous this year and squeeze out 10% raises in face of declining profits. Or the elderly could decide that they need one final fling before kicking the bucket.
With that kind of money disappering in Florida I just have wonder if the Bush family is involved. Anyone know what Neil or Marvin are up to these days? But what can you expect in a state that is run like a Banana Republic?
Kicker: What's needed is something I suggested a long time ago. A government sponsored entity for the unsecured credit market. Forget homes, the real American dream is a no-limit credit card. I even have a name already for them... Big Mac.
They are being marked down because in a no bid market I suppose you gotta do something It doesn't necessarily reflect their judgement about the long-term value.-Banker
well i guess thats the issue here isn't it? but with homes selling at decreased values and E trade selling assets at 27 cents on the dollar i could argue that those write downs are too low.
funny these brilliant financial alchemists couldnt even figure out that they were failing finance 101. I recall something about a risk return tradeoff, not sure what it was exactly, but something that sounded like return increasing along with risk. And there was some curve or something, kind of like going up kinda fast, then flattening out as risk went up. I dunno. Hick...anyway, seems like these people managed to think they had found a point where you could get a higher return with out higher risk, or even no risk. Hmmm, cant recall where that was in the textbook. But I sort of recall this thing about guessing the risk you are taking or listening to someone tell you there is none, probably means you are way out on the other end of the risk (x) axis. But hey, what do I know, Im not an alchemist.....
crispy
California does have LAIF, but not all cities and counties use it. Some CA County Treasurers are smart enough to manage their own short-term investment pools and avoid toxic waste.
Some public pension funds also have only minimal exposure to subprime derivatives. But it's true that a lot of them didn't know what they were buying, or, more precisely, being sold.
Finally, there is GAAP in the public sector--in fact there's GASB, which is associated with FASB.
Wednesday evening, the SBA said it would recommend the board adopt a plan, which included providing credit protection against the potential for default by about $1.5 billion in securities from Axon Financial, KKR Pacific, OTTIMO Funding and Countrywide, continued restructuring of investments to become more liquid and conservative, and building a larger reserve fund. The suggestions were not fully accepted.
Any runs on run of the mill money market funds that you have heard about yet? I would think this might be the next "thing". Banks still have FDIC insurance, but MM funds that have been acting as banks for many people do not. I would certainly liquidate any MM fund I had if it were not 100% in US Treasuries.
There's a special report area on Bloomberg on the Florida public funds/subprime crisis containing this and other related articles.
Bloomberg.com:
Special Report
While it was supposed to be "safe", the pitch to municipalities and institutions was superior returns over typical "cash equivalent" vehicles.
For those who like charts:
| Charts - Yahoo! Finance
OT - Fed and FDIC stymied by lack of information on troubled loans and their request that lenders step up workout attempts.
Fed, Treasury, FDIC Stymied By Lack of Data on Subprime Loans - Bloomberg.com
"Fed, Treasury, FDIC Stymied By Lack of Data on Subprime Loans
By Craig Torres and Alison Vekshin
Nov. 29 (Bloomberg) -- Federal regulators, who met with bankers today at the Treasury Department in Washington, still lack reliable estimates on the extent of the subprime mortgage crisis.
Three months after they asked banks to modify loans for borrowers at risk of default, agencies have little data on what lenders and loan servicers have done, officials say. The authorities, including the Federal Reserve and the Federal Deposit Insurance Corp., want to stem a wave of defaults that are jeopardizing the six-year economic expansion.
..."
Andrew, thanks - I added that link. No bid? Call Citadel, I understand they pay 27 cents on the dollar! (apples to orange I know).
DAGMAN, that was the question when Orange County, CA was burned in the mid '90s. I believe Merrill Lynch ended up having to pay for selling inappropriate investments to OC.
Best Wishes.
Geronimoooooooooooo................
Obviously the Lehman salesman does not remember what happened to the Merrill Lynch Orange County crew.....how could you not watch out for your biggest client ? Wow.
You can start to see how congressmen would be willing and eager to allow the Fed to monetize bad debt and buy bad loans at "good loan" prices.
Again, as I understand it, monetizing bad loans is equivalent to "printing money".
If the fund can't pay back all the money, is the FL taxpayer on the hook? Did the State require the local governments to put their money in the fund instead? That would seem to imply some type of guarentee the money would be there when the local governments needed the funds.
How many more States have similar arrangements? This could get real ugly for the other states because of fear of failure causing the failure of this type of fund.
Karma!
Is this the beginning of 'run on the bank' for the non-bank institutions? And the answer ATM is 'bank' holiday?
"``There is no liquidity out there, there are no bids'' for those securities, he said.
"If a firm were to have a concentrated position in a risk that suddenly became illiquid, that would clearly be bad. However, much worse would be a concentrated position with negative convexity that suddenly became illiquid. That trifecta is a risk manager's nightmare, as there is little to do once the markets start moving adversely and liquidity goes away, other than to hope. And as one head trader wisely said recently, "Hope is a crappy hedge."
By far 2 of the best quotes seen anywhere today....
Wait until the municpalities and pension funds in CA figure this out. They will run faster than Florida...
The fund may also adopt more conservative investment guidelines and focus on more easily tradable securities.
The fund hasn't bought any asset-backed commercial paper this month and expects its exposure to this troubled part of the short-term borrowing market to be under 15% by the end of this year, the board said in its statement on Wednesday.
You can start to understand the monster treasury we've had of late reading stuff like this.
Remember, you don't really have to worry about the US government defaulting on its debt since they can always just print dollars to pay it off.
Glad that something I posted was finally timely and useful CR.
BTW - in case anyone wants to see it there's a video interview on the sidebar of the special report area with an Orange County, FL. official on why they pulled out of the fund and into treasuries.
It's a bit of an amazing statement to me of how much fear and paranoia has spread. Admittedly this is over subprime/abcp money market funds, but when was the last time you had the spectre of possible default and counter-party risk arising between state and local government?
CAlifornia has the "LAIF" which is where all cities and Counties place their pooled funds -
PMIA-LAIF
I wonder what they have in their "portfolio"
He who hesitates is lost. Or at least they are left holding an empty bag.
But I thought "junk" was still good money! (or so mooed one Florida official the other week?)
From LAIF -
Asset-Backed Securities
Asset-backed securities entitle the purchaser to receive a share of the cash flows from a pool of assets such as principal and interest repayments from a pool of mortgages (such as CMOs), small business loans, or credit card receivables.
U.S. $1,841.137 million As of: 09/30/07
http://www.treasurer.ca.gov/pmia-laif/disclosure/20070930.pdf
Here is more credit crunch fun!
Asset Backed Commercial Paper Continues to Decline
Seasonally adjusted change in billions:
August -$205.4
September - $52.7
October - $38.4
November - $59.2
(November through 28 November 2007)
So November's decline in ABCP is second only to the August decline. Also, it appears that the maturity distribution is shortening again though I didn't dig into the recent numbers, anyone want to tackle that?
I seem to recall that someone posted a bloomberg(?) article (I'll have to see if I can find the link)a month or two ago on the continued selling of ABCP/CDOs/etc. to state and local government financial administrators as low risk AAA investments even as serious doubts were being raised on these instruments. I guess the other shoe has finally dropped. I wonder how many of these state/local financial officers are going to be answering awkward questions and/or losing their jobs in the near future.
This will go political in a hurry. Large electoral state during an election cycle. Let the grandstanding (and real problem solving) begin.
Looks like Florida will go from hanging chads to hanging the State Treasurer....
It's a bit of an amazing statement to me of how much fear and paranoia has spread. Admittedly this is over subprime/abcp money market funds, but when was the last time you had the spectre of possible default and counter-party risk arising between state and local government?
If we had a gold-backed currency I would be legitimately concerned about a possible depression due to the growing magnitude of this credit crunching.
With a gold-backed currency the Fed would only have a limited ability to add liquidity to markets or ultimately prop up the value of imperiled assets to some arbitrary amount (since you can't print or fractionally reservify new gold).
It's hard to know whether such a thing is a blessing or a curse.
At least the US economy survived the Great Depression. Who knows, with a fiat currency the government might have printed money in response and in the end destroyed the economy outright with a hyperinflationary breakdown.
``If we don't do something quickly, we're not going to have an investment pool,'' said Stipanovich at the meeting in the state capitol in Tallahassee.
It isn't like these clowns are running a hedge fund and can just halt redemptions I don't think, I wonder what he thinks they are going to do.
energyecon
actually if you add Oct 31 asset backed decline of -7.5 you get a total of -66.7 B since the Oct number of -38.4 B.
-66.7 B ABCP for November that is.
ac-if we had a gold std we wouldn't be in this mess.
where the heck are Seb, OJoe, James, and Tennis when u need them to discuss these numbers?
idoc,
thanks - was just looking at the period totals and coming to a similar conclustion - total contraction in ABCP from the end of July is -$362.3 billion in the space of sixteen weeks or a 30.5% decline.
idoc,
ROFLMAO! On at least a half a dozen occasions I have asked the usual suspects for the bull case on this implosion... [crickets chirping]
Just a silly question... did the 137 billion pension fund for the State of Florida invest in SIVs , CDOs and CDO squared products , CMBS , RMBS , ABCP and CLOs ? I ask that question because the same folks that run the Pension Fund also ran the Investment Pool in question.... why wouldn't they invest on behalf of the Pension Fund in these same vehicles that jammed up the State Investment Pool.... weren't they also chasing yield ???? And if so , what's the exposure of the 137 billion dollar Pension Fund to these very dicey asset classes ? Just wondering ?
This is one of those news items where the reaction swiftly transitions from idle rubbernecking to real worry. I have family members whose retirement plans are invested in state-sponsored funds; this is a serious, serious issue.
For what it's worth, the biggest risk I see going forward is counterparty risk. The one question that has not been asked on countless obligations is whether or not the other party will be able to pay.
As I mentioned in CR's previous post its imperative to start considering
the "Boys In the Hood" portfolio: Gold(aka bling), guns and a pit bull.
Wealth is for all.
Peripheral,
That is the elephant in the room - with interlocking obligations so there is the potential for one default to trigger a cascade of defaults - I believe that is what is called the 'global interlocking credit derivative meltdown' scenario.
One more OT comment,
The ten year was on the move again today, took off ALL of yesterday and was just under the Tuesday close...makes me go 'hmmmmm.
Morgan Stanley Co-president Cruz out
Expired
UPDATE to this story:
On BloombergTV, the CFO from Jefferson cnty Fla cant get money from the closed investment pool for teacher payrolls due tomorrow. Hes obviously scared. It feels like things are spinning out of control doesnt it?
Hey! I posted a link to the Bloomberg article on this back in the "MGIC Tightens Alt-A" thread... (sniffle, sniffle...never had a hat-tip...sigh...)
Can someone tell me who in the world is buying stocks to drive the market up the past few days? That must what Seb and OJoe are up to.
Where are the bulls - I want to sleep tonight.
I had dinner last night with a guy who runs a very small ($600 million) hedge fund and we were talking about the "no bids" situations. He was amazed at the folks he had previously thought as sophisticated not understanding that no bid means NO BID. That it ain't about price. His take? It gets worse for the next 6-8 months in the mortgage market and folks who are presently liquid will ultimately make a killing on the super senior stuff. Good conversation. On another topic, he thinks China is trying to do too much too fast and is going to have some real issues. Good conversation.
Rough coupla days huh?
The fund was the largest of its kind, managing $27 billion before this month's withdrawals.
Yeah, that's $27B assuming you don't actually need to get at it.
He was amazed at the folks he had previously thought as sophisticated not understanding that no bid means NO BID.
For real No BId? Not just No Bid that isn't ten cents on the dollar? Fugly.
No Bid? That's unacceptable at this point. When the vulture investors don't want to bid, it's probably worth zero. I presume we're not at that point.
Peripheral Visionary, that is highly likely to be the case. The same assets that were sold to the money market investment pool were sold to the state and local pension funds (if not worse, the pension funds were probably not restricted to the money market equivalents that the short-term investment pool probably was). It is also entirely likely that private pensions and endowments were sold the same things and are also going to take a hit.
They were both wined and dined by the same Wall Street investment bankers. A (bloomberg?) article that talked about one of those investment conferences where these were sold to the state and local government/pension folk even as it was obvious that things were circling the drain (that I recall was posted here in the comments a month or two ago) is what I'm currently trying to find.
Banker,
"China is trying to do too much too fast and is going to have some real issues."
I had the same thought on Februaray: "there is a limit to how much can a person, an oragnization, a country grow"
So I decided to short China but my wife said: You can short everything BUT china. She was right....
Banker,
i also had a conversation with a hedge fund manager 6 mo ago who said he thought the dollar was gonna turn around and take off upwards. wrong.
i also routinely speak with a former hedge fund manager who made a killing in 98/99 from the tech boom and retired thereafter at age 31. he thinkis we're heading into a recession. i also routinely speak to a former investment banker for MS, who made a killing and is retired, and he too thinks the dollar is toast and that we're heading into recession.
so take that!
Davenyc,
No bid as in folks don't answer the phone if they think you are calling regarding that (whatever it may be) topic. The folks who think the markets for junk bonds, let alone the really esoteric stuff are efficient are simply incorrect. When "sentiment" turns bad on something, all John Q. Hedge Funds' investors' often want to hear is "we're not involved." They don't want to know about the potential for profit by buying at a steep discount.
Hey Banker,
Rough coupla days but a gift from the Bear God if you have any dry powder and the nerve...
Looks like you were bang on about the over crowded USD trade vs the euro (did I remember that one right?).
Idoc,
so take that!
Um........perhaps you are supposing that I was doing something more that simply recounting a conversation some might find interesting? If so you're incorrect. As for the MS guy, that's my story too and I offer him a nod and a well done.
Banker,
seriously, hedge fund managers i've come to know don't have any greater insight to the mkts than we have here. in fact sometimes less b/c they HAVE to believe in bull mkts and financial alchemy. its the reason for their existence and the perpetuation of that existence. so many of them are on the wrong side of the trade now that they are throwing the Hail Mary right now just as we're entering recession.
Open your eyes people, the ten year treasury has outperformed the s&p 500 for nine years running - very soon to be ten years. Houston, we have a problem. When wall street was selling large cap, tech and ipo's they were a bad investment be it the late 1920's, late 1960's or the late 1990's. Same with so many other wall street sales products. The public at large are suckers, especially large state pension plans. Wall street has even figured out a way to sucker people on the safest of all investments - a house. Smell the coffee people.
Wealth is for all!
Rough coupla days huh?
Banker | 11.29.07 - 5:31 pm | #
this is the part that didn't sit too well.
It's a bit of an amazing statement to me of how much fear and paranoia has spread
It's been there all along, buried, hidden. It pervades the culture, quietly, but it's detectable in many areas. I first noticed it almost two years, in the job market, and lately in the romance department.
There is a level of distrust and dishonesty through the culture.
Andrew: Maybe you are referring to Tanta's great post Reelin' In the Suckers?
Calculated Risk: Reelin' In the Suckers
It was regarding equity tranches in CDOs. But the other point was that pension fund managers are suckers on Wall Street.
Teachers, firefighters, and police officers: you are not just the sucker at the table here. You are the sucker at the table of the suckers in the big casino of suckers. Your "managers" of your pension money just took the "opportunity" to assume the risk that Wall Street does not want to keep because it doesn't think a "20% return" is worth it.
energyecon,
If I dared make a currency prediction at some point and I happened to be correct? That is a quintessential blind squirrel story.
On another topic, each day MLEC continues to be pursued, when it seems to me it is already obsolete, your "single point of failure" argument gains plausibility.
idoc,
Sorry about that. All that was was supposed to be me walking into a familiar bar, looking at the financial screens and news and acknowledging to the guys I sat next to things were tough. It was unrelated to the dinner story. Or supposed to be anyway.
The folks who think the markets for junk bonds, let alone the really esoteric stuff are efficient are simply incorrect.
Heck, I used to work on IT systems for one of the stock exchanges. I don't have any illusions about the efficiency of equities markets, much less a market that still relies on calling up three or four people to get a price.
I guess the market sentiment as turned against the market's sediment.
Banker,
no apology necessary. was just being a smartass.
been wondering where you've been. the boys have been pretty hard on you during the decline and i was worried you'd gotten tired of us. you're truly a great contributor here.
VERSUS has a new "depressing" song parody out. I think it will make you laugh and cringe!
I've included it as a musical tribute for those interested.
Banker,
You have any color commentary on the CP markets? Just curious, seems like it will have to pinch profits and generally reduce the velocity of money what with a 15% contraction in total CP in sixteen weeks (that's 30.5% of the ABCP gone away). Also, I had the impression that the maturity distribution was shortening again though I just glanced at that and there may be some funky end of year stuff going on...
Thanks much Dr. Strange. I had only managed to scan back to August. It figures that the always insightful Tanta would be the one to post on it.
Meanwhile, back at the ranch...
On Tuesday, Yellowstone County Commissioners asked the Montana Board of Investments to return nearly $72 million of its investment funds because of the potential exposure to risky loans and other concerns.
http://www.billingsgazette.net/articles/2007/11/28/news/local/18-countyfunds.txt
Zoe Cruz out at Morgan Stanley. When you need to lighten the load you ditch the women first. LOL
NEW YORK - Morgan Stanley said Thursday that co-President Zoe Cruz, one of the most powerful women on Wall Street, will leave in the latest investment bank management shakeup since the summer's credit turmoil.
Robert Scully, who was named co-President along with Cruz last year, will remain at the firm in a new capacity. He will join a newly created Office of the Chairman, and will focus on Morgan Stanley's sovereign investors.
Cruz had been with Morgan Stanley for the past 25 years, and rose to her current title after former chief executive Philip Purcell promoted her in a move to consolidate power. There had been expectations that John Mack, the current CEO, would at some point place someone else in the job.
"He was amazed at the folks he had previously thought as sophisticated not understanding that no bid means NO BID."
Stuff is worth what somebody will pay you for it.
Florida? No one could have predicted this. These are the folks whose third-world government incompetence gave us GWB.
Couldn't happen to a sweller bunch as far as I'm concerned.
Ooops, did I say that?
What I meant was, I'll take over for the optimists' club today.
What are you people complaining about? Inflation is low and oil is down. Treasuries are stabilizing. The market is up. Employment is great. New home sales are great. Cats and dogs are sleeping together (wait a minute, is that a bull thing or a bear thing?). The Arabs and the Isrealis are on the verge of a peace deal.
Feel better?
I'm willing to bet you the Florida situations and other commercial paper/SIV state fund fiascos won't be the BIG story in muni losses.
I'll bet there are govts. out there that hold a lot of CDOs, as yet unreported, in their long-term (pension) funds. For big govts., pension fund losses might not be death. But for small govts. caught in a bubble market or downturn, it could be. The way today's muni bond market is, even a modest size govt. that gets trapped in a big CDO loss could set off fireworks. Just watch!
Yes, Banker, please keep posting despite the occasional flak. I learn something from almost every post you make. Is anyone calling you about participating in a rescue team for one or more of the distressed IB's? Maybe they should be.
Phil
Looks like the weekend head-chopping is starting early at MS.
idoc,
Just been away from the internet travelling for the holidays etc. So I haven't even read anyhting here for about a week. I'm gettin hammered huh? Oh well. 4.9% third quarter was pretty good and clealry we are slowing, but the story will end up being no recession in 2007.
I will say that I said pretty early on in August that the important impact of the credit mess would be duration rather than depth. It is getting pretty long now. Consumers will get increasingly spooked, corporate boards will begin to pull in their horns etc. The outlook for 2008 is pretty wide open in my view. I bet against recessions only because 7-8 years it makes me right
Energyecon,
I really haven't been paying much attention for the past week in general, sorry.
[i]Federal regulators, who met with bankers today at the Treasury Department in Washington, still lack reliable estimates on the extent of the subprime mortgage crisis.
[/i]
So, all that talk earlier in the summer about subprime being 'contained' and the problems 'bottomed' were known lies.
Phil,
Thanks but the available folks today, Spector, Maheras, Barker...ok, maybe not Barker, as well as truly special folks like Michael Klein at Citi, Bob Scully at Morgan are several cuts above me in terms of talent, creativity and overall excellence.
Man's gotta know his limitations
-Dirty Harry Callaha
the 386 windows 98 computer i put on ebay also got "NO BID". but darn it, its still worth the $4000 i paid for it!
"Federal regulators, who met with bankers today at the Treasury Department in Washington, still lack reliable estimates on the extent of the subprime mortgage crisis."
Solution: give each man, woman and child $1,000,000 in cash and be done with the lending industry.
the CFO from Jefferson cnty Fla cant get money from the closed investment pool for teacher payrolls due tomorrow
Jefferson is a fairly small county (relatively speaking). Monticello (county seat) has 2 grocery stores (neither very large). I bet both of them would accept post dated checks if any of the school system employees were in a jam. That doesn't solve the problems with mortgage, car loan, or other misc payments. I bet the banks over there are holding their collective breath tonight.
This kind of thing could ricochet in unexpected directions.
So many posts today . . . poor JJ couldn't keep up. My crack tech squad is working on the JasBot, which will pop in on each and every thread multiple times to accuse CR of being too bullish.
Trouble so far is, we haven't been able to make it grating enough.
idoc,
Specifically, the no bid part of the conversation related to the super senior tranches of one particular CDO being marked in the low 90's and wondering did folks really believe that 65-70% of the underlying mortgages/loans were going to default with mimimal recovery? That's what the mark implies in that particular case.
Crispy, I think cashflow issues, such as the county CFO from FL wondering if he is going to be able to make the teacher payroll, are going to be the least of the state and local government worries. Cashflow, like illiquidity, may be painful but can be worked out over time. Insolvency hurts a lot more and isn't as easily fixed. Remember, state and local government don't have to conform to GAAP, a fact that politician's have used for years to juggle the books. This is made a little more palatable in that they usually always have had the ability to raise taxes to get themselves out of trouble (and if bungled big enough, typically resulting in the removal of said imprudent politician(s) by the taxee's in the next election).
This is going to be interesting seeing play out. Interesting in the bad sense. For example, as I recall, many state and local (and private) pension plans are already technically insolvent in that they can't actuarily cover all expected future benefits. Having to cover losses on supposedly safe instruments is not going to make that task easier and could probably really start making the masses panicky if the word gets out.
Dang those guys!!
No bid my butt- they were supposed to give the 4 mil bid I put in.
Lazy bond traders were stuffing their yaps with $10 burgers and playing liar's poker.
Michael Lewis is laughing right now.
Hysterically.
Once again fools and their money were parted.
I can hardly wait for Commercial and RTC II!
Someday this war's gonna end...
I bid four mils per thousand for anything that was originally A or better!!!
Call me, I just got an advance from my Citibank Credit Card- 3.9 till I pay it off!!!
Someday this war's gonna end...
Just a silly question... did the 137 billion pension fund for the State of Florida invest in....And if so , what's the exposure of the 137 billion dollar Pension Fund to these very dicey asset classes ?
fredw,
Don't worry.. they have the pension funds in other assets.. that they think are riskier than the ones in the MMF.
yawhawhaw.
Hopefully, they are as bad at picking risky assets as they are at picking safe assets.
The fund was supposed to be "safe as houses".
(Sorry, sorry. But it just never gets old.)
Specifically, the no bid part of the conversation related to the super senior tranches of one particular CDO being marked in the low 90's and wondering did folks really believe that 65-70% of the underlying mortgages/loans were going to default with mimimal recovery?
Sigh, the retail investors can never get a seat at the good carcasses. I'd take that particular bet and would be happy to hold it till maturity.
I'm guessing that there are a lot of professional money managers who feel the same what, what's holding them back? Worried about inflation? Or are all of them leveraged so high that there isn't any dry powder?
what's holding them back? Worried about inflation? Or are all of them leveraged so high that there isn't any dry powder?
Kicker,
Maybe all their dry powder is in the frozen MMF?
A.C. agree, will take G.E.'s reputation over govt. money printing:
NEW YORK, Nov 29 (Reuters) - General Electric Co on Thursday sold $4.0 billion in global notes, said a market source familiar with the sale.
The notes were priced at 99.195 to yield 140 basis points over U.S. Treasuries.
The joint lead managers on the sale were Citigroup Global Markets, JP Morgan, Lehman Brothers and Morgan Stanley. (Reporting by Caryn Trokie)
Crammer sez to "sell cash," what is he a gold bug now?
Banker
so if i look at todays ABX-HE-AAA 07-2, which is the most senior of the index, its priced at about 67 cents on the dollar. low 90's seem high to me.
IIRC, aren't the IB's writing off just these specific senior tranche holdings they were forced to keep?
how can the most senior tranches be selling at rates like that?? makes zero sense. how many defaults would it take to eat all the way up into that slice?
of course the ABX gets used in ways that don't always necessarily reflect fundamentals dont they i.e. index trades for hedging purposes?
you're holding the actual paper so short the index for protection?
energyecon - i'd think we might want to start referring to the 'global interlocking credit derivative meltdown' as...
Diversified Interlocking Credit that Knocks Em Dead - DICKED for short.
dd
"so if i look at todays ABX-HE-AAA 07-2, which is the most senior of the index, its priced at about 67 cents on the dollar. low 90's seem high to me."
ABX-HE is the home equity variation. I don't think you can compare it to a first lien CDO..
Several small townships in northern Norway went along with a securities firm's advice and invested as much as NOK 4 billion in complicated American commercial paper sold by Citibank. They now risk losing it all.
The lights have been burning late at Terra Group's office in Oslo, after the firm sold Citibank products to Norwegian townships that have gone bad.
Townships caught up in international credit crisis - Aftenposten - News in English - Aftenposten.no
Kicker,
What is holding them back is not having to take the "Why are you in cdo's/mortgages, GET OUT, GET OUT!!!" call from investors or their bosses, both of whom probably can't be convinced of any trade in this market. In the short-term, sentiment can be, and often is irrational. Waddya gonna do
It's also why in 10 years we are going to be talking about Leon Black II (whomever it may be).
idoc,
Marking them down and writing them off are two different things. They are being marked down because in a no bid market I suppose you gotta do something
It doesn't necessarily reflect their judgement about the long-term value.
An analogy from the past may help. When Drexel crashed the secondary junk market crashed as well. As just one example, you had cable TV companies (all below IG at the time)with billions of dollars in public market equity values and bonds (in a relatively stable rate environment) trading in the 50's and 60's. Now a rational investor would say those two things shouldn't co-oexist. Weren't the distressed level bonds indicating the underlying equity had only option value? Yes if both markets were reasonably efficient. The junk market wasn't. It was broken. What happened? Folks who bought cable junk bonds did exceedingly well when the market returned to some semblance of normalcy in the early 1990's.
When it comes to valuing the MBS paper it's more than just credit scores that impact the borrower's default chances.
It is the value of the collateral itself. Home prices are falling everywhere regardless of the homeowner's financial position.
"If a firm were to have a concentrated position in a risk that suddenly became illiquid, that would clearly be bad. However, much worse would be a concentrated position with negative convexity that suddenly became illiquid. That trifecta is a risk manager's nightmare, as there is little to do once the markets start moving adversely and liquidity goes away, other than to hope. And as one head trader wisely said recently, "Hope is a crappy hedge."
And as E-Trade gave proof today, it is worth about 27 cents on the dollar.
Bernanke said he expects consumer spending will continue to grow and suggested the country can withstand the current problems without falling into a recession.
Expired
Just what is the basis of those expectations? Where is exactly is the US consumer going to get all that extra cash to spend?
Equity market bubble? Tax cuts? Cash out the homestead? Tap savings? Credit cards?
Already been done, can you really do it again?
Maybe tax free withdrawls of your 401K to re-finance? AELOC (Auto-equity line of credit)? CDS (Consumer Default Swaps) where CitiBank pays you money to hedge against you defaulting on your credit cards? FIC (Forward Income Contract) where investors give you a lump sum in exchange for a slice of your future income?
Or maybe the CEOs will be extra generous this year and squeeze out 10% raises in face of declining profits. Or the elderly could decide that they need one final fling before kicking the bucket.
With that kind of money disappering in Florida I just have wonder if the Bush family is involved. Anyone know what Neil or Marvin are up to these days? But what can you expect in a state that is run like a Banana Republic?
Kicker: What's needed is something I suggested a long time ago. A government sponsored entity for the unsecured credit market. Forget homes, the real American dream is a no-limit credit card. I even have a name already for them... Big Mac.
xofruitcake
ok you caught me. explain to me what exactly is inside the ABX bonds?
They are being marked down because in a no bid market I suppose you gotta do something
It doesn't necessarily reflect their judgement about the long-term value.-Banker
well i guess thats the issue here isn't it? but with homes selling at decreased values and E trade selling assets at 27 cents on the dollar i could argue that those write downs are too low.
"the 386 windows 98 computer i put on ebay also got "NO BID". but darn it, its still worth the $4000 i paid for it!
idoc | 11.29.07 - 6:10 pm | #
funny these brilliant financial alchemists couldnt even figure out that they were failing finance 101. I recall something about a risk return tradeoff, not sure what it was exactly, but something that sounded like return increasing along with risk. And there was some curve or something, kind of like going up kinda fast, then flattening out as risk went up. I dunno. Hick...anyway, seems like these people managed to think they had found a point where you could get a higher return with out higher risk, or even no risk. Hmmm, cant recall where that was in the textbook. But I sort of recall this thing about guessing the risk you are taking or listening to someone tell you there is none, probably means you are way out on the other end of the risk (x) axis. But hey, what do I know, Im not an alchemist.....
toka koka....
Add to above
The difference is you're not using the 'puter as collateral...
crispy
California does have LAIF, but not all cities and counties use it. Some CA County Treasurers are smart enough to manage their own short-term investment pools and avoid toxic waste.
Some public pension funds also have only minimal exposure to subprime derivatives. But it's true that a lot of them didn't know what they were buying, or, more precisely, being sold.
Finally, there is GAAP in the public sector--in fact there's GASB, which is associated with FASB.
State suspends withdrawals from SBA pool
Wednesday evening, the SBA said it would recommend the board adopt a plan, which included providing credit protection against the potential for default by about $1.5 billion in securities from Axon Financial, KKR Pacific, OTTIMO Funding and Countrywide, continued restructuring of investments to become more liquid and conservative, and building a larger reserve fund. The suggestions were not fully accepted.
Any runs on run of the mill money market funds that you have heard about yet? I would think this might be the next "thing". Banks still have FDIC insurance, but MM funds that have been acting as banks for many people do not. I would certainly liquidate any MM fund I had if it were not 100% in US Treasuries.