Can you find a chart that goes back to about 1985 or so, in regard to overlay of volitility:

^VIX: Basic Chart for CBOE VOLATILITY INDEX - Yahoo! Finance

For those of us who are financially illiterate, What does it mean?
Is it bad or good?

Year-end Commercial Paper Outstanding

FRB: Year-end Commercial Paper Outstanding

CR this post is obviously not true. The Feds have been lowering rates and pumping up the volume. Therefore, this can not be happening.
(Sarcasim off)

Actually, if you turn it upside down it looks pretty darn good.

To be honest, this is not at all funny. The system seems to be locked or at least seizing. Is all this hording simply because it is year end and everybody is trying right-side the balance sheet to meet banking regs, should losses accelerate in the current Q?

I have an idea for a website:

A "no-recession-call-o-meter."

Get a list of perhaps several dozen major well-known players in the financial world that have made the "no recession" or "recession unlikely" call.

As they change their mind or concede a recession is likely or a certainty, they have then "imploded".

It will be fun to see who and when they change their outlook. Perhaps it could get media coverage or come up in some questioning of them on by media members..."according to the website, you are among the last few who still think we will avoid recession...are you standing by your call?"

I am tired of all these talking heads in the industry, paraded onto the air, saying "I still think we'll avoid recession..but...."

It's about time they are held accountable.

(anyone is welcome to my idea, I have neither the time or skill for such things).

I like the "discount rate history" chart in the middle of the page. All classes of CP track the federal funds rate very closely for years, and then something... funny... happens in 2007.

I suggest keeping a close eye on the weekly Commercial Paper Outstandings  page, too.

Am I correct in thinking that, to a first approximation,

"Financial" = money market funds
"Nonfinancial" = real businesses' working capital
"Asset-backed" = SIVs
?

SEC Rule 2a-7 (tier levels)
Rule 2a-7 of the Investment Company Act of 1940 limits the credit risk that money market mutual funds may bear by restricting their investments to "eligible" securities. An eligible security must carry one of the two highest ratings ("1" or "2") for short-term obligations from at least two of the nationally recognized statistical ratings agencies. A tier-1 security is an eligible security rated "1" by at least two of the rating agencies; a tier-2 security is an eligible security that is not a tier-1 security. The sum of tier-1 and tier-2 securities will not add up to the total due to ineligible securities.

Money funds may hold no more than five percent of their assets in the tier-1 securities of any individual issuer and no more than one percent of their assets in the tier-2 securities of any individual issuer; moreover, a money fund's holdings of tier-2 securities may constitute no more than five percent of the fund's assets.

FRB: About Commercial Paper

Are there any insights from the Bankerdome?

I can't understand why the Fed doesn't just print more money.

It seems to me like it would make all these problems go away.

John Stark,

If I understand correctly, in the old days businesses would rely on lines of credit from banks in order to fund short-term activities. The commercial paper market sprung up as a cheaper alternative for this funding.

Commercial paper must mature in 270 days or less in order to avoid registration requirements.

The issuing entity may use assets as collateral to secure the commercial paper. This is asset-backed CP.

A more thorough explanation can be found here:

Commercial Paper Defined

Hope that helps.

(continued)

Now, in recent years there has been an explosion in other kinds of commercial paper. Banks created these off-balance sheet entities called "SIVs" which buy mortgages and issue CP. So instead of CP collateralized by accounts receivable and capital equipment, this CP is collateralized by mortgages. And money market funds lapped it up, too.

Except now the MM funds are a little worried about the quality of the collateral, for some reason, so they are taking money OUT of commercial paper and plowing it into Treasury bills. That is why the yield on the 13-week T-bill has collapsed; insane amounts of money has been taken out of CP and put into "perfectly safe" Treasuries. You know, just until "this whole thing blows over". Better safe than sorry. Etc.

By some sort of "contagion" mechanism that I do not really understand (animal spirits?), this is affecting the CP market for real businesses. This is where they get their working capital to do things like, oh, make payroll. If these CP numbers continue their current trend for much longer, real companies -- not banks or brokerages or mortgage lenders, but real companies in the real world -- will have to start liquidating real assets and/or firing real people.

And this is the real problem in the entire crisis. MEW affecting consumer spending remains pure speculation, and financial firms writing down billions makes for great CNBC coverage, but commercial paper is the mechanism by which this crisis threatens the real economy, right now, today. It is by far the most important thing to monitor, IMO.

Counterparty risk is certainly a large component of the situation. But don't you think there is also desire to hold on to cash, regardless of the price and the risk, given a) uncertainty whether access to capital will be there in a few weeks/months and b) all those SIVs coming back to Balance Sheets, which now need to be supported by real capital.
So the spread seems to be driven up by both counterpary risk and liquidity squeeze (=less supply)

Does anyone have data on the spread from the '90s or '80s?

I need more perspective.. but it's hard to track down on the internet.

"What if inflation rises such that Helibeni needs to raise interest rates?"

HA!!! Heliben laughs in the face of this notion. He can drop rates no matter what.

in all seriousness, I hate to say this about my own government, but I think that the govt would tinker with the inflation numbers until it was acceptable in order to allow the Fed to cut. you know, hedonic adjustments and all that.

John Stark, go here and read Anuk Teasdale's 2004 paper on asset-backed commercial paper conduits. It's not rocket science.

YieldCurve.com - dedicated to fixed income and the global debt capital markets

Think "off the books." Think "not transparent." Think "who's holding the bag," and you'll see why there's a global crisis of confidence in the financial system.

Nemo,

Bang on - and what mp said - another epicenter of financial opacity (along with the various flavors of mortgage securitization). There are buckets o' cash out there, but everyone is hanging on to theirs until folks fess up or the the smoke clears in some other fashion...repeating others, it's a crisis of confidence and an issue of insolvency, not a lack of liquidity.

Can a crunch effect exisitng credit lines?

Energyecon:

As I posted in the previous thread:

The Fed can create liquidity, but it can not mandate trust.

The new definition of "Liquidity" (my paraphrase of AllenM) is the Fed's willingness to store the financial (toilet) paper until the owners can afford to buy it back and take the (inevitable) losses.

-- Hiding Out

eli asked: "Does anyone have data on the spread from the '90s or '80s?

I need more perspective.. but it's hard to track down on the internet."

Not for multiple grades of commercial paper, I don't, but for a variety of others there's plenty of data here:

FRB: Federal Reserve Statistical Release H.15 - Historical Data

I chart the spreads for AAA vs. Baa, AAA vs. UST, Baa vs. UST and the TED spread (3-month LIBOR vs. 3-month T-bills).

One observation: If you look back at the times when these spreads were really wide (like now) it often signalled that the climax of the crisis was near, at least in terms of the impact on the stock market. Spreads might be able to tell you the level of panic in the markets, but they can't tell you if that panic is rational or if it's about to vanish as quickly as it appeared.

Sebastian

REBear- "Can a crunch effect exisitng credit lines?"

You bet. The major financial centers are on tenterhooks now. They're watching all of their large customers closely. A violation of a covenant, that would be overlooked in a "normal" environment, could lead to nastiness that wouldn't otherwise occur.

The amazing thing (to me) is that while the stock market's been volatile this past month or for the past few months, that we haven't seen a real correction take hold. We're still above November lows, much less August.

Considering the string of bad news, the likes I haven't even heard of since the early 80s, doesn't anyone think we're due for a serious correction? One that actually takes more than a few weeks to recover from? Something like 15-20% of the DJIA and about 10%-15% of the NASDAQ?

Speaking of August lows:

LONDON (Reuters) - The leading shares shed 3 percent on Thursday to touch a one-week low, with credit fears still playing on investors minds despite a plan by central banks to provide greater liquidity.

The FTSE 100 (UKX.L) ended down 195.6 points at 6,364.2 -- its biggest one-day percentage loss since Aug 16.

On Wednesday, the Federal Reserve launched new temporary short-term lending facilities to ease credit market strains in concert with market-calming actions by several other major central banks.

Midway through Thursday's session, the index briefly cut its losses after Lehman Brothers beat forecasts with its quarterly earnings.

But banks remained the worst hit on the day, shaving more than 52 negative points off the index.

"The problem comes in actually trying to make any sense of it, said Tim Hughes, head of sales trading at IG Index. "When you scrutinize what they're (central banks) suggesting, it's not immediately clear. (But) by acknowledging it, they're saying 'this is really bad'."

Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor

Conjure Bag's Global Financial Meltdown Clock just ticked from 11:57 to 11:58 PM.

mp,

I'm guessing that there's some fight going on between the Bank of England and the other central banks.

I'm betting that.. if the BoE doesn't come around nicely, the other banks will get out the knives..

Shit.. if Soros can break the BoE.. it won't be much for the rest of the planet to do it.

But, I guess we'll see..

I said here, when the Bear Stearns funds blew up, that it was a major systemic event. I also said that it was time for the Fed to work the phones. Hard.

They lost the opportunity.

So, Ben's facility isn't working.

Do you pray?

HELOCS....thats what yah wanna look at, because people are not pumping equity into investments, they be trapped with interest

O/T but interesting:

CHICAGO, Dec 13 (Reuters) - The home loan unit of Countrywide Financial Corp (CFC.N: Quote, Profile , Research), the largest U.S. mortgage lender, is under investigation in Illinois over its lending practices in the state, an Illinois attorney general official confirmed on Thursday.

Deborah Hagan, chief of the Illinois Attorney General's consumer protection division, said a subpoena for documents was sent to Countrywide in mid-September. Information sought relates to any mortgage-related activity by the company in Illinois, including loan originations, fundings and securitization, Hagan said. She declined to discuss the time frame in which that activity took place

Denver - all the Bonus checks have not been handed out. Once this is done, some houskeeping can take place and reality can set in.

the likes I haven't even heard of since the early 80s, doesn't anyone think we're due for a serious correction

I'm no technician, and only learned what the Dow Theory was last month, but one look at the 6-month track of the Dow does give me the gut feeling that the highs are coming in lower and the lows are going to do the same, for the foreseeable future.

It all depends on corporate profits, which depend on consumer spending, which depends on consumer purchasing power, which depends on low inflation (ha!), wage growth (ha ha), wealth-effect from asset appreciation (ho ho ho), and of course good ol' MEW (hoo-boy).

Denver Ken

history suggests to me that the change in the dow has little correlation to the economy as measured by changes in the gross domestic product.

For example from 1910 to 1919 the gdp increased about 10% compounded year over year where as the dow increased less than 1 percent.

In the 70’s just the opposite occurred, gdp grew at nearly 10% compounded over the decade while the dow increased by less than 1 percent.

Looking at a secular bull market period as opposed to a decade or two, from 1982 to1999 the dow grew by over `15 percent while the gdp progressed at less than half that rate.

To my way of thinking the stock market is at least 50 percent gaming and less than 50 percent reality.

I'm all into NCUA insured Certs of deposit and cash and a basement full of food etc..

ac, I know you were just kidding about that printing money crack, and I just ran across a good quote I found on theroxylandr's site about this,

Good question.

Darth Toll,

While the world economy is able to grow rapidly due to debt creation.. first with the fractional reserve system.. then, more recently, with the creation of derivatives contracts..

Money will need to be literally printed and "stuffed" into the system. Mainly, because of the derivatives..

This won't make people keep partying.. but it will hopefully prevent a collapse.

My guess is.. if this gets as nasty as it can get.. the central banks will announce a plan on the scale of $1 - $2 trillion dollars being released into the world economy.

They will have to announce that as a group, they will soak up all of these outstanding derivatives contracts and they will provide as much money as needed.

There can't be any half-assed measures that maybe provide enough liquidity to stop any current issues. They have to announce some ungodly amount of cash being released that no one can fathom being soaked up.

So.. I suppose the financial system could collapse.. but it'd be a result of the central banks being so naive as to believe that this problem isn't that big of a deal.

eli- "So.. I suppose the financial system could collapse.. but it'd be a result of the central banks being so naive as to believe that this problem isn't that big of a deal."

Conjure Bag says, "It is collapsing NOW, at this moment."

"The question NOW is: can the collapse be arrested?"

Thanks Nemo, you cleared up more than a few questions I had.

Ditto.

Pretty sure I read about this before, but your example is much easier to remember.

MP: The question is, how many or the perpetrators will be arrested?

eli- "i don't see a level of fear that suggests a total collapse."

Eli, it doesn't happen that way. You don't hear the shot until it hits you.

The global system is seizing up. Banking is a faith-based business. What do you call what's happening, business as usual?

Do you believe?

Love it!!

MP says: "Banking is a faith based business".

Correcto mundo!

And it is now "Come to Jesus" time.

-- Hiding out

Just talked to a realtor neighbor.

She is under the impression I have been looking for a house (as I pick her brains).

She has had some clients who are stuck with two homes (bought one before selling the other).

I asked her for an update.

She said they still have two houses.

She said she is trying to convince them to borrow out as much money (HELOC I guess) as possible and then short sell or walk away.

If this is being spread about among realtors then watch out.

There may be alot of people who would like to "cash out" right now who are more likely to get big bucks by mortgaging to the hilt and then walking away, rather than trying to sell in this market. Perhaps you can borrow $200,000 grand on your house but may only get $100,000 grand if you priced it to sell

The hit to FICO will probably be shortlived in this world.

It's interesting that a realtor is not only thinking this way, but also recommending it as a strategy for her clients.

Avg Joe - would like to hear more about that possibility in terms of how plausible it is - anyone out there want to comment?

I have a brother in law who makes $125 grand. He bought a house in Arizona for $500,000 about 3 years ago. It shot up to about $900 grand at the peak according to Zillow.

He recently bought a $300,000 beachfront condo in Mexico on the gulf.

I have been scratching my head as to why since I know he can afford both this and his house. Also, he was on board at least as much as I about the real estate world.

We don't talk, but I am beggining to suspect he refied on his house and pulled out the 300 grand and paid cash on the vacation spot (which he occassionally rents out between uses). He may have gotten a pay option on his main residence that he could afford until it resets, then will just walk away from the main residence and rent in the states and keep the vacation as a paid-off, income producing spot. It's in Mexico so likely safe from any perceived seizure I guess.

He telecommutes and was likely going to be moving to another city for his job anyway (away from Pheonix). So if he didn't do this, perhaps he could or should have?

I'd love to know.

F. Frederson--

Fraud to inflate it, fraud to deflate it, I guess.

Perhaps learning from the Fed:
Easy money caused it, Easy money will fix it?

It's clearly fraud, that wasn't my question. The issue is whether it is something that realtors could actually be recommending. I mean, lots of them are pretty dumb, but they can't be so hair-brained as to think there isn't something wrong with this. I just can't imagine it would be very widespread as a strategy that these people are pushing, especially when their latest PR is to show how honest they are and how "not a part of the problem" they are.

What I'm mostly wondering about is, is the system set up in a way that this could actually work for people, or does it depend on the state's particular rules with respect to what they can come after when a default results. They'd probably be able to look back at this type of behavior and see a behavior pattern that smells very fishy.

Based on the historical data posted, we are not looking at a meltdown. The spread is quite similar to that of prior big recessions - 1973 and 1981. Somewhat lower, actually. It's a strong indication of a recession, but an indication against anything more.

OT--about the stock market. Keep in mind that the last two weeks of December and the first two of January have the most bullish seaonality of the year. I hope to make some trading money on the long side. If we don't get a Santa Claus rally, this would bode poorly for the coming months. If we do get one, it doesn't mean that everything is rosey going forward. Take care.

Hey CR --

Lower rated companies also issues CP and this is the A2/P2 rating. In the current environment, much of this A2/P2 paper is Asset Backed Commercial Paper (ABCP), backed by, you guessed it, U.S. mortgages.

Are you sure? I thought the chart was comparing AA nonfinancial to A2/P2 nonfinancial, not ABCP (which is a separate category).

In other words, isn't the chart showing the spread between the lending rates to high-grade and lower-grade corporate entities? (With mortgage-backed ABCP having an even higher rate but not shown in that chart?)

I have to bookmark this page... The first and last time I will ever get to correct CalculatedRisk!

Fret not, Bush and Paulson will address this increasing discount spread with another plan, it will be called:

"Miracle Whip 2"

"Personally, I've become a little more sanguine about the possibility of a mild recession. "

Putting aside everything else, I wonder about the ability of the average American to withstand a mild recession these days. 25 years ago most people had savings and, if homeowners, manageable payments, and lesser credit card debt.

Today: too many people in homes they can't afford, too many with little or no savings, too many with too much consumer debt.

Given the weaker condition of the American middle class, couldn't a "mild" recession floor a lot more of them financially than we might expect? Leading to something of a cascade effect?

The auditor's report on ACA's last 10Q was an obituary. It's dead, but won't get in the box.