Conduits, SIVs, cash-hoarding, commercial paper restructuring and such
Yves Smith of Naked Capitalism is right – If Gillian Tett of the FT disappeared, we would be in a whole lot of trouble. I wouldn’t be surprised if a lot of central bankers rely on her reporting to understand developments in the arcane parts of the credit market almost as much as I do.
Her coverage of conduits and SIVs – basically mechanisms for banks to borrow short and lend long, but to do so in the modern “off-balance-sheet” and acronym-intense way – has been absolutely invaluable.
The troubles with these vehicles – it turns out that some of the acronyms they bought may not be worth quite as much as they paid, that the acronyms are difficult (if not impossible) to sell right now and that at least some of the money market funds who previous lend money to these “vehicles” would rather not continue to finance them – explain a large part of the recent liquidity crunch.
Tett, Davies and Cohen earlier this week:
“regulators are scrambling to understand what is happening in structured investment vehicles (SIVs), a breed of often huge, mainly bank-run, programmes designed to profit from the difference between short-term borrowing rates and longer-term returns from structured product investments.These have proliferated in recent years and control assets worth hundreds of billions of dollars.
Depending on whether they are fully rated by credit rating agencies and on how strictly they have to conform to certain rules, they are known as SIVs, SIV-lites, or conduits.They are typically quite opaque, invest in complex securities and often do not need to be displayed on a bank’s balance sheet.It seems they have played a key role in last week’s liquidity crunch. ….
These programmes typically invest in credit market instruments, such as US subprime mortgage-backed bonds and collateralised debt obligations. These assets tend to be the highly rated, supposedly safe versions of such debt, but in the recent fear-driven turmoil have shown just how illiquid and hard to value they can be.
The profit for those who run such programmes comes from the fact that the assets pay fairly high yields, while the conduits and SIVs fund their purchases with short-term borrowings in which interest and principal payments are backed by financial assets that are deemed to have stable cash flow. Collectively this so-called “asset-backed commercial paper” – or ABCP – lasts for anything between a few days and a few months before needing to be refunded.
If these vehicles cannot raise money in the money market, they will have to turn to the banks for financing. Some have backup credit lines with a range of banks. Some may have to rely on their parent. In other case, the banks needed liquidity. And since a lot of these vehicles are owned by European banks, even if they (formerly) raised money in dollar and bought dollar denominated acronyms— a lot of European banks needed to raise a lot of cash. Tett, Davies and Cohen.
“By early August, the problems in the ABCP market had become so serious that some European banks were preparing for additional calls on credit lines to SIVs. But the banks are also grappling with a backlog of unsold leveraged loans, which is placing additional pressure on their balance sheets.So early this month some European banks – and a few US institutions as well – quietly started trying to raise new credit lines themselves. That, however, triggered additional alarm, as rumours spread about the potential losses at SIVs – on top of problems in other corners of the financial world.”
The difficulties facing European banks likely explain why the ECB injected so much liquidity into the market last week.
It also explains (in part) why the banks are hoarding cash – cash they may need to lend to support their own “vehicles.” Tett.
These vehicles, which have proliferated in recent years, seem semi-detached from the banks, since they raise their own finance and thus do not (usually) need to be displayed on a banks balance sheet. But there is a crucial rub: if conduits cannot raise finance the normal way, they can go back to the banks to get emergency liquidity lines.
Right now, nobody knows exactly how many SIVs or conduits have actually asked banks for help. But what is crystal-clear is that the conduits and other vehicles are now facing funding problems, since investors are no longer willing to buy the asset-backed commercial paper they issue. Thus banks are responding by hoarding whatever funds they can, either because liquidity lines are being called, or in anticipation of such demands.
And, just as a frenetic stockpiling of baked beans tends to fuel panic, the very fact that banks are grabbing for cash is making investors even more nervous, particularly in the dollar market where many investment vehicles have raised funding in recent years, even if they are based in Europe (ironically, because the dollar market was supposed to be ultra-liquid.)
There is another solution. Rather than coming up with funds to pay the commercial paper that cannot be rolled over as it comes due, the maturity of the commercial paper could be extended. Call this the Canadian solution. Canadian borrowers and lenders all got together and agreed to extend the maturity of a bunch of paper – turning short-term commercial paper into longer-term (three to five year) floating rate notes. The New York Times reports:
“the group agreed to convert asset-backed commercial paper, which normally matures in 30 to 60 days, into long-term notes with a floating interest rate. Until that happens, they have agreed not to make margin calls on holders of the paper for 150 days and to drop all current liquidity calls.”
That sounds a bit like Korea’s agreement with the international banks to rollover their maturing loans to Korea back at the end of 1997. And, just as it was easier to get the banks to rollover loans to Korean banks (guaranteed by the Korean government) than to rollover loans to Indonesian firms, those holding Canadian commercial paper were likely more willing to extend the maturity of that paper because they are confident that the assets backing Canadian dollar denominated commercial paper are of relatively high quality.
There is another reason why the Canadian solution may not work more elsewhere. Tett notes:
“it is one thing to get two dozen Canadian banks to agree a swap; it is quite another to arrange a restructuring with the 6,200 financial institutions that deal with the ECB (or those interacting with the Fed).”
The proliferation of these vehicles also helps to explain a couple of things that have puzzled me for a while.
One is how the banks made money with a flat to inverted yield curve over the past few years. The answer seems to be a combination of leverage and taking on more credit risk. The leverage came from the SIVS. The Economist:
“Making matters worse, some banks even manage SIV-lites (echoing the covenant-lite trend of the leveraged-loan market). These have fewer diversification restrictions and involve borrowings of up to 40 to 70 times equity collateral. Most SIV-lites made big, focused investments in American mortgage securities, including subprime and Alt-As, which are also troubled in spite of their better credit quality.”
That is a lot of leverage. And the rating agencies aided the banks quest for yield. Borrowing short-term in the money market to buy long-dated Treasuries clearly didn’t work – not with an inverted yield curve. But you could make money borrowing short to buy CDOs and the like. Taking a bit of credit risk was essential. And since these instruments were highly rated, it was possible to gear up.
The other mystery? Why Europeans were such big buyers of US corporate debt. The TIC data doesn’t leave much doubt on this point. But I always wondered how those purchases were financed.
Europe after all doesn’t have a big current account surplus, so it doesn’t have lots of funds to invest globally (though it can – and does — borrow from the world to buy the world’s assets). And borrowing euros to buy dollar-denominated assets seems, well, rather risky. The carry could not have consistently covered the losses associated with the dollar’s long slide. Yes, the currency risk could be hedged, but someone has to provide the hedge.
But if – as seems likely – a lot of “European” purchases of US corporate debt (a category that includes private MBS and host of acronyms) were financed by selling commercial paper to American money market funds, well, the European funds were only taking only the credit risk, not the currency risk. They also were not providing any net financing to the US – the inflows associated with European purchases of long-term debt were associated with short-term outflows from the US, as Americans effectively lent Europeans the money needed to buy US debt.
There is a bit more to the “European financing of the US” story. There are some strange correlations between oil and European demand for US debt. And some European vehicles might have tapped offshore sources of dollar liquidity, not just the US money market. More on that later – it takes us off in another direction.
UPDATE: Prier du Plessis has found a diagram showing out how CP funded conduits/ SIVs that bought high-yielding acronyms (CDOs and the like) can create liquidty (and perhaps solvency) problems for their sponsoring banks. Hat tip, Barry Ritholtz of the Big Picture.
Let me get this straight. There is an overnight REPO inter-bank rate, set at 5.25%. There is a Fed discount window that used to be 6.25% and now 5.75%. Why someone in their right mind would pay more if cheaper overnight rate is available? Why any prime broker-dealer would ever use discount window?
Now, REPO apparently requires hard collateral such as US treasuries. Fed now is willing to accept MBS, which other banks refuse to lend against! That means we do not have a liquidity crisis! If that was the case – REPO rates must have been higher than Fed discount window rates. We have a crisis of banks not having enough “good” collateral and not trusting each other with all this MBS junk.
That perfectly explains why effective overnight rate has been well below Fed target rate. There is no demand for the inter-bank funds, demand that can be backed with required collateral!
With that, even if Fed lowers rate to zero – it is not going to help at all. Banks will not be willing to lend to each other because there is no collateral to lend against!
http://www.spacewar.com/reports/China_and_The_Dollar_Crisis_999.html
The lesson of the past two weeks in the markets has been the deepening interdependence of the global economy and its financial system, and everybody has an interest in keeping it going. The grim news is that these days, that means everybody has an interest is nursing the United States back to health. In Washington, Frankfurt and Tokyo, the central bankers put aside their concerns about moral hazard and made funds available to bankers and investors who make over-risky bets, judging that the real priority was to keep the wheels of credit turning.
“Wealth managers are urging millionaire clients to sell shares and build up cash until stock markets settle and low prices provide new buying opportunities… Rich clients… are a formidable force on financial markets, holding an estimated $37 trillion in assets worldwide…” http://today.reuters.com/news/articleinvesting.aspx?type=etfNews&storyID=2007-08-17T161951Z_01_L17619140_RTRIDST_0_ECONOMY-CREDIT-WEALTH.XML&pageNumber=2&imageid=&cap=&sz=13&WTModLoc=InvArt-C1-ArticlePage2
“…An anonymous investor has placed a bet on an index of Europe’s top 50 stocks falling by a third by the end of September…” http://www.financialnews-us.com/?contentid=2448565379&page=ushome
It’s important to differentiate between liquidity risk and interest rate risk. It’s been a long time since well-run banks simply bet the place on the yield curve. You’ll also find that most SIVs have interest rate risk limits and controls that tend to reign in the amount of yield curve risk taken. This is typically done with interest rate swaps in the vehicles. Liquidity risk is a different risk, which is the mismatch in principal cash flows – not in interest rate sensitivity. That’s what the Canadians ran into, which is why they agreed to extend term on CP.
guest — thanks for the clarification. makes sense. the vehicles then are pure liquidity and credit plays …
Mikhail — i should check and see if the fed changed its policy today, but it generally only accepts MBS with an Agency guarantee as collateral — and that isn’t the real junk. indeed, folks like Buiter content that the Fed and ECB should be buying (i.e. making a market) in the truely illiquid and riskier stuff rather than lending against the good stuff in the hope that helps … largely b/c they are worried that lending against the good stuff and indirectly supplying liquidity leads to an excessively large liquidity injection.
I keep asking this on various blogs over the past week, and never get a good answer. Almost all depositories can turn to their Home Loan Bank to get an advance against MBS. The fact that the Fed felt the need to liquify MBS tells me that the Fed is offering liquidity not to the banking system, but to one or more big non-depositories that are in a world of hurt. If the banking system is (or at least could be via advances) liquid why the need to grease the skids for non-depositories?
i am not the right persoon to ask — not my speciality. I would tend to be surprised if a big universal bank (think citi) which is part of a big financial firm that does banking/ insurance/ i-banking and the like turned to a Home Loan Bank for liquidity, but that may just betray my total lack of knowledge about this topic …
Why does Wall Street always get bailed out?
http://biz.yahoo.com/hftn/070817/081707_sloan_enablers_fortune.html?.v=2
Wall Street loves to talk about letting financial markets weed out the weak. But when the Street itself gets in trouble, it sticks out its little tin cup, asking for help. And gets it.
The Street itself? It’s bailout city. Even before the Fed made a symbolic half-point cut in the discount rate, it and other central banks from Switzerland to Singapore were trying to rescue the Street by injecting hundreds of billions of dollars into the financial markets and announcing they will put up more, if needed.
Hello? If you believe in markets – which I do – this rescue is especially galling, because Wall Street enabled this mess in the first place. How so? By happily sucking up hundreds of billions of dollars’ worth of suspect mortgages from marginal U.S. borrowers-and begging mortgage makers to create more of them. The Street sliced and diced this financial toxic waste into a variety of esoteric securities, making a nice markup when it sold them and generating a continuing stream of profits when it made markets in them.
It’s really amazing: Most of the loans to substandard creditors borrowing 100% of the purchase price of homes they couldn’t afford were rated the same as GE and the federal government. That makes no sense. But the money rolled in, and Wall Street-by which I mean the world’s biggest and most important financial institutions-didn’t care about the real world or ask any questions. It was too busy making money, and cashing bonus checks generated by subprime-mortgage profits.
But the world’s central banks aren’t letting the big guys fail. Think of it as the Escape of the Enablers.
Mikhail,
The discount rate is an emergency lending facility that is available from the Fed all/most of the time, whereas the Fed funds target rate is an interbank rate that the Fed attempts to steer the market towards by an occasional open market operation (OMO), like a system repo or a coupon pass. The Fed funds rate may rise well above the target within the day, or the other banks may not accept the collateral offered, in which case a bank may still use the discount window even though the rate is above the Fed funds target. Lowering the discount rate like today should mean that the spikes in the Fed funds rate between Fed OMOs are capped at a lower rate.
One reason why there may be insufficient high quality collateral like treasury and agency bonds is that the central banks who have absorbed so much of this debt may not lend their bonds, especially as general collateral.
Written by RebelEconomist on 2007-08-17 14:30:13
Is the fed funds interbank market collateralized?
I know bank discount window borrowings and dealer repos are collateralized, but I assumed the interbank market wasn’t.
Guest,
Come to think of it, I don’t think that the interbank Fed funds market is collateralised. The OMOs I mentioned are, and in these, the Fed takes only treasury and agency collateral. A wider range of collateral is taken at the discount window.
If you are a hedge fund manager, you are not going to be bothered by a recession. Even if your hedge fund collapses, you sell your BMW, look up your Rolodex for your friends in the business and move on. You might have to move to a smaller mansion, but having a recession or even losing your job won’t hurt you in any real way. You have skills, you have connections, and you won’t starve. You might have to move into a smaller mansion and drive an Honda instead of a BMW, but there is nothing really that bad that the market will be able to do to you. The typical response of a dot-com million or hedge fund manager whose fund has blown up is to start another one.
If the Fed tightens credit and pushes the economy into a recession or worse yet a depression, the people that are really going to get hurt are people just getting by on minimum wage who have nothing to do with the decision that led to the mess.
DC: Wall Street loves to talk about letting financial markets weed out the weak.
Wall Street *doesn’t* like to talk this way. Wall Street tends to vote Democrat rather than Republican, and New York has some of the highest tax rates in the United States. The editorial pages of the Wall Street Journal has some free market conservatives, but the news section has been rated as one of the most liberal papers out there.
CEO’s of large Fortune 500 companies do, but they are a different group of people. Also there are some political differences between hedge fund managers and investment bankers.
Thanks. Very interesting aspect of the system.
Here’s something I just dug out – looks like an agreement of a US bank with its correspondents on fed funds borrowings – appears to be collateral free up to the lending bank’s limit and collaterilized over any excess over that normal limit
http://www.commercebank.com/pdfs/Correspondentletter.pdf
Interesting aspect of system credit risk – that Fed advances to banks through the window and to dealers through repo require collateral, but banks dealing among themselves don’t – I wonder what the logic of that is?
To confirm (I looked it up in Meulendyke): the interbank Fed funds market is unsecured, not collateralised. Sorry if I gave the impression that it is. Good spot Guest!
Let’s recap events thus far….
China depegs -> China buys fewer treasuries and MBS -> interest rates rise -> subprime borrowers default -> hedge funds blowup -> ?????
I doubt anyone could have seen this chain of events start when the PBC decided to depeg. This is precisely why I’ve always been against a sudden depeg. I wasn’t able to predict what bizarre things would happen, but I knew that something bizarre would. The world economy just has too many moving parts for something unexpected not to happen.
As things go, things are happening slow enough for people to think and respond. If you have a sudden appreciation, then the bizarre and unexpected thing that will happen will happen too quickly for anyone to respond, and usually the results are disastrous.
2fish– one problem with your story. china isn’t buying fewer treasuries and agencies. it is buying more. The $250b in h1 reserve growth had to go somewhere …
the pboc hasn’t stopped intervening, it didn’t ever allow any major moves in the rmb/ $ and it hasn’t stopped (in any enduring way) buying us debt.
this crisis stems from private activity — and specifically the risks that some folks took in a world where many big firms weren’t borrowing much and where china was snapping up a lot of “safe” (as in lacking credit risk) assets, helping keep their yields down.
Guest, may be because banks can just stop lending to other banks if they wish? I heard that doing the paperwork for collateral to central banks was quite boring for private banks so they always try to minimize it.
Written by Laurent GUERBY on 2007-08-17 15:40:59
Well, both banks and central banks bother to take collateral from dealers, and it has something to do with very real credit risk.
There must be something in the institutional structure and arrangement of the interbank fed funds clearing system (whose balances ultimately clear through the Fed) that allows the participants to operate without assuming undue credit risk. After all, banks do fail (Herstatt and Continental Illinois come to mind).
R. Economist – any further insights?
I presume Twofish was being rhetorical……sub-prime has been going bad for months – since at least February.
But Twofish, what would you do about this mess? It seems to me (and has since at least 1998) that if easing manages to stop the bust, the problem just returns even bigger. Maybe it is not now possible to find a solution without risk.
A rapidly inflating asset bubble is equally distorting to the efficient allocation of capital as is a high inflation rate. With the cost of capital remaining well below the “real” inflation rate, the Federal Reserve risks both a higher consumer inflation rate and inflating various asset class bubbles, from bonds to real estate. In short, the Federal Reserve monetary objective should not be the inflation of one asset class bubble after another. The Greenspan-Bernanke inflation of an asset bubble in real estate ameliorated the fallout from the earlier Dot-Con stock market bubble, but the larger massive misallocation of capital has resulted in the even bigger mess in bad subprime and Alt-A mortgage loans, which has had systemic failure implications for the entire US banking system. Federal Reserve regulators have proven irresponsible in their lax oversight of the banking system, and providing excessive “cheap credit”.
Laurent,
I am afraid you are reaching the limits of my understanding of US money markets – I am not an American anyway! I believe that the banks in the Fed funds market are just perceived as better credits than securities dealers. They only use the discount window when they are shunned by their fellows.
bsetser: 2fish– one problem with your story. china isn’t buying fewer treasuries and agencies.
It’s buying fewer treasuries and agencies than it would have had it kept the exchange rate at 8.11. It shouldn’t be too hard to calculate the effect of the change from 8.11 to 7.6, and the resulting change in interest rates.
Rebel: But Twofish, what would you do about this mess? It seems to me (and has since at least 1998) that if easing manages to stop the bust, the problem just returns even bigger.
If you look over the last four hundred years of world economy history, financial panics have been a part of the system. They are like thunderstorms and hurricanes, and the trick is to make sure that as few people as possible get seriously harmed by them.
DC: In short, the Federal Reserve monetary objective should not be the inflation of one asset class bubble after another.
If one asset bubble after another is necessary to keep the party going, I don’t see why not. Also the US banking system is nowhere near “systemic failure.”
If China, Japan, and Korea are continuing to take US Treasuries as usual, will they continue? A drop of Fed Funds rate from 5.25% to 4.75% would immediately decrease the market value of collective holdings by some 9.5%. That would be a big hit if Fed panics for domestic reasons.
To DC: The thing that I don’t understand is that you’ve been critical of the Washington Consensus and the IMF but at the same time you seem to be advocating that the US follow the completely disastrous policies of that view.
The thing to do when you have a financial panic is to pump liquidity into the system, and the fact that the IMF’s prescriptions caused the reverse to happen is why those policies were completely destabilizing to Latin American and Southeast Asia.
It may be “poetic justice” to have the US economy fall apart for following the stupid economic policies that it once advocated, and which wrecked other countries. Certainty one can argue that the United States is hypocritical for not taking its own medicine, and one can legitimately argue that the world is unfair for having Indonesia and Thailand being small enough to have be forced to listen to the IMF, while the US can basically ignore it.
But at the end of the day, if you are against the Washington Consensus and IMF policies of the 1990’s, I don’t see how you can argue that loose money in response to a financial panic is not in the US national interest.
Sorry, Twofish,
I understand that you’d want to give to US the same medicine that US gave to Asian countries. And I think that it’s a totally fair play.
But I’m afraid that everybody in this blog knows that the IMF prescription was a disaster for Asian economies ten years ago.
So, are giving us a solution or a revenge? Talking about “poetic justice”…
I think that US don’t apply poetics in economy and less in justice, though talking about spreading democracy…
Aren’t you playing in both sides, with different cards?
I’m quite slow, but I don’t catch the meaning of your message.
twofish states: “It may be “poetic justice” to have the US economy fall apart for following the stupid economic policies that it once advocated, and which wrecked other countries.”
Twofish, if you’re wishing that “the US fall apart”, you are wising for the world to fall apart. The Fed was not the only central bank pumping in liquidity over the past two weeks.
Warning! Warning! I’m getting “Information Overload” for the past few days here and else where.
koteli – I believe Dave Chiang wants justice and for the Fed to follow its agency mission to tighten money to fight inflation (asset bubbles) and not cut interest rates to bail out Wall Street; while Twofish wants the least harm done to the people by whatever action the Fed decides or has done – I don’t think Twofish is playing both side but merely pointing out the “irony” of how one might take an action that’s might go against its stated mission or remedy propelled to other smaller nations with a financial crisis in the past.
Anyway, it seems the global financial markets is so “intertwined” and with so-called creative financial instruments (SIVs) abling to turn off the “interest risk” factor that no matter what the Fed does to the interest rate, the supposedly right financial cure may not be all that effective and could possibly back fire too.
Of course, Asian Man,
I’m quite slow, but I feel myselt like talking to one of the 7th samurais by Kurosawa, who at the same time is a more clever finalcial man than macro man, and instead of humor, is using lots of irony, but, a big but, he wants the party going on.
Who’s party? Too many things togheter…
As a perfect capitalist Chinese and financial expert, he wants the socialization of costs and the privatization of benefits.
A new class of Chinese communism…
It was obvious that Chinese were clever enough, even more patient that US-Americans in general, but I expected a new medicine from Twofish, not the IMF’s one.
But to use “poetic justice” while ranting to DC…
Someone is using too much “leverage” or I’m a bit lost
Someone could help me?
Twofish
“If one asset bubble after another is necessary to keep the party going, I don’t see why not. Also the US banking system is nowhere near “systemic failure.”
Capital misallocated in building the McMansions asset bubble is capital wasted that should have gone into more productive uses. The subprime and Alt-A problem is not insignificant; 30 percent of mortgages amounting to 3 trillion dollars issued in the past several years have been non-prime. The US has under invested in physical infrastructure, and industrial production facilities relative to competitors in Asia and Europe, which has resulted in the record US trade deficit. The banking system was near a “systemic failure” that required the European, US, and Japan Central banks to inject over $200 billion in high powered liquidity over the past several days. That liquidity in a fractional reserve banking system is multiplied at least ten fold into 2 trillion dollars.
To koteli:
I was pointing out that there is a massive inconsistency in DC’s position. On the one hand, he seems to argue that the policies of the IMF and the Washington Consensus were disastrous (which I agree with), but on the other hand, he seems to argue for the Fed to follow the same policies (which I don’t agree with).
DC: Capital misallocated in building the McMansions asset bubble is capital wasted that should have gone into more productive uses.
The trouble with this is that you start sounding like the IMF and the supporters of the Washington Consensus who you purport to oppose. Worrying about capital misallocation in the middle of a liquidity crisis is like forcing a heart attack victim to run to the hospital so that they can get exercise. A liquidity crisis is the worst time to try to undertake reforms intended to boost capital efficiency. When you have a crisis like that, paying half the population to bury money so that the other half can dig it up is the standard economic solution.
What you have to ask yourself, Twofish, is where do the resources that feed the party come from? If this not sustainable, then, as someone once said, it will stop. Is the resulting hangover disproportionately worse than the party was good? Your heart attack analogy is wrong; the economy does not die. So what does it suffer?
There are many instances where policy spends a lot to avoid something that it is believed will be worse but the exact tradeoff is not known. For example, on this reasoning, the US keeps over two million people in prison at a cost of about $50bn per year.
I do not know the answer for sure, but in that position, I favour letting the bust take its course, and saving the intervention until it becomes apparent that there is no bounce, and that even those who were cautious through the bubble are suffering. Something like this happened in the financial panics through most of the four hundred years you mention – because currencies were tied to gold, so central banks had restricted ability to provide liquidity.
I do not advocate a return to the gold standard, as I consider gold a dangerously undiversified backing for money, but some basket of hard assets seems sensible to me. Monetary policy based on interest rate targeting seems particularly unsafe to me, because interest rates are inherently about inter-temporal substitution, and politicians and even central bankers with limited terms must be prone to using it in a biased way.
By the way, I have been making this argument since 1998, and have found it unpopular with most policy makers or academics without hearing a convincing rejection, hence “RebelEconomist”!
if the complexity and obscurity of these new mechanisms is baffling – even to the experts – then the man in the street doesn’t have the option of following the game, and is left to react to the whiff of panic in the air.
there is a ponzi quality to these mechanisms. that means that the significant factor is not the quality of the scheme itself, but simply the confidence that leads new investors to join up. likewise, as a result of ’swarm intelligence’ – a naturalists’ term for how shoals of fish and flocks of birds wheel in apparent unison – the quality becomes irrelevant once the little people stop signing up and change direction.
the only question for a mr. ponzi is ‘are new people still joining ?’
Guest, may be debt ranking is quite high for those inter-bank short term loans.
RebelEconomist, I’m french
. And to be clear I heard that line for European Central Bank, I know nothing about Fed relations with USA private banks.
hey, does anyone know if the nyfed is accepting ABCP as collateral thru the discount window? or is it just on a case by case basis, selectively choosing what they want to (re)liquidate?
Oldvet, reducing the short-term rate will not effect China’s holdings, since the majority of their holdings are in long-term Treasuries. It will actually increase the price of those bonds since they will yield more than new issues. Of course, that is offset by the fact that the dollar will become worth less against other currencies.
We need to remember that although we commonly used names like Citi and Countrywide, all these entities has multiple business structures. Some are investment banks, some are depository banks, etc. Countrywide Financial Corporation is the parent, Countrywide Home Loans is the mortgage broker, Countrywide Bank is the depository institution, and they have several others. CWFC does not make loans, take deposits, it is the holding company of all its little children.
re: “it is one thing to get two dozen Canadian banks to agree a swap”
“…The lenders who have said no, including Deutsche Bank and Canadian Imperial Bank of Commerce, are taking advantage of a loophole that only exists in the Canadian market, where saying no is easier than anywhere else in the world… In Canada, the way the contracts between lenders and conduits, or funds, are written, the conduits can only demand payment in the event of a “general market disruption,” which is defined by many as a time when the entire commercial paper market shuts down…” http://www.globeinvestor.com/servlet/story/GAM.20070816.RABCP16/GIStory/
re: “If one asset bubble after another is necessary to keep the party going, I don’t see why not.”
“…CIBC’s strategy is based on bringing Chinese companies to North American stock markets, and the firm calculates that it’s been involved in more deals than any other investment bank in the past four years when it comes to issuing stock for Chinese companies listed on U.S. exchanges. The pace is picking up…” http://www.theglobeandmail.com/servlet/story/LAC.20070807.RLEAGUEWORLD07/TPStory/Business
Here is the list of acceptable collateral for the discount window:
http://www.frbdiscountwindow.org/discountmargins.pdf
Look at the bottom: SubPrime Credit Card Receivables
re: “If China, Japan, and Korea are continuing to take US Treasuries as usual will they continue?” – what are their options?
“…By cutting the discount rate, the central bank is trying to manage the tricky task of keeping the financial system humming without bailing out people who simply made bad bets… In practice, there has been a stigma attached to using the discount window, and banks have rarely used it. Now, the Fed is effectively encouraging banks to do so. “They’ve opened the door… That doesn’t mean anyone is going to show up.”…” http://www.washingtonpost.com/wp-dyn/content/article/2007/08/17/AR2007081700618_2.html
“…Russian banks borrowed heavily abroad in recent years, taking advantage of low global interest rates… Russian financial markets could be hit hard by a nosedive in global sentiment owing to the rapid growth in borrowing by some consumer lenders. “It is a boom which is not sustainable… Russia could lose a large source of financing as global hedge funds reel from the subprime crisis. “Russia is losing an entire segment of the market which has been piling Russian assets on their backs…” http://www.ft.com/cms/s/24621b40-4c35-11dc-b67f-0000779fd2ac.html
computer trading.
at one level it might seem to go without saying that computers and computer trading are rational. but computers in a market full of similar computer trading programmes are largely responding to what other similar programmes are doing right at that moment. thus computers are also flocking – using ’swarm intelligence’ like flocks of starlings or schools of fish.
after the 1987 – (was it?) – plunge they changed the rules for computer trading. no doubt they will again. when the horse has bolted more ’swarm intelligence’ agrees to shut the stable door.
i hadn’t realized that triple AAA CDOs and CLOs are acceptable collateral at the discount window …
“…The exposure of France’s BNP Paribas to subprime risk is limited and manageable, while the impact on quarterly earnings from the frozen funds would be “zero”, its head of asset management said on Friday… The bank was working to ascertain the mix of investments in the funds’ assets. He said it could not yet determine the value of the funds… Valuation of the funds would resume as soon as liquidity returned to the market, the firm said…” http://www.gulfnews.com/business/Banking_and_Finance/10147396.html
Also non-AAA CDOs and CLOs (at more margin), by the looks of it (just below)
oops – says excludes non-AAA
Capital misallocated in building the McMansions asset bubble is capital wasted that should have gone into more productive uses. The subprime and Alt-A problem is not insignificant; 30 percent of mortgages amounting to 3 trillion dollars issued in the past several years have been non-prime. The US has under invested in physical infrastructure, and industrial production facilities relative to competitors in Asia and Europe, which has resulted in the record US trade deficit.
One thing you forgot to mention is U.S. investment in committing massive violence in the name of democracy, security, peace, and prosperity in Iraq and elsewhere. The infrastructure of war ain’t cheap! How it benefits my compatriots and myself remains a mystery.
A new twist? Is this why the banks were so worried
http://www.securitization.net/knowledge/article.asp?id=1&aid=7527
market-value swap counterparties for the paper
American Home’s Broadhollow Funding on Monday became the first conduit to extend payments
All of Broadhollow’s $1.6 billion of outstanding paper is due to mature by the end of this month. Once it extends, Broadhollow must liquidate the underlying collateral, consisting of prime-quality jumbo and alternative-A loans, and repay investors within 120 days.
That’s potentially bad news for ABN Amro, Bank of America, Calyon and Citigroup. As market-value swap counterparties for the paper, the banks must cover any shortfalls in the likely event that some of the mortgages have deteriorated in value. Thus, the banks were scrambling this week to figure out how much the assets are worth.
CIBC major shareholder is Li Ka-shing (or now the Li Ka-shing foundation)
He is the richest person of Chinese descent in the world most influential investor in Asia
the 9th richest man in the world
It look like the ratings agencies will have to downgrade the ratings on a lot if this junk but many of the owners will then legally be unable to hold these lower rated issues and will have to sell
“…Coventree’s offerings still carry top ratings from debt rating agencies. “You can be right as rain on your investments, but if everyone in the market is betting against you, you’re going to lose money”… Debt market players say it will be difficult for Coventree to bounce back from this week’s setbacks, and speculate the company may be sold…” http://www.globeinvestor.com/servlet/story/GAM.20070818.RCOVENTREE18/GIStory/
“…Six of China’s largest banks may report losses amounting to 4.9 billion yuan ($647 million) on subprime-related investments, according to a report in Capital Week, a mainland magazine…” http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_wilson&sid=aloy6uDFHM6w
“Global financial markets faced a real crisis last week… This is why the instant recovery operation came from… Europe…the Central Bank of Japan… China, Malaysia and Australia… merged world economies and made it a must for all to cooperate… But, where did the problem stem from? …high-risk mortgage loans, with the purpose of increasing profits and imposing high interest rates on people without good credit records…” http://archive.gulfnews.com/articles/07/08/16/10146870.html
“…thanks to globalisation, the subprime woes have been transported to our shores… Widening credit spreads and negative international investor perceptions are forcing regional companies and banks to postpone the pricing of their forthcoming bond issues… because they find it difficult to price their issues. After all, credit is and always has been all about confidence…” http://archive.gulfnews.com/articles/07/08/01/10143238.html
“China has ordered its media to report only positive news… ahead of the most important meeting of the communist party in five years…” http://www.guardian.co.uk/china/story/0,,2151227,00.html
market value swap counterparties — whoah. new term to me. i am not even sure i really understand a market value swap.
tis interesting though that a lot of folks are exercising their options to extend (and those options are no longer available in the market)
SIV Lite
With expensive liquidity facilities making it difficult to place a CDO that can tap the CP market, and tightening credit spreads making traditional SIV structures less appealing, dealers began searching for alternatives. They came up with the SIV-Lite, which seems to combine the best of both the CDO and SIV worlds.
So an SIV-Lite actually looks a lot like a CDO
There are other key differences between an SIV and an SIV-Lite. “SIV-Lites are much more highly levered than the traditional SIVs
A traditional SIV will generally offer investors 12 to 16 times leverage, but SIV-Lites have equity leverage of 40 to 70 times, depending on the collateral.
SIV-Lite structurers tend to source debt from sectors with greater spreads than those SIVs
However, SIV-Lites come with greater funding risks than traditional SIVs,
Brad,
Very educational. Thanks!
Li Ka-shing sold his CIBC shares years ago
no such thing as a ‘market value swap’
maybe a credit default swap
Twofish,
Thanks for your answer, but my question about your playing in both sides meant that at the same time you reject IMF’s prescriptions to get out of the crisis, you support the injection of liquidity by the Fed to bail out as the best solution to avoid painful consequences to ordinary people. It’s a sort of bifurcation of policy, like the real economy and financial worlds are bifurcated, isn’t it?
Now that the mess created by financial experts are well-known to everybody in the street, and even the cheerleaders are talking about bubbles, you know that the party is going to an end (Brad was in the soft landing view, but I think that lately he’s now changing his mind to a bit more roubiniesque view; sorry the license, Brad!), a bad one or a worse one, who knows?
“If the Fed tightens credit and pushes the economy into a recession or worse yet a depression, the people that are really going to get hurt are people just getting by on minimum wage who have nothing to do with the decision that led to the mess”, you say.
Where is the root of the problem? In the tightening of the fed or the financial engineering party going on for several years?
I think that the Fed and the IMF are eggs of the same chicken, and you bet one egg against the other, but looking as a fair player.
I’m as skeptical as gilles in policy in general and more in US policies, but there are some brave people trying to do this world a better place, more faithful than me, who invest a lot of time and knowledge trying to correct this stupid world.
Here goes an example, written by a banker (and a friend of commenter Laurent Guerby, called Jerome Guillet, but more well-known by Jerome a Paris in the blogworld).
I’ll take the license to publish his last blog-post in next.
The politics of the market crash
by Jerome a Paris
I wrote a bit on this in my diary yesterday on the now universally acknowledged busting of the financial bubble, but I think it is worth revisiting.
The current financial crisis literally begs for the left to reclaim the political initiative and say out loud some hard truths about the devastating economic policies of the past 25 years inflicted upon the world by Reagan and Thatcher with the support of the neo-libs and the rightwing noise machine.
Unless these points are made, the wrong lessons will be drawn from this crash. Because make no mistake about it, the sole cause of this bubble and its consequences is the feudalist economic ideology of the right.
Blaming rating agencies and computer models, as is being done, or focusing on the bits of data that still look fine (the meaningless unemployment rate, the wealthy-confiscated average growth, the absolute level of the Dow Jones), are just a way to avoid the real debates, the ideological ones:
- that over the supposed superiority of the “efficient markets” to drive economic behavior,
- that over the insistence that things be valued in dollars (discounted cash flow) or be worthless,
- that over the idea that greed is good and leads to socially acceptable outcomes.
The core of the Reagan-Thatcher revolution is that greed (especially that of financiers capturing future cash flows of the real world for their personal, immediate profit) spontaneously improves the common good (because it generates apparent GDP out of thin air, and that GDP could be shared) and that all regulations and taxes that limit it should be dismantled.
Well, we’re about to see the price of that grand collective delusion. But we should not mistake our target. Bankers and financiers should be made to pay for their follies but that is only a small part of it. The big thing is to blame it on the failed, and utterly dangerous, ideology of the efficient-markets/society-doesn’t-exist/government-is-the-problem crowd.
Otherwise it will start again – and not only that, but their proposed remedy WILL be lower wages, fewer worker rights, lower taxes and the other usual “reforms.”
As I argued in yesterday’s diary, the fact that a bubble is now publicly acknowledged ensures that there will be a major economic correction, irrespective of whether there is a full financial meltdown or not. There will be pain. There will be calls for bailouts. There will be further pressure on the lower and middle classes to bear the brunt of the price. Unless we have a coherent alternative economic discourse on the crisis – that of strict regulation of the financial world (real regulation, not the busybody but pretend kind like we have right now), financiers and their paymasters, the wealthy, will continue to capture wealth, even as the pie shrinks.
This is what needs to be blamed, again:
- the ideology of greed (this is the core of the conservative talking point: the idea that being selfish is somehow good for others as it creates more wealth, and thus that unregulated markets are good for society);
- the idea that only financial valuations give worth to anything (again, the cult of the dollar, and the underlying notion that trying to get rich is a good thing for society);
- the notion that wage inflation is bad but not asset price inflation (money going to the poor is bad, money going to the rich is good); the shockingly lax monetary policy of the past decade (when markets go up, fuelled by what is essentially easy public money, it’s capitalism at work; when markets go down, because of poor investments by the rich, it’s a systemic crisis and the rich need to be bailed out or else);
- the cheerleading by politicians of finance as the new engine of growth and wealth creation (industry, balanced budgets, communities are so yesterday and downright communist and evil);
- the unraveling of existing regulations (like Glass-Steagall) in the name of market efficiency, and the corresponding death of those old engineering concepts, resiliency, safety margins, redundancies, and of old old ethical ideas: reputation, community, duty to future generations.
This suggests a very simple political discourse; fighting these above trends with positive messages.
Wealth is not defined by how the richest fare, and should not be counted via how much they accumulate, but only by how the poorest amongst us are doing.
Society is not doing well when the rich get richer, but when communities care for their members, leave no one behind, and do not focus exclusively on how much money one has to rank and judge members. Richer does not mean better. Together is better.
Things built to last are the most valuable, even if they create no profit today. Infrastructure, education, careful nurturing of rare resources are investments that pay for all in the long run and can be handed over to future generations. Many government tasks are investments, not costs.
The financial crisis, if properly described, provides (together with the Iraq mess, the recent bridge collapse and other tales of Republican corruption) an unbeatable opportunity to make these points loud and clear – and to carry a positive message, not just the “we are not Bush” one.
Buyt if the left does not make that case, I am certain that the current mindset will continue to prevail and the dominant economic ideology will stay, to the detriment of the vast, but empoverishing middle class.
Twofish, a last comment,
To avoid the spreading of dangerous plant in a garden, is not enough to cut them (or next year will grow up strengthened). You have to take them out with their roots.
On the other side, if you want to make good music, you have to choose some roots to make your music worthwhile of a listening (or invent new roots if you are a genius).
The roots is he core of the problem, but they are different if you read Brad’s post or you read The Sun, or listen to CNBC or Fox-News. That’s the core of the matter.
I don’t trust any financial expert giving solutions o ordinary people, as I don’t believe in a US left party, when they are supported by the money of oil-industry, Pharm., financial worlds…
Anyway, even the most stupid man on earth is able to realize that this sub-prime mortgages crisis has been main news worldwide for the credit collapse of investment entities, not for the thousands of foreclosed homes of ordinary american citizens.
Because of that I take out my hat to an green-energy-investment banker, like Jerome.
The best for you all
PS: Sorry for the references Brad, Jerome and Laurent.
An overview of Washington Mutual’s subprime program can be found at http://investors.wamu.com/Interactive/LookAndFeel/102028/Subprime_061107.pdf. The “Conduit Strategy” is discussed on page 21. “Conduit Transaction Stats” are given on page 39. I found the long list of credit policy changes starting on page 14 rather interesting.
“Interestingly, in Bear Stearns latest 10-K filing with the SEC, they self-describe [at the top of page 54 if you want to play along at home] their activities conducted in off-balance-sheet-arrangements are described as follows:
In the normal course of business, the Company enters into arrangements with special purpose entities (”SPEs”), also known as variable interest entities (”VIEs”). SPEs are corporations, trusts or partnerships that are established for a limited purpose. SPEs, by their nature, are generally not controlled by their equity owners, as the establishing documents govern all material decisions. The Company’s primary involvement with SPEs relates to securitization transactions in which transferred assets, including commercial and residential mortgages, consumer receivables, securities and other financial assets are sold to an SPE and repackaged into securities or similar beneficial interests. SPEs may also be used to create securities with a unique risk profile desired by investors and as a means of intermediating financial risk. The Company, in the normal course of business, may establish SPEs, sell assets to SPEs, underwrite, distribute and make a market in securities or other beneficial interests issued by SPEs, transact derivatives with SPEs, own securities or other beneficial interests, including residuals, in SPEs, and provide liquidity or other guarantees for SPEs.
I make mention of the use of SPE’s – where the use of derivatives is concerned – because this term has a familiar “ring” to it. SPE’s were the very same accounting structures which Enron used to hide a quagmire of fraudulent OTC derivatives transactions. As Trinity University’s Bob Jensen pointed out in a paper titled, What’s Right What’s Wrong With [SPEs], SPVs and VIEs:
The Whitewing SPE is only one of the thousands of Special Purpose Entities set up by Enron CFO Andy Fastow with the assistance of its auditor, Andersen, and its law firm. The SPE appears to be almost hopelessly complex to hide risk as well as hide the trail of the millions of dollars Andy Fastow was making in double dealing at Enron.”
Does anyone out there know of a safe place to put money that still gets some kind of a yield? Are there CDs out there that are not subject to SIVs, CDOs, conduits ect.? Aside from auction rate securities, what other safe, semi-liquid vehicles are out there. Is FDIC insurance (which I believe, if one creates a number of revocable trust accounts, can insure up to $1,000,000) the only safe deposit insurance?
Black Swan. Well why not buy 3 month US Treasury bills? You can purchase them through you bank and get as many as you want, though you may have to pay a fee of some sort if the amount exceeds I forget what figure.
Ron: that’s the problem. Nobody knows how much “toxic waste” is floating around or exactly where it is. Hence the panic and paralysis. Dead bodies suddenly just pop up from nowhere.
Exactly. But have you ever seen a pundit or media figure or anybody worth mentioning ask that question? When I ask (former) warmongers what benefit the Iraq mess has brought to the US, I get nothing but a blank stare.
“One thing you forgot to mention is U.S. investment in committing massive violence in the name of democracy, security, peace, and prosperity in Iraq and elsewhere. The infrastructure of war ain’t cheap! How it benefits my compatriots and myself remains a mystery.”
That part of the last post got lost somehow.
SPEs have been around for almost 20 years. This all started when banks wanted to move assets off their balance sheets in order to avoid capital charges (a la Basle) while retaining a servicing spread on the business they originate. Bank’s view SPEs as an alternative source of funding. But liquidity and credit backstopping was pushed to the limit. It’s all about capital arbitrage.
“…If you had to list the culprits for the subprime-mortgage mess, the Financial Accounting Standards Board would be a good place to start… For now, the FASB is seeking another short-term fix by amending Statement 140. It could be a big one, though, aimed squarely at the securitization industry, which packages pools of loans into asset-backed securities and repackages them into exotica like collateralized debt obligations… ”
http://www.bloomberg.com/apps/news?pid=20601039&sid=aIOWGBzzWpNo&refer=home
“Treasuries are getting an unexpected boost from pension funds controlling more than $14 trillion… shifting away from stocks to prepare for accounting changes requiring them to more fully disclose the value of their holdings…” http://www.bloomberg.com/apps/news?pid=20601087&sid=aCoF9B9h8rxs&refer=home
“…The FASB concluded that specific guidance about the effect of the FDIC’s powers as receiver on the isolation of transferred assets would no longer be needed. Therefore, Statement 140 removes the specific guidance. It is anticipated that auditors will now seek legal letters from attorneys concerning isolation of assets when banks enter into securitization transactions… If securitizations are accounted for as sales (but not if they are accounted for as debt), the securitizer must disclose for each major type: 1. Its accounting policies for initially measuring the retained interests including the methodology used to determine fair value…” http://www.securitization.net/knowledge/accounting/fasb_140.asp
re: “The infrastructure of war ain’t cheap!”
Try telling the administrations of nations like China and Russia, whose predecessors managed to slaughter 10’s of millions without WMDs or help from the US. Not that the world’s most chronic wealth gaps and infrastructure problems have stopped them from rebuilding their own creatively financed military expenditures now that they’ve got money to spend.
How related information gathering and dissemination expenditures are categorized, and are changing – ‘US’ and globally – obviously more difficult to track and assess.
If anyone knows who/ what has controlling stakes in CIBC, BNP Paribas, Deutsche or any of the other big banks, please do tell. But there seem to be many ways of doing that…
re: “I wouldn’t be surprised if a lot of central bankers rely on her reporting to understand developments in the arcane parts of the credit market almost as much as I do.”
Terrifying prospect – let’s hope you’re joking. But distressing that one of “the foremost scholars of the Great Depression” may have the greatest responsibility for ‘protecting the smooth functioning of financial markets’ at a time when things are very, very different.
Why aren’t we hearing more about the BOE’s reaction to all of this?
“…even if Bernanke’s medicine works and the liquidity crisis ends, the shock of seeing so many sub-prime mortgages go up in smoke, and the re-assessment of risk, will still bring the deal frenzy of the past few years to a halt and, with it, the bonus bonanza in the City… the UK economy being more heavily dependent than the US on the financial sector for growth…” http://observer.guardian.co.uk/business/story/0,,2151549,00.html
Also, SPE’s are pretty standard devices in finance. They can be used for good things and bad things, and the fact that someone uses them for bad things, shouldn’t give the impression that they can only be used for bad things.
For example, suppose ten years ago, you bought into a security whose cash stream is funded by payments from rabbit farmers in Ebonia. It turns out that the investment bank that underwrote the security invested a lot in subprime mortgages and is in trouble. The actions of the IB have nothing to do with your investment, and so *shouldn’t* have anything to do with your investment in rabbit farms. However, there are lots of high priced lawyers that will look for any excuse to take your money to fund their losses.
An SPE separates things out so that they can’t do that.
Disparities in national laws and accounting ’standards’ along with deficiencies in the adoption of international accounting standards have to make everything that much more interesting, given the very international nature of this aspect of finance alone, especially as ‘globalization’ seems to have involved the creation of many more ‘independent’ nations (islands) and legal systems. Also have to wonder why we hear so much about ‘US’ subprime when these instruments seem to be a pillar in other ‘developed’ and ‘developing’ nations. Other factors making the valuations all that more complex have to involve ongoing inadequacies in the valuation of intangibles – think about the value of ‘intangible’ assets (liabilities) in a Ferrari or a luxury home or commercial property with a desirable address (in boom economies compared to depression or recession economies) – as well as what all this is doing to ways and means of determining ‘fair valuation’ of the base currencies used to express the price – assuming USD is still the standard – and how this affects the ‘fair value’ of USD?
black swan: Does anyone out there know of a safe place to put money that still gets some kind of a yield?
There is a famous theorem in finance which says that there isn’t such a thing as a free lunch (”the no arbitrage theorem”). It essentially says that you can’t have more return with assuming more risk. If you want something safe, it’s yield is going to be low. If you want more yield, then you are going to have more risk. If you *think* you are getting higher yields without more risk, then you aren’t looking close enough.
Also, for a small investor (anyone with less than say $10 million), yields really don’t matter. What matters to the small investor are taxes and brokerage fees, and you end up in a far better position by looking at minimizing those than you will at looking at yields.
re: “impression that they can only be used for bad things”
not my impression, and although it’s been a while since I’ve read Jensen, he also seems to do a good job of making that point. But as with any innovative technology, and anything that requires a whole lot of rules and ’structures’, the potential for bad applications, misunderstandings and mistakes seems to be infinite. Coventry desribes itself as “a niche investment bank specializing in structured finance using securitization-based financing technology” http://www.coventree.ca/template.asp?menuID=17&MIDI=17
and look at Coventree’s chart as Mr. Market tries to (re)assess its’ fair value.
There is a famous theorem in finance which says that there isn’t such a thing as a free lunch (”the no arbitrage theorem”). It essentially says that you can’t have more return with assuming more risk. If you want something safe, it’s yield is going to be low. If you want more yield, then you are going to have more risk. If you *think* you are getting higher yields without more risk, then you aren’t looking close enough.
Theorem? Well, I guess. But it’s easily proven not to be a universal truth and, therefore, it’s a false theorem. This is a perfect example why finance and, more broadly, economics is not a science. It’s weird that things as fundamental to economic relationships as existing differences in wealth, political power, control, and information access along with the ever present use of fraud are neglected so often.
If I neglected air resistance and asserted that a feather and a bowling ball dropped from some height would hit the ground at the same time in the real world, I’d be laughed at. Yet economists often neglect equally important facts and still make pronouncments on policy as if the facts were negligible. They should be laughed at too.
I think that now would be a good time for regulators to require broker/dealers to disseminate structured credit transactions via TRACE in the same form as they report trades for all corporate bonds denominated in usd. even when a lot of cdo tranches do not trade on a day to day basis this will in very short time stil provide sufficient data points to require market participants to move away from the mark-to-model nonsence which they currently apply. Also I would strongly recommend that prime brokers need to report the leverage which they provide to their hedge fund clients versus the (real) market value of hedge fund collateral.both would in my view be big eye openers at this point in time but improve the global financial system in the long run. best regards guenter leitold
“Bitter disputes are developing behind the scenes in the hedge fund industry about the way funds are valuing some assets for their end-of-month performance reports. In particular, the recent violent swings in the credit markets are making it unusually hard for some funds to agree the value of these assets with their administrators… It may even form fertile ground for future lawsuits, since sharp differences in the perceived value of hedge fund portfolios could influence investor confidence… Worse still, the sharp swings in credit prices now also make it hard to value instruments according to market or broker quotes. “Illiquidity is making those month-end [valuation] marks look atrocious,”… in the mainstream credit default swaps sector the bid-offer spread can now now be “as high as 20 basis points” (or between 5 and 20 per cent of the actual spread)… with banks now raising margin calls, some weaker funds are scrambling for survival – raising the pressure for accounting tricks…. “You are getting a distressed subprime asset which one person values at 20 cents in the dollar, and someone else values at 40 cents…” http://www.ft.com/cms/s/396559be-4067-11dc-9d0c-0000779fd2ac.html
I think it makes a lot of sence for hedge fund investors to check the offering memo before they invest and check out if the manager can overrule the administrator in regards to marking positions to market.
“…Where charm, the right accent or family background and a foreign language once guaranteed a job in an undemanding backwater of the banking business, requirements have changed. Once, clients were happy to have safe but low-yielding fixed-interest bonds in their portfolios. But the better informed clients of today demand better performance. And that requires a new breed of private banker with improved financial skills… traditional apprenticeships remain central for the bulk of appointments in Switzerland, which is home to an estimated one-third of the world’s offshore wealth… But the sheer rise in demand have led banks to start recruiting more graduates…” http://www.ft.com/cms/s/88f06f0a-49b8-11dc-9ffe-0000779fd2ac.html
i am not the right persoon to ask — not my speciality. I would tend to be surprised if a big universal bank (think citi) which is part of a big financial firm that does banking/ insurance/ i-banking and the like turned to a Home Loan Bank for liquidity, but that may just betray my total lack of knowledge about this topic …
Written by bsetser on 2007-08-17 14:21:30
I am always amazed at how little knowledge is left at large firms once their cash flow is compromised.
All these Tett fans understand the markets Tett covers only sligtly less than she does. she frequently gets details plain wrong and journalists like her are responsbile for a huge chunk of the issues going on right now.
sure many of these complex structures should have never have been put together in the first place let alone rated what they were. but she has not shed light on these investments as much as she has shed alarmed prose on yellow ahem pink paper.