For those who haven't seen it already, Berkshire Hathaway agreed to invest $5 billion in Bank of America this morning. The pop in stocks lasted all of 30 minutes.
But I wanted to discuss the last Buffett Bailout - of Goldman and what it may portend. My operating thesis is that WB has morphed into a completely political creature and will only make big, publicized investments for propaganda purposes. That certainly was the case with GS in 2008.
But like any actor, he has to receive something in return for the use of his name and image. That something is a political guarantee for his "investment" and the history of 2008 supports this. Buffett's deal with Goldman was announced before the US market opened on September 23, 2008. But behind the scenes a lot of political moves were being made that he obviously knew about but few others did at the time.
The Fed of course was involved. Over the next few days (through 9/29) they established or increased swaplines with a large number of foreign central banks. In effect they lent out $360 billion to foreign banks. The FDIC closed Wachovia and WaMu - pushing them to merge into the already bloated and insolvent Citibank and JP Morgan respectively. Wells ultimately outbid Citi for Wachovia. The Treasury moved to guarantee all money market funds and the TARP bailout was cooked up as a bill and submitted to the House over the weekend prior to initial rejection on the 29th.
The Bottom Line
My point is this. Last time Buffett was part of a full-court press designed to fool people into investing their earned money right along side his borrowed bank credit. Every lever was pulled by Wall Street and the Government in order to "restore confidence" and as the price of his participation, Buffett was given the privilege of front running virtually every central bank and government policy change.
I expect this time will be no different. The Fed is likely to announce something desperate and stupid tomorrow morning. It will likely be accompanied by something out of the Treasury and/or FDIC shortly thereafter if the Fed move proves insufficient to pump asset prices higher and bail out Warren after he stuck his neck out financially for favorable propaganda effect.
Of course the bad news if you're a bull is that it didn't work in 2008 despite truly extreme measures. Stocks, after a short sharp bounce continued to fall for another 6 months and housing prices merely rebounded slightly before resuming their decline. In 2008, stocks had already been falling for a year and had nearly been cut in half before they got that desperate. This time, we are 3.5 months past the rebound high and six weeks from the secondary peak. We are also only 15% off those highs - not 45% like in 2008.
There is probably a trading opportunity on the long side for the next week or two but I'm not going to get greedy or stupid. History indicates that Buffett is likely front-running SOMETHING here. But it sure as hell isn't fundamentals.
Showing posts with label commercial paper. Show all posts
Showing posts with label commercial paper. Show all posts
Thursday, 25 August 2011
Thursday, 2 October 2008
CP to FRB ICU ASAP!
The commercial paper market certainly appears to be critically wounded. The seasonally-adjusted amount of CP has fallen dramatically since mid-September. Per the Federal Reserve the declines over the last three weeks:
September 17: -$52.1 billion
September 24: - $61.0 billion
October 1: -$94.9 billion
Headlines emphasizing funding cutoffs to companies in the real economy, like Caterpillar and A&T are highly misleading. Non-financial CP took a single hit of $18 billion ($217 billion to $199 billion) two weeks ago and has hardly budged since. The REAL story is the collapse of CP issued by banks and other financial companies. Domestic financial paper is down by $93 billion ($590 billion to $497 billion); foreign financial paper fell $40 billion ($225 billion to $185 billion, down 20%!); asset-backed paper is off $55 billion ($780 billion to $725 billion).
We have seen record withdrawals from money market recently, which has led to falling demand for commercial paper - which is usually purchased by these funds. In order to stem the flight from MM funds and hide the losses in asset-backed CP, the Fed recently extended their alphabet soup yet again. The "Asset-backed commercial paper money market mutual fund liquidity facility" or ABCPM3FLC for short was instituted just two weeks ago. It's gone from zero to $152 billion in just days - $22 billion average last week, to $122 billion average this week, to $152 billion by 10/2/08. All data are from the Fed's H.4.1 release.
Panic Lending
Actions of this magnitude clearly indicate that a major crisis is unfolding behind the scenes. The freeze in interbank lending, the explosion of LIBOR loan rates, the collapse of financial commercial paper and counter-measures taken by CBs around the world indicate that the final act of the Universal Debt Bubble may be upon us. The UDB rested entirely on confidence - and badly misplaced confidence at that. It allowed credit to be extended to those who were manifestly NOT credit-worthy and the temporarily elevated economic activity created the illusion of prosperity.
All of that is going in reverse now and the politicos don't like it. Well, unfortunately this is all necessary to return to a stable economic structure after the bankers deliberately destabilized it. One of our first blog entries was Legions of the Damned - wherein we pointed out:
Globo-shock
Inability to borrow in the US money markets helps to explain the severe dollar starvation overseas. It is this problem that the Fed is trying to fix with the their massive dollar loans (mischaracterized as "swaps") to foreign CBs. Less than a week ago, the Fed announced a $330 billion expansion of these loans.
The results of the dollar starvation are manifest across Europe. Huge institutions like Dexia, Fortis and Bradford & Bingley have been fully or partially nationalized within the last few days. It does not help that the leverage ratios of European commercial banks are typically much higher than their American counterparts. Not only are the commercial paper markets closing to such banks but elevated LIBOR rates cut those same banks off from cheap dollar loans from other banks. The squeeze to dress up balance sheets to make them look good for the quarter-end reports undoubtedly contributed to it but the fact that pressures have not abated much yesterday and today indicates that much more than a seasonal problem is at work here.
The "dash for cash" is on. Despite the Fed lending as fast as it can, commercial credit is being drained from risky financial institutions faster than the Fed and other CBs can pump it in. Having seen Wachovia, WaMu and a half-dozen European banks fail in the last week, we see no near-term end to the pressures or the bank failures.
September 17: -$52.1 billion
September 24: - $61.0 billion
October 1: -$94.9 billion
Headlines emphasizing funding cutoffs to companies in the real economy, like Caterpillar and A&T are highly misleading. Non-financial CP took a single hit of $18 billion ($217 billion to $199 billion) two weeks ago and has hardly budged since. The REAL story is the collapse of CP issued by banks and other financial companies. Domestic financial paper is down by $93 billion ($590 billion to $497 billion); foreign financial paper fell $40 billion ($225 billion to $185 billion, down 20%!); asset-backed paper is off $55 billion ($780 billion to $725 billion).
We have seen record withdrawals from money market recently, which has led to falling demand for commercial paper - which is usually purchased by these funds. In order to stem the flight from MM funds and hide the losses in asset-backed CP, the Fed recently extended their alphabet soup yet again. The "Asset-backed commercial paper money market mutual fund liquidity facility" or ABCPM3FLC for short was instituted just two weeks ago. It's gone from zero to $152 billion in just days - $22 billion average last week, to $122 billion average this week, to $152 billion by 10/2/08. All data are from the Fed's H.4.1 release.
Panic Lending
Actions of this magnitude clearly indicate that a major crisis is unfolding behind the scenes. The freeze in interbank lending, the explosion of LIBOR loan rates, the collapse of financial commercial paper and counter-measures taken by CBs around the world indicate that the final act of the Universal Debt Bubble may be upon us. The UDB rested entirely on confidence - and badly misplaced confidence at that. It allowed credit to be extended to those who were manifestly NOT credit-worthy and the temporarily elevated economic activity created the illusion of prosperity.
All of that is going in reverse now and the politicos don't like it. Well, unfortunately this is all necessary to return to a stable economic structure after the bankers deliberately destabilized it. One of our first blog entries was Legions of the Damned - wherein we pointed out:
As we surmised well over a year ago, the repricing of risk is ongoing and the current crisis is simply the big brother of the one we experienced last summer. The clearest indication of risk recognition is the explosion of spreads. Once again, according to the Fed's Commercial Paper Report, yield differentials between high-quality (AA) and lower-quality (A2/P2) commercial paper have blown out enormously - from 80 basis points (0.80%) just a few weeks ago to over 400 bp today. Then there is the spread due to implied higher risk just for being a financial company. The spread on financial vs non-financial paper has widened from 30 bp to 160 bp in just weeks. A risk that Financial Jenga readers have known about for a long time is now confirmed by the market.Over the last several weeks, there has been a collective recognition of the inherent riskiness of using illiquid, volatile and hard to value paper as collateral for lending. The lenders are requiring either much more (paper) or better (cash) collateral to secure the loans. The result is the global "Dash for Cash" that we've seen recently. Cash is King again and the scramble to come up with it resulted in huge spikes in overnight lending rates. The injection of $150 billion into the system was designed to bring the rates back down to the ECB and Fed targets of 5.25% and 4.0% respectively.
Had the CBs not acted, there would have been massive forced selling of the illiquid paper, demonstrating it to be nearly worthless. Now that would only formally recognize a situation that already exists in reality but as long as the banks can pretend that it's worth face value, they can continue to make loans and prop up consumption. This is a classic example of Gresham's Law - to oversimplify "Bad money drives out good money." When dodgy paper assets are treated nearly the same as cash, nobody is going to put up cash.
Globo-shock
Inability to borrow in the US money markets helps to explain the severe dollar starvation overseas. It is this problem that the Fed is trying to fix with the their massive dollar loans (mischaracterized as "swaps") to foreign CBs. Less than a week ago, the Fed announced a $330 billion expansion of these loans.
The results of the dollar starvation are manifest across Europe. Huge institutions like Dexia, Fortis and Bradford & Bingley have been fully or partially nationalized within the last few days. It does not help that the leverage ratios of European commercial banks are typically much higher than their American counterparts. Not only are the commercial paper markets closing to such banks but elevated LIBOR rates cut those same banks off from cheap dollar loans from other banks. The squeeze to dress up balance sheets to make them look good for the quarter-end reports undoubtedly contributed to it but the fact that pressures have not abated much yesterday and today indicates that much more than a seasonal problem is at work here.
The "dash for cash" is on. Despite the Fed lending as fast as it can, commercial credit is being drained from risky financial institutions faster than the Fed and other CBs can pump it in. Having seen Wachovia, WaMu and a half-dozen European banks fail in the last week, we see no near-term end to the pressures or the bank failures.
Monday, 10 September 2007
Australia Leads the Way
The race to the bottom in financial responsibility reached a new milestone today. The Reserve Bank of Australia - their equivalent to the Fed agreed to take asset-backed debt paper as collateral for repo loans to commercial banks. The Wall Street Journal reports this morning:
Conduits and structured investment vehicles (SIV) enabled banks to move assets off the balance sheet, where they would no longer count against their required capital. By providing these entities with a guaranteed line of credit, the bank was on the hook if investors who normally provide funding got cold feet. Of course, it was assumed that the high times would last forever so such a thing could never happen but naturally it did.
In hindsight, it can be seen that the conduits and SIVs were an attempt to evade the reserve requirements and banking regulations. These things traded on the credit and the good name of the bank but never appeared anywhere in the financial statements. Simply another clever, legalized fraud. Taxpayers should not be on the hook for this sort of gamesmanship.
Basically, the RBA is willing to accept asset backed paper as collateral for loans now. The Fed will apparently do the same but only at the discount window where distressed banks come to borrow, hat in hand.Banks that may be forced to assume assets from the conduits that have financing coming due could themselves face shortages of capital.
To head off such a problem, Australia's central bank, the Reserve Bank of Australia, has relaxed rules on collateral it will accept for short-term funding. This would enable banks to take more time to evaluate which portions of the asset-backed commercial-paper market are most affected by ailing subprime mortgages.
In doing so the Australians went beyond the Federal Reserve, which doesn't accept such paper as collateral in repo operations but did recently clarify it was willing to accept a wide variety of such paper for its lesser-used, and costlier, "discount window" loans to banks.
Conduits and structured investment vehicles (SIV) enabled banks to move assets off the balance sheet, where they would no longer count against their required capital. By providing these entities with a guaranteed line of credit, the bank was on the hook if investors who normally provide funding got cold feet. Of course, it was assumed that the high times would last forever so such a thing could never happen but naturally it did.
In hindsight, it can be seen that the conduits and SIVs were an attempt to evade the reserve requirements and banking regulations. These things traded on the credit and the good name of the bank but never appeared anywhere in the financial statements. Simply another clever, legalized fraud. Taxpayers should not be on the hook for this sort of gamesmanship.
Thursday, 30 August 2007
Ongoing Credit Implosion
The rate of implosion in the credit markets continues to accelerate. In fact, the process seems to be proceeding very rapidly and the only element missing is mass bond defaults. According to Bloomberg, the asset-backed commercial paper (ABCP) market has shrunk by 20% in a mere three weeks and the total CP market is 11% smaller over that period. This type of credit has contracted by $244 billion in a very short time. For those who think the Fed can simply "print money" to revive asset inflation, $244 billion is roughly 4x the $68 billion total of all US currency in circulation today. And of course, the CP market is just one of many credit markets undergoing a buyers' strike.
Private label MBS of any kind is very hard to sell right now, which is why even Countrywide is doing almost nothing but conforming loans.
There is complete distrust of credit ratings for any sort of structured debt. Of course that's what happens when BBB-rated "investment grade" structured bonds lose over half their value. More confirmation of just how bogus the ratings were and how badly standards had slipped came recently. S&P cut their rating on some structured investment vehicles (SIVs) from the gold standard AAA to near-default CCC in one fell swoop. As we previously mentioned in Fed Actions and Terrorist Attacks, the ratings agencies got paid three times as much on structured bonds but I'm sure that had nothing to do with the generous ratings. Surely, they are only correcting an inadvertent previous oversight.
Of course, when the ratings are that badly wrong, no one cares what about motives or excuses. All such ratings become suspect. Nothing the Fed can do will restore trust in the ratings agencies. Only the agencies themselves can do that and only with time and hard work. Similarly, much of the credit that was extended should never have happened. Since the creditors have been burned by dumb mistakes, those won't be repeated - regardless of how many unsustainable investment structures depend on the them.
The Fed cannot recreate the naivete, the wild optimism and the frenzy that drove much of structured finance over the last several years. The illusion of permanently lower risk has been broken and cannot be recreated. Much of the recent "financial innovation" was utterly dependent upon this illusion and so those products must simply disappear. The UDB has burst and the Fed just needs to get over it. Efforts by the CBs to halt this process will meet with the same success as King Canute's command to halt the tides.
Private label MBS of any kind is very hard to sell right now, which is why even Countrywide is doing almost nothing but conforming loans.
The corporate junk market is nearly frozen right now. As far as I can tell only one junk deal of any size has been done in eight weeks. Other than debt issued or guaranteed by governments, very little is being sold in the bond markets anywhere right now. Unless you are a "natural" AAA or AA-rated entity, you can only issue debt at punitively high interest rates.[Countrywide] says that soon about 90% of its originations will conform to either bank loan or such so-called "Government Sponsored Enterprises" standards.
There is complete distrust of credit ratings for any sort of structured debt. Of course that's what happens when BBB-rated "investment grade" structured bonds lose over half their value. More confirmation of just how bogus the ratings were and how badly standards had slipped came recently. S&P cut their rating on some structured investment vehicles (SIVs) from the gold standard AAA to near-default CCC in one fell swoop. As we previously mentioned in Fed Actions and Terrorist Attacks, the ratings agencies got paid three times as much on structured bonds but I'm sure that had nothing to do with the generous ratings. Surely, they are only correcting an inadvertent previous oversight.
Of course, when the ratings are that badly wrong, no one cares what about motives or excuses. All such ratings become suspect. Nothing the Fed can do will restore trust in the ratings agencies. Only the agencies themselves can do that and only with time and hard work. Similarly, much of the credit that was extended should never have happened. Since the creditors have been burned by dumb mistakes, those won't be repeated - regardless of how many unsustainable investment structures depend on the them.
The Fed cannot recreate the naivete, the wild optimism and the frenzy that drove much of structured finance over the last several years. The illusion of permanently lower risk has been broken and cannot be recreated. Much of the recent "financial innovation" was utterly dependent upon this illusion and so those products must simply disappear. The UDB has burst and the Fed just needs to get over it. Efforts by the CBs to halt this process will meet with the same success as King Canute's command to halt the tides.
Tuesday, 21 August 2007
Fed Actions and Terrorist Attacks
We are beginning to see severe impairment of credit functions - the fruits of massive and long standing frauds that have recently come to light. By now, many of you are familiar with the 'mark to model' fraud, where the imaginary prices generated by a computer model are preferred over the actual prices which are being paid by actual people - especially when using the former allows firms to report gains rather than the losses they have suffered in reality. With some 'investment grade' paper trading at huge discounts to par, the rating services have a lot of explaining to do. The fee structures for structured finance create serious conflicts of interest.
"S&P, Moody's and Fitch have made more money from evaluating structured finance--which includes CDOs and asset-backed securities--than from rating anything else, including corporate and municipal bonds, according to their financial reports. The companies charge as much as three times more to rate CDOs than to analyze bonds, published cost listings show."
Then there are the garden-variety frauds that occur in every credit cycle and are endorsed or at least accepted by the accountants. Low losses in good times are assumed to be permanent and provisions for losses are small - inflating reported bank profits. This is often compounded by banks which drain their pre-existing reserves to inflate profits further. When combined with loose credit standards, nastiness is practically guaranteed to ensue since the low losses will be followed by very large losses once the weaker borrowers come under pressure. Financial 'innovation' simply adds to the problems since it is nearly always used to take on more risk, not reduce risk.
At the end of a massive credit cycle like the one we have just experienced, financial earnings are wildly overstated, assets are significantly overstated, credit quality is very bad and it is very difficult to distinguish the banks with some troubled assets from those that are insolvent. Under these conditions, it only makes sense to be very cautious when making loans.
Uber cautious lending is exactly what is happening today. Spreads on risky bonds have widened dramatically as investors demand to be compensated for risk again. New issuance of junk bonds has been virtually nil for eight weeks. More ominously, about half of the commercial paper (CP) market seems to be in the process of going away. There is almost no interest in asset-backed CP except at punitively high interest rates. In fact, this market judged the Fed's discount rate cut to be about as useful as a terrorist attack.
"Even the Fed's decision to cut the discount rate that it charges banks failed to revive demand. The rate for overnight borrowing in the asset-backed commercial paper market soared 0.39 percentage points to that price on Aug. 17, the biggest rise since the Sept. 11 terrorist attacks."
The bizarre rally in stocks is especially puzzling in light of the continued deterioration in credit quality and availability. This is way beyond 'whistling past the graveyard' by the equity markets; it's more like cramming fingers in their ears, kicking and screaming "lalalalalala I can't hear you!"
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