Wednesday, December 12, 2007

Fed, ECB, Central Banks Coordinate to Add Liquidity

Another attempt to unwind the liquidity issue. They will have a problem if this won´t work......When i look at the collateral that they are accepting i can smell a rat......

Ein neuer und koordinierter Ansatz um die Liquiditätskrise zu lösen. Sicherlich die bisher mit Abstand vielversprechenste Idee. Sollte selbst diese Herangehensweise nicht helfen haben die Zentralbanken wohl ein Problem.......Wenn ich mir die neuen Kriterien für die zu hinterlegenden Papiere angucke kann man schon auf den Gedanken kommen das hier alle guten Vorsätze über Bord geworfen worden sind.......

Fear at the Fed from Floyd Norris NYT (hat tip to Calculated Risk)
...The Fed will lend money to banks based on almost any asset they own, even ones that are not liquid at all. That will include some of the more exotic loans and securities out there.

How much will the Fed lend against illiquid assets? It has a public list, already in use in discount window lending. You will note that it allows the lending of up to 85 percent of the face value of AAA-rated collateralized mortgage obligations, if there is no observable market value. There are some C.M.O.’s out there that have not yet been downgraded but that might not bring that much in a sale.

I’d love to see which assets are pledged, and how much the Fed lends against them. But the Fed won’t disclose those facts. Nor will it let us know which banks borrow using the new facility.

The Fed's New Auction System Minyanville´s Mr. Practical via Mish

So the Fed is considering a “new auction system”. Essentially, what the Fed is doing is taking the stigma away from the discount window--the Fed will lend directly to banks and the banks don’t have to tell anybody. Theoretically, the Fed could make these quiet loans for indefinite periods, thus giving banks more permanent capital (it’s really credit, but banks call it capital).


...this is a bailout,. Nearly all government bailouts take the form of subsidized loans, extending credit at low rates to counterparties or against collateral for which the market would have demanded a high premium. That is precisely what the TAF will do. The Fed's press release claims, of course, that loans will only be available to "sound" banks, and that they will be "fully collateralized". But no one who can get the same deal from private markets will use this facility. The need for the program arises because private markets are skeptical about the soundness of counterparties and the quality of the assets they have to offer as collateral. The Fed hints at this when it mentions the "wide variety of collateral" that can be used to secure loans. You can bet that whatever it is private lenders are eschewing will be pledged as collateral to the Fed under TAF. The Fed is going to bear private risk that the market refuses to. That is a bailout.

Felix Salmon

to give you an idea of what the Fed will lend, consider a AAA-rated subprime-backed CDO – the kind of thing which is causing billions of dollars in losses all over the financial system. If the CDO has a market price, the Fed will lend up to 98% of that price if it's a short-term CDO, up to 96% if it's medium-term, and up to 93% if it's long-term.

But what if the CDO is completely illiquid, and you can't find a price for it at all? No worries, the Fed will still accept it as collateral, and lend up to 85% of par value. (There's an interesting thought experiment here: what happens if a long-term CDO has a market value of, say, 90 cents on the dollar? In that case, an illiquid version of that CDO would actually be worth more to the Fed than the liquid version.)

Do keep on looking down that list, though: it turns out that banks can even put up as collateral subprime credit-card receivables – they don't even need a AAA rating.

Yves from Naked Capitalism Maybe the Real Reason for the Central Bank (Especially the Fed's) Actions Wednesday has also a very good summary

Yyes von Naked Capitalism hat mit Maybe the Real Reason for the Central Bank (Especially the Fed's) Actions Wednesday ein weitere erstklassige Zusammenfassung an den Start gebracht

Now the roundtrip to the official press releases.

Nun zu den offiziellen Presseerklärungen

The total size of reserves offered in the operations on 18 December and on 15 January will be raised from £2.85 billion to £11.35 billion, of which £10bn will be offered at the 3-month maturity.

The Bank will accept a wider range of high quality securities as collateral against funds advanced at the 3-month maturity. The additional categories of eligible collateral are:

  • Bonds issued by sovereigns rated Aa3/AA- or above (in addition to those currently eligible), subject to settlement constraints.
  • Bonds issued by G10 government agencies guaranteed by national governments, rated AAA.
  • Conventional debt security issues of the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Corporation and the Federal Home Loan Banking system, rated AAA.
  • AAA-rated tranches of UK, US and EEA asset-backed securities (ABS) backed by credit cards; and AAA-rated tranches of UK and EEA prime residential mortgage-backed securities (RMBS).
  • Covered bonds rated AAA.

BOC Part 1 & BOC
Expansion of List of Securities Eligible as Collateral for Use Under Bank of Canada Standing Liquidity Facility

Under its Standing Liquidity Facility (SLF), the Bank of Canada is prepared to provide liquidity on a daily basis to financial institutions that participate directly in the payments systems operated by the Canadian Payments Association. Loans made by the Bank of Canada must be fully collateralized.

In the context of the ongoing review of the Bank of Canada's collateral policy, begun in the spring of 2007, the Bank has decided to broaden the range of securities acceptable as collateral for use under the SLF to include (i) certain types of asset-backed commercial paper (ABCP) sponsored by banks and (ii) U.S. Treasuries.

By the end of March 2008, the Bank will expand the list of eligible securities to include certain types of Canadian dollar-denominated ABCP that meet the following general criteria: are bank-sponsored, are covered by a liquidity provision that meets global standards, and are backed by traditional assets of an acceptable credit quality. In addition, higher standards of disclosure and additional credit ratings will be required. Asset-backed commercial paper backed by collateralized debt obligations and other highly-structured assets will not be considered at this time.

Over the next two months, the Bank will consult with financial institutions and other interested parties on the terms and conditions that will apply to ABCP as collateral. By the end of March 2008, the Bank will announce the terms and conditions regarding the use of ABCP as collateral, including the margins that will be applied. The arrangements for accepting U.S. Treasuries as collateral are expected to be completed by mid-2008.


Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window. All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions. All advances must be fully collateralized. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.

Alternative Instruments for Open Marketand Discount Window Operations / Fed Page 43

Acceptable discount window collateral generally can best be described as any asset that can confidently be liquidated within a reasonable period of time at the value at which it is accepted.As a general rule, the greater the level of risk associated with a certain type of underlying collateral, the lower the (lendable) valuation assigned to the collateral. Accurately measured, the margins or haircuts used in the valuation process should reflect the true relative risks of the various asset types, and they should contribute to relative asset price neutrality across the broad spectrum of assets deemed eligible for collateral.

Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). The first TAF auction of $20 billion is scheduled for Monday, December 17, with settlement on Thursday, December 20; this auction will provide 28-day term funds, maturing Thursday, January 17, 2008. The second auction of up to $20 billion is scheduled for Thursday, December 20, with settlement on Thursday, December 27; this auction will provide 35-day funds, maturing Thursday, January 31, 2008. The third and fourth auctions will be held on January 14 and 28, with settlement on the following Thursdays. The amounts of those auctions will be determined in January. The Federal Reserve may conduct additional auctions in subsequent months, depending in part on evolving market conditions.


The Eurosystem shall conduct two US dollar liquidity-providing operations, in connection with the US dollar Term Auction Facility, against ECB-eligible collateral for a maturity of 28 and 35 days ECB Eligibility Criteria Collateral The submission of bids will take place on 17 and 20 December 2007 for settlement on 20 and 27 December 2007, respectively. The operational details can be obtained from the ECB’s website ( The US dollars will be provided by the Federal Reserve to the ECB, up to $20 billion, by means of a temporary reciprocal currency arrangement (swap line).

SNB $ 4 billion

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Anonymous Anonymous said...

Hi jmf,

It sounds like the Super SIV failed, so the CBs are going to give it a go. Should the investment banks beggar the money from overseas, or just print more at home? It sure is nice of the whole world to sit on giant stacks of US$ so that the maggots can get bigger yachts. If we the people ever get control of our gubbermint back we will not be thanking the foreign central bankers for propping up a criminal banking system.

9:10 AM  
Anonymous Worried said...

it is interesting that as interbank rates go higher and these rates only just stay above official inflation that even more money is now being added to keep the rates low.

Meanwhile in an alternate reality real rates are already negative and implosion continues.

Interesting times for sure!

10:33 PM  
Blogger jmf said...


the more action they are taking the more they are signaling that they are getting closer to a panic mode.

Remember Greenspan with his 1percent deflation scare......

The only way i can stand this kind of stuff is loocking at my gold position :-)

10:58 PM  
Anonymous Joen said...

Is Hussmann still right? Or do central banks now really inflate?

11:34 PM  
Blogger jmf said...

Moin Joen,

i think from an academic point Hussman is still right.

But from another point of view one could argue that they are indirectly (through regulatory changes) have, and yesterdays action underscores this, a strong bias to do so....

Just think of the eliminating of the reserve requirements.
What (Really) Happened in 1995? - Aaron Krowne

"The key event that happened around 1995 is that the fractional reserve ratio was not only lowered, it was effectively eliminated entirely. You read that right."

No direct change to the monetary base but an explosion in the money supply.

But i think they have pulled almost every hidden trigger possible and lowered the bar on so many fronts that they really have to be creative to keep the game going...

11:44 PM  
Anonymous worried said...


"The only way i can stand this kind of stuff is loocking at my gold position :-)"

"i think from an academic point Hussman is still right."

Hussman was obviously wrong. Any system will provide whatever information is needed to best serve its purpose. How independant is Hussman?

Inflation is now at the max possible without it being obvious to everyone what is happening.

If the covers can be kept on then with devaluation and inflation house prices will look cheap again even if they dont much fall.

The bottom is getting nearer for now i would guess.

Gold? Why not just buy a nice German house? prices are cheap there. Gold is for a disaster scenario. Do you see that?

Difficult yes. Gloomy yes. As an investment gold is expensive to hold. As something to trade then maybe it is a good one. For sure it will go up and down a bit from here.

12:18 AM  
Blogger jmf said...

Moin worried,

" Gold is for a disaster scenario. Do you see that?"

I think we are seeing at on a daily bais...

And i wanted to make it clear that i am aware that the government, central banks etc are always trying to inflate the way out.

Mish describes it best in Inflation: What the heck is it?

12:55 AM  
Anonymous Worried said...

Risk Capital over at CR mentioned one of my worries about Gold. At a critical moment margin requirements could be changed, forcing highly leveraged buyers to dump the stuff, and since that would be a known in advance situation there would be massive short selling in favour of the Fed and the insiders.

So it seems that in a disaster scenario you need to somehow have it in your possession. And then you have to have the appropriate security etc.

I do like the idea of gold. I really do, but how does it really work in a disaster?

What happens when you go to spend it? i imagine word would spread fairly quickly that "JMF has some gold"

But i suppose a few coins makes a good deal of sense

4:37 AM  
Blogger jmf said...

Moin Worried,

i agree that hot money and momentum players will always play a role

I remember the last brutal brutal move when the momentum players exited gold. Gold went from 725 to 540 within a few weeks.

But when i look at
The common man's sovereign wealth fund
from Tim i have a very good feeling that the momentum crowd is not the main force behind the move.

5:05 AM  
Anonymous Anonymous said...

M3/M4 goes parabolic. Inflation (wholesale) moves to a 34 year high. Oil still at high levels. CC and consumer debt at all time levels. And lots of junk being passed off as AAA assets. What a wacky place to be.
I think this coordinated move to inject money is nothing but a sharade to shore up a few large banks who have no more wiggle room. No matter how much grease you apply to locked brakes, skidding is inevitable.

7:41 AM  

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