SIV liquidity problems: The next wave looms

Another reason to strenghten the balance sheets or we soon will see more news like this or this Santa Claude at the ECB. It looks like Santa Claude will have to return more than once a year.....

Ein weiterer Grund um die Bilanzen so schnell wie möglich zu stärken oder wir werden un s bald an Meldungen wie diese und diese Santa Claude at the ECB gewöhnen müssen. Santa Claude wird wohl demnächst öfter als einmal jährlich erscheinen müsen.....

FT Alphaville Funding problems for the structured investment vehicles at the heart of this year’s liquidity troubles are far from over, despite the move by a number of banks to step in to support their vehicles, reports the FT’s Paul Davies on Tuesday.

January will bring the start of a second wave of liquidity problems for SIVs as the vast majority of medium-term funding starts to come due for repayment, according to a report from Dresdner Kleinwort analysts to be published on Wednesday.

SIVs rely on cheap, short-term debt to fund investments in longer-term, higher-yielding securities. This cheap debt has come from both the very short-term commercial paper markets and from the slightly longer maturity, medium-term note (MTN) markets. CP funding has long dried up and much of what was sold has matured.

So far, SIVs have primarily felt the impact of collapsed CP issuance, Domenico Picone at DrK told the FT. Outstanding MTN for the 30 SIVs currently stands at $181bn, which will be the next liquidity challenge they face, he added.

This represents almost 65 per cent of the value of the SIV sector in mid-October, and it is likely that SIVs have shrunk a great deal more since then.

According to the DrK analysts’ calculations, two-thirds of all MTN funding for SIVs comes due for repayment by the end of next September. Almost $40bn is to be repaid from January to March alone.

> Yves from Naked Capitalism nails it

No wonder banks are hoarding cash.....

"Honey, I Shrunk The Company" Centro Properties Down 76 Per Cent

Another one in the series Honey, I Shrunk The Company"....

Ein weiterer Kandidat aus der Serie Honey, I Shrunk The Company".....

Flashback March 2007

Centro Properties of Australia is set to become the fifth-largest operator of shopping centres in the US after agreeing to buy New Plan Excel Realty Trust for $3.7bn in cash. The deal is the biggest acquisition to date by an Australian real estate investment trust in the US. Including debt, it amounts to $6.2bn. Centro said it would finance the takeover by issuing new shares worth A$1.25bn in both the company and the trust, as well as raising a further A$750m from fund inflows and hybrid financing. JPMorgan Chase will underwrite the share offering.

Shopping for subprime victims, down under FT Alphaville
Anyone still needing to be convinced that synthetic financial strife has real world consequences could look down under on Monday - to Centro Properties, the Australian shopping mall operator. A cut in its 2008 earnings forecast of 13.6 per cent caused a 76 per cent plunge in its share price - bringing Centro’s market cap down from A$4.82bn to A$1.15bn.

Bloomberg

Centro Properties Group, the owner of 700 U.S. shopping malls, slumped 76 percent in Sydney trading and said it's struggling to refinance debt because of the collapse in the U.S. subprime housing market.

With A$26.6bn of property on its books, the company is having to face up to sharply higher financing costs and is already looking at selling its US acquisitions to private equity buyers, although no names were mentioned. As recently as March it paid US$6.2bn to acquire New Plan Excel Realty Trust.

Taken from todays Centro Presentation

Centro said it had won an extension for all of its maturing debt - but only up until February 15. Refinancing talk continuing in the meantime. Chairman Brian Healey said:

Tightened credit conditions have…had the effect that negotiation of a comprehensive refinancing package of these short-term facilities has not yet occurred.“It has become clear that to secure longer term financing in the current illiquid credit market, Centro will need to reduce its gearing level significantly.

Last week, Merrill Lynch said that it had doubts about Centro’s business model and rating agency Standard & Poor’s put the group on credit watch, causing a temporary suspension of Centro’s shares.

> I assume they will have to update their statement on securitisation ( and others) from their euphoric annual 2007 review

> Sieht ganz so aus als wenn die Aussagen zum Verbriefungsmodell in dem rückblickend mehr als amüsanten Rückblick für das Jahr 2007 nicht mehr ganz aktuell sind

The 2007 financial year has seen retail property continue to deliver strong total returns to investors.”
Brian Healey, Chairman

The benefits of using a CMBS funding arrangement compared to traditional
bank debt are:

• It is more flexible;
• It involves less administration; and
• It has more generous loan covenants.

OUCH!

Federal Home Loan Banks Act As A Lender Of Last Resort......

You already know what is coming when you read this statement from FHLB ......

Jeder der diese Zielsetzung der FHLB liest weiß was kommen muß........

The mission of the Federal Home Loan Banks is to improve access to housing for all Americans by providing FHLBank members with lowcost mortgage funding and by supporting community development.

Everytime you think the fallout from the housing debt will hit the banks another "vehicle/institution" shows up that acts as a lender of last resort. Maybe the Bank of England should use this as a blueprint to solve their "problems". Stories like this remind me why i´m bullish on gold.......

Immer wenn man glaubt alles gesehen zu haben kommt der nächste Hammer und man fragt sich ob das wirklich stimmen kann. Schon praktisch wenn man sich bei Problemen praktisch unbegrenzt zu AAA Konditionen unabhängig vom Risiko mit Liquidität eindecken kann. Evtl. sollte die Bank of England dieses Modell zur Lösung Ihrer Probleme übernehmen. Solche Nachrichten bestätigen mich Tag für Tag in meinem bullishen Ausblick für Gold......

U.S. Tosses Lifeline to Lenders Using Home Loan Banks
Oct. 30 (Bloomberg) -- Banks shut out of the market for short-term loans are finding salvation in a government lending program set up to revive housing during the Great Depression.

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.

To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs' Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.

> The graph for 2007 is only including September. If this pace continues the numbers should be even more shocking.........

> Bedenkt bitte das diese Grafik nur die Zahlen bis einschließlich September beinhaltet. Leicht auszurechnen wie das am Ende des Jahres aussieht.......

The government is ``taking a lot of risks through the Federal Home Loan Banks that are unnecessary,'' according to Peter Wallison, a fellow at the American Enterprise Institute, a Washington-based organization that analyzes public policy, and general counsel at the Treasury Department from 1981 until 1985.

The home loan banks, known as FHLBs, are increasing risks to taxpayers by assuming the role as a lender of last resort, said Wallison. That's the job of the Federal Reserve, he said.

System Shock
A loss of confidence in the companies could prompt investors to dump FHLB debt, potentially causing the collapse of one or more banks, according to Wallison and lawmakers including Representative Richard Baker of Louisiana. If others were unable to meet the liabilities, taxpayers would be on the hook, they said.

The FHLBs are cooperatives created by President Herbert Hoover in 1932 to spur mortgage lending. The system's 8,100 owners and customers range from New York-based Citigroup Inc., the largest U.S. bank, to the single-branch Custer Federal Savings & Loan in Broken Bow, Nebraska. Their government ties support top AAA ratings from Standard & Poor's and Moody's Investors Service.

Bigger Than Government
They borrow in the bond market and lend the money to their members. Federal Home Loan Bank obligations, when combined with the $1.5 trillion debt and $4.7 trillion in bond guarantees of Washington-based Fannie Mae and Freddie Mac in McLean, Virginia, are 46 percent more than the $5.04 trillion of Treasury debt held by the public.

Lenders turned to the FHLB as two main sources of funding, short-term IOUs backed by mortgages and mortgage-bond sales, began to dry up in August. That's when losses on securities tied to subprime home loans began to spread throughout the credit markets and investors retreated to the relative safety of Treasuries and their equivalents.

Asset-backed commercial paper outstanding fell 25 percent to $883.7 billion as of last week from $1.18 trillion on Aug. 8, data compiled by the Fed show.

Sales of mortgage bonds, excluding those issued by Fannie Mae and Freddie Mac have tumbled by 66 percent to a monthly average of $39 billion from $115 billion in 2006, according to Friedman Billings Ramsey Group Inc., a securities firm in Arlington, Virginia.

`Only Game'
The home loan banks ``were the only game in town for a lot of borrowers,'' said Jim Vogel, head of agency debt research at FTN Financial a securities firm in Memphis, Tennessee. They are ``like an old watch your grandfather left you years ago, and you pull it out of the drawer and find it's the only timepiece you have.''

In July, lenders could raise funds by issuing one-month asset-backed commercial paper that yielded 1.8 basis points less on average than the one-month London interbank offered rate. A basis point is 0.01 percentage point.

In September, the asset-backed commercial paper, when it was available, cost as much as 51 basis points more than Libor. At the same time, the Federal Home Loan Bank of New York offered one-month funds at an average of 48 basis points below Libor, making their loans more attractive.

The FHLB's outstanding discount notes rose to a record $311 billion in the first three quarters, the most since 2001, according to data compiled by Zurich-based Credit Suisse Group.

Government Ties
FHLB loans probably will continue to grow in the next few months, though at a slower rate than during August and September, said Margaret Kerins, an agency debt strategist at RBS Greenwich Capital in Greenwich, Connecticut.

``Each day we seem to have new financial institutions announcing losses and so this probably isn't over,'' she said.

The home loan banks can lend at below-market rates because their government charter enables them to borrow more cheaply than other financial institutions. The ties to the government suggest the U.S. will bail them out in times of trouble.

The system sold $3 billion of two-year notes on Oct. 26 at a yield of 4.26 percent, or 46 basis points more than Treasuries of similar maturity. Stamford, Connecticut-based General Electric Co., also rated AAA, has $1 billion of notes due a month later that yield 4.6 percent.

Syndicated Global Bond Distribution
For bullet issues –September 1, 2006
thru October 5, 2007

> I would like to see which central bank is buying....

> Ich würde gerne wissen welche Zentralbank da kauft......

Some lawmakers said they are concerned the FHLBs are taking on too much debt after they were unable to account properly for their own risks.

Stricter Oversight?
Five of the banks, including the Atlanta and Pittsburgh branches, restated earnings from 2001 through 2004, while the Chicago and Topeka branches corrected mistakes from 2001 through 2003. All of them fixed accounting errors for financial contracts used to protect against swings in interest rates.

The mistakes at the home loan banks, as well as those at Fannie Mae and Freddie Mac, prompted Republican lawmakers to spend the past four years pushing for legislation to create a tougher regulator for the government-chartered enterprises. While the House passed legislation in May, the Senate Banking Committee has yet to do so.

The failure to create new laws ``is predicting disaster,'' Baker, a Republican on the financial services panel, said in an interview. The FHLBs ``have the potential for adverse economic impact if not properly administered,'' he said.

No Losses
The banks require borrowers to put up mortgages, mortgage bonds and other assets as collateral. None has experienced ``a credit loss on an advance to a member, ever,'' Ronald Rosenfeld, chairman of the Federal Housing Finance Board, the Washington- based regulator of the FHLBs, said in an e-mail.

The New York bank looks at detailed data on each asset when deciding how much to extend against it and doesn't accept delinquent loans or non-AAA rated bonds as collateral, Paul Heroux, its head of member services said in an interview.

``The home loan banks are extremely low-risk institutions,'' Allan Mendelowitz, one of five directors of the Federal Housing Finance Board, said in an interview. ``There is probably no contingent risk to the taxpayer.''

Investors said the same about mortgage securities, which had home loans as collateral and were given top AAA ratings by S&P and Moody's. Then defaults soared for loans to people with poor credit and some securities fell as much as 80 cents on the dollar.

A collapse would create ``tremendous pressure to have the taxpayer bear the cost of a bailout,'' said Representative Ed Royce, a Republican from California on the House Financial Services Committee.

Maturing Debt
The FHLBs have $276 billion of bonds maturing in 2008 and $174 billion in 2009, according to data compiled by Bloomberg. The system last week began to refinance about $144 billion of its so-called discount notes sold in August and September with maturities ranging from eight to 12 weeks, FTN's Vogel said.

Borrowing from the system during that period was probably a record for a two-month span, Vogel said. The FHLBs disclose their borrowing at the end of each quarter.

Calabasas, California-based Countrywide, the largest U.S. mortgage lender, almost doubled borrowings from the Federal Home Loan Bank of Atlanta to $51 billion during the quarter, the company said in a statement last week.

Countrywide began to use the FHLBs in August as analysts at New York-based Merrill Lynch & Co. raised the possibility that the company could go bankrupt after it had trouble raising funds in the commercial paper market. Countrywide later sold a $2 billion stake to Charlotte, North Carolina-based Bank of America Corp., the second-biggest in the U.S. after Citigroup.

Out of Business?
``You don't want to use the phrase `going out of business' in the press, but they would be in a much, much worse liquidity position if they didn't have the Federal Home Loan Bank system sitting out there,'' said Paul Miller, an analyst at Friedman Billings Ramsey Group Inc., a securities firm in Arlington, Virginia.

Washington Mutual, the largest U.S. savings and loan, boosted its borrowing from the FHLBs by $31 billion, the company said this month.

The Seattle-based lender's ``funding flexibility'' put it in ``a much stronger position to withstand the market disruptions of the third quarter,'' Chief Financial Officer Thomas Casey said on a Oct. 17 conference call with investors. Washington Mutual spokeswoman Libby Hutchinson declined to comment further.

Paramus, New Jersey-based Hudson City Bancorp, the third- largest thrift in the U.S., borrowed $800 million from the FHLBs in the third quarter, 25 percent more than a year earlier, said Chief Executive Officer Ronald Hermance.

``Even AAA rated credits were having a tough time issuing paper,'' Hermance said. ``It took everybody back to the Federal Home Loan Banks.''

NAV SIVs

No wonder Paulson & Co are working overtime.......

Kein Wunder das Paulson & Co momentan sehr beschäftigt sind........

FT The point of M-LEC
Since SIVs were last in the limelight, things have not improved. In fact, asset prices in SIVs have continued to slide. Take a look at this graph, published by Fitch ratings in a note to clients:

Net Asset Value, or NAV, is a measure of the amount by which the market value of a SIVs portfolio exceeds the senior debt, divided by the capital - in other words, a measure of a SIVs underlying worth after leverage.

Not only does Fitch’s graph highlight that SIV’s fortunes have steadily worsened, it also points to a growing divide. Some SIVs are in a far worse NAV situation than others. Axon Financial, managed by TPC-Axon Capital Management, has a NAV currently at 35-40 per cent. Compare to AbAcAs Investments, managed by EBI/NSM. Its net asset value (NAV) is at around 100-105 per cent.

Even if funding briefly loosened up after August, SIV NAVs are still clearly troubled.

Citi - the prime mover behind M-LEC, is a case in point. While the bank could last week declare it had funding for all its SIV CP for the next year, it couldn’t rest on its laurels: The 3 Citi SIVs Fitch rates (in total there are 7) have seen NAVs slide pretty much in line with Fitch’s graph. On September 6, Beta’s NAV was 85.3 per cent, Five’s NAV was 81.6 per cent and Sedna’s NAV was 81 per cent. One month later, on October 8, Fitch puts Beta at 75-80 per cent, Five at 70-75 per cent and Sedna at 75-80 per cent. A decline of up to 10 per cent.

>Mish is asking in Enron Accounting at Citigroup

If a fire sale of those SIVs and conduits resulted in a 25% loss, Citigroup would have net tangible assets of $25.5 billion. If a fire sale of SIVs and conduits resulted in a 41% loss in those SIVs and conduits, Citigroup would have zero net tangible assets.

M-LEC is not only about restoring confidence and making the market more transparent. It’s about restoring asset values.

> Hellasious from Sudden Debt has a related post that is also painting a very bleak picture

> Hellasious von Sudden Debt hat ebenfalls ein Post zu diesem Thema das wenig Linderung verspricht

Hat Tip Eh

Cheyne SIV fails insolvency tests

I think lots of people are hoping that the ruling (see emphasized part of the post) won´t spread...... If you want to laugh or to shake your head in disbelief click here and read what S&P has to say about conduits and SIV just a few month ago.....

Ich kann mir sehr gut vorstellen das wohl einige den unterstrichenen Absatz basierend auf dem Richterspruch nicht sonderlich gerne sehen......Wenn Ihr ordentlich ablachen oder einfach nur fassungslos den Kopf schütteln wollt kann ich diesen Kommentar von S&P zum Thema "Conduits und SIV´s" empfehlen.....

Thanks to Jim Borgman

Cheyne Finance halts payment / FT
Cheyne Finance has become the first structured investment vehicle to stop repaying its short-term debt after the administrator of the troubled fund won court backing to declare it in breach of insolvency tests.


The move came as Cheyne Finance entered final negotiations with four banks bidding for its assets, which stood at $6.6bn (£3.2bn) at the start of last month.

The hold on repayments of the SIV’s commercial paper will hit short-term debt markets just as they had begun to show some signs of recovery from the ravages of the summer credit squeeze.

But Neville Kahn, a partner at Deloitte, the administrator, said the insolvency would not force it to sell assets at firesale prices and would make it easier to push through a sale.

“It will mean that we will get to a solution quicker,” he said. “We hope to have a recommended deal very shortly to communicate to creditors.”

The SIV still has $1.3bn of cash and could have continued to repay maturing commercial paper until at least the end of this month.

The administrator won backing from the High Court in a sealed judgment on Wednesday, said people present at the hearing.

However, the court’s interpretation of the insolvency test – using a balance sheet measure, in spite of the SIV’s cash pile – could prove controversial, as many SIVs would be insolvent if a similar measure was applied.

Mr Kahn refused to say which banks were bidding or at what prices, but said it was wrong to assume the holders of mezzanine debt – the lowest-rated tranche – would be wiped out.

That suggests holders of the top-rated commercial paper will be repaid in full, in spite of the insolvency.

Cheyne Finance, set up and managed by Cheyne Capital, the $12bn London hedge fund, is one of several vehicles either struggling to find new financial backers to support a restructuring or have triggered restrictions on their operations.

Two SIV-lites struggling to restructure have turned to Barclays for support, although Golden Key, set up by Swiss-run hedge fund Avendis, is in dispute with the bank about whether it has to repay a loan it drew down, reported to be worth $250m. Mainsail II, an SIV-lite run by London hedge fund Solent, had a rescue plan backed by Barclays turned down by investors.

In total, more than $42bn of assets in SIVs and SIV-lites are facing limits on their operations.

US banks take $280bn onto books

Despite all the orchestrated efforts around the globe from central banks, regulators, politicians etc. the party or orgy :-) is over. The cracks are so obvious that no matter what kind of "bailout" attempt will happen next the real economy will take a significant hit. The times of easy credit are over. I think the biggest fear now is that the creditors will overshoot to the other side. The fact that foreigners are less willing to finance US assets will intensify this trend. I also recommend the excellent piece from Brad Setser The US trade deficit is falling, but not as fast as the world’s demand for US debt.

Trotz der konzertierten weltweiten Aktionen von den Zentralbanken, Aufsichtsbehörden, Politikern etc sind die Zeichen nicht zu übersehen das die Party oder Orgie :-) zu Ende ist. Die Einschläge sind so massiv das ganz egal was noch an neuen "Bailout" Versuchen auf die Agenda kommt die reale Wirtschaft darunter zu leiden haben wird. Die Zeiten des einfachen Zugangs zum Kreditmarkt sind Geschichte. Die größte Sorge die momentan vorherrscht ist sicher das die Kreditgeber von einem Extrem ins andere wechseln und es den Zugang über Gebühr erschweren. Die Tatsache das ausgerechnet jetzt die Ausländer aufwachen und immer weniger US Anleihen erwerben wird diesen Trend nur noch verstärken. Zu diesem Thema solltet ihr ebenfalls die Meinung von Brad Setser lesen The US trade deficit is falling, but not as fast as the world’s demand for US debt.

Banks’ debts threaten growth / FT

Big US commercial banks have seen $280bn of new debt come on to their balance sheets since the credit squeeze, threatening to undermine economic growth by inhibiting their ability to make new loans.

The banks have been forced to take on to their books large amounts of commercial paper and leveraged loans after investor demand for such assets dried up in the summer.

David Rosenberg, economist at Merrill Lynch, said that this amount had risen to $280bn since the start of August.

He added that according to data from the Federal Reserve, large bank capital – represented by net assets – had declined by $40bn since the beginning of August. “This has never happened before over such a short timeframe and this is rather serious because such a steep and sudden compression in large-bank capital has the potential to create a negative lending environment,” he said.

If left unchecked, this could “significantly inhibit” economic growth, he added.

> via Minyanville The Bernanke Put Defined

"Access to a backstop source of liquidity in turn reduces the incentives of banks to limit the credit they provide to their customers and counterparties."

Read that statement carefully. It's the one key sentence in the entire speech.

The misunderstanding that is perpetuated is that the Fed by "providing liquidity" is not actually "providing credit."

What Bernanke's statement means is that, in reality, the two are synonymous.

European banks are facing similar pressures with many observers expressing concern at the ability of some smaller lenders to handle the potential strain on their balance sheets.

Fears over the effect of the credit squeeze on US bank balance sheets was one factor behind the US Treasury’s encouragement of the creation of a "super fund" to take on the assets of troubled investment vehicles.

The three top US banks – Citigroup, JPMorgan Chase and Bank of America – this week unveiled plans for a fund that would buy up to $100bn of mortgage-backed assets from structured investment vehicles.

Citigroup, which manages $80bn of assets in such vehicles, has bought some of the vehicles’ commercial paper.

On Monday, Citi said it was suspending share buy-backs because its capital ratios had weakened partly due to the large amount of commercial paper and leveraged loans it had taken on.

According to Moody’s, the credit rating agency, assets held by bank-sponsored special investment vehicles fell to $320bn from $395bn in July.

“The large banks have been forced to take commercial paper back on their balance sheets and as a result are choking on assets they did not plan on having – thereby tying up regulatory capital and in turn possibly leading to a reduction in credit extension,” said Mr Rosenberg.

He pointed out that 30 per cent of the growth in the debt that US households took on was backed by asset-backed investors.

Master Liquidity Enhancement Conduit / SIV & Conduit Bailout

It looks like the big players, the Treasury Department & the Fed have found a way to hold on to their off balance sheet addiction. Although the details are not clear yet i can´t help myself but whenever i hear "Big Banks" & Treasury Department and the Fed in one sentence it doesn´t smell like more transparency is on the way ....

Es sieht einmal mehr danach aus als wenn die großen Banken Hand in Hand mit dem Finanzministerium und der Fed Überstunden geschoben haben um auf jeden Fall zu verhindern das die bisherigen Off Balance Sheet Verbindlichkeiten in die eigene Bilanz aufgenommen werden müssen. Ich muß zugeben das immer wenn ich Banken, Finanzministerium und die Fed in einem Satz zu lesen bekomme es nicht zu Unrecht zu befürchten steht das die eh schon dürftige Transparenz noch mehr Schaden nimmt ...

And thanks to Aaron Krowne we know of some small print that is already in place to prop up these vehicles....

Und dank Aaron Krowne erfahren wir auch das die Fed bereits jetzt fleißig diese Konstruktionen ausserhalb der Bilanz auf eine Art und Weise fördert das es einem dem Atem verschlagen muß.......

Is The Fed Flushing Out The “Excess Credit” Demons?

With this in mind, those generally suspicious of the Fed might not be surprised to find out that the Bernanke bunch is busy suspending even more reserve requirements for many major banks amidst this credit crisis.

Specifically here I am referring to bank off-balance-sheet conduit subsidiaries (this is now how money market and similar vehicles are handled… which is a sketchy fact in and of itself). The Fed is apparently piling up exceptions to its regulation 23A, which normally mandates 10% reserves for such conduit entities.

The exceptions “temporarily” suspend these reserve requirements. They are open-ended. Hmmm.

One would think in a time of financial crisis that the monetary authorities would be increasing capitalization requirements. Not so in the bizarro-world of the US Fed — maintaining the con a little longer is top priority

Here the reports / Hier die Berichte

Citigroup, Bank of America Agree to Set Up $80 Billion CP Fund / Bloomberg

Banks to Start Fund to Protect Credit Market / NYT

Banks line up $75bn mortgage debt fund / FT

Rescue Readied By Banks Is Bet To Spur Market / WSJ

Here are other takes / Hier andere Meinungen

Mish Super SIVs - A Fraudulent Attempt at Concealment

Nacked Capitalism The Smoke and Mirrors SIV Rescue Plan

Zeitenwende Wall-Street plant Notfall-Fonds

Calculated Risk Musical SIVs

WSJ Deal Journal A Bailout for Citigroup?

Lee Adler The Worst Is Over ?

WSJ Opinion House of Paulson?

Paul Kasriel MLEC - Trying to Turn a Sows Ear into a Silk Purse?

Calculated Risk Institutional Risk Analytics on MLEC

Worst IPO of the Year..... RAMS

Rams really deserves the award "Honey, I Shrunk The Company". What an IPO.....

Rams verdient in der Tat den Titel "Honey, I Shrunk The Company" . Was für ein gelungenes IPO...... Rams is blaming like Northern Rock the freezing of the commercial paper market for the trouble. But when i look at their products.......

Rams schiebt wie z.B. Northern Rock die Probleme ausschließlich auf das einfrieren der Kreditmärkte. Wenn ich mir allerdings die Kreditangebote ansehen sind wohl berechtigte Zweifel angebracht....

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Westpac to Rescue Rams, Refinance Debt, Buy Branches
Oct. 2 (Bloomberg) -- Westpac Banking Corp. agreed to take over Rams Home Loans Group's branch network and provide A$1.5 billion ($1.3 billion) in funding after the Sydney-based lender failed to refinance its short-term debt.

Westpac, Australia's fourth-biggest bank, will pay A$140 million for the 92 outlets and assume all future loans, it said in a statement today. Rams will retain its current A$14.5 billion of mortgages and remain traded on the stock market, it said in a separate statement.

Rams shares slumped 19 percent today and have declined by two-thirds since listing on July 27, making it the worst- performing initial public offering in Australia this year. Shares of Westpac, which will expand its mortgages business by 10 percent through the deal, rose 2.6 percent to a record.

``They're effectively buying Rams future loans and customers for A$140 million, versus Rams's market value of around A$260 million,'' said Michael Birch, who helps manage the equivalent of $133 million at Wallace Funds Management in Sydney. ``There's nothing much left for Rams now as a viable ongoing concern.''

Rams has sold top-rated Australian mortgage-backed bonds at yields almost three times the premium it paid on debt in June after failing to refinance A$6.1 billion in short-term loans after buyers fled the U.S. commercial paper market. The A$1.5 billion provided by Westpac will be used to help refinance this debt, which covers Rams's current loan book.

`No Deposit? No Worries!'
Rams, which isn't a deposit-taking institution, obtained more than 40 percent of its funding for mortgages from the U.S. commercial paper market. It touts loans for as much as 100 percent of the purchase price of a home under the slogan ``No deposit? No worries!''

Rams shares started trading the same day that the risk of owning corporate bonds soared to the highest on record in the U.S. and Europe. The company began in 1991 as a wholesale finance provider for lenders and expanded its network to serve individuals in 1995.

Australian Central Bank to Buy Mortgage-Backed Debt

Lots of mistrust out there..... And when you talk about as the Ft calls it "Enron-esque characteristics" with off balance sheet vehicles like SIV / conduits in the ABCP market this should be no surprise....

Jede Menge Misstrauen am Markt vorhanden..... Und das sollte auch vorhanden sein wenn man sich die wie die FT es schön ausdrückt "Enron-esque characteristics" der Zweckgemeinschaften ansieht die ausserhalb der Bilanz geführt werden. Fragt hier in Deutschland bei der IKB und in Sachsen nach.

Sept. 6 (Bloomberg) -- Australia's central bank said it will buy debt backed by home loans to add cash to the financial system, after the U.S. subprime credit rout eroded demand for asset-backed securities and drove up interest rates.

> Looks like Bloomberg is overstating it. If you read the official press release Reserve Bank Of Australia DOMESTIC MARKET DEALING ARRANGEMENTS they are not buying RMBS they are taking it as collateral. But nevertheless they have widened the possible funding options....

> Sieht so aus als wenn Bloomberg hier etwas zu dick aufgetragen hat. Wenn man die offizielle Pressemitteilung Reserve Bank Of Australia DOMESTIC MARKET DEALING ARRANGEMENTS als Maßstab nimmt, werden die Papiere nicht direkt erworben sondern wie auch von der Fed & Co lediglich als Sicherheit herangezogen. Bleibt aber trotzdem festzuhalten das die Notenbank die Möglichkeiten der Geldbeschaffung erheblich ausgeweitet hat....

The rate banks charge each other for three-month loans fell 15 basis points from yesterday's 11-year high of 7.06 percent after the Reserve Bank of Australia said in a statement today it will buy top-rated bonds linked to mortgage payments. Asset- backed commercial paper and bank bills are also eligible for purchase.

The move increases funds available to banks and supports the market for asset-backed debt in Australia, where credit markets have been roiled by losses related to debt backed by loans to U.S. homeowners. National Australia Bank Ltd., the nation's largest lender, yesterday said an affiliate had been unable to refinance A$6 billion ($4.9 billion) of loans.

> The FT has this to say Bad pennies roll back to NAB?

NAB’s chief financial officer Michael Ullmer will tell a UBS investment conference in London that the bank expects to see about A$11bn of these assets migrate to its balance sheet by the end of September

And, quoting directly from the Cheery PR Guide to Complex Financial Crises, a spokesman told the newswire:

So whilst this wasn’t a predicted event, it isn’t an event that causes us any concern.

All the assets are rated AA- or higher and the impact on NAB’s core capital ratios will be minimal, the spokesman added.

We aren’t concerned about the credit quality of the assets coming on board because they are subject to our normal credit processes and of course we have done a lot of work to diversify our funding over the years so we are in a strong funding position.

Good pennies, in other words, rather than bad pennies rolling back. Honest (End FT)

Australia's lenders depend more on capital markets for funds than other banks in the Asia-Pacific, Moody's Investors Service said in a report. Australia & New Zealand Banking Group Ltd., the third-largest lender, said Aug. 30 profit margins on its loans have narrowed as much as 25 basis points.

`Helps the Markets'
The Reserve Bank yesterday left the overnight cash rate unchanged at an 11-year high of 6.5 percent. Central banks typically buy government securities in so-called repurchase agreements, or repos, for a set period to bring money market rates closer to their targets. At maturity, the securities and the cash are returned to the central bank.

The spread for three-month Australian dollar Libor over the RBA's benchmark rate touched 56 basis points yesterday, the widest since February 2000. It has averaged 12 basis points in the past five years. A basis point is 0.01 percentage point.

Refinancing Trouble
National Australia Bank moved funding for A$6 billion of loans onto its balance sheet after the unit holding some assets was unable to refinance in the short-term debt market, the Melbourne-based bank told investors in London yesterday.

The rate banks charge each other to borrow in dollar for three months in Singapore rose for a ninth day to 5.7775 percent, the highest since Jan. 3, 2001. A similar benchmark in Hong Kong rose to 4.972 percent, the highest since April 6, 2001.

``The higher cost of funding in the interbank market reflects the banks' reluctance to lend because nobody knows the extent of the subprime problem out there,'' said Joseph Tan, strategist at Fortis Bank SA in Singapore.

The Bank of Japan refrained from adjusting funds in the financial system today. In Japan, the rate for overnight call loans between commercial banks and other financial institutions in Japan rose to 0.49 percent as of 12:13 p.m. in Tokyo from 0.42 percent yesterday, according to brokerage company Tokyo Tanshi Co. That's still below the BOJ's target of 0.5 percent.

Yields on three-month U.S. asset-backed commercial paper rose on Sept. 4 to 6.16 percent, the highest in more than six years, according to data compiled by Bloomberg. In Australia, margins lenders have to pay on the securities have risen up to 20 times the level of a month ago to as much as 40 basis points.

While the Australian dollar Libor rate rose 54 basis points from the end of July until yesterday, the dollar Libor rate climbed 36 basis points to a seven-year high of 5.72 percent

Bloomberg has some details on the impact on the important core capital

Moving loans onto National Australia's balance sheet will reduce core capital by 0.15 percent

Australia & New Zealand Banking Group Ltd., the nation's third-largest bank, has moved A$2.5 billion of loans back onto its balance sheet, and may shift the remaining A$2.1 billion by the end of this fiscal year, spokesman Paul Edwards said today. That will reduce its core capital ratio by as much as 20 basis points

Party Of The Week.....Global ABCP & SIV Summit ‘07

The FT nails it in their piece SIVs, junk and rock n’ roll: Global ABCP summit ‘07. Sarcasm at its best! What an excellent timing.... The "mood" should be just fine.......They should invite the manager from the IKB , Landesbank Sachsen and Barclays as key note speakers...... ;-)

Besten Dank an die FT für dieses Meisterwerk an Sarkasmus.SIVs, junk and rock n’ roll: Global ABCP summit ‘07. Der Zeitpunkt könnte kaum besser sein.... Nach den "Vorkommnissen" der letzten Wochen dürfte dort ne klasse Stimmung herrschen. Ich empfehle zur weiteren Aufheiterung die Manager von IKB , Landesbank Sachsen und Barclays als Hauptredner einzuladen..... ;-) Ever been to One Of Those Parties? You know, the ones more like a wake than the raucous brannigan the shiny invitation promised.

No? Then why not pop along to the 2007 Global ABCP & SIV summit, the [former] glittering jewel in the crown of the financial alchemy party circuit.

This year’s conference has had an “amazing response” say its narcotized organisers, and numbers should be “good”.

As long as everyone can manage to hold down their jobs for another couple of weeks that is.
.....dug out by FT Alphaville are some “notable quotables” from a few months back they might live to regret:

The asset-backed ECP market has now evolved to a primary, stand-alone funding source for the biggest asset backed market players. IMN’s Paris conference brings together the players and the source in a unique two-day interface designed to take advantage of the latest evelopments- Tony M. Gioulis, Head of Securitization UK/Europe, NABCapital

The growth of the European ABCP market is likely to further accelerate significantly in 2008. In addition to the underlying economic conditions, I see recent legal and regulatory developments as positive for this market. We will explore these often complex factors at the Global ABCP and SIVs conference this September. I expect some lively discussion there.- Omar Bolli, Senior Vice President, Head of Asset Backed Finance, Norddeutsche Landesbank Girozentrale

And FT Alphaville’s favourite:

In an environment plagued by subprime related volatility, SIV’s represent a relatively safe haven of stable risk adjusted returns facilitated by structural protections designed to withstand and effectively respond to market vagaries.- Kumar Tangri, Principal, Eiger Capital

To quote Jeff Matthews "I´m not making this up"

American Investment Banks "Shots In The Dark" Economist

I think that not even the best accounting magic can hide that the earnings and the balance sheet will take major hits down the road and have deteriorated significantly. There goes the low multiple....... This was always one of the main bull arguments, now they already had switch to book value (see comment further down), next......

Ich denke das nich einmal die größten Bilanzierungstricks verschleiern können das sich sowohl der Gewinnausblick als auch die Bilanzstruktur erheblich und wohl auch auf längere Sicht verschlechtert hat. Soviel zum niedrigen KGV das seit jeher als Kaufargument herangezogen worden ist. Nun wird bereits auf den niedrigen Buchwert hingewiesen (siehe Kommentar weiter unten), demnächst.......

Wall Street pays for its opacity

STOCKMARKET investors come in all shapes and sizes, but in the current turmoil they agree on one thing: if in doubt about a financial firm, shoot first and ask questions later.

> And when you have committed liquidity guarantees as shown in the table from the Handelsblatt to conduits/SIV´s it is no wonder that you dump the shares first.......

> Und wenn man Zweckgemeinschaften lt. dem Handelsblatt solch großzügige Liquiditätsgarantien gemacht hat würde ich auch schnellstmöglich meine Bankaktien auf den Markt schmeißen.......

> John M from Housing Doom has found this via Minyanville

Through the conduits’ convoluted structures, banks were able to “lend” huge amounts off-balance sheet and collect fees on no-capital-required lines of credit. No one - and I mean no one - ever expected these conduits to move from off-balance sheet back on-balance sheet and I don’t think the market yet understands the earnings, capital and liquidity impact of this migration.

If you figure you need anywhere from 6-8% capital per dollar of loans, then a move of $1.0 trln from off-balance sheet to on requires $60-80 bln in additional equity capital. I don’t know about you, but I don’t see this kind of free capital sitting around.

> Exellent find John M! Maybe we should forward this info to the rating agencies.... ;-)

> Nochmals besten Dank für diesen Fund an John M. Evtl- sollte man diese Erkenntnis an die Rating Agenguten weiterleiten....;-)

State Street, a big money manager, is the latest to stumble into the line of fire. Its shares slumped this week on unsubstantiated rumours that it faced big losses in asset-backed commercial paper.

> More details on State Street from Mish

But it is the investment banks that continue to take most of the bullets. They helped drag stockmarkets down on August 28th after Merrill Lynch downgraded a number of its peers, citing exposure to toxic credit, a day after Goldman Sachs had done the same. An unseemly squabble over jurisdiction in a bankruptcy case against two defunct Bear Stearns hedge funds ´probably didn't help to calm nerves. It hurts all the more to fall from a great height. Until a couple of months ago the investment banks were flying. Profit records were smashed quarter after quarter. Bonus pools looked more like lakes. Valuations climbed to three times book value, implying sustainable returns on equity of over 30%, when even 25% is rare in the industry.

As long as the money rolled in, no one seemed to mind that much of the business was cloaked in mystery.

Investment banks are now paying for that opacity, even though their management of risk has improved since the last credit crisis in 1998. They are suffering from their decision to do less moving and more storing of assets: they hold a lot more illiquid, hard-to-value paper these days, and have more capital tied up in lumpy private-equity deals. Worse, some of Wall Street's most lucrative recent creations, such as conduits and CDOs, are suddenly out of favour. This is part of what one analyst, Deutsche Bank's Mike Mayo, calls “dis-disintermediation”: the return of more traditional forms of finance, to the benefit of universal banks like Citigroup.....

Thanks to iTulip

All except Bear are still trading well above book value, the level at which they are generally considered cheap.

> Reminds me of the discussion from the "value" guys that came up with book value to measure the stock as dirt cheap... Until this sector turned to an impaired industry

> Die ganze Argumentation mit dem Buchwert erinnert mich sehr stark an dieselbe Diskussion mit den Homebuildern. Nachdem das KGV zu hoch war bzw. keine Gewinne mehr vorhanden waren kam plötzlich das Argument von sog. "Valueplayern" (LOL) das gemäß den Buchwerten die Aktien praktisch geschenkt sind.....Das war bevor der Sektor eine einzige Abschreibungsruine geworden ist......

Tellingly, while executives at other financial firms piled into their own shares in August, believing them oversold, there was scant buying among investment bankers.

The key now will be to reassure markets that the exotic assets on bank balance sheets are worth something. Investors are waiting with bated breath for Wall Street firms' third-quarter results, beginning in the second week of September. They may try to get as much bad news out as they can while sentiment is at rock bottom.

Mr Hintz sees it as an encouraging sign that none of the investment banks issuing bonds in the second half of August pointed to new “material” risks, as required when a company raises debt. This suggests that, while things are undoubtedly bad, the banks see no further nasty surprises in the short term.

bigger / größer

Thanks to Kevin Duffy / LewRockwell

The debate over how to value elaborate securities, less pressing in good times, is now taking centre stage. Most credit instruments have to be held at the value a buyer might pay for them, not cost. But judging that is more art than science. The Securities and Exchange Commission, the investment banks' regulator, is examining the issue following rumours that Merrill Lynch and Goldman Sachs were too optimistic in their marking. “This is a chance for the SEC to show leadership on a crucial issue. We desperately need an umpire to ensure consistency and restore confidence,” says one senior banker.

At least investment banks are in better shape than they were going into past crises. Their capital structures are more stable: they increased long-term funding by $200 billion in the past year alone, making them less vulnerable when capital markets dry up. They are also more diversified. They have piled into commodities trading and wealth management, which remain attractive. Their proprietary trading desks, once predominantly credit-focused, now trade lots of equities too. All except Bear Stearns now earn roughly half of their non-retail revenues outside America. ....

Peter Nerby of Moody's, a rating agency, points to two further advantages (though his rivals at Standard & Poor's are not so sanguine). The banks have become better at making money in tough times, he says. Thanks to hedging, trading volume and volatility are now bigger earnings drivers than the level or direction of markets.

> Really? Wasn´t it just 2 weeks ago that the Fed bends rules to help two big banks that had to step in for their brokerage affiliates.... And when you look at the leverage the guy from Moody´s is overly confident. The bond market has a much gloomier view on Goldman & Co

> Wirklich? Ist es nicht gerade ein paar Tage her das die Fed Ihre Grundsätze über Bord geworfen hat um 2 Investmentbanken vor dem Kollaps zu retten.....Der Anleihemarkt sieht die Lage von Goldman & Co weniger entspannt...... Second, good first-half results will help to bail Wall Street firms out, as half of their accrued bonus pools can be taken back to cover second-half losses. A generous pay structure can come in handy if markets falter at the right time of the year.

Bear and Lehman Brothers are likely to suffer more than the rest, partly because they are smaller and partly because they are more exposed to asset-backed nasties (see chart). If conditions worsen, they may even have to buy back securities peddled to clients, as they are obliged to make markets in some of them.

The tables may yet turn. Merrill, Goldman and Morgan Stanley are more exposed than Bear or Lehman to the $300 billion overhang of unsold debt from leveraged buy-outs. This week the bankers fought back, forcing Home Depot to cut the price on the sale of its supply division and the trio of private-equity buyers to swallow higher interest rates on the debt. A bigger test of nerves will come in the next couple of weeks, when buyers are sought for more than $20 billion of loans to finance the takeover of First Data, a transaction-processing group. Were that or another big upcoming deal to collapse, the investment banks could expect a hail of bullets.

> And with appetite for junk like this coming to a halt it is likely that they will have to hold far more toxiy loans than planned.....

> Und nachdem der Junkmarket praktisch zum erliegen gekommen ist ist es sehr wahrscheinlich das die Banken einige ungewollte Kredite in Ihrer Bilanz behalten müssen......

Eleven junk-rated borrowers have sold bonds since the beginning of July, compared with an average of 41 a month in the first half of the year, Bloomberg data show. Three found buyers in August.

Some of them are desperately trying to find a way out..... But with onlyJust three of the 40 biggest pending LBOs have an escape clause that lets the buyer back out if funding can't be arranged this could be very expensive

Einige von Ihnen versuchen bereits verzweifelt sich aus einigen Deals freizukaufen..... Da aber nur 3 der 40 Deals eine Klausel beinhalten das man vom Kredit zurücktreten kann könnte das eine extrem teure Geschichte werden.....

Cheyne May Liquidate Commercial Paper Plan on Losses, S&P Says

Too bad that Cheyne didn´t have a larger parent bank or the German taxpayer to bail them out. Will be interesting to see at what levels the markets will step in and place the bids. Needless to say that the downgrade from AAA to A- (six levels) is "amusing". I´m pretty sure that the business model from the rating agencies won´t look the same in the year 2008. The chart from Moody´s is giving a clear signal. Hard to see how Buffet ( largest shareholder) sees value in Moody´s

Schon dumm wenn man keine Mutterbank oder besser noch den deutschen Steuerzahler hat der einen "raushaut". Es dürfte sehr spannend werden zu welchen Preisen diese Papiere einen Abnehmer finden werden. Das die Ratingagenturen über Nacht festgestellt haben das AAA auf einmal A- bedeutet ist schon fast wieder komisch. Ich bin mir ziemlich sicher das deren Geschäftsmodell und deren Struktur im Jahr 2008 nicht mehr mit den heutigen zu vergleichen sein werden. Der Chart spricht Bände. Verwunderlich das Buffet (größter Aktionär) hier immer noch als Valueplayer engagiert ist.

S&P had said this two weeks before......

In Standard & Poor’s Ratings Services’ view, SIV managers recognize the importance of managing price volatility in the asset pool. These investment vehicles have weathered the difficult credit conditions of 1990-1991, the Long-Term Capital Management collapse, and the Sept. 11, 2001, terrorist attacks. SIVs responded to each event by diversifying into multiple funding markets, such as Europe and the U.S., and by having access to the best available liquidity sources, including banks and easily traded assets. SIVs also maintained access to the CP and MTN markets through each crisis during those 19 years

position SIVs to manage very differently than, for example, mutual funds or traditional CDOs. The market value tests and related assumptions penalize less-liquid, less-transparent, and less-understood asset selection. The tests encourage diversification, best-of-class asset selection, and defensive leverage management….As markets go through volatile periods, such as the current one, SIVs are not immune to eventually failing a test. However, SIVs are generally structured to have incentives to maintain asset portfolio and liability profiles that would help them in the face of volatile markets.

Aug. 29 (Bloomberg) -- Cheyne Capital Management Ltd., a London-based hedge fund, may be forced to liquidate $6 billion in assets backing a commercial paper program after the global credit rout reduced the value of the securities, Standard & Poor's said.

The Cheyne Finance LLC fund, which can hold as many as $20 billion in assets, breached a test based on losses in the portfolio, S&P said in a statement. Cheyne Capital also runs Queen's Walk Investment Ltd., a fund that invested in mortgages and which reported in June a loss of 67.7 million euros ($92 million) in the year ended March 31.

``Even though you are a well-regarded investment vehicle, if you can't roll over your paper and the market is concerned about the asset value of rolling over that paper, investors are not going to refinance you in this environment,'' said Craig Saalmann, credit strategist at JPMorgan Chase & Co. in Sydney.

Commercial paper conduits have faced funding shortages as investors balk at buying asset-backed, short-term debt after losses on U.S. home loans to risky borrowers caused turmoil in global credit markets. The retreat has caused commercial paper yields to soar to five-year highs.
Profits Cut
Structured investment vehicles like Cheyne Finance purchase long-term securities on money raised from short- and medium-term debt. The profit typically delivered from this strategy is being cut by rising yields.

HBOS Plc, the U.K's largest mortgage lender, said last week that it would step in to repay about $35 billion of commercial paper owed by its Grampian Funding LLC unit as contagion from the subprime slump drove up the cost of borrowing.

Cheyne Capital may begin liquidating assets and by Aug. 30 will estimate expected proceeds from future asset sales, S&P said. ....

There are about $385 billion outstanding in structured investment vehicles and 23 percent of their assets are mortgage securities or collateralized debt obligations that often hold mortgages, according to an Aug. 9 report by Bear Stearns Cos.

The Cheyne portfolio is primarily invested in ``real estate securitizations'' and none of the assets have had downgrades, S&P said. Structured investment vehicles often aren't backed by credit lines from banks like asset-backed commercial paper programs, of which there are $1.05 trillion outstanding.

S&P lowered the credit rating on the commercial paper issued by Cheyne Finance by two levels to A-2 from A-1+. The rating on senior debt was cut six levels to A- from AAA, the highest rating.

The average yield on the highest rated asset-backed commercial paper with one-day maturity has risen 0.71 percentage point this month to 6.04 percent as investors have fled funding linked to subprime mortgages, according to Bloomberg data.
Securities of subprime mortgages to people with poor credit or high debt have lost value because of the highest delinquency rate in four years. Commercial paper is debt due in 270 days or less.

> Here is the Cheyne Letter to clients via the FT

> Hier der Brief an die momentan wohl ziemlich aufgebrachten Cheyne Investoren via der FT

ANGST Backed Securities / Economist

Here we go...... I don´t know how the the Economist got to this number( see new link Asia Times further down). But if this is true it is clearly a form of a bailout......And this would explain in some part why the window is tapped from Citi, JPM & Co.... If this is true I think we will see much more during the next days especially from weaker players......At least they are now channeling the liquidity where it is needed....

Es geht los......Ich habe keine Ahnung wie der the Economist zu dieser Annahme kommt ( siehe neuer Link von der Asia Times weiter unten). Sollte sich das als wahr herausstellen erfüllt das für mich den Tatbestand eines "Bailouts". . Das würde auch zum Teil erklären warum Citi, JPM & Co.... dieses Fenster so intensiv genutzt haben. Sollte das den Tatsachen entsprechen gehe ich jede Wette ein das wir hier in den nächsten Tagen besonders von den schwächeren Marktteilnehmern haufenweise Transaktionen sehen werden..... Immerhin sollte so die Liquidität zielgerichtet erhöht werden....

The Fed has been offering 85% of face value for AAA-rated paper presented at its discount window, even collateralised-debt obligations stuffed with subprime mortgages (as long as they are not—yet—impaired).

Thanks to Solvent Celt !

Hat tip to Professor Bear for provinding this link

Central bank impotence and market liquidity/ Asia Times

‘Chairman Bernanke has now summoned his own clean-up team into action. The Fed hopes that by assuring banks that they can now access cash on less punitive terms from the Fed discount window, collateralized by the full “marked to model” face value of mortgage-backed securities, rather than the true
distressed value as “marked to market”, for which they could find no buyers at any price in recent weeks as the market for such securities has seized up, it can jumpstart market seizure for mortgage-backed commercial paper and securities.’

Here is a another view from iTulip

Bernanke: Talks the Dove, Acts the Hawk / iTulip

Paper losses / Economist

Central banks struggle to restore calm without breeding complacency

....Some commercial paper is easy to understand: a big company sells an IOU, which it repays in, say, 90 days. This stuff got the American financial system into trouble in 1970, when Penn Central Railroad defaulted on $82m-worth. The recent problems stem from a different brand of paper, backed not by the good name of a big company, but by assets, such as mortgages or credit-card receivables. Mostly held off-balance-sheet by bank-sponsored “conduits”, this market has boomed in recent years. It now accounts for roughly half of the more than $2 trillion of commercial paper outstanding. But issuers have been caught out by a cashflow mismatch, says Louise Purtle of CreditSights, a research firm. Funding is short term but the proceeds are invested in longer-term assets, leaving issuers vulnerable when investors start to doubt the quality of those assets and want out.

That is what happened at the start of this week as money-market funds sold these IOUs, causing rates to spike as never before (see chart). This paper suffered from two main layers of mistrust. First investors are worried that the banks won't always be able to support the conduits.
The second worry, about the mortgage collateral, is particularly stark. Rating agencies badly misjudged default rates in subprime mortgages and are now having to downgrade reams of securities linked to them. With the credibility of ratings in tatters (there have even been calls for Warren Buffett to take over Moody's), investors have been left without a compass. For the time being, many would rather pull back than trust in their own analysis of credit risk. They are staying on the sidelines because they can't work out what securities are worth, not because they don't have the money to buy them.

Ratings may be in doubt, but they remain powerful. The Fed has been offering 85% of face value for AAA-rated paper presented at its discount window, even collateralised-debt obligations stuffed with subprime mortgages (as long as they are not—yet—impaired). Josh Rosner, a critic of the rating agencies, thinks it extraordinary that, despite their obvious flaws, they “continue essentially to regulate the behaviour of even the central bank”.

Home truths
Even if stability returns to markets, the repricing of risk is likely to continue. How far it goes will depend largely on the state of the mortgages that serve as collateral for many of the newfangled instruments that were, until recently, hawked w