Comments on: Maybe the Real Reason for the Central Bank (Especially the Fed’s) Actions Wednesday http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html Mon, 23 Nov 2009 01:41:08 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Mr. Naybob http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html#comment-2565 Mr. Naybob Thu, 20 Dec 2007 03:38:00 +0000 http://www.nakedcapitalism.com/2007/12/maybe-the-real-reason-for-the-central-bank-especially-the-feds-actions-wednesday/#comment-2565 Yves,<br/><br/>Great minds think alike, as I said on the 12th, its the worlds largest pawn shop.<br/><br/>http://naybob.blogspot.com/2007/12/fed-worlds-largest-pawn-shop.html<br/><br/>Roubini has it nailed "only depository institutions, i.e. only banks.<br/><br/>Does anyone think Tony Soprano would set up a pawn shop for anyone other than his shylocks? (The banks)<br/><br/>This way the Feds masters (the banks legally own the Fed) can take the money and lend it to the other institutions, at a nice vig, like 9%.<br/><br/>The Nattering Naybob Yves,

Great minds think alike, as I said on the 12th, its the worlds largest pawn shop.

http://naybob.blogspot.com/2007/12/fed-worlds-largest-pawn-shop.html

Roubini has it nailed “only depository institutions, i.e. only banks.

Does anyone think Tony Soprano would set up a pawn shop for anyone other than his shylocks? (The banks)

This way the Feds masters (the banks legally own the Fed) can take the money and lend it to the other institutions, at a nice vig, like 9%.

The Nattering Naybob

]]> By: Walt French http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html#comment-2450 Walt French Sun, 16 Dec 2007 01:42:00 +0000 http://www.nakedcapitalism.com/2007/12/maybe-the-real-reason-for-the-central-bank-especially-the-feds-actions-wednesday/#comment-2450 Methinks you underrate the importance of the year-end turn, where US banks repo stuff they don't want on their year-end statements to brokers.<br/><br/>No doubt, the brokers couldn't predict being able to line up enough high-risk capital, despite the high profitability of the deal in past years. The TAF takes some of the pressure off these deals, allowing the banks to report less junk than otherwise. Methinks you underrate the importance of the year-end turn, where US banks repo stuff they don’t want on their year-end statements to brokers.

No doubt, the brokers couldn’t predict being able to line up enough high-risk capital, despite the high profitability of the deal in past years. The TAF takes some of the pressure off these deals, allowing the banks to report less junk than otherwise.

]]> By: foesskewered http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html#comment-2407 foesskewered Fri, 14 Dec 2007 02:32:00 +0000 http://www.nakedcapitalism.com/2007/12/maybe-the-real-reason-for-the-central-bank-especially-the-feds-actions-wednesday/#comment-2407 The crux of the problem is not just persuading the banks to take up the loans but how to pass it on (as they so cheerfully did with the toxins) and somehow start a chain of credit to non-banks or those without recourse to fed funds.<br/><br/>mike: if you have overvalued stuff, obviously you'd try to sell it on or hock it to the person who offers you the best price, the problem is, as yves has pointed out , is the term, 28 and 35 days are way too short. Can't blame the investing community for thinking that these are merely measures postponing the crisis, not solving it. Guess is, some bankers are gonna have a headache regardless of whether they're teetotalling this holiday season or not.<br/><br/>vlade:<br/>Just wondering but what happens when those AAA rated collateral turns non - AAA, maybe AA or worse during these period whether it's due to the rating agencies or the insuring agency? Would the net effect then be the fed making money from these loans, thereby further punishing the banks ? The crux of the problem is not just persuading the banks to take up the loans but how to pass it on (as they so cheerfully did with the toxins) and somehow start a chain of credit to non-banks or those without recourse to fed funds.

mike: if you have overvalued stuff, obviously you’d try to sell it on or hock it to the person who offers you the best price, the problem is, as yves has pointed out , is the term, 28 and 35 days are way too short. Can’t blame the investing community for thinking that these are merely measures postponing the crisis, not solving it. Guess is, some bankers are gonna have a headache regardless of whether they’re teetotalling this holiday season or not.

vlade:
Just wondering but what happens when those AAA rated collateral turns non – AAA, maybe AA or worse during these period whether it’s due to the rating agencies or the insuring agency? Would the net effect then be the fed making money from these loans, thereby further punishing the banks ?

]]> By: doc holiday http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html#comment-2399 doc holiday Thu, 13 Dec 2007 16:38:00 +0000 http://www.nakedcapitalism.com/2007/12/maybe-the-real-reason-for-the-central-bank-especially-the-feds-actions-wednesday/#comment-2399 Re: So the real effect may be, as Hamilton and others suggest, in the expansion of types of collateral that are considered acceptable. Hamilton's notion that the assets are "taken off the balance sheet" is somewhat misleading<br/><br/>>> By allowing CDOs with higher risk to be used as Fed Window colateral adds risk to this mess and if Im not mistaken, these CDOs and SIVs, ets are taken off the balance sheet, which adds further distortions to this bail out attempt! Re: So the real effect may be, as Hamilton and others suggest, in the expansion of types of collateral that are considered acceptable. Hamilton’s notion that the assets are “taken off the balance sheet” is somewhat misleading

>> By allowing CDOs with higher risk to be used as Fed Window colateral adds risk to this mess and if Im not mistaken, these CDOs and SIVs, ets are taken off the balance sheet, which adds further distortions to this bail out attempt!

]]> By: vlade http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html#comment-2398 vlade Thu, 13 Dec 2007 16:35:00 +0000 http://www.nakedcapitalism.com/2007/12/maybe-the-real-reason-for-the-central-bank-especially-the-feds-actions-wednesday/#comment-2398 Anonymous:<br/>What I meant by "unsecured loans" was that if the value of collateral is significantly below of what you Fed says it is, a part of the loan is unsecured (could be a large part).<br/>I wasn't aware that all of the term facility collateral would be applicable to the discount window though. It still doesn't change the argument - if anyone was brave enough to use discount window, due to the nature of the collateral the loan would be (effectively) unsecured. So it could just be that Fed was trying the trick earlier, but had no bites (because of the stigma associated with discount window - although I believe people will be watching closely who will take up the auctoion and what they will bid). Anonymous:
What I meant by “unsecured loans” was that if the value of collateral is significantly below of what you Fed says it is, a part of the loan is unsecured (could be a large part).
I wasn’t aware that all of the term facility collateral would be applicable to the discount window though. It still doesn’t change the argument – if anyone was brave enough to use discount window, due to the nature of the collateral the loan would be (effectively) unsecured. So it could just be that Fed was trying the trick earlier, but had no bites (because of the stigma associated with discount window – although I believe people will be watching closely who will take up the auctoion and what they will bid).

]]> By: Mike http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html#comment-2397 Mike Thu, 13 Dec 2007 16:30:00 +0000 http://www.nakedcapitalism.com/2007/12/maybe-the-real-reason-for-the-central-bank-especially-the-feds-actions-wednesday/#comment-2397 Excellent post and comments.<br/><br/>News reports state that Temporary Auction Funds winners will remain anonymous. Will they disclose how many banks were bidding, or the portion of the funds sold?<br/><br/>There has been a realization that real estate isn't as valuable as was thought; mortgages aren't as secure as was thought; ratings of securitised debt isn't as high as was thought; financing long term debt with short-term money isn't as sophisticated as was thought.<br/><br/>What should a holder of overvalued stuff do (assuming they are solvent)? Borrow against it? Then invest the proceeds? In what? Excellent post and comments.

News reports state that Temporary Auction Funds winners will remain anonymous. Will they disclose how many banks were bidding, or the portion of the funds sold?

There has been a realization that real estate isn’t as valuable as was thought; mortgages aren’t as secure as was thought; ratings of securitised debt isn’t as high as was thought; financing long term debt with short-term money isn’t as sophisticated as was thought.

What should a holder of overvalued stuff do (assuming they are solvent)? Borrow against it? Then invest the proceeds? In what?

]]> By: Anonymous http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html#comment-2396 Anonymous Thu, 13 Dec 2007 15:56:00 +0000 http://www.nakedcapitalism.com/2007/12/maybe-the-real-reason-for-the-central-bank-especially-the-feds-actions-wednesday/#comment-2396 Vlade - they're not doing unsecured loans. As Yves says in the post:<br/><br/>" 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.<br/><br/>So this is basically a discount window under another name, with a different price setting mechanism. The Fed plans at least two more auctions in January, and will seek comments. So this is an experiment that may become a permanent feature, or may be tweaked further "<br/><br/>The acceptable forms of collateral will be the same as for the discount window (which in fact are remarkably expansive).<br/><br/>This is a key point in terms of why either facility should not be considered as a credit 'bail-out'.<br/><br/>This term facility really allows banks to meet their reserve requirements in a planning mode rather than an emergency response mode over year end.<br/><br/>Other than that, it won't accomplish broader pricing normalization in libor and CP spreads in my view because the Fed is underestimating the full extent that those spreads are having on monetary tightening over and above the funds rate. Vlade – they’re not doing unsecured loans. As Yves says in the post:

” 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.

So this is basically a discount window under another name, with a different price setting mechanism. The Fed plans at least two more auctions in January, and will seek comments. So this is an experiment that may become a permanent feature, or may be tweaked further “

The acceptable forms of collateral will be the same as for the discount window (which in fact are remarkably expansive).

This is a key point in terms of why either facility should not be considered as a credit ‘bail-out’.

This term facility really allows banks to meet their reserve requirements in a planning mode rather than an emergency response mode over year end.

Other than that, it won’t accomplish broader pricing normalization in libor and CP spreads in my view because the Fed is underestimating the full extent that those spreads are having on monetary tightening over and above the funds rate.

]]> By: vlade http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html#comment-2395 vlade Thu, 13 Dec 2007 13:47:00 +0000 http://www.nakedcapitalism.com/2007/12/maybe-the-real-reason-for-the-central-bank-especially-the-feds-actions-wednesday/#comment-2395 Anynymous: correct me if I'm wrong, but you can only borrow at fed-funds (definitely BoE) if you are collateralized. If you can give collateral, you just can't get the money, full stop. If you have already used up all your treasuries and similar stuff (and who, apart from Japanese/China/GCC etc. central banks was buying treasuries in any extent for last years when you could have bought commercial paper which gave you better returns and was AAA rated?), you can't borrow. Be it at fed fund, be it at discount, at whatever rate. In fact, the top price (=low yield) you have to pay for treasuries might be also an effect of the scramble for repoeable securities.<br/><br/>LIBOR, on the other hand, is <b>unsecured</b> loan, so you don't need any collateral to get that - and that's where you turn to if you don't have any collateral to repo with your friendly (or not) CB.<br/><br/>That's the reason why I think that CBs are just trying to figure ways of doing effectively unsecured loans. Anynymous: correct me if I’m wrong, but you can only borrow at fed-funds (definitely BoE) if you are collateralized. If you can give collateral, you just can’t get the money, full stop. If you have already used up all your treasuries and similar stuff (and who, apart from Japanese/China/GCC etc. central banks was buying treasuries in any extent for last years when you could have bought commercial paper which gave you better returns and was AAA rated?), you can’t borrow. Be it at fed fund, be it at discount, at whatever rate. In fact, the top price (=low yield) you have to pay for treasuries might be also an effect of the scramble for repoeable securities.

LIBOR, on the other hand, is unsecured loan, so you don’t need any collateral to get that – and that’s where you turn to if you don’t have any collateral to repo with your friendly (or not) CB.

That’s the reason why I think that CBs are just trying to figure ways of doing effectively unsecured loans.

]]> By: Anonymous http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html#comment-2394 Anonymous Thu, 13 Dec 2007 13:11:00 +0000 http://www.nakedcapitalism.com/2007/12/maybe-the-real-reason-for-the-central-bank-especially-the-feds-actions-wednesday/#comment-2394 This facility is an extension of the discount window. It may be useful for year end precautionary reserve management by banks who want to avoid the 'stigma' of window borrowing. But its only a band-aid, and a weak one at that. The Fed is doing everything it can to avoid lowering the funds rate as a response to the credit problem. But using non-funds rate tools assumes implicitly that libor and commerical paper spreads are independent of the funds rate. This is questionable. Credit spreads are disproportionately high relative to the current level of the funds rate. They have a disproportionate monetary tightening effect relative to that rate. So monetary policy overall is too tight. The Fed will have to respond to credit spreads that have reversed much of the effect of funds easing to date - by easing the funds rate further. They made a mistake by not dropping 50 bp this time. The yield curve has been inverted too long at this stage and the inversion is also telegraphing that debt deflation rather than inflation is the greater threat. This facility is an extension of the discount window. It may be useful for year end precautionary reserve management by banks who want to avoid the ’stigma’ of window borrowing. But its only a band-aid, and a weak one at that. The Fed is doing everything it can to avoid lowering the funds rate as a response to the credit problem. But using non-funds rate tools assumes implicitly that libor and commerical paper spreads are independent of the funds rate. This is questionable. Credit spreads are disproportionately high relative to the current level of the funds rate. They have a disproportionate monetary tightening effect relative to that rate. So monetary policy overall is too tight. The Fed will have to respond to credit spreads that have reversed much of the effect of funds easing to date – by easing the funds rate further. They made a mistake by not dropping 50 bp this time. The yield curve has been inverted too long at this stage and the inversion is also telegraphing that debt deflation rather than inflation is the greater threat.

]]> By: vlade http://www.nakedcapitalism.com/2007/12/maybe-real-reason-for-central-bank.html#comment-2393 vlade Thu, 13 Dec 2007 12:00:00 +0000 http://www.nakedcapitalism.com/2007/12/maybe-the-real-reason-for-the-central-bank-especially-the-feds-actions-wednesday/#comment-2393 Repo leaves repo-ed security on the loan's recipient balance sheet - so whatever gets repoed doesn't help the balance sheet much (that's despite the fact that the legal ownership changes).<br/>At least in the UK.<br/><br/>I also doubt very stronly about the flooring - you cannot really argue that the value (on the market of something) is x because fed is happy to take it for x (and get you to pay x+y at the end of the term) - mostly becasue no-one in the market would buy it from you for x, as the only thing they could do with it is to repo it to Fed, but ultimately they would get it back (and have to repay the pile of cash, so all that would happen is that they would get a very shorttime infusion of cash, which they would have to repay rather quickly). <br/><br/>Note also that if the asset collapses while Fed holds it (and, if it indeed is a repo), two things happen: cpty will have to supply a new collateral (for which they don't get anything), and they still have to pay x+y as agreed before. So, Fed carries no loss unless cpty goes bust, and all loses are still carried by the cpties. This is one of the reasons why the price doesn't get necessarily floored. If you have an asset and expect to receive 20p in a pound, repoing it doesn't help, it's still worth 20p to a pound even if Fed's willing to (technically) pretend it's worth more. I think that CBs are using this as a technicality to allow them effectively unsecured lending (which they can't do otherwise).<br/><br/>Above of course assumes that the repo facility will not keep rolling - if it would, then Fed indeed effectively "buys" the asset, and the flooring will come. So, I will wait and see whether Fed will do only the four auctions it promised, and what it will do when the maturity comes. Repo leaves repo-ed security on the loan’s recipient balance sheet – so whatever gets repoed doesn’t help the balance sheet much (that’s despite the fact that the legal ownership changes).
At least in the UK.

I also doubt very stronly about the flooring – you cannot really argue that the value (on the market of something) is x because fed is happy to take it for x (and get you to pay x+y at the end of the term) – mostly becasue no-one in the market would buy it from you for x, as the only thing they could do with it is to repo it to Fed, but ultimately they would get it back (and have to repay the pile of cash, so all that would happen is that they would get a very shorttime infusion of cash, which they would have to repay rather quickly).

Note also that if the asset collapses while Fed holds it (and, if it indeed is a repo), two things happen: cpty will have to supply a new collateral (for which they don’t get anything), and they still have to pay x+y as agreed before. So, Fed carries no loss unless cpty goes bust, and all loses are still carried by the cpties. This is one of the reasons why the price doesn’t get necessarily floored. If you have an asset and expect to receive 20p in a pound, repoing it doesn’t help, it’s still worth 20p to a pound even if Fed’s willing to (technically) pretend it’s worth more. I think that CBs are using this as a technicality to allow them effectively unsecured lending (which they can’t do otherwise).

Above of course assumes that the repo facility will not keep rolling – if it would, then Fed indeed effectively “buys” the asset, and the flooring will come. So, I will wait and see whether Fed will do only the four auctions it promised, and what it will do when the maturity comes.

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