tag:blogger.com,1999:blog-30643134.post161628820266066401..comments2023-12-26T01:10:26.319-05:00Comments on Accrued Interest: Fear leads to sufferingAccrued Interesthttp://www.blogger.com/profile/05096191765979971184noreply@blogger.comBlogger48125tag:blogger.com,1999:blog-30643134.post-40020219564674624382007-08-19T17:16:00.000-05:002007-08-19T17:16:00.000-05:00Will rigor mortis set in?There have been only 42 B...Will rigor mortis set in?<BR/><BR/>There have been only 42 Bank & Thrift failures in the last 10 years. In the 10 years prior to 1997, there were 2,179 Bank & Thrift failures.<BR/> <BR/>http://www2.fdic.gov/hsob/HSOBSummaryRpt.asp? BegYear=2007&EndYear=1979&State=1Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-23903919673664962322007-08-19T16:49:00.000-05:002007-08-19T16:49:00.000-05:00This comment has been removed by the author.Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-91924239848242947772007-08-18T12:50:00.000-05:002007-08-18T12:50:00.000-05:00“Would you say that the Fed was frustrated by cont...“Would you say that the Fed was frustrated by continually tight credit spreads as they were tightening policy in 2004-2005?”<BR/><BR/>Well, they were vocally frustrated by the maturity spreads, so I imagine they were taking the credit spreads into account too. Historically, flat and inverted yield curves tend to lead widening credit spreads (at least for the junk bond spreads that I looked at). This time the lead turned out to be longer than usual. Somehow these things always seem to go on just long enough to convince the last skeptic that it might be different this time, and then finally Lucy lets go of the football yet again.knznhttps://www.blogger.com/profile/11777056267168876929noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-30682267944038097252007-08-18T10:56:00.000-05:002007-08-18T10:56:00.000-05:00Raising the conforming loan limit is just raising ...Raising the conforming loan limit is just raising the subsidy.<BR/><BR/>I have trouble buying into the concept that a subsidy or an increase in the subsidy is for the benefit of the buyer. When has that ever been the case? It mainly benefits the seller. It's the sellers out there screaming for this.<BR/><BR/>If they said, "not enough people are going to Mets games," and said, "OK, so we'll give everyone who goes $20 to offset the cost," yeah, more people will go, but who benefits from that and who would think prices would remain unchanged?<BR/><BR/>I just thought of a real example. When the tax credits for the Prius started falling, it was Toyota Motor doing the whining to bring them back. The seller.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-72390667395036179832007-08-18T06:43:00.000-05:002007-08-18T06:43:00.000-05:00KNZN: I agree with you on credit spreads, that's a...KNZN: I agree with you on credit spreads, that's a good point. BTW, I liked your piece on the Greenspan Put.<BR/><BR/>Would you say that the Fed was frustrated by continually tight credit spreads as they were tightening policy in 2004-2005?<BR/><BR/>On Countrywide Bank, the analyst at MER thought they would try to move the majority of their operations under the bank umbrella. They can indeed borrow from the window.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-85067339243015335112007-08-18T01:02:00.000-05:002007-08-18T01:02:00.000-05:00TDDG said: "I talked to two banks and Fannie Mae, ...TDDG said: "I talked to two banks and Fannie Mae, and they are saying you cannot use ABSCP as repo collateral with the Fed. You can use it as collateral at the discount window. But I understand that's been the case for a long time. You can use Baa-rated corps also."<BR/><BR/>A bank treasurer confirmed this for me, but noted that the <B>amount</B> of collateral that has to be pledged is variable: you may get $0.50 for each dollar collateral. While this is better than being in a "locked" market with no bids, it is hardly "opening the floodgates of liquidity."<BR/><BR/>Also, the <A HREF="http://www.latimes.com/business/la-fi-countrywide17aug17,0,585598,print.story?coll=la-home-center" REL="nofollow">L.A. Times reported </A> an old-fashioned bank run at Countrywide Bank, which has $107 B in assets. Parent CFC does about $40 B a month in mortgages.<BR/><BR/>CFC execs declined to comment on the effects of CFC Bank's heavy withdrawals might have. <BR/><BR/>My take would be that CFC Bank is a small part of the overall operation. However, is it the only part that can borrow at the Fed discount window? Is there a mechanism to get money from CFC Bank to the parent to get all the loans in the pipeline funded?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-77550613239323675822007-08-17T18:55:00.000-05:002007-08-17T18:55:00.000-05:00"It isn't the Fed's problem if risk spreads widen...."It isn't the Fed's problem if risk spreads widen."<BR/><BR/>I think you understate the case. If the Fed is trying to run a "mildly tight" policy, and risk spreads widen, rendering credit "moderately tight", then the Fed needs to cut rates in order to continue its "mildly tight" policy.knznhttps://www.blogger.com/profile/11777056267168876929noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-82428492477468104902007-08-17T16:10:00.000-05:002007-08-17T16:10:00.000-05:00I'm saying it USED to be viewed that way. Not no m...I'm saying it USED to be viewed that way. Not no mo'. <BR/><BR/>http://blogs.wsj.com/economics/2007/08/17/using-discount-window-is-sign-of-strength-fed-says/Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-60217351257320009032007-08-17T15:56:00.000-05:002007-08-17T15:56:00.000-05:00TDDG:You imply that depositories have downside ris...TDDG:<BR/><BR/>You imply that depositories have downside risk from going to the discount window ("they'll be there on Tuesday"). <BR/><BR/>True in normal circumstances, when one or another bank may be guilty of fraud or mismanagement, but not now. Imagine the news if the Fed sends out those examiners: it would put us back into a situation of illiquidity. It would create a run on that bank's deposits. It would in short create the situation that access to the discount window is supposed to avoid.<BR/><BR/>The Fed is hostage to the market's addiction to liquidity.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-76588422529742641402007-08-17T14:36:00.000-05:002007-08-17T14:36:00.000-05:00One more point on CP as collateral. In theory, if ...One more point on CP as collateral. In theory, if the repo collateral fails (e.g., the ABSCP defaults), that doesn't eliminate the repo borrower's obligations. So really if Bank of America pledges ABSCP for collateral, and the CP went into default, BofA would still owe the Fed when the term is up. Only if the CP becomes worthless AND BofA is insolvent is the Fed at risk of losing money.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-23050116231666543292007-08-17T14:28:00.000-05:002007-08-17T14:28:00.000-05:00As to Anon's daughter going into Goldmand Sachs, i...As to Anon's daughter going into Goldmand Sachs, its an interesting story. I'd suspect with several hedge funds and mortgage originators failing that the big dealers are going to have to do a lot of work to figure out their counterparty situation. Don't forget about REFCO failing, though. That kind of thing can be worked out.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-11067027789099927652007-08-17T14:24:00.000-05:002007-08-17T14:24:00.000-05:00BTW, my bank sources are not people who deal direc...BTW, my bank sources are not people who deal directly with the Fed or anything, so I won't swear they know for a fact that the Fed isn't accepting CP repo.<BR/><BR/>Bear in mind that for someone to use CP as repo, they have to be the <I>lender</I> not the borrower. In otherwords, they aren't the issuer of CP, they are the one who bought the CP. That's an important distinction. Banks that used ABSCP to fund CDO programs or mortgage warehouses are not the ones who'd get to use them for repo, even if the rumor is correct.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-56739705189392144342007-08-17T14:20:00.000-05:002007-08-17T14:20:00.000-05:00I talked to two banks and Fannie Mae, and they are...I talked to two banks and Fannie Mae, and they are saying you cannot use ABSCP as repo collateral with the Fed. You can use it as collateral at the discount window. But I understand that's been the case for a long time. You can use Baa-rated corps also.<BR/><BR/>I'm inclined to agree with Flow 5 that the discount window isn't really being used the way it once was. It used to be said that if a bank came to the discount window on Monday, expect the FDIC to be at their hedquarters on Tuesday.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-61310868080427183192007-08-17T14:18:00.000-05:002007-08-17T14:18:00.000-05:00This comment has been removed by the author.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-21459634671526759672007-08-17T13:48:00.000-05:002007-08-17T13:48:00.000-05:00By lowering the discount rate to 5 3/4% the Fed ex...By lowering the discount rate to 5 3/4% the Fed expanded the collateral accepted and provided more competitive rates with its discount window advances (as opposed to using open market operations to purchase Treasury, agency, & mortgage-backed securities):<BR/><BR/>DISCOUNT WINDOW COLLATERAL ACCEPTED<BR/>http://www.frbdiscountwindow.org/frscollateralguide.cfm?hdrID=21&dtlID=81Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-37337412069207498442007-08-17T12:20:00.000-05:002007-08-17T12:20:00.000-05:00"Anon #18 (or whatever... why don't you people pos..."Anon #18 (or whatever... why don't you people post your damn names?)"<BR/><BR/>Advice taken (though I was not any of the anon's on this thread. For full disclosure, I am the electricity trader and have been a curmudgeon against rate cuts and the debt and for the dollar). :-)<BR/><BR/>Anyway, the recent anon post of the dude's daughter straightening out counterparty risk got me thinking. To what extent does this crisis result from operational risk concerns? For example, in Florida the creditor can not simply foreclose on a mortgagee in arrears, and in some cases it is impossible to even determine the legal standing of creditors when a mortgage has changed hands. Does that then tie up the liquidity of the MBS, separately from whether it can catch a bid in the market, in which that mortgage is packaged or can that one be hived out (assuming anyone can even figure out it is in there...)?<BR/><BR/>Basically, to what extent has Basel II failed to mitigate this crisis, or is this an issue for Basel III?<BR/><BR/>It was pretty obvious at GARP this year that nobody outside possibly the most robust and sophisticated five or so banks in the world really had a good handle on implementation of Basel II’s Operational Risk requirements. Maybe this is the crisis that gets that straightened out (stipulating that it is a crisis, which in general I am not prepared to do)?DABhttps://www.blogger.com/profile/17664853658943281026noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-7783160188948969732007-08-17T11:58:00.000-05:002007-08-17T11:58:00.000-05:00The London Telegraph reported "sources" saying tha...The London Telegraph reported "sources" saying that the Fed "quietly" began accepting ABCP repo's. <BR/><BR/>http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/17/cnfed117.xml<BR/><BR/>The spirit of the repo facility is to provide ready access to liquidity where counterparty risk is an issue. As such, the repo's are supposed to use liquid, safe, easy-to-value instruments. One can easily argue that the ABCP does not fit the bill. Obviously, the Fed's actions ooze with moral hazard.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-66464476403953046572007-08-17T09:42:00.000-05:002007-08-17T09:42:00.000-05:00As ugly as the markets are, the behind the scenes ...As ugly as the markets are, the behind the scenes situation is even uglier.<BR/><BR/>My daughter is a financial risk consultant with the consulting arm of one of the top accounting firms. Yesterday she received a call to get to GS as quickly as possible...it seem the derivatives settlement process is in danger of coming unglued.<BR/><BR/>Since most of these are poorly documented private contracts with counterparties, there are $billions at stake where they don't know the counterparty or if the CP is even still in business. This has made it impossible to ascertain their existing positions because so many of the "sells" in the last couple of months have not been settled, but are in limbo.<BR/><BR/>The NY Fed has been warning of this situation for the past several months...it seems like it is here in real life. My daughter has been told to expect to be at GS through the end of the year...the mess is HUGE.<BR/><BR/>Re the FOMC move, only depository institutions, thrifts, banks, etc. are allowed to borrow at the discount window; loans now good for 30 days.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-18154221168464490312007-08-17T09:15:00.000-05:002007-08-17T09:15:00.000-05:00tddg said..." It wasn't easy money in the debt mar...tddg said..." It wasn't easy money in the debt markets that allowed the tech bubble to continue. Now we will never know whether they Fed could have engineered a better outcome during the tech bubble had they taking an alternative approach.""<BR/><BR/>I kept hoping that the Fed would increase margin requirements for investors. As it turned out the brokerages did their job for them when they made many dot-com stocks unmarginable. IMO, Greenspan should have done it for the entire stock market, as i think that would have killed a lot of the speculation.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-42976659414694789692007-08-17T08:11:00.000-05:002007-08-17T08:11:00.000-05:00If the 12 discount windows are properly administer...If the 12 discount windows are properly administered, advances would only be made to meet emergency outflows of funds from the applicant banks. Advances by the reserve banks would be closely monitored to prevent the use of these funds for profit, that is, to finance an expansion of thee applicant bank’s earning assets. If legal reserves acquired through advances are used to finance bank credit expansion, then the fed is allowing the depository institutions to usurp a power that should be the exclusive province of the central bank. <BR/><BR/>For many years (before George Mitchell & some others) it was understood that discounting was a privilege, not a right. Banks should not borrow from the central bank except in an emergency. And an emergency does not extend to helping a banker meet obligations under lines of credit. Under this system bankers know they have to hold sufficient liquid assets to meet such contingencies, or meet their obligations through their “managed liabilities.” As it is, bankers can borrow to meet “seasonal needs.” Today, discount rules and administration are so lax, that borrowed funds can be resold in the federal fund’s market. By providing virtually free access to the discount window, the Fed relinquishes its power to control money creation. <BR/><BR/>It should be emphasized that one dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances have to be repaid in one month or less is immaterial. A new advance can be obtained, or an old advance extended, or the borrowing bank replaced by other borrowing banks. The importance of controlling borrowed reserves is indicated by an excessive volume of free legal reserves/discounting. <BR/><BR/>Under proper conditions and surveillance, the increased volume of discounting can be easily offset by concurrent open market sales or through a smaller volume of purchases than would otherwise have been made. Discount window administration is necessarily concerned with the emergency needs of specific banks. Applications for secondary credit to meet short-term liquidity needs or to resolve challenging financial circumstances should be given priority. In this way the illiquidity needs of the problem banks can be addressed before they balloon.<BR/> <BR/>In contrast, the FRBNY’s “trading desk” deals with a network of 21 established primary dealers which participate in the Fed’s open market operations and submit bids or offers as well as trade using the automated U.S.Treasury securities auction system when bonds, bills, & notes are originally sold. It follows that “primary dealers must be in compliance with Tier I and Tier II capital standards under the Basel Capital Accord, with at least $100 million of Tier I capital” and thus by observance are not encountering the same kind liquidity problems experienced . Instead the primary security dealers are reaping a windfall. A responsible central banking policy will not permit the determination of the volume of legal reserves of depository institutions to be dictated, even in a small way, by the profit proclivities of commercial bankers.Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-76332284895406355432007-08-17T08:02:00.000-05:002007-08-17T08:02:00.000-05:00Anon #1MM:You can refuse to believe it if you want...Anon #1MM:<BR/><BR/>You can refuse to believe it if you want. I don't know what to tell you.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-1895420525990452252007-08-17T07:52:00.000-05:002007-08-17T07:52:00.000-05:00Fed funds still trading below 5.25%:http://www.new...Fed funds still trading below 5.25%:<BR/><BR/>http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm<BR/><BR/>4.97% as of August 16.<BR/><BR/>The systematic risk right now is in investor losses which, quite frankly, doesn't bother me at all. If there is a guy making $300,000 a year fresh out of school and "hooked" into the firm and he is not catching bids on the bond desk, then fire his ass and send him home. Maybe we will see "financial" day laborers being scooped up on Wall Street whenevr there is work. <BR/>If the problem is caused by a temporary lack of liquidity then a easing of rates will help. But that is not the case. It is being caused by a "de-rating" of asset quality and no amount of Fed easing will help.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-30643134.post-52831107163128026172007-08-17T07:46:00.000-05:002007-08-17T07:46:00.000-05:00David:"By saying jumbo prime MBS is "fine", you ar...David:<BR/><BR/>"By saying jumbo prime MBS is "fine", you are making assumptions about default rates, severities, CA unemployment rates, etc. Who's supposed to make these assumptions? The market. And the market says they are not fine. "<BR/><BR/>If these bonds aren't fine, then give me the right price. Right now there is no price. That's the problem. The market could work with ANY price, but it can't work with no price at all.<BR/><BR/>"The market is a discounting mechanism."<BR/><BR/>OK, but right now its discounting zero cash flow on a security that will obviously have cash flows. You can't reconcile that.<BR/><BR/>Look, I'm as big a free market guy as anyone, but I believe the Fed has a role as lender of last resort. I think those arguing that the Fed shouldn't perform this role should consider the U.S. economy in the 1930's and the Japanese economy of the 1990's.<BR/><BR/>I don't believe the Fed is accepting ABCP. If I'm wrong, I'm wrong, but I can't find any reference to this.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-82350630648629301132007-08-17T07:39:00.000-05:002007-08-17T07:39:00.000-05:00Anon #456:"I have always felt the Fed's big mistak...Anon #456:<BR/><BR/>"I have always felt the Fed's big mistake was not raising rates much more quickly post 2002---those endless 25 bp raises just took too long from too low a level. I remember saying they should just move to 4% from 1% and get it over with."<BR/><BR/>I think the Fed was worried about tripping up all the cash and carry programs (which they created with 1% FF anyway). I think in hindsight it was the 1% FF that was the mistake. But given that, I think they could have gotten away with some 50bps hikes in there and cut the time to move from 1% to 5.25% by 1/3.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.comtag:blogger.com,1999:blog-30643134.post-82412298201919148012007-08-17T07:38:00.000-05:002007-08-17T07:38:00.000-05:00Flow5:The Fed just cut the Discount Rate and sound...Flow5:<BR/><BR/>The Fed just cut the Discount Rate and sounds wide open to proving more liquidity if needed. So I think their actions are speaking louder than their words.<BR/><BR/>On the CP issue, this is exactly what I'm getting at. We can't have it where solid financial institutions can't access the CP market "just because." I mean, we need some outlet, and I think the Fed's repo activities are potentially that outlet. Consider that if an industrial company has a CP program which gets shut down, they invariably take down a bank credit line. But that means the banks need to fund the credit line. Someone someplace has to step up and provide the liquidity, even if only for a short while.Accrued Interesthttps://www.blogger.com/profile/05096191765979971184noreply@blogger.com