Alchemy?
How does one turn silver into gold? In this developing solvency melodrama, we've commented on these issues before.
Yesterday, we outlined how short term treasuries are being used to fill the gap in the ABCP market...
and how big finance, petrodollars, asset managers, pension funds & insurance co's could benefit.
We also posed the question as to how even the Fed & Treasury might participate & benefit.
Today some of the pieces of the puzzle came together on how "somebody" might make a killing acquiring the distressed paper...
and perhaps solve some Social Security fund IOU and massive pension plan funding deficits in the process.
How much ABCP is maturing in the next 90 days?... $550 Billion in addition to $400 Billion already trapped in the pipe.
About 86 % of all asset backed commercial paper comes due within seven days, and about 50% matures overnight, according to Fed data as of Aug. 22.
Risk premiums have risen because few want to touch the toxic paper...
Yields on the $1.2 trillion market for asset backed commercial paper have been rising because the funds may have to liquidate assets quickly to pay back short term debt.
That may set off spiraling losses in the market for other structured finance (read CDO and other derivatives).
About $125 billion in asset backed commercial paper has been withdrawn from the market in the past two weeks, as banks had to put the assets on their books for a complete lack of buyers.
Fill the gap... bump up the suppy of short term treasuries being used as collateral in the ABCP market...
The Treasury will auction $24 billion in three-month and $19 billion in six-month bills on Aug. 27. It will be the biggest three month sale since at least July 1990.
Opening the discount window for the Banks...
JPMorgan Chase ; Wachovia ; B of A and Citibank each took $500 Million for a total of $2 Billion from the Fed discount window.
Can our friends the broker dealers participate too?
The Fed eased restrictions on the relationship between Citibank NA, Citigroup Inc.'s U.S. bank, and its broker dealer subsidiary, Citigroup Global Markets Inc.
The exemption allows Citibank to lend up to $25 billion to the broker-dealer's customers. Bank of America received a similar right.
The Fed already accepts FNMA, FHLMC or GNMA guaranteed aka AGENCY MBS as collateral for repo money...
On 08/10 the Fed smashed all previous records for MBS acceptance with $38 Billion in strictly MBS repo. Why strictly MBS?
Massive amounts of Treasuries have been bought by foreign central banks that do not lend out. Treasuries were on the rise as demand for high quality debt escalated...
and since MBS had the lowest opportunity cost to the borrower; the Fed encouraged MBS because it did not want to exacerbate the spread in Treasuries further.
A repo is a collateralized loan. The collateral pledged by dealers towards the repo has a “haircut” applied, which means they are valued at slightly less than market value.
Forms of collateral the Fed will accept: 1. Treasury securities. 2. Federal agency debt in addition to Treasury securities. 3. mortgage backed securities issued or fully guaranteed by federal agencies in addition to federal agency debt or Treasury securities.
Naturally, on the repo, Treasuries get the lowest lending rate and mortgage backed securities the highest.
What was unusual on Aug 10th's repo? The MBS received the same lower lending rate as Treasuries.
When the repo matures, the dealer returns the loan plus interest, and the Fed returns the collateral. In the case of a default the Fed does not get paid and keeps the collateral.
And the Fed is now cheerfully accepting ABCP with open arms at the discount window...
The Fed received inquiries from commercial banks in recent days on whether their clients' asset backed commercial paper could be pledged as collateral at the discount window.
As investors shunned the commercial paper sold by finance companies that held loans such as mortgages, the companies asked banks to buy the securities.
The New York Fed's announcement clarifies that its discount window is prepared to accept these asset backed securities as collateral from banks.
"In response to specific inquiries, the Federal Reserve Bank of New York has affirmed its policy to consider accepting as collateral... "investment quality" asset backed commercial paper."
The Nattering One muses.... so the conduit for the Fed to hold the ABCP paper is now open.
Much like in 1999, when the Fed suspended (and later in 2002 eliminated) the clauses in their charter which prevented them from holding MBS.
What does this have to do with Alchemy? Or turning shit, er, I mean silver into gold?
Here's a clue... In Aug 05 we reported... Foreign holdings of US MBS rose 26% last year, making them the fastest growing source of demand.
Foreigners held $280 billion of U.S. mortgage securities at the end of 2004, or 6% of the total outstanding.
Asian investors now account for roughly 10% to 20% of mortgage securities sold by IndyMac. Today, China alone holds over $260 Billion in MBS...
More to come in Part II.
Yesterday, we outlined how short term treasuries are being used to fill the gap in the ABCP market...
and how big finance, petrodollars, asset managers, pension funds & insurance co's could benefit.
We also posed the question as to how even the Fed & Treasury might participate & benefit.
Today some of the pieces of the puzzle came together on how "somebody" might make a killing acquiring the distressed paper...
and perhaps solve some Social Security fund IOU and massive pension plan funding deficits in the process.
How much ABCP is maturing in the next 90 days?... $550 Billion in addition to $400 Billion already trapped in the pipe.
About 86 % of all asset backed commercial paper comes due within seven days, and about 50% matures overnight, according to Fed data as of Aug. 22.
Risk premiums have risen because few want to touch the toxic paper...
Yields on the $1.2 trillion market for asset backed commercial paper have been rising because the funds may have to liquidate assets quickly to pay back short term debt.
That may set off spiraling losses in the market for other structured finance (read CDO and other derivatives).
About $125 billion in asset backed commercial paper has been withdrawn from the market in the past two weeks, as banks had to put the assets on their books for a complete lack of buyers.
Fill the gap... bump up the suppy of short term treasuries being used as collateral in the ABCP market...
The Treasury will auction $24 billion in three-month and $19 billion in six-month bills on Aug. 27. It will be the biggest three month sale since at least July 1990.
Opening the discount window for the Banks...
JPMorgan Chase ; Wachovia ; B of A and Citibank each took $500 Million for a total of $2 Billion from the Fed discount window.
Can our friends the broker dealers participate too?
The Fed eased restrictions on the relationship between Citibank NA, Citigroup Inc.'s U.S. bank, and its broker dealer subsidiary, Citigroup Global Markets Inc.
The exemption allows Citibank to lend up to $25 billion to the broker-dealer's customers. Bank of America received a similar right.
The Fed already accepts FNMA, FHLMC or GNMA guaranteed aka AGENCY MBS as collateral for repo money...
On 08/10 the Fed smashed all previous records for MBS acceptance with $38 Billion in strictly MBS repo. Why strictly MBS?
Massive amounts of Treasuries have been bought by foreign central banks that do not lend out. Treasuries were on the rise as demand for high quality debt escalated...
and since MBS had the lowest opportunity cost to the borrower; the Fed encouraged MBS because it did not want to exacerbate the spread in Treasuries further.
A repo is a collateralized loan. The collateral pledged by dealers towards the repo has a “haircut” applied, which means they are valued at slightly less than market value.
Forms of collateral the Fed will accept: 1. Treasury securities. 2. Federal agency debt in addition to Treasury securities. 3. mortgage backed securities issued or fully guaranteed by federal agencies in addition to federal agency debt or Treasury securities.
Naturally, on the repo, Treasuries get the lowest lending rate and mortgage backed securities the highest.
What was unusual on Aug 10th's repo? The MBS received the same lower lending rate as Treasuries.
When the repo matures, the dealer returns the loan plus interest, and the Fed returns the collateral. In the case of a default the Fed does not get paid and keeps the collateral.
And the Fed is now cheerfully accepting ABCP with open arms at the discount window...
The Fed received inquiries from commercial banks in recent days on whether their clients' asset backed commercial paper could be pledged as collateral at the discount window.
As investors shunned the commercial paper sold by finance companies that held loans such as mortgages, the companies asked banks to buy the securities.
The New York Fed's announcement clarifies that its discount window is prepared to accept these asset backed securities as collateral from banks.
"In response to specific inquiries, the Federal Reserve Bank of New York has affirmed its policy to consider accepting as collateral... "investment quality" asset backed commercial paper."
The Nattering One muses.... so the conduit for the Fed to hold the ABCP paper is now open.
Much like in 1999, when the Fed suspended (and later in 2002 eliminated) the clauses in their charter which prevented them from holding MBS.
What does this have to do with Alchemy? Or turning shit, er, I mean silver into gold?
Here's a clue... In Aug 05 we reported... Foreign holdings of US MBS rose 26% last year, making them the fastest growing source of demand.
Foreigners held $280 billion of U.S. mortgage securities at the end of 2004, or 6% of the total outstanding.
Asian investors now account for roughly 10% to 20% of mortgage securities sold by IndyMac. Today, China alone holds over $260 Billion in MBS...
More to come in Part II.
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