Not So Easy Anymore? Part III
We've said it before and we'll say it again: "Folks, this could turn into a real HORROR show worth the price of a ticket and a box of pop corn, the prologue and Act I are complete.
Just sit back and watch as Act II opens shortly. We now return you to your regular programming..."
Whats that crashing sound??? HINT: Read below then look at the chart.
We warned here 08/21 on $550 Billion in ABCP coming due in the next 90 days.
And here on $400 Billion of LBO hung loans alreday on the commerical banks books, making it $1 Trillion in need of paper rolling.
During the 2001 downturn, commercial paper peaked in November 2000 and slid through to December 2003. Over that three-year period it declined by 22%.
From the Fed 09/10: Asset-backed commercial paper fell a further 3.1% for the week to $966.7 Billion.
Overall commercial paper outstanding fell by $54.1 Billion. Total commercial paper outstanding has fallen 13.4% in one month.
Hat tip to Bennet Sedacca at Minyanville:
"15-day commercial paper is yielding 6.3%, 90 basis points higher than a month ago. Treasuries are 200 basis points below these levels.
Credit in the system is contracting fast. As a result, signs of weakness in the economy will appear fast.
Libor rates remain at extremely elevated levels, also suggesting that the credit crunch in debt markets is as bad as it has been despite more liquidity injections from the ECB.
Something is very wrong in the financial system. Does that not have vast implications to an economy that is built on the financial industry with over 30% of all S&P 500 earnings based on financial companies?"
Hedging redemption... In June, Caliber Global Investment planned to close and sell assets.
In July, Bear Stearns sought bankruptcy protection for two hedge funds. Basis Capital Fund & Absolute Capital froze customer assets.
Basis sought bankruptcy protection in August for the Basis Yield Alpha Fund. Last week, Synapse Investment shut one of three fixed-income funds.
Yesterday, Y2K Finance, the flagship hedge fund of Wharton Asset Management, said it will halt redemptions until at least December.
From our Foreign Legion of Dishonor... Barclay's could be on the hook for another of its ABCP SIVs.
Barclays is offering to underwrite a $1 Billion rescue of Mainsail II, a $4.5 Billion structured investment vehicle designed by Barclays Capital.
The SIV had been forced to start selling assets as it struggled to roll over finance in the commercial paper market.
Separating the chaf... GMAC, which has $68.5 billion of bonds outstanding, reported more than $1 billion of mortgage losses at its Residential Capital LLC mortgage unit.
GMAC is injecting $775 million into GMAC LLC, ranked as the ninth-largest U.S. mortgage lender
Citigroup, the biggest U.S. bank, will provide another $14.4 billion and may offer another $7 billion of financing for GMAC LLC.
In the Citi... Citigroup owns about 25% of the market for SIVs (conduits), accounting for nearly $100 billion of assets under management.
Citi has avoided SIV capital requirement issues thus far by selling SIV assets ($5.3 billion in August) and is likely to do this if there were moderate need for funding.
As pointed out in Not So Easy Anymore Part I, Almost $60 billion of the commercial paper due this week and next is owed by conduits or SIV's.
Stiff Upper Lip... From the BOE:
"There are strong private incentives to market players to recognise early and transparently their exposures to off-balance sheet entities and to accelerate the re-pricing of asset-backed securities.
If risk continues to be under-priced, the next period of turmoil will be on an even bigger scale."
CreditSights analysts on the SIV pickle:
Structured investment vehicles (SIVs) that have been rolling their commercial paper at very short maturities may be challenged to fulfill rating agency liquidity requirements.
This could trigger downgrades that ultimately send the structures into a death spiral.
"Clearly the ability to roll (paper) at any tenor is better than not being able to at all, but we would point out that the roll of maturing debt into one-week or overnight commercial paper is a train wreck in the making".
The SIV's can search for an increase in their backstop bank line of credit... (unlikely to be forthcoming from banks already caught napping on ABCP exposure.)
or liquidate assets that are not eligible liquid securities in order to buy U.S. Treasuries and other assets that will count towards the liquidity minimum.
Here's the catch... As all SIVs face the same risks, however, the structures may be forced to sell securities at the same time, which would send down prices of the assets.
This would drive down the net asset value of the SIVs. And, as net asset values fall, the structures are subject to further downgrades.
"This death-cycle dynamic can have the consequence of forcing steep downgrades of SIV commercial paper even if the SIV is still able to roll most of its commercial paper in the overnight or one-week tenors."
Viva la resitance... Last week, Nigerian rebels spooked the oil herd, this week its Mexican insurgents blowing up pipelines. Crude hit and all time high over $80 per barrel on the "news".
Who do you trust?? Yesterday Intel gave reassuring upside forward guidance based on international demand. Today, Texas Instruments narrowed and lowered forward guidance.
From the Wheat... Wheat surpassed $9 a bushel for the first time as a drought in Australia cut production, pushing global stockpiles toward a 26-year low.
Grain stockpiles in Canada, the world's second-largest wheat exporter, plunged 29 percent at the end of July from a year earlier
Job drought... Electronic Data Systems Corp., the second-largest computer-services company, plans to offer early retirement to 12,000 workers in the U.S. after new orders plunged last quarter.
Some of the work they are doing will probably move to lower-cost geographies around the globe.
Longer than you think... Treasury Secretary Hank Paulson:
"The subprime market will take longer (to recover) than other markets because of a number of these resets (ARM's) taking place over the next 18 months to two years."
The Nattering One muses... new & existing inventories are at an all time high; in California: Countrywide holding 2700 and Wells Fargo 3700 REO's.
Newsflash: At an average price of $500K thats $1.3 Billion and $1.8 Billion being carried on the books by just 2 lenders in 1 state.
Stricter lending standards have eliminated virtually all the lemmings and speculators from the market.
Remember, once credit contracts and asset prices drop sufficiently, it becomes impossible to service the debt.
Currently, REO property in Florida is going for .45 cents on the $; and California at .75 cents on the $, and this is in the "good" times.
Just wait until the ARM resets take their toll while the non durable economy whithers into recession. As inventories continue to build, prices will truly crater and furthermore...
no amount of rate cutting or liquidity injections can rescue the real estate or the asset backed commerical paper market.
Just sit back and watch as Act II opens shortly. We now return you to your regular programming..."
Whats that crashing sound??? HINT: Read below then look at the chart.
We warned here 08/21 on $550 Billion in ABCP coming due in the next 90 days.
And here on $400 Billion of LBO hung loans alreday on the commerical banks books, making it $1 Trillion in need of paper rolling.
During the 2001 downturn, commercial paper peaked in November 2000 and slid through to December 2003. Over that three-year period it declined by 22%.
From the Fed 09/10: Asset-backed commercial paper fell a further 3.1% for the week to $966.7 Billion.
Overall commercial paper outstanding fell by $54.1 Billion. Total commercial paper outstanding has fallen 13.4% in one month.
Hat tip to Bennet Sedacca at Minyanville:
"15-day commercial paper is yielding 6.3%, 90 basis points higher than a month ago. Treasuries are 200 basis points below these levels.
Credit in the system is contracting fast. As a result, signs of weakness in the economy will appear fast.
Libor rates remain at extremely elevated levels, also suggesting that the credit crunch in debt markets is as bad as it has been despite more liquidity injections from the ECB.
Something is very wrong in the financial system. Does that not have vast implications to an economy that is built on the financial industry with over 30% of all S&P 500 earnings based on financial companies?"
Hedging redemption... In June, Caliber Global Investment planned to close and sell assets.
In July, Bear Stearns sought bankruptcy protection for two hedge funds. Basis Capital Fund & Absolute Capital froze customer assets.
Basis sought bankruptcy protection in August for the Basis Yield Alpha Fund. Last week, Synapse Investment shut one of three fixed-income funds.
Yesterday, Y2K Finance, the flagship hedge fund of Wharton Asset Management, said it will halt redemptions until at least December.
From our Foreign Legion of Dishonor... Barclay's could be on the hook for another of its ABCP SIVs.
Barclays is offering to underwrite a $1 Billion rescue of Mainsail II, a $4.5 Billion structured investment vehicle designed by Barclays Capital.
The SIV had been forced to start selling assets as it struggled to roll over finance in the commercial paper market.
Separating the chaf... GMAC, which has $68.5 billion of bonds outstanding, reported more than $1 billion of mortgage losses at its Residential Capital LLC mortgage unit.
GMAC is injecting $775 million into GMAC LLC, ranked as the ninth-largest U.S. mortgage lender
Citigroup, the biggest U.S. bank, will provide another $14.4 billion and may offer another $7 billion of financing for GMAC LLC.
In the Citi... Citigroup owns about 25% of the market for SIVs (conduits), accounting for nearly $100 billion of assets under management.
Citi has avoided SIV capital requirement issues thus far by selling SIV assets ($5.3 billion in August) and is likely to do this if there were moderate need for funding.
As pointed out in Not So Easy Anymore Part I, Almost $60 billion of the commercial paper due this week and next is owed by conduits or SIV's.
Stiff Upper Lip... From the BOE:
"There are strong private incentives to market players to recognise early and transparently their exposures to off-balance sheet entities and to accelerate the re-pricing of asset-backed securities.
If risk continues to be under-priced, the next period of turmoil will be on an even bigger scale."
CreditSights analysts on the SIV pickle:
Structured investment vehicles (SIVs) that have been rolling their commercial paper at very short maturities may be challenged to fulfill rating agency liquidity requirements.
This could trigger downgrades that ultimately send the structures into a death spiral.
"Clearly the ability to roll (paper) at any tenor is better than not being able to at all, but we would point out that the roll of maturing debt into one-week or overnight commercial paper is a train wreck in the making".
The SIV's can search for an increase in their backstop bank line of credit... (unlikely to be forthcoming from banks already caught napping on ABCP exposure.)
or liquidate assets that are not eligible liquid securities in order to buy U.S. Treasuries and other assets that will count towards the liquidity minimum.
Here's the catch... As all SIVs face the same risks, however, the structures may be forced to sell securities at the same time, which would send down prices of the assets.
This would drive down the net asset value of the SIVs. And, as net asset values fall, the structures are subject to further downgrades.
"This death-cycle dynamic can have the consequence of forcing steep downgrades of SIV commercial paper even if the SIV is still able to roll most of its commercial paper in the overnight or one-week tenors."
Viva la resitance... Last week, Nigerian rebels spooked the oil herd, this week its Mexican insurgents blowing up pipelines. Crude hit and all time high over $80 per barrel on the "news".
Who do you trust?? Yesterday Intel gave reassuring upside forward guidance based on international demand. Today, Texas Instruments narrowed and lowered forward guidance.
From the Wheat... Wheat surpassed $9 a bushel for the first time as a drought in Australia cut production, pushing global stockpiles toward a 26-year low.
Grain stockpiles in Canada, the world's second-largest wheat exporter, plunged 29 percent at the end of July from a year earlier
Job drought... Electronic Data Systems Corp., the second-largest computer-services company, plans to offer early retirement to 12,000 workers in the U.S. after new orders plunged last quarter.
Some of the work they are doing will probably move to lower-cost geographies around the globe.
Longer than you think... Treasury Secretary Hank Paulson:
"The subprime market will take longer (to recover) than other markets because of a number of these resets (ARM's) taking place over the next 18 months to two years."
The Nattering One muses... new & existing inventories are at an all time high; in California: Countrywide holding 2700 and Wells Fargo 3700 REO's.
Newsflash: At an average price of $500K thats $1.3 Billion and $1.8 Billion being carried on the books by just 2 lenders in 1 state.
Stricter lending standards have eliminated virtually all the lemmings and speculators from the market.
Remember, once credit contracts and asset prices drop sufficiently, it becomes impossible to service the debt.
Currently, REO property in Florida is going for .45 cents on the $; and California at .75 cents on the $, and this is in the "good" times.
Just wait until the ARM resets take their toll while the non durable economy whithers into recession. As inventories continue to build, prices will truly crater and furthermore...
no amount of rate cutting or liquidity injections can rescue the real estate or the asset backed commerical paper market.
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