How to cardiovert the global banking system

Discussion in 'Wall St. News' started by drsteph, Oct 12, 2007.

  1. I don't usually post news links, but found this particularly interesting.

    Note participants.

    U.S. Treasury Talks With Banks on Commercial Paper (Update3)

    By Jesse Westbrook, Kevin Carmichael and Mark Pittman

    Oct. 12 (Bloomberg) -- U.S. Treasury officials are talking with Citigroup Inc., JPMorgan Chase & Co. and other banks about a plan to jump-start the asset-backed commercial paper market.

    Discussions over the past two weeks addressed structured investment vehicles, units set up by banks to finance purchases of assets including subprime mortgage debt, said a government official and a banker with knowledge of the deliberations. Under one plan being considered by the banks, lenders would establish a fund of as much as $100 billion to buy assets from the SIVs, said two people familiar with the negotiations who declined to be identified because the talks are continuing.

    Policy makers are concerned that investors remain reluctant to acquire the paper even if the loans that back them are sound, said the official, who declined to be identified. Setting up a fund would allow SIVs, which own $320 billion of assets, to avoid having to sell their holdings at fire-sale prices and further roil the credit markets.

    ``If the firms get together to improve the quality, that's a good development,'' said Mark Amberson, who runs the $5 billion Russell Money Fund for the Russell Investment Group in Tacoma, Washington. ``It would be a positive credit event if you wind up with a better vehicle.''

    As losses in securities linked to subprime mortgages started to spread in July, investors retreated from high-risk assets. SIVs that issued commercial paper to buy the securities found they could no longer roll over the debt, forcing them to sell about $75 billion of their assets.

    Shrinking Market

    The amount of asset-backed commercial paper outstanding tumbled to $899 billion in the week ended Oct. 10, from a high of $1.14 trillion at the end of June, according to the Federal Reserve.

    Treasury Secretary Henry Paulson, the former Goldman Sachs Group Inc. chief executive officer with 32 years of experience on Wall Street, met with Citigroup CEO Charles Prince, JPMorgan chief Jamie Dimon and other executives from the country's biggest banks during the bi-annual meeting of the Financial Services Forum in Washington on Oct. 10. Lloyd Blankfein, Paulson's successor at Goldman, was also at the meeting according to a person familiar with the session.

    ``We are always meeting with market participants,'' Treasury spokeswoman Jennifer Zuccarelli said in Washington, declining to confirm any specific discussions.

    Treasury Approach

    Treasury is playing a ``a facilitators' role,'' said Joseph Mason, an associate professor of business at Drexel University in Philadelphia and a former financial economist at the Office of the Comptroller of the Currency. ``We have a Treasury secretary that is familiar with Wall Street and who they trust.''

    The talks are the latest effort by policy makers to help restore liquidity to credit markets, a campaign started by the Fed in August, when it cut the charge on direct loans. Fed officials have said this month that while there are signs of improvement, some markets remain under stress.

    ``Some markets have been experiencing illiquidity,'' San Francisco Fed President Janet Yellen said in an Oct. 9 speech in Los Angeles, referring to mortgage-backed securities and asset- backed commercial paper. ``This illiquidity has become an enormous problem for companies that specialize in originating mortgages and then bundling them to sell as securities.''

    As yields on asset-backed commercial paper climbed amid the exodus from the market, some companies found their access to borrowing cut off. Countrywide Financial Corp., the biggest U.S. mortgage lender, had to tap an entire $11.5 billion bank line on Aug. 16 after being unable to fund itself with commercial paper.

    Interest Rates

    Speculation on ``a bank consortium being formed to address the funding of SIV assets'' helped reduce the interest rates on loans that banks make to each other in dollars in Europe, Jacqueline Cavuoto, a Bear Stearns Cos. analyst in New York, wrote in a note to clients.

    The one-month London interbank offered rate, a benchmark for corporate borrowing, has fallen 5 basis points in the past two days, to 5.06 percent. A basis point is 0.01 percentage point. The rate reached 5.82 percent on Sept. 7, up half a percentage point from July, as demand for short-term funds soared.

    Fed officials have been monitoring businesses' access to borrowing, where any decline could hurt plans for hiring and spending. Fed Bank of Boston President Eric Rosengren cited the jump in Libor in the past two months as a concern.

    Libor Influence

    ``This tightens credit for a variety of U.S. borrowers, since many loans to businesses and many floating rate mortgages are tied to the Libor rate,'' the Boston Fed chief said Oct. 10 in a speech in Portland, Maine.

    Holdings by SIVs have dropped to about $320 billion from about $395 billion of assets in July, Moody's Investors Service said this month.

    ``SIVs are all losing money right now,'' said Chris Low, chief economist at FTN Financial in New York. ``If any one of the conduits dumps'' their holdings of distressed securities, ``it could trigger selling by the others as well, and that's the scenario they're to avoid,'' he said.
  2. much of the above would require more thought than i care to devote to it, but these policies and others provide at least the whiff of a possibility that we experience a fiscal crisis: bank's mis marking illiquid assets, overleveraged lending out hundreds times what they have on deposit, along with a government accumulated so much debt that they can't back the banks, a prolonged japan like recession due to protectionist and isolationist polices, then a panic among people that they can't pull their money out. this may not happen for decades or ever, but it's going to take a severe turn in policy and national sentiment. say 10% chance within 25 years?
  3. "structured investment vehicles" = shitty loans