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Post by jeffolie on Aug 23, 2007 13:56:41 GMT -6
In summary: while the extremes of the investors’ panic have receded in the last couple of days the credit markets remain mostly in a severe credit crunch: money markets, commercial paper, asset-backed commercial paper, SIVs, CDOs, LBOs, leveraged loans, subprime, near prime and prime mortgage markets. In all of them the credit crunch is still severe if less extreme than at the time of the peak of the investors’ panic. Persistent credit problems – rather than just illiquidity ones – will keep a variety of credit markets in a crunch for a persistent period of time. In the meanwhile the housing recession is becoming more severe, consumer confidence is sharply down, retail sales in August look like falling relative to July and the tightening in credit conditions is likely to slow down an already anemic capex spending by the corporate sector. www.rgemonitor.com/blog/roubini/
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Post by unlawflcombatnt on Aug 23, 2007 15:30:18 GMT -6
One of the articles Roubini linked to helps clarify the relation between short-term paper sale and purchase of MBSs (mortgage-backed securities). If financial institutions can't sell short-term paper, they can't raise the cash necessary to buy MBSs. If they can't buy MBSs, the MBS packagers on Wall Street can't sell them and get cash to buy mortgages from banks & mortgage originators. If banks & mortgage originators can't sell their mortgages, and get cash in return, then they cannot issue any more mortgages. Thus, the inability of financial institutions to sell commercial paper reduces the money available to issue mortgages. Let me map this out: Commercial Paper Sales by Financial Institutions = Cash (to buy MBS)-->
MBS Sale by Finan. Instit. (to Investors) = Cash for Fin.Inst. (to buy mortgages)-->
Mortgage Sale (to Finan. Instit) by Originator = Cash (for new mortgage origination.)Thus, again, reduced commercial paper sale reduces the actual money available for mortgage origination. In addition, downgrades on MBSs reduces their actual market value, and makes them harder to sell to investors at their inflated "mark-to-model" price. So a decline in commercial paper sale, combined with a decline in the market value of MBSs, reduces money available for mortgage origination. This reduces mortgage originations, home sales, demand for homes, and ultimately the price of homes. In summary, the combined effect of declining commercial paper sales and MBS downgrades will reduce home prices. Below are excerpts from a related story from Bloomberg on declining commercial paper sales. Banks Have $891 Billion at Risk in CP, Fitch Says By Mark Pittman " Aug. 23 (Bloomberg) -- Banks worldwide have $891 billion at risk in asset-backed commercial paper facilities because of credit agreements that ensure investors are paid back when the short-term debt matures, Fitch Ratings said.
The investment vehicles, which carry top credit ratings, sell debt that matures in one to 270 days and invest in longer-term securities with higher yields, Fitch said in a report. Some of those securities are subprime mortgage bonds, which have been losing value as default rise to the highest in 10 years.
In a sign that banks are shouldering more risk, U.S. asset- backed commercial paper shrank by its biggest weekly percentage since 2000 as investors shunned debt linked to mortgages and opted for the safety of Treasuries. The asset-backed market has dropped by $180 billion in the past two weeks, according to the Federal Reserve....
Asset-backed commercial paper this week dropped $77.1 billion to $1.05 trillion from Aug. 15, according to the Federal Reserve. The percentage drop is the biggest since at least November 2000, according to data compiled by Bloomberg. Asset-backed commercial paper is down $125.5 billion over two weeks....
Some companies that use commercial paper to buy asset-backed securities or collateralized debt obligations backed by subprime mortgages are having trouble finding investors. Commercial paper buyers, in the face of attempts by the Federal Reserve to ease the credit crunch, have headed for Treasury bills, where yields on Aug. 20 fell the most since the stock market crash of 1987.
Some of the liability ``falls on the banks, some of it forces the unwind of these assets to potentials buyers,'' said Bill Gross, manager of the $103 billion Pimco Total Return Fund, the world's biggest bond fund, at Pacific Investment Management Co. in Newport Beach, California. ``There is no doubt that banks have been forced to assume liabilities that they had not assumed before.''
The $1.1 trillion market for commercial paper used to buy mortgages, aircraft cars has seized up just as more than half of that amount comes due in the next 90 days, according to the Federal Reserve. Unless they find new buyers, hundreds of hedge funds and home-loan companies will be forced to sell $75 billion of debt, according to Zurich-based UBS AG, Europe's largest bank....
Those sales would drive down prices in a market where investors have already lost $57 billion, based on Merrill Lynch & Co.'s broadest index of floating-rate securities backed by home- equity loans. That may hurt the 38.4 million individual and institutional investors in money market funds, the biggest owners of commercial paper. Top-rated commercial paper is one of the world's safest assets...."
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Post by jeffolie on Aug 23, 2007 15:59:26 GMT -6
In the last 2 weeks, I read that the average duration for commercial paper is 55 days. So on average, the commercial paper market must roll over or go out of existance by the end of September.
The end of September is looking to become a perfect storm financially. All those hedge fund redemptions are due then. Money market funds will have to mark to market by then. End of Quarter statements are then due for mutual funds. I believe it will also be a triple witching. October may well be a brutal month for the economic community.
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