AAA Paper? 92.5% Are Not
That headline is a bit of an exaggeration.
So what is the quality of the collateral willing to be accepted by the new Term Securities Lending Facility (TSLF)? As we noted earlier, much of this paper is junk.
Consider this recent survey of triple A (AAA) paper, at risk of losing their AAA rating in the ABX Indexes, via Bloomberg:
Click thru for interactive chart
Source: Bloomberg
Tuesday, March 11, 2008 | 12:41 PM | Permalink
| Comments (58)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00e550ecd2d18833
Listed below are links to weblogs that reference AAA Paper? 92.5% Are Not:
Comments
"Junk" is such a negative word.
We should call it "value challenged" paper.
Posted by: Marcus Aurelius | Mar 11, 2008 12:55:53 PM
So what are the odds than any of these get downgraded before the Fed Pawn Shop for "AAA" MBS opens on March 27th?
Actually what are the odds than any of it ever gets downgraded?
I guess if it does get downgraded then we will see the "Enhanced TSLF" facility: taking anything C or above at par value for a period of 10 years.
Posted by: Scribe | Mar 11, 2008 12:58:02 PM
So what are the odds than any of these get downgraded before the Fed Pawn Shop for "AAA" MBS opens on March 27th?
Actually what are the odds than any of it ever gets downgraded?
I guess if it does get downgraded then we will see the "Enhanced TSLF" facility: taking anything C or above at par value for a period of 10 years.
Posted by: Scribe | Mar 11, 2008 12:59:08 PM
How to piss off a gloomster ... Nay ... how to make a gloomster sputtering mad: Try to fix the economy using tools that don't plant the seeds for a brand new asset bubble for form. Gloomsters don't want good times if the betterments put into place don't bring along the seeds of destruction.
'But you're not fixing all problems at once' sputter the gloomsters, 'thus you shouldn't do Anything'. 'Harummph ...Innocent people need to Suffer .... more!' hiss the gloomsters. 'Necessary, lovely, delicious Pain begets us all. Why won't the Fed let us Hurt as we Must?'.
Posted by: cinefoz | Mar 11, 2008 1:07:11 PM
CNBC (Gasparino) reporting that traders saying today's move by the Fed was fallout from Bear Stearns. Give me a freakin' break.... Fed and central banks representing over 75% of world GDP is going to collude to bail out Bear Stearns. Sitting here staring at my cat wondering if it's smarter than market commentators.....
Posted by: Stuart | Mar 11, 2008 1:11:58 PM
Check out the beneficiaries of this exercise, which include BAC, BSC, CFC, etc. http://www.newyorkfed.org/markets/pridealers_current.html
Posted by: Andy | Mar 11, 2008 1:13:30 PM
Stuart ... Re your cat: Mostly, yes.
Posted by: cinefoz | Mar 11, 2008 1:13:58 PM
We have had so much discovery since August of last year that the discussion of whether AAA actually represents true AAA quality is now mute. Conclusion: it does NOT and has not for many years. To re-kindle such discussions are a futile attempt to perpetuate fraudulent misrepresentation. One only needs to look at the AMBAC, MBIA...etc. etc. debacles... There's a snowball's chance in hell that the AAA paper the Fed will be accepting is true 100% guaranteed AAA.
Posted by: Stuart | Mar 11, 2008 1:15:47 PM
What about Ambac, MBIA, et al? Doesn't this mess have to be addressed? Do you thin Paulson dreams about not having taken this thankless job of being the admins fall guy/spokesman?
Posted by: larster | Mar 11, 2008 1:20:23 PM
Yes they do, and, this blows my mind, the Fed is relying on those very same rating agencies in the epicenter of that complete world class debacle to decide what AAA paper it accepts as collateral. Good lord.
Posted by: Stuart | Mar 11, 2008 1:23:33 PM
You can bet the PPT is out in force this afternoon! I've never seen such a minipulated market in my life. When will they realize that nothing works except the markets - which means some lose big, while others win. Oh, but that can't happen unless its a Wall Street Bank who gets to win big!
Posted by: JustinTheSkeptic | Mar 11, 2008 1:35:01 PM
Barry, what do we really expect them to do? Tell the truth at this point? They are doing what they do in order to survive although right now it sure doesn't look like it.
The yield curve has steepened dramatically which helps the banks that lent long while borrowing short, very bad when it reverses on you i.e. August 2007. The steepening curve allows them to try and stabilize their portfolios and balance sheets.
There is no quick fix for this, and indeed there may be no fix at all, but this does buy more time for the banks to extrecate themselves from some of their wrong way bets. All that being said, they must lend which they currently aren't doing for fear of losing the money to a defaulting Hedgie or to companies that want/need capital in a slowing economy.
Ben has studied an ocassion such as this his whole life, so this is his defining momment in history, but to have this weight on his shoulders, I wouldn't wish it on anyone. Today at least I wish him God's speed for the sake of the kids and grandkids. What the hey, it's what father guido sarducci would want us to do. :>)!
Posted by: SPECTRE of Deflation | Mar 11, 2008 1:42:03 PM
There's an element missing here.
Collateral at risk is the percentage past due.
Credit support is the percentage that can be lost before it stops making payments.
In order to estimate credit support, don't I need to figure in the recovery rate on past due collateral? If collateral at risk reflected likely realized losses, this would be really scary. If these were all second lien loans, total loss of collateral might be on the table, but AFAIK they're a mix of loan types. These are also the senior credits, the juniors take the first hits.
There are real problems, but calling these "junk" is a bit over the top. They're probably not comparable to a vanilla corporate AAA, but not junk either.
Posted by: Estragon | Mar 11, 2008 1:48:10 PM
Liquidity and credit are returning to the market. The end of the quarter is approaching, bringing along the probable and usual end of quarter window dressing.
My bet is that the market is going to start to rally today and not look back appreciably until April.
Time to jump in and make some money. Cha Ching! Last one in is a pissing mad gloomster.
Posted by: cinefoz | Mar 11, 2008 2:01:16 PM
Barry, why doesn't CNBC have any bears on to give their opinion on what the FED action today is about? No one has defined it the way that you have.
Posted by: JustinTheSkeptic | Mar 11, 2008 2:05:37 PM
Cinfoz, let's just throw good fundamentals out the window. Has anything really changed since yesterday, besides the FED's actions confirming how dire the situation really is? It's the consumer, they've gone fishing, there are none!
Posted by: JustinTheSkeptic | Mar 11, 2008 2:13:27 PM
My thoughts on all things subprime, radical derivitatives, etc. Barry & all, comments appreciated.
Reforms often do more harm than good. This is currently the case with the “mark-to-market” rule, which is imploding the US financial system by requiring financial institutions to value subprime mortgages at their current market values.This makes a big problem for balance sheets. These financial instruments became troubled prior to a market being established for them, as they were marketed direct from issuers to investors. Now that they are troubled and with their true values unknown, no one wants them. Their lack of liquidity assigns them a low value. The result is tremendous pressure on balance sheets. The plummeting value of subprime derivatives is pushing institutions that own them into insolvency, destroying their own stock values and forcing the financial institutions to sell untroubled liquid assets, thus resulting in an overall decline in the stock market. The solution is to suspend the mark-to-market rule. Instead, allow financial institutions to keep the troubled instruments at book value, or 85-90% of book value, until a market forms that can sort out values, and allow financial institutions to write down the subprime mortgages and other troubled instruments over time. Suspending the mark-to-market rule would take pressure off the stock market and make it unnecessary for the Fed to lower interest rates in an effort to force liquidity into the economy through an impaired banking system. The problem is not a general lack of liquidity, but liquidity for poorly conceived new financial instruments. Low US interest rates could worsen the crisis by accelerating the dollar’s decline. Now that inflation has raised its head, more liquidity from the Fed adds to the economic distress. It is mindless to allow a “reform” to cause a financial crisis, but that is what is happening. Unfortunately, there are people who argue that anything less than financial armageddon would create a “moral hazard.” It is certainly true that securitized subprime mortgage instruments were a bad idea, that a lot of people who should have known better opened floodgates to greed and fraud, and that “somebody should pay.” But it shouldn’t be the general public and the economy that pays. It is also true that without the Federal Reserve’s irresponsible low interest rate monetary policy, which produced a housing boom, the subprime instruments would not have been created, or at least not in such amounts. Rapidly rising real estate prices were expected to make the risky loans good. What were issuers and the Federal Reserve thinking? No doubt but that greed, fraud, and bad policy all played their roles. But at the heart of the problem is a 1999 “reform” that repealed an earlier reform known as the Glass-Steagall Act. In 1933 the Glass-Steagall Act separated commercial banking from the securities business. It prevented securities speculation from destroying bank capital and shrinking bank deposits from bank failures and runs on banks by depositors. Congress and President Bill Clinton foolishly repealed the Glass-Steagall Act in 1999. The repeal of the 1933 law was driven by profit lust in the banking industry and by “free market” ideology, which claims the unfettered marketplace is always superior to regulation. In pushing the repeal forward, Congress and Clinton ignored warnings from the General Accounting Office that the banks needed to build up their capital levels before being permitted to enter a broad range of securities businesses. The GAO also noted that there were no regulatory structures in place to monitor the new financial networks that would result from removing the wall between commercial and investment banking. However, greed and ideology won over sound advice. The result is a crisis that, if mishandled, will be c
Posted by: Thomas Schmidt | Mar 11, 2008 2:15:44 PM
JustinThe(PissingMad)Skeptic,
M up + V up = Stock Market up = Wealth effect = consumer spends. Loop.
Posted by: cinefoz | Mar 11, 2008 2:20:55 PM
Oooops! Here's the rest of the sentence:
The result is a crisis that, if mishandled, will be calamitous. No one ever brings up Glass-Steagall. Any reason for this?
Posted by: Thomas Schmidt | Mar 11, 2008 2:22:00 PM
Thomas...sorry...I'm not reading that...you need to use paragraphs..
cinefoz: ever heard of reality? "Wealth effect"? WTF are you talking about? Hey, the markets up 2%...I feel rich....oh, wait, you mean I'm 6 figures underwater on my house? And 4 on my car? And the bank pulled my HELOC? And it cost $75 to fill the gas tank? And my food bill has jumped 35%?
cinefoz, you are trully a wonder. Let me guess..you bought at the close yesterday, right? And you don't eat or use oil in any manner, so increasing prices on basic materials have no effect on you....damn...I forgot that your ARM just readjusted saving you .12 this year...
Posted by: Mr. Obvious | Mar 11, 2008 2:31:16 PM
Paul Craig Roberts agrees with Thomas Schmidt.
Posted by: ceo | Mar 11, 2008 2:37:10 PM
O.K. My apologies for not paragraphing earlier. Here it is with paragraphs!
Reforms often do more harm than good. This is currently the case with the “mark-to-market” rule, which is imploding the US financial system by requiring financial institutions to value subprime mortgages at their current market values.This makes a big problem for balance sheets. These financial instruments became troubled prior to a market being established for them, as they were marketed direct from issuers to investors. Now that they are troubled and with their true values unknown, no one wants them. Their lack of liquidity assigns them a low value.
The result is tremendous pressure on balance sheets. The plummeting value of subprime derivatives is pushing institutions that own them into insolvency, destroying their own stock values and forcing the financial institutions to sell untroubled liquid assets, thus resulting in an overall decline in the stock market. The solution is to suspend the mark-to-market rule. Instead, allow financial institutions to keep the troubled instruments at book value, or 85-90% of book value, until a market forms that can sort out values, and allow financial institutions to write down the subprime mortgages and other troubled instruments over time.
Suspending the mark-to-market rule would take pressure off the stock market and make it unnecessary for the Fed to lower interest rates in an effort to force liquidity into the economy through an impaired banking system. The problem is not a general lack of liquidity, but liquidity for poorly conceived new financial instruments. Low US interest rates could worsen the crisis by accelerating the dollar’s decline.
Now that inflation has raised its head, more liquidity from the Fed adds to the economic distress. It is mindless to allow a “reform” to cause a financial crisis, but that is what is happening. Unfortunately, there are people who argue that anything less than financial armageddon would create a “moral hazard.” It is certainly true that securitized subprime mortgage instruments were a bad idea, that a lot of people who should have known better opened floodgates to greed and fraud, and that “somebody should pay.” But it shouldn’t be the general public and the economy that pays.
It is also true that without the Federal Reserve’s irresponsible low interest rate monetary policy, which produced a housing boom, the subprime instruments would not have been created, or at least not in such amounts. Rapidly rising real estate prices were expected to make the risky loans good. What were issuers and the Federal Reserve thinking? No doubt but that greed, fraud, and bad policy all played their roles. But at the heart of the problem is a 1999 “reform” that repealed an earlier reform known as the Glass-Steagall Act.
In 1933 the Glass-Steagall Act separated commercial banking from the securities business. It prevented securities speculation from destroying bank capital and shrinking bank deposits from bank failures and runs on banks by depositors. Congress and President Bill Clinton foolishly repealed the Glass-Steagall Act in 1999.
The repeal of the 1933 law was driven by profit lust in the banking industry and by “free market” ideology, which claims the unfettered marketplace is always superior to regulation. In pushing the repeal forward, Congress and Clinton ignored warnings from the General Accounting Office that the banks needed to build up their capital levels before being permitted to enter a broad range of securities businesses. The GAO also noted that there were no regulatory structures in place to monitor the new financial networks that would result from removing the wall between commercial and investment banking. However, greed and ideology won over sound advice. The result is a crisis that, if mishandled, will be calamitous.
Posted by: Thomas Schmidt | Mar 11, 2008 2:40:47 PM
Ah Cinefoz. To be so happy that the government bails out the bad. Have you no sense of justice? Does it not bother you to play on a rigged table? At least it is more and more patently rigged. Who would dare take the short side when everyone knows the government doesn't allow declines? After all, everyone knows it is bad when bad businesses fold. The best possible thing for an economy is for all bad companies to limp along on government life support, and all reckless bettors and debtors to be assured they can leverage without risk. Do you really feel the way, Cinefoz?
Posted by: philip | Mar 11, 2008 2:47:29 PM
ceo,
Yes ... word for word.
It's a good piece. Although the other side is Japan and balance sheets that were not even a little like reality. If repackaged loans are nothing but available for sale or trading investments, that mark-to-market is appropriate. Banks shouldn't be able to hide junk by invoking special circumstances. The banks would be technically insolvent, but phony financial statements would say the opposite.
The problem would still be building if the bubble didn't burst as it did.
Professional incompetence shouldn't be able to hide behind custom rules.
Posted by: cinefoz | Mar 11, 2008 2:51:08 PM
The repeal of Glass-Steagal has been discussed here, Mish also did a post on it a couple of days ago. The repeal of such legislation without backstops for the issues you addressed lead me to believe that the debaucle we currently face, when coupled with other sources such as;
Spitzers Washington Post Article which he is now paying for in spades,
"Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers. "
And "The Tape Worm Economy" detailing profit by way of the destruction of the popsicle index, or the siphoning of wealth from entire neighborhoods and its impact on the likelyhood of your child returning home safely from the corner variety store.
Catherine Austin Fitts HUD Director under Bush1
These allegations lead one to question deeply, the accidental status of the comming carnage, and if not accidental to what end was the event engineered.
Posted by: Stormrunner | Mar 11, 2008 2:53:51 PM
