Tuesday, August 21, 2007
commercial paper shortfalls mean asset sales going forward?
The commercial paper market take up remains very poor particularly for ABCP. According to Dealogic, $41bn of European CP were due to mature yesterday, but they had been replaced by only $15bn of new notes. Within ABCP, $22.6bn matured and only $4.6bn were refinanced, implying a ratio of 20 per cent. In normal market conditions the two figures should be roughly the same. The danger is that this could cause further forced sellers.
more on further forced sellers -- this is one of the most dire-sounding articles i've yet read.
The $1.1 trillion market for commercial paper used to buy assets from mortgages to car loans 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 $44 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.
``We're dumping all this collateral into the market and it becomes a death spiral for the assets,'' said Brian McManus, head of collateralized debt obligation research at Charlotte, North Carolina-based Wachovia Corp., the fourth-biggest U.S. bank by assets. CDOs contain pools of mortgage securities that have been repackaged and sliced into pieces.
The credit crunch, sparked by the highest level of defaults on subprime mortgages in a decade, is ``getting uglier and uglier,'' said Christopher Low, chief economist in New York for FTN Financial, the capital markets unit of Memphis, Tennessee- based First Horizon National Corp. ``This has moved beyond temporary. It's gotten beyond bailing out some hedge fund and into the broad economy.''
Investors are refusing to buy short-term debt backed by any mortgage that isn't guaranteed by government-chartered companies such as Fannie Mae and Freddie Mac, Aladdin's Marshman said.
``The unwind will not be denied,'' said Marshman. ``Whether it takes place overnight or over the course of several months, these assets have to be placed in different hands.''
Wall Street is in a ``financial panic'' and won't fund any mortgage bonds, even AAA rated bonds backed by prime home loans, said Garrett Thornburg, chief executive officer of Thornburg, which makes loans of more than $417,000 to people with good credit. The mortgages are known as jumbo loans because they exceed the limit on what Freddie Mac and Fannie Mae can purchase.
Even the Fed's decision to cut the discount rate that it charges banks failed to revive demand. The rate for overnight borrowing in the asset-backed commercial paper market soared 0.39 percentage points to that price on Aug. 17, the biggest rise since the Sept. 11 terrorist attacks. Overnight yields fell 2 basis points to 6.01 percent today, while 30-day paper widened 9 basis points to 6.09 percent. A basis point is 0.01 percentage point.
``There's still a huge problem in the credit markets,'' Thornburg said in an interview. The market ``is unwinding because no one wants to own A1/P1 asset-backed commercial paper.''
Thornburg is using lines of credit for financing even though only 58 of its 38,000 mortgages are 60 days or more in arrears.
``That's just crazy,'' he said. ``If it's backed by subprime, all right. If it's backed by junk, get out. But if it's backed by high-quality receivables from Macy's or triple As from us, that market should be functioning and that market has stopped functioning.''
the rumor has been that merrill lynch is potentially a victim of all this. speculation has been that one of the investment banking majors is close to chapter 11. and merrill is said to be holding five times equity in commerical paper, a significant slice of which may be of questionable value.
in any case, brad setser links to this blog, noting that most major banks were using commercial paper "to finance what look like mini-credit hedge funds".