Hurricane

Liar Loan Securitizations: A Surprising Twist

Read Fortune's cover story article "What were these guys smoking?" It concludes that the likes of Merrill could not sell the low rated paper, but loved the fees that came from the higher grade paper they could sell. To keep the fees, they put the low rated paper on their balance sheet and crossed their fingers. Recent article in Vanity Fair on AIG's London subsidiary had a variation on the same story line. When AIG stopped using its AAA rating and non-bank status to back insuring subprime mortgages (summer 2007?), firms like Merrill were forced to eat the bad stuff in order to generate the fees.

The Fed Extends Lending Programs' Life Support

The banks don't make a profit on what they borrow unless they lend it out. In the US, if they just buy longer dated Treasuries then the Fed is just helping them repair their balance sheets with riskless profit. i.e. a "carry trade". This has the benefit of flying below the political radar screen. The problem is that the money is just going full circle and the private sector - citizens and businesses - are not in the circle. Maybe the Congressional Watchdogs are right."If we give you riskless funding, then involve private sector debtors and help the economy as well as your balance sheet.

Tim Bond on China, Bonds and Interest Rates

In the interview I believe Mr. Bond noted that because of the recession the private sector's demand for loans/debt issuance has fallen by more than the increased issuance and commitments of Treasury and the Fed. Certainly no crowding out" effect. Perhaps a shortage of options for those who "must" buy debt on a regular basis (e.g. insurance industry). How much does this impact the "success" of recent government auctions? Doesn't it give Bernake some "breathing room" on QE and some flexibility when he "removes the punch bowl?" Do others share Bond's view?

Bond Expert: Wednesday Wrap

A video of an interview by the Financial Times noted that the significantly lower demand from the private sector for loans/debt issuance means that there is no "crowding out" effect. How much does this impact the government auctions? Doesn't it give Bernake some "breathing room" on QE and some flexibility when he "removes the punch bowl:?

Banks Still Not Ready to Give In on Derivatives

I am familiar with a pricing service in the '80s - when CMOs traded "by appointment only." Only one brokerage handled most of the trading . Then, as now, no one really knew what they were worth. The creator's models hadn't been tested for extreme redemptions when interest rates fell quickly, decreasing the duration of the underlying securities and hence the value of the CMOs. The packager of the CMO's, recently swallowed by a bank, was embarrassed to the tune of several hundred million.
Models still are just that - models - whether they "predict" the weather or "determine" value. "Bespoke" instruments means "bespoke" models. Better multiple standard instruments that everyone understands (like leveraged and unleveraged, sector specific ETFs) and then work with a client to select the best fit to their needs. Like making change with quarters, dimes, nickles and pennies.