The Latest Reincarnation Of Repo 105 - With End Of Quarter "Deleveraging" Over, Primary Dealer Repoable Assets SurgeSubmitted by Tyler Durden on 04/20/2010 00:16 -0500
One of the take home lessons from the Lehman Repo 105 scam is that Primary Dealers will do everything in their power to dispose of assets in any way possible at end of quarter time in order to make their leverage ratios palatable to investors and rating agencies. A week ago, taking a hint from the WSJ, we observed how for the week ended March 31, total Primary Dealer assets plunged by $34 billion in just one week: from March 24 to March 31. For this EOQ asset window dressing hypothesis to be confirmed, we needed to see a corresponding spike in asset in the week immediately following March 31. Sure enough, using Treasury data of Primary Dealer holdings, we observe precisely that, and then some. In the week ended April 7, total Primary Dealer assets exploded by $53 billion to the highest level seen in 2010, or $300 billion, a stunning 21% increase in total assets in just one week! This is also the highest total level of PD asset holdings since June 10, 2009. What do primary dealers do with these assets? They either repo them out back to the Fed directly, or via the Tri-Party Repo System, or via some other off balance sheet conduit, using the cash proceeds to go elbow deep in risky assets and purchase every stock imaginable (having given the impression the week before that they are all prudent fiduciaries who don't "gamble" with other people's money). If you were wondering where the surge in buying interest came from in the first few days of April, wonder no more. Furthermore, as PDs would be careful about negative carry on the repo rates, it would be expected that the one security they would buy the most of, would be T-Bills with their next to nothing interest rates... Which is exactly what happened: PD T-Bill holdings surged from a mere $12.6 billion at March 31 to $44.4 billion on April 7. PDs no longer need Repo 105 - they do all their EOQ window dressing directly in the open market.
A Return To Rate Normalcy Will Cost The Fed Hundreds Of Billions; The Fed Will Go "Negative Carry" In 2015: D-Day For AmericaSubmitted by Tyler Durden on 04/19/2010 16:32 -0500
Today, Chris Whalen's Institutional Risk Analytics carries a fantastic piece by Alan Boyce, in which the author picks up where we left off some time ago in deconstructing the DV01 of the Federal Reserve's SOMA. As a reminder, using Jefferies data, we observed that the Fed's DV01 on its balance sheet is about $1 billion (the potential unrealized profit/loss for every basis point move in interest rates, and with ZIRP here, rates can only go up, so make that just loss without the profit) . Alan Boyce, a former Fed member, CFC executive, and Soros portfolio manager, provides a more granular analysis of the Fed's holdings and comes up with an even scarier DV01: one that is 50% higher, or a $1,509 million/bp. This means that the Fed faces a "$75 billion loss for the first 50 bps move in the markets." As before, it is obvious why the Fed will do everything in its power to keep rates as low as possible for as long as possible, as the vicious cycle that will begin with increasing rates will make all future press releases of how much money the US taxpayer has "made" on the US' bailout of the mortgage industry far more problematic. Boyce also discusses how precisely it is that the Fed has managed to maintain rates at current record low levels for so long, what the cost of an appropriate hedging portfolio would be, and, critically, the implications of what will happen when markets realize that we are caught in a state of artificial suspended and Fed-endorsed animation. The primary conclusion: look for interest rate volatility to surge by 50% even as the Fed scrambles to cover hundreds of billions in losses in its portfolio sooner or later. Boyce's summary is basically that the countdown to the end of the Fed QE regime is now on: "If you look at forward fed funds (Eurodollar curve less basis swap),
the FRB will go negative carry in March 2015, where 3 month financing
rates are forecast to be over 5% (just gets worse and worse from
there). The point here is that mark-to-market accounting is an
iron law. You cannot escape the losses just because you do not report
them. If the FRB loses $200 billion on mark to market,
there will be $200 billion LESS that they remit to the Treasury
Department every year. That will require legislation to either raise
taxes or lower spending by $200 billion (or run up bigger Federal debt
to be paid back by another generation)." Must read analysis.
Even as Bank of America is preparing to restart securitization and thus provide the single greatest gift to creditors the world over, as this is merely the first step in wiping out/transferring yet more trillions in private sector debt, it has done the public a bigger favor by compiling the following list of key terms for all those lost in the current labyrinth of definitions,acronyms and euphemisms. Since following the Goldman legal plight will require a facility with some heretofore quite complex constructs, the following catalog is a must read for all financial novices.
Minneapolis Fed President Expects Fed's Balance Sheet To Normalize... By 2020; The Parable Of The Fed And SarahSubmitted by Tyler Durden on 04/06/2010 14:03 -0500
Minneapolis Fed president Narayana Kocherlakota gave a presentation before the Minnesota Chamber of Commerce earlier today. While still following the party line, Kocherlakota continues to demonstrate out of the box type type thinking, which hopefully will push him into the Hoenig camp before it is too late. His biggest warning, which is inline with prevailing common sense arising out of the fact that the Fed's SOMA has a $1 billion DV01, is that Bernanke will have to sell "a nontrivial amount of its MBS holdings if it is to be able to normalize its balance sheet in the next two decades. Such sales might cause untoward jumps in interest rates unless the Federal Reserve is able to credibly commit to a sufficiently slow pace." Yet even Narayana does not see any normalization in the monetary picture until 2020: "I am optimistic that we will be able to normalize our balance sheet by the end of the teens." Which means, no rate hike until 2015 theearliest, and possibly later. And you all thought the Maestro was bad.
More insight from a just released interview with Pimco's Paul McCulley. Nothing that McCulley has not said before but sheds some additional light on PIMCO's specific portfolio exposure currently. Of course, as Goldman has taught us all too well, anyone talking their book who is as big (and smart) as Pimco, could just as easily hld the other side of the trade, and just be looking for willing lemmings, of the variety that stood 24 hours in line for a big and blendable iPod.
January Fannie Mae Delinquency Rate Climbs To New Record At 5.52%, 14 bps Higher Than December, Double From Year AgoSubmitted by Tyler Durden on 03/31/2010 11:45 -0500
Fannie Mae reported its January total serious delinquency rate for single-family houses: the rate hit a new record of 5.54%, a jump from the December's 5.38%, and double the 2.77% in January 2009. All in all a perfect time for the Fed to be moving away from the mortgage market, pardon, to no longer being the mortgage market. The one saving grace for the Fed, was that new issuance keeps declining: $43.9 billion in MBS was issued in February, 7% less than the $47.6 billion in January. Yet $44 billion is not zero, and we anticipate ongoing new issuance which will need to find private buyers now that taxpayers are out of the picture. And even as Fannie's total book of business grew at a 1% annualized pace to $3,229,645 MM, the actual guaranteed MBS and mortgage loans declined at 0.9% to $2,882,552.
"In sum, in response to severe threats to our economy, the Federal Reserve created a series of special lending facilities to stabilize the financial system and encourage the resumption of private credit flows to American families and businesses. As market conditions and the economic outlook have improved, these programs have been terminated or are being phased out. The Federal Reserve also promoted economic recovery through sharp reductions in its target for the federal funds rate and through large-scale purchases of securities. The economy continues to require the support of accommodative monetary policies. However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so." Ben Bernanke. Too bad the Chairman will not add that time will not come until the US finally implodes.
One of the more vocal economic skeptics (as pertains to the developed world at least, China not so much), CLSA's Chris Wood, chimes in with his latest weekly observations on the economy, which are not for the faint of heart, in the latest edition of GREED and fear. Digging in.
Today the Fed released its Q4 Flow of Funds, aka Z.1, report. Using the data in this report, some have focused on such temperamental measures as household net worth, which in Q4 came out at $54.2 trillion, a $700 billion increase from Q3. What they will not disclose is that all of this increase came courtesy of the stock market, as the "Equity Shares at Market Value" line increased from $15.546 trillion to $16.234 trillion: this represented the entire increase in household net worth. Should the market dive, as many are concerned it is will once the Fed stops manipulating the mortgage (and potentially equity) market, watch all this intangible net worth disappear, as unbooked profits are just that - unbooked. Others will tell you that consumer deleveraging continues unabated, which is true: the decline in total non-financial debt in Q4 for Households and Businesses was -1.2% and -3.2%, respectively. Who made up the difference: the US government of course, whose domestic nonfinancial debt holdings increased by 12.6%. We, instead focus on Tables F.209 and F.210, the detailed listing of holders of US Treasuries and Agencies/MBS securities, as this is precisely where the Fed is the dominant market maker, and the means by which Ben Bernanke continues to manipulate the market by being the perpetual bid for 5% and lower yielding securities, thereby forcing all other yield chasers to go lower in the cap structure and buy, buy, buy all equities. And while there are no major surprises in the data set, it is notable that even as the Fed has purchased over $1.5 trillion in Agency/MBS debt, the total amount of all such securities over the past year has remained constant. The Fed has been buying everything that other have been selling. Adjust the data to exclude the Fed's purchases and one sees just how scary the MBS situation truly is.
Fed Announces Expansion Of Reverse Repo Program, Adds Money Market Funds To List Of Eligible CounterpartiesSubmitted by Tyler Durden on 03/08/2010 10:13 -0500
Over the weekend we posted a very critical paper by the Minneapolis Fed discussing the potential weakness with the various liquidity extraction mechanisms (in the absence of a Fed Funds rate hike). Today, the Fed goes one step further, after noting increasing pressure by its own members to commence a tightening policy, and has announced the expansion of its reverse repo program with Primary Dealers, by adding additional counterparties.And guess who the first expansion wave focuses on - why Money Market mutual funds of course. Let's just do all we can to drain the money market system asap, shall we.
Federal Reserve Balance Sheet Update: Week Of March 3; 98% Of Q.E. Over; Just $35 Billion In MBS/Agency Purchases LeftSubmitted by Tyler Durden on 03/04/2010 19:55 -0500
The fed has completed $169.1 billion of $175 billion in the agency MBS program: there is just 3% of Agency dry powder remaining (no new purchases in the week ending March 3). The Fed has completed $1.22 trillion of its $1.25 trillion MBS debt purchase program, or 98%, through March 3 (including the $10 billion announced today). There is now just $35 billion left in Quantitative Easing capacity.
Federal Reserve Balance Sheet Update: Week Of February 25 - Just $45 Billion Left In Quantitative EasingSubmitted by Tyler Durden on 02/25/2010 20:38 -0500
The Federal Reserve's assets were at $2.27 trillion as of February 25, jumping by $6 billion sequentially. Securities held outright: $1,975 billion (an increase of $62.6 billion MoM, resulting from $59 billion increase in MBS and $3 billion in Agency Debt), or $8 billion increase sequentially. The fed has completed $169.1 billion of $175 billion in the agency MBS program, or a 97% completion, and 96% complete with purchases of Agencies. The Fed has completed $1.21 billion of its $1.25 billion MBS debt purchase program, or 97%, through February 25. There is just $45 billion left in QE. Net borrowings: $103 billion. The monetary base increased by $81 billion in the past fortnight to $2.14 trillion. The ratio of total assets to Monetary Base declined slightly to 1.06x. Float, liquidity swaps, Maiden Lane and other assets: $191 billion. The CPFF program was at $7.7 billion. FX liquidity swaps are now at zero: we are carefully keeping an eye on this metric as any increase presently would indicate banks are again experiencing a dollar funding shortage. Maiden Lane I and Maiden Lane II increased and were $27.2 and $15.5 billion, while Maiden Lane III as always continues pretending it has value and came flat at $22.4 billion.
Since everyone is expecting it, maybe it won't happen?
On the heels of the surprise discount window rate hike late last week, and on the eve of Bernanke’s Congressional testimony, speculation abounds as to the when and where of the next round of tightening. We need look no further than the US Treasury press room, as it has announced today a revival of sorts for its Supplementary Financing Program (SFP).
Goldman's Alec Phillips provides some perspectives on why the recent announcement that the GSEs will purchase 120+ day delinquent loans will not be a major impact to either the overall MBS market or to the Fed's QE tactics when it comes to stabilizing the market. Furthermore, in addition to not being a material mitigant to the Fed's massive balance sheet holdings, some direct implications as pertains to end borrowers include a greater incentive to foreclose, a greater emphasis on non-modification strategies, and more aggressive modification efforts. Yet the major issue, the one addressed by the Fed's Hoenig yesterday when discussing the urgent need to commence selling Fed assets asap, will likely be completely sidestepped, in essence stressing the need to find a legacy replacement through to QE when it expires in just over a month.