ECB Hires Blackrock For ABS-Buying Advice; Crushes Idea Of Upcoming QE

Tyler Durden's picture

Just in case futures buying algos forgot what the regurgitated "catalyst" that activated the overnight ramp was, the ECB was kind enough to remind everyone that the main event over the past 12 hours was the Deutsche Bank leak that while the ECB will not announce outright QE any time soon, thus denying the rumor spread in the past weak by the likes of Citi and JPM, the formerly preannounced and thus already priced-in (by the EURUSD which was about to take out 1.40 a few months ago) ABS purchase program, or as DB called it "private QE" is about to be unleashed. The ECB confirmed this earlier this morning when it announced that it had appointed BlackRock, the world’s biggest money manager, to advise on developing a program to buy asset-backed securities.

In other words, BlackRock wil strongly advise the ECB to purchase all those subprime auto loan and rental-securitized ABS securities that Blackrock currently holds. Keep an eye out for UofPhoenix CCC-rated student loan securitization OWICs.

In yet other words, Europe's largest public-sector hedge fund has just hired the world's largest private-sector hedge fund to "fix things."

One thing is certain to come out of this: nothing in Europe will actually be fixed, but at least Blackrock's Christmas bonuses will be the highest ever.

From Bloomberg:    

BlackRock Solutions, a unit of the New York-based company, will provide advice on the design and implementation of a potential ABS-purchase plan, an ECB spokesman said in response to e-mailed questions. Safeguards against any conflict of interest are included in the agreement, the spokesman said.


ECB President Mario Draghi said in June that the central bank is intensifying preparations to purchase ABS as it strives to revive the faltering euro-area economy. While the effort could help revitalize a $1.9 trillion market that has contracted 34 percent since 2009, and at the same time inject liquidity into the financial system, officials have yet to agree on what such a program should look like.


BlackRock’s contract requires it to ensure effective separation between the project team working for the ECB and its staff involved in any other ABS-related activities, the spokesman said. External audits related to the management of conflicts of interest will be made available to the ECB. The company, headed by Chief Executive Officer Laurence D. Fink, had more than $4 trillion of assets under management last quarter.


The final decision on the design and implementation of any ABS-purchase program will be taken by the ECB’s Governing Council, and the execution will remain the responsibility of the central bank, the spokesman said.

And here is the ECB's oracular equivalent of Jon Hilsenrath, DB's team of Wall and Moec, explaining what is about to happen next week (ABS) and what isn't about to happen any time soon (QE). From DB:

Private QE in September

  • We are bringing forward the timing of private QE (ABS purchasing) to 4 September. Recent weak data and Draghi's latest comments on inflation expectations we think are enough to believe the ECB will supplement the TLTRO in the next few months. Our baseline is to expect this as soon as the next ECB meeting on 4 September, but this is a very close call. An announcement could wait, although the markets will be unhappy to be told that inflation expectations are potentially dis-anchoring if the ECB has no new policies to announce.
  • What we expect is not generic QE with government bond purchases, as other central banks have done. We believe the ECB will engage in private QE, that is, ABS purchasing as a complement to the TLTRO. If private QE does not emerge in September, we think it will follow shortly thereafter.

Our baseline had been to expect the ECB to initiate private QE in early 2015. Our view is that the ECB won’t want to take any chance with the capacity of the TLTRO to alone end this protracted period of low inflation. We thought the preliminary staff estimates for 2017 HICP inflation, to be published in December, could be the trigger for private QE or to at least give rise to a more vocal debate on QE.

Mario Draghi's speech in Jackson Hole was significant, in our view. It opens the door to earlier action by the ECB. It is a close call, but we now think the ECB will announce private QE (ABS purchasing) on 4 September. There are several reasons for the faster move to private QE.

First, recent real economy data have been disappointing, e.g. Q2 GDP and August PMI. There are several distortions which might have weighed on GDP in Q2, overpowering the underlying momentum of the recovery. This includes weather and holiday effects. The geopolitical uncertainties of the Russia/Ukraine situation might have also have dragged. The geopolitical effects are lingering into H2. We recently reduced our forecast for euro area GDP growth in 2014 to 0.8% (from 1.1%) in 2015 to 1.3% (from 1.5%), but most of this revision was due to the weaker than expected Q2 2014. There remains vulnerability in growth expectations for H2 and into 2015, as hinted at recently by the Bundesbank in its monthly report.

Second, HICP inflation has continued to undershoot expectations. In fairness, the downside surprises this year come predominantly from food prices. Core inflation, though a little volatile, has effectively moved sideways this year around 0.8-0.9% yoy. The trouble is the Russia story is now spilling into the inflation debate. Russia's ban on imports of certain European foods is set to increase supply and dampen prices further. The low point in the HICP inflation cycle has not been reached yet.

Third, although credit flows were better recently (and the credit impulse positive) and signs of some (limited) improvement in bank funding costs and margins are perceptible, the benefits of the TLTRO are lagging and might not have a strong enough bearing over current conditions to quickly stabilise growth and inflation expectations.

Fourth, the crucially, market-based inflation expectations have declined in the last couple of weeks. The SPF survey-based indicator showed the first increase in the 5-year ahead inflation expectations balance for about 2 years, despite drops in nearer term expectations. But the rise was tiny (1.86% from 1.84%).
The current crop of ECB Executive Board members seems keen to take a steer on medium-term expectations from market breakeven rates. These have weakened in the last couple of weeks. Draghi referred to this in unprepared comments in his speech at Jackson Hole on Friday. He said B/Es point to "significant declines at all horizons". The 5Y5Y inflation swap he singled out as falling 15bp to below 2%. This is the third time the 5Y5Y has fallen below 2% since the start of the credit crisis. Draghi said "this is the metric that we usually use for defining medium-term inflation".

Draghi said the Governing Council "will acknowledge” these developments with inflation expectations and within its mandate "will" use all available instruments needed to ensure price stability over the medium term. There is a definitiveness to the message. Having questioned the stability of inflation expectations, it would be very difficult for the ECB to credibly claim on 4 September that inflation expectations "remain firmly anchored", at least not without announcing a new policy to better anchor those expectations.

On balance, we think the data and Draghi's comment puts pressure on the ECB to accelerate the next phase of monetary easing. We believe the ECB will accelerate the announcement of a private QE (ABS purchasing) to 4 September. Draghi has some history of deviating off-script at a conference and subsequently convincing the Council to act. For example, his "whatever it takes" precursor to OMT in mid 2012.

The risk is the Council plays for more time, arguing that Q2 GDP was distorted, inflation is close to its trough, that once inflation starts rising after the trough it could help stabilise inflation expectations, that the TLTRO benefits are still to be seen, the EUR exchange rate is declining, etc. But one way or another, it feels to us like ABS purchasing begins before December.

Our view is the ECB announces a "private" QE, that is, not sovereign bond purchasing and not a mixed package of private and public purchases. We don't expect sovereign bond purchasing to be ruled out, but it faces political, legal and technical questions in a way that private QE does not. Government bond purchases will remain in reserve for a more outright deflationary episode.

How effective is ABS purchasing? The objective will be to incentivise banks to lend. The incentive depends on exactly which ABS the ECB purchases and in what scale. The TLTRO is implemented in a way to not directly incentivise mortgage lending, but in July Draghi intimated that the set of assets the ECB would consider for ABS purchasing includes RMBS. This raises the set of existing ABS by 10 fold to about E500bn. Draghi talks about incentivising a new market for ABS, implying the ECB focus may be more on primary (new ABS) rather than secondary (existing ABS). Still, the ECB can play the portfolio reallocation channel for QE by purchasing existing ABS.

The ECB has talked of a twin track effort on ABS -- regulatory easing as well as a commitment to ABS purchasing, if it proves necessary. At last month's press conference, Draghi implied that the purchasing decision is not conditional on achieving regulatory easing. Proposals have been published for an easing of the Solvency II capital charges on ABS, but no action has been taken yet. Beyond changing the capital charges to incentivise banks to lend and create ABS, the best way for the ECB to do so is by buying the mezzanine tranches of ABS. It is not obvious that the ECB has the risk appetite for this.

If the ECB does not have an appetite for mezzanine, the route to the success of ABS purchasing will be via the expansion of the ECB balance sheet and the impact of this on the EUR exchange rate. Our FX strategists reckon that of the roughly 4% decline of the euro trade-weighted index since March roughly a quarter of this was the negative deposit rate and the remainder implies an expectation of roughly E300bn of ECB balance sheet expansion. ABS purchasing will have to go beyond this to keep the EUR on a downward trajectory. Maybe this is what the ECB has most in mind. As Draghi said on Friday, outright ABS purchases "would meaningfully contribute to diversifying the channels for us to generate liquidity".

To summarise, recent data and Draghi's latest comments we think are enough to believe the ECB will supplement the TLTRO in the next few months. Our baseline is to expect this as soon as the next ECB meeting on 4 September, but this is a very close call. An announcement could wait -- but the markets will be unhappy to be told that inflation expectations are potentially dis-anchoring and the ECB announces no new policies to address this. But what we expect is not generic QE with government bond purchases, as other central banks have done. We believe the ECB will engage in private QE, that is ABS purchasing as a complement to TLTRO. If private QE does not emerge in September, we think it will follow shortly thereafter.

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Headbanger's picture

Implosion dead ahead!

BaBaBouy's picture

Who's Holding The EUzi???

Arizona shooting: Girl, nine, kills gun instructor


A nine year-old girl in the US has killed her shooting instructor by accident while being shown how to use a high-powered submachine gun.

The instructor was giving the girl a lesson at a shooting range in Arizona when the recoil from the automatic fire caused her to lose control of the Uzi.

NoDebt's picture

You gotta be kidding me.  I just started teaching my 10 year old how to shoot a pistol this summer.  My little .22 cal S&W revolver is about all I feel comfortable putting in his hands for now.  He wants to shoot the .45, but no way would I put that gun in his hands.  It's not just the lack of strength to control it, it's the lack of judgement that I worry about the most.  Plus a revolver requires a long trigger pull every time unlike the "party time!" trigger on an auto.

Sounds like that "instructor" was the one lacking in proper judgement in that situation.

medium giraffe's picture

Sounds like Darwin got him.

ilion's picture

This is my favorite part:

"BlackRock’s contract requires it to ensure effective separation between the project team working for the ECB and its staff involved in any other ABS-related activities, the spokesman said. External audits related to the manage".

So they will be placed into separate room. Can they still have lunch together and talk about ABS market?

wallstreetaposteriori's picture

This is going to rally the Euro like you have never seen before....

RaceToTheBottom's picture

Placed in separate rooms, but all on the same email distribution lists....

Headbanger's picture

I agree.

I freak out every time  some bozo parents bring there little ones, or even teens to the range for the first time and promptly put a Glock, Glock, Glock, Glock, Glock.. (is how many times they MUST tell you its a fucking GLOCK to impress you) in their hands so they can brag even moar  their perfect little kid can shoot a fucking Glock now too.

Then they'll say..  It's the safest handgun it the world!"

It looks like this instructor was being paid by some over bearing parent wanting to show off the video of their little girl blasting away with an Uzi. And so he pushed the limits of safety for it.

clade7's picture

He must have been a very good instructor!  Taking a client from a 'noob' to 'advanced' in such a short time?

IANAE's picture

moar mispricing of assets ... nothing like volunteering - no, practically demanding - to take risk assets off-balance sheet to incentivise mispricing of still moar risk assets.

Bill of Rights's picture

Keep it in the family as they say.

emsolý's picture

Trickle down monetary policy via bankers' bonuses -- copied from the Fed's playbook, nice move

Soul Glow's picture

My buying analysis is that when QE ends no one will be buying bonds and it will be time to get the fuck outta Dodge.

NoDebt's picture

And that's how everyone lost money every year for 20 years betting on a rise in rates for Japanese government bonds.

NoDebt's picture

It must be so nice to be able to write your own ticket.  You really have to admire the elegant simplicity of "mutually assured destruction" implicit in crony capitalism.  Hire us to fix this or we'll make sure it breaks.  

john39's picture

so much more elegant that local gang extortion rackets of small business...  its bonafide.

Catalonia's picture

Send me some money so that I can fix your economy. This makes Nigerian scams seem legit

falak pema's picture

Well that just answers my first question : no uncoupling between EZ and US. 

It'll all be managed behind the scenes.

Draghi is a Squid man like the Bones men of the CIA.

Once a skull n bones man always a bones man.

Watson's picture

Why doesn't the ECB just bypass the banking system and simply lend directly to the public?


aleph0's picture

... like asking the Mafia why they steal

falak pema's picture

Not only the ECB does not directly help the sovereigns it does nOT help the public; aka small businesses.

It only helps the TBTF.

"Rhineland Capitalism", aka the German model, is a partnership beween Industry and BANKS. Always has been. Public investments in corporate stock, like all over continental europe, represents a smaller share of public saving as investment than in the Anglo countries; where markets reign supreme.

In Europe the Public buys property or buys Life Insurance policies as savings placements; less the stock market, unlike the USA.

Which means that Eurobanks, which were never separated by a Glass Steagall type screen, are investment cum deposit banks since way back. They own the market as such, not the general public. Corporates bow to them for their stocks as well as their Bond placements.

Now all caught up in the Reaganista and post Reaganista asset bubble pump fed on WS steroids, they have been caught with their pants down since 2008; aka since US based hubris blew up the global system.

Euro banks got so greedy in the 90s and 2000s they are totally fubar-ed into debt and its all under the carpet as its bigger the GDP! 

So these banks couldn't help Jack Straw as they are running after their own big hole (or potential hole) in the Balance sheets. 

The ECB is their fairy godmother as per the Squid mantra; playing more like Wolf than Red Riding hood !

Only 4-5% solid real eco growth for 10 years or more can save these banks. Not gonna happen.

So ECB is like FED, only it is not Reserve, so it has been more cautious under Mutti's dictat. South burns beyond all hope but North chugs along hoping...

LawsofPhysics's picture

Let me be clear, useless fucking paper-pushers can't fix shit...

hedge accordingly.

disabledvet's picture

"The surgery was successful but the patient died."

So the interest rate monster has been if only we could start solving the problem of 30% unemployment.

LawsofPhysics's picture

"solving the problem of 30% unemployment."  -  easy peasy, conscription bitches.  by hook or by crook, the fraud must continue...

Youri Carma's picture

Other hint of no QE: ECB’s Draghi has been ‘overinterpreted’, says Germany’s Schaeuble

Infinite QE's picture

The ECB, like the Fed before it, was designed to transfer the wealth of the people to itself. BlackCrock, being masters of this in practice shall add accelerant to the process of fleecing the citizenry of the EU.