Do What Feels Wrong, Citi's Credit Strategy For 2012

Tyler Durden's picture

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
DonBadajoz's picture

Finally, First Bitchez

Moe Howard's picture

You are officially "First Bitchez"

Yen Cross's picture

 How about Sovereign Debt? Better yet ( Euro ~ Fund) , packages?

Yen Cross's picture

 Hey ? Check out those inverted ( reborn) , yield curves. I need a haircut for " X-MAS"!

Michael's picture


Dr Ron Paul started the national discussion on the Federal Reserve last campaign. Now he has started a discussion on US Foreign Policy that more and more people are starting to discuss.

Here's a good example;

Ron Paul vs. Israel (The Truth) 

Yen Cross's picture

 SNB was inferring a 1.30 purchasing power (vs( euro on the DE-PEG, last week. I call that bullshit! The SNB was basing that call on (USD). Exports!

  Now SNB has a better position, slightly. That 120 peg is being tested.

Dick Darlington's picture

Bonds Stop Flowing as Collateral Gets Stuck at ECB


Dec. 21 (Bloomberg) -- The chains of loaned securities
being pledged and re-pledged in the so-called wholesale money
markets are growing shorter, as collateral piles up at central
banks where it can’t generate additional borrowing.
     Rehypothecation is the financial alchemy that transmutes
$2.45 trillion of assets into $5.8 trillion of collateral
at the 14 largest securities dealers, down from a peak
of $10 trillion in 2007, according to Manmohan Singh, senior
financial economist at the International Monetary Fund in
Washington. Once collateral is parked at the central bank, it
can’t be recycled, and may become hard to find in times of need.
     At the end of last year, banks turned each dollar of
securities into $2.40 of collateral, Singh says. As banks
grow wary of lending to each other, those assets are being
pledged instead to the European Central Bank in one-time
transactions that mean the securities can’t be recommitted.
     “The system is collapsing onto the balance sheet of the
most-solid member of the system, which is the central bank,”
said Perry Mehrling, professor of economics at Barnard College,
Colombia University in New York. “The central bank is on one
side of the market only. The bonds are flowing in and they’re
not flowing out again.”
     The disappearance of the unsecured credit markets as the
sovereign debt crisis deepens has underlined the importance of
secured borrowing through repurchase agreements.

                     Shortage of Collateral

     “There is an enormous shortage of collateral,” said Simon
Gleeson, a financial-services lawyer at Clifford Chance LLP in
London. “That’s because the European banks can no longer raise
unsecured funds. There’s never been enough quality collateral so
the only way to do it was to re-use the securities.”
     European banks are opting to park money on deposit at the
central bank rather than lend it to one another. They kept an
average of 272 billion euros ($356 billion) at the Frankfurt-
based institution during the past 20 days, within 6 billion
euros of the most since July 2010, according to ECB data.
     The importance of secured lending in the interbank market
has grown largely unnoticed in recent years, said Matt King,
global head of credit strategy at Citigroup Inc. in London. Its
size may make it a source of risk, since borrowers may struggle
to find enough acceptable securities should lenders demand more
security, he said.
     “Risk has become channeled here in an increasing way in
recent years, and we just don’t focus on it,” King said.
“Everyone is just doing what is efficient under the rules but
it’s built up to become a source of systemic risk.” There is
“scope for runs on banks due to collateral suddenly becoming
very scarce, as in Europe at present,” he said.

                          Systemic Risk

     Repo trading volumes in Europe are sliding, according to
ICAP Plc, the largest interdealer broker and the owner of
BrokerTec, the biggest platform for repo trading, where
securities such as government bonds are loaned for a fee.
     “We’ve seen quite a significant fallback in the past two
to three months, and most of that’s driven by Germany,” said
Don Smith, an ICAP economist, who puts the decline at as much as
20 percent. “The German repo market has been getting very, very
tight,” forcing borrowers to use larger amounts of lower-
quality collateral and pushing up borrowing costs, he said.
     “There is a lack of position-taking going on which is
consistent with elevated levels of risk aversion, the sense that
people just want to buy and hold German government collateral,”
Smith said.

                          Risk Aversion

     Secured lending was viewed as having two big advantages,
said Barbara Ridpath, the chief executive of the International
Centre for Financial Regulation in London, who was head of
Standard & Poor’s ratings activities in Europe until 2008.
     “Bankers realized that if they took collateral, two good
things happened,” she said. “One, they could stop looking at
the credit of a counterparty. And two, they could get ahead of
other creditors in a bankruptcy because they had security.”
     Rehypothecation, where a bank takes an asset pledged to it
and recycles it to another institution, makes it hard for
creditors to keep track of ownership, as was shown in the 2008
collapse of New York-based Lehman Brothers Holdings Inc. in the
biggest bankruptcy to date.
     In a paper dated 10 days before the collapse, King at
Citigroup pointed out how assets pledged to Lehman had declined
54 percent since November 2007, compared with declines of no
more than 3 percent among its peers. Those still using Lehman as
a counterparty when it crashed found the securities they had
pledged as collateral had been recycled through London and they
were now in line for payment with other creditors.

                         ‘Credit Claim’

     “Once you engage in a repo with me, you no longer have the
assets, you have a credit claim against me,” said Gleeson at
Clifford Chance. “A wise counterparty doesn’t do repo with
someone in a deep hole.”
     As secured transactions increase, unsecured creditors get
pushed further back in the queue for payment in a default. This,
combined with reforms in countries such as the U.K. to make
insured depositors whole before unsecured bondholders, mean it’s
more costly for banks to issue unsecured debt, said Simon
Adamson, a bank analyst at CreditSights Inc. in London.
     “I suspect regulators will become increasingly concerned
about asset encumbrance and levels of collateralized
borrowing,” he said. “Senior unsecured will remain an option
for banks, at least if and when the sovereign debt crisis is
fixed. However, it will be a smaller market, partly because of
bail-in legislation, lower-rated, and more costly.”

                          Debt Crisis

     Faced with a situation in which the lack of collateral is
starving the financial system of the instruments it needs to do
business, the ECB said Dec. 8 that it will offer unlimited
three-year funding against collateral in two auctions.
     The central bank also said it would accept lower-rated
bonds and bank loans as collateral in its own lending, and cut
reserve requirements, potentially freeing up another 100 billion
euros of collateral, according to JPMorgan Chase & Co.
     “Everyone wants collateral, everyone wants dollars,” said
Mehrling at Barnard College. “If the central bank accepts bad
collateral, then bad collateral goes out of the system. But that
releases good collateral that the central bank would otherwise
be demanding.”

slewie the pi-rat's picture

"buy cheap straddles"  [anon. fringe blog publisher]

Zero Govt's picture

"Citi lays out five scenarios for 2012's credit market.."

Is this the multiple choice section of Citi's advise???

Could they boil it down to 1 please... or go put their heads in a microwave and boil their multi-hedging (clueless) brains out. Thank you

Moe Howard's picture

Citibank seems to have only one plan for recovery - spamming me with credit card applications. I get three a week now from them for various cards. If they are counting on me to save them, they are fucked.

swani's picture

Do what feel wrong? You mean, vote for Obama? Go long on the Euro? Buy B of A? Stock up on European bonds?  Dump gold? Turn on the TV?

swani's picture

I think if I'm going to gamble, I should just go to Vegas and put all of my money on Red. Less stress and I will feel more macho.