I saw that post too, and like that blog generally, but unfortunately I’m not financially literate enough (yet) to always read it fluently, reasoning and following along.
I know the Fed collects a lot of data, but do you really think they had this chart in front of them when they made the decision?
At a borrowing cost of 5.70-5.80% against assets that yielded maybe 5.50% and leveraged 10-20x,…
How is it known what these ‘assets’ were and how much they were returning?
…or the banks would have to sell collateral (CDOs, CLOs, etc.) in a depressed market and write huge losses in their books…
In general we hear that ABCP is disappearing, i.e. the amount of it outstanding is going down/a lot of it is not being ‘rolled over’. Does this mean that assets are being sold at “depressed” prices already? If so, why don’t we hear more about that?
I have no doubt that market participants are scrambling to avoid selling paper they hold; recall the stories around the BSC funds back in June. How long do you think this game can go on?
Great blog resource ( Sudden Debt ) and a straight forward explanation for the move. I think many felt the move was forced but most explanations had a tin foil hat ring to them…. this one makes sense. So , without question , we should watch o/n to 12 month money market series for clues as to upcoming fed actions. I think the calculus becomes trickier if we still have stubbornly high commodity prices , gold above 750- 775 and the dollar below 78 at the time of the fed meeting at the end of October … your thoughts ?
Thanks all for great comments. I think as long as LIBOR rates stand in the 5%-5.25% area Feds will not cut anymore, this is the rate the market can stand without enduring major losses.
>>> In general we hear that ABCP is disappearing, i.e. the amount of it outstanding is going down/a lot of it is not being ‘rolled over’. Does this mean that assets are being sold at “depressed” prices already?
I think a lot of those assets are either unfinished (undergoing construction) or not for sale (shopping malls, office buildings). Those assets are expected to yield some profit or at least break even. The owner needs to keep some debt and service it from returns of those assets. Even .5% makes huge difference.
>>> I have no doubt that market participants are scrambling to avoid selling paper they hold; recall the stories around the BSC funds back in June. How long do you think this game can go on?
I think a lot of financial institutions are forced now to just keep the debt on the books. Hence they need to work with every debtor to make sure his business model returns at least 5% on capital.
I think we are back to old good times when banks are actually holding the debt on the books. I think this is healthy for the economy, because it makes bankers to actually roll up the sleeves and work side by side with corporations. Of course this doesn’t mean that we will avoid the recession – we will not. But that’s ok.