Posted by October 6, 2008
Here’s a review of last week’s financial market activity. Congress passed the Troubled Asset Relief Package but for some reason the actual name of the law is the Emergency Economic Stabilization Act (EESA). The stock market certainly isn’t stable now. On the day the massive EESA bill was passed into law, the market was surprisingly down 1.5%. Maybe that’s what good news looks like these days?
Over the past week, Europe finally woke up to the fact that a lot of their banks are likely wading in a pool of pooh.
- The country of Ireland guaranteed the liabilities of its six largest banks for the next six years.
- Germany realized that supporting Hypo Bank wasn’t enough to calm solvency concerns across the banking system and substantially increased the sovereign’s guarantee on all bank deposits. Hypo Bank owns Depfa Bank which is heavily involved in structured finance, particularly with US municipal entities.
Meanwhile, real -world inter-bank lending / funding is very strained. Almost all of this activity has an overnight maturity and LIBOR fixings are ridiculously high.
Jumping back to my so-called “career”, I’m still waiting for a reply to an email I sent about three days ago to the broad “dealer team” with what I thought was an insightful question about Morgan Stanley’s liquidity position. The lack of response seems to be yet another confirmation that my career is in limbo.
October 7, 2008
The stock market was down 8% yesterday before rallying to close “only” 3% down on word that the Fed was going to start a Commercial Paper purchasing facility. The Fed also officially announced an increase in the size of its Term Auction Facility from $300 billion to $600 billion. Additionally, it was announced that Congress will increase the FDIC insurance limit from $100,000 to $250,000 per account and they granted the Fed the ability to pay interest on reserves as part of the EESA law. Staying with the government sector, pay-out amounts were announced for FNMA and Freddie Mac’s credit default swap contracts. If I’m understanding this correctly, CDS contracts on their subordinated debt received higher payout amounts than senior debt. This makes sense, NOT!
On my way into work today, I’m thinking about Morgan Stanley’s liquidity position and whether or not my email will be helpful or even seen. Soon enough I discover that there are no Morgan Stanley related emails, but I have been asked to join the nascent Commercial Paper Funding Facility (CPFF) team. Excellent!!
October 10, 2008
I end up working on CPFF issues until about 8:15 pm each night this week and I have to admit it’s nice to feel wanted and to able to contribute. It’s exciting to be part of the emergency response team and at least one bank / dealer interview would not have occurred but for my contacts. Out of the blue, my boss from seven months ago asked if I was still interested in covering the municipal bond market and I instinctively gave him a vague answer. I’m wondering if this was an appropriate response, but I’m thinking so far, so good, until later in the week when the president of the bank actually asks me if I’m still covering municipal bonds. This makes me think that I should be.
Even though the CPFF facility work seems very rewarding, I managed to pivot my workflow towards municipal bonds and spend all day today talking to muni bond market participants and thinking about how a potential “muni bond facility” might work. The equity markets closed on a down note (what else is new) to put an exclamation point on a remarkably bad period with the Dow Jones Industrial Average down about 20% on the week!
October 13, 2008
Even though today is a bank holiday, Columbus Day, I come into work to try and advance a potential facility to support the municipal bond market and I’m able to develop an outline of how such a facility might be organized. The bond market is closed today, along with the Fed, but for some reason the equity market starts rallying like crazy – turns out that the rally was based on rumors of still more government activity as Treasury will reportedly make equity investments in the nine largest US banks and the FDIC will reportedly guarantee the senior unsecured debt of these banks for a fee of 75 basis points.
October 15, 2008
What goes up must come down, I guess. The stock market was down in a big way today, more than erasing the large gains on Monday. LIBOR fixing have come down from very elevated levels. Of note, interest rates on debt issued by FNMA and Freddie Mac have increased considerably as their debt is now only implicitly government guaranteed while the senior, unsecured debt of the nine largest banks is explicitly government guaranteed. The whole landscape is confused, which perhaps is a logical consequence of a government starting to pick “winners” and “losers”. One of the commonly agreed goals of the financial rescue plan was to stop home prices from plummeting by opening up access to mortgage financing. Now that Fannie and Freddie’s funding costs are going up, retail mortgage interest rates are likely to increase too. No good deed goes unpunished. ☹
Getting back to my work assignment, the municipal bond market is clamoring for a bailout. I just put together a Draft Term Sheet that would potentially commit the Fed to buying hundreds of billions of dollars of short-term municipal debt; I even have a suggested name for the would-be facility: Municipal Refinancing Transaction Program. I would never recommend such a facility in normal times. The only thing is if the Fed is buying Commercial paper, why shouldn’t it support the municipal bond market? But . . . when does it stop?!
I heard that today’s downdraft was accelerated by hedge funds who sold stocks to shore up their impaired liquidity positions after losing money with Lehman. This sounds like a classic downward spiral: decreases in the asset values of pledged assets prompt borrowers receiving margin calls to pledge additional assets to “top-up” / restore the value of their pledged collateral; to meet the margin call, the borrower sells assets, which starts another round of price declines, leading to more margin calls and more price declines, i.e. a downward price spiral. Volatile market pricing also leads to increases in the required over-collateralization percentage, known as a “haircut”, which only compounds the problem. Over the past month, the value of every asset class is falling like a stone and measures of market volatility are very high. When does it stop? It’s looking like 2009 will be the Year of the Great De-leveraging.
Getting back to picking winners and losers, the FDIC announced that they will extend their guarantee to healthy institutions. Sounds great J just wondering who defines “healthy”, though. I imagine if the FDIC doesn’t think you’re “healthy”, it’s “judge, jury and execution time” for the bank. Another point, what if the whole region is unhealthy? Do all the banks have to effectively declare bankruptcy? Still, the FDIC actions should be helpful. Anyway, my draft muni term sheet should find its way to SOMA manager Bill Dudley’s hands soon. Fingers crossed.
October 16, 2008
Alleluia! Friday has arrived and my work week is over. This week has been super stressful but it’s nice to be able to contribute as well. Feedback from Bill Dudley was that there’s no immediate demand for this product right now, so we’ll just put it on the shelf and “cross that bridge when we come to it”. Alleluia once again!
October 23, 2008
I got to work about ten minutes late yesterday and I had just enough time to time log into Bond Buyer to see if there were any breaking developments in the municipal bond market before attending the 8:20 am meeting that helps prepare the “the Desk” to give a daily 9:20 am conference call. As the computer is turning on, my boss from when I used to work in the Domestic Money Markets area stops by and wants to talk to me in a conference room. Once we’re there…he basically offers me the position to become the first level manager (Staff Coordinator) of the Domestic Money Market Desk. Inside I was like, “Wow!!!!”, but on the outside I tried to be cool and calm. I told my potential new boss that I would try to get back to him later today after I touched base with my current boss, etc. 😊 😊