February 25 – 29, 2008

February 25, 2008

I left my brand new Blackberry at work on Friday. I got it specifically so I could be in touch with the office on the weekends. Sounds potentially productive, but apparently the technology doesn’t work if you don’t have the machine with you. Who knew?  😉 Anyway, I wasn’t thinking much of it when I came into work on Monday morning, but then I see that I’ve received, like, six e-mails on Saturday.  A lot of them were asking about an email / memo that I was supposed to write on the topic of—you guessed it—the Auction Rate Securities market.  I wasn’t sure why so many people were looking for it, maybe because I didn’t finish and send the email until about 7 pm on Friday? 

I spent most of Monday re-writing that email / memo, incorporating suggestions from several people, but I’m not sure it got any better.  Hopefully it did.  On Friday, my area, Domestic Capital Markets, also published a nine-page internal analytical piece titled ‘Current State of the Credit Markets’ which presented a picture that was not good.  I pulled my weight within the piece, more or less, having written two of the nine pages.  The piece was very well received, but I couldn’t help but think it would be nice if my ARS document gets some of the same attention. 

In terms of the markets themselves, there weren’t many new developments today.  The potential Ambac restructuring was not announced.  There was a big rally in both Ambac and MBIA though, following news that S&P was re-affirming their ‘AAA’ ratings, while keeping Ambac on ‘Negative Outlook’.  I remain fearful of the fall-out from “good insurer / bad insurer” schemes, but everything is just conjecture at this point.

Lunch with an actual Governor of the Federal Reserve System was pretty cool.  Five FRBNY staffers like myself had lunch with the Governor.  We had a nice chat, it probably would have been better if we weren’t all so exhausted, but it was still super interesting.  The Governor explained how, on a conceptual level, it’s always hard to “take away the punch bowl”.  A main focus should be to develop appropriate lessons learned from the subprime lending disaster.  We talked about the usual suspected culprits of the crisis: not enough economic “skin in the game” for originators in securitizations, conflicts of interests for rating agencies, and the importance of having proper risk management controls to diversify and limit risk. I came away with a favorable impression overall and felt like we were doing our part to stabilize the crisis.  I didn’t get to ask him to pass me anything, though.  😉 

February 27, 2008

I was asked to attend a meeting of ARS dealers at a prominent law firm today.  My management actually gave me a hard time for attending the meeting, even though the President’s office basically asked me to go (nobody ever said navigating multiple layers of bureaucracy would be easy!).  What’s the matter here?  Well, my management wants me to write the ‘PM Briefing’ again today.  Anyway, after appealing to the powers that be, I was “allowed” to attend the meeting provided that I leave at 11:30 am, which was cutting it a little tight since the meeting started at 10:00 am.  

There were nice digs at the prominent law firm, as you may imagine.  I went with a lawyer from FRBNY who seemed relatively uninformed about the current state of the municipal securities markets.  That scared me a little, but there’s a good chance that I don’t know / probably can’t even understand what he knows, anyway.  The purpose of the meeting was to explore some different “collective action” options that participants could take to “help” the market. The group’s main concern was about the plight of ARS investors in closed-end mutual funds, a market that has had a good history of maintaining liquidity for the past 18 years, but just not now!

The meeting didn’t seem to go that well from my perspective.  The dealer who called the meeting wanted to get “buy in” from the larger group on a proposal to add some liquidity support to outstanding closed-end ARS and effectively convert them to Variable Rate Demand Notes.  Apparently, a precedent-setting “no action letter” was issued by the SEC around 2002 that said this is possible.  What is the problem with this plan?  Currently there is very little bank liquidity support available for anybody.  I literally received comments from two different market participants this afternoon, independently complaining about the lack of bank liquidity.  It looks like over the near-term ARS investors have two options:  1) employ a strategy of simply waiting for someone (probably the issuer) to give you your money back or 2) sell now at a loss in the secondary market.  I’ve heard these losses might range from 10 to 30 cents on the dollar.  There is one undeniable benefit if a secondary market does develop; investors will be able to get their hands on an increasingly precious resource: liquidity.

Unfortunately, nothing concrete came from the meeting, and so it  was probably a waste of time. One cool thing did happen to me though, involving me and a Senior Partner of the law firm, no less. To make the story even better, this guy appeared to be a legendary deal maker who is extremely well known in the legal / corporate finance community. The story starts when someone at the meeting naturally asks, “What about the Fed?  Can you provide some temporary support to help stabilize the market?” During my four months covering the municipal bond market, I learned that the Federal Reserve Act literally says that the Fed’s trading desk, in its normal course of business, can purchase municipal bonds only if they have six months or less remaining until maturity.  I mentioned this important fact at the meeting and the Senior Partner said, “With all due respect, I don’t think that’s right.”  To which I replied, “Hey, I may be wrong, but it’s my understanding that there is a six-month maturity restriction on any Fed purchase of muni securities by the open market Desk per the Federal Reserve Act”.  During the meeting, the Senior Partner gets up and walks around the room a bit, and then pulls out a book that looked like it was published in 1914. He starts reading it and about 15 minutes later he says, “well it looks like our friend from the Fed is right, they can’t help us”, and I was like ‘Whoaa!!!! 😊’  

Next up is pressure from the FRBNY lawyer to edit his summary of the meeting.  The Executive Office wants a summary from me as well.  So I’m thinking, “no problem, it’s going to be a little tight, but I’ll attend a broad 4 pm meeting with the President of the bank and then I’ll rush back to write the all-important, ‘PM Briefing’”.  Much to my relief, an EVP at the 4 pm meeting said that one of the big financial guarantors was going to get a capital infusion to preserve their ‘AAA’ rating without a “good insurer / bad insurer” split.  Hallelujah!  My sense of near-term improvement is short-lived, however.  At the end of the day, my management told me that they really want me to just focus on the ‘PM Briefing’, no more updating the President of the bank or editing lawyer summaries when I’ve been assigned this duty.  Great—bureaucracy strikes again.  ☹

February 29, 2008

Leap-year day.  There was an after-work party for a woman who worked in the Markets Group for 7 years, but I wasn’t sure if I would go, even though my wife was out of town.  The reason why I wasn’t sure about attending is that I was just so pissed off.  Why?  Maybe it’s because I had to provide written market updates three times today, in addition to my awesome training opportunity learning how to effectively write a PM Briefing. Before I elaborate further on the skill set necessary to thrive in writing that all-important document, let me share some of the constructive criticism that I received from well-meaning colleagues over the past couple of days.

My prior perception of what a Trader / Analyst should do is to engage market participants in an honest dialogue of that day’s important developing market events, while being careful not to disclose any information that I obtained in confidence.  Sounds pretty straight forward, no?  Apparently not, based on my recent feedback. The job isn’t really to engage in conversation about market developments because, God forbid, what if I offer up an opinion on something?  This could be misconstrued as an official representation of the Federal Reserve system.  For example, let’s say the price of a particular derivative contract seems out of line with others.  I shouldn’t ask about that directly, instead I should say something like, “What do you think of the price of the ABC derivative contract?”  After receiving the answer, I’m supposed to say something completely innocuous like, “Oh, I see, thanks.”, rather than asking if it could be mispriced, opening the door to obtaining potentially more valuable information.  It’s just a matter of style and of course I can learn how to do my job better.  All of the procedural rigidity makes me wish that sometimes I could just check my brain at the door, though.

Regarding my personal work situation, I mentioned to my boss today that my current work environment is untenable, specifically complaining that I can’t keep up with the demand for market updates concurrent with my PM briefing training.  He related to me on a human level and suggested that I take some time off.  So, I’m going to take Monday off…woo-hoo!!  As stressed as I feel, it’s nothing in comparison to the conditions people working in the municipal bond market are dealing with.  One contact told me that his desk works until 10 pm each evening just to process the daily volume of failed ARS tickets.  I also heard that people who work for various “tender agents” (who facilitate the settlement of maturity of securities) are just swamped with manually processing unusual workflow. Enough about me—I know the reader is pining for more info on the PM Briefing.  The goal of this document is to summarize, in as few words as possible, the price action on the day in major markets, along with a brief explanation of what caused the price action. Major markets include, but are not limited to, the value of the US dollar vs. other currencies, the US Treasury market, credit derivative markets, agency debt markets, agency MBS debt markets, equities (stocks), commodities (especially oil), and interest rate futures.  As one might expect, the PM Briefing has its own special nomenclature.  The prior week, I actually had to sit through a 15-minute information session with a manager who explained that the “theme” of my recent briefings could be better expressed if some of my paragraphs were re-aligned.  I did my best to feign interest and hopefully my “whatever” attitude did not come through.