Source of your numbers?
Heres the FCIC count:
http://www.fdic.gov/bank/statistical/stats/2009jun/fdic.html
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US government looking to control credit by reduciing system to 5 large banks
- Thread starter zdreg
- Start date
Source of your numbers?
Heres the FCIC count:
http://www.fdic.gov/bank/statistical/stats/2009jun/fdic.html
Quote from Martinghoul:
I disagree... Nothing inherently more "unsafe" about CP than other unsecured debt and people who own it on a normal, prudent mark-to-market basis deal with it. For example, the original Canadian ABCP blowup in 2007 was, while messy, dealt with. The problem is the fundamental mismatch between offering investors instant liquidity without mark-to-mkt and applying this to your entire asset base. MMF is the only type of institution that offers this to retail clients without any sort of a explicit minimal backstop. That, IMHO, is a disaster waiting to happen (well, it's happened already, actually).
When Penn Central blew up in 1970, money market funds were a footnote. But the Fed stepped in anyway, because the problem is corporate liquidity: most corporations roll over their cp's, and of course would have had a huge cashflow problem, both in 1970 and in 2008, if the market seized up and they couldn't roll it over.
Commercial paper is considered safe because of its extreme short-term nature. In normal times it is, and that's the problem. When a company blows up the paper does too, and suddenly there's risk in a market where risk is normally an afterthought. I'm not even sure how you solve the problem.
Quote from Martinghoul:
Well, from what I can see Reserve Primary had $23bn of assets before Leh. If we assume they only lost $785MM on writing down Leh paper to 0, that's a loss of smth like 3c on the dollar. This is a rough estimate.
thanks for the info. however, a 3% haircut is not a cause to upend an industry.
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from trefoil
"Commercial paper is considered safe because of its extreme short-term nature. In normal times it is, and that's the problem. When a company blows up the paper does too, and suddenly there's risk in a market where risk is normally an afterthought. I'm not even sure how you solve the problem."
if you don't reach for yield you don't have much of a problem. full disclosure works quite well in a capitalist economy
Hahaha, 3% haircut? There were only two reasons MMFs haircuts across the industry weren't a LOT higher. One is the ability to avoid mark-to-market. Two is the fact that some of these funds have parent companies, which were forced to inject liqudity into the funds to avoid a massive blow to their reputations. Legg Mason, if memory serves, had to do this to the tune of more than $600mil.Quote from zdreg:
thanks for the info. however, a 3% haircut is not a cause to upend an industry.
Again, let me reiterate. The cause to upend the industry is that the industry in question is a scam that is based on a fundamental fallacy.
With all due respect, Ed, you're completely missing the point. The discussion has nothing to do with low rates, even though, obviously, it's not making the life of a MMF manager any easier. However, rates will one day rise, but the nature of the industry will not change unless something is done.Quote from Ed Breen:
It was tedious reading 5 pages of this thread. Zdreg, thanks for the article links at the onset they were worth the read. Mghoul and responders: you could skip all the meta coversation and this would be a 1 page thread.
The elephant in this room is that at Zero short term interest in confident credit there is no profit in the MMF industry. People who have big money need to put somewhere for short terms, if they can't put it in MMF, then it has to go somewhere else. Banks, with no loan demand can't use it very well...it will all end up as increased excess reserves. Looks like the short term U.S. TBills will be low for at least into 2014 whether Barananke wants it or not.
How can you ask sponsors that are already making no money to raise capital to support that result?
Yes, agreed, but that's a different issue. The system definitely has fragilities of all sorts and the CP mkt is certainly one of the biggest, given how important it is for everything that happens in the real economy (hence the Fed stepped into that mkt in 2008 with CPFF). However, let's not add insult to injury and make the problem worse by allowing a particular set of investors to use what amounts to a loophole in the law. That is all I am saying. While this way we may not completely solve the CP mkt issues, we will certainly eliminate the need for the Fed to specifically backstop the MMF industry.Quote from trefoil:
When Penn Central blew up in 1970, money market funds were a footnote. But the Fed stepped in anyway, because the problem is corporate liquidity: most corporations roll over their cp's, and of course would have had a huge cashflow problem, both in 1970 and in 2008, if the market seized up and they couldn't roll it over.
Commercial paper is considered safe because of its extreme short-term nature. In normal times it is, and that's the problem. When a company blows up the paper does too, and suddenly there's risk in a market where risk is normally an afterthought. I'm not even sure how you solve the problem.
Quote from Martinghoul:
Hahaha, 3% haircut? There were only two reasons MMFs haircuts across the industry weren't a LOT higher. One is the ability to avoid mark-to-market. Two is the fact that some of these funds have parent companies, which were forced to inject liqudity into the funds to avoid a massive blow to their reputations. Legg Mason, if memory serves, had to do this to the tune of more than $600mil.
Again, let me reiterate. The cause to upend the industry is that the industry in question is a scam that is based on a fundamental fallacy.
I don't see how those haircuts would have been higher. Other than Lehman, no one else blew up. That was because of the TARP and the FDIC of course, but still. Reserve Fund investors got back 99% of their money.
I don't think I am missing the point...because I think the issue effects me directly. I am responsible for a close corp manufaturing business that has operating cash flows in excess of FDIC deposit insurance. After the Reserve MMF broke the buck I immediatleyh directed the CFO to put uninsured funds in short term Treasuries or a TBill fund, moving the funds out of MMFs. After the Fed propped up the MMFs and increased the insured deposti amount we have returned to allow some overnight funds to remain uninsured. We buy CD's in various banks to stay insured on surplus cash. Operating funds do flow into MMFs but when they reach a certain point we sweep them out. If the proposed changes are implemented to withhold deposit withdrawals of 5% for 30 days or to charge up front feed for deposit in MMFs then we will not use them. There is no yield, so their is no incentive to pay for the short term deposit. We would instead put the funds in a TBill account or fund. It is obvious to me that such costs on the depositor to MMF would cause a huge run off in MMF funds.
On the other side I fully understand that with short term rates so low, there is no margin for the MMF sponsors to make a profit. The isse will get worse when volumes contract. With the prospect that short term rates will be low, as Fed policy, for the next two years at least...I simply don't see how the SEC changes can do anything but casue a severe contraction of the industry.
On the other hand, such move would drive short term funds to TBills and operate to keep TBill rates low...maybe that is what they want.
On the other side I fully understand that with short term rates so low, there is no margin for the MMF sponsors to make a profit. The isse will get worse when volumes contract. With the prospect that short term rates will be low, as Fed policy, for the next two years at least...I simply don't see how the SEC changes can do anything but casue a severe contraction of the industry.
On the other hand, such move would drive short term funds to TBills and operate to keep TBill rates low...maybe that is what they want.
Huh? So I guess mark-to-market doesn't matter then? How can I get a deal like that for my trades? Moreover, what about the fact that the MMFs had to be bailed out by their parent co's?Quote from trefoil:
I don't see how those haircuts would have been higher. Other than Lehman, no one else blew up. That was because of the TARP and the FDIC of course, but still. Reserve Fund investors got back 99% of their money.
At any rate, I can't make you see what you don't want to see. I was directly involved in the money mkts during the really painful moments of 07/08. All I can tell you is that I don't want to see MMFs causing the issues they caused back then ever again.