Friday, August 10, 2007


Don't Blink!

While writing about Bernanke, I spoke of how he had to project a feeling of confidence, and by not lowering rates: he basically told investors that there is no need to panic. Markets are like that. While one bigwig do one thing, and then do something to destroy that very thing. In an unprecedented move yesterday, the European Central bank poured a record 94.8 billion euros (US$130 billion) into the markets, with the Federal Reserve also injecting capital as banks gasped for liquidity. Now, isn't that a bit silly. Bernanke looked like Churchill for a while and then like a Japanese prime minister the next. When you cave so soon after a non-action on the fed funds rate, you send out a strong signal that ALL IS NOT WELL.

The move came in the aftermath of France's largest listed bank BNP Paribas shutting the door on withdrawals of funds worth 1.6 billion euros, tied to subprime securities. BNP Paribas said it can not provide a fair value of the holdings of the funds, regardless of their quality or credit rating. Credit issues spilled deeper into the European markets, engulfing more of the continent's banks, and concerns grew that losses could multiply. BNP's woes and ECB's firefighting move sparked a sell-off in all major European markets

The Federal Reserve injected US$24 billion in temporary reserves to the US banking system as there was spillover demand for funds from the European market. Dutch investment bank NIBC Holding also said it had incurred a loss of at least 137 million euros on its subprime investments.

The ECB said it will provide unlimited cash to meet demand after the fastest rise in the overnight interbank rate seen since June 2004. The supply of funds by banks was sharply reduced as investors retreated from investments due to losses in subprime related assets. BNP said it would suspend three funds - Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia - which have all declined rapidly in value in the past few weeks to 1.593 billion euros on August 7, down from 2.075 billion on July 27. The suprime crisis hit commodities as US oil fell more than US$1 to US$71 a barrel and metals futures plunged 1.1 and 2.9 percent respectively. Emerging debt spreads blew out 12-14 basis points over US Treasuries while the volatile equity market saw investors scurry to bonds with a rally in eurozone government bond futures.

This looks like a pre-emptive strike to head off any possible liquidity problem. Its a bit funny, in the US the Fed did not think its a big thing but the ECB is telling everyone ITS A BIG THING - it seems the Europeans are saying if you don't act first, we will. We should also bear in mind that ECB's 95 billion euros move is significant and will calm waters, while Fed's US$24 billion is only a trickle to US markets. Before the injection of funds the overnight rates for the euro spiralled to 4.62% the highest level in 6 years. After the injection the rates went back to the targeted 4%.

Volatility will reign for a while as markets try to anticipate other problems coming out of the closet. I still do not think the subprime mess is a big problem, but when you have the media "hyper-focusing" on the issue 24/7, it gets magnified. Have to wait it out while they play "horror movie game". Look at it this way, I have already calculated the dividend yields for the few US big financials. The story is the same everywhere else, the rebound will be substantial once the scary clowns finish their act.

4 comments:

hellthy correction said...

looks like one intended healthy correction turns out to be HELLthy for all market players. While billions if not trillion have been wiped off in financial markets around the globe, almost everyone have their confidence ego bruised. With such a choatic senario even with the new injection, do u think the rebound would sustain say for 6 - 12 months?

The Great Game said...
This comment has been removed by the author.
The Great Game said...

Interesting that there would always be a conspiracy theory everytime there's a crisis.

Seems like the BNP's meltdown conform to this:

http://www.dealbreaker.com/images/pdf/HaymanJuly07.pdf

"... He told me that the “real money” (US insurance companies, pension funds, etc) accounts had stopped purchasing mezzanine tranches of US Subprime debt in late 2003 and that they needed a mechanism that could enable them to “mark up” these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!! He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of Subprime debt. Interestingly enough, these buyers (mainland Chinese Banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, UK banks) possess the “excess” pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the US in USD, 2) petrodollar recyclers. These two pools of excess capital are US dollar denominated and have had a virtually insatiable demand for US dollar denominated debt…until now. "

It is true that subprime is only a small % of the whole housing market, but the re-rating of the whole structured finance asset class (in the regime of trillions) would be highly disatrous.

Guess that if Global Alpha of GS really went down as rumoured in the next 2 - 3 weeks, the situation would be further exarceberated. Coupled with the fact that GS is also one of the largest leveraged loan warehouse both in relative and absolute term, wont be surprised if we see some of the top tier investment banks goes under.

http://dealbook.blogs.nytimes.com/2007/08/07/buyout-loans-whos-holding-the-bag

Just barely a week ago, BNP still claimed that it's in a very solid position.

Hope this subprime mess would be shortlived.

ikanair said...

Muahahaha.... more cockroach coming out to enjoy the sunlight, but then again, all the current cockroach are from same cupboard(sub prime).

Just wait for a little while more, and more cockroach from other cupboards(us consumer, shanghai bubble) will see the light.