Bernanke: Talks the Dove, Acts the Hawk

[GRG55]

Re: Bernanke: Talks the Dove, Acts the Hawk

...Going back to the BoA deal with CFC that I mentioned in my previous post, BoA is essentially acting as the shady Undertaker for CFC. They rented the casket (the $2 billion convertible preferred, convertible at the below market price of $18) for 7.25% (net rental income of 100bp). Looking at the share volume over the last two days, it’s conceivable that BoA shorted an equivalent amount of shares to net out the conversion for a profit of ~$500 million. So, there’s the nonrefundable deposit! When CFC goes to zero, they get the casket back and can even steal any jewelry the dead body is wearing at the bankruptcy (funeral)...

Under the terms of the deal BoA is barred from shorting CFC for 18 months.

[sparki]

Re: Bernanke: Talks the Dove, Acts the Hawk

Moin again,

Professor Bear at Ben´s blog has provided this link to my question


Central bank impotence and market liquidity
/ Asia Times

Chairman Bernanke has now summoned his own clean-up team into action. The Fed hopes that by assuring banks that they can now access cash on less punitive terms from the Fed discount window, collateralized by the full “marked to model” face value of mortgage-backed securities, rather than the true distressed value as “marked to market”, for which they could find no buyers at any price in recent weeks as the market for such securities has seized up, it can jumpstart market seizure for mortgage-backed commercial paper and securities.’

[lb]

Re: Bernanke: Talks the Dove, Acts the Hawk

Under the terms of the deal BoA is barred from shorting CFC for 18 months.

I haven't seen the details yet, but I thought they were barred from selling their shares, theoretically they could lend them to someone else. However, CFC is still nowhere near the reg. SHO list last time I checked.

[Pervilis Spurius]

Re: Bernanke: Talks the Dove, Acts the Hawk

Under the terms of the deal BoA is barred from shorting CFC for 18 months.

I read it as they were barred from trading in CFC stock after conversion for 18 months.

[ratfink]

Re: Bernanke: Talks the Dove, Acts the Hawk

The banks borrow from the Fed, and the hedge funds borrow from the banks. Hedge funds and others can still fail, but in an orderly way versus a simultaneous dumping of assets into a frozen market.

EJ,

Great find, and this would make a lot of sense of the last week's news.

I can see how this could mitigate the “uncontrolled” part of “uncontrolled debt deflation”; I just wonder how much of a brake this can put on the long term unwind. It seems to me that they have figured out a straightforward and technically efficient way to eliminate the liquidity issue caused by the lock-up in markets due to fear, which, in the short term, will buffer the movement down. Those positioned to take advantage of their anointment as the elect few gain the ability to glean through the pickings brought to their own doorsteps and make the movement down, if not orderly, then maybe less of a panic. These seem like beneficial short term advantages to keep the markets from stopping entirely.

The gleanings they assess and bid on are still the result of the previous times of moral hazard, though, and for their own solvency they are going to have to set the discounts deep to avoid just concentrating the risk at a higher level. In the longer term this seems orderly only in the same sense as Napoleon’s return from Russia.

[Charles Mackay]

Re: Bernanke: Talks the Dove, Acts the Hawk

If the FIRE economy is allowed to "mark to market" then we will have a deflationary depression. On the other hand if the FED is able to keep the $74 trillion in debt and obligations "marked to model" a little longer by this OMOF strategy then we will continue the exponential phase of debt growth that we are currently on now. There is no way out of this logrithmic growth in debt because our GDP can't service it! Eventually market participants (particularly Europeans and Asians) will probably boycott dollar based debt.

Ben and his buddies would like you to play this as a developing deflationary event. In other words, buy their paper and shun hard assets. They need to get you back in the barn because right now you are running around on the loose.

When have you heard bearish pronouncements like the ones that came out of Bloomberg, Goldman, and the MSM before the top and during the top like happened this time? Never in my investing history.

[metalman]

Re: Bernanke: Talks the Dove, Acts the Hawk

jumpstart market seizure for mortgage-backed commercial paper and securities.’

markets don't seize assets, creditors do. in this case, they're buying them cheap with cheap money from the fed. markets do seize up, tho.

i wonder... when a hedge funds puts up some cdos as collateral for a fed loan, how are they priced?

[Finster]

Re: Bernanke: Talks the Dove, Acts the Hawk

...The Fed has been offering 85% of face value for AAA-rated paper presented at its discount window, even collateralised-debt obligations stuffed with subprime mortgages (as long as they are not—yet—impaired)....

This looks more impressive on the surface than it is. Remember the ratings agencies - firms paid by the issuers, not the buyers of debt - have been slapping these AAA ratings on stuff that has been trading like junk. There is a mess of a conflict of interest here, reminiscent of the fallout from the last bubble. Remember when Wall Street sell-side analysts were under fire for issuing "buy" recos on stocks they were actually deeply suspicious of?

Investors - mostly institutional - have been shirking their due diligence, effectively offloading onto third parties who depended on the sellers of the paper for their livelihood. This AAA rated paper was always just junk suffering from grade inflation.

[EJ]

Re: Bernanke: Talks the Dove, Acts the Hawk

markets don't seize assets, creditors do. in this case, they're buying them cheap with cheap money from the fed. markets do seize up, tho.

i wonder... when a hedge funds puts up some cdos as collateral for a fed loan, how are they priced?

That is one of the more clever aspects of OMOF system. It creates a market where markets have previously frozen up. If only one bank stepped in to borrow $500M at the window to use to buy hedge fund and investment bank assets, then there'd be no pricing mechanism. Citi, BoA, etc., compete for the assets. The remaining mystery is how a market is to made for a glut of overpriced houses without a fed funds rate cut.

[EJ]

Re: Bernanke: Talks the Dove, Acts the Hawk

EJ,

Great find, and this would make a lot of sense of the last week's news.

I can see how this could mitigate the “uncontrolled” part of “uncontrolled debt deflation”; I just wonder how much of a brake this can put on the long term unwind. It seems to me that they have figured out a straightforward and technically efficient way to eliminate the liquidity issue caused by the lock-up in markets due to fear, which, in the short term, will buffer the movement down. Those positioned to take advantage of their anointment as the elect few gain the ability to glean through the pickings brought to their own doorsteps and make the movement down, if not orderly, then maybe less of a panic. These seem like beneficial short term advantages to keep the markets from stopping entirely.

The gleanings they assess and bid on are still the result of the previous times of moral hazard, though, and for their own solvency they are going to have to set the discounts deep to avoid just concentrating the risk at a higher level. In the longer term this seems orderly only in the same sense as Napoleon’s return from Russia.

I don't want to over-state the importance of this one method. Again, as there is no precedent, there is no way of evaluating whether the OMOF system will work long term. It does serve as evidence to support our belief that the Fed has thought this through and likely has more ideas than this one. The old maxim "don't fight the Fed" meant don't discount the Fed's ability to step in and support the system with rate cuts. Now it means don't underestimate the range of market engineering options that the Fed may develop and institute.

[jk]

Re: Bernanke: Talks the Dove, Acts the Hawk

The old maxim "don't fight the Fed" meant don't discount the Fed's ability to step in and support the system with rate cuts. Now it means don't underestimate the range of market engineering options that the Fed may develop and institute.

does this throw ka-poom theory in doubt? or does it just mean it happens more slowly and less extremely?

[jeffolie]

Re: Bernanke: Talks the Dove, Acts the Hawk

I have 2 problems with this approach:

1. Only $2B was taken from the Discount window. This is not enough to bailout even 2 large hedge funds as Bear Stearns found out.

2. The Discount window loans are for only 30 days. This postpones the day of reckoning to mid September while the redemption fiasco for hedge funds is at the end of September.

Still, the reality is that the equity markets and ABX index have calmed. So, the Fed's approach is temporarily working very well.

[bart]

Re: Bernanke: Talks the Dove, Acts the Hawk

I have 2 problems with this approach:

1. Only $2B was taken from the Discount window. This is not enough to bailout even 2 large hedge funds as Bear Stearns found out.

2. The Discount window loans are for only 30 days. This postpones the day of reckoning to mid September while the redemption fiasco for hedge funds is at the end of September.

Still, the reality is that the equity markets and ABX index have calmed. So, the Fed's approach is temporarily working very well.

1. True. I view as more of a confidence building attempt than a real move.

2. They can be rolled over as many times as desired.

[Spartacus]

The audio I posted earlier has a little history on the discount window

http://www.itulip.com/forums/showthr...4690#post14690

This type of operation had become hightly dis-favored for a long, long time and now is apparently being resurrected and repurposed.

[Spartacus]

Re: Bernanke: Talks the Dove, Acts the Hawk

but does that count the money that actually made it to the troubled end-user?

So far all we know is that the banks have that money - has anyone borrowed it from them (did they actually intermediate? or is the money just sitting there? )

The facts say otherwise.

The recent reporting week shows total discount window borrowings at $1.54 billion (the previous week was $.27 billion). That's a record high, by far.

August 1997, the previous high, was about $1.1 billion.