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Originally posted by sudden debt blog
[emphasis added]
In recent years many banks set up nominally separate conduits to keep mortgages and other loans off their balance sheets, enabling them to conserve regulatory capital. Such conduits played the oldest game in banking: they borrowed short by selling and rolling ABCP's and lent long by holding CDO's, CLO's and other such asset-backed securities. The banks kept the spread and at the same time conserved regulatory capital, which allowed them to make or purchase more loans on the books and then to shift them off by securitizing them and "selling" them to their conduits. Neat, eh?
Well, yes, until the ABCP market simply stopped functioning and the conduits could not fund themselves independently. Several banks have already had to technically "bail out" their own conduits by taking their assets back onto their books. This means higher regulatory capital requirements and lower ability to make or purchase additional loans, i.e. a form of immediate credit tightening.
One such example is reported by Bloomberg today, involving National Australia Bank (the country's largest) which has already taken on $US 4.9 billion from its conduits and will likely have to take back another $US 4 billion. ANZ, Australia's thiaurd largest bank also had to take back loans and will likely take back more, for a total of about $US 3.5 billion and Westpac has a potential exposure of $US 5 billion. All this has forced Australia's central bank to intervene directly into the market, buying mortgage-backed bonds for cash - a very unusual move that underscores the extent of the trouble. Events are rapidly evolving from "lender of last resort" to "buyer of last resort" - and the buck hopefully stops right there because after that it is the printing presses.
As reported by the WSJ, Citibank has 25% of the entire SIV/conduit market with $100 billion under management. Barclay's is also heavily involved and it already had to tap BOE a couple of times claiming, however, that it was facing technical glitches in interbank market settlements.
In closing, the trouble with asset-backed credit is migrating closer and closer to the balance sheets of big global banks and this is a "conduit" for serious trouble. It is one thing for hedge funds to go down in flames; high risk eventually turns into big losses. But if banks are starting to take direct hits into their balance sheets, that is a whole different ballgame, by at least an order of magnitude.
I also note that the ECB is being forced today to once again offer money to the interbank market, since the O/N rate moved to 4.68% yesterday, much higher than its 4.00% benchmark. The amount provided came to EUR 42 billion ($57 billion) - that's a lot of money and the recurrence of the need after earlier injections two weeks ago is a very bad sign, indeed.
Banks are turning into CB cash junkies.
In recent years many banks set up nominally separate conduits to keep mortgages and other loans off their balance sheets, enabling them to conserve regulatory capital. Such conduits played the oldest game in banking: they borrowed short by selling and rolling ABCP's and lent long by holding CDO's, CLO's and other such asset-backed securities. The banks kept the spread and at the same time conserved regulatory capital, which allowed them to make or purchase more loans on the books and then to shift them off by securitizing them and "selling" them to their conduits. Neat, eh?
Well, yes, until the ABCP market simply stopped functioning and the conduits could not fund themselves independently. Several banks have already had to technically "bail out" their own conduits by taking their assets back onto their books. This means higher regulatory capital requirements and lower ability to make or purchase additional loans, i.e. a form of immediate credit tightening.
One such example is reported by Bloomberg today, involving National Australia Bank (the country's largest) which has already taken on $US 4.9 billion from its conduits and will likely have to take back another $US 4 billion. ANZ, Australia's thiaurd largest bank also had to take back loans and will likely take back more, for a total of about $US 3.5 billion and Westpac has a potential exposure of $US 5 billion. All this has forced Australia's central bank to intervene directly into the market, buying mortgage-backed bonds for cash - a very unusual move that underscores the extent of the trouble. Events are rapidly evolving from "lender of last resort" to "buyer of last resort" - and the buck hopefully stops right there because after that it is the printing presses.
As reported by the WSJ, Citibank has 25% of the entire SIV/conduit market with $100 billion under management. Barclay's is also heavily involved and it already had to tap BOE a couple of times claiming, however, that it was facing technical glitches in interbank market settlements.
In closing, the trouble with asset-backed credit is migrating closer and closer to the balance sheets of big global banks and this is a "conduit" for serious trouble. It is one thing for hedge funds to go down in flames; high risk eventually turns into big losses. But if banks are starting to take direct hits into their balance sheets, that is a whole different ballgame, by at least an order of magnitude.
I also note that the ECB is being forced today to once again offer money to the interbank market, since the O/N rate moved to 4.68% yesterday, much higher than its 4.00% benchmark. The amount provided came to EUR 42 billion ($57 billion) - that's a lot of money and the recurrence of the need after earlier injections two weeks ago is a very bad sign, indeed.
Banks are turning into CB cash junkies.
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