RANDALL W. FORSYTH keeping his astute eye on the situation today in Barron's
an excerpt: (see Message 23780642 for the full article)
Nevertheless, the lack of transparency for the new esoteric instruments, such as collateralized debt obligations and collateralized loan obligations, has exacerbated the current nervousness because nobody knows what they're worth, he also notes.
In that, it appears some of the problem lies with asset-backed commercial paper "conduits" and so-called structured investment vehicles. These ABCP conduits and SIVs are used to fund the purchase of assets such as trade receivables, auto loans, credit cards, whole mortgage loans, as well as securities such as corporate debt, residential mortgage-backed securities and CDOs, according to a Bear Stearns report.
The ABCP conduits and the SIVs then are able to issue high-grade commercial paper to finance these assets, which are less the prime quality. ABCP now comprises over half the $2 trillion-plus commercial paper market, up from 20% in 1998, according to MacroMavens' Stephanie Pomboy. And, money market funds own 27% of all CP outstanding, she also notes.
According to the Bear report, some $38 billion-$43 billion RMBS and CDOs could be liquidated from ABCP conduits. Got that? In other words, a load of these assets is backing ABCP and may have to be sold into a less than receptive market.
Fears of large and wholesale liquidations may be behind the big price drops in triple-A mortgage securities, the firm notes. The worst case may be discounted and these securities may be attractive, the Bear report concludes.
Maybe so, but just last Friday, Bear's CFO called the current fixed-income market the worst he's seen in 22 years, which would imply it's not the best time for these mind-numbingly complex securities. What Bear's fixed-income brain trust is currently thinking can't be reported here because the firm shut journalists out of a conference call on the state of the market Thursday.
More remarkable is that the capital markets have arrived at this "mini-Minsky moment" while central banks have not been pursuing restrictive policies and unemployment is low, observes F. Mark Turner of Babson Capital. And, it might be added, well before the real economy feels much impact from the current financial dislocations. |
