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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: John Metcalf who wrote (67751)	8/17/2007 3:43:48 PM
From: Chispas	Respond to of 116555

LONDON --The recent liquidity squeeze in financial markets has cast a shadow over banks' short-term funding arrangements, exposing the opaque process as a weak point in global credit markets. Several Canadian issuers of asset-backed commercial paper this week found themselves unable to refund maturing issues with new paper, and were forced to draw on liquidity agreements to pay off the maturing notes. The lack of liquidity has made valuing commercial paper almost impossible, prompting fears that more liquidity draws will be triggered. The fear is that some banks may now be forced to realise their losses and sell the underlying assets that back ABCP in order to pay investors. "The troubles in the CP market are not over, and not close to being over, despite the rescue package devised in Canada," says Tom Jenkins, financial analyst at RBS. "We expect more bad news in the coming days and weeks as the squeeze continues." So far, there haven't been any forced sales, though some ABCP funds have refused redemptions. BNP Paribas last week sparked global credit market concerns after temporarily halting the operations of three of its asset-backed securities funds because of a lack of liquidity in the market. The situation in the Canadian ABCP market, currently valued at $111 billion, has tested the resilience of the system. But this is only a small portion of the global CP market, which is now in excess of $1.5 trillion. Major players in the Canadian financial markets Thursday engineered a solution to the liquidity crisis in commercial paper via an orderly unwind in trades. U.S. mortgage lender Countrywide Financial Corp. (CFC) also said Thursday that it is taking down the world's largest ever liquidity draw, calling on a syndicate of more than 40 banks for the whole of its $11.5 billion committed facility. The company is finding it difficult to fund itself in the overnight and short-term CP markets, mainly because it cannot extend the maturity on much of its outstanding commercial paper. The squeeze on short-term paper was triggered by a lack of liquidity, which inflates the overnight lending rates and makes it hard for banks to determine a market price for commercial paper. Investors remain concerned that more European banks may be forced to take CP issuers' losses onto their balance sheets, leading to further tightening of lending standards, higher lending rates and a larger funding shortage. A forced unwind has potential knock-on effects for structured credit markets, especially in iTraxx tranche markets where investors take exposure to certain bands of risk based on the underlying iTraxx indexes. Citi said in a note that Canadian issuers are large holders of the highest-rated portion of exposure, called the super senior tranche. That includes investment bank Coventree Inc. (COF.T) which said Monday it was seeking liquidity for C$700 million in ABCP notes it was unable to place in the market that day, and was extending the repayment term of another C$250 million. According to Citi, Coventree sponsors ABCP to the tune of some $16 billion. If this were invested solely in ABCP and assuming a conservative 10 times leverage, this implies $160 billion in super senior exposure, which would be extremely tough for tranche markets to digest right now, Citi said. This may also have a negative effect on the iTraxx Crossover index as investors close their hedge positions. Coventree confirmed that it sponsors $16 billion in ABCP, but declined to comment further. Independent research firm CreditSights believes there is a lack of clarity, not just a lack of liquidity. Central banks throwing money at the issue will only hide the issue in the short-term while markets continue to mis-price subprime assets. "The problem is that data is not readily available, either with regards to the extent of banks' liquidity commitments, or to the nature of the investment portfolios of the conduits," CreditSights said in a report. "Nor do we know how many conduits are having problems accessing funding, ie rolling over commercial paper." Conduits are off-balance-sheet vehicles used by banks to release the value of assets while gaining regulatory relief. Given the opaque nature of the CP market, investors can only expect more negative news as the liquidity squeeze continues. Inflated lending rates and difficulties pricing CP are continuing despite the Canadian rescue package. RBS' Jenkins thinks other small states, such as Australia, may be able to execute this type of rescue, but that even major banks aren't big enough to absorb the $1.2 trillion in outstanding paper that currently makes up the CP market. [DJs Newswire Live] ................................ siliconinvestor.com