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Bernanke: Talks the Dove, Acts the Hawk

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  • Finster
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    Originally posted by sparki View Post
    ...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.

    Leave a comment:


  • metalman
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    Originally posted by sparki View Post
    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?

    Leave a comment:


  • Charles Mackay
    replied
    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.

    Leave a comment:


  • ratfink
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    Originally posted by EJ View Post
    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.

    Leave a comment:


  • Pervilis Spurius
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    Originally posted by GRG55 View Post
    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.

    Leave a comment:


  • lb
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    Originally posted by GRG55 View Post
    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.

    Leave a comment:


  • sparki
    replied
    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.’

    Leave a comment:


  • GRG55
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    Originally posted by Pervilis Spurius View Post
    ...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.

    Leave a comment:


  • GRG55
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    Originally posted by Finster View Post
    ...The new discount window strategy is an admirably clever and out of the box use of a tool that has been gathering dust in relative obscurity for so many years. If it can be used in such a limited way as to grease the sticky wheels in credit markets without encouraging further asset price inflation, it could turn out to have been a stroke of genius.

    That said, it seems almost inevitable that the Fed will be under tremendous pressure to countenance higher inflation. Even in the 1970s, the US was a net creditor to the rest of the world. It is now a net debtor to the tune of trillions of dollars. Unless it outright defaults - not exactly an attractive option itself - the only way to mitigate that debt burden would be to pay it off in depreciated dollars. Inflation of course has problems of its own, not least further reinforcing debt as a way of life for the American consumer and therefore yet further aggravating the original problem, but the prospect of a US willing to consuming less than it produces in order to retire debt the old fashioned way seems unlikely any time soon.
    Although the mechanics of the Feds actions may be "new", it does not appear inconsistent with EJ's "Disinflation followed by more Inflation" sequencing.

    Presently the Fed appears to want to inject just enough liquidity to prevent disinflation from turning into outright deflation (I still think that is Bernanke's primary fear). Once the weakest debtors and creditors have been eliminated (liquidated assets and debt write-offs, respectively), and the political pressure becomes unbearable, it's not difficult to imagine the Fed mitigating the remaining debt burden by inflation. Time will tell.

    Leave a comment:


  • fogger
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    In other words, the well connected are getting deep discounts on real assets.

    Leave a comment:


  • sparki
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    Moin from Germany,

    the Economist is writing...

    http://www.economist.com/finance/dis...ory_id=9687709

    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).

    Has anybody heard similar things and can provide another link?

    If this is true i think this image is well deserved.... :-)

    Leave a comment:


  • bart
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    Originally posted by zoog View Post
    Doesn't seem to be much of a market, at least so far.
    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.

    Leave a comment:


  • bart
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    Originally posted by EJ View Post
    Today iTulip's recently appointed new ShadowFed Chairman discusses Bill Gross's appeal to the Bush administration to bail out said strapped homeowners.
    Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money
    Today Bloomberg published the following report.
    Pimco's Gross Urges Bush to Bail Out U.S. Homeowners

    By Patricia Kuo

    Aug. 23 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., urged the Bush administration, rather than the Federal Reserve, to bail out U.S. homeowners to avoid ``destructive housing deflation.''
    Let’s dig into this a little bit.
    Pimco's Gross Urges Bush to Bail Out U.S. Homeowners
    No, Bill. Bush doesn’t have that kind of money.
    Gross advised President George W. Bush to set up a ``Reconstruction Mortgage Corporation'' and ``write some checks'' to bail out homeowners
    Oh … I see. You want Bush to use MY money. How generous of you. more...


    ...recently appointed new ShadowFed Chairman...


    Congratulations Finster!

    Leave a comment:


  • Pervilis Spurius
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    It’s late and maybe I am not thinking correctly, just getting tired and cynical. I can’t get this Fed model out of my head. The Fed won’t budge on the FF Rate, so no new activity is being generated here. Instead they are attempting to steer everyone to the discount window via the Fab Four. The Fed document promotes the idea that by injecting liquidity this way they can minimize moral hazard and motivate the Fab Four and any secondary dealers to increase their “credit monitoring”. In a strict sense, I agree that this will be the outcome of this policy. However, the real world effect is that the Fed has just anointed the Fab Four the worst form of Undertaker: those who rent caskets.

    With the discount rate at 6.25% the “credit needy” are still suffering rate adjustment shock. Until just recently, the needy have been able to borrow at ~5%, for some of the PE deals I imagine it was less. Now they suddenly have to pay something north of 6.25%?

    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).

    Now that’s what I call “credit monitoring”.

    At a 6.25 % discount window, I think these are the only kind of liquidity injections we will see through this model. If that’s the case, the crash is still imminent.

    If the Fed lowers the discount rate significantly, even significantly under the FF Rate, the market for casket rentals will expand and competition increase and rental costs to the needy will go down. We may even see some resurrections, but I really don’t think that’s the purpose of this policy. After all, the Undertakers are motivated to tightly monitor that credit!

    The net effect of this is that the undeserving (USIPs) will get no caskets. They will get buried in mass graves. Meanwhile, the profits from the casket rental business will help shore up the Undertakers against risk exposure the Fed isn’t willing to insure them against.

    I think this is ONLY the method the Fed plans to use to mop up the speculative excess (the barf after the all night Hairy Buffalo Party) while protecting the banking system.. In the end, they must inflate.

    It’s still very early innings for this policy, the Fed has just created a new market, the casket rental market.
    Last edited by Pervilis Spurius; August 24, 2007, 12:33 AM.

    Leave a comment:


  • nksantabarbara
    replied
    Re: Bernanke: Talks the Dove, Acts the Hawk

    I'm not as sophisticated as you guys on this stuff but is seems to me that the bottom line is that such tactics lead to a recession led by housing, followed by cuts in the real estate sector jobs, followed by lowered earnings from banks and retailers, and finally stock prices dropping to reflect lowered earnings (could happen in advance but who knows). There is a great deal of demand built into all companies' earrnings worldwide that will need to be unwound and with debt contracting, multiples will contract - a double whamy on the market. This is a self reinforcing cycle on debt because most of the lbo's of recent were contructed with massively optimistic cash flow projections and some of these companies will default. There has been a very very low default rate on junk bonds and that is the only reason why credit spreads are so tight. The Fed can slow the unwinding of leverage, but cannot stop the depreciation of the primary object of speculation (housing and assets in generall). I don't see how this plays out well for equities, which need to drop in value just as housing does. It all just happens slower.

    Leave a comment:

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