Thursday, March 27, 2008

More questions than answers

OK, so the TSLF result is in.....and it left your humble scribe scratching his head. Given the daily moans concerning the "worst banking crisis since the Depression" (has that phrase been trademarked yet?), one would have presumed that a facility that enabled banks to replace soiled MBS turds with shiny Treasuries would have generated quite a bit of interest.

In fact, the result was pretty damned tepid. Bid-to-cover was a paltry 1.15; by way of comparison, the bid-to-cover at today's 5 year Treasury auction, which most observers characterized as "mixed", was 1.98. The lowest bid-to-cover at any of the TAFs was 1.25, and the rest of them have been closer to 2, if not more.

So what gives? Are banks in dire straits and in need of money for nothing? (Sorry.) If so, why couldn't they be bothered to bid more aggressively in the TSLF? (Only 7 banks submitted bids.) And if they don't need the liquidity, then why the bloody hell is the Fed helping JPM buy Bear? And if (relatively speaking) no one was going to use this facility, why did its announcement prove to be such a fillip for risk assets?

Any fixed income geeks who are more familiar with the "plumbing" of these Fed facilities than Macro Man, please feel free to chime in and enlighten him as to what he's missing. 'Cause as things now stand, this TSFL mularkey is creating more questions than answers.


OldVet said...

Banks don't need money, it's the counterparties to credit default swaps who need money. The pattern after BankAmerica bought Countrywide is just like pattern of equities after JPM "bought" Bear Stearns. It's counterparties dumping saleable assets to cover margin calls, cover shorts in other stocks, and delevering CDS that had suddenly lost value from Friday to Monday. I think it's delevering, and the auctions are a sideshow.

Anonymous said...

what are the parties bidding on? the spread between the collateral? if so, then perhaps the low bid to cover ratio means that bids were just very very aggressive.

Anonymous said...

The 33 bp award rate was the difference between treasury collateral and mortgage collateral and theoretically should indicate the spread bewteen 1-month gc funding for treasuries and mortgages. As the minimum bid was 25bp, a paltry 8bp higher does indicate tepid demand- or at least would appear so...additionally the fed basically gave the treasuries away in the sense that with gc trading 1.5/2% for 30d (tsy) there's no way mtg gc is trading just north of 2%...additionally such collateral as mortgages would normally be funded at libor-plus, not FF minus... Why the tepid bid?
1- other Fed programs already helping take mortgages off balance sheets (yes the TAF was not useable by the pd's but it still is removing sh*t off of balance sheets and helping the liquidity situation)
2-uncertainty about outcome from dealers given this was the first one
3-haircut levels are important- i.e. 33bp sounds really cheap but not nearly as cheap if the Feds allowing only 50% of mortgage collateral for example...additionally this information is NOT publicized by the Fed; only the pd's involved know the haircut rate
4-Participating helps pd's liquidity, but does not reduce balance sheets- especially with quarter end approaching. Swapping collateral then lending for cash are balance sheet expanding...

Therefore while it appears that demand was tepid, it may not have been as tepid as appeared...with treasury repo rates trading at fail (zero) or negative as they have been over recent days for otr's (esp 5's and old 5's) and gc itself trading 50-60bp the demand has been insatiable and contradicts the seeming benign demand for the TSLF. An indication of success will be if treasury gc rates ease out from present levels.

postmaster said...

Anon @ 3:42:

This is from the PDCF faq:

How will collateral be valued?

The collateral will be valued by the clearing banks based on a range of pricing services.

I suspect it means pd, not Fed, decides the haircut. TSLF presumably values collateral the same way as PDCF.

S said...

Bid to cover seems meaningless in the context of the facility. An adjusted bid to cover would tally all the $ out there and put it against the $75B offerd. Including repo, the fed facility, the JP morgna loan and the other we are looking at a number well in excess of 2x. Also, the Street oligopoly is engaged with a nod from the fed in a game of mutually assured survival.