PrefBlog

In a post tweaking Republicans for opposition to TARP, Menzie Chinn of Econbrowser passes along the fascinating observation that yield levels for non-financial commercial paper have become incalculable:

On Tuesday, the US Federal Reserve quietly admitted that it had been temporarily unable to calculate yield levels for non-financial commercial paper, issued by AA-rated companies for one to three months.

The problem, it seems, was a dire lack of activity; or, as Morgan Stanley says, “extreme levels of stress and illiquidity”. More specifically, while investors are still purchasing ultra short-term notes – say, for one or two days – on a massive scale, they are reluctant to buy instruments that last longer than a few days. That may be temporary (yesterday yield prices were apparently returning to the AA sector again although they were unusually high). However, even a temporary freeze is remarkable. After all, these non-financial companies typically have nothing to do with Wall Street or toxic mortgage debt.

The data is not to be found in the Federal Reserve Release H.15 for September 22: rates are listed for one- and two-month nonfinancial CP, but for three-month all we get is “n.a.”. The only ray of sunshine I can find is that the outstandings are in line with seasonal norms.

In a classic example of Banks’ advantage in hedging liquidity risk, it has been reported that corporations are drawing heavily on committed lines:

Goodyear Tire & Rubber Co., General Motors Corp., and International Lease Finance Corp. lead companies drawing on so- called revolving loans obtained before the credit crisis began in July 2007. Banks had more than $1.4 trillion in untapped loan commitments as of a year ago, the most on record, according to the Shared National Credit survey by four U.S. regulators including the Federal Reserve.

Corporate treasurers, blocked from accessing capital markets, are turning to the funding as the failure of Lehman Brothers Holdings Inc. sparks concern that other banks may be unable to provide funds. Pressure to find cheaper, longer-term capital is also building as costs rise in the $1.7 trillion short-term debt market. Banks are being forced to come up with the money after swallowing $521 billion of writedowns and losses.

We will have to see some of these borrowers biting the bullet and paying up to issue bonds before the strain on the Fed’s discount window (mentioned yesterday) will start to ease.

The JPM/WM takeover was discussed yesterday. We are told that:

Pressure on WaMu intensified in the last three months as market conditions worsened. An outflow of deposits began on September 15, 2008, totaling $16.7 billion. With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business. The OTS closed the institution and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC held the bidding process that resulted in the acquisition by JPMorgan Chase.

I would be most interested in learning what fraction of that $16.7-billion was uninsured deposits. One would imagine the answer would be “all”, but one sometimes imagines rational things in an irrational world!

There has been a similar revelation regarding a run on Lehman:

Lehman Brothers Holdings Inc.’s brokerage lost more than $400 billion in assets in the months before its parent filed for bankruptcy protection, according to the trustee overseeing customer accounts.

Lehman’s holding company filed for bankruptcy Sept. 15 claiming $639 billion in assets, using four-month-old data. The wholly owned brokerage unit had shrunk to less than $100 billion in assets from $500 billion “a few months ago,” according to a Sept. 19 court statement by James Giddens, the trustee overseeing the settling of Lehman brokerage customer accounts by the Securities Investor Protection Corp.

Dosado and allemande left! The banks continue square-dancing, with rumours that Wachovia has asked Citigroup if they could spend some time together at the social … now that WB’s been spurned by MS.

And here’s a little throwaway line in a virtually unrelated article:

TD Ameritrade said it would spend up to $50 million to offset losses for its customers who have money in the Reserve Primary Fund. Other investors still don’t know the fate of their savings.
…
TD Ameritrade used the Reserve’s Primary Fund as one of its cash “sweep” accounts, a place where consumers could automatically park cash from a maturing certificate of deposit, for example.

In the past, I’ve expressed concern about bank-branded MMFs … perhaps I should have cast my net wider!

PerpetualDiscounts lost ground today, closing with a weighted-average bid-YTW of 6.23%, equivalent to 8.72% interest at the 1.4x equivalency rate. Long Corporates now yield 6.50%, so the pre-tax interest-equivalent spread is now 222bp … narrowing in slightly, but still at very elevated levels.

Massive crosses today by Scotia, with National Bank playing a supporting role. Today was the first day for an October settlement date and there wasn’t too much price movement for these issues … so my guess is that they were all internal crosses. Who wants to spend the weekend matching up the trades to the holdings of one of the big funds?

There were fourteen other index-included $25-pv-equivalent issues trading over 10,000 shares today

This entry was posted on Friday, September 26th, 2008 at 10:29 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.