Comments on: TSLF Update

By: Andre

Andre — Tue, 29 Apr 2008 17:27:48 +0000

julio:

Main-street investors buy a huge chunk of muni issues . Does your dentist know how to use CDS to hedge against default, or even how to do basic credit analysis?

By: julio_lugo

julio_lugo — Mon, 28 Apr 2008 01:03:47 +0000

thanks. thanks. good explanation. so it appears that if they can get back an AAA rating and write new business, they have a fighting chance, otherwise, they are minced meat.

By: jck

jck — Sun, 27 Apr 2008 22:04:17 +0000

julio_lego:
in the past, the monolines had a comparative advantage because of their triple A rating. they could write so-called “insured” CDS without putting up collateral or being subject to margin call so they could do it cheaper than anyone else, this is no longer the case.

By: julio_lugo

julio_lugo — Sun, 27 Apr 2008 20:35:59 +0000

jck, thanks, that is understood. but assuming if they can fix their balance sheets, why would anyone use them if when defaults can be hedged with CDS?

By: jck

jck — Sun, 27 Apr 2008 13:56:30 +0000

julio_lego:
the monolines are dead because there is minimal new business for them, they are de facto in run-off mode.

By: jck

jck — Sun, 27 Apr 2008 13:54:38 +0000

Markit:
I think the TSLF has a different objective than the TAF, basically the spread between treasuries and other “good” collateral was at aberrant level indicating systemic stress and that’s the issue the Fed wanted to address and it did so successfully so far. As for the ad hoc packinging of lev loans etc this is more a bank problem than a primary dealer problem with some exceptions like LEH maybe. I don’t think the TSLF should be expanded but the TAF should have longer term funding and be done insuch size as the rate converge with the discount rate.

By: Markit

Markit — Sun, 27 Apr 2008 00:57:00 +0000

Regarding the TSLF collateral requirements, I posted this on April 10

First Boston wrote this BEFORE the TSLF results.

TSLF could be very interesting today. Getting the sense that there may not be enough collateral to cover the auction. Remember the Fed only takes AAA private label MBS/CMBS not on creditwatch negative. That rules out a whole lot of securities. At the first schedule 2 auction there was 86.1B bid for a 75B auction. So 11.1B did not get funded and is probably still knocking around. Add to that a couple yards here and there additional that has come into each dealers hands, and you might get close to the 50B that is being offered today but certainly doesn’t seem like we’ll have a high-bid-to-cover. In theory dealers could bring schedule 1 collateral (Agy, Agy MBS) but it doesn’t make sense to pay the 25 bp minimum fee rate to fund stuff at Tsy GC +25 when it trades on top of Tsy GC in the market. We would look for an anemic bid-to-cover and a

stop-out close to the minimum. Stocks probably pop on this and drag Tsy prices lower as people take this as a sign funding pressures aren’t that bad, later the realization should set in that the Fed needs to expand the collateral it takes to make the TSLF more effective going forward. Finally, some talk out there of dealers packaging up things like lev loans into CLOs to take to the Fed (that would be for PDCF - get those #s at 4:30 today) TSLF doesn’t tkae CDO/CLO but it probably should be expanded to do so

By: julio_lugo

julio_lugo — Sat, 26 Apr 2008 22:47:39 +0000

Sorry for changing the subject here. I wanted to pose a question related to the monoline issues you posted a couple days ago. A buddy of mine claims that, because of the CDS market, monoline insurance is an outdated business model that will go the way of video rental stores. Any truth to this?

Thanks

By: ss

ss — Sat, 26 Apr 2008 02:57:36 +0000

TAF & TSLF are two paths to the same end. One provides good collateral to swap for cash and the other provides cash? How are these different? One provides cahs to banks that can;t get financed and the other procvides collateral to b/d so they can pretend to trade good assets with one and other.

Somehow I suspect if the implict government gar. were pulled tomorrow, a few broker dealers would be 50% lower on the way to the graveyard.

Perhaps that is why the BOE was honest enough to term out 1 yerar with extension for 3.

By: jck

jck — Fri, 25 Apr 2008 15:12:01 +0000

TAF and TSLF aren’t comparable. TAF is collateral for funds and TSLF is collateral for collateral.
TAF isn’t working but it raises a question: why are banks using the TAF when the discount window would be much cheaper ? [ I don't know, stigma maybe, so the 27 bp is the price of avoiding stigma ;-)]
For the TSLF, I don’t buy the argument that collateral rules are too strict, there was a wide spread between treasuries general collateral and the other type of acceptable “good” collateral, and the Fed succeeded in narrowing it and tha’s their job, the relationship between treasuries and AAA should be pretty stable, if not you have a systemic problem.

By: Markit

Markit — Fri, 25 Apr 2008 13:06:21 +0000

The argument is the TSLF collateral rules are too strict which accounts for the low bid-to-cover. Not that things are getting better.

These results of this week’s TAF back this up as the banks paid more (2.87%) for money than they would have at the discount window (2.50%)

Thoughts?