Tuesday, November 25, 2008


This new ABS lending program from the Treasury/Fed is quite a powerful construct, providing 'levered financing' to the market. Woo-hoo!

This term-financing for up to a year for a variety of initial asset types, subject to a (one-year?) price-volatility haircut. The collateral must be "AAA", highest quality. In addition to the price/market-risk haircut, the Treasury then backstops the Fed with an equity pool, for the credit risk.

Two things I don't like, based on a quick first-read.

- 'AAA' may not be the part of the market that needs the most help. I'd like to see a broader range of collateral. All qualities may need help, to the extent the market is shut down, but still.

- The Treasury ought not to be the one managing the collateral, unless it intends to immediately enter into a forward purchase agreement with someone in the marketplace (and take a residual risk to lubricate the deal, maybe).

The Fed using it's balance sheet during crisis is just fine. However, with this latest construct, the Government looks like it is too much both the supply and the demand for funds. Of course, it's just $200 billion, so no need to wring hands over it, either.

"Dual-action" may be fine to address a blip in a market or smooth things over, in a market that isn't huge. It may even be a powerful "can-do" in a near deflationary environment.

But, on face, it doesn't seem a sound recipe for the long-term or for much larger asset classes, like commercial real-estate or private-label RMBS (nor does 1-yr term financing, given the duration of the underlying collateral of those instruments)

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