Tuesday, August 14, 2007

Is That What We Call Them Now?

Some odds and ends from the newswires that caught my attention:

  1. Did you know that nearly 50% of all commercial paper (CP) outstanding, the short term debt issued by corporations to fund day-to-day operations, are asset-backed? They are commonly issued by funding corporations to make loans, purchase mortgages, etc. Why does it matter? Because such money market instruments are heavily bought by money market funds (MMF's), those supposedly ultra-safe repositories of peoples' savings. Most Americans may not be aware of this, but several european "enhanced" MMF's (they go by names like "LIBOR Plus") have already experienced heavy losses due to asset-backed CP investments going sour. We're not talking 1-2% losses here, but double digit hits. One insurance company had to bail out its own fund.
  2. KKR said yesterday that its funding costs have increased significantly and that this may "adversely impact the returns of (their) LBO transactions". Citigroup estimates that $330 billion of bonds and loans for announced deals remain unsold. This is more than chicken feed and it certainly takes much more than a "snap of his fingers" to get $20 billion now, as a private equity honcho bragged just a few months ago.
  3. Goldman arranged an infusion of $3 billion into one of its quant hedge funds, after it was down 28% just this month alone. They hope that such a show of confidence will avert other investors from cashing out. My opinion? In for a penny, out of a pound. Oh, and on the use of "investor" as a term to describe those that partake of the hedge fund joys, I am reminded of what Alan Greenspan had to say of the dotcom "investors" back in 1999-2000: "Is that what we call them now?"


  1. Watch the price of gold.

    As long as it remains sedate these ballout/market support operations will continue unabated.

  2. you are correct : the CP market is a danger. it has increased by nealy 60 % in 2 years. however its size is still small compared to the debt market (outstanding 750 billions against 19500 for all debt securities outstanding). Which one will have more impact at the macro level : CP or debt ?

  3. Coventree was unable to roll over its CP yesterday.

    Money market funds in the US are mostly protected by SIPC insurance (to 100K). Fidelity also backs its MM funds with an additional unlimited guarantee.

    There isn't a big enough rock to hide under the day a credit event blows through the SIPC and the brokerages backing the MM funds.

    The bigger worry is if the commercial paper market freezes up, there may be a lot of companies that are forced to seek the protection of bankruptcy courts.

  4. and that is why central banks have put some money in the system (bailing or not baling out :-))
    On the size : figures take account only of cp issued by the financial sector

  5. Know your risks with money market funds. From the SIPC's website:

    "SIPC is not the FDIC. The Securities Investor Protection
    Corporation does not offer to investors the same blanket
    protection that the Federal Deposit Insurance Corporation
    provides to bank depositors.
    How are SIPC and the FDIC different? When a member bank
    fails, the FDIC insures all depositors at that institution against loss up to a certain dollar limit. The FDIC’s no-questions-asked approach makes sense because the banking world is “risk averse.” Most savers put their money in FDIC-insured bank
    accounts because they can’t afford to lose their money.
    That is precisely the opposite of how investors behave in the
    stock market, in which rewards are only possible with risk.
    Most market losses are a normal part of the ups and downs of
    the risk-oriented world of investing. That is why SIPC does not bail out investors when the value of their stocks, bonds and
    other investments falls for any reason. Instead, SIPC replaces
    missing stocks and other securities where it is possible to do so...even when investments have increased in value."

  6. Money market funds in the US are mostly protected by SIPC insurance (to 100K).

    My broker makes no mention of this:

    Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value

    An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC). Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.


  7. Sorry, I was mostly thinking of securites like FCASH. SIPC considers FCASH "cash waiting for reinvestment" and insures them for up to 100K.

    My mistake.

  8. Also, it's probably a good idea to differentiate money market funds in a bank (which are covered by FDIC) and brokerage money market funds (which are not).

    But, I think the gist of my original post applies. Significant losses in money market funds would be an end-game event for the financial system and the central banks know it.

    Look at the steps that European Central Banks took when by BNP Paribas took down three "money market funds"

  9. Frick, when you think it can't get any worse:

    Sentinel halts client redemptions

    Well, we'll see what kind of impact this has on the market.