Can someone explain this new FED credit plan announced today?

[brewer12345]

They will be borrowing against the MBS, so it will stay on their balance sheet. And it seems highly likely to me that at the end of the 28 days the Fed will re-up for another 28 days, unless the credit markets have magically healed (unlikely).

 

[FIRE'd@51]

My understanding of this is that the primary banks/dealers will be swapping AAA MBS for T-bills for 28 days. So for the 28-day period, the T-bills (not the MBS) will be on their balance sheets, at least for the purpose of computing regulatory capital. This avoids having to mark-to-market the MBS which is reducing regulatory capital (in some cases by a great deal because of the leverage involved) and restricting the ability to lend, or forcing them to meet margin calls or other triggered payments on existing swap agreements. Effectively, it's a time-out from having to mark-to-market these high-quality MBS securities which are currently trading at much wider than normal spreads relative to Treasuries.

 

[brewer12345]

My understanding of this is that the primary banks/dealers will be swapping AAA MBS for T-bills for 28 days. So for the 28-day period, the T-bills (not the MBS) will be on their balance sheets, at least for the purpose of computing regulatory capital. This avoids having to mark-to-market the MBS which is reducing regulatory capital (in some cases by a great deal because of the leverage involved) and restricting the ability to lend, or forcing them to meet margin calls or other triggered payments on existing swap agreements. Effectively, it's a time-out from having to mark-to-market these high-quality MBS securities which are currently trading at much wider than normal spreads relative to Treasuries.

Highly unlikely, IMO. I think this will be accounted for like a repo transaction, in which case the asset stays on the dealer's balance sheet and the transaction is accounted for as a borrowing. This is about liquidity for MBS, not quarter-end marks.

 

[FIRE'd@51]

Highly unlikely, IMO. I think this will be accounted for like a repo transaction, in which case the asset stays on the dealer's balance sheet and the transaction is accounted for as a borrowing. This is about liquidity for MBS, not quarter-end marks.

I am talking about the daily marks, which do affect liquidity by reducing regulatory capital. It seems to me the only way to avoid this is to get the assets off the balance sheet, so they needn't be marked-to-market every day.

 

[haha]

This should make analyzing these companies just that much harder, and they are opaque enough already.

Ha

 

[brewer12345]

This should make analyzing these companies just that much harder, and they are opaque enough already.

Ha

Not really. Repo financing is on the balance sheet of every broker dealer and most banks already.