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Razor · 03-12-2008, 09:49 AM

After reading all of the above I am still confused.
Do you people think this was a good move by the FED or could it have some bad consequences. If it was a good move why didn't they do it before?

brewer12345 · 03-12-2008, 09:54 AM

I think it was a necessary, good thing. I think t took them a bit because we are in uncharted waters here and they had to figure out what was needed, how to do it, and how much of it to do. The Fed has openly said they will work out the details with treasury dealers and may upsize the program, so clearly the how and how much are still in flux.

al_bundy · 03-12-2008, 10:00 AM

Quote:

Originally Posted by ziggy29

Absolutely correct -- and to add to this, this is important because many of the financials which were melting down were being killed by margin calls. The prices of even these extremely high-quality mortgage securities were falling out of a combination of fear and an excess number of sellers. That triggers margin calls, which forces more selling into a market with no buyers, and you started seeing very good paper getting killed out there. By letting these institutions borrow Treasuries (which aren't suffering the same fate in the market) in place of their currently struggling, less liquid securities, these institutions can stabilize their balance sheets and fend off the margin calls, *hopefully* long enough for these markets to regain some sanity so they can get their original paper back.

That's how I understand it, anyway. This is not a bailout, and especially NOT a bailout of subprime (which is not included in this scheme).

so when a lot of companies close out the 1Q in less than 28 days will they count the treasuries as assets on their balance sheet and magically remove the supposed AAA paper they can't sell? will that come off the balance sheet for reporting purposes and magically appear after 1Q earnings are set in stone?

brewer12345 · 03-12-2008, 10:06 AM

Two observations:

1) this will almost certainly be recorded as a borrowing on balance sheets.
2) it will only affect the 20 primary treasury dealers, as they are the only ones eligible to directly participate.

al_bundy · 03-12-2008, 10:33 AM

what i meant is will this somehow wash away the mortgages on the balance sheets

say BSC has $20 billion of these and the current market value is $5 billion. they give these to the Fed this week and get $20 billion of T-Bills. come end of march when they close the books on 1Q, do they still count these mortgages as being on their books? or are they washed away only to reappear for 2Q?

brewer12345 · 03-12-2008, 10:46 AM

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 · 03-12-2008, 11:56 AM

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 · 03-12-2008, 12:03 PM

Quote:

Originally Posted by 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.

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 · 03-12-2008, 12:11 PM

Quote:

Originally Posted by brewer12345

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.