Saturday, March 21, 2009

The Debts of the Spenders: Geithner's Gamble W/TALF

Will the revised TALF plan work?

There is a limit to how much the Fed can monetize. That is why they are floating this plan to alleviate public spending. Remember the goal is to keep the ABS basis pt spreads narrow.

Pictures are worth a thousand words.

As you can see on the diagram above, the CMBX spreads have barely budged during the last 2 weeks bear rally (e.g. short squeeze rally). The higher the chart the lower the underlying value or put another way, the bigger the spread the more distance there is between buyers and sellers. The buyers represent hedgies and private equity buyout firms while the sellers represent investment banks and insurance companies w/$trillions of mark to market junk on their balance sheets.

And this is from the "AAA" rated tranches - the stuff that the Fed is swapping for Treasuries! Is it any wonder that foreign creditors such as the Chinese have openly voiced their concerns about US fiscal stability?

The hope is that the private sector can narrow the spread w/o the Fed having to resort to the very inflationary measures of directly buying the securities.

The problem w/this strategy is that the Fed is explicitly guaranteeing losses. And it does nothing to address the underlying issue of real estate (both residential and commercial) supply and demand. I have written many many posts on the problems of commercial real estate here - feel free to go through the archives.

There is simply not enough demand to meet the glut of supply currently on the mkt - not to mention the wave of newer completed projects due to hit soon. Then there are the fantasy projections that banksters used in their models such as real estate would rise 5% every year forever or luxury retail stores would continually be able to sell $300 jeans. This is commercial real estate so don't get me started on the "NINJA" (no income no job and asset) Heloc loans that have been tranche'd together w/commercial loans into an unholy Frankenstein monster.

For more information, I recommend the always inimitable Tyler Durden over at Zero Hedge:

Traders remain sceptical of the Fed/Treasury's plan. I encourage readers to regularly check the CMBX spreads on Markit's web site in order to assess the (lack of) progress. Or if you are an ABS trader, just turn on your Bloomberg terminal and see it in real time.

PS *
*Like many of you reading this, I am NOT an ABS or corporate bond trader so ALL this stuff was self-taught. Instead my background is as a trader of EXCHANGE floated issues such as stocks, bonds, and options on futures for the above. The esoteric and arcane world of CMBX is something that I had to piece together from reading and communicating w/varied sources. Special credit goes to Zerohedge, Accrued Interest, and Karl Denniger.


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