Sunday, February 11, 2007

The New York Fed Window

Some emailers have wondered what the NY Fed is up to with respect to its "Dscount Window". Banking institutions can go to this window to borrow money to alleviate "liquidity strains". The borrowing time is generally overnight to enable a financial institution to smooth things out. The loans can go as long as 14 days.

In looking at the Temporary Market Operations of the New York Fed last week they accepted NO bids for mortgage backed collateral after 9 a.m. on Thursday and then nothing on Friday. Those were the 2 worst days of the week for the subprime lenders and taxing for anything related to mortgages. A few days is a small sampling and if you look back through the operations, the Fed has not been accepting much in the way of mortgage backed collateral for several weeks.

My emailers have wondered if the Fed is sending a 'no help from us' message to the subprimers, but the posters over at the Roubini blog theorize that perhaps the Window is reacting to fraud and its impact on mortgage backed collateral quality. Yet another poster on the Roubini blog worries that we should watch for signs that the Fed BEGINS to lend more against the mortgage collateral as a sign a bailout is taking place.

Interesting stuff, and the link above is worth keeping on eye on.

Comments are welcome.

By the way, reader Jason sent this very interesting link along Saturday about Merrill Lynch apparently margin calling some distressed B&C companies. The snowball is starting to roll down the hill folks.


Anonymous said...

Looking down at all the Fed data you will notice that they always accept zero or very little for mortgage collateral, anyway.

Jim K said...

yes, noticed that... but a few folks had wondered about zero on thursday and Friday and the fractional amount of the $28 bln 14 day repo. you're probably right, though.

igor said...

The recent flood of small subprime lenders going bankrupt could be just the tip of the iceberg. I wonder why nobody mentions Fannie Mae and Freddy Mac, which are liable for over $3 trillion dollars of outstanding subprime debt securities to the markets. $3 trillion dollars is a lot of money to have at risk with the assumption the underlying cash flow will always be there!

When the mortgagors of the underlying assets that the GSEs guarantee start to default on their loans, watch out! I don't know what percentage of defaults needed to trigger a catastrophic situation, but when defaults and forced prepayments become rampant, Fannie and Freddie and any other institution that guarantees mortgage-backed securitized debt will be scrambling. The derivative instruments they rely on will only protect them so much.

Government bailout would not suffice either. The conditional line of credit the GSEs have with the Treasury caps at $2.25 billion which, when you’re talking trillions, won’t go very far.

In recent speeches, fed officials made comments about providing liquidity, but not capital to the markets. It will be interesting to watch if Fed window starts to show more liquidity for morgate collateral in the near future.

Jim K said...

Grat points, Igor. It's something that's so large and nasty that most would prefer to crawl under a rock and hide from.