Sunday, Nov 22, 2009
A new paper by the IMF provides much needed insights into the nature of Asset Backed Commercial Paper (ABCP) conduits, which amounted to $1.2 trillion in June 2007, a subset of the broader Commercial Paper shadow asset class (which as Bill Dudley discussed a week ago, hit a peak of $2.3 trillion), and the product’s role in funding imbalances (and maturity mismatch) at global banks courtesy of the shadow banking system. However, the most useful observation of the paper’s addenda include insights into the global shadow banking system’s holdings, as well as its changing composition over time, the collapse of the ABS securitization market whose reincarnation via TALF is critical for preventing the CRE market’s implosion in 2012, and lastly a comprehensive overview of the entire shadow banking system topology.
The first chart presents the breakdown of the ~$10 trillion (at its peak) in shadow liabilities. As can be seen, the Repo system, which as Zero Hedge discussed extensively previously, is the primary component of shadow money, accounting for about 25% of the entire shadow banking system.
The collapse of shadow banking and its attempted compensation by boosting traditional monetary aggregates (M1-3) is shown on the next slide. Obviously, the Fed is woefully unprepared to fully compensate for the ongoing contraction in shadow liquidity, especially of the very near-term variety. At over $2 trillion in just CP and Reverse Repo contraction from the peak, the Fed can pump all the liquidity it wants into the monetary system: it will merely slosh around equities and never make its way into anything of actual consumer value (merely speculative capital market gambling).
The utter collapse in ABS products such as ABS CDOs, SIVs, Arbitrage conduits, and others is presented by the next chart. If one were to remove the government-guaranteed attempt to jump start securitization, it becomes clear that the Fed is doomed to failure at reigniting the securitization spark.
The virtual standstill in ABS issuance is seen next: there is no market interest for securitized products. Of course, that could change once CCC bonds start trading at 101, courtesy of the Fed guaranteeing that no risky asset will ever again be impaired.
The key observation is one of the most comprehensive single page topology overviews of the entire shadow banking system. The take home here is the massive leverage applied to any single product (which courtesy of soon to be defunct rating agencies was presented as having AAA or comparable collateral when in fact the underlying assets were total garbage), which ranges anywhere from 7x to infinity. This last leverage category is precisely what the Fed, in its attempt to reincarnate the bubble once again, consequences be damned, is doing its damnedest to make sure comes back. And if investors are stupid enough to fall for the same trick one again, then we all deserve the financial apocalypse that will ensue as a result. Because while in 2007 the ABS collateral pool at least had some more quality assets supporting it, over the past 2 years even these have gotten impaired, courtesy of horrendous asset resource management.
This article was posted: Sunday, November 22, 2009 at 8:32 am