March 10 – 14, 2008

March 10, 2008

With the sharp sell-off in the stock market on Friday, I thought today (Monday) might be a mild down day. Wrong again!  Given all that forced selling of MBS last week, somebody apparently looked around and said, “Hey, Bear Stearns (Bear) has a lot of MBS, let’s sell their stock!”  There was a quasi “run” on Bear in the financial markets as its stock price fell 15% between 10 am and 11:30 am and their CDS (credit derivative swap) spreads widened from an already-high 480 basis points to 600 basis points.  I spoke to some CDS traders, and they expressed very negative sentiment in the market. The on-the-run CDX Index (a broad measure of credit health) reached an all-time high of 178 basis points at the close on Friday, reflecting widespread concern about the potential for credit losses to accelerate in the future.  It was only fitting then that today’s CDX Index close should be much higher: 194 basis points!

 My boss called the Domestic Capital Markets staff into a conference room today around 5:30 pm and told us that the Fed would probably have some more announcements tomorrow. The fun and games continue…

March 11, 2008

At 8:30 am, the Fed announced that we are going to offer a new facility, the Term Secured Lending Facility, for primary dealers to exchange their “not so good” collateral for Treasury securities. The market pretty much loved the idea and it helped reverse, for the time being anyway, the dominant “flight to quality” sentiment in the market that we haven’t been able to shake the past few days.  Two-year Treasury note yields increased 30 basis points on the day and the stock market ended up 3.7%. Woo- hoo!

On a personal note, as if all this market turmoil wasn’t enough, the dreaded “PM Briefing” is returning to my life. I am the scheduled author for today – the lucky chosen one.  Drat!  So, I’ll be making a ton of phone calls during which I’ll have to be very careful with what I say, followed by being even more careful to factually describe and contextualize the price action. It actually shouldn’t be that hard today because there will be two previous market-based conference calls providing very current updates and I can readily “steal” content from them.  Even though I knew a lot would be happening today, still, as I’m doing it, I’m wondering if I’ve become mentally challenged or something. The soft deadline for posting the PM Briefing is 5:30 pm and I didn’t finish until 6:30 pm.  Most of those lucky enough to write the PM Briefing are given months of training ahead of time and I just don’t know if I have the patience to learn this crap from scratch in such a chaotic market environment.  I literally received some instruction from management today that sounded like: “don’t say it like this, say it like that”, only trouble is, “this” and “that” both sounded exactly the same to me.  What’s an analyst to do?  Once again, the bright side is that I don’t have immediate concerns about getting laid off, unlike the rest of Wall Street.

I just need to tread water with this briefing gig until my rotation ends.  I am getting pissed off, though.  Nothing unusual, I suppose.  I’m having a breakfast meeting tomorrow with my boss and someone from the high yield market.  Should be interesting. It’s also possible that I will like writing the AM Briefing (the PM Briefing’s more famous sibling) better than the PM Briefing.  Not likely, though, since you have to get into work by 4:30 am to write the AM Briefing.  Arrgh !:-0

March 12, 2008

At 3 am today I woke up, wide awake and already pissed off.  Once again, I console myself with the fact that at least I have a job. I instruct myself not to appear resentful at work as being resentful doesn’t help anyone, rather it alienates everyone around you.     

Perhaps needless to say, I arrive at work in a bad mood, but the breakfast with the high-yield bond consultant was quite enjoyable. Then, when I get back to my desk, I quickly see that I received an “attaboy” email complementing me for helping an SVP prepare for a trip to Basel, Switzerland. Upon receiving some positive feedback, memories of the bad dream disappear along with my bad mood.

Staying with the topic of negative sentiment, that’s what this current market appears to be all about, despite yesterday’s one-day reprieve. Stocks fell 1.0% today, with all the price action occurring in the last hour, including another record low for the dollar vs. the Euro and the price of oil hitting a near-term high. The current fed funds (overnight) target rate is 3.00% and the two-year Treasury note is trading at 1.60%.  The difference between the yields along these two maturities implies expectations for some fairly dramatic cuts in the overnight policy rate over the next two years.  Something’s wrong somewhere – or is it everywhere?  There’s certainly something wrong in the municipal bond market, where equilibrium rates are supposed to be below Treasury yields because of the tax-exempt status of the muni bonds.  But this is not the case today as municipal 10-year yields are 108% of 10-year Treasury yields, and muni yields are even higher than comparable Treasuries in the 2- and 5-year tenors. One muni market analyst told me that retail investors become interested when 10-year yields get to 5.00%.  That’s it – no need for fundamental credit or technical analysis, no need for financial guarantors, etc., retail investors apparently just like to earn 5.0%.

 At the 4 pm Executive meeting today the President of the bank was very forceful in saying that we had to get info onto our public website tomorrow to explain the new Fed lending facility: the Term Secured Lending Facility. I was a little shocked to hear the word, “tomorrow”; we typically have a culture of planning meetings to have future meetings, so as to ensure a very low frequency of making mistakes.  You have to hand it to President Geithner; not only is he trying to solve this mess, he apparently can also get things done very quickly.

March 13, 2008

No new announcement from the Fed today, although equity markets were up about 0.5% on news that S&P said that “the worst is behind us” … like they “know” and they have a good track record.  Ha!  Despite the positive equity reaction, there was lots of negative sentiment in the market. The CDS of the ‘AAA’ financial guarantor, MBIA, traded at 760 basis points, a new record.  To put this into perspective, if we use a fairly common assumption of a 40% “recovery” rate after a credit event (default) and assume that the entire premium will be paid over 5 years, the seller of a hypothetical $10,000,000 notional amount of protection for this ‘AAA’ credit would receive $760,000 a year for 5 years which is $3,800,000.  That’s $3,800,000 to provide expected loss protection of $6,000,000 (notional amount minus assumed recovery).  Divide 6,000,000 by 3,800,000 and you get 63%.  So, albeit with simplifying assumptions, there’s a greater than 60% chance that this ‘AAA’ company will have a credit event over the next five years.  Uh, oh!!

I’m happy to report that market fixation on MBIA and Ambac is waning.  However I’m less happy to report that the market is now fixated on only one broker / dealer: Bear Stearns.  There is considerable speculation in the market as to whether or not Bear will survive.  Right now it seems like they are experiencing a bit of a classic “run on the bank.”  Hopefully they can get past this crisis of confidence.  By the way, Bear’s stock price is down 40% over the past six weeks and their CDS credit default price is around 700 basis points.  Yikes! The happy path is that they report positive earnings next week and those earnings will have a calming effect on the market.

Bear’s immediate liquidity problem is a concern to the Fed because if Bear suddenly defaults to the institutions that they’ve borrowed money from in the secured funding markets, all these institutions that lent Bear money would suddenly own the secured assets that they were funding (and probably do not want to own).  The resulting process of collateral liquidation could get disorderly, potentially starting a steep downward spiral in asset price discovery.  This potential downward spiral might even be much worse than the forced MBS selling that has occurred over the past week.

I also received word around 10:30 in the morning today that a big boss would like me to attend a conference call with, literally, the Undersecretary of the Treasury, to discuss options for the student loan market. I’m like, “well that sounds cool”, but then I had to scramble like a madman to learn all I can about student loans in just three hours.  The call was just fascinating.  The Undersecretary was expressing appropriate concern for how to support this important market that literally finances our country’s future.  I’m like, “Yeah!!”  However, my management was like, “whatever”  ☹ .  Maybe they knew there were “bigger fish to fry”?

March 14, 2008

I get to work on time, maybe even a couple of minutes early, but I procrastinate a bit at my desk and don’t enter the “Operations Room” for a daily meeting until 8:23 am – three minutes late.  Even before I get to the room, it’s clear that’s something’s up.  As I try to enter the crowded room, there are two SVPs in the room who are in the midst of explaining that the Fed is going to lend indirectly to Bear via their clearing bank, JP Morgan Chase (JPMC).  It required a vote by the actual Governors of the Federal Reserve Board and will be made from the Fed’s Discount Window.

 The soon-to-be-released press release says the lending arrangement is “back-to-back nonrecourse financing”.  It didn’t help that I missed the first three minutes of the meeting, but I really didn’t understand what was going on.  I did know that I was supposed to give frequent updates on the credit derivative market to executive level management and, no doubt, it was going to be a rough ride today.  The announcement of the Bear loan didn’t hit the newswires until about 9:20 am, just 10 minutes before the stock market opens.  Amazingly, Bear’s stock actually rallies for about half an hour, climbing about 7.5%.  Puzzling, but perhaps its good news for Bear that the Fed is now lending it money indirectly from the discount window.  Just after 10 am, however, Bear releases a statement that admits that their liquidity position is somewhat impaired.  This causes the stock to start falling like a stone, eventually closing at around $30.00 a share, down 60% on the day!

It wasn’t until about 10:30 am when I had the time to discreetly ask someone, “hey that ‘non-recourse’ word that’s in the Press Release, does that mean that we don’t have recourse to Bear, or JPMC, or is it that JPMC doesn’t have recourse to the Fed?”  The answer surprised me: the Fed has no recourse to JPMC, we’re totally on the hook for any losses that may emerge from liquidating the collateral we are to receive from Bear.