Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24
Stock & Crypto Markets Going into December 2024 - 2nd Dec 24
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Citicorp, Bank of America and JP Morgan Attempt at Halting Asset Liquidation with MLEC

Stock-Markets / Credit Crunch Oct 17, 2007 - 12:23 AM GMT

By: Paul_L_Kasriel

Stock-Markets The big news over the weekend is that Citigroup, Bank of America and JP Morgan were putting together a consortium of financial institutions to establish an entity, the Master Liquidity Enhancement Conduit (MLEC), whose purpose would be to buy securities from structured investment vehicles (SIVs) that are having difficulties funding themselves (see Banks agree $75bn mortgage debt fund ).


SIVs are investment funds, some of which have off-balance sheet affiliations with large financial institutions, such as Citigroup, that purchase asset-backed securities, financing their purchases through the issuance of asset-backed commercial paper (ABCP). In recent months, investors' appetite for ABCP has all but evaporated due to concern about the credit quality of the assets, especially subprime mortgage-related paper backing the commercial paper (see chart below).

With the inability to rollover their ABCP, some SIVs would either have to liquidate their assets or have their assets come onto the balance sheets of their affiliated financial institutions such as Citigroup. The liquidation of assets under current market conditions might entail sharp declines in the prices of these assets. This would put pressure on other institutions holding similar assets to mark down the value of these assets on their balance sheets. If the affiliated financial institution were to put its SIV's assets onto its balance sheet, these assets would then incur a charge against the institution's capital, which could constrain the institution's ability to engage in revenue-producing activities.

Chart 1

The idea of the MLEC is for it to purchase various high-quality assets from SIVs and to finance these purchases via MLEC-issued commercial paper. Although it is not entirely clear to me what guarantees would be provided by the MLEC's syndicate of financial institutions, presumably they would absorb some part of the losses the MLEC might incur. As some analysts have observed, it is not the high-quality assets of the SIVs that have impaired the credit quality of ABCP, but the questionable assets on their books such as subprime mortgage-related securities. To a skeptic, this MLEC might appear akin to re-arranging the deck chairs on the Titanic .

But even to one less skeptical, the establishment of the MLEC does not seem to do much in terms of addressing the key underlying issue – rising mortgage defaults and falling residential real estate prices. Merrill Lynch has estimated that $683 billion of non-prime residential mortgages will subject to interest rate resets between the second quarter 2007 and the fourth quarter 2008. Many of these mortgages were issued in 2005 and 2006, the nadir of underwriting standards. Many of the borrowers made no or very low downpayments on the homes they purchased. Given price declines on homes of late, many of these borrowers have negative equity in their homes and will not be able to afford the higher interest rates they face after resets.

In other words, lenders will not receive the principal and interest rates they were promised when they purchased the securities backed by these mortgages. Wall Street can value these securities at any price it chooses. But the fact is that holders of some of these mortgage-backed securities are not going to receive the cash flow they expected. Wall Street can value these securities at any price it chooses, but the fact remains that house prices are going to fall and that fall in house prices will have real negative effects on economic activity. Unless I am missing something, which is entirely possible, it looks to me as though the establishment of the MLEC is another attempt to turn a sow's ear into a silk purse.

 

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in