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This terrible word "conduit"
At the beginning of the main players in the market fears were related to hedge
funds and rumours that the next "opportunities fund" has lost 20 per
cent in value. But as it turned out, the main trouble was not in the hedge -
Funds - someone - for example, Goldman Global Alpha, whose more recent star
managers throughout six months ago in an interview with built big plans and wrote down from Warren Baffett, as the spent material not lucky but many of the
monsters including trade and followers of a mate. models (the same DE Shaw and
Renaissance Technologies that are among the largest hedge funds) stay confident
and ready to buy the assets of wastelands prices.
The trouble came from not waited - on the part of banks. In recent years, banks
are actively engaged in organizing conduits, which bought all sorts of
structured products (for example, the P CDO tranche from the example above),
usually with high ratings. Money received konduity including issuing CP -
commercial paper (short-term high-ranked bonds with a maturity of a few
days to several months). Because these securities in fact secured assets
konduita (Tight - loose company established to acquire and fund assets), they
are called ABCP - asset-backed commercial paper.
Dates ABCP, as stated above, short and long assets from the conduits. Konduity
rasplachivalis with buyers ABCP issuing new securities. In general, it unusual
that the organization is short-term and investing in long not --
say, almost any bank is in a position. However, unlike banks konduity are not
regulated, have no credibility and therefore much more overrun risk losing
funding source (without which they could not exist).
The objectives of the organization visited different conduits - sometimes
temporarily banks parkovali there assets at the time of the search for
long-term funding, the aim was sometimes "pseudo" arbitration - the
cost of borrowing through ABCP was heavily lower profitability in Mortgage assets. Ie konduity banks are not allowed to keep the assets in their balanceand hence save on the reservation fulfilling the requirements of capital.
In case without finding suitable buyers for ABCP it was usually an agreement
with the bank (usually organizer konduita) on the provision of liquidity. In
theory, this should not have happened - ABCP programmes were arranged in such a
way that, in order to Credit assets lost so much money that harm the ABCP holders should have happened really something quite incredible. Consequently
potential buyers ABCP had no reason to refuse to buy the paper - as a last Bad Credit (as conduits thought managers) have to give them a little more profit.
However, when it became clear that in the wake of panic some of the papers,
here in konduitah investors are not willing to buy for any money (that, in
theory, can cost less than 90 and can not be sold for 80), narisovalis problem:
if the conduit will not be able to get right financing, followed by sale of
assets wastelands prices and the inevitable losses.
A couple of months ago conduit German bank IKB - Rhineland Funding was unable
profinansirovatsya at short paper it in the right amount (about 20 billion
euros) - commercial paper market investors are among the most conservative, and
they are interesting presence Rhineland securities risks subprime mortgages.
Conduit appealed to the Bank for the loans, but the bank is also not proved andhe was unable to eliminate sufficient assets to recover those funds. All ended
that the bankers had to buy nezadachlivyh gosbanku German KfW. After all this
history, all of a sudden attacks that would have conduits lot ta banks
(aggregate "short" securities issued konduitami - approximately 1.3
trillion dollars and is one half of the total market in the United States CP),
and panicked even more.
ABCP market just got up. Samy banks, realizing that far when they will lend
konduity began feverishly gain all the money, which could reach up to. This
triggered a liquidity crisis.
In fact, in itself konduity (as in themselves a problem with the Bad Credit Mortgage) isnot dangerous: the worst that could happen - banks will have assets on the
balance conduits. Records show a variety of agencies (public access, I found
only presentation Fitch), the banks may well do so, without prejudice to the
regulator on capital adequacy.
The biggest providers of liquidity for conduits - ABN Amro, Citigroup, Bank of
America and JP Morgan Chase have their commitments to provide Remortgage at 70-100 billion dollars each. This, of course, is not small, but not so much for these
giants. Problems may be a small number of small banks, which seem unable to
cause substantial harm to the system.
On the other hand, the world financial system, everything is so connected among
themselves and messed up, that small problems do not occur. In the same
konduitah assets secured by subprime mortgage (which started all the
misfortunes) according to the records DB, no more than 20-25%, and those are
mostly very high quality. Yet paralyzed ABCP market, the cost of borrowing for
corporations has grown, as have so many players did not have anything to do
with either the Mortgages or to konduitami, problems in order to fund theirpositions.
In recent weeks, the panic receded, and at least high-quality ABCP programs
have as providers of liquidity big banks, no special problems in the deployment
of their short commitments.
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