This is a week in which some of the brightest, best educated, most eloquent – who can normally argue three different and contradictory positions at once on the economy, the markets and their own industry – discover that they've somehow lost track of how the new financial markets work. They know it's somewhere, but they have no idea where and in what measure they have distributed the risks. Some of the usually vociferous don't want to talk at all, fearful that if they say something today and the markets move the opposite way tomorrow, they'll look stupid. But no one looks terribly clever.
Every conversation this week as Euromoney breakfasts, lunches, dines around midtown and Wall Street, waits impatiently in executive reception areas, has meetings cancelled, rearranged, retrieves urgent, apologetic cell phone messages, dials and chats begins with the same ritualistic small talk. Are markets getting back to normal? The answer is always no, its far too early to say that. Is there any clarity as to where the most serious problems are, the worst stresses and strains will be felt, which counterparts are to be treated most warily? And its always the same disappointed, rueful shrug and the same admission: "We have absolutely no idea."
This is a week in which some of the brightest, best educated, most eloquent, who can normally argue three different and contradictory positions at once on the economy, the markets and their own industry, discover that theyve somehow lost track of how the new financial markets work. They know its somewhere but they have no idea where and in what measure they have distributed the risks. Some of the usually vociferous dont want to talk at all, fearful that if they say something today and the markets move the opposite way tomorrow, theyll look stupid. But no one looks terribly clever.
Right now, believing there is plenty of toxic waste around, plenty of dubious credits and as yet unmarked and unrecognized losing positions, but not knowing which bank, dealer, or fund is sitting full of toxic waste, the only prudent way to proceed is to assume that every counterpart could blow up. The financial system is freezing up.
Sentinel Management Corp, a $1.5 billion midwestern fund investing the surplus cash of hedge fund and commodity trading clients including some clearing members of the Chicago derivatives exchanges, reports that its inability to find a price for certain portfolio securities has led it to suspend investors redemptions of cash from its funds. Worry spreads. If the fund clients cant withdraw cash to meet margin, will they become forced sellers, and if so, of what? Other very short-term debt funds, supposedly the least risky after money-market funds and federally insured deposits, are under water.
The news from Canada is that banks providing back-stop facilities to certain troubled issuers that cannot roll over asset-backed commercial paper are refusing to lend them money instead.
It turns out that a peculiarity of the Canadian market means that some issuers can only access these bank lines in the event of a market upheaval. But surely that is exactly what they are facing, isnt it? A Deutsche Bank source carefully explains to Euromoney that there is no widespread failure of the Canadian commercial paper market. The disruption has only affected a few issuers... who are now completely frozen out: so therell be no drawdowns from those back-stop bank lines.
There wasnt really much point in having them then, was there?
Euromoneytalks to a senior credit markets banker at one of the largest US banks. "This is now about a breakdown of trust in the entire financial system. All we know is that were now taking in-coming from all sides, from sub-prime, from leveraged finance and hung bridges, from hedge fund and leveraged investors, from structured credit. Can the participants get together and resolve all this? Were not in control of events. And theres a huge ambiguity and friction right now between those who may soon be required to mark to market and record or realize actual losses and those who are not under that immediate pressure."
Its not often that bankers implore journalists, but in this case: "I implore you to be precise in your terms when you write this. Its one thing to talk about disruption in correlation products, single-tranche and synthetic CDOs but I dread the consequences if investors are wrongly told that money-market funds are no longer safe."
Suddenly its impossible to roll over huge parts of the CP market
Commercial paper market issues are concentrated in ABCP
Euromoneyleaves the meeting and immediately calls up details of the $100 billion Fidelity cash reserves fund. Net asset value is rock steady at $1 per share and return to date for the year is 3.26%. Thank goodness.
The Dow Jones ends the day down 1.6% after weak earnings reports from Home Depot and Wal-Mart stores drove each down by 5%.
Wednesday August 15 Skin in the game "It was PIKs and toggles," he rolls his eyes, as if someone else had forced him to do this deal or cheekily agreed it in his name. "It was covenant lite and even what covenants there were were rubbish ones." After weeks of wrangling over how to bring the senior secured portion of the financing to market, his own banks' team and that of the LBO sponsor were barely on speaking terms.
Thursday August 16 Crescendo of panic We've got hedge funds who are saying, 'Look, we have been in business for ten years and we've paid $500 million in fees and commissions to Wall Street and you can't give us a couple of days?' We are getting a lot of blunt decisions made by people far away from these markets and some of them are bad decisions. If someone comes down from the 40th floor and tells us not to accept a certain class of collateral or counterparty, we're not going to disagree"
Friday August 17 No one leaves unscathed "It's really troubled. Everything is being tarred with the same brush and investors in funds that buy commercial paper are ringing and asking: 'You're not in that asset backed CP are you?' And if funds have bought ABCP, investors don't want to hear about whether it's good ABCP or not, they're out of there"