There's been a lot of talk around the house about New World Orders, the Rothschilds, the Jesuits, the Catholic Church in general, the Illuminati, the Priory of Zion, the pharmaceutical industry, your mom, and the Bush-Clinton bi-family hold on the leadership of the country. I stick my head in the sand during such conversations, but clearly there's a lot of anxiety floating about. If you feel powerless, like the world is being controlled by an unknown cadre of “deciders,” it just might be. The suspects, notwithstanding, are not cloaked conspirators enacting arcane rites among the cryptograms of Scottish kirks. They're actors in the top echelon of modern financial markets. Like the ones on Monday who “created an $80 billion fund intended to prevent a critical corner of the lending market from harming the broader economy.”
The plan, which comes after three weeks of meetings organized by the Treasury Department, is intended to prevent the subprime mortgage mess from freezing credit markets more broadly, which would make it difficult for corporations to fund operations and growth. The discussions began as regulators and banks were increasingly concerned about a fire sale of assets held in so-called structured investment vehicles, which are funds organized by banks that hold a wide range of hard-to-value securities known broadly as "asset-backed commercial paper."
The fund, named the "master liquidity enhancement conduit," will be operational in about 90 days, once the financial institutions hammer out the details. The fund plans to buy at market value only high-quality, low-risk securities that have been affected by the credit crunch as a fearful market painted a variety of assets with the same brush, according to sources who were familiar with the plans. It will not buy securities related to subprime mortgages.
"Once established, [the fund] will agree, for a set period of time, to purchase qualifying highly-rated assets from certain existing [structured investment vehicles] that choose, in their sole discretion, to take advantage of this new source of liquidity," said a statement issued by the banks creating the fund, led by Citigroup, J.P. Morgan Chase and Bank of America.
Wuh? Maybe I'm just being anti-capitalism crazy. Let's—ding, ding, ding—ask a banker! Please welcome Banker Josh to the stage. (Applause.)
Donnie: Welcome, Josh, thanks for coming.
Josh the Banker: Thanks for having me. I hope I can add some filler (albeit interesting) content to your blog.
Donnie: One man's filler, another's feature. What is this "asset-backed commercial paper" thing they talk about?
Josh the Banker: All these banks are creating a giant "structured investment vehicle" (SIV), which invest in longer-term assets like mortgages and fund these investments by selling short-term debt called "asset-backed commercial paper." This short-term debt is backed by your mortgage which is backed by your house (get it?). The SIV makes their money from the spread between your mortgage and their debt.
Donnie: Can you give us some examples of "high-quality, low-risk securities" that have been affected by the credit crunch"?
Josh the Banker: The rating organizations, i.e. Moody's, Standard & Poor's, have gotten a lot of flack for rating some sub-prime debt AAA when in actuality by definition a sub-prime loan shouldn't be even near an AAA rating. Picture if you had 100 mortgages each at $100,000 pooled together into a $10,000,000 security. Each mortgage has a house of at least $150,000 in value with a borrower with a 700+ (Good) credit score. This would be a "high-quality, low-risk security" A lot of babies have probably been thrown out with their bathwater.
Donnie: Please define "structured investment vehicles". Does a '68 Chevelle count?
Josh the Banker: The SIV is an off-balance sheet asset created by a "big New York City" bank and sets up with independent investors (usually risk adverse investors such as Money Market Mutual Funds). The big banks make their money from fees they charge SIVs, and are responsible to buy a portion of the asset-back commercial paper if no one else wants it. They also face reputation risk if their SIVs were to fail.
Donnie: Are there lots and lots of clandestine funds and amorphous securities that no one knows about? Is the world controlled by a disembodied brain in the dark recesses of the J.P. Morgan building? Be honest.
Josh the Banker: There is always at least one buyer or one seller, whether that is J.P. Morgan selling from is right hand to his left hand, who knows.
Donnie: Has finance capitalism become so complicated and abstract in the modern era that economic collapse like in the 1930's is virtually impossible? This is barring some extremely negative condition of a resource, like gas at $20 a gallon or the South totally running out of water. The question could be rephrased: To have an assault rifle or not to have an assault rifle?
Josh the Banker: Instead of collapse, it's more likely individual bubbles will blow up and pop with a big one coming every three to seven years. Some of these may lead to recession some just slight growth. The next one is China: it's flying too high too fast. Think late 90's tech stocks. You may be enjoying the ride know but be ready for a quick drop at some time.
Donnie: Is Joel Osteen a prophet?
Josh the Banker: More like the greatest salesman in the nation. But remember kids, caveat emptor.
Donnie: After the subprime lending fiasco and now the water problems, what is your outlook on the real estate market over the next year and down the road?
Josh the Banker: I assume we're talking Northeast Georgia. While both are problems, they both appear fixable over the long-term (with a lot of work). As long as there is economic growth in state, people will come for jobs. As long as people come for jobs they will need places to live, eat, work, and shop. The subprime problem is getting sorted out, but even if some one gets foreclosed on a house they can't afford, they can still rent a one-bedroom apartment. If we can't find a sustainable long term solution to our water problems the state won't maintain or exceed it's current pace of economic growth.
Donnie: Thank you, we hope to see you back soon.
Let's all give Banker Josh a big hand for participating. (Standing ovation.)