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Discussion of “Do Global Banks Spread Global Imbalances?”



               Adam B Ashcraft
    Credit, Investment, and Payment Risk
Overview of paper
   ABCP conduits ($1.2 trillion in June 2007) were used by global
    banks to manufacture “riskless debt” by purchasing the medium-
    term private debt of countries with current account deficits using
    short-term debt and a bank-sponsored backup line of credit
    (section 3.1)
   ABCP conduits were sponsored by both current account surplus
    and deficit countries (section 3.2), but were more prevalent in
    countries with weaker capital requirements for backup lines of
    credit (section 3.3)
   Focusing on the largest publicly-traded banks in the US and
    Europe, banks with more ABCP exposure relative to equity
    capital had more negative equity returns during August 2007
    (section 4)



                                                                         2
Shadow Bank Liabilities
                        July 2007, estimated
           Short Term                            Long Term

       ABCP                                    MTN
       $1200 billion                           $2000 billion



       Securities lending                      LTD
       $600 billion                            $??? billion


       Broker-dealer repo                      Equity
       $2500 billion                           $??? billion


       Finance company CP
       $400 billion

                                                  Total ~ $10,000 Billion
       Liquidity puts
       $700 billion
                                                                            3
                                                           3
Reserve Board
Source: Federal
                                                          500
                                                                1000
                                                                       1500
                                                                              2000
                                                                                                    2500
                                                                                                                          3000
                                                                                                                          Billion

                                            Nov 1 1995
                                            May 1 1996
                                            Oct 30 1996
                                            Apr 30 1997
                                                                                                           M1


                                            Oct 29 1997
                                            Apr 29 1998
                                            Oct 28 1998
                                            Apr 28 1999
                                            Oct 27 1999
                                            Apr 26 2000
                                                                                                           CP




                                            Oct 25 2000
                                            Apr 25 2001
                                            Oct 24 2001
                                            Apr 24 2002
                                            Oct 23 2002
                                            Apr 23 2003
                                            Oct 22 2003
                                            Apr 21 2004
                                            Oct 20 2004
                                            Apr 20 2005
                                            Oct 19 2005
                                                                                                           Reverse Repo




                                            Apr 19 2006
                                            Oct 18 2006
                                            Apr 18 2007
                                            Oct 17 2007
                                            Apr 16 2008
                                            Oct 15 2008
                                            Apr 15 2009
4
 M1 is a bad Proxy for Short Term Funding
                                                                                                                                    Short Term Liabilities: CP, Reverse Repos, M1




                                                          500
                                                                1000
                                                                       1500
                                                                              2000
                                                                                                    2500
                                                                                                                          3000
                                                                                                                          Billion

                                                                                                           2008
                                                                                                           Sep 15,




4
                                                                                     Jul 18, 2007
Bank deposit rates and money market yields




                                             5
ABS Demand by Investor Type
                                            Billions $




                 2007                                                         2009
                                                                            (excluding TALF)
                                            SIV lites
                           18
                                43          Securities arbitrage conduits
                107
                                      50    Prime money market                     20
                                            ABS CDO Mezz
                                       72   Enhanced cash accounts
          100
                                            SIVs
                                 75         Securities lenders
                      80
                                            ABS CDO HG

Source:
JP
                           ABS Demand Collapsed6                                               6
ABS Issuance: Growth and Collapse by Asset Class

                       350
                                                                                                                                                                                               Other
                       300
                                                                                                                                                                                               Non-U.S. Residential
                       250
                                                                                                                                                                                               Mortgages
                                                                                                                                                                                               Student Loans
          $ Billions




                       200
                                                                                                                                                                                               Credit Cards
                       150
                                                                                                                                                                                               Autos

                       100
                                                                                                                                                                                               Commercial Real
                                                                                                                                                                                               Estate
                        50
                                                                                                                                                                                               Home Equity
                                                                                                                                                                                               (Subprime)
                         0
                             Mar-00
                                      Sep-00
                                               Mar-01
                                                        Sep-01
                                                                 Mar-02
                                                                          Sep-02
                                                                                   Mar-03
                                                                                            Sep-03
                                                                                                     Mar-04
                                                                                                              Sep-04
                                                                                                                       Mar-05
                                                                                                                                Sep-05
                                                                                                                                         Mar-06
                                                                                                                                                  Sep-06
                                                                                                                                                           Mar-07
                                                                                                                                                                    Sep-07
                                                                                                                                                                             Mar-08

Source:                                                                                                                                                                               Sep-08
                                                                                                                                                                                                                      7
JP                                                                                                                                                                                             7
Shadow Bank Topology
Balance Sheet for ABS (1)
                                                   Good SIVs                          Bad SIVs                         SIV Lites
                                          (Limited Purpose Finance Cos.)
                                                $100 billion assets               $400 billion assets              $50 billion assets
                                                             ABCP        ~20%                                     AAA-A
                                                                                  AAA-A        ABCP       ~60%                   ABCP     ~40%
                                              AAA-A                                                               (heavy
                                                              MTN        ~50%   (subprime
                                                (no                                             MTN       ~30%   subprime         MTN     ~30%
                                                                                exposure)
                                             subprime)                                                           exposure)
                                                              LTD        ~20%                    LTD      ~0%                      LTD    ~20%
                                                          Capital Notes ~15%     BBB-B      Capital Notes ~15%    BBB-B       Capital Notes ~10%
                                                   levered ~7x                        levered ~7x                    levered ~10x



Origination of Loan and ABS                                                                                                                        Shadow Bank Funding
                                              Multiseller Conduits                    Term ABS                        ABS CDOs
                                               (loan accumulators)              (SPV, maturity matched)             (resecuritization)
                                                $525 billion assets


                                                                                               AAA-A              AAA-A          AAA-A
           Finance Companies and BHCs          Loans      100% ABCP               Loans                                                                    MMFs
                   (loan originators)                                                          BBB-B                             BBB-B                    (funding)
                                                                                                                  BBB-B
                              Parent CF                                                        Equity                            Equity
                                 CD                levered ~ ∞                       levered 5-10x                   levered 5-10x
                                  CP
                                                                                                                                                   ABCP MTN,        MMF
                 Loans         Conduit       Single-Seller Conduits
                                                                                                                                                    Floaters       Shares
                                 ABS         (maturity transformators)
                              MTN, LTD          $150 billion assets
                                Equity
                                                                                                                                                    60 days        1 day
                                               Loans      100% ABCP                                                                                    implicit levered



                                                  levered ~15x


Balance Sheet for ABS (2)

                                          Securities Arbitrage Conduits           Securities Lenders                      MMFs
                                                $150 billion assets               $600 billion assets              $50 billion assets



                                                                                                                 A1 (MMF)         MMF
*Hybrid conduits were a                        AAA-A      100% ABCP              AAA-A        T-Bonds
                                                                                                                 tranches        Shares
mixture of single-seller,
multiseller and arb
conduits and had $210 in
CP outstanding at the                              levered ~ ∞                       levered ~50x                   implicit leverage
                                                                                                                                                                            8
peak.
                                                                                                                                               8
9

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Discussion of “Do Global Banks Spread Global Imbalances?”

  • 1. Discussion of “Do Global Banks Spread Global Imbalances?” Adam B Ashcraft Credit, Investment, and Payment Risk
  • 2. Overview of paper  ABCP conduits ($1.2 trillion in June 2007) were used by global banks to manufacture “riskless debt” by purchasing the medium- term private debt of countries with current account deficits using short-term debt and a bank-sponsored backup line of credit (section 3.1)  ABCP conduits were sponsored by both current account surplus and deficit countries (section 3.2), but were more prevalent in countries with weaker capital requirements for backup lines of credit (section 3.3)  Focusing on the largest publicly-traded banks in the US and Europe, banks with more ABCP exposure relative to equity capital had more negative equity returns during August 2007 (section 4) 2
  • 3. Shadow Bank Liabilities July 2007, estimated Short Term Long Term ABCP MTN $1200 billion $2000 billion Securities lending LTD $600 billion $??? billion Broker-dealer repo Equity $2500 billion $??? billion Finance company CP $400 billion Total ~ $10,000 Billion Liquidity puts $700 billion 3 3
  • 4. Reserve Board Source: Federal 500 1000 1500 2000 2500 3000 Billion Nov 1 1995 May 1 1996 Oct 30 1996 Apr 30 1997 M1 Oct 29 1997 Apr 29 1998 Oct 28 1998 Apr 28 1999 Oct 27 1999 Apr 26 2000 CP Oct 25 2000 Apr 25 2001 Oct 24 2001 Apr 24 2002 Oct 23 2002 Apr 23 2003 Oct 22 2003 Apr 21 2004 Oct 20 2004 Apr 20 2005 Oct 19 2005 Reverse Repo Apr 19 2006 Oct 18 2006 Apr 18 2007 Oct 17 2007 Apr 16 2008 Oct 15 2008 Apr 15 2009 4 M1 is a bad Proxy for Short Term Funding Short Term Liabilities: CP, Reverse Repos, M1 500 1000 1500 2000 2500 3000 Billion 2008 Sep 15, 4 Jul 18, 2007
  • 5. Bank deposit rates and money market yields 5
  • 6. ABS Demand by Investor Type Billions $ 2007 2009 (excluding TALF) SIV lites 18 43 Securities arbitrage conduits 107 50 Prime money market 20 ABS CDO Mezz 72 Enhanced cash accounts 100 SIVs 75 Securities lenders 80 ABS CDO HG Source: JP ABS Demand Collapsed6 6
  • 7. ABS Issuance: Growth and Collapse by Asset Class 350 Other 300 Non-U.S. Residential 250 Mortgages Student Loans $ Billions 200 Credit Cards 150 Autos 100 Commercial Real Estate 50 Home Equity (Subprime) 0 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Source: Sep-08 7 JP 7
  • 8. Shadow Bank Topology Balance Sheet for ABS (1) Good SIVs Bad SIVs SIV Lites (Limited Purpose Finance Cos.) $100 billion assets $400 billion assets $50 billion assets ABCP ~20% AAA-A AAA-A ABCP ~60% ABCP ~40% AAA-A (heavy MTN ~50% (subprime (no MTN ~30% subprime MTN ~30% exposure) subprime) exposure) LTD ~20% LTD ~0% LTD ~20% Capital Notes ~15% BBB-B Capital Notes ~15% BBB-B Capital Notes ~10% levered ~7x levered ~7x levered ~10x Origination of Loan and ABS Shadow Bank Funding Multiseller Conduits Term ABS ABS CDOs (loan accumulators) (SPV, maturity matched) (resecuritization) $525 billion assets AAA-A AAA-A AAA-A Finance Companies and BHCs Loans 100% ABCP Loans MMFs (loan originators) BBB-B BBB-B (funding) BBB-B Parent CF Equity Equity CD levered ~ ∞ levered 5-10x levered 5-10x CP ABCP MTN, MMF Loans Conduit Single-Seller Conduits Floaters Shares ABS (maturity transformators) MTN, LTD $150 billion assets Equity 60 days 1 day Loans 100% ABCP implicit levered levered ~15x Balance Sheet for ABS (2) Securities Arbitrage Conduits Securities Lenders MMFs $150 billion assets $600 billion assets $50 billion assets A1 (MMF) MMF *Hybrid conduits were a AAA-A 100% ABCP AAA-A T-Bonds tranches Shares mixture of single-seller, multiseller and arb conduits and had $210 in CP outstanding at the levered ~ ∞ levered ~50x implicit leverage 8 peak. 8
  • 9. 9