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fomc | 2,008 | The other thing that we should talk a bit about is credit risk to the Fed in all of this. I think the important thing to recognize here is that the credit risk to the Fed is quite low because the Federal Reserve is protected by two things. One, it is protected by the haircuts. The Fed's risk is a credit risk not a mark... | 178 |
fomc | 2,008 | I have no problem with that. What I'm thinking about is, if we do define a new regime, how we conduct policy. How are we tying ourselves down now relative to what we might want to do in the future in moving these assets on and off our balance sheet? I think that the more flexibility we have in moving them out, the more... | 87 |
fomc | 2,008 | Governor Kohn, did you have a comment? | 10 |
fomc | 2,008 | A comment and a question. One comment, to follow up on your comment, Mr. Chairman, to President Lacker--I think there's pretty good evidence that there are liquidity strains in the market, beyond just credit strains, impinging on the price of these securities. One piece of evidence I would cite is the difference betwee... | 176 |
fomc | 2,008 | Cash bonds versus derivatives, for example. | 8 |
fomc | 2,008 | Right. The point that Bill made yesterday was that the equivalent things are selling at very different rates and no one is doing the arbitrage. Second, I like the model that Bill just described in which the Federal Reserve supplies liquidity but the private sector plus the Treasury takes the credit risk. I think that p... | 187 |
fomc | 2,008 | Okay. On the AAA--it is really for specific classes. I think we've heard that somehow the AAA would not be sufficient mostly from the auto loan area. It's hard to judge how credible that is, given that the AAA is the big bulk of the capital structure. So if you're getting good financing for most of the capital structur... | 124 |
fomc | 2,008 | Even of those who are saying that today they're having trouble not only placing the AAA but also placing the other tranches, a number say that, if you could start pricing the AAA tranche, that would make placing the others a lot easier. Basically you'd be determining how much of the spread income from the underlying as... | 84 |
fomc | 2,008 | You can figure out the economics better once you know how much you have to pay for that 75 percent of the capital structure. | 26 |
fomc | 2,008 | On the nonleveraged? | 6 |
fomc | 2,008 | I don't think this program addresses the nonleveraged, but I think there's not much nonleveraged interest in this sector at this point. | 28 |
fomc | 2,008 | Well, that's the fundamental problem. Again, some of them were these classes of investors, who are no longer around. Even if they were around, I don't think we'd want them around--the SIV and securities lenders et cetera. But then you have the pension funds, the insurance companies, and so forth that are not in the mar... | 347 |
fomc | 2,008 | May I add just one thing to that? It's also not clear to me that the private sector won't be clever enough to take these things and package them into securities that have the equity and the leverage embedded in them and sell them to people who want to get high rates of return. It might be a pretty interesting propositi... | 64 |
fomc | 2,008 | President Lacker. | 4 |
fomc | 2,008 | So are there any other constraints of a legal or regulatory nature on participants in this market? Is there anything that keeps any hedge fund in the world from buying these things? | 34 |
fomc | 2,008 | Yes, we're still working on-- | 7 |
fomc | 2,008 | No, no, no, not the program--the underlying securities. | 14 |
fomc | 2,008 | In general. | 3 |
fomc | 2,008 | In general. Anyone could buy them, right? | 10 |
fomc | 2,008 | The issuers have to basically conform with the TARP executive comp restrictions. | 15 |
fomc | 2,008 | No, no, no. Even not participating in the program. There are no limitations on the investors who can participate, for example, in the market for asset-backed student loans. | 36 |
fomc | 2,008 | Well, there is in this program, in that we're trying to figure out the right way of restricting it to U.S. investors. | 27 |
fomc | 2,008 | Excuse me. The program doesn't exist yet. Right now, today, is there anything that restricts a hedge fund in London from buying an asset-backed security. | 33 |
fomc | 2,008 | I don't think so--not that I'm aware of. | 11 |
fomc | 2,008 | No. | 2 |
fomc | 2,008 | The reason I ask--the point that I'm making--is that you can reference theories but, at the end of the day, it's not just those predictions. It's the whole range of things about the theory. We haven't, in this, seen many theories put on the table, and the ones that have been--things like cash-in-the-market pricing--jus... | 167 |
fomc | 2,008 | I think it comes back to the point that Bill made earlier. If you're a hedge fund, even LIBOR plus 500 is still not a rich enough return to that hedge fund unless you can borrow against those securities and leverage it up into a higher return. And until 18 months ago you could have gotten the financing from Deutsche Ba... | 115 |
fomc | 2,008 | I think we're in disequilibrium. We're in a disequilibrium in which the dealers and banks that used to do this lending are in the process of dramatically shrinking their balance sheets. Goldman announced their fourth quarter today. They shrank their balance sheet by 18 percent from the end of their third quarter to the... | 94 |
fomc | 2,008 | Are we preventing equilibration? I mean, what are we doing? We're in the middle of an adjustment process, it takes some time. | 28 |
fomc | 2,008 | The way I look at it, President Lacker, is that the deleveraging process is happening at a very rapid rate, and that speed can cause quite a bit of damage to financial conditions and, therefore, to the real economy. To the extent that we intervene and slow down the pace of that deleveraging, we can probably mitigate th... | 89 |
fomc | 2,008 | I look forward to seeing the model. | 8 |
fomc | 2,008 | We're bridging. | 3 |
fomc | 2,008 | We're bridging--exactly. | 6 |
fomc | 2,008 | President Lacker, I guess there are at least a couple of theories you could have. One of them has to do with capital. If you think that certain types of intermediaries have specialized knowledge and their ability to lend depends on their capital, then there are informational asymmetries in which clearly exogenous destr... | 155 |
fomc | 2,008 | I'm familiar with those models. We don't have time to discuss them now. | 15 |
fomc | 2,008 | No, we should discuss them off line. President Rosengren. | 14 |
fomc | 2,008 | The loss of the securitization market is really important, so I think this facility is a very important innovation. My question is, How important were the conduits to this market, and how confident are we that there will be structures to bring back the securitization market? Or are we basically bridging to these things... | 100 |
fomc | 2,008 | I think the conduits were more important in some asset classes than others. In credit cards, for example, the conduits were pretty important. But even there they were important in recent years. I think they were important in recent years because spreads kept on coming down and down and deterred the real money investors... | 189 |
fomc | 2,008 | Also how you go through the cycle and what the loss experiences on these securities are going to be are hugely important. If this is the worst recession in 30 years, that's going to be a very interesting data point in terms of what the credit losses on the securities are. If it turns out that the credit losses are low ... | 137 |
fomc | 2,008 | President Hoenig. | 4 |
fomc | 2,008 | Do we have in mind a limit as to how broadly we would make the credit facility available? | 19 |
fomc | 2,008 | Currently we have the class of securities. We're looking at consumer and small-business ABS. | 17 |
fomc | 2,008 | The Treasury has basically committed $20 billion of TARP, and we think that's going to fund a program of roughly $200 billion of credit cards and auto loans and so on. | 36 |
fomc | 2,008 | I ask that question because there are some very important industrial companies that have been financing at fairly attractive rates and are now going to have to refinance that at far less attractive rates. I think that will have every bit as significant an impact on the economy as the mortgage-backed securities. So unle... | 76 |
fomc | 2,008 | Well, I'm sympathetic with your view that broader is better than narrower because of all the boundary issues that one creates. I think we all are sympathetic with that. | 32 |
fomc | 2,008 | For example, would you consider AAA industrial-grade credits? | 11 |
fomc | 2,008 | I think we would consider it. The real issue is the Treasury's willingness to use TARP money. We can't do any of this without the Treasury's commitment, so we're somewhat constrained in our ability to broaden it in the dimensions that we might want to broaden it. | 54 |
fomc | 2,008 | We've heard from practically everyone that's not within the class of consumer ABS and SBA loans. We have heard from the commercial real estate people and from the auto dealers about their floor plan loans; we have heard from the banks that would like to get the motorcycles and leases. But also corporate loans--the CLO ... | 168 |
fomc | 2,008 | Which makes my point. We really have to focus on fixing the intermediary process in the United States. There's no limit to this. The refinancings coming due are huge. | 35 |
fomc | 2,008 | That's agreed and understood. Again, the limits include the TARP capital, our own willingness with respect to the balance sheet, and so on. There really are limits to what this can accomplish. President Plosser. | 44 |
fomc | 2,008 | But in some sense, just to follow up on this point, the limits are what is really important here because, as long as we don't define some limits and we just say limited by TARP capital, well, that doesn't really answer the question. As long as the markets act as if we or someone else is going to step in and rescue them... | 122 |
fomc | 2,008 | That's a good point, and I think one thing that is a problem now is the transition between Administrations. We'll soon have a new Treasury Secretary and a new Administration. I think it's very important--I've discussed this with Tim Geithner and others--that as soon as possible we lay out a broad strategy. What are the... | 80 |
fomc | 2,008 | And what are the limits to it? | 8 |
fomc | 2,008 | Well, implicitly, what are the limits to it? How are we going to approach the banking issue? What are we going to do about failing firms? How are we going to try to address the securitization markets? I think the more clarity we can provide--I fully agree with the critique that lurching is very bad, and we need to prov... | 119 |
fomc | 2,008 | By the way, Mr. Chairman, I want to thank you. I thought your exchange of letters with Senator Dodd, I guess it was, over the automobile issues was well done. | 38 |
fomc | 2,008 | I don't think you read it, though. [Laughter] | 13 |
fomc | 2,008 | Excuse me, I read about it. | 9 |
fomc | 2,008 | Other questions for Bill? | 5 |
fomc | 2,008 | I just want to raise two things that worry me. One is that, when these programs are small, you subsidize X percent of the credit market. The other 1 minus X percent, the effect on their rate of return, their borrowing costs, probably is small. But when X gets near--I don't know where it is now-- 1/3 or 1/2, then our su... | 94 |
fomc | 2,008 | It's not clear. The commercial paper market might be a counter-example to that. | 16 |
fomc | 2,008 | There are some models in which that is the case. It's not obvious how we rule them out. The second thing is--I don't know how you evaluate this--you must be thinking whether this means that in every moderate-sized recession henceforth we'll view the Federal Reserve's best policy as extending-- | 59 |
fomc | 2,008 | It's not a moderate recession, and it's not a normal financial downturn. | 14 |
fomc | 2,008 | Right. Every recession of the size we've now seen 3 of in the last 50 years. So every recession of that size? | 27 |
fomc | 2,008 | You have to have a deep recession and a financial crisis. That's pretty unusual. Twice a century, or once a century so far. | 27 |
fomc | 2,008 | I'll give you an example--the VIX has never been this elevated this long since the Great Depression. | 21 |
fomc | 2,008 | So you're saying that you're not concerned about setting up expectations for the next recession. | 16 |
fomc | 2,008 | Certainly I'm concerned. I'm very concerned. But I'm also concerned about getting through this recession. So those are the tradeoffs. | 25 |
fomc | 2,008 | Okay. | 2 |
fomc | 2,008 | Other questions about the program? If not, let me just tell you that I'm going to be doing a call with the press at 3:15 in the Special Library. Any FOMC member who has nothing else to do and would like to join is welcome. Michelle has given your Public Affairs people the phone number so that they can listen in, and we... | 102 |
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