Comments on: Feeding on Fed Funds http://alephblog.com/2008/04/03/feeding-on-fed-funds/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Fri, 25 May 2012 21:31:47 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: alephblog » Blog Archive » Fourteen Notes on Monetary Policyhttp://alephblog.com/2008/04/03/feeding-on-fed-funds/comment-page-1/#comment-27016 alephblog » Blog Archive » Fourteen Notes on Monetary Policy Tue, 29 Jun 2010 00:38:19 +0000 http://alephblog.com/?p=631#comment-27016 [...] 8 ) But perhaps all of the Fed’s efforts on the asset side are making it more difficult for Fed to keep the fed funds market stable.  I have one more graph that stems from my recent piece on the Fed: [...] [...] 8 ) But perhaps all of the Fed’s efforts on the asset side are making it more difficult for Fed to keep the fed funds market stable.  I have one more graph that stems from my recent piece on the Fed: [...]

]]> By: Louis Hillhttp://alephblog.com/2008/04/03/feeding-on-fed-funds/comment-page-1/#comment-17389 Louis Hill Fri, 04 Apr 2008 15:55:52 +0000 http://alephblog.com/?p=631#comment-17389 A quick comment about # 2. I hope I interpert your question right. The ABX as presented by MARKIT has been blamed for misrepresenting the market value as data come from very thin trades. See www.markit.com for explainations. A second effect is with the accounting rule 157 level 3 definition. There is an exception to level 3 in that fair value does not have to be used on "distressed" trades. I think this has an effect that fewer trades get made. I assume the company lawyers would not want any manager to list a trade as "distressed" because of liability issues. That is, the don't want to look like that they have made a mistake. A third issue is that the SIV's or conduits have trigger points based on net asset value or some similar formula where they have to stop trading or even dissolve the fund. I have heard no one blame the ABX for a fund closure yet but I am out of the loop in Minnesota so I am far away from most news and rumors. It is not perfect data but it is what we have. A quick comment about # 2. I hope I interpert your question right. The ABX as presented by MARKIT has been blamed for misrepresenting the market value as data come from very thin trades. See http://www.markit.com for explainations.

A second effect is with the accounting rule 157 level 3 definition. There is an exception to level 3 in that fair value does not have to be used on “distressed” trades. I think this has an effect that fewer trades get made. I assume the company lawyers would not want any manager to list a trade as “distressed” because of liability issues. That is, the don’t want to look like that they have made a mistake.

A third issue is that the SIV’s or conduits have trigger points based on net asset value or some similar formula where they have to stop trading or even dissolve the fund. I have heard no one blame the ABX for a fund closure yet but I am out of the loop in Minnesota so I am far away from most news and rumors.

It is not perfect data but it is what we have.

]]> By: Andy Reyburnhttp://alephblog.com/2008/04/03/feeding-on-fed-funds/comment-page-1/#comment-17365 Andy Reyburn Fri, 04 Apr 2008 00:56:20 +0000 http://alephblog.com/?p=631#comment-17365 Fascinating David. I've no idea, but I'm curious if knowing what the other periods when the below average lows were "violently" exceded might explain something. ?? Maybe they would give some historical prospective about this phenomenon? Fascinating David. I’ve no idea, but I’m curious if knowing what the other periods when the below average lows were “violently” exceded might explain something. ?? Maybe they would give some historical prospective about this phenomenon?

]]> By: Wolfershttp://alephblog.com/2008/04/03/feeding-on-fed-funds/comment-page-1/#comment-17364 Wolfers Thu, 03 Apr 2008 20:39:46 +0000 http://alephblog.com/?p=631#comment-17364 Is it possible that the Fed is gaming the borrowings to keep the weighted avg close to the target rate...ie Bank A (a perceived higher risk) can only borrow at 4.25% rate, so to lower the effective rate, the Fed also lends to JPM at 0.25%, so blended is 2.25%? I'm not an expert by any means on the mechanics of the borrowings, but if something like this is going on, it would mean the Fed has a difficult time lower rates further. Is it possible that the Fed is gaming the borrowings to keep the weighted avg close to the target rate…ie Bank A (a perceived higher risk) can only borrow at 4.25% rate, so to lower the effective rate, the Fed also lends to JPM at 0.25%, so blended is 2.25%? I’m not an expert by any means on the mechanics of the borrowings, but if something like this is going on, it would mean the Fed has a difficult time lower rates further.

]]> By: Jonathanhttp://alephblog.com/2008/04/03/feeding-on-fed-funds/comment-page-1/#comment-17363 Jonathan Thu, 03 Apr 2008 19:37:19 +0000 http://alephblog.com/?p=631#comment-17363 David, I haven't looked at the data to see if this is way off base or not, but one important thing to remember is that the NY Fed generally does its trading in the morning and lets the rest of the day go as is. Now if the demand for funds is high, the NY Fed will have to throw in as much liquidity as they can in the morning to keep the effective funds rate close to their target. During "normal" times, after the NY Fed ends its open market operations each day, banks keep close to the fed funds rate (maybe because they figure that they can always wait until the next day if they can't get a good rate), but during "crisis" times like now, banks don't have a choice so if they start off the day thinking things will be fine, but by the afternoon things aren't looking so hot then they will have to borrow at any cost without the luxury of waiting for another day. David,
I haven’t looked at the data to see if this is way off base or not, but one important thing to remember is that the NY Fed generally does its trading in the morning and lets the rest of the day go as is. Now if the demand for funds is high, the NY Fed will have to throw in as much liquidity as they can in the morning to keep the effective funds rate close to their target. During “normal” times, after the NY Fed ends its open market operations each day, banks keep close to the fed funds rate (maybe because they figure that they can always wait until the next day if they can’t get a good rate), but during “crisis” times like now, banks don’t have a choice so if they start off the day thinking things will be fine, but by the afternoon things aren’t looking so hot then they will have to borrow at any cost without the luxury of waiting for another day.

]]> By: Cere Davishttp://alephblog.com/2008/04/03/feeding-on-fed-funds/comment-page-1/#comment-17362 Cere Davis Thu, 03 Apr 2008 19:37:17 +0000 http://alephblog.com/?p=631#comment-17362 David, Thank you for such a cogent explanation of what trends you are seeing and possibly why you are seeing them(rare). I often struggle to understand the larger meaning being all these strange unexplained references I here about ABX indexes (care to explain that one?) and other such mysterious acronyms. One thing that I didn't understand from your article was your reference to 9/11/2001. I didn't see any remarkable change in the interest rate on the graph around that date? Did I miss something? David,

Thank you for such a cogent explanation of what trends you are seeing and possibly why you are seeing them(rare). I often struggle to understand the larger meaning being all these strange unexplained references I here about ABX indexes (care to explain that one?) and other such mysterious acronyms.

One thing that I didn’t understand from your article was your reference to 9/11/2001. I didn’t see any remarkable change in the interest rate on the graph around that date? Did I miss something?

]]> By: AllanFhttp://alephblog.com/2008/04/03/feeding-on-fed-funds/comment-page-1/#comment-17361 AllanF Thu, 03 Apr 2008 18:43:46 +0000 http://alephblog.com/?p=631#comment-17361 Maybe I misunderstood what was being covered, but I think Paul Krugman mentioned this a couple weeks back <a href="http://krugman.blogs.nytimes.com/2008/03/20/" rel="nofollow">here</a> and <a href="http://krugman.blogs.nytimes.com/2008/03/21/" rel="nofollow">here</a> and I think some others. His blog is not easy to skim the archives. He concluded, banks were scarred to lend. Except for the case of imminent insolvency, I suppose if you won't lend, then yeah, you are by definition awash in liquidity. But no, I'm not sure what it all means or portends, or if I've even kept it all straight. But at least it seems my confusion puts me in good company. Maybe I misunderstood what was being covered, but I think Paul Krugman mentioned this a couple weeks back here and here and I think some others. His blog is not easy to skim the archives.

He concluded, banks were scarred to lend. Except for the case of imminent insolvency, I suppose if you won’t lend, then yeah, you are by definition awash in liquidity.

But no, I’m not sure what it all means or portends, or if I’ve even kept it all straight. But at least it seems my confusion puts me in good company.

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