Comments on: The Occasional Seemingly Free Lunch

By: Andre

Andre — Tue, 02 Dec 2008 22:04:24 +0000

If one of the issuers did default, how quickly would FDIC have to pay up?

In theory it can take quite a while after a bank fails for insured depositors to be made whole, although in recent practice FDIC has been moving pretty quickly.

By: dWj

dWj — Tue, 02 Dec 2008 15:12:36 +0000

Kurt: A significant portion of Lloyd’s wealth is still in the firm, though not to the degree that his predecessors’ was. Hank, on the other hand, had to liquidate his position on moving to Washington. A buyout of outside shareholders should involve him, and maybe Corzine and/or Rubin, too.

By: Kurt Osis

Kurt Osis — Sat, 29 Nov 2008 14:09:07 +0000

P.S. not content at having blown up GS, Hank Paulson has turned the FDIC from an insurance company into a CDS desk…. hey didn’t AIG… never mind.

By: Kurt Osis

Kurt Osis — Sat, 29 Nov 2008 13:58:30 +0000

oh, I don’t know that the discount is so unreasonable. The only point of the security is to keep say Goldman from failing, if Goldman did default would the FDIC really need to bother providing its insurance since it will have already failed in its purpose? What if Goldman Citi and Morgan Stanley all failed, would the government choose to pay Treasuries first or weirdo FDIC backed notes?

Who knows how the heck these things will really be settled in the event of default.

P.S. Why doesn’t Goldman just LBO itself with FDIC backed paper?, don’t think Lloyd hasn’t run the numbers….

By: David Merkel

David Merkel — Thu, 27 Nov 2008 15:37:42 +0000

Bond Newbie — Thanks regarding the TVA. Not sure how I missed that. I recognize the liquidity and financing issues, thanks for fleshing them out further.

As for the Chinese, if they don’t accept FFC, they shouldn’t own Treasuries. Just wait for the Argentine-style forced conversion, or the creation of a two-tier currency system… they will get paid back in something called US dollars, but what those will be worth is questionable.

By: Bond newbie

Bond newbie — Thu, 27 Nov 2008 07:47:07 +0000

David, you answered HMF’s question, but I’m not sure if everything you wrote was correct:

DM: “TVA bonds are full faith and credit.” TVA Web site: “TVA debt securities are not obligations of the U.S. government, and do not carry a government guarantee.” Link:
http://www.tva.gov/finance/opportun/index.htm

You mention spreads, but only touch on liquidity briefly. Liquidity is at such a premium that investors don’t want to lose 6 months’ worth of coupon income because of a horrid bid when selling a callable agency bond or a “headline risk” name like Morgan Stanley paper (FDIC insured or not — some people just won’t touch it). For buy-and-holders like the insurance companies you reference, probably a good opportunity.

Second, I am not too sharp on the repo market, but a commenter on Bronte Capital blog said there are distortion in the repo market that will make corporate bonds (FDIC-backed or not) more costly to finance through repo — 25% haircut. So this would reduce demand, too.

Lastly, let’s acknowledge the Chinese central bank as the marginal buyer of government and GSE debt. With the net selling of GSE debt they’ve been doing for two-plus months now (and continuing to buy Treasurys), is it any wonder that they are skeptical of any “government backed” bond that doesn’t say “U.S. Treasury”? They have had enough of “implied” and “effective” guarantees, or “full faith and credit” of an underfunded government unit.

By: hmf

hmf — Wed, 26 Nov 2008 20:11:38 +0000

David,

Thank you for taking time to provide this comprehensive, crystal-clear & insightful answer – which addressed every follow-up question I had planned. I thoroughly appreciate your willingness to interact with your audience. As a reader of your blog from its inception, I’m very grateful to have this resource, especially over the past three months. I hope you & your family have a happy Thanksgiving.