Presentation Transcript

1. Fed Balance Sheet (millions), April 2009 Assets Liabilities & Capital Gold & Coin 15,107 Loans to depository institutions - Repurchase agreements 0 US treasury securities 534,969 Agency securities 64,511 MBS 367,590 Term Auction Facility (TAF) 455,799 CP Facility 242,431 Maiden Lane & related 72,163 Other loans 102,988 Foreign currency 282,863 Other 59,849 2,198,269 Federal Reserve Notes 862,960 Rev Repurchase agreements 64,681 Deposits Depository inst balances 915,773 US Treasury 295,399 Other 13,456 Capital 46,000 2,198,269
2. Term Auction Facility As subprime problem arose in late 2007, banks began to encounter liquidity problems. Overwhelmed discount window. In Dec 2007, Fed suspended traditional discount window operations in favor of Term Auction Facility (TAF): rather than just overnight, made 28 and 84-day loans accepted other securities, rather than just Treasuries and agency securities, as collateral. originally for depository institutions, extended to non-bank financial institutions. no new loans after March 2010
3. Fed Balance Sheet, August 22, 2013 Assets Liabilities & Capital Gold & Coin 11,041 Loans to depository institutions 344 Repurchase agreements 0 US Treasury securities 2,007,832 Agency securities 65,713 MBS 1,494,679 Term Auction Facility (TAF) 173 CP Facility - Maiden Lane & related 1,768 Other loans - Foreign currency 23,997 Other 41,141 3,645,688 Federal Reserve Notes 1,156,377 Rev Repurchase agreements 96,342 Deposits Depository inst balances 2,287,585 US Treasury 41,527 Other 8,770 Capital 55,087 3,645,668
4. Commercial Paper Unsecured promissory notes that mature before nine months (270 days). Proceeds can only be used for operating purposes (inventories, receivables) and not for fixed assets (land, buildings, machinery). Issued by 600 to 800 corporations. Sold at discount, mature at par. Some sold by direct placement, but most sold through dealers . Dealers charge something like one-tenth to one-eighth of a percent of face value to underwrite an issue for a firm.
5. CP Backup Lines of Credit Except for a few highly-rated firms, usually not possible for an issuer to sell CP without a backup line of credit. Backup line of credit is agreement by which a bank will lend an issuer, if needed, the money necessary to redeem maturing paper. Makes purchasers feel more secure in the event issuer is not able to “roll over” maturing CP (i.e., sell new CP to pay off old CP). Banks charge 10 to 12.5 basis points (on an annual basis) of par amount for backup lines of credit, then market interest rate if money is actually borrowed. Average CP maturity is about 30 days In financial crisis, were difficult to roll over
6. CP Rated: prime, desirable, satisfactory. P-1, P-2, P-3 (Moody’s) A-1, A-2, A-3 (S&P’s) Virtually impossible to sell unrated commercial paper Advantage of CP: low interest rates About 30 commercial paper dealers. There is a secondary market and issuers sometimes buy back their commercial paper. Transaction costs in range of about one-eighth of one percent per annum. Normal US CP: up to $1 trillion outstanding at any moment.
7. Asset-Backed Commercial Paper In addition to normal commercial paper, there is asset-backed commercial paper (ABCP). Typical maturities of ABCP a little longer: 90 to 180 days In run up to financial crisis, issued by up to 1,000 special purpose vehicles to help buy pools of mortgages, car loans, student loans, credit card receivables, etc., but mostly mortgages. Before financial crisis struck, up to $1 trillion of US ABCP outstanding. Then couldn’t roll over, so Fed had to step in.
8. Dates stocks bonds -90% safe -98% safe -100% part loss -95% safe -100% tot loss -90% safe -60% safe 03/17/08 Bear Stearns (taken over by JP Morgan Chase and government guarantees) 09/07/08 Fannie Mae / Freddie Mac (conservatorship) 09/15/08 Lehman Brothers (bankruptcy) 09/16/08 AIG (kept alive by US government and Federal Reserve) 09/21/08 Goldman Sachs & Morgan Stanley become bank holding companies 09/25/08 Washington Mutual (receivership by FDIC and then bankruptcy, formerly 6th largest US bank) 12/31/08 Wachovia (taken over by Wells Fargo, formerly 4th largest US bank) 01/01/09 Merrill Lynch (saved from failure by being purchased by Bank of America)