Transcript Chapter 2 PowerPoint - University of Georgia

Fed Balance Sheet (millions), April 2009
Assets
Liabilities & Capital
Gold & Coin
15,107
Federal Reserve Notes
Loans to depository institutions
-
Rev Repurchase agreements
Repurchase agreements
0
Deposits
US treasury securities
Agency securities
534,969
64,511
862,960
64,681
Depository inst balances
915,773
US Treasury
295,399
MBS
367,590
Other
13,456
Term Auction Facility (TAF)
455,799
Capital
46,000
CP Facility
242,431
Maiden Lane & related
72,163
Other loans
102,988
Foreign currency
282,863
Other
2,198,269
59,849
2,198,269
9/26
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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 nonbank financial institutions.
• no new loans after March 2010
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Fed Balance Sheet, August 22, 2013
Assets
Gold & Coin
Loans to depository institutions
Liabilities & Capital
11,041
344
Repurchase agreements
US Treasury securities
Agency securities
MBS
Term Auction Facility (TAF)
CP Facility
Maiden Lane & related
Other loans
0
2,007,832
65,713
1,494,679
173
-
Federal Reserve Notes
Rev Repurchase agreements
1,156,377
96,342
Deposits
Depository inst balances
US Treasury
Other
Capital
2,287,585
41,527
8,770
55,087
3,645,668
1,768
-
Foreign currency
23,997
Other
41,141
3,645,688
10/1
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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.
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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
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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.
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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.
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Dates
stocks bonds
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)
-90%
safe
-98%
safe
-100% part loss
-95% safe
-100% tot loss
-90%
safe
-60%
safe
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