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Monday, 29 September 2008

Toxic pricing

TARP is one thing and global stock markets are all looking at a hefty 5% fall (US & Europe indices back to where they were a year ago) led by oils (oil futures off by oer 7%) and banking sectors down together. Central banks announced more co-ordinated action to combat the credit crisis and boost dollar liquidity, and the US Fed will more than double its swap lines with the ECB and other central banks from $290bn to $620bn (why not $700bn?) and it's expanding its Term Auction Facilities programme.
The FT suggests that one of the hardest to do aspects of TARP will be pricing somewhere between current firesale and hold to maturity valuations. It is not that hard to calculate between firesale and through the cycle fair value; the hedge funds are making those analyses, and have been doing so for months. They are supremely confident that they can profit by them. The bigger problem for TARP is answering why a bank or investor would seek to sell to TARP given the penalties of doing so, which may be more deadly to the value and risk grade standing of the asset seller than the funding boost is beneficial! Therefore, what may happen is that others (the shady shadow bankers, of types known as prime brokers, AI, Distress Real Estate, Global Macro, Vulture, Hedge, and Raptor, funds) will copycat TARP minus the reputational risks in return for a softer price that discounts TARP's prices.(note: those asking what is a Raptor Fund may like to know that raptors are birds of prey characterized by a hooked beak, sharp talons, and keen eyesight such as buzzards and sparrowhawks that prey along our hedgerows for rabbits and smaller birds and vermin, a type of fund that I believe will soon catch on. Raptor is also the Lockheed Martin/ Boeing F22 stealth fighter aircraft that entered service in December 2005 just as house prices began falling!)

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