So far no CMBS takers for TALF

A quick look at the breakdown of TALF financed asset classes is shown below:



As expected it is dominated by credit cards (54%) and autos (29%). CMBS based loans are strangely missing.

From the Fed:


Is it too early? Premium Finance ABS program was announced around the same time as the CMBS program and some Premium Finance bonds have already been financed with TALF. Premium Finance loans are used to distribute corporate insurance (such as hazard insurance) premium payments over a period of time rather than in one shot.

Here are the haircuts (the amount of equity an investor has to put up to finance CMBS securities) from the Fed:

CMBS Average Life (years) 0-5: 15%

For CMBS with average lives beyond five years, collateral haircuts will increase by one percentage point for each additional year of average life beyond five years.

The financing rate is LIBOR Swap Rate + 100bp. 15% down, the government funds the rest. You would think people would be lining up to do this. What gives?

Is it possible that even with all the nice leverage the Fed is providing, there are not many takers? This is not a typical 3-year auto deal that is clean and predictable. CMBS has some serious refinancing risk (chee chart of maturities below) and TALF may not be there when the time comes to roll. Leverage doesn't help when you don't believe in the asset.

CMBS Maturities (source: DB)


Reuters is quoting Citi saying the delay is due to complexity.

"Nobody was expecting any deals to be ready in June," said Darrell Wheeler, head of securitized asset strategy at Citigroup Global Market. He said they would come in July at the earliest, and more likely August or September due to the complexity of the origination and structuring process compared with other assets eligible for a similar Fed program.

We'll track the situation closely.

Cheniere using futures to stay alive

CHENIERE ENERGY (ticker: LNG) has built up enormous capacity to purchase liquefied natural gas, convert the liquid into gas, and pump the gas into the the US pipeline system. The idea was to buy up cheap liquefied natural gas from say Kuwait and sell it in the US. In the past this capability to convert LNG into gaseous form did not exist in the US on a large scale.

Sabine Pass (Cheniere's LNG facility)


Unfortunately for Cheniere, natural gas prices in the US have collapsed as we discussed (see Sober Look post). At $4/MMBTU, it just doesn't work. So the shares are taking a beating.



Instead the company is deploying another strategy. They buy liquefied natural gas, simultaneously selling it forward in the futures market. Having built up a massive storage capacity, they are able (for now) to store the gas cheaper than the slope of the natural gas curve. Then as the futures contracts mature, they will deliver the gas against their futures position.

US natural gas futures curve


They hope that either the US gas price improves or the futures curve stays steep to keep them going. Predictions of a cold winter, for example will keep a nice slope on the curve. Of course pumping more gas (from imported LNG on top of domestic production) into the US storage system is just to contributing to an already massive US oversupply.

But the natural gas physical market is all about optionality. There are basis options, curve options, and compound options. Cheniere has one more trick up their sleeve. They can buy LNG from abroad, store it, and then sell it back abroad. In effect the US becomes a huge natural gas storage facility for the World. See Reuters story:

Cheniere plans to take advantage of seasonal prices changes in the LNG market by importing the super-cooled gas during summer when prices are low, storing it and then re-exporting when prices are higher, most likely in winter.

Block the truth and rule another day

As an update to our previous post on China, take a look a Xinhua News Agency (News.cn) coverage of the Iran situation. There is none to speak of. The story today is "Ahmadinejad urges U.S., Britain to stop intervening amid post-vote unrest "

Addressing a group of clerics on Saturday evening, Ahmadinejad "urged Western states, particularly the United States and Britain, to change their policies of intervening in Iran's domestic affairs," IRNA said.

"Condemning interference of certain foreign states in Iran's domestic affairs, the president reiterated that the Iranian nation would not consider such governments as its own friends," IRNA reported.

That's it. The official news is filtering information and is now telling private sources to do the same.

Sterilize and twist information is the mantra. Try the following experiment:

1. Go to www.Google.com and type Tiananmen Square protests. The click on images. This is what you get:



2. Repeat this for www.Google.cn (the Chinese version of Google). Note that unless you are in China, this is not officially filtered. Click on images (图片) to get this:



The striking contrast speaks for itself.

However if you type in Iran protests, the results of the two searches become much more similar (it's newer information that hasn't been sterilized). That spooked the Chinese authorities and they asked Google to simply block access within China.

China blocks Google to prevent people from knowing the truth ... about Iran

From the FT:

Beijing has ordered Google to stop users of its Chinese-language service accessing overseas websites in the biggest blow to the world’s leading search engine in China since it started operating there four years ago.

Of course the story goes on to discuss how it will impact Google's growth in China. But there is more to the story.

Why would China do such a thing? Why now? To make sure people don't go onto CNBC.com? Probably not. The answer is simple: the communist government is deathly afraid that the people in China will see Iran. They will see the masses (including many students) protesting, taking on an oppressive, tyrannical government.

Students? Hmmmm. Sounds familiar. Maybe it will remind the Chinese people of an event in the past. It was the massacre in Beijing's Tiananmen Square 天安門事件 (June 4, 1989). And maybe it will stir the will to once again take on the Communist regime.

Standardizing OTC derivatives destroys "hedge accounting"

As an echo of our post in early June called Derivatives, the WRONG war, Chatham Financial, a risk management advisor to corporations has shot a letter to the U.S. Congress regarding the proposed regulation of the OTC derivatives market.

Here is a quote from PR Newswire:

The letter lists concerns over regulations that might limit access to customized derivatives or impose onerous collateral requirements on the American businesses that use OTC derivatives responsibly to hedge fluctuations in interest rates, foreign currency exchange rates, and commodity prices. These concerns are directed at certain proposals mandating clearing and exchange-trading for all OTC derivatives. "Forcing all derivatives onto exchanges or into central clearing is not the answer," says Bontrager.

The letter cautions that companies forced to use standardized derivatives could "face significantly increased earnings volatility and accounting complexity and may be unable to qualify for hedge accounting treatment" under FAS 133. Discussing the letter, Clark Maxwell, director of Chatham's accounting consultancy, commented that, "We're concerned that the accounting for derivatives could become even more complicated and may discourage prudent risk management. The benefits of customizable derivative contracts that precisely hedge a company's risks are significant for the vast majority of end users."

They are making a reference here to an accounting rule called "hedge accounting" (FAS133 or IAS39). Under this rule corporations who hedge their risks precisely do not have to show losses (or gains) on a derivatives contract because whatever it is they are hedging would have the offsetting gain (loss). To qualify for this rule the hedge must be shown to be "effective" - that is it must be proven to closely mirror the asset or liability being hedged.

However the push to standardize OTC derivatives and move them to a clearing house will cause havoc for corporations because the standard contracts will rarely match precisely the hedged item. That means corporations will rarely qualify for hedge accounting and will either not hedge at all or have imprecise hedges that need to be marked to market without marking the item being hedged (marking only one side of a risk neutral position). Either scenario will make earnings extremely volatile for many firms (from power companies to cereal manufacturers).

At the risk of sounding repetitive, the knee-jerk reaction to blindly regulate OTC derivatives is imprudent. It will help some politicians and bureaucrats with their careers and CNBC with their ratings. But it will force US corporations to take more risk, not less.

Don't buy what the mainstream media and populist blogs are feeding you. Think for yourself.

A new solution to the budget crisis

From our friends at the Onion News Network: Timothy Franz Geithner's new idea is having the Treasury trade gold reserves for cash through Cash4Gold.com

Enjoy!

California running out of options

The great State of California has been backed into a corner. Here are some recent facts:

• California's unemployment rate is now at 11.5%
• Sales tax in LA is now 9.5%
• Fresno County is a federal disaster area hit by a three-year drought. It's destroying California’s agricultural industry. Fresno county unemployment is near 17%.
• The rating agencies are threatening to crush the CA bond ratings.

From Moodys:

NEW YORK, Jun 19, 2009 -- Moody's Investors Service has placed the State of California's A2 general obligation rating, as well as the ratings for lease debt and other state-backed debt listed below, on Watchlist for possible downgrade. The Watchlist action reflects the following: an expected budget gap of over $20 billion (or more than 20% of the state's General Fund budget) in the state's fiscal year 2010 budget; the announcements by the state controller that without solutions the state will not be able to meet all its financial obligations in July; the continued political stalemate that has resulted in inaction by the legislature thus far; and the limited solutions available to the state. Although the executive branch has proposed a package of budgetary and cash measures, thus far no meaningful solutions have come out of the legislature.

In addition, Moody's has placed the Aa3 global scale rating assigned to the California Federally Taxable General Obligation Bonds and Stem Cell Research and Cures Bonds, Series 2007A, and the A2 global scale rating on the California Judgment Trust Certificates of Participation Series 2005 on Watchlist for possible downgrade.

The difficulties the state is facing include the following:

* After enacting a budget for fiscal year 2010 in February, the economy has continued to deteriorate and the state is now expecting budgetary gaps for fiscal year 2010 of over $20 billion.

* Budgetary solutions are more limited now that the voters did not authorize the state to issue deficit bonds secured by lottery revenues.

* Without legislative and executive solutions, the state is expecting to run short of cash beginning in July.

A downgrade will significantly limit California in issuing new debt. An impasse over taxes leaves them with very few options. The document below from the governor's office shows just how limited.

Some difficult questions: Should CA be massively cutting the educational system, the prison system, or Medi-cal? Maybe raising the already ridiculous state taxes, putting the state deeper into recession? Or defaulting on their debt? Unthinkable until recently. The impact on various retirement funds will be unprecedented. Will the US taxpayers come to the rescue?

California crisis is looming.

In Iran history is power

The early demonstrations against the government created the first student casualties. The scene repeated itself numerous times. Student organized protests kept growing, drawing in larger crowds. Demonstrators were killed by the hundreds. At some point the streets of Shahyad Square in Tehran were filled with over two million people, to demand the removal of the current government and the return of their chosen leader.




The year was ... 1978. The leader the student movements were supporting was Ayatollah Khomeini, who was in exile at the time. This was the Iranian Revolution that overthrew the Shah of Iran.

Sounds familiar? Iran's students have a history of galvanizing that nation. Iran has a massive student population, many of whom are extremely active. The current leadership should heed the protesters' demands if they want to stay in power. What's going on now is not an isolated incident. Just like in 78, the desire for change has been brewing for some years. This "election" was just the final straw.

But unlike some dictatorships that were able to suppress protests (like Moldavia), this one is going to be hard to squash. Students know their power from history, they know how to use technology, and they are fed up with the economic nightmare of Ahmadinejad's government (as well as earlier governments). Inflation of about 16% (over the past 9 years) and over 4 million people unemployed sets the misery index at unsustainable levels. The so called "Green Revolution" will not just go away.




Update:

Here are some photos that tell this story far better than words can describe it.








This is a message for our Canadian friends. Please call the Foreign Office to request opening of the Canadian embassy (in Tehran) doors for the wounded: 1-800-267-8376