The “big issue” that remains for gridlocked credit markets is how to jump-start the stalled market for asset-backed commercial paper (ABCP).
This market declined in size from $1.2 Billion in July – which represented half of the entire commercial paper market – to less than $900 Billion recently, according to Federal Reserve data. That’s a decline in value of more than 25%! That's on par with the stock market plunge that occured on Wall Street twenty years ago.
Nearly $900 billion in ABCP, much of it issued by Wall Street’s SIVs and tainted by the sub-prime crunch, will mature over the next six months and need to be “rolled-over” or refunded.
Since the CP market is essentially shut down, the only option for many of these funds now is to de-leverage – or begin liquidating assets at whatever prices can be obtained – to pay off creditors.
Unwinding Troubled SIVs: The Next Market Shock
Wall Street faces a painful process of unwinding these troubled SIVs. Quoting a recent Financial Times article, this process has already begun: “In total, the industry sold about $43bn of assets to meet repayments of maturing debt between early July and the end of September, according to data from Moody’s, the ratings agency.”
According to various estimates I have seen, there are about three dozen SIVs operating globally with a capital base of some $400 billion. But that’s NOT the total exposure to potential losses.
Remember, these SIVs are leveraged to the hilt the way many South American “banana-republics” used to be (or the way U.S. consumers are today), with total levered assets of perhaps $2 trillion or more.
So if wholesale liquidation of SIV’s begins to take place en mass, Mr. Paulson’s bailout fund (er, that is “Super Fund”) with just $80 billion of capital will be just a drop in the bucket compared to the torrent of unwinding sub-prime investments that will shock credit markets.
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