TGIF and TSLF

Whew, doing taxes is mind-numbing ! And I still have to do our own taxes Ugh ! I need a day off. Maybe today ?

The Fed's TSLF auction went off OK - decent demand. I mentally call the TSLF the "Teasle-F", by the way, thinking that fat, fascist sheriff [ the "F", among others ;-) ] in the first Rambo movie, "First Blood". I suspect the Street and banks need a while to evaluate how to use the facility and its costs. I heard a lending fee 0.33% quoted. Hmmm what does this mean ? Here is a link to the New York Fed that describes the terms of the TSLF: http://www.newyorkfed.org/markets/tslf_terms.html

Let me educe [ ;-) see yesterday's blog for this $10 word ] the economics of this program from its terms. Note this program is a "loan" of securities - a hypothecation - like one does when shorting a stock.

Suppose I own some mortgage securities now yielding 6%. When I "lend" them, I still keep the interest on mine. Assume Treasuries I receive on the loan are yielding 2.5% which I must pay the Fed and that I must put up 110% market value as collateral. So I put up $110 million yielding 6%, receive $100 Treasuries yielding 2.5%, so therefore have $10 equity capital tied up in the transaction. In my bid, I agreed to pay the Fed an extra 0.33% on the loan of the Treasuries to me.

Inflows: $110 million at 6% = $6.6 million
Outflows: $100 million at (2.50% + 0.33%) = $2.83 million
Net Inflow: $3.77 million
Capital Used: $110 million - $100 million = $10 million
Annual ROE: 37.7%

Hmmm that's pretty good. This is a good program for the primary dealers.

This calculation also shows one the huge net interest income now being earned by the banks. They can borrow at 2.25 - 2.5% overnight or for 28 day tems in the TAFfy, or the TSLF now and receive around 6% on the assets they buy/own. The net interest spread of over 3.5% is simply huge. Suppose a bank has 10% capital (primary plus secondary). It's gross ROE is over 35% per annum now. The stocks are trading at book value or less. So that gross return is simply enormous.

You can see why I like my investment in the big banks. It was made on the basis of the Fed doing my bidding eventually and that management of the big four will weather the storm. Obviously there were and are risks. And I screwed up the entry, violating my time diversification principles a bit in the fall. But I like the long term prospects. When the write-offs and losses stabilize, that 37% gross ROE will reap huge returns, in my humble opinion, for owning these stocks at book value. I had better stop or I'll talk myself into buying more ... I have plenty already.

Words of the Day

"Helot" - noun [$10]
Helot means 1. one of a class of serfs in ancient Sparta; 2. a serf, bondman.
Sentence: Do the radical Democratic leaders really repect the freedom of the people, or are they insideously seeking to transform free Americans into 21st century helots in service to themselves as the new nobility ?

"Hedonic" - adjective [$10]
Hedonic means of, pertaining to, or characterized by pleasure.
Sentence: (A) Some dispute the hedonic adjustments made by the BLS and the Fed to account for the positive improvements in a good, such as computer speed. (B) While projecting a public image of puritan morals, Elliott Spitzer lived a hedonic private life beyond legal limits.

"Harbinger" - noun [$10]
Harbinger means 1. one that pioneers or initiates a major change; precursor; 2. something that presages or foreshadows what is to come.
Sentence: Is the recent gold price of $1000/oz. a harbinger of future major increases in inflation, or does it simply represent volatile swings in a long term uptrend caused by limited supply and increased demand in Asia ?

"Halcyon" - noun and adjective [$10]
Halcyon means (noun) a mythical bird having the power to calm winds and waves; (adjective) 1. calm, peaceful; 2. rich, wealthy, prosperous; 3. happy, joyful, carefree.
Sentence: Oh I dream of a return to halcyon days of the bullish, trending stock market !