Comment on Adrian and McAndrews
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Comment on Adrian and McAndrews

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Comments on“The FdFederall R eserve’’s Primary Dealer Credit Facility” Tobias Adrian and James McAndrewsSGE Session on “The Fed’s New Lending Facilities”ASSA Meetings San Francisco JhJohn B. TaylorStanford UniversityJanuary 4, 2009Summary• Excellent paper on economic rationale for PDCF– Analogy: Broker‐Dealers (PDCF), Depository Institutions (PCF)• Focus onon role ofof the ReRepo market– Haircuts, margins, leverage, downward spirals (33:1 to 20:1)– Leverage first rose in recent crisis ((,SIVs, large rate cuts)• Structural changes over time:– Growth of broker‐dealers and hedge funds relative to dideposittory iitnstitituttiions– Trend toward tradable assets and liabilities– Repoo runs or margin spirals rarather than classic bank runsruns• Protections: Penalty rates, regulation, moral hazard• Main Comments:– Empirical Impact – Slippery slope to more facilitiesEmpiricall Findings• “credit default swap prices of pyprimary dealers fell after the introduction of the PDCF”• “To date, the PDCF seems to be having measurable effectcts on thethe repoo and otherother funding markets, as many primary dealers found that their perceived risk of default, as measured by credit default swap prices, declined after the facility’s introduction. ” • Yet nono evidence prpresentted in thethe paper, so lelet’s take a look at CDS rates for Merrill Lynch and Goldman Sachs (for example)…basis pointsmillions of dollars500400300150,000200125,000100100 ...

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Comments on e e era eserve s Primary Dealer Credit Facility” Tobias Adrian and James McAndrews
SGE Session on “The Fed’s New Lending Facilities” ASSA Meetings San Francisco
o n . ay or Stanford University  ,
Summary Excellent  paper  on  economic  rationale  for  PDCF – Analogy:  Broker Dealers  (PDCF),  Depository  Institutions  (PCF)       – Haircuts,  margins,  leverage,  downward  spirals  (33:1  to  20:1) Levera e  first  rose  in  recent  crisis  SIVs  lar e  rate  cuts Structural  changes  over  time: – Growth  of  broker dealers  and  hedge  funds  relative  to  epos ory  nst ut ons – Trend  toward  tradable  assets  and  liabilities          Protections:  Penalty  rates,  regulation,  moral  hazard Main  Comments: – Empirical  Impact  – Slippery  slope  to  more  facilities
 
credit  default  swa  rices  of  rimar  dealers  fell  after  the  introduction  of  the  PDCF To  date,  the  PDCF  seems  to  be  having         markets,  as  many  primary  dealers  found  that  their  perceived  risk  of  default,  as  measured  by  credit  default  swap  prices,  declined  after  the  facilitys  introduction.         ,    take  a  look  at  CDS  rates  for  Merrill  Lynch  and  Goldman  Sachs  (for  example)
 
millions of dollars
150,000
125,000
100,000 75,000 50,000
25,000
0
PDCF
CDS Goldman Sachs
basis points 500
Weekly  averages  of  daily  CDS  data  and  weekly  average  PDCF  loans  
400
200
100
0
millions of dollars
150,000 125,000
100,000 75,000 ,
25,000
0
PDCF CDS Merrill Lynch CDS Goldman Sachs
basis points 600
500
400
200
100
0
Daily  CDS  data  with  daily  PDCF  date  interpolated  from  weekly  average  data
 
 
 
Gra hical  evidence  is  difficult  to  inter ret CDS  rates  appear  to  increase  when  PDCF  loans  rise! But  there  are  cause  and  effect  issues  to  sort  out We  can  apply  time  series  methods  to  sort  out  the  timing  differences ‐ ‐     between  CDS  rates  (on  Merrill  Lynch   and  Goldman  Sachs)  and  PDCF  loans Compute  impulse  response  functions  from  the  VARs Look  for  significant  effects    
60
40
20
0
-20
PDCF  and  Goldman  Sachs  CDS  Impulse  Responses Based  on  Weekly  Data Res onse to Choles ne S.D. Innovations ± 2 S.E. Response of CMER1U5 to CMER1U5 Response of CMER1U5 to PDCF 60
40
20
0
-20
-40 -40 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of PDCF to CMER1U5 Response of PDCF to PDCF 30,000 30,000
20,000
10,000
0
-10,000
20,000
10,000
0
-10,000
-20,000 -20,000 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
80
0
-40
PDCF  and  Merrill  Lynch  CDS  Impulse  Responses Based  on  Weekly  Data Response to Cholesky One S.D. Innovations ± 2 S.E. Response of CGS1U5 to CGS1U5 Response of CGS1U5 to PDCF 80
0
-40
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of PDCF to CGS1U5 Response of PDCF to PDCF 30,000 30,000
20,000
10,000
0
-10,000
20,000
10,000
0
10,000 -
-20,000 -20,000 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
 
 
  
 
  
 
 
 
 
 
  negatively    of  the  PDCF CDS  rates  Gran er cause  PDCF  loans  positively     loans  at  the  time  of  market  stress
 
 
 
 
A  Slippery  Slope  to  More  Facilities?  Securities  (Treasury  and  Agency)  held  outright  Repos  Loans  from  the  TAF Other  Loans Primary  Credit  Facility  (discount  window) – Primary  Dealer  Credit  Facility – Asset  Back  Commercial  Paper  Money  Market  Mutual  Fund  Liquidity  Facility oans  to  – Term  Asset Backed  Securities  Loan  Facility  (credit  card,  student,  auto)* Private  Portfolio  holdings     – Maiden  Lane  I  (Bear  Stearns) – Maiden  Lane  II   (AIG)     – Money  Market  Investor  Funding  Facility* – Mortgage  Backed  Securities  Purchase  Program*         
 
Note:  Minimal  change  items  are  gold  stock,  SDRs,  Treasury  currency  outstanding,  seasonal  and  secondary  discounts,  float  
 
billions of dollars 900
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100
0
2000
December 31, 2008  $848 Billion
Reserve Balances of De ositor Institutions at Federal Reserve Banks
2002
2004
September 10, 2008  $8 Billion
2006 2008