This past weekend marked the third anniversary of the start of the "Subprime Liquidity Crisis," a series of panics in the short-term funding markets and money markets. We mark the beginning as August 7, 2007, when several "Secured Liquidity Notes, or "Extendible ABCP" issues delayed payment and triggered a series of market and media concerns over structured investments. We review our coverage of these events from three years ago below.
In the first sign of problems in the "cash" markets, Crane Data's August 7, 2007, News featured, "Trouble in ABCP Market as Secured Liquidity Notes (SLNs) Are Extended." Our brief said, "The meltdown in the CDO marketplace has begun impacting money market funds, though in a limited fashion. Several SLN (secured liquidity note) programs extended yesterday, including American Home Mortgage-related Broad Hollow Funding, Luminent Star Funding, and Ottimo Funding Ltd. The Broad Hollow program extended for 4 months, and Luminent extended for 110 days. Only a handful of money funds held these securities as of recent filings, and the holdings appeared to be very minor (<2%). Some money funds have avoided extendible asset-backed commercial paper because the investor provides the liquidity. The penalty step-up in yield for extension may be some solace for any companies holding these now illiquid securities. We've also heard that several auctions for ARS (auction-rate securities) have failed in recent days."
On August 8, we wrote "Extendible ABCP Troubles Trigger Rare Wall Street Journal CP Article," which said, "Today's Wall Street Journal features 'Commercial Paper Shows Some Stress,' one of only a handful of stories the Journal has ever run on the CP, or commercial paper, market. It discusses the recent extensions of ABCP, and estimates that 'Extendible asset-backed commercial paper makes up about 12% to 13%, or around $144 billion to $156 billion, of the $1.2 trillion asset-backed commercial-paper market.' Fitch's AJ Santos told Dow Jones that ABCP 'borrowings secured by bundles of home loans accounted for about 10% to 12% of the market in the first quarter'."
Crane Data also wrote another August 8 piece entitled, "'Subprime 'Tsunami' Hits Asset-Backed Commercial Paper Market' Says Bloomberg." It said, "Extendible asset-backed commercial paper yesterday carried yields of 5.75 percent to 5.95 percent, compared with 5.45 percent for asset-backed commercial paper that isn't extendible and 5.25 percent to 5.30 percent for corporate commercial paper," said the article, quoting Money Market One's Lee Epstein. Bloomberg says extendible notes 'make up about 15 percent of the asset-backed' market of $1.15 trillion, 'or about $172.5 billion, according to Moody's.'"
Finally, on August 9, Crane Data wrote "'Money Funds May Hold Subprime Too' Says Wall Street Journal." We said, "Thursday's WSJ article names names, saying that Evergreen Institutional Money Market Fund held recently-extended Broadhollow Funding LLC debt earlier this year, according to SEC filings. The Journal also incorrectly mentions Putnam Premier Income Trust, but this is a bond fund and not a money market fund. (Putnam says they've never held Broadhollow in their money funds.) The Journal says money fund managers will likely 'pay closer attention to what is backing the commercial paper they buy, demand additional compensation for investing in a particular type pf vehicle that issues some asset-backed commercial paper and call for greater transparency in the market.' The article quotes several fund managers, including Schwab's Linda Klingman, Advantus' Jon Thompson, and William Blair's Jim Kaplan. The subprime problem 'isn't likely to cause big losses at these funds or endanger them' adds the piece."
See also Dow Jones Financial News' "The credit crunch three years on: The day the world changed?". It says, "For Adam Applegarth, then chief executive of UK bank Northern Rock, it was the day 'life changed'. August 9, 2007 was the day the markets froze. For Northern Rock, it meant an end to the short-term financing on which it relied and, within six months, the bank had been privatised. For the global financial markets, it was the beginning of a period of turmoil that redrew the economic landscape."
