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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Jun 16

Written by: Donald van Deventer
6/16/2011 12:19 AM 

Today’s blog focuses on the U.S. dollar funding shortfall that took place at Barclays during the period from February 8, 2008 to March 16, 2009. Today’s blog contains a surprising conclusion.  Barclays ranked second in average borrowings from the Fed during the March-May 2008 crisis surrounding the collapse of Bear Stearns and its subsequent absorption by JPMorgan Chase, which we review in a subsequent blog. In spite of this semi-crisis, Barclays agreed on September 16, 2008 to take on $72 billion of the trading assets of Lehman Brothers and $68 billion of the trading liabilities. Although Barclays’ initial funding shortfall from this transaction was quite large, the bank’s ability to repay the borrowings was much more substantial than it appeared to be in the aftermath of the Bear Stearns collapse.

This is the eleventh Kamakura case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, Lehman Brothers, Morgan Stanley, Citigroup, Dexia SA, and Depfa Bank plc.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at Barclays during the credit crisis. Although most observers implicitly assume that the primary beneficiaries of Fed support in the credit crisis were U.S. organizations, there were some major European beneficiaries of Federal Reserve lending programs, and Barclays ranked higher than any firm but the consolidated JPMorgan-Bear Stearns entity in its borrowings during the March-May 2008 period.

The data used for Barclays in this analysis is described in more detail below. The data consists of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included in this definition put forth by the Federal Reserve. 

A detailed chronology of the credit crisis through February 28, 2008 is given in this recent blog post:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog, www.kamakuraco.com, May 13, 2011.

The key dates in the chronology relevant to Barclays, including the timing of the Bear Stearns events, are summarized below.  The Levin report referred to below is the report entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” Majority and Minority Staff Report, Permanent Committee on Investigations (Senator Carl Levin, Chairman), U.S. Senate, April 13, 2011.

April 27, 2007
Moody’s cuts ratings of $348 million of Lehman CDOs
   
June 7, 2007
Bear Stearns suspends redemption rights for hedge fund heavily invested in subprime debt market after losing 19% of value in April alone (Source: www.businessweek.com)
   
June 20, 2007
Merrill Lynch seizes $850 million in assets from the two Bear Stearns hedge funds. Merrill tries to auction the bonds, but the auction fails
   
June 17, 2007
Two Bear Stearns subprime hedge funds collapse (Source: Levin report, page 47)
   
June 21, 2007
“Bear Stearns Fund Collapse Send Shock Through CDOs” article on Bloomberg details losses on mortgage-backed securities-related CDOs
   
July 17, 2007
Bear Stearns sends letter to investors stating that two Bear Stearns hedge funds specializing in subprime debt have lost at least 90% of their value. The funds invested only in AAA tranches of subprime-related debt. (Source: investopedia.com)
   
August 1, 2007
Bear Stearns' two troubled funds file for bankruptcy protection and the company freezes assets in a third fund. (Source: www.investopedia.com)
   
August 31, 2007
Barclays rescues $1.6 billion Cairn Capital Fund due to U.S. mortgage losses (source: Bloomberg)
   
November 15, 2007
Barclays confirms a $1.6 billion write down in the month of October on their subprime holdings. The bank also released that more than £5 billion in exposure to subprime loan packages could lead to more write downs in the future
   
November 29, 2007
Bear Stearns cuts 650 more jobs, bringing total job cuts to 1,500, 10% of its total work force. (Source: www.ft.com)
   
December 20, 2007
Bear Stearns reports its first quarterly loss in 84 years, $854 million, after write downs of $1.9 billion on mortgage holdings (Source: www.ft.com)
   
January 17, 2008
Lehman Brothers cuts 1,300 jobs in its domestic mortgage division after previously cutting 2,500 jobs due to subprime lending problems. (Source: www.bankingtimes.co.uk)
   
March 14, 2008
Federal Reserve and JPMorgan Chase agree to provide emergency funding for Bear Stearns. (Under the agreement, JPMorgan would borrow from the Federal Reserve discount window and funnel the borrowings to Bear Stearns. Source: Forbes and www.datacenterknowledge.com)
   
March 16, 2008
JPMorgan Chase agrees to pay $2 per share for Bear Stearns on Sunday, March 16, a 93% discount to the closing price on Friday March 14. JPMorgan agreed to guarantee the trading liabilities of Bear Stearns, effective immediately (Source: New York Times).
   
March 16, 2008
Federal Reserve agrees to provide up to $30 billion of financing to support Bear Stearns’ “less liquid” assets (Source: New York Times).
   
March 24, 2008
JPMorgan Chase raises bid for Bear Stearns from $2 per share to $10 per share. JPMorgan also agreed to bear the first $1 billion of losses on Bear Stearns assets, with the Federal Reserve bearing the next $29 billion of losses. (Source: The Times of London)
   
March 24, 2008
Federal Reserve Bank of New York forms Maiden Lane I to help JPMorgan Chase acquire Bear Stearns (Source: Levin report, page 47).
   
May 29, 2008
Bear Stearns shareholders approve sale (Source: Levin report, page 47).
   
May 30, 2008
JPMorgan Chase completes Bear Stearns acquisition (Source: Charles Schwab & Co. report)
   
September 14, 2008
Lehman Brothers bankruptcy (Source: Levin report, page 47).
   
September 14, 2008
Merrill Lynch announces sale to Bank of America (Source: Levin report, page 47).
   
September 16, 2008
Federal Reserve offers $85 billion credit line to AIG; Reserve Primary Money Fund NAV falls below $1 (Source: Levin report, page 47).
   
September 16, 2008
Barclays agrees to pay $1.75 billion to take on core Lehman Brothers businesses, including $72 billion of trading assets and $68 billion of trading liabilities (Source: New York Times and The Guardian).
   
September 23, 2008
Nomura pays $225 million for Asia offices of Lehman Brothers (Source: The Age)

This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to Barclays during the period February 8, 2008 to March 16, 2009. Barclays’ borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowing $2.0 billion on March 17, 2008, with borrowings continuously outstanding from March 24, 2008 through May 29, 2008 and then from September 18, 2008 through December 18, 2008.
Average from
 
2/8/2008 to 3/16/2009
$2.45 billion
Average when Drawn
$6.18 billion
Maximum Drawn
$47.9 billion on September 18, 2008
Number of Days with
 
Outstanding Borrowings
160 days

The graph below shows the one month and one year default probabilities for Barclays from Kamakura Risk Information Services version 5.0 Jarrow-Chava reduced form credit model. Default probabilities began rising most sharply in the aftermath of the partial acquisition of Lehman Brothers on September 16, 2008 and peaked in March 2009:

 

Cumulative default risk peaked for Barclays on March 9, 2009, with a 5 year cumulative default risk of 13.89%.



Barclays’s first borrowing from the Federal Reserve was $2.0 billion on March 17, 2008, the first business day after the Sunday March 16 announcement that JPMorgan Chase would absorb Bear Stearns in a Fed-supported rescue. Although the peak borrowing for Barclays from the Fed came on September 18, 2008, immediately after its agreement to purchase most of the trading assets and liabilities of Lehman Brothers, it was the period from March 17 through May 29, 2008 which showed a volatility and volume of funding shortfalls that was very unique compared to other firms. 



In the chart below, we compare Barclays’s funding short fall to those firms whose liquidity risk we have previously analyzed in this series.  Barclays’s average drawn borrowing of $6.2 billion ranks ninth of the firms analyzed in this series to date.



If one ranks the same firms by largest outstanding borrowing on a single day, Barclays ranks sixth, with a peak borrowing of $47.9 billion, very close to the peak borrowings of Dexia, the consolidated Bank of America, and Depfa Bank plc:



Borrowings During the Bear Stearns Crisis, March 14, 2008 to May 31, 2008

If we focus on the period from March 15 (one day prior to the JPMorgan Chase absorption of Bear Stearns) to May 31, 2008, it is apparent that Barclays’ funding needs during that period were unique compared to other institutions. Barclays’ average borrowings of $7.7 billion were triple that of any other institution except for the consolidated JPMorgan Chase/Bear Stearns.



If one analyzes the maximum borrowings during the Bear Stearns crisis, March 15-May 31, 2008, Barclays’ peak borrowing of $23.6 billion again ranks second after JPMorgan Chase/Bear Stearns and is triple that of any other institution during this period, among the firms studied so far:



Borrowings from the Commercial Paper Funding Facility

Barclays borrowed $7.9 billion on October 31, 2008 for three months and an additional $1.987 billion on November 3, rolling over both borrowings 3 months and 6 months later. The final borrowing was for $2.98 billion in July 2009.



Implications of Funding Shortfall Data

Barclays’s peak funding need of $47.9 billion on September 18, 2008 was almost double the $28 billion funding shortfall at Lehman Brothers on September 15, 2008, the day after Lehman Brothers filed for bankruptcy. More notably, Barclays’ peak borrowing during the March 15, 2008 to May 31, 2008 period was $23.6 billion on April 24, 2008 was nearly equal to the amount that the Federal Reserve made available to Lehman Brothers only after the firm was forced to declare bankruptcy on Sunday September 14, 2008. It is ironic that Lehman Brothers was sold to a firm who only five months earlier suffered a funding shortfall nearly equal to that which brought down Lehman Brothers.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

http://www.federalreserve.gov/newsevents/reform_transaction.htm

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From www.twitter.com/zerohedge Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at info@kamakuraco.com.  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
June 14, 2011

© Copyright 2011 by Donald R. van Deventer, All Rights Reserved.

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