Doubts are growing about the long term impact of a planned “super fund” designed to boost short term market liquidity, following concerns voiced yesterday by former Fed chairman Alan Greenspan in Emerging Markets.
Although many believe the immediate benefits of the $75 billion Master Liquidity Enhancement Facility (MLEC) are clear, key market participants echoed Greenspan’s fears about a “non-market force” artificially propping up valuations in the structured finance market.
Hans-Joerg Rudloff, chairman of Barclays Capital, told Emerging Markets yesterday that “whatever eliminates normal price setting mechanisms in the market will always be detrimental in the future”.
Rudloff said: “A [global economic] slowdown is going to come anyway. The question is whether the market accepts this, or instead fights it and then ends up postponing it for one or two years, when it will come back most likely in a much more severe fashion.”
Jacob Frenkel, vice-chairman of AIG, warned that “you need to be very very careful to not destroy incentive systems for the future.” But he acknowledged that, if there is a danger to the financial system itself, then “actions not usually considered, should be considered.”
Dominic Konstam, head of interest rate strategy at Credit Suisse in New York, said that although the EMLC could be a useful tool for clarifying the position of special investment vehicles (SIVs), uncertainty remains over how bad collateral will be treated – which could become more significant if the US housing market has further to fall.
“The sub-prime defaults have been about people who could never repay. We have not yet seen whether the reset of mortgage rates, due to higher Libor, will affect those who are able to repay at the moment – in that case, EMLC might not be a panacea,” said Konstam.
But he added: “Instead of lines of credit they might lose, the SIVs will now have 100% backing with a more formal structure and guarantees. You are providing prices for good collateral that would otherwise not be provided,” he said.
In contrast to Greenspan, Andrew Crockett, president of JP Morgan Chase International, one of the banks that has set up the $75 billion Master Liquidity Enhancement Facility (MLEC), told Emerging Markets that it showed large banks are prepared to “accept responsibilities,” to help good-quality assets be appropriately priced. He added that it would help the market psychologically, but also practically, by “allowing some assets that were temporarily frozen to be moved.”