Buyers vs. Financers April 15, 2008 at 6:35 pm

There has been some discussion recently of the central banks buying assets such as RMBS rather than simply providing financing for them. Intuitively I am less enamoured of this idea. Some of these assets may indeed represent a screaming buy at current levels, but I find it hard to believe any government body would have the expertise to assess that. Moreover many of the sellers are reluctant to trade at the current level, and the moral hazard of buying above the market is evident and insupportable. Perhaps instead the central banks could provide a financing wrapper to encourage liquidity in the market. Much like a bond wrap is a guarantee that if the bond does not pay then the wrapper will, so a certificate of finance would allow the holder of the bond whoever they may be to access the central bank window to finance the asset (with an appropriate haircut). The certificate would be specific to the asset so the central bank could target the financing appropriately, and it could have a reasonable but not excessive life – a year, perhaps.

Update. If the Bank is going to offer 2 way repos, ABS vs. gilts, then just make these repos assignable so the bank can sell the ABS with the repo in place. Job done.

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