The only “Austrian” tune Stevens is humming would be of the classical genre, or Falco, if he’s lucky.

In the seventies, lots of mainstream scientists from venerable hatted institutions believed we were all headed for an Ice Age. Apparently they were wrong, or interpreted the signs incorrectly, yet now you apparently see no schizophrenic tension between what the Reserve is arguing and doing and what mainstream economists now view the Rudd Govt should do with accrued and future forgone consumption (ie real savings from production). I do.

Non sequitur. In terms of fiscal impact the budget made immaterial changes to the spending and taxation settings. FFS get over it.

You were even clueless enough to use the code-word “Ponzi”. Here’s a tip: look it up and learn something. The evidence so far is that you received your BEc. from the Tinfoil Department of the Universamity of teh Interwebs.

Perhaps youd like to explain just how the mainstream economic view is doing at present Fyodor, instead of throwing names at your betters.

How is it doing? Just dandy. If you’re het up to argue contra, make your case. I stand ready to be shocked and awed by your command of economic theory and practice. I’ll even give you extra points for anecdotes of collective wisdom from the smoko room.

Explain to me why our Govt shouldnt spend all that $21.7bill surplus theyve budgeted for, or simply give it back to their pet working families who are doing it so tough with those fuel and grocery prices. Why not Mr Mainstream?

Likewise, I’m not particularly vexed about fiscal tinkering in the last budget. Pretty underwhelming in general, was my take. I certainly don’t give a fuck about special pleading for this Mr Mainstream to which you refer.

Sorry, just to be clearer why werent they using the same basis spread for both sides of the book?

Australian variable-rate home loans are priced off the OCR. It’s the convention, albeit not an entirely sensible one. Wholesale funding is based off the prevailing money-market rate, being Bank Bills here.

In the end they did actually manage to roll over didnt they? And this is where my question comes. If they were able to roll over and could pass on the cost where did they come unstuck. I am assuming the bill rate went up just as much as the CP market basis Or didnt it (if in fact they end up rolling in the CP market). And why werent they basing the asset side of the book to the CP market spread rather then the domestic bill market.

RAMS was refinanced because Westpac and other banks stepped in with their own balance sheets to refinance the XCP, principally with warehouse facilities. This only happened after Westpac carved up the business to its own benefit. No free lunch and all that.

It’s this though that got me a little stuck:

However, with little realistic prospect of being able to refinance that debt at the end of the extension period, the business effectively died.

In the end they did actually manage to roll over didn’t they? And this is where my question comes. If they were able to roll over and could pass on the cost where did they come unstuck. I am assuming the bill rate went up just as much as the CP market basis… Or didn’t it (if in fact they end up rolling in the CP market). And why weren’t they basing the asset side of the book to the CP market spread rather then the domestic bill market.

I understood that part of book was mismatched in terms of duration. I didnt think i gave the impression that I thought all their book was mismatched.

But let me ask you as I still dont quite understand what happened with Rams if as you say there was next to none duration risk.

Nearly all their asset side was based on variable rate. anchored to what i am not sure. If the cost of funding blew out why couldnt they pass that on to the borrowers. As far as I understand it they have covered the liabilities side otherwise they would have gone broke.

Assets – predominantly at offical cash rate plus spread

Liabilities – at bill rate (or equivalent) plus spread

When the credit crisis snowballed into an avalanche in August, the bill rate blew out relative to cash. By the end of August, 30day Bills less cash had gone from around 10bps to 35bps. RAMS was able to wear that margin impact temporarily, and did have the option to reprice rates on its mortgage assets. The problem at this stage wasn’t price or spread.

The problem was that RAMS had just over A$6.1bn in XCP paper rolling over in the middle of August that simply had no takers – the XCP market collapsed over July-August. RAMS was forced to “extend” (which is where the “X” in XCP comes from) its programmes for a further 180 days. However, with little realistic prospect of being able to refinance that debt at the end of the extension period, the business effectively died. This fact was confirmed when Westpac bought the operating assets and agreed to become the cornerstone investor in the refinance of the XCP programmes.

As I said, it was the inability to refinance the XCP facilities that killed RAMS.

But let me ask you as I still don’t quite understand what happened with Rams if as you say there was next to none duration risk.

Nearly all their asset side was based on variable rate…. anchored to what i am not sure. If the cost of funding blew out why couldn’t they pass that on to the borrowers. As far as I understand it they have covered the liabilities side otherwise they would have gone broke.

Are you trawling for stock tips again

?

Na, just interested in what you have to say, believe or not.

You sure they werent. (going from memory) There was an interval from the time the problems first arose which i think was back in August and rolling a largish portion of their liabilities which was about 3 to 5 months. In other words I understood they were running a mismatched book. a short book.

The problem wasn’t a mismatched book; as I stated earlier, both the asset and liabilities were effectively priced off short-term variable rates. The problem wasn’t duration mismatch. The problem, as I explained earlier, is that the XCP funding (which was only term 30 days to begin with) that was rolling over – the one you’re referring to – rolled over into a non-existent market. There was simply no functioning market for it. That’s not a mismatch; it’s a liquidity event.

Serious enough to send them to the ER.

You don’t state the spread to which you were referring.

Where do you think is the most serious mispricing going on here in oz? I actually thinks some of the Mac and BNB satellites are very mis priced.

WTF? Are you trawling for stock tips again?

Given I didnt mention fully committed lines of credit I think you can take it as given that I didnt say RAMS had a fully committed lines of credit.

Fair enough.

Whether they had committed lines or not is irrelevant in regard to your assertion that RAMS was running a short book. It wasnt.

You sure they weren’t. (going from memory) There was an interval from the time the problems first arose which i think was back in August and rolling a largish portion of their liabilities which was about 3 to 5 months. In other words I understood they were running a mismatched book…. a short book.

So you’re saying they didn’t have maturity risk in their book?

Depends on which spread youre talking about, and what you mean by serious.

Serious enough to send them to the ER.

I think weve discussed this before – theres a tremendous amount of irrational pricing in debt-land at the mo.

Where do you think is the most serious mispricing going on here in oz? I actually thinks some of the Mac and BNB satellites are very mis priced.

So youre saying that eg RAMS had a fully committed lines of credit? I am not sure that was the case with them or others. Some portion of their lines were committed, but not all.

Given I didn’t mention “fully committed lines of credit” I think you can take it as given that I didn’t say “RAMS had a fully committed lines of credit”.

Whether they had committed lines or not is irrelevant in regard to your assertion that RAMS was “running a short book”. It wasn’t.

But yes, they had serious spread risk.

Depends on which spread you’re talking about, and what you mean by “serious”.

They werent running a short book – their assets were variable rate and their liabilities were variable rate, all short-term.

So you’re saying that eg RAMS had a fully committed lines of credit? I am not sure that was the case with them or others. Some portion of their lines were committed, but not all.

But yes, they had serious spread risk.