Cantor Fitzgerald LP, the bond broker run by Howard Lutnick, is jumping into a part of the shadow banking system that shrank 73 percent in five years.
The firm is arranging a fund that aims to issue as much as $20 billion of commercial paper to help finance banks, the first of its kind to be rated this year by Moody’s Investors Service or Standard & Poor’s. The borrowing will be backed by arrangements that allow “major global banks” to shift assets of any type into the pool as collateral, with the promise of repurchasing them or covering losses.
The index typically rises as investor confidence deteriorates and falls as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The decline in outstanding U.S. asset-backed commercial paper resumed late last year after growth of about $35 billion in the nine months through August to $394 billion, Fed data show. The market shriveled through 2009 after losses on issuers known as structured investment vehicles that lacked support from banks and changes in accounting rules that forced lenders to bring many of the programs onto their balance sheets.
Turning the repo into commercial paper before selling it broadens the types of buyers and makes it easier to trade. Banks also need to find financing with longer maturities amid changing regulations pending under international rules known as the Basel III accord, Roever said.