Paul Krugman Recommends Floyd Norris Today

Floyd Norris writes:

A New Kind of Bank Run Tests Old Safeguards: A few generations ago, savers responded to financial panics with runs on banks, and even healthy institutions could fail if they could not raise enough cash quickly enough. For a long time, that all seemed to be safely relegated to the past. But now the runs are back — and this time the targets are not banks but the securities that have replaced them as the prime generators of credit in the new financial system.

“Our current system of levered finance and its related structures may be critically flawed,” said William H. Gross, the chief investment officer of Pimco, a mutual fund company. “Nothing within it allows for the hedging of liquidity risk, and that is the problem at the moment.” This problem has plagued the United States at regular intervals. The Panic of 1907 was halted only when the banker J. P. Morgan persuaded banks to stand together and halt the string of closings by lending money to threatened institutions. That led to the creation of the Federal Reserve, as Congress recoiled from the notion that the country’s financial health had relied on the wealth and wisdom of one private citizen. Then the Depression, with a wave of bank failures, led to the establishment of deposit insurance. With that, savers became convinced that they need not worry about the health of their bank, and bank runs vanished.

But a new financial architecture emerged in the last decade — one that relied more on securities and less on banks as intermediaries. With the worth of those securities now being questioned — and no equivalent of deposit insurance — some who financed the securities want their money out, a fact that has created the 21st-century equivalent of a run on a bank. Left to deal with the run are the institutions that were created to deal with the old system’s problems — notably the central banks like the Federal Reserve and the European Central Bank. But, in contrast to their close involvement with the banking system, these banks have little regulatory oversight of the securities that are in trouble and may not even know who is holding them....

The problem first gained widespread attention when two hedge funds run by the brokerage firm Bear Stearns collapsed and a third Bear Stearns fund had to suspend redemptions as investors sought to get out even though there was no evidence that the fund was in trouble. “The third Bear Stearns fund announcement was the key,” said Robert Barbera, the chief economist of ITG. “You have to believe that in the hedge fund and mutual fund complexes, there is a decision that is building that says, ‘I want to hold some Treasuries to have a cushion if I see redemptions.’”...

Yesterday, BNP Paribas, a major French bank, said it could no longer value three investment funds that it managed, whose assets had been invested in highly rated securities that were backed by dubious mortgages. “The complete evaporation of liquidity in certain market segments of the U.S. securitization market,” the French bank said, “has made it impossible to value certain assets fairly, regardless of their quality or credit rating.” Adding to the problem is that the questionable securities are widely owned and sometimes have been repackaged to form the basis of other securities. European banks and funds own paper tied to subprime mortgages, and it is not clear who else does, or how investors will react....

The central banks, while clearly crucial to dealing with the loss of faith in the new financial system, lost influence under that system. Loans could be arranged by nonbanks, not subject to bank regulators, and the regulators were hesitant to impose rules that would not apply to all lenders.... Prices in the futures market for federal funds show that just a few weeks ago investors thought there would be no Fed easing this year. Now they seem to think such a move is highly likely, and some expect it as early as next month. But the Fed’s influence is limited when lenders are suddenly risk-averse. “The impetus of lowering interest rates may not help, if they don’t let you borrow in the first place,” said Kingman Penniman, the president of KDP Investment Advisors.

The new financial system is not the one the Fed was created to deal with, but it is the one it must try to handle.

Comments

[christofay]

"William H. Gross, the chief investment officer of Pimco, a mutual fund company. 'Nothing within it allows for the hedging of liquidity risk, and that is the problem at the moment.'"

WTF, this is Bill Gross the chief of the selection committee of who gets voted off the island of his world's biggest bond fund saying before the credit squeeze there isn't a derivative to speculate on access to funding in the credit squeeze.

[Michael Carroll]

In a far away land there is a barn filled with horses.

Everyone is upset because although some people want to buy horses and some people want to sell horses it has occurred to folks that some of the horses might not be worth buying or selling at asking prices.

To complicate things, although I have a piece of paper that says I own a "horse" what this really means is I own the tail of a very good horse, the hoof of a very feeble horse and now I am told that some of the horse parts I own exist only as bottles of gelatin and glue.

At the end of the day can't buyers and sellers just get together and pay someone to go to the barn and look some of these goddamned horses in the mouth?

[Leila A.]

I'm a mere apprentice novelist, with a graduate degree in telling lies (MFA Creative Writing). In that capacity, I've allowed a fictional guest to post a confession on my blog, Dove's Eye View.

http://bedouina.typepad.com/doves_eye/2007/08/hi-my-name-is-u.html

Uncle Sam, representing the USA, admits to the world that he needs Debtors Anonymous. He has many of the officially adopted Signs of Compulsive Debting, and he can't handle his problem by himself.

But of course, he's not really ready to change. Stay tuned.

[knzn]

I haven’t quite got my mind around all this, but my gut says the comparison with pre-FDIC era bank runs is overly alarmist. One of the consequences of the replacement of banks by securitization is that the system is more diffuse, which means that the spillover effects from a run on a few entities are not transmitted quite as readily to the rest of the system. Illiquidity in the market for mortgage-backed CDOs and CMOs, for example, doesn’t necessarily mean investors are unwilling to buy, say, corporate bonds, though clearly they are demanding wider spreads.

I guess, here’s the thing: when banks were running our financial system, they were all about leverage. I mean, traditionally, leverage (borrowing from depositors to invest in loans) was the core of a bank’s business model, and banks were the only game in town. So a few bank runs could lead to massive disintermediation. Today there are a lot of players with varying degrees of leverage, many with no leverage at all. Those who are highly leveraged, and who hold hard-to-value securities, are in trouble. The rest are fairly solid, it seems to me, even if part of the system collapses.

[Laurent GUERBY]

"The central banks, while clearly crucial to dealing with the loss of faith in the new financial system, lost influence under that system. Loans could be arranged by nonbanks, not subject to bank regulators, and the regulators were hesitant to impose rules that would not apply to all lenders...."

Incredible lies.

Only banks lend money and no one force hedge fund and rich investors to buy debt packaged by banks.

Central choose not to regulate bank lending prefering the lazy approach of setting short term rates and taking a nap.

The current event are 100% due to central bank failure to do their job of not being always friends of private banks.

Why lying about that so blatantly?

[Colin Danby]

So how *do* you hedge liquidity risk?

The Norris piece is great, but I was wondering how much of this was not anticipated by Bagehot 130 years back -- he certainly understood that occasions like this had little to do with interest rates as simple prices and that liquidity could suddenly dry up even for perfectly good assets, which is why the last few days seem like good Bagehotian central banking: lend generously in times of worry. Is the qualitative difference between now and then opacity, that is that it's harder to figure out who owns what?

[David Lloyd-Jones]

I once audited the Toronto Branch of Fuji Bank, which is a Schedule B bank in Canada. They have a one-man trading desk: the guy works a dial up phone, but they give him a squawk-box in his cubicle to make him feel real.

I asked him how he knew the net net of his position, and he told me he writes out all his positions on legal pads, and as long as the longs are within a couple of lines of the shorts, that's good enough.

[David Lloyd-Jones]

I once audited the Toronto Branch of Fuji Bank, which is a Schedule B bank in Canada. They have a one-man trading desk: the guy works a dial up phone, but they give him a squawk-box in his cubicle to make him feel real.

I asked him how he knew the net net of his position, and he told me he writes out all his positions on legal pads, and as long as the longs are within a couple of lines of the shorts, that's good enough.

[Dennis - SGMM]

Is Due Diligence too antique a concept for today's market? I find it hard to believe that no one was aware of the extent to which mortgage backed securities were based on sub-prime or Alt-A mortgages many of which were essentially worth the paper they were printed on.

What's next, roulette securities? How about Texas Hold 'Em funds?

[bailey]

The Norris piece MIGHT have been great, had it mentioned it was AG as FED Head who pushed hard for the total repeal of Glass-Steagall WITHOUT demanding regulatory oversight also be updated to respond to the problems sure to result from the deregulation.

[James Killus]

Interesting. It looks like we have two different but connected problems here.

The first was mentioned recently: because of securitization, those who bought their homes on slim credit have difficulty renegotiating the loans, as there is no single entity with whom to negotiate.

The second is the massive illiquidity that this (along with stupidity and panic) has caused.

The first is a problem for poor credit risk homeowners, though it may spread to the more affluent if it causes a housing price collapse (probably unlikely, but never say never).

The second is a problem almost exclusively confined to those of substantial wealth, though it spreads to lesser mortals when it begins to affect the financial system.

One might think that efforts were being made to solve both problems; indeed, it may well be that there is a good, single solution. But why do I have the feeling that there are folks staying up late trying to figure out ways to help the latter group at the expense of the former, or at least ways to help the latter group in such a way as to deny assistance to the former?

[bakho]

What's next? Hedge Fund insurance?

[don majors]

Why no mention of the greed which brings moral hazard into play. The failure to verify borrowers financial statements and income history; the enormous profits made writing mortgages; eye popping real estate commissions; unbelieveable realty price rises with no serious governmental oversight pronouncements exposing the known hazards.

Now those same jokers say that there has to be a time for re-evaluating the "risks" and allowing "corrective interest rate changes" ... good lord, they don't know how big the lies are on the balance sheets or if they are "off budget" somewhere. Betty Crocker is surely spinning in her grave.

The news media shows homeowners losing homes into which the borrower never even pumped in a nickel -- then the fork in the eyeball ... added funds loaned to include all fees AND the trip to Vegas. We've really been had.

I'm even scared of USTs. Is it time for Krugerands stuck under the mattress? Does anyone really know? The answer is: No !

[don majors]

Why no mention of the greed which brings moral hazard into play. The failure to verify borrowers financial statements and income history; the enormous profits made writing mortgages; eye popping real estate commissions; unbelieveable realty price rises with no serious governmental oversight pronouncements exposing the known hazards.

Now those same jokers say that there has to be a time for re-evaluating the "risks" and allowing "corrective interest rate changes" ... good lord, they don't know how big the lies are on the balance sheets or if they are "off budget" somewhere. Betty Crocker is surely spinning in her grave.

The news media shows homeowners losing homes into which the borrower never even pumped in a nickel -- then the fork in the eyeball ... added funds loaned to include all fees AND the trip to Vegas. We've really been had.

I'm even scared of USTs. Is it time for Krugerands stuck under the mattress? Does anyone really know? The answer is: No !

[John Drake]

Of course we don’t have tools to deal with a rogue financial system. It was created for the express purpose of circumventing the rules that regulated the old financial system. The Fed can’t deal with loan sharks either because by design they are outside the law. How are you going to get people to buy junk once they realize it really is junk? If you want safety buy T-Bills, otherwise you take your chances lending money to people who can’t pay you back.

[Roger Bigod]

The answer is so obvious I'm sure it's been planned, and the authorities are simply waiting for the timely moment. There should be a Federal bail-out agency to buy only the forms of worthless derivative paper held by the rich. The name should be suitably uplifting, something like Homeland Property Security and Prudence Encouragement Agency. The beauty part is that they could trade agency paper for toxic paper, keeping the whole thing off budget.

[Craig Tindale]

Rothbard, Hayek and Mises stand in heaven just looking down saying "I told you so" :)

This is the beginning of the end of moneterist inflationists . The Austrian's always said (sorry guteed) this would happen eventually .

The moral hazard of fiat and the Bernanke / Greenspan experiments is just about exhausted.

Brad , love work but your generation of economists have destroyed America for generations to come.

Yeay yeah I know we are still in the denial phase but makr my words this next phase will make you all question everything you ever concept you ever held dear.

[andres]

Craig: That's a wonderful impersonation of an inebriated George W. Bush as a disciple/convert of Austrian economics ;-)

[Matt]

I follow it all here, including reading all the posts. Very enlightening.

Unlike the past, these events unfold in predicted time as we follow along with our expert economists (good column Paul!). Each of the thousands of semi-literate followers are here now, they wern't there before.

Our bankers sit in a new kind of fishbowl, for we have already discussed over the months all of the predicted paths our goldfish could take.

[Craig Tindale]

lol andre your right I have had a few red wines ;)

I did my post grad in CB monetary policy and reading through Bernanke's work it dawned on me at the time that it was impossibly naïve. Target inflation rates are just shorthand for bullshitting the public. Bernankes papers about monetary rains and helicopter drops to the consumer are just plain snake oil , for god sake the guy recommended that you instigate money drops to consumers through the Real Estate asset channel so consumers would spend money due to the wealth effect they we seduced into feeling and then if you still get deflation you cause you currency to devalue so you get import price inflation. Further , if it still persists you start buying real asset and services in the economy. Geeze, we used to carry on about the USSR’s centrally managed production and now we have centrally managed consumption, worse the consumers have been seduced or tricked into it by the fraudulent and duplicitous policies of the central bankers, the consumer (to dumb to realize they aren’t really wealthier) use their home ATM’s to by flat screen TV’s all the while we borrow of off the Chinese to pay them for the damn TV’s we couldn’t afford in the first place. Now they threaten us with financial a nuke event and we say they wont do it it will hurt them as well, lol yeah we buy everything off them, we produce no goods, we borrow off them to finance most of our budget and we are going to stare them down in a trade n finance war. The country is nuts and Bernanke is part of a generation of economists who used their own country as a monetary policy lab experiment .

I frankly think that we have all been heading down the wrong path , it worked and worked till it didn’t work, the bond market problems are a direct result of Bernankes monetary rains but the helicopter wont help anymore he needs B52’s . Enron was an early meme for the fraud that’s been perpetrated in the bond and fixed income market and frankly Von Mises & Co warned us of this result and need to be dusted off.

[anne]

What the Federal Reserve has done is to provide liquidity to allow for smooth immediate and short term financial transactions. Nothing more. Institutions need a flow of credit for the shortest of periods to allow for normal financial transaction. Even perfectly secure short term debt needs to be accepted for immediate payment to allow for our common transactions. The Fed is insuring that immediate financial transactions continue by lending to banks as always but in larger amounts through this cautious or even paniky period.

There is no changing of conditions in the mortgage market as such. There is no rescue of institutions that hold difficult mortgage debt and derivatives. What the Fed is doing is protecting what should be normal financial transactions. I agree completely with Paul Krugman about the danger of a cascade of lending limitations, but as such there is no reason to criticize what has been essentially a normal Fed operation magnified to avert a potential financial market freeze.

There has been no rescue, no putting.

The Fed is supposed to insure immediate liquidity needs. Such insurance simply defuses needless risk, where there is no risk to the underlying debt instruments.

[anne]

http://delong.typepad.com/sdj/2007/08/the-fed-is-buyi.html

August 10, 2007

The Fed Is Buying Mortgage-Backed Securities?

Brad,

There is a big distinction between outright purchases and collateral taken in repo. On the former, you are basically right that the Fed only holds US Treasuries (although if you look closely you will see that in the past that purchased agencies outright as well). What they are doing in repo is taking collateral.

[Ah. Thanks. Bloomberg had it as a *purchase*, which would have been unusual both in size and in manner...]

This is not "intervention" since they are going to give the stuff back. In the case of todays (admittedly very large) $35 billion operation, it will all automatically reverse on Monday.

A quick look at the history of these temporary open market operations shows that they have been taking mortgage-backed securities as collateral for repo for some time. In the past 30 seconds I could verify that they have been doing it regularly since at least 2000. The quantities have normally been small (between $100 mil and $2 bil), but they have been doing it.

So this is not what I would call an "intervention in the mortgage-backed securities market". And it is not unusual.

If you are interested in the data, you can download it from
http://www.newyorkfed.org/markets/omo/dmm/temp.cfm

Steve Cecchetti

[anne]

Austrian complaints about central bank immediate and short term credit extension needs are a simply way to understand what is generally made incomprehensible or Austrian economic thought in general. The basic idea masked by writing in endless complexity, is that facilitating financial transactions should never be necessary. The idea is of course absurd, as should be evident following central bank credit extension on any day but is especially evident in a possible credit freezing as in the last days.

[don majors]

Anne's comment re: "facilitating financial transactions" is right on.

Consider having to make a payroll with zero cash in the bank but a guaranteed sales contract for a completed building that will yield a million dollar profit after 90 days. Cash flow is an immediate problem and a good working relationship with a banker will solve the immediate cash needs. It's a problem business faces all the time.

Moral hazard/fraud occurs when the timing sequences of cash flows are tampered with or asset values are overstated.

Apologies is advance for my simplistic illustration.

[anne]

Don Majors' illustration is a fine aid.

[Marcy Shaffer]

Our VERSUS musical political parody website's Parody of the Week addresses the turmoil in "BEARISH" (to the Terry Kirkman song "Cherish"). "BEARISH" is on VERSUS at http://versusplus.com, and on YouTube at http://youtube.com/watch?v=37pal-PYTUQ.

[bigTom]

"Apologies is advance for my simplistic illustration."

For many of us readers who are non-experts, thats just what is needed!

[NoiseTrader]

Floyd Norris gets it right by likening this to a bank run, but I think he misses an important point. The problem is not that loans are now securitized. The problem is that too much credit and liquidity risk has been shifted into the hands of people and institutions who have no idea what they hold.

One of the reasons the hedge fund industry has boomed in the last 5 years is a shift in attitudes toward funds among conservative investors like pensions and bank trust departments. Hedge funds, which in the past were seen as something racy and dangerous, have now been accepted as a prudent choice for conservative portfolios.

The result of this shift has been a wave of conservative money washing into hedge funds, often through funds-of-funds. When a pension manager or wealthy widow is sold a fund of funds, they are told "here is a chance to pick up some return in a way that is not correlated with the traditional markets." That is a reasonable statement, but it leaves the investor with no idea of what the hedge funds are doing with their money. These people do not have confidence in their hedge fund investments. The do not understand what they own or how it generates a return, and that makes them especially vulnerable to panic.

The losses at Sowood were a turning point. Sowood had a solid pedigree. People must be thinking that if Sowood can lose half its value in a couple of months, no fund is safe. And it doesn't help that every morning, there is a report of a fund somewhere that has decided to suspend redemptions to "protect" its investors from "abnormal market conditions."

All these conservative investors with money in hedge funds must feel very much like bank depositors did in 1932. They entrust their money to an opaque financial institution that promises a low risk return, and then discover that many similar institutions are failing. The impulse to flee must be very strong -- especially since many of these investors have no idea at all what they own.

Now imagine a world in which, month after month, cash is being drawn out of hedge funds. Spreads widen, volatility increases, and all the favorite hedge fund trades begin to run in reverse. As the losses mount, banks withdraw credit from the funds, forcing them to liquidate more of their trades. Credit tightening causes a contraction in the real economy and further credit losses. Hedge funds played important roles in the global financial system, providing liquidity and insuring credit risk. As funds are forced unwind their trades, there is no obvious player to take the other side. It is going to be a mess.

Bill Gross thinks the problem is about liquidity risk, but I disagree. The real problem is that too much risk is being insured unknowingly by people and institutions who have no appetite for that risk. As long as times are good, these investors see a steady, modest return and think they are conservatively invested. In a downturn, when they discover the risks to which they are exposed, they will flee. At the core of the world economy is a trillion dollars of hot money, that will panic after a few months of bad returns. That is an extremely dangerous situation.

[anne]

Brad DeLong has written of a lack of understanding of the appetite of institutional and personal investors for high cost asset management that when looked at broadly has to underperform the broad market by the costs of investing as the amounts invested grow to be substantial parts of the market. Where is price competition in asset management? Darned if I know. John Bogel has been expecting such price competition for 25 years only to be surprised that it does not come.

I wish I understood why selling absurdly high cost asset management to institutional management is so simple a matter.

[tjallen]

Re - Roger Bigod, above.

I was going to suggest a similar thing. If the problem is illiquidity, the solution is to create artificial buyers of last resort.

Artificial buyers are created and funded to stand on the sidelines and get paid to wait, until that moment when a security comes for sale and no one will buy it, then the artificial buyer of last resort pops up, and buys it. Liquidity guaranteed, funded by a fee on securitization.

Your idea is similar, set up a gov't agency as buyer of last resort - spread the risk over all taxpayers. This would be less fair than putting the cost on investors themselves, but that never stopped them before, did it?

tjallen

[azurite]

Questions: (1) The money the Fed used to buy whatever it bought (including, apparently mortgage backed securities) to inject billions into the market--where did that money come from? Is it taxpayer dollars or what? (2) And who valued the securities that the Fed bought? (3) What if their value has decreased by Monday, would that mean the banks the Fed bought them from would repay the Fed less than the Fed paid them?

[azurite]

Questions: (1) The money the Fed used to buy whatever it bought (including, apparently mortgage backed securities) to inject billions into the market--where did that money come from? Is it taxpayer dollars or what? (2) And who valued the securities that the Fed bought? (3) What if their value has decreased by Monday, would that mean the banks the Fed bought them from would repay the Fed less than the Fed paid them?

[azurite]

Questions: (1) The money the Fed used to buy whatever it bought (including, apparently mortgage backed securities) to inject billions into the market--where did that money come from? Is it taxpayer dollars or what? (2) And who valued the securities that the Fed bought? (3) What if their value has decreased by Monday, would that mean the banks the Fed bought them from would repay the Fed less than the Fed paid them?

[knzn]

Answers: (1) The money is created out of thin air, just as if the Fed were printing it out on a printing press. The only cost is that it (theoretically) decreases the value of the money already in circulation. However, in this case, with the demand for money suddenly rising, the money already in circulation would probably have become more valuable (deflation) if the Fed hadn’t acted, so the new money only offsets this effect. (2) My understanding is that the securities involved were highly liquid (agency securities or something similar, not CMOs), so market prices would have been available, but it doesn’t really matter because… (3) The borrower will pay back what they borrowed plus interest, no matter what the value of the securities. The only risk (quite small) is that the borrower could default, in which case the Fed would have to sell the securities on the open market and might (or might not) take a small loss relative to what was owed.

[Craig Tindale]

I soemtimes wonder if folks have read Bernanke's work and just think they understand his theories.

The is a big difference between providing liquidity during a shock (fair enough) and a long term program of money supply growth .

Benrnanke has suggested many times that the cure of deflation is to rain money on the consumer. He suggest that central bankers do this through the money rains through the asset channels and money supply funded tax cuts.

If you lower taxes as a percentage and raise money supply you neutralise net debt as long as you depreciate the currency

The rising asset prices trick consumers into thinking they are richer so they withdraw money through the use of low cost debt. This cures deflation of prices but it creates asset inflation and debt growth.

He wrote about doing this in a few Princeton papers in 1999 and here we are in 2007 with lots of debt and asset bubble in real estate.

Doh !

So Bernanke's at it again injecting debt into a debt bubble :)

Austrian economics pointed out that this would happen under a fiat system. Now few serious folk want to go back to gold but a fiat system relies on discipline, money stock should only grwon sparingly and Bernankes got a B52 not a helicoper (Helcopter drops actuall first appeared in Miltons work)

so go figure it out for yourselves

Why oh Why dont we have better economists ?

this generations ones are worse than the journalists

So here we stand on the edge of an abyss and you folk wants to blame everyone else.

I am suggesting that current monetary policy theories have hidden long term flaws and what we need is a hybrid between Austria and Chicago.

[Brenda Rosser]

Keeping in mind that if you create more money than there is wealth on the planet you will find the natural environment ripped to shreds by the fake 'enterprises' generated.

Today's super-duper technologies of over-exploitation have turned this wreckage into a holocaust.

This is not just about money but what action it generates in the REAL world of wealth.

It is no coincidence that we have economic and environmental meltdown occuring at the same time.

[Roger Bigod]

tjallen,

You took me more seriously than I intended. I just wanted to note the basic fraudulence of rhetoric and behavior that are likely to characterize the political approach. But in the thought-experiment that assumes rational adults are in charge, your suggestion is probably better. It provides quicker and more transparent valuations, which would allow hedge funds to value similar securities. I've read that inability to value the portfolio is why Paribas closed some funds.

[dsquared]

[So how *do* you hedge liquidity risk?]

be a bank, or otherwise get yourself access to the central bank discount window. Of course, this involves taking on certain other obligations, but many rich men in the past have found it worth the trouble.

[burritoboy]

"So how *do* you hedge liquidity risk?"

If by "liquidity risk" you mean "drastic increase in your own credit spread in refinancing", there would be any number of ways to hedge that out:

you'd need an absolutely rock solid counterparty, which may not be available, but if it is:

buy a portfolio of credit default swaps on corporates in which the current consensus view is that the underlying credits are quite sound (so the CDS is cheap when you buy it) AND you know the borrowers will need to rollever debt or refi in the near term, but in which the portfolio will prove valuable in case the entire credit environment tightens (thus, your credits your CDS cover will be in a lot of unexpected distress). Of course, that means you have to spend time and money running a CDS portfolio (not something available to individuals). And, in most time frames, you'll lose your money on this, but make some when in an unexpected major credit tightening.

And, of course, the CDS market may itself behave weirdly at a crisis point, so you've added THAT risk as well.

Even more simply, an interest rate cap.

I'm not certain why Gross would say that you can't hedge liquidity risk. Most Fortune 1000 treasury departments have used interest rate caps.