Should You Care About a ‘Backdoor Bazooka’?
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U.S. investors could feel reverberations from Europe’s use of a “back-door bazooka,” one “Fast Money” trader said Tuesday.
The concept of a “back-door bazooka” is based on a recent policy change made by the European Central Bank that introduces three-year loans to try to counter the freeze in interbank lending.
“It takes the tail risk that you’re going to have a Lehman-type event in Europe,” said “Fast Money” trader Brian Kelly of Shelter Harbor Capital.
The move was aimed at financial institutions to improve interbank lending by increasing the time frame to refinance to three years from one year.
“The other thing it does is they can now go and buy more bonds and try to get those yields to come in a little bit,” Kelly said. “In my opinion, it’s a little crazy to kind of layer upon layer upon it, but they can go out and buy government bonds, bring them to the ECB as collateral and then go out and buy some more.”
Kelly said the long-term financing operations could take forced buyers out of the equation.
“All in all a net positive for European banks, a net positive for Europe, which in general should be a net positive for risk here in the U.S.,” he said.
But larger European banks might not use the “back-door bazooka” option because it would require that they increase their leverage and have to recapitalize.
“The smaller banks that really don’t have much of a business left may want to play this carry trade — borrow at 1 percent, buy bonds at 6 percent for the next three years, play that carry trade as a way to increase capital,” he said. “I’m not certain this is the end-all, be-all solution, but it certainly takes tail risk off the table.”
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Trader disclosure: On Dec. 20, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders: Seymour is long BAC; Seymour is long INTC; Seymour is long CSCO; Adami owns (AGU); Adami owns (C); Adami owns (GS); Adami owns (INTC); Adami owns (MSFT); Adami owns (NUE); Adami owns (BTU); Terranova is long VRTS; Terranova is long IBM; Terranova is long LQD; Terranova is long MUB; Terranova is long EMC; Terranova is long CSCO; Terranova is long AXP; Terranova is long SBUX; Terranova is long TRLG; Finerman owns AAPL; Finerman owns BAC; Finerman owns JPM; Finerman owns IBM; Finerman owns CVS; Finerman owns DIS; Murphy owns AKS; Murphy owns BAC;
Mike Khouw
Cantor Fitzgerald is a market maker in securities of AAPL
Cantor Fitzgerald is a market maker in securities of AKS
Cantor Fitzgerald is a market maker in securities of BAC
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Brent Thill
The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Oracle Corporation.
Stephen Schork
No disclosures
Mike McCormack
(T) Nomura Securities International Inc. makes a market in securities of the company
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Brian Kelly
Shelter Harbor Capital is long KRE
Shelter Harbor Capital is long IWM
