A P.R. Blitz For A Veneer Of Respectability
Some housing bubble news from Wall Street and Washington. The New York Times, “Three of the nation’s largest banks, working together at the behest of the Treasury Department, announced this morning that they were creating a large fund to serve as a buyer of bonds and other debt at a time when many investors are avoiding them. Citigroup, Bank of America and JPMorgan Chase will create a fund, called a conduit, that will be able to buy around $75 billion to $100 billion in highly rated bonds and other debt from structured investment vehicles, or SIVs.”
“Those vehicles own mortgage-backed bonds and other securities and have had trouble obtaining financing since early August, when the credit markets froze up. Bank and government officials are concerned that if these vehicles are forced to dump billions of dollars worth of debt in the coming weeks, it could cause a repeat of the crisis that rattled markets in August and sent the cost of mortgages and other loans soaring.”
“To maintain its credibility with investors from whom it would raising money, the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories.”
“Each bank will put up an unspecified amount of its own capital into the fund, and other banks from around the world are expected to join the consortium in the coming weeks. The conduit will raise most of its money by selling commercial paper.”
“But it remains unclear how officials will determine the price of some bonds that have not been actively traded since August, because the difference between what buyers are willing to pay and what sellers want has widened significantly.”
“‘For me, this is more of a P.R. blitz,’ said analyst Christian Stracke. The banks are ’saying, it’s not just that we are doing this on an ad hoc, individual basis. Rather, we have a plan and consortium in cooperation with Treasury, which gives it a veneer of respectability.’”
From Bloomberg. “The group formed by Citigroup, Bank of America and JPMorgan will be known as the Master Liquidity Enhancement Conduit, or M-LEC.”
“‘This is mostly symbolic,’ said Christian Stracke, strategist at a New York bond research firm. ‘The banks were going to need to inject more liquidity into the SIVs anyway, so the public cooperation just makes the bailouts of SIVs seem more orderly.’”
From MarketWatch. “There won’t be any public money involved in the fund, said Robert Steel, the Treasury’s deputy undersecretary for domestic finance, in an interview on Bloomberg TV.”
“‘The goal here is to help the markets start to work,’ Steel said. ”This is a temporary solution in order to transition the market on to more sound footing.”
“The announcement of the fund came as Citigroup reported its third-quarter net profit fell by 57%, reflecting accounting for previously announced write-downs for bad loans and other credit issues. ”
From Reuters. “Citigroup Inc said on Monday third-quarter profit fell 57 percent as losses mounted from subprime and leveraged loans, fixed-income trading and its U.S. consumer business.”
“The earnings decline was the largest in three years for the No. 1 U.S. bank, and reflected $6.5 billion of pre-tax losses and writedowns, $600 million more than previously estimated.”
“‘This quarter’s performance was well below our expectations, and frankly surprising,’ CEO Charles Prince said on a conference call.”
“Citigroup reported pre-tax writedowns of $1.35 billion for leveraged loans, $1.56 billion for subprime mortgages, and $636 million from fixed income trading.”
“It also reported a $2.98 billion increase in credit costs, including a $780 million increase in net credit losses and a $2.2 billion charge to boost reserves for bad loans. Delinquencies on second mortgages nearly doubled last quarter.”
“CFO Gary Crittenden said Citigroup ended September with exposure to $57 billion of leveraged loans.”
“Crittenden said U.S. consumer credit conditions ‘will continue to deteriorate’ this quarter. He also said Citigroup faces $10 billion of mortgages whose rates will reset by the end of 2008, though 90 percent of these are higher-quality loans.”
“Nomura Holdings, Japan’s largest brokerage, on Monday said it will quit the U.S. residential mortgage-backed securities market and cut one-fourth of its U.S. workforce.”
The Wall Street Journal. “Nomura said it would take a loss of $621 million on write-downs of residential mortgages and an additional charge of about $85 million for restructuring the business. That will swing Nomura to a pretax loss of as much as $510 million in the quarter ended Sept. 30, 2007.”
“‘This is extremely regrettable,’ Nomura CEO Nobuyuki Koga said at a press briefing in Tokyo today. ‘The pace of the collapse in the U.S. residential mortgage-backed securities market was quicker than we expected.’”
“The world’s largest banks and securities firms have reported credit and market losses of at least $21 billion after defaults on subprime mortgages contaminated securities backed by home loans and other types of debt.”
“‘We found out that there was a limit to the measures that could be taken to cope with changes in the U.S. without having a thorough understanding of the market,’ Koga, said.”
The Washington Post. “Long before the mortgage market fell apart this summer, Friedman Billings Ramsey, Washington’s largest investment bank, saw the trouble ahead.”
“In early 2005, the company invested an eye-catching half-billion dollars, a third of what it had available, in the subprime mortgage business, even buying a mortgage lender. The company bet big that these high-risk loans to people with poor credit would return impressive profits.”
“But by the end of the year, FBR realized that it had miscalculated. The Federal Reserve kept raising short-term rates, and the firm suddenly was paying more to borrow money than it received in interest on its loans.”
“FBR sold some investments to stem the losses but didn’t move aggressively enough. Eventually, 80 percent of its mortgage-related investment would be lost and the company’s stock price would spiral downward.”
“‘It was brutal, extraordinarily difficult. There’s no other way to describe it,’ said CEO Eric Billings, of the firm’s series of investments in subprime mortgage lenders. ‘Our timing was very bad.’”
The Dow Jones Newswires. “Months before Merrill Lynch & Co. preannounced a third-quarter loss and a writedown of $5 billion last week, it had been assuring investors and the press that its portfolios of mortgages and asset-backed securities were well-hedged and profitable.”
“Investors are now questioning why Merrill would dissemble if the truth was going to come out weeks later. Similar questions could be asked about Citigroup Inc. and UBS AG, which each wrote off fixed-income assets of $1 billion or more months after sending out soothing words about their franchises. Bear Stearns Cos. whose mortgage woes triggered the summer credit crisis, similarly offered assurances that its mortgage portfolios were solid.”
“‘They didn’t understand or someone was willfully deceiving them,’ says Arthur Levitt, a former chairman of the Securities and Exchange Commission. ‘I don’t think either is a very good excuse.’”
“‘This market is characterized by an overwhelming number of synthetic and derivative products that are not adequately understood by people who build them and by people who buy them,’ Levitt said. ‘Investors in companies dealing in these opaque products probably bear risks that they never knew they were buying into.’”
“Autumn in New England may feel more like a winter of discontent for the 4,000 home lending specialists heading to Boston next week for an industry jamboree set amid the worst housing slump in a generation.”
“The Mortgage Bankers Association’s annual convention, a gathering ordinarily known for its pomp, parties and star sightings, this year will reflect the belt-tightening across a business under siege.”
“As of Thursday the MBA had registered just 38 Countrywide employees for the Oct. 14-17 meeting, down from 61 last year and 63 at the height of the housing boom in 2005. Wells Fargo & Co, JPMorgan Chase & Co’s Chase Home Mortgage and WaMu also sharply trimmed registrants.”
“Many previous conference-goers are now out of work, with 97,509 housing-related jobs slashed in the past year, according to Challenger, Gray & Christmas Inc.”
“The bottom line: Mortgage bankers lost $50 per loan in 2006, compared with $258 profit in 2005, according to the MBA.”
“Seismic shifts of power in the industry are still unfolding, with some lenders still nursing their wounds and others moving forward.’We’re at the beginning of an 18-month period that’s going to be very bumpy,’ said Alfred DelliBovi, president of the Federal Home Loan Bank of New York and a former HUD official.”
“Larry Goldstone, co-founder of jumbo lender Thornburg Mortgage, added: ‘There seems to be a lot of uncertainty about exactly what people want to do’ in the near-term.”
National Mortgage News. “Countrywide Financial Corp. has plenty to worry about these days: it’s facing a second-quarter loss that could top $2.5 billion, not to mention tons of negative publicity concerning its loss mitigation efforts on delinquent loans.”
“But now it may have a new worry. Loan brokers that use the company for table funding say its service is getting worse. One broker told us, ‘Ever since they closed local offices in Fresno their Sacramento office has no clue of what the hell is going on. I never get any of my calls returned and my clients tell me: ‘Why would I want to put them into loan with Countrywide?’”
Do you think this will turn into a guvmint bailout once the big banks use up the $75 billion?
Bernake can say: well the banks tried but it’s far bigger then we could have ever imagined.
Again, today many more billions are reported gone from the housing bubble and there is no bail-out. All this plan is is some investment banks taking a problem out of one set of buckets and sloshing it over into s different set.
It’s like the FBR report. IMO, it is perfectly reasonable to suggest that these giant corporations don’t know what they are doing, and run-around doing press conferences, etc, to cover up that fact.
All this plan is is some investment banks taking a problem out of one set of buckets and sloshing it over into a different set.
I would agree that it is simply going from one bucket to the other bucket. It looks to me as a way to try and fool the investors with a bait and switch tatic. The bait is the banks are putting up some money and state they will not put in mortgage back bonds from subprime. The switch may come when investors find out they dumped their subprime bonds by mixing the good with the bad over time.
The new name Master Liquidity Enhancement Conduit, or M-LEC should be changed to MASTER BAITERS! How can one trust these banks after what they did with the subprime mess? To me they are indedd the maters at bait and switch tatics to the investors.
speaking of sloshing..
The standard liquidity action this morning throws in another 7.25Billion (total sloshing 44.75Billion, more than 6B in MBS currently slushing out the drive through FED).
I abandoned the dollar this weekend.. I just hope its not to late to escape the debasement when the FED steps in Friday to ease the volatility on Options Expiration.
FED intervenes; Market goes up.
FED leaks intervention, Market goes upper.
Hey Voz,
what currency did you choose?
No, this is not sloshing money from one bucket to the other. They are not buying the riskiest securities, but the better grades. The hope is that the market is (short term) undervaluing these higher grade assets. This establishes a market for investors to regain confidence in the assets. Now, are they right? Time will tell, but these guys are pretty bright, and I’d bet with them.
This establishes a market for investors to regain confidence in the assets.
They have some rotten meat they can’t sell. So they sell some fresh meat to build confidence. Then when confidence goes back up, they try to sell the SAME rotten meat! Are investors going to fall for this? You can’t make the meat fresh again.
Oxide
You have to realize that a large portion of risk is time. These assets will continue to season, as they do, the actual performance will become much more transparent, and therefore, the ability to reliably value the assets. No more mark-to-model, thus the term confidence. The fact is, we don’t know how rotten the meat is at this point in time - though you suspect it to be maggot infested, time will prove you right or wrong.
This does not cure the run on the SIVs. Like regular bank depositors, money managers are running from these special entities. The too big to fails can collude and delude themselves all they want, but the fact remains, this is a failed model. It’s time to bury it.
“The fact is, we don’t know how rotten the meat is at this point in time - though you suspect it to be maggot infested, time will prove you right or wrong.”
That’s the point, isn’t it? Money market investors are interested in short term liquid contracts. Not bullsh!t off balance sheet opaque long term paper marketed and packaged as short term paper.
No one signed up for the kind of time it takes to discover the prices of the assets you describe. They want short, in and out, and uncomplicated. These guys give them complicated, long, let’s wait a while bullsh!t.
More like:
(1) salt and pepper rancid meat to make appealing;
(2) make above-market sham trades to draw in customers;
(3) take short positions on the rancid meat;
(4) dump as appropriate.
‘Time will tell, but these guys are pretty bright, and I’d bet with them.’
The trolls are out today.
Yeah, they’re bright. That’s why they got fired today. The one’s doing the firing are also having their heads called for by investors. Go ahead, bet with ‘them’ and pick up some of that paper!
“Time will tell, but these guys are pretty bright………”
So bright they painted the screens red!
tbgdetroit ,
You said “These assets will continue to season, as they do, the actual performance will become much more transparent, and therefore, the ability to reliably value the assets.”
Even you admit that no one knows what these “assets” are worth. If something cannot be reliably valued, how can it be considered either an asset or an investment ?
Ha, what a “shell game”. And if $100B is about the size of a walnut shell, you are gonna a large bucket to try and contain the 10’s of trillions of “wealth” that are gonna evaporate over the next few years.
The problem with a financial system that is based on growth/debt is that in the long run (i.e. now)….it becomes unstable and must crash in order to realign with cold hard economic reality.
Time to pay the piper…..
Any guesses on how large this SIV will be in the end - $500 bllion.. $1 trillion..???
Also, why are we not worried about the marking down of these assets to FMV? Clearly this should be an issue???
I’m not worried because I don’t own stock in any of these companies. Anyone who buys the paper of this new entity (assuming they don’t just pretend all this never happened in a couple of weeks/months) deserves what they get.
And if it isn’t going to hold subprime, why is this even neccesary?
I am not worried either, I just think they should be forced to recognize the loss on their books now. This is nothing but accounting tricks to delay the loss.
They are accounting tricks with official approval from the highest level of the U.S. govt, which makes them a bit different from, say, Enron’s accounting tricks. In particular, (1) they are implicitly legal, and (2) they are implicitly guaranteed to “work.”
I heard from someone who works closely with Countrywide that the government is basically begging them not to unload all their foreclosures on the market at once because it would cause prices to go through the floor (which needs to happen). This person also said that everyone involved knows this problem is much, much bigger than anyone knows (other than us bloggers). I wonder how much longer the banks are going to keep these properties on the books at “wishing” prices?? I say let it rip!!
Agree - This is just another use of SPE’s (special purpose entities) with a new name…I wonder how those SPE’s worked out for Enron?
Fannie Mae has over a thousand of them.
Unfortunately, we (taxpayers) guarantee FNM…
Contrary to what the ratings firms like to throw around, we don’t.
Last week in the WSJ reported on the new L 3 method the banks can use to price Structured Assets that do not trade called “Mark to Model” as opposed to mark to market. New Accounting standards passed Sept. 06 now permits this and the banks all changed their accounting policies this year and adapted it
That does not help them in the CP market. It just adds to the opacity. Investors want clarity.
–
Ben: “Contrary to what the ratings firms like to throw around, we don’t.”
Congress has chosen to keep the impression of guarantee out and refuses to clarify as Greenspan had asked several times. We are dealing with people who bad and shameless.
Jas
And if it isn’t going to hold subprime, why is this even neccesary?
Ding ding ding. Why indeed? If the aren’t building this fund to bailout their own subprime MBS, then what exactly are they bailing out? Either they are anticipating and hiding other losses (soon-to-be-worthless Alt-A?), or are just doing this for some other purpose like taking advantage of tax write-offs or whatnot. Or it’s just an elaborate hoax to raise cash.
And meanwhile, subprime MBS are still losing money.
‘an elaborate hoax to raise cash.’
It could be. After all, haven’t these ’securities’ already been purchased? Why a huge new issuance of notes?
Two things:
1. Most people don’t realize that Alt-A is subprime in layman’s terms.
2. They are trying to delay the inevitable marking down of assests until their next reporting period, probably giving their own executives time to dump their company stock.
It doesn’t mattter what it is as long as it’s exotic — where the payment goes up to where the buyer can no longer afford it (i.e., anything not fixed, anything over 3x income etc.)
Subprime exotic, Alt-A exotic, Prime exotic. One by one, they will all be toast. We HBB knew it long ago, the banks only caught on after Subprime, are now afraid of Alt-A and Prime and are trying to hide it. Realtors are still in puzzlement, the clueless media still calls it Subprime. And Joe Six pack says “Who’s FICO, again?”
Yes, why is it necessary?
And the ABX market continues to tank…The “market” knows something and it knows the MBS market is going to get much worse.
Yeah, now they are concerned with credibility. One hopes the WS banks have their heads handed to them, i am tired of their manipulative games.
It’s neccessary because these SIVs were buying mortgages and borrowing the corporate equivalent of the introductory 0% offer on a balance transfer. The introductory offers dried up, and their CDs would require a huge penalty to break early (and they were big enough buyers that they’ll increase the size of the penalty if they were forced to sell).
The paper could be equivalent treasuries at this point, they’d be just as screwed without access to the commercial paper market.
It might be a mistake to assume it will not hold subprime just because they say so. Maybe it won’t hold anything that is already in foreclosure. I wonder if they really expect to sell this mysterious new stuff, which is the old stuff noone would buy, rewrapped. Maybe they will just keep them and pretend they are gold bars.
“Master Liquidity Enhancement Conduit” = Master Abate Writeoffs?
Roget’s New Millennium™ Thesaurus
Main Entry: conduit
Part of Speech: noun
Definition: passage
Synonyms: aqueduct, cable, canal,…… sewer
It appears they chose the wrong word to describe their objective……..
If the assets are marked down to zero what would the consequences be? I really don’t think anyone has a long term answer because these types of outcomes are rarely put into models. It is in their best interests to try and push the damaged goods into a dark closet like the wealthy classes of old did with their own damaged offspring.
“So Buffington what ever happened to your young deranged son TImmy?”
“Timmy? I never had a son named Timmy. Let us retire to the study to have a cigar and speak of things more palatable. “
If the assets are marked down to zero what would the consequences be?
utter panic ..
I don’t know about that. At zero, megacorp goes from having a market cap of 52 billion down to 15 billion. I won’t even notice that at my place.
If the assets are marked down to zero what would the consequences be?
A good shorting opportunity?
“I won’t even notice that at my place.”
You’re forgetting the trickle-down theory. Those who are left holding the bag of rotting meat will soon start throwing it around as if they were baboons in the zoo.
Popping corn as I type this.
Dr. Peter Venkman: …a disaster of biblical proportions.
Mayor: What do you mean, “biblical”?
Dr Ray Stantz: What he means is Old Testament, Mr. Mayor, real wrath-of-God type stuff.
Dr. Peter Venkman: Exactly.
Dr Ray Stantz: Fire and brimstone coming down from the skies. Rivers and seas boiling.
Dr. Egon Spengler: Forty years of darkness. Earthquakes, volcanoes…
Winston Zeddemore: The dead rising from the grave.
Dr. Peter Venkman: Human sacrifice, dogs and cats living together - mass hysteria.
Watchout!!!!
It’s the Stay Puff Master Liquidity Enhancement Conduit Man.
Dripping with opaque stick goobbs of crashing assets on investors heads!!!
Ohh the huge manatee!!!!!
the whole problem is there is no set fair market value to mark to.. none of this stuff is marketable.. nobody will touch it.. which is why they are trying to get things moving by any means possible.. and at this moment, they are willing to settle for the illusion of movement.
“…nobody will touch it…”
… at recent (mythical) valuations. The problem is that, like the homes which provide the underlying collateral value of subprime debt, the price is too high.
Unlike the home market, which reacts very slowly to price markdowns and people bailing out, and will require months at a minimum to unwind, the securities market could unwind in a matter of hours.. it won’t be calm and orderly.
IMF chief warns of tighter times ahead
By Krishna Guha in Washington
Published: October 15 2007 19:22 | Last updated: October 15 2007 20:46
The risk of a disorderly adjustment of global economic imbalances has increased after the turmoil in credit markets, Rodrigo Rato, managing director of the International Monetary Fund, said on Monday.
In an apparent U-turn, the outgoing IMF chief also backtracked on earlier statements to the Financial Times in which he said the dollar was “undervalued”. Mr Rato said the IMF’s official position, based on staff analysis of medium-term equilibrium exchange rates, was that the dollar was still “overvalued”. “We still see room for further depreciation” over the medium term, he said.
“There is no question that if financial risks have increased and the pricing of risk has also increased, the financing of global imbalances could – I underline could – become tighter,” he told reporters ahead of the IMF’s annual meeting this weekend.
http://www.ft.com/cms/s/0/c91065ce-7b48-11dc-8c53-0000779fd2ac.html
the whole problem is there is no set fair market value to mark to.. none of this stuff is marketable.. nobody will touch it..
What’s more… Even savvy bottom feeders won’t touch it because the instruments are too complicated to understand to even put a price on what they’re worth.
What these banks are doing is nothing less than forming an officially sanctioned pool to trade mortgage securities with each other thereby maintaining an artificial market and hoodwink investors into thinking the prices reflect the value of the underlying assets. What they don’t seem to understand is that investors have now seen through their cynical lies and deception and will continue to insist on higher yields before they put any money on the table. Mr Risk has come back into town, and he is now demanding some respect.
heh heh… I just love how the market was pretending last week that we were aaaaaaaa- ok and that the subprime issue along with the fact that most americans are essentially in serious debt had simply disappeared and now we’re back to the party.
Guess not…
i dont think anyone will want to invest in anything tied to mortgages in the US as long as there are still record forclosures going on. and i dont see anyway these banks are going to get people to pay the notes on their homes that are losing value every day. these guys have to be in panic mode.
I agree and think the additional compounded problem is that the vast majority of those subprime loans were planted in extremely volatile housing markets that are tied to local economies that are also prone to equally dramatic downfalls. What I mean is that these areas, such as CA and NY are full of homeowners that were more than likely literally betting the house for the majority of their financial well-being. Not the best thing in the world, especially if the banks that invested in these loans were expecting the same outcome.
Again, it is not the volume of foreclosures that is the major problem. It is the loss on each one.
Banks expected a 2 million foreclosures at a cost of $20K loss each. Afterall, when you foreclose, you sell for a price that covers what you are owed, so the loss is just the costs of processing the foreclosure.
Eng… What’s $40 billion loss here or there?
So, they may get 5 million foreclosures… Engh.. That’s only $100 billion. Still not a huge hit.
Ohhh… 5 million foreclsoures, and a hit of $200K each because I can’t really sell all these properties at the bubble prices? OOOPS… That is $1 trillion in losses.
That can’t be hidden!
Right, Darrel. With Anderson homes auctoning off properties for 32% below peak prices in Lard City and The Bathrooms, that $20k loss on each house just started to look like the spectre it really is. Try $200k. What’s 2 million times 10? Now let’s adjust that foreclosures # up to today’s expectation (which is still too low). What’s 2 million x 10 x 2?
Good point Darrell. Though I wouldn’t say “it’s not the volume” but rather “it’s not just the volume”. The volume is still very important - if it were only a few hundred thousand then $200k loss on each would be absorbable, but 5 million (hypothetically) as you say is not hideable.
In years past the volume was what really mattered, because it was assumed that there was some set value lost on each foreclosure, and the value didn’t include significant “mark to market” of lowered prices. Those that quote and calculate such things though can’t lose the habit of only caring about volume.
Certainly we’ll end up in a bit of a downward spiral for a while - where increased foreclosures causes lower home prices, and lower home prices cause increased foreclosures, etc. Eventually though the critical mass will be reached where the volume of deal-seekers will be high enough to stop the price reductions, and eventually the foreclosure rate will get back to “normal” where foreclosures include only very irresponsible or very unlucky people, not by people just making bad investment decisions.
Eventually though the critical mass will be reached where the volume of deal-seekers will be high enough to stop the price reductions, and eventually the foreclosure rate will get back to “normal” where foreclosures include only very irresponsible or very unlucky people, not by people just making bad investment decisions.
i might be able to see this senario, but in a select few states there is a much bigger problem, the overbuilding in spectulation that the houses will be sold. this is still happening in california. why? i dont know, only time will tell.
RE: these guys have to be in panic mode.
They bought the garbage appraisals and turned a blind eye to the BS underwriting.
“Let’em burn” *. (from Saving Private Ryan)
Lazarus — Are you suggesting risk aversion has come back from the grave? (Sorry — could not resist that one!)
http://www.agapeindia.com/miracle_05.htm
Yep, Professor Bear. The resurrection of risk is at hand. Repent all ye sinners on Wall Street.
Amen!
And a vehicle to entice trusted partners (endowments, pension funds, institutions, foreign entities, hedgies) to kick in help stabiliz things — with promises either explicit or implicit that not doing so will end up devaluing their own MBS or related instruments, positions or hedges.
My guess is the thinking is “stop the bleeding, keep from having to dump these items at their actual current market values, and figure out a fix down the road.” Of course, this strategy may work as well as an individual trying to refinance their way out of debt.
This is reminiscent to the Great Depression. Banks at one point tried to rally the market by using their funds to buy enormous amounts of stocks to send a message that the market is fine In the end the banks couldn’t withstand the the Market’s downward spiral. Bad….Very bad……BUT at that time, the government had a laissez faire approach (no economic or monetary(?) policy)
Another historical parallel:
To bring relief to the situation, United States Secretary of the Treasury George B. Cortelyou earmarked $35 million of Federal money to quell the storm. Complete ruin of the national economy was averted when J.P. Morgan stepped in to meet the crisis. Morgan organized a team of bank and trust executives. The team redirected money between banks, secured further international lines of credit, and bought plummeting stocks of healthy corporations. Within a few weeks the panic passed, with only minimal effects on the country.
By February 1908, confidence in the economy was restored.
http://en.wikipedia.org/wiki/Panic_of_1907
Liquidity crisis vs. solvancy crisis. I’m guessing that in 1907 it was a liquidity crisis, not a solvency crisis.
The recent panic driven liquidity crisis has been quelled, but our current solvency problem just won’t go away.
I am one of the people who don’t appreciate the significance of the change in Fed policy that took place Friday (in fact, this Minyan’s report was the first I heard about it). Can anyone with insight please explain?
Further, what’s a MTN?
Second, I don’t think people appreciate the significance of the change in Fed policy that took place on Friday involving the brokerage affiliates of several money center banks. In the asset-backed commercial paper market, maturing commercial paper is normally either rolled over or replaced by loans from standby liquidity banks when it can’t be rolled over. With Friday’s change, it would appear that investors now have the ability to “put” unmatured commercial paper back to the bank affiliated brokers - who in turn will pass it along through the Discount window to the Fed.
In doing this, I believe the Fed has established a very dangerous precedent. If investors can now put unmatured CP to the banks (instead of waiting for the standby liquidity banks to fund at maturity), it may not be long before investors pressure the bank-affiliated brokers to accept MTNs and who knows what else further out the curve.
http://www.minyanville.com/articles/TGT-SEC-Fed-credit-debt/index/a/13898
MTN = Medium Term Notes
I disagree with his terms of “change in Fed policy that took place on Friday”. This change started in August. The more interesting (to me) is “I don’t think the market yet appreciates the fact that banks are currently provisioned for the top of the market. (And, in fact, up until recently, most major banks reported net provision reductions over the last several quarters.) As credit continues to deteriorate, the earnings/capital hits will be enormous as provisions need to reflect higher and higher delinquency and loss rates.”
Current bank reserves, total = ~$50B, total loans outstanding = 15.6T. Now that is what I call leverage.
wow! these guy are going to get slautered if they cant get investors back in the game.
No. They’ll be just fine. It’s the rest of us who will pay the piper.
the article referenced WAS written in August. txchick57 posted the link in today’s bits buckets. I learned a lot.
LOL
I should have looked at the date. I said the changes happened in August! I am a dork. God is in the details.
Scarier that even with massive changes over the last 10 weeks, the problem is worse now than in August.
Damn! I missed that date, too. 1 1/2 months later, and the problem looks worse than ever.
Business as usual, bear. The Fed is a warm fuzzy who works diligently to buy crap paper from reckless banks. If it weren’t for all us pesky kids blogging them down, they would have gotten away with it!
He also said Citigroup faces $10 billion of mortgages whose rates will reset by the end of 2008, though 90 percent of these are higher-quality loans.”
_____________________________________________________
LMFAO!!
I assume these are Alt-A no-doc, NINJA or other loans that will be an even bigger problem than that Sub_slime.
Hey! Those are higher-quality Alt-A no-doc, and NINJA loans. None of the low quality stuff here at Citigroup.
Yeah, that just means that the loans were for a higher amount. They were given to RICH people (a.k.a. people with average or above credit scores).
further remember that people are not born as subprime. they had to do something to earn it. there are countless prime borrowers as we speak who are evolving into subprime. the wall is down, the lines are blurred
“The conduit will raise most of its money by selling commercial paper.”
What’s different? Nothing is different. It’s just a bigger version of the same thing. This looks like f@cked Lender debt consilidation.
Reminds me of the old bad bank/good bank bailouts they did in the 80’s and early 90’s. Only they are spinning it as a liquidity issue this time. Seems to me they are trying to sweep a banking crisis under the rug.
“‘The goal here is to help the markets start to work,’ Steel said….”
The market is working. It is rejecting this sh!t product.
Money market managers buy short term paper because it is liquid. Nobody in this space wants illiquid long term paper packaged as short. Sell long paper elsewhere.
‘As forclosures soar, dreams die’.
http://tinyurl.com/yorn42
“They take people who are not in the best of credit, and they treat us like we’re millionaires — then they try to rip every dollar that you can make from your pocket, and they try to draw blood,” said Casselman, who couldn’t persuade lenders to refinance his adjustable-rate loans when the $974 monthly payment was about to double. “They try to keep a poor man poor.”
“They try to keep a poor man poor.”
———————–
Welcome to the world of credit.
Debt forces costs up while committing future income to interest payments (which go to the wealthier creditors). Nice work if you can get it.
“the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories.”
What will they be buying if nobody knows what they are really worth?
Why does every monday bring more bad news for home bears?
“‘This quarter’s performance was well below our expectations, and frankly surprising,’ CEO Charles Prince said on a conference call.”
That’s odd. With all the news flying all over the place about subprime and the credit crunch, how can the CEO of the largest US bank be surprised? Is he out of touch with current events or did he think his firm was insulated from the fallout? When you run the largest bank you are exposed to pretty much everything. You should not be surprised. You should be curious about your level of exposure.
“…how can the CEO of the largest US bank be surprised?…”
It is very difficult for a Mr. Prince or a Mr. Paulson to comprehend the dilemma to the average borrower. The only people that they personally know do not have any financial stress. So to these minions of mediocrity the world and US looks great.
Mr. Prince is still employed, the board of directors of C and of most other major US corps have failed in their responsibilities to the shareholders.
Why is a surprise that a lawyer who got his job because he’s close to the NY attorney general wouldn’t know all that much about credit analysis and underwriting?
Isn’t it tempting for the banks to artificially blow up losses and then cry to FED and lawmakers for help ?
I can imagine that MB jamboree turning into the next Jonestown.
I don’t understand.
I watched CNBC last week, and every 5 minutes or so they were saying that the banks were “throwing the kitchen skink” into their recent writeoffs.
There can not POSSIBLY still be losses that they are trying to hide in off-balance sheet accounts… Can there be?
This is SOOOOO far from over!
So true. If they had nothing more to hide they would not be doing this. I think what is still in the closet is scarying them to death. This is so appropriate for Halloween.
Okay kids, we aren’t going to do those tired old ghost and goblin costumes this Halloween… this year we’re going to dress you up as something REALLY scary. Timmy, you’re going as a Mortgage Backed Security. Tammy, you’re going as a Structured Investment Vehicle. Okay kids, let’s go… time to go scare the crap out of Mr. Paulson, then we’ll head down the street to Mr. Bernanke’s…
I watched CNBC last week, and every 5 minutes or so they were saying that the banks were “throwing the kitchen skink” into their recent writeoffs.
You misspelled “skank”.
“Master Liquidity Enhancement Conduit, or M-LEC” - in other words, a hollowed out, but still painful, Joshua tree.
I prefer the name Master Lick.
I read recently that the US Army has been in negotiations to purchase the membership rolls of the MBA, and having a recruiter call all of them to see if they are interested in “alternate employment” in exciting foreign lands.
GREAT maybe they will quit spamming us 3-5 times a week on Craigslist! Along with the 20-30 “unlimited income” “the sky is the limit”….. Free work, MLM scams
Bwwwhaaa.
Forgive me I don’t know why I found your comment funny t-bone. Unfortunately those MBAs would be officers and I would pity the poor enlisted person that would have to serve under them.
A lot of MBs would make great recruiters themselves: “Look, why don’t you just enlist for a 20 year stint. Then, if it is more than you can handle, believe me, you can back out anytime, no problem! “
It like who’s to stop whatever backroom machinations are going on between the US Treasury Dept. and the big banks.
Most people in this country can’t even balance their checkbooks or understand a simple mortgage contract.
We are Wal-Mart Nation.
“Hi America ..We’re the FED…and We are SANCTIONED …to Help YOU!!!”
“We are from the government and we are here to help.”
Ronald Reagan, we need you.
It’s not “symbolic.” This is the cherry-picking that I predicted a few months ago. The banks intend to salvage everything decent (”highly-rated” and “not subprime”) that’s out there, then abandon the rest. They will probably gin up some recovery company to take in the garbage and sift through it for whatever money remains, sort of a Super-REO Company, but mostly, it’s a bust.
Sounds highly likely, KIA.
–
P.R. stands for Propaganda Rail. That is what is driving, or carrying, the US economy.
Jas
They may as well put a statue of Carlo Ponzi in front of the Fed Reserve building.
SIV = Sieve.
The stock market is leaking like a _____.
“‘The goal here is to help the markets start to work,’ Steel said. ‘’This is a temporary solution in order to transition the market on to more sound footing.”
The markets are working steele. The markets are saying no more selling toxic garbage loans rated at AAA.
And who is rating the loans? Moody who didn’t understand the subprime fiasco. Kind of like letting the fox guard the chicken coop.
You know how they always say that suicide is a permanent solution to a temporary problem? Well, what happens when you have a permanent problem and a temporary solution? Is there a crisis hotline for that?
It should be noted that despite this PR campaign, prices on BBB bonds continue to crash, with the lowest bond (BBB-06-2) currently going for 28 cents on the dollar, an all-time low.
A-07-2? Try 55 cents on the dollar.
The $21 billion written off this far is merely the prelude.
http://www.markit.com/information/products/abx.html
I once posted an argument for why I thought that the ABX market was predicting the eventual percentage decline in residential real estate from the time the underlying loans of the bonds were made. I’ll say it again in brief.
The value of the properties must be linked to the ABX bonds. If the value of the homes was higher than the ABX bonds, then there would be an arbitrage opportunity. Someone could buy up the tranch and essentially own a controlling share of the property.
I also think where ABX BBB- goes, so must all other tranches. Every neighborhood has people who overbought and their loan wound up in ABX BBB-. ABX BBB- is predicting a 72% decline for those assets backing that tranch. Housing is priced on the margin. Therefore, Thus the whole neighborhood will drop 72%. Thus people will bail from their homes because of declining value and all other tranches of ABX will fall to 28c on the dollar.
The tranches are linked. The underlying assets are in neighborhoods. I don’t think Da Boyz understand the correlation factor here. It only takes a few comps to destroy a whole neighborhood.
CCC
UPDATE: BBB-06-2 closed on a new low today, at 26 cents on the dollar.
Good luck finding investors to fund your special little new fund, banks.
Mark-to-markit valuation:
15-Oct-07 Overview
Index Series Version Coupon RED ID Price High Low
ABX-HE-BBB 07-1 7 1 224 0A08AIAC4 28.50 98.35 28.50
ABX-HE-BBB- 07-1 7 1 389 0A08AOAC1 26.81 97.47 26.81
“Those vehicles own mortgage-backed bonds and other securities and have had trouble obtaining financing since early August, when the credit markets froze up. Bank and government officials are concerned that if these vehicles are forced to dump billions of dollars worth of debt in the coming weeks, it could cause a repeat of the crisis that rattled markets in August and sent the cost of mortgages and other loans soaring.”
God forbid the cost of mortgage capital accurately reflect the real underlying risks involved. Heavens to Betsy, if those specuvestors and NINJA-loan borrowers start being forced to pay a risk premium which truly reflects the toxicity of their loans, it means the end of the Uh-merikan Dream.
Those poor, poor ‘victims’ (*sob*) oh, the humanity! The banksters and gub’ment can’t have any of that. Why that’s… (*gasp*) REAL CAPITALISM!
(the horror…)
They fear the great unwinding, just like with LTCM.
I’m with you, HARM.
It’s way past old getting a measly 5% (or less) on savings with these idiots try to cap interest rates — and inflation through the roof!
Time for double-digit interest rates!!!
How is this for lying sack of scum posted on CL
http://losangeles.craigslist.org/sfv/fns/449737848.html
Powerful ARMs – More Muscle to Buy Your Home
——————————————————————————–
Reply to: serv-449737848@craigslist.org
Date: 2007-10-15, 10:43AM PDT
Adjustable Rate Mortgages ( ARM ) are often a better alternative to
fixed rate mortgages, offering more options and more flexibility.
Advantages of our ARMs loans:
• Get approved for bigger loan amounts
• Lower monthly payments
• Payment options that adapt to your needs
• Flexibility for first time homebuyers
• Better options for savvy investors
Klaus Barth
Fidelity Financial Group
Phone 818.425.4920
“Savvy”
That’s a term that’s really annoying at first, but after a while it starts to grow on you. Sort of like George Costanza.
“Chili’s, baby back ribs …”
Need 2: thanks for including verbage. It’s always frustrating to have someone say “check this out,” only to find out that the post has been removed.
“Payment options that adapt to your needs”
LMFAO
Yeah they adapt all right. Adapt you right to the auction block so you can bid on your own house.
Banks
Dire Straits
Money for Nothing
http://tinyurl.com/2cnmsq
Greetings!
I posted this link a few weeks back and scratched my head.
Is this more of the same?
Leigh
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20070912/REG/70912006/1036
I think that article is referring to the new “private” stock market, which will be unregulted and open only to institutions and folks with at least $1 million to risk.
“Long before the mortgage market fell apart this summer, Friedman Billings Ramsey, Washington’s largest investment bank, saw the trouble ahead.”
“In early 2005, the company invested an eye-catching half-billion dollars, a third of what it had available, in the subprime mortgage business, even buying a mortgage lender. The company bet big that these high-risk loans to people with poor credit would return impressive profits.”
Since when has high risk loans to people with poor credit ever worked. They have poor credit because they don’t know how to manage money, so why would they ever think these people would pay back their loans.
Things that make you go hmmm.
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20071015/REG/71011010/1036
New IRS office leads to rise in tips from corporate whistle-blowers.
By Nicholas Rummell
October 15, 2007
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20071015/REG/71012026
uh oh
“Now the office is required to pay whistle-blowers 15% to 30% of the take from legitimate tax fraud or abuse cases that bring in at least $2 million in owed taxes, penalties and interest.”
You can earn big moneys! No wonder Halliburton is no longer a US company. Is Intel next or AMD or MST?
In fact, why stick around the US if you did not have to be stuck here?
Greenspan is about to speak on CNBC. If he’s pissed for being blamed about the current situation, one ‘the chance of recession is rising’ remark could really send the last half hour into a spin in the markets. And I wouldn’t doubt that he’d do it just b/c he’s pissed he’s being blamed.
why can’t this guy shutup for a few days ? my guess is he is campaigning for the job at the Fed again once Hilary gets into office.
Founder of Ameriquest is worth $1.5 b and is the Ambassador to the Netherlands…
http://blogs.abcnews.com/theblotter/2007/10/ameriquest-in-s.html
Wasn’t this the first sub-prime lender to go under? I believe they were under scrutiny for predatory lending at least a few years ago. Anyone else remember?
Does anyone know where this Superfund will get it’s cash
This was a quote in regard to Citibank
Investors were further disheartened after Crittenden said capital ratios — a measure of the bank’s ability to handle a business downturn — have fallen below the company’s target, according to Kersting. The bank now has to divert spare capital away from share buybacks, Crittenden said.
I suspect the other banks are in similar shape.
I doubt anyone will buy bonds to support this
Will they just use a revolving line of short term help from the FED, or will the FED figure some way to get them longterm financing w printed cash.
Any thoughts
“The conduit will raise most of its money by selling commercial paper.”
But isn’t that the problem there’ s no market for these loans and CDO’s. How are they going to find enough people willing to buy 100 billion dollars worth and if these buyers exist won’t it just drain them from those already trying to catch the falling knife?
Simple. The commercial paper is used as collateral for discount window loans at lower yields than the paper. Sure the banks will lose a ton of dough but that will be covered over by the spread between the commercial paper and the discount window.
Yep he’s dropping bombs.
Not near a Tv - what is this senile old fart saying?
Chance of recession 50/50. MB tried to spin that as not so bad. I believe his last prediction was 30%…
Q4 and Q1 are toast. That’s when the real impact of the housing/consumer slowdown will be seen.
Asian markets can’t keep up this pace of growth.
We haven’t even begun to feel the impact of housing and have no way of knowing what ABS are worth or how low prices will go.
I’m paraphrasing so I might be slightly off but that’s what I caught.
Thanks!
WOOOOoooooo hooo!!!
Greenspan is punishing all these A-holes for trying to fob it all off on him. He says “Oh, you wanna play hard ball? I can play hard ball. I’ve got a hot young wife and I’m set for life. What can you say about yourself, Mr. Matador? That’s what I thought.”
“I’ve got a hot young wife and I’m set for life.”
Andrea Mitchell????????????????????????????????? I guess “hot” is in the eye of the beholder and, oh well, the old man’s eyesight is probably not so good.
The chances of recession from various pundits:
as of Oct 12, 2007
Merrill Lynch - 65%
Friedman, Billings, Ramsey Group - 60%
Lawrence Summers -58%
Alan Greeenspan -45%
Richard Syron -42%
UBS - 40%
Moody’s Economy dot com - 40%
Jeremy Siegel Wharton Finance - 25%
Oak Associates - 15%
Federal Reserve calculations - 13% (DIY)
Consensus view - 38%
Federal Reserve Calculations are:
http://www.federalreserve.gov/pubs/feds/2006/200607/200607abs.html
In the spirit of M-LEC, I propose the following:
All FB’s should band together and build the McMansion of all McMansions with a giant key. After completing construction each FB should toss their purchase contracts and applicable mortgages to their own personal McMansion into the giant McMansion. After a solemn minute or so of silence the FBs should then throw the giant key on the roof and walk into the sunset.
, build a giant roof, machine tool a giant key, throw said giant key onto giant roof and then walk off into the sunset.
It looks to me like they based values on millions of little appraisals and now they can’t do one of what they bought. It sure as hell ain’t the sum of the little ones.
Here, I can help. Take 60% of the gross number and calculate the PV based upon am 18% cap rate using 3 year term.. Should just about do it.( For today only)
“Help!..I’ve Bought, Sold, or Invested in a(you choose from the long list) a Suicide Loan and I’ve BEEN WRONGED”
All to gether now, grab a beer and sing along with the Chorus…ha ha
“The Mortgage Bankers Association’s annual convention, a gathering ordinarily known for its pomp, parties and star sightings…”
STAR SIGHTINGS !!!!!!!….??????
interesting…nice plays to offload the crap and keep it off their balance sheets…nice !
“‘For me, this is more of a P.R. blitz,’ said analyst Christian Stracke. The banks are ’saying, it’s not just that we are doing this on an ad hoc, individual basis. Rather, we have a plan and consortium in cooperation with Treasury, which gives it a veneer of respectability.’”
Rolling Stones gather no moss…
Well now you’re respected in society
You don’t worry about the things that you used to be
We’re talking siv’s and div’s with the president
Well it’s a problem, sir, but it can’t be spent
Uh yes!
Well now you’re a pillar of $ociety
You don’t worry about the things that you used to be
You’re a rag-trade mob, you’re the queen of whores
You’re the easiest lay on the White House lawn
Get out of my life, don’t come back
Get out of my life, don’t come back
FED’s so respectable
FED’s so respectable
FED’s so delectable
FED’s so respectable
Get out of my life
Don’t take my rights
Don’t come back
Get out of my life
Don’t take my rights
Don’t come back
What I say!
http://www.youtube.com/watch?v=oZPy7sqKHOs
I don’t believe it. I don’t believe the figures they’re putting out. I think the losses are much, MUCH higher than what they are stating. After all, this is the land of ENRON.
Secondly, creating a “fund” or “conduit” of $75 billion is nothing. It won’t even put a dent in the gigantic mess which is becoming bigger & harder to hide. Just this week, I believe around $440 billion dollars worth of commercial paper comes due. This is stuff we don’t hear so much about, but it’s even worse than the subprime market.
Also, note the wording in the “rescue” conduit.
“These bonds will be buy around $75 billion to $100 billion in highly rated bonds and other debt from structured investment vehicles, or SIVs.”
First of all, if these mortgages are highly rated, why do they need a Rescue? What is the need in the first place to buy these things? They’re lying. They’re hoping smoke & mirrors will do the trick, since it’s worked up until now.
“‘We found out that there was a limit to the measures that could be taken to cope with changes in the U.S. without having a thorough understanding of the market,’ Koga, said.”
Loosely translated from what I know of Japanese and them going out of their way, not to lose face…
“We knew your poker game was rigged, but we are utterly shocked at the extent of it. Goodbye now.”
long time lurker (I’ve learned a lot) - a question; do holders of credit default swaps have legal recourse because the market is being manipulated - do contracts anticipate this?
Nope.