The fed loans money using crappy MBS bonds as collateral. They are just another BSC!

Hey, you accounting types, look's like our favorite builder, BZH, made some mistakes. Oddly enough they were in BZH's favor. GO figure. Their auditors didn't find them the first time but somehow they discovered them now as the authorities are all over them like flies on sh!t.

CORRECTED-Beazer Audit Committee finds incorrect accounting
| Reuters

sorry, Tanta, looks like i have created more work for u if u decide to do a repo ubernerd...that's what u get for ruining two of my breakfasts this week!

mortgage brokers selling off fast after FNM announcement

I think I have a confusion.

The problem is that the Fed wants the rate a 5.25. The banks put a premium on lending so the rate is really above the desired 5.25.

The Fed intervenes by lending enough until the rate comes down to the desired level.

Now, this is the trouble in the credit markets.

How does a cut alleviate this?

It would seem is a bigger problem, it would require bigger interventions to bring down to the new desired rate.

After the Bell-Fannie Mae falls after caps held

Fri 10 Aug 2007 4:54 PM CDT

NEW YORK, Aug 10 (Reuters) - Shares of Fannie Mae (FNM - news) fell 1.2 percent to $65.63 in extended trade on Friday after a federal government regulator denied for now the housing finance company's request to raise the limit on its investment portfolio.

ShortCourage, it's short for repurchase agreement, which is just a literal description of the transaction
bacon dreamz | 08.10.07 - 6:17 pm | #

Truly , though, it's short for repossesio

Ubernerdliness question: Is "three days" three of Mon-Fri minus Holidays or is "three days" seventy-one hours fifty-nine minutes or is "three days" by the end of trading on the thrid day after execution?

bailey, if the Fed was serious about having a rate of 5.255, it couldn't sit.
It had to intervene to bring the rate down.

The last intervention brought it below his desired stated rate, what was the justification for this one I don't know.

Execution, Rob, I’ll take execution. Now all we have to decide is who to do it to? Or maybe execution means something like “execute the trade”. what if we, hehe, get a little closer here, do not execute the trade, but stick the FED with the collateral, huh, sshhhh, three days to think about it, Rob.

CR
whoever got the loan from fed, how it would be able to scrape together money over the weekend? to pay fed back by monday. And what if it still can't???

Geoff: Not yet. I'm just trying out the dark humor today, since it may appear to be bright compared to how things will look Monday.

LoL !

LawFitz posted this on another thread:

"Clarification of Collateral Tranches on Desk RP Operations
Typically, when the Desk arranges RPs it accepts propositions from dealers in three collateral tranches.

"From time to time, for operational simplicity, the Desk has arranged RPs just in the third tranche, under which dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities. Today's RPs were of this type."

As bacon dreamz says, there's no to expect any big problems with agency MBS. Not that the loans backing it can't perform worse than expected if the economy tanks, but these are loans written on the same basis they always have been: 20% down, reasonable debt to income, etc. Nothing exotic about them.

Tanta, an ubernerd post on repos would be great if you have the time and inclination-- but I'd just like to say, thank you, thank you, thank you for all your amazing work!

poszi,

Didn't both the ECB and the Fed had to do what the did to support their target rates?

Didn't both the ECB and the Fed had to do what the did to support their target rates?

Well, yes. It was not unusual that they reacted but unusual was that they had to.

First of all, The 3-day repos the Fed did today are actually done every business day but are not so widely reported. This is how the Fed can maintain the desired fed funds interest rate of 5.25%. Beginning Thursday, the cost of short term money in the banking system was climbing above the rate the Fed has targeted so they offered banks a way to borrow from them directly at a 5.25% annual rate instead of from another bank at a higher rate. This is really nothing unusual except it is requiring larger Repos to bring the Fed Funds Rate down to the desired interest rate level. Clearly, there is trouble in the banking system. There is an inordinate demand for cash as significant margin calls are permiating throughout the globe.

If the problem continues, as I expect it will, then the central banks around the globe will further increase the temporary liquidity through Repo agreements.

Secondly, Central Banks can also permenently increase the money supply by buying bonds outright and pay for them with newly printed currency. This is where it can get really dangerous. This is what is called monitizing the debt. Germany tried this in the 20's and we remember what the result of that was.

So far the Fed is only doing temporary Repos, 3 and 14 day variety in a somewhat larger than normal amount. We should all just monitor the situation to see if the problem continues to grow.

If the Fed starts to monitize the debt, watch gold pop through $700 and the long term bond sell off causing even higher mortgage rates for those who can find financing.

We live in interesting times!

that is right the Fed does repos in the normal course of business. the doods on the ib repo desk will tell u, though, that the fed starting doing more than normal about two weeks ago, but the press forgot to notice.

I don't know if Tanta needs to go uberNerd for Repos.

The New York Fed website has a reasonably understandable description of the process here  

Wikipedia has a pretty decent simplified description under "Repurchase agreement".

InquiringMind

Allow me to spread a little contagion from another financial blog.
Dare yee:
BBC - Peston's Picks: US exports poison

"they will pay the loan back with 3 days of 5.25% interest."

The rate Fed charge to the bank is 6.25% (a 1% addition to the 5.25% rate set by FED. And the collateral take a 5% hair cut (so you can only get 95% on the face value). Larry Kudlow has 3 ex-fed governor on his show to explain the in and out of the repo operation.. He acutually asked all the questions that I want to know the answer.. Check the video one. I think it will become a premium access tomorrow...

Video - CNBC.com

I could care less if the FED lends Countrywide enough money to buy and hold every home in SoCal. I have no interest buying a house at these inflated levels, period.
bailey

Excellent point, bailey. Now if only everyone would think rationally like you, we'd actually have....rational markets. You know, that fictional thing economists are always making believe exists.

problem is there is a too large pool of the repo quality securities in the US.
if it includes treasury,municipial and agency, that is about the size of the GDP.
because repo quality bonds are quasi money their quantity should be controlled, e.g. the way it is done in the eurozone by the Maastrich treaty, which doesn't allow to issue more govment bonds than 60% of the GDP

CR,

I’m going to disagree with you on this one. This is a big deal because the collateral for the Repo is of questionable value. Would you take MBS as collateral right now, especially MBS not marked to market? No rational market participant would and that’s why the central banks are doing it. The central banks are supposed to supply liquidity, not capital, and taking collateral at non-market values is dangerously close to providing capital. Even if the agreement is fulfilled the underlying problem still exists: there is a ton of mispriced paper floating throughout the global financial system that no one wants to take losses on, neither the current holders nor potential bidders. This means the central banks are the only ones who will take the questionable paper at a value that maintains the financial standing (and liquidity) of the banks holding them. Furthermore, the fact that the Fed and other regulatory agencies allowed the banking system to become so congested with inflated and mispriced assets that they are facing liquidity problems undermines one of the key roles of the central banks: financial stability. No matter how you cut it, these are very serious problems.

I also think there is a possible systemic risk from a 21st century variant of a bank run. Wait until people realize that their money market funds are sitting on piles of mispriced paper with bogus collateral and that their banks balance sheets are cluttered with insufficiently collateralized obligations.

Its fun to see the Fed do its thing. These actions to increase liquidity are interesting because the Fed gets to play the part of the big, dumb, rich guy who appears to be willing to accept shaky mortgage backed securities as collateral for big million or billion dollar short-term loan periods. Of course the bank borrower has to pay back the money plus interest and the Fed doesn't look too dumb after all.