While it may just be the time of year (or maybe it's the time of man), but non-financial CP outstanding is falling, as is non-asset-backed CP. With the collapse of SIVs, the sharp decline in ABCP is not hard to understand, nor is an end to the decline, as SIVs are getting close to going out of existence.
I think we have seen the liquidity crunch lessened, but the overall credit crunch is still with us. There is more to the financial world than ABCP.
I think the Fed is doing the proper thing by aggressively trying to prevent a liquidity crisis.
But preventing an insolvency crisis would necessarily involve taking money from the solvent and giving it to the insolvent.
My sense is that you have to be very careful in an economy with going too far rewarding counter-productive behavior and punishing productive behavior for the sake of the aggregate good. Especially if you do it for long enough that people expect to be compensated specifically for screwing up or engaging in economy-wide investment scams.
If you pay people to gamble and screw-up fiancially for a long enough period of time, you get a nation full of gamblers and financial screw-ups.
For the spread to fall so low the solvency crisis has to be considered minor by the market as well. This suggests the crisis over the last month was mostly about year-end padding.
Dr. Ben has a patient with 2 problems. For stareters, the patient has cancer (inflation) but it is still at an early stage and has shown only limited metastization (from energy into food, starting to move into other areas like airfares etc). However, the patient is also having a heart attack (credit crunch) and has a weak heart anyways. Now the medicine for treating the heart attack is also been known to accelerate the spread of cancer, and is generally considered to be contraindicated to cancer pateints. But if you dont administer the medicine for the heart attack the patient will die. So what do you do? First you deal with the heart attack (i.e. cut FF rate) and then once the patient has stabilized you go back and have to deal with a much more severe round of chemo to treat the cancer than you would have had to do otherwise. Not a great position to be in if you are Dr. Ben, but more of the blame belongs with the previous doc, Dr. Al, who said its ok to keep smoking 2 packs a day and deep frying your eggs in bacon fat, while living a sedentary lifestyle.
Whats going on here in real terms that young people will understand (@ WSJ)?
Re: Jan. 3 /PRNewswire-FirstCall/ -- Fannie Mae (NYSE: FNM - News) will redeem the principal amounts indicated for the following securities issues on the redemption dates indicated below at a redemption price equal to 100 percent of the principal amounts redeemed, plus accrued interest thereon to the date of redemption:
Principal Security Interest Maturity Date CUSIP Redemption Date
Amount Type Rate
$250,000,000 MTN 7.150% January 17, 2017 31359M3D3 January 17, 2008
$500,000,000 MTN 6.370% January 17, 2017 31359M3E1 January 17, 2008
To ac: oh, NOW you tell us ("...If you pay people to gamble and screw-up fiancially for a long enough period of time, you get a nation full of gamblers and financial screw-ups...").
Man, all this good news -- stock market up on 40K in new hires (hilariously weak, but beating low expectations) and on headline factory orders up but core orders down, again -- is killing me.
Ben has to try electroshock therapy and hope that the patient will ignore the symptoms associated with the underlying systemic issues related to not feeling well enough to go out shopping at the mall.
ABCP did increase by $26.3 billion, but domestic non-financial CP decreased by $13 billion. That looks more like a dangerous contraction than an "easing".
All of this could just be year-end noise. Too soon to say.
Office of the Illinois State Treasurer
Alexi Giannoulias
Request for Proposals for Securities Lending Services
(Custodial and Non-Custodial)
August 8, 2007
State Treasurer's Security Portfolio
As of 7/31/2007
Late payments on a cluster of consumer loans, including those for autos, home improvement and certain home equity loans, climbed in the summer to their highest point since the country's last recession in 2001.
...
Meanwhile, the delinquency rate on "indirect" auto loans -- which are arranged through dealerships -- jumped in the third quarter to 2.86 percent, a 16-year high.
The hurricane sweeping through Spain's construction and housing industry has claimed a fresh victim as regulators suspended trading in the shares of Inmobiliaria Colonial, the country's second biggest property empire........While it was able to raise 6.4bn in September from a consortium of banks led by the Royal Bank of Scotland and Goldman Sachs, the interest rate was punitive. A $1bn tranche of junior debt was priced at 400 basis points over Euribor.
The crisis over the past week appears to have been precipitated by the sudden withdrawal of two key investments funds
More OT related to accounting firms. This link is related to the above OT link related to State Treasurer's Security Portfolio, which implies they want an honest accounting firm...which I think is really funny. If you have not looked at recent audits, this is an amazing joke and related to the collusion within this subprime/recession related to fraud and misleading information by every lending institution, rating agency, etc...etc..
I had noticed the discount rate spread narrowing yesterday, and then today it decreased dramatically. Props to CR for jumping right on it. I don't agree that CR put a negative spin on it; I think he rightly reminded us that this situation is like, um, driving a heart attack patient to the ER; we just swerved to avoid a tree.
My question is, does averting a liquidity crisis mean deflation is less likely? Are we back on a stagflationary path, or is this just noise in the data?
CR (or anyone else that can answer this), out of curiosity for those of us economically uneducated, how exactly does a solvency crisis differ in evolution from a liquidity crisis in the effect on the economy.
I understand from what I've read that in a liquidity crisis the underlying institutions are solvent (assets > liabilities) and are just experiencing a short term cash flow crunch where, unless they have access to funds from lenders, can force a fire sale of long term assets and possible economy-wide domino effect of cash crunches/fire sales. The solution is for the lender of last resort to inject cash into the system to provide the short term financing needed and avoid the fire sales. On the other hand, in a solvency crunch the institutions are insolvent (assets < liabilities) and no amount of access to short term cash will fix this fundamental issue. I also understand that typically speaking in a solvency crisis (such as in the S&L crisis) if the damage is large enough the financial authorities try to either strong arm takeovers of insolvent institutions by solvent ones or will temporarily nationalize them to clean up the debt problems and then sell them off or liquidate the assets (such as with the S&L era RTC or how the FDIC handles an insolvent bank)...
However, 1) none of this insolvent strong arming/temporary nationalization consolidation of insolvent institutions seems to be taking place currently (is this because the insolvent institutions have yet to be identified and/or the authorities are still "gearing up" for the task?). And, 2) If nothing organized on a national level is done to clean up these insolvent institutions what effects can we expect to see on the ground level. I understand that these effects could be both short term (such as a continuation of the liquidity crunch as banks and institutions hoard cash and make no loans as the Fed & State authorities get their acts together) or long term (such as, more and more institutions outright failing or going to FDIC-like receivers, a massive credit crunch, and a return of counter party distrust - with a vengeance - that'll fade away in a decades long painfully slow manner as everyone ignores the elephant in the room and hopes it goes away on its own).
In the meantime I can see that there may be even more bad news in the economic pipeline with a looming recession possibility, CRE bust, and huge numbers of home mortgage rate resets and possible increase in "jingle mail" solutions and personal bankruptcy. So I'm assuming that ignoring things and hoping the solvency crisis goes away on its own is not a realistic option.
Re: On the other hand, the Enterprise failed to honestly
disclose the primary motivation behind its repurchase activity. It emphasized a secondary
objectiverisk managementmisleadingly described the cost-savings objective, and, most
importantly, omitted a straightforward discussion of earnings management.
Fannie Maes debt buy-back practices also reveal a lack of adequate delegations of
authority, controls, and procedures. As such they raise operations and litigation risk and
constitute an unsafe and unsound practice. At a minimum, an appropriate, written policy on debt
repurchases was required.
"Whats going on here in real terms that young people will understand (@ WSJ)?"
Fannie's calling callable debt issued previously. There's nothing nefarious here. They issue callable bonds to make it easier to match their assets and liabilities. Also, because the mkt for callable debt tends to be inefficient, their option adjusted spread paid is lower than straight debt (the last part is my opinion.)
Eric: Or, after trying several antibiotics, the docs found one that the infection is responding to. Could there be a relapse? Sure, but for now the kids can come visit.
Man, all this good news -- stock market up on 40K in new hires (hilariously weak, but beating low expectations) and on headline factory orders up but core orders down, again -- is killing me.
I think the hedge fund insdustry has become so evolved that they can manage to create bubbles in more and more adverse conditions.
As far as I can tell the US federal reserve is incapable of learning from its past mistakes:
Politically they may be trapped now, and we may see them start to push for more regulatory solutions.
I think they've really screwed up cultivating an expectation of rate cuts at the first hint of economic pain. Now it's considered sadistic not to cut rates at the first sign of economic trouble. Yet that may be the only effective tool they currently have against the Fantasy Wealth Industry. I.E. the best tool in the Fed's arsenal may be the most unpopular one. I think the hedgies know this and maybe planned on it.
$250,000,000 MTN 7.150% January 17, 2017 31359M3D3 January 17, 2008
$500,000,000 MTN 6.370% January 17, 2017 31359M3E1 January 17, 2008
DH Anonymous: With the rate drops, Fannie is just calling some of its callable debt, soon to be replaced by cheaper issuances, thus lowering their interest costs. As an example, they issued this $750m last January to probably fund the acquisition of "cash" PCs or agency-eligible tranches of subprime securitizations. The ABS trader identifies the assets they want to buy, yell over to the debt issuance desk, and the debt is placed by Goldman/Lehman in about 5 minutes, not much notice required. Then the ABS trader hits the bid on the assets.
For the spread to fall so low the solvency crisis has to be considered minor by the market as well.
That would be the same omniscient marketplace that declined 31% between October 14, 1987 and October 19th, 1987? Thanks for reassuring me. I was starting to worry.
Re: Fannie Maes Annual Reports did not disclose the clear earnings management motivation
of its 2001 and 2002 debt buy-backsthe smoothing away of what otherwise would have been
earnings higher than necessary to meet bonus targets and analyst expectations. The Enterprise
did add an additional, somewhat misleading, explanation along with its earlier risk-management
explanation, saying that the repurchases took advantage of favorable market conditions.
IMHO, this is window dressing by Fannie & OFHEO to ramp up Jumbos, which is what Paulson is pushing and hyping, touting and pumping and I think OFHEO is dropping the hardball line to play easy and nice, versus standing uo the fraud within Fannie!
December 13, 2007, 1:21 pm
The Feds Legal Arbitrage
Today, Federal Reserve Bank of New York President Timothy Geithner, discussing the credit crisis of recent months, declared that The Federal Reserve Act gives us broad authority to act in response to these types of conditions.
Fed officials had the same freedom these central banks did, they may not have created the new term auction facility. As it is, the facility is a form of legal arbitrage a way for the Fed to get around the artificial constraints imposed by the Federal Reserve Act. It gives us a tool that lies somewhere between our open market operations and the discount window, Mr. Geithner said.
That is related to the OFEHO Report:
hat the
repurchased debt was trading at wide spreads to other fixed-income securities was not a
justification for the repurchases because it did not result in any economic benefit for Fannie Mae.
Economic benefit would only result from arbitrage activities, which Fannie Mae has never
mentioned in public disclosures.
Conceptually you have it right. We have a moving target, human mortgage payment behavior, which is becoming more & more volatile. We have banks that are rapidly approaching their minimum capital requirements. Those same banks used to sell their risk and now must retain their risk, but they do not have the infrastructure/analytics/techonology/personnel in place to measure or mitigate that risk. We have regulators that are understaffed & don't know where mortgage-backed securities backed by exotic mortgages should be priced when there is "no bid". And we have their bosses in Washington who did not know we had a problem in the markets until this past Labor day.
So let's recap: Increasingly cash-strapped borrowers defaulting on loans faster than banks can count; banks that are falling below their capital requirements faster than the regulators can count; and regulator-royalty (the Fed quants that don't talk to anyone in the banking sector) that is further behind the curve than equity investors can count.
I realize its often normal for them to do repurchase on calls, but Im more interested in the amount of repurchases; Im looking at valuation trends, because I think they do game these things to dress windows, like the Jumbo push and getting off the hook with OFHEO....which should never happen with these crooks, and that is why anything at this point, is nefarious and questionable, suspect and worth doing DD!
Fannie follows Freddie in loan buyback change
The mortgage financers change their guidelines for repurchasing late home loans.
Fannie Mae and Freddie Mac, its smaller competitor, have been forced to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and defaults are spiking on high-risk mortgages made to borrowers with weak credit histories.
The companies customarily repurchased most mortgages once they were 120 days past due. Freddie Mac said it will now purchase delinquent loans that were part of larger securities issued by the firm when the mortgages are at least 120 days past due and either the mortgage has been modified, a foreclosure sale occurs, or the cost of payments to security holders exceeds the cost of holding the loans. It will also repurchase mortgages that are 24 months delinquent.
Brian Faith, a spokesman for Washington-based Fannie Mae (Charts), said late Monday, "We are undertaking the same steps."
McLean, Va.-based Freddie Mac (Charts, Fortune 500) said the move will help stem the erosion of its capital and will make its financial results more accurately reflect its "expectations for future credit losses."
Fannie Mae's intention to match Freddie Mac's move was reported online late Monday by The Wall Street Journal, which cited concerns among some financial analysts that the companies could use the new policy as a way to delay booking credit losses.
I really just think Fannie is back to the old tricks and no one is watching close enough!
From The OFHEO Report:
... the investor analyst community understood well that Fannie Mae had used large debt repurchases to smooth earnings in 2003. Nevertheless, in
response to inquiries, Fannie Mae publicly denied employing debt repurchases to achieve
earnings targets.
You have the very same smoothing crap being engineered into the next report to hide reality and con OFHEO into looking the other way, while these con artists lobby to get Jumbo loans backed by taxpayers.....its crap!
tj: More like the deflation is being "managed" so as to allow an unwind without risking a systemic crisis. (that is, our opportunity)
+
ac: (cum spencer in so many words), the ultimate result of shielding men from the effects of folly is to fill the world with fools. (that is, our imperative and deadline)
From cal (post), in a future story posted in future time; CR story: Consumer Delinquency Rate Highest Since Last Recession:
Cal posts the following news related to my interest in Fannie manipulating repurchases
"$3.5B 4Q Derivatives Hits Seen at GSEs
Bloomberg News | Jan 3
Fannie Mae and Freddie Mac probably lost more than $3.5B last quarter on derivatives used to hedge against interest rate changes, according to an analyst at FTN Financial."
Email from Pete Barbera to Jonathan Boyles, Subject: Inventory of FAS 133 transactions, June 2, 2004, produced via CD 8/11/04 in M Box. Attached to Mr. Barberas email was a draft schedule titled Analysis of the March 2004 Book. The draft analysis categorized approximately $960 Billion of Fannie Maes notional outstanding derivatives by transaction type (per the DAG) and by hedge classification (CF, FV, DNQ and Other) as of the end of March 2004. The thirteen most frequently used transactions presented in Mr. Barberas analysis match those presented in a letter by Jodie Kelley, Vice President and Deputy General Counsel, to Chris Dickerson, July 28, 2004, FMSE 00083. They are 1, 2, 3, 4, 8, 10, 11, 12, 13, 20, 52, 67 and 71. Of these, OFHEO has identified that 5 are term-out transactions and comprise approximately $240 billion of the over $960 billion of outstanding derivative notional balances at March 31, 2004.
Andrew - a liquidity crisis is fundamentally a lack of tokens for exchange. If you think about money as being a simple proxy for goods, it's perfectly possible for everybody to have plenty of goods to exchange, but for there not to be enough pieces of paper available to actually write the IOU's on.
A solvency crisis on the other hand, is when you don't have the goods available to match your IOU's, for example say, if you sold mortgage insurance...
I know a lot of people here @ CR hate these types of long posts, but IMHO, Fannie has had a very long record of being a very corrupt entity. It is worth reviewing many of the past FNM sins, because IMHO, they are very active in lobbying for Jumbo loans to be backed by taxpayers. Im a taxpayer and I dont want this (or any) corrupt GSE to take on more debt and screw up more taxpayer money; these entities obviouisly cant control the organizations they have, so I question any talk about FNM taking on more risk in terms of backing Jumbos! Furthermore, if OFHEOs Lockhart wants to jump into the collusive firestorm and get in bed with Paulsons proactive lobbying, I suggest they both be fired ASAP!
Federal National Mortgage Association Fannie Mae · 8-K · For 2/22/06 · EX-99.2
The Company's hedge documentation rests almost entirely on an
assumption that any ineffectiveness associated with its hedge transactions would
be inconsequential.
FINDINGS REGARDING OVERSIGHT OF FANNIE MAE'S HEDGE ACCOUNTING
Company records and interviewees' recollections show that five
different groups were involved to a greater or lesser degree in Fannie Mae's
implementation of FAS 133. These were: Fannie Mae's senior management, its Board
of Directors, the FASB, KPMG, OFHEO and Fannie Mae's Office of Audit. Each
played a different role and had a different level of involvement in the process.
Both OFHEO and the Company's internal auditors had the opportunity to
review Fannie Mae's FAS 133 program in detail and both issued reports that
praised the Company's implementation efforts without qualification. Indeed, both
the OFHEO and Internal Audit reports contain language that is so broad it could
have misled readers into believing that the conclusions say more than was
intended, particularly with respect to the Company's compliance with GAAP.
OFHEO's review is particularly noteworthy given the fact that, a year after
OFHEO issued its 2002 report, it would begin its Special Examination of Fannie
Mae and conclude that the errors in Fannie Mae's hedge accounting were numerous
and fundamental.
Treasury Secretary Henry Paulson announced Monday that he was in favor of temporarily lifting the dollar limit on loans purchased by Freddie Mac and Fannie Mae, allowing them to provide a market for so-called "jumbo mortgages."
Under current rules, the two government sponsored enterprises (GSEs) cannot purchase loans that exceed $417,000. Paulson is advocating that this limit be lifted and appeared not to disagree with earlier suggestions by Federal Reserve Chairman Ben Bernanke that the new limit could be as much as $1 million. Paulson stressed, however, that he did not favor raising the loan limits forever, only until the current credit crunch eases.
These crooks toss out the $1 million test, as if its based in stone, or has some realistic backdrop, and I say that punk @ Treasury works for me and those rats need to back off because they do not have the authority to use mafia magic to adjust what taxpayers back!
Testimony of Treasury Secretary Henry M. Paulson, Jr.
Before the House Committee on Financial Services
On the Legislative and Regulatory Options
For Minimizing and Mitigating Mortgage Foreclosures
The constraints imposed on the GSEs include that they: are limited to operating in the secondary mortgage market; can only purchase or guarantee loans below the conforming loan limit set by Congress (currently $417,000 or lower); and must have credit enhancements if the loan-to-value ratio exceeds 80 percent. In addition, they are also subject to safety and soundness oversight, and they must meet affordable housing goals.
Fannie Mae and Freddie Mac also have the ability to purchase mortgages and package them into MBS (Now who in hell do you think that might help @ Goldmans and all the other underwriting agencies linked to subprime packaging)?
We are starting to see encouraging signs that other markets, such as the jumbo mortgage market (loans greater than $417,000), are loosening up but these markets are not functioning as normal. While some financial institutions are more willing to take these loans onto their balance sheets than they were weeks ago, others are in a sense compelled to do so because the demand for jumbo and other non-conforming mortgage backed securities (and other asset backed securities) has broken down and liquidity concerns remain. (Nice call there bub).
additional pressure on the current loan-to-value ratios of all types of mortgages. The GSE charters require that they have adequate credit enhancement on any loans they securitize or purchase that have a high loan-to-value ratio (greater than 80 percent LTVs). Changing this would require legislation. Again, I would welcome the debate in Congress about whether the GSEs should have the ability to go deeper into the credit spectrum to help current homeowners and to support further their affordable housing mission. (ranting and swearing here censored).
I dont know if anyone is keeping up with this...I doubt it, but tis whole thing is gonna be a done deal, faster than you can say fraud!
FHA Reforms
NAR successfully lobbied for the passage of H.R. 1852, the Expanding American Homeownership Act of 2007, which helps modernize FHA by expanding the availability of safe and affordable FHA-backed loans for purchases and refinances. The bill includes provisions to eliminate the 3% down payment requirement, increase loan limits up to 175% of the conforming limit in high-cost areas, streamline condominium purchases, and eliminate the cap on Home Equity Conversion mortgages (HECMs). The Senate Banking Committee passed a similar bill. The Senate bill is expected on the floor by the end of the year.
Freddie Mac/Fannie Mae Reform
NAR also successfully lobbied for passage of H.R. 1427, the Federal Housing Financing Reform Act of 2007, which overhauls the regulatory structure of the nations housing finance government-sponsored enterprises (GSEs). H.R. 1427 provides for regional adjustments to the caps on mortgages the GSEs may buy for high-cost areas, helping more working families qualify for safer GSE loans. The House passed H.R. 1427, 313-104. The Senate has taken no action to date.
While it may just be the time of year (or maybe it's the time of man), but non-financial CP outstanding is falling, as is non-asset-backed CP. With the collapse of SIVs, the sharp decline in ABCP is not hard to understand, nor is an end to the decline, as SIVs are getting close to going out of existence.
I think we have seen the liquidity crunch lessened, but the overall credit crunch is still with us. There is more to the financial world than ABCP.
Shrinkage.
I think the Fed is doing the proper thing by aggressively trying to prevent a liquidity crisis.
But preventing an insolvency crisis would necessarily involve taking money from the solvent and giving it to the insolvent.
My sense is that you have to be very careful in an economy with going too far rewarding counter-productive behavior and punishing productive behavior for the sake of the aggregate good. Especially if you do it for long enough that people expect to be compensated specifically for screwing up or engaging in economy-wide investment scams.
If you pay people to gamble and screw-up fiancially for a long enough period of time, you get a nation full of gamblers and financial screw-ups.
2007 financials are now being captured,the books are closed and everything is fine. No need to shore up the balance sheets 'till Q1 rolls around.
So... a strong Fed wind has cleared the smoke in order for everyone to see that the house is still burning brightly?
I'm wondering if this doesn't have something to do with the ABCP market deal Canada just completed.
Cheers,
For the spread to fall so low the solvency crisis has to be considered minor by the market as well. This suggests the crisis over the last month was mostly about year-end padding.
Dr. Ben has a patient with 2 problems. For stareters, the patient has cancer (inflation) but it is still at an early stage and has shown only limited metastization (from energy into food, starting to move into other areas like airfares etc). However, the patient is also having a heart attack (credit crunch) and has a weak heart anyways. Now the medicine for treating the heart attack is also been known to accelerate the spread of cancer, and is generally considered to be contraindicated to cancer pateints. But if you dont administer the medicine for the heart attack the patient will die. So what do you do? First you deal with the heart attack (i.e. cut FF rate) and then once the patient has stabilized you go back and have to deal with a much more severe round of chemo to treat the cancer than you would have had to do otherwise. Not a great position to be in if you are Dr. Ben, but more of the blame belongs with the previous doc, Dr. Al, who said its ok to keep smoking 2 packs a day and deep frying your eggs in bacon fat, while living a sedentary lifestyle.
Whats going on here in real terms that young people will understand (@ WSJ)?
Re: Jan. 3 /PRNewswire-FirstCall/ -- Fannie Mae (NYSE: FNM - News) will redeem the principal amounts indicated for the following securities issues on the redemption dates indicated below at a redemption price equal to 100 percent of the principal amounts redeemed, plus accrued interest thereon to the date of redemption:
Principal Security Interest Maturity Date CUSIP Redemption Date
Amount Type Rate
$250,000,000 MTN 7.150% January 17, 2017 31359M3D3 January 17, 2008
$500,000,000 MTN 6.370% January 17, 2017 31359M3E1 January 17, 2008
DH
To ac: oh, NOW you tell us ("...If you pay people to gamble and screw-up fiancially for a long enough period of time, you get a nation full of gamblers and financial screw-ups...").
Man, all this good news -- stock market up on 40K in new hires (hilariously weak, but beating low expectations) and on headline factory orders up but core orders down, again -- is killing me.
The front page in today's Union Buffoon was surprisingly negative:
http://subscribers.uniontrib.com/daily.pdf
Change in attitude -- towards negative -- is afoot.
Dirk,
Ben has to try electroshock therapy and hope that the patient will ignore the symptoms associated with the underlying systemic issues related to not feeling well enough to go out shopping at the mall.
ABCP did increase by $26.3 billion, but domestic non-financial CP decreased by $13 billion. That looks more like a dangerous contraction than an "easing".
All of this could just be year-end noise. Too soon to say.
CR-I was just going to complain that you only post bad news and then I saw this.
Of course you had to put a negative spin on it, but I can live with that.
Way OT, but:
http://www.treasurer.il.gov/about-us/procurement-opportunities/rfps/pdf/2007-08-08SecuritiesLendingRFP.pdf
Office of the Illinois State Treasurer
Alexi Giannoulias
Request for Proposals for Securities Lending Services
(Custodial and Non-Custodial)
August 8, 2007
State Treasurer's Security Portfolio
As of 7/31/2007
Lots of nice DD for references:
DH
OT: CR how many hits are you getting from the Fed and Treasury these days?
OT - Late Payments on Consumer Loans Rise (AP)
Page expired - MSN Money
Late payments on a cluster of consumer loans, including those for autos, home improvement and certain home equity loans, climbed in the summer to their highest point since the country's last recession in 2001.
...
Meanwhile, the delinquency rate on "indirect" auto loans -- which are arranged through dealerships -- jumped in the third quarter to 2.86 percent, a 16-year high.
Well, we all know a bailout is in store. Problem is the election year. I just don't think congress will be able to wait though?
Lets look at Spain:
The hurricane sweeping through Spain's construction and housing industry has claimed a fresh victim as regulators suspended trading in the shares of Inmobiliaria Colonial, the country's second biggest property empire........While it was able to raise 6.4bn in September from a consortium of banks led by the Royal Bank of Scotland and Goldman Sachs, the interest rate was punitive. A $1bn tranche of junior debt was priced at 400 basis points over Euribor.
The crisis over the past week appears to have been precipitated by the sudden withdrawal of two key investments funds
Inmobiliaria Colonial shares suspended - Telegraph
More OT related to accounting firms. This link is related to the above OT link related to State Treasurer's Security Portfolio, which implies they want an honest accounting firm...which I think is really funny. If you have not looked at recent audits, this is an amazing joke and related to the collusion within this subprime/recession related to fraud and misleading information by every lending institution, rating agency, etc...etc..
http://www.pcaobus.org/Inspections/Public_Reports/2007/Deloitte.pdf
@Aheadofthecurve
I had noticed the discount rate spread narrowing yesterday, and then today it decreased dramatically. Props to CR for jumping right on it. I don't agree that CR put a negative spin on it; I think he rightly reminded us that this situation is like, um, driving a heart attack patient to the ER; we just swerved to avoid a tree.
My question is, does averting a liquidity crisis mean deflation is less likely? Are we back on a stagflationary path, or is this just noise in the data?
Eric,
More like the deflation is being "managed" so as to allow an unwind without risking a systemic crisis.
CR (or anyone else that can answer this), out of curiosity for those of us economically uneducated, how exactly does a solvency crisis differ in evolution from a liquidity crisis in the effect on the economy.
I understand from what I've read that in a liquidity crisis the underlying institutions are solvent (assets > liabilities) and are just experiencing a short term cash flow crunch where, unless they have access to funds from lenders, can force a fire sale of long term assets and possible economy-wide domino effect of cash crunches/fire sales. The solution is for the lender of last resort to inject cash into the system to provide the short term financing needed and avoid the fire sales. On the other hand, in a solvency crunch the institutions are insolvent (assets < liabilities) and no amount of access to short term cash will fix this fundamental issue. I also understand that typically speaking in a solvency crisis (such as in the S&L crisis) if the damage is large enough the financial authorities try to either strong arm takeovers of insolvent institutions by solvent ones or will temporarily nationalize them to clean up the debt problems and then sell them off or liquidate the assets (such as with the S&L era RTC or how the FDIC handles an insolvent bank)...
However, 1) none of this insolvent strong arming/temporary nationalization consolidation of insolvent institutions seems to be taking place currently (is this because the insolvent institutions have yet to be identified and/or the authorities are still "gearing up" for the task?). And, 2) If nothing organized on a national level is done to clean up these insolvent institutions what effects can we expect to see on the ground level. I understand that these effects could be both short term (such as a continuation of the liquidity crunch as banks and institutions hoard cash and make no loans as the Fed & State authorities get their acts together) or long term (such as, more and more institutions outright failing or going to FDIC-like receivers, a massive credit crunch, and a return of counter party distrust - with a vengeance - that'll fade away in a decades long painfully slow manner as everyone ignores the elephant in the room and hopes it goes away on its own).
In the meantime I can see that there may be even more bad news in the economic pipeline with a looming recession possibility, CRE bust, and huge numbers of home mortgage rate resets and possible increase in "jingle mail" solutions and personal bankruptcy. So I'm assuming that ignoring things and hoping the solvency crisis goes away on its own is not a realistic option.
Ok,
No more kid glove stuff Tanta (CR), lets not go soft here!
Can you get back to Fannie repurchase activity?
This explains a lot of things here (tons of repurchase manipulation, which is happening as we post:
Report of the Special Examination of
Fannie Mae
http://www.ofheo.gov/media/pdf/FNMSPECIALEXAM.PDF
Re: On the other hand, the Enterprise failed to honestly
disclose the primary motivation behind its repurchase activity. It emphasized a secondary
objectiverisk managementmisleadingly described the cost-savings objective, and, most
importantly, omitted a straightforward discussion of earnings management.
Fannie Maes debt buy-back practices also reveal a lack of adequate delegations of
authority, controls, and procedures. As such they raise operations and litigation risk and
constitute an unsafe and unsound practice. At a minimum, an appropriate, written policy on debt
repurchases was required.
Doc
"Whats going on here in real terms that young people will understand (@ WSJ)?"
Fannie's calling callable debt issued previously. There's nothing nefarious here. They issue callable bonds to make it easier to match their assets and liabilities. Also, because the mkt for callable debt tends to be inefficient, their option adjusted spread paid is lower than straight debt (the last part is my opinion.)
Eric: Or, after trying several antibiotics, the docs found one that the infection is responding to. Could there be a relapse? Sure, but for now the kids can come visit.
Man, all this good news -- stock market up on 40K in new hires (hilariously weak, but beating low expectations) and on headline factory orders up but core orders down, again -- is killing me.
I think the hedge fund insdustry has become so evolved that they can manage to create bubbles in more and more adverse conditions.
As far as I can tell the US federal reserve is incapable of learning from its past mistakes:
Aggressive Rate Cuts = Bubbles
Bubbles = Financial Ruin
Financial Ruin = Economic Ruin
Politically they may be trapped now, and we may see them start to push for more regulatory solutions.
I think they've really screwed up cultivating an expectation of rate cuts at the first hint of economic pain. Now it's considered sadistic not to cut rates at the first sign of economic trouble. Yet that may be the only effective tool they currently have against the Fantasy Wealth Industry. I.E. the best tool in the Fed's arsenal may be the most unpopular one. I think the hedgies know this and maybe planned on it.
"Check... it's your move Ben."
$250,000,000 MTN 7.150% January 17, 2017 31359M3D3 January 17, 2008
$500,000,000 MTN 6.370% January 17, 2017 31359M3E1 January 17, 2008
DH Anonymous: With the rate drops, Fannie is just calling some of its callable debt, soon to be replaced by cheaper issuances, thus lowering their interest costs. As an example, they issued this $750m last January to probably fund the acquisition of "cash" PCs or agency-eligible tranches of subprime securitizations. The ABS trader identifies the assets they want to buy, yell over to the debt issuance desk, and the debt is placed by Goldman/Lehman in about 5 minutes, not much notice required. Then the ABS trader hits the bid on the assets.
For the spread to fall so low the solvency crisis has to be considered minor by the market as well.
That would be the same omniscient marketplace that declined 31% between October 14, 1987 and October 19th, 1987? Thanks for reassuring me. I was starting to worry.
Bah Humbug!
Analysts have estimated Wachovia's net CMBS exposure at about $9 billio
Clyde,
Thanks for the post. Im also reading other motivations for Fannie redemptions here:
Report of the Special Examination of
Fannie Mae
The page cannot be found F...SPECIALEXAM.PDF
Re: Fannie Maes Annual Reports did not disclose the clear earnings management motivation
of its 2001 and 2002 debt buy-backsthe smoothing away of what otherwise would have been
earnings higher than necessary to meet bonus targets and analyst expectations. The Enterprise
did add an additional, somewhat misleading, explanation along with its earlier risk-management
explanation, saying that the repurchases took advantage of favorable market conditions.
DH
Related to Fannie redemptions:
The Feds Legal Arbitrage
December 13, 2007, 1:21 pm
The Feds Legal Arbitrage
Today, Federal Reserve Bank of New York President Timothy Geithner, discussing the credit crisis of recent months, declared that The Federal Reserve Act gives us broad authority to act in response to these types of conditions.
Fed officials had the same freedom these central banks did, they may not have created the new term auction facility. As it is, the facility is a form of legal arbitrage a way for the Fed to get around the artificial constraints imposed by the Federal Reserve Act. It gives us a tool that lies somewhere between our open market operations and the discount window, Mr. Geithner said.
hat the
repurchased debt was trading at wide spreads to other fixed-income securities was not a
justification for the repurchases because it did not result in any economic benefit for Fannie Mae.
Economic benefit would only result from arbitrage activities, which Fannie Mae has never
mentioned in public disclosures.
DH
Andrew,
Conceptually you have it right. We have a moving target, human mortgage payment behavior, which is becoming more & more volatile. We have banks that are rapidly approaching their minimum capital requirements. Those same banks used to sell their risk and now must retain their risk, but they do not have the infrastructure/analytics/techonology/personnel in place to measure or mitigate that risk. We have regulators that are understaffed & don't know where mortgage-backed securities backed by exotic mortgages should be priced when there is "no bid". And we have their bosses in Washington who did not know we had a problem in the markets until this past Labor day.
So let's recap: Increasingly cash-strapped borrowers defaulting on loans faster than banks can count; banks that are falling below their capital requirements faster than the regulators can count; and regulator-royalty (the Fed quants that don't talk to anyone in the banking sector) that is further behind the curve than equity investors can count.
Such as dramatic drop in one week...right after the YE?
Looks like the balance sheet fashion show is over....for now.
Doc, Gab is right, these callable debt refinancings are everyday occurrences. I would be frightened if they were NOT doing it.
Clyde,
Re: Gab: "There's nothing nefarious here"
I realize its often normal for them to do repurchase on calls, but Im more interested in the amount of repurchases; Im looking at valuation trends, because I think they do game these things to dress windows, like the Jumbo push and getting off the hook with OFHEO....which should never happen with these crooks, and that is why anything at this point, is nefarious and questionable, suspect and worth doing DD!
DH
Business, financial, personal finance news - CNNMoney.com
Fannie follows Freddie in loan buyback change
The mortgage financers change their guidelines for repurchasing late home loans.
Fannie Mae and Freddie Mac, its smaller competitor, have been forced to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and defaults are spiking on high-risk mortgages made to borrowers with weak credit histories.
The companies customarily repurchased most mortgages once they were 120 days past due. Freddie Mac said it will now purchase delinquent loans that were part of larger securities issued by the firm when the mortgages are at least 120 days past due and either the mortgage has been modified, a foreclosure sale occurs, or the cost of payments to security holders exceeds the cost of holding the loans. It will also repurchase mortgages that are 24 months delinquent.
Brian Faith, a spokesman for Washington-based Fannie Mae (Charts), said late Monday, "We are undertaking the same steps."
McLean, Va.-based Freddie Mac (Charts, Fortune 500) said the move will help stem the erosion of its capital and will make its financial results more accurately reflect its "expectations for future credit losses."
Fannie Mae's intention to match Freddie Mac's move was reported online late Monday by The Wall Street Journal, which cited concerns among some financial analysts that the companies could use the new policy as a way to delay booking credit losses.
Doc, digging...
I really just think Fannie is back to the old tricks and no one is watching close enough!
From The OFHEO Report:
... the investor analyst community understood well that Fannie Mae had used large debt repurchases to smooth earnings in 2003. Nevertheless, in
response to inquiries, Fannie Mae publicly denied employing debt repurchases to achieve
earnings targets.
You have the very same smoothing crap being engineered into the next report to hide reality and con OFHEO into looking the other way, while these con artists lobby to get Jumbo loans backed by taxpayers.....its crap!
Let's see what things look like in the run up to Jan 20 before we consider the health of the credit markets.
tj: More like the deflation is being "managed" so as to allow an unwind without risking a systemic crisis. (that is, our opportunity)
+
ac: (cum spencer in so many words), the ultimate result of shielding men from the effects of folly is to fill the world with fools. (that is, our imperative and deadline)
=
praxis, per mellon, liquidate, liquidate... etc.
From cal (post), in a future story posted in future time; CR story: Consumer Delinquency Rate Highest Since Last Recession:
Cal posts the following news related to my interest in Fannie manipulating repurchases
"$3.5B 4Q Derivatives Hits Seen at GSEs
Bloomberg News | Jan 3
Fannie Mae and Freddie Mac probably lost more than $3.5B last quarter on derivatives used to hedge against interest rate changes, according to an analyst at FTN Financial."
DH
This is kinda interesting:
Email from Pete Barbera to Jonathan Boyles, Subject: Inventory of FAS 133 transactions, June 2, 2004, produced via CD 8/11/04 in M Box. Attached to Mr. Barberas email was a draft schedule titled Analysis of the March 2004 Book. The draft analysis categorized approximately $960 Billion of Fannie Maes notional outstanding derivatives by transaction type (per the DAG) and by hedge classification (CF, FV, DNQ and Other) as of the end of March 2004. The thirteen most frequently used transactions presented in Mr. Barberas analysis match those presented in a letter by Jodie Kelley, Vice President and Deputy General Counsel, to Chris Dickerson, July 28, 2004, FMSE 00083. They are 1, 2, 3, 4, 8, 10, 11, 12, 13, 20, 52, 67 and 71. Of these, OFHEO has identified that 5 are term-out transactions and comprise approximately $240 billion of the over $960 billion of outstanding derivative notional balances at March 31, 2004.
DH
Andrew - a liquidity crisis is fundamentally a lack of tokens for exchange. If you think about money as being a simple proxy for goods, it's perfectly possible for everybody to have plenty of goods to exchange, but for there not to be enough pieces of paper available to actually write the IOU's on.
A solvency crisis on the other hand, is when you don't have the goods available to match your IOU's, for example say, if you sold mortgage insurance...
I know a lot of people here @ CR hate these types of long posts, but IMHO, Fannie has had a very long record of being a very corrupt entity. It is worth reviewing many of the past FNM sins, because IMHO, they are very active in lobbying for Jumbo loans to be backed by taxpayers. Im a taxpayer and I dont want this (or any) corrupt GSE to take on more debt and screw up more taxpayer money; these entities obviouisly cant control the organizations they have, so I question any talk about FNM taking on more risk in terms of backing Jumbos! Furthermore, if OFHEOs Lockhart wants to jump into the collusive firestorm and get in bed with Paulsons proactive lobbying, I suggest they both be fired ASAP!
Federal National Mortgage Association Fannie Mae · 8-K · For 2/22/06 · EX-99.2
The Company's hedge documentation rests almost entirely on an
assumption that any ineffectiveness associated with its hedge transactions would
be inconsequential.
FINDINGS REGARDING OVERSIGHT OF FANNIE MAE'S HEDGE ACCOUNTING
Company records and interviewees' recollections show that five
different groups were involved to a greater or lesser degree in Fannie Mae's
implementation of FAS 133. These were: Fannie Mae's senior management, its Board
of Directors, the FASB, KPMG, OFHEO and Fannie Mae's Office of Audit. Each
played a different role and had a different level of involvement in the process.
Both OFHEO and the Company's internal auditors had the opportunity to
review Fannie Mae's FAS 133 program in detail and both issued reports that
praised the Company's implementation efforts without qualification. Indeed, both
the OFHEO and Internal Audit reports contain language that is so broad it could
have misled readers into believing that the conclusions say more than was
intended, particularly with respect to the Company's compliance with GAAP.
OFHEO's review is particularly noteworthy given the fact that, a year after
OFHEO issued its 2002 report, it would begin its Special Examination of Fannie
Mae and conclude that the errors in Fannie Mae's hedge accounting were numerous
and fundamental.
http://www.secinfo.com/dsvRq.vRm.c.htm
Cross Reference here:
http://www.ofheo.gov/media/pdf/FNMSPECIALEXAM.PDF
Doc H
These people piss me off! FYI, Im also pissed off at @ DOL, FTC, SEC, IRS, DOJ, FBI,....
Well, dont get me sidetracked on Pension Reform Fraud!
Just as reference to this retarded Fannie Fued:
Treasury Secretary Henry Paulson announced Monday that he was in favor of temporarily lifting the dollar limit on loans purchased by Freddie Mac and Fannie Mae, allowing them to provide a market for so-called "jumbo mortgages."
Under current rules, the two government sponsored enterprises (GSEs) cannot purchase loans that exceed $417,000. Paulson is advocating that this limit be lifted and appeared not to disagree with earlier suggestions by Federal Reserve Chairman Ben Bernanke that the new limit could be as much as $1 million. Paulson stressed, however, that he did not favor raising the loan limits forever, only until the current credit crunch eases.
These crooks toss out the $1 million test, as if its based in stone, or has some realistic backdrop, and I say that punk @ Treasury works for me and those rats need to back off because they do not have the authority to use mafia magic to adjust what taxpayers back!
DH
Re: September 20, 2007
HP-565
Testimony of Treasury Secretary Henry M. Paulson, Jr.
Before the House Committee on Financial Services
On the Legislative and Regulatory Options
For Minimizing and Mitigating Mortgage Foreclosures
The constraints imposed on the GSEs include that they: are limited to operating in the secondary mortgage market; can only purchase or guarantee loans below the conforming loan limit set by Congress (currently $417,000 or lower); and must have credit enhancements if the loan-to-value ratio exceeds 80 percent. In addition, they are also subject to safety and soundness oversight, and they must meet affordable housing goals.
We are starting to see encouraging signs that other markets, such as the jumbo mortgage market (loans greater than $417,000), are loosening up but these markets are not functioning as normal. While some financial institutions are more willing to take these loans onto their balance sheets than they were weeks ago, others are in a sense compelled to do so because the demand for jumbo and other non-conforming mortgage backed securities (and other asset backed securities) has broken down and liquidity concerns remain. (Nice call there bub).
additional pressure on the current loan-to-value ratios of all types of mortgages. The GSE charters require that they have adequate credit enhancement on any loans they securitize or purchase that have a high loan-to-value ratio (greater than 80 percent LTVs). Changing this would require legislation. Again, I would welcome the debate in Congress about whether the GSEs should have the ability to go deeper into the credit spectrum to help current homeowners and to support further their affordable housing mission. (ranting and swearing here censored).
DH
I dont know if anyone is keeping up with this...I doubt it, but tis whole thing is gonna be a done deal, faster than you can say fraud!
FHA Reforms
NAR successfully lobbied for the passage of H.R. 1852, the Expanding American Homeownership Act of 2007, which helps modernize FHA by expanding the availability of safe and affordable FHA-backed loans for purchases and refinances. The bill includes provisions to eliminate the 3% down payment requirement, increase loan limits up to 175% of the conforming limit in high-cost areas, streamline condominium purchases, and eliminate the cap on Home Equity Conversion mortgages (HECMs). The Senate Banking Committee passed a similar bill. The Senate bill is expected on the floor by the end of the year.
Freddie Mac/Fannie Mae Reform
NAR also successfully lobbied for passage of H.R. 1427, the Federal Housing Financing Reform Act of 2007, which overhauls the regulatory structure of the nations housing finance government-sponsored enterprises (GSEs). H.R. 1427 provides for regional adjustments to the caps on mortgages the GSEs may buy for high-cost areas, helping more working families qualify for safer GSE loans. The House passed H.R. 1427, 313-104. The Senate has taken no action to date.