Friday, August 31, 2007

And you can take that to the bank

Excerpts from:

Bush Moves to Aid Homeowners


"President Bush, looking for ways to respond to the subprime-mortgage crisis, will outline a series of policy changes and recommendations today to help borrowers avoid default ... to allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers....

"And he will announce an initiative, to be led jointly by the Treasury and Housing and Urban Development departments, to identify people who are in danger of defaulting over the next two years and work with lenders, insurers and others to develop more favorable loan products for those borrowers.

""The president wants to see as many homeowners who can stay in their homes with a little help be able to stay in their homes," a senior administration official said. "We're not looking for an industry bailout or a Wall Street bailout.

"Mr. Bush also plans to announce that the FHA will begin charging "risk-based" premiums, a move that will enable the agency to help riskier borrowers since they can charge those individuals higher insurance rates. Right now, FHA premiums are a flat 1.5% of the loan, and the change would give the FHA flexibility to charge some borrowers as much as 2.2%."
Do you really think Bush would be doing any of this if the bankers and Wall Street highflyers who engineered this "crisis" didn't have their proverbials in the wringer?

And what kind of pissant crisis is it, anyway, when the Dow Jones Index is not even down a typical 10% correction?

(And the Market will Take Off when it opens later today - because THEY know who this bailout is really aimed at.)


Bush's Mainly Cosmetic Homeowner Rescue Proposals

Barry Ritholtz:
Not to be cycnical, but this appears to be much more politics than policy, and a lifeline to the big investment banks on the last day the month and (some of their) fiscal years. I suspect hank Paulson had a major hand in the timing.

But a fix for what ails the system? Not even remotely close.

Thursday, August 30, 2007

How many degrees of separation between this and a ponzy scheme?

"In the last few weeks, turmoil in the market for asset-backed commercial paper -- a type of short-term loan secured by mortgage and credit-card debt -- has forced bailouts at two German banks, sparked fears of losses at Barclays and driven a further Europe-wide slump in banking stocks.

"The problems for these banks are linked to so-called conduits and structured investment vehicles (SIVs), which in essence borrow money at low interest rates to invest in pools of debt that offer a higher return.

"What's more, banks that set up the vehicles don't have to include them on the balance sheet, meaning more money can be loaned elsewhere.

"The use of SIVs and conduits has rocketed in recent years -- with the European asset-backed commercial paper market now worth around 550 billion euros ($748 billion), up from under 50 billion euros in 1998.

"While the credit markets prospered, conduits and similarly structured SIVs, known as SIV-lites, were a money-spinning operation. Money was borrowed by issuing commercial paper.
Commercial paper, however, generally matures after only a month or two. That meant the conduits had to continually issue more paper in order to pay off earlier debts.

"And that's where the wheels have come off.

"'Very quickly the conduits can run into liquidity issues as cash is withdrawn faster than assets in the conduit can be sold,' said UBS analyst Stephen Andrews in a note to clients.

European banks battle short-term loan crunch by Simon Kennedy

Greed & Fear marvels at the wilful blindness of stock market investors and looks to the great unwind of structured finance.

More and more banks are being forced to admit to having set up special investment vehicles, or “conduits”, off-balance sheet, he notes. “A lot of dodgy securitised debt is now being put back to them,” he says, advising investors to “fundamentally underweight all the financial plays globally that have been making their money in this fashion”. The main risk in this stance is an escalating moral hazard generated by central-bank actions, he adds.
(See, Legacy of the Greenspan Put)

Friday, August 24, 2007

$2 billion out the window?

August 22nd: David Gaffen (WSJ) blogs:
Citigroup and three other giant financial institutions each announced intentions to borrow $500 million from the Federal Reserve’s discount window, in order to encourage other institutions to do the same, and three of them (Bank of America, Wachovia and J.P. Morgan Chase), in a joint release, said they’re doing it because “it is important at this time to take a leadership role in demonstrating the potential value of the Fed’s primary credit facility and to encourage its use by other financial institutions.” [Do the math: 4 times $500 million is ....]

Uh-huh. An object lesson on how financial markets work, courtesy of a bunch of institutions that spend their days trying to figure out how to drive their competitors out of business. It’s weird.

“It’s clear that someone in Washington made a call to these Street leaders asking them for a show of support,” writes Todd Harrison in

Still, even as a vote of confidence, it doesn’t make a lot of sense that the Street’s financial behemoths would, in a strange show of benevolence, decide to borrow money at rates higher than they need to in order to tell everyone things are hunky-dory. “If the discount rate cut was so critical, why did the banks have to issue a joint press release… and why didn’t they rush to the window when rates were shaved?” wonders’s Herb Greenberg, on his blog.

August 23rd from Bloomberg:
Countrywide Financial Corp. rose as much as 12 percent after Bank of America Corp. bought $2 billion of preferred stock in the company, erasing concern the nation's largest mortgage lender will go bankrupt.

Step back a couple of days to August 21st. The International Herald Tribune:
Countrywide Financial has sought to reassure customers that it is safe to do business with, adding that it has eliminated about 500 jobs nationwide as it tries to cope with a credit shortfall stemming from the U.S. housing downturn.

The company, being closely monitored by U.S. regulators, took out full-page advertisements in The New York Times and other newspapers to tell readers that mortgage market problems did not affect the safety of federally insured deposits at its Countrywide Bank unit, which it said was "well capitalized." (The International Herald Tribune is owned by The New York Times Co.)

Back to the future. August 23rd, The Economist:
Fed officials are said to have been taken aback by the speed with which large non-subprime lenders, such as Countrywide and Capital One, have been hit. Countrywide is America's biggest mortgage provider, and one of its best managed. But it was still forced to draw on bank credit lines after struggling to fund itself through the usual channels. On August 22nd a rescuer arrived: Bank of America said it would make a $2 billion equity investment in Countrywide.

Ben Bernanke, the Fed's chairman, was quoted by the head of the Senate Banking Committee as saying that he would use “all tools available” to quell the crisis.

Jeff Mathews did not make this up:
A senator—who’s also running for President and wants desperately to get his poll numbers above Dennis Kucinich, the Democrats' answer to Dwight K. Schrute, the whacky, lovable character in "The Office"—meets with the Chairman of the Federal Reserve, tells him to do his job, to which the Fed Chairman agrees…and that’s news?

What else was Ben Bernanke going say to the Chairman of the Senate Banking Committee—“No, we think it would be cool to have a crash”?