Gary North..on the $200B Fed plan

[RockOn]

Quote:

Originally Posted by nepo For a better analysis read this: Econbrowser: TSLF

Thanks, I'll read it.

.....That's seems to be what Gary North was saying. However, what is different is that as long as the Treasury never asks for the swap to be undone, it is providing liquidity and avoiding solvency problems. Interesting that this article says this a "bailout" by the FED. Didn't Bush say we were not going to bail out speculators and investors? I guess he meant, unless the DOW Jones falls a few more percent.

It looks to me like the FED has decided to be responsible for the problem. They are not going to print money to solve it, just take the riskier assets from the bankers and put them on the books of taxpayers. If they eliminate the risk on those assets for banks, there is no problem. Hopefully it will be temporary and end at $200B, otherwise welcome Moral Hazard.

[Hamlet]

I think that there is a lot of debate on how risky these AAA assets are. I suspect that most of them are probably really secure, its just the panic in the markets has created an irrational fear that everyone is going to default on their mortgage.

In my neck of the woods (Minneapolis), it appears to me that the vast bulk of the foreclosures are either subprime, or speculators that bought with no money down and just bailed when the market went bad. Mixed in are some job losses and a few people that spent their home equity like it was free money.

I don't see a massive problem with the vast majority of average home owners, unless the economy gets really bad. 70s bad. That is possible of course, but anytime I'm not watching CNBC it seems pretty unlikely.

Quote:

Originally Posted by RockOn Thanks, I'll read it. .....That's seems to be what Gary North was saying. However, what is different is that as long as the Treasury never asks for the swap to be undone, it is providing liquidity and avoiding solvency problems. Interesting that this article says this a "bailout" by the FED. Didn't Bush say we were not going to bail out speculators and investors? I guess he meant, unless the DOW Jones falls a few more percent. It looks to me like the FED has decided to be responsible for the problem. They are not going to print money to solve it, just take the riskier assets from the bankers and put them on the books of taxpayers. If they eliminate the risk on those assets for banks, there is no problem. Hopefully it will be temporary and end at $200B, otherwise welcome Moral Hazard.

[RockOn]

[quote=Hamlet;629701]I think that there is a lot of debate on how risky these AAA assets are. I suspect that most of them are probably really secure, its just the panic in the markets has created an irrational fear that everyone is going to default on their mortgage.


I also think most of them are not risky and the FED is not taking large risk taking them in. At least if things do not get much worse in the economy. The question is though, as I see it, are they worth 100% on the dollar, or 95%? That makes a big difference if you hold tons of AAA paper.

[ziggy29]

Quote:

Originally Posted by RockOn I also think most of them are not risky and the FED is not taking large risk taking them in. At least if things do not get much worse in the economy. The question is though, as I see it, are they worth 100% on the dollar, or 95%? That makes a big difference if you hold hold tons of AAA paper.

Maybe, but when there's a 2-3% yield spread between Treasuries and some AAA paper, you can take a 2-3% default rate and come out even with Treasuries. Plus, if the Fed can "borrow" securities with 5-6% yields and lend securities paying out only 3% or so, wouldn't the Fed be able to make up for at least some of the defaults with the arbitrage on interest rates here? Is the Fed getting the coupon for the AAA paper while they hold it?

Ultimately I see the risk here to the Fed AND to the economy overall as being MUCH lower than with letting these megabanks drown in illiquid paper that forces them to keep marking to market and leading to margin calls. At least the Fed has no margin calls, so they can get this paper off the market for a while as we try to stabilize things.

[nepo]

Quote:

Originally Posted by RockOn I also think most of them are not risky and the FED is not taking large risk taking them in. At least if things do not get much worse in the economy. The question is though, as I see it, are they worth 100% on the dollar, or 95%? That makes a big difference if you hold tons of AAA paper.

According to a commentator in the Econbrowser post, the non-agency AAA mortgage backed securities are worth 50 to 70 % on the dollar. That's a severe haircut that we wouldn't know if the Fed is applying.

[Hamlet]

That seem insane. Are 50% of homeowners going to default on their mortgage? Even if they do, are the homes worth nothing in a foreclosure sale?

I think the market has gone into Anal-Cranial loopback

RockOn's question of 100% or 95% seems much more reasonable.

Quote:

Originally Posted by nepo According to a commentator in the Econbrowser post, the non-agency AAA mortgage backed securities are worth 50 to 70 % on the dollar. That's a severe haircut that we wouldn't know if the Fed is applying.

[nepo]

Quote:

Originally Posted by Hamlet I think that there is a lot of debate on how risky these AAA assets are. I suspect that most of them are probably really secure, its just the panic in the markets has created an irrational fear that everyone is going to default on their mortgage.

Lets go back to the basics here. It's the house prices going down that broke the securitization schemes that created the real crisis that the Fed is desperately trying to fix. It rippled through the entire system. Why the prices started to go down? First, there were borrowers who wouldn't qualify otherwise who got innovative mortgage products. Then, other higher quality borrowers started to go under as they also bought too much house for their income. An oversupply causes a drop in prices. Bubbles have to burst. The whole system is now unstable.

[barbarus]

Not only do the subprimes reek, but the alt-As
are about to reset en mass. There's a reason these are colloquially known as "liar loans".

Unless you believe J6P and Jason-Winecooler are about to have their incomes doubled, one must speculate that they may have a bit of trouble remaining current on their debts.

[HFWR]

Quote:

Originally Posted by nepo ...innovative mortgage products...

Understatement of the week!

[ladelfina]

Quote:

Are 50% of homeowners going to default on their mortgage? Even if they do, are the homes worth nothing in a foreclosure sale?

well, something 10% 6% of mortgages are already in delinquency or foreclosure, I believe. That could easily go to 20 a bigger number.. then we're not even talking commercial RE loans that could be even more stinky on stalled half-built projects that no one wants at ANY price. The homes might be worth something, but how much.. and more important how long will they take to unload? Every month that goes by is $2/3/4/5k less in the bank's projected pipeline. The banks will have to take on the 6% RE commissions, too (although maybe they'll get bulk discounts! woo hoo!), and will have to start paying prop. taxes. They built and sold and mortgaged to people w/o money. People with money already are pretty stable in their homes. Who's left to buy the glut of over-priced ones? The same people who couldn't afford them in the first place?? What a mess.

The scary not-at-all-scary thing is that Bernanke said 45% of current bad loans are PRIME and gov.-backed..

[Hamlet]

I think you're overstating the problem. People who bought too much house for their income will be in trouble. Nothing can change that. But most people have mortgages they can pay, because most people aren't foolish enough to sign up for a monthly payment that they can't make.

If you had a 30-year fixed mortgage before the crisis, nothing has changed. Even a normal ARM isn't much more expensive. Some people who would have liked to move will be stuck for a while, but they will still have the same payments they had before.

California and Florida will have it worse, because it got crazier there than most places. More of their loans were "creative". I still think fear is distorting the market more than is rational.

Quote:

Originally Posted by nepo Lets go back to the basics here. It's the house prices going down that broke the securitization schemes that created the real crisis that the Fed is desperately trying to fix. It rippled through the entire system. Why the prices started to go down? First, there were borrowers who wouldn't qualify otherwise who got innovative mortgage products. Then, other higher quality borrowers started to go under as they also bought too much house for their income. An oversupply causes a drop in prices. Bubbles have to burst. The whole system is now unstable.

[al_bundy]

Quote:

Originally Posted by Hamlet That seem insane. Are 50% of homeowners going to default on their mortgage? Even if they do, are the homes worth nothing in a foreclosure sale? I think the market has gone into Anal-Cranial loopback RockOn's question of 100% or 95% seems much more reasonable.

one of the financial blogs i read had a screenshot a few days ago of a mortgage bond that was rates AAA and had a default rate of over 20%.

the key is not how much the home is worth at auction but that in the last few years people forgot about risk and now the losses are greater than anyone dreamed. everyone thought AAA meant safe and there are a lot of AAA rated MBS's out there that are defaulting at insane rates.

unlike what the media says the real problem is Alt-A, not subprime

and most people doesn't matter since in almost every marketplace it takes a small minority of participants to move prices by a large percentage, but either way there has been a huge number if funny loans made in the last few years.

[al_bundy]

latest rumors are that Bear will be sold to JPM for a little more than $2 billion, half the market cap based on friday's close

[ladelfina]

Quote:

most people have mortgages they can pay, because most people aren't foolish enough to sign up for a monthly payment that they can't make.

Hamlet, you could be right (I hope you are!!) ...but then I'd also have said "most people" wouldn't run up $10k of CC debt.

[Hamlet]

I believe your numbers are incorrect. Do you have a source? I've seen numbers from subprime lenders that are that bad (or worse), but everything I've seen on the overall market is nowhere near that bad.

What is the current default rate on a standard 30-year fixed mortgage? I bet that it isn't much worse than the last few years.

Note-- Your stat on 45% of the defaults being PRIME is not alarming, given that the prime market is many times the size of the subprime market. If 90% of loans have a 1% default rate, and 10% have a 10% rate, half of the defaults will come from the 90%.

Quote:

Originally Posted by ladelfina well, something 10% of mortgages are already in delinquency or foreclosure, I believe. That could easily go to 20.. then we're not even talking commercial RE loans that could be even more stinky on stalled half-built projects that no one wants at ANY price. The homes might be worth something, but how much.. and more important how long will they take to unload? Every month that goes by is $2/3/4/5k less in the bank's projected pipeline. The banks will have to take on the 6% RE commissions, too (although maybe they'll get bulk discounts! woo hoo!), and will have to start paying prop. taxes. They built and sold and mortgaged to people w/o money. People with money already are pretty stable in their homes. Who's left to buy the glut of over-priced ones? The same people who couldn't afford them in the first place?? What a mess. The scary thing is that Bernanke said 45% of current bad loans are PRIME and gov.-backed..

[ladelfina]

ooops! you're right. I mixed it up with the other # in my head which was 10-11% of homes being valued at less than the outstanding mortgage, and thus potential walkaways.
My mistake...

The real delinquency number is 5.82% according to these people:
Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey
They also have the breakdown of percentages there. Right again you are there, Hamlet.
Next time I promise to measure twice, rant once. Good night and sleep tight!

[RockOn]

I just heard on TV that Bear Sterns is going to be sold to JP for $2 a share. I hope I don't have any shares in any of my funds. They closed at $30 on Friday down from $55.
I think there is a solvency problem.

[nepo]

Quote:

Originally Posted by Hamlet I think you're overstating the problem. People who bought too much house for their income will be in trouble. Nothing can change that. But most people have mortgages they can pay, because most people aren't foolish enough to sign up for a monthly payment that they can't make.

I thought this topic was about the Fed actions to rescue financial organizations that have got into trouble and what the implications are. To say most people don't default on their mortgages, while a true statement, is a red herring.

The crisis has to do with the securitization of bad loans, which by the magic of financial engineering became AAA rated securities. There are many bag holders and financial institutions that are going to pay the price for this. Ultimately, the risk to everyone is that the tax payers will pay the price and not the Wall Street firms that are on the verge of collapse.

A system that is based on absurd levels of leverage, no transparency, and wrong assumptions is bound to collapse. It just happened to Bear Stearns which is been sold for $2 a share of JPM stock. And the Fed is announcing just now new measures to boost liquidity to the primary dealers, companies like Bear Stearns, opening the discount window immediately at a lower rate (just 25 bps above the fed funds rate).

This is not a walk in the park.

[ladelfina]

Seems like there's a new "facility":
FRB: Press Release--Federal Reserve announces two initiatives designed to bolster market liquidity and promote orderly market functioning--March 16, 2008

[RockOn]

Quote:

Originally Posted by ladelfina Seems like there's a new "facility": FRB: Press Release--Federal Reserve announces two initiatives designed to bolster market liquidity and promote orderly market functioning--March 16, 2008

Looks to me like a 1929 move, averting the panic, unreal