March 11, 2008
A Liquidity Boost (And A Chance To Launder Some “AAA” Securities?)
"The Federal Reserve, struggling to contain a crisis of confidence in credit markets, plans to lend up to $200 billion in exchange for mortgage-backed securities.
The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems. The Fed said in a statement it will hold auctions of Treasuries in exchange for debt including AAA rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks.
Today's steps indicate the Fed is increasingly concerned about the investor exodus from mortgage debt, which threatens to deepen the housing contraction and the economic slowdown. While they fall short of the calls by some analysts for the Fed to make outright purchases of mortgage debt, the central bank left the door open to expanding the effort."
∙ Fed to Lend $200 Billion, Take on Mortgage Securities [Bloomberg]
First Published: March 11, 2008 7:54 AM
Comments from "Plugged In" Readers
About F*cking Time!
Posted by: Mystery Realtor at March 11, 2008 8:12 AM
Despite the apparent impatient enthusiasm you colorfully express for the Fed's announced policy: 1) it's only a short-term lending facility, not a permanent purchase facility by the Fed of securitized overpriced real estate dead-collateral, 2) it will not relax more stringent lending requirements, it will not revitalize exotic mortgages, and it will not leave your breath tasting minty fresh, 3) it simultaneously demonstrates the persistence of the credit deflation crisis and the Fed's limited ability to stem it, and 4) all credit-sensitive assets will continue their systematic price tumbling, with some large component of the underlying collateral going bad, bad, bad.
But you're right: it's about time... for Kondratieff Winter,
Posted by: Debtpocalypse at March 11, 2008 8:55 AM
Is this the taxpayer bailout we've all been hoping for?! (Especially me, I don't pay enough taxes as it is!)
Let's see, first we'll trade $200B of treasuries for $200B worth of .... nothing! Then, we "discover" that the "nothing" is worth... surprise! Nothing! Then we quietly write off our loss on that "nothing" and voila! Instant taxpayer bailout.
Posted by: Jimmy (Bitter Renter)q at March 11, 2008 9:29 AM
Wow. The creativity of this bailout is very impressive. Kudos!
Posted by: eddy at March 11, 2008 9:30 AM
I'm glad that someone mentioned the Kondratieff winter! Debtpocalypse is obviously a connoisseur of credit deflation erudition.
Posted by: Satchel at March 11, 2008 9:38 AM
The market is up 150+ points on this news so far. Probably because most people read the headlines, but not the articles. If they did, they'd realize this is basically a 1-month repo. Essentially a tenor extension of the overnight repos the CBs have been doing all along.
Banks borrow from the CBs for 28 days, after which the collateral (i.e. non-performing loans) goes right back on their balance sheets. It's a short-term solution to give them some breathing room. But we can now add TSLF to the list of acronyms (SIV, MLEC, TAF...).
Hey Mystery Realtor...why so eager for a bailout? Times getting tough in the white-hot San Francisco real estate market?
Posted by: Dude at March 11, 2008 9:41 AM
"Is this the taxpayer bailout we've all been hoping for?!"
Not quite. One of the purposes of the fed is to be the lender of last resort to banks who have collateral but no cash.
The argument the banks have been making is that their mortgages are not worthless, just temporarily so. If one needs cash, they can pledge their mortgages as collateral on loans they get from the fed or give them to the fed and agree to buy them back at a later time in return for cash now.
The auditors want the banks to mark their assets to market, and the banks don't want to, because of course, they'll get clobbered in the market if anyone really finds out how bad things are. So this lets the banks hand the mortgages to the fed, get cash, and say to their auditors, "See, all cash. No Problems here!"
Until next quarter. But in the mean time, this takes the pressure off the fed to drop interest rates, which has the obvious effect of raising interest rates. So it's good, not bad, because it's not bad, so it's good.
Posted by: tipster at March 11, 2008 9:52 AM
... and to see this clever little process in action, via cartoon, check this out Subprime for Dummies
Posted by: garrett at March 11, 2008 9:58 AM
Correct my if I am wrong, but my understanding is that the 28 day periods can be rolled over, so that the banks can essentially trade MBS, etc. for treasuries indefinitely...
So, while it is a temporary solution, it will allow banks to spread out mark-to-market write downs over a far longer period than would otherwise be required.
As Satchel often says, this seems to be very in line with the Fed plan to deflate the housing market over a long period of time rather than in a one-time crash.
p.s. I don't post often, so I would like to thank Satchel, ef-sf'er and others who often add detailed economic analysis to the site. Your perspective combined with the Socketsite topics really adds a ton of value to the site (taking nothing away from Socketsite of course, which is a fantastic resource)
Posted by: Tom at March 11, 2008 10:12 AM
Good Lord you people. I'm not asking for a bailout ala the S&L fiasco (Hmm, which Bush was President then, you ask?). I was just expressing the sentiment that finally the Fed is trying to do something constructive to loosen up the markets.
Posted by: Mystery Realtor at March 11, 2008 10:31 AM
I don't think the exact terms have been drawn up yet (first draws expected to occur on March 27). But "normal" repos are marked to market periodically and, should collateral values fall, the borrower has to post margin. This is what threw Thornburg Mortgage into default - couldn't meet a margin call on a reverse repo.
But given the lender is the Fed, and the entire reason this is even happening is that the value of the collateral is questionable in the first place....I'm sure there will be a lot of (intentional) gray areas. Bet Satchel knows more about repo structures than I do, though...
Posted by: Dude at March 11, 2008 10:31 AM
The collateral values are all about to fall. A lot. Moodys is about to downgrade the AAA subprimes. This buys the banks some time. Moodys has held off doing this as long as it can, so the fed is now the only one left to try to keep the banks from collapsing.
"None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg."
``The fact that they've kept those ratings where they are is laughable,'' said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. ``Downgrades of AAA and AA bonds are imminent, and they're going to be significant.''
Posted by: tipster at March 11, 2008 10:50 AM
Lots of comments. It's great that people are taking an interest in such an esoteric subject.
Anyway, with the new facility, the Fed will be extending around $400 billion into the pockets of their masters, ie, the banks. ($100B through the TAF, $100B through the new term repos and $200B through this new TSLF facility.) Now, we're starting to talk some serious scratch! And people who laughed at the idea that the banking system is WHOLLY INSOLVENT are starting to rethink whether they understand the world. I mean, this was all obvious as early as March 2007, when the Fed started issuing Reg 23A exemptions to Citibank so it could downstream more $$ into its bankrupt broker dealer subs. If you missed that, there were all the rate cuts (which didn't add dime one to liquidity - look at the adjusted monetary base) and then of course the TAF and the TAF increase. Hard to ignore this latest attempt, but never underestimate how little the population understands what is happening!
Anyway, about the structure. $400B sounds like a lot, but it's really not, and the market understands this in the end. There are $11 TRILLION of mortgages alone, and $400B won't plug the whole, once housing falls its 30%. I would hope by now people are starting to understand that there is no way to stop the fall. I mean, you can't "print" household wealth! Inflation in necessities isn't going to help either - I mean people are going to have LESS money to buy houses after paying for food and gas now!
What the Fed can, and is doing, is what Tipster said. They are extending good funds against bad collateral in order to fool the auditors and the population, who are so into this scam they are willing to overlook outright fraud. But Tipster's analysis doesn't go far enough. When the banks get the $$, they are borrowing at 3% approx. They will take most of this money and lend it right back to the government at 1.5% by buying T-bills (that's what the banks will use as collateral). The Fed will "sterilize" the additional dollars sloshing around by selling the treasuries on its balance sheet and siphoning off the $$ from the economy (that's why the adjusted monetary base - if I am correct - will stay flat). So, the Fed is running its own little spread game. Lend to the banks at 3%, borrow from the market at 1.5%, and in the process extend lifelines to the banks (the Fed's owners) so that management can continue to pay itself!
Some of the money borrowed by the banks will also be downstreamed to hotshot hedge fund guys to speculate with in the commodity markets, and some will be invested in long term treasuries, allowing the banks to rebuild capital. Little if any will find its way to homedebtors. At least that is the way it worked in Japan.
Dude is right about the value of the collateral. You can google around and find the Fed's TAF lending sheet (NYFed) and see that they are lending 70-85% against the "value" of toxic crap that we all know is worth 10-15 cents on the dollar. There won't be any margin calls (although in long term repo structures there ordinarily would be), but if I know my Fed they will NOT take any losses. Ultimately, some of this will be absorbed by the taxpayer, once an agency is up and running to buy toxic debt. At that point, the Fed will repo the toxic crap back to the banks that survive that long, and collect the cash from the banks that will have already sold the returning repo'd securities to that government agency. But all that is down the road, and the intuition that these new lending structures will turn out to be permament is dead on! Let's see if I turn out to be right....
(OT - BTW, Dude, bless your heart for keeping that little 414 Foerster foreclosure front and center. Now down 25% from its last sale, and about 10% less than the house right next door to it sold for in 2005....)
Posted by: Satchel at March 11, 2008 11:25 AM