September 17, 2008
JustQuotes: ARM Holders Take Note, Libor Lifts Off
"The overnight Libor rate in U.S. dollars soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years....The one-week rate rose by more than a percentage point, to 3.88 percent from 2.49 percent on Monday, and the one-month rate increased to 2.75 percent from 2.5 percent."
∙ U.S. Mortgage Rates May Wreak Havoc After Libor Gain [Bloomberg]
First Published: September 17, 2008 7:00 AM
Comments from "Plugged In" Readers
Crap! I used to do the buy v. rent calculation, now I do the pay v. walk away calculation. It's starting to lean towards walk away.
Posted by: tom at September 17, 2008 7:36 AM
People! People! Rates go up... rates go down. Don't walk! You signed up to pay! Pay! Don't walk! Look at all the turmoil you guys are causing on Wall Street! And what about the pain you guys are causing me! I posted the following on another thread last night... read on.
In my portfolio, I had $20,000 in Lehman senior bonds. I didn't think Secretary Paulson was going to go the way he did. I was sure he will bail his buddies out. Wrong bet! I maybe able to sell the bonds for $5,700 now. My understanding is that, in bankruptcy, these bonds get paid first. I am hoping someone will comment on what to do. I do have some gains I will need to offset at year end.
Posted by: chuckie at September 17, 2008 7:57 AM
Is this a blessing in disguise, in that this will drive people who actually are considering purchasing or refinancing (if they can get approved for a loan) to move into more traditional and perceived "safer" loans such as a 30 year fixed?
Can somebody with much more financial chops than me please comment?
Posted by: Can't think of cool name at September 17, 2008 8:08 AM
Most prime loans are indexed using the Fed rate as the article mentioned. Of course, I was surprised that 40% apparently use LIBOR which I thought was used just for subrime. Secondly, rates go up and down all the time as Chuckie said. It only matters what the rate is when your adjustment comes up, and that varies from borrower to borrower. LIBOR is also still tracking around a 4 year low, so many borrowers will likely go lower when their reset comes due.
As Public Enemy once said, "don't believe the hype".
Posted by: Lance at September 17, 2008 8:15 AM
FYI, LIBOR is also used to set a lot of credit card rates.
As for LIBOR rates still being near 4 year lows, that doesn't necessarily mean it will stay there. Doesn't mean it will go higher either. Just sayin.
Posted by: scurvy at September 17, 2008 8:39 AM
FYI, LIBOR is also used to set a lot of credit card rates.
As for LIBOR rates still being near 4 year lows, that doesn't necessarily mean it will stay there. Doesn't mean it will go higher either. Just sayin.
Posted by: scurvy at September 17, 2008 8:47 AM
Ouch! The LIBOR can affect the rate of many types of loans including law school loans. :(
chuckie - I think your blame is misplaced. Individuals should walk if it makes sense for them. Instead, try blaming the people responsible for setting up this ponzi scheme at the expense of those most vulnerable. I feel for most who were taken in by the scheme including those like you who invested in entities like Lehman. But if you could "give back" these senior bonds, I bet you would do it no matter what the downstream effects of such a move might be.
Posted by: Publius at September 17, 2008 8:48 AM
The changes in LIBOR are simply emblematic of the continued lack of confidence in the world financial markets. Notice the $50 jump in the price of gold today? When WaMu goes down, things could really get interesting. I believe the White House was hoping to keep a lid on things at any cost until after the election... but even the great George Bush can't always get what he wants.
I added to my short position yesterday by buying the Apr 10.00 Put on WB (Wachovia Bank). All the turmoil in the markets has made me another nice little pile of cash today!
Airline stocks will be the big winners this year. My UAUA (United Airlines) is up about $2 already since I bought last week. The falling price of oil (it will be under $80 next month) will help their bottom line tremendously.
You heard it here first!
Posted by: Jimmy (Bitter Renter) at September 17, 2008 8:59 AM
WARNING - WAY OT!!
You probably paid around $4 for the WB puts yesterday, and they are up probably around 15-20% today. A strategy that many sophisticated options traders like to do when an option has gone ITM like this is called "legging" a 1x2 trade. Today, one could SELL the $5 puts for that date for about $2. There is a lot of implied volatility "juice" in that $5 put because of something we call the "volatility smile" (I'll leave you to google that and figure it out!).
By selling the $5 put you are effectively going LONG WB, but think of the payoffs. Selling twice as many $5 puts today nets you $4, which was the cost of the options you bought yesterday (1x2, so TWO options sold for each purchased). You now CANNOT lose money. If WB goes to $0, you make $10 on the long put position but lose $10 on the short put position. If WB rallies, you lose nothing. If WB is right at $5, you make $5 (on your long put position). Right now, if WB ends up at $5 next April you make only $1 (because the option cost you $4, and only pays off $5).
Why would you do this "flattening" of exposure? Well, no 1 I actually think WB is going to make it and it isn't going to go BK (WM will IMO, though). No 2 is you now have the ability to "reload" without increasing risk. If we get a rally, you can buy some more puts and increase your exposure to the downside. Alternatively, you could buy back the short put position ($5 strike) and book some profits on that "leg" of the trade.
I know this is way OT, but this is the sort of stuff I do every day (and I suspect that k10 has done/does this sort of stuff too). There are hundreds of options strategies, and the fraudsters on Wall Street know every way there is too make money. We are/were always looking for ways to flatten risk exposure yet still retain upside promise. Looks like the banksters have learned a lot in the 10 years since I did this kind of stuff professionally: the BEST way to flatten risk exposure is simply to pass it off to the foolish taxpayer!
PLEASE for anyone reading this options are risky and there is a potential to lose everything. Do not trade options without first consulting with a licensed broker or financial adviser and DO NOT rely on any random anonymous blogger for advice or strategies.
Posted by: Satchel at September 17, 2008 9:24 AM
The perhaps more on-topic take-away from this development is it indicates even further tightening of lending standards. Banks aren't even willing to lend their precious capital to one another, so you can bet they are going to be even more strict about lending to some individual home buyer on a non-GSE mortgage -- higher downpayment, higher interest, higher documented income requirement, higher FICO. The pool of qualified buyers is just going to continue to shrink, softening demand even further. Those who can put enough down to get the loan within GSE limits (soon to be $625k) will have little trouble, but everyone else will have to jump through a lot of hoops.
Any stats on how many sales are falling out due to funding problems? I see lots of anecdotal evidence this is significant, but I've seen nothing concrete. I don;t know if this could be derived from the MLS or not.
Posted by: Trip at September 17, 2008 9:41 AM
its called a 'butterfly' in option parlance
Posted by: paco at September 17, 2008 9:41 AM
As I watch AIG, FNM, FRE, and BSC all dumping their toxic debt on the taxpayer's doorstep, I just can't fathom why anybody would have any qualms AT ALL about walking away from their house. The big banks are doing it, why shouldn't the little guy do it too?
Here's one difference: the little guy (in general) was duped by unscrupulous banks and mortgage lenders. He was pretty seriously misled about what he was getting into. The banks did this voluntarily. They were doing the misleading!
Anyone who doubts this should have seen the amount of effort WaMu put into trying to get me -- a prime borrower -- into a subprime loan in 2005! I wish I'd recorded it. I ended up giving the branch manager (Woodside iirc) a lecture on financial suicide and begging her to please show me the fixed rate loans. It was bizarre.
I feel like it's more immoral to destory your life and your loved ones trying stay in a loan that sucks down 65% of your income for the next 30 years.
Been meaning to write that for weeks. :)
Posted by: Sb at September 17, 2008 9:44 AM
Not really. One of the "wings" is missing. We call it a 1x2. Maybe "half a butterfly"?? :)
Posted by: Satchel at September 17, 2008 9:56 AM
Overnight LIBOR doesn't mean jack to mortgages. It's usually a one-year rate, which will remain low for the next year or two.
Posted by: anon at September 17, 2008 9:57 AM
"so you can bet they are going to be even more strict about lending to some individual home buyer on a non-GSE mortgage"
The latest I saw on the new GSE guidelines that will be going into effect is 5% down for purchase money loans.
Posted by: diemos at September 17, 2008 9:59 AM
if the third strike is zero its the same thing
"We call it a 1x2"
who is this "we"
did you ever get your B/D license?
Posted by: paco at September 17, 2008 10:05 AM
1) 6 million US homes have mortgages tied to LIBOR
2) 41% of prime ARMs are tied to LIBOR
both stats according to First American CoreLogic in Santa Ana, California
I'm not sure I would make too much of today's LIBOR rate. The weekend saw a historic event with the collapse of Lehman, the near collapse of Merrill, and collapse of AIG. Many banks lost big bucks due to having lent Lehman money.
Thus, today banks don't want to lend to another bank, because they all know that most of the big banks have horrific balance sheets and can fail in a day! also, most banks are hoarding cash because they look into their own balance sheet and realize that capital=possible survival.
Over the next few weeks we'll see what happens. There is a good chance that the banks will calm down and become willing to lend to each other again. If so, then LIBOR will fall. It all depends on "confidence".
Regardless: we have a de facto nationalized mortgage system anyway. the Federal Govt doesn't need to make a profit. It can just continue to use taxpayer money to subsidize mortgages
as I've said before: NONE of us can possibly anticipate future mortgage rates now, because it is at the POLITICAL whim of a few chosen elected and un-elected officials. (president, congress, treasury sec, Fed reserve chairman, new OFHEO position etc)
If LIBOR (actually really the Treasury-Eurodollar spread) doesn't calm down soon (a few weeks/months) then we will have a depression. Our economic system cannot survive if banks are unwilling to lend to one another.
however, going back a step: there are a few big banks I won't name that are on the brink of failure. My guess is that they will be married off to someone ASAP to shore up confidence in the marketplace.
as confidence returns- LIBOR and TED spread will fall, which may or may not affect mortgage rates depending on our government's political fancy
Posted by: ex SF-er at September 17, 2008 10:41 AM
Satchel is correct the overnight LIBOR won't impact mortgages. The 1-month and 3-month LIBOR rates affect construction and value-add projects.
Posted by: T-Money at September 17, 2008 11:30 AM
Yeah, ex SF-er knows his stuff. What do you do for a living?
There was a concerted action by The Fed, BoJ and Euro bank to inject money into the system last night. They will keep doing that until the LIBOR rates fall back to where the various Reserve Banks want them to be, or until the international consensus on this breaks down, but I am pretty sure that it will be the former. The central banks can print money faster than bankers can hoard it, I am pretty sure.
there are a few big banks I won't name that are on the brink of failure.
Ah, why not? Don't want to start a bank run? I wonder who WFC is going to get? They and BRK are in the cat bird's seat right now.
Posted by: NoeValleyJim at September 17, 2008 5:00 PM
"There was a concerted action by The Fed, BoJ and Euro bank to inject money into the system last night."
Where are you getting your information with respect to what the Fed is doing? Yesterday on one of the other threads you asked for a place to monitor Fed TOMO operations (these are the "injection" that the media talk about) and I pointed you to the slosh report.
It looks to me like they DRAINED liquidity yesterday and today. In fact, they DRAINED out everything they put in on Monday to stabilize Fed Funds in the aftermath of the Lehman BK.
Here are the numbers:
9/15/2008 ADD 65.000 Billion
9/16/2008 DRAIN 28.000 Billion
9/17/2008 DRAIN 50.000 Billion
(That site aggregates data directly from the NYFed's web page)
Are you coming over to the conspiracy side :) Thinking the Fed is doing one thing and publishing another? :)
Actually, I am getting a little worried. Bernanke has lost control of the situation. He is not very market savvy, and probably not too smart either. I mean anyone who understands how markets work knows that all the traders will IMMEDIATELY try to drive every financial into bankruptcy by shorting the stock, as the fed will wipe out the equity in the "rescue". The traders are just doing what they are supposed to do: maximize profits at all costs.
I actually sold off about 1/3rd of my treasuries today (I hate to pay tax to Clownifornia on the capital gain, but what the heck!), and pulled off most short exposure and went a bit long in equities right now. Lots of foolishness and fireworks to come I am betting, but the ultimate spiraling out is basically assured now. Nevertheless, they may try to squeeze equities higher here, and that's a bet I'm willing to take in the short term.
Posted by: Satchel at September 17, 2008 5:23 PM
Hey Satchel--Remember when I told you the Fed could give money to anyone, even a private individual if it decides it needs to? And you told me I was full of malarkey?
Posted by: cooper at September 17, 2008 5:31 PM
I pretty sure that I agree with you that "the ultimate spiraling out is basically assured now". When we are all spiraled out, where do you see the Dow, S&P, gold etc? Are we fortunate to live in interesting times? Thanks for your insights.
Posted by: FSBO at September 17, 2008 5:56 PM
So, for those of us who aren't options traders and have just regular old jobs and paychecks, and have a bit of money in the bank, saving for rainy days and a big down payment and maybe even retirement... just how nervous should we be?
I'm not sure whether to move money into banks that offer good interest rates or to avoid those banks, because the better the interest rate, the more likely the bank is about to collapse.
Just to get a sense of perspective, are any of you catastrophe predictors the same people that were predicting the collapse of the infrastructure of the country when the calendar turned to Jan 1, 2000?
(And thanks SocketSite, I appreciate all the info on this site. From apples to finances, it's all interesting stuff.)
Posted by: RenterAgain at September 17, 2008 8:58 PM
If US government acts like a true Capitalist government (as Satchel claims should), we will be in Great Depression 2, and then WW3.
Your best action is to buy a little lot in the middle of nowhere, and learn to hunt.
However, US (and most Western European countries) are as socialist as you can get, even more than "communist" countries like China. For example, when you add the Federal and State spending, the US government spending is roughly 40% of the GDP (comparing to a little over 30% for China) - that's according to CIA fact book.
So, the Fed and congress will print money and do whatever they can to keep the market stable, including nationalizing private companies (like AIG)....
Unless it choose to act in total capitalism way (as Satchel wishes) and we will be in GD2.
By the way, if we end up in GD2 (and WW3), nothing you do right now will matter. Everything will be wiped out, whether you own, rent, have job, unemployed, or whatever. It is like reshuffling the cards. Everything will start from 0.
Posted by: John at September 17, 2008 9:08 PM
"I'm not sure whether to move money into banks that offer good interest rates"
Stay below the 100K FDIC limit at any one bank and you should be fine.
"Just to get a sense of perspective, are any of you catastrophe predictors the same people that were predicting the collapse of the infrastructure of the country when the calendar turned to Jan 1, 2000?"
Ok, this is one of my pet peeves so prepare for a rant.
We saw the problem, we fixed it, therefore it did not happen.
Imagine we're driving along in a car and I shout out "Look out! We're heading for a brick wall" which we are. You slam on the breaks and then turn to me and say, "Hey! We didn't hit a brick wall. You made me hit the brakes for nothing." I reply, "No, really, if we had kept going we would have hit the wall. Slamming on the brakes prevented it from happening." Frowning dubiously, "No, no, no. You obviously had no idea what you were talking about because you said we would hit a brick wall and we didn't."
Which is, incidentally, why no politician will ever try to prevent problems from happening and will only do something once the situation is obviously broken.
Posted by: diemos at September 17, 2008 9:33 PM
I actually got this originally off a Rueter's feed, but here it is from the Guardian:
The Federal Reserve pumped $70 billion of temporary reserves into the banking system on Tuesday, following the $70 billion it provided on Monday, and said it was ready to do more as needed.
The European Central Bank injected 70 billion euros ($98.09 billion) into money markets Tuesday, after 30 billion the previous day. Demand from banks for Tuesday's funds, a measure of how much other sources of liquidity are drying up, topped 100 billion euros.
In Britain, the Bank of England injected 20 billion pounds ($35.21 billion), after 5 billion Monday. Demand was three times the amount of extra liquidity offered Tuesday.
Posted by: NoeValleyJim at September 17, 2008 10:57 PM
And LIBOR is down more than a full percentage point today. But it is still unusually high.
Posted by: NoeValleyJim at September 18, 2008 12:12 AM
I said Rueter's feed, but I meant Rueters.com. I do not have access to a Reuter's terminal, or whatever those things are that financial professionals use, as I am an IT guy.
Posted by: NoeValleyJim at September 18, 2008 7:27 AM
Satchel, what type of equities?
Posted by: bottomyet? at September 18, 2008 7:32 AM
I trade indices mostly. Yesterday I sold some 1150 puts on the S&P (expiry tomorrow), covered some bank shorts, and left all commercial REIT shorts on. I also bought back some 1350 calls on the S&P that I was short (October expiry). I don't recommend this sort of option trading to anyone who is not very familiar with trading and options specifically.
Posted by: Satchel at September 18, 2008 10:19 AM
NVJ & John,
All this talk of "pumping" money in! My view is that it won't make a bit of difference because the entire system is insolvent. The banking system needs to consume real capital, ie, real wealth. You can't "lend" capital for consumption ("liquidity" injections) and you can't "print" wealth. It's all a show for public consumption.
Back last December, John and I had a whole discussion about this on SS. John was arguing that the financial situation was no big deal, and that banks were basically taking their medicine back then (I hope I'm not mischaracterizing you, John!). I said that the whole system was insolvent, and everyone sort of laughed at me (they still do, but not so much). Here are some excerpts:
"The banks are hoping to stretch out recognition of the losses over many quarters, if not years. They also hold out the hope that they will be able to sell all this stuff at favorable valuations to a taxpayer-funded bailout fund, which I believe is a certainty at some point in the future. The simple reason is that if they were to write down all of this now, every one of the banks would be insolvent. Every one. Why do you think they don't want to lend to each other? That's the problem. That's why the ECB and the Fed are lending **enormous** sums of money - levels that I have never seen in my career, and I do not think have ever been seen in the history of the world. Note, though, they're not **giving** anyone money, just lending. It has to be paid back. How will they do it? Well, they hope the toxic assets work out over time. But in th meantime the banks are scared, they hoard cash, and they restrict lending. This is how the transmission mechanism gets into the real economy. There is no way to stop it, only ways to lessen its impact. The Fed thinks it can avoid a hard landing, but this is silly. (Actually, the Fed knows what is coming - they just don't want to say it, and they want to be able to say "we tried" after they fail.)
Posted by: Satchel at December 19, 2007 3:14 PM"
"But, last thing, if there is no big deal and the writedowns are going to be resolvable, why did the ECB the other day - in ONE DAY - lend the equivalent of 60% of the ENTIRE ADJUSTED MONTEARY BASE OF THE US!!
These kinds of things do not happen unless there are balance sheet insolvencies of big borrowers. Multiple. [snip]
Watch how this unfolds. You will be surprised IMHO. As always, the long bond tells the tale.
Posted by: Satchel at December 20, 2007 10:31 AM"
I'm not trying to shut down discussion, but the sniping at me by people who really have NO track record of anticipating even 10% of what's happening is getting silly.
I've been singing the same tune consistently for months and months.
For anyone out there who thinks that the Fed and the "governments" can figure this out, that "socialism" means that we're all going to be ok, that the Fed's magic printing press will make all the pain go away, please I implore you to put down a LOT of cash and buy SF properties! Take advantage of these low rates! The credit bonfire needs to consume your wealth!
BTW, about "pumping' liquidity, last December the ECB "pumped" in $500 billion in order to stem asset declines and stimulate lending.
How'd that work out? As always, it's the perennial triumph of hope over experience, again and again and again.
Posted by: Satchel at September 18, 2008 10:37 AM
I thought you might enjoy this one in case you missed it.
“He can make any loan he wants under any terms to any entity or individual in America that he thinks is economically justified,” said Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee.
“I asked the chairman if he had $85 billion to bestow in this way. He said ‘I have $800 billion.’ ”
All hail our leader Ben. You might be right Satchel that he can't inflate our way out of this mess, but boy, it sure sounds like he is willing to try.
I must say, I don't believe market timing works in the long run (I'm an academic after all), but your short term timing calls have been pretty darn good. I guess that makes me sheeple, and you are a wolf no?
Do you trade TED spreads, Satchel? I can't imagine they continue up from here, would expect that with a sifficient time horizon, the spreads will eventually ebb down to the 50 basis point territory again (assuming no upward bias in interest rates - big if i realize).
Posted by: enonymous at September 18, 2008 10:47 AM
Oh, our standard of living is going down, there is no way to avoid that, I just don't think your prediction of us experience it at the consumer level as deflation is going to be correct.
As the US government takes on more and more debt, the temptation to try and "inflate away" the cost of that debt will prove irresistible. Especially as more and more Treasury holders are foreigners.
But I notice you are now saying deflation, then inflation, so we are probably in agreement about that.
Posted by: NoeValleyJim at September 18, 2008 12:09 PM
Satchel, thanks for keeping on top of the repos. Looks like an additonal $70billion went out through the TSLF on Tuesday (not part of the 'normal' weekly auction on Wednesdays). By my count, TSLF stands at around $185 billion. Add in another $80billion for AIG. Subtract $265B from $480B (Fed Treasury securities) and they are left with around $215 billion of "ammo". No wonder they went to the Treasury to raise an additional $50 Billon. As someone who was worried about the Fed running out of money, I had grown complacent the past couple of months as the TSLF hovered around $100 billion. These latest developements are rather frightening. Will be interesting to see what the H.4.1 release looks like today (and if my numbers match theirs).
Posted by: EBGuy at September 18, 2008 12:34 PM
We probably don't really disagree, except about the effect on SF housing prices that will result from the Fed's future monetary inflation. (Think DOWN - much lower than people are willing to entertain now as a possibility.)
"But I notice you are now saying deflation, then inflation, so we are probably in agreement about that."
Two things. First, I have ALWAYS said this. I figured all this out summer 2007 (I had seen the variants of this cycle before many times in trading Japan and Asia in the 1990s). For instance, here I am back last February:
"IMO, people expecting that the USG can inflate its way out of this do not understand the dynamics. Once we have reduced debt levels, then the USG will be free to inflate again, and I am sure that it will. But that is a few years' off, at the earliest. Buying real estate after the coming adjustment will be a winning bet IMO....
Posted by: Satchel at February 15, 2008 1:14 PM"
In that post, I went through the intuition of why I think this is going to go down this way (I've done it a number of times in other posts - always the same message).
I filled in some ideas on buying real estate - based on this deflation-inflation cycle which i also expanded upon a bit - here, and this is what I intend to do:
"I firmly think that this cycle is different, because it will play out against a backdrop of credit deflation, at least for the next 2-4 years. Interest rates on safe debt should go down over this period, and this will have the effect of moderating the rise in risky interest rates (mortgages, corporate debt, etc.), and generally slow the asset price deflation from what it would otherwise be (both for stocks and real estate). At some point the pain will be too great and/or the Fed will run out of treasuries with which to manipulate rates, and then we will get serious monetary inflation, similar to the late 1960s/1970s. Rates on all debt will rise, hurting the ability of "inflation-hedges" that are also dependent on financing to rise. in this environment, I would think owning real estate recently purchased at low interest rates will be good as an investment, largely because of cash flows (rising rents) rather than asset price increase (which wil struggle as rates rise). Timing as an investor would seem to me to be tricky - to buy after the lion's share of price depreciation has occurred but before rates rise too much....
Posted by: Satchel at July 29, 2008 10:25 AM"
Second thing, I use the terms "inflation" and "deflation" the correct way - inflation or deflation of the MONEY SUPPLY, not the change in prices. It's too hard to figure out a representative price index for "price inflation" - even harder than tying to identify a money supply aggregate that is useful IMO. I'm not trying to be a pedant about it - it's just that thinking in those terms helps me in thinking through my trading strategies, and seems to conform more with how the world works.
Posted by: Satchel at September 18, 2008 12:56 PM
Jimmy, WB is up 50% (!!!) today. I hope you unwound your position. Playing in this market is playing with fire.
Posted by: Anon at September 18, 2008 12:58 PM