The Fed Rescue Has Failed

[Crazy_Vasey]

ne paying off WW1? Were those debts forgiven or are they still outstanding?

I don't think anyone payed off their First World War debts. It all just got abandoned when the world economy died on its arse in the Great Depression.

[J]

When headlines like this start showing up on Bloomberg, you know things are getting really bad.

Link

Agency Mortgage-Bond Spreads Rise; Markets `Utterly Unhinged'

By Jody Shenn

March 6 (Bloomberg) -- Yields on agency mortgage-backed securities rose to a new 22-year high relative to U.S. Treasuries as banks stepped up margin calls and concerns grew that the Federal Reserve may be unable to curb the credit slump.

The difference in yields, or spread, on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 21 basis points, to 237 basis points, the highest since 1986 and 103 basis points higher than on Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less.

The markets have become ``utterly unhinged,'' William O'Donnell, a UBS AG government bond strategist in Stamford, Connecticut, wrote in a note to clients today. A lack of liquidity has ``led to stunning air-pockets in price levels.''

Investors are realizing that banks have little room to make new investments amid rising losses and a flood of unwanted assets, said Scott Simon, head of mortgage-backed bonds at Pacific Investment Management Co. The world's top banks have reported more than $181 billion in asset writedowns and losses, been stuck with $160 billion of leveraged buyout loans, and bailed out $159 billion of structured investment vehicles.

``Everything is telling you the financial system is broken,'' Simon, whose Newport Beach, California-based unit of Allianz SE manages the world's largest bond fund, said in a telephone interview today. ``Everybody's in de-levering mode.''

Agency mortgage securities outstanding, which are guaranteed by government-chartered Fannie Mae and Freddie Mac or federal agency Ginnie Mae, total almost $4.5 trillion, about the same size as the U.S. Treasury market

No Savior

The widening spreads prompted speculation the government may step in to support securities guaranteed by Fannie Mae and Freddie Mac, said Tom di Galoma, head of U.S. Treasury trading in New York at Jefferies & Co., a brokerage for institutional investors. The Treasury Department said the rumor isn't true.

``The Fed can't really save the mortgage market,'' di Galoma said. ``As they keep cutting, mortgage rates aren't going lower.''

The spread of current-coupon fixed-rated securities guaranteed by Ginnie Mae against 10-year Treasuries has climbed 55 basis points this month to 205 basis points, also the highest since the 1980s, according to Bloomberg data. Debt guaranteed by Ginnie Mae is explicitly backed by the U.S. government, and based on loans already insured or guaranteed by its agencies. A basis point is 0.01 percentage point.

Carlyle Margin Call

Carlyle Group's publicly traded mortgage bond fund, which raised $300 million in July and used loans to buy about $22 billion of agency mortgage securities, failed to meet margin demands and has received a notice of default. In margin calls, banks demand more collateral on their loans because of falling prices. Lenders have been imposing ``additional collateral requirements'' outside of margins call, Carlyle said today.

``The capital issues at commercial banks are making them, in general, reluctant to lend, so lending is either harder to find or when you do find it, it's more expensive or the other terms are more-limiting.'' Steven Abrahams, an analyst with Bear Stearns Cos., said in a telephone interview yesterday.

``If there's less money to finance positions and less balance-sheet available to warehouse positions, the markets are going to become more volatile,'' he said.

Carlyle Capital Corp. missed four of seven margin calls yesterday totaling more than $37 million, the Guernsey, U.K.- based fund said today in a statement. Thornburg Mortgage Inc., the Santa, Fe, New Mexico-based owner of ``jumbo'' mortgages and securities backed by adjustable-rate loans, said yesterday it received a default notice from JPMorgan Chase & Co.

Next to Blow Up

``The single biggest concern right now is who's the next hedge fund to blow up, and how big are they,'' Arthur Frank, the New York-based head of mortgage-backed-securities research at Deutsche Bank AG, said in an interview today. ``The more the market widens, the more likely it is that another leveraged player has to sell, so it does feed on itself.''

Bloomberg current-coupon indexes represent the average of yields for the two groups of bonds with prices just above and below face value, the ones that lenders typically package new loans into.

Prices for agency securities backed by adjustable-rate mortgages with five years of fixed-rates fell 0.63 percent this month through yesterday, according to Lehman Brothers Holdings Inc. index data. Fixed-rated securities fell 1.66 percent, according to the New York-based company. The various classes of collateralized mortgage obligations used to repackage agency bonds collectively have fallen 0.9 percent, according to Merrill Lynch & Co. index data.

``Traders are putting their phones down and backing slowly away from their desks,'' O'Donnell said today in a telephone interview. ``Relatively little'' agency mortgage-backed securities are being traded, Pimco's Simon said.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: March 6, 2008 16:36 EST

[Darth Wong]

Interestingly enough, Canadian house prices are fairly stable, even as American house prices are in free-fall.

[Kodiak]

Interestingly enough, Canadian house prices are fairly stable, even as American house prices are in free-fall.

Is it easy for someone close to the border to work in the US and live in Canada?

[Darth Wong]

Interestingly enough, Canadian house prices are fairly stable, even as American house prices are in free-fall.

Is it easy for someone close to the border to work in the US and live in Canada?

I think the tax situation might be a nightmare.

[J]

Interestingly enough, Canadian house prices are fairly stable, even as American house prices are in free-fall.

So far, though I think it's only a matter of time before our housing market starts following the US. Home sales in Canada are starting to slow down a bit and the inventory of listed homes on the market is increasing. Combined with a general slowdown in our economy and blowback from the panic south of the border, I expect a downturn sooner or later, though I don't think it'll be as severe as the one the US is experiencing.

[The Yosemite Bear]

im getting strangely reminded of cantacle for liebowitz and about how life in general goes on, and humanity adapts, empires die, people die, but life continues.

On the otherhand someone just loaned me 2 boxed sets of "Dark Angel" remind me is this looking too familiar...

[Darth Wong]

Interestingly enough, Canadian house prices are fairly stable, even as American house prices are in free-fall.

So far, though I think it's only a matter of time before our housing market starts following the US. Home sales in Canada are starting to slow down a bit and the inventory of listed homes on the market is increasing. Combined with a general slowdown in our economy and blowback from the panic south of the border, I expect a downturn sooner or later, though I don't think it'll be as severe as the one the US is experiencing.

Oh, we'll get a downturn, but we won't get their preposterous sub-prime crisis. Our government never encouraged middle class debt to the same extent that the US government has. For example, the lack of a mortgage interest deduction. And unlike the US which has thousands of banks, we have only a few huge ones: Scotiabank, TD, CIBC, RBC, and BMO. Of those, TD and BNS have mostly avoided the sub-prime market. TD's CEO declared the whole sub-prime market "an accident waiting to happen" one or two years ago.

[J]

Oh, we'll get a downturn, but we won't get their preposterous sub-prime crisis. Our government never encouraged middle class debt to the same extent that the US government has. For example, the lack of a mortgage interest deduction. And unlike the US which has thousands of banks, we have only a few huge ones: Scotiabank, TD, CIBC, RBC, and BMO. Of those, TD and BNS have mostly avoided the sub-prime market. TD's CEO declared the whole sub-prime market "an accident waiting to happen" one or two years ago.

RBC, CIBC, and BMO are taking some large write-off from the US subprime market though, so far it's in the hundreds of millions to billion range and they claim to be washing their hands of the toxic bills so if that's true then losses will be contained. Scotiabank has yet to reveal its exposure to the US credit collapse so we don't know what's going on with them, I'm expecting a larger hit than the other Canadian banks have taken given their reluctance to come clean but who knows. We should be in decent shape unless our federal government and the Bank of Canada do something truly stupid. Then again, Harper is managing to run the first current account deficit we've had in nearly a decade so I'm not entirely optimistic.

[J]

Since it worked so well in the past, the Feds will keep throwing money at the problem.

Bloomberg link

Fed Boosts Lending to Banks as Credit Rout Continues (Update6)

By Craig Torres and Vincent Del Giudice

March 7 (Bloomberg) -- The Federal Reserve moved to add as much as $200 billion to the banking system over the next month to offset a deepening credit crisis that may have already pushed the U.S. economy into a recession.

The central bank raised to $50 billion each from $30 billion the amount intended for auctions of funds on March 10 and March 24. The Fed also said in a statement in Washington today that it will make $100 billion available through weekly 28-day repurchase agreements, where the central bank will lend cash in return for assets including mortgage-backed bonds.

The decision is the central bank's latest attempt to reduce the threat to the economy from banks curtailing loans to companies and households. Banks and securities firms have posted losses exceeding $188 billion since the start of last year as the impact of surging defaults on subprime mortgages rippled through world financial markets.

``Given what we have seen in terms of illiquidity in the financial markets in the last four or five days, this came right in time,'' Ajay Rajadhyaksha, head of fixed-income strategy at Barclays Capital in New York, said in an interview with Bloomberg Television.

The Fed said it will increase the sizes of both the so- called Term Auction Facility operations and the repurchases ``if conditions warrant.''

Interest Rates

Traders increased bets that the Fed will lower its benchmark interest rate by three quarters of a point this month after a government report showed the biggest job loss in five years, adding to evidence the economy is contracting. Odds of a smaller, half-point reduction fell to 6 percent from 26 percent yesterday, futures prices showed.

Fed officials said today's announcement wasn't related to the jobs report, and instead was aimed at addressing the deterioration in credit markets. The officials, speaking on condition of anonymity in a conference call with reporters, also said the measures won't expand the Fed's balance sheet.

At the same time, the central bank's balance sheet will likely change in composition as a result of today's announcements. Changes in the way the Federal Reserve Bank of New York accepts bids for repos will probably boost the level of mortgage-backed debt the Fed holds, while reducing the level of Treasuries, a Fed official said.

In effect, the Fed is using its own balance sheet to help banks and bond dealers finance assets riskier than U.S. government debt.

Investor Exodus

The move comes as investors are questioning the worth of even the highest-rated securities after Standard & Poor's and Moody's Investors Service assigned AAA grades to bonds backed by mortgages to borrowers who are now struggling to make their payments.

Carlyle Group's mortgage-bond fund was suspended in Amsterdam today after creditors forced the sale of some holdings, jeopardizing shareholders' capital. The fund borrowed to buy about $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac.

Citigroup Inc., the fourth-largest U.S. home lender by new loan volume, said March 6 it plans to pare its mortgage and home-equity loan holdings by about $45 billion, or 20 percent, over the next year.

Federal Open Market Committee members are next scheduled to meet on March 18. As credit stresses increased since the last gathering on Jan. 29-30, speculation has increased among traders that officials will consider lowering rates before the next meeting, as they did on Jan. 22.

Rate Target

Officials said they will keep the benchmark federal funds rate target around the level set by the FOMC, indicating they don't plan for the liquidity measures to drive the rate lower.

The central bank introduced the TAF, a lending tool that allows banks to give the Fed a range of collateral in return for loans, in December. The TAF loans for this month have a 28-day maturity.

``What the Fed's saying with the TAF changes is, `We hear you and we want to ensure everybody has financing for good collateral,''' said Joe Tully, managing director of the money- market desk in Newark, New Jersey, at Prudential Investment Management, which oversees about $55 billion.

The New York Fed said in a statement that the first of the 28-day repo operations will be conducted today, in the amount of $15 billion. It also said it will sell $10 billion of Treasury- bill holdings, ``to maintain a level of reserves'' consistent with keeping the federal funds rate around the current target.

Helping Banks

Repos allow the central bank to inject funds into primary dealers, a group of 20 banks that trade securities directly with the New York Fed. By contrast, the TAF operations offer funds to deposit-taking institutions; the most recent auction included 72 banks.

The Fed said it is ``in close consultation'' with other central banks. In December, the Fed loaned $24 billion to the European Central Bank and Swiss National Bank through a swap agreement to make more dollars available to banks in Europe.

``If need be, we could certainly continue'' to coordinate with the Fed, ECB spokeswoman Regina Schueller said, citing remarks by President Jean-Claude Trichet.

The SNB said it has no plans to join in dollar auctions, spokesman Werner Abegg said.

Job Losses

The Fed is also trying to contain the fallout on the broader U.S. economy, which is moving closer to recession. Employers cut payrolls by 63,000 after a loss of 22,000 in January, the Labor Department said today.

The central bank said that the TAF operations will be continued for at least the next six months. Fed Chairman Ben S. Bernanke said in January that officials may make the resource a ``permanent addition to the Fed's toolbox.''

Former Fed Chairman Alan Greenspan yesterday said March 5 that the credit markets won't recover until house prices stop falling. He said in a conference call organized by Deutsche Bank AG that home construction needs to decline to clear a surfeit of unsold properties and stabilize home prices.

``I don't think there's that much the Fed can do about this,'' Harvard University economist Kenneth Rogoff, a former chief economist of the International Monetary Fund, said in an interview in Paris. ``It's very limited what monetary policy can do in the wake of a once-in-many-decades housing-price crash.''

Ouch, TAF to continue for at least the next 6 months, and may become a permanent feature of the Fed? $160 billion so far, another $100 billion slated for March, plus the $100 billion bonus, and this is going to continue for at least another half year? A billion here, a billion there and pretty soon we're looking at an amount of money which rivals the US military budget.

[Big Phil]

Interestingly enough, Canadian house prices are fairly stable, even as American house prices are in free-fall.

Depends on the market - In the Seattle area, while sales are down by nearly a third, home values remained steady in 2007, and actually increased by 4% in January 2008. Prices went up in Charlotte and Portland as well. At the same time, home values dropped by more than 15% in Miami, Las Vegas, Phoenix, and San Diego.

[J]

Yahoo news, via Reuters

Banks face "systemic margin call," $325 billion hit: JPM

By Walden Siew Sat Mar 8, 9:24 AM ET

NEW YORK (Reuters) - Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co (JPM.N), said in a report late on Friday.
ADVERTISEMENT

JPMorgan, which sent a default notice to Thornburg Mortgage Inc. (TMA.N) after the lender missed a $28 million margin call, said more default notices and margin calls were likely. The Carlyle Group's mortgage fund also failed to meet $37 million in margin calls this week.

"A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call."

The credit crisis that began about a year ago will likely intensify after Friday's weak February U.S. employment report "that most definitely signals recession," JPMorgan said.

Indeed, corporate bond spreads widened to a new record on Friday, surpassing levels seen in October 2002 during a boom in bankruptcies following the dot-com crash. U.S. employers cut payrolls in February for a second consecutive month, slashing 63,000 jobs, the biggest monthly job decline in nearly five years, the U.S. Labor Department reported on Friday.

"The weak February employment report points to an economy in recession," JPMorgan said.

The JPMorgan report included a revised bleaker forecast for subprime-related home prices. The bank now sees prices falling 30 percent, from its prior 25 percent forecast. Those prices have declined 14 percent since mid-2006, JPMorgan said.

The U.S. jobs results also came after the Federal Reserve expanded the amount of its short-term auctions to $100 billion in total in the central bank's latest effort to ease credit concerns. Ongoing concerns about bond insurers, known as monolines, and their effort to save their top ratings also are weighing on market sentiment.

So much for the situation being "contained", I wonder how far behind "systemic market failure" is...

[The Yosemite Bear]

I turn on the radio and all I hear are commercialls urging people to dig the hole deeper for the good of the economy.....

[Vaporous]

I'm pretty sure the phrase "margin call" is a troubling factor in any context. That such a thing still exists borders on the hilarious. Whats that? Making unreliable investments backed by insufficient funds dangerous? Nonsense!

[SirNitram]

Interestingly enough, Canadian house prices are fairly stable, even as American house prices are in free-fall.

Is it easy for someone close to the border to work in the US and live in Canada?

I think the tax situation might be a nightmare.

Alot of people do it.

What will be the nightmare is rules proposed by the most repugnant branch of the already repugnant Department Of Homeland Security. Basically, the millions who make the daily commute from one side to the other will now be photographed and fingerprinted by Immigration and Customs Enforcement. Every. Time. They. Cross. You must have your Passport. Every. Time. You. Cross. I've not heard on whether it's gotten beyond proposal, but you have to admire the brass balls of that and one other, which is off topic and thus not commented on here.

[brianeyci]

I just had a really really nasty thought. What if America ignored all the economic talking heads and did the following:

• Raised the minimum wage by a quarter every month, until it hit 20 or 10 percent less than the jurisdictional living wage.
• To account for the numbers of unemployed created by this raise, make it easier to access UI. In fact, ridiculously easy to the point if you don't have a job, you get a subsistence income.
• Make continuing education and college free and wipe out student loans.
• Make extending credit to people who can't reasonably pay the interest per month illegal.

Of course such changes are unthinkable, even though many other countries have considered all these points. Yes, even point two -- it's called cradle to grave income or universal income.

[Surlethe]

Brian, what effect would the first three have on inflation? Qualitatively, they would increase it, but are there any measures on by how much?

Depends on the market - In the Seattle area, while sales are down by nearly a third, home values remained steady in 2007, and actually increased by 4% in January 2008. Prices went up in Charlotte and Portland as well. At the same time, home values dropped by more than 15% in Miami, Las Vegas, Phoenix, and San Diego.

Is home value decrease proportional to prior growth?

[Big Phil]

Brian, what effect would the first three have on inflation? Qualitatively, they would increase it, but are there any measures on by how much?

Depends on the market - In the Seattle area, while sales are down by nearly a third, home values remained steady in 2007, and actually increased by 4% in January 2008. Prices went up in Charlotte and Portland as well. At the same time, home values dropped by more than 15% in Miami, Las Vegas, Phoenix, and San Diego.

Is home value decrease proportional to prior growth?

The article didn't say (probably because the reporter didn't know).

[ray245]

Fuck this...speaking as a person who isn't from USA...I am quite pissed with the US managing of its economy.

The thing about global economy is everyone is connected to USA economically. Sure, you can manage your country economy well enough to ensure that such a type of recession does not spiral out of control in your own country, or trying to enjoy the fruits of your labour.

But once the US economy starts to crash, it will drag alot of countries along with it.

Damn, people need to find a way to cut off a foreign country economical influence, if that foreign country is falling into a recession; and be able to reestablish ties once the foregin country recovers...


But I guess that is highly unlikely...

[Ghost Rider]

Interestingly enough, Canadian house prices are fairly stable, even as American house prices are in free-fall.

Is it easy for someone close to the border to work in the US and live in Canada?

I think the tax situation might be a nightmare.

Sadly, from a person who does such things...it's vastly easier then multiple states. I shit you not, there is less paper work involved, and usually another countries tax code makes more sense then multiple state tax codes.

The saddest part is what Nitram mentioned.

And back to your regularly scheduled topic.

[brianeyci]

Brian, what effect would the first three have on inflation? Qualitatively, they would increase it, but are there any measures on by how much?

Well if you believe economists it is a zero sum game at best, with inflation wiping out any possible gain when you raise the minimum wage, and at worst job loss. But I still would not mind it for several reasons:

1. Americans have no savings. Only the people with savings would be hurt by this, and once they realize they can dump all their money into foreign currencies or spend, stimulating the economy.

2. Americans are deep in debt and inflation destroys debt.

3. America desperately needs more education. Maybe people who are not worth at least a living wage in the free market shouldn't be working at all, but instead studying to upgrade their skills so they don't have to work two or three jobs.

If you want an exact number, I could probably post a chart of inflation compared to minimum wage increases and see the rate. I've seen that chart before, and the wipeout occurs very quickly according to the chart, in a matter of months to a year. But I don't think such charts are very informative. They don't take into account luxury items are far more violatile than rent and base necessity items, and government regulation can prevent rent from increasing to match market rates (oh the horror.)

[J]

I just had a really really nasty thought. What if America ignored all the economic talking heads and did the following:

• Raised the minimum wage by a quarter every month, until it hit 20 or 10 percent less than the jurisdictional living wage.
• To account for the numbers of unemployed created by this raise, make it easier to access UI. In fact, ridiculously easy to the point if you don't have a job, you get a subsistence income.
• Make continuing education and college free and wipe out student loans.
• Make extending credit to people who can't reasonably pay the interest per month illegal.

Then they get to experience the Greater Depression, as it doesn't do much to address the shenanigans going on in the markets which caused this mess to begin with.

Right now, liquidity & trust have to be restored to the financial institutions, and that's not going to happen until we know who's holding all the bad debts & toxic papers, and where all the bodies are buried. At the same time they have to be deleveraged & recapitalized, and institutions which can't do that will have to go under. No public bailouts at taxpayers' expense, if we bail them out they'll never learn and history will repeat itself sooner rather than later. And of course we'll have to wait until home prices readjust to their historical average of around 3 times annual income.

After all that's sorted out we can begin working on societal and regulation reforms.

[J]

Citigroup alone has assets in excess of 1.5 trillion. This is an outright lie.

That part bugged me too. The write-downs in the US are in the tens of billions of dollars already, so it's more like $10 trillion for all of them, not one.

After a bit more research, I believe I have the answer. I believe the article is confusing assets with residuals (assets less liabilities). Total assets is indeed in the $11 trillion range while residuals are sitting at a bit over a trillion. Assets & Liabilities of US Banks.

[brianeyci]

What do you call a bailout?

After reading Mike's explanations about how subprime borrowers fuck over responsible borrowers, I have to agree that if someone is going to lose a house, they can lose it and move into an apartment. After all, thinking you can own a house when you make 9 bucks an hour in a factory is stupid.

But what about the responsible people? Letting institutions go under with no bailout at all... do you draw the line at savings and chequing accounts, retirement plans, or what?

Homes cost 350k+ now, and you're saying the historical average is 150k (or less)? And this is caused by what, too much credit floating around? You realize there is a 50 year mortgage now and what you're suggesting is at the least a painful readjustment.

[Uraniun235]

Savings and checking accounts are covered under an institution called FDIC, which insures such accounts for up to $100,000 per person per bank.