This post first appeared on Minyanville.
Even the Treasury Department's best attempts at statistical obfuscation can't hide the truth that credit remains off limits for most Americans. Banks -- despite billions in government handouts -- still aren't lending.
A Wall Street Journal study of lending data supplied by the 19 biggest recipients of TARP funds paints a decidedly less-rosy picture than does the Treasury's analysis of the same information.
New lending, as measured by aggregate loans made in February compared to last October -- which was the month then-Treasury Secretary Hank Paulson poured tens of billions of dollars into Goldman Sachs (GS), Bank of America (BAC), Citigroup (C) and other big American banks -- is down 23%. This tally, arrived at by the Journal, contrasts Treasury Department figures that measure the change in lending by looking at the median amount of new loans made by the same group of banks.
No surprise, government methodology arrives at numbers that make things markedly better.
And while no one data point can truly claim to be the best measure of the entire US lending environment, that government officials chose the method that supports their claim that borrowing is still possible for the most creditworthy Americans, shouldn't be surprising.
Even as the Treasury, Federal Reserve, FDIC and even Congress urge banks to make new loans, loudly assuring the American people the government has their best interests in mind, the borrowing public isn't listening: Americans continue to shun credit.
A spokesperson for JPMorgan Chase (JPM) said the bank aggressively made credit available "despite the fact that loan demand has dropped dramatically." This assessment is consistent with reports from community banks that consumers simply don't want to take on new debt.
About the only corner of the lending market that's booming is mortgages. Artificially low interest rates, falling home prices and aggressive marketing from the National Association of Realtors has led to a spike in new home loan originations.
Yet, as property values continue to spiral downward, banks like Wells Fargo (WFC), who tout their mortgage division as a strong earnings driver, are lending against an asset class that continues to tumble in value.
Increasingly, Americans are reassessing their own personal income statements. And with an economic future that's cloudy at best, taking on more debt isn't sounding like a great idea.
Not convinced? Examine the lengths to which automakers like Ford (F) are going to get buyers to open their wallets: payment insurance against job losses.
These sorts of marketing tricks are not dissimilar to teaser rates and no-money-down loans that were so prevalent during the mortgage boom. And we see how well that turned out.
Until Washington accepts the new reality -- that credit is driven not just by supply, but also demand -- we'll keep reading suspect analysis of data ostensibly supporting crackpot theories that credit markets have thawed, and a return to the go-go years of unsustainable economic growth is just around the corner.
Showing posts with label Paulson. Show all posts
Showing posts with label Paulson. Show all posts
Thursday, April 23, 2009
Saturday, March 7, 2009
Foreclosure By Design
This post first appeared on Minyanville and Cirios Real Estate.
Specialists in handling distressed debt amassed tens of billions of dollars to buy up bad loans at steep discounts. The offending institutions who had bought the stuff in the first place would be forced to own up to their mistakes, take their lumps and move on. Meanwhile, those deft enough to clean up the problems would reap their just deserts.
Alas, it was not to be.
Sometime around the middle of 2006, some regulator woke from a decade-long slumber and decided to hazard a look at the balance sheets of America’s largest financial institutions. To his horror, just about every bank in the country would be insolvent, given the going prices for delinquent mortgage debt.
He raced off to tell his boss, who alerted his superior, and so on up the chain until then-Treasury Secretary Hank Paulson got wind of the coming tsunami of losses. Paulson barely flinched, for Wall Street’s top brass was well aware their collective predicament. After all, it was the likes of his former charge, Goldman Sachs (GS), who designed and sold the toxic assets in the first place.
The choice then was simple: Step back and let markets sort out the mess, risking the lives of storied firms like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM) - or latch onto the absurd notion that these institutions were “too big to fail,” and begin a process whereby the American taxpayer's hard-earned nest egg would be used to forestall the inevitable day of reckoning.
We now know how that sad story ends.
Two pieces today, one run by Bloomberg charting the failure of myriad modification programs to address the problem of negative equity, and one in the New York Times documenting the exploits of former Countrywide executives buying distressed debt from the FDIC on the cheap, evidence the abject failure of government efforts to stem the rising tide of foreclosures.
Private investors, the ones best suited to forgiving principal or lowering interest rates to keep a family in their home, were handcuffed by political bumblings. But these programs, by preventing true price discovery in the housing market, have likely achieved their goals of their designers.
Our banking system has buckled, but not broken. The eventually recovery, however, has been pushed well down the line and the cost shoved onto future generations. Those responsible have by in large retained their posts at the institutions deemed “too big to fail,” save a couple token scapegoats tossed to the media wolves.
Meanwhile, the responsible few who did not speculate on their home, did not use credit as a vehicle for illegitimate economic growth and never thought they’d be asked to pick up the tab for those that did, have now been asked to shoulder the burden.
It should come as no surprise that housing prices keep falling -- indeed they must in order for true stabilization to occur. But the slow bleed, the persistent drag on the fundamentals of our economy, is doing more damage under the hood than our wise leaders would care to admit.
Still, they insist the more economic control centralized in Washington, the better. After all, the ones that drove us off this cliff certainly should know how to break the fall.
Specialists in handling distressed debt amassed tens of billions of dollars to buy up bad loans at steep discounts. The offending institutions who had bought the stuff in the first place would be forced to own up to their mistakes, take their lumps and move on. Meanwhile, those deft enough to clean up the problems would reap their just deserts.
Alas, it was not to be.
Sometime around the middle of 2006, some regulator woke from a decade-long slumber and decided to hazard a look at the balance sheets of America’s largest financial institutions. To his horror, just about every bank in the country would be insolvent, given the going prices for delinquent mortgage debt.
He raced off to tell his boss, who alerted his superior, and so on up the chain until then-Treasury Secretary Hank Paulson got wind of the coming tsunami of losses. Paulson barely flinched, for Wall Street’s top brass was well aware their collective predicament. After all, it was the likes of his former charge, Goldman Sachs (GS), who designed and sold the toxic assets in the first place.
The choice then was simple: Step back and let markets sort out the mess, risking the lives of storied firms like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM) - or latch onto the absurd notion that these institutions were “too big to fail,” and begin a process whereby the American taxpayer's hard-earned nest egg would be used to forestall the inevitable day of reckoning.
We now know how that sad story ends.
Two pieces today, one run by Bloomberg charting the failure of myriad modification programs to address the problem of negative equity, and one in the New York Times documenting the exploits of former Countrywide executives buying distressed debt from the FDIC on the cheap, evidence the abject failure of government efforts to stem the rising tide of foreclosures.
Private investors, the ones best suited to forgiving principal or lowering interest rates to keep a family in their home, were handcuffed by political bumblings. But these programs, by preventing true price discovery in the housing market, have likely achieved their goals of their designers.
Our banking system has buckled, but not broken. The eventually recovery, however, has been pushed well down the line and the cost shoved onto future generations. Those responsible have by in large retained their posts at the institutions deemed “too big to fail,” save a couple token scapegoats tossed to the media wolves.
Meanwhile, the responsible few who did not speculate on their home, did not use credit as a vehicle for illegitimate economic growth and never thought they’d be asked to pick up the tab for those that did, have now been asked to shoulder the burden.
It should come as no surprise that housing prices keep falling -- indeed they must in order for true stabilization to occur. But the slow bleed, the persistent drag on the fundamentals of our economy, is doing more damage under the hood than our wise leaders would care to admit.
Still, they insist the more economic control centralized in Washington, the better. After all, the ones that drove us off this cliff certainly should know how to break the fall.
Thursday, December 18, 2008
Keepin’ It Real Estate: The Other Side of the Rock-Bottom Mortgage
This post first appeared on Minyanville and Cirios Real Estate.
It’s wishful thinking that artificially low interest rates alone are enough to rehabilitate the housing market.
The mortgage industry has undergone a swift and ruthless downsizing over the past 18 months. While a necessary part of the corrective process, the market is ill-equipped to handle the onslaught of new loans that regulators are hoping to incite.
Last week, the Wall Street Journal reported the Treasury Department is considering pushing down mortgage rates to levels not seen since the heyday of the housing bubble. Through the recently nationalized mortgage giants, Fannie Mae (FNM) and Freddie Mac (FRE), loans would be offered to qualified homebuyers with rates as low as 4.5%.
It’s wishful thinking that artificially low interest rates alone are enough to rehabilitate the housing market.
The mortgage industry has undergone a swift and ruthless downsizing over the past 18 months. While a necessary part of the corrective process, the market is ill-equipped to handle the onslaught of new loans that regulators are hoping to incite.
Last week, the Wall Street Journal reported the Treasury Department is considering pushing down mortgage rates to levels not seen since the heyday of the housing bubble. Through the recently nationalized mortgage giants, Fannie Mae (FNM) and Freddie Mac (FRE), loans would be offered to qualified homebuyers with rates as low as 4.5%.
The story sparked a wave of refinancing as rates on all types of mortgages tumbled. Coupled with the Federal Reserve’s plans to buy agency debt and freshly originated mortgage-backed securities, the stage is set for renewed buying activity.
Although Treasury Secretary Hank Paulson has since denied that he’s planning such a move, he did say that he’s “always looking at new ideas” and that “the key thing to get us through this period is getting housing prices down.”
Whether there’s an official program of 4.5% mortgages is immaterial, as Washington is doing everything in its power to push rates as low as possible.
It’s hard to argue cheaper mortgages won’t encourage buyers to leave the sidelines and jump into the market. However, as Bloomberg noted this morning, layoffs at mortgage companies and banks like Citigroup (C), JPMorgan (JPM) and Bank of America (BAC) have greatly diminished origination capacity. Lenders, having already tightened underwriting standards, have limited resources to process new applications.
Many are hoping low rates will encourage refinancing and help clear out the toxic subprime and Alt-A securities still plaguing the financial system. Unfortunately, the loans originated for securities in 2005, 2006 and 2007 – the ones causing all the trouble — were done with minimal down-payment requirements. Falling home prices mean most of these borrowers are underwater - and thus unable to refinance.
Furthermore, any renewed buying is likely to be met with a flood of new supply. There’s a concept in real estate known as “phantom inventory,” which refers to homeowners who want to sell, but keep their homes off the market while they hope for conditions to improve. Some experts believe actual inventory levels, when these would-be sellers are taken into account, is as much as 25% higher than official data show.
Anecdotally, this makes sense. For each buyer waiting for lower prices to step in, there’s a seller waiting for a better market. So any pop in buying activity will offer sellers an opportunity to list their homes in a seemingly stronger market. As foreclosures continue to spread into previously unaffected areas, inventory levels are likely to remain high throughout much of the country.
And while attractively-priced, well-maintained homes in desirable neighborhoods will continue to sell, more of the same will be available in each successive month. Patience remains the best ally for the prospective buyer.
Friday, December 5, 2008
Keepin' It Real Estate: Treasury Tries to Re-Inflate Housing Bubble
This post first appeared on Minyanville and Cirios Real Estate.
Treasury Secretary Hank Paulson is hoping he's found the magic bullet to solve the US housing market's seemingly never-endless woes.
He hasn’t.
By throwing around the weight of recently nationalized mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), the Treasury Department is considering a plan to push interest rates on purchase money mortgages down to 4.5% - well below the current market rate of around 5.75%.
Artificially lowering rates so buyers can afford more house led us into this mess; it’s doubtful the same tactics will lead us out.
According to the Wall Street Journal, the plan is in the early stages of development, but officials expect the initiative to spur buying activity. The aim is to prop up home prices by enabling borrowers to afford more expensive houses. Columbia University economists believe such a program could help between 1.5 million and 2.5 million Americans buy new homes. In order to qualify for the low rate, borrowers have to meet Fannie and Freddie’s now-stricter loan underwriting requirements. But even with more affordable monthly payments -- the lower rate amounts to savings of $150 per month on a $200,000 loan -- precious few prospective buyers are willing and able to pony up the tens of thousands dollars still required for a down payment.
Combined with the Federal Reserve’s recent $200 billion lending program for securities backed by newly originated mortgages, bureaucrats are pulling out all the stops to buoy falling property values.
This is the latest in a series of botched attempts to re-inflate the housing bubble. And like the others before it, the plan fails to address the root causes of ongoing home price declines: Negative equity, over-supply and mounting job losses.
The flood of recent loan modification programs championed by FDIC Chairman Sheila Bair and rolled out by JPMorgan (JPM), Citigroup (C) and Bank of America (BAC) also miss the point. Like any distressed market, the housing market badly needs price discovery. And like any other asset class, the true price of a house is only discovered when someone buys it on the open market.
By creating unnaturally low interest rates and allowing buyers to purchase bigger homes than they could normally afford, Paulson and Bernanke are preventing home prices from falling back to where responsible, fiscally minded Americans can buy without the crutch of government subsidies.
These continued distortions of the free market end up running in contrast to their intended goals: As long as the charade continues, as long as the real estate market is prevented from finding a natural bottom, home prices will continue to fall.
The silver lining -- for those brave enough to uncover their eyes and look -- is that just as it overshot on the way up, the housing market will likewise overshoot on the way down.
A protracted period of stabilization will ensue, during which time the opportunity to purchase high-quality residential real estate below its long-term intrinsic value will be extraordinary.
Savvy investors with the ability to identify attractively priced properties will, eventually, have the buying opportunity of a lifetime.
Treasury Secretary Hank Paulson is hoping he's found the magic bullet to solve the US housing market's seemingly never-endless woes.
He hasn’t.
By throwing around the weight of recently nationalized mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), the Treasury Department is considering a plan to push interest rates on purchase money mortgages down to 4.5% - well below the current market rate of around 5.75%.
Artificially lowering rates so buyers can afford more house led us into this mess; it’s doubtful the same tactics will lead us out.
According to the Wall Street Journal, the plan is in the early stages of development, but officials expect the initiative to spur buying activity. The aim is to prop up home prices by enabling borrowers to afford more expensive houses. Columbia University economists believe such a program could help between 1.5 million and 2.5 million Americans buy new homes. In order to qualify for the low rate, borrowers have to meet Fannie and Freddie’s now-stricter loan underwriting requirements. But even with more affordable monthly payments -- the lower rate amounts to savings of $150 per month on a $200,000 loan -- precious few prospective buyers are willing and able to pony up the tens of thousands dollars still required for a down payment.
Combined with the Federal Reserve’s recent $200 billion lending program for securities backed by newly originated mortgages, bureaucrats are pulling out all the stops to buoy falling property values.This is the latest in a series of botched attempts to re-inflate the housing bubble. And like the others before it, the plan fails to address the root causes of ongoing home price declines: Negative equity, over-supply and mounting job losses.
The flood of recent loan modification programs championed by FDIC Chairman Sheila Bair and rolled out by JPMorgan (JPM), Citigroup (C) and Bank of America (BAC) also miss the point. Like any distressed market, the housing market badly needs price discovery. And like any other asset class, the true price of a house is only discovered when someone buys it on the open market.
By creating unnaturally low interest rates and allowing buyers to purchase bigger homes than they could normally afford, Paulson and Bernanke are preventing home prices from falling back to where responsible, fiscally minded Americans can buy without the crutch of government subsidies.
These continued distortions of the free market end up running in contrast to their intended goals: As long as the charade continues, as long as the real estate market is prevented from finding a natural bottom, home prices will continue to fall.
The silver lining -- for those brave enough to uncover their eyes and look -- is that just as it overshot on the way up, the housing market will likewise overshoot on the way down.
A protracted period of stabilization will ensue, during which time the opportunity to purchase high-quality residential real estate below its long-term intrinsic value will be extraordinary.
Savvy investors with the ability to identify attractively priced properties will, eventually, have the buying opportunity of a lifetime.
Wednesday, December 3, 2008
Paulson Rolling Out Rest of TARP?
This post first appeared on Minyanville.
$350 billion sure didn't last very long.
Just 60 days ago, Congress allocated $700 billion in TARP money to rescue the financial system, half of which was available immediately. Now, according to the Wall Steet Journal, Treasury Secretary Hank Paulson may ready to ask for the second half.
If he does, he's likely to face stiff opposition on Capitol Hill. A recent Government Accountability Office report rebuked the Treasury for insufficient oversight and staffing to ensure the money it has already poured into banks like Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and Morgan Stanley (MS) is achieving the intended goals.
Meanwhile, Congress is eyeing the remaining bailout funds for other uses. First, and most immediately, lawmakers are likely to spring for an aid package for floundering automakers General Motors (GM), Ford (F) and Chrysler. The Big 3 said yesterday it would take $34 billion to save them from collapse.
Lawmakers are also pushing for more help for homeowners. The debate over loan modifications and how best to prevent foreclosures has intensified in recent weeks, as banks, loan servicers, investors, academics and regulators squabble over the best solution.
FDIC Chairman Sheila Bair has advanced an aggressive plan for the government to share potential losses with banks and streamline the modification process. Critics, however, argue Bair's program -- currently being stress-tested at failed California thrift IndyMac -- is falling short of lofty expectations and that claims of it's successes are overblown.
Compounding the complexity of deploying the bailout money is the transition to a new presidential administration. The Journal reports the Obama team is in close communication with the Bush administration, but is shying away from taking the lead in negotiations.
It's all but certain the $700 billion Congress allocated to prop up the financial system will simply be round one of a widescale capital infusion into American banks. Eroding economic conditions, falling consumer confidence and the ongoing credit contraction will continue to result in heavy losses for financial institutions across the country.
A broad-based stimulus package due to be announced on inauguration day is likely to include more help for troubled banks.
Still, short of outright nationalization, Washington is powerless to force banks to start lending again. Economic recoveries are typically spurred by an expansion of credit, making it cheaper for firms of all types to borrow, spend and start growing again. This time, however, banks won't part with their precious dollars for fear loans won't be repaid and losses will continue to spiral.
As well they should: Defaults across loan categories are rising as the economic malaise spreads up the credit spectrum. American consumers, strapped for cash and credit alike, are cutting back, reining in the rampant spending the propped up the domestic economy.
The road to recovery will be long, and not without potholes and hairpin turns, but it is a road nonetheless. As Toddo often says, "In order to get through this, we have to go through this.
$350 billion sure didn't last very long.
Just 60 days ago, Congress allocated $700 billion in TARP money to rescue the financial system, half of which was available immediately. Now, according to the Wall Steet Journal, Treasury Secretary Hank Paulson may ready to ask for the second half.
If he does, he's likely to face stiff opposition on Capitol Hill. A recent Government Accountability Office report rebuked the Treasury for insufficient oversight and staffing to ensure the money it has already poured into banks like Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and Morgan Stanley (MS) is achieving the intended goals.
Meanwhile, Congress is eyeing the remaining bailout funds for other uses. First, and most immediately, lawmakers are likely to spring for an aid package for floundering automakers General Motors (GM), Ford (F) and Chrysler. The Big 3 said yesterday it would take $34 billion to save them from collapse.
Lawmakers are also pushing for more help for homeowners. The debate over loan modifications and how best to prevent foreclosures has intensified in recent weeks, as banks, loan servicers, investors, academics and regulators squabble over the best solution.
FDIC Chairman Sheila Bair has advanced an aggressive plan for the government to share potential losses with banks and streamline the modification process. Critics, however, argue Bair's program -- currently being stress-tested at failed California thrift IndyMac -- is falling short of lofty expectations and that claims of it's successes are overblown.
Compounding the complexity of deploying the bailout money is the transition to a new presidential administration. The Journal reports the Obama team is in close communication with the Bush administration, but is shying away from taking the lead in negotiations.
It's all but certain the $700 billion Congress allocated to prop up the financial system will simply be round one of a widescale capital infusion into American banks. Eroding economic conditions, falling consumer confidence and the ongoing credit contraction will continue to result in heavy losses for financial institutions across the country.
A broad-based stimulus package due to be announced on inauguration day is likely to include more help for troubled banks.
Still, short of outright nationalization, Washington is powerless to force banks to start lending again. Economic recoveries are typically spurred by an expansion of credit, making it cheaper for firms of all types to borrow, spend and start growing again. This time, however, banks won't part with their precious dollars for fear loans won't be repaid and losses will continue to spiral.
As well they should: Defaults across loan categories are rising as the economic malaise spreads up the credit spectrum. American consumers, strapped for cash and credit alike, are cutting back, reining in the rampant spending the propped up the domestic economy.
The road to recovery will be long, and not without potholes and hairpin turns, but it is a road nonetheless. As Toddo often says, "In order to get through this, we have to go through this.
Tuesday, November 25, 2008
What's Another $200 Billion?
This post first appeared on Minyanville.
The burden of pulling the US out its economic tailspin is being placed squarely on those responsible for it in the first place: Spend-happy consumers and a financial system too eager to lend.
The Federal Reserve announced today plans to lend up to $200 billion to financial institutions interested in buying new securities backed by credit cards, auto loans and student loans. The Treasury Department will pony up $20 billion of Troubled Asset Relief Program (TARP) money to help support the new initiative, the latest in the government’s attempt to help struggling American consumers tap the credit markets.
The facility will be managed by the New York Federal Reserve, which is chaired by Timothy Geithner, likely the next Treasury secretary.
Fed Chairman Bernanke and current Treasury Secretary Paulson hope the lending program will encourage new issuance of asset -backed securities, which, prior to the credit crunch, were the primary source of funding for consumer loans.
Banks and other issuers of credit cards and auto loans prefer to bundle these loans into packages, selling slices to investors with various risk preferences. This allows the banks to offload a portion of the default risk and make better use of their limited cash.
According to the Treasury Department, last year this type of financing accounted for $240 billion in new issuances, but is down precipitously this year as credit markets have seized up. As a result, banks like JP Morgan (JPM), Bank of America (BAC) and Citigroup (C) are being forced to keep more of the loans on their balance sheets. Since massive losses on bad debt have shrunken their capital bases, lenders are reticent to hand out new loans.
In a separate announcement, the Fed said it will also buy up to $100 billion in debt issued by Fannie Mae (FNM) and Freddie Mac (FRE) - and $500 billion in securities backed by the 2 government-sponsored enterprises, or GSEs. The action is aimed at reducing mortgage rates that have remained stubbornly high, even as the Fed has pumped billions into the mortgage market.
Despite massive intervention into the credit markets, myriad new lending facilities and hundreds of billions in new equity, banks are still being stingy. New loans are hard to get and expensive to boot.
As well they should be.
Americans are up to their eyeballs in debt. The government understands, however, that as long as credit cards stay maxed out, economic activity will continue to contract. Without savings to fall back on, purchasing decisions that aren't absolutely essential are being delayed indefinitely.
Giving consumers easier access to credit is a bit like handing a drug addict a pill, asking him to use responsibly and wandering off, leaving him to his own devices. The immediate problem may have been avoied, but the inevitabe crash is just that - inevitable.
The burden of pulling the US out its economic tailspin is being placed squarely on those responsible for it in the first place: Spend-happy consumers and a financial system too eager to lend.
The Federal Reserve announced today plans to lend up to $200 billion to financial institutions interested in buying new securities backed by credit cards, auto loans and student loans. The Treasury Department will pony up $20 billion of Troubled Asset Relief Program (TARP) money to help support the new initiative, the latest in the government’s attempt to help struggling American consumers tap the credit markets.
The facility will be managed by the New York Federal Reserve, which is chaired by Timothy Geithner, likely the next Treasury secretary.
Fed Chairman Bernanke and current Treasury Secretary Paulson hope the lending program will encourage new issuance of asset -backed securities, which, prior to the credit crunch, were the primary source of funding for consumer loans.
Banks and other issuers of credit cards and auto loans prefer to bundle these loans into packages, selling slices to investors with various risk preferences. This allows the banks to offload a portion of the default risk and make better use of their limited cash.
According to the Treasury Department, last year this type of financing accounted for $240 billion in new issuances, but is down precipitously this year as credit markets have seized up. As a result, banks like JP Morgan (JPM), Bank of America (BAC) and Citigroup (C) are being forced to keep more of the loans on their balance sheets. Since massive losses on bad debt have shrunken their capital bases, lenders are reticent to hand out new loans.
In a separate announcement, the Fed said it will also buy up to $100 billion in debt issued by Fannie Mae (FNM) and Freddie Mac (FRE) - and $500 billion in securities backed by the 2 government-sponsored enterprises, or GSEs. The action is aimed at reducing mortgage rates that have remained stubbornly high, even as the Fed has pumped billions into the mortgage market.
Despite massive intervention into the credit markets, myriad new lending facilities and hundreds of billions in new equity, banks are still being stingy. New loans are hard to get and expensive to boot.
As well they should be.
Americans are up to their eyeballs in debt. The government understands, however, that as long as credit cards stay maxed out, economic activity will continue to contract. Without savings to fall back on, purchasing decisions that aren't absolutely essential are being delayed indefinitely.
Giving consumers easier access to credit is a bit like handing a drug addict a pill, asking him to use responsibly and wandering off, leaving him to his own devices. The immediate problem may have been avoied, but the inevitabe crash is just that - inevitable.
Tuesday, November 18, 2008
Insurance Companies Position Themselves for Bailout
This post first appeared on Minyanville.
Insurance companies have now joined the growing list of American firms vying for a piece of the bailout pie.
According to the Wall Street Journal, large insurance companies are snatching up small regional banks to speed up their transition to savings-and-loan holding companies, thereby qualifying them for capital infusions from Washington.
Like Goldman Sachs (GS) and Morgan Stanley (MS), who recently made similar conversions, insurance companies are looking for billions of dollars in government money to shore up their battered balance sheets.
Over the last week, Hartford Financial Services (HIG) purchased Federal Trust of Sanford, Florida; Genworth Financial (GNW) bought a thrift in Maple Grove, Minnesota; and Lincoln National (LNC) agreed to buy a tiny bank in Goodland, Indiana, which has a mere $7 million in assets. For Lincoln, a company with over $180 billion in assets, that’s just not very much money.
Insurers take in premiums from policy-holders, which they then use to buy up securities. As long as the income generated from those investments covers their payouts on claims, they turn a profit. Traditionally believed to be stogy, conservative firms, in recent years insurers dabbled in risky securities to juice profits. Using leverage, they added mortgage-backed securities to their core holdings of highly-rated corporate bonds.
The poster-child for these bad investments was, of course, AIG (AIG), which has now gobbled up almost $150 billion in taxpayer-funded bailout money.
And while AIG was the worst offender, its competitors have likewise seen the value of their investments erode in value in recent months. Last month, Met Life (MET), the largest US insurer by assets, raised capital to cover expected losses. Investors initially cheered the move, optimistic that the firm could get money at all.
In the last month, however, Met Life shares have lost almost 50% of their value.
And the bailout money is running thin. Treasury Secretary Hank Paulson has said he won’t petition Congress to release the second half of the $700 billion allocated for the bailout of the financial system. Confident the bailout is working, Paulson is urging lawmakers to hold on to the money for that proverbial rainy day.
The question, of course, is in what form the deluge will come. General Motors (GM)? General Electric (GE)? Or something else entirely?
Insurance companies have now joined the growing list of American firms vying for a piece of the bailout pie.
According to the Wall Street Journal, large insurance companies are snatching up small regional banks to speed up their transition to savings-and-loan holding companies, thereby qualifying them for capital infusions from Washington.
Like Goldman Sachs (GS) and Morgan Stanley (MS), who recently made similar conversions, insurance companies are looking for billions of dollars in government money to shore up their battered balance sheets.
Over the last week, Hartford Financial Services (HIG) purchased Federal Trust of Sanford, Florida; Genworth Financial (GNW) bought a thrift in Maple Grove, Minnesota; and Lincoln National (LNC) agreed to buy a tiny bank in Goodland, Indiana, which has a mere $7 million in assets. For Lincoln, a company with over $180 billion in assets, that’s just not very much money.
Insurers take in premiums from policy-holders, which they then use to buy up securities. As long as the income generated from those investments covers their payouts on claims, they turn a profit. Traditionally believed to be stogy, conservative firms, in recent years insurers dabbled in risky securities to juice profits. Using leverage, they added mortgage-backed securities to their core holdings of highly-rated corporate bonds.
The poster-child for these bad investments was, of course, AIG (AIG), which has now gobbled up almost $150 billion in taxpayer-funded bailout money.
And while AIG was the worst offender, its competitors have likewise seen the value of their investments erode in value in recent months. Last month, Met Life (MET), the largest US insurer by assets, raised capital to cover expected losses. Investors initially cheered the move, optimistic that the firm could get money at all.
In the last month, however, Met Life shares have lost almost 50% of their value.
And the bailout money is running thin. Treasury Secretary Hank Paulson has said he won’t petition Congress to release the second half of the $700 billion allocated for the bailout of the financial system. Confident the bailout is working, Paulson is urging lawmakers to hold on to the money for that proverbial rainy day.
The question, of course, is in what form the deluge will come. General Motors (GM)? General Electric (GE)? Or something else entirely?
Friday, November 14, 2008
Treasury Defends Bailout Bait-and-Switch
This post first appeared on Minyanville.
It's the classic bait and switch: Offer up a shiny, too-good-to-be-true trinket and hook the buyer - only to deliver a rusty old spoon.
The bailout sounded like it was just that: Too good to be true. $700 billion deftly injected into the financial industry to sop up toxic assets, an end to ad-hockery that would not only rescue the financial system from imminent collapse, but would also turn a hefty profit for taxpayers.
With almost half the bailout money spent, Ford (F), General Motors (GM), and Chrysler teetering on the brink, only marginal improvement in credit markets, and an economy that's badly lost it's way, a rusty spoon isn't sounding all that bad.
Yesterday, in what can only be described as a rather unprecedented show of cowering to the American media machine, the Treasury Department defended itself ... from the Washington Post.
The Post ran a piece entitled "Bailout Lacks Oversight Despite Billions Pledged," detailing failures on the part of bureaucrats to keep tabs on their Frankenstein-ish bailout machine.
Oversight behind schedule, opaque initiatives and a program whose initial focus -- and what was sold to the American people -- has been all-but-scrapped: The Post tore Treasury a new one.
The Treasury, for its part, shot back.
Arguing that the Post's assertions omitted many key facts, Henry Paulson and company issued a press release dubbed "Setting the Record Straight" to try to quash the public's growing discontent with the bailout. They trumpeted disclosure of contracts and other pertinent information on their website, efforts to choose a new Special Inspector General for the TARP program, the immediate convening of the Financial Stability Oversight Board, and regular briefings to Congress.
That Treasury even responded at all is astounding. Their continued focus on an aggressive media campaign to sell what our friends at BTIG like to call "half-baked ideas" is evidence of just how little credibility regulators have left.
Surely, the officials dealing with a financial crisis they call the worst in our lifetime have better things to do.
It's the classic bait and switch: Offer up a shiny, too-good-to-be-true trinket and hook the buyer - only to deliver a rusty old spoon.
The bailout sounded like it was just that: Too good to be true. $700 billion deftly injected into the financial industry to sop up toxic assets, an end to ad-hockery that would not only rescue the financial system from imminent collapse, but would also turn a hefty profit for taxpayers.
With almost half the bailout money spent, Ford (F), General Motors (GM), and Chrysler teetering on the brink, only marginal improvement in credit markets, and an economy that's badly lost it's way, a rusty spoon isn't sounding all that bad.
Yesterday, in what can only be described as a rather unprecedented show of cowering to the American media machine, the Treasury Department defended itself ... from the Washington Post.
The Post ran a piece entitled "Bailout Lacks Oversight Despite Billions Pledged," detailing failures on the part of bureaucrats to keep tabs on their Frankenstein-ish bailout machine.
Oversight behind schedule, opaque initiatives and a program whose initial focus -- and what was sold to the American people -- has been all-but-scrapped: The Post tore Treasury a new one.
The Treasury, for its part, shot back.
Arguing that the Post's assertions omitted many key facts, Henry Paulson and company issued a press release dubbed "Setting the Record Straight" to try to quash the public's growing discontent with the bailout. They trumpeted disclosure of contracts and other pertinent information on their website, efforts to choose a new Special Inspector General for the TARP program, the immediate convening of the Financial Stability Oversight Board, and regular briefings to Congress.
That Treasury even responded at all is astounding. Their continued focus on an aggressive media campaign to sell what our friends at BTIG like to call "half-baked ideas" is evidence of just how little credibility regulators have left.
Surely, the officials dealing with a financial crisis they call the worst in our lifetime have better things to do.
Monday, November 3, 2008
National Debt Gets More Expensive
This post first appeared on Minyanville.
The national debt is getting more expensive.
Over the past 15 months, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson have unleashed a litany of programs aimed at averting wide-scale collapse of the American -- and indeed the global -- financial system. They go by the acronyms we've all come to know and love: TARP, CPFF, TAF, PDCF, TSFL, etc.
For all their nuances and complexities, the aim of each is to pump more cash into the American economy. Many of these programs are financed with Treasury debt, which is sold on the open market to domestic and international investors alike.
Bloomberg reports that, despite aggressive interest-rate cuts, the cost of US debt is rising - and will likely continue to do so.
Recently, as markets swooned, investors flocked to Treasuries as a safe haven. Yields -- which move in inverse relation to prices -- became almost non-existent as protecting capital trumped earning returns. Now, as credit markets slowly heal and the appetite for risk cautiously returns, many doubt existing demand will be enough to sop up the massive supply of American debt set to be issued in coming months.
Bureaucrats and regulators have pledged billions in support for our struggling economy: The money has to come from somewhere.
Foreign investors -- particularly Japan and China -- are the largest holders of our government-backed debt, and, as their economies stumble, federal budgets will become strained. Lower tax receipts and mounting costs means these countries will demand a higher return on their investments abroad.
This dynamic, coupled with increasing supply, is likely to push up yields on US Treasury debt. That means American taxpayers, gazing down the double barrel of the $700 billion bailout package and a likely second round of stimulus checks, will see their debt costs rise.
Credit costs throughout the economy are similarly moving north. Credit card companies like American Express (AXP) and Capital One (COF) are slashing lines and hiking up interest rates. Mortgage rates stubbornly continue to move higher, and corporate borrowing is as expensive as it’s ever been. That’s all after more than 400 basis points in Federal Reserve easing in less than a year-and-a-half.
Meanwhile, taxpayers wait eagerly to see if this increasingly expensive debt will be put to good use. In the past week, both Bank of America (BAC) and JPMorgan (JPM) have announced plans to step efforts to modify troubled mortgages. This is encouraging - but with 1800 banks lined up at the government trough, that $700 billion isn’t likely to last long.
For a group that would implore their fellow Americans to get out of debt and live within their means, Congress and their regulatory counterparts certainly don’t set a very good example.
The national debt is getting more expensive.
Over the past 15 months, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson have unleashed a litany of programs aimed at averting wide-scale collapse of the American -- and indeed the global -- financial system. They go by the acronyms we've all come to know and love: TARP, CPFF, TAF, PDCF, TSFL, etc.
For all their nuances and complexities, the aim of each is to pump more cash into the American economy. Many of these programs are financed with Treasury debt, which is sold on the open market to domestic and international investors alike.
Bloomberg reports that, despite aggressive interest-rate cuts, the cost of US debt is rising - and will likely continue to do so.
Recently, as markets swooned, investors flocked to Treasuries as a safe haven. Yields -- which move in inverse relation to prices -- became almost non-existent as protecting capital trumped earning returns. Now, as credit markets slowly heal and the appetite for risk cautiously returns, many doubt existing demand will be enough to sop up the massive supply of American debt set to be issued in coming months.
Bureaucrats and regulators have pledged billions in support for our struggling economy: The money has to come from somewhere.
Foreign investors -- particularly Japan and China -- are the largest holders of our government-backed debt, and, as their economies stumble, federal budgets will become strained. Lower tax receipts and mounting costs means these countries will demand a higher return on their investments abroad.
This dynamic, coupled with increasing supply, is likely to push up yields on US Treasury debt. That means American taxpayers, gazing down the double barrel of the $700 billion bailout package and a likely second round of stimulus checks, will see their debt costs rise.
Credit costs throughout the economy are similarly moving north. Credit card companies like American Express (AXP) and Capital One (COF) are slashing lines and hiking up interest rates. Mortgage rates stubbornly continue to move higher, and corporate borrowing is as expensive as it’s ever been. That’s all after more than 400 basis points in Federal Reserve easing in less than a year-and-a-half.
Meanwhile, taxpayers wait eagerly to see if this increasingly expensive debt will be put to good use. In the past week, both Bank of America (BAC) and JPMorgan (JPM) have announced plans to step efforts to modify troubled mortgages. This is encouraging - but with 1800 banks lined up at the government trough, that $700 billion isn’t likely to last long.
For a group that would implore their fellow Americans to get out of debt and live within their means, Congress and their regulatory counterparts certainly don’t set a very good example.
Friday, October 31, 2008
Bond Insurers Beg for Piece of Bailout Action
This post first appeared on Minyanville.
The race to be included in the government’s $700 billion financial bailout plan is starting to get a little absurd.
First, Treasury Secretary Hank Paulson offered to buy up mortgage-backed securities rotting away on the balance sheets of our biggest banks. When it became clear more immediate action was needed, he forced Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS) and other big lenders to accept $125 billion in fresh capital.
Then, as the financial crisis deepened, MetLife (MET), Prudential (PRU), Hartford Financial (HIG) and other big insurance companies were rumored to be lining up for the government dole.
Next came General Motors (GM) and Chrysler, who are begging for billions from Washington to complete their merger.
Now, bond insurers Ambac (ABK) and MBIA (MBI) are nuzzling up to the government spigot, scrambling for their piece of the protective TARP. The Wall Street Journal reports the 2 firms are even vying to be part of Treasury’s plan to inject capital into troubled financial institutions.
Including the bond insurance industry in the bailout, Ambac and MBIA executives argue, would allow the firms to step in and insulate the rest of the financial industry from losses. Ambac called the potential impact “exponentially positive.”
The mere thought of including these firms in the bailout, frankly, is nauseating.
Ambac and MBIA personified the abject inability to assess risk during the credit boom, handing out bond insurance like candy on Halloween. Only theirs were the pieces parents warn their kids about: Snickers a la razor blades.
Their guarantees on debt ranging from municipal bonds to collateralized debt obligations allowed investors to ignore credit risk, use obscene leverage and rake in profits while adding next to no true value to the economy. When the bonds went sour, the firms' tiny cash reserves paled in comparison to their obligations.
As a result, hospitals, cities and countless other innocent bystanders had to scramble earlier this year just to make payroll as debt costs skyrocketed.
The bond insurers already had their chance for a bailout. Thankfully, their pleas have thus far fallen on deaf ears - and they haven’t gotten their grubby little paws on any taxpayer money.
With the government already considering a massive mortgage-guarantee program, bond insurers could be fearful their usefulness may have finally run its course.
And rightly so. It has.
The race to be included in the government’s $700 billion financial bailout plan is starting to get a little absurd.
First, Treasury Secretary Hank Paulson offered to buy up mortgage-backed securities rotting away on the balance sheets of our biggest banks. When it became clear more immediate action was needed, he forced Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS) and other big lenders to accept $125 billion in fresh capital.
Then, as the financial crisis deepened, MetLife (MET), Prudential (PRU), Hartford Financial (HIG) and other big insurance companies were rumored to be lining up for the government dole.
Next came General Motors (GM) and Chrysler, who are begging for billions from Washington to complete their merger.
Now, bond insurers Ambac (ABK) and MBIA (MBI) are nuzzling up to the government spigot, scrambling for their piece of the protective TARP. The Wall Street Journal reports the 2 firms are even vying to be part of Treasury’s plan to inject capital into troubled financial institutions.
Including the bond insurance industry in the bailout, Ambac and MBIA executives argue, would allow the firms to step in and insulate the rest of the financial industry from losses. Ambac called the potential impact “exponentially positive.”
The mere thought of including these firms in the bailout, frankly, is nauseating.
Ambac and MBIA personified the abject inability to assess risk during the credit boom, handing out bond insurance like candy on Halloween. Only theirs were the pieces parents warn their kids about: Snickers a la razor blades.
Their guarantees on debt ranging from municipal bonds to collateralized debt obligations allowed investors to ignore credit risk, use obscene leverage and rake in profits while adding next to no true value to the economy. When the bonds went sour, the firms' tiny cash reserves paled in comparison to their obligations.
As a result, hospitals, cities and countless other innocent bystanders had to scramble earlier this year just to make payroll as debt costs skyrocketed.
The bond insurers already had their chance for a bailout. Thankfully, their pleas have thus far fallen on deaf ears - and they haven’t gotten their grubby little paws on any taxpayer money.
With the government already considering a massive mortgage-guarantee program, bond insurers could be fearful their usefulness may have finally run its course.
And rightly so. It has.
Tuesday, October 21, 2008
Banks Using Your Tax Dollars For Mergers, Acquisitions
This post first appeared on Minyanville.
Banks, it appears, may finally be tired of losing money.
The $700 billion bailout plan rushed through Congress was aimed at shoring up the American financial system, providing banks with capital that they could then blithely begin lending again.
The law of unintended consequences -- already familiar to us following the recent spate of unprecedented government intervention -- is once again rearing its unsightly head.
The Wall Street Journal reports that, rather than extending credit to embattled American consumers, banks may use recently allocated taxpayer funds to gobble up competitors. Zions (ZION) and BB&T (BBT) are eager to go shopping for attractively priced banks, and are considering accepting government funds to do so.
Many argue this is a healthy, natural progression as the banking sector consolidates and prepares for its eventual recovery. Others, however, aren’t pleased to see taxpayer funds funneled into takeovers, which will do little to pump credit into the economy in the near term.
Furthermore, as Professor Sedacca noted on this morning's Buzz and Banter, banks like KeyCorp (KEY) are tapping the government for cash - only to turn around and dole it out to shareholders in the form of dividends. Good for equity owners; not so good for taxpayers.
Lending money to consumers in the past 12 months has been a losing bet. Banks -- obligated to make good on credit lines handed out during better times to individuals and businesses alike -- are finding themselves with more bad loans than they know what to do with. American Express (AXP), heretofore the lender of first resort to the world’s wealthiest, saw third-quarter profits tumble 24% on a 51% jump on credit-loss provisions.
Banks, like any responsible economic actor, act in their own best interests. Irrespective of whatever pressure Treasury Secretary Hank Paulson or French President Nicolas Sarkozy puts on financial institutions to start lending again, government officials cannot force money into the real economy.
The massive amount of liquidity being pumped into the financial system may be a short-term fix for the panic gripping world markets, but self-preservation is paramount during hard economic times. If an acquisition makes more financial sense than extending credit to struggling consumers, banks won't think twice.
A few lost customers or a few angry borrowers is a small price to pay for survival - and the chance to emerge on the top of the heap.
Banks, it appears, may finally be tired of losing money.
The $700 billion bailout plan rushed through Congress was aimed at shoring up the American financial system, providing banks with capital that they could then blithely begin lending again.
The law of unintended consequences -- already familiar to us following the recent spate of unprecedented government intervention -- is once again rearing its unsightly head.
The Wall Street Journal reports that, rather than extending credit to embattled American consumers, banks may use recently allocated taxpayer funds to gobble up competitors. Zions (ZION) and BB&T (BBT) are eager to go shopping for attractively priced banks, and are considering accepting government funds to do so.
Many argue this is a healthy, natural progression as the banking sector consolidates and prepares for its eventual recovery. Others, however, aren’t pleased to see taxpayer funds funneled into takeovers, which will do little to pump credit into the economy in the near term.
Furthermore, as Professor Sedacca noted on this morning's Buzz and Banter, banks like KeyCorp (KEY) are tapping the government for cash - only to turn around and dole it out to shareholders in the form of dividends. Good for equity owners; not so good for taxpayers.
Lending money to consumers in the past 12 months has been a losing bet. Banks -- obligated to make good on credit lines handed out during better times to individuals and businesses alike -- are finding themselves with more bad loans than they know what to do with. American Express (AXP), heretofore the lender of first resort to the world’s wealthiest, saw third-quarter profits tumble 24% on a 51% jump on credit-loss provisions.
Banks, like any responsible economic actor, act in their own best interests. Irrespective of whatever pressure Treasury Secretary Hank Paulson or French President Nicolas Sarkozy puts on financial institutions to start lending again, government officials cannot force money into the real economy.
The massive amount of liquidity being pumped into the financial system may be a short-term fix for the panic gripping world markets, but self-preservation is paramount during hard economic times. If an acquisition makes more financial sense than extending credit to struggling consumers, banks won't think twice.
A few lost customers or a few angry borrowers is a small price to pay for survival - and the chance to emerge on the top of the heap.
Tuesday, October 14, 2008
Treasury Throws Good Money After Bad
This post first appeared on Minyanville.
In recent testimony before the Senate Banking Committee, Treasury Secretary Hank Paulson rejected the idea of the US government injecting capital into banks and taking preferred stock, suggesting that such an extreme measure would imply that the US banking system had failed.
"Some [say] we should just stick capital in the banks, take preferred stock in the banks. That's what you do when you have failure," Paulson said.
Houston, we have failure: Yesterday, after the markets closed, Paulson announced plans to just stick capital -- $250 billion, to be exact -- into the banks and take preferred stock.
According to the Wall Street Journal, 9 of our biggest banks will receive around half the total injection.
In recent testimony before the Senate Banking Committee, Treasury Secretary Hank Paulson rejected the idea of the US government injecting capital into banks and taking preferred stock, suggesting that such an extreme measure would imply that the US banking system had failed.
"Some [say] we should just stick capital in the banks, take preferred stock in the banks. That's what you do when you have failure," Paulson said.
Houston, we have failure: Yesterday, after the markets closed, Paulson announced plans to just stick capital -- $250 billion, to be exact -- into the banks and take preferred stock.
According to the Wall Street Journal, 9 of our biggest banks will receive around half the total injection.
- Citigroup (C): $25 billion
- JPMorgan (JPM): $25 billion
- Bank of America (BAC) and Merrill Lynch (MER): $25 billion
- Wells Fargo (WFC): $20 - 25 billion
- Goldman Sachs (GS): $10 billion
- Morgan Stanley (MS): $10 billion
- State Street Bank (SST): $3 billion
- Bank of New York Mellon (BK): $3 billion
The rest of the $250 billion will be divvied up among smaller, healthier institutions around the country.
Reports indicate that some of the banks balked at the injections, which include restrictions on executive pay and requirements to help struggling homeowners.
Careful not to dilute existing shareholders by buying common equity, Treasury will purchase preferred stock carrying a 5% dividend, that jumps to 9% after five years. This represents a significant discount, however, to the 10% return Mitsubishi Finance (MTU) is earning on its recent $9 billion investment in Morgan Stanley, and Warren Buffett is picking up from his stake in Goldman Sachs.
In conjunction with Treasury's plan, the FDIC announced it will guarantee senior unsecured debt issued by banks, making it easier for them to raise capital in private markets. The FDIC will also insure all non-interest bearing deposits, which are typically held by businesses.
Over the weekend, after Europe announced a quasi-unified front to tackle the financial crisis which has spilled over into markets around the world, Washington said it planned to release details of a “comprehensive” plan to shore up America’s financial system - and by extension the economy as a whole.
Many scoffed at the idea that the government's actions to date -- hundreds of billions in liquidity injections, rescuing AIG (AIG) and Bear Stearns, the bailout package itself, and countless other measures -- didn't constitute a “comprehensive” approach. Today, as financial commentators huff and puff through reams of press releases and sift through details of the myriad new programs, we're coming to understand what a truly “comprehensive” plan entails.
Still, amazingly, bureaucrats don’t get it.
Even this morning, FDIC chairman Sheila Bair -- who by many accounts has performed admirably throughout this crisis -- described our situation as “a liquidity problem.”
Liquidity is just the external manifestation of the true issue: Too much debt. A liquidity crisis is easier to explain (and more politically palatable), because admitting the true problems facing this economy and their implications for our long-term prosperity are a bit too scary to trumpet around on national television.
Professor Depew laid out the details of why this is a debt crisis, not a liquidity crisis, last week:
"Similarly, the issue today is not one of temporary liquidity, time preferences being shortened out of a temporary risk aversion. The issue is too much debt supported by too little real income. As a result, global time preferences are retreating, risk aversion is growing, and access to credit is diminishing."
Until that debt load shrinks -- until American consumers and businesses alike save, repay debt, save again and repay some more -- the merry-go-round of bailouts, capital injections and more bailouts will continue its revolutions.
Unless they’re interrupted by a revolution of another kind.
Monday, September 29, 2008
Bailout Treats Symptoms, Not Disease
This post first appeared on Minyanville and on our sister site Cirios Real Estate.
The bailout is done! Time to breathe a sigh of relief.
Or is it?
As details emerge about the financial bailout package that was jammed through Congress over 10 days of political theater at its most nauseating, there’s still a striking omission from the plan to right American’s economic ship.
The failure of bureaucrats and regulators to propose a realistic solution for the foreclosure problem is emblematic of their inability to treat the root cause of an issue, focusing instead on simply applying band-aids to the visible symptoms.
The bailouts of Bear Stearns, Fannie Mae (FNM) and Freddie Mac (FRE), and AIG (AIG) all claimed to remove the cancer - but all they did was hasten the patient's demise.
Treasury's plan will deliver money into the banking system to sop up toxic assets sitting on the balance sheets of our financial institutions. This is a necessary -- albeit unfortunate -- step, but it still doesn't address the root of the rot: Milions of homes are worth less than the outstanding balance of the owner's mortgage.
Billions of dollars in negative equity are destroying Main Street’s balance sheet even as it devours Wall Street, eroding the value of the very securities Taxpayers are about to start buying.
As long as Washington tries to fight foreclosures with ineffective loan modification programs that simply prolong the problems, foreclosures will continue to set records. Modifying a mortgage for someone who is barely scraping by is sort of like rescuing him from the side of a cliff, only to leave him on the edge, dangling by one arm.
Foreclosures are often blamed for spiraling home prices and the resulting collapse in value of securities tied to the mortgages used to buy those houses. According to Bloomberg, the government’s aid package is designed to support “financial companies reeling from the record number of home foreclosures.”
Foreclosures don't cause houses to lose their value. Foreclosures happen when a home loses value such that it’s worth less than the mortgage used to buy it, and the homeowner can’t sell or refinance if his interest payments become overwhelming.
Defaults become delinquencies, which become foreclosures, which become evictions, which become repossessions, which flood the market, depressing prices as supply outstrips demand.
Back in what seems like ancient history, when home prices only went up, banks weren’t too concerned with defaults, since homeowners could almost always sell themselves out of a problem. Foreclosures stayed low because the liquid, appreciating housing market bailed out troubled homeowners on its own. That's part of the reason the industry is so ill-equipped to handle the scope of the current problem: it never had to before.
But now, with so many borrowers underwater -- owing more on their house than it's worth -- defaults result in not only eventual liquidation of the property, but profound distress in the homeowner’s life and real losses for investors. Furthermore, delinquent borrowers are less inclined to pay for upkeep or security, and many foreclosed homes are seriously damaged by the time a bank is able to take possession of it.
Being underwater is debilitating. To sell, not only does a homeowner have to pay a Realtor 6% whether he gets a raw deal or not, but he has to pay the bank the difference between where his home sells and the outstanding balance of his loan.
For many who have seen the value of their homes fall hundreds of thousands of dollars, this is an impossibility. Most homeowners, once they’re upside down, just want to stay in their homes.
A more effective plan to curb foreclosures would require an independent reviewer to evaluate each delinquent mortgage, determine the borrower’s ability to pay going forward and the amount, if any, of negative equity that needs to be destroyed to bring the loan amount back under the home’s value.
Since the notion that buying Wall Street’s toxic assets will result in windfall profits is a willfully distributed fallacy aimed at getting the public on board for the bailout, Taxpayers would be well-served dumping money into a blender that’s at least in their own backyard.
British Prime Minister Gordon Brown recently proposed a similar plan, where the government will buy delinquent mortgages from banks for the outstanding balance of the loan. The home is then rented to the existing tenant or a new one and managed by a local housing association.
The government would absorb the difference between the loan amount and the resale value, which would hasten increase sales activity, clearing out the glut of homes listed too high for the simple reason that the owner can't afford to sell at a lower price.
This type of personalized bailout, unfortunately, reeks of moral hazard. Many individuals who made bad financial decisions will get to keep their homes, albeit without actual ownership. But the current socialization of our free markets is simply moral hazard be design, so if Congress is so hell-bent on bailing out Wall Street, why not share the spoils with Main Street.
If Congress wants this bailout to help the American people and keep the financial system in tact, a sizable portion of the funds should be directed at fixing the asset that’s at the center of this turmoil: the residential property.
Home prices need to come down further. They will come down further. It’s only a matter of time. We can either let home prices bleed down, slowly eroding the value of the securities they support and violently uprooting families, or the government can plug the hole.
Washington Mutual (WM) is already off the field, as JP Morgan (JPM) continues to play widowmaker for the financial system. Wachovia (WB) isn't likely to remain independent for long. The sooner the rebuilding process begins, the better.
This crisis, and the resulting ebb and flow of what remains of the free market has already tipped the scales, started us sliding down a path of deflation in everything from stock prices, to cereal boxes, soda bottles, not to mention homes.
This is a good development. The hardest lesson Americans will learn from this crisis, should learn from this crisis, is that sometimes it’s necessary to live within our means. There is virtue in simplicity. More is not always better. Bigger is not always better. Sometimes, amazingly enough, less is often better.
This progress is the only true way we'll make it out of this mess.
The bailout is done! Time to breathe a sigh of relief.
Or is it?
As details emerge about the financial bailout package that was jammed through Congress over 10 days of political theater at its most nauseating, there’s still a striking omission from the plan to right American’s economic ship.
The failure of bureaucrats and regulators to propose a realistic solution for the foreclosure problem is emblematic of their inability to treat the root cause of an issue, focusing instead on simply applying band-aids to the visible symptoms.
The bailouts of Bear Stearns, Fannie Mae (FNM) and Freddie Mac (FRE), and AIG (AIG) all claimed to remove the cancer - but all they did was hasten the patient's demise.
Treasury's plan will deliver money into the banking system to sop up toxic assets sitting on the balance sheets of our financial institutions. This is a necessary -- albeit unfortunate -- step, but it still doesn't address the root of the rot: Milions of homes are worth less than the outstanding balance of the owner's mortgage.
Billions of dollars in negative equity are destroying Main Street’s balance sheet even as it devours Wall Street, eroding the value of the very securities Taxpayers are about to start buying.
As long as Washington tries to fight foreclosures with ineffective loan modification programs that simply prolong the problems, foreclosures will continue to set records. Modifying a mortgage for someone who is barely scraping by is sort of like rescuing him from the side of a cliff, only to leave him on the edge, dangling by one arm.
Foreclosures are often blamed for spiraling home prices and the resulting collapse in value of securities tied to the mortgages used to buy those houses. According to Bloomberg, the government’s aid package is designed to support “financial companies reeling from the record number of home foreclosures.”
Foreclosures don't cause houses to lose their value. Foreclosures happen when a home loses value such that it’s worth less than the mortgage used to buy it, and the homeowner can’t sell or refinance if his interest payments become overwhelming.
Defaults become delinquencies, which become foreclosures, which become evictions, which become repossessions, which flood the market, depressing prices as supply outstrips demand.
Back in what seems like ancient history, when home prices only went up, banks weren’t too concerned with defaults, since homeowners could almost always sell themselves out of a problem. Foreclosures stayed low because the liquid, appreciating housing market bailed out troubled homeowners on its own. That's part of the reason the industry is so ill-equipped to handle the scope of the current problem: it never had to before.
But now, with so many borrowers underwater -- owing more on their house than it's worth -- defaults result in not only eventual liquidation of the property, but profound distress in the homeowner’s life and real losses for investors. Furthermore, delinquent borrowers are less inclined to pay for upkeep or security, and many foreclosed homes are seriously damaged by the time a bank is able to take possession of it.
Being underwater is debilitating. To sell, not only does a homeowner have to pay a Realtor 6% whether he gets a raw deal or not, but he has to pay the bank the difference between where his home sells and the outstanding balance of his loan.
For many who have seen the value of their homes fall hundreds of thousands of dollars, this is an impossibility. Most homeowners, once they’re upside down, just want to stay in their homes.
A more effective plan to curb foreclosures would require an independent reviewer to evaluate each delinquent mortgage, determine the borrower’s ability to pay going forward and the amount, if any, of negative equity that needs to be destroyed to bring the loan amount back under the home’s value.
Since the notion that buying Wall Street’s toxic assets will result in windfall profits is a willfully distributed fallacy aimed at getting the public on board for the bailout, Taxpayers would be well-served dumping money into a blender that’s at least in their own backyard.
British Prime Minister Gordon Brown recently proposed a similar plan, where the government will buy delinquent mortgages from banks for the outstanding balance of the loan. The home is then rented to the existing tenant or a new one and managed by a local housing association.
The government would absorb the difference between the loan amount and the resale value, which would hasten increase sales activity, clearing out the glut of homes listed too high for the simple reason that the owner can't afford to sell at a lower price.
This type of personalized bailout, unfortunately, reeks of moral hazard. Many individuals who made bad financial decisions will get to keep their homes, albeit without actual ownership. But the current socialization of our free markets is simply moral hazard be design, so if Congress is so hell-bent on bailing out Wall Street, why not share the spoils with Main Street.
If Congress wants this bailout to help the American people and keep the financial system in tact, a sizable portion of the funds should be directed at fixing the asset that’s at the center of this turmoil: the residential property.
Home prices need to come down further. They will come down further. It’s only a matter of time. We can either let home prices bleed down, slowly eroding the value of the securities they support and violently uprooting families, or the government can plug the hole.
Washington Mutual (WM) is already off the field, as JP Morgan (JPM) continues to play widowmaker for the financial system. Wachovia (WB) isn't likely to remain independent for long. The sooner the rebuilding process begins, the better.
This crisis, and the resulting ebb and flow of what remains of the free market has already tipped the scales, started us sliding down a path of deflation in everything from stock prices, to cereal boxes, soda bottles, not to mention homes.
This is a good development. The hardest lesson Americans will learn from this crisis, should learn from this crisis, is that sometimes it’s necessary to live within our means. There is virtue in simplicity. More is not always better. Bigger is not always better. Sometimes, amazingly enough, less is often better.
This progress is the only true way we'll make it out of this mess.
Wednesday, September 24, 2008
Buffett Pans for Goldman
This post first appeared on Minyanville and was noted in the Wall Street Journal.
You can almost hear the sound of sheep falling into line, clamoring to follow the lead of the world’s greatest investor.
After the market closed yesterday, Warren Buffett -- bottom fisher extraordinaire -- announced he would be making a $5 billion investment in Goldman Sachs (GS). Financial commentators are now eager to take the Oracle of Omaha’s entry into the financial fray as a sign of the long-awaited bottom.
However, as the Wall Street Journal notes, Buffett’s last foray into Wall Street -- his 1987 investment of $700 million into Solomon Brothers -- immediately preceded October’s market crash. Ultimately, Buffett profited handsomely from the trade after Citigroup (C) folded the once-proud investment bank into its massive operations - but only after serving a 9-month stint as Solomon’s interim chairman, which he described as “far from fun, [but] interesting and worthwhile.”
This time around, Buffett took down preferred shares that pay out 10% and warrants giving him the right to buy $5 billion of Goldman stock at $115 per share, or around 10% of the company’s outstanding equity. Goldman popped on the news in after-hours trading; if the $135 last trade holds when markets open this morning, Buffett will have already booked around $900 million in profits. Not bad for an evening’s work.
Coming on the heels of Morgan Stanley's (MS) capital infusion of $8 billion from Mitsubishi Finance, the largest bank in Japan, the inevitable question is now: Does Buffett’s validation of the Goldman brand -- coupled with the massive bailout rambling its way through Washington -- mark an end to the credit crisis that has intensified to seemingly apocalyptic proportions in recent weeks?
Treasury Secretary Hank Paulson, the architect of the $700 billion financial aid package, weighed in with his answer today during his testimony before the Senate Banking Committee. When asked if he believed the bailout would calm the roiled financial markets, Paulson responded that financial markets would stabilize only when American home prices stop going down.
Indeed.
The credit crisis is bigger than one man, irrespective of how adept his investment decisions may be. It’s bigger than one firm, no matter how deftly its traders navigate choppy markets. The deleveraging that’s under way, which the Federal Reserve will try to prevent with hyperinflation and false price discovery, isn’t something that can be corralled over a weekend or during a hectic week in Washington.
While Buffett's move may provide extra fuel for already historically volatile markets, it's unlikely to do much to stabilize home prices, or to loosen up the massive oversupply of residential real estate that continues to force them downward.
If Paulson’s own assessment of the situation is accurate then, fundamentally -- still -- nothing's changed.
You can almost hear the sound of sheep falling into line, clamoring to follow the lead of the world’s greatest investor.
After the market closed yesterday, Warren Buffett -- bottom fisher extraordinaire -- announced he would be making a $5 billion investment in Goldman Sachs (GS). Financial commentators are now eager to take the Oracle of Omaha’s entry into the financial fray as a sign of the long-awaited bottom.
However, as the Wall Street Journal notes, Buffett’s last foray into Wall Street -- his 1987 investment of $700 million into Solomon Brothers -- immediately preceded October’s market crash. Ultimately, Buffett profited handsomely from the trade after Citigroup (C) folded the once-proud investment bank into its massive operations - but only after serving a 9-month stint as Solomon’s interim chairman, which he described as “far from fun, [but] interesting and worthwhile.”
This time around, Buffett took down preferred shares that pay out 10% and warrants giving him the right to buy $5 billion of Goldman stock at $115 per share, or around 10% of the company’s outstanding equity. Goldman popped on the news in after-hours trading; if the $135 last trade holds when markets open this morning, Buffett will have already booked around $900 million in profits. Not bad for an evening’s work.
Coming on the heels of Morgan Stanley's (MS) capital infusion of $8 billion from Mitsubishi Finance, the largest bank in Japan, the inevitable question is now: Does Buffett’s validation of the Goldman brand -- coupled with the massive bailout rambling its way through Washington -- mark an end to the credit crisis that has intensified to seemingly apocalyptic proportions in recent weeks?
Treasury Secretary Hank Paulson, the architect of the $700 billion financial aid package, weighed in with his answer today during his testimony before the Senate Banking Committee. When asked if he believed the bailout would calm the roiled financial markets, Paulson responded that financial markets would stabilize only when American home prices stop going down.
Indeed.
The credit crisis is bigger than one man, irrespective of how adept his investment decisions may be. It’s bigger than one firm, no matter how deftly its traders navigate choppy markets. The deleveraging that’s under way, which the Federal Reserve will try to prevent with hyperinflation and false price discovery, isn’t something that can be corralled over a weekend or during a hectic week in Washington.
While Buffett's move may provide extra fuel for already historically volatile markets, it's unlikely to do much to stabilize home prices, or to loosen up the massive oversupply of residential real estate that continues to force them downward.
If Paulson’s own assessment of the situation is accurate then, fundamentally -- still -- nothing's changed.
Monday, September 22, 2008
And Then There Were None: Goldman, Morgan Become Bank Holding Companies
This post first appeared on Minyanville.
Regulators were at it again over the weekend, rewriting the rulebook of America’s financial landscape.
Late Sunday, Goldman Sachs (GS) and Morgan Stanley (MS) announced plans to become banks, seeking the sounder funding base of traditional deposit-taking institutions. The last remaining independent Wall Street brokerages will be transformed, now supervised by the Federal Reserve and other national regulators.
According to the Wall Street Journal, the Fed allowed Goldman and Morgan to reorganize themselves as bank holding companies, thereby subjecting them to more restrictive rules and regulations. The new designation offers greater access to federal lending facilities and gives the 2 firms the chance to open retail branches and accept customer deposits -- widely considered a more reliable method of funding.
The money markets, until recently the brokerages’ primary source of liquidity, were in a historic state of disorder following the collapse of Lehman Brothers and the governments’ seizure of Fannie Mae (FNM), Freddie Mac (FRE) and AIG (AIG). The uncertainty surrounding once-strong firms made access to cash highly unreliable.
Rather than merging with commercial banks, Goldman and Morgan decided to retreat, delever and rebuild under a more conservative business model.
Deposit-taking institutions face tighter capital requirements and can’t use leverage as freely as investment banks, which reduces their ability to make outsized profits when times are good. It does, however, create more insulation to protect against losses when bets go sour.
Bad bets by the truckload saddled both Goldman and Morgan with assets of such questionable value that investors feared the once-proud institutions would sheepishly follow Merrill Lynch (MER) into the arms of a big commercial bank.
Morgan had been holding talks with Wachovia (WB) about a potential merger, while Goldman adamantly refused to even consider the idea of a buyout.
When traders went to bed 10 short days ago, 4 big investment banks -- storied firms deeply entrenched in the American ideology of entreprenuership and risk-taking -- still existed, however tenuously.
Now, there are none.
William Isaac, a former chairman of the Federal Deposit and Insurance Corporation, told Bloomberg: "The decision marks the end of Wall Street as we know it. It's really too bad, as our country has benefited greatly from the entrepreneurial risk-takers on Wall Street."
Many, fearful of free markets, wary of trusting men and women to make their own decisions, will welcome Wall Street’s demise, calling it a victory for the little guy, a much-needed punishment for the greediest of the greedy. And while some of the bankers who poured into lower Manhattan each morning certainly exemplified self-interest at its worst, the positive impact Wall Street’s risk-taking has had in building this country cannot be downplayed.
Bridges, skyscrapers, our highway system and countless other industrial cornerstones of our economy would not have been possible if crafty financiers hadn’t figured out how to use credit and risk to enhance economic growth. Risk-taking is a natural, healthy part of capitalism. In fact, without it, the free markets cannot function.
We got out over our skis, to be sure, but that doesn't mean the entire concept of lending, borrowing and taking on projects that may or may not turn out well should be condemned in its entirety.
The destruction of debt required to bring our economy back into balance and enable healthy growth to sprout anew must be led by those willing to take risk, to wade bravely into markets before they're fully healed. Now that the foremost private risk-takers in this country are out of the way, public speculators are poised to step in and sop up $700 billion in toxic assets sitting on the financial industry’s collective balance sheet.
Don’t forget to pay your taxes this spring.
Regulators were at it again over the weekend, rewriting the rulebook of America’s financial landscape.
Late Sunday, Goldman Sachs (GS) and Morgan Stanley (MS) announced plans to become banks, seeking the sounder funding base of traditional deposit-taking institutions. The last remaining independent Wall Street brokerages will be transformed, now supervised by the Federal Reserve and other national regulators.
According to the Wall Street Journal, the Fed allowed Goldman and Morgan to reorganize themselves as bank holding companies, thereby subjecting them to more restrictive rules and regulations. The new designation offers greater access to federal lending facilities and gives the 2 firms the chance to open retail branches and accept customer deposits -- widely considered a more reliable method of funding.
The money markets, until recently the brokerages’ primary source of liquidity, were in a historic state of disorder following the collapse of Lehman Brothers and the governments’ seizure of Fannie Mae (FNM), Freddie Mac (FRE) and AIG (AIG). The uncertainty surrounding once-strong firms made access to cash highly unreliable.
Rather than merging with commercial banks, Goldman and Morgan decided to retreat, delever and rebuild under a more conservative business model.
Deposit-taking institutions face tighter capital requirements and can’t use leverage as freely as investment banks, which reduces their ability to make outsized profits when times are good. It does, however, create more insulation to protect against losses when bets go sour.
Bad bets by the truckload saddled both Goldman and Morgan with assets of such questionable value that investors feared the once-proud institutions would sheepishly follow Merrill Lynch (MER) into the arms of a big commercial bank.
Morgan had been holding talks with Wachovia (WB) about a potential merger, while Goldman adamantly refused to even consider the idea of a buyout.
When traders went to bed 10 short days ago, 4 big investment banks -- storied firms deeply entrenched in the American ideology of entreprenuership and risk-taking -- still existed, however tenuously.
Now, there are none.
William Isaac, a former chairman of the Federal Deposit and Insurance Corporation, told Bloomberg: "The decision marks the end of Wall Street as we know it. It's really too bad, as our country has benefited greatly from the entrepreneurial risk-takers on Wall Street."
Many, fearful of free markets, wary of trusting men and women to make their own decisions, will welcome Wall Street’s demise, calling it a victory for the little guy, a much-needed punishment for the greediest of the greedy. And while some of the bankers who poured into lower Manhattan each morning certainly exemplified self-interest at its worst, the positive impact Wall Street’s risk-taking has had in building this country cannot be downplayed.
Bridges, skyscrapers, our highway system and countless other industrial cornerstones of our economy would not have been possible if crafty financiers hadn’t figured out how to use credit and risk to enhance economic growth. Risk-taking is a natural, healthy part of capitalism. In fact, without it, the free markets cannot function.
We got out over our skis, to be sure, but that doesn't mean the entire concept of lending, borrowing and taking on projects that may or may not turn out well should be condemned in its entirety.
The destruction of debt required to bring our economy back into balance and enable healthy growth to sprout anew must be led by those willing to take risk, to wade bravely into markets before they're fully healed. Now that the foremost private risk-takers in this country are out of the way, public speculators are poised to step in and sop up $700 billion in toxic assets sitting on the financial industry’s collective balance sheet.
Don’t forget to pay your taxes this spring.
Tuesday, September 9, 2008
Fed Pushes Fannie, Freddie Shareholders in Front of Train
This post first appeared on Minyanville.
The effects of this weekend’s dramatic power grab in Washington are rippling through the financial markets - and the pundits are arguing about who was right and who was wrong about the Fannie Mae (FNM) and Freddie Mac (FRE) bailout. In the meantime, federal regulators are quietly doing damage control.
Small banks will see large chunks of capital wiped out from equity losses in Fannie and Freddie - but they can now get in line for the government dole.
In seizing the embattled mortgage giants, the Treasury Department shoved common shareholders in front of the train, reaffirming they’d bear the brunt of future losses. As with the Bear Stearns takeover, the Federal Reserve and the Treasury dealt with the moral hazards of risky investments by simply punishing common shareholders and bailing out debtholders.
The countless financial institutions holding Fannie and Freddie preferred stock must now act as the second line of defense for the money of our trading partners, allies and certain well-connected institutional bond investors.
Preferred shareholders have no voting rights, but they stand in front of common shareholders in terms of dividend payments and the right to recover their investments in the event of liquidation. There had been speculation that Washington would go easy on preferred holders and protect their dividends, and, by extension, the value of preferred shares. Since most holders of these assets were other financial institutions, the logic went, the Treasury wouldn't put undue stress on an already troubled group.
The Treasury’s bailout plan doesn't protect preferred shareholders, as evidenced by the steep drop in the value of those shares today. However, various financial regulators are prepared to step in and assist small banks with significant exposure to Fannie or Freddie via investments in preferred shares.
FDIC chairman Sheila Bair tried to diffuse the situation by claiming that “Across the industry, banks do not have significant exposure to GSE equity securities.” But since the FDIC also neglected to include collapsed mortgage thrift IndyMac on its list of potentially troubled financial institutions just weeks before it went bust, her assertion shouldn’t carry much weight.
Sovereign Bank (SOV) isn’t likely to be comforted by Bair’s soothing words either, as losses on the bank’s Fannie and Freddie preferred stock could erase almost a year’s worth of earnings, according to analysts at Credit Insights. JPMorgan (JPM) is also likely lose money on similar holdings, although even if it’s entire $1.2 billion investment is wiped out, the hit would represent less than 1% of its tangible capital.
Capitalist ideals go right out the window during times of crisis. Unprecedented financial calamities result in unprecedented government intervention.
It's anybody's guess as to how long it will be before markets are allowed to find a true bottom, to experience true price discovery and thus establish a true foundation for recovery. Until then, investors should try to relish being a part of some of the most historic financial events in the past 80 years, while preserving capital for the inevitable opportunities that lie on the ever-elusive other side of the abyss.
The effects of this weekend’s dramatic power grab in Washington are rippling through the financial markets - and the pundits are arguing about who was right and who was wrong about the Fannie Mae (FNM) and Freddie Mac (FRE) bailout. In the meantime, federal regulators are quietly doing damage control.
Small banks will see large chunks of capital wiped out from equity losses in Fannie and Freddie - but they can now get in line for the government dole.
In seizing the embattled mortgage giants, the Treasury Department shoved common shareholders in front of the train, reaffirming they’d bear the brunt of future losses. As with the Bear Stearns takeover, the Federal Reserve and the Treasury dealt with the moral hazards of risky investments by simply punishing common shareholders and bailing out debtholders.
The countless financial institutions holding Fannie and Freddie preferred stock must now act as the second line of defense for the money of our trading partners, allies and certain well-connected institutional bond investors.
Preferred shareholders have no voting rights, but they stand in front of common shareholders in terms of dividend payments and the right to recover their investments in the event of liquidation. There had been speculation that Washington would go easy on preferred holders and protect their dividends, and, by extension, the value of preferred shares. Since most holders of these assets were other financial institutions, the logic went, the Treasury wouldn't put undue stress on an already troubled group.
The Treasury’s bailout plan doesn't protect preferred shareholders, as evidenced by the steep drop in the value of those shares today. However, various financial regulators are prepared to step in and assist small banks with significant exposure to Fannie or Freddie via investments in preferred shares.
FDIC chairman Sheila Bair tried to diffuse the situation by claiming that “Across the industry, banks do not have significant exposure to GSE equity securities.” But since the FDIC also neglected to include collapsed mortgage thrift IndyMac on its list of potentially troubled financial institutions just weeks before it went bust, her assertion shouldn’t carry much weight.
Sovereign Bank (SOV) isn’t likely to be comforted by Bair’s soothing words either, as losses on the bank’s Fannie and Freddie preferred stock could erase almost a year’s worth of earnings, according to analysts at Credit Insights. JPMorgan (JPM) is also likely lose money on similar holdings, although even if it’s entire $1.2 billion investment is wiped out, the hit would represent less than 1% of its tangible capital.
Capitalist ideals go right out the window during times of crisis. Unprecedented financial calamities result in unprecedented government intervention.
It's anybody's guess as to how long it will be before markets are allowed to find a true bottom, to experience true price discovery and thus establish a true foundation for recovery. Until then, investors should try to relish being a part of some of the most historic financial events in the past 80 years, while preserving capital for the inevitable opportunities that lie on the ever-elusive other side of the abyss.
Wednesday, August 20, 2008
With Fannie Falling, All Eyes on Paulson
This post first appeared on Minyanville on August 8th.
You can almost hear Treasury Secretary Paulson firing up his bazooka.
This morning, Fannie Mae (FNM) joined its smaller cousin Freddie Mac (FRE) in announcing losses that exceeded Wall Street's already dour expectations.
The company lost $2.3 billion in the second quarter and plans to slash its dividend to a paltry $0.05 per share, down from $0.25, according to Bloomberg.
All eyes now turn to Paulson, who just weeks ago asked for -- and received -- a blank check from Congress to support the beleaguered government sponsored enterprises, should the need arise. He had hoped the mere existence of the backstop would calm Investors' nerves such that he wouldn't need to step in.
Reality, it appears, had other plans: Shares of the 2 companies have slid back down to where they were when markets feared they'd collapse under the weight of their massive loan portfolios.
Fannie and Freddie are hopelessly levered to the U.S. housing market, which slides deeper into disarray every day. The 2 companies collectively back over $5 trillion of American mortgages, which are going sour at a record pace.
As I wrote earlier this week, after Freddie announced equally dismal results, it's no longer a matter of if they collapse, but when.
It turns out buying mortgages with nothing but a superficial glance at the paperwork -- something Fannie and Freddie excelled at during the housing boom -- just isn't good business.
Although the 2 firms only lightly dabbled in subprime loans, originators easily duped their automated risk engines into buying fraudulent or otherwise shoddy loans.
But since banks like Citigroup (C), Bank of America (BAC) and Wachovia (WB) are saddled with troubles of their own, Fannie and Freddie have been asked to expand their role in the market. They now provide the only liquidity left for new mortgages.
The government has little choice but to bail out their wayward children. If it doesn't, Hank will need a lot more than just a bazooka to save the ship.
You can almost hear Treasury Secretary Paulson firing up his bazooka.
This morning, Fannie Mae (FNM) joined its smaller cousin Freddie Mac (FRE) in announcing losses that exceeded Wall Street's already dour expectations.
The company lost $2.3 billion in the second quarter and plans to slash its dividend to a paltry $0.05 per share, down from $0.25, according to Bloomberg.
All eyes now turn to Paulson, who just weeks ago asked for -- and received -- a blank check from Congress to support the beleaguered government sponsored enterprises, should the need arise. He had hoped the mere existence of the backstop would calm Investors' nerves such that he wouldn't need to step in.
Reality, it appears, had other plans: Shares of the 2 companies have slid back down to where they were when markets feared they'd collapse under the weight of their massive loan portfolios.
Fannie and Freddie are hopelessly levered to the U.S. housing market, which slides deeper into disarray every day. The 2 companies collectively back over $5 trillion of American mortgages, which are going sour at a record pace.
As I wrote earlier this week, after Freddie announced equally dismal results, it's no longer a matter of if they collapse, but when.
It turns out buying mortgages with nothing but a superficial glance at the paperwork -- something Fannie and Freddie excelled at during the housing boom -- just isn't good business.
Although the 2 firms only lightly dabbled in subprime loans, originators easily duped their automated risk engines into buying fraudulent or otherwise shoddy loans.
But since banks like Citigroup (C), Bank of America (BAC) and Wachovia (WB) are saddled with troubles of their own, Fannie and Freddie have been asked to expand their role in the market. They now provide the only liquidity left for new mortgages.
The government has little choice but to bail out their wayward children. If it doesn't, Hank will need a lot more than just a bazooka to save the ship.
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