Category: credit crunch

Obama/Bernanke science project now on red alert

Over the past few years we’ve chronicled the build and unwind of the greatest credit bubble in history while most market observers continued to embrace the almighty central planners. Time and time again either the Federal Reserve or the US Treasury appeared on the crime scene with extraordinary measures all fraught with precarious unintendid consequences.

First, the countless interventions involving GSEs, money center banks and AIG all had one common denominator: “save the bondholder.” In all cases the US government stepped into various private sector businesses, took a significant equity ownership interest alongside the prior destroyers of capital, and preserved bondholders, consequently crowding out the future investment capacity of remaining and prospective entrepreneurs. For example, AIG is now 79.9% owned by the US taxpayer thanks to over $180 billion in bailout funds, some of which found their way into the hands of multiple Wall Street beneficiaries, namely Goldman Sachs and Deutsche Bank. Fannie Mae and Freddie Mac are categorized as “works in progress” courtesy of ex-Treasury Secretary Hank Paulson’s “conservatorship” scheme while the Obama administration tinkers with alternative strategies. Meanwhile, these propped-up entities are classified as off balance sheet budget items requiring over $100 billion in bailout funds since last fall with projections of another $300 billion before year end!

Second, the money center banks, specifically Citigroup and Bank of America, are ridiculously insolvent yet the Bush/Obama triage unit remains hell bent on emulating the Japanese model of keeping the zombies alive at any cost. Most of the life support was provided by the $700 billion TARP boondoggle.

Third, FDIC debt guarantees enabled additional dead men walking, such as Morgan Stanley, Goldman Sachs, JP Morgan and countless others, the opportunity to sell debt at below-market interest rates in the hope of recapitalizing the murky lenders during the recovery process.

Finally, the Federal Reserve – under fearless leader Ben Bernanke – has assured the American people that his science project, a.k.a. Shadow Banking II, will revitalize the private sector credit machine since over 60% of all US lending the past decade took place in the toxic off balance sheet world (Shadow Banking I). Predictably, his reliance on the same incompetent rating agencies and questionable collateral never comes up when presenting his plan. One simple question comes to mind regarding the Fed’s current balance sheet vs. several years ago: “How will the Fed remove all of this temporary liquidity when the balance sheet two years ago was primarily short term T-bills vs. longer-term structured finance instruments today?” Of course the answer is they won’t be able to remove any of it without creating hyperinflation.

In summary, the US government, in cahoots with the privately-owned Federal Reserve, intervened in an unprecedented fashion in order to preserve the US dollar fiat monetary system. It took conservatorship of Fannie and Freddie, the Bear Stearns bailout, TARP, FDIC guaranteed debt, and a plethora of “temporary” Federal Reserve credit facilities as well as permanent government credit backstops totaling $12.7 trillion to prevent the mother of all bank runs.

Until now the economic and investment minyans have applauded the work of Alan Greenspan’s worthy successor, but what lies ahead should make any supporter of central planning awfully concerned. Ladies and gentlemen, the dollar reserve currency system is now teetering on the edge thanks to the latest decisions by the Obama/Bernanke administration. Instead of allowing bank receivership or worthy bankruptcy law to remove the misallocated private sector debt in our lopsided system, team Obama has created additional bailouts resulting in a projected record budget deficit of $2.2 trillion for 2009 (an unprecedented 20% of GDP). This year alone sends over $1 trillion to the Wall Street dealers who created the fiasco with no mention whatsoever of the epic fraud from various participants, some now on the Obama team roster (Rubin, Geithner, et al.). The $1 trillion happens to be roughly 8 years of productivity in this country so expect government handouts to crowd out potentially thousands of new businesses and related jobs. (Despite the current government-created economic drought, the public sector parasite must be well-fed.) On cue, team Obama – literally televised daily – continues to tell the American people not to worry since his recent stimulus plan will create thousands of new government jobs similar to FDR’s New Deal.

By 2011 some economists project another several trillion in borrowing needs, taking the national debt above $15 trillion with an economy contracting by another 10%. This begs the question: “Who will lend us money to operate the USS of A?” Clearly scientist-in-chief Bernanke is now in the final phase of his lab experiment since earlier test results have all been negative. Showing signs of desperation, beginning in December of last year Bernanke discussed the possibility of extraordinary measures by the Fed, specifically buying mortgage-backed securities and longer-term Treasuries in hopes of controlling the long end of the yield curve. Germany tried this in the ’20s and we all know how that ended up. Since Bernanke’s trial balloon in December, the 10-year Treasury yield has climbed from 2.28% to over 3.45% as of Friday’s close. Subsequent to the December speech Bernanke has implemented his quantitative easing experiment as the Fed announced in March it would buy $750 billion in mortgage-backed securities and $300 billion in Treasury notes and bonds. $113 billion has been committed to buying Treasuries year-to-date. Not only has the yield spiked on the 10-year, but the US dollar index has declined by approximately 11%! Note to Bernanke: your experiment is an unmitigated disaster; please refrain from any more of this economic insanity! (Fortunately, Dr. Ron Paul has now garnered momentum in his quest to strip Mr. Bernanke of these insidious actions.)

It is said the road to hell is paved with good intentions. In this case, the perpetrators of the crime of the century are simply motivated by saving their own bacon.

The mother of all margin calls

On credit expansions:

This new money [inflation] is never evenly distributed, but instead gets funneled into whatever narrow area happens to capture the public’s fascination. As prices and valuations soar, greater doses of credit are required to keep the game going. Either more marginal borrowers are drawn in at ever more precarious levels or greater leverage must be applied to existing borrowers. This is what ultimately doomed the housing bubble. In the end, nearly anyone who could fog a mirror was getting an invitation to join the party.

The trouble with pyramid schemes is that they’re not designed to go in reverse. Eventually, the number of willing dupes is exhausted. The same people who panicked late to get into the game are just as likely to panic when the music stops. The longer the music plays, the more leveraged and unstable the inverted credit pyramid becomes. As the late economist Hyman Minsky observed, “stability is unstable.”
~ Kevin Duffy, “It’s a Mad, Mad, Mad, Mad World,” May 22, 2007

The financial establishment and power elite have known all along that their asset inflation scheme was not designed to work in reverse. The consequences for them (as opposed to the rest of us who bear most of the costs) would be too terrifying to face. Despite 13 months of massive government intervention, D-Day has arrived. The mother of all margin calls is finally upon us.

Credit markets enter crisis mode

Last weekend’s bailout of Fannie and Freddie came as no surprise due to multiple years of excess mortgage credit creation hitting a wall in 2007. The downturn in home values in 2006 led to the demise of toxic lenders such as New Century and Countrywide Financial setting the stage for one last surge in GSE balance sheets in 2007-2008 as the remainder of mortgage freeways became jammed. No-homeowner-left-behind DC mantra continued to receive media support as marginal homeowners and McMansion dwellers pleaded for additional rate cuts or forbearance.

Initial intervention

Unprecedented credit facilities and other types of government intervention by central planners have proven to be inadequate for several reasons. As articulated numerous times (specifically here and here), we presented our case of a failed monetary system collapsing at epic speed. From the chronic denial by Hanky Pank and Bernanke last summer to the most recent assurance that Fannie and Freddie now have Paulson’s bazooka to fight the mortgage monster, has it become obvious that the central planners are in reactive/desperation mode and the inferno continues to rage as Paulson reaches for one more bucket of water?

Paradox of deleveraging

Eventually global central bankers providing ongoing credit lines to banks and brokers in return for suspect asset-backed collateral will come to the realization that this is a solvency issue. Additional collateral damage from rising unemployment, declining home prices and minimal wage growth all but guarantee the worst credit cycle since the Great Depression. Since this credit bubble evolved from the inception of credit default swaps it seems appropriate that we come back to square one. Players of all shapes and sizes wrote default insurance on a wide array of debt instruments which drove additional issuance as swaps hit multi year lows and debt issuance hit all time highs in 2006. Of course this changed last year when AAA-rated structured finance securities imploded and the confidence game ended. Shock waves went out to bond insurers, investment banks, banks, insurance companies, hedge funds and others who built faulty models based on asset inflation. Declining collateral coupled with unprecedented leverage of 40-1 has led to the inevitable unwind of planet leverage.

Tipping Point

Over the next 6 months roughly $500 billion in corporate borrowings come due with fewer and fewer possible creditors. Lehman Brothers is ready to join the equity holders of Bear Stearns and GSEs into the dustbin of history as credit default swaps soar and CEO Dick Fuld waves the white flag. AIG, though, remains the bigger tell in our opinion. Markets are screaming “game over” as credit default insurance on AIG surpasses 640 basis points, exceeding the March highs. How will this $1 trillion asset behemoth survive if the market refuses to finance $20 billion in additional debt later this month? Or do we turn to Merrill Lynch, who over the last 4 quarters destroyed 17 years of earnings? CEO John Thain has raised capital and sold assets yet his balance sheet has witnessed growth in Level 2 assets of some $280 billion the past 12 months while equity has declined from roughly $38 billion to less than $32 billion. Today we are inundated in bailout requests for both Ford and GM as automakers go to DC with a $50 billon hat in hand.

Central bankers’ end game

The heavy lifting has been completed by the Bernanke clan as 85% of the Fed balance sheet has now been lent out to casino dealers on Wall Street leaving Paulson with another challenge. Since his announcement in July of supporting Fannie and Freddie with additional taxpayer dollars, many asked the question of moral hazard. Will the Lehman Brothers demise force the government to remain on the sidelines when future financial institutions incur a bank run? Have we finally left the denial stage and accepted the fact that over $3 trillion in shadow banking system asset problems are dead ahead leaving central planners impotent? Or is Bernanke of the opinion that most of the shadow banking system was nothing more than speculation so it should fail along with housing speculators? At the end of the day we envision a credit contraction for the ages resulting in an L-shaped recession lasting several years.

Credit market update

Since massive intervention beginning 12 months ago we take a glance at modern central banking’s unintended consequences:

Mortgage Market

  • 30 year conforming mortgage rates have increased by 75 basis points, jumbos 175 basis points
  • Mortgage loan applications are down 34% year over year
  • Prime mortgages for less than $417,000 had a delinquency rate of 2.44% in May, up 77% from last year. Prime jumbo loans over $417,000 had a 4.03% delinquency rate in May, up 263% from last year
  • Approximately 15% of all subprime mortgages and 7% of all Alt-A mortgages are in delinquency
  • Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages
  • Fannie and Freddie now comprise approximately 80% of the $12 trillion residential mortgage market
  • Difference between yields on Fannie/Freddie MBS and borrowing rates adjusted for prepayment risk increased from 10 basis points in Jan ’08 to 65 basis points this week
  • Private securitizations reached just $131 billion (1st half ’08) down sharply from $1 trillion in the same period last year
  • Fannie’s current-coupon 30-year fixed-rate bonds currently yield 6.02 percent, 212 basis points more than Treasuries, 26 basis points from the 22-year high of 238 basis points reached March 6, 2008
  • 75 percent of U.S. banks surveyed indicated they tightened standards on prime mortgage loans, up from 60 percent in the previous survey, the Federal Reserve
  • 80.7% of survey respondents said they were tightening standards on commercial real estate loans up from 78.6% a quarter earlier and the highest on record.

Credit Market

  • 66.6% of lenders said they were tightening standards on credit card borrowers up from 32.4% a quarter earlier and the highest since the Fed began collecting data in 1996. 67.4% are making it tougher to get other consumer loans, up from 44.4% and another record.
  • Federal Reserve has now lent approximately 2/3 of their balance sheet to broker dealers/banks
  • Interbank lending still problematic as Libor remains elevated
  • Spread between 10-year Baa-rated bonds — the lowest investment grade rating — and U.S. Treasurys increased to 326 basis points
  • Foresight Analytics estimates that land- and construction-loan delinquencies reached 8% in the second quarter for commercial banks, up from 7.1% in the first quarter and 2.3% in the year-earlier period
  • Estimated $700 billion in HELOCs on bank balance sheets and based on foreclosure/delinquency 25% should default leading to $175 billion in write offs

Credit contraction has only just begun

A few weeks ago we presented “Unwinding Planet Leverage” at the Spring CMRE dinner (http://www.cmre.org/) where I would say many were concerned about the ongoing credit fiasco. On the other hand, after countless capital raises, reassurances from commercial and investment bankers and the Bear Stearns rescue several months ago, sentiment has swung into bullish territory. Time after time I hear the same response from investors, “the Fed will not allow another large bank or investment bank to fail” or “I’m buying stocks since the Fed has things under control”. Oh really?

Today the Financial Times did a piece about potential accounting changes to off balance sheet entities created by our transparent bankers. Evidently, FASB wants to remove all conduits, SIVs, VIEs and any other form of off balance sheet activities consequently returning roughly $5 trillion to bank balance sheets – ouch!

Accounting changes could force US banks to take thousands of billions of dollars back on to their balance sheets in the coming months in a move that is likely to curb further their lending and could push them into new capital raisings, analysts have warned.

Analysts at Citigroup said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books.

The off-balance sheet vehicles have been used by financial institutions to keep some assets off their balance sheets, thereby avoiding the need to hold regulatory capital against them.

Birgit Specht, head of securitisation analysis at Citigroup, said: “We think it is very likely that these vehicles will come back on balance sheet. “This will not affect liquidity because they are funded, but it will affect debt-to-equity ratios [at banks] and so significantly impact banks’ ability to lend.

In the past I’ve discussed leverage at various financial institutions which in some cases actually increased since the credit crisis began last Spring. For example, since the Bear Stearns funeral Citigroup actually increased their leverage from 18-1 to 19-1 while Lehman and Morgan Stanley shifted more of their level 2 assets to level 3. Adding additional pressure to an already strained banking system, the SEC will hear proposals regarding new credit rating systems, specifically asset backed securities.

The U.S. Securities and Exchange Commission may recommend this week that Moody’s Investors Service, Standard & Poor’s and Fitch Ratings include a new designation to the scale created by John Moody in 1909. The changes may force investors to reassess the way they gauge the risk of securities backed by mortgages, student and auto loans and credit cards, said one of the people, who declined to be named before the announcement. The action could force banks to add capital to guard against losses or curb lending.

To be considered “well-capitalized” under U.S. regulations, banks are required to hold five times as much capital against corporate debt than they are for commercial or residential mortgage-backed securities rated AAA and AA by S&P, Fitch
Ratings and Moody’s.

Should the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. order banks to hold more capital, investors in asset-backed securities may balk at buying, making mortgages more expensive, said American Bankers association executive director Wayne Abernathy.

Finally, the Bank of International Settlements is out with a warning on the global credit crisis implying a potential depression from the massive credit contraction.

In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.

The report points out that between March and May of this year, interbank lending continued to show signs of extreme stress and that this could be set to continue well into the future. It also raises concerns about the Chinese economy and questions whether China may be repeating mistakes made by Japan, with its so called bubble economy of the late 1980s.

My Comments: As planet leverage continues to unwind expect numerous rounds of toxic financing as regulators pressure banks and investment banks to raise more capital, diluting shareholders away in the process. Concurrently, regulatory pressure from the Fed will require banks and investment banks to meet margin calls as posted collateral via temporary lending facilities decline in value. Finally, our banking system will move closer to Japan circa 1991-1993.

Denial runs rampant in rating agency land

When placing blame on the latest bubble without a doubt the rating agencies are near the top of the list. Ongoing denial seems to permeate the credit landscape and after further review we know why.

Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor’s and Moody’s Investors Service haven’t cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.

None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent.

Sticking to the rules would strip at least $120 billion in bonds of their AAA status, extending the pain of a mortgage crisis that’s triggered $188 billion in writedowns for the world’s largest financial firms. AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.

The 20 ABX indexes are the only public source of prices on debt tied to home loans that were made to subprime borrowers with poor credit histories. About $650 billion of subprime bonds are still outstanding, according to Deutsche Bank. About 75
percent were rated AAA at issuance.

Regulators require banks to hold more capital against lower- rated securities to protect against losses; a downgrade would force them either to sell the securities or bolster reserves. While most banks haven’t disclosed the ratings of their subprime holdings, S&P estimated in January that losses on the debt may exceed $265 billion. American International Group Inc., the world’s largest insurer, has $20.8 billion invested in AAA rated subprime-mortgage debt, not including asset-backed securities that caused the company’s biggest-ever quarterly loss last period, according to the New
York-based company’s disclosures.

Further analysis of the AAA rated structured paper market clearly illustrates significant downgrades are on the way over the next few months.

My Comments: When 74 of 80 “AAA” bonds fail the investment grade test one should realize the Wall Street machine is beyond broken. Of course that same machine actually owns this paper with leverage beyond belief. Is the US taxpayer the buyer of last resort? Or are US and foreign savers the patsies of last resort?

"Council on Foreign Relations Fund" collapses

As bailout fever spreads like wildfire we are hit with the shocker of 2008: “Carlyle Capital (aka the Council on Foreign Relations Fund) Nears Collapse as Rescue Talks Fail.”

Carlyle Group said creditors plan to seize the assets of its mortgage-bond fund after it failed to meet more than $400 million of margin calls on mortgage- backed collateral that plunged in value.

Carlyle Capital Corp., which began to buckle a week ago from the strain of shrinking home-loan assets, said in a statement it defaulted on about $16.6 billion of debt as of yesterday. The fund fell 87 percent in Amsterdam trading. Carlyle Group, co-founded by David Rubenstein, tapped public markets for $300 million in July to fuel the fund just as rising foreclosures caused credit markets to seize up.

One of Carlyle Group’s talking heads – I’m sorry, “advisor” – was also the head of that incredibly efficient SEC which sat idle during the last mania. Here are a few of his brilliant comments:

The fund’s losses were caused by “excessive leverage,” said Arthur Levitt, a senior Carlyle adviser, in a Bloomberg Radio interview today. “This did not affect the overall Carlyle enterprise,” said Levitt, former chairman of the Securities and Exchange Commission and a board member of Bloomberg LP, the parent of Bloomberg News. ”This was a single fund, and I suspect as this plays out, you are going to see a lot of other private-equity companies, a lot of banks, going down the same road,” he said.

My comments: Why would someone like Arthur Levitt watch one of his funds, which he advises, take leverage to 32-1? Additionally, where was Carlyle Group’s Chairman Lou Gerstner during this irresponsible behavior? If the most politically-connected private equity group in the world can’t be saved by the Fed, remaining credit fund managers may want to order some sleeping pills.

End of bubble behavior

As the greatest bubble in history continues to unwind we now see the various fiduciaries turning on one another. Several weeks ago the monolines floated a trial balloon involving a split into two divisions, one municipal insurance and the other insuring defaults on structured finance. Today, the derivative plot thickens as hedge funds file lawsuits against Citigroup and Wachovia over credit default swap contracts.

In separate lawsuits filed in a New York federal court, a $58-million-asset hedge fund alleges that Citigroup and Wachovia Corp., respectively, improperly required the fund to pay out more money from insurance derivatives contracts known as “credit default swaps” amid a steep decline in the value of mortgage-backed bonds. The hedge-fund manager says he didn’t view the insurance-related trades as particularly risky and now says he feels “suckered.” Citigroup and Wachovia each say the fund’s claims are “without merit.”

Meantime, other financial players say they have been stiff-armed by trading partners when they’ve tried to cash out on profits from such insurance-related transactions. In one instance, a hedge-fund manager says he was blocked from selling out of a swap position, unless he made another credit-default swap (CDS) trade.

Of course the subject of counter party risk moves front and center while the results are somewhat discomforting.

The problem with banks and brokers buying credit protection from hedge funds is that you just don’t know when they are going to go dark, turn out the lights and say this is now the brokers’ problem,” says David Lippman, a managing director of Metropolitan West Asset Management, a bond manager in Los Angeles.

Unlike most other big players in the swaps market, hedge funds aren’t subject to heavy oversight by regulators or capital requirements. Financial firms usually guard against the risk of their hedge-fund trading partners being unable to pay by requiring they put up cash or collateral for their swap trades.

So are banks forcing hedge funds to over collateralize the CDS contracts?

One suit, filed Feb. 14, outlines a credit-default-swap agreement in which Ctigroup bought $10 million of protection against a security backed by subprime-mortgage assets from a small Florida hedge fund with just $58 million in capital. The security was a “collateralized debt obligation,” known as a CDO, or a thinly traded investment that packages pools of loans.

The fund — VCG Special Opportunities Master Fund Ltd., which is owned by an investment firm that also owns a Puerto Rican investment bank — alleges that Citigroup breached its contract after the bank demanded the fund post additional collateral. By this January, the hedge fund says, the collateral Citi sought from it nearly equaled the $10 million “notional,” or underlying, amount of the swap.

More importantly, is there really a secondary market for CDS? Some other hedge-fund managers say they’ve been bullied by securities firms when they’ve tried to cash out on profits from such positions. When one hedge-fund manager considered selling out of a credit-default swap — in which his fund bought protection on $10 million of bonds of Countrywide Financial Corp. — he says there was a condition attached by two securities firms. He says the firms — Bear Stearns Cos., which sold him the swap, and Morgan Stanley — told him they would cash him out of his profitable position, only if he would simultaneously enter into another swap-selling insurance protection on the bonds equal to his fund’s $3 million profit. Eventually, he says, his fund sold the position through Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., allowing him to book the $3 million profit.

My comments: It appears the shadow banking system is dealing with the mother of all margin calls. One creating a viscous chain reaction whereby brokers, insurers and speculators are turning on one another in order to survive the perfect financial storm.

St. Valentine’s day massacre

Latest figures out of the Mortgage Bankers Asscociation clearly rang the alarm bells this week on Capital Hill.

The Mortgage Bankers Association says default rates on all outstanding home loans in the US have reached 7.3%, the highest level since modern records began in the 1970s.
The default rate in America’s ‘prime’ mortgage market has hit a record 4%, prompting fears of house prices crashing by 25%. Arrears on “prime” mortgages have reached a record 4%, confounding expectations that middle-class Americans with good credit records would be able to weather the storm.
While sub-prime and close kin “Alt A” total $2,000bn of debt, the prime market in all its forms is roughly $8,000bn. If prime default rates rise on their current trajectory, they could ultimately cause huge financial damage.

Across the pond our friends in Switzerland were obviously drinking excess mortgage koolaid circa 2002-2006:

UBS reported a fourth-quarter net loss of 12.45 billion Swiss francs ($11.23 billion), including a $13.7 billion write-down on investments tied to U.S. mortgage investments. The bank posted its first full-year net loss — 4.4 billion francs — in the 10 years since it emerged from a megamerger between Swiss Bank Corp. and Union Bank of Switzerland in 1997. Write-downs for 2007 were $18.4 billion.
For the first time, UBS provided details of nearly $70 billion in holdings of subprime-mortgage and other problematic securities — an exposure that led analysts to predict more trouble.

Finally, as Rome continues to burn the noise on Capital Hill sounds more and more like a coordinated bailout is in the works:

Bank of America Corp., Citigroup Inc. and four other U.S. lenders will announce steps today to help borrowers in danger of default stay in their homes, according to three people familiar with the plans.

Encouraged by Treasury Secretary Henry Paulson, the banks will offer a 30-day freeze on foreclosures while loan modifications are considered, two people said on condition of anonymity. The initiative, which follows a week of talks with Bush administration officials, will apply to customers who are at least three months late on payments and include prime borrowers, as well as those with poorer credit histories.

Make sure the Swiss are included in the bailout mission.

The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers.
Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal. The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss.

My comments: Record mortgage defaults of prime residential mortgages will continue to impede commercial bank lending for many quarters to come. And to think most analysts and money managers believed the fiduciaries back in December when they echoed “the worst is behind us”. Fool me once shame on you, fool me twice shame on me.

Bank bailout 2.0

As the truth gets exposed and global bankers reach for fire extinguishers the drumroll appears to be getting louder and louder-can you hear it? If not, maybe this op-ed will wake you up:

The federal government could make this (ability for banks to recapitalize) happen by entering into an arrangement with American banks that hold subprime mortgages, in which homeowners typically pay a low interest rate for two or three years then face much higher payments. Here’s how it would work: The government would guarantee the principal of the mortgages for 15 years. And in exchange the banks would agree to leave their “teaser” interest rates on those loans in effect for the entire 15 years.
This would instantly give the lending banks new capital. As these mortgages would be guaranteed by the Treasury, they would suddenly be assessed, on bank balance sheets, at their original value — and a significant amount of the banks’ lost capital would be restored. Plus, the banks would receive, from most of the homeowners with subprime mortgages, up to 15 years of teaser-rate payments.
By solving the bank capital crisis immediately, this strategy would ensure that fewer families would lose their homes, that fewer neighborhoods would deteriorate because of abandoned housing and that, as a consequence, there would be less downward pressure on local real estate prices and property tax revenues.

Sound familiar folks? It should, Goldman Sachs floated this trial balloon across the pond with Northern Rock several weeks back. Virgin would use a refinancing plan proposed by Goldman Sachs Group Inc. to sell bonds backed by Northern Rock assets and guaranteed by the U.K. government. The proceeds would be used to repay the estimated 24 billion pounds that Northern Rock borrowed from the Bank of England after credit-market turmoil choked off funding and led to the first U.K. bank run in more than a century.
The British government, the Financial Services Authority and the central bank will decide whether to submit one of the private proposals for European Union approval by March 17. The bank will be “temporarily” nationalized in the event that the private bids are inadequate, Prime Minister Gordon Brown said last month.

My comments: Finally, I was on a conference call yesterday with a well respected macro research firm who puts the entire global financial bailout at $3-5 trillion. Chris Whalen (http://www.institutionalriskanalystics/) recently put the entire structured finance business, ex GSE, at $3 trillion. So one should ask who participates and how will the bailout unfold? Most believe the soverign wealth funds in conjunction with central bankers can keep things relatively glued together but at what cost?

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