More on FASB and MBS

[WildspitzE]

Interesting read discussing accounting and securitization, and how these will affect housing.

"... When mortgage spreads were in virtual free fall last autumn, the Fed stepped in with its MBS purchase program (allowing spreads to tighten to historically narrow levels). But the Fed is scheduled to stop the purchases at the end of this year. The GSEs aren’t going to step back in either – starting in 2010 they are required by law to reduce their portfolios 10% per annum. The mortgage market has begun to worry about this possibility – and the possibility that MBS prices could plummet five, ten points – who knows, it’s never happened like this ever before – on the Fed’s departure.

..."

http://www.housingwire.com/2009/07/2...-new-playbook/

[c1ue]

Re: More on FASB and MBS

Nice idea, but as 'mark to market' showed: when push comes to shove, FASB caves.

There will absolutely be a reckoning but it won't be due to accounting rules.

It will be due to immovable objects being struck by irresistable forces: lack of state/local income vs. lack of tax/maintenance/fee payments for REOs.

[WildspitzE]

Re: More on FASB and MBS

Nice idea, but as 'mark to market' showed: when push comes to shove, FASB caves.

There will absolutely be a reckoning but it won't be due to accounting rules.

It will be due to immovable objects being struck by irresistable forces: lack of state/local income vs. lack of tax/maintenance/fee payments for REOs.

While I agree on existing precedent of the FASB caving in, equating mark to market to risk-transfer/consolidation may not be the best light to think about this. One is a valuation methodology that can be justified reasonably, the other is a risk transfer methodology that has been in question for a while now. While ultimately the valuation methodology can affect capital, off-balance sheet transactions (based on a claim of risk transfer) ensure that the system as a whole becomes undercapitalized to begin with. There is a lot of orphan credit risk out there. It's a huge pie in the face for FASB (and the Fed/OCC too).

Nowhere did I say that this was the cause for the day of reckoning, and I agree with your two examples....of the many potential "swans" flying around waiting to poop on our collective heads. However, don't underestimate the importance of the shadow banking system to get FIRE up and running again. In the long-run I'm sure that new loopholes and structures will be found, as well as new [carbon based] assets too...but in my opinion, currently this would be herbicide to the greenshoots currently being seen in the shadow banking system.

Coincidentally , zerohedge has some stuff on this today:
http://www.zerohedge.com/article/new...shadow-banking

[ThePythonicCow]

Re: More on FASB and MBS

Coincidentally , zerohedge has some stuff on this today:
http://www.zerohedge.com/article/new...shadow-banking

Wow! A coherent explanation of wild horses and open barn doors. Not surprisingly, it comes after the horses ran off, but still it's surprising to see this come from the Federal Reserve.

Well, surprising until one notices that it comes as part of the Fed's efforts to add "wild horse catcher" to its authority.

Did I notice somewhere else that JPMorgan is trying to (having to?) reduce its leveraging of securitized derivatives?

Certainly we've all noticed the bad press Goldman Sachs has been enjoying lately. Are they still highly leveraged on securitized crap? Are the Fed and JPMorgan ganging up on Goldman? Is it time to short Goldman yet?

[WildspitzE]

Re: More on FASB and MBS

Wow! A coherent explanation of wild horses and open barn doors. Not surprisingly, it comes after the horses ran off, but still it's surprising to see this come from the Federal Reserve.

Well, surprising until one notices that it comes as part of the Fed's efforts to add "wild horse catcher" to its authority.

Did I notice somewhere else that JPMorgan is trying to (having to?) reduce its leveraging of securitized derivatives?

Certainly we've all noticed the bad press Goldman Sachs has been enjoying lately. Are they still highly leveraged on securitized crap? Are the Fed and JPMorgan ganging up on Goldman? Is it time to short Goldman yet?

Some of the other big banks are also doing the same. I have knowledge of big banks that still have billions off-balance sheet that are preparing to consolidate assets, and the potential capital requirements that any consolidation would bring along. Could this spurr another round of asset sales? We'll see.

If you want my honest opinion, at first my thoughts ran along the same vein as c1ue's, I was skeptical that the FASB would enforce this now after they've been talking smack for some time. However, and after a few phone calls, I saw how concerned these banks are about this whole consolidation issue - plus how serious they're taking it - and it changed my mind a little. Enough to at least think about it more.

Most likely there will be a compromise on how quickly this eventual consolidation happens, and what the outs to it are. From my experience, the door is never completely shut.

All that said, this potentiality puts a hamper on anybody seeking to do a transaction, beause the potential participants don't know what the regs will be and consequently what the capital will be - it's part of the uncertainty that is making them retiscent (and this is a big pipeline that leads to a lot of systemic lending).

Meanwhile, the rating agencies, whose ratings also affect the capital requirements for insurers, investors, and lenders (based on their views of this orhpaned credit risk), are flying below the radar again.

Re: JPM and GS.

JPM <-> Fed, FDIC
GS <-> Treasury
... but now, JPM < -> White House .... Treasury's Dadda.

When mass inflation hits, watch all these interests start to become misaligned.