Fed will start buying up Agency MBS

[DemonD]

Re: Fed will start buying up Agency MBS

How about AAA-rated MBIA and Ambac? While they are desperately selling equity to recapitalize their bombed out balance sheets? What a farce.

No doubt. The markets, rightfully so, are saying to the ratings agencies: "You guys are lying liars and we are not buying into your BS."

I heard on the radio today that BBB rated muni bonds default at a rate of .6%, whereas AAA corporate bonds default at a rate of .9%. Of course, a municipality can "buy" insurance to get it up to AAA - and the wheels get greased on the backs of the taxpayers, once again.

I never realized how awfully nefarious this was. I'm kind of nauseous that our elected officials have allowed this obvious perversion of capitalism to infect our system, but I'm not surprised.

Incidentally, I see the dollar is absolutely taking a nosedive, right now, down 1.5% against the yen overnight alone, getting slaughtered in other currencies and of course gold.

Never had my question answered before, I wonder if my reasoning here is the trigger for today's action:

When the paper goes bad, and the Fed puts it back on the banks... wouldn't the fed just roll the loan they gave over to the banks into another loan? In other words loan the bank the difference between the money they owe the fed and the market value of the paper?

And then roll that loan into another loan, and another and another... (evergreen loans)....?

To me this [liquidity injections] seems way way way more inflationary that simple interest rate cuts.

And overseas markets are tanking... I think the Fed may be out of bullets for at least this week. The next 2 trading days should be real interesting for the currency, commodity and stock markets.

[bill]

Re: Fed will start buying up Agency MBS

I just can't shake the feeling that they're working with the Federal Reserve and the banks to prevent a total, immediate meltdown of the banking system.

I think it's obvious by now to everyone, even bankers, that a lot of AAA-rated paper is of questionable quality. To salvage what little is left of their credibility, the ratings agencies should quickly re-evaluate the paper they have already rated. Leaving as much of the garbage as there is with AAA ratings just further sullies their already damaged reputations. It's one thing to unknowingly make a mistake and then make amends upon discovering the mistake. It's another thing altogether to make a mistake and then pretend that nothing is wrong despite overwhelming evidence to the contrary.

Isn't it convenient that the agencies haven't lowered the ratings on the AAA trash so that the banks can use it as collateral to borrow from the Federal Reserve?

After acquiring all this garbage AAA paper the Feds may dump it into a new government agency and offer 30 yr refinancing. Maybe they can offer the first 100 yr loan!

[bill]

Re: Fed will start buying up Agency MBS

After acquiring all this garbage AAA paper the Feds may dump it into a new government agency and offer 30 yr refinancing. Maybe they can offer the first 100 yr loan!

I guess I’m wrong. They suck the reserves from Fannie and Freddie first.
http://www.bloomberg.com/apps/news?p...XUg&refer=home

March 19 (Bloomberg) -- Regulators for Fannie Mae and Freddie Mac cut the companies' surplus capital requirement to 20 percent from 30 percent to help expand their combined $1.5 trillion in mortgage investments and revive the home-loan market.

They could care less what Lockhart said.

Lockhart on Feb. 7 told the Senate Banking Committee that Fannie Mae and Freddie Mac need to sustain reserve capital against rising foreclosures and cautioned against encouraging the companies to expand their mortgage assets.
``The risks are beginning to take their toll,'' Lockhart said. ``Credit losses and risks are growing'' for the companies.

[blazespinnaker]

Re: Fed will start buying up Agency MBS

Obviously this whole interest rate thing is not working at all.

Look for the fed to trying innovative measures, including directly targeting its liquidity measures.

Major moral hazard, but when you think about it, the collateral damage that it does by massive fed funds rate movements is probably a lot worse in this particular situation.

I also think this will mitigate ka-poom to a certain degree. Gold will see major declines.

So, let's see, I think I'm three for three here:

1. I was right (like, 8 hours early, but hey, I called it before), they'd start buying up Agency MBS(or, at least, exchanging it for Treasuries in long term loans)

2. This allowed them to cut less than expected

3. Gold saw major declines.

[Tulpen]

Re: Fed will start buying up Agency MBS

Obviously this whole interest rate thing is not working at all.

Look for the fed to trying innovative measures, including directly targeting its liquidity measures.

Major moral hazard, but when you think about it, the collateral damage that it does by massive fed funds rate movements is probably a lot worse in this particular situation.

I also think this will mitigate ka-poom to a certain degree. Gold will see major declines.

This attempt is mostly driven by the democrats by the way.

Very worrisome for the country, doing this puts far more in jeopardy than just the health of some banks.

[bill]

Re: Fed will start buying up Agency MBS

After acquiring all this garbage AAA paper the Feds may dump it into a new government agency and offer 30 yr refinancing. Maybe they can offer the first 100 yr loan!

I don’t know what I was thinking I forgot to add in the go between flipper before assets are acquired by the Fed.
Mr. Kurland once a mortgage creator, now a mortgage liquidator with PennyMac http://pnmac.com/index.htm the new Vulture Capital Co. PennyMac (private) the newly formed capitalized mortgage liquidator targets distressed mortgages. Once they acquire mortgages at prices we will probably never know PennyMac can revalue and flip assets to other newly formed partnerships. If the flips slow down for PennyMac they can have BlackRock stamp a rating on the asset pool and acquire a loan (a sale to the fed) from the fed. After all BlackRock is the Fed’s current favorite financial advisor.

http://blogs.wsj.com/economics/2008/...r/?mod=WSJBlog

April 3, 2008, 12:23 pm
Blackstone? BlackRock? Whoever

Sen. Wayne Allard (R., Colo) asked a key question at today’s hearing: How did the Fed decide to hire Blackstone Group as the central bank’s financial adviser?
Once Mr. Geithner was done, Treasury Undersecretary Robert Steel stepped in to correct Mr. Allard. It was actually BlackRock, not Blackstone, that the Fed hired as its financial adviser.
.
.
.
And you ask yourselves like congress asked Uncle Ben … what was BackRock’s payment for their recomendations and due diligence? Hum… I don’t know the answer to that question… you think… try this one one to fit the glove of greed!
March 24 2008 - BlackRock and Highfields Capital Management Launch New Company
To Acquire and Restructure Distressed Mortgage Loans
Led by Mortgage Industry Leaders, Private National Mortgage Acceptance Company, LLC (PennyMac) Seeks to Help Troubled Borrowers Remain in Their Homes
New York, March 24, 2008 – BlackRock, Inc. (NYSE: BLK) and Highfields Capital Management today announced that they have sponsored a new company that will acquire and restructure distressed residential mortgage loans in response to the ongoing dislocation in the U.S. mortgage market. The new company, Private National Mortgage Acceptance Company, LLC (PennyMac), has been formed by BlackRock, Highfields, and a management team of mortgage industry veterans led by Stanford L. Kurland, PennyMac’s Chairman and Chief Executive Officer. PennyMac will raise capital from private investors, acquire loans from financial institutions seeking to reduce their
mortgage exposures, and seek to create value for both borrowers and investors through
distinctive loan servicing. Mr. Kurland was President and Chief Operating Officer of Countrywide Financial Corporation untilhis departure in October 2006. The PennyMac management team also includes David Spector, Chief Investment Officer, who is former Co-Head of global residential mortgages for Morgan Stanley.
“We are pleased to sponsor PennyMac, a company that seeks to bring patient capital to the unprecedented distress in residential mortgages,” said Laurence D. Fink, BlackRock Chairman and Chief Executive Officer. “Stan Kurland and his team have enormous talent and experience in the mortgage business, making them well equipped to develop effective solutions for sellers of mortgage assets and homeowners alike.”
“There has been intense market focus on write-downs of mortgage-related securities, but whole loan losses have barely begun to materialize,” said Jonathon S. Jacobson, Highfields Co- Founder and Senior Managing Director. “Over the next two to three years, we anticipate that the volume of bank-held non-performing mortgages will grow dramatically. PennyMac will be extraordinarily well positioned as both a buyer and servicer of these assets.” “Our intent is to combine fresh capital with deep mortgage portfolio management and servicing expertise,” said Mr. Kurland. “We are delighted to have the support of BlackRock and Highfields Capital as we expand our business and work to help both lenders and borrowers as one step inaddressing the U.S. mortgage crisis.”

Comment by The OZ - April 3, 2008 at 3:02 pm

[quigleydoor]

Re: Fed will start buying up Agency MBS

Strong stuff from the normally sedate Robert Rodriguez at First Pacific Advisors (FPA): Crossing the Rubicon, March 30, 2008.

In our opinion, a new financial system is in the process of being created. This is the beginning of a new era. Some may refer to it as Pre-Bear Stearns and Post-Bear Stearns. It is inconceivable to us that the Fed can place its balance sheet at greater risk without having some type of regulatory authority over those financial institutions that now have access to its liquidity services. In essence, new and increased levels of regulations are a likely outcome from this series of events. We believe that primary dealers and the rest of the brokerage industry will be subject to greater regulatory oversight, with a concomitant reduction in firm flexibility and financial leverage. These new regulations will also likely limit customer financial flexibility and, thus, they may potentially lessen the availability of credit. Furthermore, the consolidation of regulatory authority into a central regulator does not, in and of itself, ensure that systematic risk to the U.S. financial system will be reduced. Unless the Federal Reserve or the new central agency that is established have the regulatory authority and courage to act, nothing will have changed. As an example, the Federal Reserve had the authority to influence or control the excesses that developed in mortgage loan originations by its regulated depository institutions. The Fed did not act, despite Federal Reserve data showing that mortgage lending was getting out of control. Over the last three years, we have addressed this growing risk. Furthermore, we took measures, within FPA New Income and our fixed-income separate accounts, to reduce mortgage credit risk exposure that we saw exploding. With the limited resources we have at FPA compared to the Federal Reserve, how could we see this mortgage risk developing and the Fed not? We have to conclude that the Fed was aware of the growing risks in the mortgage and derivatives markets; however, it was unwilling at that time to take appropriate risk-reduction measures. In all likelihood, exogenous political pressures were a likely contributor to this inaction. We also believe these elements were in existence in other governmental agencies as well. Because of this poor record of inaction, we have more confidence in capital market discipline, if it is allowed to prevail, than in governmental regulatory agency discipline.

We are also fearful that the Fed’s recent actions have increased the likelihood of an increase in moral hazard risk or the socialization of risk. By this we mean that there is a movement at various levels of government to stem the tide of mortgage foreclosures while trying to increase the level of liquidity available in the mortgage market. FNMA and Freddie Mac recently had their special capital requirement reduced from 30% to 20%. That previously higher capital requirement had been put in place because these two agencies had engaged in reckless and questionable accounting and management practices. They were not in a position to address this mortgage crisis, for which they had originally been created, because their balance sheets had become impaired by unsound profit motivated activities. They were just too financially leveraged. With this new lower level of required capital, subject to raising a non-disclosed amount of new capital, they are now being placed in a position that would allow them to acquire $200 billion of additional mortgage securities. Should this new flexibility lead to their balance sheets becoming overextended again, there is the potential risk that taxpayers may be forced to ride to their financial rescue. In addition to these actions, the Federal Home Loan Bank is being asked to increase its purchases of mortgage-backed securities by $160 billion. Finally, Senator Chris Dodd and Congressman Barney Frank are in the process of crafting legislation that would possibly create a new entity to help deal with a prospective flood of potential foreclosures. This new entity could buy as much as $300 or $400 billion of mortgages under various types of aid packages. They are not referring to this as a bailout but rather as a “rescue” package. Because of the recent Federal Reserve action that bailed out Bear Stearns and their counter parties, we can expect to hear the argument that, if Wall Street can be bailed out, why should there not be some help given to Main Street? We believe it will be difficult to defeat this type of an argument. These measures may prove more dangerous than many realize as they can result in unintended consequences. As for FPA, we will likely require a higher compensation, through an increased mortgage spread, for us to deploy capital into the mortgage market because of the growing risk of governmental interference into the sanctity of the mortgage contract.

We believe that one of these unintended consequences will likely lead to the Federal Reserve becoming even more politicized. With the taxpayer’s purse being placed at greater risk by these governmental entities’ increased financial risk, the process by which the Federal Reserve conducts monetary policy may be placed in jeopardy. Will the Fed be as willing to raise interest rates to fight economic excesses or inflation if it means it could cause losses for these governmental entities or place the American mortgage borrower at increased financial risk? Given the extreme measures that are currently being contemplated, we believe this is a serious risk consideration. If we are willing to “rescue” borrowers and financial institutions that have been reckless or unwise in their financial decision making leading up to this crisis, how can we expect a different outcome in the future? Why should individuals and financial institutions conduct themselves in a financially prudent manner, knowing that the government will likely ride to their rescue? Why shouldn’t they take increased risk with the expectation of short-term gain, while laying off long-term risk to the government? The Federal Reserve’s recent policy changes, federal agency enhanced risk taking and possibly new consumer mortgage “rescue” plans, all have the potential of increasing future unsound business and consumer decision making.

Ever since the government bailout of Chrysler in 1979-80, this country has been on a course of raising the safety net so that the market’s discipline, in a capitalistic economic system, has been truncated. We have witnessed a growing level of decisions that are based upon expediency rather than sound long-term decision making. Each time these expedient decisions are made, the level of risk within the U.S. economy has been increased. The market’s discipline is not allowed to work for fear of the potential economic fallout.

In light of the above comments, the partners of FPA came to a unanimous conclusion that the recent Federal Reserve actions and the potential new Congressional policies under consideration are likely to lead to a significantly higher level of long-term inflation in the U.S. We are more than disappointed in the substandard decision making that has taken place within the Federal Reserve and other governmental entities these last several years. The misguided monetary policies of the former Chairman of the Federal Reserve, Alan Greenspan, created an era of “too big to fail” that has led to two major asset bubbles. With each successive bubble, the policy actions available to the Federal Reserve to reduce financial system risk have been systematically reduced. The extraordinary actions taken by the Bernanke Federal Reserve reflect acts of desperation rather than long-term policy solutions. The rapidly changing events within the capital markets are forcing the Fed to adopt policies that have the potential of long-term negative consequences. These recent events, and their fundamental changes to the U.S. financial system, are forcing the leaders of FPA’s product areas to reassess their present portfolio allocations. In essence, we believe we have “Crossed the Rubicon” into a new financial era.

[c1ue]

Re: Fed will start buying up Agency MBS

Robert Rodriguez is one of the very first to publicly speak about the worthlessness of the ratings agencies' ratings.

Bought him all the credibility possible in my book.