Thursday, 10 July 2008 01:00

In the "Worst is behind us" world of news for July 10th, 2008

The mortgage market has not even started to "really" fall apart yet. The "worst is behind us", indeed!

U.S. Mulls Future of Fannie, Freddie

The Bush administration has held talks about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter, according to three people familiar with the matter, as the stock prices of both companies continue to fall sharply.

These were two of the most obvious shorts to make in the mortgage crisis -pure mortgage lenders and insurers!

From Bloomberg: Fannie Mae, Freddie Losses Make Them `Insolvent,' Poole Says :

Chances are increasing that the U.S. may need to bail out
Fannie Mae and the smaller Freddie Mac, former St. Louis Federal
Reserve President William Poole said in an interview. Freddie
Mac owed $5.2 billion more than its assets were worth in the
first quarter, making it insolvent under fair value accounting
rules, he said. The fair value of Fannie Mae's assets fell 66
percent to $12.2 billion, data provided by the Washington-based
company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are
insolvent, that it is allowing these firms to continue to exist
as bastions of privilege, financed by the taxpayer,'' Poole, 71,
who left the Fed in March, said in the interview yesterday.

Foreclosures Rose 53% in June as U.S. Bank Repossessions More Than Doubled:

Reggie's Archives

U.S. foreclosure filings rose 53
percent in June from a year earlier and bank repossessions almost
tripled as deteriorating property values and higher payments on
adjustable mortgages forced more people to give up their homes.

More than 252,000 properties, or one in every 501 U.S.
households, were in some stage of foreclosure, RealtyTrac Inc., an
Irvine, California-based seller of default data, said today in a
statement. Nevada, California and Arizona had the highest
foreclosure rates.

``The foreclosure problem is getting worse and will stay with
us well into the next decade,'' Mark Zandi, chief economist for
Moody's Economy.com in West Chester, Pennsylvania, said in an
interview. ``The job market is eroding and homeowners have less
equity. Lenders are much less willing to work with you if you've
got negative equity, and you're more likely to give up your house
if you're deeply underwater.''

I can only say I told you so. I finally
got my archives fixed. There are almost 450 articles going back to
September 1st of last year. See them in the sidebar on the right or in
the menu column on the left as you scroll down. I recieved this in the mail yesterday (Hat tip to M), which confirms the news story above with ferver:

doc 07-2008_unreal_estate_monthly 10/07/2008,06:48 45.50 Kb

Devaney Liquidates United Capital Hedge Funds at Total Loss on Margin Call:

John Devaney is liquidating hedge
funds at his United Capital Markets Holdings Inc. after failing
to meet a margin call from Deutsche Bank AG.

Deutsche Bank seized and auctioned off collateral after the
Horizon group of funds failed to meet the bank's demands,
according to a letter to clients obtained by Bloomberg News
yesterday. The funds were frozen a year ago because of wrong-way
bets on mortgage securities.

``The survival of the funds and any potential recovery for
their investors has been dependent on these lenders continuing
their relationships with the funds,'' Devaney wrote in the letter
dated July 9. United Capital is based in Key Biscayne, Florida.

The global credit rout spurred by the collapse of the
subprime-mortgage market has led firms from Sailfish Capital
Partners LLC to Peloton Partners LLP to liquidate funds or shut
down this year. Fixed-income hedge funds are among the worst-
performing groups, according to data compiled by Hedge Fund
Research Inc. in Chicago. Hedge funds overall have lost 0.2 percent
this year through May, Hedge Fund Research said.

This happens much more than is reported
in Bloomberg. What do you think happens to the marks in the MBS market
everytime there is a forced liquidation due to a margin call. Do you
really think valuations get better for everyone? The worse it gets, the
worse it is going to get.

S&P 500 Index May Lose Another 12% Before Bear Market Ends, History Shows: maybe or maybe not, but the Asset Securitization Crisis
will reverbrate farther than that, an methinks a consequence will be a
deeper, broader bear than this generation is used to seeing.

Huge FDIC Hit Seen If IndyMac Collapses
A collapse of IndyMac could be one of the costliest failures in recent memory because of poor market conditions and high reliance on FHLB advances, observers said Wednesday.

Citigroup Looking for Exit from Texas
Several industry sources said the nation's largest banking company is actively seeking a buyer for the rest of its Texas franchise.

Wachovia Hires Treasury Official as CEO, Sees 2Q Loss
Smith to remain Chairman
Wachovia late Wednesday named Treasury Undersecretary Robert K. Steel as its CEO and president and said its 2Q results will be hurt by higher provision expenses and charges.

Bankers, Clients Views on Cycle Diverge
Bankers are more pessimistic than their business customers about the economy, according to a pair of surveys conducted in the second quarter.

Last modified on Thursday, 10 July 2008 01:00

6 comments

  • Comment Link Kip Coon Friday, 11 July 2008 01:32 posted by Kip Coon

    Just heard a news report that MS is repackaging their garbage and taking it to the FED for more taxpayer dollars - I mean a "loan". I think I heard that JPM is doing the same. The heavy PUT options on LEH today were incredible. Volatility rose to over 200%. MASSIVE volume on LEH. Take a look at the numbers. Go back a few weeks too. The open interest in MS August 30 PUTS was overrun. Some 9,000 were traded today. Other notable large volume moves: ZION, MTB (This one's been slowly moving down from the high 70's and it looks like some share dumping is going on), MI has seen increases in volume (Been a nice short thank you), like it's no surprise but FNM and FRE have seen massive volume spikes too. Even yesterday when we were told they had plenty of cash! Who was that Senator that got blasted because sent an email questioning the solvency of FNM and FRE??? Hhhmmmm..... No wonder they wanted to shut him up.

    While we've figured all along that we, the taxpayers, would clean up the mess with our tax dollars, I'm not too sore about it. The government's stupidity in running just about anything gave us the chance to make money off of them. Sure, we'll be giving some back and it pisses me off. Since it was bound to happen, I'll send them a thank you card for the short of the year! They can have some of my tax dollars from the money they served up on a platter. The sad part is all the ruin and fall out to come. It really sucks watching the mismanaged companies, the greed, the pocket lining..... and let's not forget... special Home Mortgage Rates for the government heads.

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  • Comment Link Mark Edmunds Thursday, 10 July 2008 17:44 posted by Mark Edmunds

    The idea of binary potential outcomes for Fannie Mae and Freddie Mac has a lot of merit. If there is no government guarantee, a death spiral could result whereby the cost of debt financing increases, which makes these two less viable, which causes the cost of debt financing to increase, etc.

    A third possibility does not seem entirely implausible, that FRE and FNM increase the charge for their guarantees enough to offset the increased financing costs, losses aren't quite as large as some critics have postulated, and these two companies eventually right themselves.

    In any event, I think the cost of a bailout of FRE and FNM could be very high, but the cost of not bailing them out would be much higher. If they are allowed to fail, how could we possibly avoid an extremely severe depression worse than the great depression?

    As an aside, can anyone provide or point me to an estimate of economic losses on mortgages in FRE or FNM's porfolio (of guarantees and mortgages on their balance sheets)? I have heard a lot of hot air in the media but no real analysis.

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  • Comment Link Claire Morgana Thursday, 10 July 2008 16:51 posted by Claire Morgana

    As a side note, Fannie's debt can really only do one of two things:

    Either the government bails them out, in which case the interest rates converge to US Treasury rates

    or

    The government doesn't bail them out, in which case they default.

    In either case, it appears impossible for their credit to be rated at its current price for long--the price is binary (you arb to guarantee payment,or arb to no payment). I guess straddles would be a way to play this, but doing that on these kinds of instruments would equire far more money than I could hope to gamble with.

    Just a thought.

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  • Comment Link Claire Morgana Thursday, 10 July 2008 15:54 posted by Claire Morgana


    1. I find it hard to believe that the worst is over when market participants continue to go to Buffett to fund their M&A activity instead of raising funds the more traditional ways

    2. It's interesting that there's no relief rally on FNM or FRE after the gov't said that they look ok and after god knows how many politicians say that they'll bail them out. To me it shows that they've lost any shred of credibility (which they deserved to lose a long time ago,imo).

    3. I wouldn't make the assumption that FNM and FRE are going to get bailed out. The cost of doing so is very high, and I do not believe that the government has that kind of money to spend. If spreads keep widening between Treasury and agency backed debt, though, it seems inevitable that more highly leveraged hedgies are going to go bankrupt.

    Just my opinion, of course

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  • Comment Link pelican Thursday, 10 July 2008 11:41 posted by pelican

    Hi Reggie,

    Regarding FNM and FRE, despite the fears of them being nationalized or being allowed to fail, I think these two scenarios are unlikely. However, I do think the government steps in and helps them out so that there viability doesn't remain a (big) issue). In this scenario, do you think the stocks rebound from current levels? I realize there is still the capital issue and so I'm trying to get my arms around that. Can the government just guarantee the debt, for example, and then lift any capital requirements? In other words, let the GSEs continue to operate whether they are technically insolvent or not. As I write this, I see that the stocks are staging a bit of a comeback; perhaps investors will start thinking that they represent good value as long as viability isn't an issue anymore. What do you think?




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  • Comment Link Marc Authier Thursday, 10 July 2008 11:11 posted by Marc Authier

    Then why is this Morgan Stanley stil holding in a tigh range as if they have no problems ?

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