In a terribly misguided attempt to address mortgage market problems, Bush's stimulus plan will include a provision to up Freddie Mac and Fannie Mae's loan limits. The dangerous initiative is liable to leave taxpayers on the hook for billions (possibly trillions) of dollars.
The fiscal stimulus package announced yesterday includes many different provisions. Most of the media emphasis has been on tax rebate checks for individuals and tax cuts for small businesses, but there is another part of the plan that everyone should be paying close attention to:
Government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae will be allowed to buy conforming loans up to $625,500.
The current limit on loans is $417,000. The problem with raising loan limits any higher revolves around the fact that Freddie and Fannie are in a precarious financial position as is. Both companies reported huge losses for the third quarter of last year and are expected to report even bigger losses for the fourth quarter any day now.
Credit Suisse analysts estimate Freddie will write down between $4 billion and $11 billion when reporting earnings. Fannie's losses are predicted to be somewhere between $2.25 billion and $4 billion.
In November Freddie warned that it might not have enough capital to cover mandatory reserves on mortgage commitments. Fannie is in a similar position and announced the need for a capital infusion just last month. Additional losses will most definitely have a negative impact on the companies and their capital positions.
If Freddie and Fannie fail--and let's face it, increasing their power almost guarantees that they will--taxpayers will be forced to pick up the pieces.
Ilargi: A few comments on the article below:
- Germany’s banking system is different from most other western countries: the major concentration in banking that has taken place elsewhere has largely not happened there. There are tons of smaller banks, and many are -publicly- owned, by the German equivalent of states and counties. This article covers 4 banks only.
- If it is true that 4 banks have a combined exposure of $117 billion, expect them to write down at least half of that. I see one bank with a $2 billion write-down, and one with $1 billion, so that leaves some $55 billion for the other two, one of which claims to have no exposure at all.
- Two German banks have already been bailed out by the -national- government.
Germany: Landesbanks' subprime exposure 80 billion euro -report
Four German state banks have a combined exposure of almost 80 billion euros ($117.2 billion) to risky assets and the state bank of Bavaria, BayernLB, could need an over 2 billion euro write-down, FOCUS magazine reported.
Germany's Landesbanks are financial institutions owned by regional government and local community savings banks.
FOCUS, in a preview received on Saturday of an article due for publication on Monday, said the other three banks were WestLB, LBBW and HSH Nordbank.
The banks are considering whether to transfer their U.S. subprime debt-related instruments to a special-purpose vehicle, the weekly magazine reported without citing its sources.[..]
Two German banks, stock exchange listed IKB and the state bank of Saxony, SachsenLB, have already been bailed out after subprime losses.
Ilargi: Well, whaddaya know, I’m not the only one thinking this deal won’t happen. Can I at least be the only one thinking it was never intended to?
Countrywide Earnings Eyed Before Deal
Investor concerns that Bank of America Corp. might try to pull out or pay less for Countrywide Financial Corp. could intensify next week when the troubled mortgage lender reports 2007 year-end financial results. After posting a $1.2 billion loss in the third quarter ended Sept. 30 -- its first quarterly loss in 25 years -- Countrywide declared it would post a profit for 2007's final three months and through this year.
Wall Street has its doubts -- most analysts expect Countrywide to post a fourth-quarter loss -- and will be watching closely Tuesday when the Calabasas-based company reports its results. Investors will be looking for signs that suggest worsening fortunes at the nation's largest mortgage lender -- and a possible about-face by Bank of America.
"Bank of America is going to take a close look at Countrywide's business and see ... whether or not it is able to get value from the purchase," said Sean Egan, managing director of independent ratings firm Egan-Jones Ratings Co. "With the continued weakness in the market, it's not as clear ... that Bank of America is going to be willing to step up," he said.
The housing slump has pummeled mortgage lenders, as home price declines have led to record levels of mortgage defaults, causing multibillion-dollar losses at many financial institutions left saddled with mortgage-backed securities that went bad. During a conference call with analysts this week, Bank of America Chief Executive Ken Lewis reiterated his expectation that the all-stock deal, valued at about $4.1 billion, will close early in the second half of this year.
Still, some investors are engaging in arbitrage -- trading shares in both companies simultaneously based on the spreads in stock prices and speculation the deal will not go through. That trading has put Countrywide shares on a roller coaster.
Banks may need $143 billion in fresh capital
If bond insurers are downgraded a lot, banks will need as much as $143 billion in fresh capital to absorb the impact, Barclays Capital estimated Friday. Citigroup Inc., Merrill Lynch & Co. Bank of America Corp. and Wachovia Corp. are among U.S. banks most exposed to bond insurers, or "monolines" as they're also known, Barclays Capital wrote to investors. In Europe, Credit Agricole , Dexia and Societe Generale are among the most exposed, the firm said.
The consequences of bond-insurer weakness are so severe that regulators and banks in the United States have strong incentives to pump more capital into the sector to avoid downgrades, according to Barclays Capital analyst Paul Fenner-Leitao. "Meetings between regulators and U.S. banks are at an early stage; few concrete details about the structure of a bank-led recapitalisation are known," he said. The last attempted government-sponsored resolution for a financial-market problem -- the M-LEC "super-SIV" -- failed and the current bond-insurer talks could suffer a similar fate, Fenner-Leitao added.
Two bond insurers -- Ambac Financial Group and Security Capital Assurance Ltd. already have had their crucial AAA ratings cut by Fitch Ratings. Without top ratings, bond insurers' business models may be imperiled. Downgrades also cut the value of the guarantees bond insurers have sold. Some banks have hedged complex mortgage-related securities known as collateralized debt obligations, or CDOs, by buying these monoline guarantees. That means more write-downs could come if bond insurers are downgraded.
Fenner-Leitao said that his $143 billion estimate is based on "very aggressive" assumptions about how exposed banks are to bond insurers and how far monoline downgrades will go. The estimate assumes that 75% of insured structured products like CDOs are held by banks. It is also based on bond-insurer ratings being cut to A from AAA and big write-downs following those downgrades, he indicated.
Option ARM Specialist FirstFed: Delinquencies Up 231 Percent in One Quarter
FirstFed Financial Corp., parent to First Federal Bank of California, said Friday that mortgage losses likely led to a 64 percent drop in quarterly earnings at the Santa Monica, Calif.-based holding company. On a preliminary basis, fourth-quarter net income was reported at $8.4 million, or $.61 per share, compared to $33.4 million, or $1.97 per share, in the year-ago period.
Delinquencies and non-accruals — non-accruals refer to severe delinquencies 90+ days in arrears or in foreclosure — have been skyrocketing at FirstFed. The bank reported that single-family non-accruals jumped to $179.7 million in Q4, up a stunning 116 percent from the third quarter alone. Delinquencies less than 90 days among single family loans rose to $236.7 million by the end of Q4 — that’s 231 percent over the $71.5 million recorded just one quarter earlier. The bank had first warned of delinquency problems during the fourth quarter on January 15.
Against such staggering rises in both delinquencies and non-accruals, FirstFed said total allowances for loan losses reached just $128.1 million at year’s end, net of provision expense and charge-off activity; that’s a rise of just 16 percent in loss reserves relative to the $109.8 million on the books at the end of last year. Not surprisingly, FirstFed said that option ARMs hitting a forced recapitalization were “a contributing factor in the higher level of delinquent loans.”
Stimulus plan may lead to higher mortgage rates
A key element of the stimulus package aimed at jump-starting the ailing U.S. housing market may have the unintended consequence of raising mortgage rates, said analysts studying the plan.
A federal proposal to increase the size limit on loans eligible for purchase by mortgage finance giants Fannie Mae and Freddie Mac has unsettled traders in the $4.5 trillion market for bonds backed by the "conforming" mortgages.
Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk.
Borrowers with large, jumbo loans are more likely to refinance since their savings are greater for each incremental drop in rates than for a smaller loan. The loans will taint the bonds since traders don't initially know the make-up of the securities known as "agency" MBS. Higher mortgage rates would make it even harder to unload already high housing inventories and existing homes on the market, delaying any housing recovery and potentially extending the U.S. economic slowdown.
Potential damage to the "to-be-delivered" (TBA) market -- the most actively traded agency mortgage market where investors can buy bonds before they are actually created -- prompted Wall Street dealers to call a special meeting with the Securities Industry and Financial Markets Association at 3:30 p.m. Friday, market sources said. A SIFMA spokeswoman would only say the group is in ongoing discussions with its members.
"The amount of money that investors are willing to pay for agency mortgages (bonds) could be lower if these loans are TBA deliverable and so mortgage spreads could widen," said Ajay Rajadhyaksha, co-head of U.S. fixed income strategy at Barclays Capital in New York, who will listen to the SIFMA meeting by phone. Mortgage rates would rise for the "vast majority" of agency-eligible borrowers, he said.
Reviewer of Subprime Loans Agrees to Aid Inquiry
A company that analyzed the quality of thousands of home loans for investment banks has agreed to provide evidence to New York state prosecutors that the banks had detailed information about the risks posed by ill-fated subprime mortgages. Investigators are looking at whether that information, which could have prevented the collapse of securities backed by those loans, was deliberately withheld from investors.
Clayton Holdings, a company based in Connecticut that vetted home loans for many investment banks, has agreed to provide important documents and the testimony of its officials to the New York attorney general, Andrew M. Cuomo, in exchange for immunity from civil and criminal prosecution in the state.
In these disclosures, underwriters typically said that loans that did not meet even lowered lending standards, called exceptions, accounted for a “significant” or “substantial” portion of the loans contained in the securities, but they offered little hard, statistical information that Clayton promised prosecutors it would provide as evidence. Investment rating firms like Moody’s and Fitch have said that they were deprived of this information before they gave the securities the top rating, triple-A.
“At the heart of the subprime meltdown is the inability to get information,” said Howard Glaser, a mortgage industry consultant who used to work for Mr. Cuomo when he was secretary of housing and urban development.
About a quarter of all subprime mortgages are in default, which has resulted in billions of dollars in losses for buyers of securities backed by these mortgages. Many of these loans were made with low teaser rates that would later increase. Critics of these practices say many of these mortgages should never have been made because borrowers could not repay them.
Investment banks, for their part, have said they provided adequate disclosures, and they even kept some of the securities on their books. They have taken more than $100 billion in write-downs as a result. Mr. Cuomo has already obtained some evidence through subpoenas. But Clayton, which in industry terminology conducts due diligence for the investment banks, could help him identify salient details in its reports.
Without an immunity deal, officials at Clayton could have refused to testify under their right to protect themselves against self-incrimination. There is no evidence that Clayton did anything wrong, but securing immunity provides legal certainty for the company and its officers. The company is in a difficult position, because its cooperation might hurt its clients, the investment banks.
First bank failure in 2008
FDIC Approves the Assumption of all the Deposits of Douglass National Bank, Kansas City, Missouri
The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved the assumption of all the deposits of Douglass National Bank, Kansas City, Missouri, by Liberty Bank and Trust Company, New Orleans, Louisiana. Douglass National, with $58.5 million in total assets and $53.8 million in total deposits as of October 22, 2007, was closed today by the Office of the Comptroller of the Currency, and the FDIC was named receiver.
Depositors of Douglass National will automatically become depositors of the assuming bank. The failed bank's three offices will reopen on Monday as branches of Liberty Bank and Trust. Over the weekend, customers can access their money by writing checks, or by using their debit or ATM cards.
In addition to assuming all of the deposits of the failed bank, Liberty Bank and Trust will purchase approximately $55.7 million of Douglass National's assets at book value, less a discount of $6.1 million. The FDIC will retain approximately $2.8 million in assets for later disposition.
Buddy, could you spare us $15 billion?
Another shady realm of finance goes begging for a massive bail-out
This has been a crisis of risk in unexpected places. Think of collateralised-debtobligations (CDOs), structured investment vehicles (SIVs), and now a £4.9 billion ($7.1 billion) loss due to fraud at Société Générale. One particular nastiness has been festering in an obscure industry which, until recently, enjoyed pristine credit ratings: the “monoline” bond insurers. Their plummeting fortunes (see chart) helped to spark the stockmarket sell-off that prompted the Federal Reserve to act this week ahead of its scheduled meeting.
So perturbing was their plight that the prospect of a rescue caused a far bigger stockmarket rally than the Fed's biggest rate cut in a quarter of a century the day before. There may be no better example of how a dull province of finance, when snared by complex risks it barely understands, can become terrifyingly unboring.
Though themselves no giants, monolines have guaranteed a whopping $2.4 trillion of outstanding debt. The two largest, MBIA and Ambac, cut their teeth “wrapping” municipal bonds, in effect, renting their AAA rating to the securities for a fee. For a long time this business, though staid, was nicely profitable.
But, as competition grew, the monolines—with two honourable exceptions, FSA and Assured Guaranty—were seduced by the higher returns of structured finance, especially the stuff involving subprime mortgages (see table).
As mortgage delinquencies rose, so did paper losses. Ambac and MBIA wrote assets down by a combined $8.5 billion in the past quarter.
The monolines' thin capital cushions, adequate when they wrote only safe municipal business, now look worryingly threadbare. Moody's and Standard & Poor's—the very rating agencies the monolines relied so heavily upon when piling into the mortgage business—are threatening downgrades unless they raise more equity. Ambac's failure to do so last week prompted Fitch, another rating agency, to cut its debt by two notches, to AA. This has spooked investors for several reasons. First, heavily downgraded insurers would lose their raison d'être and thus face the prospect of selling up or going into “run-off”: closing to new business and gradually winding down.
Worse, from a systemic point of view, when a monoline is downgraded all of the paper it has insured must be downgraded too. Hence, after its move against Ambac, Fitch went on to cut no fewer than 137,500 bonds (including one issued by Arsenal football club). This is more than academic: holders of downgraded bonds have to mark them down under “fair value” accounting rules. Some, such as pension funds, may hold only the highest-grade securities, raising the prospect of forced sales. And, with fewer top-notch insurers to turn to, bond issuers' costs would rise. The loss of the AAA badge would cost investors and borrowers up to $200 billion, reckons Bloomberg, a financial-information firm.
US slides into dangerous 1930s 'liquidity trap'
The United States is sliding towards a dangerous 1930s-style "liquidity trap" that cannot easily be stopped by drastic cuts in interest rates, Nobel economist Joseph Stiglitz has warned.
"The biggest fear is that long-term bond rates won't come down in line with short-term rates. We'll have the reverse of what we've seen in recent years, and that is what is frightening the markets," he told the Daily Telegraph, while trudging through ice and snow in Davos. "The mechanism of monetary policy is ineffective in these circumstances. I'm not saying it won't work at all: it will help the banking system but the credit squeeze is going to go on because nobody trusts anybody else. The Fed is pushing on a string," he said.[..]
"People have been drawing home equity out of the houses at a rate of $700bn or $800bn a year. It's been a huge boost to consumption, but that game is now up. House prices are going to continue falling, and lower rates won't stop that this point," he said.[..]
... the global downturn may already have acquired an unstoppable momentum, requiring months or even years to purge the excesses from the bubble. Professor Stiglitz blamed the whole US economic establishment for failing to regulate the housing and credit markets adequately, allowing huge imbalances to build up. "The Federal Reserve and the Bush Administration didn't want to hear anything about these problems. The Fed has finally got around to closing the stable door (on subprime lending), but the after the horse has already bolted," he said.
Banks 'face a further $300bn sub-prime hit'
The world's financial institutions will have to write down a further $300bn (£152bn) of US sub-prime losses before the crisis is over, according to a study by consulting firm Oliver Wyman.
"We expect a stormy 2008," Oliver Wyman said in its State of the Financial Services Industry report. "While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting."
Tumbling property prices - especially in the UK and Spain - a weakening dollar, a possible collapse in commodity prices, and a fall in Chinese and Indian stocks will "disrupt" the global economy, the report claimed. Banks are already coming off one of the worst trading periods in memory, with shares across the industry plummeting 40pc in the past six months.
Oliver Wyman has estimated that financial services companies have already taken a $300bn hit on their sub-prime exposure. It estimates that $1,300bn worth of sub-prime mortgages were written in total.
US banks will feel the pinch in particular, Oliver Wyman predicts. "North American financial services firms will have a tough year," it said. "Market uncertainty, combined with further write-downs and expected home-price and loan-volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves."
UK: Pointing fingers at the plutocrats
In an extract from his provocative book Who Runs Britain?, Robert Peston looks at the roots of the current financial crisis and blames a political pact with the super-rich for impoverishing the rest of us
When the going was good, investment bankers, hedge fund managers and partners in private-equity firms all did very nicely from the bonuses and the capital gains and the fees generated by the frenetic manufacturing of deal after deal after deal. Many of them are now paying a price for failing to understand the risks they were taking on. Don't weep for them. They have already extracted fortunes.
It is most of us who are paying for their foolhardiness, as the pricking of a financial bubble they created has a negative impact on all our prosperity. Months, possibly years, may go by before banks are prepared to lend as freely as they had been doing. The price of money is going up for all of us, and the economy is slowing down, because regulators and governments did not dare stop the over-exuberant behaviour of greedy traders, bankers and financiers. In fact, the Government encouraged the excesses of these super-rich individuals and their financial servants because they were thought to be good for London and good for Britain.
There is collusion between most politicians, bankers and investors to avoid asking the big question: has the freedom of investment banks, private-equity firms and hedge funds to buy and sell what they like, when they like, gone too far? That would be to threaten the return to full throttle, whenever it comes, of the most successful machine in the history of the world for expanding the clone army of the super-rich.