Who’s Really Getting Bailed Out Here

This is not exactly new news for anybody following the plot, but a Deutsche Bank (DB) report that fluttered uninvited into NakedShorts’ inbox over the weekend — danke, David S. Products — put some numbers on just why Uncle Sam Hank ain’t gonna let the GSEs' debt go bad, no way, no how.

...the biggest holders of US agency securities are countries with some of the largest current account surpluses vis-à-vis the US...

The Cayman Islands? Aaahhh, yes. More precisely, Hedgefundistan, doubtless bolstered by the odd petrodollar or two. For those uncomfortable with large numbers, the $3.15 trillion total is a mere 420 Kerviels®, give or take.

Not content with undermining the US economy by taking our chitties in return for the carp piled high at Wal-Mart and Bed, Bath and Beyond, and the fake leather upholstery option in the Escalade that seemed such a great deal with gas at $2.50 before the bank pulled the HELOC, they enabled the housing bubble. The kindness of strangers, a beautiful, beautiful thing.

But Hedgefundistan is, predictably, not keeping up its end of the bargain.

As of June 30, 2007 hedge funds and other investors operating through the Cayman Islands held a significant share of agency bonds. After the crisis started in August 2007 the hedge funds have been significant sellers of agency debt, whereas the emerging market countries (sic) have continued buying.

Bottom line:

We estimate that unless the GSEs are able to make a significant bounceback and raise substantial new capital, as much as USD10bn could be needed to facilitate expansion of the mortgage market at a minimally desirable pace over the year ahead, and another USD30bn could be needed to reserve against rising losses ahead.

And don’t go looking for any help from Kuwait.

NakedShorts is regrettably unable to pass along the complete report; investment bankers tend to take a dim view of that sort of thing, sponsoring as they do a veritable Wehrmacht of attorneys to shout “copyright” and “violation” and “misappropriation” and other dire prophecies. But your friendly DB prime broker and/or structured products salesman will almost certainly do the decent thing.

Fannie, Freddie, Sheila and Hank
Global Economic Perspectives
Deutsche Bank Securities Inc
Jul. 21 2008

Comments

[Dusty:]

In all these bailouts and buyouts (whatever the deal with Bear might be called) it would seem that some reference points or bench marks would help the general perspective. What, for example, does a new Navy carrier cost? Start with an empty drydock in a shipyard. Cost of hull, cost of nuclear power unit, cost of crew per year, how much does all those planes add, munitions prices to make it a viable system? From empty drydock to complete weapon system sailing out ready to do battle? Now cross reference this total with the money the Government is spending to keep our economy alive and to keep our friends and allies from suspending us in the air by the rope we put around our collective neck?

2008 Jul 29 04:42 AM

[Afthought:]

Dusty, too early for smoking the pipe - both carrier and bailout valuations are impossible gauge accurately. Additionally it is a cracked analogy; cracked big enough for the investment banker in chief, Paulson, to drive a brinks through.

2008 Jul 29 05:02 AM

[CanadianBanker:]

First Federal Bank is a train wreck in progress. First, the Sr. Mgmt is, I believe, making its greatest attempt to decieve investors. Note the following: (a) A new member was added to the board of directors on Friday - read the bank's press release (has "Shareholder dissent written all over it), (b) where's the bank's press release on 2Q earnings - normally announced on the last Thursday on the month following the quater end? Well, this quarter will be announced next Saturday - hopefully to keep the expected bad news as quiet as possible. This bank has all the markings of a government take-over. Consider this: (a) The bank is on the watch list of feds (in fact First Fed is considering a ludicrious lawsuit for disclosing this info in the LA Time, (b) core deposits continue to shrink - their base depoist is "brokered deposit" - those investors w/ excess cash of $100k looking to spread their money such that it's covered by FDIC, (c) Look closely at the reserves. The Bank is less then 50% reserved for loans on non-accrual - an accounting gimmick. Expect reserves to increase substantially w/ their 2nd quarter resuts. (d) Speaking of 2nd quarter, do you wonder why First Federal is announcing its 2nd Quarter next weekend? Expect bad news & management is hoping to diminish its impact on the street - love the arrogance but won't work. (f) Speakding of arrogance, did any investor fall for Prez Giraldin or CEO Hiembech's shock that so many loan applications proved to be untrue!!?? What, borrowers who applied for stated income loans actually lied on their application. This "surprise" from two seasoned executives in the S&L industry (I was hearing about these "Liar Loans" in 2004 - are you kidding me?? They are either idiots or think their shareholders are greater fools (read the 2007 annual report if you don't believe me). (g) Prez Giraldin conveniently sold over 50% of his stock (about 32,000) in November for orver $1 million. Ah, you fools, no you idiots. But keep buying FED stock & please continue making your deposits, even if Senior Mgmt doesn't believe in the Company (think Indy Mac, Countrywide, Bear Sterns)!! But read on my investor friends: according to CEO Hiembech, First Fed repurchased over 1 million shares of its stock at an average price of $48.00 (that is $48 million dollars FLUSHED down the toilet). First Fed stock won't see $48 in most of our lifetimes (unless you are 20; which in that case, by 40 it might hit $40). (h) Ever wonder why a CEO would post a non-sensical, gravellling letter begging customers to keep their deposits w/ First Fed (don't believe, look at FED's site; yes Hiembeck is reduced to gravelling for your dollars, which means things must be really bad given that for the last 10 years, she hasn't given a shit about anyone but herself. Please, please do not buy her crap about how well capitalized First Fed is, it is all in how you account for revenues and losses. The bank (more specifically, Hiembech & Geraldin have way under-reserved for loan losses and non-accruals). Ask any analyst: how can a bank be at 19% risk based capital with non-performing assets at over 6% and rising - you can't & they would tell you the books are cooked. Like I said, watch for 2Q08 - particularly cash. IF I WERE YOU, I WOULD PULL MY DEPOSITS FROM FIRST FEDERAL!!!!!!!!!!!!!!

2008 Jul 29 06:36 AM