More On Banking Subprime Fallout [Housing Tracker]

Seeking Alpha's Housing Tracker is a collection of housing-related excerpts from various sources, grouped by topic. Feel free to post any interesting links on the subject in the comments section below.

Quotes of the Day

“It sounds like Paulson is asking to be a financial dictator, for a limited period of time.” - Historian John Steele Gordon, on Henry Paulson’s plan to ask Congress for free-reigning powers to buy $700 billion in bad mortgage investments from U.S. financial companies. (Bloomberg, Sept. 20) 

We should be "unafraid to think and act on the scale of the New Deal-era reformers.” – Yale economist Robert J. Shiller, who looks at the current subprime crisis as an opportunity to transform America in the same way the depression did, by further “democratizing finance” in America. (San Jose Mercury News, Sept. 21)

“How will you address the perception by the market that money market mutual funds now have a permanent implicit government guaranty – much like Fannie Mae and Freddie Mac did?” - American Bankers Association president Edward Yingling said in a letter to Fed chief Bernanke and Treasury Secretary Paulson that a great majority of banks never made a subprime loan and have paid billions of dollars into the FDIC fund for the past 75 years. (Housing Wire, Sept. 19)

Banking Subprime Fallout

The Road Ahead. “Both Morgan Stanley (MS) and Goldman (GS) shares look reasonably priced, with MS trading below its book value of $31 and Goldman at 1.3 times book value… Financial leverage at Goldman and Morgan Stanley… will have to come down, lowering returns. And it's going to be tougher to carry the illiquid assets, like private-equity stakes, that were a boon to [them] on the way up… Hitting new 52-week highs on Friday, richly priced regional banks include Wells Fargo (WFC), US Bancorp (USB) and PNC Financial (PNC)… Shares of Bank of New York (BK) and State Street (STT)… [look appealing. Both] now trade at historically low valuations.” (Barron’s, Sept. 22)

Wells Fargo Not Only Surviving Downturn, But Thriving. “Wells Fargo's stability is a consequence of its limited exposure to failing mortgages, particularly of the subprime variety. It hasn't escaped unscathed, however. It said it would take Q3 charges related to investments in Fannie Mae (FNM), Freddie Mac (FRE), and Lehman Brothers, but much less than those taken by rivals Wachovia (WB) and Washington Mutual (WM). Wells Fargo has been selectively acquiring assets, mostly in the western U.S., during the economic woes, and is expected to continue to do so.” (Blogging Stocks, Sept. 21)

U.S. Treasury Widens Scope of Plan to Buy Bad Debt. “The Bush administration widened the scope of its $700 billion [bailout] plan… by including assets other than mortgage-related securities… The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset. That may force an eventual increase in the size of the package as Democrats and Republicans in Congress negotiate the final legislation with the Bush administration, analysts said.”  (Bloomberg, Sept. 21)

Government Steps To Head Off Run On Money Funds.  “In [a move] to bolster the teetering $3 trillion money-market mutual fund industry and stem a wave of withdrawals… the Treasury Department said it will tap into a $50 billion fund created during the Depression and temporarily provide guarantees for the popular [money market funds.] Held in some 38 million accounts, [M-M Funds] enable investors to see modest returns while keeping cash readily available if needed. Providing additional support, the Federal Reserve took steps to back typically safe commercial short-term lending that underlies fund assets.” (AP via MSN Money, Sept. 19)

Aurora Sees Servicer Ratings Dropped in Wake of Lehman’s BK. “Fitch Ratings has cut its core servicer ratings on Aurora Loan Services, the substantial servicing arm and Alt-A origination platform tied to Lehman Brothers Holdings. All servicer ratings were affected… Aurora’s residential primary servicer rating for Alt-A product [was] downgraded to ‘RPS3+’ from ‘RPS2+’; its residential primary servicer rating for subprime product to ‘RPS3′ from ‘RPS2′; its special servicer rating to ‘RSS3′ from ‘RSS2′; residential master servicer rating downgraded to ‘RMS3+’ from ‘RMS1′. The master servicer ratings cut is by far the most substantial and dramatic, a four-notch cut; all cuts move the servicer into territory that could potentially affect its ability to maintain servicing on some deals.” (Housing Wire, Sept. 19)

Freddie Mac Discloses Large Exposure to Lehman. “Freddie Mac disclosed in a securities filing Thursday that it hasn't received principal payments of $1.2 billion plus interest on short-term loans to Lehman that were due Monday. A Freddie spokesman said the loans were part of the mortgage company's routine management of cash reserves and were made in late August. The cash was advanced to Lehman in the federal funds market for short-term loans among financial institutions.” (WSJ, Sept. 19)

ABA: Money Market Bailout Could Compromise Bank Deposits. “American Bankers Association president Edward Yingling said that the bailout of money market funds “will undermine the role of banks during this current crisis and has the potential to have an extremely negative impact in the future.” The U.S. Treasury moved Friday morning to insure money market funds, after a few funds “broke the buck” earlier this week.” (Housing Wire, Sept. 19)

Citi, Looking Rejuvenated, Weighs a WaMu Takeover Bid. “Citigroup Inc. (C) is considering making a bid for Washington Mutual Inc… While the New York company has suffered tens of billions of dollars in mortgage-related write-downs in the past year, it raised more than $40 billion in capital and has deposits to fall back on as a reliable funding source. As a result, Citigroup is in a relatively strong position to consider expansion opportunities that seemed impractical earlier this summer. In particular, Citigroup is eager to expand its U.S. retail-banking network.” (WSJ, Sept. 19)

Questions, Partisan Demands Surround Financial Bailout. “More than a few market insiders expressed concern at the Fed and Treasury’s plan, to the extent that it involves resurrecting the Resolution Trust Corp., which was created to manage the liquidation of bad assets tied to the S&L crisis... But other sources… suggested that very few still understand just how close to the edge the financial market really was on Thursday… Needed or not, [one] equity fund manager said: “I think we eventually lose our AAA rating because of this.” In April, S&P’s Ratings Services suggested that the ailing GSEs alone might be enough to threaten the U.S. government’s AAA credit standing.” (Housing Wire, Sept. 19)

How SEC Regulatory Exemptions Helped Lead to Collapse. “The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms… to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1. Instead, the 2004 exemption -- given only to 5 firms (Goldman Sachs, Morgan Stanley, Bear Stearns, Merrill Lynch, Lehman Brothers) -- allowed them to lever up 30 and even 40 to 1… Former SEC official, Lee Pickard: Making matters worse… the SEC this month… withdrew requirements that they maintain a certain level of rating from the ratings agencies.” (Barry Ritholtz, Sept. 18)

A Nuclear Winter?  “Investors [worry] about financials [because they] don’t know how exposed they are to the derivatives market… A bankruptcy the size of Lehman’s has three potential impacts on the $62 trillion credit-default swaps market, where investors buy insurance against corporate default. All of them would have been multiplied many times had AIG (AIG) failed too [with] $441 billion in exposure to credit derivatives. A lot of this was provided to banks, which would have taken a hit to their capital had AIG failed… The first impact concerns contracts on the debt of Lehman itself. As a “credit event”, the bankruptcy will trigger settlement of [insured] contracts… The second effect, [in] deals where Lehman was a counterparty… The third effect will be on the collateralized-debt obligation market.” (The Economist, Sept. 18)

Are Commercial Banks the New Kings of Finance? “Out of the wreckage emerges a new, more powerful investing institution - a hybrid commercial/i-bank…There are challenges to the super-bank model… Both Citigroup and UBS have struggled to retain investor’s confidence in 2008 as their under-performing securitized assets cannot be separated from the more stable retail banking business.  Goldman Sachs and Morgan Stanley, the two remaining stand-alone investment banks, have strong balance sheets and analysts don’t seem to doubt their future viability.  It seems that savings and deposits, the staple of the banking business since its conception, will once again provide the backbone of the industry.” (The Simplified Investor, Sept. 17)

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Comments

[ineedacookie:]

Well, here’s something that goes beyond the trivial discussions that go on within seekingalpha; Something that’s beneficial & important especially to you here on seekingalpha. Today we are going through a financial crisis in the world and its concentrated within the US. Changes are occurring at a rapid pace and we have reached a point right now where we have hit a crossroad for what the world's future would be like the next decade; (1) one road leads to a collapse of our economic system that will destroy the country's ability to preserve jobs & create future jobs, lead to destruction of the remaining value of what we own & earn, lead to higher costs for you, your family (grandparents & sons & daughters), and friends who'll no longer be able to scrape by to pay for housing, food, healthcare, and transportation, and lead to government control that goes beyond anything we can imagine today; OR (2) the other road that leads to flushing our economic system to preserve our ability to create future jobs, save the value of our livelihoods & standard of living for all of us, and salvage our base freedoms & rights to prosperity-which have been undermined but we need to atleast preserve the base that we have today so we can fight to reclaim all our freedoms & deserved rights that any world citizen should enjoy.

Anyways, this is what brought me out of my apathy, getting turned on to an amazing man fighting for us, Karl Denninger who put up this 10 min video that lays out what happened to our financial system from banks down to us these past 5 yrs in a comprehensive, logical manner;
www.youtube.com/watch?...

Here is the SOLUTION he posted today, September 21, 2008. Very important - Watch this:
www.youtube.com/watch?...
Again this solution is a document you can read through and has been submitted to the senate this weekend. It has been hand-signed and distributed to each member of the Senate Banking Committee and hopefully is considered there.

This is the solution & the best, realistic shot at starting to address & fix the problems we are facing today. All I ask of you is to check out the videos, consider it, think about it, discuss it, share it with others, distribute it please. At the very least this will create much needed discussion amongst us for a realistic solution today or at the very best it will lead to the first step in many to halt a finacial collapse & stop a government shutdown on the people, preserve our ability to financial prosperity and ability to get a job (a good paying one in this country), and provide an example for others to follow. It can lead to a much brighter future for our ourselves, our families, and friends.

Please tell me what you think and copy/paste this to others you know.

Thank You,
Pete
(I had not had any communications with Karl Denninger, however since he moved me to get out of my seat & do this, I copied and pasted this message to him and I hope he appreciates this message as a token of respect to the message he is fighting to get out to the rest of us).

2008 Sep 22 03:43 AM

[Luan:]

Why worry about the election. At the rate Bush is going there will be nothing left to govern.

2008 Sep 22 11:03 AM