It's All About Guaranteeing Counter-Party Risk [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.

Quote of the Day

“So that would drive Libor down and basically tell the banks, 'Look, do your normal business, if anything goes wrong, we'll pay for it.'” - Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. on Treasury Secretary Paulson’s plan to buy equity stakes in banks. (Reuters, Oct. 10)

Subprime Banking Fallout

U.S. Officials Said to Offer Protection to Japan Investors. “Sources: Federal officials assured a big Japanese bank late Sunday that its planned investment in… Morgan Stanley (MS) would be protected… Treasury officials urged a hesitant Mitsubishi UFJ Financial Group to proceed with its $9 billion investment in Morgan Stanley, which has sought the capital infusion to reassure investors and customers about its stability. The deal is considered a crucial step in the government’s strategy for revitalizing the financial system by luring outside investment while it considers buying stock in banks directly… The Treasury’s assurances amount to another extraordinary move by the government and could serve as a model for future deals.” (NY Times, Oct. 12)

Fix the Credit Problem, Not its Symptoms.  “The Federal Reserve and the Treasury Department… have been treating falling asset prices—houses, stocks, bonds—as well as the lack of confidence between banks, as the actual issue… Falling asset prices and a lack of confidence are a result of the underlying problem: Banks are refusing to extend credit to each other because they do not understand the liabilities of their counterparties… They don’t know if the other bank whom they are dealing with will still to be standing tomorrow. The thing roiling markets today is not the lack of confidence; It is capital, or more accurately, the lack thereof… Banks are now dramatically undercapitalized.” (The Big Picture, Oct. 10)

AIG Increases Borrowings While Racing to Sell Assets. “Market conditions aren't helping prospects for AIG’s assets sales. In the current environment, with investors and credit-rating agencies voicing deep concern over the industry's capital reserves, potential suitors are holding back. AIG (AIG) is also reluctant to part with businesses, many of which it built up over decades, at fire sale prices.” (WSJ, Oct. 10)

White House Overhauling Rescue Plan. “The Federal Housing Finance Agency… lifted capital restrictions on Fannie Mae and Freddie Mac last week and effectively gave them a green light to buy more mortgage securities of all types, including those backed by subprime loans, given to borrowers with weak credit. The companies have a lot of money; Congress authorized Treasury to lend them as much as $100 billion each as part of the rescue plan created for them. That could free up money in the separate $700 billion bailout plan for injecting capital directly into the banks.” (NY Times, Oct. 11)

Feds Waive Capital Rules For Fannie, Freddie. “Federal regulators: Fannie Mae (FNM) and Freddie Mac (FRE) are [officially] undercapitalized. [They] have suspended rules that would have required the companies to raise additional money. Federal Housing Finance Agency: Fannie and Freddie have effectively been undercapitalized since June 30. But the Treasury Department's backstop of the companies… ensures that "for the very long term both entities will have positive net worth.” Before being placed into conservatorship, Fannie calculated its core capital of $47 billion represented a $9.4B surplus above that required by regulators. Freddie Mac said its $37.1B in core capital exceeded regulatory requirements by $2.7B.” (Inman News, Oct. 9)

                                                           

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Comments

[madasiwannabe:]

The GSE's were better capitalized before conservatorship then they are now. The takeover was just a knee jerk move to treat the symptoms. The cure ended up being worse than the problem.

Buying troubled assets is another treatment for a symptom. The banks got themselves in trouble, and should be allowed to get themselves out. Buying equity stakes in the companies is a much better solution for the markets as well as the taxpayers. It doens't relieve the banks from their responsibility, but it does give them the capital they need to work through the issues, and in the end, the taxpayers will be rewarded.

Since the government takeover had nothing to do with insolvency, and had everything to do with restoring market confidence at the expense of the GSE's, the terms of the intervention are completely out of line with today's market reality. Only question now is will the treasury level the playing field by cancelling the warrants and instead take equity stakes in the GSE's equivelent to the capital they have injected?

2008 Oct 13 08:51 AM

[blondino:]

yeah, but confidence just evaporated after govt communication stating that GSEs are financially sound with ample (mandatory) cushion, then zap nationalized over a sunny weekend with no escape door for investors. so what's that if not undermining confidence BIG TIME!???

2008 Oct 13 09:06 AM