Even though the stock markets are over the moon as of this hour (the Nikkei up nearly 440 points, other Asian markets up over 3%, bank stocks up even more), the all-important question is the reaction in the credit markets. It is far less enthusiastic. One might charitably call it underwhelmed.
From John Jansen:
I just spoke with a trader in Tokyo who works for a rather substantial primary dealer. He said that benchmark agency spreads are about 20 basis points tighter than levels which prevailed at 300PM on Friday. Following the Wall Street Journal report spreads tightened about 10 basis points and have moved another 10 basis points in early trading there.
He described market conditions as “illiquid” and “worse than March”.
And this comment from reader and credit market analyst Marshall:
A major bankruptcy can often mark the climactic low of a bear market, but this comes after months of downward pressure, compelling valuation and signs of incipient recovery. And this bailout isn’t even a “one-off”. Youll probably get rolling bailouts to the GSEs on a quarter by quarter basis and so nobody can quantify the total cost to the taxpayer.
And will the foreign central banks, which have hitherto provided the biggest bailouts to the US economy, continue to play along? They might appreciate the fact that the government’s implicit guarantee for the GSEs is now explicit, but you’ve still got no pricing transparency, as you did in Sweden, so there can be no real confidence in the government bailout, because the government is actively perpetuating subterfuge and offering no segregation of the good assets vis a vis the bad assets. It’s another half-assed measure by Paulson, who still doesn’t want to hurt his friends on Wall Street too much.
9 comments
Comments are closed.
Here we go again. The 7th weekend government rescue. Market surge followed by reality. I am starting to see a pattern….
Yves,
Yves,
The seizure appears to have been triggered by a hedge fund attack on the shares of the GSE’s which began to collapse broadly in after hours trading on Friday night; Fannie Mae plunging over 25% and Freddie Mac down in excess of 15%. In both cases, ‘the bottom’ simply dropped out, and rather then have both shares prices collapse in very public fashion (likely even further) on Monday, the government simply moved in and seized the companies.
Here is how an analyst put it:
In reality, this signals that the credit crisis of the last 12 months has now entered a new and likely even more negative phase, with the government balance sheet now ‘on the line’ to make the formerly implicit GSE guarantees, now explicit government guarantees. The demise of Fannie and Freddie over time has the potential to add as much as 2 Trillion dollars of bad debt onto the backs of U.S. tax-payers. This is a potentially staggering sum when you consider that US GDP is on the order of 13 Trillion dollars. Of course, we know that some of the initial estimates for bad debts are far lower, ranging in the order of $200 to $300 billion dollars.
However, what is not being generally discussed is the fact that both GSE’s are loaded with major derivative exposure and there is a good chance that the crisis in GSE Mortgage land could start a chain reaction derivative melt-down over time. Over the years, the GSE’s have been THE liquidity back-stop for the mortgage arena with SWAP transactions of all kinds networked throughout the financial system and massive quantities of complex mortgage backed securities. While the government take-over of Fannie and Freddie may forestall some near term liquidity issues, the take-over will
not solve the larger problem of falling real estate collateral values, which will continue to wreak havoc on the balance sheets of corporations throughout the financial sector.
Sorry for the double “Yves”. I was not calling for an undue attention to my argument. Just a typo.
>> "The seizure appears to have been triggered by a hedge fund attack on the shares of the GSE’s which began to collapse broadly in after hours trading on Friday night; Fannie Mae plunging over 25% and Freddie Mac down in excess of 15%. In both cases, ‘the bottom’ simply dropped out"
What about Friday afternoon, what was that all about???
While the effective conversion of GSE debt into Treasury debt may not signify, an effective socialisation of the housing bubble might affect the value of the dollar, no?
Bad news for sustainability of US current account deficit
….
This is bad news for those who think that accumulating current account deficits can be financed at constant returns to the foreign investor. In practice, foreign investors require a currency depreciation before financing new deficits.
….
Cited in:
How a downturn could turn into a disaster
By Wolfgang Münchau
This is like transferring a patient from the regular floor to the intensive care unit: never a good sign.
We’re nationizing (in the most half-assed way we can) the housing industry, because China holds a lot of mortgage debt. China also manufactures most of what is consumed in the US. What’s wrong with this picture?
This is what happens when creditors run a country…without any oversite at all. Who made Paulson President of the US?
“Financial Industry” is an oxymoron.
FYI: Outrageous Severance Deals For Fannie/Freddie CEOs–Paid For By You
http://www.businesssheet.com/200…nie-and- freddie
Specifically, Dan Mudd, the CEO of Fannie Mae, is getting $9.3 million of severance for destroying his company. Richard Syron, the CEO of Freddie Mac, is getting $14.1 million–in part because of a clause he added to his employment contract two months ago, when it was clear the company was headed for disaster.
I apologise for not linking the acutal headlines and dates of occurrences but time prohibits that right now (am dashing out for an appointment and Im late already..).
Have you noticed how schizophrenic the (share) markets have been? One day its “markets down on oil price fall” followed a few days later by “markets up on oil price fall” followed by “markets down on oil price rise” and then to make sure all possibilities have been covered “markets up on oil price rise”.
Seriously, I have lost all faith in crediting markets with any intelligence whatsoever at this point….
There is no rhyme or reason or logic. Any news appears to be alternately acknowledged by a market movement.
Marshall hit it on the head ~”It’s another half-assed measure by Paulson, who still doesn’t want to hurt his friends on Wall Street too much.”
But Paulson went further by extending credit to the FHLB Banks to buy repackaged MBSs that Wall Street will no doubt start bundling tomorrow.
Yes Mr Paulson has a track record of BS remedies including the Super SIV, Callling for New Regulation in an election year and his famous Hope Now project which is hopeless.