I Love the Smell of Repos in the Morning . . .
Last night, I asked the assembled multitudes what was the Fed's motivation behind their big 50 bp whack.
Let me add some spin to the question: OFHEO will now allow Fannie Mae and Freddie Mac to increase their portfolios by 2%/year above cap.
"In another sign of an administration shift, the regulator for Fannie Mae and Freddie Mac, the Office of Federal Housing Enterprise Oversight, agreed to relax restrictions on the mortgage-finance companies' investment holdings. Ofheo's new policy allows Fannie Mae to increase its portfolio by 2% a year, a level comparable with an existing limit on rival Freddie Mac.
Fannie Mae called on the regulator to allow bigger increases. "We still believe the more effective response, given the extent of the market disruption, would be to raise our portfolio cap by at least 10%," Fannie Mae spokesman Brian Faith said."
The details will come out over the next few weeks -- but there are expectations this will eventually include Jumbo Mortgages, Sub-Primes, etc.
Thus, a GSE, originally established to make purchasing homes more affordable for the middle and lower classes, has now become a subsidy for speculators and the purchases of McMansions.
These are your tax dollars at work . . .
In a recent letter to Rep. Barney Frank, FOMC Chair Bernanke opposes the increase. We must assume Helicopter Ben does not want competition for their "Credit From Above" air cavalry unit (via a bastardized version of “Apocalypse Now” and Lt. Col. Kilgore’s ‘Death From Above’ moniker for his helicopter/air cav unit).
And, as Bill King notes, we cannot answer the question of whether the Fed plays “Ride of the Valkyries” before injecting credit or cutting rates. But he is hard at work spreading the rumor that Ben ‘loves the smell of repos in the morning.’ He says, “It smells like...victory.”
Less sarcastically, and more specifically, King observes:
"You know all that crappy paper, particularly mortgage-related, that is circumnavigating the universe in search of a home? Ironically, Helicopter Ben might have just made it harder to unload the crap on patsies.
The intent of the 50bp rate cut is to:
1) alleviate the urgency to unload crappy paper, and
2) to prevent a panic and Northern Rock-like run on US financial institutions.
Unintended consequences of the 50bp rate cut include:
1) re-popularizing ARMs, especially with so many pundits forecasting more rate cuts. (Isn’t ARM excess a major factor in the current mess?)
2) Long rates have increased smartly.
Helicopter Ben’s dual rate cuts have cut the legs off of bonds and the non-ARM mortgage market. Higher long-term yields will force the price of crappy paper lower. Ben better hope that his scheme to lower the ‘cost to carry’ on crappy paper mitigates the urge to avoid capital losses.
We need some context to comprehend this: Alan Greenspan's 1% rates created what looked like a huge Housing boom. But what it really created was a credit boom, which then in turn led to a derivative boom and ultimately structured finance boom.
Thus, the so-called sub-prime crisis was merely the match that ignited a much wider breakdown.
I like this quote from Christopher Wood, chief strategist at the broker CLSA:
“This is not a sub-prime crisis. Sub-prime has merely exposed the bigger scam of structured finance; a scam that is about pretending that bad credit is good credit.”
That's as good an explanation as any of the others that have has been proferred so far . . .
Credit Markets Show Revival After Rate Cut
DAMIAN PALETTA and SERENA NG
WSJ, September 20, 2007; Page A1
Chief strategist at CLSA predicts record gold run
Leo Lewis in Hong Kong
Times online, September 19, 2007
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Barr... Good Luck w/ all of the projects!!!!
It's not a subprime crisis at heart, Wood is right...
When U.S. rates are a 1% and Japan's are 0% -- and people in the industry will make huge money brokering these loans and creating and selling the structured finance instruments... Then participants could hardly resist moving around that cheap money as many times as possible for as many Bps in fees as possible.
The subprime blowup merely illustrates the fact that when when the "powers that be" act irresponsibly -- the financial system follows suit...
If the FED etc. wouldn't eat a big recession after 9/11 but instead put rates to 1% -- then that's a sign to particpants that however risky and unrealistic their borrowing and trading activity may be it would be worth it because there would always be a "bailout" light at the end of the tunnel...
remember that water will flow with gravity from the high ground to the low...seeping downward as it trickles along...so too with the MASSIVE liquidity injections in the past decade...Eventually in 2004-2005, at the end of the boom, even the most base levels of the system... subprime mortgages were severely beset with irresponsible lending buying selling and borrowing.
Just a thought.....
Is the fact that the FED cut 1/2 a point with the INDICES (not nazz) so close to new highs an inadvertant reveal that those highs are only nominally existant and that in REALITY i.e. vs. Gold and other currencies and assets, the INDICES are really down 50% ish since 2001?????
Posted by: SINGER | Sep 20, 2007 8:25:48 AM
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