PrefBlog

VoxEU has put together a book comprised of selected columns about the sub-prime crisis.

The GSEs got whacked today, on reports that they may need to raise $75-billion:

Freddie Mac fell $2.59 to $11.91 after earlier dropping as low as $10.28. Fannie Mae declined $3.04 to $15.74 and earlier fell to $14.65.

The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients today.

Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote.

The companies will probably get an exemption from the rule because it would be “very difficult” for them to raise that amount of capital, the analysts said.
…
“The provision discussed by Lehman could have an effect on our ability to serve the housing mission,” Freddie Mac spokeswoman Sharon McHale said. “We would hope FASB would take into account our mission” when it writes the final rule, McHale said.
…
Yields on agency mortgage securities relative to U.S. Treasuries rose to the highest since March 13 on concern that banks may need to sell off the debt.

Bank of America Corp., the second-largest U.S. bank, may sell mortgage assets after buying Countrywide Financial Corp., Kenneth Hackel, the managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a note to clients.
…
The difference between yields on the Bloomberg index for Fannie Mae’s current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened 7 basis points, to 204 basis points. The spread has climbed 18 basis points since June 18.

Note that Accrued Interest comments that he does not believe that the sell-off and Lehman’s analysis are related.

Remember my table of CM issues on June 26? Well, here’s a table of PWF issues, just to make sure you’re thoroughly confused.

Negative Convexity? Negative Schmonvexity! It just doesn’t make any sense!

Update: Assiduous Reader prefhound points out in the comments that PWF goes ex-dividend tomorrow … so be careful when comparing! … end update

The market got thumped again, on average volume with a notable paucity of block-trades. What can I say? It looks retail-driven … but it’s pretty depressing anyway. But with long corporates still hanging around 6.10% and PerpetualDiscounts now yielding 6.23% … tax-advantage? We don’t need no stinking tax advantage! But for those who do, AND who have an interest-equivalency factor of 1.4x, that’s +262bp. Wow.

There were nineteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Monday, July 7th, 2008 at 9:44 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.