PrefBlog

Panic, Chaos, Confusion! And then it got worse!

It looks like the US administration, quite properly, will ensure investors are wiped out before taking over Fannie & Freddie:

A government takeover of one or both companies is among several options that have been considered, Joshua Rosner, an analyst at Graham Fisher & Co., said after meetings with administration officials. U.S. Treasury Secretary Henry Paulson said today that federal regulators are backing Fannie Mae and Freddie Mac in “their current form.”

“The administration is considering all options in its contingency planning,” Rosner said. “That doesn’t mean to say that we’re at an inflection point where any decision is required immediately.”

The U.S. is reluctant to step in before Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, which own or guarantee about half the $12 trillion in home loans outstanding, exhaust their options for raising capital, according to Rosner and U.S. Representative Spencer Bachus of Alabama.

… but this will have very serious knock-on effects …

“It is impossible to contemplate all of the negative events that will occur if Fannie and Freddie go under,” said Richard Bove, an analyst at Ladenburg Thalmann & Co.

Fannie Mae fell $4.40 to $8.78 as of 11:21 a.m. after closing at the lowest level in 17 years yesterday. Freddie Mac slid $2.85 to $5.15.
…
“Fannie and Freddie’s demise mean the investment banks can’t do any more securitization for a while, but their securitization revenue being zero has been written off from their share prices already,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co.

There is considerable opposition to a bail-out:

Former U.S. Treasury Secretary John Snow said that Fannie Mae and Freddie Mac have relied on leverage to fund their businesses in the same fashion as a hedge fund, and that the government should avoid taking them over.

“Congress ought to be embarrassed” for years of delays in passing legislation aimed at strengthening regulation of the two companies, Snow, now chairman of New York-based buyout fund Cerberus Capital Management LP, said in a telephone interview. He said he flagged when in office that “the business model they were using was really the model of a hedge fund.”

The government-chartered companies, which grew to account for almost half of the $12 trillion in U.S. mortgages, were able to borrow at cheap rates because of an implicit federal guarantee, Snow said. His opposition to a full government takeover echoes the signal sent today by his successor, Treasury Secretary Henry Paulson.

Naked Capitalism has further clippings.

After the bell IndyMac was siezed by regulators:

IndyMac Bancorp Inc. became the second-biggest federally insured financial company to fail today after a run by depositors left the California mortgage lender short on cash.

The Federal Deposit Insurance Corp. will run a successor institution, IndyMac Federal Bank, starting next week, the Office of Thrift Supervision said in an e-mail today. Customers will have access to funds this weekend via automated teller machines.

The Pasadena, California-based bank specialized in so-called Alt-A mortgages, which didn’t require borrowers to provide documentation on their incomes. Its home state has been among the hardest hit by foreclosures.
…
IndyMac becomes the largest OTS-regulated savings and loan to fail and second-biggest financial institution to close behind Continental Illinois in 1984, according to the FDIC.

The lender racked up almost $900 million in losses as home prices tumbled and foreclosures climbed to a record. California ranked second among U.S. states, with one foreclosure filing for every 192 households in June, 2.6 times the national average.

The Office of Thrift Supervision comments:

The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.

“This institution failed today due to a liquidity crisis,” OTS Director John Reich said. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

Schumer comments:

“If OTS had done its job as regulator and not let IndyMac’s poor and loose lending practices continue, we wouldn’t be where we are today,” Schumer, a New York Democrat, said in an e-mail today. “Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.”

Naked Capitalism has other media clippings.

Credit woes? You know things are really getting out of hand when people need to be reassured about … :

U.S. debt is “well within” the guidelines for an Aaa rating, said Steven Hess, vice president and senior credit officer at Moody’s in New York. The U.S.’s AAA rating is not at risk, said Nikola Swann, S&P’s primary U.S. credit analyst.

Treasuries got crushed and Accrued Interest provides us with a little nugget about credit swaps:

credit default swaps on the United States of America moved 11bps wider today (from 9bps to 20bps).

Who’s the counterparty?

Accrued Interest comments on monoline re-structuring initiatives with the telling line:

In other words, bonds are trading as though there is a penalty for once carrying Ambac or MBIA insurance. While this would seem to present a buying opportunity, be sure you can handle the illiquidity. Many institutional municipal buyers don’t want to explain to their clients why they hold so much MBIA paper, so even at higher yields, bids can be hard to come by.

This is an unfortunate reality of the business. There are many who take great joy in pointing out that the average investment manager (by which they generally mean “stockbroker”, an entirely different thing) is average. Chasing rainbows, panicking … there are a great many investment managers (and many more stockbrokers) who simply reflect the greed and fear of their clients without adding any value of their own. But … if they don’t reflect the greed and fear of their clients, they’ll get fired and the next guy will reflect this greed and fear.

Investment pundits love a hard-nosed maverick who sticks to his guns, right or wrong … until the first time he’s wrong.

Things went blahooey today all right! Yet another ghastly day, with some extremely sloppy trading (great market making there, guys! Keep up the good work!), not terribly exciting volume and … none of the volume leaders had any block trades at all. Retail’s panicking, Institutional’s at the cottage … I get a little trading done now and then. Not much, but enough to be worthwhile.

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

This entry was posted on Friday, July 11th, 2008 at 11:40 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.