Presiding over Supply
Posted on: November 5, 2008 - Email Article - Printable Version
The transformation of the financial landscape over the past several months has left investors searching for a safe haven for their money. As evidenced by periods of negative t-bill yields, the flight to safety has investors flooding the risk-free market or sitting in cash. The freezing of the credit markets has been a product not just of uncertainty amongst borrowers and lenders, but of uncertainty regarding the role of government in our capital markets. The unprecedented actions taken by the Federal Reserve have changed the traditional thought process on investing. Moreover, with the looming Presidential election, the investment framework has another big question mark. Assuming Senator Obama takes the election Tuesday night and the Democrats retain the Senate, the investment community could find itself in an unnatural and unwelcoming regulatory environment. One can’t help but juxtapose Obama and Reagan, with the liberal senator poised to bring to an end to laizze faire capitalism as quickly as Reagan ushered it in.
The Election
The recent Federal Reserve action will limit the effectiveness of the next President-elect. The move toward market stabilization has piled the government’s balance sheet high with debt. The government essentially has two options to pay for the tremendous amount of its debt outstanding in the market. First, it can raise taxes. Gi
ven the increasing likelihood of a Democratic President and Senate, do not rule this out. Second, it can let inflation run rampant (say 6%). With interest rates priced to be cut again, this is also a possibility. Federal Reserve Bank of San Francisco President Janet Yellen said Friday the central bank may cut the benchmark interest rate close to zero. Whatever the decision, the reality of the government’s financial situation will by necessity take precedence over most of the promises made on the election trail.
Demanding Supply
The Federal Reserve has the Treasury market awash in liquidity. Tuesday the Treasury auctioned $35 billion 2-year notes. This coming Wednesday, they will announce the November refunding, where it is likely to include $20 billion in 10-year notes and $10 billion in 30-year bonds. Additionally, there is an expectation the Treasury will announce $25 billion in 3-year notes. As the federal deficit continues to blow up, concern over the markets ability to handle the increase in supply is mounting. The dramatic resteepening in the yield curve demonstrates the effect of the rate cuts on the front end in contrast to the supply concerns keeping yields high on the long end.
While the huge increase in Treasuries is a concern, recessionary conditions and volatile equities are friendly to this market and should keep investors parking their money in them. What is more interesting is the spillover effect from the government’s borrowing spree. Demand for debt is being impaired by deleveraging firms and shrinking balance sheets. All of the supply in the Treasury market and the government backing of the banks’ paper means that safety-seeking investors have little reason to place their money in Fannie and Freddie. The traditional means in which Agencies make money, 
their ability to borrow at 
comparatively favorable rates to where they lend, has been significantly impaired. The result of this is a mortgage market that remains very expensive. The New and Existing Home Sales numbers have been atrocious and will continue to be until financing becomes more reasonable.
The other group seeing the pain of the government’s recent issuances and their backing of the banks are the lesser quality names in the corporate space. The Leveraged Finance departments at most of the banks have seen massive layoffs as the subprime debt market has all but dried up. While this is an unfortunate consequence in most economic downturns, it is being exaggerated by flight-to-quality investors having to pay less for safety because of increased supply. However, unlike the spillover effect in the mortgage market, I actually view this trend as somewhat favorable. Consolidation seems necessary right now and allowing poor firms to continue to operate reinforces unnecessary risk-taking that to a large part got us into this credit mess.
PMI and Supply
The Chicago PMI was released Friday afternoon. The results were abysmal and the market sold off heavily on the news. The New Orders-Inventories spread was -24. While a somewhat unrelated note than above, I think the
general concept applies. Demand for corporate goods is waning and supply is not slowing in parity. The one light for GDP earlier in the year was our ability to export excess supply. Q3 brought a -0.3% reduction in GDP as foreign demand has hit a wall on the heels of similarly struggling economies. San Francisco Federal Reserve Bank President Yellen summed it up well stating “Clearly, we have a long way to go before the credit crunch shows significant healing…We are in the grip of an adverse feedback loop,” in which tighter credit conditions are exacerbating economic weakness.
I think an Obama victory is mostly priced into the market and Tuesday’s election will only affect stocks if McCain can surprise us all with a victory. That being said, the market should trade mostly on economic indicators for the week. Most notably will be auto sales, nonfarm payrolls and the unemployment rate. However, this is not to play down the enormous importance of Tuesday’s election. The decision the U.S. makes will decide economic policies and regulations that affect us beyond just the next four years. All eyes throughout the world will be on the United States Tuesday evening as the result of one of the most important elections in our history is decided.
-Adam Brown
Disclosure: None.
The Following Stocks Were Mentioned In This Article: FNMA
Comments
A thought
This is what is wrong in America. The man who Built Burlington Coates (Worth 7-Billion Approx.,) stared in the depression and never took more than 100,000 (A YEAR as Salary till the last (3) years and now takes $250,000-a year. The avg., American makes $20-45,000 a year. I, have Built of Motels ,Condos and worked (7) Days a week most my life starting as a 6 year old boy for my Father (A old Depression Farmer)-*&* Was asked by the help if I, were adopted / or a step-son.As they saw me do a mans job starting at 6-AM (The workers arrived at 8-AM) and the (Workers left @ 5-PM) My Brother and I Stopped working @ 9-10-PM (7-Days a week)
Who the ____Do these people making $250,000 to Mr. Paulson with 160-Million Dollar Bonus think they are-?-
Wed ,need “America” back with manufacturing jobs paying $16-30- a hour and to build a nation of savers and Hard-workers.
Paul, this nation will not survive with this GREEDY-LAZY-Un-American-ME-ME-ME /Money-Money-Money/Gambling /Drugged-up/Alcoholic/Upper Income to the top Billionaires businesspeople /Congressman /Senators—Who have NO idea how a average American lives -works-or struggles/I, wish You could interview the Man who built Burlington Coates and show him what is written here and ask him his opinion.
George Washington and Thomas Jefferson /*&* Benjamin Franklin were willing to Die /Lose everything they own to get Us AMERICANS A CONSITUTION *&* A BILL of RIGHTS.
Franklin=invented the Eye-glasses and give the invention “FREE” to the “PUBLIC” as He said “GOD had given him—He also invented and give a type of Heating stove that used 1/2 the normal Lumber&/or Coal to Heat Americans –who would have Frozen otherwise—
I,could go on *&* on and these people of this Country *&* the “World” think Men of this Statue are dumb (Willing to give “ALL” for their fellow countrymen *&* women and the ABOVE is their re-payment-????) Our schools refer to them as a bunch of WHITE BALD-HEADED old MEN—???
I Fear people who know not their history are bound to repeat the worst of Human-Kinds-WARS-Depression etch!!!!!!!
Franklins’ biggest FEAR of Democracies was they end-up 1st as Republics then Democracies of a Pluralistic nature and then Anarchy—Them Dictatorship. (A “STALIN” (Murder 40-million of his own people) (Hitler(Murdered 3-6 Million Jews and on top of that FORCED THE GERMANS into a WAR many DID not want and killed the protestors either in a similar manner to the Jews / or simple shot them in the Head *&* had a tractor dig large mass graves (Only to prevent a outbreak of diseases) As soldiers do not fight well sick—And Hitler wanted them fit to fight *&* die.) All Dictators are generally all alike and come out of “CRISIS” *&* People beg for them to bring order—Even at the lost of their “Freedoms” See the Roman / Greek / Persian/Turkish/European/Empires that died of GREED-ME-Me_ME —No Morales—No God—I am “GOD” Societies. Everything is O.K.,–Just ck., out Sodom & Gomorrah Fates—(Spelling may be off) –But You , all get the picture / *&* Message = Solution -Each *&* Every person start trying to emulate Benjamin Franklin / Thomas Jefferson / George Washington – Each in Your own way— start by reading the History of
America-Goodbye for now *&* I pray the “BEST” for ALL of US-May God have Mercy on our Souls
Subject: Re: Quote by Thomas Jefferson “If a Central Bank is ever created in America- Through Inflation and Deflation the “Bankers” will Rob The Americans”
****B of A to own Countrywide Mtg.(B of A will by itself control close to 40% of ALL USA Mortgages) with Countrywide
alone not counting the two below.
JP Morgan to own EMC Mtg.—Merrill Lynch to own Saxon Mtg.
(Talk about a Monarchies)
Subject: Quote by Thomas Jefferson “Is a Central Bank is ever created in America- Through Inflation and Deflation the “Bankers” will Rob The “Americans”
This is the Truth-The Bankers created the S&L crisis and eliminated the competition and They created the Sub-prime crisis (The Banks create the product not the Loan-Brokers) and will eliminate the Loan Brokers.And have already procured the Treasury-and Federal Reserves’ approval and the Supreme court confirmation to go into Real Estate and as The now deceased “George Thatcher” ( Thatcher who started Sterling S&L and build it into Union bank and sold it to Barclays -Who sold it to a Japanese Financial concern) told me – The Bankers tried this in the depression. As the “Movie” ” A Wonderful Life” with Jimmy Stewart depicts” only this time the “Jimmy Stewarts of America” lose. Due to a ignorant Senate / Congress /and Public all to willing to buy the (BS) -That the Loan Brokers did it. And this way (With only the Banks left) the Public will save money with No competition (Wrong). Further the Late Senator “Henry Hyde” of Utah and “Henry Gonzales” of Texas held the Bankers at bay till “Henry Hyde’s” apprentice turned on him after he died and “Sold” out to the Bankers.
Lets start a petition and have everyone from the Homeowners’ losing their Homes to the Loan Brokers to the Real Estate community sign under this and get millions of signatures and STOP the Bankers before it is to late to save the “America” created by our Founders OR will we become like the “Serfs of Europe” in the 1300-1600s controlled by the Central Bankers as Slaves.
The plan is for a ALL powerful Federal-Central government to eliminate the States, And then , Run “America” Thru the Federal Reserve and its main Bankers .Example: B of A will control 22% of ALL Home Loans on the buy out of Countrywide. This means B of A will control more than 1 out of 5 Home
Loans. Remember the “Magna Carta” & the “Bill of Rights & The Sons of Liberty & Thomas Paine’s “Common Sense” & the Laws against Monopolies.
The Truth is the Loan Brokers (were pawns) and for the most part made a living and sold their Loans to the big Banks who were not at this point controlled by Respa and resold the Loans at Multiple profits to the (GSEs). Compare the Loan-Brokers commissions with the Bankers.” The BANKERS HAD THEIR HIGHEST PROFIT in HISTORY” from 1999-2006 who. and now are crying “Wolf” .
Our founders refused to have a Central Bank– until the Traitor- Wilson “SOLD” out with J.P. Morgan’s”
Help creating the “Federal Reserve”
We had absolutely no national debt, had the largest middle class in the world, and Mom stayed home to raise the kids.
Read what Pres. Andrew Jackson Pres. Thomas Jefferson and Pres. George Washington thought of the Central Bankers.
The Treasury Department’s plan to revamp regulation of the nation’s banks, thrifts and investment banking firms is (so we hear) going nowhere fast. The blueprint – among other things – would eliminate state banking charters. As we all know, state chartered banks are at the center of the nation’s mortgage crisis because they’re the ones who created all those risky loan programs, securitized subprime mortgages, and sold them overseas in the form of CDOs to foreign investors. Ooops, I’m sorry that’s Wall Street where Treasury secretary Henry Paulson used to work. If I were the head of a community bank trade organization I would attack the monster that created the mess: Wall Street. How best to do that? Answer: resurrect Glass-Steagall which (until it was torn down by Congress last decade) prohibited investment bankers from owning depositories and banks from underwriting securities..
Accounts Receivable Tax
Building Permit Tax
CDL License Tax
Cigarette Tax
Corporate Income Tax
Dog License Tax
Federal Income Tax
Federal Unemployment Tax (FUTA)
Fishing License Tax
Food License Tax
Fuel Perm it Tax
Gasoline Tax
Hunting License Tax
Inheritance Tax
Inventory Tax
IRS Interest Charges (tax on top of tax),
IRS Penalties (tax on top of tax),
Liquor Tax,
Luxury Tax,
Marriage License Tax,
Medicare Tax,
Property Tax,
Real Estate Tax,
Service charge taxes,
Social Security Tax,
Road Usage Tax (Truckers),
Sales Taxes,
Recreational Vehicle Tax,
School Tax,
State Income Tax,
State Unemployment Tax (SUTA),
Telephone Federal Excise Tax,
Telephone Federal Universal Service Fee Tax,
Telephone Federal, State and Local Surcharge Tax,
Telephone Minimum Usage Surcharge Tax,
Telephone Recurring and Non-recurring Charges Tax,
Telephone State and Local Tax,
Telephone Usage Charge Tax,
Utility Tax,
Vehicle License Registration Tax,
Vehicle Sales Tax,
Watercraft Registration Tax,
Well Permit Tax,
Workers Compensation Tax..
STILL THINK THIS IS FUNNY?
Not one of these taxes existed 100 years ago,
and our nation was the most prosperous in the world.
We had absolutely no national debt, had the largest middle class in the world, and Mom stayed home to raise the kids.
Why ‘Too Big to Fail’ Scares Me – And What We Can Do About It
First, the good news: thanks to the mortgage/credit crisis and the ensuing financial panic, we have created a new cadre of ‘mega-banks’ that are large, well capitalized and have come to the rescue of their ailing brethren in the financial services industry. All has been saved because of ‘charitable’ takeovers of such ailing has-beens as Countrywide, Merrill Lynch, Wachovia and Washington Mutual.
We can all sleep again, knowing that the big boys are stable, and together control 67% of the mortgage market in terms of receivables on first and second liens. Here’s how the servicing numbers shake out in terms of market share: Bank of America (21.68%), Wells Fargo (17.65%), Chase Home Finance (15.09%), CitiMortgage (8.49%) and Residential Capital LLC (4.14%).
Now for the bad news: the top five control 67% of the residential servicing market, which means in my book most of these firms are “too big too fail” just like Fannie and Freddie were. Think about it for a second: what if something goes wrong with Bank of America, which now services $2 trillion in home mortgages for American consumers? I’m not saying BoA is in danger financially but we’ve created a financial system – for better or worse – where too much risk is in the hands of too few. There’s something wrong with that.
Let’s take Fannie Mae and Freddie Mac, for example. They own or guarantee $5.2 trillion of the nation’s $9.6 trillion in U.S. housing debt or 54%. That type of market share concentration should never have been allowed to happen. It creates a situation where the government cannot – for fear of a huge market disruption – allow something so big to fail.
Some of you remember the giant hedge fund Long Term Capital Management, the brainchild of John Meriwether, a former star bond trader at Salomon Brothers. LTCM went down during the Russian debt crisis in 1998 when it bet the wrong way on that nation’s prospects. The Federal Reserve stepped in. Do you know why? Answer: LTCM had borrowed $125 billion from commercial banks. If LTCM went down so would its lenders, at least some of them.
The big question is how do you fix “too big to fail”(TBTF)? Do you put caps on how large an institution can grow or will lobbyists from the banking and financial service industries shoot that one down in the name of free market capitalism? Are we better off with a system where we have thousands upon thousands of smaller institutions where the risk can be spread around the nation?
I’m not sure the answer to these questions is yes. But I do sometimes wonder if we’ve made a huge mistake by even allowing such things as interstate banking. When I was a young cub reporter in the 1980s interstate banking was a hot issue. There were regional interstate banking “compacts” where a thrift in Massachusetts would be allowed to open up branches in Rhode Island and vice versa. In the old days a California bank or S&L could not open de-novo branches in New York.
Then the S&L crisis happened and lobbyists became involved and all of a sudden you had West Coast banks buying out East Coast ones, and North and South intermingling. Non-depository mortgage bankers, on the other hand, had the ability to open offices and lend anywhere in the U.S. – as long as they went through the proper licensing procedures. But this was also a time when non-banks were hemmed into making mostly FHA loans.
Times like this I wonder if we’ve made a huge mistake by allowing interstate banking and not putting caps on how much market share a company can have in terms of mortgage servicing and deposit gathering. We are dealing with the public’s money – their mortgages and savings.
I’m not an expert on banking but I believe there’s a 10% cap on one bank amassing more than 10% of all deposit accounts. I’m sure it’s just a matter of time before the government grants an exception to this rule just so another bank can be saved. We’ve deregulated and we’ve change old laws in the name of capitalism but look at what we created in 17 years time: a savings and loan crisis that cost the nation’s taxpayers $120 billion and a mortgage/credit crisis that cost $700 billion. The last number, as you may’ve guessed, is just a downpayment.
Karl Marx and Leonid Ilyich Brezhnev are looking up from their graves, whispering “victory.” What I am talking about? Take note: the Federal Reserve today said it would buy up to $600 billion of MBS and debt from Fannie Mae, Freddie Mac and the FHLB System. Treasury and the New York Federal Reserve launched a $200 billion program to kick-start the ABS market and should I mention that Uncle Sam owns (more or less) Fannie, Freddie, American International Group and plenty of preferred stock in our largest banks, Wall Street firms and thrifts. Still to come: GM, Chrysler and Ford. Folks, I’m not saying all these efforts will fail. On the contrary the whole crazy plan could work. But please, let’s not call it capitalism, shall we. But just in case, over the holidays I will be reading books by Marx and Mao and renting the movie “The Motorcycle Diaries.” Have a Happy Thanksgiving. Better red than dead. Oh, and one final irony: it was all done under our nation’s first “MBA” president, George W. Bush, who’s greatest accomplishment was buying and then selling the Texas Rangers. It seems fitting that Ameriquest once owned the naming rights to the Rangers stadium. That would be Roland Arnall’s Ameriquest. (See the book “Chain of Blame”…
Jumbo mortgage investor Thornburg Mortgage says it has just 300 delinquent loans in its $21 billion portfolio but its stock price is $0.20 a share compared to a 52-week high of $140. (It recently had a reverse stock split.) In an interview last week company CEO Larry Goldstone said the publicly traded mortgage REIT, though, is bracing for an increase in delinquencies. Mr. Goldstone said the industry is in the “fourth inning” of its recovery but noted that he’s unsure if “we’re in the top of the fourth or the bottom.” Thornburg is no longer funding new loans but hopes to one day return to the origination market – and even use loan brokers…
WASHINGTON NEWS: The Federal Deposit Insurance Corp. estimates that 638,000 mortgages entered foreclosure in the second quarter while servicers had to deal with a larger crop of newly delinquent loans. Single-family mortgages becoming 60 to 90 days past due in the second quarter totaled 736,000, up from 670,000 in the first quarter and 618,000 in the fourth quarter of 2007. (For the full story see Brian Collins’ story on MortgageWire.
Why ‘Too Big to Fail’ Scares Me – And What We Can Do About It
First, the good news: thanks to the mortgage/credit crisis and the ensuing financial panic, we have created a new cadre of ‘mega-banks’ that are large, well capitalized and have come to the rescue of their ailing brethren in the financial services industry. All has been saved because of ‘charitable’ takeovers of such ailing has-beens as Countrywide, Merrill Lynch, Wachovia and Washington Mutual.
We can all sleep again, knowing that the big boys are stable, and together control 67% of the mortgage market in terms of receivables on first and second liens. Here’s how the servicing numbers shake out in terms of market share: Bank of America (21.68%), Wells Fargo (17.65%), Chase Home Finance (15.09%), CitiMortgage (8.49%) and Residential Capital LLC (4.14%).
Now for the bad news: the top five control 67% of the residential servicing market, which means in my book most of these firms are “too big too fail” just like Fannie and Freddie were. Think about it for a second: what if something goes wrong with Bank of America, which now services $2 trillion in home mortgages for American consumers? I’m not saying BoA is in danger financially but we’ve created a financial system – for better or worse – where too much risk is in the hands of too few. There’s something wrong with that.
Let’s take Fannie Mae and Freddie Mac, for example. They own or guarantee $5.2 trillion of the nation’s $9.6 trillion in U.S. housing debt or 54%. That type of market share concentration should never have been allowed to happen. It creates a situation where the government cannot – for fear of a huge market disruption – allow something so big to fail.
Some of you remember the giant hedge fund Long Term Capital Management, the brainchild of John Meriwether, a former star bond trader at Salomon Brothers. LTCM went down during the Russian debt crisis in 1998 when it bet the wrong way on that nation’s prospects. The Federal Reserve stepped in. Do you know why? Answer: LTCM had borrowed $125 billion from commercial banks. If LTCM went down so would its lenders, at least some of them.
The big question is how do you fix “too big to fail”(TBTF)? Do you put caps on how large an institution can grow or will lobbyists from the banking and financial service industries shoot that one down in the name of free market capitalism? Are we better off with a system where we have thousands upon thousands of smaller institutions where the risk can be spread around the nation?
I’m not sure the answer to these questions is yes. But I do sometimes wonder if we’ve made a huge mistake by even allowing such things as interstate banking. When I was a young cub reporter in the 1980s interstate banking was a hot issue. There were regional interstate banking “compacts” where a thrift in Massachusetts would be allowed to open up branches in Rhode Island and vice versa. In the old days a California bank or S&L could not open de-novo branches in New York.
Then the S&L crisis happened and lobbyists became involved and all of a sudden you had West Coast banks buying out East Coast ones, and North and South intermingling. Non-depository mortgage bankers, on the other hand, had the ability to open offices and lend anywhere in the U.S. – as long as they went through the proper licensing procedures. But this was also a time when non-banks were hemmed into making mostly FHA loans.
Times like this I wonder if we’ve made a huge mistake by allowing interstate banking and not putting caps on how much market share a company can have in terms of mortgage servicing and deposit gathering. We are dealing with the public’s money – their mortgages and savings.
I’m not an expert on banking but I believe there’s a 10% cap on one bank amassing more than 10% of all deposit accounts. I’m sure it’s just a matter of time before the government grants an exception to this rule just so another bank can be saved. We’ve deregulated and we’ve change old laws in the name of capitalism but look at what we created in 17 years time: a savings and loan crisis that cost the nation’s taxpayers $120 billion and a mortgage/credit crisis that cost $700 billion. The last number, as you may’ve guessed, is just a downpayment.
Karl Marx and Leonid Ilyich Brezhnev are looking up from their graves, whispering “victory.” What I am talking about? Take note: the Federal Reserve today said it would buy up to $600 billion of MBS and debt from Fannie Mae, Freddie Mac and the FHLB System. Treasury and the New York Federal Reserve launched a $200 billion program to kick-start the ABS market and should I mention that Uncle Sam owns (more or less) Fannie, Freddie, American International Group and plenty of preferred stock in our largest banks, Wall Street firms and thrifts. Still to come: GM, Chrysler and Ford. Folks, I’m not saying all these efforts will fail. On the contrary the whole crazy plan could work. But please, let’s not call it capitalism, shall we. But just in case, over the holidays I will be reading books by Marx and Mao and renting the movie “The Motorcycle Diaries.” Have a Happy Thanksgiving. Better red than dead. Oh, and one final irony: it was all done under our nation’s first “MBA” president, George W. Bush, who’s greatest accomplishment was buying and then selling the Texas Rangers. It seems fitting that Ameriquest once owned the naming rights to the Rangers stadium. That would be Roland Arnall’s Ameriquest. (See the book “Chain of Blame”…
Jumbo mortgage investor Thornburg Mortgage says it has just 300 delinquent loans in its $21 billion portfolio but its stock price is $0.20 a share compared to a 52-week high of $140. (It recently had a reverse stock split.) In an interview last week company CEO Larry Goldstone said the publicly traded mortgage REIT, though, is bracing for an increase in delinquencies. Mr. Goldstone said the industry is in the “fourth inning” of its recovery but noted that he’s unsure if “we’re in the top of the fourth or the bottom.” Thornburg is no longer funding new loans but hopes to one day return to the origination market – and even use loan brokers…
WASHINGTON NEWS: The Federal Deposit Insurance Corp. estimates that 638,000 mortgages entered foreclosure in the second quarter while servicers had to deal with a larger crop of newly delinquent loans. Single-family mortgages becoming 60 to 90 days past due in the second quarter totaled 736,000, up from 670,000 in the first quarter and 618,000 in the fourth quarter of 2007. (For the full story see Brian Collins’ story on MortgageWire.