It was a bad day for the credit markets today: [Hat tip John!]
The credit markets came under renewed stress Thursday as investors sought absolute safety and even moved away from debt issued by Fannie Mae and Freddie Mac, the government-sponsored mortgage lending enterprises.
The intensifying credit crisis came as one regulator, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, said that some banks had moved from being too willing to take on risks to being reluctant to take any chance of losing money, a move that was making the crisis worse.
“The rational actions taken by even the strongest financial institutions to reduce exposure to future losses have caused significant collateral damage to market functioning,” Mr. Geithner said in a speech to the Council on Foreign Relations. “This, in turn, has intensified the liquidity problems for a wide range of bank and nonbank financial institutions.”
In Congressional testimony, William B. Shear, an official with the Government Accountability Office, warned that Fannie and Freddie, “with more than $6 trillion in outstanding obligations,” could pose “significant risks to taxpayers” if they ran into difficulty.
Each of the two enterprises has a $2.25 billion line of credit with the Treasury, but that is a small fraction of what they owe. Mr. Shear said it was “generally assumed on Wall Street that assistance would be provided in a financial emergency.”
With the trading levels indicating that some traders were no longer as confident of that assumption as they had been, rumors swirled that the Treasury Department was preparing to issue an explicit guarantee of the debts of government-sponsored enterprises, or G.S.E.’s, to calm the market. A Treasury spokeswoman denied those rumors.
According to Gregory Peters, Chief Credit Strategist at Morgan Stanley:
There’s a clear lack of confidence. There’s no confidence in ratings. There’s no confidence in banks and the dealer community. There’s no confidence in hedge funds. And so no one in the market trusts each other.
Today the Dow dropped 214.6 points because investors basically gave the markets a vote of "no confidence". We’ll see how they vote tomorrow.
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twist,
I read something saying Feds may make an emergency rate drop tomorrow after the jobless claims comeout. ??? I have an article if your interested.
I wonder if anyone is thinking along the line I am… It does seem like this big implosion came right after the OFHEO rule changes?
Does that mean that the market expect a huge dive in quality of mortgage backed by fannie and freddie because of the new complex rules about the loan limit, and therefore banks are bracing for the storm?
In other words, the change of rules designed to stablize the credit market had the opposite effects.
What I predicted years ago are now right in front of me, but I don’t get much joy out of it.
Hehe I wondered if John was still watching the GSEs squirm. Hey John, I miss your posts!
One thing that has happened in the last 3-4 days that has received zero coverage in the press is that the spread to Treasuries on Fannie and Freddie pass-throughs has widened by something like 50 BPs. That is a HUGE swing, and just about unprecedented. The realization is coming that much like the bond insurers Fannie and Freddie do not have anywhere near enough capital to cover even a small percatage of the mortgages they say they “guarantee”.
Bottom line is that this correction has just started and the same herd mentatlity that drove people to buy when prices went up, up, up are the same ones that will walk away when they go underwater.