Effective Guarantee My A**

 

"Bill Gross must be smiling"

 

That quote comes from the comment thread for Calculated Risk’s post [1] covering a new Fed program to buy up to $600 billion of GSE Agency Debt. It’s not often that our blogging world invades the kitchen at Doom North, but CBC News World at Six Tuesday at suppertime had my ears perked up.

Bernie McNamee [6:13]: In the U.S. another day, another $800 billion. The Treasury and the Federal Reserve took more extraordinary action to shore up credit markets in an attempt to drive down interest rates. Most of the money, $600 billion worth is a transfer of debt from the government backed mortgage giants Fannie Mae and Freddie Mac to the books of the central bank. But the other $200 billion will be used in a new program aimed at supporting the everyday credit needs of Americans. ..

 

The CBC slipped that $600 billion through pretty slickly, but that was the significant move of the day. Remember way back on October 23rd when FHFA’s Lockhart proclaimed an "effective guarantee" capped at $200 billion? It’s barely a month later and the cap has become 4 times as big. What are they looking at that they had to raise the cap by 300 percent? Well, here it is.

Basically, they’ve lowered a rope from the top line to the bottom line and are trying to restore the lost confidence of foreign central banks and other traditional customers in buying Agency Debt. And hopefully they do this without eroding the same buyers’ appetite for the Treasury Debt that will be needed to "pay" for today’s announced buy. If that top line starts sagging now, we’re in a whole other world of hurt.

But at least now if someone like PIMCO has to dump a few billion dollars of agencies to meet redemptions, there will be someone to sell the stuff too. Bill and Mohamed will certainly be counting their blessings Thursday.

** Yep.  Twist and her asterisks strike again.  T.  :  )

________________________

Notes and References

[1]: "Fed Announces New Facility to Buy GSE MBS", Calculated Risk, November 25, 2008.

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1 Comment for this entry

  1. John M. says:
    November 26, 2008 at 7:55 PM

    twist -

    Like I was saying … (emphasis in original)

    “Fed Buying Agency MBS – Still No ‘Explicit’ Guaranty”, by “Mr Mortgage”, Implode-O-Meter, November 26, 2008.

    Agency MBS are not ‘explicitly guaranteed’, rather under conservatorship they are ‘effectively guaranteed’, which has scared to death many large investors. MBS spreads over US Treasuries clearly show this. They likely did not want to make that announcement yesterday taking us to the quantitative easing stage, but they had to. That’s because they could not ‘explicitly’ guarantee the GSE’s $5 trillion+ in mortgage guarantees.

    In my opinion, yesterday’s announcement that over the next six quarters the Fed would buy MBS was an attempt to talk the market better and is proof that they are not planning to explicitly guaranty the debt. If I were a Foreign Central Bank or Bill Gross, I would want an explicit guaranty vs .gov buying a paltry $100 billion in GSE MBS per quarter. Remember, this $500 billion represents only approximately 10% of the total outstanding GSE mortgage guarantees.

    I hope I am wrong here, but I see this move as more of a cushion that allows large Agency MBS holders to sell rather than a move to keep mortgage rates down over a long period of time. I bet we see a 6 handle on mortgage rates by year end. -Best Mr Mortgage

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