"If we’re going to restore and maintain investor confidence and…consistent liquidity, that is going to require an explicit backstop," said John Courson, chief executive and president of the MBA. – WSJ1
Maybe now CDARS will have to do debt instruments so that Bill Gross can get around the $100K limit on coverage 🙂
Let’s see if I’ve got this one straight. Fannie and Freddie get smashed into dozens of Fragmies. The "good" Fragmies with the valuable assets become new private label mortgage lenders (and dues paying MBA members). The "bad" Fragmies, with all the losses that the big GSEs managed to soak up during the housing bubble and its aftermath, stay under the aegis of the Treasury Department and the present "effective" guarantee on agencies becomes an explicit one (if it isn’t already — see below) on the new, sovereign debt.
OK, fine. I see that the Administration is studying7 the matter.
Later: So just when I thought this couldn’t possibly get any weirder, it gets weirder.8
Options activity picked up in the government sponsored enterprises as investors started to believe the companies’ stocks would recover.
And it gets even better. I’ve been reflecting on another WSJ story2 that had me reacting with horror late Wednesday. There’s an amazing graphic in the article that gives a good thumbnail picture of the Fed’s balance sheet, although this snippet captures its essence in words.
Since March 18, when the Fed expanded its MBS program, it also has shed roughly $716 billion in other securities. Thus the size of the Fed’s balance sheet has stayed roughly steady, but MBS and agency debt now constitute a third of it.
If you check this week’s Puplava number, you’ll see that the Fed has now bought $0.625 trillion of Mortgage-Backed Securities. If memory serves, when I started following American mortgage finance around 2003, that was roughly the size of Freddie Mac’s retained portfolio. So do Doomers think that FHFA is up to providing adult supervision at FOMC Meetings? 😉
OK, enough comedy. This week’s Reuters report3 recorded a pretty good increase in Treasury Debt holdings (off a fair bit from the previous week’s) and yet another small selloff in Agency Debt, although that result was an improvement from last time. What’s interesting is that the report itself was just a little bit odd. Doomers, what’s wrong with this picture?
NEW YORK, Sept 3 (Reuters) – Foreign central banks’ holdings of U.S. debt at the Federal Reserve rose in the latest week, after last week’s strong bids for $109 billion in new Treasury supply, Fed data released on Thursday showed.
Treasuries held by overseas central banks at the Fed grew by about $8 billion to total $2.502 trillion.
OK, here’s the punchline for that little joke. Although the report separated those two bits of data in the text, they ended up showing that last week’s increase in the cenbanks’ treasuries represented a whopping 7.2 percent of the that new supply. So just for fun, let’s examine this report6 from an auction that disposed of a bit more than a quarter of that supply on Monday.
The Treasury received bids totaling $118.06 billion and accepted $30.00 billion. Primary dealers were awarded $13.39 billion, while indirect bidders – a category that includes foreign central bankers – were awarded $13.09 billion.
The indirect buyers, then took 49.4 percent of the treasuries from that auction. That’s a rate nearly 7 times greater than what the H.4.1 figures would suggest was the real participation rate by the cenbanks. "Indirect buyers" hardly seems to be a good proxy for foreign central banks anymore.
The actual treasuries figure was up $7.898 billion, about a third less than last week.
Agencies fell by just $2.132 billion, which figure was also about a third off from last week’s sell-off.
The addition of $5.766 billion total obligations was more than $3 billion less than last time, and the absolute divergence of the two lines moderated. The Fed’s own MBS figure increased by just $2.389 billion.
Twist’s ratios graphs stepped down a bit less than last week.
Setser’s 52-week change graph pops up in both lines. Last year treasuries dropped about $4 billion, while agencies fell about $10 billion (we’re getting into the meat of that historic 6-month MBS dump).
Notes and References
The proposed framework, to be released Wednesday by the Mortgage Bankers Association, would give successor entities to Fannie and Freddie the authority to create securities backed by certain types of mortgages. The new companies would guarantee the securities against defaults on the underlying mortgages.
The new companies would also pay fees into a federal insurance fund, which would guarantee interest and principal payments to bondholders if the companies were unable to make them.
: "Foreign c.banks’ US debt holdings rose in week-Fed", by Richard Leong, Reuters, September 3, 2009.
Barr, who met here with U.S. Rep. Dennis Moore and consumer and business leaders in Kansas, said dire housing market conditions made it "absolutely critical" for the government to keep mortgage rates low, and expand a program of loan modifications.
He brushed off a proposal by the U.S. Mortgage Bankers Association to revamp housing finance giants Fannie Mae and Freddie Mac by creating several smaller, privately held companies that would issue mortgage securities with a government guarantee, saying it was not yet time to determine their future shape.
The U.S. Treasury put both Fannie and Freddie into a conservatorship with new management nearly a year ago as markets lost confidence in their ability to withstand mounting losses from subprime and other mortgage loans. The government effectively declared an explicit guarantee for their debt and mortgage-backed securities [that sound you just heard was Timmie falling down in a dead faint] and has committed up to $400 billion in taxpayer capital to shore up the balance sheets.
: "Fannie, Freddie rise after regaining NYSE compliance", by Angela Moon and Doris Frankel, Reuters, September 4, 2009.