Housing Doom Housing Bubble Blog

Foreign central banks were net strong net buyers of US obligations in the week ending September 19. They bought both treasuries and agencies, with treasuries and the total result both being the strongest we’ve seen since starting following the data series from early April. With the US dollar steadily losing value against most foreign currencies during this week, this blogger at least is in pretty total confusion as to what this means. Just yesterday there was a story [99] about how foreign appetite for US paper had been very weak in July. Oddly, the Reuters report [36a] gave no context at all, keeping strictly to their dullest boilerplate. Furthermore, Google News did not bring up the report, and we had to dig it out using the search function on the Reuters site. Is this falling off the table accidentally, or is someone interested in keeping the wild gyrations of this series from attracting attention?

Once again, twist to the rescue with graph and chart.

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Jan-Martin writes from Germany …

"Very telling if you have to watch the "Comedy Central" to get good business news coverage and someone who is willing to ask the obvious."

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Good luck trumped good planning on this one. A quirk in Canada’s rules for Commercial Paper meant that most of the weight of the crisis fell on companies, not the banks. This has given David Dodge, Canada’s soon-to-retire central banker, precious time to orchestrate an orderly unwinding of all these opaque deals. Britain, on the other hand, is having to deal with a massive all-at-once rollover of commercial paper this week. It’s like Dodge got to pull into the pits to have his car serviced, while BoE’s Mervyn King in London has to crawl out onto the bonnet to make adjustments while the car is zorching around the track at 200 kilometers per hour.

The Economist is looking across the pond with envy [1] at all this. In effect they are saying that this accidental quirk in Canada’s rules is how it should be in general. They also include a fascinating snippet. Dodge is evidently close enough to retirement he felt he could express his real opinions about off-balance-sheet deals.

"Like Mr King, Mr Dodge is fearful of moral hazard. Banks should suffer for their mistakes, he says, though not so much that the system becomes insolvent.

He acknowledged that the Bank of Canada may itself have played a role in stoking the excesses by not raising interest rates enough. ‘One can see in retrospect that we should have been driving those rates harder than we did, because in reality credit conditions were being eased by increased securitisation and movement of stuff off balance [sheet],’ he says. That is an admission that most officials would make only when they are safely in retirement. If the failure to tighten was an error, it was surely one committed by many other central banks besides Canada’s." [my emphasis]

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Feeling lucky? "The lottery of London’s £70bn rollover week".[1]

"As we reveal today [Sunday Sept 9th], an estimated £70bn worth of European commercial paper that has not yet been caught up in the crisis is due to expire between September 11 and 19. Ordinarily, this would present little problem. Companies borrowing money by issuing commercial paper normally expect to "roll over" the loan from one period the next. Just in case the lenders decide not to play ball, most borrowers arrange a backstop funding facility with a major bank."

Our new credit contraction word is Rollover! This is what the next ten days looks like …

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Peter Schiff speaks with CNN about federal intervention in the market correction:

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There may be a time for irony on housing bubble blogs, but this isn’t it. The news is filtering in [1] from Buncombe County in western North Carolina, and it’s pretty grim. David Kanis is a mortgage broker and branch manager of the local Ashford Mortgage Advisors brokerage. He writes a regular column for the Citizen-Times, and in today’s piece he gives us a clear-eyed view of how the entire non-conforming mortgage finance sector has essentially stopped working in and around Asheville. Last down were Jumbo mortgages, which seized up dramatically in mid-month.

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Is this any way to finance a trade deficit? According to the weekly Reuters report,[32] foreign central banks continued to sell off US obligations at the rapid pace last week of over $1.5 billion per day. This result for the period August 16th to 22nd inclusive was slightly less negative than the previous 7 days. Very peculiar, as domestic demand for "safe" treasuries went straight through the roof on Thursday the 16th. Our intrepid copywriter is back to her boilerplate, but couldn’t resist using words like dumped and plunged to document this remarkable result. Meanwhile, the Treasury sold the biggest volume of 3-month T-bills in 17 years yesterday,[99] so Doom might expect fewer net sales with all that competition. But with the way things are going, it’s anybody’s guess what will happen next.

Once again — it’s twist to the rescue with charts and graphs.  When the following graph is in positive territory it means agency debt is carrying the ball in supporting the US trade deficit.

Thanks for the graphics!

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Again Housing Doom is pleased to re-post an article [1] by Montreal based economist, humanist and political figure Rodrigue Tremblay. Professor Tremblay sends (I’ve extracted the relevant parts, the second paragraph might serve as an Abstract) …

"… Thanks for your note and the article about the housing problems in Cleveland.

As I mention in my article, the crisis is essentially a long-lasting "solvency" crisis. The Fed can alleviate the short term "liquidity" crisis by discounting assets-based securities, but it cannot solve the "solvency" crisis that will unfold during the coming months."

Doomers may also want to compare the Quebec economist’s thoughts on solvency with those of Telegraph business reporter Ambrose Evans-Pritchard [2] (thanks to Doomer V for recommending this story).

________________________

Financial Bankruptcy, the US Dollar and the Real Economy
par Rodrigue Tremblay

"The U.S. government is on a ‘burning platform’ of unsustainable policies and practices."
David Walker, U.S. Comptroller General

"Modern society, based as it is on the division of labor, can be preserved only under conditions of lasting peace."
Ludwig von Mises, Austrian economist

"People know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation."
Ben S. Bernanke, Fed Chairman

"Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again."
Ben S. Bernanke, Nov. 8, 2002 (Fed Chairman, talking to economist Milton Friedman)

Ordinary investors and people in general will have to get accustomed to hearing a lot about financial terms they never heard before, such as the subprime mortgage market, aggressive underwriting, asset securitization, repackaged loans, subprime loans, "no-doc" loans, adjustable rate mortgage interest rate adjustment (ARM) loans, collateralized debt obligations (CDOs), asset backed securities, mortgage-backed securities, closed-end second-lien loans, subprime second-lien loans, alternative-A (Alt-A) mortgage loans, piggyback loans, asset-backed commercial paper (ABCP),…etc. —As a general definition, "subprime" or "high-risk" loans" are those made to people with poor credit and at lax conditions. Second-lien loans are loans that are placed in second place for any potential recovery after the primary lender on a property. —Residential mortgage-backed security (RMBS) are created when mortgage lenders sell their loans (and the risks associated with such loans) to banks, which package them together and slice them into different classes before selling them to (gullible) investors. This process, called "asset securitization" is the method whereby interests in mortgage loans and other receivables are packaged, underwritten, and sold in the form of "asset-backed securities". This is financial alchemy, through which subprime mortgage loans are transformed into AAA-rated paper for unsuspecting investors.

Some of these artificial or derivative securities are low-grade quality, and when their prices fall because borrowers cannot meet their interest or capital payments, such financial instruments become quickly "illiquid" or unsalable, since nobody wants to touch them. They become fictitious capital. Those who hold them, investors, banks or other types of lenders, are stuck with them: they cannot sell them and they cannot borrow while placing such shaky assets as collateral. These are the imprudent lenders and investors that central banks now are trying to bail out.

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Once the customer loses faith in what’s in the can, you’re dead. Canada’s been there before. Twenty two years ago, in what came to be called the TunaGate Scandal, a government inspector failed canned fish from a New Brunswick packing plant based on a subjective "smell test." With millions of cans of product on the line and 400 jobs at stake in the small town of Saint Andrews, a furious retesting and political lobbying effort arose to reverse the bureaucratic decision. The tuna was initially reinstatated, but media reports and a botched government response to them pushed consumers past the tipping point to where the product, the plant, and even the brand were permanently crushed.

Susan Bies’ famous subprime sliver [1] has, fairly or unfairly, acquired a similar fragrance since the now-retired Fed Governor’s remarks last February. These mortgages were securitized into MBS, sliced up into tranches with a variety of risk / return profiles, and further refined into high-octane products like CDOs and CLOs. But since the June 20th blow-up of two Bear Stearns hedge funds, the markets have become convinced that some of the riskiest "toxic waste" parts of subprime’s securitization could have been the secret ingrediant in all manner of high-yielding assets. People speak of "contagion," but this is a misnomer. Nobody looked at the recent importation of problematical pet food as a contagion issue, but as the possible inclusion of an unwholesome ingrediant. Potential investors of all sorts of classes of opaque assets simply worry about "exposure" to subprime — that the asset’s value might be directly damaged through American subprime borrows defaulting or, much more critically, that the asset’s next buyer might fear such a risk.

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Doom’s favourite retired Fannie Mae lobbyist is back today in fine form, and will have up a post in a few moments. Bill Maloni comes out swinging at OFHEO head Jim Lockhart, Karl Rove, even the President. Indeed nobody standing in the way of immediate GSE portfolio cap relief is safe from Bill’s trenchant commentary.

Various sectors of the mortgage market have been vise-tight in recent days, but some signs of loosening may be on the horizon. Reuters reports [1] that Freddie will now back more Alt-A loans, but Calculated Risk blogger Tanta looks closely at this story [2] and concludes that perhaps there is slightly less than meets the eye.

Meanwhile over in the Jumbo sector, reputed best-in-class lender Thornberg is struggling.[3] Speaking on CNBC, their COO Larry Goldstone makes a strong case [4] for the company surviving the present crisis. In the first video he admits under some pressure from the hosts that should Fannie and Freddie temporarily be allowed into the prime Jumbo market it might be of some assistance, but he’s adamant that Thornberg does not want the big GSEs to compete in Jumbo space.

And finally, according to latest reports,[5] Fannie Mae is tentatively due to submit their 10-K to the SEC later today. It’s hard to imagine them dropping their 2006 financial report into the middle of this maelstrom, but then CFO Blakely seems to be one gutsy guy. Everyone, hold onto your hats — it looks like it’s going to be a wild ride to the other side of this liquidity glitch.

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