Housing Doom

To that end, FHFA has informed Fannie Mae that a possible transfer of a portion of its LIHTC investments to unrelated third-party investors is consistent with FHFA’s ongoing efforts to conserve Enterprise assets and with the Enterprise’s multifamily housing mission. … FHFA Acting Director Edward J. DeMarco, November 5, 2009¹

Many thanks to twist for data-mining that gem from the dark recesses of the DC bureaucracy. So in all the turbulence going around, the most urgent crisis facing America is …

• Swine Flu? not even in the top 10
• Recession? OVER! OVER! OVER!
• CMBS Tsunami? way out in the offing, won’t hit for weeks
• Looming Shortage of "Dow 10K" Party Hats? not even that …

America’s most urgent crisis is the fallout from October 23, 2008, when DeMarco’s predecessor Jim Lockhart testified in Congress and mentioned the word explicit.²

Once a week³ ever since, the OMB’s most consistently optimistic analyst (let’s just call him "Phineas Q. Pangloss") has come back from a long lunch, taken a deep breath, and circulated a research note to the effect that …

… Yeah sure guys, no problem. Treasury can cut off their support⁴ to the GSEs any time they want to. And holders of Agency Debt would be, like, totally cool with the resulting haircut. After all, every piece of senior debt ever issued by Freddie, Fannie and the gang came stamped with a nice big notice that "This Ain’t No Sovereign Obligation of No USA!"

And the reason this happens every week without fail is that should the OMB ever come to the same conclusion as Mr. Market (that there’s no way in Hell that Geithner’s ever going to throw the agencies holders under the bus) they would have no choice but to immediately double the nominal value of the US National Debt.

But there’s one small problem. Fannie & Freddie are being used as a couple of cudgels to beat back the housing recession, and so their balance sheets are swelling by the day with more and more toxic MBS. Profitable? Probably never as they’re situated, but if the farce of conservatorship ends and they revert to the pre-1968 world where Fannie was an actual Federal Government department like Ginnie, you trigger the above disaster.

Enter LIHTC. If Fannie requests another $15 billion (like they did yesterday) too often, even Pangloss will have to recognize the evident truth that

1. Fannie’s a basket case; and,
2. Treasury is their explicitly dependable sugar daddy.

So the GSEs and their regulator, the FHFA, are going to use every trick they can think of to keep up the pretense that the Enterprises are going concerns.

Now LIHTC is tax-reduction credits, many $billions worth, but Fannie isn’t going to have a bit of taxable income for many, many years. So to achieve a benefit for its own balance sheet, they have to find someone else with $billions of fresh profit who will buy the credits at a discount so they can reduce their taxes. Hello, Goldman⁵ and Mr. Buffett.⁶

But in real life, Fannie and the US Treasury are two pockets on the same pair of pants. The net effect of this exploit would be to give a direct government gift of billions of dollars to some of America’s most flush companies so that Fannie can put off for a couple of months formally going back to Geithner for their next infusion of cash. What’s Wrong with This Picture?

So at any rate, Doomers will I’m sure be ecstatic at the heart-warming news that response-times to aid the needy have reduced considerably since Katrina. Guy Fawkes’ fireworks have barely cooled down and already WSJ⁷ is reporting FHFA approval for selling $2.6 billion-worth of the credits to unnamed, but surely deserving counterparties. Would that FEMA could start dropping relief packages as expeditiously.

UPDATE: The plot thickens.¹¹

If you were curious about the recent news regarding Goldman Sachs’ (GS) and Warren Buffett’s (BRK.A) interest in acquiring the tax losses of Fannie Mae (FNM), the details are in Fannie’s 10-Q.

This deal was agreed to and inked a month ago. It is still pending approval. So the information that was first reported by Bloomberg was a deliberate plant. A possible objective would have been to get a decision on the transaction before yesterday’s release. Note that the Q provides an update of the deal’s status as of November 5. Someone was waiting to edit this section right up to the last minute. A tad unusual.

……………………..

Further (Friday PM late): This¹² just in from the WSJ.

The U.S. Treasury blocked Fannie Mae’s proposed sale of nearly $3 billion in low-income housing tax credits to Goldman Sachs Group Inc. and Berkshire Hathaway Inc. on Friday after concluding that the deal was too costly for taxpayers.
…

But Treasury Department officials blocked the deal after concluding that it would have resulted in a loss of tax revenues greater than the savings to the federal government had it allowed the sale. "In short, withholding approval of the proposed sale affords more protection of the taxpayers than does providing approval," an administration official said in a statement.
…

Approving the deal could have also furthered a perception that policy makers have taken steps that have favored Goldman ahead of other banks at a time when populist sentiment against Wall Street has surged.

But since the debt that finances things like that is still regarded as the world’s safest investment, foreign central banks are eager to buy the stuff. While The Fed’s own MBS holdings rose a trivial $0.328 billion, and the cenbanks’ agencies not much more than that, their Treasury Debt buy was more than healthy, according to this week’s Reuters report⁸. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.⁹ Here is Doom’s updated CSV version¹⁰ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy was a lusty $18.159 billion, more than doubling last week’s figure.

Agencies were back in positive territory, but only added $0.758 billion.

The net change of US obligations was an excellent $18.917 billion, well over $2 billion a day.

Read the rest of this entry »

The Fed’s own MBS holdings slid by just $2.802 billion, while foreign central banks sold off a bit more MBS than that. Meanwhile, cenbanks bought a good amount of treasuries. Altogether a pretty ho-hum week on the US obligations front.

This week’s Reuters report¹ settled down significantly after last week’s excitement. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.² Here is Doom’s updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy was a healthy $8.651 billion, but last week’s splurge had been over $20 billion higher.

Agencies have resumed their steady march down, dropping a significant $3.788 billion.

The net change of US obligations was just $4.863 billion. About twice that amount on a regular basis would be better.

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The Fed’s own MBS holdings rose by a relatively modest $13.878 billion, but this made the total Fed holdings of MBS larger than the total reported for foreign central banks, who recorded a very small reduction. Meanwhile after four weeks of quiet, and while the equity people were throwing a party over Dow 10k, the treasuries number surged by the 5th biggest amount ever. The amount of volatility in that number is becoming a little comical.

This week’s Reuters report¹ came in with a huge jolt to the treasuries number and the 3rd consecutive sub-billion move in agencies. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.² Here is Doom’s updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy streaked up to a whopping $28.706, well up the table of Doom’s Top 10.

Agencies stalled completely, dropping a mere $0.070 billion.

The net change of US obligations was $28.636 billion, good enough to support US debt for a whole month, which is good because there hasn’t been much buying since the even bigger surge 5 weeks ago.

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The boost in August capital flows to the U.S. appears to be driven by a stronger appetite for U.S. Treasury and agency debt. Also, Japan and the U.K. boosted their holdings of U.S. debt. Japan increased its holdings by $6.5 billion and the U.K. boosted its holdings by $5.9 billion. Still, some analysts say foreign demand for U.S. securities needs to be much stronger in order to offset downward pressure on the dollar. - WSJ⁴

UPDATE: The above was added mid-Friday.  Looking beyond August, you’ll note from the following charts that the strong foreign demand they’re talking about doesn’t seem to have materialized in the last couple of months, at least from official sources, except for the anomaly in the week Sept 10-16.

The Fed’s own MBS holdings leaped by $70.699 billion, but other than a return to billion dollar a day support for America’s debt markets, this week’s episode isn’t all that exciting. Funny the foreign central banks would choose to dip their toes into debt again while the Dow was on a tear.

This week’s Reuters report¹ documented a modest but healthy buy of treasuries, and a second consecutive positive sub-billion rise in agencies. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.² Here is Doom’s updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy recovered this week, adding $7.148 billion after last week’s sub-billion selloff.

Agencies improved on last week’s even smaller result, nudging up $0.976 billion.

The net change of US obligations was a healthy $8.124 billion. That’s the first week in three to yield a significant increase.

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An investor class that includes foreign central banks bought 34.5 percent of the notes, compared with 46.5 percent at the last auction and an average of 45.36 percent at the past five auctions. Bloomberg¹

Could have fooled me. Last week’s change in foreign central banks’ holdings of US Treasury and Agency Debt was from a liveliness class that includes "dead." The Fed’s own MBS holdings were also essentially unchanged, falling just $0.074 billion.

This week’s Reuters report² yielded numbers so small that the up/down story was largely irrelevant. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.³ Here is Doom’s updated CSV version⁴ of the agencies and treasuries foreign central bank holdings data set.

SPECIAL NOTE: Doom’s own twist, who faithfully makes up the charts for this series,⁵ is actually a scientist in real life. Last night she had a glorious opportunity to advance her research, and still managed to get this job done ahead of our deadline.  Not only that but she found this⁶ late entry.  She’d be the first to remark that correlation does not imply causation, but isn’t it a juicy tidbit that the cenbanks’ liquidity swaps were as flat as their buying appetites?

The Fed’s balance sheet contracted for the second straight week, dipping slightly to $2.120 trillion from $2.123 trillion. Nearly all of the drop came from a decline in central bank liquidity swaps, as foreign demand for dollars continues to wane. Nearly all of the programs set up as emergency facilities to prop up the financial system were essentially flat. …

The treasuries buy collapsed this week. There was actually a net selloff, but it was only $0.634 billion.

Agencies, on the other hand, recovered from last week’s selloff, but the buy was a tiny $0.512 billion.

The net change of US obligations was a miniscule selloff of $0.122 billion. That’s the second straight week where the number has moved less than a billion dollars.

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NEW YORK (Dow Jones)–U.S. stocks marked their worst decline in about three months as a disappointing report on manufacturing early Thursday led to a broad sell-off for many of the companies that helped pace a surging third quarter in stocks, including JPMorgan, Caterpillar and American Express. - WSJ¹

With Dow 10K receding like a toy helium balloon and equity investors looking over their shoulders at what well may have been the most astounding Bear Rally in Wall Street history, you’d think that the debt markets would be flooded with refugees from the capital markets, but they didn’t include this gang, at least not this week. Foreign central banks’ holdings of net US obligations barely nudged up, less than a billion dollars. Even the the Fed’s own MBS holdings slipped a trivial $1.270 billion. This week’s Reuters report² provided yet another episode of "same same," with modest moves by Treasury and Agency Debt in opposing directions. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.³ Here is Doom’s updated CSV version⁴ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy bounced back a bit to $8.365 billion, nearly doubling last week’s figure.

But agencies fell by a significant $7.462 billion, nearly canceling out the treasuries rise.

The net buy of US obligations was a tiny $0.903 billion. Gains in holdings of US debt have been quite lumpy lately.

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I did my rant on Wednesday already, and even the Puplava number shows just a modest $8.539 billion rise in the Fed’s little hoard of MBS, so let’s cut right to the chase, such as it is. This week’s Reuters report¹ was positively dull after last week’s historic treasuries buy. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.² Here is Doom’s updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy sagged back to $4.549 billion, about an 85 percent reduction from last week’s number, which was our 2nd highest ever.

Agencies fell by $1.483 billion, but that was less than a third of last week’s selloff.

The net buy of US obligations was a paltry $3.066 billion. Except for last week’s outstanding result, foreign official buyers haven’t been very busy lately.

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There are some who think it’s time for the central bank to exit the market. Others say such an abrupt end would undo the Fed’s efforts to keep mortgage rates low and instead suggest a gradual wind down of its purchases and an extension of the program into the early months of next year. - Nasdaq¹

A year ago last Friday, exactly 7 years and 7 days after 9/11, the US became a command economy.

Now, in a "fit of absent-mindedness," key agencies of American financial policy find themselves with side-businesses as Soviet-era economic secretariats, and they don’t quite know what to do about it.

Starting from zero eight and a half months ago, the Federal Reserve Board has gorged on $685 billion worth of mortgage-backed securities, making "the Fred" America’s dominant player in residential real estate.

Meanwhile, thanks to the 9/11 ‘09 collapse of Corus, the Federal Deposit Insurance Agency has suddenly been propelled into a leading role in commercial RE.

Dow Jones is covering both aspects of the story, framing it as an effort to return to capitalist business-as-usual, but Murdoch’s deploying his bigger guns² against the commercial side, as Ms Bair prepares to impersonate Jesse Jones, hopefully without "discovering" prices for strip malls in the Ghost Towns in the desert around Las Vegas that will send CMBS asset prices (and the holders of such assets) straight into the tank.

The Corus transaction is being structured as a partnership between the agency and winning bidder. The FDIC will hold a 60% stake and provide financing, according to people familiar with the matter. While seven other FDIC deals since 2008 have had similar partnership structures, the Corus deal is by far the largest. A similar arrangement was made in last week’s sale of $1.3 billion in residential mortgages to a venture between the FDIC and Residential Credit Solutions Inc., these people said.

The public-private partnership structure is modeled on about 70 such deals pioneered by Resolution Trust Corp., a federal agency formed to clean up the savings-and-loan mess of the late 1980s and early 1990s. Rising property values in the mid- and late-1990s enabled the RTC to reduce taxpayer losses.

Still, the partnerships expose the U.S. to more financial risk than it might face by selling assets completely to private investors. The Corus auction also is complicated by an oversupply of condos in some of the same states where Corus concentrated its lending, such as Florida, California and Nevada.

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[Congressman Alan] Grayson: “So who got the money?”
Bernanke: “Financial institutions in Europe and other countries.”
Grayson: “Which ones?”
Bernanke: “I don’t know.”
Grayson: “Half a trillion dollars and you don’t know who got the money?” - Wall St. Cheat Sheet¹

Twist was circulating the above around the Castle earlier today with the comment "… you could purchase a bunch of treasuries and agency debt with that," to which I’m going to add the thought — last week. Foreign central banks have been suddenly gorging on Treasury Debt, but an even bigger number is this week’s Puplava number, and it was so extreme it merited notice in Bloomberg.²

The Fed’s assets rose $51.9 billion, or 2.5 percent, to $2.14 trillion, the highest since May, in the week ended yesterday, the central bank said today in Washington. Mortgage- backed securities increased by $59.8 billion to $685.1 billion.

We’re certainly being kept busy here at Doom trying to follow the mind-bogglingly huge piles of money being shifted around in this gigantic shell game. And when I try to get my head around the idea of the Fed evolving⁷ into America’s premier social housing agency it’s definitely time to let the old Earl Grey steep a little longer.

This week’s Reuters report³ delivers yet another high hard one. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.⁴ Here is Doom’s updated CSV version⁵ of the agencies and treasuries foreign central bank holdings data set.

Last week I asked, "Could this sputtering pattern [of modest treasuries buys] presage a top?" so this week … Kapow!! we get the 2nd highest weekly buy ever of the stuff.  Doomers who have good memories may remember that the week ending in October 1st last year, the week that still holds #1 honours, was hardly a normal time.⁶ … And if you look at #10 you’ll see that more than half of that splurge was given back the next week.

Agencies fell by $5.073 billion continuing a slowly accelerating trend of inexorable sell-off.

The net buy of US obligations was a very healthy $26.353 billion, but remember that the previous two weeks nearly canceled each other out.

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Moody’s said in a report it doesn’t expect any downgrades of countries with triple-A ratings — the highest possible — in the "near future," adding that only a sustained increase in government debt over several years, which it doesn’t anticipate, would warrant such a decision. - WSJ¹

Well, the good news is that this week’s Reuters report² suggests if the US wants to sell a lot more debt, foreign central banks might not be in a mood right now to buy the stuff. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.³ Here is Doom’s updated CSV version⁴ of the agencies and treasuries foreign central bank holdings data set. The Puplava number barely budged. The Fed’s own holdings of mortgage-backed securities rose a mere $0.025 billion.

Cenbanks sold a modest but significant $3.003 billion of Treasury Debt last week. Could this sputtering pattern presage a top?

Agencies fell by $2.656 billion, just half a billion more than last week and continuing the pattern of a slow inexorable sell-off.

The combined sell-off of both flavors of US obligations erased all but $0.104 billion of last week’s net buy. Not much to show for all those indirect buyers being reported (see note 6 at link) on August 31st.

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