The Market Ticker

"Tending to larceny....."

So what sold off the market yesterday?

Having to cease tending to larceny:

"There is simply no provision in the law that requires investment bank holding companies to compute capital measures or to maintain liquidity on a consolidated basis. Nor does the law provide for a consolidated supervisor that is knowledgeable in their core securities business, and that would be recognized for this purpose by international regulators.

...
At the same time, without waiting for new internationally accepted standards, the Division of Trading and Markets has strengthened the liquidity requirements for CSE firms relative to their unsecured funding needs. They are closely scrutinizing the secured funding activities of each CSE firm, with a view to lengthening the average term of secured and unsecured funding arrangements. And they are currently obtaining funding and liquidity information for all CSEs on a daily basis, and discussing with CSEs the amount of excess secured funding capacity for less-liquid positions. There will also be more disclosure of actual capital and liquidity positions of the CSE firms in terms that the market can readily understand and digest. The CSEs will institute public disclosure of their capital ratios computed under the Basel Standard later this year, and then phase in additional disclosure related to concentration of exposures."

Ding ding ding ding ding.

Let me translate into one sentence:

"You're gonna have to tell us what you hold and how you're valuing it, and that is going to be publically disclosed."

That this resulted in a two hundred point selloff in the Dow, with every financial stock getting hit in unison when this ditty crossed the wire, says more about our capital markets than anyone can put into print.

It should wake every single member of Congress out of their somnolence right now.

If you don't get this, as investors, as regulators, as Congress, as President Bush, as Treasury Secretary Paulson, and as Chairman Bernanke, you're either blind, stupid or both.

Probably both.

The market has gone up over the last two months, since Bear Stearns was bailed out, because companies are lying and the "regulators" have been explicitly allowing them to lie.

In fact, that is exactly what Bloomberg reported:

"Data on capital and liquidity will be required this year 'in terms that the market can readily understand and digest,' Cox said in a speech today before the Securities Traders Association in Washington. The SEC already collects much of this information without giving it to the public, he said.

The five biggest Wall Street firms had their largest share-price declines in at least a month. Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, led the way, losing $2.67, or 5.8 percent, to $43.64 as of $:31 p.m. in New York Stock Exchange trading."

There 'ya go, reported by the media - the threat of having to tell the truth resulted in the largest selloff in more than a month.

Never mind Merrill "we don't need more capital" Lynch who has a CEO that loves to repeat his mantra every time there is a microphone within 60' - and then immediately turns around and - you guessed it - raises more capital.

"Tending to larceny....."

Or shall we count JP/Morgan that pulled the same stunt, selling $1.6 billion in hybrids @ 8%. Heh, that's great - I can get a mortgage at a lower coupon! So tell me, is Mr. Dimon's firm in worse financial shape than I am, since they have to pay a higher interest rate for a shorter maturity (their notes can be called in 2013; my 30 year mortgage could not be.)

"Tending to larceny....."

If that's not bad enough, I have to hammer on Fannie again, this time using their Press Release:

"The initiatives include 1) a new refinancing option for up-to-date but "underwater" borrowers with loans owned by Fannie Mae that will allow for refinancing up to 120 percent of a property's current value."

Oh that's rich. Fannie proposes to allow borrowers to instantaneously saddle them with at least a 40% loss should they default? (20% underwater plus another 20% in foreclosure, rehabilitation and marketing expense)

This is part of Fannie's "great idea" speech for how to navigate a market that they have admitted is bad and getting worse?

OFHEO and Congress are allowing this sort of manifestly-unsound nonsense?

The very same practice - having an outstanding balance that exceeds the value of the property - that is now causing massive numbers of defaults?

Add to this that Fannie claims 11.2% of their credit book is ALT-A. Their credit book, in total, exceeds two trillion dollars.

So that's $200 billion, roughly.

Let's run some assumptions:

• Their ALT-A exposure will default at 1/2 the rate of the WaMu securitization ("we're better than the other guys")
• Recovery will be 50.

This puts ~15% of their exposure into default, and with a recovery of 50, results in $15 billion in losses on their ALT-A exposure alone, and that assumes no more price declines (its reflects only what has happened thus far in these securitizations!)

The firm itself is projecting not one but two more years of trouble, with 2009 being worse than this year.

Should the firm's own projections, along with extremely conservative loss ratios for that "ALT-A" book prove up Fannie would have a "Fair Asset Value" that is negative by an amount roughly equivalent to their current market capitalization.

If OFHEO and/or Congress does not step in right here and now and stop this stupidity Fannie is, in my opinion, absolutely a short to zero.

Unless their projections either prove horribly pessimistic or they raise several times the $6 billion they claim they intend to I cannot see how, within a year or two, they do not end up collapsing with the result being a 100% loss on shareholder equity, significant losses for bondholders, and the need to nationalize the firm.

OFHEO's "dropping" of Fannie's "excess reserve" requirement borders on criminal stupidity. Lockhart must resign now; this act, if it is allowed to stand, essentially guarantees that the taxpayer will be saddled with huge credit losses - and we haven't even started to talk about Freddie yet, who is likely in no better shape!

Since OFHEO won't take action Congress must step in and stop this. Not next year - by then it may be too late. This simply has to be addressed immediately, or the ticking nuclear debt-device's timer may reach "00:00" with not-amusing consequences.

Specifically, Fannie must be immediately forced to:

• Stop buying any paper that does not have at least 15% homeowner equity, with no "assistance" or kickbacks being permitted (Nehemiah anyone?)


• Stop buying any paper unless the DTI is under 36% and the loan is fully-documented.


• Go through its entire credit book and where any element of fraud can be found in any loan being held, immediately force the repurchase of that paper by the party that tendered it to Fannie, so that the firm doing the tendering eats the loss instead. When not possible (the tendering firm had no intermediary investment bank and/or is insolvent) then these loans must be identified and segregated, with details of same released to the investing public.


• To the extent that Fannie is holding any seconds or HELOC paper, segregate and total any amount that exceeds 100% LTV at current market values.


• Raise at least $20 billion in additional core capital, plus 50 cents for every dollar of loan face value that has fraud inherent in its issue, plus one dollar for every dollar of underwater 2nd lien or HELOC, via issue of common stock (not preferred which carries a coupon!), and eliminate the dividend entirely (or reduce it to 1/2 cent/share, if the desire to keep it as a "dividend paying stock" to prevent divestiture is a key part of what management believes is necessary.) Yes, this will be extraordinarily dilutive (like equal to 100% of the outstanding market cap - at least - and perhaps significantly more.)

If this is not done - and soon - I see no way for Fannie to avoid cascading losses that will smother its operating and "core capital", ultimately resulting in the firm being rendered insolvent.

Lockhart came out (perhaps in response to justifiable questions about Fannie) and said:

"Mortgage financing giants Fannie Mae and Freddie Mac could face further problems if home prices continue to plummet, but a taxpayer bailout is not likely, said the federal regulator charged with overseeing the two firms."

He is prepared to let them go bust? That would be cute.

Thanks for the "short list" James.

Let's move on from larcenous (or just plain stupid) corporations (and their regulators) to even dumber (or is that larcenous) governments.

You want a mortgage in New York? You're gonna have a hell of a time getting one unless you've got 30% down. Yes, 30%. Why? This bill:

"If members of the New York State Assembly have their way, lenders and investors with loans in New York state will soon have to contend with a one-year moratorium on foreclosure activity in the state. Members of the state Assembly passed a legislative package of four housing-related measures Wednesday, one of which would force a one year delay between the moment a notice of default is filed through the foreclosure sale itself."

That will instantaneously devalue all existing mortgage paper written in the state and "adjust" (guess in which direction) the risk premium on new mortgages. Yes, your government at work.

All this in yet another crass attempt (see Fannie's 120% LTV example above) to keep housing prices from adjusting to the maximum sustainable 3x incomes. It not only won't work it will cause an even greater crash because the loss of value in that paper will create an immediate spike in interest rate demands for all new loans in the state.

Nor are they first - Taxachusetts got in front of this one by days. That wasn't a surprise. That New York would attempt to follow them is. Expect lawsuits, by the way, over existing mortgage paper, although the ability to prevent this for new mortgages via court action is unlikely to succeed.

The NY Legislature's new refrain: "If I only had a brain....."

Moving on to the next "Forest Gump" candidate we have...... the American Consumer!

The Fed's G.19 credit release showed that Americans last month not only spent their stimulus checks before they got them, but levered up even more, charging up the plastic at a prodigious rate. Indeed, the annual rate of increase in revolving (credit card) debt was nearly 8% in March, more than double the annualized rate of increase in wages.

"Heh honey, our HELOC got recalled. Think we should cut back?

Naw, get out the plastic - its time for another pair of $600 shoes!"

Ya.

Indeed, store comps out this morning say that is exactly what happened, with strong increases across the board.

Oh, never mind that our great Congressfolk and Ben Bernanke would never advise Americans to actually pay down debt! Why no! In fact quite the opposite - all the talk out of Washington was to spend spend spend! We have to keep the economy going!

The futures did not respond materially to the news flow - heh, you think Wall Street might have figured out how compound interest works?

Now, after all these years?

This much is certain - there will never be a shortage of stupidity in the universe, as we have an ample supply of it between Congress, The Fed and American households.

Got KaPUTts on Credit Card and auto loan issuers?

Their turn in the wood chipper is coming.

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