The Market Ticker

So yesterday Citibank "settles" their suits with various people and agrees to "buy back" all of the frozen auction-rate securities (ARS) that customers hold, at par.

This is (or will be) shortly followed by every other bank on the street doing the same thing.

Why did this suddenly happen?  Two reasons:

• The markdown from par really isn't that bad.  5 cents off, maybe. 
• There was a real risk they were going to lose in court.  Badly.  I've seen some of the prospectuses and some of the account statements.  These things were basically sold as if they were a money market, and often were listed as "cash equivalents" on customer account statements.  That's more than a bit over the line, and is utterly indefensible.

In any event this is yet one more exotic that is no longer going to be where it doesn't belong.

But that's not the real story today.  No, that's BNY Mellon, who is suing Bank America/Countrywide.

I've talked about the problems with that acquisition before, with the biggest one being that BAC has refused to formally guarantee Countrywide's debt.

This is a major issue should BAC start to dismantle the value in the Countrywide enterprise and/or transfer part of it (say, the servicing part?) into their organization.

See, the bondholders bought those bonds with the support of the value of the firm behind them.  BAC cannot (legally anyway) just strip off pieces and leave a skeleton there, which is then allowed to die, and screw the bondholders.  That won't work, and if its attempted, Sir Judgealot is likely to play "unwind" on that with ugly consequences.

But now Bank NY/Mellon has decided to get preemptive and ask a judge to declare that an act of default already happened.  Weeeeelllll.... how long before there are 20 more suits behind theirs, and perhaps an involuntary bankruptcy petition?

Most of the time that's not a good idea; you force a BK you get less as a bondholder, if it can be avoided.  But if you fear asset strippage (or just plain rottage)......

This bears watching.

But the real news out this morning is Fannie.  No, not that they lost four times the estimate (duh), but embedded in the news release were a few "tidbits", if you were.

First, "regulatory capital"; $47 billion.  Sounds like a lot, right?  Uh, except that they have a $3 trillion book, between credit and retained.

That's an enterprise leverage ratio of 63:1, or roughly double Bear Stearns was just before it blew up.

As I've noted, there are all sorts of "dirt" in those numbers too.  Tax benefits, for one, which are (of course) only worth something if you pay taxes (because you made money.)  Take that back out and the numbers look even worse.

But this is old news - I've ranted about this for months, and nobody cares.  (We all know they will blow up, but heh, we're all watching American Idol,  and this makes it all good, right?)

No, the bigger news was embedded in the series of flash news releases - Fannie is ceasing the purchase of ALT-A paper.

Huh?  ALT-A eh? 

I thought we were told by the politicians that Fannie and Freddie were providers of liquidity to "conforming" mortgage holders; that is, fully-documented, even if they've redefined "prime" in recent years.

Ah, grasshopper, now you are starting to understand the lie that you've been told, and why its a problem.

See, the truth is that Fannie and Freddie have been buying both ALT-A (liar loans, interest only, etc) and subprime.  That's right, they've been playing "hedge fund" along with mortgage originator and guarantor!

This is what you get when people are allowed to run without having to take their own credit risk and deal with the market absent an "implicit" backstop.

You get monsters.  Frankenstein.  Godzilla.  Mothra.  LochNess.  Stay-Puft Marshmallow Man. Ok, ok, maybe not Nessie; she's cute.

Then the monster steps on your church and flattens it.

Fannie and Freddie have an enormous amount of exposure to both subprime and ALT-A on their credit book, nearly all of it purchased from others, not originated for them.

In other words, the firms went out into the marketplace and bought this paper.

People wonder why I'm rabidly opposed to any taxpayer-funded support of these clowns?  This is not a firm providing market support and liquidity for borrowers on loans they originated and controlled, directly or indirectly; they literally have been going into the market and buying this paper on their own for investment purposes!

THAT is where the largest concentration of risk and loss has come from.

Therefore, my position that I have elucidated over and over on these guys - cut them off and let them fend for themselves in the marketplace.

If Congress, at the same time (or subsequently) decides that we need a mortgage market liquidity provider with government involvement (an assertion that I am willing to accept but have not yet seen convincing evidence of) then establish an explicit government agency operating with a completely transparent book that the public can monitor and provide oversight of, with the benefit of same going to the public to reduce the public debt.

Oh, and before you listen to Barney Fife, er, Frank or Chris Doddering, er, Dodd on the "value" that Fannie and Freddie have brought to American Homeowners, you might want to first read a paper published by The Fed in 2005.  It makes quite clear that the largest beneficiary of Fannie and Freddie's existence has been Fannie and Freddie themselves - that is, their shareholders, employees and executives.

The "money chart" is here (click for a bigger one)

What's this mean?  It means that the impact of having the GSEs in the market has been a "whopping" improvement in your interest rate of 0.04 to 0.12%!

That's right, four to twelve basis points.

All of the rest of the benefit has gone to someone other than you as a homeowner.

Bottom line? 

The claim that the GSE's have been of "tremendous benefit" to the American Homeowner is a whopping LIE, perpetuated by Congress who wants you to think they've done you a huge favor over the years.

In truth, they've done nothing of the kind, and now they want you to swallow up to $1 trillion dollars in risk for a benefit you never received in the first place.

Don't be a fool.

In geopolitical news there may be an all-on war between Russia and Georgia.  Pray that doesn't spread folks.  If NATO gets involved on Georgia's side this has the potential to get extraordinarily ugly with frightening speed.  We can only hope that cooler heads prevail, but I'm not confident that they will.