100 Billion dollar subprime Fund

[The OC Scam]

Is this a bailout plan for the banks? I don’t understand who is going to pay for this fund? Is it so obvious …

http://www.marketwatch.com/news/story/big-banks-treasury-talks-alleviate/story.aspx?guid=%7B25C497CF%2D79C8%2D4FF0%2D8DA0%2D39D90DA65796%7D

[HLS]

We are facing economic meltdown. They will print an unlimited number of bills or create the ultimate fund to TRY and stop the tsunami. In the beginning they tried using an umbrella. It didn’t work.

The govts biggest fear right now is a collapse of housing prices. If thousands upon thousands walk away, they cannot burn the houses down, they must be sold, but the only buyers will be at greatly reduced prices causing a panic in the economy.

They will do ANYTHING to figure out how to keep John/Jane Q Public wanting to pay their inflated mortgage. Even at 0% interest, the myth is kept alive by the high principal balance.

What is best for the public is not what is best for the govt.
People walking away and buying a similar house in the future for 50% less than they owe today is good for the public.

What the govt wants is to keep people from losing their homes so the system doesn’t collapse and staying in debt.

If the homes were “worth” more than people owed, the govt wouldn’t be so concerned.

$100bn is a good number to start. They will create more $ if they need to.
The situation is giving a new definition to the word CRISIS.

[HLS]

We are facing economic meltdown. They will print an unlimited number of bills or create the ultimate fund to TRY and stop the tsunami. In the beginning they tried using an umbrella. It didn’t work.

The govts biggest fear right now is a collapse of housing prices. If thousands upon thousands walk away, they cannot burn the houses down, they must be sold, but the only buyers will be at greatly reduced prices causing a panic in the economy.

They will do ANYTHING to figure out how to keep John/Jane Q Public wanting to pay their inflated mortgage. Even at 0% interest, the myth is kept alive by the high principal balance.

What is best for the public is not what is best for the govt.
People walking away and buying a similar house in the future for 50% less than they owe today is good for the public.

What the govt wants is to keep people from losing their homes so the system doesn’t collapse and staying in debt.

If the homes were “worth” more than people owed, the govt wouldn’t be so concerned.

$100bn is a good number to start. They will create more $ if they need to.
The situation is giving a new definition to the word CRISIS.

[patientrenter]

HLS is spot-on. Keeping home prices high is what most voters want, and making the majority of voters feel good is what politicians and their government employees will try to do, at almost any cost, especially in an election year.

Can the pols succeed? Probably not 100%, because there’s a lot of water to hold back. But whereas prices in Southern California probably should drop by at least 50% in a free market, they might drop by only 20-25% with concerted government action. And I predict that govt actions will progressively increase in scale and ferocity as prices go down another 5, 10, 15, 20, 25%.

This is a moment when I will temporarily go along with all the doomsayers on moral hazard, dollar exchange rates, and inflation. I hope a Chinese central banker makes a few warning bond sales that nip all these rescue programs in the bud, but I don’t see that as likely.

Patient renter in OC

[patientrenter]

HLS is spot-on. Keeping home prices high is what most voters want, and making the majority of voters feel good is what politicians and their government employees will try to do, at almost any cost, especially in an election year.

Can the pols succeed? Probably not 100%, because there’s a lot of water to hold back. But whereas prices in Southern California probably should drop by at least 50% in a free market, they might drop by only 20-25% with concerted government action. And I predict that govt actions will progressively increase in scale and ferocity as prices go down another 5, 10, 15, 20, 25%.

This is a moment when I will temporarily go along with all the doomsayers on moral hazard, dollar exchange rates, and inflation. I hope a Chinese central banker makes a few warning bond sales that nip all these rescue programs in the bud, but I don’t see that as likely.

Patient renter in OC

[bsrsharma]

Citigroup has proposed the creation of a "superconduit" that would issue short-term debt and buy assets currently held by SIVs affiliated with the participating banks, the Journal reported.

So replacing SIVs with a SuperConduit will solve liquidity problem? If they can't sell SIV bonds, how can they sell Superconduit bonds? Pig in a Poke, anyone?

Importantly, none of these Ponzi tricks can solve the Fundamental problem, which is:

Between 2006 to 2010, the National "Wealth" is going to decrease by 50%. Yes, you read it right, because most of the national "Wealth" is equity in homes. How can this huge "destruction" of wealth be made invisible? I have put quotes to show that this bulking up of wealth was illusory and the loss is also illusory. But the effects of the loss can't be hidden anymore than the effects of gains were hidden.

 

[bsrsharma]

Citigroup has proposed the creation of a "superconduit" that would issue short-term debt and buy assets currently held by SIVs affiliated with the participating banks, the Journal reported.

So replacing SIVs with a SuperConduit will solve liquidity problem? If they can't sell SIV bonds, how can they sell Superconduit bonds? Pig in a Poke, anyone?

Importantly, none of these Ponzi tricks can solve the Fundamental problem, which is:

Between 2006 to 2010, the National "Wealth" is going to decrease by 50%. Yes, you read it right, because most of the national "Wealth" is equity in homes. How can this huge "destruction" of wealth be made invisible? I have put quotes to show that this bulking up of wealth was illusory and the loss is also illusory. But the effects of the loss can't be hidden anymore than the effects of gains were hidden.

 

[davelj]

This is a really interesting development. A couple of issues/observations:

(1) If all of the institutions involved (and others more indirectly involved in this rolling disaster) had to mark these positions to observed market values there would be a MAJOR fiasco. Otherwise, they wouldn’t be going through all of these machinations and pledging all of this capital TO AVOID THE REAL ISSUE: PRICE DISCOVERY. This is an admission of huge underlying problems.

(2) The assumption behind the establishment of this “super fund” (this description is so rich in unintentional irony I can hardly stand it) is that current market values for this sludge are not a true reflection of economic values. In other words, the issue is liquidity rather than these securities’ true cash flows. This may or may not be the case. No one knows the answer here. It would take a team of knowledgeable professionals weeks to analyze just a handful of these securities properly, which would involve all sorts of Monte Carlo simulations regarding default rates, prepayment rates, etc. Bottom line: Even the institutions that own this crap don’t really know what it’s worth. This super fund is all about buying time in the hope that things will improve. From these institutions’ standpoint there’s no downside to delaying price discovery. Who knows… maybe the securities will ultimately be worth more than their current market values. And if they’re not, then they’re sunk anyway. So why not delay things?

(3)It will be fascinating to see how the market reacts to this news. The bears will say, “A ha! There are major problems out there that haven’t been acknowledged to the public. Stocks should go down.” But the bulls will say, “Party on, dudes! It’s all under control. The institutions are going to form a totally rad super fund that will make these pesky liquidity issues go away. Buuuuuuuuyyyyyyyyy, Winthorpe, Buuuuuuuyyyyyyyy!!” I have no clue who wins this tug of war.

(4) I suspect that things are much worse than the large institutions are letting on. The real problem – the one that won’t go away merely by delaying price discovery – is that these securities are backed by mortgages that a lot of people aren’t paying on, and the collateral values are plummeting. And the situation is getting worse and will continue to get worse for at least a couple of years. Nothing – and specifically not this super fund – will change this fact. As I like to say when discussing this issue with colleagues: “The loans have been made. You can’t put the genie back in the bottle. In the short term it’s about perception. But in the long term these are just a whole boatload of really ugly mortgages and securities. And nothing will change that fact.”

In summary: This reeks of rearranging the deck chairs in the hopes that a big whale will come along and plug the hole in the ship until help arrives. The problem is that, ultimately, I don’t think help arrives for most of these securities. The loans have already been made…

[davelj]

This is a really interesting development. A couple of issues/observations:

(1) If all of the institutions involved (and others more indirectly involved in this rolling disaster) had to mark these positions to observed market values there would be a MAJOR fiasco. Otherwise, they wouldn’t be going through all of these machinations and pledging all of this capital TO AVOID THE REAL ISSUE: PRICE DISCOVERY. This is an admission of huge underlying problems.

(2) The assumption behind the establishment of this “super fund” (this description is so rich in unintentional irony I can hardly stand it) is that current market values for this sludge are not a true reflection of economic values. In other words, the issue is liquidity rather than these securities’ true cash flows. This may or may not be the case. No one knows the answer here. It would take a team of knowledgeable professionals weeks to analyze just a handful of these securities properly, which would involve all sorts of Monte Carlo simulations regarding default rates, prepayment rates, etc. Bottom line: Even the institutions that own this crap don’t really know what it’s worth. This super fund is all about buying time in the hope that things will improve. From these institutions’ standpoint there’s no downside to delaying price discovery. Who knows… maybe the securities will ultimately be worth more than their current market values. And if they’re not, then they’re sunk anyway. So why not delay things?

(3)It will be fascinating to see how the market reacts to this news. The bears will say, “A ha! There are major problems out there that haven’t been acknowledged to the public. Stocks should go down.” But the bulls will say, “Party on, dudes! It’s all under control. The institutions are going to form a totally rad super fund that will make these pesky liquidity issues go away. Buuuuuuuuyyyyyyyyy, Winthorpe, Buuuuuuuyyyyyyyy!!” I have no clue who wins this tug of war.

(4) I suspect that things are much worse than the large institutions are letting on. The real problem – the one that won’t go away merely by delaying price discovery – is that these securities are backed by mortgages that a lot of people aren’t paying on, and the collateral values are plummeting. And the situation is getting worse and will continue to get worse for at least a couple of years. Nothing – and specifically not this super fund – will change this fact. As I like to say when discussing this issue with colleagues: “The loans have been made. You can’t put the genie back in the bottle. In the short term it’s about perception. But in the long term these are just a whole boatload of really ugly mortgages and securities. And nothing will change that fact.”

In summary: This reeks of rearranging the deck chairs in the hopes that a big whale will come along and plug the hole in the ship until help arrives. The problem is that, ultimately, I don’t think help arrives for most of these securities. The loans have already been made…

[gandalf]

DaveLJ,

Funny coincidence with name, I used to work at DLJ in a former lifetime, secondary mortgage market, MBS desk, whole loan analyst. Good job, interesting work for a while. Loved the math, yield curve, loan characteristics, pricing mechanics. RTC cleanup was mild compared to the ‘junk’ out there today.

I think you’re exactly correct, BTW. Both in your read of the situation, and predicting the outcome. Superfund will help to shore up cash flow deficiencies, defer re-marking the securities. But at the end of the day, it’s an awful lot of bad paper.

[gandalf]

DaveLJ,

Funny coincidence with name, I used to work at DLJ in a former lifetime, secondary mortgage market, MBS desk, whole loan analyst. Good job, interesting work for a while. Loved the math, yield curve, loan characteristics, pricing mechanics. RTC cleanup was mild compared to the ‘junk’ out there today.

I think you’re exactly correct, BTW. Both in your read of the situation, and predicting the outcome. Superfund will help to shore up cash flow deficiencies, defer re-marking the securities. But at the end of the day, it’s an awful lot of bad paper.

[4plexowner]

there is about $20 trillion in derivative paper sitting on top of subprime mortgages

there is another $400+ trillion in derivative paper based on interest rates, price of energy, price of gold, etc ($700 trillion is the highest number I have seen)

this worthless paper trash has been sold to an unsuspecting body of investors who are now waking up to this fact:

ALL OF THIS PAPER IS WORTHLESS TRASH!!!

the trick now is to monetize this paper without making it obvious to the public

I personally don’t think it is possible – there is just too much of this toxic crap floating around – but the bankers are going to try to do it – they will do it in little pieces here and there in the hopes that the sheeple don’t notice

this is what it will look like: $100 Bil for a new subprime fund, expand Freddie and Fannie’s loan limits and portfolio size limit, lower the standards for mortgages that Freddie and Fannie can buy, lower the standards for the paper that the Fed will accept in its repurchase agreements, create ‘rescue’ plans for F’d home-debtors, lots more to come and lots more being done behind the curtains

we humans continue to repeat the fiat currency mistake and it bites us in the ass every time – welcome to the latest ass-biting

~

http://piggington.com/fed_monetizing_fannie_and_freddie

“one of the ways for a central bank to stave off credit contraction and deflation is to directly monetize paper assets – in simplified terms this means using printing press money to buy worthless paper assets instead of letting those assets meet the price discovery process in an open market”

[4plexowner]

there is about $20 trillion in derivative paper sitting on top of subprime mortgages

there is another $400+ trillion in derivative paper based on interest rates, price of energy, price of gold, etc ($700 trillion is the highest number I have seen)

this worthless paper trash has been sold to an unsuspecting body of investors who are now waking up to this fact:

ALL OF THIS PAPER IS WORTHLESS TRASH!!!

the trick now is to monetize this paper without making it obvious to the public

I personally don’t think it is possible – there is just too much of this toxic crap floating around – but the bankers are going to try to do it – they will do it in little pieces here and there in the hopes that the sheeple don’t notice

this is what it will look like: $100 Bil for a new subprime fund, expand Freddie and Fannie’s loan limits and portfolio size limit, lower the standards for mortgages that Freddie and Fannie can buy, lower the standards for the paper that the Fed will accept in its repurchase agreements, create ‘rescue’ plans for F’d home-debtors, lots more to come and lots more being done behind the curtains

we humans continue to repeat the fiat currency mistake and it bites us in the ass every time – welcome to the latest ass-biting

~

http://piggington.com/fed_monetizing_fannie_and_freddie

“one of the ways for a central bank to stave off credit contraction and deflation is to directly monetize paper assets – in simplified terms this means using printing press money to buy worthless paper assets instead of letting those assets meet the price discovery process in an open market”

[davelj]

On this subject, a few quotes from friends of Bill Fleckenstein that were included in Bill’s market update today:

“How anyone can look at the creation of this fund as anything other than a cynical way of moving an existing pile of crap from one place to another is beyond me. The fact that no one seems to think there is anything wrong with it (and I include the regulators) tells you just how ‘fixed’ the markets’ problems are. The level of terror that must exist in the boardrooms of the banks and regulators that peered into Pandora’s box this summer must be extreme. They set up the conduits to skirt balance-sheet constraints, investors realized they were getting paid no risk premium to buy the paper and fled. The answer? Do it again, in the same way, but call it something different.”

“Meanwhile, in the background, Moody’s is telling us in no uncertain terms that massive downgrades of subprime-laden CDOs are coming. To be sure, the ABX has been telling us for many months what the market thinks about the value of these things [and the top of the stack was pounded again today], but until the actual downgrade comes, an investor isn’t necessarily obliged to sell. The IRS is also investigating accounting for mortgage-backed securities. Thus, the situation has become quite dicey.”

I can’t improve much on this synopsis.

[davelj]

On this subject, a few quotes from friends of Bill Fleckenstein that were included in Bill’s market update today:

“How anyone can look at the creation of this fund as anything other than a cynical way of moving an existing pile of crap from one place to another is beyond me. The fact that no one seems to think there is anything wrong with it (and I include the regulators) tells you just how ‘fixed’ the markets’ problems are. The level of terror that must exist in the boardrooms of the banks and regulators that peered into Pandora’s box this summer must be extreme. They set up the conduits to skirt balance-sheet constraints, investors realized they were getting paid no risk premium to buy the paper and fled. The answer? Do it again, in the same way, but call it something different.”

“Meanwhile, in the background, Moody’s is telling us in no uncertain terms that massive downgrades of subprime-laden CDOs are coming. To be sure, the ABX has been telling us for many months what the market thinks about the value of these things [and the top of the stack was pounded again today], but until the actual downgrade comes, an investor isn’t necessarily obliged to sell. The IRS is also investigating accounting for mortgage-backed securities. Thus, the situation has become quite dicey.”

I can’t improve much on this synopsis.

[Author]

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