[bsrsharma]

Further evidence of liquidity crunch deep inside the system. There was another news item today about Freddie Mac being unable to hawk its warez. Being GSE is no longer Slam Dunk.

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Sense of growing crisis over interbank deals
By Gillian Tett

Published: September 4 2007 21:34 | Last updated: September 4 2007 21:34

As bankers have returned to their desks this week after the summer break, they have been searching frantically for signs that the markets are gaining a semblance of calm after the August turmoil.

However, the money markets are notably failing to offer any reassurance. While the tone of equity markets has calmed, the sense of crisis in the interbank markets actually appears to be growing – especially in London.

In particular, the cost of borrowing funds in the three-month money markets – as illustrated by measures such as sterling Libor or Euribor – is continuing to rise, suggesting a frantic scramble for liquidity among financial groups.

This trend is deeply unnerving for policymakers and investors alike, not least because it is occurring even though the European Central Bank and the US Federal Reserve have taken repeated steps in recent weeks to calm down the money markets.

“What is happening right now suggests that the moves by the Fed and ECB just haven’t worked as we hoped,” admits one senior international policymaker.

Or as UniCredit analysts say: “The interbank lending business has broken down almost completely . . . it is a global phenonema and not restricted to just the euro and dollar markets.”

If this situation continues, it could potentially have very serious implications.

One of the most important functions of the money markets is to channel liquidity in the banking system to where it is most needed.

If these markets seize up for any lengthy period, there is a risk that individual institutions may discover they no longer have access to the funds they need.

This danger has already materialised for vehicles that depend on the asset-backed commercial paper sector – short-term notes backed by collateral such as mortgages.

In recent weeks, investors have increasingly refused to re-invest in this paper.

As Axel Weber, a member of the ECB council, admitted this weekend: “The institutions most affected currently are conduits and structured investment vehicles . . . Their ability to roll these short-term commercial papers is impaired by the events in the subprime segment of the US housing market.”

This problem is affecting the wider banking system because these vehicles are now tapping other sources of finance – mainly liquidity lines from banks.

It appears that the prospect of receiving new liquidity demands has prompted banks to rush to raise funds – and, above all, hoard any liquidity they hold.

The high demand from banks to secure liquidity for the next three months, coupled with their desire not to lend out what liquidity they have, has made it virtually impossible to execute trades – even at the official prices quoted for such borrowing.

That has created some extraordinary dislocations such as the fact that the cost of borrowing three-month money in the sterling Libor markets is now higher than borrowing six-month or 12-month money. “The system has just completely frozen up – everyone is hoarding,” says one bank treasurer. “The published Libor rates are a fiction.”

This situation could become increasingly dangerous in part because many other markets, such as swaps, are priced off the three-month Libor and Euribor rates. So the interbank freeze could have knock-on effects throughout the financial system.

A more pressing problem is the large volume of asset-backed commercial paper due to expire in coming weeks, which is set to increase the scramble for cash by the banks. “Money market stability needs to return as soon as possible,” says William Sels, of Dresdner Kleinwort. Jan Loeys, of JPMorgan, notes: “The longer it lasts, the greater the risk that the current liquidity crisis will worsen.”

The crucial uncertainty is what, if anything, policymakers can do to combat the sense of panic. Some observers hope the problems in the sterling market, at least, may dissipate when the current maintenance period at the Bank of England comes to an end.

Others, such as Mr Weber, have suggested that banks themselves need to raise more funds in the capital markets to meet liquidity calls. However, many private sector bankers, for their part, say that radical steps from the central bankers are needed to remove the sense of panic.

Whether the central bankers are willing or able to really help – in the UK or anywhere else – remains the great question.

Additional reporting by Paul J Davies

Copyright The Financial Times Limited 2007

[bsrsharma]

my industry

Can you describe that a little, please? Sounds like IT & Telecom service company. How are you so tightly coupled to Title companies?

[bsrsharma]

mom has wanted to buy a condo

If she can write a check for $128K and has an income of 200K (Or she is sitting on $640K), she is probably  a very smart lady and knows what she is doing. You shouldn't be too worried. If she want's a mortgage for $512K, the lender is also going to do a rather thorough due diligence on the property.

[bsrsharma]

Did you try calling your Congressman’s office? What was the response? I haven’t heard about any House initiatives or announcements yet.

[bsrsharma]

I agree. It is good to call your Congressman and Senators to warn them that they will lose your support if they use any taxpayer funds for bailout. I just felt jumping on the Whitehouse right away may be wasteful. Most attempts to steal from your pocket usually begin in Congress. That is where our focus should be. If anything, the WH would try not to spend any money on domestic issues due to idealogy (all available funds to be given to Pentagon).

[bsrsharma]

LBC, Isn’t it a bit early since the parameters of the “bailout” haven’t even been outlined with any clarity? Till any taxpayer impact is written into a Congressional Bill, all the protestations may just be some premature noise.

Oh, BTW, if you have to call someone, it is better to call your Congressman & Senator. Tell them you are a Constituent and will consider this issue while voting in 2008. That concentrates their mind mightily. By the time any bill reaches Dubya’s desk, the game is in the last innings.

Another unpleasant thought: A half % cut in FFR by BB has far more impact on the economy than any puny Billion $ bailout attempt.

[bsrsharma]

On the other hand, “Liar’s Poker” is a truly interesting book. You get to know the inner mechanics of Wall street a bit too well.

http://books.google.com/books?id=YK6-xuF6gZIC&dq=&pg=PP1&ots=J9fezmjtcs&sig=j0Zpr0RdeeDpbTrv8gpvKKFFIDk&prev=http://www.google.com/search%3Fq%3Dliars%2Bpoker%26ie%3Dutf-8%26oe%3Dutf-8%26aq%3Dt%26rls%3Dcom.ubuntu:en-US:official%26client%3Dfirefox-a&sa=X&oi=print&ct=title#PPP1,M1

[bsrsharma]

mixxalot – want an example of misplaced sense of priorities? Read this tragic story below. This woman can’t cremate her mother, but has money for toys.
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Comment by walt526
2007-09-03 13:16:54

Last week, a co-worker’s mother passed away. The co-worker is a single mom (13 year-old daughter and 4 year-old son) who had been living in a two-bedroom apartment with her mother (until she died). Her mother’s social security disability check basically covered their rent, while her paycheck covered everything else. So now she doesn’t know how she’s going to cover her September rent and can’t even come up with $600 to cremate her mother. She was overwhelmed with not only losing her mother, but was completely screwed financially.

This woman is a good friend at work, so I talked about it with my wife and we decided to give her a check for $300. So on Friday night, we headed over there to meet her at her apartment. We go inside and sit down and the 4 year-old starts showing us how to work the Comcast digital box. Then my co-worker asks me if we’d like to watch last week’s episode of Big Love on HBO On-Demand. She knows that my wife and I really like the show but only get to watch it when we’re over at my parents. We just subscribe basic cable because of the cost, even though we’re DINKs who gross a combined $90k.

I didn’t say anything, but that really pissed me off. The woman makes ~$35k with two kids, and she’s spending $100/month on Comcast? I also know that she has DSL plus a cell-phone for both herself and her 13 year-old daughter. So she’s probably spending around $200/month on telecommunications.

As I said to my wife once we were inside our car, that $300 isn’t paying to cremate her mother, but is paying for 3 months worth of cable. This country is doomed because nearly EVERYBODY confuses luxuries with necessities.

$600 is not that much money. Granted, it was an unexpected expense, but shit happens. You’ve got to be prepared. Next month it could be the timing belt on her van or something with her kid, etc. That’s why prudent people don’t spend everything they earn. Now I’m glad that we were able to help her out, but I just feel that she needs a serious reality check about how she spends her money.
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[bsrsharma]

Larry – I think the properties of interest for this analysis are more in the range of $522K – $800K. Above that, I think, the dynamics are very different. You are going out of the middle class spectrum and looking at buyers for whom price is (almost) of no great concern.

[bsrsharma]

SD – Is it possible to compare that number 1239 with historical trend? Is it possible by those having full access to MLS to make historical queries like “Number of properties for sale on **/01/2007”? Then the query can spew out data for 01/01/2007 .. 09/01/2007. I think Professor Bear’s theory makes a lot of sense. There will be very high pressure to get under the $521K line for anyone in the $522K to, say, $650K range. That should create a compression point at $521K and a vacuum in the $521K+ area, till you reach true estate grade properties at around million $ range. Of course, the crunch is less than a month old. There won’t be enough of data points for at least a couple more months. By 2008, I think this should be obvious.

[bsrsharma]

I think Professor Bear finds prices trying to get below the $521K mark, post Jumbo crunch. My guess is, by Aug 2008, houses for sale with jumbo price tags would have become rare. A real scientific analysis is difficult since prices are generally coming down. But the near non-availability and high price of jumbo loans will combine to create a highly non-linear “sound barrier” at 521K. If you are a buyer, not much sense making a higher offer and if you are a seller, not much sense keeping a higher price – unless the property is truly exceptional.

[bsrsharma]

kewp – FED may start accepting sub-prime junk for long term REPOs. Helicopter Ben may be reading your thoughts.

[bsrsharma]

rseiser – you can rest assured that there won't be any government bailout. You have the reason in your own post – $3 trillion. The treasury is so completely broke that any government help will be all hat and no cattle.

[bsrsharma]

Thebreeze: Estimated 7 million total foreclosures. Estimated 2 million+ families. Per your 1 in 5, it becomes 1.4 million.

I have no interest in federal involvement beyond stopping 1099s for non-recourse loans only (i.e. pure mortgage, no HELOC). I am really keen on stiffing the lenders so hard that they will shiver before making the next loan. You get that by burying them in a mound of non-performing loans. The prices will slowly come down once mortgages become strict and elusive. It will be Japan asset deflation 2.0

[bsrsharma]

Has no intention of living there…. She bought it for an investment!

Was it a cash purchase or mortgaged? if it is cash, good for the lucky seller. If it was mortgage, woe be to the lender. Either way, Darwin is right.

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