tag:blogger.com,1999:blog-4815867514277794362.post1742293785199734543..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: The Reality Based Community and FrannieJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-4815867514277794362.post-8648406821184614812008-09-08T15:39:00.000+10:002008-09-08T15:39:00.000+10:00Crocodile Chuck is more cynical than me - which do...Crocodile Chuck is more cynical than me - which doesn't mean he is wrong about a large number of Republicans. <BR/><BR/>But I work on the assumpton that most the rank-and-file of political parties actually believe they are right and moral. For instance many rank-and-file republicans - including a woman who might one day be president - really believe that the world was created in six days about 6000 years ago. They may be wrong. They may reject all evidence - but they sincerely believe it and they are sincerely offended by "the liberal creation myth called evolution".<BR/><BR/>I don't think Paulson went to Washington to line his own pockets. That idea makes no sense. After all he was dynastically wealthy anyway.<BR/><BR/>There is an enormous amount of crony-capitalism in this administration - but Paulson is in Washington because he thinks its the right thing to do - and I suspect he was pained.<BR/><BR/>JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-4131341390351339872008-09-08T15:30:00.000+10:002008-09-08T15:30:00.000+10:00John"This must really pain the Republicans&qu...John<BR/><BR/>"This must really pain the Republicans" (from your post).<BR/><BR/>Capitalism in the US is for suckers. Crony capitalism rules. Enron, Cheney's 'Energy Plan' in the first terms crafted by the OilCo's (still 'top secret'); MilitaryIndustrial Complex/defense contractors; the Executive Branch's Praetorian Guard (Blackwater et al), one can go on, on and on...<BR/><BR/>60% of the goods and services traded by the S&P 500 never see the 'invisible hand' (transfer pricing/tax avoidance). This is why the effective corporate tax rate is between 5-10% of profits. Remember the 'tax amnesty' of a couple of years back?<BR/><BR/>The US is well on its way to becoming a banana republic-aided, abetted and catalysed by the Republican Party.<BR/><BR/>CrocodileChuckCrocodileChuckhttps://www.blogger.com/profile/10762442097044797842noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-7876000734566973742008-09-08T01:44:00.000+10:002008-09-08T01:44:00.000+10:00John, wake up! I need analysis. The treasury has s...John, wake up! I need analysis. The treasury has spoken and only you can interpret.<BR/><BR/>I am hoping for stability and lower rates in the mortgage market. Positive for housing. No clue on what will happen to preferred and regular shareholders.<BR/><BR/>As you are a full 1/2 day ahead of where I sit let us know what the markets think in Australia as well as your thoughts.<BR/><BR/>Thanks.Unknownhttps://www.blogger.com/profile/17160151672589065416noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-63551698107501732442008-09-08T00:45:00.000+10:002008-09-08T00:45:00.000+10:00J--There are all kinds of guarantees. One gets pr...J--<BR/><BR/>There are all kinds of guarantees. One gets printed on the prospectus for new Agency issues. Another is a promise to inject capital as needed beyond your administration, which may or may not be honored by future administrations. Then there is proposed legislation that the USG will promise to pay any principal or interest owed by F&F, now and in the future. Finally, there's a nebulous statement the government "stands behind" the debt.<BR/><BR/>Which of these will we get this morning? Which would satisfy you if you were a CB? We'll find out soon.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-1844345240136704832008-09-07T15:58:00.000+10:002008-09-07T15:58:00.000+10:00Are you suggesting then that the Treasury will lea...Are you suggesting then that the Treasury will leave an implicit guarantee in place and allow Frannie to raise several hundred billion at say 2 percentage points of spread?<BR/><BR/>Maybe - but if so it is madness. <BR/><BR/>If you are going to have a government guarantee you might as well get the benefit of it.<BR/><BR/>A government guarantee whilst paying the spread is insane. <BR/><BR/>So we now find out - is the senior debt guaranteed or not. To leave the matter open would indicate the Bush administration is totally incomepetent.<BR/><BR/>JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-72637885422096840002008-09-07T15:15:00.000+10:002008-09-07T15:15:00.000+10:00John,One thing that appears certain -- based on th...John,<BR/><BR/>One thing that appears certain -- based on the confluence of press reports -- is that Treasury will make quarterly capital injections based on losses incurred.<BR/><BR/>In other words, $500b up-front is quite a stretch. Much more likely is a $4b injection into each for the next two quarters. After that, it will be up to the next administration. Hardly an iron-clad guarantee.<BR/><BR/>Again, anything non-massive is unlikely to result in FCB Agency buying. In fact they may elect to unload into speculative demand.<BR/><BR/>Of course, all is conjecture at this point. My view, though, is that spreads have remained "irrationally high" after passage of the GSE bail-out exactly because no one expects an explicit guarantee out of this Treasury.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-16584422536391997902008-09-07T13:47:00.000+10:002008-09-07T13:47:00.000+10:00Steve said:The second reason is way bigger (really...Steve said:<BR/><BR/>The second reason is way bigger (really). If anything more than a "suspension" of preferred dividends occurs (up to 5 years, I think) as spelled out in the prospectus, it will be a CDS-triggering credit event. As I understand it, there are more $ volume CDSs outstanding on fannie & Freddie than any other names. Disorderly settlement of counter-party risk anyone?<BR/><BR/>Disagree. If there is a CDS triggering event you get to put the insured objecct at par. It it is a preferred those who wrote the CDS wear the losses. Tough.<BR/><BR/>If it is senior they get to put something that yields 100bps above treasuries at par when it is guaranteed by the treasury. They ain't gonna do that.<BR/><BR/>No counter party problem.<BR/><BR/>---<BR/><BR/>I suspect they will want to haircut the preferred in some way.<BR/><BR/>But we find out shortly.<BR/><BR/>JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-46384423951050417542008-09-07T13:32:00.000+10:002008-09-07T13:32:00.000+10:00John,Making the preferred senior to the government...John,<BR/><BR/>Making the preferred senior to the government's position for losses is not in question. it's a check-mate situation. Two reasons:<BR/><BR/>If the banks holding GSE preferred have to write it off it will send many of the smaller ones to the FDIC, which from a public-panic-perspective is a worse problem than overpaying here and holding one's idealogical nose that much more tightly.<BR/><BR/>The second reason is way bigger (really). If anything more than a "suspension" of preferred dividends occurs (up to 5 years, I think) as spelled out in the prospectus, it will be a CDS-triggering credit event. As I understand it, there are more $ volume CDSs outstanding on fannie & Freddie than any other names. Disorderly settlement of counter-party risk anyone?<BR/><BR/>Cheers<BR/><BR/>ps - regarding collapsing spreads, it seems to me that with the Russians having to support the ruble recently, and declining imports from China & Korea, and prices for oil falling off, there's going to be a marked decrease in FCB flow into US debt anyway. And this story about the Chinese CB makes me wonder how much more risk averse they are feeling these days for their own reasons:<BR/><BR/>http://www.nytimes.com/2008/09/05/business/worldbusiness/05yuan.htmlSGhttps://www.blogger.com/profile/10868464331839314127noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-85892930615797494682008-09-07T10:51:00.000+10:002008-09-07T10:51:00.000+10:00A lot of banks in the United States own preferred ...A lot of banks in the United States own preferred shares in Frannie; Bernanke, whose primary academic accomplishment was describing the great depression in terms of widescale disintermediation, may well be pressing for the banks to be made whole for much the same reasons he wanted Bear Stearns creditors made whole: if they aren't, there could be very widespread knock-on effects and a lot of deleveraging.<BR/><BR/>I would imagine Paulson would listen to a heart-felt plea by Bernanke.dWjhttps://www.blogger.com/profile/12072494989829344049noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-13064346455017768942008-09-07T10:01:00.000+10:002008-09-07T10:01:00.000+10:00I have not read the legislation - and am not going...I have not read the legislation - and am not going to now - <BR/><BR/>But my understanding is that the authorisation is effectively unlimited UNTIL end 2009. So no they cannot entirely guarantee the long dated Frannie paper.<BR/><BR/>They can however inject an insane amount of money - which will have the similar effect.<BR/><BR/>The spread COULD be more than 30bps (ex refi risk) tomorrow - but I would be suprised.<BR/><BR/>Then again I have been suprised before - so... <BR/><BR/>The eventual structure leaves me in the dark as much as you. However if the Treasury injects $500 billion in subordinated capital then I suspect the spread goes very low indeed.<BR/><BR/>The deal - swap 500 billion in Treasuries for 500 billion in higher yielding subordinated Frannie debt. 500 billion in long dated treasuries leaves Frannie solvent. <BR/><BR/>If you don't think 500 billion is enough try a trillion. That ought to do it. <BR/><BR/>Covenant the treasuries so they can only be sold to make good net reductions in Frannie obligations if you want. <BR/><BR/>This is highly speculative - so for the moment I really want to leave it till we see the deal.<BR/><BR/>JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-57080637056602728182008-09-07T09:53:00.000+10:002008-09-07T09:53:00.000+10:00John,The question for the broader markets is, by h...John,<BR/><BR/>The question for the broader markets is, by how much will rmbs spreads decline? Its really rmbs -- and not Agency -- spreads that matter to the housing market and the real economy.<BR/><BR/>Presumably, rmbs spreads should be zero, right? If F&F guarantee the securities, and if the government explicitly stands behind F&F, then the chances of losing money on rmbs are equal to Treasury risk.<BR/><BR/>So, do rmbs spreads collapse to zero (ex the premium for prepayment risk) on Monday? If so, its unlikely that Treasury rates will rise by the same amount, so the result is a net positive to the economy, right?<BR/><BR/>Except that for spreads to collapse, you need buyers with balance sheets. As long as there is some question, any question, as to the status of Agencies vs. Treasuries, they will not be freely interchangeable by Central Banks. If that's the case, F&F guaranteed rmbs spreads should remain "irrationally" high.<BR/><BR/>In other words, there's an imperative here to give an explicit guarantee, as that is the only thing that will create massive buying of Agencies. However, its not even clear that the GSE bail-out legislation authorizes Treasury to make the guarantee explicit.Anonymousnoreply@blogger.com