Alchemy? II
From Alchemy? Part I... So now the Fed can deal in ABCP as well as MBS...
Rest assured, the ratings agencies have been told to put on a dunce cap, sit in a corner and act like Tommy (deaf, dumb & blind).
As long as the Fed is holding large amounts of ABCP or MBS, there will be very limited debt rating downgrades... and a feeding frenzy by the big sharks on the small fish who do get downgraded.
Meanwhile, any faultering large institution, such as Countrywide, WaMu or Wells Fargo will receive a "hand" in support and very favorable terms from the Fed and its brethren.
For now, it seems that there is sufficient liquidity and given the Fed's favorable terms, less reticence to lend. This in and of itself, should keep the wheels of the market spinning.
The resulting demand to purchase Treasuries has lowered short term paper rates, thus increasing the value of long term & high yield paper.
This helps the pension funds, insurance companies and anyone holding or buying discounted high yield long term debt on the come.
However, this does not not address the solvency issue. Perhaps, the solvency issue is by design and the larger players in this "grift" welcome it.
Glancing at the attached graph from Credit Suisse, there's a bumpy road ahead.
What happens if there is further economic distress and the ARM mortgage resets trigger even more defaults and foreclosures? Further CDO failure and damage in the MBS ABS tranches would result.
The BIG Question's: What is the price point of capitulation for the players at the table? And how far can the market be bent, without breaking?
And, what will the Fed, Commercial Banks, Broker Dealers, Fitch's, Moody's and S&P do?
In any scenario, the big players should be: quitely scooping up the paper at a discount, then getting the Fed to lower rates. Why?
When rates decline, the value of high yield & long term debt rises.
Should we worry about the Fed's temporary MBS and ABCP holdings? The Fed's making money on these temporary transactions.
And in either case, there haven't been any defaults by the dealers YET, but, don't hold your breath on that one.
Silver lining in the clouds? How is the exposure to our "toxic" MBS spread? As of the latest Fed report June 06;
Europe is currently suffering $266 Billion worth of indigestion. $110 Billion of which is corporate or ABCP.
Asia is suffering $226 Billion worth of "safer" AGENCY indigestion.
Now lets see the top 10 overall holdings leaders break down:
Looks like the UK is good for $60 Billion of which $50 Billion is Corporate ABCP, the largest amount of any foreign holder.
Bad news for the Chinese & Japanese as well, holding $150 and $100 Billion in lower quality NON AGENCY MBS.
As noted in Smearing Lipstick On A Pig performing the biggest "bait & switch" in history the "alchemists" turned subprime slime into AAA rated gold.
For which the eager foreign buyers of "AAA" MBS paid a premium, and are now being held by our "repo men", upside down and shaken out of a 10th story window.
Scared shitless, some of "the marks" gladly liquidate at a discount, letting the paper "fall" out of their pockets.
At the same time, the small players are getting the "margin call squeeze" and "BK shake down" as well.
Our "loan sharks" waiting on the ground, scoop up the paper cheap, on the come.
Maybe this group already had a copy of the script in their back pockets? Maybe not?
If so, truly alchemists, turning sub prime slime into AAA gold on the ratings game, then back to slime with the crisis, then back to gold with the shake down.
Nice work, if you can get it, as long as the "grift" doesn't get out of hand...
Speaking of "out of hand"... early conservative estimates of the total MBS loss over the next 4-5 years will be $200 - $300 Billion.
Total market "value" outstanding at the end of Q107: U.S. MBS $6.6 Trillion; ABS $2.4 Trillion. The real estate behind all the loans is declining...
The Nattering One conservatively estimates that to date, there has been a 5% "haircut" in "value" on the MBS alone, equaling $330 Billion.
Further declines? A 7% "haircut" would result in losses of $460 Billion MBS & $170 Billion ABS, not exactly chump change.
Rest assured, the ratings agencies have been told to put on a dunce cap, sit in a corner and act like Tommy (deaf, dumb & blind).
As long as the Fed is holding large amounts of ABCP or MBS, there will be very limited debt rating downgrades... and a feeding frenzy by the big sharks on the small fish who do get downgraded.
Meanwhile, any faultering large institution, such as Countrywide, WaMu or Wells Fargo will receive a "hand" in support and very favorable terms from the Fed and its brethren.
For now, it seems that there is sufficient liquidity and given the Fed's favorable terms, less reticence to lend. This in and of itself, should keep the wheels of the market spinning.
The resulting demand to purchase Treasuries has lowered short term paper rates, thus increasing the value of long term & high yield paper.
This helps the pension funds, insurance companies and anyone holding or buying discounted high yield long term debt on the come.
However, this does not not address the solvency issue. Perhaps, the solvency issue is by design and the larger players in this "grift" welcome it.
Glancing at the attached graph from Credit Suisse, there's a bumpy road ahead.
What happens if there is further economic distress and the ARM mortgage resets trigger even more defaults and foreclosures? Further CDO failure and damage in the MBS ABS tranches would result.
The BIG Question's: What is the price point of capitulation for the players at the table? And how far can the market be bent, without breaking?
And, what will the Fed, Commercial Banks, Broker Dealers, Fitch's, Moody's and S&P do?
In any scenario, the big players should be: quitely scooping up the paper at a discount, then getting the Fed to lower rates. Why?
When rates decline, the value of high yield & long term debt rises.
Should we worry about the Fed's temporary MBS and ABCP holdings? The Fed's making money on these temporary transactions.
And in either case, there haven't been any defaults by the dealers YET, but, don't hold your breath on that one.
Silver lining in the clouds? How is the exposure to our "toxic" MBS spread? As of the latest Fed report June 06;
Europe is currently suffering $266 Billion worth of indigestion. $110 Billion of which is corporate or ABCP.
Asia is suffering $226 Billion worth of "safer" AGENCY indigestion.
Now lets see the top 10 overall holdings leaders break down:
Looks like the UK is good for $60 Billion of which $50 Billion is Corporate ABCP, the largest amount of any foreign holder.
Bad news for the Chinese & Japanese as well, holding $150 and $100 Billion in lower quality NON AGENCY MBS.
As noted in Smearing Lipstick On A Pig performing the biggest "bait & switch" in history the "alchemists" turned subprime slime into AAA rated gold.
For which the eager foreign buyers of "AAA" MBS paid a premium, and are now being held by our "repo men", upside down and shaken out of a 10th story window.
Scared shitless, some of "the marks" gladly liquidate at a discount, letting the paper "fall" out of their pockets.
At the same time, the small players are getting the "margin call squeeze" and "BK shake down" as well.
Our "loan sharks" waiting on the ground, scoop up the paper cheap, on the come.
Maybe this group already had a copy of the script in their back pockets? Maybe not?
If so, truly alchemists, turning sub prime slime into AAA gold on the ratings game, then back to slime with the crisis, then back to gold with the shake down.
Nice work, if you can get it, as long as the "grift" doesn't get out of hand...
Speaking of "out of hand"... early conservative estimates of the total MBS loss over the next 4-5 years will be $200 - $300 Billion.
Total market "value" outstanding at the end of Q107: U.S. MBS $6.6 Trillion; ABS $2.4 Trillion. The real estate behind all the loans is declining...
The Nattering One conservatively estimates that to date, there has been a 5% "haircut" in "value" on the MBS alone, equaling $330 Billion.
Further declines? A 7% "haircut" would result in losses of $460 Billion MBS & $170 Billion ABS, not exactly chump change.
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