A Margin of Leveraged Reserve
Street Fee Bull... 1st half of 07 a record $8.4 B in fees for investment brokers arranging leveraged buyouts.
The 2nd half of 07, it could be a famine as June LBO's slowed 33% and July/Aug numbers (which will be lower) are not out yet.
Companies have scrapped 46 debt deals worth $60 B since June 22. What does a famine mean?
I.E. A 50% drop in income from arranging buyouts and other "higher-risk credit," together with a 10% decline in other investment banking revenue would slash earnings at Credit Suisse by 19%.
Load bearing GSE's....HUD Secretary Alphonso Jackson said the government may raise the limit on purchases of home loans by Fannie Mae and Freddie Mac in order to increase liquidity in the mortgage market.
Jackson said today that he and FNMA CEO Daniel Mudd talked about the GSE's request to be allowed to buy mortgages beyond a current $722.5 B federal limit.
Jackson also spoke yesterday with James Lockhart, director of the Office of Federal Housing Enterprise Oversight, about allowing FNMA and FHLMC to buy mortgages that exceed the current federal JUMBO cap of $417K.
In the blink of an eye or too many a margin call? AHM was the 1st non sub prime lender to go under, so what?.
Who's on the hook? BofA $1.3 B, Bear Stearns $2B; Barclay’s $1B all making margin calls to pull the plug in a matter of days...
...on an operation with a mortgage underwriting total of $9.7B, the margin calls prevented $300M being raised to fund the latest batch of toxic RMBS loans.
As the debt slowly but surely gets downgraded and marked to market, the margins required will increase and exponentially.
FYI GSE's FNMA & FHLMC already back 44% of all MBS and hold 14% of all RMBS.
Stealth Reserve...
From Grant's Interest Rate Observer: global commercial banks are only required to set aside 56 cents ($0.56) for every $100 worth of AAA rated securities they hold.
That's 178-to-1 leverage. The Mugambo Guru says, "That is 1/18th of the 10% stock margin equity required in 1929"!!
If that same security is downgraded to BBB, the set-aside requirements escalate from $0.56 to $4.80... a margin increase of more than 750%.
Drop all the way down to BB-minus, and the requirement jumps to $52 per $100 worth of securities held... a margin increase of 9000%.
Why is this discussion of leverage on marginal reserves relevant? And why do we digress regarding AHM being forced into BK by margin calls? Because 21% of all RMBS is held by commercial banks.
If anyone thinks this is going to be smoothed over with the wave of a hand and a little press spin, guess again. Just have a look at these Credit Suisse charts.
Charts 5, 21 & 42 paint a grim picture, if you can stomach it, look at them all. And if you really can handle the truth, read the whole report.
Bare in mind that 106 sub prime lenders have now failed, the 1st non sub prime lender has been forced into BK...
defaults & foreclosures are spreading through Alt-A & Prime and multiple hedge funds are failing. And the spinsters say we aren't even in an economic downturn yet!
This probably sounds vaguely familiar to anyone who lived through the 1930's and very bizarre to the Yuppie generation, but...
When this is all said and done, due to an inability to cover deposits and/or reserve & margin call requirements...
perhaps even the doors and ATM at your local bank will be shuttered with plywood. Go ahead and laugh, its happened before and could happen again.
The only difference is this time, due to the amount of systemic leverage, it could happen much swifter and be far worse than anyone imagines or expects.
The 2nd half of 07, it could be a famine as June LBO's slowed 33% and July/Aug numbers (which will be lower) are not out yet.
Companies have scrapped 46 debt deals worth $60 B since June 22. What does a famine mean?
I.E. A 50% drop in income from arranging buyouts and other "higher-risk credit," together with a 10% decline in other investment banking revenue would slash earnings at Credit Suisse by 19%.
Load bearing GSE's....HUD Secretary Alphonso Jackson said the government may raise the limit on purchases of home loans by Fannie Mae and Freddie Mac in order to increase liquidity in the mortgage market.
Jackson said today that he and FNMA CEO Daniel Mudd talked about the GSE's request to be allowed to buy mortgages beyond a current $722.5 B federal limit.
Jackson also spoke yesterday with James Lockhart, director of the Office of Federal Housing Enterprise Oversight, about allowing FNMA and FHLMC to buy mortgages that exceed the current federal JUMBO cap of $417K.
In the blink of an eye or too many a margin call? AHM was the 1st non sub prime lender to go under, so what?.
Who's on the hook? BofA $1.3 B, Bear Stearns $2B; Barclay’s $1B all making margin calls to pull the plug in a matter of days...
...on an operation with a mortgage underwriting total of $9.7B, the margin calls prevented $300M being raised to fund the latest batch of toxic RMBS loans.
As the debt slowly but surely gets downgraded and marked to market, the margins required will increase and exponentially.
FYI GSE's FNMA & FHLMC already back 44% of all MBS and hold 14% of all RMBS.
Stealth Reserve...
From Grant's Interest Rate Observer: global commercial banks are only required to set aside 56 cents ($0.56) for every $100 worth of AAA rated securities they hold.
That's 178-to-1 leverage. The Mugambo Guru says, "That is 1/18th of the 10% stock margin equity required in 1929"!!
If that same security is downgraded to BBB, the set-aside requirements escalate from $0.56 to $4.80... a margin increase of more than 750%.
Drop all the way down to BB-minus, and the requirement jumps to $52 per $100 worth of securities held... a margin increase of 9000%.
Why is this discussion of leverage on marginal reserves relevant? And why do we digress regarding AHM being forced into BK by margin calls? Because 21% of all RMBS is held by commercial banks.
If anyone thinks this is going to be smoothed over with the wave of a hand and a little press spin, guess again. Just have a look at these Credit Suisse charts.
Charts 5, 21 & 42 paint a grim picture, if you can stomach it, look at them all. And if you really can handle the truth, read the whole report.
Bare in mind that 106 sub prime lenders have now failed, the 1st non sub prime lender has been forced into BK...
defaults & foreclosures are spreading through Alt-A & Prime and multiple hedge funds are failing. And the spinsters say we aren't even in an economic downturn yet!
This probably sounds vaguely familiar to anyone who lived through the 1930's and very bizarre to the Yuppie generation, but...
When this is all said and done, due to an inability to cover deposits and/or reserve & margin call requirements...
perhaps even the doors and ATM at your local bank will be shuttered with plywood. Go ahead and laugh, its happened before and could happen again.
The only difference is this time, due to the amount of systemic leverage, it could happen much swifter and be far worse than anyone imagines or expects.
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