Investment Banks Running Out of Investment Grade ‘Assets’?

Posted on July 6th, 2008 in Daily Stock Market / Economic News - The Real Story, Mr Mortgage's Personal Opinions/Research

On Tursday, after the market closed, the Fed released the Bear/JPM updated numbers at the same time as the TAF borrowing amounts. To every one’s surprise it was reported that:

The Fed also said lending to securities dealers fell to zero for the first time since it began extending the credit in March, when Bear Stearns was taken over in a deal that was brokered by Washington officials.

The fact that no lending had recently occurred means that Wall Street is using the Fed only as an emergency backstop rather than as a continuing source of funding, Brian Stack, a senior economist at Macroeconomic Advisers LLC, told Bloomberg.

Immediately the circle-jerking on bubblevision commenced with the King Pumper himself, Tyler Matheson, the leader of the unruly bubblevision children on stage speculating on how great this is. The consensus within seconds was ‘the investment banks must be out of the woods because their borrowing dropped so much’.

I CALL BULL$^&#! Economists, stock pumpers and bubblevision always look at the simplest explanation and most positive reason for anomalous news and they are consistently wrong.

What about looking at it from a different perspective such as ‘the investment banks are running out of ‘investment grade assets’ to use as collateral’. Remember, there was a rumor floating around last week from credible sources that the Fed was going to HAVE to extend the TAF to 90-days. This fits in perfectly with the IB’s running out of collateral. In addition, the credit markets have gotten notably worse in the past 30-days meaning the demand for cash shrinking due to investment banks getting stronger is a pipe dream. 

What do you think? -Best Mr Mortgage


11 Responses to “Investment Banks Running Out of Investment Grade ‘Assets’?”

  1. Keen insight. I’m willing to bet you’re right on banks running out of investment grade assets; we just have to wait and see…

  2. I think the horse has ate too many oats and drunk too much water and can’t canter.

  3. Cinderella’s magic carriage has transformed itself into a pumpkin. It’s way passed midnight. Even investment grade assets are getting spoiled by all the junk in circulation. You mean that a US treasury bond is an investment grade asset ? Even that, smells real bad in 2008. No easy solution here. You are so right with the media. “Is it time to buy. Is it a good time for bottom fishing ?” But hey ? What did you expect. Bloomberg is 20% controlled by Merrill Lynch and CNBC by GE the hedge fund mascadaring as a company. 🙂

  4. Notice the selling of assets by the iBanks – example… MER to sell stake in Bloomberg…..etc. They still need cash and selling assets like this proves it. I would agree that they may be out of assets to dump onto the taxpayers… I mean Fed. ALSO another look at this is…. POSSIBLY…. The Fed won’t take anymore of their garbage??? The lending was for garbage with particular ratings. Hmmmmm…. downgrades again to the monolines….. the garbage they had left which could be dumped onto the Fed may no longer have the required rating for the Fed to take them. ??? Hence, no lending by the Fed. Those JackA… on TV need to take the rose colored glasses off, pull their heads out of their…. but, that will NEVER HAPPEN. Wall Street makes more money when people BUY the shares they have to sell. TV will NEVER give a viewpoint of what’s been discussed on this comment thread UNLESS…. Everyone is talking about it and it’s so obvious. This keeps the advertising revenue coming in from the companies paying the bills. Understand that and it makes sense as to why TV has one sided views. We know better, so “Trade the Market You Have, Not the One You Hope For.”


  5. Mr. Mortgage –

    Forgot to mention something…. THANK YOU for your hard work and for this blog. It’s been VERY helpful!!!! I’m always looking forward to the next post or video. Thanks again!

  6. I am so glad that you brought this up and greatful as well for your persistent look at the markets.

    I had thought about this a few months back and not too many people discuss this thought. I absolutely agree 100% that investment grade assets are drying up. If you notice over the past few months a lot of deals are not getting done. When you sell off and dilute the share holders value over and over again it dilutes the entire value of the company as a whole. Why would anyone want to buy many of these financials paper right now after all the capital they have raised already. The companies stocks are down and its value is so diluted that at some point even at .25 on the dollar it doesn’t make it attractive any longer. Remember capital is only capital when it is bought and sold. I don’t care what they think their company may be worth. It is all about what it is actually worth. Mark to market!

    I said a while ago that if or until a major chunk of this L3 junk gets brought back onto the books at its real value and is marked to market nothing will change. Why would anyone want to hold any of this paper at any price when you have no clue what its true value is. It is like buying a car or home site unseen and nobody does that…

    We are talking billions here too, so decisions are not made in a vacuum, but rather thought out or at least they should be. I certainly wouldn’t give any of these companies you list a dime for anything they own. First of all you may never get a dime back and secondly I am sure you would be overpaying whether you realize it or not. These foreign investors that jumped at a chance early on to buy billions of these assets will be very upset to find out most of it is gone. They will stop playing this game once they realize they can’t win any longer…

  7. Here is an example that I will share, as a dedicated mortgage banker who thrived on the originate to securitize model who has worked for Accredited Home Lenders and Countrywide Bank and now for a lender,, a law firm and Modification Services, Inc. I always believed in the “Price to Earnings” or its inverse the “Cap Rate” of any property as a good measure on how to define value – in relative terms compared to rental rates in the area of comparable properties. Is it cheaper to rent or own? Banks totally ignored this since 2002 and the beginning of cheap money. I am now funding loans under the most conservative guidelines in the history of modern mortgages, full doc mostly and the occasional stated income loan at 65%LTV. If I can’t do it conventionally, because of negative equity, credit or hardship, my partners and I work with the existing lender, the client’s attorney and my bank to reduce interest rate, and now principal when justified by a Broker Price Opinion or Appraisal. I have worked or am working with Loss Mitigation at EMC, Wilshire, Indymac, Countrywide, Option One, Litton Loan Servicing, Ocwen Servicing, AHM, GMAC and WAMU. The banks will always reduce interest rates first and then reduce principal if they absolutely have to (30-50% loss or greater). I have a client offered a $132,000 principal reduction from one of the lenders above- but they can’t qualify through a conventional refinance and short payoff. Their credit is shot. The lender may just allow them to stay in home under lowered payment for 6 months, to make it a performing loan, then try to refinance it themselves on FHA once the credit is FHA worthy, and then forgive the overage. The loan amount is $412,000, current lender ordered BPO is $152,000-210,000. They naturally want to reduce down only to $210,000, when the BPO shows $152,000. You can email me at — My Personal Website that explains more of the P/E and Cap rate and how this necessarily defines the bottom line price at any given time point is at – We are all in this mess in the first place because the banks all use the Sales Comparison Approach to determining value in a flat to declining sales market, because that is how it has always been done for owner occupied properties. They did this in an appreciating market in order to make larger loans to meet their quarterly projections and bonuses, with no regard to comparable rental rates in the vicinity for comparable properties, and are were not nimble enough to change the practice in mid 2007 when markets started to decline. Bottom line is this – Is it cheaper to rent or to own? If you stayed in your home, how much would it get if you rented it out? would you stay at that rental payment? if so – email me and let’s get started.

  8. Well it appears as though someone has a brain in the Fed!!

    “As Congress returns from a July 4th recess to again consider a sweeping housing and mortgage reform package that would establish a new regulator for Fannie Mae (FNM: 15.00, -20.13%) and Freddie Mac (FRE: 10.66, -26.48%), as well as allow the Federal Housing Administration to endorse up to $300 billion in troubled mortgage debt, an economist at the St. Louis Fed is warning that government intervention might end up doing more harm than good.”

  9. What’s the combined market cap of Freddie and Fannie relative to the $ portfolio of loans they guarantee? Jesus.. it must be over 50 times at least! 100? 500? 🙂

  10. Bonds away !

  11. Both Fannie and Freddie will be nationalized. Oh! Socialism in America ? Well just for the bankers. What’s nice with this measure, is that the taxpayers will only benefit of the nasty part of socialism. Privatize the profits and socialize the losses ! What a great business model ! Never knew Ben was a commie, but only for his buddies.

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