After reading 50 PR’s, talking to 20 industry leaders and being on a lengthy investment bank conf call last night this is what I think…
It all comes down to MBS. When speaking about MBS it is important to note their are two distinct classes now… old-vintage (OV – prior to today) and new vintage (NV – everything going forward). When OV MBS gap narrower do China, Russia and Bill Gross dump them knowing full well Paulson only made an announcement’? Paulson will be gone in four months and a new regime will be in. The new Treasury Sec has no obligation to this deal. The ‘deal’ can be rescinded.
Furthermore, we know the could ends in 16 months anyway when the GSE’s go into run down. Why in the world would OV MBS holders hang on when they can buy NV, explicitly guaranteed stuff soon enough? The Treasury will only be buying the NV MBS they said. The Treasury will not be in here buying OV MBS today or anytime soon. If you were China, why take the chance of holding past Paulson’s term or past a nice gap this morning?
On the flip side, if this plan does work and spreads do narrow considerably they can just put the money in Ginnie’s and have no doubt about a guaranty on OV MBS. It makes no sense to hold and pray when you have a chance to get out of this trade with your life and perhaps a profit. The OV MBS now and never were ‘explicitly’ guaranteed by the Gov’t. NV explicitly are guaranteed.
What happened Friday? Prices/spreads got so ugly last week and the failure was going to be so disastrous for Foreign Central Banks and Bill Gross that Paulson threw a ‘Hail-Mary’ in hopes of bringing in buyers. If that trade does not hold, however, and there are not enough buyers for the mammoth supply held by all of these entities, it all comes tumbling down. There is no follow-up to this. They can’t do a larger announcement. Two bazooka’s are not better than one in this case.
On the equities side, what actually happened here? After Bear collapsed they saved the market with real solutions…JPM and the TAF. After Fannie and Freddie collapsed the first time in July, Paulson moved Congress in a week. Those are both big events, perhaps worthy of mega-rallies.
What really happened this weekend? Nothing too positive at all. Deloitte and Morgan found out that the GSE’s were far worse off than everyone has been saying due to accounting fraud and ready to collapse so they had to move early. Just two weeks ago the analysts at the investment banks were saying ‘they were adequately capitalized through year end’. Just before that, Paulson and Congress told everyone they would never have to take out the ‘bazooka’. Last week Fannie/Freddie CEO’s were on saying how strong they were. Now this? Financials have not discounted this.
The fact that this move is just what Paulson said he would do and what everyone expected is a net-neutral. This move has been discounted because for weeks, as everyone has come to the conclusion that the GSE’s had Gov’t backing. The financials have outperformed most other sectors recently. The credit markets never bought it thought. They were right. Stocks were wrong. Stocks already had today discounted. Why should today’s announcement result in a huge rally?
I agree one positive is if spreads do come in and stay, mortgage rates to the consumer could drop. But if Treasuries get blown out for a variety of reasons and stay under pressure, mortgage rates will not fall. Its all relative.
Keep your eyes on those MBS spreads. They will tell us everything. If they break stocks will crack hard and everything else will go along with it.
Also keep your eyes on GSE swaps. Apparently it is just being found out that today’s move does in fact constitute an ‘event of default’ tripping $1 to $2 trillion in CDS. I will get more on this later if needed.
I am willing to bet at some point today, US Treasuries catch a sweet bid, Agency mortgage backed debt gets sold (spreads widen) and stocks respond to the downside. It just seems obvious. But, hey what do I know. I am just a mortgage hack.
This week will be interesting indeed. -Best Mr Mortgage
Posted on September 7, 2008 10:59 AM
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