Final Phonie/Fraudie Thoughts Before Market Decides Fate

Posted on September 8th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

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  The ‘deal’ can be rescinded.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

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  • Fannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have.
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  • Fannie/Freddie…Now We Wait For Help or HELL
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  • 9% of All Mortgages in Default/Foreclosure
  • 41 Responses to “Final Phonie/Fraudie Thoughts Before Market Decides Fate”

    1. I’m so sick of this interference and manipulation. What about all of the people that do things the right way? No one seems to care if they get burned. What about the rumors that pump stocks? Where is Chris Cox on the bullsh*t LEH rumors with Korea Devel. Bank? Oh I’m sorry. It’s only shortsellers that cause problems.

      Someone with some balls and a big wallet needs to get some lawyers on this. The feds openly admit they are manipulating the market for the sole purpose of keeping it from falling! Is that what it means to have “open markets”? So not only do I lose on my positions because I know what’s going on and have myself positioned properly, but I’m going to lose again because my tax dollars just got flushed down the toilet. Nice job. Nothing like doubling the size of the national debt overnight. That worked really well for England so far.

      The sad part is that when we get our next president it will only get worse. Neither one knows anything about finance or the capital markets. One wants to raise taxes (cap gaines to 28%+), increase the size and scope of government even more than it already is, and take 95% of the population off of the tax roles. Atlas is getting ready to shrug.

    2. And the other candidate just doesn’t have a clue and has no plan at all. But please don’t forget the current president is great at running businesses for a loss… we just gave him the reigns to the worlds single largest business and let him go.

      Honestly, I wish they would have just let F/F fail. It would have really crushed the US and many of the world Financials but in the end everything would have reset back down to true market value. Listening to some of those talking heads on TV trying to spin this whole ordeal as positive makes me want to scream.


    4. I found this article insightful. There is no incentive to hold the OV securities and the event of default call on the CDS’s means that all the current holders are going to swap out at par.

      Given the guarantee is only until 2009 what kind of discount do you apply to the FRE and FNM securities in the open market? There will also be a huge supply of these securities ready for sale to cover the “paper” losses that executing the swap will engender. This could be a real nightmare…

      If it goes that way, I’d wonder if the US government isn’t going to have to suck up that supply now and not later.

    5. So is it clear that they are not providing a guarantee on the OV?

    6. Get cha’ popcorn ready.

      this is gonna be fun.

    7. Major’s last sentence is totally killer:

      “Atlas is getting ready to shrug”

      No question about that brother. Why hold the weight of the world when tawpayers will do it for him?

    8. If the bail out does in fact constitute an “event of default” and trip trillions of CDSs, who have the larger SELLERS of Fannie and Freddie CDSs been? These entities will be left holding the bag. Rumor is GS was a big seller of this, but it’s just a rumor for all I know.

      Anybody have an idea on this?


    9. I don’t know. What other option do we have? Isn’t the Fed just betting on the housing market recovering in a few years by taking over? Right now they are buying up F&F shares for pennies on the dollar. If or when the housing market recovers, who ever buys these shares now will make quite a penny.

    10. They will be delisted. The only thing holding them up at all must be shorts covering. I agreed with od last night, but not now–not after seeing the continuing deterioration in prices with no bounce.

    11. Just wait until the next president is elected…he will talk down the economy like you will not believe in order to blame bush and start with a clean slate.

    12. If Fannie and Freddie hold 50% of all the mortgages (mostly sub primes right?) what is the Fed going to do about the coming Alt-A crisis?

      Will this take over do anything to prevent the next tsunami in defaults?

    13. I knew it when it all started to crummble, and I said it here on more than a few occasions along with elsewhere. Literally 1 second after Paulson said: We have no intentions of ever using this backstop. And: This is only to aasure the markets it is there so that they have the confidence to invest. I knew right there and then we the “TAX PAYERS” were on the hook for $100’s of Billions of dollars. My thought was this: $200 Billion initially, $250 Billion to the FDIC (still to come by the way), $100 Billion for the Auto sector (still to come by the way), and the rest available for the near term needs of the GSEs (in my opinion the MSM is reporting far too small of an ultimate figure) and possibly another bail out. In other words we have just now gotten really started!!! The Congress gave Paulson and Ben $800 Billion to spend and by now you should ALL know how that works. Don’t spend it and you don’t get anymore. Now go be good boys and spend that damn money!!!

      Now I have some questions I need answered and my guess is that they will never be answered. My childrens, childrens, children will have an answer but by then it will be too late as they will have been paying for our govermental corruption 20 fold. Nope, no answer for me… just a big fat check for the players involved and a mega bill for our childrens, childrens, children. Nice job Fed!!! Nice Job Congress!!! Nice Job Senate!!! Nice job White House!!! You all screwed us royally and we deserve it in many ways so god bless you and your hard work in destroying our country!!!


      What the hell are “Tax Payers” doing “Bailing Out” private companies in the first place?

      Where the hell were the regulators?

      Where the hell were those in charge and what the hell are they thinking allowing this to happen?

      Why is nobody being brought up on charges immediately?

      Short term where is this money going to come from?

      When do our payroll taxes get raised?

      Why is Ben still at the helm? I know Paulson is gone anyway but why is this idiot still in power? Both should go immediately as they are poison, so why has it not happened?

      This should be a lesson to everyone that by not getting involved it does make a difference, just as by getting involved does. Not to say that your vote will stop massive corruption such as this, but it can stall it by removing the bad elements little by little and often. You can’t get these things done if the people in power are changing all of the time. They lose their buddy system and their ability to build up large forces that gain power by percentages and therefore ruin what democracy is based on. You need constant turn over to prevent classes of people altering events by sheer numbers alone and with ill regard to what is good to the masses. They start caring about one thing and that is not the “Tax Payer” of the country I assure you!!!


    14. What happens in 2010 when FN/FH have to shrink their portfolio by 170 Billion, 153 Billion in 2011, etc all the way down to $250 billion each from $850 Billion? Who steps in to provide all the financing that is required seeing how well private label mortgages are currently trading? The plan to shrink them just does not make sense given the current environment. Oh wait I get it now, the treasury and the next congress will pass a law making it illegal for the value of a home to go down in value. That should work well. Seems the only answer.

    15. Uh, isn’t this how gov’t normally works? I mean look at how any state or federal budget works. If you don’t spend ALL of the money you are allocated, then you get LESS the following year.

      Government is punished for not over-spending.
      You give them a blank check,….Oh hell. It’s all over.

    16. We need a revolution…

    17. Mark: I think your right, and whomever is unfortunate enough to take office SHOULD blame Bush, Cheney, Greenspan, Ben, and Hank (and others). One idiot, one dictator and three bankers, but they all managed to fool most of the people some of the time and that was good enough to accomplish what they did…bring down the American standard of
      living…and cause a global recession. This administration will undoubtedly go down in history as the absolute worst ever,… bar none. The biggest collection of liars, conspiritors, cheats and frauds all pooled together. I do not envy the next president no matter who he is.

    18. “he will talk down the economy like you will not believe in order to blame bush and start with a clean slate.”

      Can we say economic and financial Enima?

    19. Is it posible Fannie/Freddie debt securities [OV] are about to be declared 0% risk weighted for financial institutions by the federal regulators?

      Banks and S&Ls have to keep a capital reserve on certain types of higher risk securities. Currently, on corporate notes and bonds, 100% of the value of the bonds has to be deducted from current capital and escrowed (reserved) against potential losses. Freddie/Fannie debt securities, 20%. Full faith and credit securities like UST’s and Ginnie Mae’s, however, are 0% capital risk weighted because they are deemed to be the highest credit quality. Because of the GOVT takeover of Fannie/Freddie a strong case can be made that the GOVT implicit guarantee of these two has now become explicit and the said regulators, by the stroke of a pen, may allow BILLIONS of dollars to be added back to active capital accounts of the depositories (banks), allowing them breathing room for new loans and investments.

      Please note this…..if this happens it will be MUCH bigger than what happened today with the bailout package. This, in effect, would recapitalize virtually the entire US banking system without costing the taxpayer a dime.

    20. It’s not just being “found out today” about the CDS swaps being triggered. NOT EVEN CLOSE.

      Aline van Duyn said precisely that, that the events of default would be triggered if the GSEs were placed into conservatorship on August 29 in the worlds’ finest newspaper, the Financial Times of London.

      Where were you?

      Tony Buzan

    21. Here’s the link to the article well over a week old that covered all of this CDS credit event/GSE chatter from the FT.

      Old news. Read the FT and get current.

      Tony Buzan

    22. An interesting pattern has emerged.
      – recognition of an inevitable event
      – a recognized talking head ‘freaking out’
      – timing that does not p**s off either the Republicans or the Democrats
      – a massive ‘suckers rally’ following the Saturday fix
      Freddie and Fannie have long been recognized as insolvent.
      Bill Gross did his ‘freak out’.
      The political conventions delayed the Freddie and Fannie take down.
      Today was the beginning of the ‘suckers rally’.

      Now market action clearly indicates that either Lehman Brothers or WaMu could be taken down, while other players are safe for now.

      Now everyone is talking about the housing bottom to be in late 2009.

      This will be a false bottom igniting a brief suckers rally.

    23. The ‘deal’ can be rescinded.

      After wiping out shareholders, both common and preferred? I don’t think so; there’s no going back, although there may be modifications.

    24. lehman’s down more than a third. koreans walked away. this could be it for lehman…

    25. Lehman is DONE. No two ways about it now… They are insolvent with no access to raise capital. There shares are worthless and so is their economic model for staying alive. Hey, isn’t that what just happened to F & F? They were insolvent and had no means to raise further capital? Well we all know what happened in that scenario don’t we? The TAX PAYER to the RESCUE!!!

      Why won’t we now “Bail” Lehman out? What about WAMU who will be next? Not part of the in crowd perhaps??

      So Paulson, Ben and the rest of these cheating, lying, phony, frauds are going to start hand picking who we the “Tax Payers” “Bail Out” moving forward. Well it may make it easier to figure out who they were in bed with… After all we know that F & F was HUGELY Democrats and gave money to many Democratic Party affiliates such as ACORN and others. These idiots may just lead us straight to the information by their actions on who they “Bail Out” and ignore.

      Now wouldn’t that be special? I would love to see Big Ben in a big bright orange jump suit if he is guilty of something. Paulson too and anyone else that we find involved who screwed America. I say go after each and every one of these PIGS!!! The time is NOW folks!!!


    26. Brians comment from yesterday is very interesting, no one has mentioned anything or anymore about the preferred or the bonds getting the 100% rule – anyone? bueller? anyone?

    27. brian,

      Interesting observation on FNM/FRE debt instruments, if what you state is correct. It will offset the write-downs on FNM/FRE preferred shares that a lot of banks hold. Some banks hold a great deal of preferreds but for many it’s primarily FNM/FRE debt, I would think.

    28. Lehman Brothers Holdings said Wednesday that it lost $3.9 billion in the third quarter after taking a gross mark-to-market loss of $7.8 billion.

      They’re cutting their dividend by 93% and get this…”Lehman on Wednesday said it plans to spin off to SHAREHOLDERS $25 billion to $30 billion of its commercial-real-estate portfolio into a separate, publicly traded company. “The concentration of positions in commercial-real-estate-related assets has become a significant concern for investors and creditors,”

      Commercial real estate is tanking as well, i wonder which investor would want to buy so much of these planned garbage shares??

    29. The big question is to what will happen with the US Dollar if the Government continues to act as it did?

    30. Senator Bunning is calling for the resignation of Ben and Hank… it is about time someone called these fools to the carpet. Also Roubini is now chastising the Fed for “Bailing Out” Fannie and Freddie. I love it and again it is about time we heard from some people that actually know hat they are talking about. Now if we can only get a few others to start pounding there fist we may be able to wake up the American people a bit. This is so bad on so many levels and it will only get so much worse as we move down the line.

      What are they thinking? After massive deflation all but wipes out everything of value in this country, the Fed will have to come clean with their books (1 or 2 year’s tops) and then massive inflation as a result of that will eat away at the value of anything left. We will be left with nothing in our pockets, nothing of value or substance that we own, and a pocket full of worthless paper to buy what little we can to survive. It is going to get real ugly around here if someone or people in general don’t start waking up and fighting back. This is not some silly ass S&L scandal, but rather a full blown financial meltdown of epic proportions. If you have money or feel your doing OK (as I do and am) then realize it will be gone just as if you didn’t real quick. Tax the wealthier and redistribute it to the poor and needy. Your wealth you think you have today will simply vanish before your eyes. This is one of those moments where if you sit back thinking that it won’t happen to me… it will in fact happen to you. This is going right up the food chain my friends!!! Slowly but surely there is a money grab going on and they will grab it from whoever has it and all of it. Then they will move on to the next group. Corporate taxes will be raised, payroll taxes will be raised, fees will be raised, income taxes on the wealthier will be raised, etc…

      I am not being doom and gloom here but rather a realist and I hope something is done to stop these bureaucrats from continuing this nonsense. We need to abolish the FHA, FED, Fannie and Freddie NOW before it is too late… NOT socialize them and not have the “Tax Payer” foot one dime of the bill coming due. Let the smart investors, and the greedy agencies that profited from this and played the game get expelled!!! When will the American public WAKE UP and realize what this all means. I hear nothing at work, on the street or in lines at the grocery store. I try asking people did you hear, and they look at me like I have three heads. What will it take? Are American people really just this stupid? If they are we all are going to pay dearly…

    31. Stu,

      I have gave up on believing in the American people. Most of the people who lived through the Great Depression are dead and the last are barely clinging to life. People have forgotten the lessons learned and it will take another major life altering catastrophe to straiten it out. I do not welcome it but it has to occur.

    32. Stu,

      I can’t recall who said it, but there are only two states of human nature, panic and complacency. It’s basically a byproduct of evolution, that we react to a situation when it becomes critical rather than prevent it.

      So yes deflation is here and it will sweep across globally. It’s only when the crisis gets full blown will we see any reaction from the public till than complacency will reign. People will think it’s not too bad, it’s ok, we’ll get by, till it gets really urgent.

      The man for the job was Ron Paul, the FED needs to be abolished, IT IS the systemic risk in the system, till than as roubini put it so eloquently, welcome to USSRA – (United Socialist State Republic of America).

      Socialism is alive and kicking and it’s starting to suffocate the system.

    33. We might want to consider that this is not a real estate bubble or mortgage bubble, but a derivative bubble. Collectively something like $100T worth of derivatives were created. That sounds like a bubble to me, and when this thing pops, look out.

      If you think about it, the real problem for banks, F&F hedgies and brokerages is not mortgages per se, but the derivatives based on them; SIVs CDOs CDSs MBSs etc. This is what drove Bear out of business.

      There’s a reason that Buffet calls them “Weapons of Financial Mass Destruction”. They actually have CDOs to the Nth power, CDO(n), which are derivatives of derivatives N layers deep! That takes $1 and turns it into N fantasy dollars. If the fed bails out everybody all N fantasy dollars get monetized and dilute the net worth of the USA (and the world for that matter).

      We might also want to consider that this collapse began with Long Term Capital about 10 years ago. That was just a hint of what was to come. Did we learn anything? No. We kept adding to this house of cards at ever increasing rates.

      In fact, the real estate bubble was driven mostly by Wall Street which needed ever more raw material for their derivatives of derivatives. They pressured banks, F&F, brokerages and hedge funds to originate or manufacture as many mortgages as possible. Due to the miracle of retarded rating agencies, the worst garbage in world could be repackaged as AAA super senior tranches.

      Now that the real estate market has collapsed from its own weight, these things are going sour at a phenomenal and amplified rate. One foreclosure can ripple through many layers of derivatives, damaging assets 10 times the value of the original (way over priced) home.

      A global uncontrolled unwinding of the entire derivative web would be far worse than our current real estate crisis.

      So it makes sense that Bernanke and Paulson are trying to let air out of the balloon slowly, hoping beyond hope that it won’t pop. An orderly de-leveraging (hisssss) is survivable, a POP! of $100T is not.

      If you are trying to understand these guys by looking at what’s fair, proper or sensible in the real estate market, you’re missing the whole show. And the inflation from $100 oil and deflation from a growing global recession is making it a dual of titans.

      A real horror show staring you!

      PS: Wikipedia has good descriptions of derivatives: CDOs SIVs CDSs MBSs which is now mandatory reading if you expect to survive this debacle.

    34. You nailed it Douglas.

      America is joining the rest of the world. If you travel enough, you know how much the rest of Europe is taxed. They are decades ahead of us. They have been through these cycles of wealth distributions many more times than us.

      I agree with viv. People are not stupid, majority just want to survive.
      Also, the bigger the lie, the easier it is for the masses to believe.

    35. Douglas, That’s the best summing up of the overall situation I’ve read so far.

    36. “I agree with viv. People are not stupid, majority just want to survive.”

      …I mean people usually just settle for less.

    37. Nice job Douglas.
      If people want a little more history of this and further explanation, there is a great book called The Trillion Dollar Meltdown. What’s shocking is there are exact similarities in 3 areas happening now, that occurred 10 years ago. They just have different names. The change in laws from that episode, helped contribute to the set up now. History repeats itself! Sometimes it comes in the disguise of a different name, but history has in fact repeated itself. This time, it’s a much bigger playing field.
      Thanks for the post.


    38. […] Rate Cut Coming? Recent PostsSurprise Fed Rate Cut Coming?Note-Worthy, Swept Under the Carpet NewsFinal Phonie/Fraudie Thoughts Before Market Decides FateFannie/Freddie – Massive Fraud BreakdownFannie/Freddie – The Game Has Changed. ENRON on […]

    39. Anyone relying on research reports should read this article.

      “It was five years ago when 10 securities firms reached a $1.4 billion settlement with regulators that was supposed to wipe out the conflicts of interest that infected Wall Street research. A little caveat: The global research-analyst settlement, as it was called, didn’t apply to fixed-income research. Nor to any other research — technical, commodities or quantitative — for that matter. Just stocks.”

      SEC Probes `Vomitorium’ While More Patients Gag: Susan Antilla :

    40. […] but now things have fallen apart again much like I speculated may happen a few weeks back in my ‘Final Thoughts Before the Market Decides’, […]

    41. Cramer talking right now about short sellers being ‘unpatriotic” and “financial terrorism”, claiming shorts are trying to bring down capitalism!!!!!!!

      Soon they’ll be coming after shorts’ profits!

      You watch.
      Cramer may want to be the Dictator of the New America!
      TIme to turn off CNBC and watch Bloomberg.

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