Note-Worthy, Swept Under the Carpet News

Posted on September 11th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

I keep close tabs on the news flow all day long but only chose to cover certain events.  This is because other, more cross-sector bloggers such as Barry Ritholtz and Paul at Housing Wire quite frankly do a better job. But, you know if I can add my spin I will. Below are two stories I did not see get much attention today that I wanted to bring to your attention. Bad news is definitely mounting fast. I changed the titles of the original stories for your reading pleasure. Best, Mr Mortgage

1. Bank of America Cites Over 50% of it Builder/Construction Loans are ‘Troubled’

Source: Bloomberg – By David Mildenberg Sept. 10 Bank of America Corp., the biggest U.S. consumer bank, said credit weakness is spreading to commercial borrowers from residential customers and loan losses probably will deepen in the third quarter.

Home builders unable to repay their loans are contributing to deterioration among commercial borrowers, said Brian Moynihan, head of the global corporate and investment banking unit, at a New York conference today. More than half the Charlotte, North Carolina-based bank’s $13.4 billion in loans to builders are considered troubled, 19 percent are not paying interest and losses are likely to mount, Moynihan said.

To contact the reporter on this story: David Mildenberg in Charlotte at

Funny stuff below. On Sunday night in my final of five Fannie/Freddie stories over the weekend, I was concerned when I discovered that the conservatorship did in fact constitute an ‘event of default’ tripping about $1.4 trillion in credit default swaps. The nay-sayers were everywhere including in the comments section of my blog and all over the mainstream media. Well, it looks like they discounted this a little too early. The problem here is the very banks that lost so much on their Preferred holdings were also the largest writers of the insurance against FanFred default.

2. Fannie/Freddie Credit Default Swaps More of a Problem Than Everyone Thought

Source: FT,com By Aline van Duyn in New YorkPublished: September 10 2008 23:30 | Last updated: September 10 2008 23:30

The default of up to $500bn of Fannie Mae and Freddie Mac credit derivatives contracts triggered by the US Government’s seizure of the mortgage groups could result in billions of dollars of losses for insurance companies and banks who offered credit insurance in recent months.

The potential losses, as well as uncertainty about exactly how the derivatives contracts will be settled and unwound, is putting strains on the unregulated $62 trillion credit derivatives market, which has been a target of regulators worried about the hidden risks it could hold for the financial system.

The exact number of credit default swaps – a kind of insurance against debt default – outstanding on Fannie Mae and Freddie Mac are not known, reflecting the private nature of the sector. However, according to the latest estimates from dealers and analysts, there could up to $500bn of contracts outstanding.

Michael Hampden-Turner, credit strategist at Citigroup in London, estimates there are $200bn-$500bn of outstanding CDS and other credit derivatives referencing Fannie and Freddie.

This would make their default the biggest the market has encountered. The previous record was held by Delphi, the US carparts maker that went bankrupt in 2005 and which had about $25bn of CDS.

Currently, the recovery value of the Fannie Mae and Freddie Mac CDS is expected to be about 95 cents in the dollar, leading to a potential 5 per cent loss for insurance companies or banks who offered protection against a default.

8 Responses to “Note-Worthy, Swept Under the Carpet News”

  1. Some credit default swap contracts require the buyer to deliver the bond in default and the seller pays par. Those will result in a 5% or less loss, as you describe. Other contracts pay a fixed cash payout in the event of a default. Those are almost 100% losses for the seller. The question is what percentage of the $500 billion of notional contracts are for delivery and how many are for cash? I have no idea.

  2. Warren Buffet said these were financial WMDs.

    Too bad Paulson and Bernake didn’t listen.

  3. Since August of last year I have called both of my senators, my u.s. rep, the presidents comment line, the sec, the fed and the RNC at least 5 times each as I knew where the SHILLS where eventually headed.

    I have emailed countless Finacial Reportes to have them FOCUS on the real story of the SHILLS of WALL ST & D.C. that is THE BIGGEST TRAIN ROBBERY IN THE HISTORY OF AMERICA.

    Please help – Get as MAD as HELL and call everyone one can,

    It’s NO to BAILOUTS and yes to PRISON of WALL ST & D.C. SHILLS!

    thank you

  4. As far as I have heard, the CDS trigger is a nonevent. These instruments have already been marked below their expected liquidation value eliminating any potential paper losses — i.e. some firms may show a gain on this transaction.

    A 5% cash loss for sellers is great news compared to what could have happened. All in all, a massive financial bomb has been defused by the Govt. at the price of doing something they more or less had to do anyway — backstop FNM and FRE.

    While I am against the bailouts that we have seen in a philosophical sense, I really do believe that not doing this particular bailout would have crushed the US financial system at some point down the road. Whether that was due to a BK of FRE and FNM or a loss of confidence by CB’s and SWF’s doesn’t really matter.

    The basic fact is the US overspends it’s income every day. Take away the credit card and there would have to be some enormous immediate changes to the way the US does business. The sad truth is the US went from an annual surplus at the end of the 90s to enormous deficits throughout this decade.

  5. Mr. Mort, you need to get some sleep. The first article goes from BAC to some home builder without a transition. What the heck are you talking about? The second makes a big deal over derivatives, then says 5% loss. So what’s the big deal.

    Am I missing the point, or is this missing some critical analysis?

  6. I guess the last big bubble is going to be the US debt. Will the world keep lending to us until we cant services the debt anymore? if the US govt were a household, what would it’s DTI be right now?

  7. CDS could trigger a sharp rise in the mkt price of FNM/FRE bonds..Thirteen “major’ dealers of credit-default swaps agreed “unanimously’ that the rescue constitutes a credit event triggering payment or delivery of the companies’ bonds..this would dramatically reduce if not eliminate their exposure(as writers of CDS contracts)…the dealers, of course, are GS,JPM,C,BAC,etc…this whole plan is to bail out the investment banks and other CDS writers who were probably facing major writedowns of there CDS positions as CDS spreads rose dramatically in response to the sharp declines taking place in FNM/FRE bonds(owned heavily by Pimco and the central banks of China,Russia,Japan,etc)..obviously PIMCO and the foreign central banks are made whole on their FRE/FNM bonds,which was a big problem..the poor schnoocks(hedge funds and other speculators) who were paying the premiums get hosed…what a game..I saw this whole scenario playout when GM’s former parts supplier,Delphi, went bankrupt a few years ago..

    >>>Reason..the Delphi bonds had to be turned in in order to receive the insurance payment..the scramble for Delphi bonds drove the price from 10 cents/dollar to a settlement value of 80/cents/dollar(the bonds had little real value)….CDS(credit default swaps) are outstanding on more than X times(a closely guarded secret by the writers) the amount of FNM/FRE bonds outstanding…each holder(of a CDS contract) who does not currently own the bonds must buy the bonds and turn them in in order to receive payment..there should be a scramble for bonds since there are many more CDS contracts outstanding than there are bonds..will drive the bonds up and give the impression that the bailout is working..nobody can accuse these guys as being stupid..why do you think Goldman’s trading profits are so teriffic quarter after quarter..they work hand in hand with the Fed and trade their positions with inside information…who do you think stabalizes the stk mkt on almost a daily basis(buying the Dow or S&P futures) with Fed repo funds?..Who do you think engineered the collapse of the commodity mkt with the help of the Fed(listen to Don Coxe’s conf call of Sept 5)?..I could go on but what’s the point..the guys in charge are criminals..

  8. In case my above comments were not clear…the take over of Fannie Mae/FreddieMac did not adversely affect their bonds..their bonds were enhanced..thus, in reality there was no “credit event”…the thirteen dealers(lead by JPM,GS,etc) in control of the CDS mkt unanimously voted that the rescue constituted a credit event in order to trigger a short squeeze in FNM/FRE bonds and give the takeover plan a positive spin..any losses should be minor, if at was a clever way to bail out PIMCO and the foreign central banks who can sell into the squeeze as well as remove the CDS liability without any losses the the thirteen dealers(writers)..

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