I said last summer/early fall of last year, this will be the eventual end game - direct purchases of home mortgages (the Federal Reserve currently can't do it by law) but by some arm of the government.... it sounded ludicrous then. I mean back in August everyone was assuring us this was 1x writeoffs - the correction in financials was the "kitchen sink quarter" and to "buy, buy, buy!". "Subprime is contained". But as the credit morass spreads, the depth of the web of interconnected dominoes is revealed, and the desperation by public officials, both elected and non-elected, in a presidential year increases, I thought this would be the likely "end of the cycle". In the past 14-21 days it is starting to pop up as a "solution" from the mouths of many others. As always, I'm early....
Once again, let me say when (ahem)/if this happens, the stock market will probably put on a 15-20% move instantly as we then move to socialize all losses from the risk takers to the tax payers. Wall Street will win again because the financial system can now take any risk they want, as they cannot be allowed to fail.
Now, today we have news of the next best thing - what I call literally the same thing... letting banks shovel these toxic instruments onto the balance sheet of the Bank of England for a YEAR, in return for government bonds. And what happens in a year? They will simply roll over this arrangement, again. And again ... and again - until the credit problem is fixed. So is this "actual" purchasing? No - but its the best workaround - an infinite loan. The US is going down the same path [Mar 22: A Historic 9 Days for the Federal Reserve] - in the "old days" loans to banks by Fed were overnight, they expired the next day - than as the credit noose tightened it went up to 3 days... and in the most recent quarter as we were headed off the precipice it went up to 28 days. Free market capitalists cry Justice! They are not buying the junk! But not only have they expanded what they let banks borrow against from the safest products to just about anything, but they now have 28 day windows that (drumroll) roll over ... and over... and over. So it's really no different from the Bank of England plan except the BOE is saying, let's not even keep up this farce every 28 days - lets just go 365. So here in the US the banks have to go through the dog and pony show every 28 days, but they will simply roll over this junk and keep shoveling back into the Federal Reserve every 28 days like clockwork... until "whenever". It could be years. So effectively it's almost an identical effect as purchasing - Treasuries are created, given to banks, and in return the Fed (tax payers) gets to hold junk.
Do you notice how that Bear Stearns moment, in which the last of these systems were set up by the Fed, along with an implicit promise that no large bank will be allowed to go under marked the bottom of this cycle? This is why I call it a socialized system. Losses are backstopped by your tax dollars - so the risk takers who got us into this mess can continue to speculate on whim - knowing your money is backing them up - because we cannot allow them to fail... since they are so interconnected to each other and if one domino falls, the whole system collapses. What does that say about the system? Not much. But as I was saying, when risk is taken away from the risk takers and put onto the taxpayers, the market can do nothing but cheer that. Off to England we go... where ironically all I read sounds like a direct parallel to the US - indebted consumer to eyeballs, housing bust just becoming, financial "innovation" throughout London, and a credit based, finance service economy. Our little brother in arms. p.s. $100 Billion is just the beginning, I predict this gets MUCH larger as we move into the year...
- The Bank of England offered to swap government bonds for mortgage securities to kick-start bank lending, with Governor Mervyn King pledging to meet demand even if it exceeds an estimate of 50 billion pounds ($100 billion.)
- ``There is no arbitrary limit on this so it could well go higher,'' King told reporters in London today.
- The measures, backed by Prime Minister Gordon Brown's government, mimic a swap of $200 billion of securities by the U.S. Federal Reserve last month as central banks around the world struggle to prop up financial markets.
- The banks will retain responsibility for losses from the assets they loan to the Bank of England. The swaps will be for a period of one year, renewable for up to three years.
- ``The collateral swap arrangement is an innovative and unique policy response,'' the British Bankers' Association said in a statement today. (not that they are biased - read: banks win again!)
- The banks will be able to enter into a swap at any time over the next six months. Assets that can be used must have the top AAA ratings. They will include mortgage debt and credit card debt. ``Raw mortgages'' and derivatives are excluded. (and we all know how effective a triple A rating is nowadays - plus now we can throw in credit card debt too! Woo hoo!)
- The bank said the public is exposed to a loss only if a lender participating in the program defaults and the assets they have placed with the central bank are insufficient to cover the value of the Treasury bills in the swap. That's why the bank is asking for collateral of greater value than the bills it lends.
- `The sense yet again from the Bank of England is that it will provide an absolute backstop to the financial system, but won't make any effort to ease the market's liquidity.''
- House prices dropped 2.5 percent in March from a month earlier, the biggest drop since 1992
- "We remain concerned about the health of the consumer given the prolonged housing slump, subprime issues, employment levels and higher fuel and food prices," CEO Ken Lewis said in a press release Monday morning. (but other than that, things are going fine!!)
- The quarter also saw net charge-offs of $2.72 billion, as consumers became further stressed by rising unemployment and tougher borrowing conditions.
- In addition, the bank said it had increased its loan-loss provisions to $14.89 billion as of March 31, compared to $8.73 billion a year earlier, a function of tightening credit markets and a sluggish housing market.
