Maiden Lane I is a $25.7 billion portfolio of Bear Stearns securities related to commercial and residential mortgages. JPMorgan refused to buy them when it acquired Bear Stearns to avert the firm’s bankruptcy.
The Fed’s losses included writing down the value of commercial-mortgage holdings by 28 percent to $5.6 billion and residential loans by 38 percent to $937 million as of Dec. 31, the central bank said. Properties in California and Florida accounted for 45 percent of outstanding principal of the residential mortgages.
Don’t worry everybody. Federal Reserve Chairman "Helicopter Ben" Bernanke says that the U.S. economy is going to be just fine, and that if it does slip up somehow the Federal Reserve is ready to rush in to the rescue. That was essentially Bernanke’s message to an annual gathering of central bankers in Jackson Hole, Wyoming on Friday. Bernanke insisted that even though the Federal Reserve has already cut interest rates to historic lows it still has plenty of tools that could be used to stimulate the U.S. economy if necessary.
Well, considering Bernanke’s track record, the "don’t worry, be happy" mantra is just not going to cut it this time. After all, if Bernanke and his team were such intellectual powerhouses the "surprise" financial crisis of 2007 and 2008 would not have caught them with their pants down. The truth is that just before the "greatest financial crisis since the Great Depression" Bernanke was telling everyone that the economy was just fine. So are we going to let him fool us again?
But Bernanke insists that this time is different. This time the Federal Reserve really has got a handle on things. During his remarks at Jackson Hole, Bernanke said that the Fed will adopt "unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly."
Could that be a thinly veiled way of saying that Helicopter Ben and his pals will do as much "quantitative easing" as they feel is necessary to keep the economy moving forward?…
So the Fed Groundhog came out of his hole at 2:15 pm today, sniffed the air, took a glance at the data and decided that there will be 6 more months of kitchen-sink policy. He certainly signaled a continuation of economic winter.
The Fed Funds target rate will remain at 0 to .25% and the Mortgage Backed Securities/Treasuries eating contest will continue apace.
Below is the full text of the statement. For fun, note how badly they wanted to use the "D" word (deflation) but how deftly they restrained themselves…
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.
Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.
Credit conditions are improving for speculators and bubblemakers, but they continue to worsen for households, consumers and small businesses. An article in the Wall Street Journal confirms that the Fed’s efforts to revive the so-called shadow banking system is showing signs of progress. Financial intermediaries have been taking advantage of low rates and easy terms to fund corporate bonds, stocks and mortgage-backed securities. Thus, the reflating of high-risk financial assets has resumed, thanks to the Fed’s crisis-engendering monetary policy and extraordinary rescue operations.
Here’s an excerpt from the Wall Street Journal:
"A new quarterly survey of lending by the Federal Reserve found that hedge funds and private-equity funds are getting better terms from lenders and that big banks have loosened lending standards generally in recent months. The survey, called the Senior Credit Officer Opinion Survey, focuses on wholesale credit markets, which the Fed said functioned better over the past quarter." ("Survey shows credit flows more freely", Sudeep Reddy, Wall Street Journal)
In contrast, bank lending and consumer loans continue to shrink at a rate of nearly 5 per cent per year. According to economist John Makin, there was a "sharp drop in credit growth, to a negative 9.7 per cent annual rate over the three months ending in May." Bottom line; the real economy is being strangled while unregulated shadow banks are re-leveraging their portfolios and skimming profits. Here’s more from the WSJ:
"Two-thirds of dealers said hedge funds in particular pushed harder for better rates and looser nonprice terms, and they said some of the funds got better deals as a result….(while) The funding market for key consumer loans remained under stress, with a quarter of dealers reporting that liquidity and functioning in the market had deteriorated in recent months." ("Survey shows credit flows more freely", Sudeep Reddy, Wall Street Journal)
As the policymaking arm of the nation’s biggest banks, the Fed’s job is to enhance the profit-generating activities of its constituents. That’s why Fed chair Ben Bernanke has worked tirelessly to restore the crisis-prone shadow banking system. As inequality grows and the depression deepens for working people, securitization and derivatives offer a viable way to increase earnings and drive up shares for financial institutions. The banks continue to post record profits even while the underlying economy is…
“The Fed did not provide assistance to all on an equal basis but tilted the playing field,” Poole said in remarks prepared for a lecture at the University of Delaware, where he is a scholar in residence. “Why should the Fed have had a program to buy commercial paper from large corporations and no program to help small businesses starved for funds?”
The Fed’s program to purchase $1.25 trillion in mortgage- backed securities issued by government-sponsored enterprises probably contributed to the demise of the market for non- government mortgage-backed securities and will “complicate monetary policy in the years ahead,” Poole said.
“Much more research is necessary to determine whether the Fed made the right choices; clearly, I have my doubts,” said Poole, 72. He was president of the St. Louis Fed from 1998 until retiring from the post in March 2008, the month that Bear Stearns collapsed.
Poole expressed concern about “an appalling lack of economic literacy in Congress” and said that neither the House nor Senate versions of legislation to overhaul financial regulation address the most important shortcomings.
Poole is correct about the Fed’s favoritism and the Fed buying mortgages. It is very doubtful the Fed helped housing much, but at some point the Fed has to get rid of that $1.25 trillion in mortgages. That will pressure mortgage rates.
Why did the Fed even purchase the last half-trillion? By then, the Fed was already discussing an exit strategy. It made no sense.
Certainly Congress does consist of economic illiterates, but the same thing can be said about the Fed. Pray tell what did Bernanke or Greenspan get right?
After a Massachusetts wake-up call Obama has decided to pay more attention to Paul Volcker. Is it too little, too late to quell public anger? What will the effects be if new Glass-Steagall legislation is enacted?
President Barack Obama tomorrow will offer proposals to limit the size and complexity of financial institutions’ proprietary trading as a way to reduce risk- taking, an administration official said.
“We’ve got a financial regulatory system that is completely inadequate to control the excessive risks and irresponsible behavior of financial players all around the world,” Obama said in an interview with ABC News broadcast tonight.
“People are angry and they’re frustrated,” Obama said in the ABC interview. “From their perspective, the only thing that happens is that we bail out the banks.”
The proposed rules could limit activities of banks like Goldman Sachs Group Inc., the most profitable investment bank in Wall Street history. Goldman reaped more than 90 percent of its pretax earnings last year from trading and so-called principal investments, which include market bets on securities and stakes in companies.
President Obama on Thursday will publicly propose giving bank regulators the power to limit the size of the nation’s largest banks and the scope of their risk-taking activities, an administration official said late Wednesday.
He also would prohibit proprietary trading of financial securities by commercial banks, including mortgage-backed securities. Big losses in the trading of those securities precipitated the credit crisis in 2008 and the federal bailout.
Last week he proposed a new tax on some 50 of the largest banks to raise enough money to recover the losses from the financial bailout, which ultimately could cost up $117 billion.
Now, in perhaps his most daring move, he is calling for a modern-day version of the Glass-Steagall Act, which in 1933 separated commercial and investment banking. The new separation would prohibit standard commercial banks from engaging in proprietary trading using funds from their commercial division.
Only a handful of large banks would be the targets of this legislation, among
Here’s another terrific article by Mish. If you’ve wondered like I have about the 45B the Fed apparently made last year, towards the end, Mish questions that figure. Op-Toons has a suggestion to improve the accuracy of reported numbers (keep reading). – Ilene
The Fed is pulling out all stops to defend its secrets, including publishing self-serving mathematical gibberish. Please consider the St. Louis Fed article on the Social Cost of Transparency.
Unless you are an academic wonk, you will be stymied by pages that look like this …
There are 24 pages of such nonsense with titles like
2.2 Private Information and Full Commitment
2.3 Private Information and Limited Commitment
3.2.1 Decision Making in the Day
3.2.2 Decision Making at Night
3.2.4 A No-News Economy
Just for good measure here is the page describing 3.2.4 A No-News Economy
The article culminates with …
For an asset economy then, the prescription of “full transparency” is not generally warranted.
Approaching the problem under the premise that fuller transparency is always desirable may not be the right place to start.
Hiding Behind Empirical Formulas
The problem is Bernanke places his complete faith in such gibberish, so much so that he has lost all sense of real world action by real people. The result is that in spite of his PhD, he could not see a housing bubble that was obvious to anyone using a single ounce of common sense.
Moreover, had Bernanke simply opened his eyes instead of relying on a poor interpretation of an already fatally flawed Taylor Rule, the credit/housing bubble would not have gotten as big as it did, and we might not be discussing the above ridiculous mathematical formulas that supposedly show us the Fed needs to be secretive.
Ralph Cioffi and Matthew Tannin, former hedge fund managers and co-heads of Bear Stearns Asset Management, were acquitted yesterday (November 10) of all six counts in their fraud trial” U.S. v. Cioffi, 08-CR-00415, U.S. District Court for the Eastern District of New York (Brooklyn).
"I worked at Bear Stearns in the late 1980s and remembered amiable newcomer Ralph Cioffi to be Bear Stearns’ most talented and successful salesman of mortgage-backed securities. He was usually even tempered, always hard working, and thoughtful. I headed marketing for the quantitative group run by both Stanley Diller, one of the original Wall Street “quants,” and Ed Rappa (now CEO of R.W. Pressprich & Co, Inc.), a managing partner. Ralph was a popular salesman with my colleagues and a heavy user of our quantitative research. In gratitude for analytical work that helped him make sales, Ralph presented our group with an $800 portable bond calculator purchased out of his own pocket. When I was lured away from Bear Stearns by Goldman Sachs, Ralph Cioffi tried to persuade me to stay, matching the offer. Around 20 years had passed and since then we occasionally stayed in touch, but we were not close friends.
Among other hedge funds, Bear Stearns Asset Management (BSAM) managed the Bear Stearns High Grade Structured Credit Strategies fund. By August 2006, the fund had a couple of years of double-digit returns. BSAM launched the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage fund taking advantage of the first fund’s “success.”
Both funds managed by BSAM included CDO and CDO-squared tranches backed in part by subprime loans and other securitizations (collateralized loan obligations) backed by corporate loans and leveraged corporate loans. In August 2006 when BSAM was setting up the Enhanced Leverage fund, other hedge fund managers (like John Paulson), shorted subprime-backed investments.
Investors in the two funds managed by BSAM had been getting double digit annualized returns on high-grade debt at a time when treasuries were yielding less than 5 percent. In fixed income investments, that usually means investors are taking risk.
Ralph seemed to have similar views to mine on CPDOs, the leveraged product that I had said did not deserve a AAA rating. Ralph told me
The Financial Times recently reported on the Fed’s latest exit strategy to eventually contain the inflation zombie:
During the crisis, the Fed created roughly $800bn of additional bank reserves to finance asset purchases and loans. This total is likely to rise in the coming months as the central bank completes its asset purchases and the Treasury unwinds financing it provided to the Fed. Fed officials think they could raise interest rates even with this excess supply of reserves by offering to pay banks to deposit their surplus funds with it rather than lend them out. However, they also want to use reverse repos in tandem to soak up some of the excess reserves. Policymakers call this a “belt and braces approach”. [The latter, clearly a nod to the great Gekko.]
TD touched on this last Thursday, and we will expand upon it here as it is particularly relevant to our ongoing theory that it is the proceeds from permanent open market operations (POMOs) and their close cousins that are driving equities.Though this may be received wisdom to ZH readers, the Fed has done us the favor of providing additional evidence through the FT story.A bit of background, as we are new contributors to this forum:
Money Supply:Based on our previous research on the effects of swings in M2 non-seasonally adjusted money supply (M2) on the stock market, we were a bit surprised in July 09 by the resiliency of the rally, which continued in the face of such a dramatic contraction in M2.The dismal Durable Goods report from last Friday confirms that the capital goods sector is still under significant pressure as a result of a lack of money in the general economy.With banks not lending to normal businesses and consumer credit contracting equally as violently, what is the basis for this rally and from where does the never-ending flow of equities juice flow?
Bank Non-Borrowed Excess Reserves:The Fed statistic that most closely correlates with the 2009 equities run-up appears to be bank non-borrowed excess reserves (bank NBER), which
Federal officials on Thursday were poised to seize Guaranty Financial Group Inc., in what would be the 10th-largest bank failure in U.S. history. Guaranty’s woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation’s worst lenders.
Delinquency rates on the holdings have soared as high as 40%, forcing write-downs last month that consumed all of the bank’s capital.
Guaranty is one of thousands of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of the mortgage industry and financial institutions.
Many analysts and bankers are increasingly worried that the boomerang effect that killed Guaranty will cripple many small and regional banks already weakened by losses on home mortgages, credit cards, commercial real-estate and other assets imperiled by the recession.
Thousands of banks and thrifts scooped up securities tied to the housing market or other financial institutions in the past decade. Such investments were alluring because they seemed certain to outperform Treasury bonds, municipal bonds and other humdrum holdings that dominated the securities portfolios at most banks for generations.
As of March 31, the 8,246 financial institutions backed by the FDIC held $2.21 trillion in securities — or 16% of their total assets of $13.54 trillion.
The problems also underscore how the boom in securitization of loans instilled a belief that risks could be controlled, an idea embraced first by financial giants like Citigroup Inc. and Merrill Lynch & Co. and then smaller institutions reaching for higher profits.
"We saw them as a safe investment, and now we wish we didn’t have them," says Robert R. Hill Jr., chief executive of SCBT Financial Corp, a Columbia, S.C., bank with 49 branches. The bank has less exposure than some other small institutions, with the crippled securities representing about 10% of its investment portfolio.
The overall impact on the U.S. banking industry’s second-quarter results isn’t clear, because disclosure of losses and even the types of securities owned vary widely from bank to bank. Some obscure their troubled holdings in
Back in September 2012 when we, correctly, suggested that one of the main drivers of demand (and increasingly becoming the only one) for US housing, especially in the mid and high-end, was foreigners - particularly of the oligarch persuasion - who come to the US to park their embezzled and otherwise ill-gotten funds, courtesy of the NAR's anti-money laundering exemptions, which means that they can buy any house, sight unseen, cash upfront (recall that a ...
One of my favorite long-term economic indicators has been the historical pattern of vehicle miles driven. I post a monthly update on the topic shortly after the Department of Transportation's Office of Highway Information publishes its latest data on Traffic Volume Trends.
My preferred way to analyze the data is on a per-capita basis, so I was particularly interested in a study release earlier today by U.S. PRIG on the decline of driving in major cities.
Here is an excerpt from the press release:
The report, "Transportation in Transition: A Look at Changing Travel Patterns in America's Biggest Cities," is ba...
GES – Guess? Inc. – Shares in apparel and accessories retailer Guess are trading lower on Wednesday ahead of the company’s third-quarter earnings report after the closing bell. Options changing hands on the stock during morning trading indicates some traders are bracing for shares to potentially drop to the lowest level since early-October by December expiration. The stock currently trades down 2.0% on the day at $33.24 just before 11:30 a.m. EST.
Around 1,700 of the Dec $29 strike put options have changed hands on GES so far today, more than two time...
It was anything but boring cooking the books to make Bernard Madoff's returns seem smooth and steady, the arch-fraudster's former CFO testified yesterday.
Frank DiPascali, in his first day on the stand in the trial of five former Madoff employees, said that each of them were intimately involved in deceiving Madoff's investors and regulators—a deception that kept the wraps on a $65 billion Ponzi scheme for decades. DiPascali, who worked for Madoff for more than 30 years, told the jury that the fraud went on "as far back as I can remember" and that "it was virtually impossible not to know what was happening."
The five former employees—Daniel Bonventre, Annette Bongiorno, Joann Crupi, Jerome O'Hara and George Perez—have said that they had no idea Madoff was a...
The U.S. Department of Justice's (DOJ) investigation of alleged bribery at Wal-Mart (NYSE: WMT) is wider and deeper than previously thought. Reuters reported that the world's largest retailer is now paying the legal bills for at least 30 executives caught up in the scandal.
“Those numbers suggest that DOJ is really digging deep,” anti-corruption lawyer Richard Cassin told Reuters. The report did not name any of the executives involved and didn't specify the cost of th...
Repeating Friday’s market performance, today, the S&P 500 sold off in the last 30 to 40 minutes, giving up its entire daily gain for a loss of 0.27%. Nevertheless, it did gain 0.1% last week for its eighth consecutive weekly gain.
The Small-cap Growth style/cap was the leader last week, gaining 1.58% and raising its leading one-year gains to 43.67%. The growth style continued to dominate value in all three major market cap ranges. Value delivered a negative performance for the week in both large- and mid-caps. (See market stats.)
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This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).
We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options.
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These rallies are becoming familiar. In early July we saw a streak of 12 of 13 sessions in a row up, early September 11 of 12, and mid October 11 of 13 (current streak). It is a bit uncanny the similarities and how the escalator goes straight up in vertical ascent as we see indexes come out of mini corrections during QE. So we are about at the same stage where the last two began to tire, so it will be interesting if this is similar or if the current consensus of the market that there is nothing to worry about until next year as the Fed and D.C. are both off the table and this 3% annual growth rate in earnings we are now seeing in the S...
Welcome to the fouth update of the IRA Virtual Portfolio. First I am going to summarize the current state of the Portfolio then I will get into all the activity we had during September expiration.
Profit and Loss – Net of closed positions the portfolio is up a total of $769
Market Commentary – Last expiration I said, "I would like to put a total of $20,000 to work by the end of SEP expiration. If the VIX pops up to around 20 I plan to put about $50,000 total to work." The market didn't quite reach the goal but I did manage to deploy $15,000 of buying power. I still feel the market is too high and expect a correction during October. If the vix pops up to around 20 I still plan to put about $50,000 to work. If a correction doesn't happen I still plan to have a total of $25,000 in buying power put to work by October expiration. Now on to the act...
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Come and get it! Read all about it! Biotechs, biotechs and more biotechs to buy buy buy for your portfolio! To date, almost 30 biotech companies have hit the market. Most of the time, there are fewer than 10-12!
For the last five years, biotechs have had issues obtaining offer prices above expectations. In 2013, that trend looks to be broken. According to BiotechNow, the offer prices are 4% above expectations! In addition, biotechs are going public with little more than a wing and a prayer (pre-clinical or Phase 1 data only). Really? What this means is that the drug or technology looks good in mice, rats, or dogs, etc, but there is no smidgen of evidence that it will work in humans. That's what is called an appitite for RISK!
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