Wednesday, September 10, 2008

Fannie Mae's new Debt: Look at the size of that thing!

Fannie Mae sold $7 billion 2-year notes this morning at Treasuries +70. The deal was oversubscribed. Here are the distribution stats.

US: 63%
Asia: 12%
Europe: 8%
Other: 17%

By type...

54% Money managers
27% Central banks (!!)
19% Other

The 27% Central Bank number is really helping Agency spreads tighten. We're 5-6 tighter, with MBS mildly tighter as well.

Dunno what to say about Lehman. Seems obvious that Fuld has given up the quest to remain independent and is looking for a buyer. That's why they are doing this spin-off of commercial real estate. Once they do the spin-off, then they are basically just a bunch of investment bankers without all the balance sheet ugliness.

Some are skeptical that finding a buyer is possible, but all Lehman needs is someone who has a stronger balance sheet and can take reasonable risks, and the firm can be plenty profitable. It will probably be someone who wants to rapidly increase their presence in the U.S. HSBC has been mentioned, but denied interest. Or Nomura. Either way, someone like that should have interest in Lehman at some price. Remember, it will only take about $4 billion to buy Lehman at current market prices once you take out the commercial real estate holdings.

I'd rather buy Lehman than WaMu. There was a time when several banks were interested in WaMu, but bear in mind that WaMu's whole business is West Coast banking. Maybe J.P. Morgan would still be interested at some price, but you have to wonder JPM wouldn't rather hunt for another West Coast bank with fewer problems. There are accounting issues, which the media has been talking about all day, but forget all that. Do you really think buyers are saying "I'd love to own WaMu, but the accounting is tough." No, I think they are thinking, "I'm not really interested in WaMu, and I'll tell the media its because of accounting."


not_tddg said...

Well, a year into what you argued was a combined "liquidity / insolvency crisis" -- the Fed has poured in liquidity. Half the Fed's balance sheet is now garbage, Fed Funds fell from 5% to 2%, and there is a whole alphabet soup of new Fed lending programs (TAF, TSLF, etc). All the liquidity the Fed could throw at the problem, legally and maybe not so legally, has failed to do much of anything. Bear fell. Dozens of hedge funds fell. And now even the insolvent GSEs have fallen.

The insolvency problem, which was always the real problem, remains

not_tddg said...

If a person gets decapitated, then I suppose it would be correct to say they are suffering from a massive loss of blood.

And its also correct to say that an insolvent entity is also illiquid.

But no matter how much blood the Fed tries to transfuse into the patient -- blood loss is not the real problem.

This was, and still is, an insolvency problem.

Accrued Interest said...

Ugh... this again. What the Fed and Treasury have done is assure that liquidity doesn't keep getting worse. That's what's preventing another Depression right now. I feel completely confident of that.

Liquidity remains bad, but there is only so much the Fed can do to create liquidity beyond what they've already done. So now all they can do is try to maintain the minimal level we have and wait this thing out. We'll eventually get through it, it will take time, and therefore in the interim we need to maintain liquidity of some kind.

not_tddg said...

Reuters has openly questioned the prudence of the Fed continuing to provide "liquidity" to insolvent firms like Lehman. Reuters said its one thing to provide a liquidity cushion against short term speculative market conditions, but its a different matter to indefinitely prop up insolvent institutions.

The ECB said pretty much the same thing a week or so back -- stating that some banks (especially in parts of Spain) were becoming dependent on cheap loans from the ECB. ECB loans are supposed to be stop gap "lender of last resort" loans -- they aren't supposed to be a permanent part of anyone's business model.

After a year's worth of "emergency" funding from the Fed, its overdue to acknowledge these firms are insolvent and shut them down.

Pretending these firms are solvent is just hurting the firms that are truly economically viable.

Anonymous said...

Well the way i look at it is this. Either face deflation now, a short deep pain and recover or just inflate slowly out of the mess. Any day Fed prefers inflation over deflation.

Unknown said...

Off topic, but any thoughts on that other Mae, Sally Mae?

Debt and preferred looks pretty attractive right now -- at least compared to the equity.

(I keep telling myself to stick with quality, but I'm drawn to junk....)

not_tddg said...

Its one thing for central economic planners at the Fed to favor inflation and monetization of all debts...

But you have to be really worried about the future when the wanna-be "capitalists" of Wall Street are calling for it.

I think the collapse of Wall Street and their demand for bailouts from central economic planners are highly related-- they are both indicators that the current/recent "leaders" of Wall Street are simply not up to the task

and if you think $400+ billion in write downs, billions more in recapitalizations, and the failure of BSC, FNM, FRE, CFC, etc is not a failure, I would hate to hear what it would take for you to acknowledge failure.

viking said...

I agree with not tddg. AI, you have consistently underestimated this crisis, culminating in your embarrassing posts of late last week. Now you are implying that there might be actual interest in Lehman, that they can be 'plenty profitable'. I'm sorry, but your credibility quotient is looking a lot like Leh's stock price.

How will spreads look in a month, when Wamu has been seized by the FDIC? After the entire FDIC bailout fund is close to 50B underwater? How will spreads react to the massive recaptilization that the FDIC (as a mathematical certainty) will require?

You still don't get it. Once again I'm reminded of the prescience of Upton Sinclair:

It's very difficult to get a man to understand something if his livelyhood depends on him not understanding it.

PNL4LYFE said...

In response to the last post on FNM, I explained why I thought LEH securities were safer despite the fact that WM has a more valuable business. The huge deposit base is a cheap funding source that many banks would love to have. The future profitability of LEH's investment banking and trading businesses is less clear, especially with a delevered balance sheet. But my fear for WM is that the eventual buyer will get it on the cheap from the FDIC..

For folks like Viking and not_tddg:

I don't think AI or anyone else on this blog has ever said that terrible mistakes and stupid decisions by Wall Street weren't a major cause of the current debacle. But the calls for the government to stop supporting the banking system make no sense to me. Do you want the traders and bankers to be punished for their sins? I can assure you that the people most directly responsible for the problems made so much money that they will be fine even if the economy does implode. The people who will be hurt if the economy collapses (and make no mistake; that's what will happen if the entire banking system is allowed to fail) are the people who were blissfully ignorant of what was going on in the mortgage market... until their ARMs reset.

Unknown said...

who would want to buy lehman???
with an unquantifiable net worth (remember level 2/3 assets...probably not MTM at realistic level).......the only assets worth something (outside a declining asset managemnet business)are people.....I can assure you all really good people are looking or have already left!!!

If I was a hedge fund manager using lehman prime borkerage,I would take my business and assets to someone else in a would be my fiduciary responsibility!!!

If (when) that is over!!!

viking said...

I fully aware the worst perpetrators of the debacle will escape rich.

The old canard of 'saving the system'!

Please. TPTB are adding to aggregate pain by their attempts to alleviate the crisis. They are HURTING J6P.

Better to admit the losses, go through the reset, and start anew.

We will go through the reset process either way.

Pray tell PNL4LYFE are you in finance? Be a man and admit it. Then go back and read the Upton Sinclair quote 100 times until it sinks in.

Then go look in the mirror.

Tyler Durden said...

If the FNM debt is guaranteed by the Treasury why is there a spread at all???

not_tddg said...


Yes, the people who committed errors should AND MUST be held accountable.

The offenders are LEH, MS, etc -- the companies. You are probably right that individual traders who were acting as agents of the sell side firms will walk away with millions. Poorly structured compensation systems is just further proof that management are not qualified to run a major bank -- further proof that they must be allowed to fail.

Saying the taxpayer should subsidize obviously unqualified bank managers is crazy.

The facts are that none of the current big firms of Wall Street were around 20-30 years ago. This group will fail, sooner or later, no matter how much tax payer money the Fed loses in the meantime.

No matter what, a new group of firms will take their place; this is how Wall Street has worked since its inception -- and sorry to the dot-com people, but once again, this time will not be different.

The problem is that people like AI want to pretend this is a temporary liquidity problem -- and throw tens if not hundreds of billions of tax payer dollars trying to prop up a bunch of failures.

Yes, the current leadership of Wall Street are failures. Winners don't need to be bailed out and they don't need special treatment from regulators.

We are more than a year into this insolvency mess -- and we are acting like the crony Asian economies we used to ridicule. The politically connected are being propped up with public money -- AT THE EXPENSE OF THE QUALIFIED.

Wall Street USED TO BE a meritocracy. The only way to restore confidence in the markets is to restore the meritocracy. Let the poorly run firms fail -- that's what they would do if one of their customers had a problem; why shouldn't Wall Street have to take its own medicine?

Propping up failed businesses under the guise of "liquidity problems" is just plain shameful and embarassing

Christopher Wheeler said...

Guys, guys...
From what I have been reading, AI has never claimed that the problem was 100% liquidity. My take is that without the Fed injecting liquidity into the market, it would be impossible to tell the insolvency problem from the liquidity problem.

It was always obvious that some players were going to fail in the housing bubble collapse. So far, BSC and Indymac shareholders have been wiped out, and it looks like the GSE common shareholders are never going to see a recovery.

Is Lehman next to fail? Maybe, maybe not. One of the problems with the current banking crisis is that nobody really knows what the assets are worth. As AI has adroitly pointed out in his article on CDO's, the lack of standardization and complexity of the bonds means that even the guys who created them aren't sure is they are going to go south or not.

In the meantime, we need to continue to make mortgages availible, even at the current reduced level of activity. Businesses also need access to credit for working capital and for expansion. The Fed and DoT are working to keep the system running, and so far seem to be doing a reasonably effective job.

Unfortunately, keeping the system running means bailing out some of the idiots who helped create the mess in the first place ("Housing prices have never gone down!"). And a lot of those guys have cashed out in a big way, so they are never going to have to worry.

As for the hypocrisy of Wall Streeters crying "free markets" in the good times, and "bail out the system" in the bad times...well, I take that with a grain of salt in both instances.

not_tddg said...

I liked Michael Lewis' explanation the best:

The Bear Stearns bailout was supposed to prevent the crisis from rippling through Wall Street. Obviously it hasn't done that. It's merely thrown the crisis into slow motion and prolonged the agony.

See Bloomberg for the whole op-ed

Accrued Interest said...


Which of my posts were embarassing? Honestly, I've said a lot of wrong things, but only one post do I look back at and really find embarassing.

not_tddg said...

Today the Bank of England joined the ECB in saying that banks are becoming dependent on special lending facilities-- and the special lending facilities will NOT be extended past their current expiry

See UK Times and others for the story.

The UK's real estate crisis is at least as bad as the US (Europe's crisis is more confined to Spain, etc)... but after a year of "emergency" liquidity, its time to acknowledge that isn't the real problem at all.

The Fed is increasingly isolated in its view that "emergency" liquidity should be extended indefinitely.

They are just dragging out the problem, and in so doing, making it much much worse.

Unknown said...

Is not America itself insolvent?

Superbear said...

It is Sunday night now.

Question: Are you still feeling confident that Fed will prevent depression?

PNL4LYFE said...

Moral hazard has been averted!

PNL4LYFE said...

Pretty amazing how well stocks are holding up today. Even XLF only -5%. I wonder if it's just because people are expecting rate cuts now. If this is as bad as it gets, I definitely overestimated the importance of supporting the counterparty system.