- President Bush continues to pander to sinking mortgage
payers while the Fed keeps devising new ways to bail out the debt markets.
There are numerous hidden consequences of the government attempt to bail
out various parties to the subprime mortgage crisis, including the borrowers
themselves. First, and foremost it is an assault on the sanctity of contracts.
It matters not that Treasury Secretary Paulson supposedly backed away from
a government mandate to freeze mortgage rates and instead switched to a
"voluntary" program of re-writing mortgage contracts. The threat
of force was enough to get the victims to agree to "voluntary"
rewrites. Legal issues still loom large because not all parties to the
"agreement" are willing to forego their rights. Then there is
the issue of fairness to those who faithfully sacrifice each month to make
their mortgage payments. They'd like a lower interest too--but by being
honest and faithful to their contracts, they are disqualified from the
program.
-
- All of this sends a chilling message to bond markets:
As Bloomberg News wrote, "President George W. Bush's plan to freeze
interest rates on some subprime mortgages may prove to be a cure that breeds
another disease. Milton Ezrati, senior economist at Lord Abbett & Co.
says, 'When the government comes in and says you have contracted to have
this arrangement and you can no longer have it, I think it opens the door
for lawsuits.'
-
- "The plan may force investors in the $6.3 trillion
market for home-loan bonds, created by pooling loans and funneling interest
payments to bondholders, to revalue their holdings. 'It could end up there's
less confidence in the viability in the bond markets and the mortgage markets
going forward and it could lead to higher interest rates and higher mortgage
rates for everybody,' said Kenneth Hackel, managing director of fixed-
income strategy at RBS Greenwich Capital Markets." And, that is why
the government is shoveling ever more liquidity out the door, and why the
dollar keeps falling. Oil prices rose $5 a barrel solely based on the anticipation
of a weaker dollar value.
-
- Sean Olender addresses the lawsuit threat: "The
ticking time bomb in the U.S. banking system is not resetting subprime
mortgage rates. The real problem is the contractual ability of investors
in mortgage bonds to require banks to buy back the loans at face value
if there was fraud in the origination process.
-
- "The 'freeze,' [is] the brainchild of Treasury Secretary
Henry Paulson. It sounds good: For five years, mortgage lenders will freeze
interest rates on a limited number of 'teaser' subprime loans. Other homeowners
facing foreclosure will be offered assistance from the Federal Housing
Administration. But unfortunately, the 'freeze' is just another fraud -
and like the other bailout proposals, it has nothing to do with U.S. house
prices, with 'working families,' keeping people in their homes or any of
that nonsense.
-
- "The sole goal of the freeze is to prevent owners
of mortgage-backed securities, many of them foreigners, fromsuing U.S.
banks and forcing them to buy back worthless mortgage securities at face
value - right now almost 10 times their market worth."
-
- THE MORTGAGE MELTDOWN ISN'T OVER, BUT THEY HAVE ANOTHER
FIX
-
- In the wake of Morgan Stanley's full recession alert
for the US economy, the Federal Reserve announced that, "The Bank
of Canada, the Bank of England, the European Central Bank, the Federal
Reserve, and the Swiss National Bank are announcing measures designed to
address elevated pressures in short-term funding markets. Actions taken
by the Federal Reserve include the establishment of a temporary Term Auction
Facility and the establishment of foreign exchange swap lines with the
European Central Bank and the Swiss National Bank. Under the Term Auction
Facility (TAF) program, the Federal Reserve will auction term funds to
depository institutions against the wide variety of collateral [subprime
debt, anyone?] that can be used to secure loans at the discount window.
All depository institutions that are judged to be in generally sound financial
condition by their local Reserve Bank and that are eligible to borrow under
the primary credit discount window program will be eligible to participate
in TAF auctions. All advances must be fully collateralized."
-
- What this really means is that the fed will begin to
accept packages of subprime mortgages as collateral that otherwise have
no value on the open market. This move will allow devalued debt to act
as security for new loans that do have value, based upon the overall reputation
of the borrowing bank. In short, the Fed has joined forces with other central
banks to LAUNDER the subprime mortgage debt packages into other forms of
debt. It also pumps billions of liquidity into bank coffers so they don't
have to liquidate these bad debts to cover investor withdrawal or legal
demands to make good on the original value of these subprime package deals.
Slick.
-
- All of this points to the fact that the US and world
debt structure is in much worse shape than is admitted by governments.
Bloomberg reports that "Citigroup Inc [with new cash from it's Arab
investors] will take over seven troubled investment funds and assume $58
billion of debt to avoid forced asset sales that would further erode confidence
in capital markets. Moody's Investors Service lowered the bank's credit
ratings." Last week I mentioned Florida's troubled state investment
pool. This week Bloomberg reported that "Florida's state investment
pool will keep November's interest income instead of paying it to counties
and schools, using the $95 million to shore up a troubled portion of the
fund." That's a stop gap measure aimed at forestalling default.
-
- Stock markets aren't fooled either. This week, for the
first time, based upon the supposed "good news" of a rate cut,
the Dow Jones average plunged nearly 300 points. It is supposed to go the
other way. But investors felt the 1/4 point drop wasn't enough.
-
- Sean Olender wrote in the SF Chronicle the definitive
piece on the legal implications of the mortgage meltdown. He says that
bankers are paying lip service to family finances while "scurrying
to avert law suits, and prison." Is it that bad? Yes, and without
a whole new set of intervention, the banks were in real trouble.
-
- "New proposals to ease our great mortgage meltdown
keep rolling in. First the Treasury Department urged the creation of a
new fund that would buy risky mortgage bonds as a tactic to hide what those
bonds were really worth. (Not much.) Then the idea was to use Fannie Mae
and Freddie Mac to buy the risky loans, even if it was clear that U.S.
taxpayers would eventually be stuck with the bill. But that plan went south
after Fannie suffered a new accounting scandal, and Freddie's existing
loan losses shot up more than expected.
-
- "And, to be sure, fraud is everywhere. It's in the
loan application documents, and it's in the appraisals. There are e-mails
and memos floating around showing that many people in banks, investment
banks and appraisal companies - all the way up to senior management - knew
about it. I can hear the hum of shredders working overtime, and maybe that
is the new 'hot' industry to invest in."The catastrophic consequences
of bond investors forcing originators to buy back loans at face value are
beyond the current media discussion. The loans at issue dwarf the capital
available at the largest U.S. banks combined, and investor lawsuits would
raise stunning liability sufficient to cause even the largest U.S. banks
to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie,
and even FDIC."The problem isn't just subprime loans. It is the entire
mortgage market. As home prices fall, defaults will rise sharply - period.
And so will the patience of mortgage bondholders. Different classes of
mortgage bonds from various risk pools are owned by different central banks,
funds, pensions and investors all over the world. Even your pension or
401(k) might have some of these bonds in it.
-
- "Perhaps some U.S. government department can make
veiled threats to foreign countries to suggest they will suffer unpleasant
consequences if their largest holders (central banks and investment funds)
don't go along with the plan, but how could it be possible to strong-arm
everyone?" They have their ways.
-
-
- The above is excerpted from World Affairs Brief, December
14, 2007. Commentary and Insights on a Troubled World.
-
- Copyright Joel Skousen. Partial quotations with attribution
permitted. Cite source as Joel Skousen's World Affairs Brief (<http://www.worldaffairsbrief.com>
http://www.worldaffairsbrief.com )
-
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