Interest Rate Roundup

Monday, September 08, 2008

More thoughts on the bailout and post-bailout action

Hey, did you hear that Fannie Mae and Freddie Mac got a government bailout? Thought so. Now it's time to assess the fallout. Some notable details:

* Fannie Mae and Freddie Mac common shareholders are getting crushed. Fannie Mae is down more than 83% as I write to a buck and change. Freddie Mac broke the buck at one point, setting an intraday low of 88 cents (vs. a Friday close of $5.10). The preferreds aren't having a good day either. You know those Fannie Mae 8 3/4% preferreds sold in May at a par value of $50? They're going for about $2.20 right now, off 87% on the day. Oops.

* At the same time, Fannie and Freddie debt spreads are collapsing. Case in point: The spread on Fannie Mae 10-year paper vs. 10-year Treasuries is down about 23 basis points to around 52 bps. That's a huge decline on par with what we saw post-Bear Stearns. What about the mortgage backed securities market? Well, rates on current coupon 30-year Fannie Mae MBS are down around 29 bps. It's reasonable to expect fixed-rate mortgages to decline into the mid-to-high 5s from the low-to-mid 6s.

* The dollar was initially sold off hard on the news. But it rallied back in the early morning hours. U.S. Treasuries initially tanked, with the long bond futures getting all the way down to the 118 area (from 119 30/32 on Friday). But bond futures are now down only about 10/32. 10-year Treasury yields are only up about 1.5 basis points (after being up about 15 bps in the early going).

* Stocks loved the news, with the Dow Jones Industrial Average up about 300 points in the early going. But it has since pared some of those gains. Part of the problem? Other financial institutions that have been concerning investors aren't having a good day. Shares of Lehman Brothers are down about 17% as I write, while shares of Washington Mutual have given up early gains. Washington Mutual, for its part, jettisoned its CEO and announced a memorandum of understanding with its regulator, the Office of Thrift Supervision. You can read more here and here.

Now that that's out of the way, the obvious question is "What do I think about what happened?" I understand why some kind of bailout was probably necessary. I understand why it happened. And I'm pleased to see that some "pain" was meted out -- to common and preferred shareholders and Fannie and Freddie executives. That's what should happen when taxpayer money is being committed to rescue financially troubled firms.

But this whole "let's buy MBS to drive down mortgage rates" component of the plan really smells. Yes, it's well intentioned. But you know what they say about the road to hell and all that. Essentially, we will now have the Treasury Department deciding when and if mortgage bonds are too cheap ... and when it judges that they are, it will use taxpayer money to manipulate the market until prices are "right." Huh?

Not to get all tin-foil-hat here, but what kind of precedent does that set? What if the auto lenders ... or the commercial real estate guys ... start to make a stink about how spreads on ABS and CMBS are too high, and how that's hurting the ability of consumers to buy cars or developers to finance commercial projects? Could the Treasury be authorized to jump in and buy ABS and CMBS to drive spreads lower?

Or how about the stock market? Higher stock prices make everyone richer right? So why shouldn't the government borrow money at low Treasury rates and buy higher-yielding stocks or just S&P futures? That's "good" right?

As I said a couple weeks ago:

"This is the problem with bailouts. You do it for someone, you have to do it for everyone."

1 Comments:

  • These are the opinions of Robert Sheridan, CEO of Sheridan & Partners, a Chicago-area real estate & development company. Their site is www.sheridanpartners.com/market.php.

    A Bad Thing for Housing Gets Worse

    The lead article in the 8/4/08 issue of The New York Times by Vikas Bajaj, “Housing Lenders Fear Bigger Wave of Loan Defaults,” comes as no surprise. Bajaj’s reporting illuminates a problem that has been apparent for a long time: foreclosures will be greater than recent estimates (now, even homeowners with good credit are finding themselves caught up in the morass) and price declines are likely to be deeper.

    What is not immediately as obvious is that this bigger-than-expected wave of defaults will likely push “the bottom” out further. It’s hard to see it occurring in most markets before 2010.

    Read the article here:

    http://www.nytimes.com/2008/08/04/business/04lend.html?_r=1&scp=2&sq=vikas%20bajaj&st=cse&oref=slogin

    Phil Collins, Chicago

    By Anonymous Anonymous, at September 8, 2008 at 1:14 PM  

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