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Extradry Martini

Us Treasury Denies Guarantee To Fannie And Freddie

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It’s kicking off now – the US Treasury department has just denied rumours that it was going to explicitly guarantee the bonds of mortgage agencies Fannie Mae and Freddie Mac. As I said in a previous thread, if triple-A tranches of prime mortgage paper are trading at 85% (though they are now trading at 69%!) then Fannie Mae and Freddie Mac bonds (which they issue to fund their purchases of mortgages) should also be trading there. The only reason they are/were not was because of an implicit guarantee which the market has always and erroneously inferred, given that these organisations were set up by Congress.

Just to give you an idea: If Fannie and Freddie bonds trade even at 90% (let alone 69%!), the mark-to-market losses which would result would be larger than all the losses in sub-prime to date.

In my view, it was a stupid thing of the Treasury to do (though I don’t know the circumstances under which they made the statement, so it could be they had no choice), because they are going to have to end up guaranteeing them anyway.

The next of the crisis is upon us.

Edited by Extradry Martini

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It's kicking off now – the US Treasury department has just denied rumours that it was going to explicitly guarantee the bonds of mortgage agencies Fannie Mae and Freddie Mac. As I said in a previous thread, if triple-A tranches of prime mortgage paper are trading at 85% (though they are now trading at 69%!) then Fannie Mae and Freddie Mac bonds (which they issue to fund their purchases of mortgages) should also be trading there. The only reason they are/were not was because of an implicit guarantee which the market has always and erroneously inferred, given that these organisations were set up by Congress.

Just to give you an idea: If Fannie and Freddie bonds trade even at 90% (let alone 69%!), the mark-to-market losses which would result would be larger than all the losses in sub-prime to date.

In my view, it was a stupid thing of the Treasury to do (though I don't know the circumstances under which they made the statement, so it could be they had no choice), because they are going to have to end up guaranteeing them anyway.

The next of the crisis is upon us.

Oh dear! Link?

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It’s kicking off now – the US Treasury department has just denied rumours that it was going to explicitly guarantee the bonds of mortgage agencies Fannie Mae and Freddie Mac. As I said in a previous thread, if triple-A tranches of prime mortgage paper are trading at 85% (though they are now trading at 69%!) then Fannie Mae and Freddie Mac bonds (which they issue to fund their purchases of mortgages) should also be trading there. The only reason they are/were not was because of an implicit guarantee which the market has always and erroneously inferred, given that these organisations were set up by Congress.

Just to give you an idea: If Fannie and Freddie bonds trade even at 90% (let alone 69%!), the mark-to-market losses which would result would be larger than all the losses in sub-prime to date.

In my view, it was a stupid thing of the Treasury to do (though I don’t know the circumstances under which they made the statement, so it could be they had no choice), because they are going to have to end up guaranteeing them anyway.

The next of the crisis is upon us.

Isn't that the basis of the argument of the inflationists - that the US will end up/has ended up guaranteeing every debt from here to Timbuctoo and will have to make good on these guarantees by issuing treasury notes? Or am I missing something/over-stating something?

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And the ECB hold unaimously, with lots of hawkish talk about inflation. Oh dear oh dear, talk about setting the markets up for a nasty spill indeed.. Glad i sold off most of my stocks, even if i was a week or two early..

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Isn't that the basis of the argument of the inflationists - that the US will end up/has ended up guaranteeing every debt from here to Timbuctoo and will have to make good on these guarantees by issuing treasury notes? Or am I missing something/over-stating something?

No, because prime mortgage are actually worth more or less face value. This is what is so scary about this - it's the financial system itself which is collapsing now.

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No, because prime mortgage are actually worth more or less face value. This is what is so scary about this - it's the financial system itself which is collapsing now.

May I clarify in my own midn what I think you are saying:

That many mortgages/securities are worth face value, but the financial scaffolding that allows these values to be recognised and therefore to be traded is collapsing, thus such value cannot be realised?

So what we are talking about is a scaffolding collapse and not a collapse of intrinsic value, yes/no?

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A report online or is this verbal/hearsay?

No, it's on the news wires:

*TREASURY DENIES RUMOR OF GUARANTEEING FANNIE MAE, FREDDIE MAC

2008-03-06 09:41 (New York)

STORY TO FOLLOW.

--CHRIS ANSTEY

-0- Mar/06/2008 14:41 GMT

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Guest DissipatedYouthIsValuable

Does this mean I shouldn't be long in USD?

*snigger*

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No, it's on the news wires:

*TREASURY DENIES RUMOR OF GUARANTEEING FANNIE MAE, FREDDIE MAC

2008-03-06 09:41 (New York)

STORY TO FOLLOW.

--CHRIS ANSTEY

-0- Mar/06/2008 14:41 GMT

Ah I see. This will cause trouble.

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No, because prime mortgage are actually worth more or less face value. This is what is so scary about this - it's the financial system itself which is collapsing now.

Prime mortgages are not worth face value. More than 20% of foreclosures in the US are on houses bought with prime mortgages and the number of foreclosures in the US in sky-rocketing. You'd have to be an idiot to pay face value on these mortgages.

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Prime mortgages are not worth face value. More than 20% of foreclosures in the US are on houses bought with prime mortgages and the number of foreclosures in the US in sky-rocketing. You'd have to be an idiot to pay face value on these mortgages.

The problem is noone knows what's what. Just because it says prime mortgage on the wrapper is it a prime mortgage inside?

Northern Rock managed to avoid labelling self-cert mortgages as such by calling them fast track mortgages. Conceivably some of them could have ended up as prime mortgages.

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This is nonsense. Bureaucrats can leak as many rumors as they want, but when push comes to shove, there is no way in hell that the US Federal government won't step in to support these guys. It's the same thing as the Federal Reserve pontificating for years on the importance of fighting inflation, but when Wall Street starts to whine, they cut interest rates by 200 bp in the face of massive upsurge in prices. Anyone who believes that the US won't back these guys up should look up how much banks "donate" to congressional campaigns in the US.

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http://www.realclearpolitics.com/articles/..._bloomberg.html

SEC. PAULSON: Well, let me say this. First of all, I've very much enjoyed working with Barney Frank, and we've worked together on a number of initiatives including this Homeowner Now Initiative. And so there's a lot we're working on, and we're working with him on FHA modernization. We're working with him on GSE reform. But, yeah, I'm not looking at initiatives that would involve taxpayer money to take investors off the hook.

MS. HAYS: So that's a non-starter.

SEC. PAULSON: That's a non-starter.

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Hmm, and previously in February...

http://www.reuters.com/article/businessNew...T00889620080213

"Raising the loan limit flies in the face of the affordable housing mission because you can have no loan limit and they could just have the whole market. That's not what you want," Paulson told the House of Representatives Budget Committee.

He said he had agreed to a temporary increase in the loan limits sought by Democratic lawmakers as the price needed to secure a wider package of measures to lift the economy, but stressed any permanent increase needed to be tied to wider regulatory reforms.

Looks like we've just worked out where Paulson's 30 pieces of silver might have been taken from.

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Prime mortgages are not worth face value. More than 20% of foreclosures in the US are on houses bought with prime mortgages and the number of foreclosures in the US in sky-rocketing. You'd have to be an idiot to pay face value on these mortgages.

The maximum LTV of the mortgage pool which Peloton owned was 60%, and they owned the triple-A tranche, so even none of the borrowers repaid a penny and house prices fell 40%, the pool would still be worth face value. On top of that, if it did fall further, the triple-A tranche gets paid first out of any proceeds, yet it trades at 70%. This has nothing to do with the true value of prime mortgages.

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No, because prime mortgage are actually worth more or less face value. This is what is so scary about this - it's the financial system itself which is collapsing now.

But isn't this part of the problem? A loss of trust in the rating agencies meaning that everyone's wondering whether they can trust a triple A rating anyway?

If the US treasury are going to guarantee these bonds, I guess political leaders would want to wrap something as big as that up into some kind of "rescue package", to make them look like they're still on top of the situation. Surely this denial is part of the process. I guess it will just cause more rumours and volatility as is plays out.

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The maximum LTV of the mortgage pool which Peloton owned was 60%, and they owned the triple-A tranche, so even none of the borrowers repaid a penny and house prices fell 40%, the pool would still be worth face value. On top of that, if it did fall further, the triple-A tranche gets paid first out of any proceeds, yet it trades at 70%. This has nothing to do with the true value of prime mortgages.

Kent Brockman: Professor, without knowing precisely what the danger is, would you say it's time for our viewers to crack each other's heads open and feast on the goo inside?

Professor: Mmm, yes I would, Kent.

Inknow someone has used this before here, but it never fails to amuse me. :)

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This is nonsense. Bureaucrats can leak as many rumors as they want, but when push comes to shove, there is no way in hell that the US Federal government won't step in to support these guys. It's the same thing as the Federal Reserve pontificating for years on the importance of fighting inflation, but when Wall Street starts to whine, they cut interest rates by 200 bp in the face of massive upsurge in prices. Anyone who believes that the US won't back these guys up should look up how much banks "donate" to congressional campaigns in the US.

Yes, indeed, that's why it's it was so stupid of them to say this as I said in my original post.

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  • 295 Brexit, House prices and Summer 2020

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