Monday, April 21, 2008

From the horse’s mouth..

Special Liquidity Scheme

Forget the Janet and John stuff at the beginning that the rest of the press is reporting, and check out the pdf link to the Market Notice. Note the prohibition of 'synthetic' securities - is this the real problem in the banking system? But also note that US mortgage backed securites are NOT excluded...

Posted by uncle tom @ 10:03 AM (1285 views)
Please complete the required fields.



17 thoughts on “From the horse’s mouth..

  • “Financial markets are not working normally,”

    “Moral hazard be damned!

    Reply
    Please complete the required fields.



  • UT – have had a quick look but it states (iii) The assets banks can swap

    “It will not accept securities backed by US mortgages.” you are usually pretty spot on so have i missed something? Will look more in depth later.

    Reply
    Please complete the required fields.



  • Interesting to note that that the markets reckon this scheme does not provide a bail-out – shares of the banks are all sharply down.

    My own take is that it will provide some strain relief, but will not greatly affect the banks ability to provide home loans or the rates loans are offered at. The scheme itself has conditions attached that effectively give the BOE a senior position, putting it ahead of shareholders, savers and staff in the event of a bank’s insolvency

    I reckon our Merv got pressured into this by Downing St. and has responded in a minimalist fashion. Good for him.

    Reply
    Please complete the required fields.



  • techie,

    Look at para.10 of the market notice – list of eligible securities – last item (page 2)

    Reply
    Please complete the required fields.



  • UT/techieman

    The main page states:
    “It will not accept securities backed by US mortgages.”

    Yet the pdf states:
    “Conventional debt issued by the US Government Sponsored Enterprises (Freddie Mac,
    Fannie Mae and Federal Home Loans), rated AAA”

    Would seem to be contradictory statements?

    Reply
    Please complete the required fields.



  • Cornish – the two are separate things. The ‘toxic waste’ everyone’s worried about were issued by mortgage corporations, specialist lenders or SPVs. Fannie, Freddie, etc. are the US Gov’t backed vehicles – the underlying assets may be just as screwed, but there’s an implicit US gov’t guarantee.

    It would therefore seem (and I’ve only read the comments on this, not the doc itself) that only the very best MBS will be accepted by the BoE. This is all about confidence – if the Bank is seen to be doing something, it’s almost as ‘good’ as actually doing something. And it costs taxpayers a lot less!

    Reply
    Please complete the required fields.



  • The BOE put stringent measures in place with large fees and haircuts. So the only paper asset worth anything in the banks vaults will be UK Treasury Bills? Everything else is tainted?

    Reply
    Please complete the required fields.



  • To clear it up a bit, from what I understand they are NOT accepting ABSs backed by US Mortgages, but ARE accepting bonds & notes (“conventional debt”) issued by “US Government Sponsored Enterprises” (N.B. “sponsored” is weaker than “backed”) – these latter securities are not quite so related to US Mortgages as the former, but nonetheless have risk associated with them – the common belief, however, is that the US government will support this debt.

    Reply
    Please complete the required fields.



  • All this just increases my conviction that this will not cause a resumption of the credit bubble – because the game has changed dramatically.

    To follow on from Captian Darling’s “food poisoning” analogy – this is a heavy dose of medicine being applid to a person who didn’t just accidentally eat some dodgy food, but deliberately gorged itself on [email protected] because it was cheaper than everybody else’s food.

    When/if the patient awakes, they will not want to eat [email protected] ever again. Nor will the doctors allow them to.

    The crash will still happen, because the bubble was caused by a credit expansion that has now turned into a retraction. And good riddence to it.

    Reply
    Please complete the required fields.



  • The only risk the taxpayer seems to be assuming from the banks is the very tail-end risk – the risk of market meltdown – i.e. where a sudden collapse of the credit markets means that none of the banks are able to pay the treasury’s margin call, and can only return the treasuries that were swapped. Therefore the arrangement may make banks more willing to lend to each other in the short term as they will believe that there will be capital available on the other side, however the arrangement is ONLY buying time, the underlying situation still remains and the markets and the banks must sort out the mess for any prospect of resuming short-term inter-bank lending in the medium to long term.

    Reply
    Please complete the required fields.



  • I’m confused now. I thought Freddie mac and Fannie Mae only dealt in mortgages.

    from the freddie mac website:

    “After the closing, the primary lender may either hold the mortgage in its portfolio (along with other loans it has made) or sell it in the secondary mortgage market.

    When primary mortgage lenders sell loans in the secondary market, they generally sell them as loans to an institution like Freddie Mac. They then use the proceeds of the sale to make new loans to other homebuyers in their community.

    Freddie Mac is one of the largest investors in mortgages. As a major player in the secondary mortgage market, we buy mortgages that meet our underwriting and product standards, package those loans into securities, and sell the securities to investors on Wall Street.”

    Reply
    Please complete the required fields.



  • Jackass – looks like Prescotts not the only practioner of Bulima in HMG then! – BTW Greenbay piped up on the precursor to this saying that he told us all that the Govn would rescue the housing market so phew another sigh of relief for him – sorry UK PLC. I still think that if anything this wont have the desired effect. Some iriate Bankers abound methinks.

    Reply
    Please complete the required fields.



  • cornishman, You are correct these entities do only deal in mortgages, but, just like any other corporate entity, they borrow money from the market by issuing debt.

    You are getting confused because the businesses are in mortgages, but the securities are not “mortgage backed”, you just think of them as being backed by mortgages – well the risk would appear to be the mortgages, but they are U.S. Government sponsored entities, that the BoE believe (almost certainly correctly – but not definitely) will be supported all the way by the Uncle Sam (they cannot be allowed to fail and have stated “sponsorship”).

    Reply
    Please complete the required fields.



  • What does this all mean to the econically ignorant (me).
    Is this going to save the housing market????

    Reply
    Please complete the required fields.



  • renting2,

    All securities carry some risk – even UK treasury bills.

    Mortgages are always offered in the knowledge that a proportion will default, and a small amount of money will never come home; the risk factor being included in the mortgage rate. In theory the two should counterbalance, leaving the asset value of a mortgage at a level that is a little higher than the redemption value.

    Unfortunately, that risk factor has been badly under-priced in recent years, so the true asset value of many mortgages is now significantly less than the redemption value. The BOE’s haircuts for this scheme are not far removed from my own estimates of eventual mortgage loss – my best estimate is that the true value of the entire UK residential mortgage book is only about 90% of redemption value. (one should not confuse the value of the mortgage book with the value of the houses)

    In addition to the haircut, the BOE are also demanding the right to additional collateral if necessary, so they are not taking a huge risk.

    Reply
    Please complete the required fields.



  • 666 & james – thanks

    james – if you ask for a password from the webmaster, you can get your comments posted instantly

    Reply
    Please complete the required fields.



  • If the securities the BOE is prepared to accept as swaps only include the less risky ones, then why don’t the banks consider these as sufficient collateral to lend money to one another? Or is it that none of the banks actually have their cash margins anymore as they are all sitting on the mortgage debt they have issued, which the investment market no longer wants to risk taking off their hands.

    Also, if nobody knows precisely what these are worth, then how does the BOE decide how much less to swap them for to add a margin of safety.

    Jeez, it’s makin my head spin.

    Reply
    Please complete the required fields.



Add a comment

  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user´s views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>