By Anthony M. Freed
On Wednesday, December 3, 2008 The New York Federal Reserve website reported that they will begin to purchase Asset Backed Securities (ABS) from failed mortgage giants Fannie Mae and Freddie Mac, as well as the Federal Home Loan Banks. They also hinted that they will stop there – everything seems to be on the table now, officially. Treasuries and stocks may see direct effects, with outcomes mixed.
Initially, the program will concentrate on non-callable, fixed-rate senior benchmark securities such as Mortgage Backed Securities (MBS), but there are indications in the language used that the program may expand to include other ABS such as privately issued MBS (non-GSE), bonds, stocks and other equities.
The New York Fed will post the time and date of the auctions and the list of securities to be included in the auctions one business day in advance.
From the perspective of several analysts I have spoken with this morning, the consensus is that this is the most significant effort the Government has made to date, and not surprisingly they are moving forward with as little fanfare as possible as they basically kick the barn doors wide open on this bailout – just as many of us predicted when they first pitched this bailout as an effort to help homeowners.
This program is only making taxpayer dollars available to everyone who lost money in risky securities that had promised high yields in short periods, and doing nothing to stem the flood of foreclosures, and doing nothing to modify the mortgages of those who can avoid foreclosure at current 30 year market rates, if given the opportunity.
Again, everyone except the taxpayers benefit. Remember, the beneficiaries of these bailouts are the same people who realized obscene profits while helping to manufacture the bubble. Now that those profits have been divvied up, their companies have been left broken and under-capitalized because of their greed and ineptitude, they are back for more of our money.
There may be benefits to borrowers, as the effort to relieve the balance sheets of banks may further reduce interest rates, which in turn could help boost real estate sales and mortgage applications – if the banks decide to let go of some of the capital reserves they have been trying to squirrel away in anticipation of a tough market and more writedowns in 2009.
The Federal Reserve has also implemented a series of actions aimed at restoring the normal functioning of financial markets and restarting the flow of credit, including providing liquidity to a range of financial institutions, working with the Treasury and the Federal Deposit Insurance Corporation (FDIC) to help stabilize the banking system, and providing backstop liquidity to the commercial paper market. The Federal Reserve supported the actions by the Federal Housing Finance Agency (FHFA) and the Treasury to put the housing-related government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, into conservatorship, thereby stabilizing a critical source of mortgage credit. The Federal Reserve has also recently announced that it will purchase up to $100 billion of the debt issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and up to $500 billion in mortgage-backed securities issued by the GSEs.
The threat to everyone lies in exactly how the Government intends to pay for all of these various bailout plans without further stimulating inflation. Perhaps the reprieve in energy costs may allow for this program to get to work before there are any immediate inflationary concerns – many analysts are still just as worried the real threat may lay in deflation now that we know for sure that we have been in a recession for a year.
From In Money Today:
Paulson & Company have resorted to some extremely desperate measures to pull this one off. To fund the TALF, approximately $600-800 billion will have to be committed, which nearly equals the amount of the original bailout plan. $20 billion of that money is, in fact, coming from the bailout plan. The other remaining billions are being leveraged, a fairly astonishing fact whose implications remain unclear. One thing is for certain: if the Fed wishes to avoid an inflationary spiral, destruction of money will become a necessity once this crisis begins to abate.
With this much unprecedented Government intervention in the markets, I find it difficult to apply any models effectively in a predictive fashion. In the long run, I believe will be inflation and devaluation of the dollar – combined with the aftermath of record writedowns, mergers, buyouts, and outright failures that we will see in 2009 – that will be the legacy of these efforts.
More Band-Aids or bloodletting? 2009 will tell.
The following is intended to address operational questions about the program announced by the Federal Reserve on November 25, 2008 to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Effective December 3, 2008.In addition, individual auction results, including accepted offers, will be made available via FedTrade to the participating primary dealers. Similar to other outright operations conducted by the New York Fed, pricing information related to transactions will not be disclosed publicly.Whom do dealers call if they experience difficulties during the auction?Primary dealers may call the New York Fed Trading Desk with submission and verification questions. For system related problems, dealers may call New York Fed Primary Dealer Support at 877-376-9837.What is the policy objective of the Federal Reserve’s program to purchase direct obligations of the housing-related GSEs?The goal of these debt purchases, combined with the purchases of mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac and Ginnie Mae announced on November 25, 2008, is to reduce the cost and increase the availability of credit for the purchase of houses. Purchases of GSE direct obligations are intended to lower the spreads between rates on GSE direct obligations and U.S. Treasury debt, which have widened recently.What type of GSE direct obligations will the Federal Reserve purchase under the program?At the beginning of the program, purchases will focus on fixed-rate, non-callable senior benchmark securities issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Over the course of the program, the Federal Reserve may change the scope of purchasable securities.Who is eligible to sell GSE direct obligations to the Federal Reserve under the program?Primary dealers are eligible to transact directly with the Federal Reserve and are encouraged to submit offers for themselves and their customers.How long will the program be in place?The program to purchase up to $100 billion in GSE direct obligations will be in place for the next several quarters, subject to conditions in the market for such securities.Will these operations be reserve neutral?No, these operations will be financed through the creation of additional bank reserves.Will the Federal Reserve Bank of New York lend GSE direct obligations purchased as a result of the program?Initially, GSE direct obligations held by the System Open Market Account (SOMA) will not be available to be borrowed through the SOMA’s daily securities lending program. The New York Fed may include GSE direct obligations in the SOMA’s daily securities lending program at a later date.How will the auctions be conducted?Auctions will be conducted via FedTrade. Awards will be based on a multiple-price competitive auction process.How often will the New York Fed conduct auctions to purchase GSE direct obligations?On average, purchases of GSE direct obligations will occur about once per week, subject to market conditions and holiday schedules. The New York Fed will publicly announce each auction on its website one business day prior to the auction.How will the New York Fed determine which issues will be included in the auctions?The New York Fed will consult market participants and solicit available inventory from primary dealers in order to determine the list of securities to be included in each auction.When will the New York Fed announce the auctions?The New York Fed will post the time and date of the auction and the list of securities to be included in the auction one business day in advance.How will dealers submit their offers in the auction?Primary dealers will submit their offers via FedTrade once the auction has been opened, or approximately 30 minutes prior to the announced close time. The auctions will normally last 30 minutes and may be shortened or extended, at the discretion of the New York Fed.How many offers can a dealer submit during an auction?Dealers are limited to three propositions per issue.What is the minimum amount for which a dealer may submit offers?The minimum offer size is $1 million, with a minimum increment of $1 million.How will the New York Fed communicate the auction results?Auction results will be posted on the New York Fed website following each auction. The announcement will include the offers received, offers accepted, and amount purchased per issue.
In addition, individual auction results, including accepted offers, will be made available via FedTrade to the participating primary dealers. Similar to other outright operations conducted by the New York Fed, pricing information related to transactions will not be disclosed publicly.
Whom do dealers call if they experience difficulties during the auction?Primary dealers may call the New York Fed Trading Desk with submission and verification questions. For system related problems, dealers may call New York Fed Primary Dealer Support at 877-376-9837.