patrick.net

The four logical steps that lead to Geithner's plan:

1. FDIC will not or can not take the big banks into receivership.

2. Congress will likely not provide any more direct bailout money.

3. The Fed is already loaded to the gills with toxic securities.

4. Therefore, we must now use the FDIC as a loan guarantor rather than a deposit guarantor, since this can be done congressional approval.

Did I get it right?

>>Why don’t banks offer loans at 15% to high-risk buyers?

Because those buyers cannot afford it? Because the REIC is pushing for "affordable loans"?

>>since this can be done congressional approval.

since this can be done WITHOUT congressional approval.

Here is the question I think should be asked:

For each big bank (TM), what is the lowest average price, as a fraction of face value, at which it could unload all its MBS paper and still remain at least technically solvent?

Now THAT would be a useful stress test.

To answer the original question:

The 10 year note is the benchmark against which other debt/CDs are priced. To oversimplify, say the 10 year rate was at 3% and due to the heavy buying by the Treasury got pushed down to 2.5%. Say mortgages were at the 10 year rate + some margin like 2%. Bonds, Mortgages and CD rates would go down correspondingly also.

For each big bank (TM), what is the lowest average price, as a fraction of face value, at which it could unload all its MBS paper and still remain at least technically solvent?

Did they say anything about more Capital Infusion in case banks are insolvent? I think it was the general belief that Govt would do that. Not sure if that's the case.

sa,

I haven't seen anyone saying that, but I think the general idea is to sell of the waste at a price that leaves the bank somewhat solvent.

Of course, the banks still will not lend out any money after that (against assets dropping in value), but at least the important people will be off the hook (sarcasm alert).

justme,

I think the general idea is to sell of the waste at a price that leaves the bank somewhat solvent.

How can that happen? Don't the private asset managers want the assets at a good price for them? I believe banks haven't taken necessary haircut. For now, it looks like we are having a party.

All loans below the jumbo amount are backstopped by Fannie and Freddie, whose papers are bought by the Fed, ie, backstopped by Fed. There is no need for banks to charge interest rate based on risk, they can turn around and sell to two Fs.

That is why mortgage rate for conforming will stay low and can go lower if Fed goes all the way in.

sa,

>>How can that happen?

By sticking the taxpayer with the difference, naturally.

You're doing one heck'uva job, Timmy (and Larry)

http://www.nytimes.com/2009/03/22/opinion/22rich.html

Fed manipulates mortgage rate directly by buying MBS from F&F directly through open market operations.

So far, the Fed has already announced $1.2T purchase of MBS from the agencies. That is why mortgage rate is capped.

Basically, if you are buying with conforming loan, Fed will make sure your mortgage rate can only get better.

If you need jumbo loan, not so lucky, but obviously Fed is working at it so maybe not too distant in the future, they will come up with something as well.

Mortgage rates will be very good in the coming years. If you are waiting for housing price to tank due to mortgage rate spike, you will be very disappointed. However, one still needs a job no matter how low the interest rate is. Therefore, you will have a much better bet hoping that unemployment rate will go sky high - make sure you stay employed though.

Let's not forget that conforming loans have been upped to ~730k, which used to be well into the Jumbo loan ramge (was ~417k as late as 2008).

The biggest surprise about the Geithner plan:

Complete media silence from Congress this morning.

I really wonder what they are thinking? Perhaps a sigh of releief that the plan does not involve THEM?

justme,

that was a nice link.

I still don't understand how you stick the difference to tax payers. If I am Pimco, I would want to buy assets at lowest price and Govt has to price the same. Banks can decide to sell or not. Is there someway of going around with conflict of interest? like Pimco offering to buy at 60 cents when asset is worth only 40 cents?

Henry Blodget wrote a very good article about what the Geithner plan really means:

http://www.businessinsider.com/henry-blodget-geithners-three-big-misconceptions-2009-3

"But mortgage lending is very risky right now, so you’d think that mortgage rates would be very high"

We saw that before, yes it was the market reaction that the unguaranteed rates were at 8 or 9%. Keep in mind though that as values drop the risk on new loans is actually lower. All of a sudden banks have been infused with very cheap cash and are now competing for quality borrowers on cheaper/safer homes to lend.

Realized I'm just rewording and repeating Justme and OO, seems like we're all on the same page.

sa,

It is because the USG via FDIC is going to give subsidized and non-recourse (as in: they can walk away) loans to the very people that will buy the assets.

http://krugman.blogs.nytimes.com/2009/03/23/geithner-plan-arithmetic/#comments

On top of that there is all kinds of possibilities for conflicts of interest, such as banks lending money to partnerships that will combine their small money with USG big money and BID UP the assets. Because of the huge leverage of the private cash when combined with the USG (about 12x according to some, 6x according to others) the banks can spend $1 in loans to bid up the CDO paper by $12!! It;s insane. Even if the bank lose the money, they get a 12x-1x=11x payoff by gaming the process.

OK, I think I get it for conforming loans. Since the banks are just originators, they pass them on to Fannie and Freddie, who in turn sell them to the Fed, who will accept low interest rates even though the mortgages are likely to default.

So what we have here is the Fed effectively lending to house buyers at lower-than-market rates. But the Fed is so big, and others don't want to lend at those rates (and don't want F&F bonds) so the Fed IS the mortgage market, for now.

And the Fed doesn't give a hoot if the mortgage doesn't get repaid, since it can just print more money anyway. No skin off its nose.

And so the banks don't really need to pay me 7% on my CD. They don't need my deposits at all, really.

But there are probably some good corporate bonds that would actually be willing and able to pay me 7%. The trick is to figure out what those bonds are.

Or has the Fed done its communist price-fixing in the corporate bond market as well?

And the Fed doesn’t give a hoot if the mortgage doesn’t get repaid, since it can just print more money anyway. No skin off its nose

This is why Obama says: "This is America, we can do what ever we want"

The Timing of the plan is also rather suspicious. Diversion baby. Don't let Tax payers settle on one issue.

>> “This is America, we can do what ever we want”

I have to say, I do not think Obama said that.

Patrick,

Yeah, The Fed is the mortgage lender for conforming loans until the 1.2T runs out. Then maybe they will print more.

I know he didn't say that, he just meant that. LOL!

Diversion and obfuscation is definitely the name of the game. The bottom line is that falling housing prices means losses for the banks, and trouble paying back the depositors.

Mish connected the dots. "500 Billion for FDIC" Legislation was basically for this plan.

Watching Geithner and Summers making separate appearances on CNBC and PBS today was quite disturbing.

Geithner is looking like all his dishonesty is getting to him, and his big cranium is about to explode.

Summers is looking like an evil industrialist from a movie based on a Charles Dickens novel.

It is getting bad.

Here's my problem:

Suppose we ditch the whole Geithner plan and instead allow FDIC to take all the big banks into receivership. How much money does the taxpayer stand to lose? Do we have to do a 1T PPIP/PPIF experiment just to fond out?

Shadows on the mountain, and the night begins to fall;
Gather up the children, 'fore the darkness takes us all.
Tribe has come together, standin' naked against the night;
Twenty feet from the fire, the evil waits with zombie eyes.

In last week's H.4.1, the Fed went back over $2 trillion by buying up over $150 billion in MBSes.

Oh! Sneakin' through the long grass on leopard feet silently,
A beast already dead comes to join the dance on the zombie.
Ooh! Time has come again - again the moment of truth;
The terror is at hand, and there's nothin' you can do.

Why don’t banks offer loans at 15% to high-risk buyers?

They do, ever heard of a 'credit card'?

From out of nowhere he's there, flashing hideous teeth,
Panic in the crowd, helter-skelter, we're brought to our knees.
Back to the darkness, back on the mountain he stands,
You can't fight a shadow, you can't kill a dead man.

It's kind of funny how the IMF (International Monetary Fund) has gone from irrelevance to center stage in just a matter of months. Following quickly on the heels of last week's news that the Federal Reserve plans to print up another trillion dollars came this announcement that a UN panel wants to replace the greenback with a shared basket of currencies.

Today, according to this Reuters report (hat tip MA), China loudly seconded the plan. Earlier today, China’s central bank governor, Zhou Xiaochuan, offered a bold proposal to overhaul the global monetary system and replace the dollar with the IMF SDR (Special Drawing Right).

The SDR, an international reserve asset created by the IMF in 1969 but little used since that time, has the potential to act as a super-sovereign reserve currency, eliminating risks inherent in any single currency used for that purpose.

EBGuy,

how are East Bay fortresses doing?

Oakland as it is really doesn't need much publicity, but every once in a while, it just has to jump into the limelight by identifying itself as the most dangerous place to live in the Bay Area. Given that Lake Meritt, Richmond, Oakland and even Hayward are all getting out of control, east bay fortresses should be even more fortified because those with money and have to work in east bay locations will have no choice but to huddle together in Berkeley Hills or Piedmont.

On our side, fringe East Palo Alto - the part bordering 101 seems to be quite successfully gentrified. I even heard from a few new worker bees out of grad school considering condo projects next to IKEA. That was unthinkable a decade ago, crossing that bridge was like a journey to hell.

Regarding the east bay, I see it only getting worse in the coming years. The unemployment rate is much too high for the dangerous age range of the east oakland type. It's a powder keg ready to blow. People in certain neighborhoods will become targets and have no escape. They will not be able to sell the house and move when the crime wave covers their "hood".
A to the mutha F-ing K homeboy. Fremont is a BART ride away.

how are East Bay fortresses doing?
Berkeley is definitely cracking in the South and to the West... at the same time, I was talking to a neighbor and the local elementary school will be adding another kindergarten class next year (and portable class rooms were added to the high school this year). So give us your poor, tired double income earning wage slaves yearning for a good education for their children.
I must now confess that all of those 100% financing disasters that I posted as being in the Berkeley Hills (rebuilt after the 91 firestorm) are actually not in Berkeley proper -- they have the Berkeley mailing address but Oakland schools. Buh-bye...
Eye-eye-eye eye of the zombie!

>>You don’t have to be a Kreskin to see where this is going.

Russia and China are tired of US being irresponsible, and want to be more irresponsible themselves?

Ok, let me get this straight:'

First Goldman Sachs received 10B in USG TARP money in 2008.

Then GS received 12.9B in USG bailout money as a beneficiary of the AIG 180B bailout

Then GS *still* wants to sell ICBC stake to raise money to pay off the TARP.

What it means: GS badly needed the TARP money, and even after being made whole by AIG, they still cannot pay back TARP outright. In particular, it means that all the propaganda about "they forced the TARP money upon us, boohoo" is provably false.

All the banks etc that are "threatening to return the TARP money" are just posturing about getting restrictions removed on executive pay and bonuses. There is no way they can return TARP money unless they get another bailout, which is where PPIP (Geithner) fits in.

In general, much of the Geithner plan is really about moving the bad assets from The Fed (where the banks have parked them at face value) to the FDIC (where the taxpayers will be directly liable).