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The essenece of PPIP/PPF: FDIC guarantees the losses
If a bank has a pool of residential mortgages with $100 face value that they are seeking to divest,
the bank would approach the FDIC. The FDIC would determine, according to the above process,
that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio. The pool would
then be auctioned by the FDIC, with several private buyers submitting bids. The highest bid
from the private sector – in this example, $84 – would define the total price paid by the private
investors and the Treasury for the mortgages. Of this $84 purchase price, the Treasury and the
private investors would split the $12 equity portion. The new PPIF would issue debt for the
remaining $72 of the price and the debt would be guaranteed by the FDIC. This guarantee would
be secured by the purchased assets
Thanks for the reminder that I'm actually doing very well even with little or no interest because:
1. Houses are getting cheaper compared to my dollars.
2. I'm not being taxed on that increase in relative value.
I feel better now, but I still don't see the exact mechanism by which Fed actions influence CD or mortgage rates.
I see that the "risk free" rate in Treasury bonds is manipulated by the Fed. But mortgage lending is very risky right now, so you'd think that mortgage rates would be very high, and therefore banks would be willing to offer high rates to savers to get that cash to loan out to buyers.
But I guess with the Fed essentially lending to banks very cheaply, banks don't have to give savers anything above that.
That still doesn't explain why banks would lend out to buyers at a low rate of interest. Interest rates should be through the roof right now, given the number of defaults and the declining prices. But instead of high interest rates, what we have is low rates, but very little lending.
Why don't banks offer loans at 15% to high-risk buyers?
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.
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 wantâ€
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.
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!
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I just don't get how the Fed's shameless murder of the free market for Treasury bonds influences what banks are willing to pay me in CD interest.
I understand that the government issues Treasury bonds, and then "primary dealer" banks buy them from the government at a discount from 100%, paying the government less than face value now (say 95%) in exchange for a promise to get paid back 100% of the face value later. When the Fed wants to lower interest rates, it buys those bonds from the banks, driving up the price of the bonds up closer to 100%, and therefore driving down the Treasury bond interest rate, which is the difference between the bond price (say 98% now) and 100%. The Fed creates cash out of nothing to pay for the bonds, which is disturbing.
When the bonds mature, it all cancels out: the government pays the bond holder (often the Fed) 100% of the bond face value, and the cash disappears back into the bowels of the Fed, whence it came. That part is nice.
Now can someone tell me exactly how that influences the rate banks are willing to pay me on a CD? I know I'm getting screwed here, watching my interest earnings fall so that some idiot can pay a lower interest rate on his McMansion's adjustable mortgage. The money I don't get in interest is the money that fool doesn't have to pay. I just want to know the mechanics of the connection between Treasury bonds and mortgage rates.
Patrick
#housing