FX Blog - US Treasury Takes GSEs off Table, Plenty Else To Worry About
The weekend takeover of
Fannie Mae and Freddie Mac was long overdue and based on how markets traded
Friday, including rumors we reported of an imminent announcement from Secretary
Paulson, one of the worst kept secrets. So it is not surprising to look
at asset prices and the financial sector, the most closely linked to the health
of the mortgage market, and things still look radically bad. US stocks
have reversed about a third of Mondayâ€™s rally (DJIA â€“ NASDAQ never
participated). Lehman, a security house most closely associated with the
mortgage market, is rapidly seeing its market cap slip away as the press
reports it is at the capital raising dance and no one wants to extend a
hand. Citigroup today was surpassed by Wells Fargo as the third largest
US bank by market capital (wonder what the comparison would be on a
per-employee basis?). And a development that I think says a lot about the
state of markets (Bill Grossâ€™s mayday call is still relevant) is the surge in
the yenâ€¦margin calls galore this week in the carry trade ripping out Mrs.
Watanabeâ€™s eyeballs (retail FX traders in Japan).
If banks can't get capital
in private market, which is the Lehman story, where is it going to come
from? Can the US gvt open its balance sheet to large US banks to lift
capital maybe for preferred shares? Maybe the shares go up over time
maybe not. Lehman today and who tomorrow? SWFs are saying no thank
you. Private equity is saying no thank you. What are Paulson and
Bernanke sayingâ€¦banks need to raise capital. What was wrong with Fannie
and Freddie? Weak capital bases and no ability to raise new capital in
Now we see the auto companies
getting access to the governmentâ€™s balance sheet via the back door of a
Congressional stimulus bill for $25bln in government guaranteed (and subsidized
at below market rates) loans. I wonder what access I would have to the
Fedâ€™s or Treasuryâ€™s balance sheet of I could not make ends meet? Maybe I
could assert I am too connected to fail and qualify for access to the discount
window where I could post my flat panel TV and boat as collateral.
Capital markets are still
broken after Sundayâ€™s historic if only temporary takeover of two of the largest
publicly traded firms in US history. The takeover helps the mortgage
market function with adequate financing and keeps GSE debt holders whole (like
much needed foreign central banks and state run banks), but it also is another
signal of just how bad things have gotten. Paulson said Sunday this was
an action he never wanted to take, but was forced to and one even forced upon
the CEOs of Fannie and Freddie (who at first resisted the takeover offer and
then caved when said they had no choice â€“ since reports have Syron and Mudd
describing the meeting Saturday as a mugging).
In terms of FX the message I
get from markets is not in the popular narrative which goes like thisâ€¦the
capital markets are reacting to signs of slower global growth and slower
European growth to be exact. Sorry but this all about running from risk
and running from leverage and a hell of a lot less about expectations of Fed
tightening when Fed officials aside from a few malcontents are worried about
the economy slowing more (Yellen said canâ€™t rule out more easing) and
expectations of ECB easing when ECB officials are uniformly worried about
higher inflation and not worried enough about weak growth to rule out more rate
I donâ€™t have any confidence
that at least half of the knock-your-socks-off dollar rally is anything more
than a massive deleveraging and risk aversion tradeâ€¦real money long European
equities (and Asian equities) getting around to repatriating. If anything
this is not unlike what happened in the early throes of the start of the credit
crisis which saw the dollar surge versus the euro and the yen explode
higher. I am not suggesting that once the market is out of risk it will
be a return to a record dollar low versus the euro, but I do think we are due
to see a healthy retracement of the 20cent move from 1.60 to 1.40 in 8 weeks
And like a giant domino
knockdown game, CDS, HELOC, Alt-A, Option ARM, credit cards. CMBS, auto loans
and student loans all stand waiting in turn to be knocked down. This
could take months to unfold and no amount of government intervention can
prevent these credit segments from suffering a severe repricing. Yes a
bottoming in housing would help. But how can the housing market bottom
with the US labor market not in an asymptotic retreat?
Where is their a market for
capital ahead? In safety â€“ cash, gold, resource companies on the cheap,
AAA govies (more foreign AAA govies than US in light of opening of the balance
sheet of the gvt) and now agencies.
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