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Wednesday, November 21, 2007

Insanity V Sanity

The European banks are shutting down trading in mortgage backed securities for a week. Obviously, this is to prevent a meltdown:
The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today.

Banks including Barclays Capital, HSBC Holdings Plc and UniCredit SpA took the step as investors shun bank debt on concern lenders face more mortgage-related losses. Abbey National Plc, the U.K. home lender owned by Banco Santander SA, became the third financial company to cancel an offering of covered bonds within a week today as investors demanded banks pay the highest interest premiums to sell bonds in the 12 years since Merrill Lynch & Co. began collecting the data.

``We are in a deteriorating situation,'' Patrick Amat, chairman of the Brussels-based ECBC, said in a telephone interview. ``A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.''
In other words, the prices would have to go too low.... Naturally no one wants that, because Euro credit default swaps on banks are moving ever higher:
The risk of banks defaulting on their debt rose to the highest on record as losses by mortgage finance company Freddie Mac fueled concern that lenders will add to more than $50 billion of writedowns worldwide.

Credit-default swaps on the Markit iTraxx Financial Index, a benchmark for the cost of protecting the bonds of European banks and insurers, rose 6 basis points to 63.5, the highest since its start in 2004. Contracts on Merrill Lynch & Co., the world's biggest brokerage firm, increased 25 basis points to 170, and Citigroup Inc. climbed 5 to 101.5, according to Phoenix Partners.
...
``Everything is signaling that the market may switch to panic mode,'' Philip Gisdakis, a credit analyst at UniCredit SpA in Munich, said in an interview today. ``The news flow is so bad and there is no relief in sight.''
Ah, come on. This is panic mode. Anyway, no one can afford those beyootiful bond thingamabobs to get marked down even further, because that would just make the cost of insuring bank debt higher due to the fact bank capitalization would be lower. And it sure sucks trying to raise capital as the cost of raising capital keeps going higher.

In the mean time, Hank Paulson, erstwhile of Goldman Sachs, came up with a brilliantly insane idea of just doing wholesale modifications on junk loans. Tanta at CR can explain all of that very well.

The era of funny money loans is being succeeded by the era of dimwitted high finance, right on schedule. And yes, ACA is the canary in the gold mine. So we go from insanity > another type of insanity > sanity. The sanity stage carries big losses.

Last night the Nikkei managed to work itself out of the 15s and into the 14s. Now we wait to see if it can stabilize there. Several UK banks are looking "troubled". Naturally our stocks are being hit.

Comments:
About the workout problem, Paulson should suggest that all those troubled mortgages continue to get closed out via forclosure. The new twist is to put some "standard guidelines" in place that permits any homeowner who experiences FC to apply for a "muligan" and have their credit restored so they can go back into the market and buy a home they can afford. Then the market corrects naturally and people can again buy houses.
 
This is a 24x7x365 market. The hubris is in thinking that they can close a market that trades MBS paper. All they've managed is to prove that those who trade MBS paper shouldn't trade it in this particular pit.
 
Ah, Rob, but generally only big institutional investors trade this stuff. Most of it has been used as fodder for short-term ABCP type money.

So shutting down the market can indeed prevent trading. Cause this stuff isn't trading here, either. At this point it's mostly illiquid.
 
Row, row, row your boat. Crime pays.
 
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