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Post by jeffolie on Jul 12, 2007 18:17:15 GMT -6
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Post by unlawflcombatnt on Jul 12, 2007 19:37:07 GMT -6
"“but $4.80 to hold $100 of triple-B-rated securitizations. [That’s an eight-fold difference in cap requirement!]"
So if a lot of the higher rated securities are downgraded to BBB, it should cause a major contraction in the global "liquidity" supply. Is that about right?
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Post by jeffolie on Jul 13, 2007 14:35:19 GMT -6
Liquidity is slippery.
As long as new debt is created liquidity is created. So the trick is for Private Equity firms to make buyouts of public firms by selling new debt in the tens of billions. Liquidity is created when the Government Sponsored Enterprises Fannie Mae ,etc. make and buy mortgages then repackage them as new debt sold as mortgage backed bonds in the tens of billions.
When old, existing debt is downgraded and repriced lower then that does not destroy the money that was already created. This will stymie the creation of new loans because the repriced debt lowers the reserves banks have available upon which to leverage new debt.
The kicker is that the FED creates new money, ie M3, like magic from nothing at all. The FED feeds the new money into the financial system through its dealers like JP Morgan and the Bank of New York. FED created money is used to levage new debt which is the seed money for more liquidity.
Thus liquidity and new debt are created as fast as the FED and other foreign central bankers want from nothing at all by expanding the money supply.
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Post by jeffolie on Jul 13, 2007 14:41:09 GMT -6
Liquidity is mostly created by creating derivatives nowadays. The Bank of International Settlements showed that money supply only accounts for less than 15% of liquidity. There are in excess of $400 Trillion in derivatives now created. The whole US economy is about $12 Trillion.
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Post by jeffolie on Jul 13, 2007 15:44:20 GMT -6
5:19pm 07/13/2007 FRE61.36, +0.12, +0.2%) told lenders that underwriting standards must be "consistent and prudent." All nontraditional mortgages made on or after Sept. 13 will be subject to the new policies. The two companies buy mortgages and repackage them as securities, thus freeing up liquidity in the mortgage market. Together, they hold about $1.4 trillion of mortgages and mortgage-backed securities -- an amount some critics call potentially destabilizing to the financial system. WASHINGTON (MarketWatch) -- Fannie Mae and Freddie Mac said Friday they will only buy mortgages that comply with guidance issued last year that requires strong underwriting standards for exotic loans like adjustable-rate mortgages and interest-only loans. www.marketwatch.com/news/story/fannie-mae-freddie-mac-tighten/story.aspx?guid=%7B892A4F90%2DF6C8%2D4FF4%2D8474%2D668CA77DD264%7D&dist=hplatest
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Post by jeffolie on Jul 13, 2007 15:58:24 GMT -6
It is estimated that U.S. banks have invested as much as 10% of their assets in CDOs, and the Office of the Comptroller of the Currency (OCC) requires that all of those CDOs be investment grade, says Kathryn Dick, deputy comptroller for credit and market risk. She says, “We rely on the rating agencies to provide a rating.” As Kevin Fry, chairman of the Invested Asset Working Group of the U.S. National Association of Insurance Commissioners says, “As regulators, we just have to trust that rating agencies are going to monitor CDOs and find the subprime.” While so many investors and regulators are relying on these ratings, the rating agencies take the position, as exemplified by S&P, “Any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision.” globaleconomicanalysis.blogspot.com/
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