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Post by unlawflcombatnt on Jul 13, 2007 21:59:13 GMT -6
HUD Secretary Alphonso Jacksons is asking China to help bail out the U.S. Housing industry and buy up real estate Mortgage Backed Securities. So apparently if the Housing & Investment Bank racket can't get a U.S. government bailout, they're going to try to get the Chinese government to bail them out. Below are excerpts from the story from Bloomberg titled U.S. Urges China to Buy Mortgage Securities Amid Subprime Woes By Josephine Lau " Housing and Urban Development Secretary Alphonso Jackson July 13 (Bloomberg) -- The U.S. is urging China's central bank to buy more mortgage-backed securities after a surge in defaults by risky borrowers in the world's largest economy eroded demand for such instruments....
The U.S. housing regulator is seeking to tap China's $1.33 trillion of foreign-currency reserves after surging defaults on subprime mortgages caused the near-collapse last month of two hedge funds run by Bear Stearns Cos. Almost $12 billion of U.S. mortgage securities have been downgraded by ratings companies.
Jackson is in Beijing to persuade the Chinese central bank to buy more mortgage securities from Ginnie Mae, a mortgage association under the Housing Department. Its securities are guaranteed by the U.S. Government National Mortgage Association.
Ginnie Mae is ``in a better position than most'' to offer mortgage products since, unlike Fannie Mae and Freddie Mac, it has the full backing of the U.S. government, said Jackson. Mortgage securities offer China's central bank better returns than U.S. Treasury bonds at the same level of credit risk, he said. China held $414 billion in U.S. Treasuries as of April, according to data compiled by Bloomberg....
China held $107.5 billion in U.S. mortgage-backed securities as of June 2006, up from $3 billion three years earlier, according to HUD's Web site. The figures include securities offered by Ginnie Mae, Fannie Mae and Freddie Mac, without providing a more detailed breakdown of each agency's holdings...."
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Post by jeffolie on Jul 14, 2007 11:05:36 GMT -6
There are, however, a number of investors - for example, central banks and pension funds - that rely only on the rating agencies for their information. Thus they fail to act when the markets start moving, and are forced to act when the rating agencies admit that the quality of the bond is actually lower than was previously thought. These investors are called "hogs" in the market - they are fattened up and then slaughtered. Meanwhile, it is also important to note that there is no "crime" being committed by those buying such securities from investment banks, as they are required to invest their countries' reserves in securities as defined by a pre-set policy. Thus no one takes eventual responsibility for losses on investment accounts, especially in many Asian countries where foreign-exchange reserves are a matter of national security, and leaks about holdings, profits or losses are punishable by long jail sentences or worse. [3] The subprime banana skin has thus claimed a number of victims, including Asian central banks that are forced to hold billions in US dollar securities because of their currency manipulation that pushes up reserves. It almost seems poetic justice that the manipulators are given losses by the very people they think they are helping, namely over-consuming Americans. I believe that forced liquidation of many portfolios in Asia will create further losses, but American borrowers will emerge in essence unscathed from all this. Holders of mortgage securities do not have any claim on the underlying assets, only on the intermediate companies, which will of course declare bankruptcy, thus leaving empty shells for lenders to pursue. Unlike in previous crises such as that involving the telecom sector in 2002, most of the losses will be absorbed by central banks around the world rather than North American or European commercial and investment banks. This is one of the greatest robberies of our time, and it will go unreported in essence. Hard-working Asian savers will see their central banks post billions of dollars in losses on the US mortgage crisis in the next few years, but nothing can be done about it given the general lack of accountability across Asia. www.atimes.com/atimes/Global_Economy/IG14Dj01.html
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Post by unlawflcombatnt on Jul 14, 2007 13:55:15 GMT -6
After reading the Asian Times article, something about the subprime carnage and 'contagion' became obvious.
If funds holding large amounts of low quality, subprime loans need to answer margin calls, or their investors want their money back, the funds often can't sell their low-quality securities. Since they can't sell the low-quality securities, they're forced to sell the higher-quality securities. Thus, the market may become flooded with the higher-quality securities, causing the price of the higher quality securities to decline (due to the increase in supply on the market.)
I'm sure many already knew this. The forced sale of higher-quality securities will drop the price of them as well. Thus, this is one mechanism by which the subprime meltdown can spread to higher quality securities. By forcing the sale of large numbers of higher-quality securities, the price of those securities will decline. It's just the simple supply-and-demand effect on price.
The recent Bear Stearns debacle was a perfect example of this. Bear had to sell high-quality securities, since it couldn't sell the lower quality securities. As more of this type of event occurs, more subprime holders will be forced to sell higher-quality loans to meet margin calls and investor redemptions.
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Post by jeffolie on Jul 14, 2007 15:13:40 GMT -6
These securities are opaque. They are rarely sold, thus their current market value is virtually known. Sometimes derivatives are sold to counterbalance the decline in value, ie ABX as published by Markit. Rather than sell the opaque securities, the owners can recognize the difference in value by the price decline by selling the derivatives they bought as 'insurance' against a decline in value. Welcome to the wild, wild world of derivatives.
The supply of below investment grade securities is just starting to increasingly be brought to market. The less than 2% downgrading of the MBSs by the rating agencies are going to (but not just now) force financial institutions required to only hold investiment grade securities to divest, sell the downgraded securities.
The margin calls given to the holders of subprime and prime securities happens when the loans are not being paid to the banks; or when the covenants of the loans require the value or quality of the collateral to be above a minimum level and these levels are being violated. If the loan covenants state it, then the banks making the loans can seize the collateral and sell it themselves. This is what happened to Bear Stearn's hedge funds. The bank, Merrill Lynch, seized $850 million in collateral to sell but withdrew the sale after recognizing that the proceeds of the first $100 million of the collateral were bringing in very reduced prices.
On a tangent, many of the securities sold by Private Equity firms to finance taking public stocks private are without very many covenants and are termed as 'covenant lite'. Another variation are PIK, payment in kind. PIKs do not pay interest in money; rather, PIKs pay with more debt from the same issuer. Lenders or investors with securities that are covenant lite or PIK are all but out of luck and can not seize assets as Merrill Lynch did to Bear Stearns.
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