Asset-Backed Securities

The latest AIG fiasco may well be the straw that breaks Geithner's "public service" back. The question of Tim's involvement in the purposeful cover up has now attained epic proportions as even the White House claims the Treasury Secretary and former NY Fed governor had recused himself and was not involved in the discussions of the biggest bailout in US history. By doing so, the White House has transferred an ever greater amount of political risk to itself by continuing to back Geithner at increasing costs to its popularity. Whether or not Geithner was intimately involved procedurally seems irrelevant: he certainly was aware of the broad strokes and was thus complicit by implication. Nonetheless, one of the allegations that is circulating the blogosphere is that the handwriting on the "smoking gun" cover up memo belongs to Timmy. While we do not have a certified graphologist in our ranks, this assumption appears to be patently false.

Morgan Stanley, appears to have reacquired the title of the "Riskiest Bank on the Street" with increasing VaR and declining risk adjusted returns that reflect growing risk in its investment portfolio, which is rife with assets that I am quite bearish on.

When it comes to the asset side of the Federal Reserve's balance sheet, there are no secrets: with the winddown of the bulk of the Fed's emergency liquidity programs by February 1, the majority of the Fed's current $2.2 trillion in assets will continue being outright-held securities. And even as the emergency programs sunset, the quasi-permanent, QE remnants will be here to stay. What we know for certain is that the current $1.8 trillion in Treasuries and MBS will rise to at least $2.2 trillion, as the balance of QE round 1 is exhausted. Will this purchasing of outright securities end there? Hardly. As the Fed is the only market for MBS, and as the MBS market can not allow a dramatic rise in 30 year mortgage rates, which is precisely what will happen if the buyer of first resort disappears, we fully expect some form of QE to show up and grab the baton where QE 1.0 ends. In fact just today, Fed economist Wayne Passmore, under the aegis of Atlanta Fed president Dennis Lockhart, stated during the annual American Economic Association meeting that GSE ABS should have an outright explicit guarantee by the Federal Reserve. Forget about QE then - this would be an onboarding of over $6 trillion in various assets of dubious worth, which currently exist in the limbo of semi-Fed guaranteed securities, yet which have an implicit guarantee. Of course, should the broader Fed listen to young master Passmore, look for John Williams' expectation of hyperinflation as soon as 2010 to be very promptly met. The danger of the Fed's next unpredictable step is so great that it is even causing insomnia for none other than BlackRock big man Larry Fink, who asks rhetorically "Are they going to kill the housing market?" Well Larry, unless the Wall Street lobby hustles, and the Fed isn't forced to print another cool trillion under the guise of Mutual Assured Destruction, they very well might.

So now that we (don't) know about the assets, what about that much less discussed topic: the Fed's liabilities?

Some days ago we wondered aloud after the blank check extended to Fannie and Freddie along with the suspiciously convenient timing of those announcements on Christmas Day.  Back then we wondered if we had been told the entire story. Recent news not only tells us that we had not, but points astute observers to what might well be one of the largest financial frauds in the history of... well, ever.

At least a few MDs at Morgan Stanley DO read my blog, but it is obvious that the guys in the real estate division don't. Early in 2008 I named Morgan Stanley the "The Riskiest Bank on the Street". The following is one of the reasons why.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

Today at 7pm, Greek Prime Minister George Papandreou will address “the economy, the productive model, the credibility of the state mechanism, the confidence of our European partners and, above all, the daily life and prospects of Greeks." The reason for this extraordinary measure (keep in mind this is Greece, not D.C., where the president provides hourly updates on the latest BLS releases) is the recent plunge in Greek stocks and government bonds, and culminating with several rating agencies either downgrading the country (Fitch) or putting it on downgrade review (S&P). Most recently, the yield on Greek 10 years hit 5.295% on concerns the country's fiscal deficit of 12.7% will makes its already extreme leverage even more unmanageable. And the biggest wildcard: the massive reliance of Greek banks on ECB repos backed by potentially soon to be much lass valuable government debt.

"Over the weekend, key MetWest professionals assumed portfolio management responsibilities for all of TCW’s high-grade fixed income client accounts. This transition has been orderly and seamless, a testament to the professionalism and enthusiasm of both MetWest and TCW employees.

Attached please find a complete list of our high-grade fixed income products and the respective portfolio managers, effective today. We expect you will notice a more collaborative, team-based approach to portfolio management. We believe this culture of cooperation will facilitate a quick, effective integration of our fixed income teams into a single unit.

We anticipated possible resignations as a result of this announcement. However, as of today, we have retained 70% of our mortgage-backed securities team." - TCW

"I am hereby extending [TARP per] the authority provided under the Act to October 3, 2010. This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats, as described above." Tim Geithner

Threat #1 - landslide change in the political landscape in 12 months

I don't want anyone to think this is a Goldman bashing exercise. I actually admire their prowess. Not for operational excellence (as many mistakenly consider them to have when not adjusting accounting returns for risk), but for the way they seem to get away with murder, time after time. You gotta give it to them. I want readers to take time to go through the anecdotal evidence here and decide if it is more profitable to invest with Goldman, or actually attempt to put your bid in to get a slice of that $19 billion, middle class taxpayer funded, regulator protected bonus pool.

Questions for our Esteemed Chairman ...

Some things I am thankful for this year: John Hussman, The Baseline Scenario, AIG, inept government regulators, and of course, Goldman Sachs. Absent these I would have nothing interesting to write about. So, without further ado, here are some interesting links for those of you who are not enticed by the Cowboys vs. Raiders game.

A topological representation of the shadow banking system, which as many may have already forgotten, smiled upon such lunacy as infinite leverage. The recreation of the latter is the ever elusive (so far) holy grail for the Federal Reserve.

Yesterday, I commented on Goldman's CMBS offering through the government's leverage program known as TALF. I was very nice and diplomatic, yet despite that I still received what I would consider, inappropriate feedback. Okay, let's take the politically correct gloves off - they never fit me anyway. This deal probably flew because Goldman Sachs underwrote it. Goldman thrives off of brand name value primarily. Contrary to mainstream media inspired belief, they are not better than everybody else at everything. I posit, they are probably not better than anybody else at anything other than marketing and lobbying.

The world's most handsome and charismatic blogger stands outside his beloved friends at Goldman Sachs headquarters at 85 Broad (see pic) to congratulate them on the outstanding CMBS offering made through TALF government leveraging for Developers Diversified Realty (notice the funny looks that I am getting from the women in the background, haven't they seen a handsome and charismatic blogger before???). A few questions still linger, though...