Asset-Backed Securities

Full Bernanke Testimony And Live Webcast

Chairman Frank, Ranking Member Bachus, and other members of the Committee, I am pleased to present the Federal Reserve's semiannual Monetary Policy Report to the Congress.

Although the recession officially began more than two years ago, U.S. economic activity contracted particularly sharply following the intensification of the global financial crisis in the fall of 2008. Concerted efforts by the Federal Reserve, the Treasury Department, and other U.S. authorities to stabilize the financial system, together with highly stimulative monetary and fiscal policies, helped arrest the decline and are supporting a nascent economic recovery. Indeed, the U.S. economy expanded at about a 4 percent annual rate during the second half of last year... Etc

Former Head Of Morgan Stanley Research And Global Strategy Slams Equity Rally: "It Is As Finite As The Excess Liquidity From QE"

David Roche, former Head Of Morgan Stanley Research And Global Strategy, and currently president of Independent Strategy shares perspectives that should be read closely by any bull who believes that there is anything else to this market rally than pure liquidity driven euphoria riding on the coattails of the Fed's Quantitative Easing program. Deconstructing one by one all the myths that make up the arsenal of every pundit who appears on CNBC to talk up their book, Roche concludes "Of course, the insider game between financial institutions and the central banks can go further. But we do not want to be a part of it because it is unsustainable. It is as finite as QE." And QE is ending in one month, at about the same time when Greece will have to bailed out as its money will finally run out. About 30 days and counting.

JPMorgan Holds A $3 Billion Reserve For Quant Screw Ups

Much has been said on these pages and elsewhere about the dangers embedded within quant groupthink, in which an ever increasing prevalence of fewer performing factors means that more and more speculators (note: not investors) line up on the same side of the trade pushing up offers, only to experience a regime change based on some heretofore unexpected exogenous event which renders existing signal translation models useless, and causes all former buyers to join the sellers. Whether that would result in a bidless market remains to be seen. If October 1987 is any indication, all signs point to yes. Yet in a sign that at least the bigger bankers may be anticipating just such an outcome, the Economist has disclosed that JP Morgan, in addition to reserving for general loan loss provisions on its balance sheet, has now taken a $3 billion reserve against quant error (yes, quants can be wrong... and for a lot of money at that). Just how many other investment banks demonstrate this kind of prudence? Without any specific regulatory guidelines for quant capital provisioning, we have no idea. While the bulge brackets may have joined JPM in a comparable form of "insurance" it is a certainty that the thousands of newly cropped up quant trading firms not only have no such reserves, but should a dramatic market reversal transpire, it is inevitable that wholesale asset dumping will have to take place to cover losses. And this assumes no leverage. Is the market prepared for such a contingency?

Minneapolis Fed President Kocherlakota Warns Massive Debt Load Can Only Be Paid By Tax Collections Or Debt Monetization

Minneapolis Fed's recently appointed president Narayana Kocherlakota had his first public speech before the Minnesota Bankers Association. His remarks on the economy were significantly much more cautious than some of the other Bernanke sycophants. While the Fed President espouses the need for bank regulation by the Fed (to be expected, the inverse would be equivalent to mutiny), Kocherlakota is much less sanguine than his Fed colleagues about the prospects for the $1+ trillion in excess reserves and how these may lead to (hyper)inflation in the future. His remarks that the only way to fix the debt excesses: increased taxes and debt monetization (even more so than to date), should let many readers reconsider just how appropriate the Fed is to regulate a system which never changes but keeps on keeping on, changing absolutely nothing in its policy approach, and merely hoping that a rising stock market (with or without its invisible hand) is sufficient to fix everything.

The Dumping Begins: Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested

It appears that this time China's posturing is for real. Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt. And from following TIC data we know that China's enthusiasm for MBS/Agencies over the past year has been matched solely by that of one Bill Gross.

Dear Senator Corker: Meet The HVol 4 And Basis (Prop) Trades That Destroyed Merrill Lynch

In the past Zero Hedge had respect for Ten. Senator Bob Corker due to his opposition to the nationalization of the bankrupt automakers and making them yet another ward of the ever larger central-planning state. However, after today's hearing with Paul Volcker on the Prop trading ban, any respect we may have had for the Senator has promptly dissipated. While we understand that the pointless bashing of Volcker's proposal by Corker was predicated by his sizable lobby interest (over $21 million raised in the course of his career) and his talking points were undoubtedly a transliteration of a memorandum submitted by one of the Too Big To Fail banks that stand to experience substantial losses should the Volcker proposal pass, one line of argument in Corker's speech that is flagrantly flawed was Corker's naive rhetorical question whether there has been a single instance during the financial crisis where a commercial bank engaging in proprietary trading led directly to that institution failing or having to be bailed out by the taxpayer. Corker assumed the answer is no and kept pouncing on that answer. Well, Senator, you are wrong - meet Merrill Lynch, incidentally one of your biggest financial backers. Also, please meet Merrill's prop basis trade and its prop HVOL4 trade, which combined were the primary reason for the firm's $15 billion writedown in Q4 of 2008 and the subsequent bail out of the firm by Bank of America.

SIGTARP Releases Quarterly Report To Congress

The SIGTARP has been busy - a 224 page report just released provides an update of his activity to date, and covers everything from the ongoing investigation into whether the closure of Chrysler dealers was politically motivated, to the SEC's complete humiliation in regard to the BofA-ML settlement, to the dismal permanent modification rate in the HAMP program, to the firing of alleged sex-tape fiend Jeff Gundlach, to how the Fed is the New Century of the new decade.

January FOMC Statement - Hoenig Dissents To "No Change" Vote

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period...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.

Stop the Presses! Deep Thoughts From Jeremy Grantham

Everyone in Congress, and anywhere else for that matter, knows prop desk trading (banks trading their own capital like a hedge fund) is a conflict of interest. They may or may not think it important or that it caused this or that problem, but they know it’s a real conflict.  Congressmen, since when wasn’t conflict of interest and poor ethical standards reason enough to change the law? But since we bring it up, of course prop trading was indeed the rot at the heart of our financial problems (see last quarter’s Letter). Watching traders take home their $28 million bonus sent a powerful message to lowly salesmen and packagers of asset-backed securities, for example, to get out there and really take some risk. This rot spread to the very top, and pretty soon chairmen of boards were exhorting CEOs to leverage up and look more like some much more profitable rival that resembled a hedge fund rather than an investment bank. Thus encouraged – or intimidated – some CEOs just kept on dancing right off the cliff. Let’s
learn from our near disaster. Viva Volcker!

Cursive Geithner To Hell

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.

Origins of an American Kleptocracy

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.

FOMC Statement: "Exceptionally" And "Extended", Liquidity Swap Arrangements Coming To An End On February 1, 2010

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.

TCW Gundlach Update: 30% of MBS Team Has Resigned

"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