Art Cashin Confirms That Operation Twist Is A Failure Before It Has Even Begun

Tyler Durden's picture

Yesterday we documented that the by now widely bashed Operation Twist has been a failure before it was even launched as confirmed by recent trends in mortgage refinancing, or more specifically, lack thereof. Today, none other than market (and alleged bar) veteran Art Cashin confirms precisely what we said: that the one goal of the Twist - to get mortgage rates lower and refinancing higher - is and will be a failure. Again, it is very unfortunate that what is by now glaringly obvious to all will never become clear to the Fed until after the economy has finally been pushed over the precipice.

From UBS' Art Cashin

Mortgage Input From A Guru (And A Friend) - On Tuesday, I had suggested in the Comments that I might be writing about the possibility that, as a substitute for QE3, the Fed might decide to target the 10 year Treasury, hoping to drive mortgage rates to super-historic lows that would ignite an explosion in refinancing and maybe inspire home buying.

To gain a solid background on both the relationship between 10 year yields and mortgage rates, and the current mortgage outlook, I turned to a friend and well-respected guru, Barry Habib. I asked Barry for a few points on the topic. What I got instead was a well thought-out analysis that Barry generously passed along. So, to avoid “reinventing the wheel”, here’s some of Barry’s thoughtful notes:

Frustrated by the slow economy and fearing a possible recession, both the Fed and the Administration have been exploring ways to stimulate the economy. The housing market has significantly underperformed, and acted as a drag on the overall economy. So finding a way to help housing could do a lot to improve overall conditions. But with previous stimulus having lackluster effects and there also being very little appetite for additional spending, there are difficulties in finding ways to accomplish this.


Enter “Operation Twist” – a plan once used in the early 1960’s where the Fed purchases 10-year Treasury Notes, which would – in theory – cause mortgage rates to drop, and therefore, cause an upswing in housing activity. And better still, the funds to purchase these would come for the Fed selling its holdings of shorter term maturities, so there would not be a need for additional money. Sounds interesting, but there are many flaws. If the plan is successful, short term yields would rise and longer term yields would fall, creating a flatter yield curve. The banking industry would see profits erode, and many businesses would see short term borrowing costs rise.


But the real problem with “Operation Twist” is, like other plans we have seen in recent years, it could still fail even if it works. Mortgage rates are already so low…really historically, ridiculously low. So why would making rates even lower solve the economy’s ills? It won’t, and it will not fix the housing market either. The problem is not that rates are too high, it is that individuals can’t take advantage of the low rates that are already on the market. Most people want to refinance but can’t. In many cases it’s because they owe more on their home than the acceptable appraised value. This actually causes many of them to become frustrated and to stop paying their mortgage, which exacerbates the problem. A better idea would be for the Fed to step in and take a second position so that individuals can refinance and lower their payments.


So “Operation Twist” would reduce the yield on the 10-year Note and likely even cause mortgage rates to decline a little. But it would do nothing to help the housing market or the economy. It would not stem the tide of foreclosures…it may even cause more frustrated homeowners to stop paying their mortgage as the only way out. The same individuals who refinanced these past few months would refinance again…saving a few more dollars, but not making any significant improvements in the economy.

Given Barry’s well-deserved reputation as a top mortgage maven, Mr. Bernanke may be working with wet tinder.

Mortgage rates are already at 50 year lows and there is no great rush to either buy or refinance. In fact, mortgage applications have actually been falling recently. Some feel that in addition to the problems Barry cited, there may also be a problem of perception.

Say you read that 30 year fixed mortgages are selling at 3.75%. You decide you want to lock that rock bottom rate in. But, when you go to the bank, you find the rate to you is, maybe, 4.25% (credit ratings, etc.). Not a big deal, but folks apparently see it as a large “percentage” difference in these low, low rates. Reports are that many folks just walk out. Warm up that helicopter, Ben!


Bonus: Here is today's trivia corner from Art:

Today's Question - I'm thinking of two numbers. When I add them I get a result which is the exact same result I get when I multiply them. What are these two numbers?

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Gandalf6900's picture

stop paying your mortgage and stock up on ammo and pm's

Long-John-Silver's picture

The three big B's. Beans, Bullets, and Bullion.

spiral_eyes's picture

big 4:

beans, bullets, bullion, bitchez. 

Janice's picture

Big 5:

Beans, Bullets, Bullion, Bitchez and Booze

Albertarocks's picture

Big 6:

Beans, Bullets, Bullion, Bitchez, Booze and no Bras

Temporalist's picture

Wouldn't that be minus 1?  And you could have chosen "boobs" "boobies" "breasts" "bazooms" "boosoms"...

LowProfile's picture

You are hereby commanded to turn in your testicles as they have clearly atrophied from disuse.

Albertarocks's picture

But those weren't my choices.  "NO BRAS" was my choice.  Live with it, lol

Smells_like_sALT's picture

Plus or minus?  It depends.  A theoretical mathematician would say minus.  An applied mathematician would say plus.  I never had much use for theory myself.  I was constantly told to apply myself in school.

LowProfile's picture

Big 7:

Beans, Bullets, Bullion, Bitchez, Booze, no Bras and Bigamy.

Albertarocks's picture

Big 8:

Beans, Bullets, Bullion, Bitchez, Booze, no Bras, Bigamy and more Bitchez.

mick_richfield's picture

The three big B's. Beans, Bullets, and Bullion.

You know, all you have to do is decide to eat soup instead of legumes, and you could change your mantra to "Bullets, Bullion, and Bouillon."

Just sayin.

john39's picture

how much time you have until foreclosure begins depends on where you live.   In some states, banks begin foreclosure sixty days after default (midwest), while in states badly affected by the real estate crash, you might get much much more time.

UpAndComing's picture

read something the other day that said avg turn time across the nation is 600 days

MachoMan's picture

It's not per state per se...  it's more a function of two overarching issues: (1) the amount of equity (negative) in the property; and (2) the creditor's desired level of capitalization/profit.  If you have a positive equity, then expect to get the boot...  whether you're in california, florida, iowa, or BFE, you're going to get the boot.  If you have a negative equity, it'll probably be a lot bigger number where the real estate bust has been more pronounced...  which probably leads to a much longer foreclosure time, if ever.

Banks face the same problem that prospective homeowners have with refinancing.  If they want to refinance (foreclose) an underwater house, then they'll have to show up to closing with a check for the difference.

oogs66's picture

operation twist does not add money, unlike qe2, so impact on stocks will be muted

KingPin 999's picture

2 and 2 is the answer to the riddle


HelluvaEngineer's picture

Hey, y'all remember when the market was down for like 15 mins this morning?  God was that scary.

caerus's picture

if fractions are allowed then since ab = a+b the solutions are a,b such that a = b/b-1 so if b=2 then a = 2/2-1 = 2 and 2,2 is a solution

(works for b!=1)

a=2 b=2

a=1.5 b=3

a=1.33 repeating b=4

a=1.25 b=5


Argonaught's picture

Maybe I am just naive in my rememberance of notations, but wouldn't "b/b - 1" always be 0??? (and, by extention "2/2 - 1" does not, ever, equal 2).

Your solution sets are technically correct, but you you failed in the show your work department.  B- grade, unless I can find the person you incorrectly copied from  ;) 

caerus's picture

ok, lets say you want two numbers a,b whose product is equal to their in the trivia problem...then the product ab is equal to the sum a + b so ab = a+b is simply a restatement of the trivia problem...from there it is just a matter of algebra

ab = a+b so subtract a from both sides and you get

ab - a = b now factor a from the left side and you get

a(b-1) = b now divide both sides by (b-1) and you get

a = b/(b-1) which is simply a restatement of the original identity ab = a+b now use the identity to find solutions b!=1 to avoid 0 in denom...

oh and i think the confusion with the expression was due to my omission of the () in (b-1) that's a habit

Butchery101's picture

Would you please care for a proper proof ?

The spectrum of solutions is described by ab = a+b = c, c being a constant for a given (a,b) solution.

Rewriting the previous as a^2 - ca + c = 0 (or b^2 - cb + c = 0), it is therefore easy to perform a discriminant analysis of this second degree equation. Discriminant D is defined as D = c^2 - 4c.

D cannot be anything but >0 for the equation to have to disctinct solutions (a and b, you guessed it right).

As D = c^2 - 4c, D>0 means c>4.

And therefore a = (c + SQRT(c(c-4))) / 2 and b = (c - SQRT(c(c-4))) / 2.

Now try any c > 4 and you'll get the corresponding a and b. c does not need to be a round number, can be anything you'd like it to be as long as c>4.

Ex : c=9, a = (9+SQRT(45))/2 and b = (9-SQRT(45))/2.

That was the elegant way to describe the solution spectrum, thank you for your attention, bitchez.


Spirit Of Truth's picture

Let me point out as an Elliott Wave analyst and Fibonacci fan...

Phi = 1.6180339... (Golden Ratio)

1.618 + 2.618 = 4.236

1.618 * 2.618 = 4.236

1.618 ^ 2 = 2.618

1.618 ^ 3 = 4.236

SokPOTUS's picture

Ha.  Yeah.  2 + 2 = 4.

If only the Bernank could do such high-level math.

(I think that must have been Art's drippingly sarcastic point).



owensdrillin's picture

The answer to Art's question is the number of years Obama will be president. Or in the case of the answer being zero, it is exactly the same as the percentage chance of the idiot being re-elected.

Irish66's picture

closing cost between $5-7,000

HelluvaEngineer's picture

The other part no one mentions is that PMI has doubled in the past two years!  Unless you have 20% equity, expect PMI to eat up any interest rate savings.

Irish66's picture

Condo's are high risk all of sudden, must pay higher rate

centerline's picture

People who may not have PMI before might have it now due to loss of equity when the home is appraised for the refi. Assuming they still have equity at all and can even qualify for the refi. Then of course the amortization schedules starts over. Then you have closing costs.

Lower mortgage rates are pissing in the wind in the aftermath of a housing bubble.

Irish66's picture

I want a 5 year refinance and they won't give it to me 10 is the lowest.  So I gave up

disabledvet's picture

Two. And zero. Now here's my question and it ain't trivial: "who invented the zero?"

Smiddywesson's picture

I don't know who invented the zero, but I know Ben Bernanke perfected it.

Anjum's picture

Aryabhat, Indian astronomer and mathematician.

disabledvet's picture

Which leads to our next question: as the Western world rediscovers the zero "who discovered The Zero?"

SokPOTUS's picture

John Kerry.  He invited Him to the 04 Convention.

Are you kidding's picture

Muslims inherited algebra from for the "discovery" of zero...really?  Nobody had any comprehention for a value of zero?  There was no concept of nothing?  I don't think so.  It's another "impossible to prove piece of propaganda".  Besides, "Muslims", don't really do much of can tell by looking at the middle east, backwards people living in a backwards culture.  It's sad, and blacks do the same.  I guess it's all in what you consider success.  Religious piety and sustinence survival, or fuck God and heidonism?

lano1106's picture

The official reason to OT is to reduce mortgage rates which is more likely to fail. However as pointed out by Phil in his daily blog entry at


he points out that another side-effect of OT is to increase existing 10Y Tbond value in the hands of holders by lowering new bonds yield. This is again an indirect and "twisted" bailout to big banks.


TradingJoe's picture

It won't change THE FACT that THE US IS BROKE! There will be no money until S&P says so!

PS "get Short(y)"! :))))

SheepDog-One's picture

Broke people in suits talking about all the money theyre going to throw around...sounds like a Skid Row alley discussion among some hobos around a trash can fire.

brown_hornet's picture

Art must be thinking of 2 and 2

gwar5's picture

Explains clearly why OT2 won't work to stimulate the economy.  Answer to today's question: 2 and 2.

SheepDog-One's picture

None of their plans will work, theyve already failed hey lets do more of it and run up equities!

Smiddywesson's picture

They don't need plans that work.  They need to buy time to purchase gold.  It's all kick the can.

We are long past the point where this could be fixed.

amarshall's picture

Perfect credit score, bought at top of the market in the Northeast, wife and I have high family combined income.. Cannot re-finance because LTV is too high.

You cannot re-finance your way out of this if everyone's property value has crashed.



Smiddywesson's picture

If that includes people with adjustable rate morgages, then we have our answer as to why the Bernanke said no interest rate increases through 2013 (that and the USG wouldn't be able to service its debt)

Tsar Pointless's picture

Come on baby, let's do the twist

Come on baby, let's do the twist

Crank on up that printing press

And go like this!