Relevant and even prescient commentary on news, politics and the economy.

Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds

by divorced one like Bush

Well, well, well, seems our Robert will have some more thinking to do. Via C & L to Radamisto who want’s to know if we have ADD or what comes the Bloomberg story that the money from money machine is being restarted.

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Gee, Morgan Stanley, Goldman Sachs? Two totally separate companies, just happen to be mentioned together implimenting the same strategic plans.

8/18/08 Morgan Stanley, Goldman link lending to their own creditworthiness

The Financial Times is reporting that Morgan Stanley is implementing systems that tie the prices of credit insurance on their own debt to their commitment to provide financing to their hedge fund clients. The shift would allow the bank to pull out from its funding commitments should it run into a crisis of confidence like that which wiped out Bear Stearns in only a matter of days. Goldman uses a similar arrangement that ties its lending commitments to the firm’s own bond prices.

9/21/08
WASHINGTON (Associated Press)

The Federal Reserve said Sunday it had granted a request by the country’s last two major investment banks – Goldman Sachs and Morgan Stanley – to change their status to bank holding companies.
The decision means that the Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed’s emergency loan program.

3/9/09 UPDATE 2-Barclays cuts price targets on Goldman, Morgan Stanley

March 9 (Reuters) – Barclays Capital cut its price targets on Goldman Sachs (GS.N: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research) and said it expects the former investment-banking giants to post losses for December, mostly due to asset markdowns, investment losses and “very subdued” core earnings.

5/19/09
Goldman Sachs and Morgan Stanley have formally asked the Federal Reserve for permission to repay a combined $20 billion in federal bailout money.

6/17/09 JPMorgan Chase, Morgan Stanley cut ties with government

In separate statements, Morgan Stanley and JPMorgan Chase said they will not issue bonds backed by the Federal Deposit Insurance Corp. The banks are striving to show they can raise funds without help from the government. Goldman Sachs and other financial institutions might follow suit.

Continuing the July 8, 2009 Bloomberg article:

A lot of banks and insurers “cannot buy anything but AAA,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” which is due to be published in November by Oxford University Press. “You’re manufacturing AAA out of not AAA, therefore allowing those people who have AAA written on their forehead to buy.”

While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.

Jennifer Sala, a spokeswoman for Morgan Stanley, and Gregory Mount, a Greywolf partner, declined to comment.

Banks are using re-REMICs to protect against losses on residential-mortgage securities during the worst housing slump since the Great Depression…Re-REMIC stands for “resecuritizations of real estate mortgage investment conduits,” the formal name of mortgage bonds.

Nice to know We the People have their backs huh?

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Grass is Green, Sky is Blue, The WSJ Lies to You

Among their editorial suggestions for replacing Tim Geither as head of the New York FRB:

Better choices would include …David Malpass, an economist who worked at the Reagan Treasury and long predicted the credit bubble….

Yes, you saw that correctly.

David Malpass.

Strangely, they don’t describe him as “David Malpass, former Chief Economist for Bear Stearns, who long advocated taking monies out of your house because appreciation in housing prices changed “the structure of the household portfolio.”

And that “long predicted the credit bubble”? This is a family blog, so I can’t call that horseshit. So let’s look at what Malpass said in August of 2007—the point at which his firm was issuing bonds at what were essentially junk levels—about the bubble, in the very pages of the WSJ:

Another aspect of the market disruption is a dramatic stand-off between bond buyers and sellers: Buyers in both housing and debt markets are using the market discontinuity to claw prices and terms back to Earth. The slowdown talk weighing on equities also reflects the Wall Street view that debt, mortgage and takeover businesses have replaced General Motors as the economy’s bellwether. According to the bears: As goes the credit market, so goes the economy.

Fortunately, Main Street is not that fickle. Housing and debt markets are not that big a part of the U.S. economy, or of job creation. It’s more likely the economy is sturdy and will grow solidly in coming months, and perhaps years.

Unlike the 1998 seizure in credit markets to which many are now drawing comparisons, reservoirs of global liquidity are full to overflowing, not empty as they were that year. The deep 1997-1998 Asian crisis has been replaced with an all-cylinder boom. Unemployment rates are falling all around the world, while China’s equities have continued hitting new highs. [emphases mine]

The other nominees are little better, including the Gary Stern, current head of the Minneapolis Fed of “Credit Crisis? What crisis?” fame. (At least Stern admits he doesn’t care about finance as much as some other things.) But Malpass—and the lies told in support of him—should be beyond the pale even by WSJ standards.

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The OTHER Reason SonofaBirch and Biden would result in a McCain victory

No matter who “won.”

Anyone who knows the phrase “think at the margin”—with or without the differential calculus and comparative statics—would have predicted that the Bankruptcy Bill (a.k.a. The Ken Lewis Retirement Subsidy Act) would damage to the economy when it was least able to survive the damage.

What no one knew for certain was how much:

According to [a BusinessWeek] article, this year, 15 retailers with assets of $100 million or more have filed for Chapter 11 protection, and almost all that filed in the first three months of the year have rapidly liquidated. Compare that outcome with Professor Lynn LoPucki’s research showing that in the 20 years prior to 2005, only 41% of the 94 retailers that filed for bankruptcy went out of business, with Kmart, Winn-Dixie Stores, and Macy’s being among those that emerged successfully from the process.

The difference between retail sales and banks is that there is no “Fed discount window” for retail. Indeed, quite the opposite:

All filers are covered by the new bankruptcy law, but the changes were particularly harsh on retailers. For companies that already are short of cash—and, in the current environment, unlikely to find new financing—these new provisions in the law can amount to a death sentence. “Liquidity is sucked out of the debtor in a way that it becomes hard to survive,” says Lawrence Gottlieb, chair of the bankruptcy and restructuring practice at New York law firm Cooley Godward Kronish, who has represented creditors’ committees in the bankruptcies of Sharper Image and Linens ‘n Things.

The idea of being able to borrow from the Fed is that that money then gets put back into circulation, supporting the economy (think “multiplier effect”). Otherwise, it just becomes inflationary. Which appears to be what is happening.

It was bad enough that consumers (most of whom file bankrutcy after health events, which may or may not be associated with a loss of employment) face a tougher row to hoe; the gaping holes that used to be large retail stores (think CompUSA) will be even more difficult to fill.

Many of the “mall owners, suppliers, and utility companies” who wanted the changes in the corporate bankruptcy bill made may be thinking of the old proverb: “Be careful what you wish for. You may get it.”

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"Yours!"

Fed values Bear Stearns assets at a level where it has only cost them $100,000nothing—so far. (Indeed, there’s a $50,000 “buffer” left.)

Strangely, the scuttlebutt in the market yesterday was that the valuation should be around $24 billion. Or at least that’s how I read this paragraph:

If the portfolio’s value were to drop to below about $24 billion, that could indicate mortgage-backed securities have fared even worse in the second quarter than markets have already reflected, analysts said.

So the Fed thinks the market for those securities is about 23% higher than market professionals were telling Reuters it was yesterday.

If I were a Fed policymaker, and I hadn’t been worying about the TSLF before, I would be now.

via CR

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A Quick One: Inflationary Credit Recession Strategies

Tom’s doing some heavy lifting, PGL is in form, Bruce has started SocSec 101, and the entire economics blogsphere is having so many conniptions over Hillary that you’d think the CEA was actually the Shadow Government.

So I just want start easy, and take a look at three easy-to-compare data points:
First, the Federal Funds target rate since 2007 (I include the last change in 2006 since it was the rate for the first 8.5 months of 2007):

If you make money easier to get, standard theory says that people will get it. While this raises the “threat” of inflation, it makes credit easier to get as well. So the theory goes.

Steven J. Balassi (h/t Aaron Schiff for bringing his blog to my attention) notes that this isn’t happening. Pull quote:

Friends in the mortgage industry are telling me you have to be “rich” just to get a home loan now.

Even granting I have a vested interest right now in peole being able to get mortgages, this is keeping the market from clearing and expanding the housing crisis. Again, contrary to the theory that easier money means, well, easier to get money.

So we have easier money and tighter credit. The implication is that the banks are keeping that money, no circulating it. No wonder they want to be paid interest on reserve requirements.*

But what about the inflation fears of easier money? Surely, if the money is not circulating, that shouldn’t be a fear?

Not so fast, says Kansas City Fed President Thomas Hoenig (h/t Mark Thoma):

Hoenig said rising inflationary pressures are “troublesome” and a “serious” matter. “The bigger concern is that these increases are beginning to generate an inflation psychology to an extent that I have not seen since the 1970s and early 1980s,” he said. Hoenig added that “there is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it.” He tied rising prices primarily to overseas factors, including a “sizable decline” in the U.S. dollar’s value.

Welcome to the Global Economy. But Hoenig is sanguine about the Fed Funds rate, even if he is willing to use the R word:

Hoenig’s views on the economy were relatively upbeat, even as he described the nation as being “at the brink of a recession.” He suggested interest rates were close to where they needed to be.

“The current accommodative stance should be sufficient to cushion the economy
from a deeper slowdown and the risks that financial disruptions could spill over to the broader economy,” he said. As the economy and markets improve “it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner.”

Citing “room for optimism,” Hoenig said “financial markets appear to have stabilized somewhat, and the economy should pick up in the second half of the year as fiscal and monetary stimulus take hold.” The official said he believe markets’ role in the current turmoil has been overstated, and that higher energy prices and housing woes have exacted the greater toll. He also said he believes the “credit crunch” hasn’t proved as damaging as some had feared.

So there we have it. We have inflation, but cutting rates was the right thing. And the credit crunch isn’t too bad, even if only the rich can buy a house. And that 325 basis points of easing in the past eight months just hasn’t gotten into the economy yet; give the banks another six months or so.

I feel better; how about you?

*Meanwhile, I am reliably informed that Bank of America just cut the rates on their (currently in place) contracts with consultants by 5-15%, depending on length of service (greater for longer).

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Interview with James Hackett

Big Think has some interviews with James Hackett of the Dallas Federal Reserve.

I find it interesting that on his bio, you have to wade through all his corporate positions past and present before finding out the guy is chairman of the Federal Reserve Bank of Dallas board of directors. The Fed thing is down toward the end of the third paragraph, right before the bit about being former Chairman of the Houston Grand Opera. I’m not kidding.

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