Last week I posted a Bloomberg news article supporting my suspicions that investors are putting bad loans back to the banks at an increasing rate. I used JP Morgan (JPM) as a specific example – Banks Swallow Another $30 billion or So in More Losses as Their Share Prices Surge (Again).
A few commenters on syndicated sites appeared to have really underestimated the significance of this development. In the article, it is alleged that Freddie (FRE) and Fannie (FNM) are forcing banks to eat up to $30 billion in soured mortgages under the warranties and representations clauses of the sales contract. To highlight the significance of this development, let me remind all that Fannie and Freddie are benchmarks for mortgage lending in the US.
Amerisafe Inc. (AMSF), a specialty provider of high-hazard workers’ compensation insurance, is becoming less attractive to analysts following its fourth quarter 2009 earnings release last week.
With a soft market cycle, characterized by increased competition that results in lower premium rates, expanded policy coverage terms and higher commissions paid to agencies, Amerisafe reported lower-than-expected quarterly results. The weak earnings ultimately translated to estimate revisions in the downward direction over the last 7 days.
By subsidies, I mean the ex poste increase in the net worth of owners of mortgages, or pieces of mortgages, as the result of:
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Government purchases of mortgages, pieces of mortgages, and liabilities of funds and institutions that own mortgages or pieces of mortgages, in excess of their market value. It’s the excess over market value that counts as a subsidy. For example, most of the $100+ billion the government paid to AIG was a subsidy, because what it got in return was essentially worthless (from the market’s point of view). The $700 billion TARP would not be all subsidy, but the Treasury received some positive value assets in return. On the other hand, I would say that Goldman Sachs (GS) received a TARP subsidy, even though it eventually paid the money back with interest, because the government paid more than market price for its Goldman Sachs securities (e.g., in another state of the world, Goldman Sachs never pays back).
The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.
The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.
You can get whipsawed by the politicians, economists and media predictions of the housing bottom and recovery. Most of the government’s foreclosure prevention programs have unquestionably failed. But the GSE 30-year mortgage security spread over 10-year treasuries is hovering at a record low 63 basis points. And investors are outbidding owner-occupiers for choice foreclosures.
Will the Federal Reserve actually end its Fannie (FNM) and Freddie (FRE) securities purchases as promised? We have already experienced the Fed’s twisted promise of liquidity to Bear Stearns which was reminiscent of former President Bill Clinton’s “it depends on what the definition of ‘is’ is.”
Manipulation by the Vampire Squids (yes, there are more) –
I believe the stock market bottomed a year ago yesterday, and has been steadily walked up by market participants at the behest of the US Government (think Goldman Sachs (GS) or JP Morgan (JPM) or even some account at the Fed or Treasury), it doesn’t matter.
By Andrew Willis
The high yield bond market remains open, with Garda World Security Corp. (GWDAF.PK) raising $325-million this week.
Hickey and Walters (Bespoke) submit:
Tuesday morning we posted on the 7-day winning streak for the S&P 500 Financial sector. After another day of trading, the winning streak now stands at eight.
As shown below, the sector has had nine prior 8-day winning streaks since 1990. The average change on day nine following these winning streaks has been -0.36%, with positive returns only twice. The sector hasn’t had a winning streak longer than nine days since 1990, so two more days of gains would mark a new 20-year record.
The New Yorker has a Talk of the Town item by James Surowiecki that the magazine’s Web site, at least, headlines "Private Equity’s Egregious Tax Loophole." The article quotes the chairman of Berkshire Hathaway (BRK.A), Warren Buffett, in favor of changing the rules so that private equity and hedge fund managers pay higher taxes than they do now: "At a congressional hearing on the subject, Warren Buffett said, ‘If you believe in taxing people who earn income on their occupation, I think you should tax people on carried interest.’"
I’ll have more to say about the overall carried interest issue at another time and place, but for starters, the New Yorker treats Mr. Buffett’s opinion on this as if he’s just a selfless citizen concerned for what’s best for public tax policy. And that may be the source of Mr. Buffett’s opinion. But the New Yorker totally ignores the fact that one of Mr. Buffett’s businesses is competing with private equity firms and hedge funds for deals. So he has a financial interest in having taxes raised on his competitors. It would raise their cost of doing business and makes it harder for them to compete with Berkshire Hathaway when a family or firm decides it wants to sell a business.
Monday, Barney Frank came out with a letter addressed to some of the big banks putting some muscle on them. He wants them to write off their second lien mortgages. He thinks the seconds are junk. His words:
Large numbers of these second liens have no real economic value.