The trouble in BOA-CW deal came at interesting moment. As I’ve noted here, the T-bonds are at the most critical juncture in 10 months. Too much complacency (VIX sub 20 for a while) and too much T borrowings are about to produce a major T-bond “sell” signal.
There are three major buyers of T-bonds: domestic investors looking for safe heaven, FCBs and speculators. If the chart bends the third group will be out, the first group will shrink. The T-bonds will fall until they find a firm support, but that could be a disaster for the economy.
I’ve demonstrated my concern. Now Bernanke needs to show his concern. The very good and sure way to save the treasury market will be to let Countrywide to fail. They are not so important for the economy and it would be a fair price to save the rest of us. Think of it as of timely sacrifice 🙂
The Theroxylandr in Flame 
May 6, 2008 at 8:12 am
Ben can’t let CFC fail, he can’t let treasuries tank…interesting. If CFC (or any major bank) fails, the derivatives nuke goes off. He simply can’t let CFC fail. The budget deficit will grow rapidly over the next years, treasury yields will rise. The highly indebted economy cannot survive that; this only leaves…
PRINTING (Ben doesn’t care about legal hurdles).
May 6, 2008 at 11:32 am
I think we should just ignore the problem and hope it goes away — i.e. continue doing the same thing as the last few months. That way the stock market can continue to go up and everyone will be happy. Except shorts, but who cares about them.
I guess the connection between CFC and treasuries you are drawing is that for the BAC takeover to go ahead — which I’m assuming is the only alternative to a CFC bankruptcy — the Fed or the federal government would have to guarantee a good part of CFC’s debt? What scenario do you see there?
May 6, 2008 at 11:41 am
My scenario is that BOA is a major creditor and may do those steps:
1. demand several positions on the board
2. declare the bankruptcy
3. take over the servicing division with all servicing accounts as the debt payment
4. kiss the rest of the co goodbye
May 6, 2008 at 12:54 pm
If treasuries will close where they are right now then the trendline will be broken.
The rising rates will start reversing the positive effects of B. rate cuts and will take 2-3 months before the economy start the major deep plunge
May 6, 2008 at 1:11 pm
Which rate are you looking at? Long Bond?
May 6, 2008 at 2:02 pm
Just TLT, it’s the benchmark for the most volatile part. But I see an identical picture with TLH.
They all are dust, broke the major support. But they have 2 hours to save the day.
The Feds must organize something very scary for the markets within one hour – otherwise they lost the game. Game over.
May 6, 2008 at 3:01 pm
1 hour is left
May 6, 2008 at 3:05 pm
Both seem to have broken their EMA(50).
Wall Street Examiner (Lee Adler) is reporting that the Fed Funds will start coming under upward pressure next week as the expected huge increases in Treasury supply begin to hit the market.
So, it would appear that its just a matter of time. If not today, maybe next week?
May 6, 2008 at 3:24 pm
What exactly are you counting down to? A bond crash?
May 6, 2008 at 3:28 pm
Shankar, thanks, yes, I’m also a subscriber.
The next week flush of new treasuries is already anticipated by the market. Traders are dumping bonds now and will dump even more next week.
I’m watching junk bonds (SHIAX, HYG) – they will follow the decline as soon as this week.
May 6, 2008 at 3:31 pm
MAZ, no, not the crash, crash already happened today. I’m counting time left for Feds to do something that will scare the market back into treasuries to reverse today decline. Only closing price matters, intraday is not important.
30 min left. If I was Bernanke I would leak that I plan the emergency rate hike, that would help 🙂
May 6, 2008 at 3:32 pm
Agreed. And its amazing seeing this market go up (albeit on a very light volume).
Someone needs to explain to me how higher rates (Rf = Risk-free rate) are good for equity prices.
Perhaps I’ll go back and read the Ben’s book that I used for my Macroeconomics class. Maybe that’ll illuminate me.
– Shankar
May 6, 2008 at 3:36 pm
Roxy!!!
Ben and increasing rates leak? Can’t do that since it’ll lead to precipitous equity price declines he’s been avoiding (more like delaying) for months.
I have maintained it for months that Ben will be forced to raise rates in the middle of crushing recession over the next 3-6 months.
I take solace from the fact that Mr. Buffett has been underwriting those index Put options. At least he is going to be in a position to pay me back on my put options.
Will see.
– Shankar
May 6, 2008 at 3:47 pm
Shankar, the higher risk-free rates are bad for economy and eventually bad for equities.
The key word is eventually. Traders are dumping treasuries and buying commodities and stocks. They are traders. They will sell them as soon as the charts will tell them to sell.
May 6, 2008 at 3:51 pm
You are absolutely right. We should keep in mind that although panics and crashes can occur, declines tend to occur over time.
So, I am certainly not looking for any crash over the next 2 days. I am betting on equity prices significantly lower than today over the next 6-12 months.
– Shankar
May 6, 2008 at 4:39 pm
It appears that the closing prices were below averages. We may get a technical SELL over the next few days.
Helicopter Ben is not going to show his concern. He will stick to the notion that rates will come down over time and my guess is that if we get any more precipitous decline in equity prices in May – he will drop another 50 bps at the end of the month and another 50 in June. Rate cuts are not over.
Also, he will try to salvage BAC-CFC deal since CFC has borrowed over $50 billion from FHLB. Someone needs to take that loss.
Its going to be interesting soon.
May 6, 2008 at 5:07 pm
>>> since CFC has borrowed over $50 billion from FHLB
Ahhh. I didn’t know that…
May 6, 2008 at 5:48 pm
http://www.reuters.com/article/gc06/idUSN2861891020071128?sp=true
I don’t think they’ve repaid any part of it yet. So, CFC deal fails, FHLB is in deep trouble. My guess is that BAC will try to arm-twist Fed in guaranteeing most of this debt otherwise Ken Lewis will kiss goodbye to his position soon.
And this is why I think rates will go up along with inflation and inflation hedges. Markets are going to be in trouble sooner than you think (3-6 months) with absolutely no recovery in sight for the next few years.
That $1,000 dollar bill is going to get introduced faster than you would think.
Just my thoughts.
– Shankar
May 6, 2008 at 6:07 pm
Shankar peaked my interest when he threw out CFC borrowed 50B from FHLB so I went searching and found it from the FDIC. Below is the top 10 borrowers from the FHLB. The site is difficult to navigate but if you play enough you will find what you are looking for and probably more 😉
If you want the data en-masse use the Statistics on Depository Institutions (SDI) section. Here are the links:
http://www2.fdic.gov/idasp/frm_inst.asp
http://www2.fdic.gov/idasp/confirmation_outside.asp?inCert1=33143
Top 10 FHLB Borrowers and Borrowings
Citibank $96,523,000.00
Washington Mutual Bank $63,851,747.00
Countrywide Bank, FSB $47,675,000.00
Wachovia Mortgage, FSB $24,112,408.00
Bank of America $23,720,735.00
Sovereign Bank $19,705,438.00
Wachovia Bank, FSB $17,264,613.00
U.S. Bank, NA $17,156,224.00
Bank of America, NA $12,500,200.00
Hudson City, FSB $12,125,000.00
May 6, 2008 at 6:10 pm
** Previous post was suspended so I removed the second URL link**
Shankar peaked my interest when he threw out CFC borrowed 50B from FHLB so I went searching and found it from the FDIC. Below is the top 10 borrowers from the FHLB. The site is difficult to navigate but if you play enough you will find what you are looking for and probably more
If you want the data en-masse use the Statistics on Depository Institutions (SDI) section. Here are the links:
http://www2.fdic.gov/idasp/confirmation_outside.asp?inCert1=33143
Top 10 FHLB Borrowers and Borrowings
Citibank $96,523,000.00
Washington Mutual Bank $63,851,747.00
Countrywide Bank, FSB $47,675,000.00
Wachovia Mortgage, FSB $24,112,408.00
Bank of America $23,720,735.00
Sovereign Bank $19,705,438.00
Wachovia Bank, FSB $17,264,613.00
U.S. Bank, NA $17,156,224.00
Bank of America, NA $12,500,200.00
Hudson City, FSB $12,125,000.00
May 6, 2008 at 6:33 pm
I presume the above numbers are in Thousands. If so, then they seem to be right.
Note who’s borrowed the most!!!
May 6, 2008 at 7:02 pm
Roxy,
Shankar takes the view that the FED and US Govt cannot afford to sacrifice CFC (if I understand correctly).
But what do you see driving the breakdowns in T-Bonds:
a. Record Federal deficit (ex-further bail-out/stimulus)
b. Looming bail-out of Fannie/Freddie
c. Further deterioration of FED balance sheet through more JPM-BSC-like deals
d. All of the above
What would you add?
May 6, 2008 at 7:08 pm
Shankar – I am assuming they are. I looked for a data description of the element (othbfhlb) but could not find one. Thanks for pointing that out as the decimal carried over after I sorted the data in Excel.
May 6, 2008 at 7:15 pm
John D
From your list only (a). The market participants don’t worry about (b) and (c) yet.
d. Credit crunch. The credit market is competing for shrinking funds.
Some AA+ – rated corporations are shopping for money and are giving nice premium over T-bonds.
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s%5B1%5D%5Bid%5D=DAAA&s%5B1%5D%5Brange%5D=5yrs
AAA rates are currently above 5.5%
http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s%5B1%5D%5Bid%5D=DBAA&s%5B1%5D%5Brange%5D=5yrs
BAA (still investment grade) almost 7%.
Who wants 3.8% for 10Y T notes?
May 6, 2008 at 9:28 pm
For example Citigroup borrows at 8.5%:
http://www.capitalstool.com/forums/index.php?showtopic=8948&st=100
Will you buy T at 3.9% or Citi at 8.5%? Big question…
May 7, 2008 at 12:19 am
Wow, we are having a good dialog here.
Personally I think BAC and CFC situation is quite tenuous. In case of bank failure, FHLB stands first in line to recover its loan – even ahead of FDIC (or insured deposits at that institution):
http://stlouisfed.org/publications/re/2002/d/pages/insurance_sidebar.html
(And that’s from St. Louis Fed.)
So, the Fed is trapped – can’t let CFC fail (FHLB), but can’t guarantee debt either.
So, I think it is critical that BAC purchases CFC, but the final transaction is going to be quite different than what it has been proposed so far.
This is a very tricky and it may create another BSC-type of situation. (Just speculating here – my thinking – absolutely no other basis.)
What’s the Solution? I think they should wipe out the shareholders and ask bondholders (not FHLB loan) to take steep haircut. This probably would perturb equity market, but I think this is a step in the right direction.
Over the next few months, I expect this to be played out multiple times. Most I-banks in my estimation are insolvent. (Look at their Level 3 assets which can’t be valued.) But running over an I-Bank is easier than running over a bank – not so good politically.
John D – I don’t think the Government will bail out Fannie/Freddie. Between the banks and Fannie/Freddie, they’ll probably help bank depositors as opposed to F/F shareholders.
Conde Nest Portfolio magazine had an article regarding how we are now facing protracted downturn and also outlined the experience of Swedish/Norwegian/Finnish authorities in handling the crisis.
What is needed is for the Fed/Treasury to face the truth – wipe out shareholders and let equities correct.
Having said this, I am sure they’ll think of something to make matters worse.
– Shankar
May 7, 2008 at 2:39 am
The way I see it it’s all about gaming the fed now. Why should BAC proceed with this takeout without losses being backstopped by the fed/treasury? Is CFC less important than Bear? It is just bad management if they cant get the deal JPM got. We are all being held hostage.
May 7, 2008 at 7:23 am
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
First, it becomes clear, to us at least, that BAC is unable to close the CFC transaction due to uncertainty regarding the target’s liabilities. We know nothing new or specific here, but the delay added to the continuing disclosure to the effect that BAC cannot accept responsibility for the liabilities of CFC adds up to one thing, in our view: BAC (and its lawyers and accountants) is not willing to do a deal that leaves BAC shareholders facing a potentially staggering loss. A future write-down and likely restatement would ensure even more litigation and end the career of CEO Ken Lewis.
Second, run the numbers. If you accept that none of the funds of CFC’s $120 billion asset bank unit are available to repay parent company liabilities, except the $9 billion or so in book value representing the CFC equity in the sub, then the calculus comes down to about $50 billion in debt, vendors and other liabilities vs. the remaining assets of the parent, roughly a similar amount of loan servicing rights, conduit and investment assets, and whatever CFC can get for the bank unit.
Thus two billion dollar questions:
1) What is the estimated haircut for the ex-bank assets of CFC?
2) What is the estimated cost of settling all pending litigation?
Now obviously, it is in the best interest of CFC bondholders to get BAC to swallow the entire meal whole. But given that the extant civil litigation pending against CFC is vast and other civil and criminal inquiries also are pending, there seems to be no way for BAC to quantify the downside risk of CFC for its own shareholders, thus in our view no deal – at least as currently structured.
For the CFC bond holders, the best outcome other than the outright sale to BAC is a sale of the bank unit alone to BAC or another buyer at the best possible price. The remaining company could then be placed into Chapter 11 with the general agreement of current creditors in order to bring all of the litigation to a halt and force an immediate resolution of all current and unliquidated claims.
Under such a scenario, the resolution for CFC bond holders and general creditors might be better than that received by the holders of The New York Title and Mortgage Paper, but not much. Just consider what the eventual settlement amount is on claims against trillions of dollars of securitization and servicing flow originated and/or managed by CFC over the past half decade.
For BAC, a risky but better strategy than the course at hand may be to withdraw from the CFC merger, pay the $160 million breakup fee, and allow the entire company to slide into a managed default. As CFC’s funding runs away, the OTS will be forced to invoke its statutory authority to appoint the FDIC as receiver of the insured bank subsidiary, thus precipitating a bankruptcy filing by CFC.
In the event, BAC and no doubt a crowd of other suitors will be standing by, waiting to bid for some or all of the bank’s assets and liabilities in a competitive regulatory sale. But the claimants on the CFC bankruptcy estate would have to await the resolution of the bank receivership to see whether there were any net amounts from the sale of the bank that could be reclaimed.
To that point, while retail depositors of Countrywide Bank FSB have little or no reason to be concerned in such a scenario, the jumbo depositors of CFC above the insured limit- if any remain – should take advice about their options. The jumbo deposit holders may or may not be paid immediately by the FDIC depending on their assessment of the bank’s condition at the point of seizure.
Given the outline above, our view is that the equity of CFC is worth $0. This just again illustrates the point that price and value are not the same! The main point of this purely hypothetical discussion, however, is to illustrate the limited rights of shareholders and liability holders of bank holding companies, namely that the bank is subject to conservatorship by federal regulators in order to safeguard depositor funds. Bank depositors and the FDIC insurance fund are the senior creditors of any bank holding company, period. This places the full weight of losses at the parent holding company level on holders of equity and debt securities, in that order.
So right about now, if you are a fully cognizant bond holder of CFC, perhaps somebody who bought the convergence thesis from S&P and is now long and wrong, then you might be getting a little indignant at the prospect of CFC equity holders being paid anything until bond holders have been made whole. If you appreciate that the net assets of the bank unit will be available to the bankruptcy estate and also understand that the equity holders are essentially toast, then as a bond holder you need to ask yourself a question:
What are you waiting for?
If the BAC deal is not happening, then the only logical course is to pull the plug on the impossible dream of Ken Lewis, shoot the equity holders and get on with the CFC restructuring. In terms of similar scenarios, take a look at the involuntary filing by Highland Capital Management in February 2001, another “surprise” event that forced Bridge Information Systems into an involuntary liquidation. As Highland Capital CEO James Dondero told the BBC:”…we felt creditors’ interests were best served by an immediate filing.”
Just imagine the fun: Fed folks jaw boning, investors yowling, journalists wide eyed. A Chapter 7 against CFC will make for days of great headlines, maybe even congressional hearings and an interview with Maria on CNBC.
And a Chapter 7 filing by a creditor of CFC will prove once and for all that a large bank holding company can go through a market-based resolution without a subsidy from Washington. For that reason alone, we’ll buy dinner at Sparks Steakhouse for the holder of CFC debt that pulls the trigger first.
May 7, 2008 at 8:41 am
1 min ago Rick on CNBC just warned about what you have written here! Pay attention!
May 7, 2008 at 8:52 am
Is this the FED’s reaction to what happened yesterday?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aD0MRS4NxKJg&refer=home
May 7, 2008 at 9:50 am
More on CFC
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=278
May 7, 2008 at 9:51 am
>>> Is CFC less important than Bear?
Yes, many times less important. Like 10x.
May 7, 2008 at 10:28 am
May 7, 2008 at 9:51 am
>>> Is CFC less important than Bear?
Yes, many times less important. Like 10x.
Please develop!
According to PF we broken the buy-signal at 1416 for the ESM8 – next stop 1450. What´s you call?
May 7, 2008 at 11:00 am
Sweden, the Bear is a major clearing house and a major underwriter of derivatives.
It’s derivative exposure is like, $10 trillion? $20 trillion? Of course all those derivatives cancel each other and the total exposure is tiny as long as the institution itself is bulletproof. They receive profit in term of spreads between derivatives.
And CW exposure is what? $100 billion? It’s just another Enron, nothing happened when Enron collapsed.
May 7, 2008 at 11:04 am
About major indices, like S&P? They probably can go another 2-3% higher but the top is behind for many sectors like homebuilders, mortgage lenders, REITs, consumer goods etc.
May 7, 2008 at 11:12 am
I approve couple of pending comments above. Please don’t put more than 1 link
May 7, 2008 at 12:32 pm
>>> Ben and increasing rates leak? Can\u2019t do that since it\u2019ll lead to precipitous equity price declines he\u2019s been avoiding
Read this:
http://calculatedrisk.blogspot.com/2008/05/feds-hoenig-serious-inflation-risks.html
I told you 🙂
May 7, 2008 at 2:13 pm
Well, yesterday I’ve said that apparently one of the few choices the Feds had to save the bond market was to hint that the rate hike is possible. It sounded strange, didn’t it?
Today it happened:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTAYVgs5054k
Today morning the bonds were in full crash mode and now they are climbing back. But not enough to cancel the yesterday crash.
You should expect more rate hike talks in the nearest future.
May 7, 2008 at 3:46 pm
Talking alone won’t cut it (for long) right? How “hawkish” can they be without making the derivatives pyramid collapse?
May 7, 2008 at 10:50 pm
MAZ, they just need to buy some time. Or just push the shit on next administration 🙂
July 2, 2013 at 7:04 pm
It’s actually very complex in this full of activity life to listen news on TV, so I only use world wide web for that purpose, and take the most up-to-date news.