The announcement of sizable write-offs in the value of mortgage portfolios by large players: Citigroup and Merrill for starters is a very significant and positive step in getting the mortgage machine functioning again. While the losses are not good they did occur and what is necessary is that participants in the markets feel that they have an accurate assessment of the size of the losses and assurance that the parties that took these losses are adequately capitalized.
While the capital to take the losses has been there for the big players the problem with being a financial institution is that one's asset base is capped by one's net worth. Consequently taking an $18 billion loss means that if you want to maintain the same asset base you need to infuse capital. This has been done by going to large players in the middle East and getting capital infusions.
I think that by mid-February there will be a consensus among market participant that while all mortgage related losses have not been taken most will have been and at least the size of the problem will be known with, say, 90% certainty.
Two things will have to then happen: 1) lending standards need to be made sane (I have written about this many times). In general that means full doc for B-paper and Alt-A and higher adds for stated A-paper. It also means stricter LTV guidelines because values are shrinking 2) the existing participants in the business of providing credit default insurance for pools of Jumbo mortgage need to be recapitalized or replaced.
What must be done is this: liquidity must return to the Jumbo A-paper market. At present it is lack of availability of credit default insurance for Mortgage Backed Securities which is preventing this.
Politics & the Economy
Anyone who has been reading these newsletters for any length of time knows that I am not a big fan of politicians. With this being a Presidential election year we will be subjected to an enormous number of inane statement and suggestions from politicians.
The most important single point I have to make is that politicians have little effect on the economy. Politicians do not create jobs. Jobs are created by a coming together of capital and labor.
I believe that is was important than Bernanke addressed the economy this week with fiscal suggestions. In essence he took the initiative telling politicians what he thought needed to be done to prevent recession.
Bush pitched an economic stimulus package today. My notion on these stimulus packages is that they are always far short of ideal but almost always better than nothing.
Dick Lepre
RPM - SF
In any sane society jobs and capital are subservient to the needs of non-criminal, non-parasitic people, not the other way around.
As long as the tail of continues to wag the dog, people will continue to fall through the gaping holes at the bottom of the market. Anyone who does not acknowledge these holes should take a trip to the inner city (if they're not so afraid to that their fear itself proves the point).
Posted by: Frank | January 31, 2008 at 06:24 AM