Friday Noteworthy Links
A: Out all day on appointments! Enjoy some interesting reading and feel free to suggest other links you found worthwhile in comment section!
Ending the off-balance sheet charade (Rolfe Winkler)
But another reason banks like off-balance sheet structures is that it enables them to manufacture profits. Coming up to the end of a quarter, if a company is a bit short of its earnings target, it can package some assets together into a security and “sell” them to an off-balance sheet entity.Barclays risky assets move a little too cozy (Reuters)
The entity is conjured out of thin air with a small equity investment by the company itself. The entity “buys” the securitized assets at a nice markup, enabling the company to book a profit on the sale. Is it really a sale if the company still owns the risk? Of course not. If I sell an asset to you, a share of stock for instance, then I transfer all the rights of ownership. Any gains or losses in the stock are yours alone.
With many off-balance sheet entities, however, companies aren’t really transferring risk to anyone else. They’re just pretending to do so in order to lever up and recognize a gain. It’s the acknowledgment of risks that is most important. Pushing assets off balance sheet — into the “shadow banking system” — put them beyond the reach of regulators, whose job it is to make sure banks have enough capital to absorb losses.
Barclays has come up with an interesting way to solve an optical problem. Concerned that the bank’s shareholders are nervous about possible future writedowns of wobbly assets with a value of $12.3 billion, it has sold them to its own employees.VIEWPOINT: The Wrong Way to Think About the Fate of the GSEs (Housingwire.com)
The deal does not remove the assets from Barclays’ balance sheet. What it does is allow the bank to pull them out of its mark-to-market book, where their carrying value is contingent upon the financial health of some monolines with whom Barclays has taken out credit insurance.
As it stands now, the Fed is scheduled to halt its support of pass-through markets just as the GSEs are scheduled to begin reducing the portfolios in 2010 (10% a year until they reach combined $250 billion, estimated to occur around 2020 as required by Housing and Economic Recovery Act of 2008).Trepp Sees CMBS Spreads Narrow on New Tax Rules (Housingwire.com)
Nothing I’ve read yet – in the financial media or in sell side research – considers the relationship between these two impending events or questions the impact the two will have together on the remaining sponsors of the MBS markets
Commercial mortgage-backed securities (CMBS) spreads are tightening this week, indicating greater demand of CMBS bonds. Spreads are the difference in yield between a bond and its benchmark (here the swap rate). New rules issued Wednesday by the International Revenue Service (IRS) and US Treasury Department permit in certain cases the modification of commercial mortgages within real estate mortgage investment conduits (REMICs) without tax penalty.Is the Rally Ending, or Does it Have More to Go? (Ritholtz vs Mish via The Big Picture)
“In the past, such discussions had the potential to trigger tax events,” Trepp said in commentary Thursday. “The market, sensing this ruling might stem the rising tide of delinquent loans, bid the market up.”
Here are 5 most reasons why I think we can have more upside, plus a look at some grim economic reality.WaPo: FHA Cash Reserves Will Drop Below Requirement (Washington Post via Calculated Risk)
1) Individual investors remain under-invested (See Liquidity/Sentiment Review).
2) Market Breadth and momentum are each positive (i.e., supportive of further upside);
3) Sentiment has not (yet) reached extreme levels; bear secular rally
4) The broader investment community believes — incorrectly in my opinion — that a recovery is upon us, profits are getting better.
5) History shows that secular bear markets have deep selloffs and huge rallies; this current rally still has room to run based upon a composite of prior cycles (See Four Stages of Secular Bear Markets).
The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency's cash reserves will drop below the minimum level set by Congress, FHA officials said. "It's very serious," FHA Commissioner David H. Stevens said in an interview. "There's nothing more serious that we're addressing right now, outside the housing crisis in general, than this issue."I discussed FHA & Ginnie Mae earlier this month as following in the footsteps of Frannie...they clearly have been picking up the slack along with $866Bln in fed purchases of MBS since the start of QE policy. Its all good though right, nothing to see here, lets just inflate those asset prices up any way we can! Punch anyone?
The new audit shows that even without any new measures, the reserves will rebound to the required level within two or three years largely as the result of the recovery in the housing market, Stevens said.