This post is supposed to be a kind of “catch up” post, where I write about a number of small things that I thought were interesting, but weren’t worth a full post. 1) The government can’t fund everybody. The recent backup in the US treasury note market is a great example of that.  As the demands for funds now in exchange for funds later has increased, Treasury interest rates have risen. I have several biases, but one of them is that the Government can’t unilaterally create prosperity.  It can create conditions that encourage economic activity, through predictable and fair laws, but it can’t make us immediately better off through deficit spending, or tax-and-spending.  The Government does not know what is needed to a better degree than its citizens do individually. But let the government fund or guarantee everybody.  When they do that, there is just one overleveraged[More...]

That's the thing about a house of cards. Only one of the supporting elements has to wobble or break loose before the rest follow suit. That pretty much sums up where we are nowadays. It started with the subprime mortgage lenders. Then came the banks, the Wall Street firms, the government-sponsored agencies, and the hedge funds. Now, according to the New York Post, in a report entitled "Don't Bank on It," another layer of cards -- er, financial institutions -- appears set to fall. FHLBs Fall; Look for $$ Two-thirds of the Federal Home Loan Banks, their balance sheets weakened by investments in toxic mortgage[More...]

Uh oh… it looks like these clowns are going to have to get bailed out next. No biggie though… “the FHLB system has $1.25 trillion of debt, making it the largest U.S. borrower after the federal government.” My ninja senses tell me that 2009 is going to be one wild year. Seattle FHLB Likely Short of Capital on Mortgage Debt (Update1): “The Federal Home Loan Bank of Seattle joined its San Francisco counterpart in suspending dividends and “excess” stock repurchases, after the declining value of mortgage bonds likely led to a regulatory capital shortfall. The shortfall is being caused by “unrealized market value losses” on home-loan securities without government backing, the Seattle bank cooperative said in a filing with the U.S. Securities and[More...]

It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to[More...]

The most powerful man in Washington, Treasury Secretary Hank Paulson has shown himself to be quite a shrewd politician. The prevailing wisdom is that he accepted the $300B FHA housing bill so that he could create the Fannie Mae (FNM), Freddie Mac (FRE) and Federal Home Loan Bank (FHLB) backstop. The much talked about unlimited power of the Treasury to lend and buy equity, which will never be needed. I disagree. I believe that Paulson created the heightened GSE anxiety for the express purpose of passing the Frank-Dodd FHA mortgage refinancing bill.Paulson’s high-wire[More...]