Monday, April 06, 2009

Bernanke's math troubles, Soros talks his book and banks bailing each other out...

Among the many weekend surprises announced in recent weeks, nothing moved the markets as wildly as Fed Chairman Bernanke's decision to force rates lower by buying US treasuries via a $300 billion plan. Well, that seems to have fooled everyone for about two weeks as t-note and bond rates have ticked back up to just about the level where they were when Bernanke announced the plan.

Why do you care? Well, mortgage rates are based on the 10-year t-note yield. As that note has rebounded in the last week mortgage rates have risen as well - back over 5% for most 30 yr fixed rate loans. Still a good rate, but not as good as the 4.75% numbers that were out there last week. This snapback has surprised me, but I think the market has realized that $300 billion, while it sounds like a big number (and it is) - it's swamped by the $2+ trillion of new government debt issuance that is expected. In short, the Fed Reserve can't fix the price with "only" $300 billion.


"Ten-year note yields increased 15 basis points last week, pushing back towards levels last seen before the Fed surprised markets after its last policy meeting by announcing it would purchase $300 billion in Treasuries in the following six months.

"The Fed's problem is that the market realizes that $300 billion in Treasury buybacks is just a drop in the bucket compared to $2.5 trillion in estimated net Treasury issuance this fiscal year," said strategists at UBS Securities. The fiscal year ends in September."

I don't get too worked up about George Soros and his comments because he's usually just talking his position. By that I mean, if he owns ice cubes he'd talk up the signs of global warming in Australia, but if he buys oil he will tell you about the threat of a new ice age.

Most traders/analysts/commentators do this - they have a specific opinion on the markets and their trades reflect that position. That's why most people talking on CNBC, etc, are just white noise. They provide little real value because they view the world relative to the positions they hold in their portfolio.

Anyway, Mr. Soros will likely get a little attention for comments made late Monday on Reuters Television.

"The U.S. economy is in for "a lasting slowdown" and won't recover this year, while "the banking system as a whole is basically insolvent," billionaire investor George Soros told Reuters Financial Television on Monday."

Finally, I forgot to mention this last week. This is so stunning it's hard to believe the banks would be this bold.


"US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.

The plans proved controversial, with critics charging that the government’s public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans."

So consider a bad asset on Goldman's books. They think it's worth $5 billion, but the market says it's worth $1 billion. Citigroup could take a nice piece of their bailout money, coupled with loan guarantees from the FDIC and offer to buy the asset from Goldman for maybe $3.5 billion. It's three card monte where Goldman wins, Citigroup wins and you and I pay more taxes.

Someone (Congress, the Treasury, FDIC, the Fed) needs to change the PPIP to make sure any bailed out financial firms do not bid on the assets of the other bailed out firms. No wonder the banks have been rallying - they keep changing the game midstream.


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