We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!
The Week Ahead in the Capital Markets - August 20, 2007
The mortgage problem has spread and Countrywide is in trouble. So the Fed is on the move. As a lender of last resort, The Fed just cut the discount rate (the rate at which banks borrower from the Fed through the discount window). In a highly unusual move, the Fed also said banks could borrow for up to 30 days and then renew their loans. The last time the Fed let banks borrow for more than a day was in 1999 for fear of Y2K computer problems. The Fed said, “These changes are designed to provide depositories with greater assurance about the cost and availability of funding.” Changes will remain in place until “market liquidity has improved materially.”
All of a sudden, the fed-funds futures market priced in 1.00% of near-term cuts (Fed funds is the rate at which banks lend balances held at the Fed to one another). Earlier this summer, there were no expectations of rate cuts at all. The world has changed. As Keynes said, “When the facts change, I change my position. What do you do, sir?” According to futures, there is 100% likelihood that Fed funds will be at or below 4.25% by May, and one-month bills currently yield less than 3.00%. ARMs anyone?
The mortgage industry has a black swan problem (a phrase coined by Nassim Taleb). You can have a database with 4,000 white swans. History and the data tell you that all swans are white. But the absence of a black swan doesn’t mean there isn’t one, and risk models fail if one shows up. The likelihood of credit spreads widening to the degree that they have – and on some AAA credits no less – is statistically extremely unlikely, something on the order of one to the power of minus 500! But it did happen, even though the historical data said it was improbable.
Countrywide is the latest victim of the black swan. In a shocking turn of events, mortgage bankers spent last week worrying about Countrywide going away. Countrywide’s business units reach far and wide. Countrywide made $245 billion in home loans in the first half of the year, 17.4% of the nationwide total. Warehouse lines, broker and correspondent loan purchases, securities trading, and an alphabet soup of ancillary services have made Countrywide a force to be reckoned with.
Our industry’s market share leader got hit hard. Already down more than 50% from a price of $45 earlier this year, Countrywide’s stock price sank to a low of almost $15, and recovered by week’s end to $21. That upshot is that while Countrywide’s problems are mostly about a lack of liquidity, a Banc of America analyst thinks they have enough borrowing capacity to survive. He says that the current stock price “fairly balances” the unlikely outcome of a liquidity-induced asset sale and the more likely prospect of an operating, “less profitable” company going forward. We wish them the best.
President Bush did not call Barry Bonds immediately after he broke Hank Aaron’s homerun record. But Bush decided to make the call. Bush said, “I realized I had a rare opportunity to talk to the only guy in the country who is less popular than I am.” – (Conan O’Brien)
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