The Fed's Balance Sheet - Pulp Fiction

Janet Yellen has been kind enough to put together a very nice chart of the Fed's Balance Sheet showing its degradation in support of the Wall Street banking bailouts. Thanks to CalculatedRisk for spotting it. We were working on a version of this but once again the principle of procrastination has served us well and delivered more time to play Halo 3 with the youngsters.

The Fed has consumed about half its reserves to prevent a domino crash in the financial system, and a probable stock market crash. It would have been rather messy. Before we pin hero medals on the Fed for avoiding it, let's remember who was a central actor in creating the situation we face today, which is only deferred, not cured.

So, 1400 on the SP 500 is what you can buy for 400 billion these days, plus a few hundred billion if you toss in the efforts of Treasury and their friends.

Next step will be to start playing with commercial bank balances if the Fed can start paying interest on them, and of course the direct monetization of debt if they can work out the right working relationship with the Treasury on this that only bends existing statutes which are sufficiently vague to allow for the creation of a pure money machine if bent under duress.

As we have observed on several occasions, the limiting factor on the Federal Reserve will be the value of the dollar and the acceptability of US sovereign debt by enough foreign trading partners to make it meaningful. That spells O-I-L.


FRB H.41 - Factors Affecting Reserve Balances

Moody's Warns on Credit Ratings of MBIA and AMBAC

3:30 ET (Bloomberg) MBIA Bond Default Risks Widen on Warning from Moody's.

Moody's: second lien RMBS woes may dent bond insurer ratings
3:36 PM EDT May 13, 2008

SAN FRANCISCO (MarketWatch) -- Poor performance of second lien residential mortgage-backed securities (RMBS) could impact the credit ratings of bond insurers, Moody's Investors Service said on Tuesday. Bond insurers have significant exposure to second lien RMBS, mainly through guaranties on the securities and, to a lesser extent, through exposure to collateralized debt obligations backed by such assets, the rating agency noted. "Moody's loss expectations for this asset class are higher than previously anticipated, owing to worse-than-expected performance trends," the agency explained. "This could have material implications for the estimated capital adequacy of financial guarantors most exposed to this risk." MBIA shares fell 5% to $9.36 during afternoon trading, while Ambac Financial dropped 7% to $4.03.

Remember how the other day we laughed when MBIA rallied on its tremendous loss and noted the spin being put on the stock by the Wall Street pundits?

A cursory examination of the financials and their context indicates the company is functionally bankrupt, and has to be rescued to remain in business. That is not out of the question of course, but the rally that took it up yesterday was a joke in a dull market.

Well today the wheel turns, and MBIA is being sold off hard on a caution at 3 PM from Moody's about the future of their credit rating, essential to their continued business, and analyst downgrades from this morning.

Under the benign neglect of the Bush Administration in particular Wall Street has become the heart of deception as a way of life, a shame and corrupting influence on the Republic.

May 13, 2008, 4:24 pm
Ratings questions return at MBIA, Ambac
Fortune Magazine

The triple-A ratings at bond insurers MBIA (MBI) and Ambac (ABK) could soon be under scrutiny again. Moody’s said Tuesday that rising losses on bonds backed by second mortgages could hit ratings at insurers that have guaranteed second-lien residential mortgage-backed securities.

“Moody’s now expects 2005 vintage subprime second lien pools to lose 17% on average, 2006 vintage pools to lose 42% on average, and 2007 pools to lose 45% on average,” Moody’s said. “Moody’s loss expectations for this asset class are higher than previously anticipated, owing to worse-than-expected performance trends. This could have material implications for the estimated capital adequacy of financial guarantors most exposed to this risk.”

The comments come a day after MBIA posted a $2.4 billion first-quarter loss but spent much of a two-and-half-hour conference call explaining why it doesn’t believe it will need to come to market to raise more capital. CEO Jay Brown told investors he believes the company can make up a $1.7 billion shortfall relative to Moody’s triple-A capital targets over the next two quarters, through he conceded he doesn’t expect the company to get a stable outlook until house prices bottom out, which he said probably won’t happen till at least next year. The improved outlook may be even further off now, given Moody’s comments Tuesday. “Moody’s intends, in the short term, to assess whether worsening performance in this sector is likely to be material for exposed financial guarantors, and will update the market as appropriate,” the rating agency said.

AP
Ahead of the Bell: MBIA
Tuesday May 13, 9:13 am ET

MBIA edges up in premarket trading, but analyst lowers estimates after 1st-quarter loss

NEW YORK (AP) -- A Friedman Billings Ramsey analyst is cutting his estimates on bond insurer MBIA Inc., pointing to the company's large first-quarter loss and difficult competition.

Steve Stelmach said MBIA's reserves may not be enough to cover deteriorating credit and write-downs, as its losses in the first quarter were larger than expected. He now expects the company to lose $1.89 per share this year. Previously he expected a profit of $2.05 per share. Stelmach now predicts a smaller profit in 2009.

He cut his price target to $13 per share from $16 and kept a "Market Perform" rating on the stock.

The analyst added that competitors like Berkshire Hathaway and Assured Guaranty have not suffered from mortgage and debt issues the way MBIA has.

MBIA said Monday that it swung to a first-quarter loss, but shares rose 4.5 percent. In premarket electronic trading, they gained another 13 cents, to $9.98 from $9.85.

AP
Moody's: Outlook bleak for consumer finance
Tuesday May 13, 11:21 am ET

Moody's Investors Service reports outlook in consumer finance is bleak

NEW YORK (AP) -- The outlook in consumer finance is bleak, Moody's Investors Service said in a report Tuesday, as the economy has likely slipped into recession and lenders struggle with bad credit.

Consumer finance companies -- credit-card lenders, auto lenders and student lenders -- likely face a "relatively mild recession" the first half of this year, Moody's said.

Lenders also face the risk the economy may suffer more severely than expected, Moody's said. A recovery depends on the stabilization of financial markets, a rebound in housing and the direction of energy prices, Moody's said. (Oh is that all it will take? We're screwed - Jesse)

Credit card lenders' loans are being repaid less reliably, Moody's said, and profits are being squeezed as companies have to set aside money to cover bad debt.

Auto lenders have also been stung by accelerating defaults. Further, lenders are not recovering as much when they repossess cars from delinquent borrowers because of softer prices for auctioned cars.

Finally, student lenders have been squeezed by legislation last year cutting subsidies to student lenders and forcing them to shoulder a greater share of the risk of students defaulting.

Bank of America Sees Higher Losses; Banks Have "Enormous Unrecognized Losses"

More losses at Bank of America. How unusual.

The only bottom we are seeing is the bottom of the barrel which we as a nation are scraping to maintain an unsustainable economy burdened by parasitical corporations that is on its last legs. Anyone who does not 'get this' by now is sucking hard on the bong pipe of government and Wall Street propaganda.

"``Based on information I see,'' it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. He didn't name any companies."

Banks Have ENORMOUS Unrecognized Losses - Carlyle Group's Rubinstein

It appears that the banks are recognizing their losses at the rate at which the Fed can monetize them while hiding the effects on the broader economy. They are manipulating economic indicators and information in the process.

The issue in this web of deceit 'for our own good' is that some are being set up for serious personal losses while a privileged few insiders are being set up for enormous personal gains. It is happening now. It is integral to the process of inequality and croney capitalism.

THAT is the moral hazard with having a centrally controlled economy, under the command of "benevolent economists," that liberal academic economists seem to fantasize about so often at times like these. Power corrupts. Integrity is not incidental to good governance. These fellows need to go back and learn the lessons of the schoolyard. The rule of law matters, because after you have knocked it down, you may not stand up easily in the cold winds that will blow unimpeded after it has gone.

Bank of America Sees Higher Losses on Home Equity
By David Mildenberg

May 13 (Bloomberg) -- Bank of America Corp., the second- biggest U.S. bank, widened its forecast of home-equity loan losses beyond projections offered last month, adding to evidence that more consumers are falling behind on the debts.

The bank expects losses to top 2.5 percent of its $118 billion in loans linked to home values, Liam McGee, president of the Charlotte, North Carolina-based company's consumer and small business division, said at a conference in New York sponsored by UBS AG. The bank previously projected a loss rate of between 2 percent and 2.5 percent.

Bank of America, the nation's largest credit-card issuer, is also seeing a ``recent sharp increase'' in spending on necessities by its credit-card customers. That has curbed retail, travel and entertainment purchases, McGee said. Economists and bankers have said the economy may be teetering near a recession as consumers struggle with job losses and gasoline prices topping $4 a gallon.

McGee said Bank of America expects the economy, measured by real gross domestic product, will shrink in the second quarter. The bank had $184 billion of credit card debt outstanding at the end of the first quarter and about a 20 percent market share.

The bank's $4 billion purchase of Countrywide Financial Corp., the largest U.S. home lender, remains ``on track'' to be completed in the third quarter, McGee said. Bank of America expected ``bumps on the road'' during the transaction, he said.

``There is a lot of talent there that will help us grow our business,'' he said, noting that home lending will join consumer deposits and credit cards as key businesses for Bank of America.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: May 13, 2008 09:16 EDT