Harbor Alert Archives

Nationalize the GSE's

August 27, 2008
The U.S. Treasury Department should nationalize Fannie Mae and Freddie Mac immediately to provide liquidity to the secondary mortgage market and to lower the level of mortgage interest rates.  This would have the collateral benefit of helping to stabilize residential real estate prices as well as to provide some stability to the banking system.  It is time to end the mistaken belief that the GSE's can effectively pursue a dual mandate; support the housing market and maximize return for their shareholders.  Continuing to attempt to serve two masters ultimately will serve neither well.  The capital markets have cast their vote by driving the common equity toward zero value and trading the preferred equity near 50% of par value.

Credit Default Swap Nightmare

June 13, 2008
CDS's cost AIG an $18 billion write-down this quarter and have brought AMBAC and MBIA to the verge of insolvency. Warren Buffet coined the phrase "weapons of financial mass destruction" some years ago when referring to derivatives. I believe CDS's are the worst of the lot. With $50-60 trillion (yes trillion!) notional amount of these things outstanding, these privately negotiated and traded instruments represent enormous company and systemic risk in our financial system. Many commercial and investment banks are relying on hedges using CDS's to reduce risk on extremely large gross exposure to such risky areas as mortgage securities and derivatives based on low quality sub prime or ALT-A assets. We don't know when or where this time bomb will go off, but we are staying away from the most likely places: commercial and investment banks, hedge funds, and any other highly leveraged financial investments.

We need standardization of CDS contracts which would allow them to be traded on some sort of exchange or network. There could then be the hope some consortium of entities might be able to help distribute the counterparty risk associated with these instruments.