Harbor Alert Archives

Christmas Eve Mugging

December 31, 2009

Taxpayers were accosted by the Treasury on Christmas Eve when the $400 billion cap on assistance to Fannie Mae and Freddie Mac was lifted providing unlimited taxpayer funding for the mortgage giants. It is time to admit the Government Sponsored Enterprises were a disastrous way for congress to try to expand home ownership.

The common and preferred shares should be cancelled providing taxpayers a break and investors a reminder that with potential gain comes risk of total loss. The right thing to do would be to fully nationalize the firms thereby lowering their funding costs and allow for an orderly wind down over a predetermined period after which the portfolio of mortgages would be sold to investors.

Reappoint Ben Bernanke!

July 27, 2009

Our Federal Reserve Chairman's term expires in January and the administration is sending mixed signals regarding his reappointment. The Chairman has done a great job stabilizing the credit markets and thereby the economy over the last twelve months. Issuing more positive comments or directly stating Bernanke will receive a second term as Chairman would further strengthen our financial markets and boost economic prospects.

Recession Update

May 15, 2009

The recession may have just completed its worst two quarters of GDP contraction with the economy declining at over a six percent rate.  Many prominent economists expect GDP to contract at a lesser rate this quarter and turn positive later this year.  We are not so sure.  This recession could feature a double-dip much like the severe contractions in the 1930's and 1980's.  We believe as stimulus wears off and unemployment grows the economy could relapse next year which is why we remain in capital preservation mode for our clients.

Mortgage Crisis

February 23, 2009
We believe much of the government crisis funding to date (stimulus, TARP, Fed programs) has been misdirected. The epicenter of the banking crisis is the residential real estate market and the mortgages and derivates based on that market. We believe the majority of the initiative should be directed at stabilizing the value of the homes Americans own.

The Home Owners Loan Corporation (HOLC) worked well in the 1930's at no net cost to the taxpayer. The Treasury should issue low rate, long amortization schedule mortgages to all who could qualify. The resulting refinancing proceeds would flow both through the banks and mortgage securities markets. This would lower the cost of buying or owning a home, stabilize the price of homes and help increase the value of mortgage securities. Importantly the equity and solvency of banking institutions that hold these mortgages would improve dramatically.

Recession

November 1, 2008
Our opinion that the U.S. economy has been in recession since the beginning of the year is slowly becoming accepted by the mainstream in the investment community which leads us to update our opinion with our latest thoughts.

We believe the recession we are now in will be one of the longest and deepest on record.  This is because of the effects of the credit crisis on our tremendously over leveraged economy.  Everyone from consumers to commercial banks, investment banks, hedge funds to the U.S. government must reduce borrowings which means they are net sellers of financial assets.  This will put unrelenting downward pressure on prices of those assets.

We will survive this recession and emerge the better for it with less borrowed money at all levels of the economy but the most difficult times lie yet ahead.

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.