mortgage-backed securities (MBS)

James Politi

There was little news in today’s prepared testimony by Ben Bernanke, Federal Reserve chairman, on the exit strategy. Mr Bernanke chose not to talk about the discount rate except to say that lasts month’s increase should not be viewed as a monetary policy shift.

And he mostly went over what he had already said last month in terms of the sequencing of the tightening, with reverse repurchase agreements and term deposits ramping up before – or alongside – an increase in the interest rate on reserves. Scant if any change there.

But one shift in tone did stand out. Read more

Simone Baribeau

During part one of the House Financial Services hearing on unwinding the Fed’s emergency liquidity programmes Ben Bernanke, chairman of the Federal Reserve, was quizzed on Okun’s law, an economic model, here-to-fore confined to the vocabulary of economics geeks.

So what is happening during part two of the hearing – when a group of independent economists will be brought together. Will it be a party with a punchbowl? Will anyone be willing to take it away? Read more

Between 2010 and 2014, $1,400bn US commercial real estate loans will reach the end of their terms. Nearly half of them are currently in negative equity – that is, the borrower owes more than the property is worth. And banks are reducing the number of loans in the sector, and have been doing so throughout 2009.

More shocking is that banks and their auditors are typically well aware of the problem, but have not written down the value of property as prices have fallen. Instead they are “extending and pretending” – or “delaying and praying”: holding property values steady and assisting the borrowers where possible. They need to. If banks were accurately to record property values, they would write down assets on their own balance sheets and jeopardise their business (see example to right).

A very thorough report just released from the Congressional Oversight Panel expects many banks to go under when the pretence comes to an end. The report concludes: “There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public.”

When a government body admits things are at crisis proportions, you have to take notice. This isn’t journalistic hyperbole. It is hard to overstate the impact of the coming second subprime, hitting, as it will, a very fragile economic recovery.

So, who will be most affected? In a nutshell, banks, and mostly the smaller ones. Read more

Simone Baribeau

The Federal Reserve board members have argued that asset bubbles are hard to identify when they’re growing. In retrospect, though, St. Louis Fed president James Bullard is calling a bubble a bubble.

Asked by Fox Business News about the housing market recovery, Mr Bullard made clear he wasn’t holding his breath waiting for the market to pick back up.

We have too many houses, so I wouldn’t expect that to really boom on us.

Housing prices have “by and large” stabilised, he said. And even there, he hedged. Read more

Hungarians will be borrowing more forints and less euros under one of several new initiatives planned by the country’s central bank.

Interest rates are typically higher on forint-denominated mortgages than, for instance, their euro counterparts. But spreads have been narrowing and the central bank plans to reduce them further. The Magyar Nemzeti Bank will buy forint-denominated mortgage notes up to a maximum face value of 100bn forint ($500m). Read more

Toxic assets will be sold with a AAA guarantee from the US government under one of the options put forward by the Federal Deposit Insurance Company.

The FDIC has more than $36bn in toxic assets on its books, ready to sell. And apparently the corporation is seeking a decent return. Scared?

There appear to be two main differences between this plan and the one that nearly brought down capitalism: first, it’s the US government issuing the guarantee and not some special legal entity that can conveniently go bankrupt. Phew. Oh no, hang on. The second difference is that we know most of these assets are toxic, or worth less than initially thought. At least the first time round, they were bought in good faith. Read more

Krishna Guha

Fed minutes show doves are still worried about the sustainability of the recovery. They fear renewed weakness in housing as the central bank winds down its MBS purchases and want to keep open the option of buying more MBS if a) the economic outlook deteriorates b) mortgage rates spike.

That option is still open, but I suspect it would take a big forecast downgrade and/or a large mortgage rate spike to persuade the majority of the committee to buy more MBS. Read more

What connects computer screens, green cars and military power? Rare earth elements, required for the manufacture of many advanced technologies, from hybrid cars to guided missiles. China enjoys 98 per cent of REE production, cornering the market after a single US mine was closed in the mid 1980s. Chinese companies have bought stakes in Australian and Canadian rare earths prospects and have tried unsuccessfully to buy the still idle US facility.

The debt load of Eastern Europe is apparently putting off investors. But there is worse news for rich countries: investors are betting that rich countries will default on their bonds Read more

As the IMF joins calls for a stronger yuan, a Xinhua report on Saturday said the Chinese government would not allow the renminbi to appreciate against the dollar in the short term. Just hours before Obama was due to arrive in China, the authorities there warned that the Fed is fuelling speculative investments and endangering the global recovery through loose monetary policy. Read more

Krishna Guha

The Fed also shaved $25bn off its planned agency debt purchases, writes Krishna Guha of the Financial Times Read more