Very interesting observations on the financial sector from Institutional Risk Analytics. Chris Whalen and IRA have consistently be ahead of the curve on where the credit markets are headed. Now Whalen argues that we are just at the start of the process where the US Treasury steps up to underwrite bank lending.
First step, bailing out Fannie Mae and Freddie Mac, nationalizing the government sponsored enterprises that for years defenders said had no real claim to the public purse. Aside: Not unlike state and local debt entangled in “public-private partnerships” and tax increment financing deals, no? Whalen strips out the spin and explains what is going on:
Since last summer, the various parts of the securitization market have been slowly imploding, right on up the food chain from subprime CDOs to the AAA-rated GSEs. The only way to staunch the bleeding and begin the process of restoring confidence in all manner of securitzations is to take the GSEs off the table as a concern for investors. When and only when the GSEs are affirmed as affiliates of the US Treasury will yield spreads on GSE debt start to fall, ending the immediate crisis.
Once the GSEs are safely under a conservatorship, with a program in place to slowly run-off the retained portfolios as the debt supporting them matures, then we can start focusing on the next task, namely fixing the securitization markets and recapitalizing the commercial banks. As you’ve read in this space previously, banks are GSEs too, just more competitive and focused on providing primary market finance to the private economy as opposed to the secondary, after-market function performed by FNM and FRE.
Banks are GSEs too. This is an important thing to keep in mind. They cannot operate if the extent of the government-sponsorship is in doubt. And this is precisely what is being tested in the current environment. BofA and Wachovia are boxed in, to some extent, by forces beyond their control. Everyone in Charlotte needs to understand this and act accordingly.
Uptown is — on every level — a highly leveraged construct. Can it survive without a $500b. bailout of the banks?
Update: On a related note I should note the new movie I.O.U.S.A tackles America’s debt bomb and is having a special screening of the film tonite at 8pm. Stonecrest and Concord Mills are among the venues.
