Brad - About Those Derivatives and the Banks

[adios]

After I posted yesterday I found an article in the Wall Street Journal about how banks aren't lending money to corporations and instead are assuming the default risk of the corporations not paying back loans via derivatives. The idea is that this business is much more lucrative for banks. So if a lot of corporations fail we could see the banks come under a lot of pressure. Of course JP Morgan was at the head of the class in issuing such derivatives but they said there isn't that much risk. Banks as a result of the depression were fairly restricted in what they could do because of Glass-Stegall. Of course the banks lobbied and lobbied to get it repealed and finally acheived their goal in 1998 I believe. After Enron and WorldComm the big money center banks have come under fire. I heard one bank exec state that the repeal of Glass-Stegall was necessary because of advances in financial engineering. I'll give you only one guess as to which bank he worked for. I really believe though that the securitization of mortgages which I would construe as "financial engineering" has been very successful and good for the real estate industry. A lot of derivatives like interest rate swaps are simple and easy to understand. However, I have no idea what bombshells if any are lurking out there and how the risk exposure for banks has changed. Derivatives actually make quite a bit of sense but I'm sure at least some people are getting hornswoggled.

[brad]

well warren buffet said that he and his team couldnt figure out the possible liabilities either, so dont feel bad.

[brad]

-----------------------------
Fannie Mae and Freddie Mac are of concern. Homebuyers can
purchase homes with very little down. They don't even need to have a
lot of income. The real estate bomb is part of the debt bomb.
Corporate debt problems and personal bankruptcies will trigger a real
estate bomb in commercial and residential real estate, leading to
eventual collapse of the derivatives markets.

--------------------------

i got that off google searching newsgroups it sounds like what i read a while ago just to give u a gist.

[brad]

well heres an article that says no problem. interesting is that its 12 months old. so a year later were they right? probably too soon to tell.


http://www.businessweek.com/bw50/content/mar2002/a3776032.htm

------------------
SPRING 2002

STREET WISE

Fannie Mae and Freddie Mac: Fear Not
The recent hysteria about worst-case scenarios ignores the solid business principles that support both institutions
--------------------

[Jimbo]

Brad I thought those loan programs required more equity (initial down payment)and better credit scores than conventional loans. Am I incorrect?

[brad]

i think u are but im not sure.

[brad]

http://www.fanniemae.com/global/pdf/commentary/fmpv1i2.pdf

well 2 points.

1 is that only in a severe housing market downturn would they require government intervention.

2 its assumed they are too big to fail.

BUT

lets remember greenspan said explicitly nothing too big to fail.

now that i remember it the crux of matter is that feds are not mandated to guarantee mae/mac, its a private deal, even though it looks like a government program, something like that, like the f.d.i.c. thing, which doesnt have enough assets to cover a bank failure, although it advertises safety.

[adios]

Look up Fannie Mae lending requirements. Agency loans are referred to as conforming loans.

[brad]

http://www.newsday.com/business/printedition/ny-bzimf043205653apr04,0,5623509.story?coll=ny-business-print

IMF: Bubble May Burst for U.S. Housing Market



THE ASSOCIATED PRESS

April 4, 2003


Washington - One more threat for the fragile economy - the possibility that America's booming housing market could be headed for a bust.