1/28/2009

Bank stocks on fire this morning are boosting the overall stock market in pre-market computer trading and putting some minor pressure on the bond market. Here comes the 'bad bank'; according to reports the so-called bad bank will be run by FDIC. The purpose; take a lot of the toxic assets off banks books and dump them on tax payers. Once again the little guy takes the pipe. The 'bad bank' idea is yet another ill conceived plan that eventually will be seen as just one more policy mis-step by Obama and previously by Bush. While setting up a bank to buy underwater assets is emerging as a favored approach, it will drive up the cost of the rescue in excess of $1 trillion.

The stock market opened better on the strength of financials. By 9:30 the 10 yr note slipped back to -3/32. Mortgage prices are doing better this morning on the news of a 'bad bank' being created. Taking some of the junk mortgages from banks is providing a momentary boost but it is only temporary unless treasuries can find traction. The 10 yr note is trading at its resistance level at 2.50%, to keep mortgages moving lower the 10 has to crack 2.50%.

Unclogging the credit markets is the front burner problem faced by politicians in Washington. So far there has been no real noticeable progress in opening up the credit markets. The $700B TARP plan has so far been nothing more than a piggy bank for banks to dip into when they need a buck or two. The bad bank looks as if it is gaining momentum as politicians wonder over Washington trying to come up with another plan that may work. It is a bad idea but there isn't much else to try. Paulson's TARP plan hasn't worked, the $825B Obama fiscal stimulus is a very questionable move; try and try again. At the end of all this America's budget deficit (taxpayers) will be so large interest rates will climb like a sky rocket.

A key question for the bad bank would be how to value the toxic assets it would buy. Geithner, in a Jan. 21 hearing before the Senate Finance Committee, outlined three possible alternatives: look at how the market is pricing similar assets; use computer model-based estimates from independent firms; and seek the judgment of bank supervisors. Does any of that hold water? Not in our judgment; the value of the junk can't be quantified using any of Geithner's ideas. Other similar assets? What similar assets? Computer models; models haven't been constructed to deal with the present financial collapse. Judgment of bank supervisors; are these the same supervisors that watched as banks went down?

The MBA mortgage applications index was slammed -38.8 last week with refis crunched -48% and purchasing applications -2.9%. The fixed 30-yr mortgage rate lightened to 5.22% from 5.24% while the 15-yr ran 4.98% frm 4.96% and 1-yr was boosted to 5.96% frm 5.89%. It was the largest decline in the weekly report in 16 yrs and is completely driven by the jump in interest rates.

The FOMC meeting will conclude at 2:15 with the statement. Normally the statement is full of platitudes and crafted to say what the Fed thinks the markets want to hear. What markets want now is some clarification from the Fed at how it will set monetary policy now that interest rates are zero; what deflation levels will worry the Fed; and will the Fed continue to dangle the carrot of buying treasuries to keep interest rates low.