How to Get Out of a Liquidity Trap
- Commitment to zero rates—-with an inflation target
- Depreciation of the yen
- Money-financed transfers
- Nonstandard open-market operations

Henry Paulson, the U.S. Treasury secretary, is planning a $15 billion capital injection into U.S. mortgage companies Fannie Mae and Freddie Mac, the Times of London reported, without citing anyone.

The plan is “high” on the list of solutions to the nation’s mortgage crisis, the newspaper said. In exchange for the capital, the U.S. government would get a new class of shares, the newspaper reported, citing no one.

Paulson’s plan also would allow the two mortgage companies to use the Federal Reserve’s discount window so they can borrow from the central bank, the Times reported.

http://www.bloomberg.com/apps/news?pid=20601087&sid=adGvdKB7NpAg&refer=home

That “Welfare State” they repeatedly complain about is for the Rich & Corporate.
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Over at Minyanville, they’re speculating that Freddie and Fannie will be placed into conservatorship and wound down , expecting that the US mortgage market will move quickly to the covered bond format that is common to the Europe mortgage market.

From their Q1 2008 (3/31/08) reports – they show a little over 6% 30+ day default rate and a 2.24% foreclosure rate – almost exactly what the Mtg Bankers Assoc numbers show as industry averages

They show losses of 12 basis points on the portfolio (0.12%) but note they projected (built in) 150 basis points in losses (1.5% of the portfolio … they go on however to note they have credit enhancements (essentially insurance) in place for up to 750 basis points loss (7.5%)

IndyMac notes they have appx $6 billion in loans (with 90% rated AAA) – a 7.5% loss rate would mean they can lose $450 million and be within their loss coverage – their actual losses were 0.12% or appx $7.2 million

And their loans in this protfolio were typically seasoned appx 28 months – so statistically the majority of defaults should have already occured – which is shown by the declining default rates

Their default rate increased 82% from Q3 to Q4 2007, and increased 39% from Q4 2007 to Q1 2008 – they project default growth rate to continue to decline to 21% in the second quarter to 6% in the third and basically be flat in the fourth

The reality sure seems to be as with most of the industry – that the underlying loan portfolio was performing – with almost 98% NOT in foreclosure and 94% fully performing and paying as agreed

Yet because of primarily accounting rules – causing paper lossess – they are now out of business – non-FDIC insured depositors will lose appx $1 billion, shareholders will lose everything, thoudands will lose their jobs and the taxpayers will lose an estimated $4+ billion ….

http://seekingalpha.com/article/76942-indymac-bancorp-inc-q1-2008-earnings-call-transcript

http://www.economicpolicyjournal.com/2008/07/is-treasury-secretary-paulson-trying-to.html

Not a chance..

I await with much giddiness what “happy news” is in store for us at about 4pm PST before the japanese continue it’s race to the bottom.

Ciao
MS