News&Notes: Money Mkt Investor Funding, Synthetic CDOs, & Mr. Mortgage

RCM Comment: Due to recent requests, I wish this morning to remind you, the reader, the purpose of this blog. We are not seeking to explain short term market gyration. Volatility has increased exponentially and we feel discussing market moves and direction at this time would be detrimental. Instead, this blog was created for the purpose of helping you cut through the confusion and spin of the news cycle. We publish in these pages only the news stories we feel will have a real lasting imprint on the markets. Through the use of color and commentary we hope we are able to help you better understand the events of the day and provide you with some solid footing in the middle of this quagmire of confusion and misdirection. As always, we welcome any questions or comments you may have. This is an important time for dialogue so feel free to communicate with us where directed at the bottom of each blog or by phone (561) 575-6832.

Details of Federal Reserve Money Market Investor Funding Facility
The Federal Reserve Board on Tuesday announced the creation of the Money Market Investor Funding Facility, which will support a private-sector initiative designed to provide liquidity to U.S. money market investors. Under the MMIFF, authorized by the Board under Section 13(3) of the Federal Reserve Act, the Federal Reserve Bank of New York (FRBNY) will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors. The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs. By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments. Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households.

Trouble for banks, insurers may lurk in synthetic CDOs - WSJ
WSJ reports a recent rash of bank failures is wreaking havoc on a large but little-known corner of the credit markets, in a development that could mean more write-downs for banks and higher borrowing costs for companies everywhere. Even as some lending markets begin to recover from last month's demise of Lehman Brothers, the securities firm's default -- together with those of other U.S. and European banks -- is causing new dislocations in the multitrillion-dollar market for complex investments known as synthetic collateralized debt obligations. That could mean trouble for banks, hedge funds and insurance cos around the world, which used synthetic CDOs as a way to invest in diversified portfolios of companies without actually buying those companies' bonds. Many synthetic CDOs contain a heavy dose of exposure to financial companies, including Lehman, Washington Mutual and recently nationalized Icelandic banks Glitnir Bank hf, Kaupthing Bank hf and Landsbanki Islands hf. As a result, the users of synthetic CDOs are facing a wave of credit-rating downgrades and outright losses, which are coming to light gradually as ratings cos pore over hundreds of individual synthetic-CDO deals. Meanwhile, hedge funds and other investors are heading for the exits amid worries about how bad the losses and downgrades will be, causing the market value of synthetic CDOs to slide. Dealers are offering about 50 cents on the dollar or less for some pieces of synthetic CDOs that used to be rated triple-A, according to one trader. That is down from about 60 cents on the dollar only three weeks ago. "We've seen some hedge funds trying to get out of positions, and that's rattling credit markets," said Laurent Gueunier, head of structured corporate credit at AXA Investment Managers in Paris.

Written 10/20 by Mr. Mortgage's Guide to the Truth:

Today, the daytime financial market variety shows are simply giddy over the DataQuick report saying ‘SOUTHERN CA HOME SALES ARE UP 65% OVER LAST YEAR’.
Sorry to rain on the pom-pom parade, but how I see it home sales were worse last month. Let me explain. In Sept 2007, there were 12,455 sales of which 12.6% (1570) were foreclosure related. This means last Sept there were 10,885 ‘organic’ sales, which is ‘me selling a home to you’. In Sept 2008, total sales were in fact up 65% over last year at 20,497. But, 50% were foreclosure related meaning only 10,249 organic sales went off. This is significant and worse than a year ago. Also, remember that last Sept sales plunged by 30% from August due to lenders pulling out of the jumbo market all at the same time so it was not a tough month to beat.
Organic sales have plummeted as prices have fallen because with values down 40%-70% across the state, so many are underwater. When you owe more than your home is worth you can’t sell or refinance. You are stuck. Additionally, more than 10k homes in SoCal entered the foreclosure process or were actually foreclosed upon during the month of Sept meaning the problem is getting worse because more inventory is coming in than going out. Lastly, prices fell a sharp 7.6% in a single month, which puts even more people underwater in their homes and exponentially increases the chance of loan default across all paper types. Please show me a month where organic sales rise, prices stay steady or rise and foreclosures stay steady or fall and I will call that a ‘better’ report. This surely is not it.