Credit Markets Wobble
An announcement that rattled the housing sector came from AIG this morning. "AIG appears to be guilty of errors similar to those committed by mortgage-finance giant Freddie Mac a few years ago. Regulators found that Freddie, which has a massive derivatives portfolio, had been undervaluing some of its hedges as way to smooth earnings."
Besides being a guarantor of the GSE's mortgage backed securities (MBS), the firm holds a lot of mortgages directly. "New York-based Loews Corp. is currently the largest holder of GM debt. American International Group Inc.'s AIG Global Investment Group Inc., is second."
Those MBS's are already in trouble. "GM and GMAC bonds have plunged in value, trading at prices comparable to even lower-rung junk-rated debt. GM's widely traded 8.375 percent bonds, maturing in 2033, were recently changing hands at 76.688 cents on the dollar, down 26 percent since the beginning of the year."
"AIG has lost $58 billion in market value since its troubles came to light in February."
6 Comments:
So why is AIG up over 5% today? Can anyone explain?
Dead Cat Bounce
Shorts covering? See if it holds up through the day.
Something is bothering me. I'm sitting here listening to CNBC's "Closing Bell" program. The host and the guest are arguing about whether the economy can withstand a 3.5% Fed fund rate.
They are talking like a 3.5% Fed rate would totally kill the economy and yet that seems like NOTHING compared to what would happen if the bubble burst.
Am I alone in thinking that many, many people haven't realized that a bubble exists nor have any comprehension of how a bubble burst would damage the economy ?
I've got this feeling that we are walking toward the edge of a cliff blindfolded.
How much difference can a 25 BP hike be compared to the mass carnage that will occur if the housing bubble bursts ?
If the bubble bursts won't MBSs be severely downgraded in quality and drive a mass devaluation of bonds (ie driving up yields) ? Wouldn't that movement make 25BPs seem like peanuts ?
Why isn't anyone talking about this ? Just because houses don't trade on the stock market doesn't mean that there isn't a looming disaster that warrants attention.
This is going to be a tremendous learning experience one way or another.
Anon 1258,
All the smart money knows its a huge housing bubble but they need a few more suckers to buy in so they can unload their remaining properties...once that happens, a 50% drop is a given.
12:58 anon,
I agree, this is a much bigger issue than rates. Why won't they address it, other than to say it isn't a problem, is a good question. Perhaps the media is in deep fear?
MBS's are already headed down.
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