2008 isn’t 1998
Russia’s reserves fell by $16.4 billion last week.
Data released by Russia’s central bank showed a drop in foreign currency reserves of just over $16.4bn in the week beginning August 8. This was one of the largest absolute weekly drops in 10 years, according to Ivan Tchakarov at Lehman Brothers.
Some of that reflects the fall in the dollar value of Russia’s existing rubles, but Russia’s central bank still likely sold close to $10 billion of foreign exchange to limit the rubles slide.
No one though is that worried that Russia is going to default — or run out of cash. It still has well over $550 billion left in the bank. And with oil trading between $115 and $120 a barrel, Russia should be able to replenish its coffers quickly.
To be sure, capital outflows have put some pressure on Russia’s domestic market, and domestic borrowing costs are up. That may constrain the Kremlin a bit. Charles Clover of the FT writes:
global market sentiment … could end up being an important check on Kremlin decision-making. “The million-headed hydra of the bourgeoisie has sent a signal: ‘change your course, comrades!’” wrote the popular internet columnist Dmitry Oreshkin on www.ej.ru in a joking reference to the communist background of Russia’s leadership.
But it isn’t anything like 1998.
At the end of June 1998, Russia only had around $11 billion in the bank — almost all borrowed from the IMF. The United States decision not to support the disbursement of a $5 billion installment on Russia’s IMF loan was enough to leave Russia effectively bust, and to force a default.
Today Russia doesn’t need US or European financial support. Indeed, right now, it is the US that needs financial support from other governments. At least for the Agency market. And a few US financial institutions seem rather keen on getting financing from the world’s development banks.
US seemed to push Russia in every front in the past 2 decades, no wonder Russia now wanted to pay back the honor.
fat brick - I agree.
Today Russia doesn’t need US or European financial support. Indeed, right now, it is the US that needs financial support from other governments. At least for the Agency market. And a few US financial institutions seem rather keen on getting financing from the world’s development banks.
The US has a CB. Can’t the Fed just buy the Agency bonds to help keep them solvent for the next year until the housing market bottoms. Thanks to foreign CBs the US has sold alot of low yielding US Treasuries to help finance the deal.
aim: Can’t the Fed just buy the Agency bonds to help keep them solvent for the next year until the housing market bottoms.
It could. I don’t see why it should. It’s possible that the housing market won’t bottom next year. If the Fed buys $100 billion of agency bonds and either Freddie and Fannie default, then what happens?
Also if you give someone money, generally in exchange, you end up with some control over how they use it. If the Fed gives Freddie and Fannie money, then there has to be some sort of punishment or control involved.
For an interesting analysis of the USSR vs USA, have a look at , Closing the ‘Collapse Gap’: the USSR was better prepared for collapse than the US by Dmitry Orlov at
http://www.energybulletin.net/node/23259
The US central bank could buy agency bonds, but to avoid printing money it would have to sell Treasuries. Indeed, it has been doing something similar — lending to commercial and investment banks against agency collateral and sterilizing this by reducing its treasury holdings.
this “funds” the agencies. it doesn’t though provide any financing for the US current account deficit. to do that, the US needs to sell assets to foreign investors.
aim: Careful what you wish for.
Actually when concerns about fannie and freddie emerged, first we got a selloff in the stocks. At that point the Fed proposed buying some of the stock to prop it up. I think they still have a few billion authorized for that, although it my be a moot move at this point.
But the GSE bond market was not happy at all with that solution. They wanted the “implicit” government guarantee to become much more explicit. The article here describes how Paulson rode in to the rescue.
How expensive this would be to the taxpayer is an unknown at this time. The only thing that would cost money is defaults. In the old days I always remember being told that Fannie had the highest lending standards and only buy pristine loans. Now I hear they bought less than pristine stuff, and of course after a housing boom and bust the value of the collateral is suspect even on “good” loans. Also default rates from even the highest credit worthy segment of borrowers may increase above historical levels.
But longer term the big risk is that we end up institutionalizing the government as a direct housing lender. That is a scary thought. “Too big to fail”, I’m sure.
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“Investors in Asia, the biggest foreign owners of Fannie Mae’s $3 trillion of bonds, were asking the Treasury to bolster the government- sponsored company and its smaller competitor, Freddie Mac, said three people with knowledge of the talks.”
Fannie’s Mudd Soothed Asian Investors as Bonds Rose (Update2)
By Dawn Kopecki
Aug. 4 (Bloomberg) — Fannie Mae Chief Executive Officer Daniel Mudd was sitting down to a glass of wine with his wife at their Washington home around 10 p.m. on Saturday July 12 when Treasury Secretary Henry Paulson called.
Concerns about the financial health of the biggest U.S. mortgage finance company had driven Fannie Mae’s borrowing costs to the highest since March the previous week and its shares had tumbled 45 percent on the New York Stock Exchange. Investors in Asia, the biggest foreign owners of Fannie Mae’s $3 trillion of bonds, were asking the Treasury to bolster the government- sponsored company and its smaller competitor, Freddie Mac, said three people with knowledge of the talks.
Paulson told Mudd he had a plan to restore confidence in Fannie and Freddie, the core of the Bush administration’s efforts to revive the U.S. housing market. “At that point, the proposal began to take form,” Mudd, 49, said in an interview. “We’re trying to solve a crisis of confidence. Would this do it?”
The next afternoon, before financial markets opened Monday in Asia, Paulson announced the rescue plan, saying he would seek authority to buy unlimited equity stakes in the companies and their bonds if needed, while the Federal Reserve would lend directly to Fannie and Freddie. Congress included the proposals in a broader housing bill that President George W. Bush signed into law last week.
Asian investors were among the most important groups to soothe because central banks, financial institutions and funds in the region own $800 billion of Fannie Mae and Freddie Mac’s $5.2 trillion in debt, according to data compiled by the Treasury. U.S. officials were concerned that sales from the region would push lending rates higher, said the people, who declined to be named because the discussions were confidential.
Stocks Plunge
The extra yield investors demanded to own five-year notes of Washington-based Fannie rather than Treasuries rose to 101 basis points, or 1.01 percentage point, on July 9, from an average of 39 basis points over the previous five years.
Borrowing costs climbed and the companies’ shares collapsed after analysts at New York-based Lehman Brothers Holdings Inc. said in a July 7 report that proposed accounting changes might force Fannie Mae and McLean, Virginia-based Freddie Mac to raise a combined $75 billion in capital.
Fannie tumbled 45 percent to $10.25 in New York Stock Exchange trading that week, while Freddie fell 47 percent to $7.75. A year ago both companies traded above $60.
At the height of the panic, Mudd dispatched two lieutenants to Asia to meet with debt investors. He declined to say which countries were visited, or the names of the officials.
`Extremely Worrisome’
Freddie and Fannie rely on foreign institutions. Investors and central banks outside the U.S. own about $1.3 trillion of Fannie and Freddie’s corporate and mortgage bonds, according to the Treasury. Chinese institutions are the biggest holders in Asia. European investors own $300 billion of the securities.
“If they stop buying the agency debt, then yields would increase,” Ajay Rajadhyaksha, the head of U.S. fixed-income strategy at Barclays Capital in New York, said in reference to Asia investors. “The costs would get passed to the consumers.”
The average rate on a 30-year mortgage jumped to 6.59 percent on July 18 from 6.22 percent on July 11 as demand for the companies’ debt waned, he said. If Asia started selling Fannie and Freddie holdings, “that would be extremely worrisome,” Rajadhyaksha said.
Like when it announced the bailout of Bear Stearns Cos. by JPMorgan Chase & Co. on a Sunday in March, the Treasury rushed to pull together a statement on July 13 before markets opened in Tokyo.
Seen the Movie
Paulson, the 62-year-old former CEO of Goldman Sachs Group Inc., “knows the markets; he’s seen parts of this movie before,” Mudd said. The decision to allow Fannie and Freddie to borrow from the Fed’s so-called discount window was meant to “send a message to the markets that it wasn’t just a someday aspiration, but those confidence building measures are in place right now before Tokyo opens on Sunday night,” he said.
Freddie CEO Richard Syron, 64, declined to comment.
Fannie was created as part of Franklin D. Roosevelt’s New Deal in the 1930s, a time when the U.S. economy was struggling to emerge from the stock market crash, industrial production had tumbled 50 percent and the unemployment rate rose as high as 30 percent. Freddie started in 1970, when the economy was strained by the Vietnam War.
Both have the implicit guarantee of the U.S. government, so they can borrow at lower rates than banks and make money by purchasing higher-yielding mortgages from home lenders, providing new capital for loans. The companies own or guarantee almost half the $12 trillion of residential mortgages outstanding.
Primary Source
Congress and the Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, loosened restrictions on the companies this year, allowing them to buy more mortgages and temporarily purchase loans up to $729,500 in larger markets, compared with the previous limit of $417,000. The new legislation allows them to buy loans up to $625,000 in the 91 most-expensive markets.
The companies have become the primary source of cash for the housing market as banks and brokers, battered by $480 billion of losses and writedowns from subprime-contaminated securities, reduce lending. Fannie and Freddie were responsible for more than 80 percent of the mortgage bonds created in the first quarter, Ofheo said.
“The markets care as much about the government’s comments about us, especially in this market,” Fannie General Counsel Beth Wilkinson said in an interview. “If there’s any kind of mixed message during a very volatile market it could be very detrimental to the GSEs and therefore the economy.”
Marines in Lebanon
Mudd, the son of former CBS Evening News reporter Roger Mudd, has some experience with crisis management. While a first lieutenant in the Marines, he led the first platoon airlifted into Beirut on Oct. 24, 1983, one day after a truck bomb leveled a barracks that housed Marines dispatched as peacekeepers during Lebanon’s civil war.
He ran General Electric Capital Corp.’s Asian businesses during the region’s slump in 1998. In 2004, four years after joining Fannie as chief operating officer, he took over for CEO Franklin Raines as the company tried to recover from an $11 billion accounting restatement and securities fraud charges.
“You develop a pretty simple, straightforward set of priorities and marching orders,” said Mudd, who’d canceled plans to spend summer weekends with his wife and four children at their rented vacation home in Nantucket. As the declines steepened, his wife flew home to support him, leaving the kids with her sister.
Yields Narrow
Yields on Fannie five-year debt narrowed to within 76 basis points of Treasuries. Fannie shares rose 1 cent today to $11.83 on the New York Stock Exchange, up from a 16-year low of $7.07 on July 15. Freddie declined 46 cents, or 5.8 percent, to $7.52, compared with its 16-year low of $5.26 the same day.
“Given the circumstances, he’s done a pretty good job,” David Dreman, chairman of Dreman Value Management LLC in Jersey City, New Jersey, said of Mudd. Dreman’s firm held 10.4 million of Fannie shares at the end of March. He said he added to those holdings last quarter, though is “holding tight” now.
Fannie reports second-quarter results this month, and will likely announce a loss of 74 cents a share, or about $730 million, according to the average estimate of 11 analysts surveyed by Bloomberg. Freddie may report a loss of 60 cents, or about $388 million.
To contact the reporter on this story: Dawn Kopecki in Washi
[...] one though is too worried that Russia is going to default, writes Brian [...]
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