Logo Background RSS


Ben & O.

  • Written by Syndicated Publisher No Comments Comments
    September 11, 2011

    Okay, so Ben said nothing. Not surprising. He spoke about that “range of options” that he thinks he has. Jon Hilsenrath over at the Journal told us about them last night.

    Dropping the ¼% rate on reserves is just stupid in my opinion. Bernanke may believe that if he puts a gun to head of the banks that they will magically start lending like mad. The gun, in this case, would be that the $2t of reserves the banks are sitting on would all of a sudden go from a small plus to a minus. The theory being that banks will find assets and make new loans. Wrong. The real problem today is that there are not enough qualified borrowers, not a shortage or the cost of credit.What Bernanke wants the banks to do is make bad loans. Loans to borrowers who have little or no equity. Bernanke would just love to see the banks do a $50B syndicated corporate buyout loan loan. He’d like to see one of those every month. He wants money so cheap and so easy that is causes a spec bid in real estate. No money down. 1% re-set mortgages. He wants junk bonds issuers to sell boatloads of paper.That’s not going to happen. If this is what we get, Ben should be fired. A plan to force banks to re-liquefy the country would be an exact repeat of all the mistakes that have been made over the past twenty years. If this is the choice, short the banks.The “Twist” is a dumb option to consider in the fall of 2011. The ten year is at 2% and Ben thinks he can move the needle if he pushes it to 1.75%? Just when in history did a flat yield curve coincide with a positive economic environment? If Ben does the Twist, short all the financials.If we were facing a steep yield curve I would (reluctantly) agree that supporting longer rates would be a viable option. That is not what we are facing, therefore the twist is no cure. It will just cause distortions and generate big profits for the primary dealers.Which leaves TALK. Talk could take two forms. The Chairman could say:
    From now on the Fed will keep the monetary gas pedal stuck on the floor until core inflation rise above 5% on a trailing basis.


    The Fed will pursue every monetary option at its disposal until such time as the unemployment rate falls below 6%. The Fed will ignore the inflationary consequences and will no longer maintain any upper band for core inflation.

    Well, if does any of that, he is a short-timer. 250 million adults will rise up against this policy. Buy all the gold you can if this is the result.

    Which gets us nicely to what O is going to say tonight. I maintain that there are some connections to the two speeches.
    We are going to get an infrastructure bank. The new bank will be initially funded with $100 billion. The $100 large will come from a special tax on corporate America. This is a deal from our boy Jeff Immelt. The tax will actually be a Tax Holiday for corporate America. The US multinationals are sitting on $2+T offshore. This money is subject to tax at 35%. It has already been taxed (foreign) at 10+%, so to bring it back home would trigger a liability of 500-600 bil. The $100b is 20 cents on the dollar for the multinationals. Two problems solved. We get a bank, corporate America gets an extra 500b.

    If this were to happen there would be 200 big-shot CEO’s who would be smoking Cuban cigars and drinking expensive French brandy. Overnight mega bucks for that crowd.

    Obama is going to ask for an additional year on the 2% break on worker’s FICA taxes. The question is, does he ask for an expansion? I think he will. There is a chance for him to increase the break to 4%. This would put an extra $1,000 in the average two-income family.

    He might go even further. He might create a savings for employers of an additional 2%. There would be strings on the companies and how the money could be used (jobs).

    Republicans can’t disagree with these recommendations.It is what they advocate. Lower taxes on workers and employers and jobs will follow.

    But the deficit for 2102 blows up. The “Baseline” assumption is that the FICA tax break is reversed in 2012. If it is extended and expanded by an additional 1% for workers and 2% for employers it translates into a cost of $325 billion. We would go over $2 trillion on the deficit as a result.
    There has been far to much talk about some type of mortgage deal for there to be no action tonight. The leaks suggest that Fannie, Freddie and FHA will somehow facilitate a mega refi.

    I think this is a theoretical option. It is very complex to execute this type of plan. There are consequences to investors and savers. (I’m not sure anyone gives a damn about them.) There would be new (interest rate, not credit) risks at the mortgage agencies. The head of the FHFA has said that will not happen. This risk could, in principal, be absorbed by the Fed.

    If there is a discussion tonight about a ReFi from Heaven there will be 55 million borrowers wondering if they just won the lotto. This is a check list to see if you might get lucky:

    -If you have a mortgage that either started or was refinanced after June of 2008 you win. 95% of those mortgages are with the Agencies.

    -Pre 08 the odds of a deal fall to 70-30 against you. Good luck!

    -You have to be current on payments. (It’s okay if you slipped up a little)

    -If you have a second lien or a HELOC you may be in luck. These loans will be cut by 70-80%. The balance will be rolled into the new mortgage.

    -You can be underwater to do the deal!! But you have to be working..

    If you are on this list you will get a new 4% mortgage at no cost to you.

    I admit that this is fantasyland. But I see very few options that would benefit homeowners and boost consumption. We shall see in a matter of hours.

    Should the topic of mortgages come up tonight there will be one man who is smiling more than any other in the land. That would be Ben Bernanke. The mega refi would also be his QE#3 and #4 rolled into one.Bruce Krasting: Ben & O.

    Images: Flickr (licence attribution)

    About The Author – Bruce Krasting

    I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it.