THE BASIS POINT

More Reason For Banks To Hoard Cash, Taxpayer Bill For Fannie & Freddie, Rates Up On QE2 Uncertainty

More Reason For Banks To Hoard Cash
FDIC head Sheila Bair said major banks likely will be required to meet higher capital standards than those outlined in Basel III. “I have fairly high confidence there will be higher capitalization requirements for systemic institutions,” Bair said. She also scrutinized the Basel III rules, saying they aren’t as tough as she would like. Many in the mortgage banking world are nervous about what Elizabeth Warren will mean for independent mortgage banking operations.

Taxpayer Bill For Fannie & Freddie
How many billons do we have up our sleeve? According to the FHFA, Fannie Mae and Freddie Mac, whom taxpayers have owned for two years now, may need as much as $363 billion in additional capital from the Treasury through 2013 to offset losses and maintain a positive net worth. “The cumulative capital needs of the two housing finance giants, which were seized by the government in late 2008, will likely fall between $221 billion and $363 billion through 2013” depending on changes in home prices. F&F have drawn $148 billion in the form of preferred stock purchases by the Treasury through the second quarter of 2010, and dividend payments on the preferred stock are making up larger portions of the capital needs as time passes. One Treasury official said that he believes nearly 90 percent of the companies’ losses are behind them, with most attributable to loans made before the government took control. Currently, of course it is a “Fannie Freddie world” with more than 50% of production being F&F eligible.

Rates Up On QE2 Uncertainty
Leading Economic Indicators were reported yesterday and showed an increase of .3% in September. So what? LEI is comprised of 10 series: the factory workweek, new consumer goods orders, nondefense capital goods orders, stock prices, the Treasury yield curve, initial
jobless claims, vendor deliveries, building permits, consumer expectations and M2 money supply. Some argue that the LEI is distorted by the interest rate spread subcomponent of the index (10yr Treasury less fed funds), which is very strong right now. Regardless, with or without it, the LEI is nowhere near signaling another recession.

Yesterday we had mixed economic data, higher than expected Treasury supply looming next week ($109b versus expectation of $106b on 2s, 5s, 7s and 5yr TIPS), and the uncertainty of QE2 looming on the horizon – and it pushed rates slightly higher. The Dow, which had been as much as 100 points higher, ended the day up over 20 points. Meanwhile, the 10-year note ended the day worse by about .5 in price (2.53%), and MBS market prices finished down/worse between .125-.250, depending on the rate, on about $2.5 billion of sales. There is no economic news scheduled today, and we find the 10-yr yield up to 2.57%, and 30-yr mortgage prices are worse by about .250.