At $10 per share its pretty tough to argue Bear Stearns was bailed out. Employees darn near lost everything. However, Noland is correct that central banks around the globe executed unparalleled concerted market liquidity operations. In that regard, Noland has the key idea correct.

Here at home, the GSEs’ regulator spoke publicly about Fannie and Freddie having the capacity to add $200 billion of mortgages to their balances sheets, with the possibility of increasing their guarantee business as much as $2 TN this year (certainly including “jumbo” mortgages).

In practice there is little market for Jumbos. Where there is a market, interest rates are sky high because of credit risk. Jumbo rates are currently two points higher than conforming loans, and even higher in distressed areas. Furthermore, jumbos often require a larger down payment to boot. Liquidity on jumbos is more imaginary than real, according to my contacts. In addition to the problem in jumbos, there is practically no market for condos. I discussed this situation in Condo Credit Squeeze. That squeeze is going to cause a wave of bankruptcies at regional banks for reasons cited.

The Federal Home Loan Bank system was given the ok to continue aggressive liquidity injections and balloon its balance sheet in the process. And now (see “GSE Watch” above) we see that the Federal Housing Administration (with its new mandate and $729,550 loan limit) is likely to increase federal government mortgage insurance by as much as $200bn this year, while Washington’s Ginnie Mae is in the midst of a securitization boom.

It is likely to do no such thing. The reason is the $729,550 loan limit is temporary. And because it expires at the end of the year, and because Fannie Mae (FNM) and Freddie Mac (FRE) have provisions in distressed areas like California, few deals are getting done. Banks are unwilling to do deals because they do not want to get stuck holding paper they cannot sell to Fannie after the end of the year. I have discussed this situation with mortgage brokers and this upping the limit is more show than reality. Perhaps Congress will remove that temporary restriction but as of now, not much is happening. One final point about jumbos: Fannie Mae and Freddie Mac will not refinance loans that are underwater. That alone will put a halt to GSEs rapidly expanding balance sheets on account of jumbos.

It is, as well, worth noting that JPMorgan Chase expanded assets by $80.7bn during the first quarter (20.7% annualized) to $1.642 TN, with six-month growth of $163.3bn (22.1% annualized). Goldman Sachs expanded its balance sheets by $69.2bn during Q1 (24.7% annualized) to $1.189 TN, with half-year growth of $143.2bn (27.4%). Even Wells Fargo grew assets at an almost 14% pace this past quarter. And we know that Bank Credit overall has expanded at a 12.6% rate over the past 38 weeks.

Meanwhile, GSE MBS issuance has been ramped up to a record pace. And let’s not forget the Credit intermediation function now being carried out by the money fund complex – with assets having increased an unprecedented $371bn y-t-d (41.3% annualized) and $900bn over the past 38 weeks (47.7% annualized). It is also worth noting the $184bn y-t-d increase (29% annualized) in foreign “custody” holdings held at the Fed. Sure, the Credit system remains under significant stress, with additional mortgage and corporate Credit deterioration in the offing. But, at least for now, policymakers have successfully stemmed systemic deleveraging. The Credit system is simply not in deflationary collapse mode.

Technically Noland is correct. However, I ask the question: at what pace did Wells Fargo (WFC), Citigroup (C), JPMorgan etc, expand credit if that credit was marked to market? Is bank credit marked to market expanding or contracting? I suggest it's contracting. One of the ways it is being masked is by hiding garbage in Level 3 assets that were Level 2 assets last quarter. Another way it is being masked is by pretending that the collateral the Fed is swapping with banks and brokerages is somewhere close to full value.

I'm quite certain that marked to market credit is contracting. However, I cannot prove it. I talked about this in Night of the Living Fed. "Several people have asked me recently if I have been changing my tune on a Fed bailout. The answer is no. I long ago predicted the Fed would try all sorts of things to stop a deflation threat. But I also have also said, these measures would not work and indeed they haven't. What is happening is the Zombification of Banks, that is exactly what happened to Japan as well."

Zombification does not halt deflation, it prolongs it. That is the main point I believe Noland misses.

When the Fed and Washington radically altered the rules of U.S. finance last month, they placed in jeopardy huge positions that had been put in place to hedge against and profit from systemic crisis. With the end of “Stage one” arises a major short squeeze in the Credit, equities, and derivatives markets. And when it comes to contemplating the scope and ramifications of today’s “hedging” activities, we’re clearly in Uncharted Waters. It is not beyond reason that a disorderly unwind of “bearish” Credit market positions could incite a mini bout of liquidity, speculation, and Credit excess that exacerbates Global Monetary Instability - while Setting the Backdrop for Stage Two of the Crisis.

I certainly can agree with the idea of Global Monetary Instability and one reason is counterparty risk on credit default swaps.

Page 1 | 2 | 3 Next