(Stolen) nighttime food for thought

My usual gambits through financial blogosphere have turned up some gems tonight.

Courtesy of Washington’s Blog (who sources T2 Capital & Agora Financial), we present a graphical display of the Option ARM reset crisis-to-be. Wells Fargo in particular has a large option ARM book, much of which is attributable to its purchase of Wachovia, but all the TBTFs have substantial exposure and minimal loss provisions against it, in already well-inflated marked-to-myth balance sheets. Asset books should begin deteriorating again in 2010, and another liquidity crunch will follow.

Option ARM reset schedule

Next is courtesy of Tim Backshall, chief strategist at Credit Derivatives Research, who delves into TGLP as being a potential debt burden for banks (read: potential “rationalization” for more bailouts) and may necessitate capital raising as rates rise and debt servicing burdens already weak capital bases.

Last on tonight’s list is a piece from Jesse’s Cafe Americain that references a piece from ContraryInvestor. Apparently 86% of the Fed’s MBS purchases (part of the QE program) have occurred during OpEx weeks.

Fed MBS purchases breakdown

To quote:

In following the money, this is the only thing we can prove in terms of actual Fed actions relative to the equity market itself. A mere coincidence? Not a chance. As we see it, the Fed printing of dough to buy back MBS has had a dual purpose. The ultimate new age definition of cross-marketing? Yeah, something like that.

Now that we have covered this data, the question of “what happens when the Fed stops printing money in March?” takes on much broader meaning and significance. Of course the Fed has not directly been buying equities with their clever and clearly very selective timing of MBS purchases, but they sure as heck were providing the immediate and sizable liquidity for “some one else” to do so during equity periods where they could achieve “maximum effect”.

Wildly enough, at least as of last week’s option-ex, the Fed was still purchasing $60B in MBS. So, as we stand here today, there are now two more options expirations weeks prior to us theoretically reaching the end of the game for Fed printing and MBS buying. You already know we’ll be watching, errr.. following the money that is.

When/if the Fed stops printing to buy MBS, do we also lose an options expiration week and month end equity liquidity sponsor? Something we suggest you think about as we move forward. See why we suggest following the money is a key theme?

And some great commentary on the topic, as always, from Zero Hedge:

The implication is clear: provide liquidity around the time most needed to “sustain” the market each month. Alas, we are willing to relieve the Fed of any allegations of wrongdoing, at least in this particular instance. As the attached chart from SIFMA demonstrates (see link), the bulk of MBS settlements simply occur during the middle two weeks of the month. What one can glean, is what particular class of MBS the Fed is focusing on: whether it is Freddie, Fannie or Ginnie, and either 15, 30 year or balloons. We suggest a granular analysis of the composition of monetized MBS would reveal a correlation between the appropriate settlement date and the relevant securities.

Of course, if this explanation is too simplistic, we would gladly entertain alternative perspectives.

These are indeed interesting times…

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