Monday 10/13. In the Absence of MBS, How About Some News?

By: Matthew Graham


Some choice snippets from the NYTimes "The Lede: Following the Financial Crisis and the Markets"
You probably can't avoid hearing about the .VIX these days. Not only does the following offer a concise definition, but also suggests that there is plenty of volatility ahead despite Bailout 2.0.
"Volatility works both ways | Noon Eastern The VIX, the measure of stock-market volatility that we took note of on Friday, offers a salient reminder today that a market stampeding upward is just as volatile as one stampeding downward.

Known formally as the Chicago Board Options Exchange Volatility Index, the VIX reflects how much it costs traders and portfolio managers to protect their holdings against sharp short-term movements in the S.& P. 500 stock index, based on the prices of put and call options for the component stocks. The higher the VIX, the more uncertainty there is about where the market is headed over the next 30 days, and the more investors will charge one another to write those options.

The VIX, which is usually no higher than the low 30's, shot to record-setting highs on Friday, registering over 75 at one point. The latest developments in official attempts to cauterize the financial crisis have trimmed it today, but not very much - it was reading around 63 at midday, a sign that traders are still bracing for a bumpy ride over the next month."

Speaking of Bailout 2.0, what's all that about?

"More detail on bailout version 2.0 | 11:05 a.m. Eastern Assistant Treasury Secretary Neel Kashkari offered a few new insights on the government's strategy to thaw the credit markets and shore up the larger economy by directly buying stakes in banks. The program represents a reorienting of the government's $700 billion bailout plan, one that shifts focus away from exclusively buying up troubled assets from the banks, and squares attention directly on the banks' capital. It would amount to a partial nationalization of some banks, but Mr. Kashkari emphasized this morning that it would be "voluntary" and aimed at "healthy institutions."

Here's the crucial nugget of a speech Mr. Kashkari delivered to the Institute of International Bankers:

"We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital."

The federal government is reaching out to private firms to enlist in throwing the process into gear, and has already tapped the firms Simpson Thatcher and Ennis Knupp and Associates as consultants on how to manage the assets it buys and set up the equity purchasing program."

We do expect this Bailout 2.0 to have a significant impact on "something." Specific enough for you? At first blush, despite stock strength today, and assuming some semblance of logical, capital market quid pro quo, this should have a positive impact on MBS. The degree to which one might concur would depend on how safe it is to assume any logic exists in this market. Furthermore, the positivity may be relegated largely to spread. Still, with what some might consider overblown losses on Friday and no reason for hope, is it too much to ask that the introduction of "hope" helps us retrace some of those losses. Is it not fair that we should read some risk tolerance into this morning's equities rally? Either way, we'll know in the morning.

But there will certainly be "more to know" far before tomorrow morning. Consider the fact that Bank Chiefs have received Paulson's Bat Signal ( or was that "bear" signal) and have been summoned to the "summit" of the Mount Doom:

"Bankers' summit at the Treasury | 11:40 a.m. Eastern American banks may be closed today to observe Columbus Day, but it's evidently no day off for the top executives of the nation's biggest financial institutions. They've been called to meet with Secretary Henry M. Paulson Jr. and his staff at the Treasury Department at 3 p.m. Eastern time, The Wall Street Journal is reporting, citing "people familiar with the matter." The list of invitees includes Ken Lewis of Bank of America, Jamie Dimon of J.P. Morgan Chase, Lloyd Blankfein of Goldman Sachs Group; John Mack of Morgan Stanley and Vikram Pandit of Citigroup, the paper says. Specific agenda not reported so far, but something tells us Topic A won't be comparing golf scores."

Will there be a secret handshake involved?

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In tangentially related news, Seeking Alpha reports: Moody's Is Acting on Private Mortgage Insurers

"Moody's Investors Service has downgraded the insurance financial strength ((IFS)) ratings of Radian Group's (NYSE: RDN) mortgage insurance subsidiaries, including Radian Guaranty and Amerin Guaranty which were downgraded to A2 from Aa3, and Radian Insurance which was downgraded to Baa1 from Aa3.

In the same rating action, Moody's also downgraded to A3 from Aa3 the IFS ratings of Radian Asset Assurance and Radian Asset Assurance Limited (collectively "Radian Asset"), and the senior debt rating of the holding company, Radian Group to Ba1 from A2. The outlook for the ratings is negative.


And did you notice the Stock Market Rebound?
Don't read too much into a monday following the worst week in the history of the DJIA, that also happens to be a holiday, that has the better portion of the market closed, is horribily illiquid, and thinly traded. Also, don't worry as much as you normally would about a DJIA rally in this market. In many ways, what is good for stocks is good for MBS as both are associated with risk. Now, we're right back to having to "wait and see" tomorrow morning.