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Commentary

The Big Time US Bailout

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The US Fed just decided to infuse the market with liquidity of nearly $200 billion, by accepting as collateral, mortgage backed securities (MBS). This is a “Term Securities Lending Facility”, which is currently for a period of 28 days from March 27.

What does this mean?

First, this is not the US govt. buying the securities. No. It’s lending on the BASIS of these securities for 28 days, and the risk and recoverability is still the responsibility of the owner.

Second, this puts new money in the hands of people who own these mortgages and are probably having huge losses on them. The assumption is that the new money will allow them to lend more. I don’t know about that. A 28 day reprieve? What if the fed doesn’t roll it over after 28 days? And $200 billion is a lot of money.

Third, this may be funded by AAA rated MBSes, but many of them are just junk in the guise of AAA, because of lousy rating by the agencies. What happens when these mortgages turn into defaults? Nobody knows, and it’s likely the Fed won’t accept them as securities anymore…tough.

I’m not sure how this changes anything, but supposedly people in the US like it because their market went up some 400 points (3.5%) yesterday. We tried to follow but someone figured India is really slowing down, as the Jan Industrial output showed some sub-6% growth, and on top of that some lousy industry figures. So we started big and then went back to where we were yesterday.

So my take is: People were waiting for some good news to buy, any news really. And a lot of shorts caved yesterday and took the index higher. So in the next few days, there will be more good news – as the Fed cuts interest rates again – and some more shorts will go out the door in the US. And then we will get the next round of really-bad-news from the banks and we’re back to square one. Except we’ll be back to square zero this time. The 1 year trend is still bearish.

In India I’m still ambivalent. We should move DOWN in the 1 year time frame, but now it looks like a consolidation phase. Most likely violent moves up, violent moves down types. Fun times!

Disclosure: Short the Nifty index; own put options.

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