We saw the first low-fee 30-year mortgage trades this week with a “5” in front (fleeting 5.875 percent), but carry this thought foremost: the low for mortgages will be at the moment of greatest fear, possibly right now.

We saw the first low-fee 30-year mortgage trades this week with a “5” in front (fleeting 5.875 percent), but carry this thought foremost: the low for mortgages will be at the moment of greatest fear, possibly right now. The moment the authorities engage effectively in stopping the worst credit crisis since the 1930s, mortgage rates will bottom — no matter how far the Fed cuts its cost of money in the months ahead.

The Fed and Treasury are miles from success, but this week for the first time show understanding that the credit crunch is worsening, and that new approaches are necessary (see tough-minded Lawrence Summers’ “Wake Up to Deepening Crisis” on www.ft.com, November 25). I believe that we are in a public-policy transition between a financial matter lost by error and delay since August to a political matter (read: “bailout”).

The economic data are grim: November layoffs are up 40,000 weekly from mid-year; orders for durable goods fell 0.7 percent in October; and home prices fell more in the second quarter than I thought possible, long before the effects of the crunch. One beneficial effect of global slowdown: oil is “down” to $88 a barrel.

Try not to watch the stock market. Its rally this week may accurately anticipate the benefits of a government rescue; more likely its pleasure at prospective Fed cuts is the happily wandering drunk who hasn’t noticed the open manhole.

Two Fed speeches are worth your time: Vice-Chair Donald Kohn sounded like a Chairman on Wednesday in a brief and brilliant piece. (Fed Chief Ben Bernanke last night was evasive — dissembling, really — asserting that the world had changed in November, accepting no responsibility for his October 31 statement that risks were balanced between those to growth and inflation, absurd then and now).

Mr. Kohn (on Alan Greenspan’s two-name list for his replacement, Bernanke conspicuous by absence) was painfully direct: there are three causes of the Crunch: counterparty risk (so many prospective failures of global institutions make trading among them thin and expensive); capital risk (it is evaporating, a cousin to #1), and liquidity risk. He said the Fed could deal with liquidity, and in thunderous silence made clear that the Fed has little or no ability to deal with risks one and two.

Here is the problem in capital and counterparty at financial institutions: minimum capital requirements at banks are 6 percent of assets, 17:1 leverage. If your assets have a bad year, losing just 6 percent of value, you’re done. Gonzo Alonzo.

It is terribly expensive to replace lost capital: new investors fear that you may still not know what you are doing, and existing investors fear serial “dilution” of their ownership percentage. This week Citibank sold 4.9 percent of itself for $7.5 billion, paying 11 percent on the money; and E-Trade sold 20 percent of itself (and a loan portfolio at 73 percent discount, trying to protect its internal bank, known on the Street as “The Hole”) for $2.5 billion, paying 13.5 percent. Note the 90-day shift in sentiment and capital cost since Bank of America paid $2 billion for 17 percent of Countrywide, $18/share, interest rate only 7.25 percent (BofA has lost about half the deal based on current Countrywide stock value). Good news for us: Freddie Mac raised $6 billion and paid a mere 8.375 percent.

[Footnote to re-cap: Citi sold to Abu Dhabi, and the fools’ chorus renewed its old, don’t-sell-our-birthright song. Global markets are global, global buyers are a good thing. Other dogs have bigger capital fleas: China announced that its $200 billion government investment fund would spend two-thirds of it to re-capitalize its banks. Subprime trouble? Uh huh: Mao-prime. The money you pay for your sneakers put to good use.]

Since it is beyond the power of the Fed to deal with capital and counterparty risks, we can’t just sit here watching more capital evaporate as more and more assets cross the event horizon to black hole. Everybody wants bad actors punished, and nobody wants a bailout — not taxpayers, and not the moral hazard police.

Get over it. Get on with it: firewall bad assets, give big banks and dealers get-out-of-jail capital cards, and restore the supply of new credit before this gets ugly.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription