Barclays says they expect investors attention to turn towards Washington, where, a new financial rescue plan is well in the works, with some sort of official announcement expected in the near-term.
They expect a multi-prong approach including some or all of: asset guarantees; an aggregator bank; additional capital injections, while avoiding nationalizations; and foreclosure mitigation tactics. To the extent the plan dispels any concerns regarding nationalization BAC and C could be beneficiaries.
With respect to the 'Aggregator Bank', those that have taken the largest write-downs could be the biggest beneficiaries. While C and BAC come to mind, it's unclear how their participation in the asset guarantee program influences this. Still, they note C's ABS CDO were not covered. ZION is another name that could benefit.
To extent these programs restore liquidity to the marketplace, thus reducing unrealized losses positions on AFS securities, the firm believes STT, followed by PNC, BK and USB could be helped relatively more.
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WSJ reports the nation's top economic officials are discussing a new way to stabilize the financial system by buying a portion of banks' bad assets and offering guarantees against future losses on some of the remainder, in an effort to help banks while trying to mitigate the cost to taxpayers.
This approach, which merges two competing ideas, was discussed this week at a meeting that included Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair, according to people briefed on the meeting. The latest bank-aid discussions represent one idea of several being contemplated by officials, who stressed that conversations are fluid and much could change.
Under the concept being discussed, the government "bad bank," possibly run by the FDIC, would buy only assets banks have already marked down heavily. This could avoid crushing the value of other assets held by banks. It could also potentially sidestep the pricing dilemma because banks have already recognized the low value of the assets being purchased.
The remaining troubled assets -- likely a sizable amount -- would be covered by a type of insurance against future losses. This would apply to mortgages, mortgage-backed securities and other loans that banks are holding until they mature.
Banks have probably given these assets an overly optimistic value because they plan to hold them. This would be similar to a structure set up recently to protect Citigroup and Bank of America, in which the government and the bank would share future losses on a set pool of assets. In addition, the Treasury is also likely to make more capital injections into banks.
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WSJ reports defaults on a popular form of mortgage that gave home buyers a choice of how much to pay each month are rising and could rival those on subprime loans, potentially causing more trouble for investors and banks. Nearly $750 billion of option adjustable-rate mortgages, or option ARMs, were issued from 2004 to 2007, according to Inside Mortgage Finance, an industry publication. Rising delinquencies are creating fresh challenges for companies that acquired troubled option-ARM lenders.
As of December, 28% of option ARMs were delinquent or in foreclosure, according to LPS Applied Analytics, a data co that analyzes mortgage performance. That compares with 23% in September. An additional 7% involve properties that have already been taken back by the lenders. By comparison, 6% of prime loans have problems. Problems with subprime are still the worst. Just over half of subprime loans were delinquent, in foreclosure, or related to bank-owned properties as of December.
The nearly $750 billion of option ARMs issued from 2004 to 2007 compares with roughly $1.9 trillion each of subprime and jumbo mortgages in that period. Nearly 61% of option ARMs originated in 2007 will eventually default, according to a recent analysis by Goldman Sachs, which assumed a further 10% decline in home prices. That compares with a 63% default rate for subprime loans originated in 2007. Goldman estimates more than half of all option ARMs outstanding will default.
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WSJ reports Fannie (FNM) has reached an agreement to work with one of its former critics, Neighborhood Assistance Corp. of America, to prevent foreclosures by reworking home mortgages to make them easier to afford. The agreement is one of several measures the government-backed mortgage company and its main rival, Freddie Mac (FRE), are working on to avoid a further jump in foreclosures. The two companies recently announced streamlined procedures for modifying loans and a suspension of foreclosure sales and evictions that is due to end Saturday.
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The Wall Street Journal reports government officials seeking to revamp the U.S. financial bailout have discussed spending another $1-2 trln to help restore banks to health, according to people familiar with the matter.
President Barack Obama's new administration is wrestling with how to stem the continuing loss of confidence in the financial system, as it divides up the remaining $350 bln from the $700 bln TARP launched last fall. The potential size of rescue efforts being discussed suggests the administration may need to ask Congress for more funds.
Some of the remaining $350 bln of TARP funds has already been earmarked for other efforts, including aid to auto makers and to homeowners facing foreclosure. The administration, which could announce its plans within days, hasn't yet made a determination on the final shape of its new proposal, and the exact details could change.
Among the issues officials are wrestling with: How to fix damaged financial institutions without ending up owning them.
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