Big loss for the US Treasury

On June 27^th the US Treasury Department announced the resignation of a top agency official; Jeffrey Goldstein, he will leave the domestic finance department at the end of July. He was overseeing the Dodd-Frank Act implementation and the chief architect of the Financial Stability Oversight Council. The reason released by the Treasury of his leave is because he wants to spend more time with his family, which is the yardstick reason many US government officials are given to resign. Goldstein, was a managing director of the World Bank and was a key person for the government’s involvement with Fannie Mae and Freddie Mac. Before he took the position of US Treasury official two years ago he had to pay at least $10.5 million to several investment partnerships according to his ethics filing. This doesn’t show a boast of confidence in the implementation and strategy for Dodd-Frank Act and the future of the US Treasury given a top official has left in such short time frame.

http://www.reuters.com/article/2011/06/28/usa-treasury-goldstein-idUSN1E75Q1ZG20110628

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aD6yvvScHUPM

Why so low 3 and 6 month Treasury

The effects of the Dodd-Frank Act are beginning to have repercussions in the Treasuries market as U.S. banks began to hoard Treasury bonds thus putting a strain on the repo market. This strain was present on Friday April 8^th and Monday April 11 when the 6-month T-Bill touched an all time record low yield of 11 bps and the 3-month T-Bill touched a 13-month low yield of 3 bps.

This Treasury desert amounted to about $40 billion on Friday raising the anxiety level for future higher borrowing costs for money market funds and their respective investors. The rule was implemented by the FDIC on April 1^st and forced many large banks to refrain from lending out their Treasury Holdings thus eliminating bank arbitrage opportunities thanks to the plentiful Treasury bond supply constraint collateral from the Fed’s $600 billion bond buying program.

Before April 1^st banks would typically lend out their Treasury holdings in the overnight Treasury repo market and take those proceeds and leave them at the Fed which paid them some interest on the reserves. Some large banks would also borrow funds from GSE’s such as Fannie Mae or Freddie Mac in the Fed-Funds market and park them in the Fed to earn a little higher spread. Although, these unintended consequences seem to be short term while markets become accustom to the rule, this past week’s yield lows had some effects in profitability for large money market funds around the world.

http://www.reuters.com/article/2011/04/05/markets-money-idUSN0512901520110405

Risk Retention and its Disassembling Consequence

With the idiosyncrasy and instability in financial economic markets, the long-awaited proposal of the Dodd-Frank Act’s risk retention requirement was released on March 29^th with the SEC acting on it on March 30^th. This proposal pays attention to the mortgage securitization and exempted classes of loans referred to as the “Qualified Residential Mortgages” or QRMs.

The proposal states that for a loan to qualify for GSE backing the borrower must make at least a 20% down payment or at least 25% of the mortgage is to be refinance or 30% if it’s a cash-out refinance. The big change with the proposal is that loans with a federal guarantee such as from FHA, Fannie or Freddie backing are exempt from risk retention during their conservatorship.

So what does this mean? Down the future it could make it more difficult for private securitization of competitors thus impacting the ability of prospective borrowers to get approved and most importantly making the road longer and challenging to unwind the federal support of the GSEs housing finance support. Here is the proposal link:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110329a1.pdf