´Sun Worldwideâ€˜: Toxic CDOs and MBSs still lurk on and off balance sheets of the worldâ€˜s banking giants.
Ã¢â‚¬Å“Sun WorldwideÃ¢â‚¬ analysts believe that despite strong Q1 results from banking giants JP Morgan Chase, Bank of America and Citigroup, the specter of the toxic asset the name given to the structured financial products at the heart of the credit crunch remains largely un-exorcised from the financial system and, with the very real possibility of a double-dip in the US housing market, the Federal Reserve may have bitten off more than it can chew.
The Fed ended its agency debt purchase program on 31st March this year having bought $1.2trn of mortgage-backed securities from, among others, Fannie Mae and Freddie Mac, the nationalized mortgage finance companies that between them own or guarantee much of Americaâ€˜s $12 trillion mortgage market. The aim was to keep mortgage rates artificially low in a bid to bolster the housing market.
Ã¢â‚¬Å“Sun WorldwideÃ¢â‚¬ believes that although the assets it purchased were generally sound, they were still tied to a housing market that remains stubbornly stagnant. If the mortgages making up the securities begin defaulting because of further falls in the housing market, the Fed will find itself in a similar position to the likes of Citigroup and Bank of America who found it impossible to value the assets they hold on their balance sheets as t he credit crunch developed.
Ã¢â‚¬Å“Sun WorldwideÃ¢â‚¬ analysts also reminded investors that the Fed had already taken the most toxic assets off the balance sheets of the banks through successive bailouts, asset purchases and liquidity injections which effectively leave the US taxpayer on the hook for trillions of dollars worth of bad debt.
A sobering thought !