Musings on Buffett, Mortgage Insurance, and the TAF
Submitted by A Dash of Insight
Occasionally we encounter important information that is not the basis for a full article, but we wish to highlight for our readers. We note these topics in our “musings” series.
Warren Buffett and Mortage Insurance
Since Berkshire Hathaway is in the insurance and reinsurance business, it has been natural for pundits to speculate about Warren Buffett and various financial companies. Some thought that this might involve buying some existing bond insurance companies. Most were surprised to learn that the plan was instead for a competing enterprise.
David Merkel writes a typically first-rate analysis of this decision, looking at various aspects of the problem. His analysis is difficult to summarize, so we urge anyone interested in credit markets to give the entire article a careful reading.
Update on the TAF
We have written a series of articles on the Fed’s new TAF approach to relieving pressure in the credit markets. We gave the Fed a “B-” because of the size of the auctions, and the resulting rate. Recent events lead us to be a bit more optimistic.
As we suspected, the Fed was testing the waters. Since the early auctions worked well, there will be more of them as needed. These are not permanent additions to liquidity, but an alternative to the discount window.
The demise of the Master Enhanced Liquidity Fund (M-LEC) has as much to do with the success of the TAF as the lack of interest in the M-LEC. Some financial institutions were hoping to establish a separate fund to hold questionable mortgage securities. They believe that payouts will probably exceed current market expectations. It is better to hold these securities, collect payments, and sell at a more propitious time. The TAF has helped in doing this, as have recent cash infusions for major financial companies.
Sometimes market observers see events as negative when they are really signals of progress.
Visit 1800blogger to see all of our industry leading blogs.
Are you an investor? Have something you want to say about the economy? Register on Econoimist Blog now and get published within minutes. Before posting, it is recommended that you review our posting guidelines.
