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Strategies & Market Trends : New US Economy Policy
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From: Arthur Tang7/6/2007 10:14:11 AM
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The housing industry is started with land subdivision by developers and community saving bank financing, which is in the old days supported by home loan bank which lends the savings bank one to one ratio of deposits. Today, many savings bank belong to FRB membership and gets loans to deposit ratio that is 10 times; and going up to 18 times eventually same as in Japan.

So, when hedge funds try to do what savings bank do in mortgage lending, the hedge funds do not have loan support from federal government and cash liquidity can be suddenly tight and subprime made it riskier even more. The overnight discount window can do many wonders, Borrowing from Citi is not as flexible(without bank reserve ratio advantages). So, eventually. mortgage funds had to operate like a savings bank; first be a member of home loan bank, then a member of Federal Reserve Bank.

We are not worried that hedge funds are not set up right. but congress will be putting in more regulations and force membership with Federal banking organizations, even FDIC protection to make investors whole.

Of course, Wall street, not being in the housing or mortgage business, did not know that mortgages can be bought and sold to Fannie Mae or Freddi Mac; which are financed by FRB sales of treasuries. The hedge funds trading mortgages can get out of liquidity troubles pretty quick.
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