TAF, TSLF, TALF, ABCP, CPP, CPFF, MMIFF, OMOs, MBS, GSEs, PPIP....

....AND NOW: SCAP

S: SUPERVISORY

C: CAPITAL

A: ASSESSEMENT

P: PROGRAM

This is the name our goverment "supervisory agencies" have given to the program that will assess the size and capital needs of 19 US BANKS (and anyone else who wants to voluntarily submit to a "STRESS TEST").

HERE IS THE WHITE PAPER that outlines the design and implementation of SCAP.

Here is the opening paragraph. I have bolded some of the noteworthy statements...

"Most U.S. banking organizations currently have capital levels well in excess of the amounts required to be well capitalized. However, losses associated with the deepening recession and financial market turmoil have substantially reduced the capital of some banks. Lower overall levels of capital-especially common equity-along with the uncertain economic environment have eroded public confidence in the amount and quality of capital held by some firms, which is impairing the ability of the banking system overall to perform its critical role of credit intermediation. Given the heightened uncertainty around the future course of the U.S. economy and potential losses in the banking system, supervisors believe it prudent for large bank holding companies (BHCs) to hold additional capital to provide a buffer against higher losses than generally expected, and still remain sufficiently capitalized at over the next two years and able to lend to creditworthy borrowers should such losses materialize.The purpose of the Supervisory Capital Assessment Program (SCAP), which is being conducted by the supervisory agencies, is to assess the size of these capital needs."

This is not a PASS/FAIL type test. Financial supervisors will access the viability of a bank or bank holding company based on several "WHAT IF" economic scenarios to ensure that banks are adequately capitalized in the event that the economic outlook worsens. If a bank needs capital it will be able to reach an open hand out to the Treasury through the Capital Assitance Program (CAP) or via the Capital Purchase Program (CPP).

The intention of SCAP is to ensure that in the event the economy is already stuck in a downward spiral of diminishing aggregate demand and consequent deflation...that we dont have yet another Lehman Brothers-esque failure which could exascerbate the "issue" and render the "already spent" government funds a complete waste.

Plain and Simple: The Fed is going to assume the worst and make sure banks are ready for it.

After a quick "once over" my initial impression was  "I NEED MORE DETAILS". For financial markets this means intraday fluctuations will remain volatile while investors day trade the gossip and sell the news.

Following the release of the white paper the DOW (the biggest sentiment indicator in the world) moved lower by 75 points. At the moment equity traders have pushed the DOW near its highs of the day...but its FRIDAY and stocks have been known to have late day sell offs recently....I bet they sell!!!

For MBS...more of the same of what we have seen this week. Sideways range trading with all originator supply offerings being consumed by the Fed's block trading buying strategies. Non-Fed accounts will day trade "up in coupon" with a watchful eye on the duration of their portfolio and the steepness of the yield curve (stay away from negative convexity and extension risk). The roll market for  "up in coupon" MBS will likely heat up as a supply shortage of 6.0 and 6.5 coupons will put short positions in a bind to cover while other accounts choose to roll their positions forward ahead of allocation day (settlement)...

Savy?

Plain and Simple: the Fed will continue to provide and liquidity and stability to the mortgage market while the rest of the MBS market patiently balances risks (prepays) and returns (churn profits in low volatility fixed income market).

I am done for the week. Have a great weekend. Matt will be posting MBS CLOSE

Since 5pm "Going Out" Marks...

FN30________________________________

FN 4.0 -------->>>> +0-01  to 100-03  from 100-02

FN 4.5 -------->>>> +0-02  to 101-28  from 101-26

FN 5.0 -------->>>> +0-03  to 103-02  from 102-31

FN 5.5 -------->>>> +0-02  to 103-24  from 103-22

FN 6.0 -------->>>> +0-00  to 104-17  from 104-17

GN30________________________________ 

GN 4.0 -------->>>> +0-01  to 100-09  from 100-08

GN 4.5 -------->>>> +0-02  to 102-05  from 102-03

GN 5.0 -------->>>> +0-02  to 103-20  from 103-18

GN 5.5 -------->>>> +0-01  to 103-31  from 103-30

GN 6.0 -------->>>> +0-01  to 104-11  from 104-10

IM OUT :-D