In September 2008, only days after the Collapse of Lehmann Brothers in the US (marking the beginning of the Global Financial Crisis), the Australian Treasurer, Wayne Swan, directed the Australian Office of Financial Management (AOFM), the Australian Treasury’s financing arm, to commence purchasing residential mortgage-backed securities (RMBS) from smaller (mostly non-bank) lenders, in a bid to inject liquidity into a market that had frozen worldwide and to provide mortgage competition to Australia’s big bank lenders.
According to official data, the AOFM has purchased $15,463 billion of RMBS since November 2008, with the last purchase occurring on 30 August 2012.
Today it has been revealed that the Government will discontinue support for the RMBS market, citing that the industry is now able to stand on its own two feet after a number of tranches were successfully issued without government support. From the Australian:
THE government will terminate its support for the $45 billion mortgage-backed securities market, arguing that the market now has sufficient private sector support to operate on its own.
Treasury’s financing arm, the Australian Office of Financial Management, which has invested a total of $15.5bn into the market since October 2008, will hold on to its remaining stock for the immediate future but will make no more purchases.
Wayne Swan will announce the end of the program today in a speech defending the government’s management of financial markets since the global financial crisis and also arguing for the preservation of the “four pillars” policy, under which mergers between the major banks are barred…
“Despite the prudence of our regulators, we were not immune from the dislocation in securitisation markets globally — our RMBS market was an innocent casualty of brand damage from US subprime,” Mr Swan says, in the speech to a Sydney conference today…
“But preserving competition wasn’t just about supporting smaller lenders, it was about maintaining the competitive pressures on the big four,” an advance copy of Mr Swan’s speech, provided to The Australian, says…
It’s good to see the RMBS market standing on its own two feet and taxpayers exiting support. My concern now is that the Coalition, once in government, will seek to extend support to the whole mortgage market by adopting the Canadian Mortgage Housing Corporation’s (and Fannie Mae’s and Freddie Mac’s) flawed system of guaranteeing pools of mortgages aggregated from all banks and non-bank lenders (see here and here for details). Such a system is said to have cost US taxpayers between $120 billion and $190 billion, and there have been indications that the shadow treasurer, Joe Hockey, supports such a plan.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
Counter intuitively this program held back the RMBS markets from returning to a competitive alternative sooner.
All government support of funding markets outside of regulatory infrastructure should be consigned to the bin, now and forever.
Bring on Son of Wallis
SMOKESTER
Not sure how it held back RMBS. Clearly it allowed some issuance which was never going to happen due to the market dysfunction which was occurring around 2009-2012. The obvious counterfactual which we will never know is how many of the non bank RMBS funders would have shut up shop if they couldnt get mortgages out of warehouses or issue RMBS. If that happened what would have happened to competition in the home loan market
aj.
More importantly – what would that have done to the flow of credit during the illiquid phase when everyone was having kittens. A house price crash was not a good look for aus banks.
Also at the time, i recall no-one really knowing what the aussie banks exposure to the MBS was.
Nice one on the competition – don’t all the banks now own the ‘non-bank’ lenders?
bskerr2MEMBER
Isn’t the RMBS that government did buy are exposed to a subprime problem that went before the senate and that there is some type of push to have a Royal Inquiry, something like 60 Billion, worse on a scale than the US markets because of fraudulent loan applications that many can no longer get hold off because the banks and document holding companies are playing tennis and bouncing people off one another effectively stopping people from getting hold of the doctored applications.
The Claw
Nice sentence there.
NMT
Yup, blatant out and out fraud to which the government is an informed party to. FRAUD, FRAUD and more FRAUD! If the originator bank cannot produce the orignal LAF or mortgage note than the loan is null and void !! Banks who sell mortgages to RMBS trusts are contractually prevented from informing the mortgagee or provided any documentation that they are legally OBLIGATED to.
SMOKESTER
Evidence? $60b is 5% of the total home loan market and probably 20% of annual originations. Hard to believe. But I could be wrong
I’d even take a web page link
There ought be no government support for mortgage backed securities.
If they need government support then by definition they are not credit worthy enough for the open market and more likely to be subject to large losses in a crisis, or at least don’t have sufficient yield to find buyers.
It ought be another 30 years before we have a crisis like 2008 so no need for government support anyway.
Giving government support is just robbing lenders of the yield opportunity they would otherwise have to subsidise borrowers.
PhilBest
Absolutely, is this just not another factor that increases bubble cyclical volatility? Isn’t it ironic – Australia, as the GFC hits, institutes a very significant policy of exactly the kind that helped start the whole saga in the US.
aj.
+1 yes this is really just banks managing to convince politicians that things are more complex then they are which somehow results in taxpayers covering financial risks.
They are very good at this, in fact it appears to be their most important job these days.
SMOKESTER
The beneficiaries were not the banks. They were the non bank lenders
PhilBest
The people who are incapable of doing enough basic due diligence to work out something as basic as “house prices DO fall sometimes….”
aj.
yes – the non-bank lenders who all got sold off to the…
And it’s pretty naive to think that bank solvency wasn’t at risk if this mess wasn’t fixed – of course it was for the banks.
PhilBest
I still strongly suspect that the finance sector COULD have worked out its own salvation if a condition of bailouts was that all executives were to be sacked, stripped of bonuses and superannuation, and barred from ever serving as executives again.
There is no inherent reason to suspect that the finance sector will wait until there really IS “systemic risk” before asking for a bailout, is there? They know the kind of people – politicians – they are dealing with. Easy meat. This is the inherent problem.
tripsterMEMBER
15,463 million, not 15,463 billion
DrBob127MEMBER
or just change the comma (,) to a dot (.)
Adz
Yeah I read that as 15.5 trillion and baulked!
squirell
Wayne Swan in my mind will always be the guy who made a bad situation much worse by kicking the can down the road so as to avoid a recession on his watch. House prices sky rocketed 30% in Melbourne after the GFC and made my life a lot harder in the process. What do you expect when you:
– triple FHOGs
– de risk lending by getting the taxpayer to provide guarantees AND buy RBMS no one else wants to touch
– dereg covered bonds.
– persist with high immigration
– categorically rule out neg gearing changes despite the overwhelming recommendations of the Henry report
He is the best friend the big 4 have ever had!
Christiaan
+1
.
Wayne Swan punching bags or even Voodoo dolls would do a roaring trade!
PhilBest
And that situation is replicated all over the world. Is there one single government that has told big finance and investors to just take a hike? Iceland did – watch that space. The world needs a bigger country to set the same example.
tsport100MEMBER
Can hardly believe they were still buying junk RMBS up until only 6 months ago, a full 4 years after the GFC! Will this drive Macquarie shares to new lows?
Good to see this happening.
Counter intuitively this program held back the RMBS markets from returning to a competitive alternative sooner.
All government support of funding markets outside of regulatory infrastructure should be consigned to the bin, now and forever.
Bring on Son of Wallis
Not sure how it held back RMBS. Clearly it allowed some issuance which was never going to happen due to the market dysfunction which was occurring around 2009-2012. The obvious counterfactual which we will never know is how many of the non bank RMBS funders would have shut up shop if they couldnt get mortgages out of warehouses or issue RMBS. If that happened what would have happened to competition in the home loan market
More importantly – what would that have done to the flow of credit during the illiquid phase when everyone was having kittens. A house price crash was not a good look for aus banks.
Also at the time, i recall no-one really knowing what the aussie banks exposure to the MBS was.
Nice one on the competition – don’t all the banks now own the ‘non-bank’ lenders?
Isn’t the RMBS that government did buy are exposed to a subprime problem that went before the senate and that there is some type of push to have a Royal Inquiry, something like 60 Billion, worse on a scale than the US markets because of fraudulent loan applications that many can no longer get hold off because the banks and document holding companies are playing tennis and bouncing people off one another effectively stopping people from getting hold of the doctored applications.
Nice sentence there.
Yup, blatant out and out fraud to which the government is an informed party to. FRAUD, FRAUD and more FRAUD! If the originator bank cannot produce the orignal LAF or mortgage note than the loan is null and void !! Banks who sell mortgages to RMBS trusts are contractually prevented from informing the mortgagee or provided any documentation that they are legally OBLIGATED to.
Evidence? $60b is 5% of the total home loan market and probably 20% of annual originations. Hard to believe. But I could be wrong
I’d even take a web page link
There ought be no government support for mortgage backed securities.
If they need government support then by definition they are not credit worthy enough for the open market and more likely to be subject to large losses in a crisis, or at least don’t have sufficient yield to find buyers.
It ought be another 30 years before we have a crisis like 2008 so no need for government support anyway.
Giving government support is just robbing lenders of the yield opportunity they would otherwise have to subsidise borrowers.
Absolutely, is this just not another factor that increases bubble cyclical volatility? Isn’t it ironic – Australia, as the GFC hits, institutes a very significant policy of exactly the kind that helped start the whole saga in the US.
+1 yes this is really just banks managing to convince politicians that things are more complex then they are which somehow results in taxpayers covering financial risks.
They are very good at this, in fact it appears to be their most important job these days.
The beneficiaries were not the banks. They were the non bank lenders
The people who are incapable of doing enough basic due diligence to work out something as basic as “house prices DO fall sometimes….”
yes – the non-bank lenders who all got sold off to the…
And it’s pretty naive to think that bank solvency wasn’t at risk if this mess wasn’t fixed – of course it was for the banks.
I still strongly suspect that the finance sector COULD have worked out its own salvation if a condition of bailouts was that all executives were to be sacked, stripped of bonuses and superannuation, and barred from ever serving as executives again.
There is no inherent reason to suspect that the finance sector will wait until there really IS “systemic risk” before asking for a bailout, is there? They know the kind of people – politicians – they are dealing with. Easy meat. This is the inherent problem.
15,463 million, not 15,463 billion
or just change the comma (,) to a dot (.)
Yeah I read that as 15.5 trillion and baulked!
Wayne Swan in my mind will always be the guy who made a bad situation much worse by kicking the can down the road so as to avoid a recession on his watch. House prices sky rocketed 30% in Melbourne after the GFC and made my life a lot harder in the process. What do you expect when you:
– triple FHOGs
– de risk lending by getting the taxpayer to provide guarantees AND buy RBMS no one else wants to touch
– dereg covered bonds.
– persist with high immigration
– categorically rule out neg gearing changes despite the overwhelming recommendations of the Henry report
He is the best friend the big 4 have ever had!
+1
.
Wayne Swan punching bags or even Voodoo dolls would do a roaring trade!
And that situation is replicated all over the world. Is there one single government that has told big finance and investors to just take a hike? Iceland did – watch that space. The world needs a bigger country to set the same example.
Can hardly believe they were still buying junk RMBS up until only 6 months ago, a full 4 years after the GFC! Will this drive Macquarie shares to new lows?