Unable to Borrow

Reuters is reporting American Home Mortgage unable to borrow.

American Home Mortgage Investment Corp., (AHM) a mortgage lender, said that it is unable to borrow under its bank lines and is looking at ways to raise money, including "the orderly liquidation of its assets."

The company said it has retained Milestone Advisors and Lazard to help it evaluate its strategic options.

MarketWatch is reporting American Home Mortgage Working To Resolve Liquidity Issues.

American Home Mortgage Investment Corp. (AHM) said Tuesday it is trying to resolve liquidity issues, which it said arose from disruptions in the secondary mortgage market. The Melville, N.Y., mortgage real-estate investment trust said Tuesday that lenders have initiated margin calls in response to the declining collateral value of certain loans and securities in its portfolio. American Home Mortgage has received and paid significant margin calls in the last three weeks and has substantial unpaid margin calls pending, the company said. The company said that, at present, it can't borrow on its credit facilities and couldn't fund its lending obligations Monday of about $300 million. It doesn't anticipate being able to fund about $450 million to $500 million Tuesday

Q: What happens when you are unable to borrow and can't fund margin calls and other obligations?
A: Something like this (except divided by 10) ...



AHM is currently sitting at a $1.10 (but changing rapidly now) having hit a low of $1.06, down 90% (overnight) from already depressed levels.

Obviously another chapter in the Liquidity Crunch at American Home is being written today. Eventually someone will buy them out at pennies on the dollar but the final chapter will no doubt be massive numbers of lawsuits.

No Poole Party

Earlier today Fed member Poole said Fed won't ride to rescue of upset markets.

Financial markets understand that the Federal Reserve will not respond quickly to a typical financial market upset such as last week's sharp stock sell off, said St. Louis Fed President William Poole on Tuesday. Poole said the best policy for the Fed in cases of market turmoil is to be cautious and try to understand the reasons for the volatility. The Fed should only act "in due time" if evidence accumulates that the market upsets threaten to cause price stability or low unemployment, or when financial-market developments threaten market processes themselves, Poole said. "If the market believes that the Fed is always primed to adjust policy, then market participants will spend more time trying to second guess the Fed than trying to understand what is happening to business and household behavior," Poole said in a speech prepared for delivery at the University of Missouri.

There is no such thing as "In Due Time". The Fed should not attempt to bail out the market place, ever, period. It is the repeated intervention over the years (otherwise known as the "Greenspan Put") that puts an unnatural bid on the market and promotes speculative behavior.

The foreclosures and the housing related blowups we see now are a direct result of the last party. The Fed managed to bailout lenders in the wake of a dotcom bust by slashing rates to 1%. What's next? I suggest the biggest party has already been thrown. There is no conceivable bailout coming that is going to create jobs and encourage reckless spending like housing did. It's the end of the line.

Today Poole says "No Party ... yet". What the Fed doesn't know is that few will be willing to put on those party hats when they next attempt to pass them out. Banks wont lend to poor credit risks and good credit risks will have no reason to borrow in a world awash in overcapacity. Cheap labor enhances the problem and will make it impossible for many consumers to pay back debts.

The party is over but a massive hangover is just starting.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/