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American Capital Agency Corp. Message Board

  • jmorgs10 jmorgs10 Mar 11, 2013 1:10 PM Flag

    Help a student!

    I'm doing a paper on reits for portfolio theory...I get the basic principal, borrow at 1% and loan at 4%...but my question is who is lending them all this money at 1%? The fed?

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    • bump..............

    • Bun=mp...

    • You're thinking of this place all wrong - As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.

    • Read Onion's reply. He has it right.

    • The AGNC website does a great job of explaining how they work, as do many of the quarterly call presentations, quarterly and annual reports, etc. And I would think they would be an acceptable source.

    • Yes, it is the Fed. The Fed controls interest rates with overnight lending at a rate called the federal funds rate. So every day the money comes due and has to be re-borrowed but I'm guessing that they make the logistics simpler than that by simply allowing the Fed to vary the interest rate on a daily basis on whatever you owe them. There are mechanisms in place for borrowing for longer periods than one day, like weeks or months and the interest rate goes up proportionally. I don't know if the Fed actually offers these longer terms or if others get the money on a daily basis and then relend it for longer terms charging additional interest for the risk. But it is available and the mREITs usually buy a basket of short term and longer term rates in order to average their risk.

      At least that is how I understand it. I suspect someone will now tell me what I have wrong. However if you use whatever we say here in your report and you get away with it then I think that you are probably going to a second rate school. You need to go to the sources and read up on it yourself. You have a responsibility to the people who will be reading your report to do this. Because if you listen to some of the political discussion going on here it is clear that a lot of people are simply saying what they imagine to be true and not what they know to be true. Many people are satisfied with using their imagined assumptions as facts and live life based on these assumptions even though they have not made a serious effort to determine if they are actually correct. It is quite common. You would be amazed what people believe as factual. Just ask most people why they voted for certain people and you will hear them spout off reasons that are based in pure fantasy. So don’t believe most of what you hear because anyone can post here. Use this place only for ideas and then go off and determine what is really true. And don't be surprised at the disparity.

      • 2 Replies to raybans2
      • Yes you do have it wrong. Depository institutions can borrow reserves directly from the FED at the discount rate. The Federal fund rate is the alternative source They are not borrowing from the FED__they are borrowing from the federal funds market. The federal funds market is an interbank market in reserves__with one bank borrowing the excess reserves of another bank. They pay the FED funds rate. These loans are usually 24 hour (overnight loans). The federal funds market is actually a private market but the FED sets the rate.

        REITs are not a depository institution__they cannot borrow from the FED or the federal funds market.

      • raybans, your first paragraph is pretty much dead bang on. toss in the money market mutual funds, which do a lot of counter-party repos, and you will get the rest. the big Fed regulated banks have all the access to the really cheap money. as long as they can find somebody to borrow that at higher rates, they will keep doing it.

    • scroll down the board a page or so to find a post with the following title:

      Is AGNC a good buy?

      i kind of like the explanation i added to it.

    • You'll get some good hits by just googling your question on the 'Ne. Try "how do REITs work?

      REIT Basics
      A REIT is essentially a corporation that invests in real estate property. A REIT corporation operates much like a mutual fund in that it pools together investor money and purchases commercial property with it. When you buy shares in a REIT company you actually take partial ownership in a large basket of diversified real estate holdings. As an owner, you benefit from company profits in the form of share price growth and dividends.

    • The initial money comes from shareholders. With these funds the REIT buys bonds. Then then use the bonds as collateral and borrow more money. These borrowings come from the major commercial banks. Goldman Sachs, Citibank, Deutsche Bank etc. These collaterallized loans are known as "repos" or repurchase agreements. Where the borrow literally sells the security to the lender with the agreement to purchase them back. Because the collateral in this case are agnecy back MBS the borrowing rate is extremely low.
      PS the fed can only lend to banks (except in special circumstances of systemic risk)

    • No the Federal Reserve loans reserves to member depository institutions at the discount rate.
      You should really read a few chapters from a macroeconomics or money and banking text book to get a handle around FED workings.

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