Mind Over Market

Bill Moyers Show: On Crony Capitalism

2012-01-23T06:42:00.001-08:00

Moyers & Company Show 102: On Crony Capitalism from BillMoyers.com on Vimeo.

Bill Moyers interviews David Stockman and Gretchen Morgenson on crony capitalism on the January 20th edition of Moyers and Company.

Black Box Casino: The Fed Could Have Saved Lehman By Briefly Guaranteeing Its Trades

2012-01-02T14:06:00.000-08:00

The Federal Reserve could have prevented the bankruptcy of Lehman Brothers in September 2008 by simply guaranteeing Lehman's trades briefly, long enough for the deal to sell the good assets of the company to Barclays Bank in the United Kingdom to gain board approval at Barlcays.

That observation was made New Year's Day during comments by Robert Stowe England on MoneyTalk with Bob Brinker in a discussion of his new book, Black Box Casino: How Wall Street's Risky Shadow Banking Crashed Global Finance.

MoneyTalk with Bob Brinker is heard on 300 radio stations on Sundays.

An archive of the broadcast can be heard here, beginning at 2:33 minutes

"I would tend to agree with Allan Meltzer on this point . . . that the failure of the Fed to help rescue Lehman was the worst mistake in the Fed’s history," England said on the radio show.

The entire deal was about to go through except for one hitch, England explained.

"The regulatory authorities in the U.K. would not allow Barclays to guarantee the trades that were on the books of Lehman between the point of the sale and the point where the board would vote on it," England said. "And, if the Fed had only guaranteed the trades for that brief period . . . the sale of Lehman would have gone through and we wouldn’t have had the failure and bankruptcy."

The sale of Lehman could have potentially avoided the enormous financial and economic consequences that ensued from the firm's bankruptcy -- consequences that are still felt today around the globe.

England explained that all the details of disposing of both Lehman's good assets and bad assets had been arranged in negotiations overseen by Treasury and the Fed in New York. Under Treasury Secretary Hank Paulson, a plan had been worked out to divide Lehman into a good bank and a bad bank.

Barclays had agreed to buy the good bank. A consortium of U.S. banks had agreed to fund the cost of acquiring the bad assets from Lehman and to place them in a special purpose vehicle, such as the Maiden Lane vehicle set up for Bear Stearns bad assets in March 2008. The banks stood to lose as much as $10 billion on the deal, according to Paulson's account of the talks.

The U.K. regulator for Barclays, the Chancellor of the Exchequer Alistair Darling, said that the U.K. could approve of the sale of the good bank at Lehman's to Barclays, but that Barclays could not assume responsiblity for the trades at Lehman between the time a sale agreement was reached and the time it would take for the board of Barclays to vote on accepting the deal.

Radio show host Bob Brinker criticized the view from Paulson, Fed Chairman Ben Bernanke, and others in Washington that nothing could be done to save Lehman.

"We were sold a bill of goods -- and this is in the book Too Big To Fail and it was in the HBO film Too Big To Fail –- we were sold a bill of goods that the reason that the deal with the Brits fell through was because they needed this regulatory approval and they couldn’t get it right away," Brinker said.

England indicated that neither Paulson nor Bernanke have indicated whether or not the option of having the Fed guarantee Lehman's trades was officially considered. In fact, none of the details of any of the options that were under review after the U.K. said Barclays could not guarantee the trades at Lehman have been made public. Those options, for example, were not identified in Bernanke's testimony or in Paulson's book, On The Brink. Nor were they revealed in the work of the Financial Crisis Inquiry Commission.

Bernanke, in testimony and public statements, has said that there was not sufficient collateral at Lehman to back up either loans or guarantees of Lehmans assets.

Without the Fed as a guarantor and with no other guarantor in sight, the deal to sell Lehman's good assets fell through and, with it, the agreement by the consortium of U.S. banks to buy the bad assets.

When Lehman declared bankruptcy on September 15, 2008, it froze up financial markets around the globe and threatened to collapse global finance and plunge the world into a depression as regulators struggled to find ways to unfreeze the markets.

Read More About Black Box Casino Here

Amazon.com Link Here

TRANSCRIPT OF INTERVIEW:

Money Talk with Bob Brinker
Transcript of Interview with Robert Stowe England
Subject: Black Box Casino
January 1, 2012

Broadcast 3 to 4 pm Pacific Standard Time
KSFO-FM San Francisco and Syndicated on 300 Radio Stations

Brinker: On your radio across America and online worldwide this is America’s money program, Money Talk. Bob Brinker and along with you our guest speaker is Robert Stowe England. Robert is author of his newest book, Black Box Casino; also is senior writer for Mortgage Banking Magazine. Robert, we thank you for joining on New Year’s Day, the big holiday of 2012 and great to have you with us.

England: Thank you very much. It’s a pleasure to be with you.

Brinker: Tell us why you wrote this book.

England: Well, the impetus to write the book happened over a period of time, beginning with the gradual collapse of the mortgage market beginning in 2007. As a senior writer for Mortgage Banking I followed the market for over 20 years and reported on it in depth. It was somewhat of surprise to me even though I had followed the deteriorating loan quality and warned about it in a number of articles over the years, I was still taken by surprise. And so, I wanted to understand how things got to be so bad and in particular what was surprising was the fallout it caused around the world in the global financial system. I began investigating that in 2007 and then following the collapse of Lehman Brothers and the crisis becoming much larger, I then decided I really wanted to write a book about it and do the research to get to the bottom of that problem and be able to answer it for myself and to tell that to other people.

Brinker: One of the things that I thought was particularly interesting about that fallout that you speak of from the mortgage debacle here, was the irregular pattern that developed in terms of country victims. As you well know, in Canada, and this is amazing, given the trade status that U.S. and Canada maintain, the closeness, the friendship, this was amazing to many that Canada managed to come through this thing with virtually no scars at all. How do you explain that?

England: Well, there was one scar, just for the record. Coventree was a major company in Canada that went under as a result of the crisis. But, Canada did not have the exposure to bad mortgage products that we had here in the United States. And lot of mortgage-backed securities that were sold in the United States were sold elsewhere and so their banks were not loaded up with these bad debts as badly as they were in the United States, Europe and in Asia.

Brinker: Although, actually although Europe certainly was dragged down by this by buying so much of this bad paper, actually Asia came out relatively well.

England: Well, a lot of them were very worried because they had bought a lot of the Fannie and Freddie securities. When the government stepped in and took over Fannie and Freddie and guaranteed those [securities], that really helped them. But, there were plenty of Asian investors in those subprime mortgage-backed securities and even the CDOs. They were buying the triple A tranches of the CDOs.

Brinker: Now, we’ve heard from callers over the years since this went down and a lot of people like to blame the whole thing on Barney Frank. They like to say this is Barney Frank’s fault. He was out there encouraging all this. It’s his fault. What do you say to that accusation?

England: Well, certainly Barney Frank bears a good deal of responsibility, but I don’t think you can put all of the crisis on a single person, whether it is Barney Frank, Angelo Mozilo, or the people at Fannie and Freddie or the people on Wall Street. It was a complicated crisis that occurred and the conditions built up over the years. Barney Frank’s contribution was relentlessly defending Fannie and Freddie when the regulations and incentives had been put in place by Congress for them to constantly lower their lending standards to increase their lending to targeted populations. So, that was a problem building up for years.

There were efforts to reform Fannie and Freddie in Congress and he opposed those very vigorously. He famously said he didn’t want Fannie and Freddie to have strong capital standards like the banks because he wanted to quote “roll the dice . . . .in favor of subsidized housing.” So, by playing that role he certainly contributed to the root causes of the crisis.

Brinker: Our guest is Robert Stowe England his new books is Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance. Now, Robert your write in your book in September 2008 Citigroup was leveraged 74 to 1. My reaction to that is this. People are going into Citigroup, Citibank branches, whatever, in all parts of the country and wherever they are, making their deposits and keeping their money with them, probably having no idea whatsoever that the company is leveraged 74 to 1. I mean that really underscores the title of your book, Black Box Casino. But, what I mean to ask you is how can a company like Citi get to a 74 to 1 leverage condition if there were responsibly managed? How could that happen?

England: Well obviously they weren’t responsibly managed. What they did and this goes to theme of the book, Black Box Casino. They accumulated a lot debts that they managed to accumulate off the balance sheet, and they came back on the balance sheet in 2008. There was over $50 billion in super senior tranches form CDOs, both off and on balance sheet that were hidden from investors, and from the public and to some extent from the regulators. Those were allowed the law, the regulations governing the banks. In fact, there was an incentive to move these assets off the balance sheets into the SIVs because they didn’t count against, the assets didn’t count against capital. And Citi had done quite aggressively.

And a lot of the crisis management in Washington, even beginning in late 2007, was aimed at preventing a collapse of Citigroup because those assets were going to come back on the bank’s balance sheets. Over $50 billion came back onto the balance sheet in late 2007 and the CEO was fired at that point. At this values of the assets it had on its balance sheet continued to decline over 2008, that weakened it even further and increase its leverage. Its share price kept falling and that stock price is part of the bank’s capital base.

And this huge leverage was there in spite of the fact Citi had been raising capital, beginning in 2007 and frequently in 2008. And, so it was both mismanagement and regulatory incentives that allowed them to accumulate the leverage hidden off the balance sheet and then it came back on. That’s why we didn’t know about it.

Brinker: Well, it seems to me that for many, many decades the banking system functioned just fine under Glass-Steagall. Glass-Steagall was voted [into law] in the 1930s in response to crash and the financial collapse of the 1930s. Along came Glass-Steagall and it work fine decade after decade and along came 1999 and in an overwhelmingly bipartisan manner, it was taken off the books. Does that make sense to you? Paul Volcker says we should have it back. What do you think?

England: I do think we need more protection. There are probably parts of Glass-Steagall we should bring back. We can look at it carefully and decide what we need. But, certainly Glass-Steagall’s end is certainly one reason Citigroup was behaving so badly after 1998. They were able to do the kinds of investment banking, risky financial things they were doing because of the end of Glass-Steagall. At the same time things were going on elsewhere in the financial system that the repeal of Glass-Steagall seemed to make worse. That includes the investment banking world. The repeal of Glass-Steagall prevented the prudential regulation of the investment bank holding companies, which were not under a consolidated prudential regulation like the banks. The lack of a prudential regulator and the lack of a way to resolve the investment banking firms if they failed became a central point in the crisis. And, of course Lehman Brothers is the prime example. Lehman could not be save and could not be resolved in the sense it can be taken over and dismantled as you can do with a [failed] bank. That was probably a legacy of Glass-Steagall also.

Brinker: Our guest Robert Stowe England. Robert’s new book Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance. We’re going to take your calls for Robert on the toll-free line across America at 1 800 934-2221, if you’d like to call in on that one.

Now Robert, I need to ask you whether in your view, as an expert on this topic, the banks are adequately capitalized today.

England: Well, you ask the hard questions, don’t you Bob?

Brinker: Yeah.

England: Traditionally it was the markets that determine the amount of capital that banks should have before a regulatory regime was put into place and set particular capital ratios. To the extent, that we still think assets on the books of the banks, we can say they need to be better capitalized. So, there is no magic number of capital that banks should have. But, certainly during the crisis, the investment banks had very, very high leverage. Those investment banks are no longer independent investment banks, part of the reasons they had to come under the banking regulatory regime, which they did after September 2008. You’d almost have to go bank by bank to say they needed more capital. I think for both Citigroup and Bank of America the markets are saying that they do not have enough capital, when you see what’s happening with the share price. The markets do not have much confidence in those two firms.

Brinker: Robert, there’s been a lot of controversy. You’ve heard it all, about the co-called government bailout of the banking system. We saw the bail out start out as a capital infusion under the Bush Administration and continued under the Obama Administration and wound up being a capital infusion. Now, we get the feedback of many who say well, the bank bailout is wrong. You should have let them fail, just let the free markets be free. What so you to this?

England: I don’t think we could have let them fail without a regime in place that would be able to handle that in an expeditious way that wouldn’t have enormous fallout in the financial system. And, we really didn’t have that with the investment banking firms. And the failure of Lehman Brothers really made the crisis, which was already really quite severe, into an epic crisis. One could argue how the regulators went about this, forcing some banks to add to their capital base when maybe they really didn’t need to do so. In the end, I don’t think they much choice. And the regulators in Europe did pretty much the same thing with their banks. They did a capital infusion, a forced capital infusion. I don’t know we could have gotten beyond that point. The crisis was worsening by the day. It’s hard to see how we could have gotten beyond that point without the capital infusion from Treasury.

Brinker: Your calls for Robert Stowe England, Black Box Casino, when we return. Here’s the number to call: 1 800 934-2221. That’s our number across the USA, from the beaches of Waikiki to shores of Block Island Sound, 1 800 934-2221. Good time to call on MoneyTalk.

[Commercial Break]

Brinker: We’re back on Money Talk. Thank you for joining us, coast to coast and from the islands of Hawaii north to Alaska. Our guest is Robert Stowe England. Robert is senior writer at Mortgage Banking Magazine. His new book is Black Box Casino: How Wall Street’s Risky Banking Crashed Global Finance.

With reference to the Lehman Brothers collapse, that was obviously the moment of high drama in September of 2008, when Lehman was allowed to go under. Of course, we’ve had the excuse, well, we didn’t have anything we could do, there was nothing we could do about it. In retrospect and knowing that the government can do whatever they want to do, they were making up things all the time to solve problems, the Federal Reserve bailout of the Bear Stearns takeover, which led to the Bear Stearns takeover by JPMorgan, the takeover by Bank of America of Merrill Lynch. The kind of wanted to get out of it and buyer’s remorse but weren’t allowed to get out of it, we’re told, [and] everything else that went down. I mean it was just a circus. I’ve never been convinced that oh well, it was impossible for the government to come up with anything that could have resolved the Lehman crisis short of bankruptcy. What’s your view on that? When you look at the fallout. You had the global financial markets frozen in a New York minute after that bankruptcy was filed all over the world. When you look at the fallout from that, what’s your view of that decision?

England: I would tend to agree with Allan Meltzer on this point, the professor from Carnegie Mellon University, who said that the failure of the Fed to help rescue Lehman was the worst mistake in the Fed’s history. And Allan Meltzer is the leading historian of the Fed today. It would not necessarily require the Fed to step in. There was a discrete at the time that could not be resolved. And that is, Barclay’s had agree to buy the good part of Lehman and a consortium of banks were going to buy the bad loans and assets and fund them in a new Maiden Lane vehicle. There was one hitch. The regulatory authorities in the U.K. would not allow Barclays to guarantee the trades that were n the book of Lehman between the point of the sale and the point where the board would vote on it. And, if the Fed had only guaranteed the trades for that brief period, which would have been about 30 days, the sale of Lehman would have gone through and we wouldn’t have had the failure and bankruptcy. There are other options, too, but I just thought I would through that one out there.

Brinker: So, you don’t accept the excuse we had from the Treasury secretary at the time, Secretary Paulson, where he said – and I don’t think this was the first excuse he gave – I think it was the second, which made me suspect by the way, where he said, well, we didn’t have any mechanism whereby we could do anything. You don’t buy that?

England: No, I don’t. He did a great job in his book by the way, On The Brink. But he didn’t tell us what options they were considering when they were meeting on this particular issue, particularly when he was meeting with Ben Bernanke. Subsequently, I’ve learned of a law that could have been invoked that could have allowed them to do just about anything. This law is called the International Emergency Economic Powers Act of 1977. And, James Rickards, who is with Tangent Capital Partners, someone who I interviewed for the book, pointed this out. He’s an expert on these types of law, and that law would have allowed an emergency to be declared and just about any type of activity could have been undertaken under that law. The failure of the Fed to do anything made to me they did not realize what was at stake and what the fallout would be.

Brinker: Oh, they underestimated the fallout absolutely. We know that. And, you know the other thing about this, when you look at the unusual things that were done to shore up the financial system back in 2008 – I know you know about them – but it just makes the point, right? I mean they provided an insurance mechanism for money market funds.

England: Yes.

Brinker: That came out of the blue.

England: Yes.

Brinker: And then they provided a mechanism to support the commercial paper market. In other words, they were making it up as they went along. There wasn’t anything they couldn’t tackle if they made the proper decision to tackle it.

England. Yes, I would agree, and I do think that this guaranteeing of certain markets and backing them up – which came after Lehman Brothers, when they saw the damage Lehman had done – shows what could be done. And I think those actions actually showed the best handling of the crisis to that point. Because they had not shown the initiative or the imagination of how to go about resolving the crisis. And, you know, I think you would have to give them an ‘A’ on those parts.

Brinker: This is where the free market philosophy actually runs into a brick wall, when you say – not you – but when the free marketeers just let the banks go down and let the markets work it out. OK. Well, then the money market funds, which have investments in the bank, so they go down. I just don’t see how it works.

England. Right. Well, we don’t really have truly free markets and free markets provide important discipline. But, this is a crisis brought on by a number of policy mistakes and so you had to react, you had to put on – you’re here to resolve a major economic crisis. So, you have to do what you have to do to prevent the worst possible outcome. And I think that’s, you have to think along those lines.

Brinker: And I think you make a good point when you cite Allan Meltzer’s point of view that the biggest Fed mistake ever was allowing Lehman to go bankrupt. I have to agree that 100 percent. We’ve expressed that view on this broadcast for years. And let me just give a reason why I think this is absolutely a line in the sand. And that is, to me, the Federal Reserve is the last resort, the lender of last resort. And, frankly that weekend – and we were on the air that weekend, Robert – that weekend, if ever in my lifetime I have seen the need for a lender of last resort to step up and resolve an issue, it was that weekend. And they didn’t do it.

England: No. And they were so close. All they needed was get the Fed to guarantee the trades at Lehman for approximately 30 days. And, of course, they ended up guaranteeing all sorts of things later. That one thing would have saved the day, I think.

Brinker: Yeah. And, we were sold a bill of goods and this is in the book Too Big To Fail and it was in the HBO film Too Big To Fail – we were sold a bill of goods that the reason that the deal with the Brits fell through was because they needed this regulatory approval and they couldn’t get it right away. You’re citing the 30 days properly. And, now you are pointing out to our listeners, this is incredibly revealing, that all they had to do was for the Fed to step in with a 30-day guarantee and the deal goes through.

England: Exactly. And, they knew that at the time, and that is not revealed in any of the books and testimony that has come out that they considered that an option. It’s clear, even looking at it from hindsight, that that would have saved the day because that was the only hitch to the deal. Every facet of the deal had been worked out to handle the bad assets at Lehman and to sell the good assets to Barclays and the regulatory authority that Barclays could buy it. They just did not want Barclays to be on the hook any losses in the trades that might occur from Lehman during the brief period of time until the board approved the deal.

Brinker: Now based on what you know, Robert, was the Fed simply unwilling to go along the 30 day guarantee, is that what crashed it?

England: If you read the testimony of Ben Bernanke, who was asked about what they could have done, he has testified that they understood full well the consequences, and I find that hard to believe, and he did not think the Fed had authority to guarantee trades if there was not sufficient collateral to back it up. They were citing the fact that they might the case with Lehman Brothers whereas it was the case with the other bailouts that they were engaging in. There are laws which at least Allan Meltzer thinks could have been interpreted this way and he believes that the general counsel at the Fed could have justified this. And so does James Rickards, who is an expert on these types of laws, that it could have been justified within the powers of the Fed that existed at that time. And, if they did not have the powers you would think they would go to Congress and ask for emergency powers or they could have invoked this International Economic Emergency Economic Powers Act – the President could have. So, the question is, were they actually considering these options. We don’t know. But, they should have been.

Brinker: We may never know because of these decisions put egg on certain faces, those faces may just remain silent. Let’s get Paul in the line in California. Paul, you’re on the line. Go ahead.

Caller Paul in California: Hello. I just can’t believe what I’m hearing. First of all I’m one of those free marketers, so I let me be upfront about that. How can you justify the bailouts, given that just shifts the responsibilities from those who caused the problem onto the American taxpayers?

Robert: I, for one, do not support the TARP funds – I do not necessarily support the necessity for the TARP funds. But what we are talking about here is guaranteeing and backing up lines of credit and trade that could have prevented a horrendous fallout in the economy. This is an emergency situation where you have to make a decision. And to the extent the Fed guaranteed those trades and lost money, they would have to seek a taxpayer bailout, I agree. But, I, too, believe in free markets. But I don’t see how we could have gotten – I think it would better if we had gotten past this by guaranteeing the trades at Lehman Brothers. The problem we had at the time where we could allow the free market forces to take their place, we didn’t have a way to resolve or take over Lehman Brothers and sell off the pieces. We didn’t have the so-called resolution authority to do that. You could have allowed it to fail and let the free market sort it out, but the regulators didn’t have that authority. It would have been easier to invoke the authority of just guaranteeing the trades for this brief period.

Brinker: Greg is on the line in Lake Isabella. Greg, you’re on with Robert.

Caller Greg in Lake Isabella: Good evening, Bob. I was kind of wondering more from an overall historical context – of course, you get this study from the ins and outs of this particular master break down, but from the historic context, is it really the crux of the problem is the historical nature of stock brokers, stock buying and selling, and the protections provided by corporations and articles of incorporation. That, really, won't this continue to happen no matter what rules we have in and out, as it has happened in the past, for instance, in the dot com bust? As long as there is protection provided for people to take money out of the system and walk away from it – for instance, I’m a general contractor. I can’t take my vendors materials and make money off if it and say I didn’t make any money on that job and take his money I made off his materials and just walk away with it. My hide is on the line, my home and my property and my assets are on the line. But that doesn’t seem to be true of corporations. Isn’t that really the problem and not which rules we should have this year and which rules we should have next year and free markets and free trade? Are those protections provided to people to do unscrupulous things, they will continue to do unscrupulous things?

England: Well, we do have laws on the books on fraud, and I think part of the problem is that the Securities and Exchange Commission has completely fallen down on the job of enforcing those laws so that people engage in activities, whether it is individually or under corporations. They thumb their nose at the consequences because they know they are unlikely to pay any consequences.

And I think the level of risk-taking and actual fraudulent behavior in the financial system really ratcheted up in the last decade. In my opinion, two events happened in 2003 and 2004 at Fannie Mae and Freddie Mac when Franklin Raines and Leland Brendsel had to leave those two institutions after engaging in massive accounting fraud in order to boost their income. And they faced virtually no consequences. I think Leland Brendsel walked off with $25 million and Franklin Raines with $92 million. And that was sort of an object lesson. You can commit all sorts of fraud and get away with murder and walk off with all the money and pay virtually no consequences. The failure of the SEC to do any adequate job of enforcing the fraud and market manipulation rules I think played a big role here and will again in the future if they don’t do a better job.

Brinker: Our guest Robert Stowe England. Robert’s new book, Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance. Well, Robert, we thank you for your time on this New Year’s Day holiday and we wish you continued success.

England: Thank you very much. I’ve enjoyed being with you.

END

Radio Interview: Subprime CDOs Played a Starring Role in the Financial Crisis

2011-12-31T07:20:00.000-08:00

The Norris Group's Real Estate Radio Show
Riverside, California
December 31, 2011
Bruce Norris Interviews Robert Stowe England
Topic: Black Box Casino

Listen to the broadcast at this mp3 link:

Summary of the Interview:

This week Bruce is joined once again by Robert England. Robert is a journalist and author who has written extensively on mortgage finance, banking, retirement policy, and the financial and economic impact of aging population. His most current work is Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance. Previous works include Aging China: The Demographic Challenge to China’s Economic Prospects. Robert is also a senior writer for Mortgage Banking Magazine.

In our minds, we used to think that we would go to the bank, get a loan, make a payment to them until we paid it all off, then they hold the loan the whole time. This was called a portfolio loan. It was not until late 2007 when Bruce heard the term mortgage-backed security and CDO.

Bruce wondered if, therefore, at the time this was commonly understood by people who were even in the loan business. Did they understand the path the paper took and how it was disseminated?

Robert believes the people involved with mortgage originations understood it, although other people involved in the housing sector probably did not understand it as much. They did not understand that the loans were being put into portfolios while securities were being issued against the portfolio so that investors were the ultimate funders of the mortgage loans and not banks. The money was funded temporarily by the mortgage originator. They would obtain a warehouse line of credit from a bank if they were an actual mortgage banker as opposed to a broker. They would have money just to the point that the loan closed, and then the loan was sold to an investor. For the mortgage originator, the investor was either Fannie or Freddie or a bank that was acquiring the loan. They did not really know what happened to the loan after that. They did not have to know this; they only knew that they were creating loans, and the demand for them kept increasing even though the quality was decreasing.

Out of the mortgage-backed security world came a product called a CDO. This is a collateralized debt obligation, which began to be used as early as the 1980s. It was used to take existing corporate debt and roll it into a pool of loans to issue securities against a pool of corporate bonds. This never became a huge amount of business and was tried later for bonds from developing nations and other kinds of debt instruments. The market would rise and fall and vanish away, so someone was always trying to come up with another way to use a CDO, which is just another form of securitization. The 1999 credential came up with the idea of having a CDO that put together mortgage-backed securities into a pool and issued securities against those securities, so you were securitizing securities.

There was also the concept of a tranch, which Bruce thought was brilliant and a good vehicle if done correctly. In the private-label mortgage-backed securities world, they all had tranches even before the CDO, and every deal had as much of the deal as possible set up as AAA rated. These were credit-rating tranches. About 94% of most MBS deals were AAA rated by the credit rating agencies, such as Moodys and Fitch. They were paid fees to buy the Wall Street firms, and they also rated the CDOs. The huge volume of private mortgage-backed securities and CDOs did not really take off until after 1999.

The reason for this was when the Basel Committee for Banking Supervision came up with a concept for having the idea risk-waited capital standards apply to these kinds of financial instruments and to give the credit-rating agencies a job of determining their credit rating, only then did it determine the amount of capital banks would hold against the tranches of the deals. The central bankers never really thought this through and were actually creating a monster here because by giving this role to the credit rating agencies, they had made a big mistake. Ironically, when the idea was first proposed, Moodys Investor Service wrote a letter in response to the proposal and suggested that it not be done and that it would corrupt the credit rating standards and created a moral hazard. Yet, this was ignored, and the various countries, including the United States, adopted the standards in 2001 that gave the credit rating agencies this role.

The same year there was a Gramm–Leach–Bliley Act that also did away with the last of the Glass-Steagall Act and barred the SEC from regulating the investment banking holding companies. The investment banking companies, which were already independent, did not have a prudential regulatory regime since Gramm–Leach–Bliley cast this in stone. There was a battle subsequently with the Europeans over this, and Congress first passed a law allowing a voluntary regulatory regime to be established for the bank holding companies and investment banking firms. All of the banking regulation was based on the idea that banks have deposits, taxpayers are exposed to deposits, and banks hold assets for a long time and therefore we are protecting the taxpayers from losses. However, investment banks do not hold deposits and by the nature of their business should not be holding assets for a very long time but rather should create markets. By adopting a regulatory regime in 2004, the bank holding companies and investment companies were given the incentive to buy and hold assets and the use of tremendous leverage, especially mortgage-backed securities. Risk-weighted capital standards are supposed to discourage banks from picking on assets with high risk, but what they really did was create incentives for banks to take on assets with low capital ratings. The investment banking firms did the same things that banks were doing, which were loading up on the assets.

The money to fund the CDOs came from investors, and it had to rated AAA to attract a lot of money. Two things were going on in the early days of the CDO. There were institutional investors who invested in the CDOs that contained mortgage-backed securities and subprime. Banks were also creating CDOs to get the lower-rated tranches of mortgage-backed securities off their books. They could not sell them, but they were trying to get rid of them, so they would put them into CDOs so it would become AAA rated. The institutional investors had lost interest in the lower-rated tranches of the private-labeled mortgage-backed securities subprime, particularly around 2003. The CDO was a way to recycle those assets that institutions would not buy by turning them into AAAs. You would basically take the worst from one pile, and it magically turned into the new pile of the best. By making it very opaque, some investors who did not understand it could be enticed into investing. These were actually black boxes.

Most of the investors aforementioned were foreign investors. After 2003, the U.S institutional investors were not buying, and the investors who were willing to buy had incentive to buy dollar assets and were looking for bond assets. They had trade surpluses or recycled petro dollars. They had lots of dollar denominated funds, and they needed to invest them in dollar assets in order to avoid currency risks. Therefore, the Asian and European banks and other institutional investors were buying these CDOs without much regard for what was in it, and you could not really know what was in it. They did not quite get the level of risk that was there because they were rated AAA.

Bruce wondered what role the Credit Default Swap played in the world of CDOs. Robert said the Credit Default Swap is a form of insurance in which one side sells credit protection against the bonds or mortgage backed securities that the payments would be made, and the other side buys the insurance. The availability of credit default swap made it possible to create synthetic CDOs on a massive scale beginning around 2005. They had existed before, and people were buying credit default swaps to protect their risks for owning certain tranches of the mortgage-backed securities. They then applied this concept to the CDO, but the synthetic CDO was created entirely with credit default swap. The actual assets were a pool of credit default swaps, and the entity issuing the synthetic CDO was insuring their performance. They would turn around and try to get insurance that would cover their losses if the bonds or notes failed. The provider of that was AIG’s financial products division, which sold all the protection for many years.

There were other companies that did it as well, but not nearly the size. The mono-line bond insurance companies that were looked over by state regulators became involved to their own detriment. When they went out of business, whoever was supposed to obtain the insurance coverage just lost.

What happened was the issuers such as Merrill Lynch, Goldman Sachs, and Citigroup were putting together synthetic CDOs and were providing the insurance. In turn, they often could not buy the insurance. Goldman Sachs was able to, but Merrill Lynch and Citigroup increasingly were not able to buy the protection and continued to put together synthetic CDOs without it. They were the designated back holder at that point. They ended up owning all the super senior tranches, which is part of the deal that is made up of the credit default swaps.

Citigroup tried to hide these assets on their balance sheet as well as their trading accounts. When the investment banking regulation was adopted, the Wall Street firms obtained a provision that allowed them to model anything held in their trading account on their book if it had not traded recently. However, Citigroup was also putting these assets into structured investment vehicles, which are more black boxes off its balance sheet. These were funded with asset-backed commercial paper, which was then backed in some cases by subprime mortgages. The Citigroup had over $50 billion worth of toxic assets at the time of the crisis. They were telling the public they had practically no subprime exposure.

Usually the person holding the credit default swap had the other side of the transaction, but this was not even necessary to get a credit default swap. One person was buying protection, and the other was selling. Merril Lynch was putting together a deal where they were providing credit protection to the other party that was in the deal. Then, someone such as Kyle Bass comes in and says he can buy, Bruce wondered if he could invest in a credit default swap and not have the other side.

Robert responded you can in that you would only take one side, in this case the protection side. You can also bet against some of the various parts of the deal, which is what the hedge funds did. The smart people were buying the protection, and the less smart people were not. The general public did not realize how many bad loans were out there, including investors. They assumed that the deals would function and people would pay their mortgages. They did not see the dangers. However, those with the hedge funds did see the dangers and began to sponsor CDOs in order to create tranches they could bet against. They were selling a product they knew was going to fail, and then they bet against its failure. This was at least what was alleged with Goldman Sachs and the deal that got so much attention in Congress.

What the hedge funds did was slightly different, and it is not clear the extent to which the investment banking firms knew about it or whether the people at the top knew about it. Hedge funds would sponsor CDOs, and they would buy the equity tranch. The banks would then have to sell the AAA and BBB to someone else. There were CDO managers, and the catch funds were not supposed to influence the choice of assets that went into the CDO. That was how investors were assured that this was done with integrity. However, certain hedge funds appeared to influence, but it cannot entirely be proved because it was done in ways where it was difficult to trade. Very often with certain hedge funds, such as Magna Tar based in Chicago, the deals they sponsored and the $50 billion worth of CDOs all failed spectacularly.

The CDO managers picked the worst assets out there. The question is whether Merrill Lynch in this case knew what was going on, and this is still going through litigation. Logically, you would think that they had to know something. The people at the top were probably the ones who did understand what was going on at the time. Interestingly, it seems to happen where they may not even understand completely the concepts that are emerging constantly.

You wonder about someone like Stanley O’Neal, who was supercharging at Merrill Lynch the CDO business at the worst possible moment because they thought it was very lucrative. You have to wonder if they were really that foolish and unaware. It is hard to know.

In Robert’s book, it talks about one trader who actually earned more doing one trade than for what Bear Stearns was sold. Bruce wondered if he used a naked short sale to achieve this. Robert said he did and that naked short selling was almost impossible to do with the uptick rule. You could still do naked short selling, but it was difficult to execute. An uptick means that stock has to rise and move up before it goes back down again. The naked short selling is selling shares of stock that you do not own or borrow. This is illegal and is done to manipulate markets to achieve outcomes that the manipulator desires to do.

In March 2008, somebody bought an option for $1.7 million that would not pay off unless the chair price at Bear Stearns collapsed within ten days. Immediately after this happened, rumors were circulated throughout the industry that Bear Stearns did not have enough cash even though it had $18 billion in cash. Brokerage firms started pulling their money out of Bear Stearns. Within days, they only had $2 billion in cash and were on the verge of collapse. Over the Bear Stearns weekend in March 2008, the sale of Bear Stearns was negotiated by the Fed. In the initial deal, which was only $2 a share, the person who made the $1.7 million bet made $270 million off the bet. The company was sold for $236 million, which was worth less than the corporate headquarters of Bear Stearns.

Bruce read a quote that stated, “Bear Stearns was vulnerable to runs because, like most of Wall Street, it had been funding its operation from short-term secured and unsecured cash. When these short-term arrangements did not roll over, new arrangements could not be secured. Cash was drained out of the firm.” We now have sovereign debt. In his book Boomerang, Kyle Bass has done his job of doing credit default swaps on Greece. He would pay $1100 for $1 million coverage. Bruce wondered if Robert saw the same setup that really damaged the world’s economic mortgages done and if round 2 might be sovereign.

Robert believes this derives from the same problem with giving assets too low a risk waiting, especially in Europe where soverance requires no euro capital. Originally this was supposed to apply to AAAs and AAs, and in fact it does still apply to lower rated tranches. You could own a lot of these assets and fund them through overnight lending, and confidence in the system would vanish and people would want their cash back. They would demand more and more assets. Effectively, the price of the asset was declining, but it was being affected by cash being drained out of the system.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

The Fannie and Freddie Hate Storm

2011-12-28T13:32:00.000-08:00

Holman H. Jenkins, Jr. writes in a column in the Wall Street Journal December 28:

Like amoebas feuding in a drop of water, pundits have been savaging each other all year over whether Fannie Mae and Freddie Mac "caused" the financial crisis. Lately the argument has become apoplectic.

But the question is phrased badly. Three things happened: a housing bubble, a collapse in lending standards, and a global liquidity panic when markets lost trust in the solvency of financial institutions.

Read more at this link.

Why the Left is Losing the Argument over the Financial Crisis

2011-12-27T12:14:00.000-08:00

By Peter Wallison and Ed Pinto

American Enterprise Institute
December 27, 2011

The day before Christmas, Joe Nocera did it again—wasted a perfectly good column with another attack on us, Peter Wallison and Ed Pinto.

It’s worth reading for what it says about the Left’s current situation. According to Nocera, we “almost single-handedly” have created a “myth that Fannie Mae and Freddie Mac caused the financial crisis.” Those who have fallen for this myth, according to Nocera, include the congressional Republicans and the Wall Street Journal’s editorial page.

It’s somewhat implausible that two guys at a Washington think-tank, arguing that the financial crisis was caused by government housing policy, could create a widely accepted alternative to the conventional liberal narrative that the financial crisis was caused by the greed and lack of regulation of Wall Street. After all, the conventional narrative was created by the government, propagated by the New York Times, and accepted without question by just about every other major newspaper and electronic mass media outlet, foreign and domestic. Apparently, however, in Noceraworld, threats to the accepted narrative can never be fully suppressed.

Read more at this link.

Radio Interview: Congress Set Fannie, Freddie on the Road to Ruin

2011-12-24T05:38:00.001-08:00

The Norris Group's Real Estate Radio Show
Riverside, California
December 24, 2011
Bruce Norris Interviews Robert Stowe England
Topic: Black Box Casino

Listen to the broadcast at this mp3 link:

Summary of the Interview:

257-TNGRadio – Robert England 12-24-11
Friday, December 23rd, 2011

This week Bruce is joined by Robert England. Robert is a journalist and author who has written extensively on mortgage finance, banking, retirement policy, and the financial and economic impact of aging population. His most recent work is Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance. Previous works include Aging China: The Demographic Challenge to China’s Economic Prospects. Robert is also a senior writer for Mortgage Banker Magazine.

Bruce said he really appreciated his Black Box Casino book and was familiar with the overall story. There are a lot of insider terms where when you are in Wall Street and you watch Squawk Box, they use the terms as if the world knows what they mean when they don’t. One thing his book really did that was very helpful was every time he had one of these words to use, he took time to explain what it means. Robert said he did this after a copy editor was reviewing his work that had a general but no financial background, so she kept saying she did not know what something meant. Since she did not understand what words meant, then Robert decided that he needed to define the term. Bruce said it was really helpful because there are some things you hear and you just pretend you know, but then you realize when you have to explain it to somebody that you really don’t know what it means.

The book talks about events as they unfolded in 2007 and 2008, yet Robert had just written the book in 2011. The reason for the long gap of time was it took a while for him to find a publisher who was interested and also to obtain a book contract. This was part of the reason. Another reason was information came out later on that was more helpful than what was available immediately after the crisis. This included a lot of research that was dug up by the financial crisis. Bruce wondered if as time passed people were more apt to say what really went on because there was a safety of distance between the events. Robert said this was probably true for some sources in the book; but for other sources they clammed up because whatever they had been involved with was being embroiled in lawsuits, so they did not really want to talk.

The name Black Box Casino is a concept that describes the change that was occurring in the global financial system. First, there was the increasing prevalence of black boxes within the system, which are financial instruments and institutions that have no transparency; you can’t see what is going on inside and therefore they are black boxes. The casino part of the title comes from learning that much of the activity that went on in a number of the black boxes was in fact speculation, even wild speculation.

Bruce said when we used to think of Fannie and Freddie; we used to think of the safest possible loan pool with a mandate to keep safety as first priority. Bruce wondered how wrong this perception is, to which Robert said this is completely 180 degrees from the reality that was going on at Fannie and Freddie. The way the regulation was set up to govern Fannie and Freddie did not guarantee that they would be operated in a safe and sound manner, and it may in fact have encouraged them to do the opposite.

Bruce wondered if the title of GSE (Government Sponsored Enterprises) came with benefits. Robert said it does because the government is sponsoring what you do, yet you are a private corporation that has shares that are publicly traded and that benefit the executives of the company if they can use the public mission of the corporation to increase revenues and profits for themselves. It is a hybrid form of a business that comes with a lot of problems and can reap a lot of damage if things get out of hand.

Bruce also wondered if the political club had considerable political clout. Robert said they did because both Fannie Mae and Freddie Mac had a considerable amount of clout in the beginning before the regulations were set up to govern them. Once the regulations were put in place, there were a number of provisions in the regulations and the statutes that gave them a lot of power. For one thing, they were allowed to lobby and also got involved with making campaign contributions. Even though they were government-sponsored enterprises, logically they should not have been allowed to lobby the government. What happened was by giving them the authority to lobby, or more specifically not prohibiting it, it allowed them to make contributions, influence Congress, and give politicians a way to provide benefits to constituents without having to go through the budgeting process since everything going on at Fannie and Freddie was not involving the budget. Even their regulator was given minimal powers to regulate them, keep them in line; and this in turn gave them more clout. The regulator did not have a source of income from fees, which is usually what the banking regulators have. Instead, they had to go to Congress every year and get funding for their activities; so they were hamstrung by the ways that the law was set up.

This law was the 1992 Federal Housing Enterprise Financial Safety and Soundness Act, which was a very important law but that unfortunately did not live up to its billing. It was supposed to have been set up for safety and soundness, but once Congress got a hold of the original idea and began devising a bill, it was really put together in a way that would benefit politicians the most as it would give them a way to constantly provide a benefit to a constituency, and that benefit would constantly rise over time. There was no way to restrain the lowering of lending standards, which would be required to increase the level of lending to designated populations.

The law contained federal affordable housing provisions, which was a kind of coup for the politicians. Bruce was shocked that they had a mandate they had to loan to low-to-moderate income people a certain percentage of their loans. When the GSE Act was being put together, at that point both Fannie Mae and Freddie Mac had informal goals in place where approximately 30% of their business would be acquiring loans that went to borrowers who were low or moderate income borrowers. That reflected on natural market share or an entity in their position that would not distort the market. The crafters of the legislation wanted to give HUD the right to raise the affordable housing goals that were put into law and to do them on a periodic basis along with constantly raising them without any consideration to whether or not it would impair the safety and soundness of Fannie and Freddie.

What is interesting about all of this is the legislation really came on just after the SNL crisis, so you would think that everyone would be in the mood to create something that was safe and sound. Robert believes everyone was in the mood, but no one was paying attention to what was being done. First of all, the concept that you would now securitize loans would be a predominant way to finance mortgages was thought to be the way they would reduce the potential fallout from a bad period of lending that occurred with the savings and loans, which held their mortgages on their book. When interest rates rose very high, there was a huge mismatch between their assets and liabilities, which did them in. Securitization was supposed to take that risk off the book, but starting with that people thought they had a magic solution. However, they did not put together a regulatory regime that would be capable of assuring the safety and soundness of Fannie and Freddie, from setting up capital standards to allowing them to have investments in portfolio, to not allowing the safety and soundness regulator to raise their capital standards if they deemed that they were inadequate at any point. In addition to having to go to Congress every year for money, the regulator was also not an independent regulator. They were a part of HUD, and they did not have any control over the Affordable Lending Goal and could do nothing about them. HUD did not have to consider safety and soundness when they were considering the goal. There were actually three goals at the time, and the main goal was raised to over 55% by the time of the crisis, so there was a subsequent goal to low income households, which is more narrowly targeted. This had not existed before and began at about 11% and rose to nearly 27% at the time of the crisis.

Bruce wondered how people qualified for the loans, whether they were really subprime or if they were good credit but low income. Robert said over time the lending standards at Fannie and Freddie declined in order to meet the affordable lending goals. As the goals were put in place gradually, they weakened their lending standards. They first lowered the down payment then gradually lowered the FICO score for borrowers to qualify to be part of the Fannie and Freddie program. They then increased the segment of the business that was funding subprime without identifying that publicly. They drastically increased the amount of business funding Alternative A or low to no documentation loans even more without publicly acknowledging it. The legislation that set up Fannie and Freddie did not require them to file quarterly audited statements to the Securities and Exchange Commission, so they could get away with not telling investors the truth about their portfolio. By the time of 2000, they were doing 100% loan-to-value mortgages and were greatly expanding their subprime lending, but it was never identified as that. This was how we ended up this past week with the SEC filing charges against former Fannie and Freddie executives for lying about the amount of subprime and Alt-A in their portfolios and in their investment holdings. They had a black box, and they were wildly at odds with the actual amount they had.

Bruce wondered if a lot of the fulfillment of the lower income goals happened because they were able to invest in mortgage-backed securities that had the loans in them. Robert said it was both through acquiring them and not calling them subprime, and also through buying private label mortgage-backed securities that had loans that met the qualifications and that would meet the goals. Jim Lockhart, the former head of the Federal Housing Finance Agency, told Robert in a recent interview that they could not have met their goals if they had not bought up a lot of the private label mortgage-backed securities. They bought large amounts of it and were the major purchaser of private MBS. Another reason may have been they were able to leverage it more. Their capital standards were very low, so they could leverage the acquisitions and increase their earnings as well as buy extensions, which was the compensation of the top executives. As a lot of people may know, the former heads of Fannie Mae and Freddie Mac were involved in accounting scandals in 2003 and 2004 where they were found to have manipulated the earnings targets to maximize their compensation. Both Franklin Raines and Leeland Brendsel had to leave the two GSEs at the time. You can jut up the amount of securities you purchase to increase your overall compensation and profitability that was at first profitable but later was not. By creating a compensation system that rewarded the executives by increasing volumes, it really drove the GSEs’ top executives to greatly expand their business in order to make more money.

The leverage for a mortgage-backed security that was stated in the books was 222 to 1, and this was for the guarantee. There were two capital rules. The first was the 222 to 1 guarantee, and the second was Fannie and Freddie had to only hold 0.45% of that capital against the guarantee of paying the principle interest to the investors in their securities. If they held any of the securities that they purchased, they only had to hold 2.5% capital against it. By early 2008, the GSEs were leveraged about 100 to 1 overall when you blend the two on standard accounting rules. The accounting rules were another way that Fannie and Freddie were able to get away with what they did. They did not have to meet what were normally considered bank accounting rules but could use generally accepted accounting principles, which allowed them to use some types of securities and assets to count as their capital when other people did not. This included losses that could be claimed against future taxes. When you are losing money constantly, there is no gain to apply the losses against.

The intended consequences of lowering lending standards was to increase homeownership rates among lower-income and moderate-income households. The homeownership rate was around 64-65% at the time that the GSE Act was passed, and they were hoping to raise it dramatically so that particularly minorities would have homeownership rates similar to those of whites. There was a disparity between both African-Americans and whites and Hispanics and whites in terms of the percentage of the population that owned a home. Although the homeownership rates were about 45%-50% range, they were better than a lot of people might have thought. However, they were not in the mid to high 60s. There was legislation in the 70s that tried to correct those things. This included the Home Mortgage Disclosure Act of 1975 that required the banks to collect data on which the person was that was the borrower as far as race. There was also the Community Reinvestment Act of 1977 against Red Lining.

When you are a lender, there are areas where you are not trying to be prejudice but you realize that an appraiser could literally get shot. Bruce is in the hard money business, and they get asked to go to certain areas to do loans; and all those things come into play that you are actually in danger. With Red Lining, the intent was not to have a prejudice outcome, which is just and fair; but you have to ask if it also takes away the ability to say no because you know it is not going to have a good outcome. The effect of all the various laws, provisions, and actions by regulators led banks and lenders to increasingly divorce the decision on whether or not to get the mortgage from hard realities of what lending is all about. At some point, in order to meet their Community Reinvestment Act targets, banks made loans they knew were going to be bad because they thought they had to do it to stay in business. The CRE Act originally required banks to make efforts to reach targeted populations but did not require that specific results be achieved. The Clinton Administration reinterpreted that law and rewrote the regulation regarding it in the mid-1990s and said that they actually had to show results. The Federal Reserve began to reject applications for mergers and opening branches to banks that did not have the Homeowner Disclosure Act data that was collected on lending by race, gender, and income. These steps taken by regulators had the effect of forcing banks to make bad loans. A common criticism against people who make claims that the CRE Act has an impact on lending is that it was passed in 1997 and the crisis was in the 2000s. The whole process was very gradual, and the idea of forcing banks to do lending against solid lending principles came into play in the mid 1990s. As each merger was made and came about in the years following 1995, the banks had to make a commitment to do a certain amount of CRE lending. By 2007, they had made commitments of over $4 trillion. If you go back to the mid 1990s, the CRE lending might be $50 billion inconsequential. In the end, it was trillions of dollars that the commitment had to be made.

There is a quote that states, “The GSE Act became the vehicle for putting forth the philosophical view that housing is the civil right,” which basically states that people are entitled to own a house. Major provisions of the act was written by a group of housing advocates and activists under an informal deputization by Henry Gonzales, who was the Chairman of the House Financial Services Committee in the early 1990s. These housing activists’ attorneys got together and crafted this language to achieve the goals and make housing more of a right and to impose that idea on lending. These are the same groups that are pointing out the loan programs and saying they were unfairly skewed to people of color and lesser income. They are now rewriting history and saying that lenders deliberately went out of the way to make bad loans, and therefore they are to blame instead of the rules, regulations, and laws. Because they were seemingly able to hide in the black box, not many people really understood the mandate underneath the covers that it was something Fannie and Freddie had to do. There was not much exposure to what was being proposed and put into law in the early 1990s. A lot of people thought it was just guaranteeing everyone equal access to credit and not steering it.

Tune in next week as Bruce and Robert England continue their discussion on the black box and real estate market

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Tags: Affordable Lending Goal, Alternative A, Black Box Casino, bruce norris, fannie mae, federal affordable housing provisions, Federal Housing Enterprise Financial Safety and Soundness Act, Federal Housing Finance Agency, FICO score, financial crisis, freddie mac, gse, GSE Act, HUD, Jim Lockhart, mortgage-backed security, political clout, Robert England, The Norris Group Real Estate Radio Show

Fannie Mae and Freddie Mac Pushed Rapid Credit Rescoring To Briefly Turn Subprime to Prime To Get Risky Loans Approved, Mortgage Broker Says

2011-12-16T13:20:00.000-08:00

By Robert Stowe England
December 16, 2011

According to a former mortgage broker, members of Congress, Fannie Mae, Freddie Mac, and federal officials orchestrated and imposed on mortgage brokers and credit rating bureaus a policy to rapidly rescore consumer credit ratings so that more borrowers without reported incomes could get mortgages.

This coordinated effort enabled many subprime and nearly subprime borrowers to temporarily appear to be have credit scores high enough to be prime borrowers and, in the process, greatly expand lending in a period that stretched from 1998 to 2004.

“I'll bet 95% of the mortgages that went out of our office were subprime even if they weren't rated that way,” the broker said.

Mortgage brokers are wholesale lenders who originate their mortgages for large banks and other financial institutions.

“What infuriates me about when [President] Obama speaks or Barney Frank or anyone else who talks about these mortgage-backed securities and everything that happened, is that nobody knows the real truth about what goes on in the mortgage business and why it failed,” the broker said.

The broker’s claims, if substantiated, could mean that the true level of subprime and risky lending at Fannie and Freddie ahead of the 2008 financial crisis, was dramatically higher than the already high $1.8 trillion previously estimated to be on their books in mid-2008 by Ed Pinto, former chief credit officer for Fannie Mae.

Rapid credit rescoring was designed to get low credit scores up to the 700 credit score level where borrowers could qualify for existing programs at Fannie and Freddie that did not require any reported or stated income.

The broker, who described how the scheme worked in a call in to the Rush Limbaugh Show on December 7, identified herself only as “Laurie,” who said she had worked both as a packager of loans and an advertising executive for a mortgage brokerage firm.

Laurie said she did not want to identify herself because the broker had become involved with lawsuits over some of these practices.

The script of the conversation between Laurie and Limbaugh can be found at this link:

The pressure on mortgage brokers to engage in rapid credit rescoring came from the credit rating agencies, according to the broker. “We used to get visits by our credit representatives from the three major credit bureaus,” she said. “They were under a lot of pressure to develop a program to allow people to, quote, unquote, fix their credits faster,” she explained.

It was clear where the pressure on the bureaus originated. “According to the people from the credit managers bureaus, they were getting that pressure from Congress and [Federal Housing Administration or] FHA and Fannie and Freddie that they weren't doing enough to help people,” Laurie recalled.

Washington politicians and bureaucrats, in speaking to credit rating bureaus, belittled and ridiculed their rating practices. The credit bureaus were accused of “being unfair because they weren't doing enough to allow people who had had financial problems to fix their credit.”

Temporary Fix

The higher scores obtained through the rapid rescoring process usually proved to be fleeting.

The new higher credit score “wouldn't survive the next update from the credit bureau,” said Laurie. “The next time that update [from the credit bureau] came along, everything [that was detrimental to the borrower] was back on [the credit report], everything was like it was before,” she added.

Rapid credit rescoring was only available from mortgage brokers, Laurie said, and not for other consumer loans. In fact, sometimes people who knew about the availability of the rapid credit rescore would abuse that arrangement by going to a friendly mortgage broker to get a temporarily higher score to get a car loan, Laurie said.

The practice of rapid credit rescoring, in turn, made it possible for Fannie and Freddie to dramatically ramp up the volume of mortgage originations in the period from 1998 to 2004.

“When Fannie began this idea of packaging these things as securities and grouping them together, you'll find that the number of mortgage brokers for residential mortgages in the country skyrocketed,” Laurie said.

With Fannie and Freddie onboard the rapid credit rescoring process, new firms could quickly obtain lines of warehouse credit from banks to jump into the business of being mortgage originators.

The practice of rapid credit rescoring started out as a fairly benign. “It went from, yeah, maybe it took a long time to fix your credit to what we call the rapid rescore process,” Laurie said on the radio talk show.

Gradually, the practice turned toxic and fraudulent. “Our office could literally, in one day, take everybody's bad credit issues, write a one-line sentence about each one, fax it over to the credit bureau that . . . we paid to be members of, and, boom, within an hour, they were dropped off and the credit was rescored,” Laurie said on air.

The whole process became a sham. “It took literally less than 15 minutes at the end of the day,” said Laurie. “I mean we could fax it over and have it faxed back and rapid rescored.”

The growing band of mortgage brokers that joined the wholesale mortgage lending business would attend Fannie and Freddie seminars once or twice a year, according to Laurie.

“Fannie and Freddie were there, and they might as well have set up a carnival booth,” Laurie said. “I mean they were so excited about the fact that if you were a new mortgage business and you could get a wholesale line of credit, you could rapid rescore and qualify 500,000 people in a year, and they would back and buy everything you could send them.”

With the advent of rapid credit rescoring, the number of brokers employed by the business where Laurie was employed, was expanded from two to 20 brokers and the owner “sat in an office and did nothing but pull in wholesale lines of credit,” from such institutions as Washington Mutual, Laurie explained.

END

Could the 2008 Crash Have Been Prevented?

2011-12-13T05:44:00.000-08:00

MortgageOrb Person of the Week: Robert Stowe England

Phil Hall of MortgageOrb writes December 13, 2011:

It has been more than three years since the September 2008 financial crisis, and many people are still trying to piece together what went so horribly wrong. Veteran financial journalist Robert Stowe England has offered his insight on what happened with his new book, "Black Box Casino: How Wall Street's Risky Shadow Banking Crashed Global Finance" (published by Praeger). MortgageOrb spoke with England about the circumstances that triggered the economic catastrophe.

Q: Was it possible that the 2008 financial crash could have been avoided? Or was this the financial services equivalent of a runaway train?

England: Both statements are true to some degree. There were so many vulnerabilities building up in the global financial system, it had, indeed, become a runaway train, while most did not yet realize that. Combine that with an ever-rising level of hidden bad credits and hidden bets and exposures, and a bad outcome was assured. In that sense, by 2005 or 2006, it was inevitable that we were headed for a train wreck. It was only a question of just how bad it was going to be.

There is a case to be made that certain actions could have prevented the coming crash from becoming the epic crisis it became. Admittedly, however, suggesting what might have been done to mitigate the expected outcome carries with it all the caveats one must make from hindsight bias.

Read more at this link

Black Box Casino Reveals Mad Max Follies of Crisis

2011-11-21T16:25:00.000-08:00

Full Text Follows:

What Went Wrong

By Robert Stowe England

Remarks Made at a Book Signing at the Federal Street Gallery in Milton, Delaware

November 5, 2011

Good day.

My name is Robert Stowe England and I’m here today to shed a spotlight on the causes of the financial crisis of 2008.

If you are like me, when this crisis broke, you were shocked and outraged that things could get so out of hand and cause such an enormous calamity – the worst financial crisis of modern times.

Something had gone terribly wrong to deliver us into the world of Mad Max, where the norms we thought necessary for society have vanished. We saw financial institutions crashing all around us while authorities seemed powerless to do anything about it.

As a financial journalist, I covered the mortgage industry at the heart of the crisis. I was on the frontlines reporting a multitude of institutional and market failures that began to unfold early in 2007.

By August 2007, fully half the mortgage market had collapsed or had to be rescued. By September 2008, most of the rest of the mortgage market had to be salvaged by a government takeover of Fannie Mae and Freddie Mac.

As the bills for the crisis mount, the cost of bailing out Fannie and Freddie have been the biggest for taxpayers, nearly $175 billion so far. The final tally could rise to $380 billion, according to Washington estimates, or nearly $700 billion according to Standard & Poor’s.

At the time of the crisis, the mortgage market was probably the largest single largest financial market in the world at $11 trillion.

From the beginning, I found mortgage banking to be a fascinating, tough, and dynamic industry. Mortgage bankers sometimes had to be as vigilant and focused as fighter pilots in order to navigate the challenges they faced.

Those who took their eyes off the ball were dealt a swift and ruthless judgment by competitors and the markets.

Mortgage companies survived by being nimble and quick. They were able to double their capacity to originate loans in short order when necessary – or cut their capacity in half. The value of the assets mortgage bankers owned could be decimated falling interest rates. If you made bad loans, you had to buy them back from the investors and take the losses.

The markets ruled with a vengeance. It was not just Adam Smith’s famous invisible hand at work. It was more like an invisible fist.

It was my first year on the mortgage beat that I met and profiled Angelo Mozilo, co-founder of Countrywide Home Loans.

To interview Angelo, I went to the company’s headquarters in Pasadena, California. At 47, he was already known for his perpetual tan. The wide-ranging interviewed last 7 hours and included a tour of Countrywide’s growing collection of Hudson River Valley School landscape paintings.

Mozilo was the epitome of the dynamic mortgage market and Countrywide became the pacesetter and leader of the industry. He had passion for mortgage banking that suited the business.

By 2009, however, Angelo had become the chief villain of the financial crisis on the front page of the New York Times.

But something we terrible wrong. In the early 1990s virtually the entire mortgage market was made up of sound credits. By 2008, $4.7 trillion or nearly half of all mortgages outstanding were risky loans.

This huge volume of bad mortgage credits is at the root of the financial crisis.

The road to ruin for the mortgage market began in 1992 when Congress passed a law that established a regulatory framework for Fannie and Freddie. The short name for the law was the GSE Act. GSE is short for government-sponsored enterprise – a firm privately held by shareholders, but with a mission assigned by the government.

The GSE Act was supposed to assure that Fannie and Freddie would be operated in a safe and sound manner and not meet the same fate as the savings and loan industry, much of which failed in the 1980s.

Washington policy makers thought that turning mortgage loans into securities would avoid the problems of the savings and loans that held loans on their own books.

Fannie and Freddie would buy mortgages and pool them into a trust and issue mortgage-backed securities that Wall Street would sell to investors as AAA bonds – AAA because of the implicit guarantee of the federal government.

In theory, securitization was a good idea. But, the GSE Act created a set of rules riddled with flaws and Trojan horses that would bring about the downfall of the market.

For starters, under the GSE Act, the regulator for Fannie and Freddie was not an independent agency like the banking regulators but part of the Department of Housing and Urban Affairs or HUD.

Also under the GSE Act, Fannie and Freddie had a tiny capital base of 2.5 percent that could be quickly wiped out by losses. Well-capitalized banks by contrast have to have 10 percent capital.

Further, the regulator was not allowed to raise capital requirements if capital levels were deemed inadequate.

Also, Fannie and Freddie did not have to file quarterly reports with the Securities and Exchange Commission or SEC. They didn’t have to audit their financial statements.

They were allowed to lobby Congress.

They could hold securities on their balance sheet to boost profits and compensation for executives even though the whole point of their existence was to transfer that risk to investors.

The law governing Fannie and Freddie was part a new era in Washington where it became official government policy to push down lending standards to expand home ownership to lower income and minority households.

Over the years, as lending standards fell lower, mortgage origination volumes rose higher. Subprime and other risky loans took a steadily larger share and this flood of money into mortgages helped launch the housing bubble.

I warned way back in 1993 that trying to achieve equal outcomes for people with good credit and a good down payment and people with bad credit and little or no down payment was destined to cause grief and serious financial harm.

The GSE Act also set affordable housing goals for Fannie and Freddie to be set not by the regulator buy by the Department of Housing and Urban Development or HUD.

With Congress constantly applying the pressure, a sucession of HUD Secretaries from Henry Cisneros, Andrew Cuomo to Alphonso Jackson steadily raised the affordable housing goals.

For members of Congress, it was a political bonanza. They could take credit for benefits for constituents without having to go through the budgeting process, no matter that loans were made to people who could not pay them back.

In 1992, 30 percent of all mortgages acquired by the GSEs were aimed at low and moderate-income households. By 2008, the affordable housing goals required that 56 percent of all loans target that same population.

To meet these goals, lending standards had to steadily fall. In 1996, Fannie and Freddie ventured into 3 percent down payments. In 2000 they launched no down payment loans. They also ventured into subprime lending but mostly hid that activity by refusing to identify most of it as subprime.

In 2003 and 2004 Freddie and Fannie were caught up in huge accounting scandals. Leland Brendsel at the helm at Freddie and Franklin Raines at Fannie were found to have manipulated earnings to increase their compensation.

While both had to resign, Brendsel went quietly but Raines went out kicking and screaming. Neither paid any real penalty for their fraud. Brendsel, who had made $30,000 in campaign contributions the prior year, walked off with $24 million, while Raines hauled off $92 million.

The failure to hold Brendsel and Raines to account sent a dangerous signal, I think, to others who contemplated fraudulent schemes. Rewards could be huge and the potential downside limited.

Fannie and Freddie grow so large that by 2004, Fed Chairman Alan Greenspan worried that if one of them failed, it would pose systemic risk.

Fannie and Freddie, however, are only part of the story.

Wall Street came up with private label mortgage-backed securities to compete with Fannie and Freddie, including jumbo mortgages, Alt-A or low or no documentation loans, and subprime loans.

In 1995 HUD decreed that the GSEs could buy those private label securities to meet their ever-rising affordable housing goals. Former GSE regulator Jim Lockhart has said Fannie and Freddie could never have met those goals without buying the private label securities.

Fannie and Freddie and the private label originators fought for market share in a race to the bottom of the mortgage credit pool. With a pricing advantage, the GSEs took the stronger credit in the subprime market.

New and increasingly predatory loans appeared. There were interest only mortgages did not pay down the principal and resulted in huge jumps in payments after few years.

Just about anyone could qualify for no income no asset or loans. Then there were no income no job no asset loans.

It got to the point the mortgage brokers were scouting out illegal immigrants with menial jobs to give them loans even when the borrowers were not even thinking about buying a home.

In South San Francisco, a cleaning lady bought a house for $700,000 with no money down and walked away from the closing with $8,000 in cash. Shocked to learn how much each month’s payment would be, she and her husband moved out of the house after three weeks and never made a single payment.

What happened to the famed market discipline that rule the mortgage industry?

Beginning in 2002, Wall Street was having trouble selling the lower credit quality pieces or tranches of private label mortgage-backed securities to investors. These were rated A, BBB and BBB minus.

American institutional investors had stopped buying these lower-rated tranches that served as a buffer for losses for investors in the AAA bonds. Without buyers for the lower-rated bonds, the subprime private label market should have corrected – or even crashed.

However, Wall Street came up with the idea of taking all the lower credit pieces of subprime and other risky mortgage bonds and rolling them into collateralized debt obligations or CDOs.

Texas hedge fund manager Kyle Bass said it best when he called the subprime CDOs “the biggest bait and switch of all time.”

Wall Street was able to sell these assets to European and Asian buyers, who took the AAA rating as a seal of approval, without seriously questioning the process by which the credit rating agencies gave them such a rating.

These buyers of AAA CDO bonds had mountains of dollars from trade surpluses and recycled petro dollars and needed dollar investments. At a time of low interest rates, they couldn’t resist the higher premium offered by CDO bonds with AAA ratings. It seemed too good to be true. It was.

How could a bunch of bad credits rolled together create good credits? It was the financial equivalent of weaving flax into gold. Few seemed to question this improbable fairy tale that was justified with sophisticated computer models.

Even with willing buyers, the subprime CDO business faced another problem. No one really wanted the lower credit rated CDO tranches.

But, Wall Street firms came up with a solution. They would sell each other those lower tranches in order to generate the deals and earn the fees. Their gentlemen’s agreement was
“You buy my BBB tranches and I’ll buy yours.”

Often senior management at these firms did not understand the risk this posed – or did not want to know. All that mattered was that the deals were generating huge bonuses for everybody.

The creation of so many unloved lower-rated tranches of CDOs caught the eye of hedge funds who loved them because they were so bad.

Hedge funds wanted them at first because of their high returns, but later they decided to bet against them.

In time, hedge funds came to sponsor almost half of all CDOs. They would buy the equity piece of the deal for its super high premium while at the same time making much larger bets against lower rated tranches. They expected to get rich off the failure of the U.S. housing market.

Hedge funds were not supposed to choose the assets placed in CDOs – but evidence suggests strongly that they were able to influence those decisions to include more are more of the worst credits.

The demand from CDOs for weaker subprime credits – usually only a fraction of each deal – had a perverse effect. It greatly increased demand for mortgage lenders to increase the volume overall level of subprime and risky mortgages to supply the bonds needed for the CDOs.

In short, the subprime CDO business was poisoning the private label mortgage-backed securities business.

In an outcome James Bond villain Goldfinger would love, Wall Street was creating a flow of funds into the mortgage industry in search of bad credits.

Subprime mortgage originator Bill Dallas of Ownit opened a window into this world when he said Wall Street was paying him more to do a loan with poor underwriting than one with good underwriting.

Merrill Lynch and Citigroup were the kings of CDOs and bear much of the blame for the crisis.

Merrill’s chairman Stanley O’Neil made $91 million in 2006 while turbocharging the CDO business. A year later, Merrill had to take an $8.3 billion write-down and O’Neal was fired, walking away with another $151 million.

At Citigroup, it was Robert Rubin who talked chairman Chuck Prince into diving headlong into the CDO business. Citigroup hid the toxic assets it was creating in structured investment vehicles or SIVs off its balance sheet and in black boxes on its balance sheet.

In the first and second quarter of 2007, the company concealed the existence of $50 billion in subprime assets in its audited SEC filings.

Even though top officials are required to personally sign accounting statements and be held personally liable, the SEC did not investigate Prince or Rubin. The case was settled with minor fines to lower-level officials.

A whistleblower inside Citi named Richard Bowen tried to warn Rubin about the growing volume of bad mortgages feeding the CDO monster.

Bowen gave his warning in a memo to Rubin titled “URGENT—READ IMMEDIATELY,” all in capital letters. He told Rubin Citi could face billions in losses if investors demanded Citi repurchase defective loans.

When called before the Financial Crisis Inquiry Commission, Rubin was asked about the memo. His answer? “[E]ither I or somebody else, and I truly do not remember who, but either I or somebody else sent it to the appropriate people, and I do know factually that that was acted on promptly and actions were taken in response to it.”

Clearly nothing was done. Citi would have failed if Treasury, the FDIC and the Fed hadn’t put together $476 billion in TARP funds and guarantees against losses from bad mortgage assets.

Washington’s worst dereliction of duty was its failure to enforce the laws on the books that could have helped prevent or mitigate the crisis.

The SEC was the weakest link – mostly by Congressional design – but also because it was a lax enforcer of laws against fraud and market manipulation.

Take the case of the naked short sellers that brought down Bear Stearns. On March 11, 2008, an unidentified party made a $1.7 million bet through put options that Bear Stearns would collapse within 10 days.

At the same time, rumors were widely circulated that Bear Stearns was out of cash even though they had $18 billion on hand. Investment funds began to pull out their brokerage accounts. In only few short days, Bear Stearns was down to $2 billion in cash and on the verge of collapse.

More than ten million shares were sold into the market by “sellers” who did not own them or had not borrowed them, as required by law. This pushed Bear’s share price from $62 to $30.

Facing a sudden demise, Bear agreed to be sold to JPMorgan for $2 a share or $236 million, less than the value of its corporate headquarters. Meanwhile, the party who had place the $1.7 million bet made $271 million.

There was a SEC investigation of the naked short selling of Bear’s shares but not one was brought to justice.

While the collapse of Bears Stearns should have been a wake-up call to Chris Cox at the SEC and Hank Paulson at Treasury, no one took steps to prevent naked short selling from bringing down other investment banks as the market now expected.

Only six months later in September 2008, naked short sellers struck again. They sold tens of millions of Lehman Brothers’ shares they did not own or borrow. In a matter of days they forced the company into bankruptcy, precipitating the financial crisis of 2008.

The SEC won’t even say if there was an investigation of the Lehman naked short sales. No one has been brought to justice.

There is another painful lesson learned from the crisis. The architecture of financial system had grown far more rickety and vulnerable.

During 2007 and 2008, there were massive mostly hidden runs on both the shadow banking system and on regulated banks and investment banks.

It all began in August 2007, when a panic began in overnight funding contracts known as repurchase agreements or repos. Firms can obtain cash by selling their assets overnight and buying them back the next day for a tiny increase in price of those assets

The panic got underway on trading desks when the parties that provided overnight cash wanted additional collateral above and beyond the value of the cash. They were asking for a haircut on the value of the assets.

By the end of 2008, a steadily increasing haircuts drained more than a trillion dollars out of the banking system. It all happened out of the public eye.

There were other calamities. For example, a run on SIVs that funded by asset-backed commercial paper drained another $451 billion out of the system in late 2007.

Credit default swaps, a form of insurance against debts, brought more financial pain. Margin calls on the swaps began to drain funds from the system, bringing down the world’s largest insurance company AIG.

How did the financial get to be so weak? That is the question that I sought to answer. It was a monumental mystery that needed to be investigated and explained.

Not surprisingly, people central to the story did not want to talk. I learned that the fastest way to a dial tone was to call a Wall Street firm and ask to talk about subprime CDOs.

Progress was slow, but I managed to piece together the story.

Black Box Casino is a story about the one half of the world of banking that is shadow banking. It is the story of how huge swaths of that shadow banking and financial activity moved into black boxes.

Black boxes are financial institutions and vehicles with no transparency. You can’t see inside and know what bad assets might be hidden there. I discovered through my work, that some of these black boxes housed financial casinos where fast money and high stakes were the norm.

Black boxes can also conceal fraud. We would learn only after its failure, for example, that Lehman Brothers filed public disclosures that hid massive manipulation of accounting.

Mortgage bonds became attractive to market players who wanted to bet for or against them using credit default swaps.

Leading up to the crisis, more than $20 trillion in bets were made on credit assets not owned by those making the bets.

In the end, I learned the painful reality of the new financial world order.

The financial system had become more sophisticated and opaque and vastly more vulnerable.

If we are to address the weaknesses in the system, we first need to understand what went wrong.

For the most part, Washington has failed to that. In some cases Washington pols and officials have covered their eyes and ears and eyes to avoid seeing and hearing the truth.

I hope my book will be a contribution toward understanding what went wrong and I look forward to the efforts of others in this vital quest.

The American people – indeed, the people of the world – deserve honest answers.

END

Rickards Says U.S. Making Same Mistakes As Japan

2011-11-13T18:11:00.000-08:00

In an interview on Bloomberg TV November 10, James Rickards says that while the Fed is saying it does not want to repeat the mistakes of Japan, the Fed is, in fact, repeating the very same mistakes.

Rickards, senior managing director for Tangent Capital Partners, a merchant bank based in New York, is interviewed on Bloomberg's Money Moves with Deirdre Bolton.

Rickards has a new book, Currency Wars, that was released November 10, that focuses on the role of currency wars in modern history and the role the a gold standard has made and can make to provide the kind of stability that is needed for sustained growth.

Rickards criticizes the Fed for thinking that "they're playing with a thermostat" that they can dial up or dial down. However, they are, instead "playing with a nuclear reactor" with fuel rods. And, if they get it wrong, we can have "a massive meltdown." He sees the possibility of a lost decade in the United States as the best possible outcome, with the possibility things could be much, much worse.

James Grant is also interviewed in the same segment and he argues that academics and policy makers should seriously consider the gold standard.

Inside the Story of What Went Wrong

2011-11-11T14:13:00.000-08:00

Remarks Made at a Book Party and Signing for Black Box Casino
Event Hosted at 3101 Chain Bridge Road, Washington, D.C. 20016

November 10, 2011

By Robert Stowe England

I’m here tonight to shine a spotlight on the causes of the financial crisis of 2008.

If you are like me, when this crisis broke, you were shocked and outraged.

Something had gone terribly wrong to deliver us into the world of Mad Max, where the norms vanished that we thought necessary to sustain our way of life.

Financial institutions were crashing all around us while authorities seemed powerless to do anything about it. It was the worst financial crisis of modern times.

As a journalist writing for Mortgage Banking magazine for more than 20 years, I covered the mortgage industry at the heart of the crisis.

In January 2007, I found myself on the frontlines of the crisis reporting on a multitude of institutional and market failures than were just beginning to get underway.

By August 2007, fully half the $11 trillion mortgage market had collapsed or had to be rescued. By September 2008, the government had to take over Fannie Mae and Freddie Mac to keep most of the rest of the market from collapsing.

As the bills for the crisis mount, the cost to taxpayers of bailing out Fannie and Freddie has been the biggest of any financial institution, nearly $184 billion so far. More losses lie ahead.

Few financial institutions have suffered so great a fall in reputation as have Fannie and Freddie. One insider put is this way: “The public’s view of us couldn’t get any worse. We’re somewhere just above or just below the Ebola virus.”

From the beginning, I found mortgage banking to be a fascinating, tough, and dynamic industry. Mortgage bankers sometimes had to be as vigilant and focused as fighter pilots in order to navigate the challenges they faced. Success could be fleeting as barriers to entry were low and, thus, new competitors could come out of nowhere and challenge your success. Companies had to be able to double in size or cut back half of capacity almost over night.

The markets ruled with a vengeance. It was not just Adam Smith’s famous invisible hand at work. It was more like an invisible fist.

It was my first year writing about the industry in 1988 that I traveled to Pasadena, California and I met and profiled Angelo Mozilo, co-founder of Countrywide Home Loans.

Mozilo personified the dynamic mortgage market and Countrywide became the pacesetter and leader of the industry. His “fire in the belly” suited the business.

By 2009, however, Angelo had become the chief villain of the financial crisis on the front page of the New York Times.

The industry went from being an exemplar of market discipline and good credits two decades ago to a generator of toxic assets. By 2008, $4.7 trillion, or nearly half of all mortgages outstanding, were risky loans.

This huge volume of bad mortgage credits is at the root of the financial crisis.

The road to the mortgage meltdown began in 1992 when Congress crafted a law to govern the regulation of Fannie and Freddie. The short name for the law is the GSE Act. A GSE is a government-sponsored enterprise – a firm owned by shareholders, but with a government mandated mission.

The provisions in the GSE Act was supposed to assure Fannie and Freddie would be operated in a safe and sound manner and not end up like the failed savings and loan industry.

Washington policy makers believed that turning mortgage loans into securities would avoid the problems of the savings and loans that held mortgages on their own books.

Fannie and Freddie would buy mortgages and pool them into a trust and issue mortgage-backed securities that Wall Street would sell to investors as AAA bonds – AAA because of the implicit guarantee of the federal government.

In theory, securitization was a good idea. Congress, however, did not capitalize on the potential market strengths of securitization when writing the GSE Act. Instead, they inserted Trojan horse provisions, as Ed Pinto calls them that would inevitably cause Fannie and Freddie to fail.

For starters, under the law, the GSE regulator for Fannie and Freddie was not an independent agency but located within the Department of Housing and Urban Affairs or HUD. Banking regulators, by contrast, are independent agencies.

Also under the GSE Act, Fannie and Freddie were required to have only a tiny capital base of 2.5 percent for loans and securities and 0.45 percent of guarantees. This capital could quickly be wiped out by losses. Well-capitalized banks by contrast have to have 10 percent capital.

Further, the regulator was not allowed to require the GSEs to raise their capital levels if they felt it was necessary to assure their safety and soundness.

Under the GSE Act, Fannie and Freddie did not have to file audited quarterly reports with the Securities and Exchange Commission or SEC.

They were allowed to lobby Congress, while they also had to go to Congress every year for funding.

They could hold securities on their balance sheet to boost profits and compensation for executives even though the whole point of their existence was to transfer that risk to investors.

The GSE Act was part of a new era in Washington where it became official government policy to push down lending standards to expand home ownership to lower income and minority households.

Congress gave HUD, not the GSE regulator, the power to set affordable housing goals for Fannie and Freddie.

A succession of HUD Secretaries from Henry Cisneros, to Andrew Cuomo to Alphonso Jackson steadily raised the affordable housing goals, often under pressure from Congress.

For Congress, steadily higher affordable housing goals proved to be a political bonanza. They could take credit for benefits for constituents without having to go through the budgeting process. It did not seem to matter to Congress that loans were made to people who could not pay them back.

In 1992, 30 percent of all mortgages acquired by the GSEs were aimed at low and moderate-income households, the broadest of the affordable housing goals. By 2008, this goal had been raised to 56 percent. The goal for low income households, which started at 11 percent, had reached an impossible 27 percent by 2008.

To meet these goals, lending standards and down payments had to steadily fall. As underwriting was loosened, mortgage funding volume expanded. The two GSEs grew so large, Fed Chairman Alan Greenspan began to worry they posed a risk to the financial system should one of them fail

In 2003 and 2004, accounting scandals were uncovered at Freddie and Fannie by the intrepid Armando Falcon, the GSEs chief regulator. Investigators found that Leland Brendsel at Freddie and Franklin Raines at Fannie had manipulated earnings to increase senior executive compensation.

Both had to resign but no one went to jail or paid a significant fine. Brendsel, who had made $30,000 in campaign contributions the prior year, walked off with $24 million, while Raines hauled off $92 million.

The failure to hold Brendsel and Raines to account sent a dangerous signal, I think, to others in the financial markets who contemplated fraudulent schemes.

Fannie and Freddie, however, are only part of the story.

Wall Street came up with private label mortgage-backed securities to compete with Fannie and Freddie, including subprime and Alternative-A or Alt-A, which are prime credit mortgages with low or no documentation of income and assets.

In 1995 HUD decreed that the GSEs could buy private label securities to meet their ever-rising affordable housing goals. Former GSE regulator Jim Lockhart has said Fannie and Freddie could never have met those goals without buying the private label securities.

Fannie and Freddie and the private label industry fought for market share in a race to the bottom of the mortgage credit pool.

New and increasingly predatory loans appeared. There were interest only mortgages where borrowers did not pay down the principal for three to seven years. Afterwards payments jumped so high, many borrowers could no longer afford the payment.

Just about anyone could qualify for a no income no job no asset mortgage or NINJA.

It got to the point that an illegal immigrant from Brazil who cleaned houses for a living and earned only $24,000 a year bought a house for $700,000 in South San Francisco with no money down and walked away from the closing with $8,000 in cash. She and her husband moved out of the house after three weeks and never made a single payment.

The famed market discipline that ruled the mortgage industry was gone. What happened?

The short answer – market discipline was subverted.

Beginning in 2002, Wall Street was having trouble selling investors the lower credit quality pieces or tranches of subprime private label mortgage-backed securities. These were the certificates rated A, BBB and BBB minus.

American institutional investors had wised up and stopped buying these lower-rated tranches that served as a buffer for losses for investors in the AAA bonds. Without buyers for the lower-rated bonds, the subprime private label market should have corrected.

However, Wall Street came up with the idea of taking all the lower credit pieces of subprime and other risky mortgage bonds and rolling them into collateralized debt obligations or CDOs.

Having no investor for the weakest subprime bonds, “We created the investor,” said Joseph Donovan at Credit Suisse in 2002. By that he meant they had created the CDO to be the investor and buy the lower-rated tranches of subprime mortgage bonds.

Texas hedge fund manager Kyle Bass called the subprime CDOs “the biggest bait and switch of all time.”

Wall Street was able to sell a lot of these assets to European and Asian buyers, who relied too much on the integrity of the AAA rating by the credit rating agencies.

Little did they understand the moral hazard of having credit rating agencies play a role in regulatory bank capital – an idea that came out of the Basel Committee for Banking Supervision in Switzerland, representing the world’s top central bankers.

Moody’s wrote to the Basel Committee in 2000 to told them not to urge nations to give credit agencies a regulatory role, warning it would lead those putting together deals to “shop” for ratings, undermining the process. Their warning was ignored. Their prophecy came true.

The buyers of AAA CDO bonds had mountains of dollars from trade surpluses and recycled petro dollars and needed dollar investments. At a time of low interest rates, they couldn’t resist the higher premium offered by CDO bonds with AAA ratings.

How could a bunch of bad credits rolled together create good a credit? It was the financial equivalent of weaving flax into gold. Yet, few questioned the sophisticated computer models that justified the ratings for these deals.

Even with willing buyers, the subprime CDO business faced another problem. No one really wanted the lowest rated tranches of the CDOs.

Wall Street came up with a solution to this, too. They would sell each other those lower tranches in order to generate the deals and earn the fees. There was a tacit agreement: “You buy my BBB tranches and I’ll buy yours.”

Often senior management at these firms did not seem understand the risk this posed. All that seemed to matter was that the deals were generating huge bonuses.

In time, hedge funds came to sponsor most of the CDOs because they liked the weaker subprime credits. They would buy the equity piece of the CDO deal for its super high premium while making much larger bets against lower rated tranches. By 2004, hedge funds were buying 80 percent of all equity tranches in subprime CDOs. After that, there was never enough supply to meet the hedge fund demand until the subprime CDO mania collapsed in mid-2007.

Hedge funds were not supposed to choose the assets placed in CDOs – but evidence suggests strongly that they were able to influence those decisions to include more and more of the worst subprime credits.

The demand for weaker subprime credits had a perverse effect. To generate the small piece of a subprime bond deal that goes into the CDO, a whole lot of subprime bonds had to be generated that were AAA. This was not too difficult as Fannie and Freddie steadily increased their demand for AAAs. To meet the demand generated by CDOs, mortgage lenders increased the overall level of subprime and risky mortgages.

In short, the subprime CDO business was poisoning the private label business and preventing it from responding to market signals.

In an outcome James Bond villain Goldfinger would love, Wall Street was creating a flow of funds into the mortgage industry in search of bad credits.

Merrill Lynch and Citigroup were the kings of CDOs and bear a great deal of the blame for the crisis.

Merrill’s chairman Stanley O’Neil made $91 million in 2006 while turbocharging the CDO business. A year later, Merrill had to take an $8.3 billion write-down and O’Neal was fired, walking away with $151 million.

At Citigroup, it was apparently Robert Rubin who talked chairman Chuck Prince into diving headlong into the CDO business. Citigroup hid the toxic assets it was creating in structured investment vehicles or SIVs off its balance sheet and in black boxes on its balance sheet.

In its audited filings with SEC for the first and second quarter of 2007, the company concealed the existence of more than $50 billion in subprime assets. When the bank owned up to it losses because failing SIVs forced them back onto the balance sheet, Prince resigned and walked away with $147 million. Rubin, who stayed on, had $50 million in compensation by the end of 2008.

Under the Sarbanes-Oxley Act, chief executives are required to sign accounting statements and be held personally liable. And yet, the SEC did not investigate Prince or Rubin or any other top official. The case was settled with minor fines to mid-level officials.

Citi stumbled toward collapse and would have failed except for a massive government intervention of $476 billion in guarantees from the FDIC, purchase and lending facilities from the Fed, and TARP funds from Treasury. More was done to save Citi than any other private financial institution.

Another cause of the crisis was Washington’s failure to enforce the laws on the books.

The SEC gained a reputation as an unsuccessful investigator and weak enforcer against fraud and market manipulation.

Take the case of the naked short sellers that brought down Bear Stearns. On March 11, 2008, an unidentified party made a $1.7 million bet through put options that Bear Stearns would collapse within 10 days.

At the same time, rumors were widely circulated that Bear Stearns was out of cash even though they had $18 billion on hand. Investment funds began to pull out their brokerage accounts. In only few short days, Bear Stearns was down to $2 billion in cash and on the verge of collapse.

More than ten million shares were sold into the market by “sellers” who did not own them or had not borrowed them, as required by law.

Out of options, Bear, whose share price a week earlier had been $62, agreed to be sold to JPMorgan Chase for $2 a share or $236 million, less than the value of its corporate headquarters. Meanwhile, the party who had place the $1.7 million bet pocketed even more money, $271 million.

There was a SEC investigation of the naked short selling of Bear’s shares but not one was brought to justice.

While the collapse of Bears Stearns should have been a wake-up call to Chris Cox at the SEC and Hank Paulson at Treasury, no one took steps to prevent naked short selling from bringing down other investment banks as the market now expected.

Only six months later in September 2008, naked short sellers struck again. They sold tens of millions of shares of Lehman Brothers they did not own or borrow. In a matter of days they forced the company into bankruptcy, precipitating the financial crisis of 2008.

None of the naked short sellers of Lehman shares have been brought to justice.

The build up of toxic assets and increase in market manipulation exposed the financial system’s rickety architecture. This, in turn, led to massive, often unseen runs on the financial system.

A panic began August 2007 in overnight funding contracts known as repurchase agreements or repos.

Counter parties that provided overnight cash wanted additional collateral above and beyond the value of the cash. They were asking for a haircut on the value of the assets.

By the end of 2008, ever-larger haircuts had drained as much as a trillion dollars out of the banking system.

There were other calamities. For example, a run on SIVs that funded by asset-backed commercial paper drained another $451 billion out of the system in late 2007, precipitating a crisis at Citigroup and causing the largest bankruptcy in Canada’s history.

Margin calls on credit default swaps added to market woes. Swaps, a form of shadow bond insurance, brought down the world’s largest insurance company AIG while the guy who ramped up the business, Joe Cassano, walked away with $300 million.

How did the financial system get to be so weak? That’s the question that perplexed me and so I started out to find the answers and tell the world what I found in a book.

Not surprisingly, people central to the story did not want to talk. I learned that the fastest way to a dial tone was to call a Wall Street firm and ask to talk about subprime CDOs. I did found many other sources, however, and pieced together the framework of the causes of the crisis.

Black Box Casino is a story about the one half of the world of banking that is shadow banking. It is the story of how huge swaths of financial activity moved into black boxes.

Black boxes are financial institutions and vehicles with no transparency. You can’t know what bad assets might be hidden there. Some of these black boxes housed financial casinos where activity was driven by fast money and high stakes and created huge risks for the financial system.

Black boxes can also conceal fraud. For example, Lehman Brothers filed public disclosures that hid massive manipulation of accounting.

In the biggest casino of all, the credit default swaps were the chips and the names of mortgage bonds were the numbered squares on the roulette table. More than $20 trillion in bets were made on credit assets not owned by those making the bets.

If we are to address the weaknesses in the system, we first need to understand what went wrong.

By and large, despite a great fanfare of good intentions, Washington has failed to do that.

I hope my book can make a contribution to a better understanding of what went wrong, the first step to setting things right. I also look forward to the findings of others studying the crisis.

The American people – indeed, the people of the world – deserve honest answers.

END

The Story of Writing Black Box Casino

2011-10-12T15:00:00.001-07:00

Financial author Robert Stowe England tells the story of writing his new book, Black Box Casino, at the Mortgage Bankers Association 98th Annual Convention and Expo at the Hong Kong Room at the Hyatt Regency Hotel in downtown Chicago on October 10, 2011. The comments were followed by a book signing. The event was sponsored by Titan Lending, IDS, and Depth PR.

The story of writing the book was also told the following day, October 11, at Barnes & Noble's DePaul Center Bookstore in downtown Chicago at DePaul University's Loop Campus. That event, too, was followed by a book signing.

Greenspan: Idea U.S. Banks Are Not Exposed to Troubled Euroepan Banks "An Inappropriate View"

2011-10-07T17:40:00.002-07:00

"You can't understand the United States at all unless you understand what's going in Europe," Greenspan stated in an interview on CNBC's Squawk Box October 7, 2011.

"I think we have been through a remarkably elaborate program to try to find out whether the single currencies work," he said. Like others, Greenspan thought it would work in the beginning because the markets bought into the idea it would work. This could be seen in the pricing of the currencies in countries like Greece, Italy, Spain and Portugal as they moved toward currency union. As the date of currency union approached in each country, the spread in interest rates of local currencies above the German bund would narrow dramatically from a level of a hundreds of basis points.

"I said and thought the markets are assuming that the Greeks and the Italians and the Spaniards and Portuguese are going to behave like Germans, and that's what [the markets] were telling us," Greenspan said. "They were going to capture the basic culture of Germany of prudence and savings." Thus, Greenspan said, this is how he was persuaded by the markets.But, in fact, history has shown the opposite of what the markets were predicting. "I was wrong," he concluded.

"Does the Euro hold together?" he asked rhetorically. "Starting from scratch [Europe] would have been better off having a Euro-zone which included obviously Germany, Austria, Luxembourg, Finland, Netherlands," Greenspan said. "Obviously, that would have worked," Greenspan said. "In a sense that there is a common culture that goes across that part of Europe, and you can see it when you go from one place to the other."

Greenspan also raised the issue of how much exposure U.S. banks have to European banks. "Many U.S. banks say that they don't have exposure or that they hedged their exposure. Do you believe them?" Greenspan asked. "It's not a direct exposure. Look at their balance sheets, you can't find it. But we're dealing with a global market, and the notion that we are completely isolated is, I think, a very dangerous -- that's too strong a word -- it's an inappropriate view [given] the integration of these systems," he added.

"The presumption that somehow the huge American banking system or financial system is independent of Europe, I think, is just utterly unrealistic," Greenspan said. "It looks independent until it isn't."

Greenspan questioned whether enough has been done in Europe to address the crisis before it gets worse, pointing out that 2,000 basis points for interest rates in Greece above the German bund are not sustainable. There is no credible scenario of which I'm aware in which they can get by without very significant cuts in their sovereign debt."

No one in Europe is taking the kind of pro-active steps to get ahead of the inevitable crisis, according to Greenspan. "It's going to take time. We know that there is a 2,000 basis point spread. But no one's rushing over there to do anything immediately," he said. He points that in the United States, former Treasury Secretary Hank Paulson, if the same problem were facing America, "would do something or we would probably face that head on immediately because it's going to get worse if you don't," Greenspan said.

"But now, this is kind of the European way. They're going to let the banks sort of maybe recapitalize in the meantime and take their time," he said. "Suddenly, we have three up days in the dow. We're okay with the track that they're on, No? No."

The Dow is seeing equity premiums at 1930s levels, even though productivity is improving and earnings of non-financials moving higher, Greenspan pointed out. This indicates a level of worry in the U.S. stock market above and beyond the fundamentals of the American economy.

George Bush Takes Up Clinton's Subprime Mantle in 2002 with Fannie, Freddie Minorities Initiative

2011-10-01T03:36:00.001-07:00

This YouTube video is a recording of a RTL-Z Dutch television program of October 7, 2008. The Dutch news program plays an audio recording of President Bush in a speech in 2002 when he calls for increasing lending flexibility for blacks and Hispanics so that poor people "can have a house as nice as anybody else." He set a goal of 5.5 million new homes for minorities by 2010 to close the "homeownership gap" between whites and minorities. This was to be achieved he said, through new initiatives from Fannie Mae and Freddie Mac to make it easier for people with poor credit histories to qualify for a mortgage. President Clinton got the ball rolling and ramped up relaxed lending standards with a National Homeownership Strategy in 1995. As part of that, Fannie and Freddie introduced a raft of programs that made it easier for people with poor credit and little or no money down to obtain a mortgage.

Bernie Marcus Calls Dodd-Frank "Bonnie and Clyde" for Destroying Small Community Banks

2011-09-16T10:15:00.000-07:00

Speaking on CNBC's Squawk Box, Bernie Marcus, co-founder of The Home Depot, blasts the regulations coming from the Dodd-Frank Act as "Bonnie and Clyde" because they are going to destroy small community banks. In the process, there will be no loans made to potential start-ups and the source of future jobs creation will be lost.

Harry Dent Sees Dow Crash to 3,000 in 2013

2011-09-12T11:11:00.000-07:00

Harry Dent, founder and CEO of HS Dent, is author of a new book, The Great Crash Ahead. He sees an economic and market crash between 2012 to 2014. As baby boomers pay down a sizable chunk of $42 trillion in private debt in the United States to deleverage, this will be an ever growing deflationary force. Baby boomers around the world will start saving and stop driving up consumption. Because of this deleveraging, Dent warns that a debt crisis is coming back stronger than ever.

Dent does not believe that efforts of central banks to inflate and provide stimulus to the economic to counteract this trend will fail. "In the United States, we keep taking viagra and nothing much happens." He predicts gold will crash after rising to $2,000. Silver has already peaked, Dent said. The U.S. dollar's role as the safe haven currency will be strengthened. That is because, as private debt is paid off, it makes dollars more scarce, and it restores value to the dollar, he explains.

ACORN Secretly Wrote 1992 Law That Set Fannie, Freddie 'On the Road to the Mortgage Meltdown'

2011-08-21T06:39:00.001-07:00

The Association of Community Organizations for Reform Now (ACORN) was a key architect of a law passed in 1992 that set Fannie Mae and Freddie Mac on the road to ruin, according to a new book by Robert Stowe England to be released September 30 by Praeger.

The book, Black Box Casino, uncovers the myriad factors that led to the financial crisis of 2008, the worst financial implosion of modern times. This story is one of many threads woven into the book's narrative.

Read more about Black Box Casino at this link.

ACORN was a key leader in clandestine negotiations among housing activists to shape new legislation that would set into place the regulatory regime that governed Fannie and Freddie.

According to an affordable housing advocate familiar with what transpired at the meetings, ACORN and other housing groups were "informally deputized" (Black Box Casino, page 42) in 1992 to write key parts of new legislation by former House Banking Committee Chairman Henry Gonzalez, a Texas Democrat.

ACORN was co-founded in Arkansas in 1970 by Wade Rathke, a former member of the radical Students for a Democratic Society.

Once ACORN and other housing advocacy groups reached an agreement amongst themselves in secret negotiations in 1992, Gonzalez championed their agreement as his own in Congress, where the provisions were enacted into law.

The radical regulatory template that emerged from the housing advocates secret meetings became the centerpiece of the Federal Housing and Enterprises Safety and Soundness Act of 1992, or as it also known, the GSE Act. Fannie and Freddie are government-sponsored enterprises.

The idea for GSE legislation was originally proposed by the George H. W. Bush Administration and within Congress as a vehicle to ensure that Fannie and Freddie would not repeat the regulatory mistakes that led to the savings and loan crisis that cost taxpayers over $150 billion.

The original intent of the legislation was to establish a regime of prudential regulation and oversight to assure that the GSEs always operated in a safe and sound manner.

The goal of creating a prudential regulatory regime was superseded by provisions in the GSE Act that created ambitious affordable housing goals and a mechanism by which they could be constantly raised -- without any consideration of whether or not it would impact the safety and soundness of the GSEs.

ACORN and other housing groups had already scored a key victory in 1989 when they worked together behind the scenes in a similar fashion to craft the Community Investment Program provision in the Federal Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989.

The Community Investment Program provision in FIRREA requires members of the Federal Home Loan Banking System (about 7,500 banks today) to set aside a portion of their profits to finance "community investments," usually at below market rates of return.

The 1989 provision was viewed by ACORN as "tithing" by banks to support community projects. It was, in fact, an expropriation of profits and set into banking regulation the idea of politically-determined credit allocation schemes.

ACORN wanted to impose a similar "tithe" on Fannie and Freddie.

The Center for Community Change was behind the idea of having housing groups craft key provisions of the GSE Act, according to a housing advocate familiar with how the effort was organized. The center was founded in 1968 to honor Presidential hopeful Robert F. Kennedy, assassinated that year in Los Angeles by a Palestinian immigrant, Sirhan Sirhan, as he was campaigning for the Democratic nomination.

The Center for Community Change called on the National Low Income Housing Coalition to convene a working group of affordable housing advocates, which included ACORN and Consumers Union, as well as other participants from state governments and nonprofits involved in community development.

The coordinated effort had the advantage of getting all activist groups on the same page with a united front so they could more easily prevail over political opposition. It also assured that the debate would occur out of public sight and thus make it easier to enact radical positions that would not withstand public scrutiny.

The secret insider role was part of a dual insider/outsider strategy of the housing advocates and radicals (page 41), who would stage noisy and disruptive demonstrations and take over hearings to put public pressure on any opponents to their insider strategy.

A debate erupted among the housing groups between two distinct views of how national housing policy could benefit poor communities in deteriorating neighborhoods.

Gale Cincotta, a firebrand from Chicago, headed the National People's Alliance, which favored incorporating into law existing informal policies on affordable housing followed by Fannie and Freddie. GSE purchases of mortgages from low and moderate-income households represented 30 percent of their business. The GSEs also informally had adopted an overlapping goal of having 30 percent of their loan purchases be from disadvantaged urban areas. These two goals together were known as the 30/30 goals.

Cincotta won the debate over whether to pursue housing goals or ACORN's tithing approach. Cincotta was able to prevail in the debate because she had the backing of Fannie Mae and Freddie Mac (page 42.) Fannie Mae Chairman Jim Johnson had earlier decided to meet with the housing groups in order to shape the final legislation -- aware that the crafting of the bill was being outsourced.

ACORN had, by 1992, become a key part of the electoral strategy of the Democratic Party. Johnson, who hailed from Minnesota and who ran the failed Presidential bid of Walter Mondale in 1984, was politically connected and already had ties to ACORN.

Even so, ACORN, with a more radical view than either Cincotta or Johnson, was determined to create a scheme that would provide political incentives that would drive the level of affordable lending ever higher in perpetuity -- and do so by lowering mortgage lending standards.

After losing the tithing debate, ACORN wanted to add a third special affordable housing goal to the 30/30 goals. This third goal would be for very low income borrowers. This time, after a debate within the housing group, ACORN's view prevailed over Cincotta's. Fannie and Freddie agreed to pledge $3.5 billion in funds for the special affordable goal.

A Weak Prudential Regulator

The housing advocates also won a set of additional victories over how Fannie and Freddie would be regulated. For example, control over the housing goals was given to the Department of Housing and Urban Development (HUD). The goals regulator at HUD would have the authority to raise the affordable housing goals over time with no limit on how high they could go.

The prudential regulator for Fannie and Freddie had no say whatsoever in the housing goals, achieving another goal of the housing groups. That regulator, the Office of Federal Housing Enterprise Oversight or OFHEO, was placed within HUD under the new law. It was, thus, was not an independent regulator. Incredibly, Treasury Secretary Nicholas Brady also favored a regulator within HUD, while publicly saying he favored an independent regulator.

The housing advocates also scored with the decision that OFHEO's budget would be financed by Congressional appropriations and not by fees charged to Fannie and Freddie and forwarded to OFHEO. Other banking regulators are funded by fees from the banks that they regulate. Having to go hat in hand every year for new appropriations, OFHEO was, from the beginning, subject to political pressure from Congress to go easy on Fannie and Freddie.

Instead of guaranteeing safety and soundness for Fannie and Freddie, the GSE Act was a recipe for disaster.

Practically no one in Congress expressed any skepticism publicly about the intent and potential impact of the affordable housing goals. Many thought at the time the goals were there merely to insure equal lending standards for all, which was not its intent, according to Edward Pinto, former chief risk officer for Fannie Mae.

“They didn’t see the HUD affordable housing mission for what it was, to completely recast underwriting standards for the entire industry in an effort to spread wealth to get equal outcomes,” Pinto said (page 44).

Those who supported strong prudential regulation for Fannie and Freddie "were rolled," according to Pinto. "The way the bill got through [Congress] was the safety and soundness got watered down" and the affordable housing goals became the price paid for the weakened regulation, he said (page 44).

Fannie and Freddie were required to have only 2.5 percent capital against loans they held on their books. Banks with mortgages held on their balance sheet have to hold 8 percent capital against the mortgages. Further, Fannie and Freddie had to hold only 0.45 percent capital against the guarantees they issued for their mortgage-backed securities.

With these thin capital standards, the GSEs had a 40-to-1 leverage ratio for loans and a 222-to-1 leverage ratio for its guarantees. Depending on the mix of guarantees and loans, the overall leverage of the GSEs could rise dramatically. In 2008, the ratio approached 100 to 1. With leverage that high, modest losses could easily wipe out capital and require a taxpayer bailout.

Incredibly, the accounting standards employed by the GSEs were not like those of banks and other financial institutions. Instead, they were the generally accepted accounting principles or GAAP, which gave Fannie and Freddie more leeway to disguise losses.

The radical rationale behind the thin capital standards set by the GSE Act was inadvertently revealed by Massachusetts Congressman Barney Frank in September 2003, during hearings on OFHEO's finding of accounting fraud at Freddie Mac.

As some members of Congress pushed for stronger capital standards for Fannie and Freddie and the right of OFHHO to raise or lower those standards, Frank was vehemently opposed. "I do not want the same kind of focus on safety and soundness that we have" in the case of federal banking regulators, Frank said. "I want to roll the dice a little bit more in this situation towards subsidized housing," he added (page 73.)

This comment reveals that Frank and radical housing advocates defended the highly leveraged capital standards because such standards meant that Fannie and Freddie could engage in more affordable lending from a given capital base than they could with conventional and more prudent capital requirements.

Over time, a succession of HUD officials raised the goals during both the Clinton and George W. Bush Administrations.

The main goal for low and moderate-income borrowers reached 57 percent by 2008, nearly double its 1992 level. The special affordable goal for very low income households (ACORN's provision) reached 28 percent, more than double the 11 percent level of 1995, the first year it was set.

Thus, in effect, Fannie and Freddie expanded their overall lending by increasing the level of lending to households with the weakest of credit and the least amount of funds to put down for a purchase.

Along the way, Fannie and Freddie increased their level of risky lending but concealed the level of risk from public view by refusing to classify mortgages as subprime that were, in fact, made to borrowers with subprime credit (credit scores below 660).

Fannie and Freddie got into low and no documentation loans, as well as low down payment loans, too, increasing the risk on its books. In 1997, they launched their 3 percent downpayment mortgages and then moved to zero percent down payment mortgages in 2000.

$4.7 Trillion in Risky Mortgages

By mid 2008, on the eve of the financial crisis, Fannie and Freddie owned or guaranteed $1.8 trillion in risky mortgages, according to Pinto, who conducted a forensic study of the loan level information released by the GSEs after the government took over the GSEs and began to require them to release more data on the characteristics of Fannie and Freddie loans (page 62).

Other government programs, including the Federal Housing Administration, represented another $900 billion in risky loans. The government share of risky lending was, thus, $2.7 trillion on the eve of the crisis -- greater than the private sector mortgage-backed subprime and low-documentation mortgage securities, which stood at $1.9 trillion, according to Pinto.

By mid 2008, there was $4.6 trillion in risky mortgages in the $11 trillion mortgage market -- more than double the $1.9 million that markets recognized as risky. The housing market, which was dominated by prudent lending in the early 1990s had become a huge risky endeavor.

The GSEs had engaged in lending programs that were similar in risk to the reckless lending schemes that had emerged in the private sector, including no-income, no-asset (NINA) loans, as well as interest only (IO) loans.

Those risky assets were hidden because the GSE Act did not require Fannie and Freddie to file quarterly and annual reports with the Securities and Exchange Commission.

Fannie and Freddie, whose executives grew rich on the bonuses and salaries they earned as they drove down lending standards, were not prohibited from lobbying Congress in the GSE Act. They also were able to set up charitable organizations that could funnel money to ACORN and other allies.

The design of the GSE regulatory system by ACORN and other housing groups assured that Fannie and Freddie would lead a race to the bottom in lending standards. The regulatory regime also gave Fannie and Freddie such heavy political clout they could easily forestall any and all efforts at reform by Congress until they were on the verge of collapse.

"The GSE Act set Fannie and Freddie on the road to the mortgage meltdown," said Pinto (page 46).

Why would Johnson agree to such a regulatory regime during his negotiations with the housing groups that wrote the legislation? Fannie and Freddie thought they could capture the regulator (both HUD and OFHEO) and prevent the housing goals from rising so high they would threaten their existence, according to Pinto. But, in fact, Johnson and the GSEs in general, made a major political miscalculation.

So far, ACORN and other housing advocates have not revealed what they expected from the regulatory framework they largely wrote. Yet, regardless of what was intended, the GSE Act created a regulatory regime that Washington could not alter because of the perverse incentives the law put into place. It was a regime that would push affordable lending to ever higher and higher levels.

The vast expansion of mortgage lending by the GSEs and the inevitable and irresistible political pressure to raise the goals to ever higher and higher levels guaranteed that more and more funds would flow to ACORN and other housing groups, who helped lenders find borrowers to help them meet "affordable" housing goals.

Perversely, the same housing groups could also get funds to help borrowers having trouble making their mortgage payments. ACORN, thus, gained revenue streams no matter what happened to the loans.

In the end, the GSE Act turned out to be a "suicide pact" for Fannie and Freddie (page 73) -- one that would make a lot of politically-connected executives at the two firms very wealthy along the way.

The mountain of risky loans engendered by the GSE Act's regulatory regime helped build the housing bubble and spread risky assets across the globe through the sale of Fannie and Freddie securities, helping to set the stage for the financial crisis of 2008.

-- Robert Stowe England

China's Newly-Built Ghost Cities

2011-08-18T04:10:00.000-07:00

In this report from Australia's DatelineSBS, Adrian Brown reports that China is building 10 new cities a year and many of them, after completion, remain ghost cities with few or no inhabitants. The largest such ghost city is Zheng Zhou New District in Henan Province in north-central China. (The old Zeng Zhou is the capital and largest city of Henan.)

This centrally-commanded economic activity is being done just to keep more people gainfully employed, according to Brown. However, it would appear to be building toward an ultimate crash and on a scale far larger than the U.S. housing bubble that created such havoc. There are an estimated 64 million empty new apartments in these new cities.

The apartments are priced at $100,000 to $300,000, while Chinese median income is around $6,000. Thus, the vast majority of Chinese live in tiny one-room apartments -- or even shared apartments, often with shared communal sink and toilet.

Buyers have to plop down half the price up front and pay the rest within three years. So, with no real mortgage finance system, an incredible run-away train of new construction appears to be careening toward a crisis.

Is Gold Headed Up or Down?

2011-08-17T09:01:00.000-07:00

CNBC reporter Simon Hobbs interviews George Gero, vice president of global futures and a precious metals strategist at RBC Wealth Management, and David Morgan, editor of the Morgan Report.

5 to 7 Years of Very Slow Economic and Job Growth, Says Professor Adam Lerrick

2011-08-03T13:02:00.000-07:00

Henry Blodget of The Ticket interviews Professor Adam Lerrick of Carnegie Mellon University.

Professor Lerrick says the United States will continue to have very low growth rates in 1.5 to 2 percent, and very low growth in employment for five to seven seven or more years because the nation does not have an economic policy and has not had one since President Ronald Reagan was in office. Instead, "Remember, this country does not have an economic policy. It has social policy disguised as an economic policy."

The policy of the United States government instead seems to be to spread the wealth earned by the richest Americans to the rest of the country without promoting private-sector growth. America's competitors, on the other hand, are pursuing pro-growth economic policies that put American professional, skilled and unskilled workers against Americans in nearly all sectors of the economy.

Professor sees no rebound for new home construction and commercial construction for a decade. "We are not going to see any contribution from the housing sector," he says.

Magnetar and J.P. Morgan's Squared CDO

2011-07-20T04:06:00.000-07:00

Note: Black Box Casino is to be published September 30 by Praeger. In writing this account of the financial crisis, the author found that ultimately some of what he had written had to be cut from the book. Below is an excerpt that was written too late to make it into Chapter 7: "Fast Money and High Stakes."

By Robert Stowe England
July 20, 2011

The Evanston, Illinois hedge fund Magnetar Capital LLC stated in April 2010 that it engaged in trading activities that its senior management claimed were neutral towards the housing market.

That is, Magnetar claimed that they were making simultaneous shorts and longs on various pieces of collateralized debt obligations, which were backed by mostly subprime mortgage-backed securities.

The point being made with the claim of neutrality was they were not betting against the housing market and bad subprime loans and securities.

After a number of news stories surfaced in 2010 about the $50 billion or more in losses from CDOs deals in which Magnetar took positions, the claim of neutrality became a public defense against any potential claims Magnetar had influenced the selection of collateral in CDO deals in a way that would provide the hedge fund with performance bet opportunities; that is, CDO tranches against which it could place high stakes bets and reap rewards when they failed.

Slowly information is emerging, however, that on many deals, the claim of neutrality does not withstand close scrutiny.

On June 21, 2011, JPMorgan Chase settled with the Securities and Exchange Commission over charges it had committed fraud by putting together a deal -- CDO Squared in 2007 -- that lead to enormous losses for investors -- a deal that also boomeranged on the firm.

Magnetar executed a correlation trade with CDO Squared as it had with other of its investments, such as the notorious Norma CDO from Merrill Lynch.

Squared was a CDO made up of other CDOs. The SEC settlement with JPMorgan Chase just also happened to reveal that in that deal Magnetar’s long position on the equity tranche was $8.9 million and its short position on mezzanine tranches was $604 million.

There's hardly any way of looking at positions Magnetar took on the Squared CDO and not conclude it was a $604 million bet against subprime mortgages.

The question is whether or not Magnetar played a role in selecting the assets in the deal in way that would assure it reaped a bonanza.

According to the SEC, an e-mail from an employee at Magnetar on January 29, 2007, described the hedge fund’s equity or long position as “basically nothing” and explained that Magnetar was “was just doing it . . . to buy some protection.”

The SEC obtained a series of communications that showed Magnetar played a role in selecting 33 of the 65 CDOs in Squared – all the ones the hedge fund bet against.

The Squared CDO defaulted in January 2008, eight months after it closed in May 2007, costing J. P. Morgan $880 million in losses from the super senior tranches it held in the deal, according to the SEC. When the deal was arranged J. P. Morgan earned $18.6 million on the deal.

The collateral manager for Squared, an independent firm selected by J. P. Morgan to choose assets in the deal, was GSC Group of Florham Park, New Jersey. The SEC has alleged that Edward Steffelin, head of the team at GSC that selected the collateral assets, “permitted Magnetar to participate in the selection of assets knowing it planned to short those assets.”

The investors who bought the mezzanine tranches of Squared knew nothing of Magnetar’s role.

The U.S. investors included Thrivent Financial for Lutherans in Minneapolis and Security Benefit Corporation in Topeka, Kansas. In East Asia, investors in Squared included Tokyo Star Bank, Far Glory Life Insurance Company Ltd., Taiwan Life Insurance Company Ltd., and East Asia Asset Management Ltd.

The deal was a tough sale for J. P. Morgan’s world wide sales staff. The employee in charge of global distribution for the tranches in the deal wrote to the sales team on March 22, 2007, that “we are soooo pregnant with this deal, we need a wheel-barrel (sic) to move around….Let’s schedule the cesarian (sic), please!” The sales team failed to disclose that Magnetar played a role in asset selection and was betting against the deal.

Steffelin was charged with securities fraud by the SEC on June 21, 2011, for failing to disclose Magnetar’s role. Steffelin’s lawyer Alex Lipman claimed it was a “real reach” for the SEC to charge Steffelin when it was J. P. Morgan that failed to disclose Magnetar’s involvement in the deal to the investors. Even so, while the deal was being put together, Steffelin sought employment with Magnetar, further cementing the appearance of collaboration in selecting assets for Squared.

Key players in the Squared fiasco escaped any fines or punishment. Michael Llodra, who headed the asset-backed CDO team at J.P. Morgan at the time of the deal, was not charged by the SEC. Neither were any high level executives at J. P. Morgan.

J.P. Morgan, without admitting or denying any wrongdoing, paid $153.6 million to settle charges it had misled investors.

Elizabeth Warren Going Back to Massachusetts

2011-07-18T13:31:00.000-07:00

Cue the Bee Gees who sang the mega hit "Massachusetts" back in 1970s. Having missed out on the nomination to be the head of the Consumer Finance Protection Bureau -- an agency that was her brainchild -- Warren will be packing up and going back to her home state.

She declined to say if she was planning to run for the Senate and lauded the new agency. She dodged a question about JP Morgan Chase's Chairman and CEO Jamie Dimon's criticism of heavy regulation coming from the Dodd-Frank Act, which Dimon said last month was impeding the progress of the recovery.

Although Warren was believed to be the Obama Administration's favorite to head the agency, she was hugely unpopular in Congress and faced fierce opposition.

Fight of the Century: Keynes vs. Hayek Round Two

2011-07-13T04:38:00.000-07:00

This is the second hip-hop music video by John Papola and Russ Roberts at http://EconStories.tv. In this one, Hayek knocks down Keynes after several rounds of debates interspersed with simulated boxing, but the chairman of the Congressional panel hearing the debate -- who suddenly transforms into the fight referee -- declares Keynes the winner.

You can view the first video which came out last year at this link

Charles Calomiris Tells How to Avoid Another Banking Crisis

2011-07-09T12:38:00.000-07:00

Charles Calomiris, a professor at Columbia Business School, talked July 7 about the U.S. financial industry and housing market. He spoke with Tom Keene on Bloomberg Television's "Surveillance Midday." See video of interview here. (Source: Bloomberg)

New Book on Financial Crisis, Black Box Casino, To Be Released in September

2011-07-07T08:24:00.000-07:00

Robert Stowe England's new book on the financial crisis -- Black Box Casino -- will be published in September by Praeger, an ABC-CLIO imprint.

The publication date has been moved up two months from the prior release date of November 30.

A press statement announcing the future debut of the book was released today by NA Associates, a New York public relations company. See statement at the end of the story.

NA Communications also released the reviews that will appear on the dust jacket of the book, which also follow below.

The book can be pre-ordered at Praeger at this link, and at Amazon.com at this link:

To request a review copy, write to Mr. England at rengland@us.net.

The dust-jacket cover reviews follow:

"Mr. England writes about the financial crisis with harrowing precision."

-- Daniel Henninger, Wall Street Journal

"First Reckless Endangerment and now it is Black Box Casino's turn to shine a bright light on the root causes of the mortgage meltdown. England, relying on decades of experience as a financial reporter and consummate research skills, documents how government housing policy, political expediency, and crony capitalism combined to cause the mortgage meltdown that nearly sank the world’s economy."

-- Ed Pinto, former chief risk officer of Fannie Mae

"Drawing upon sources not available to previous writers, England presents the most complete account yet of how the collapse of an obscure subprime mortgage lender in January 2007 could eventually take down some of the greatest names on Wall Street by September 2008, wreaking massive economic destruction that Americans are still struggling with today."

-- Kenneth Cline, managing editor, BAI Banking Strategies

The press release from NA Communications:

FOR IMMEDIATE RELEASE

THE AMERICAN PEOPLE WANT TO KNOW WHAT WENT WRONG IN THE FINANCIAL MELTDOWN OF 2008. NOW COMING SOON, BLACK BOX CASINO, THE BRILLIANT NEW BOOK HAS THE ANSWERS.

New York, New York, July 7, 2011: BLACK BOX CASINO: How Wall Street’s Risky Shadow Banking Crashed Global Finance by Robert Stowe England solves the puzzle of what led to the biggest financial crisis of modern times – and exposes the follies in Washington and on Wall Street that caused it.

To be published in September by Praeger, the book is already receiving raves from financial executives, regulators, politicians, Wall Street insiders, fraud litigators, risk analysts, media and many more.

BLACK BOX CASINO describes how Washington created incentives that drove half of all lending activity into the shadow banking system, where risks can be hidden in black boxes and markets manipulated for huge private gains at public expense. The book also tells how Washington generated a race to the bottom in mortgage lending standards, loading toxic assets on the books of financial institutions.

Mr. England is a veteran financial journalist and author who has covered the mortgage industry inside and out for over two decades as senior writer for Mortgage Banking magazine. He witnessed from a front row seat the reckless behavior that wrecked the global economy.

In this breakthrough exposé the author sorts through a mountain of evidence, interviews and information to give the American people and the world a compelling, fast-paced account of what went wrong, why, and who’s to blame. BLACK BOX CASINO is the book the world has been waiting for.

# # #

Contact: Nancy Alloggiamento, nancyanyc@yahoo.com, 212/7551085

Keynes vs. Hayek Rap: Fear the Boom and the Bust

2011-07-06T04:17:00.000-07:00

John Papola and Russ Roberts have produced an entertaining and educational rap debate video between British economist John Maynard Keynes and Austrian economist F. A. Hayek. A modern reincarnation of the two economic theorists argue the importance of stimulating demand to lift an economy out of a bust (Keynes) versus saving and investing in free markets and skepticism about booms (Hayek). The video is from econstories.tv.

The Angst of Phil Angelides

2011-07-01T12:16:00.000-07:00

Investors Business Daily in an op-ed writes June 30:

Subprime Scandal: Democrats thought they'd dammed up the truth about government's role in the financial crisis. But the levies are breaking, thanks to a spate of rogue new books on the subject.

The latest, "Reckless Endangerment," shreds the narrative carefully constructed by Democrats and the liberal media that Fannie Mae and Freddie Mac were only bit players in the crisis and followed Wall Street into subprime lending.

It details how the federally chartered mortgage giants in fact led the way in relaxing underwriting standards for the entire industry — thanks to relentless pressure from Democrats, who used them as off-budget piggy banks to fund their social crusade to boost minority homeownership (and shore up their voting base).

Read more.

CNBC: Virginia Is Best for Business

2011-06-29T09:05:00.000-07:00

CNBC names Virginia the best state for business. CNBC reporter Scott Cohn explains why.

Bill Gross: United States in Worse Shape Financially Than Greece

2011-06-14T05:37:00.000-07:00

Pimco founder and co-chief investment officer Bill Gross told CNBC that the unfunded debt burden of the United States puts it in a worse position than Greece.

By his calculation, the U.S. is on the hook for $100 trillion. "To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross told CNBC. "That's much more than Greece, that's much more than almost any other developed country. We've got a problem and we have to get after it quickly."

Jim Rogers: Next Crisis Will Be Worse Than 2008

2011-06-09T14:23:00.000-07:00

Jim Rogers, ceo of Rogers Holding, says that when the next crisis comes around, the United States will be in far worse shape than in 2008, according to an interview on CNBC with Maria Bartiromo. Rogers says that we need to cut the budget drastically.

Rogers calls Fed Chairman Ben Bernanke a "disaster," who has gotten nothing right since he came to Washington. "He doesn't understand finance. He doesn't understand currency. He doesn't understand the economy," Rogers says of Bernanke.

Bernanke only knows about printing money as a way to address problems, so he will revert to QE3, further weakening America's debt position, according to Rogers. He predicts the dollar is going to crash while the Chinese yuan will become a safe currency.

If gold and silver correct, Rogers recommends buying more. Rogers is shorting technology stocks.

Jamie Dimon Takes on Bernanke

2011-06-08T16:25:00.000-07:00

JPMorgan Chase & Company chairman and ceo Jamie Dimon confronted Federal Reserve Chairman Ben Bernanke today, asking him if he had considered the impact of all the regulations being proposed and how they might together negatively impact the availability of credit and the economy. The Chairman revealed that, in essence, regulators had examined proposed rules individually but not in the aggregate.

This is a rare public challenge from a banker to a top regulator.

In the second video Jeffrey Sonnenfeld, professor in the practice of management for the Yale School of Management talks about Dimon's challenge to Bernanke.

Alan Greenspan on CNBC: Dodd-Frank Based on Faulty Understanding of Financial System

2011-06-03T05:19:00.001-07:00

Part One:

Part Two:

CNBC Squawk Box hosts Joe Kernen, Becky Quick and Carl Quintanilla interviewed Alan Greenspan June 3 from the Department of Labor in Washington, D.C., where they had traveled to broadcast the show remotely.

In his comments, Greenspan says that one of the missing parts of the economic recovery is the construction sector, missing partly because of the weak housing sector. According to research by his firm, Greenspan said, If the production of longer-lived assets had recovered as it has in the past, unemployment would be at 6 percent.

Greenspan also supports raising income tax rates to the Clinton era levels, if necessary, for a budget agreement that reduces the deficit and debt outlook.

Greenspan also does not believe that there will be a crisis after August 2, as Secretary Timothy Geithner has suggested, if the debt ceiling is not raised. Treasury is high likely to continue paying interest on the nation's debt service. The problem is that a 40 percent decline in government spending (40 percent of each dollar is borrowed) would negatively impact the economy.

While he opposed the idea of the debt limit on principle, in this instance it provides a real opportunity to address the serious issue of deficits.

Business Uncertainty

Greenspan said part of the problem facing business is that they cannot get an idea of what the outlook is going to be 20 years or more from now.

The uncertainty is holding back long-term business investment, he added.

"One of the reasons is that there's too much government activism in a technical sense," he said. The high level of government activism has a very negative impact on potential rates of return. When calculating the rate of return on a long-term investment, such as an aluminum rolling mill, which Greenspan said he had done, the distribution of potential rates of return is very wide.

"The distribution [of rates of return], if it is very wide give you agebraicly very low risk-adjusted rate of return," Greenspan said.

The coming onslaught of regulations, "the structure of activism," from new laws in response to the crisis, as well as Obamacare, are factors in the reluctance of business to expand or hire.

"I don't think the structural framework of how the financial system actually works is captured in the philosophy of Dodd-Frank," Greenspan said.

"in other words, they are specifying if you do this (moves hand right), this (moves hand left) will happen. All the evidence of which I'm aware is that it will not. It will do this (raised hand)," he added.

Greenspan said that he did not see how the 200 rule-makings at the Fed could be accomplished. "When I was at the board, if we had 10 a year, that was a big work load," Greenspan said.

Greenspan believes that federal entitlement programs will necessarily face the budget knife.

"Medicare or any other kind of defined benefit program cannot persist in the type of economy that we are going to be viewing over the next decade," Greenspan said.

One of the reasons is that as highly educated productive people retire, new entrants into the labor force will not be able to make as much of a contribution in terms of productivity because of the failures in the U.S. educational system, according to Greenspan.

The former Fed chairman also believes that because banks have been parking their excess reserves rather than lending them out to earn more money, the end of quantitative easing will not necessarily have a huge negative impact. Banks have not lent, he said, because of capital constraints.

Matthew Vadum Challenges ACORN on Their Role in the Financial Crisis

2011-06-02T18:13:00.000-07:00

In his new book Subervsion Inc. Matthew Vadum accuses ACORN of intentionally targeting Wells Fargo with demonstrations, harrassment, phony studies and lawsuits on behalf of their paymaster Herb and Marion Sandler who contributed more than $11 million to ACORN. On Fox News Vadum debates a representative of ACORN.

The Sandlers were the former owners of Golden West (World Savings) which had more than $100 billion in toxic payment option ARMs on its books when they sold the company to Wachovia in 2006. The toxic mortgages helped sink Wachovia during the financial crisis and Wells Fargo acquired Wachovia in 2008.

British Equity Analyst Simon Maughn Says Bond Markets Are Telling Us "QE3 Is Coming"

2011-06-01T14:38:00.000-07:00

Simon Maughn, co-head of European equities at MF Global, speaking on CNBC's European Squawk Box show June 1, says investors should prepare themselves for a third round of quantitative easing.

He says that decline in the equity values suggest this market does not anticipate the advent of QE3. "It's all about the monetary injection trade," he says of the sell-off of equities in advance of QE2. "The equities are calling up a post-QE2 trade."

While the equities markets do not know if we are going to have Q3, the bond markets are clearly expecting a QE3, he said.

On the Greek crisis, Maughn says, "Most informed opinion will tell you that a Greek default is inevitable."

Barron's Calls for a 50 Percent Haircut for Greece

2011-05-28T05:07:00.000-07:00

It's time to cut in half the €327 billion that Greece owes sovereign bond holders in an orderly fashion and delay interest payments on the remaining debt.

That's the shock therapy Barron's is urging on the European Union, as more and more voices are coming to agree with Michael Darda, chief economist and chief market strategist of MKM Partners, Stamford, Connecticut, who says the policy of lending new money coupled with aggressive budgets cuts is failing in Europe.

In a new report, "Why Bailouts and Austerity Are Failing in the Euro Zone," Darda points out that despite the policy changes urged on the the PIIGS -- Portugal, Ireland, Italy, Greece and Spain, now plus now Belgium -- the spreads of sovereign debt in peripheral Europe against the core nations of Germany and France is rising above the levels where it stood a year ago.

The problem is particularly acute in Greece, which received a €110 billion bailout last year from the European Union and the International Monetary Fund.

Greece is proposing a new round of austerity measures that will likely further weaken the economy.

"Usually, Barron's staunchly advocates full repayment to bondholders," writes Vito J. Racanelli in the May 30 issue of Barron's.

"But the choice for Greece's bondholders, as we see it, is to accept 50 cents on the euro now -- or 30 cents or worse down the road."

See story here.

Haris Pamboukis: Greece Needs Incentives to Expand Exports and Grow the Private Sector

2011-05-25T17:32:00.000-07:00

Haris Pamboukis, Minister of State for Greece, told CNBC May 25: "Our aim is to take drastic measures," he said, to pull Greece out of its "depression."

Greece needs to make the public sector more competitive. Government spending, he claimed, has already been reduced 5 percent, which has been very painful, but more must be done.

Greece also needs new incentives to expand the private sector. "Our goal is to have an economy that produces more than it consumes," Pamboukis said. Exports have grown to represent 26 percent of growth. This export-led growth from the private sector is the way forward for Greece.

Black Box Casino

2011-05-15T08:01:00.000-07:00

Robert Stowe England's newest work -- Black Box Casino -- will be published this fall by Praeger Books.

Advance copies for reviewers and selected media outlets will be sent out at the earliest possible date.

The book is currently going through the copy-edit and production process.

The book can be pre-ordered at Praeger at this link, and at Amazon.com at this link:

The new book, Mr. England's fifth, is a no-holds barred account of the financial crisis of 2007 and 2008 and explores and explains the causes of the crisis and describes the unfolding of the crisis in dramatic and compelling detail.

The author sorts through a mountain of evidence, interviews and information and provides new information, sources, analysis and insight into the crisis in order to tell Americans what they most long to hear: what went wrong and why.

The book is unsparing in its examination of the follies in Washington and on Wall Street that caused so much economic and financial pain for so many people and institutions around the globe.

It takes a look at how the world of traditional banking has moved into shadow banking and, in the process, made the global financial system more vulnerable to shocks.

It describes how shadow banking also became a fertile ground for the creation of black boxes, which are financial institutions and vehicles where the activities are completely or nearly completely hidden from the public eye.

The two biggest black boxes were Fannie Mae and Freddie Mac, where increasingly risky lending was occurring over the period from 1997 to 2007.

The degree of risk accumulating in Fannie and Freddie was concealed from the public, and the markets were not aware that there was $4.6 trillion in risky mortgage loans outstanding in the financial system -- of which 39 percent or $1.8 trillion were either Fannie and Freddie mortgages or securities they purchased and held on their balance sheets.

There were also black boxes hidden off the balance sheets of banks, such as Citigroup, where mortgage assets were placed and, thus, not seen to be a potential threat to the sponsoring bank.

Collateralized debt obligations or CDOs made up of mostly subprime mortgage assets, both real and synthetic, were also another sphere where black boxes proliferated and generated demand for subprime mortgage credits, pushing more funding into the weakest part of the mortgage market.

CDOs are securities or certificates issued against a pool of collateral of debt instruments, from corporate loans to asset-backed securities, including mortgage-backed securities.

A flood of mortgage credit aimed at subprime borrowers fostered an environment where fraud could flourish and created mortgage bonds that became high stakes gambling chips in black box casinos sponsored by savvy hedge funds.

A number of hedge funds found the CDOs extremely attractive vehicles for proprietary trading strategies based on pricing anomalies between the equity and lower-investment grade tranches or slices of the deals.

The degree of risk was further enhanced because of the availability of credit default swap "insurance" to cover losses for those who either owned or bet on subprime mortgage-backed securities. The swaps magnified the losses to the system after the crash of mortgage bonds in 2007.

The book also examines the vulnerabilities of the investment banking business model and how it was further weakened in the years leading up to the crisis through decisions made by the Securities and Exchange Commission, which generated ever more incentives to arrange mortgage securitizations and retain some of the assets on the books of investment banks, as well as to raise leverage at these firms.

These perverse incentives magnified vulnerabilities to the mortgage market at Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and even Goldman Sachs.

The book examines how the crisis was handled by regulators and officials and documents how they failed to fully grasp the full extent of the threat, despite mounting evidence of bad credits disbursed around the globe, as well as being concentrated in a number of large financial institutions.

The book identifies a number of instances in the history of the crisis where opportunities existed where government and banking officials failed to chose a course, when given the opportunity, to take a direction that would have mitigated the severity of the crisis or which could have given authorities and regulators a better hand in dealing with it.

The book also looks at the role of Congress in the crisis, including the passage of laws that created incentives for banks and investment banks to engage in riskier financial activity. Congress also failed to enact legislation where it was needed to make the financial system safer and sounder.

Below is a list of the chapters:

Chapter 1 The Mortgage Meltdown
Chapter 2 The Panic of 2007
Chapter 3 Seeds of the Disaster
Chapter 4 The Race to the Bottom
Chapter 5 The Rise of Private Label
Chapter 6 Wall Street’s Subprime CDO Mania
Chapter 7 Fast Money and High Stakes
Chapter 8 American International Group
Chapter 9 Bear Stearns
Chapter 10 Fannie and Freddie
Chapter 11 Lehman Brothers
Chapter 12 The Panic of 2008

There is also a glossary and an index.

Hard-Cover Book is 6 1/8 by 9 1/4 inches

ISBN 978-0-313-39289-4

$44.95 or £31.95

eBook ISBN 978-0-313-39290-0

Black Box Casino

2011-05-02T08:19:00.000-07:00

Robert Stowe England's newest work -- Black Box Casino -- will be published this fall by Praeger Publishers, a division of ABC-CLIO, Santa Barbara, California.

Advance copies for reviewers and selected media outlets will be sent out at the earliest possible date.

The book is currently going through the copy-edit and production process.

The book can already be pre-ordered from Praeger at this link, and at Amazon.com at this link:

The author sorts through a mountain of evidence and information and provides new information, analysis and insight into the crisis in order to tell Americans what they most long to hear: what went wrong and why.

The book is unsparing in its examination of the follies in Washington and on Wall Street that caused so much economic and financial pain for so many people and institutions around the globe.

It takes a look at how the world of traditional banking has moved into shadow banking and, in the process, made the global financial system more vulnerable to shocks.

It describes how shadow banking also became a fertile ground for the creation of black boxes, which are financial institutions and vehicles where the activities are completely or nearly completely hidden from the public eye.

The two biggest black boxes were Fannie Mae and Freddie Mac, where increasingly risky lending was occurring over the period from 1997 to 2007.

The degree of risk accumulating in Fannie and Freddie was concealed from the public, and the markets were not aware that there was $4.6 trillion in risky mortgage loans outstanding in the financial system -- of which 39 percent or $1.8 trillion of which were either Fannie and Freddie mortgages or securities they purchased and held on their balance sheets.

There were also black boxes hidden off the balance sheets of banks, such as Citigroup, where mortgage assets were placed and, thus, not seen to be a potential threat to the sponsoring bank.

Collateralized debt obligations or CDOs made up of mostly subprime mortgage assets, both real and synthetic, were also another sphere where black boxes proliferated and generated demand for subprime mortgage credits, pushing more funding into the weakest part of the mortgage market.

CDOs are securities or certificates issued against a pool of collateral of debt instruments, from corporate loans to asset-backed securities, including mortgage-backed securities.

These perverse incentives magnified vulnerabilities to the mortgage market at Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and even Goldman Sachs.

The book also looks at the role of Congress in the crisis, including the passage of laws that created incentives for banks and investment banks to engage in riskier financial activity. Congress also failed to enact legislation where it was needed to make the financial system safer and sounder.

It is too early to place orders for the book. Readers of this blog will be kept apprised of when they can order the book.

Below is a list of the chapters:

Chapter 1 The Mortgage Meltdown
Chapter 2 The Panic of 2007
Chapter 3 Seeds of the Disaster
Chapter 4 The Race to the Bottom
Chapter 5 The Rise of Private Label
Chapter 6 Wall Street’s Subprime CDO Mania
Chapter 7 Fast Money and High Stakes
Chapter 8 American International Group
Chapter 9 Bear Stearns
Chapter 10 Fannie and Freddie
Chapter 11 Lehman Brothers
Chapter 12 The Panic of 2008

There is also a glossary and an index.

Hard-Cover Book is 6 1/8 by 9 1/4 inches

ISBN 978-0-313-39289-4

$44.95 or £31.95

eBook ISBN 978-0-313-39290-0

The Embrace of Junk Bonds

2011-04-12T14:58:00.000-07:00

CNBC's Kayla Tausche on the frustrating hunt for higher yields and risks some investors are willing to take to get it.

Interview with Wells Fargo CEO John Stumpf

2011-03-11T14:35:00.001-08:00

Mary Thompson of CNBC interviews Wells Fargo CEO John Stumpf, who discusses lending policies to small business.

Should Fannie and Freddie Be Shut Down?

2011-02-23T12:13:00.000-08:00

Lewis Ranieri of the Hyperion Group discusses the state of the housing market and whether the government should unwind the government-sponsored enterprises (GSEs) known as Fannie Mae and Freddie Mac.
Link: http://www.cnbc.com/id/15840232?video=3000007154&play=1

CNBC Interview of Neil Barofsky

2011-02-03T05:40:00.002-08:00

Insight on what banks should do to prevent 2008 from happening all over again, with Neil Barofsky, TARP special investigator general.
http://www.cnbc.com/id/15840232?video=1777498977&play=1

Strict Parents Fueling China's Growth?

2011-01-11T16:26:00.000-08:00

Could China's stricter parenting philosophy be the reason why China is starting to trump America? Amy Chua, author of "The Battle Hymn of the Tiger Mother," and Matt Comyns, CEO of Pacific Epoch, weigh in.

C-Span Interview with Janet Tavakoli

2010-12-10T06:22:00.001-08:00

On December 9, C-Span's Washington Journal interviewed Janet Tavakoli, a Chicago-based structured finance analyst. She was in Washington to attend a conference sponsored by the Federal Housing Finance Administration. She talked about Fannie Mae, Freddie Mac, private label mortgage-backed securities, Wall Street fraud, and derivatives.

See the entire 39:43 minute interview at this link:
http://www.c-spanvideo.org/program/FannieMaean

The Day the Dollar Died

2010-11-28T05:39:00.000-08:00

The National Inflation Association has released another in its powerful video series warning of the dangers of hyperinflation from loose monetary policy by the Federal Reserve. Is it time to start hoarding? Or is this just fear-mongering?

"Did You Hear About the Fed?"

2010-11-17T06:59:00.000-08:00

This ascerbic and hilarious cartoon by Malekenoms is done in a question and answer format between two bears who speak with computer-generated voices and broken English. The first bear starts off the process by asking the second bear, "Did you hear about the Fed?" and then proceeds to explain to the second bear why the Fed is engaging in quantitative easing.

The policy name "quantitative easing" is described as a euphemism for printing "a ton of money." When the second bear asks the first bear, why not just calling it "the printing money," the first bear responds that the Fed calls in quantitative easing because printing money is seen as "the last refuge of a failed economic empire and banana republics, and the Fed doesn't want to admit this is their only idea."

The bears then belittle the notion that there is deflation when prices are rising everywhere. The the first bear also lampoons the Fed's credibility and claims it has been wrong about everything and right about nothing.

The bears also spoof Ben Bernanke as "the Ben Bernank." It blasts the New York Fed's relationship with Goldman Sachs and the fact "the William Dudley," head of the New York Fed, used to work at Goldman Sachs. It ridicules the Fed for going to Goldman Sachs to buy U.S. Treasuries at higher prices rather than going to the Treasury direct so that Goldman Sachs can make a lot of money on the deal.

Charlie Gasparino, citing this cartoon, takes issue with the growing scapegoating of Ben Bernanke in a column in The Daily Beast at this link:

http://www.thedailybeast.com/blogs-and-stories/2010-11-17/ben-bernanke-the-economys-fall-guy/

Geithner's Dollar Gambit

2010-10-23T16:33:00.001-07:00

On his CNBC show Friday October 22, Larry Kudlow touts Treasury Secretary's recent statements supporting the dollar with guests Jim Rogers and Andy Busch. They discuss the odds for a dollar rally after the meeting of the Fed on November 3.

A Pictorial of Obamacare

2010-10-22T06:37:00.000-07:00

The Joint Economic Committee worked four months putting together this graphic representation of how the new Obamacare works -- a graphic that is being featured in an article by Deroy Murdock posted on National Review. See the article at this link: http://www.nationalreview.com/articles/250485/three-charts-will-infuriate-taxpayers-deroy-murdock

You can download at high resolution version of the graphic at this link: http://www.jec.senate.gov/republicans/public/index.cfm?p=CommitteeNews&ContentRecord_id=bb302d88-3d0d-4424-8e33-3c5d2578c2b0

It's one of three charts that Murdock says "will infuriate every taxpayer."

Wheaton: Housing Market Will Come Roaring Back

2010-09-28T09:22:00.000-07:00

Prof. William Wheaton of the Massachusetts Institute of Technology, expects the housing market to come roaring back in the next few years. He gave his views today on CNBC's Squawk on the Street. The reason, he explains, is that household formation is creating demand that is far greater than the current rate of new home construction. Foreclosures and excess inventory are not so much of a problem because they are filling in the demand between new home construction and new household formation.

The market is poised for a comeback even without the range of mortgage products that existed prior to August 2007, the professor says. He points out that in the past people were able to buy homes before the new mortgage products were available.

Household Wealth Losses Pared to $12.3 Trillion

2010-09-19T18:59:00.000-07:00

The Federal Reserve has released its Flow of Funds report for the second quarter of 2010. Household net worth declined $1.5 trillion to $53.5 trillion.

Household net worth in the second quarter of 2010 had risen $4.7 trillion from the trough in the first quarter of 2009, but still off $12.3 trillion from the peak in 2007.

At the First Quarter 2009 trough, the loss in household wealth had declined $17 trillion from the 2007 peak.

With home prices expected to be headed for a double dip, these trend lines may head back down again.

In the chart above net worth of households and nonprofits is expressed as a percent of GDP.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages).

Read more of an analysis of the trends in household wealth at The Business Insider: http://www.businessinsider.com/household-net-worth-2010-9#ixzz101zh0bCN

The Flow of Funds data can be found at this link: http://www.federalreserve.gov/releases/z1/current/z1.pdf

Home Depot CEO Bernie Marcus: Washington Sees Job Creators As "Monsters" and "Villains"

2010-09-19T16:06:00.000-07:00

On September 17, Home Depot chairman and chief executive officer Bernie Marcus appeared on The Squawk Box on CNBC. He was interviewed by show host Joe Kernen. Marcus lambastes the "academics" who have positions of power in Washington (including President Obama) and their view of job creators as "monsters" and "villains." Marcus facetiously "apologized" for creating 320,000 jobs.

Marcus, verbatim:

Now you take some of the people the President surrounded himself with, now think about it a second, they’re all academics . . . most of them . . . I mean all of them, they come out of Harvard they come out of Yale. These guys are all on tenure. By the way they’re all on tenure. Tenure means they get paid whether they work or not, tenure means they are on insurance for life, tenure means they don’t ever have to worry about anything just because they were there for a number of years. America is not that way. America is not that way. And if the President got out of, you know, Washington, in his cloak as I talked about, and started moving around the peasants which is people like everybody else in the world except for Washington. Washington has their own insurance plan, they got their own pensions, they don’t even abide by their own rules they everybody else lives by.

Senator Gregg Says Obama Administration's Record Debt Run-Up Intentional Prelude to Value-Added Tax

2010-09-11T10:57:00.000-07:00

In an interview by Larry Kudlow, Senator Judd Gregg (R-N.H.) explained why the Obama Administration and the Democratic Congress are not worried about the huge run-up in the deficit and rising national debt.

In his September 9 program host Larry Kudlow pointed out that the Obama Administration has increased the national debt by more than all prior Presidents from George Washington through Ronald Raegan. When Senator Gregg suggested this was going to bankrupt the nation, Larry Kudlow disagreed.

“Senator, instead of going bankrupt, you know what will happen?” Kudlow said. “It's a massive tax trap. That's what's going to happen. It's going to be a gigantic humongous, massive tax trap that will doom us to subpar, stagnant, slow economic growth and high unemployment. Isn’t that really the issue?”

“Larry, you're absolutely right,” Gregg responded. “This is a very important point for your viewers to understand. This spending is being done intentionally. The reason the GDP –the spending-to-GDP ratio has gone from 20 percent to 24 percent, it’s heading to 27 percent of GDP is because the present government, the present presidency and the present Congress genuinely believe that you create prosperity by radically growing the size of government and they genuinely believe that our society is fundamentally under-taxed and they want to fill the gap between what has historically been our tax revenues, which have been about 18 to 19 percent of GDP and the spending, which they put in place at 24 percent.”

“They want to fill it with a value added tax,” Gregg continued. “That is the plan. They're trying to run the government into the ditch so that the options will be so few and so Draconian and so inappropriate that the only choice that would be left would be to go down the European social welfare mode. Remember, every European country has an income tax, a sales tax, which is their VAT tax, and what they see is the United States only has an income tax. So they say, ‘Well, we can obviously take the European model. If we go down the European road of expanding our government dramatically,’ which is what they’re planning to do and what they’ve actually done with the health care bill specifically, ‘Then we can fill that gap without going down the European model of a VAT tax.’”

“That of course reduces the productivity of society, because the more you put a tax burden on society, you basically reduce productivity,” he said. “That costs you jobs and makes you less competitive.”

Senator Corker and the Dodd-Frank Bill

2010-09-01T05:41:00.000-07:00

Senator Bob Corker (R-Tenn.) went to extraordinary lengths to reach across the aisle to forge a consensus financial regulatory reform bill. After making considerable progress in a cooperative effort at crafting a bill, Senator Corker's efforts were cast aside. Instead, Senator Chris Dodd (D-Conn.) went ahead with a purely partisan bill that, only with very minor compromises, obtained enough Republican support to pass. This is another legislative behemoth that will have enormous unintended consequences.

Read an interview with Senator Corker and his views on his experience and the new legislation at this link:

http://robertstoweengland.com/index.php/writer/436-senator-corker-qaa

Barney Frank v. Barney Frank

2010-08-21T17:09:00.000-07:00

Thursday, August 19, the day that Treasury and HUD held a conference on the future of mortgage finance -- including the future of Fannie Mae and Freddie Mac -- Barney Frank, Chairman of the House Financial Services Committee, who fought belligerently and vindictively against anyone who tried to rein in Fannie and Freddie for more than a decade, was on CNBC and Fox Business trying to rewrite history. This clip gives some insight into Barney Frank then versus Barney Frank now. Can Barney Frank ever have a conversation that does not include ridicule of and sneering at people who disagree with him?

This video was put together by Barney Frank's opposition in the upcoming election, Sean Bielat. Read more at http://www.retirebarney.com/.

CBO Says Huge Deficits Risk New Financial Crisis

2010-07-28T05:52:00.000-07:00

Congressional Budget Director Doug Elmendorf writes on the Director's Blog at the CBO web site:

Federal Debt and the Risk of a Financial Crisis

In fiscal crises in a number of countries around the world, investors have lost confidence in governments’ abilities to manage their budgets, and those governments have lost their ability to borrow at affordable rates. With U.S. government debt already at a level that is high by historical standards, and the prospect that, under current policies, federal debt would continue to grow, it is possible that interest rates might rise gradually as investors’ confidence in the U.S. government’s finances declined, giving legislators sufficient time to make policy choices that could avert a crisis. It is also possible, however, that investors would lose confidence abruptly and interest rates on government debt would rise sharply, as evidenced by the experiences of other countries.

Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States. In a brief ("Federal Debt and the Risk of a Fiscal Crisis") released today, CBO notes that there is no identifiable “tipping point” of debt relative to the nation’s output (gross domestic product, or GDP) that would indicate that such a crisis is likely or imminent. However, in the United States, the ratio of federal debt to GDP is climbing into unfamiliar territory—and all else being equal, the higher the debt, the greater the risk of such a crisis.

Read more: http://cboblog.cbo.gov/?p=1249

The Soviet Story: A Documentary about Mass Murder to Create a True Socialist Society

2010-07-27T05:50:00.000-07:00

The atrocities of the Soviet Union have largely been ignored by history. But, thanks to this award-winning documentary, people can now begin to learn that the Soviet Union committed mass murder and atrocities on a scale that dwarfs that of all other ideologies, states and systems in the history of the world. The deliberate starvation of seven million Ukraines in a single winter of 1932-33 was known to a New York Times correspondent who, instead of reporting it, covered it up. That would make this the single most horrible act of complicity with evil in mankind's history. This is an astonishing video that should be widely disseminated.

More on the documentary at this site: http://www.archive.org/details/TheSovietStory

The Soviet Story is a 2008 Latvian documentary about Soviet Communism and Soviet-German collaboration before 1941. It was written and directed by Edvins Snore and sponosred by the Union for Europe of the Nationas group within the European parliament. The EUN functioned as a parliamentary group from 1999 to 2009, when the political parties within the group, mostly conservative, migrated to other coalitions.

EBRI Study Finds Workers Have Improved Their Prospects for an Adequate Retirement

2010-07-24T17:24:00.000-07:00

More than 40 percent American workers face the prospect of having too little income in retirement and are likely to run out of money, according to a new study by the Employee Benefit Research Institute (EBRI).

The share of the population segment at risk for an inadequate retirement ranges from 70.3 percent of households with incomes in the lowest one-third of the population to 41.6 percent in the middle income group to 23.3 percent for the highest income group.

Surprisingly, given the difficulties from the financial crisis and the recession, the results find workers better prepared for retirement than a similar study conducted seven years ago.

In 2003, by comparison, 79.5 percent of households in the lowest one-third of income were at risk, falling to 47.3 percent for the middle income households and 39.6 percent of the highest income group.

Defying the expected pattern, older worker are less prepared than some younger workers. For example, 47.2 percent of Early Baby Boomers may not have enough to live in retirement, while 44.5 percent of Generation Xers may not have enough.

In 2003, by comparison, 59.2 percent of Early Boomers were "at risk" while 57.4 percent of Generation Xers were at risk.

The study measures the projected time from a worker retirement date until the worker runs out of money, based on what they have saved to far and what they are likely to save before retiring. Not surprisngly, 41 percent of the lowest income group will run out of money after only 10 years in retirement.

The study finds that one popular proposal to improve retirement saving and income -- auto-enrollment into plans and auto-escalation of contributions every year -- would make it possible for a 25-year-old work to accumulate twice as much saving as a 25-year-old worker in a plan without the automatic features.

Click on the link at the end of this sentence to reach the web page at the Employee Benefits Research Institute where you can download a pdf Issue Brief describing the findings of the study.
http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4593

Dodd-Frank Provides For Only One Flavor of Mortgages -- Just Like the Old Soviet Union

2010-07-22T12:40:00.000-07:00

By Robert Stowe England
July 22, 2010

"Like the Saturday Night Live lunch counter from the late 1970s that, regardless of what the customers reasonably requested, offered only cheeseburgers, chips, and Pepsi, the Mortgage Reform and Anti-Predatory Lending Act (the Mortgage Reform Act) would essentially mandate that all flavors of mortgage loans besides 'plain vanilla' may disappear from the menu," write Krstie D. Kully and Laurence E. Platt at K&L Gates LLP law firm.

Their assessment appears in a newsletter released by the law firm July 8, that can be read at this link: http://www.klgates.com/newsstand/Detail.aspx?publication=6528

This section of massive Frank-Dodd financial services bill targets originators of mortgages that are not plain vanilla. These companies and institutions are targeted for "punishment through enhanced monetary damages, defense to foreclosure and risk retention requirements," Kully and Platt state.

"Only time will tell whether the mortgage finance industry will assume the risks and expand the menu of mortgage options," they write.

So, let me get this straight. Senator Chris Dodd and Representative Barney Frank and Congress refused to address the obvious need to reform and possible do away with Fannie Mae and Freddie Mac?

They are in no rush to address the biggest bailout of all time and the chief cause of the housing and mortgage bubbles that led to a financial meltdown that has left millions of Americans and their lives and fortunes in tatters?

Instead, they want to punish consumers and deny them any choices other than Fannie and Freddie and Federal Housing Administration mortgages? The only choices are the choices the goverment provides for you. Goodbye, America. Hello, Soviet Union.

No wonder the vast majority of Americans are so angry at Washington.

These days every decision and law emanating out of Washington takes away our liberties and choices and imposes an unworkable, untested solution that suits the ideology and vanity of the politicians and apparently virtually no one else.

Call it ideological self-induglence from people who actually think they know it all. All this is done in ways that make it more difficult and more costly for the rest of us to live, whether from higher taxes or, in this case, the lack of flexible, affordable and preferable mortgage options.

The law virtually outlaws Alternative A loans and thereby potentially denies the opportunity to own a home or refinance a mortgage to millions of Americans with good credit and a traditional 20 percent down payment.

The Alt-A or low or no documentation loan had a long and successful history as the mortgage of choice for self-employed people. An Alt-A with a sufficient down payment has -- for 150 years -- been a stable and valued mortgage at thrifts and banks and even in the mortgage-backed securities market.

The Alt-A was tarnished in the great decline in underwriting practice that occurred from 2005 to 2007 -- when it was provided to wage earners and not the self-employed. It was handed out like candy to people with low credit scores and not to the traditional high credit score borrower. It was given to anyone who could fog a miror with no money down instead of the traditional 20 percent down payment borrower who used these loans.

The irony is that Federal Housing Administration is actually making more risky loans that the traditional Alt-A loans that were funded in the market place without government backing. And, in the case of those loans, the taxpayers will be on the hook again. Just as we have been for the bailout of Fannie and Freddie.

Clearly, the majority in Congress have learned virtually nothing of value for the nation from the financial crisis. If they did, they are keeping it a secret.

Las Vegas Developer Blasts Washington on CNBC

2010-06-28T13:26:00.000-07:00

Speaking on CNBC, Las Vegas hotel owner Steve Wynn excoriates the lack of common sense in Washington and blast politicans for insane spending, regulatory policies and legislative initiatives. He says Washington has created a terrible environment of uncertainty for business in America -- worse than in China, which is more stable. "The shocking unexpected government is in Washington," he says. "Everything is cuckoo and God knows what's coming next."

In particular, he attacks FHA for backing $20 billion a month in subprime lending. He blasts Obamacare and says it will drive up costs and faults Washington for failing to do anything about frivolous lawsuits that drive up the cost of liability insurance for doctors.

Moody's: Loan Performance Improves for Subprime Mortgages in Private Mortgage-Backed Securities

2010-06-14T15:33:00.000-07:00

By Robert Stowe England
June 14, 2010

Subprime loan performance of mortgages held in private label residential mortgage-backed securities (RMBS) has finally improved for the first time after rising steadily for nearly four years.

Delinquencies in RMBS vintages from 2005 to 2008, which peaked at 54.4 percent in January 2010, began to decline over the last three months and fell to 51.5 percent as of April 2010, according to Moody's Investors Service.

"Subprime mortgage loan performance appears to have turned a corner over the past several months," writes Peter McNally, vice president and senior analyst at Moody's in the credit rating agency's Weekly Credit Outlook for June 14.

McNally notes that other classes of RMBS, jumbo prime and Alt-A and home equity, have also shown improvement, "though somewhat less pronounced."

McNally is crediting the Home Affordable Modification Program (HAMP) as "one contributor" to the improved loan performance for subprime mortgages underlying subprime RMBS.

"As HAMP ramped up in 2009, the number of seriously delinquent loans increased because loans that would otherwise have been foreclosed on and liquidated, instead waited for their placement into trial modifications," McNally writes.

The Moody's analyst notes that the number of active permanent modifications has more than doubled, rising from 117,301 in January to 299,092 in April.

"Each permanently modified loan improves the aggregate delinquency rate because upon modification the loan's stauts changes from delinquent to current," explained McNally.

Moody's reports that loan-level analysis of 641 subprime RMBS transactions issued in 2005 to 2008 shows that fewer loans have moved into delinquent status while more have moved from delinquent to current status.

Moody's analysis found that 24 percent of borrowers that were 30 days delinquent in February were current in March. By contrast, only about 15 percent of borrowers in a given month became current on their loans 30 days later during most of 2009.

McNally predicts that HAMP 2.0, which focuses on principal forgiveness for homeowners with underwater mortgages, may further reduce delinquency rates.

Despite these improvements, not all is rosy. Moody's currently expects that 50 percent to 70 percent of permanent modifications will eventually re-default. To the extent HAMP 2.0 can implement principal reductions, the re-defaults can be reduced, McNally concludes.

CBO's Low Cost Estimate of the Fed's Crisis Actions

2010-06-07T04:04:00.000-07:00

At the request of Senator Judd Gregg, New Hampshire Republican and ranking member of the Senate Budget Committee, the Congressional Budget Office has completed a report titled The Budgetary Impact and Subsidy Costs of the Federal Reserve's Actions During the Financial Crisis. See the report at this link: http://www.cbo.gov/ftpdocs/115xx/doc11524/05-24-FederalReserve.pdf

The report, written by Kim Kowalewski and Wendy Kiska of CBO's Macroeconomic Anlaysis Division, comes up with what most willl surely think is a low ball estimate of the subsidy cost of the extraordinary actions during the financial crisis of 2007 and 2008.

From July 2007 to the end of 2008, the Fed's balance sheet grew from $790 billion to $2.275 trillion. Of that total, loans and other types of support extended to financial institution made up $1.686 trillion.

By the end of 2009, direct loans and other support had fallen to $280 billion, but the Fed held just over $1 trillion in mortgage-related securities (which continued to rise through March 2010 to $1.25 trillion).

The report notes that there was also a big change in the composition of the Fed's liabilities. Before the crisis, the biggest liability was $814 billion in currency in circulation (as of July 2007). By the end of 2009, the biggest liability was the $1.022 trillion in bank reserves held by the Fed. At the end of July 2007, by contrast, the Fed held a mere $6 billion in bank reserves.

"In effect, the Federal Reserve financed its activities during the crisis primarily by creating bank reserves rather than by issuing more curency or increasing its other liabilities," the report concludes.

Banks moved their reserves to the Fed after the Fed was authorized to pay interest on those reserves beginning October 1, 2008, due to the passage by Congress of the Emergency Economic Stabilization Act of 2008.

Of course, all these funds placed in reserve at the Fed meant they were not available for lending to the broader economy.

The report attempts to estimate the economic costs of the Fed's actions to stabilize the financial markets. The authors use an approach they call "fair value" to estimate the value of the subsidies, which they admit often corresponds to the market value. "It is the price that would be received by selling an asset in an orderly transaction between market participants on a designated measurement date.

"Subsidies etimated on a fair value basis provide a more comprehensive measure of cost than do estimates made on a cash basis: They take into account the discounted value of all future cash flows associated with a credit obligation, and they include the cost of bearing the risk," the report states.

However, there is a caveat: OMB uses what it calls "a conceptually similar subsidy measure, as specified by the Emergency Economic Stabilization Act of 2008" to estimate the value of the TARP, the Troubled Asset Relief Program.

CBO estimates a $21 billion fair-value subsidy was conferred by the Federal Reserve on the financial system with all its activities.

Only $21 billion? How did we get to a number that low? For starters, the subsidy cost estimate incorporates the fact that most of the loans forwarded have been paid back, thus presumably reducing the value of the cost subsidy.

Of the $21 billion total, $13 billion comes from the Term Asset-Backed Securities Loan Facility (TALF). This seems tiny compared to the $1.25 trillion in exposure to mortgage securities that is still in place.

What about other subsidy costs? Whout the Fed's intervention, Goldman Sachs would no longer exist in its present form. How does one calculate the fair value cost of that subsidy? Morgan Stanley would conceivably no longer exist in its present form. How does one compute the fair value cost of that subsidy? For the Fed, in both instances, it's zero.

The CBO estimates zero fair market subsidy cost for the Primary Dealer Credit Facility and the Term Securities Lending Facility (TSLF) that provide primary dealers with access to short-term liquidity. That's the facility that kept Goldman Sachs and Morgan Stanley from going down -- not to forget the subsidy from the AIG bailout that went via the back door to Goldman Sachs and other investment banks.

What about all the losses that may be forthcoming from AIG? (CBO estimates the present fair value subsidy cost is only $2 billion) What about the fair value cost to Citigroup of the Fed's subsidies? (CBO estimates it's only $2 billion) What about Bank of America ($1 billion)? The estimates for AIG seems beyond rosy. And Citigroup is still just a step above being a penny stock ($3.79 as of June 3), even with the subsidy. What is the fair value subsidy cost to the Fed of salvaging Citigroup from bankruptcy and ruin?

The report does concede a bit of the obvious in the following sentence:

"It bears emphasizing that CBO's fair-value estimates address the costs but not the benefits of the Federal Reserve's actions. In CBO's judgment, if the Federal Reserve had not strategically provided credit and enhanced liquidity, the financial crisis probably would have been deeper and more protacted and the damages to the rest of the economy more severe."

Setting aside the value of the broad economic benefit, however, surely the CBO estimate does not capture the full fair value cost of the subsidy. What's missing from the estimate is any sense of "fair value."

Maybe what we need is a new definition of fair value subsidy cost.

Or, maybe what we need is a measure of the fair value benefit of each subsidy, focused on its impact on the intended financial recipients of each benefit and not considering the broader economic benefit.

From a common sense view, that's the real value of the Fed subsidy. Surely that would be in the hundreds of billions, at minimum.

"Meltup" Video Warns of Hyperinflation and Massive Devaluation of the Dollar

2010-05-16T06:13:00.000-07:00

This 54 minute video was posted May 13 and by early May 18, it had 265,973 hits on YouTube at this link: http://www.youtube.com/watch?v=eb1n1X0Oqdw&feature=player_embedded

The video, which features the views of Gerald Celente of Trends Research Institute, warns of a coming era of hyperinflation and the collapse of the dollar if nothing is done to turn around America and return the economy to free market principles and the government to Constitutional principles. Celente predicted the market crash of 2008.

Among other things, the video warns about the likelihood of a Comex default on silver based on the possibility that many commodity traders, like J.P. Morgan Chase, are manipulating silver and selling more silver than actually exists presumably in an effort to drive down the price. A Comex default would drive up precious metals prices dramatically.

The video also catalogues dramatic increases in food prices already under way. Gerald Celente warns of food riots and tax riots as prices rise so high many cannot afford food and energy.

The video also raises questions about whether or not the full amount of the gold reserve still exists in Ft. Knox and calls for an annual audit, noting further that even if the full amount of the gold reserve remains in Ft. Knox, it would only be about worth about $300 billion or so.

The video argues that the Fed engages in price-fixing by setting interest rates and has prevented the functioning of the free market. By competing inflation artificially low, the Fed distorts economic forces. Interest rates are likely to soon rise to 5 percent to control inflation and, as a result, interest payments on U.S. debt will rise to $500 billion a year, the video forecasts.

The dire picture the video paints of the future need not come true. Gerald Celente argues that if 20 percent of Americans buy better quality goods made in America and not cheap goods made overseas and if America becomes better educated on the economy, Americas can begin the second American revolution and restore the Amercian economy to a better balance.

Viewers are invited to sign up for a newsletter from the National Inflation Association and are called on to know and support the U.S. constitution as the "last line of defense."

Jim Rickards on CNBC: "Goldman Can Create Shorts Faster Than Europe Can Print Money"

2010-05-11T13:35:00.000-07:00

Market observers have been quick to agree that Europe can not print its way out of its crisis, in spite of the $1 trillion emergency rescue package announced Monday. The best quote expressing this view comes Jim Rickards, senior managing director for market intelligence at Omnis, Inc., a scientific consulting firm in McLean, Virginia, from his appearance on CNBC.

Rickards quote, from the CNBC video above from Monday, May 10 during early morning show Squawk on the Street at 7:23 AM, is as follows:

"Look at what Soros did to the Bank of England in 1992. He went after them, they had a finite amount of dollars. He was selling sterling and taking the dollars, and they were buying the sterling and selling the dollars to defend the peg," Ricards said. "All he had to do was sell more than they had and he wins. But he needed real money to do that. You either had to have cash, which he did, or bank lines of credit."

"Today, you can break a country. You don't need money. You just need synthetic euroshorts and CDS. You have a trillion dollar bailout. Butm Goldman can create 10 trillion of euroshorts. So, it just dominates whatever governments can do. So, basically Goldman can create shorts faster than Europe can print money. You say the market wins, but it's not really a market, it's back to this casino thing, and that's the problm."

The Long and Winding Road to GSE Reform

2010-05-02T10:03:00.000-07:00

With the price of the bailout rising and momentum for reform in Washington slowing, Fannie Mae and Freddie Mac remain vital to the functioning of the mortgage and housing markets. A framework for a new system is beginning to take shape, at the same time that analysts are looking to fully and adequately address flaws in the current system.

Mortgage Banking

May 2010

By Robert Stowe England

A giant question mark hangs over the mortgage finance industry. What is the future of Fannie Mae and Freddie Mac? That is part of a larger question. What is the future of mortgage finance?

The two pillars of the mortgage industry that own or guarantee payment on $5 trillion in U.S. mortgages and/or mortgage-backed securities (MBS) failed dramatically at the height of the Panic of 2008 and were placed into conservatorship by the Federal Housing Finance Agency (FHFA).

The significance of the failure of the two government-sponsored enterprises (GSEs) has been difficult to fully capture; but however you describe it, it is epic in scope. The Congressional Budget Office (CBO) has projected that the bailout of Fannie and Freddie added $291 billion to federal outlays in fiscal year 2009 (October 2008-September 2009). CBO predicts another $99 billion in outlays from 2010 to 2019, for a total loss of $380 billion--by far the largest federal rescue ever.

It’s also one for the history books. “It was the biggest failure of housing policy on the planet and throughout all of history,” says Alex Pollock, resident fellow at the American Enterprise Institute (AEI), Washington, D.C. The GSE failures dwarf the next largest spectacular failure, the savings-and-loan (S&L) crisis of the early 1990s, where only $1 trillion in assets were on the line, he says.

To read more, click this link:
http://robertstoweengland.com/index.php/writer/383-the-long-and-winding-road-to-gse-reform

Chanos Calls for Investigation into AIG, Lehman

2010-04-30T14:31:00.000-07:00

This video clip from CNBC's early morning Squawk Box show features James Chanos, President of Kynikos Associates and Bill Ackman of Pershing Square Capital Management LP. The two were interviewed April 27, 2010.

Quote from Chanos: “Until we find out what happened (with AIG and Lehman), we’re not going to be able to reform the system."

Senator Levin Releases Goldman Sachs Emails

2010-04-24T09:50:00.000-07:00

The Senate Permanent Subcommittee on Investigations, headed by Senator Carl Levin (D-Michigan), fresh from its grilling yesterday of executives from the credit rating agencies, has released several emails from Goldman Sachs on a Saturday, no less. Cannon fodder for the Wall Street firing squads on the Sunday talk shows, perhaps?

There is no "smoking email," as it were, but a lot of grist for the mills in the Obama Administration, Congress and their cheerleaders in the media to vilify Wall Street, with Goldman Sachs as the preferred target of the moment.

A July 25, 2007 email from chief financial officer David Viniar is already burning up the wires from the Associated Press in an article by Dan Strumpf titled "E-mails show Goldman boasting as meltdown unfolds."

See AP story here: http://apnews.myway.com//article/20100424/D9F9GVN80.html

The mortgage-backed securities and mortgage collateralized debt obligation (CDO) markets were beginning to seriously tank in late July, ahead of a complete meltdown only a few weeks later.

One email Gary Cohn at Goldman Sachs forwards to CFO Viniar contains information describing the dramatic plunge in the value of mortgage-backed securities in an unindentifed deal. The email also noted a 95 percent wipe-out of the deal's residuals, the parts that are sometimes retained by companies that put together the deals because they are hard to sell.

In response to the collapse of these mortgage bonds, Viniar comments: "Tells you what might be happening to people who don't have the big short."

Reporting on another email on November 18, 2007, from Lloyd Blankfein, Goldman's chairman, AP reporter Strumpf sees the comments as boasting, giving more support to the article's theme of Wall Street gloating while America was burning.

Bankfein writes: "Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts. Also, it's not over, so who knows how it will turn out ultimately."

While Blankfein is happy about Goldman's experience so far, it seems a stretch to portray this as boasting.

Take a look at the context for the statement. The email is in response to an internal email notice about a positive story on how Goldman Sachs dodged the bullet in the mortgage meltdown being written by Jenny Anderson and Landon Thomas and slated for publication the next day in the New York Times.

Blankfein was pointing out that the conclusion of the article was not factually correct and, indeed, even with the protection of its big shorts, Goldman might still see big losses -- as they ultimately did.

The Blankfein email inadvertently exposes the shallowness of the reporting by the New York Times, whose reporters seem to rush to a premature conclusion about a company that previously had often enjoyed favorable coverage in their pages. It also reveals that the reporters had pretty much conveyed to Goldman ahead of publication just how they planned to portray the investment banking firm in their article.

The leaked emails are available online at this link:
http://levin.senate.gov/newsroom/supporting/2010/PSI.Exhibits.pdf

The release of these emails, while entertaining, also serve as a reminder of the unattractive sanctimoniousness of Senator Levin and the other members of Congress who have had a field day grilling people who may or may not have contributed materially to the mortgage and financial market meltdowns.

Too bad there is no one to compel Congress to release its emails and statements made in private that showed how they wanted to "roll the dice" with lending standards for affordable housing at Fannie Mae and Freddie Mac, as Representative Barney Frank (D-Mass.) once gleefully said.

It would also be nice to see on prime-time TV people from Main Street grilling members of Congress about emails and statements that showed how cavalier they were about potential future losses from concerted and relentlesss efforts to pressures lenders to lend money to people who could not pay back the loans.

With a Congress complicit in the crisis doing the grilling, one almost feels sorry for the people on Wall Street who helped enginer and then compound the mortgage disaster that are paraded before us in a humiliating public display. But, not quite.

The least these harradans in Congress can do when they summon people to stand before them for grilling is be fair and even-handed.

If they were to show a degree of impartiality, it would be a shock and might improve the standing of Congress in the eyes of the American people. They won't, of course, because they do not appear to want to craft a bill that is thoughtful and measured and actually responds to the causes of the crisis. It's too much fun playing God with the lives of other people to actually get serious about the real issues.

Wallison: Obama's Financial Reform Plan Aims To 'Control Yet Another Sector of the Economy'

2010-04-22T12:20:00.000-07:00

In a new brief released today, Peter J. Wallison at the American Enterprise Institute states that the Obama Administration's financial regulation plan -- as represented in Senator Christopher Dodd's bill -- 'raises the question of whether its purpose is actually to address the causes of the financial crisis or -- like ObamaCare -- to put the government in control of yet another sector of the U.S. economy."

Wallison, who is the Arthur F. Burns Fellow in Financial Policy Studies at AEI, argues that the bill's provisions allowing for the Federal Reserve to regulate all large, nonbank financial institutions "would signal to the market that these institutions are too big to fail."

The proposed $50 billion rescue fund to be administered by the Federal Deposit Insurance Corporation (FDIC) enhances the too-big-to fail approach by assuring creditors "that they will be bailed out if one or more of these large institutions are in danger of failing," the brief states.

The bill, through these provisions, will favor large financial institutions over smaller competitors, and this, in turn, will lead to a restructuring of the financial markets and the U.S. economy, Wallison states.

These elements of the reform "make sense only if the administration is pursuing an ideological objective instead of striving to ensure a healht and competitive U.S. financial system in the future," Wallison writes.

Wallison, in the body of the brief, points out some of the flaws and consequences of the Obama administration's proposal:

It fails to address the government's role in the creation of a vast numbers of subprime and other nonprime loans that led to the crisis.
Instead of controlling large Wall Street firms, as claimed, the bill provides advantages to Wall Street financial institutions.
The legislation, if enacted, "would establish an unprecedented and unhealthy partnership betgween the government and the largest financial institutions."
As it did with Fannie Mae and Freddie Mac, the government will protect the largest firms from failure in return for the willingness of those firms to implement the policies of the government.

To read the entire brief, "Crisis and Ideology: The Administraiton's Financial Reform Legislation," click the link below:
http://www.aei.org/docLib/FSOApril2010-g.pdf

The Story of the CDO Market Meltdown

2010-04-21T07:47:00.000-07:00

A year ago, a paper written by a student at Harvard College -- Anna Katherine Barnett-Hart -- received a fair amount of media attention. The paper examines the collateral performance and credit rating of asset-backed security collateralized debt obligations, so-called ABS CDOs. The author's findings are not surprising, in light of what is already known about the mortgage meltdown, but they do provide a better delineation of the parameters of the CDO meltdown.

Given the intense interest in CDO deals following the Securities and Exchange Commission's charges of civil fraud against Goldman Sachs for a deal known as Abacus 2007 AC1, it is worth revisiting the findings in this research and analysis by a college senior seeking to graduate with honors.

The author looks at both broad data on CDO performance and the ratings of credit rating agencies, but she also closely examines 735 ASB CDO deals.

The author's main finding is that there was far too much in the way of low quality assets in CDOs -- and given the continued deterioration since the report, updated information would find the conditions of those assets even weaker.

Relying on data from Lehman Live, Barnett-Hart found that the share of floating-rate collateral (adjustable-rate mortgages or ARMs) in ABS CDO deals, which had been a small share of the deals, rose sharply to become a majority of collateral in 2003. Synthetic collateral began to take off in 2005 and rose to about a third of the deals in 2006 before declining slightly in 2007.

Barnett-Hart explored a number of hypotheses and measured them by looking at a range out outcomes, from defaults to CDO downgrades.

In terms of collateral, Barnett-Hart examined three effects over the period from 2002 to 2007 with the following outcomes:

The Housing Effect: Increasing exposure to residential mortgages, specifically subprime and Alt-A residential mortgage-backed securities (RMBS), is associated with worse CDO performance as measured by defaults.

The Vintage Effect: Increasing exposure to 2006 and 2007 vintage collateral, particularly assets with floating interest rates, is associated with worse CDO performance as measured by defaults.

The Complexity Effect: Increasing the amount of synthetic collateral, the amount of pre-securitized CDO collateral, and the overal number of collateral assets is associated with worse CDO performance as measured by defaults.

CDO Underwriters and Originators

The paper also ranks the biggest CDO orginator clients of the credit rating agencies. And its findings agree with much of the anecdotal evidence accumulated in a number of press reports and an increasing number of books on the meltdown.

Merrill Lynch, with $76.9 billion in rated deals, was at the top of the list for Moody's, followed in order by Citigroup, UBS, Wachovia, Calyon, Goldman Sachs, Deutsche Bank, Credit Suisse, RBS, Lehman Brothers, Bear Stearns, Bank of America, West LB, Dresdner Bank, Morgan Stanley, Barclays Capital, and JP Morgan.

After reviewing underwriters and originators, Barnett-Hart concluded the following:

The Underwriter Effect: Holding constant general CDO characteristics, CDO performance varies based on the underwriting bank.

The Size Effect: The performance of an underwriter's CDOs varies according to the size of their CDO business, with overly-aggressive or very inexperienced banks issuing worse CDOs, as measured by their ex-post defaults and rating downgrades.

The Originator Effect: Controlling for the type of mortgages issue, as measured by average FICO the combined loan-to-value, and debt-to-income scores, the performance of a CDO depends on the specific entities that originated the assets that became collateral in the CDOs.

Underwriters as Originators

Barnett-Hart also looked at how much the credit quality of CDOs is affected when banks are both CDO underwriters and collateral originators.

Here, she found some interesting correlations.

The Assymetic Information Effect: CDO performance will be affected if it contains collateral originated by its underwiter, although the performance might improve or decline, depending on the important of reputation vs. adverse selection and moral hazard.

To read the entire paper, click this link:
http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf

Bill Moyers Interviews Simon Johnson and James Kwak on Wall Street Abuses

2010-04-18T16:51:00.000-07:00

How did Big Finance grow so powerful that its hijinks nearly brought down the global economy – and what hope is there for real reform with Washington politicians on Wall Street's payroll? Bill Moyers talks with authors Simon Johnson and James Kwak, two of the nation's most respected economic experts and authors of the new book 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.

To hear the segment, that ran Friday, April 16, click this link:

http://www.pbs.org/moyers/journal/04162010/watch.html

Did the Government Pay J P Morgan Chase 5 Basis Points to Borrow $271 Billion?

2010-04-16T15:41:00.000-07:00

Buried in a financial supplement report to the first quarter 2010 SEC filing by J P Morgan Chase is a note that reports that J. P. Morgan chase was paid 5 basis points to borrow $271 billion in repos, which were part of the liquidity provided by the Fed to primary dealers (Wall Street firms) to strengthen financial markets.

A post by Edward Harrison on the blog Naked Capitalism argues that, in effect, the government (Federal Reserve) paid J P Morgan Chase to borrow money. Here is how he defends that charge against those who said that technically, the borrowing was not between J P Morgan Chase and the Fed, but between J P. Morgan Chase and its counterparties:

A commenter felt my reference to borrowing from the government was misleading. So, note that technically Repo counterparties are largely banks lending and borrowing excess reserves from one another. So, they are not really borrowing from the government. However, the Fed has set the Fed Funds rate at 0.00-0.25%. It controls the Fed Funds rate to within that range by making repurchase and reverse repo agreements that are collateralized loans to primary dealers of Treasury securities. The supply and demand dynamics in the repo market are largely controlled by the Fed in order to maintain the repo rate at the specified level set by the Fed.

So, while the repo market participants may be borrowing from each other, in essence they are borrowing from the Fed. The repo rate is set and controlled by the Federal Reserve. You could suspend all counterparty transactions in the market and have dealers just repo with the Fed and the net effect would be the same.

To read the entire post, click the link below:

http://www.nakedcapitalism.com/2010/04/jpmorgan-gets-paid-to-borrow-271-billion-from-the-government.html

Mortgage Reset Nightmare Recedes

2010-03-29T08:09:00.000-07:00

This year was supposed to be the final blow to the housing market. A wave of resets of Option ARMs, Interest Only (IOs) mortgages and plain-old adjustable-rate (ARM) mortgages were supposed to lead to a surge in foreclosures, pushing down the weak housing sector as it was showing some signs of stability.

New data, however, suggest that is unlikely to happen. For one thing, people been refinancing and modifying their home loans ahead of the resets to avoid rising mortgage payments at the time of the reset. Further, many mortgages on homes that were supposed to reset this year have already gone into foreclosure.

Due to these trends, the number of outstanding Option ARMs -- the mortgage that allows for negative amortization -- have fallen from a peak of 1.05 million active loans in March 2006 to 580,000 loans outstanding at the end of 2009, according to First American CoreLogic.

So, maybe the reset threat has been cut down to size.

Vincent Fernando at The Business Insider makes the case at this link:

http://www.businessinsider.com/the-adjustable-rate-mortgage-time-bomb-fizzles-out-2010-3

Retirement Slip Sliding Away for More Americans

2010-03-09T17:12:00.000-08:00

The annual Retirement Confidence Survey released today finds that while the state of American confidence about retirement is stabilizing, more ground has been lost in prepration for retirement since the survey from 2009. The survey is jointly sponsored by the Employee Benefit Research Institute (EBRI) and Mathew Greenwald and Associates, a market research firm.

An EBRI Issue Brief contains lots of details on the findings of the survey. It is authored by Ruth Helman at Greenwald and Craig Copeland and Jack VanDerhei at EBRI and can be dowloaded as a pdf at this link: http://www.ebri.org/pdf/briefspdf/EBRI_IB_03-2010_No340_RCS.pdf

Below are the highlights from a press release:

The Retirement Confidence Survey (RCS) also finds that a growing number of American workers are also planning to delay retirement—which has negative implications for the U.S. job market, where unemployment is high and layoffs continue to grow. As older workers stay at their jobs longer, the RCS results suggest that fewer existing jobs are likely to open up.

And Americans continue to lack confidence in institutions. They are most likely to express confidence in private employers and least likely to express confidence in the federal government. Both workers and retirees expressing low levels of confidence in banks and insurance companies.

"Americans' attitudes toward retirement have clearly tracked the economy the last couple of years, and that seems to be the case in 2010," said Jack VanDerhei, EBRI research director and co-author of the survey. "Unfortunately, while their attitudes are stabilizing, their preparation for retirement is not. A distressing number of people have no savings at all."

The 2010 RCS marks the 20th wave of this survey, which is the longest-running public opinion study of its kind on Americans' attitudes on retirement and savings. The survey is co-sponsored by EBRI and Mathew Greenwald and Associates, which fielded the questions in January. More than 30 organizations provided funding for this year's survey, which is online at http://www.ebri.org/

In addition to looking at long-term trends on workers pushing back their expected retirement age—which had been steadily growing even before the recent economic recession—this year's RCS also reveals several other major trends that this unique survey has been tracking over the past two decades. Among the survey's key points:

•Stabilizing confidence: The percentage of workers very confident about having enough money for a comfortable retirement remains steady at 16 percent, which is statistically equivalent to the 20- year low of 13 percent measured in 2009. Retiree confidence about having a financially secure retirement has also stabilized, with 19 percent saying now they are very confident (statistically equivalent to the 20 percent measured in 2009).
•Basic expenses: Worker confidence about paying for basic expenses in retirement has rebounded slightly, with 29 percent now saying they are very confident about having enough money to pay for basic expenses during retirement (up from 25 percent in 2009, but still down from 34 percent in 2008). The percentage of retirees indicating they are very confident about paying for basic expenses has stayed level at 33 percent (statistically equivalent to the 34 percent observed in 2009).
•Financial aspects of retirement: The percentages of workers very confident about other financial aspects of retirement have held steady at 12 percent for medical expenses, 10 percent for long-term care expenses, and 21 percent for doing a good job of preparing for retirement. However, the percentages not confident continue to creep upward, from 44 percent in 2009 to 51 percent in 2010 for medical expenses, from 56 percent to 61 percent for long-term care expenses, and from 30 per- cent to 35 percent for doing a good job of preparing for retirement.
•Fewer are saving: Fewer workers report that they and/or their spouse have saved for retirement (69 percent, down from 75 percent in 2009 but statistically equivalent to 72 percent in 2008). Moreover, fewer workers say that they and/or their spouse are currently saving for retirement (60 percent, down from 65 percent in 2009 but statistically equivalent to percentages measured in other years).
•Ranks of those with no savings are growing: An increased percentage of workers report they have virtually no savings and investments. Among RCS workers providing this type of information, 27 percent say they have less than $1,000 in savings (up from 20 percent in 2009). In total, more than half of workers (54 percent) report that the total value of their household's savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000.
•Workers postponing retirement: One-quarter of workers (24 percent) report they have postponed their planned retirement age in the past year. Among the reasons cited for delaying retirement are the poor economy (29 percent of those postponing retirement), a change in their employment situation (22 percent), inadequate finances (16 percent), and the need to make up for losses in the stock market (12 percent).
•Later retirement expected: Although the age at which workers report they expect to retire shows little change from 2009, a longer-term look finds significant change. In particular, the percentage of workers who expect to retire after age 65 has increased over time, from 11 percent in 1991 to 14 percent in 1995, 19 percent in 2000, 24 percent in 2005, and 33 percent in 2010.
•Institutional confidence: Americans continue to lack confidence in institutions. They are most likely to express confidence in private employers (23 percent of workers and 27 percent of retirees very confident) and least likely to feel confidence in the federal government (11 percent of workers and 8 percent of retirees). Just 19 percent of workers and 22 percent of retirees report they are very confident about banks, while 12 percent of workers and 13 percent of retirees say they are very confident about insurance companies. Moreover, the percentages of retirees somewhat confident about banks (45 percent, down from 51 percent in 2009), insurance companies (42 percent, down from 56 percent), and the federal government (30 percent, down from 45 percent) are declining.
•Clueless about savings goals: Many workers continue to be unaware of how much they need to save for retirement. Less than half of workers (46 percent) report they and/or their spouse have tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement.
•Some reality testing on savings needs: The savings goals cited by workers who have done a retirement needs calculation have increased over time. In the 2000 RCS, 31 percent said they needed to accumulate at least $500,000 for retirement. This percentage gradually increased to 43 percent in 2005 and 54 percent in 2010.
•Investing confidence ticks up: Those who have saved for retirement have recovered some confidence in their ability to invest their savings wisely. Thirty-two percent of workers indicate they are very confident (up from 24 percent in 2009) and another 54 percent are somewhat confident. Retirees who have saved for retirement show a similar rebound in confidence that they are investing their savings wisely, with 82 percent saying they are very or somewhat confident (up from 70 percent in 2009).
•Sources of retirement income: Over time, the RCS has observed changes in workers' expected sources of retirement income. In particular: fewer workers are expecting to receive retirement income from Social Security (77 percent, down from 88 percent in 1991) and defined benefit plans (56 percent, down from 62 percent in 2005). However, more workers report they will rely on employer-sponsored retirement savings plans (75 percent in 2010, up from 69 percent in 2005) and employment income (77 percent, up from 70 percent in 2005).
•Guaranteed income products: Few workers report they are likely to purchase a financial product or select a retirement plan option that pays them guaranteed income each month for the rest of their life. Only 11 percent indicate they are very likely to do so, while 35 percent say they are somewhat likely. Only 14 percent of retirees report they purchased a guaranteed-income product or selected a guaranteed-income option from a retirement plan.
Methodology

These findings are part of the 20th annual Retirement Confidence Survey (RCS), a survey that gauges the views and attitudes of working-age and retired Americans regarding retirement, their preparations for retirement, their confidence with regard to various aspects of retirement, and related issues. The survey was conducted in January 2010 through 20-minute telephone interviews with 1,153 individuals (902 workers and 251 retirees) age 25 and older in the United States. Random digit dialing was used to obtain a representative cross section of the U.S. population. To further increase representation, a cell phone supplement was added to the sample.

In theory, the weighted sample of 1,153 yields a statistical precision of plus or minus 3 percentage points (with 95 percent certainty) of what the results would be if all Americans age 25 and older were surveyed with complete accuracy. There are other possible sources of error in all surveys, however, that may be more serious than theoretical calculations of sampling error. These include refusals to be interviewed and other forms of nonresponse, the effects of question wording and question order, and screening. While attempts are made to minimize these factors, it is impossible to quantify the errors that may result from them.

About EBRI and MGA

EBRI is a private, nonprofit research institute based in Washington, DC, that focuses on health, savings, retirement, and economic security issues. EBRI does not lobby and does not take policy positions. http://www.ebri.org/

Mathew Greenwald and Associates, Inc., is a full-service market research company with expertise in financial services research. Founded in 1985, Greenwald & Associates has conducted public opinion and customer-oriented research for more than 150 organizations, including many of the nation's largest companies and foremost associations. http://greenwaldresearch.com/

Manufacturing Demand

2010-03-01T14:34:00.000-08:00

Will home sales fall off a cliff once the latest version of the homebuyer tax credit expires? Experts vary on the precise impact of the credit, and on what will happen when it ends. But most agree the credit created a big wave of sales pulled forward in time to when the housing market really needed a boost.

Mortgage Banking
March 2010

By Robert Stowe England

The homebuyer tax credit--all three versions adopted since its first effective date of April 1, 2008--is widely believed to have boosted overall home sales at a time when the housing market was in a deep slump.

At this point, opinions vary on the extent of the boost, while early data support the view that the credit has had a positive impact. But the big question that remains, is how much of future sales were pulled forward in time, leaving the period after the credits expire badly starved for demand.

"Tax credits like this are designed to essentially pull demand forward," explains Jay Brinkmann, chief economist with the Mortgage Bankers Association (MBA). "So, I don't think anyone thinks that it creates new potential homebuyers out of thin air."

The tax credit is intended to influence people who were prepared to buy next year or the year after, and induce them to buy the home earlier in order to receive the benefit of the credit, according to Brinkmann. One of its goals is to reduce the excess inventory of homes on the market and provide some price stabilization "with the realization that it is a short-term event," he says.

To read more, click this link to Mr. England's web site:

http://robertstoweengland.com/index.php/writer/304-manufacturing-demand

How to Profit From the Rising Dollar

2010-02-28T15:56:00.000-08:00

CPA Chris Wachtel at Seeking Alpha provides a helpful catalogue of the combination of fears and hopes that are driving the dollar higher. Importantly, he notes, the dollar's strength results form its 'relative' stronger position among a host of weak currencies, including the dollar.

Wachtel is the chief analyst for AVAFX, a leading online trading site for global currency, commodity, and stock index trading, at http://www.avafx.com/

Here's a key quote from his Seeking Alpha post:

The ramifications are chilling. The default of any of the PIIGS could well send borrowing rates for the others beyond affordable rates, effectively setting off a wave of defaults. Remember that the collapse of Lehman Brothers bank alone was enough to crash credit and asset markets in the fall of 2008. Imagine the panic caused by the collapse of Southern Europe.

That alone is enough to explain US dollar strength.

The Zombification of Fannie and Freddie

2010-02-18T12:14:00.000-08:00

Peter J. Wallison of the American Enteprise Institute has outlined several alternative futures for Fannie Mae and Freddie Mac, from nationalization to privatization. Unfortunately, the most likely outcome is that they will return as Government-Sponsored Enteprises and sow the seeds for yet another bailout in the future. Only privatization can stop the dead GSEs from returning as zombies.

By Robert Stowe England
February 18, 2010

In the current issue of Financial Services Outlook, Peter J. Wallison of the American Enteprise Institute lays out alternative future scenarios for Fannie Mae and Freddie Mac, both of which are currently under the conservatorship of the federal government.

The January-February 2010 issue of Financial Services Outlook, devoted entirely to Wallison's article, can be found at this link: http://www.aei.org/docLib/01JanFSOg.pdf

Wallison assesses the probability of each scenario and the likely outcome if that scenario is realized.

Nationalization

The first scenario is a complete government takeover, which would require that Fannie and Freddie's losses, which are likely to be at least $400 billion, be accounted for in the federal budget.

Fannie Mae was, in fact, converted into a Government-Sponsored Enterprise in 1970 in order to get its losses off the federal budget at the time of rising deficits. Enormous political pressure is likely to be brought to bear to prevent the nationalization of Fannie and Freddie, according to Wallison.

Public-Utility Structure

Under this approach Fannie and Freddie would be GSEs privately owned by banks or other private shareholders but would function like public utilities. Under this model, Wallison contends, the GSEs would no longer hold a portfolio of mortgages and mortgage-backed securities.

The borrowing would not be backed by the government. Wallison argues that mortgage securitization requres differential pricing to deal with differential risk among borrowers. Congress is likely to interfer in this pricing in such a way that higher quality mortgages will subsidize lower quality mortgages. This would make it easy for private sector competitors to undercut the higher GSE mortgage rates, which over time, would leave the GSEs with mortgages "skewed to the risky end of the curve," he writes.

Congress would likely confer some advantage to the GSEs to prevent this outcome, such as guaranteeing its mortgage-backed securities or giving it a monopoliy over a section of the market -- or both, Wallison claims. These guarantees would have to be scored in the budget and would amount to a high subsidy. Political forces are likely to suppress guarantee fees unduly. "With these fees too low for the risk involved, regulated utilities will eventually become insolvent," he contends.

Restoration as GSEs

Wallison explains why GSE's have always been so popular. "They appear to provide free money for purposes for which Congress would normally have to appropriate funds," he writes. GSE's can borrow with the implicit backing of the federal government and can be directed to spend their funds on policies and programs favored by Conbgress. Further, "GSEs can spend without the hassles of troublesome public reporting," Wallison notes.

The GSEs are likely to return to the practice of doing favors for important members of Congress while Congress pressure the regulator to weaken underwriting to service favored constituencies. Wallison points out that Rep. Barney Frank, Chairman of the House Financial Services Committee, has backed the elimination of Fannie and Freddie -- but not without Congress coming up with "a whole new system of housing finance." Wallison thinks the new system, not yet even on the horizon and likely years away from formation, will turn out to be the old system.

Wallison argues, then, that the "restoration of Fannie and Freddie as GSEs seems the most likely direction Congress will take once the housing-finance market stabilizes." It has in its favor the course of least resistance, while other alternatives are likely to be seen as "a leap into the unknown."

Congress is likely to argue that with better regulation under the Federal Housing Finance Administration, a future bailout will be prevented. That argument appears weak, as highly-regulated banks had to be bailed out .

The GSEs "are founded on a false premise: that private companies can perform a government mission," Wallison writes. "This cannot be true." The reason is that private companies must seek profit while a public mission requires devotion to that mission.

Wallison cites Professor Dwight Jaffee to back up his assertion that regulation is not enough; that in fact, "regulation needs the assistance of effective market discipline."

Wallison quotes Professor Jaffee as follows:

The flaw -- and I believe the fatal flaw -- with any and all plans to reconstitute the firms as GSEs is that they leave the inherent incompatibility of a private firm with a public mission. We have learned from first-hand experience that the incentive of a GSE with a government guarantee, implicit or explicit, is to expand its size and risk-taking as much as possible, and that these incentives ultimately dominate any public mission. I believe that the reestablishment of new GSEs will inevitably end with a new government bailout.

Citation: Dwight M. Jaffee, “The Future Role of Fannie Mae and Freddie Mac in the U.S. Mortgage Market” (paper presented at AEA/AREUEA session “The Future of the GSEs,” Atlanta, GA, January 3, 2010), 2, available at www.aeaweb.org/aea/conference/program/retrieve.php?pdfid=299 (accessed February 4, 2010).

Privatization

Wallison argues that only privatization can avoid the moral hazards, failures and future bailouts for any institutions like Fannie and Freddie.

Wallison contends that the private sector was prevented from developing a prime mortgage securitization business because Fannie and Freddie drove out all the competition with their low-cost, government-backed competition. He suggests that once the securitization market has returned to normal, the government should privatize Fannie and Freddie while they are still in conservatorship.

In order to accomplish the privatization, Fannie and freddie will have to gradually sell of their $1.5 trillion in mortgages and mortgage-backed securities. This can be done over time, following the pattern of the sales of the savings and loans' assets accomplished by the Resolution Trust Corporation.

As for Fannie and Freddie's guarantees, Wallison recommends that they be handled through the process of defeasement. Defeasance is a technique by which a debtor unit removes liabilities from its balance sheet by pairing them with financial assets, the income and value of which are sufficient to ensure that all debt service payments are met.

As Treasury acknowledges losses that were guaranteed, it should "defease the continuing obligation on the GSE's guaranteesby placing them in a trust."Wallison states. Treasury will place risk-free Treasuries into the trust to cover potential losses.

Fannie and Freddie can then begin the process of allowing private sector competitors to take over the market by slowing reducing the conforming loan limit guarantee, currently at $730,000 for single hamily homes in expensive markets. As the limit moves toward zero, the private sector will gradually take over the entire market.

Wallison has done an excellent job of laying out the alternatives and the potential outcomes for each choice. Perhaps a new Congress next year, elected to bring Washington spending under control, will be in more of a mood to face honestly the task of winding down Fannie and Freddie to prevent their resurrection as permanent zombies kept afloat by taxpayers in perpetuity.

Given the spectacular failure of Fannie and Freddie as GSE's, surely champions of privatization can emerge in Congress to pursue the right course.

© 2010 Robert Stowe England. All Rights Reserved.

Barofksy Says Bank Bailouts Raised Systemic Risk

2010-01-31T14:48:00.000-08:00

Neil Barofsky, in his 224-page quarterly report to Congress as the Special Inspector General for TARP, argues that the extraordinary efforts taken to rescue banks in the 2008 financial meltdown, have inadvertently created a situation where a future crisis will be even worse.

Read the entire report, released January 30, 2010, at this link:

http://www.sigtarp.gov/reports/congress/2010/January2010_Quarterly_Report_to_Congress.pdf

Read FoxNews.com story on the report at this link:

http://www.foxnews.com/politics/2010/01/31/watchdog-bailouts-created-risk/

Below is a section of the Executive Summary that is particularly insightful:

It is hard to see how any of the fundamental problems in the system have been addressed to date.
• To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.
• To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.
• To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current
bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.
• To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.
Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.

Better Late Than Never

2010-01-30T10:11:00.000-08:00

AIG in a filing with the Securities and Exchage Commission has finally released a detailed list of the derivatives contracts covered by bailout funds provided in the fall of 2008 to AIG by the federal governement. The payouts went through AIG to holders of credift default swaps against underlying Collateralized Debt Obligations (CDOs) worth $62 billion.

By Robert Stowe England
January 30, 2010

American International Group, Inc. (AIG) released Friday a schedule of Collaterized Debt Obligation (CDO's) that were made public two days earlier by a release of the same information by Rep. Darrell Issa (R-CA).

The list includes all the derivatives contracts in a federal bailout of AIG to make whole $62 billion in CDOs at big Wall Street firms and large banks around the globe who had purchased Credit Default Swaps from AIG as insurance against the CDO's.

Many of the CDO's were loaded with mortgage-backed securities written on pools of mostly subprime loans.

Under an agreement brokered by the New York Fed between AIG and the counterparties on Oct. 31, 2008, the counterparites agreed to terminate the derivatives, which were then sold to a new entity set up by the New York Fed and titled Maiden Lane III LLC.

The counterparties retained the collateral they had required AIG to post with them against the CDO's covered by the credit default swaps.

Maiden Lane III received equity and loans from the New York Fed to purchase the underlying CDO's at a discounted value, spelled out in Schedule A's five pages listing of each transaction. In turn, Maiden Lane III entered into a Shortfall Agreement with AIG, whereby AIG would pay any shortfall on the CDO's.

Holders of the CDO's were made whole at 100 percent from bailout funds from the federal government, an arrangement that has become controversial and was the focus of hearings before the House Oversight and Government Reform Committee where Treasury Secretary Timothy Geitner was grilled at length about it.

In an amended 8-K filing January 29, AIG wrote:

Due to the recent public disclosure of the full contents of Schedule A to the Shortfall Agreement, dated as of November 25, 2008, and as amended as of December 18, 2008, between Maiden Lane III LLC and AIG Financial Products Corp., American International Group, Inc. is filing this Amendment to Form 8-K in order to file an unredacted version of Schedule A. Pursuant to an SEC order granting confidential treatment, the information previously redacted from Schedule A qualified as confidential commercial or financial information under the Freedom of Information Act.

The complete list of swap transactions with the values of underlying CDO's can be found at this link:

http://www.sec.gov/Archives/edgar/data/5272/000095012310006481/y81800bexv10w1.htm

Copyright © 2010 by Robert Stowe England. All Rights Reserved

Progress Report on Loan Modifications Shows Little Progress

2010-01-16T11:17:00.000-08:00

In a story titled "Paperwork Woes Plague Mortgage Plan," in the weekend (January 16-17, 2010) edition of the Wall Street Journal, the accompanying chart appears. It is based on data provided by the Treasury Department.

The chart is intended to capture the extent to which banks have move to modify loans that are eligible for loan modifications under the Obama Administration's loan modification program, which subsidizes lower interest rates on existing loans eligible for the program.

From a quick look at the chart, it would appear that the lenders with the fewest number of loans eligible for the program have made the most permanent modifications. Permanent modifications occur after a trial period when homeowners who qualify for the program make regular payments on time for their new modified loans.

For example, GMAC Mortgage has the highest rate of permanent modifications on the fewest number of eligible loans. Bank of America has one of the lower rates of permanent modifications on the highest number of loans. Wells Fargo Bank has made more progress than J.P.Morgan Chase Bank. CitiMortgage lags even further behind.

CNBC: Federal Reserve Purchased 80% of Treasury Issues in 2009

2010-01-12T15:13:00.000-08:00

News anchor Erin Burnett's throw-away line that the Fed had purchased 80% of new Treasuries goes unchallenged in this discussion on January 8. I'm not sure on what basis that claim is made. Can anyone explain? The Fed's target for Treasury purchases was $200 billion. Treasury issues are far, far higher than that.

New York Fed Told AIG Not to Disclose Counterparty Payments

2010-01-07T11:52:00.000-08:00

In emails from the New York Fed obtained by California Republican Darrell Issa's office, the New York Fed told AIG not to disclose the payments AIG was making to counterparties when the Fed was bailing out AIG.

By Robert Stowe England
January 7, 2010

Officials from the New York Fed in emails in December 2008 pressured AIG not to disclose how much was paid to counterparties in the federal government bailout of AIG earlier that year.

Normally, such information would be disclosed in an 8-K filing by AIG.

The emails were obtain by Representative Darrell Issa, California Republican, and released to the press yesterday.

Under a bailout deal overseen by then New York Fed Chairman Timothy Geithner, the government agreed to provide 100 cents on the dollar for credit default swaps that were worth considerably less.

Through the bailout, full payment on the notional value of the credit default swaps were made by AIG to Goldman Sachs, Societe Generale and other counterparties.

The actual emails can be seen at this link :

http://www.scribd.com/doc/24899682/E-mails-from-N-Y-Fed-to-A-I-G-to-Not-Disclose-Counterparty-Payments

The payment of full value by AIG to its counterparties on credit default swaps was also criticized by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and reported by Mind Over Market at this link:

http://mindovermarket.blogspot.com/2009/11/new-york-feds-backdoor-bailout-of-aigs.html

Further, Goldman Sachs played a starring role in the entire bailout. Many many of the bailed out positions made by AIG's 100 percent reimbursement, both at Goldman and other counterparities, were written against derivatives underwritten by Goldman Sachs.

See story here: http://mindovermarket.blogspot.com/2009/11/tavakoli-goldman-sachs-played-starring.html

A Capital Dilemma

2010-01-06T12:20:00.000-08:00

It’s a tough time for community banks to raise capital – and the regulators aren’t making it any easier.

By Robert Stowe England
Banking Strategies Magazine
January 1, 2010

For community banks scrambling to raise capital, the propensity of federal regulators to raise the goal posts in the middle of the game makes the task increasingly onerous.

Case in point is Normal-based Bank of Illinois, a two-branch community bank with $235 million in assets which, back in May 2009, possessed a risk-based capital ratio of just over 10%, just above the regulatory requirement for a well-capitalized bank. This ratio, established in guidelines from the Federal Reserve, is the ratio of total risk-adjusted capital (tier one and tier two) to risk-adjusted assets.

Then, in May, a joint visit by the Illinois state bank regulatory agency and the Federal Reserve came with a demand that the Bank of Illinois increase its loan-loss reserve to cover potential losses on commercial real estate, which dropped the risk-based capital ratio below 10%, according to President Larry Maschhoff.

To read more, click this link:
http://www.bai.org/bankingstrategies/compliance-and-regulatory/law-and-regulation/a-capital-dilemma