Mind Over Market

The deal dynamics in the 'securitization process' expanded the overall level of subprime lending and boosted the degree of risk in subprime residential mortgage-backed securities (RMBS) deals, according to a Fed working paper analysis of 1,267 securitization deals between 1997 to 2007. A new SEC rule in 2004 that, on paper, increased capital in five large broker-dealer banks -- Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley -- led to greater demand for lower credit quality subprime mortgage purchases. The evidence in deals from these investment banks in 2005 suggest they engaged in ‘ratings arbitrage’ to bring to the secondary market the lowest cost subprime loans that could earn an AAA investment rating, according to the Fed authors. By Robert Stowe England MindOverMarket.blogspot.com July 30, 2009 The securitization process – how loans are put together and assigned credit ratings – drove up the flow of credit in subprime residential mortgage-ba...

Shanghai officials June 23 announced they were mounting a campaign to encourage couples to have two children instead of one. The policy applies to couples where each party is a single child. Since the fertility rate in Shanghai is 0.8 percent and has been very low for many years, most new marriages are between men and women who have no siblings and, thus, are eligible for the new two-child policy. The allowance for couples to have two children if each had been an only child was actually adopted in 2004. It generated a modest boost in the low birth rate but not enough to reach goals for overall births set by officials. By embracing and encouraging couples to have two-children, Shanghai has officially moved beyond the one-child policy to a two-child policy. The idea of having more children is a policy aimed at addressing the problems posed by an aging population in Shanghai, which now has nearly 22 percent of its population 60 and over. See story from China Daily in Beijing at this link...

After spiking dramatically higher in April and May, the pace of defaults for the most troubled area of the mortgage market -- non-conforming mortgages -- slowed significantly in June, according an analysis of performance data on jumbo prime, Alternative-A, and subprime loans by Five Bridges Advisors. Default rates should steadily rise until they peak in the first quarter of 2010. By Robert Stowe England MindOverMarket.blogspot.com July 22, 2009 The pace of credit deterioration for securitized prime, Alternative A (Alt-A or low documentation), and subprime mortgages – which had accelerated in April and May – slowed “significantly” in June, according to an analysis of home loan performance data from Black Box Logic, LLC by Five Bridges Advisors, LLC. Both firms are based in Bethesda, Maryland. “The irregular and extreme spikes of recent months were conspicuously absent in June,” reports Mortgage Flash , which is published monthly by Five Bridges. Nevertheless, during June default rates f...

Despite recent financial turmoil, 71 percent of employers say they will focus on ensuring the long term viability of their defined benefit plans, according to a survey by CFO Research Services and Towers Perrin. The remaining 29 percent are focused on finding an alternative to their defined benefit plan. The steep downturn, however, has "qualified" employer commitment, as 51 percent also say they are more likely to seek an exit strategy from their defined benefit plan. By Robert Stowe England MindOverMarket.blogspot.com July 17, 2009 The faith of 71 percent of private sector employers in the company’s traditional defined benefit plan may have been severely shaken, but it has not been broken, according to the results of a new survey. For 29 percent of employers, however, the financial turmoil and recession have left them focused on finding an alternative retirement benefit for their employees in the coming years. These findings are from a survey of 439 employers in the United ...

Treasury today added a new wrinkle to the Obama Administration's proposed financial regulatory overhaul: All hedge funds and investment advisors with more than $30 million under management will have to register with the SEC. Despite the fact that no hedge funds had to be bailed out in the financial meltdown, Assistant Treasury Secretary Michael Barr said in an address that hedge funds need to be regulated because their deleveraging contributed to the financial crisis and regulators need to be able to identify potential systemic risk from the world of hedge funds. By Robert Stowe England mindovermarket.blogspot.com July 15, 2009 Michael Barr, assistant secretary for financial institutions, today revealed a new item on the Administration's refinancial regulatory reform agenda: the regulation of hedge funds. Hedge funds and investment advisors above the $30 million threshold will have to register with the Securities and Exchange Commission and be required to disclose to regulators...

Congress should compel over-the-counter (OTC) derivatives dealers to publish monthly the pricing models they use or register the models with the Securities and Exchange Commission, says risk analyst Christopher Whalen. Such disclosure will, he contends, reduce the complexity of derivatives. Even so, an outright ban would work better to eliminate the "horrible damage" they have inflicted on the global financial system, he argues in responses to 33 questions submitted by the chairman and ranking member of a Senate panel following his testimony last month. In his answers to Senators' questions, Whalen also opposes the agreement between the New York Fed and the derivatives dealers to clear trades through the Intercontinental Exchange (ICE), a start-up he says is controlled by the banks and which shares half its profits with the banks. This agreement, while ostensibly putting in place a necessary clearinghouse mechanism, fails to run trades through an independent exchange, suc...

The markets for over-the-counter (OTC) credit default swaps (CDS) and collateralized debt obligations (CDOs) can never overcome their opaque and complex nature; further, they were designed to hoodwink potential purchasers and to obscure their essentially fraudulent nature, according to risk analyst Christopher Whalen. CDS and CDO's provide supersized financial returns to the Wall Street dealers who construct them while imposing a tax on the financial system, the global economy and the public, Whalen contends. Rather than spread risk, as claimed, they are the chief source of systemic risk and Congress should ban them forever, he recommends. All other OTC derivatives need to be brought under the regulation of the Commodity Futures Trading Commission, he adds. By Robert Stowe England mindovermarket.blogspot.com July 9, 2009 (Updated July 10, 2009) As Congress tackles the issue of regulatory reform of the financial system, the most important thing it can do is to ban over-the...

According to an analysis by the San Francisco Fed, the American economy may be facing a jobless recovery similar to the one after the 1991 recession. Two current trends suggest such an outcome: an increase in the rate at which workers settle for involuntary part-time employment and a decline in the rate of temporary layoffs. The San Francisco Fed’s earlier expectation in May was that unemployment could peak at 11 percent in mid-2010 -- significantly higher than the consensus forecast of 10 percent by early 2010. Given the accelerating pace of joblessness, an updated analysis based on the factors cited by the San Francisco Fed would suggest that the peak might be even higher at 11.5 percent or 12 percent. By Robert Stowe England mindovermarket.blogspot.com July 1, 2009 (Updated July 2 with new unemployment data) An analysis of labor market data suggests that this recession may be followed by a jobless recovery like the one following 1991 rather than a sharp rebound in hiring that occurr...