Thursday, December 31, 2009

IMF: Mortgage Lenders That Lobby Washington Do Riskier Lending and Have Higher Delinquencies

An International Monetary Fund study finds a significant correlation between lobbying by mortgage lenders in the United States and the prevalence of riskier loans and higher delinquencies in markets where lobbying lenders increased their level of lending faster than non-lobbying lenders.

By Robert Stowe England

December 31, 2009

The International Monetary Fund (IMF) has released a working paper that examines the relationship between lobbying by mortgage lenders and the performance of loans in markets where lobbying lenders originated mortgages.

The working paper is titled “A Fistful of Dollars: Lobbying and the Financial Crisis” and authored by economists Deniz Igan, Prachi Mishra, and Thierry Tressel.

It is posted at this link:

The study analyzes detailed information on lobbying and mortgage lending activities.

For loan data, the study relies on data complied under the Home Mortgage Disclosure Act (HMDA) of 1975. This data is collected by the Federal Reserve Board from 9,000 lenders in 378 Metropolitan Statistical Areas (MSAs).

The IMF study found that “lenders lobbying more on issues related to mortgage lending had higher loan-to-income ratios, securitized more intensively, and had faster growing portfolios,” the report states.

More specifically, the study finds, “delinquency rates are higher in areas where lobbyist lending grew faster.”

The study states:

The estimated effect is economically significant: a one standard deviation increase in the relative growth of mortgage loans of lobbying lenders is associated with almost a 1 percentage point increase in the delinquency rate.

The study also finds that lobbyist lenders “experienced abnormal stock returns during key crisis events” – namely, the lobbyist lenders had sharp declines in stock values during the crisis events of 2007 and 2008.

The loan-to-value measure was seen by the IMF authors as a proxy for lending standards. The recourse to securitization and the rate of growth in lending were also seen as potential measures of risky lending.

Data Analysis

The authors also looked at possible explanations for the link between lobbying and risky lending.
“Our findings indicate that lobbying is associated ex-ante with more risk-taking and ex-post with worse [loan] performance,” the authors conclude.

“This is consistent with several explanations, including a moral hazard interpretation whereby lenders take up risky lending strategies because they engage in specialized rent-seeking and expect preferential treatment associated with lobbying,” the study reports.

“Such preferential treatment could be a higher probability of being bailed out, potentially under less stringent conditions, in the event of a financial crisis,” the authors state.

“Another source of moral hazard could be ‘short-termism,’ whereby lenders lobby to create a regulatory environment that allows them to exploit short-germ gains.”

The authors also explore other explanations for the poorer loan performance of loans originated by lobbying lenders. One is that the lenders “may specialize in catering to borrowers with lower income levels and originate mortgage that appear riskier ex ante, with a higher incidence of default in a downturn.”

The authors also consider one possibility that lobbying lenders may be “over-optimistic” about their prospects and “may lobby more intensively against a tightening of lending laws to exploit expected profit opportunities because they underestimate the likelihood of adverse events.”

While reasons not related to moral hazard “cannot be definitely ruled out,” the authors say that additional tests of the data suggest they alternative explanations “may be less likely to be valid.”
The results of the study “provide suggestive evidence that the political influence of the financial industry might have the potential to have an impact on financial stability,” the authors state.

Even so, the authors caution that “it is hard to distinguish whether it is rent-seeking or information-revealing that drives lobbying by the financial industry.”

Copyright © 2009 by Robert Stowe England. All Rights Reserved.

Saturday, December 26, 2009

Treasury Moves Raise Questions about Expanded Role for Fannie Mae and Freddie Mac

A Treasury announcement Christmas Eve raises a lot of questions about the future of Fannie Mae and Freddie Mac.
  • Is the Administration planning a future where the two companies become permanent government agencies?
  • Is the Administration laying the groundwork to expand the capacity of the two agencies to retain more mortgages and buy more mortgage-backed securities?
  • Is the Administration planning to ramp up loan modifications involving principal reductions, which would mean more near-term losses for Fan and Fred?

Those are some of the questions posed by mortgage industry consultant Ed Pinto.

By Robert Stowe England

December 26, 2009

Treasury released a statement on changes affecting the role of Fannie Mae and Freddie Mac on Christmas Eve, a time when they might be expected to escape more intense press scrutiny.

"The timing of this executive order giving Fannie and Freddie a blank check is no coincidence," Rep. Spencer Bachus (R-Ala.), ranking minority member on the House Financial Services Committee, told the Wall Street Journal. It was done "to prevent the general public from taking note."

The policy changes deserve close public scrutiny.

First, and foremost, the cap on the amount of money Treasury will invest in preferred stock has been removed. It was set at $200 billion each for Fannie and Freddie in September 2008 under the Preferred Stock Purchase Agreements (PSPAs) that were adopted to ensure that each agency maintained a positive net worth.

As the Treasury stated it in its press release:

Treasury is now amending the PSPAs to allow the cap on Treasury's funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years. At the conclusion of the three year period, the remaining commitment will then be fully available to be drawn per the terms of the agreements.

So far, Treasury had provided $51 billion to Freddie Mac and $60 billion to Fannie Mae through the third quarter of 2009.

As Treasury stated it:

The amendments to these agreements announced today should leave no uncertainty about the Treasury's commitment to support these firms as they continue to play a vital role in the housing market during this current crisis.

Secondly, Treasury is amending the prior agreement concerning the level of mortgage-backed securities that can be retained by Fannie and Freddie. In September 2008, a cap of $850 billion was set for the end of 2009.

Treasury has now raised the cap to $900 billion for 2010 and beyond.

Further, the original agreement called for a gradual reduction on Fannie's and Freddie's holdings of mortgages and mortgage-backed securities, which have been the chief source of huge losses for the two mortgage agencies.

The ultimate goal was to reduce each company's retained mortgage and mortgage-backed securities portfolio by 10 percent a year until it reaches $250 billion. It was capped at $850 billion. The scheduled reductions will now begin from a peak of $900 billion in 2010.

Here's the text on the changes to the caps:

Treasury is also amending the PSPAs to provide Fannie Mae and Freddie Mac with some additional flexibility to meet the requirement to reduce their portfolios. The portfolio reduction requirement for 2010 and after will be applied to the maximum allowable size of the portfolios – or $900 billion per institution – rather than the actual size of the portfolio at the end of 2009.

While this policy appears to be a bit cryptic, Treasury explains it as follows:

Treasury remains committed to the principle of reducing the retained portfolios. To meet this goal, Treasury does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of their retained mortgage portfolios, but neither is it expected that active selling will be necessary to meet the required targets. [The Federal Housing Finance Agency] will continue to monitor and oversee the retained portfolio activities in a manner consistent with the FHFA's responsibility as conservator and the requirements of the PSPAs.
It appears that the two government-sponsored enterprises (GSEs) will not actually be required to sell securities to reduce their overall holdings. Nor does it appears they wil be retaining more mortgages or buying mortgage-backed securities.

Instead, the policy suggests that the potential decline could occur through attrition of the portfolio holdings (due to a range of activities from refinancings to loan payoffs when houses are sold).

Thirdly, Treasury announced that the program established in September 2008 to allow for the purchase of Fannie and Freddie-guaranteed mortgage-backed securities will end December 31. Treasury expects to have purchased approximately $220 billion of securities across a range of securities through this program.

Preliminary Plan

Treasury also indicated in its statement that the Administration is "reviewing issues around longer term reform of the federal government's role in the housing market," and will provide a preliminary report on its vision for the future of Fannie and Freddie in February when a budget is released for 2011.

The Treasury statement tried to reassure taxpayers and investors that the Administraiton remains intent on sound mortgage underwriting standards for not only Fannie Mae and Freddie Mac, but also for the Federal Housing Authority.

Treasury also indicated in its statement that it anticipated a return to a larger role for the private sector, without defining what that role might be beyond having the private sector expand its purchases of mortgage-backed securities at the same the government and Federal Reserve reduce their purchases.

The Federal Reserve has kept the mortgage-backed market strong and interest rates low for more than a year due to its commitment to purchase $1.2 trillion in mortgage-backed securities issued by Fannie and Freddie.

The Fed purchase program is supposed to end in March, raising concerns about higher interest rates crimping the potential for a recovery in the housing sector.

The entire text of the Treasury announcement can be found at this link:


Christmas Eve was also the timing for announcements from Fannie and Freddie on the compensation packages for senior executives.

Fannie Chief Executive Officer Michael Williams and Freddie CEO Chalres Haldeman Jr. will receive about $6 million each, including bonuses. FHFA and Treasury approved the pay packages.

The compensation packages are down by 40 percent from prior to conservatorship, according to FHFA.

The packages also do not include any stock options for the two companies, whose shares have remained severely depressed. Fannie Mae (ticker symbol FNM) closed at $1.05 December 24, while Freddie Mac (ticker symbol FRE) closed at $1.26.

The Treasury and GSE pay package announcements were made after the stock markets closed early at 1 p.m. December 24.

Questions Raised

Mortgage market guru Edward Pinto, who was chief credit officer at Fannie Mae from 1987 to 1989, has issued a statement indicating the types of questions he thinks are raised by the Christmas Eve announcements.

For one thing, the announcements may suggest that Treasury and FHFA are expect rising losses (and bailout costs for Fannie and Freddie) from the Homeowner Affordable Housing Program or HAMP loan modification program, Pinto says.

Pinto asks if the HAMP program might be refocused to incorporate principal reductions, with sharper short-term losses, and not just lower interest rates, which spread losses out over time.

The announcements also raise the possibility that the Obama Administration plans to keep Fannie and Freddie as government-owned companies and does not intend to try to return them to the private sector, according to Pinto. The failure to pay the top executives in stock options raises this issue, he explains in a statement, which is printed at the end of this story.

Raising the portfolio limits to $900 billion (from $850 billion) allows Fannie and Freddie combined to purchase up to $275 billion in mortgage-backed securities, enough to continue that program for four or five months at the same pace that has been maintained by the Federal Reserve over the course of the last year.

Also, by raising the level of the federal government's financial (and bailout) commitment to Fannie and Freddie, Treasury may be setting the stage for Fannie and Freddie to expand their role in purchasing mortgage-backed securities, Pinto says.

These efforts may be intended to keep interest rates from rising so high that it puts a damper on the recovery underway in the housing sector.

Further, changes in the way banks are required to set aside capital reserves for holdings of mortgage-backed securities (not included in the Treasury announcement) could increase demand for those securities, according to Pinto.

Pinto's statement appears below.

Copyright © 2009 by Robert Stowe England. All Rights Reserved.


What the Treasury’s lifting of the bailout caps on Fannie and Freddie might portend for 2010

Might Treasury be taking these steps in anticipation of the following?

1. Revisions to the flagging Homeowner Affordable Housing Program (HAMP). Any changes will likely increase near term bailout costs to Fannie and Freddie if HAMP’s current reliance on interest reduction is replaced in part by principal reduction. The losses associated with a modification of a loan using an interest rate reduction are spread out over time while a modification using principal reduction results in taking a more immediate loss.

2. Fannie and Freddie taking on a greater role in the near term to support their own mortgage backed securities (MBS). Now that the Treasury’s and the Federal Reserve’s own support programs are in the process of winding down, the administration’s actions may be preparing Fannie and Freddie as the vehicles for continuing this support. The Treasury’s December 24, 2009 announcement raises the portfolio limits to $900 billion each, thereby providing Fannie and Freddie with the ability on a combined basis to increase their portfolios by a total of $275 billion. At the current rate of the Fed’s MBS purchases, this new capacity would last about 4-5 months.

3. Fannie and Freddie growing their portfolios on a long term basis to provide continued support to the MBS market. Given the recent uptick in mortgage rates due to increasing Treasury rates, the lifting of the bailout caps may be designed to reassure investors in an effort to keep MBS spreads from widening relative to Treasury rates. By providing a more open ended capital commitment, along with the greater portfolio capacity now, Fannie and Freddie are in a position to grow their portfolios early in 2010. If the market accepts their purchases without wider spreads, then even higher portfolio dollar limits can be created with the stroke of a pen;

4. The administration’s announcement in February regarding the future role of Fannie and Freddie. In a separate press release also issued on December 24, 2009 it was revealed that the executive pay packages at Fannie and Freddie do not include a common stock component. This fact, along with the lifting of the bailout caps and the expanded portfolio capacity, may well indicate an intention to formalize Fannie and Freddie’s continued status as government agencies. If this were to happen, Fannie and Freddie’s outstanding common stock likely becomes worthless, making it of no use as an employee incentive. This action would be justified by stating that Fannie and Freddie are just too important to the economic recovery to re-privatize.

5. Increasing the demand for Fannie and Freddie’s MBS by reducing the multiplier for bank risk based capital requirements from 20% to 10%. This action would help serve to keep spreads to treasuries narrow. Banks would only need 0.8% risk based capital to support their holdings of Fannie Freddie MBS versus the 1.6% needed today. The earlier noted lifting of Treasury’s capital support caps could provide the justification for this reduction in capital requirements, since it signals an increase in the government’s commitment to Fannie and Freddie.

The above actions would preserve and strengthen the government’s involvement and control over the country’s housing finance system and make it harder to reintroduce substantial private sector involvement later on. They would also continue distortions in the marketplace leading to who knows what unintended consequences. Finally these steps would do nothing to deleverage the housing finance system, a key step in returning it to any degree of normality.

Edward Pinto
Consultant to the housing finance industry and former
chief credit officer
at Fannie Mae from 1987-1989.
Voice: 240-423-2848
Fax: 301-229-2848

Sunday, December 13, 2009

Rob Johnson: Too-Big-To-Fail Dragon Not Slain in House Financial Regulatory Reform Bill

In the financial regulatory overhaul bill that passed the House December 11, insufficient regulation of over-the-counter (OTC) derivatives 'renders impotent' the enhanced resolution powers aimed at making sure large financial institutions are not too big to fail, according to economist Robert Johnson.

By Robert Stowe England

December 13, 2009

The Wall Street Reform and Consumer Financial Protection Act that passed the House of Representatives December 11 on a 232-202 party-line vote fails to attain its intended objective to rid the regulatory regime of the moral hazard of too-big-to-fail.

Thus, the bill, known in Capitol Hill short-hand as H.R. 4173, does not protect the tax payer from future financial crises when regulators will once again be compelled to bail out major financial institutions that fail, economist Robert Johnson has told Mind Over Market.

The complete text of the interview with Johnson, who is the Director of Financial Reform at the Roosevelt Institute in New York, appears at the end of this article.

The bill also leaves unshaken the power of big Wall Street firms to shape legislation to suit their objectives and to protect their interests and ability to earn outsized profits in the lucrative over-the-counter derivatives business, according to Johnson.

“There’s really nothing in the legislation that’s got a lot of teeth in it vis-à-vis the financial sector,” Johnson said.

Johnson, who also serves on the United Nations Commission on Experts on Finance and International Monetary Reform, testified October 7 before the House Financial Services Committee on behalf of Americans for Financial Reform, a consumer and labor coalition.

You can read Johnson's prepared testimony at this link:
Links to the testimony of other witnesses on over-the-counter derivatives are found at this link:

How would Johnson rate the House bill over?

“[With] the crisis as a backdrop, the second largest in history . . . , second only to the Great Depression – in light of that magnitude of crisis, and we’re talking trillions of dollars of lost output, bailouts, and what have you, I have to give this bill very close to a failing grade overall,” Johnson said.

The failure to adequately regulate OTC derivatives means that regulators will again be unable to monitor and detect to what extent derivatives have lost value and pushed a financial institution into insolvency, said Johnson.

“People remind me that Lehman Brothers went out of business one week after they claimed they had eleven percent capital,” he said, referring the failure of the Wall Street firm in September 2008.

The collapse of the firm sent shock waves through the financial markets and led to a a liquidity and credit freeze that threatened to plunge the nation into a economic catastrophe.

Johnson said the derivatives provisions fail on several accounts. The bill tolerates large end-user exemptions, which means that many end users, such as hedge funds, are not subject to the restrictions in the bill that require that OTC derivatives serve a purpose in mitigating risk for the end-users who purchase them.

The legislation tolerates large off-balance sheet presence for derivatives, which means a situation can develop that can turn a company into a future Enron before it is detected.

The bill also tolerates mark-to-model pricing rather than mark-to-market pricing, which allows users to conceal their losses until that they become so large they can endanger the institution.

All these shortcomings mean that financial institution regulators will be “sailing in the fog without a chart, or at least [without] a significant set of navigational tools,” Johnson said.

“And I think that creates more risk for the taxpayer because you can wake up one day and find out somebody’s under water like Lehman Brothers,” he added.

Further, the bill does not provide sufficient deterrence in requiring Treasury to impose certain losses against future risk taking that could lead to a large potential bailout, according to Johnson.

“They need to know on good days [that] if I ever get caught going down, it’s going to hurt,” Johnson said.

Steps that should be taken by a regulator in resolving the problem should be clear in advance and the rules hard and specific: allowing for turning debt into equity, zeroing out or severely reducing equity, and initiating claw backs of deferred compensation before ever calling on the taxpayer for resources, according to Johnson.

To improve deterrence, the bill should have a requirement for an international agreement, which is needed for Treasury to be able to act in dealing with large multinational financial institutions doing business in the United States.

For more commentary on the need for an international agreement, see interview by CBOE News with William Brodsky, Chairman and CEO Chicago Board Options Exchange Chairman and Chairman of the World Federation of Exchanges, which can be seen at this link:

Derivatives Regulation

The effort to devise significant derivatives regulation was derailed by intense lobbying by Wall Street firms, according to Johnson.

What was left in the bill contained enormous loopholes and exemptions – to the point that it does little to change the existing situation, Johnson explained

“Systemically significant institutions can exploit those loopholes in order to continue their opaque, complex, over-the-counter [derivatives] behavior relative to bringing what some Senators have called the dark market into the light,” he said.

End users, too, can “grow into Enron, or grow into large speculative organizations that can do a lot of damage,” Johnson added.

What surprised Johnson is that end-users who testified before the House Financial Services Committee, firms that have at times been victims of OTC derivatives that have blown up in their faces and caused enormous financial harm, more or less supported the expansion of loopholes and exemptions in the bill sought by major Wall Street firms.

“I think the Chamber of Commerce and other large end user institutions were in cahoots a little bit with the banks,” said Johnson.

He explained: “Goldman Sachs didn’t want to carry its own message, given how unpopular they’ve been, but the end users or their counterparties and customers appeared to be willing to do so.”

Johnson had expected end-users of OTC derivatives to want to see a more transparent market, which would, all other things being equal, tend to reduce the cost of the insurance provided by the derivatives, he explained.

Johnson suspects that the inherent subsidy provided to too-big-to-fail institutions by taxpayers reduces the cost of the OTC derivatives when they are sold to end-users; and that subsidy is large enough that some of the cost saving can be passed on to the end-user.

“In other words, people over use insurance because it’s too cheap and then can buy too much of it,” he said.

The shortcomings of the House bill mean that the current power of Wall Street remains intact and that a flawed arrangement continues in place, according to Johnson.

One is taught in economics that the financial sector is there to meet a social goal to support the economy. However, over time, that has changed through the ability of Wall Street firms to obtain legislation and regulation that enhances their role in the economy, according to Johnson.

“What we’ve seen at some level is [that] what I would call the servant’s servant has become the master’s master,” Johnson remarked. “Finance is now making rules through its ability to manipulate the legislature through what I will call rent-seeking activity.”

Wall Street and the financial sector, are, in essence, “using the government [to assure and enhance] its profitability . . . to the detriment of the society as a whole,” Johnson said.

Wall Street is able to do this because specialized concentrated interests have disproportionate power against large and diffuse interests, such as the public good, he asserted.

“So, if you put the taxpayer against the top five Wall Street banks, you find they are on schedule through OTC derivatives to make $35 billion this year,” said Johnson.

If there were a better regulatory environment that shed light on the opaque and complex world of OTC derivatives, then it might cost Wall Street firms $7 billion a year in lost profits, Johnson estimated.

What sort of derivatives regulation does Johnson suggest to address the concerns he raised?

Johnson said he would have legislation set up the Commodities and Futures Trading Commission Chairman as the arbitrator through public hearings of anything that was an exemption to the rules that determine what “would qualify as a proper use of OTC derivatives.”

Through hearings, the CFTC would likely allow for foreign currency exchange products and interest rate swaps, many of which are plain vanilla, direct that they be priced and recorded frequently to improve their standardization and transparency in the market.

“By the time you start doing synthetic collateralized debt obligations (CDOs) [you] may end up de facto outlawing them, because they can’t be priced and measured on a frequent basis,” said Johnson.

The decision on whether or not these products would be seen as legitimate for end users would be made through a hearing process by the CFTC and jointly with the Securities and Exchange Commission when it involved derivatives tied to equities or stock indexes.

Credit Rating Agencies

The House bill also neglects the problems surrounding credit rating agencies, gave top investment grate ratings to securities that later turned out to be toxic assets.

Johnson said it surprisef him that the House bill failed to include reform of the credit rating system. The current arrangement, where the seller of the derivatives pays for the rating, is widely seen as flawed.

“If you are going to have seller payments, there needs to be like a claw back or a deferral or some kind of basis upon which wrong estimates cost the rating agencies money,” said Johnson.

Credit Default Swaps

Johnson also said the bill fails to deal adequately with issues surrounding credit default swaps, the derivative insurance contract that brought down AIG.

The legislation exempts hedge funds from any restrictions on speculating through credit default swaps against the failure of a given company. Thus, hedge funds can still “use CDS in bear raids,” Johnson said.

This hedge fund exemption is “like you can take an insurance policy on someone else’s life and you also have a permit to get a gun to shoo them,” Johnson said, recalling how controversial fund manager George Soros described the arrangement recently.

“I think there’s the role for . . . creating insurance for credit risk, but I think this market structure was extremely out of balance and a renegade rebel,” he stated.

“It had, as we learned, some very toxic side effects for society as a whole, and I think the legislation should have done one hell of a lot more to repair that structural malady.”

Copyright © 2009 by Robert Stowe England. All Rights Reserved

Q&A with Robert Johnson
December 12, 2009

Robert Johnson is the Director of Financial Reform at the Roosevelt Institute. He serves on the United Nations Commission of Experts on Finance and International Monetary Reform. Previously, Dr. Johnson was a managing director a Soros Fund Management, where he managed a global currency, bond and equity portfolio specializing in emerging markets. He has also been a managing director at the Bankers Trust Company. In Washington, he served as chief economist of the U.S. Senate Banking Committee in the 1980s under the leadership of Chairman William Proxmire (Wisconsin Democrat). Johnson, who received his M.A. and Ph.D. in economics from Princeton University, is on the Board of Directors of the Economic Policy Institute and the Institute for America’s Future. Mr. England caught up with Dr. Johnson Saturday morning December 12, shortly after his return to New York from a trip to London.

Robert England: What do you think of the Wall Street Reform and Consumer Protection Act which passed the House of Representatives Friday, December 11?

Rob Johnson: What I would say is . . . some people are very encouraged by the consumer financial protection dimension. I myself, while I welcome that, do not think that’s the essence of the matter. And, I’m somewhat sympathetic [to how the reform affects] the smaller banks. The money center banks – the too-big-to-fail banks – blew up and now the regulatory burden is being placed on the smaller institutions and the crux of the problem – too-big-to-fail resolution powers and [over-the-counter] derivatives regulation of those largely systemically risky institutions is not at the center of what’s being reformed. And I think that’s a valid criticism. On the other hand, I do think there is a basis for [having a Consumer Financial Protection Agency] – not unlike the Food and Drug Administration. So, I would guess I would say, on net, one could welcome the CFPA provisions, but that’s not sufficient for feeling good about the bill.

With regard to the resolution powers that the House has passed, my sense is that they are not sufficient. They are an improvement. But, there are three elements of resolutions, as I see, thematically. The first one might be called deterrence. The second might be called detection, meaning when a bank or financial institution goes through the – we’ll call it like in football – goes past the goal line of solvency or low levels of capital that require restructuring, you have to be able to measure what I call detection. You have to know when the institution is there [that is, insolvent]. This will get to derivatives in a second. And then the third is the actual resolution – in other words, once somebody is impaired. So, deterrence, detection and resolution are the three pieces I’d have.

My sense is that the derivatives regulation feeds into this and I tried to write a little bit about this in my testimony [before the House Financial Services Committee October 7], that when things are opaque and complex, no matter what resolution powers you have, when the Treasury Secretary comes up on deck, he’s actually what you might you call induced to forbearance because they can’t imagine unwinding this entangled spider web. And, most of the models that look at this resolution power kind of structure imagine an isolated bank. But, as we saw last year, when the oligopoly of large institutions gets into trouble, maybe to differing degrees, but they’re all in trouble and they can all take each other down. So, the idea of let’s say insufficient derivatives regulation – and we’ll explore that in a minute – impairs or impedes or renders impotent resolution powers.

Robert England: OK.

Rob Johnson: The second piece is one [that] probably needs international agreement to make resolution powers effective because most of the institutions that we’re talking about as too big to fail, or as they are called, systemically significant, have a large international presence. And, if you’re going to restructure the capital structure, do debt-equity conversions, wipe out equity, and so forth, one has to be very careful that there’s an international agreement where this can be done to creditors across the spectrum. And I didn’t see that as being a feature of this bill. What I would say is that the level of resolution of my three pieces, it looks like to me like [the lack of] derivatives deterrence and international deterrence will make it hard [for a regulator] to invoke the resolution powers that were passed [in the House bill].

When I talk about detection, you can only assess that companies’ capital and therefore their fitness, if you can measure their assets and value those assets. And, we’ve just experienced in this country a long period of what we call mark-to-model, complex and opaque derivatives which had largely fictitious prices. People remind me that Lehman Brothers went out of business one week after they claim they had eleven percent capital. You know, capital is a residual. You’ve got debt. You’ve got assets. And the difference between those is your net worth or your existing capital. And whatever people want to call accounting categories, if you’re overstating the value of assets, you’re overstating the value of capital.

If I’m a regulator and examiner, I have got to be able to understand the value of those assets or I don’t have any basis for informing people about how much capital the institution in fact has. So, when you have derivatives regulation that tolerates large end-user exemptions and tolerates large off-balance sheet presence and tolerates mark-to-model rather than mark-to-market pricing, you are essentially as management and as supervisory examiner or regulator, it’s like you’re sailing in the fog without a chart, or at least not a significant set of navigational tools. And I think that creates more risk for the taxpayer because you can wake up one day and find out somebody’s under water like Lehman Brothers, to a much greater degree than would be necessary [to invoke] what the FDIC calls prompt corrective action [and thereby protect the taxpayer].

And then when I talk about deterrence, I would like to have seen resolution powers – let me just break this down for a second. When it comes to resolution powers, what deterrence means is that people know they will be penalized if they cross the goal line ex ante. They need to know on good days [that] if I ever get caught going down it’s going to hurt.

Robert England: The goal line being solvency.

Rob Johnson: The goal line being solvency, yes. What you want to see in terms of the ethic of our society, what you want to create for the Treasury secretary or whoever is the captain of the ship is the most discretion possible in order to handle whatever the particulars are of the crisis that comes up. On the other hand, a lot of people are very critical of how the previous Treasury secretary and for that matter the existing one when he was at the New York Fed handled the most recent bailout.

In that climate of low trust, they don’t want to hand discretion to that ultimate resolution authority, probably the Treasury secretary. They want to create rules, which means zeroing out of equity, or at least diluting equity significantly, claw backs on deferred compensation, firing of management and restructuring of senior debt where it’s converted to equity before you ever touch the taxpayer. In other words, rather than giving discretion to the Treasury secretary where he engage in crony capitalism, they want rules which are clear to all before hand, so they can price the various elements of the capital structure, according to the risk, but knowing that if you cross the goal line, you’re going to get a hair cut and pay a price.

At any rate, that’s a long-winded expression. But, basically there is not enough deterrence in the absence of derivative regulations. Measurement is very difficult. And, in the absence of derivatives regulation and an international agreement on burden sharing and resolution, it’s very hard to invoke the resolution powers.

As a result, coupled with the idea that the Fed plays the leading role, for the most part, I see this bill has having done little to markedly change the behavior of large systemically significant financial institutions. What I’m saying by that [is that] the pain of this episode will change organically how managements act and the Fed certainly won’t have the cavalier attitude that it did during the Greenspan era, but there’s really nothing in the legislation that’s got a lot of teeth in it vis-à-vis the financial sector.

Robert England: That explanation is very helpful. I appreciate the long answer. Now, getting to the derivatives themselves.

Rob Johnson: My impression, looking at the amendments that failed, is that the end-user exemption, let’s just say, generically, contains within it two types of major dangers. One is that the systemically significant institutions can exploit those loopholes in order to continue their opaque, complex, over-the-counter behavior relative to bringing what some Senators have called the dark market into the light. I’m speaking here pertaining to the large too-big-to-fail institutions that draw on the taxpayer.

The second danger is the end-users themselves, in what you might call grow into Enron, or grow into a large speculative organization that can do a lot of damage.

And, so my impression of the attempts after the original markup of the House Financial Services and House [Agriculture Committee] markups, the attempts by consumer groups, labor unions, others, like this group Americans for Financial Reform that I testified on behalf of, to negotiate with [Commodities and Futures Trading Commissioner Chairman] Gary Gensler, but really not Gary Gensler, he was supporting the same philosophy we were, but to negotiate with [House Financial Services Committee] Chairman [Barney] Frank, [Massachusetts Democrat], and [House Agriculture Committee] Chairman [Collin] Peterson, (Minnesota Democrat], those efforts largely failed.

And what I mean by failed; I want to be very careful. Chairman Frank and Chairman Peterson did not make promises that they did not deliver on, but they set in motion a process, because of the strength of lobbying power, where what we identified as healthy modifications, meaning narrowing the scope of end-user loopholes for large financial institutions or narrowing the scope vis-à-vis the activities of a proper end user, in other words, of becoming a speculative enterprise like Enron, that the set of amendments and the negotiations with new Democrats were largely resolved in favor of the new Democrat who sought to enlarge the scope of those loopholes.

Robert England: So, the –

Ron Johnson: You might say the endeavors that started my testimony and I did another version for [Senator] Blanche Lincoln [Democrat of Arkansas] – the Senate side is still a work in progress – but suggestions about what you might call the harm that could be done, which, to his credit, and I’ve met with Chairman Frank, he and his staff recognized and sought to mitigate, but by and large, the banks won in this round.

Robert England: At the same time when he held hearings on derivatives, every witness before the committee represented large banks, didn’t they?

Rob Johnson: They represented the larger banks or they represented the end users which, in essence, were in quite significant negotiation with the large banks. In other words, I think the Chamber of Commerce and other large end user institutions were in cahoots a little bit with the banks.

Goldman Sachs didn’t want to carry its own message, given how unpopular they’ve been, but the end users or their counterparties and customers appeared to be willing to do so. I found that a little bit surprising, because my understanding of market structure is such that the more transparent market with real pricing, even if it involves some provision of margin, is usually much less expensive than dealing in an opaque OTC market. [In such an opaque market] you don’t see what you might see; [that is,] the alternatives available in such world. [In this environment where the is asymmetric information [between the market makers and the end-users], then market markers tend to make a lot more money [than they would if there were more transparency that gave the end-users a better idea of what they were buying].

And, so I was a little bit surprised. I knew there were some special cases. I heard of one with natural gas, where they didn’t think their future cash flows as a public utility would qualify like a letter of credit from a bank that would allow them to post margin. But, just a simple matter, I was surprised by the end users seeming to tolerate higher cost market structures and siding with the banks.

Robert England: Yes.

Rob Johnson: There is one way to resolve that logically. If the taxpayer is forced somewhat against his will, to subsidize the too-big-to-fail banks, essentially by providing the back stop insurance, then the insurance represented by derivatives hedges [is] far too cheap . . . reflecting that subsidy. And some of the benefit of the subsidy accrues to the market makers, the too-big-to-fail banks, and some of it may be passed on to the end users. In other words, people over-use the insurance [provided by OTC derivatives] because it’s too cheap and they can buy too much of it.

Robert England: I see

Rob Johnson: At the expense of the taxpayer ultimately, at least on a contingent –

Robert England: Turns out to be really much more expensive because the taxpayer bails out the losers.

Rob Johnson: Right

Robert England: But of course AIG was not reserving anything against losses when it provided its insurance against derivatives losses.

Rob Johnson: That’s right. They created mirage capital for the system and forced the Treasury secretary to make good on the capital they provided.

Robert England: If you had to give a grade to what has come out of the House, it seems to fail on all the major points.

Rob Johnson: I would give the overall bill – let’s say the crisis as a backdrop, was second largest in history, basically compared, second only to the Great Depression. In light of that magnitude of crisis, and we’re talking of trillions of dollars of lost output, bailouts, and what have you, I have to give this bill very close to a failing grade overall.

Robert England: Right.

Rob Johnson: I would say it’s not over, but the industry powers. . . what you and I really talking about is a malfunction in the political structure of representation. The same reason we got into the crisis -- which had to do with lack of regulation, lack of supervision, lack of enforcement, lots of changes in laws, starting in the 1980s -- is the same reason it’s difficult to repair our financial regulatory structure in the aftermath of the crisis – and that is the power of the financial institutions, which are not being treated as a means to an end; but, rather, they are being treated as an end in themselves.

Robert England: By that you mean they provide financing for the economy.

Rob Johnson: When you’re taught economics, you’re taught that the economy is there as a mechanism to meet social goals. And it’s an efficient way to meet social goals, the market process. And you’re taught that finance is there to support the economy, what you might call facilitate commerce. And what we’ve seen at some level is what I would call the servant’s servant has become the master’s master.

And now finance is making rules through its ability to manipulate the legislature through what I will call rent-seeking activity, meaning using the government [to assure and enhance] its profitability. But really to the detriment of the society as a whole, and to what economists refer to as the logic of collective action, meaning specialized concentrated interests usually have disproportionate power relative to large and diffuse interests. So, if you put the taxpayer against the top five Wall Street banks, you find they are on schedule through OTC derivatives to make $35 billion this year; a healthier market structure might cost them $7 billion. But the population as a whole doesn’t have much incentive, meaning each individual, to actually stage that fight, whereas the five banks can band together through their lobbyists and prevail.

Robert England: It’s a hard thing for the public to understand.

Rob Johnson: Yes, that’s true, too.

Robert England: Forgetting for a moment what has been done in the House, what do we really need in terms of derivative regulation?

Rob Johnson: My impression is that when one looks at the explosion – I actually listened to Jean Claude Trichet from the European Central Bank speak about this two nights ago (December 10) at Cambridge University outside London. When you look at the explosion of derivatives from 1997 to the present, it’s very, very hard to understand the social function that would justify this like 15- or 20-fold increase. And it does appear that it may be related to a significant underpricing or mispricing of these products.

The under-regulation, if not non-regulation of many of these things, the non-supervision, allowed that public good called the financial system to become toxified with complexity and opaqueness so that when the system was shocked by the housing downturn, even the most able financial thinkers and regulators, like a Ben Bernanke, were absolutely stunned by how much, how violent and prolonged the downturn was. And what I would attribute that to is when you are very opaque and you know you have an adverse shock in the system, everybody becomes terrified that everybody else is a default risk, what they call counter-party default risk.

Robert England: Right.

Rob Johnson: And that freezing up of the capital markets was prolonged and deep and culminated in the evaporation of what I’ll call conjectural guarantees when Lehman was allowed to go bust. Everybody thought the government would save everybody that was big and then found out they weren’t going to, and it just sent the economy into a tail spin. And so, that opacity, you know people often talk about something called a public good, you know like the national defense is a public good, we all share the benefits of those protections.

Robert England: Right.

Rob Johnson: Opacity and complexity, which engenders fear in the financial system, which is supposed to be a public good, is actually a public bad. Now, when it comes to derivatives regulation, allowing all kinds of exemptions, allowing opacity, allowing non-regulation supervision, allowing market to model rather than what I’ll call market-tested pricing on a frequent basis, contributes to that opacity, and it contributes to complexity and the inability to know about with any confidence the solvency of financial institutions.

It’s a little bit like once the system gets shocked, and everybody is talking about counterparty default risk, no institution even has the ability to disprove allegations that they are insolvent. The guys at Goldman Sachs and Morgan Stanley were really infuriated because they thought they were in pretty solid shape. But, if anybody looked at them and said prove it, they really couldn’t because their books were almost so complex they’re incomprehensible. I think that’s an example of when things are complex and opaque, nobody can understand who’s insolvent and who isn’t and once fear gets into the system, which clearly the housing downturn was a great catalyst for, but it’s not the only one, one could imagine, then the system ceases to function well.

Robert England: To the extent possible, we have to get rid of the complexity and opacity. Would that require banning over-the-counter derivatives?

Rob Johnson: I don’t know that if [the answer is] banning over-the-counter derivatives or very, very markedly narrowing their scope.

Robert England: How would you do that?

Rob Johnson: I would have made [Commodities and Futures Trading Commission Chairman] Gary Gensler the arbitrator through public hearings of anything that was an exemption, that would qualify as a proper use of OTC derivatives. I would basically tale foreign exchange products, major swaps – and a lot of that stuff is plain vanilla [and] I don’t want to pretend that all of that stuff is real dangerous – but I would have all those things priced and recording frequently. I think it’s relatively easy in plain vanilla interest rates and foreign exchange products. But, by the time you start doing synthetic collateralized debt obligations (CDOs), you may end up de facto outlawing them, because they can’t be priced and measured on a frequent basis. Each one of them is kind of an unusual custom combination that I would call roughly correlated with other baskets.

Robert England: Right.

Rob Johnson: But it’s not a homogeneous product and you might just have to forgo some of that in order to contribute to systemic integrity.

Robert England; But the decision would be done through a hearing process and a ruling by the CFTC.

Rob Johnson: The CFTC in the instance the Securities and Exchange Commission to the extent the derivatives were based on a stock.

Robert England: OK.

Rob Johnson: Or a stock index or something of that nature.

Robert England: Have you thought anything about how to resolve the mess that is our mortgage finance industry today?

Rob Johnson: My impression is that – and this is less an area of my expertise; I’m much more experienced at looking at large-scale financial institutions – but it appears to me what you want to call standards of measurement or scrutiny in forming these bundles, maintaining awareness of the components of the bundles, was essentially non-existent. That’s probably too strong. It was certainly not very strong. The capacity to analyze things, even if you had all the components, became more and more difficult as things were re-sliced and re-mixed. And . . . the last thing is that the rating agencies constituted what you might call the free pass that provided the lubricant for the entire process.

Robert England: There was nothing in the House bill about a significant reform of the rating agencies.

Rob Johnson: That surprised me.

Robert England: OK. They seemed to have gotten a free pass again so they can continue to give passes --

Rob Johnson: By the way, there’s a really interesting thing coming up here. Berkshire Hathaway, Warren Buffet’s company, bought the big municipal bond insurance company, MBIA or whatever, from the early parts of the crisis. And that company also owns Moody’s [Investors Service, the credit rating agency]. And as our state and local governments experience increasing distress, and Berkshire Hathaway has been the writer through the company that it owns, of a lot of insurance, it will be interesting to see how Moody’s behaves, vis-à-vis downgrades that could negatively impact the balance sheet of their parent company.

Robert England: What sort of credit rating system would be ideal?

Rob Johnson: I think right now, the credit rating system [is one] where the seller pays for the quality. [Economics professor] Alan Blinder of Princeton [University], in a private conversation, he said ‘You know, Rob, when you were my student, it would be like you could come up and pay me for your grade.’ It is kind of silly that the sellers get to tell you the value of what it is they are trying to sell. So, I guess I would say, if you are going to have seller payments, there needs to be like a claw back or a deferral or some kind of basis upon which wrong estimates cost the rating agencies money. The other possibility is to go public or nationalize the rating agency function, saying this is another public good of providing information. I think that’s fraught with some difficulties, not the least of which is this whole lobbying influence we’ve talked about earlier.

Robert England: Right.

Rob Johnson: A good friend of mine from another country said to me the other night, he said, ‘You know Rob the problem you have is you guys have to nationalize the government.’ [Laughter] I thought that was pretty good.

Robert England: Well, there have been a lot of jokes about Wall Street firms owning the government.

Rob Johnson: But I think the rating agency reform is certainly a formidable dimension of [the problem.] One could almost ask why in God’s name do these people on the buy side trust the rating agencies. It’s almost as if they got a validation of what they wanted to do, which was reach for higher yield. And they didn’t really care what the truth was.

Robert England: There’s probably some truth to that. They were told a good story and they wanted to believe it.

Rob Johnson: That’s kind of where . . . the macro influences of the Asian imbalances depressing Treasury yields set in motion this whole system for enhancing yields. So, the micro balance of payments malfunction affected the macro [imbalances with Asian countries]. Actually guys I work with at the United Nations told me interesting stories about how it was really the behavior of the [the International Monetary Fund] and the U.S. Treasury in the 90s and restructuring of the Asian economies that led them to say never again. They amassed these reserves so that they [would not have to] submit themselves to the discipline of the so-called Washington consensus. That, in turn, drove down those interest yields, and the driving down of the interest yields set the appetite in motion for all of the new financial insurance.

Robert England: Is there anything else relevant to the problems posed by derivatives that we should discuss?

Rob Johnson: One of the things we didn’t cover is the idea of only being able to insure an insurable risk. Credit default swaps are not being adequately reformed in light of the AIG episode and others that we’ve experienced. Most of the hedge funds guys in New York are quite surprised the CDS market is not coming in for much, much greater structural changes [in the regulatory reform bills before Congress].

Robert England: Is there anything in the House bill that affects credit default swaps?

Rob Johnson: I haven’t been through the final version of the bill, but my impression that this ability to speculate on insurance, what my former boss George Soros said last week, it’s like you can take an insurance policy on someone else’s life and you also have a permit to get a gun to go shoot them. [Laughter] He was talking about the ability to use CDS in bear raids. I think there’s the role for what you might call creating insurance for credit risk, but I think this market structure was extremely out of balance and a renegade rebel. It had, as we learned, some very toxic side effects for society as a whole and I think the legislation should have done one hell of a lot more to repair that structural malady.

Robert England: The hedge funds are excluded from any of the rules so they can still do all they did before.

Rob Johnson: It seems. The other thing, I would say, I’m very surprised, and this comes from the 1980s -- I worked as the chief economist on the Senate Banking Committee when Bill Proxmire was the chairman, during the ’87 stock market crash and the prelude to the S&L bailout -- I am absolutely stunned by how little the Federal Reserve is doing right now to prescribe modifications and structural changes that would fortify our financial system. Now I know they are under a lot of heat from the bailouts and all that kind of stuff. But, I’ve really been – you might say my jaw is gaping that the Fed hasn’t been a bigger proponent for protecting society from the Wild West activities of our largest institutions in this most recent period. I really think they’ve fallen down on the job.

Robert England: Of course they really didn’t have a handle on what was happening ahead of the game either.

Rob Johnson: I think in the Greenspan era there was a philosophical blind spot, which to his credit Alan Greenspan has actually acknowledged. He has talked about that.

Robert England: He didn’t quite specify what he thought the flaw was that he had discovered in the functioning of free markets [in testimony in the House in the fall of 2008]. But, I think the point he failed to understand is that free markets don’t work if they are not transparent.

Rob Johnson: Right. They need boundaries. They need rules. They need enforcement.

Robert England: When it’s all so opaque and complex, no one knows what’s going on.

Rob Johnson: Well, the price signals aren’t conveying anything that helps society allocate resources. In a very simple schematic I used to give power points shows, for instance, when everything went bust. And I said what are the real big problems? And the two I come out to are leverage and complexity. And, if you said what makes a firm profitable, it’s profit margin times volume. In finance, leverage is volume and profit margin increases with complexity.

So you have a system when finance is running the economy rather than serving the economy, where to enhance their profitability they have a temptation towards excessive leverage and excessive complexity, particularly when the downside is mitigated by the tax payer. It’s kind of mixture of complexity, leverage and moral hazard where the moral hazard is a turbo-charger of the leverage.

But the complexity turbo-charges the downturn, the depth and duration, when everybody gets scared about that counterparty default risk. And, it’s really up to society to make markets work for it. Markets are a public good. Instead what we’re tending to do is protect businesses who provide large campaign contributions. And where I’m most troubled, my final thought to share with you. It looks to me like large financial institutions are buying what I call refracted insurance. Instead of paying premiums [for proper insurance] they are paying politicians, they are paying lobbyists on a contingent basis to mitigate their losses.

And, then the mainstream media, to some degree, gets advertising revenue from these firms, particularly the ones that have a consumer franchise, like Bank of America and Citibank and they are also getting media expenditures [through advertising] in the campaign seasons. A lot of these cable stations would go under if they didn’t have the media expenditures of political candidates. We’ve got a weird system right now, where they pay premiums to the politicians, perhaps to the media for the media to look the other way, and for the politicians to use the tax base, bail them out when they have a problem. But, the people who are providing the guarantees are never the same people who are what you might call collecting the premiums. That’s a failed political system.

Robert England: Yes. It’s very astute of you to see that. And you express it so well. I watched the whole mortgage industry go up in smoke, which helped me realize what a disaster the whole system is. Nearly every major institution has been wiped out or acquired.

Rob Johnson: Yes, everybody was a little bit penny wise and pound foolish in this episode. Probably the overarching thing that’s very important right now, I really want to resist the temptation to demonize people too much right now. There’s an old saying in legislative back rooms you either the repair the system because the system was bad or you cut off heads of people because the system was good but the people were bad apples.

And, what concerns me right now, if we divert our energy to say that guys at Goldman Sachs are immoral or this or that, in my opinion that’s missing the point. A young man who gets out of college, comes out of Princeton, and Goldman Sachs offers him $400,000 a year and if he applies his skills to journalism he gets $60,000. The question is, is he evil for doing that? You can always say we have moral license. At some level you need to change the rules where the best and brightest kids make about the same thing working in investment banking as they do in other meaningful endeavors in life. The system is set up to pay Goldman Sachs too much. But that doesn’t mean that an individual who is a partner at Goldman Sachs is a bad person.

Robert England: I think that’s a very important distinction. The public wants to vilify a company or an individual rather than take an approach thhat presents a proper and beneficial solution to the problem.

Rob Johnson: So, when we get diverted to demonizations, we actually are taking energy away from the structural reforms we need to do. Where this gets muddy, is that we elected our political officials in order to do rules for our society on our behalf. And when they kow-tow to the industry which is really part of the logic for their own survival, do they get burned at the stake, meaning not being re-elected and vilified? Is that justified or not?

At some level, when I talk to Senators, the population needs to change the campaign finance rules in order to free us from this. And we say, you need to change those campaign finance rules. Those campaign finance rules actually help incumbents stay in power because when you’re in power, you can sell policy to raise your war chest so you can deter powerful, meaningful significant opponent from taking you on. So, it’s a structurally messed up system. And just demonizing people and not re-appointing Bernanke really doesn’t change what is going on very much.

Robert England: OK.

Rob Johnson: Other than it scares people. When they start knocking off heads, people start to duck and maybe change their behavior a little bit. But, to me, it’s not a meaningful what you might call channeling of our social energies after all the pain and evidence of the dysfunction.

Robert England: Good point there. Thank you so much for taking time to talk about these issues with me.

Rob Johnson: On the question of diverted insurance or refracted insurance, I wrote a piece for The American Prospect on financial risk and mitigation of risk in this bad insurance structure in our society. If you want to cite that, it’s public domain.

Note: Robert Johnson's article from The American Prospect can be read at this link:

Copyright © 2009 by Robert Stowe England. All Rights Reserved

Tuesday, December 8, 2009

81.5 Percent of Employers Continue or Raise Level of Matching Contributions to 401(k) Plans

Four out of five employers have maintained or increased their matching and non-matching contributions to their 401(k) plans during the Great Recession of 2008 and 2009, according to the Profit Sharing /401(k) Council of America. And, nearly half of all employers who reduced or suspended their match have either already restored the match or plan to restore it by the end of the next quarter.

By Robert Stowe England
December 8, 2009

The Chicago-based Profit Sharing / 401(k) Council of America surveyed employers who sponsor 401(k) and profit sharing plans in October and found that 76.8 percent made no changes to their matching contributions in 2008 and 2009, compared to the end of 2007.

An additional 4.7 percent of plan sponsors increased the employer match, bringing the share of surveyed companies that either maintained or increased their match to 81.5 percent.

Further, of 264 companies that offered a non-matching company contribution -- where the employer makes a contribution to the plan whether or not an employee makes a contribution -- 73.2 percent made no changes to their plan.

The council's survey of 508 plan sponsors from across the country found overall "a continued commitment by plan sponsors to their participants and by participants to the plan," according to the council's report of the survey.

The report is titled "Impact of Economic Conditions of 401(k) and Profit Sharing Plans." It can can be found at this link:

Not surprisingly, the survey also found that when companies suspended the employer's matching contribution, 72.9 percent of plans experienced a decrease in plan participation by employees. That is, fewer employees made contributions to the plan.

What is surprising, however, is that even in the midst of the worst recession since the Great Depression, 17 percent of plans had an increase in employee participation (employees contributions) even though there was no change in the employer match.

On the down side, 14.8 percent of employers suspended the match, while 3.7 percent reduced it. The economic fallout on non-matching contributions was greater, as 26.8 percent of companies surveyed suspended or reduced it.

For employees who work at a company that suspended or reduced the match, there is bit of good news. Within this group, 5.4 percent of companies have already reversed the reductions or suspensions, and another 41.3 percent plan to restore their match within the first quarter of 2010.

That means that during the next quarter nearly 47 percent or nearly half of those companies that had reductions or suspensions in matches will restore them.

Of those companies that have suspended or reduced their non-matching contribution, 5.5 percent have already restored it, and 30.6 percent plan to restore it within the first quarter of 2010.

The council also surveyed the impact of the economy on 403(b) plans and the findings of that survey, which are similar to those for 401(k) plans, can be found at this link:

Copyright (c) 2009 Robert Stowe England. All Rights Reserved.

Gerald Celente: Ben Bernanke Destroying Dollar, U.S. Economy and Should Not Be Re-Appointed

Gerald Celente on Ben Bernanke

By Robert Stowe England
December 8, 2009

Moscow-based RT, a 24/7 English language news broadcasting service, interviewed Gerald Celente, Director the Trends Research Institute, Kingston, New York, on whether or not Ben Bernanke should be confirmed for a new term as Chairman of the Federal Reserve. RT's Washington bureau reporter Cedric Moon conducted the interview via Skype broadband.

In the interview Celente charges that Bernanke should not be re-appointed to the Fed because he has been a failure as its Chairman and cited several instances where he got in wrong -- most importantly by igniting a bailout bubble that will be worse than the real estate and mortgage-finance bubble that occurred because of the mistakes made when Alan Greenspan was Chairman of the Fed.

Celente declines to offer another name for Fed Chairman, noting the choice is made by Wall Street insiders to protect their own interests. Citing Timothy Geithner's position as Treasury Secretary and his former position as New York Fed Chairman, Celente says, "Wall Street is Washington. Washington is Wall Street."

Monday, December 7, 2009

Richard Bove Talks About Q4 2008 Run on Banks

Richard Bove, a financial strategist at Rochdale Securities, was a keynote speaker at The Deal Economy 2010 conference, held November 18-19, 2009 at the Union League Club in New York City. In this video Bove speaks about the run on the banks in the fourth quarter of last year.