Friday, December 10, 2010

C-Span Interview with Janet Tavakoli

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:

Sunday, November 28, 2010

The Day the Dollar Died

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?

Wednesday, November 17, 2010

"Did You Hear About the Fed?"

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:

Saturday, October 23, 2010

Geithner's Dollar Gambit

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.

Friday, October 22, 2010

A Pictorial of Obamacare

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:

You can download at high resolution version of the graphic at this link:

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

Tuesday, September 28, 2010

Wheaton: Housing Market Will Come Roaring Back

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.

Sunday, September 19, 2010

Household Wealth Losses Pared to $12.3 Trillion

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:

The Flow of Funds data can be found at this link:

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

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.

Saturday, September 11, 2010

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

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.”

Wednesday, September 1, 2010

Senator Corker and the Dodd-Frank Bill

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:

Saturday, August 21, 2010

Barney Frank v. Barney Frank

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

Wednesday, July 28, 2010

CBO Says Huge Deficits Risk New Financial Crisis

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:

Tuesday, July 27, 2010

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

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:

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.

Saturday, July 24, 2010

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

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.

Thursday, July 22, 2010

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

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:

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.

Monday, June 28, 2010

Las Vegas Developer Blasts Washington on CNBC

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.

Monday, June 14, 2010

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

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.

Monday, June 7, 2010

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

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:

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.

Sunday, May 16, 2010

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

This 54 minute video was posted May 13 and by early May 18, it had 265,973 hits on YouTube at this link:

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."

Tuesday, May 11, 2010

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

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."

Sunday, May 2, 2010

The Long and Winding Road to GSE Reform

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:

Friday, April 30, 2010

Chanos Calls for Investigation into AIG, Lehman

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."

Saturday, April 24, 2010

Senator Levin Releases Goldman Sachs Emails

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:

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:

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.

Thursday, April 22, 2010

Wallison: Obama's Financial Reform Plan Aims To 'Control Yet Another Sector of the Economy'

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:

Wednesday, April 21, 2010

The Story of the CDO Market Meltdown

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 ABS 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 issued, 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:

Sunday, April 18, 2010

Bill Moyers Interviews Simon Johnson and James Kwak on Wall Street Abuses

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:

Friday, April 16, 2010

Did the Government Pay J P Morgan Chase 5 Basis Points to Borrow $271 Billion?

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:

Monday, March 29, 2010

Mortgage Reset Nightmare Recedes

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:

Tuesday, March 9, 2010

Retirement Slip Sliding Away for More Americans

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:

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

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.


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.

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.

Monday, March 1, 2010

Manufacturing Demand

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:

Sunday, February 28, 2010

How to Profit From the Rising Dollar

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

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.

Read more at this link:

Thursday, February 18, 2010

The Zombification of Fannie and Freddie

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:

Wallison assesses the probability of each scenario and the likely outcome if that scenario is realized.


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 (accessed February 4, 2010).

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.

Sunday, January 31, 2010

Barofksy Says Bank Bailouts Raised Systemic Risk

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:

Read story on the report at this link:

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.

Saturday, January 30, 2010

Better Late Than Never

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:

Copyright © 2010 by Robert Stowe England. All Rights Reserved

Saturday, January 16, 2010

Progress Report on Loan Modifications Shows Little Progress

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.

Tuesday, January 12, 2010

CNBC: Federal Reserve Purchased 80% of Treasury Issues in 2009

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.

Thursday, January 7, 2010

New York Fed Told AIG Not to Disclose Counterparty Payments

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 :

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:

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: