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:

Wednesday, January 6, 2010

A Capital Dilemma

It’s a tough time for community banks to raise capital – and the regulators aren’t making it any easier.

By Robert Stowe England
Banking Strategies Magazine
January 1, 2010

For community banks scrambling to raise capital, the propensity of federal regulators to raise the goal posts in the middle of the game makes the task increasingly onerous.

Case in point is Normal-based Bank of Illinois, a two-branch community bank with $235 million in assets which, back in May 2009, possessed a risk-based capital ratio of just over 10%, just above the regulatory requirement for a well-capitalized bank. This ratio, established in guidelines from the Federal Reserve, is the ratio of total risk-adjusted capital (tier one and tier two) to risk-adjusted assets.

Then, in May, a joint visit by the Illinois state bank regulatory agency and the Federal Reserve came with a demand that the Bank of Illinois increase its loan-loss reserve to cover potential losses on commercial real estate, which dropped the risk-based capital ratio below 10%, according to President Larry Maschhoff.

To read more, click this link:

Sunday, January 3, 2010

Q&A with FHA Commissioner David Stevens

The Federal Housing Administration is making tough choices to help shore up the government program from weaker loans made in years past. A mortgage industry veteran is at the helm shaping the policy changes.

By Robert Stowe England
Mortgage Banking
January 2010

David H. Stevens was sworn in as assistant secretary for housing at the Department of Housing and Urban Development (HUD) and commissioner of the Federal Housing Administration (FHA) on July 15, 2009, and is responsible for overseeing the $600 billion FHA mortgage insurance portfolio and HUD’s multifamily subsidized housing program. The commissioner also oversees HUD’s regulatory responsibilities under the Real Estate Settlement Procedures Act (RESPA).

Prior to his appointment, Stevens was president and chief executive officer of the Long & Foster Companies, Inc., in Chantilly, Virginia. Further, he has an extensive background in mortgage finance. He served as executive vice president and national wholesale manager at Wells Fargo Home Mortgage in Des Moines, Iowa, and was a senior vice president in single-family business at Freddie Mac. Stevens spent 16 years at World Savings Bank, where he began his career. He is a graduate of the University of Colorado at Boulder.

Mortgage Banking caught up with Stevens at his office in the HUD building in southwest Washington, D.C., recently, where this interview was conducted.

Q: There are some who have taken to referring to the FHA lending program as “the new subprime.” How do you respond to those comments and is there any truth to that assessment?

A: I think those who refer to it as the new subprime are creating an unnecessary and irrational judgment about the FHA program. Nothing could be further from the fact. Where subprime was characterized by extremely low credit quality, adjustable mortgages, 2/28s with a fairly significant payment increase in the early period, limited or sometimes no income documentation or otherwise . . . the FHA portfolio is very different. It’s 100 percent 30-year, fully amortized fixed-rate. It’s [a] 100 percent fully [documented] mortgage portfolio. It’s a primary residence-only [mortgage portfolio]. No second homes, no investor properties, and the average credit score has risen to near 700.

An FHA loan is for shelter. The fact it’s owner-occupied, and you look at the average loan size, these loans are not for speculation or investment. And much of the subprime and alt-A product was originated either for speculative purposes or originated with no documentation or originated using variable-rate loans that didn’t amortize at all or had significant spikes in either the rate, payment or both within their early period.

FHA was only . . . at 2 1/2 percent of the mortgage market in 2007, while subprime and alt-A combined were near 50 percent of the market. This reflects the fact that FHA didn’t compete with those kinds of programs for a reason. It’s a pretty boring product--fully documented, 30-year fixed, owner-occupied, primary residence.

To read more, go this link and register at no cost to have access to all items on Mr. England's Web site: