Monday, December 17, 2012

David Tepper: The Fed Expects Inflation Will Not Be Triggered Until Unemployment Falls to 6%

In an interview on CNBC's Squawk Box December 17, 2012: David Tepper, president & founder, Appaloosa Management, says what the Fed has done helped the markets. He also says he believes the Fed sees a 6 percent unemployment rate is the trigger for inflation. He also says Obama's legacy will be defined by entitlement reform.

Friday, November 30, 2012

ECRI’s Achuthan: Ignore GDP and the Fiscal Cliff, U.S. Is Already in Recession

Aaron Tasker of the Daily Ticker Interviews Lakshman Achuthan November 29, 2012:

The U.S. economy grew 2.7% in the third quarter, up from a previously reported 2% the government reported Thursday. But the guts of the report raised some concern, notably a big increase in inventories and a big downward revision to consumer spending.

For most economists, the GDP report provides further evidence of a U.S. economy that's growing modestly, but far from robustly. For Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, the report is a distraction from the real story: the U.S. economy is already in recession.

Read more here.

Saturday, November 24, 2012

Marc Faber: Unintended Consequences of Easy Monetary Policies

Marc Faber's Presentation to Hedge Funds World Middle East 2012
March 5-8, 2012, Jumeirah Beach Hotel, Dubai, United Arab Emirates

Expansive Keynesian monetary and fiscal policies, instead of smoothing economic cycles, is increasing economic and financial markets volatility instead, Dr. Faber contends in this presentation.

Sunday, November 18, 2012

Kyle Bass: The Central Bankers' Potemkin Village

Kyle Bass in his November 15, 2012, letter to investors, exposes the flaws in the monetary excesses occurring around the globe and explains why this will end badly.

Kyle Bass

Saturday, November 17, 2012

Kyle Bass: Germany Will Leave Euro Within 3 to 4 Years

In an interview on Bloomberg TV's Market Makers with Stephanie Ruhle on November 16, 2012, Kyle Bass says that Milton Friedman was right when he said the currency union will fall apart when they hit a bump in the road. He thinks Germany will leave in 3 to 4 years to avoid ceding its national sovereignty and funding the wasteful spending of other nations. He would not invest in Europe right now but wait for things to deteriorate further.

Thursday, November 8, 2012

Marc Faber: Obama Is `Very Negative' for the Economy

Marc Faber, publisher of the Gloom, Boom & Doom report, talks about the potential impact of President Barack Obama's reelection on the U.S. economy and financial markets. He speaks with Trish Regan and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

As a result of the reelection of Obama, there will be more regulatio and a disincentive for business men to hire people and higher taxes. You still have Ben Bernanke and because of money printing, you have very high corporate earnings. The global economic slowdown will affect markets negatively. At a minimum the market will drop at least 20 percent over the next few months.

Faber thinks there will be a year-end rally and a cosmetic deal with the fiscal cliff. He believes we are already in recession.

Thursday, November 1, 2012

Neil Barofsky Warns of Coming Financial Crisis; Calls for New Reforms

In an interview conducted by Bill Moyers October 26, 2012, Former Special Inspector General for TARP, Neil Barofsky, talks about the need for new reforms in banking regulation and oversight and warns that the financial system is headed for another crisis.


BILL MOYERS: And now for another reality check -- a far cry from the humbug and rhetorical static afflicting our election campaigns. Let’s talk about something President Obama and Governor Romney barely mentioned in their debates: banking reform. It’s four years since the economic meltdown knocked America and the world to our knees, four years since that massive taxpayer bailout. But if you listened to the candidates, the enormity and severity of this continuing crisis hardly merit notice. Barack Obama pledges change but touts Dodd-Frank, a bulky, watered-down version of financial reform that scarcely makes a ripple in the vast sea of corruption and abuse. Mitt Romney campaigns as the banker’s pal and says he’ll make Dodd-Frank disappear altogether.

If you’re appalled by this, so is the man who held the thankless job of special inspector general in charge of policing TARP, the bailout’s Troubled Asset Relief Plan. Before he signed on, Neil Barofsky was a federal prosecutor in New York chasing white-collar criminals and drug lords; he busted 50 members of a Columbian guerrilla group deeply involved in narcotics trafficking. At TARP, he was assigned to ferret out waste, fraud and abuse. The banks didn’t make it easy, and neither did the U.S. government. Neil Barofsky tells this story in his book, “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.” He is now a senior fellow and adjunct professor at the New York University School of Law.

Neil Barofsky, welcome.


BILL MOYERS: When you were a kid, did you say, "Mom, Dad, I want to grow up and be an inspector general?"

NEIL BAROFSKY: No, I said I wanted to be a lawyer, though.


NEIL BAROFSKY: It must be some sort of major genetic flaw I have. But my mom keeps a fortune cookie that said, "You will be a great lawyer one day." And I signed it and dated it. I think I was 12 years old. So there was something weird about me that I wanted to be a lawyer. I wanted to be a prosecutor. I mean, that was sort of what I wanted to do. Maybe it's from watching TV shows, Perry Mason, as a kid or something like that.

But I was always drawn to the law. And so I think I did have this drive for public service. But certainly never did think that I'd be an inspector general one day. I didn't really even know what that was until I actually got the job, to be honest with you.

BILL MOYERS: When you took the job, I read about you. And I thought, "Why is someone like that, with that record of prosecution going to take on this job at this-- in the depth of this crisis?"

NEIL BAROFSKY: Part of it was because this new office, this office of the Special Inspector General for TARP, with the worst acronym in Washington.

BILL MOYERS: It really is.

NEIL BAROFSKY: SIGTARP. Was to have two focuses. One was the oversight function and doing reports and audits and keeping an eye on Treasury and making recommendations. But what I was more focused on in the beginning and what I thought my job would be is we also created a brand-new law enforcement agency, completely from scratch, whose job was to police the TARP program.

And with $700 billion going out the door, the idea was that, inevitably, there were going to be criminal flies drawn to that honey. And our job was to catch them, do the investigations, and then get the Department of Justice to prosecute them. So I really looked at this job going in as a law enforcement job. And I was thrilled with the opportunity to build one from scratch.

But once I got down there --

BILL MOYERS: Early 2008, wasn't it? 2008?

NEIL BAROFSKY: I arrived in December 15th, 2008. And the money started going out the door in late October of 2008. And what I saw was that there were tremendous opportunities for abuse. There were no conditions, no strings attached and conflicts of interest being baked into some of the programs.

So I, doing what my job was as a former fraud prosecutor started pointing these out and making suggestions, recommendations to try to close these loopholes and make it less vulnerable to losses. And the response I got was remarkably eye-opening to me. I was told that maybe my concerns were valid. But I didn't need to worry about it, because these were banks.

And these banks would never, I remember this quote, "risk their reputation by putting their own profits over the public purpose behind these programs." And to be very clear, this was told to me by Paulson people under the Bush administration and the same exact words were told to me by the Geithner people under the Obama administration.

But it was a remarkable thing to hear. Because who could really believe that other than people who had come from these institutions.

And my response, of course, is "Where have you been for the last couple of years? What rock have you been under, that you haven't seen that these guys would sell their soul for a few basis points of profit?"

That ideas like they wouldn't risk their reputations or wouldn't embarrass themselves again, as Bill Dudley, the president of the New York Fed said to me when I complained about relying too heavily on credit-rating agencies. This was the core ideology and approach of how they viewed the financial crisis. It wasn't the bank's fault. And if we could just trust them, we'll be in a good place again.

BILL MOYERS: And yet, there haven't been prosecutions have there, of these-- the people culpable for this crash?

NEIL BAROFSKY: No, I mean, what our office did was to detect, prosecute, investigate, and refer for prosecution those who tried to steal from the program. So we were blocked out of any activities that occurred before TARP. Because we were-- our jurisdiction was limited to TARP. And we had great success. I think close to a hundred people, so far, have been charged for trying to rip off this program. We saved more than a half a billion dollars of TARP money in just one investigation alone. And the CEO who committed a multibillion dollar accounting fraud is now sitting in jail for 30 years.

But we never had the opportunity, really, to dig into the financial crisis cases that led to the cause of the crisis. But there you are absolutely correct. No senior executive has been held accountable under the criminal laws.


NEIL BAROFSKY: There's no easy answer. And it depends on who you ask. So if you were to talk to someone from the Department of Justice or Wall Street they would tell you these are very complex issues. The president has mentioned that a lot of times it might be caused by greed or stupidity or avarice but not necessarily by criminal conduct.

If you were to talk to people on the other side, they would say we just have a hopelessly corrupt criminal justice system. I think the truth is a little bit more nuanced and a little bit in between. What I saw personally was a real timidity on behalf of the Department of Justice. And a lack of sophistication and expertise, when looking at the complex accounting fraud cases that I was doing.

And I think it's safe to presume that that also applied over there to the crisis-related cases. But you also have to look into the reality behind what those cases would mean. We just spent trillions of dollars of treasure, taxpayer money, an unbelievable amount of effort to save these financial institutions, save them from failure, because we believed that the failure of any one of those would bring down the entire economic system with it.

They were too big to fail in 2008. They were too big to jail in 2009.

BILL MOYERS: I thought, at the time, this was an incestuous orgy going on there, between inside players at Washington and inside players at Wall Street. Is that too strong?

NEIL BAROFSKY: It's probably not too strong. It's the fact that their ideology matches up. And look, one of the reasons why their ideology matches up is they all come from the same small handful of institutions. And the people I was dealing with on a daily basis came from the same financial institutions that helped cause the financial crisis and were the most generous recipients of bailouts, Goldman Sachs, Bear Sterns, which, of course, had been adopted by J.P. Morgan Chase. Goldman Sachs, Goldman Sachs, it seemed like every time I turned around, I bumped into someone from Goldman Sachs.

Which is not to single them out. But they all bring that ideology with them, when they come to Washington. It's not like somebody hits them in the head with a magic wand and they give back everything that they've learned and believed in their years of Wall Street. And they bring that ideology with them. And even those who don't come from a specific bank, when you surround yourself, create an echo chamber of likeminded people, it's not terribly surprising that the government policy looks a lot like what the Wall Street institutions themselves would have most desired.

And I think the other side effect of that is that people who are outside of that bubble, people who don't have that background, people like myself as a federal prosecutor or Elizabeth Warren, who was the chair of the Congressional Oversight Panel and before that a Harvard professor, that our views, our criticisms, our contrary positions were discounted, mocked, ridiculed, insulted, cursed at, at times. Because there was no-- we didn't have the pedigree in their world to have a meaningful contribution. So what happens is that there's no new ideas that creep in. And you get this very uniform, very non-diverse approach to the problems of finance.

BILL MOYERS: It was puzzling to outsiders like me that you had TARP money being used to concentrate further the size of these banks.

NEIL BAROFSKY: And the granddaddy of all those transactions, Bank of America acquiring Merrill Lynch. And the important thing to remember here is this is not banks gone wild, banks taking the money and saying, "Party time, we're going to consolidate." They did this with the encouragement of the government. And in Bank of America, a little bit with a gun to the head to complete that transaction.

This was the government policy created by the architects, Ben Bernanke who is chair of Federal Reserve, Tim Geithner, who was then the president of the New York Fed before becoming Treasury Secretary, and Hank Paulson. Their solution originally was to further concentrate the industry, to make the too big to fail banks bigger.

The theory was you take a healthier bank and mix it up with a failing bank and you get something somewhere in between, which is better overall for the system. Which may have had some validity in the very, very short term, but has put us on a path, I believe, to being even more dangerous. Because you have institutions now that are just monstrous in size, over $2 trillion in assets by certain measures, close to $4 trillion by other measures. Terrifying. The idea that any of these institutions could ever be allowed to fail is pure fantasy, at this point.

BILL MOYERS: Are you suggesting that we could have another crash?

NEIL BAROFSKY: I think it's inevitable. I mean, I don't think how you can look at all the incentives that were in place going up to 2008 and see that in many ways they've only gotten worse and come to any other conclusion.

BILL MOYERS: What do you mean incentives in place?

NEIL BAROFSKY: So in a normal functioning capitalist utopia, where, you know, most markets are that don't have this too big to fail, this presumption of government bailout if a firm like a Citigroup amasses massive amounts of risk. And in so doing, they keep razor-thin capital to absorb potential losses, which basically means they're just borrowing tons and tons of money.

And not have a lot of their own money at stake, but it's mostly borrowed money. And it is very opaque. It's not very transparent about how they're running their business. You would expect that creditors, people lending them money, counterparties, those on the other sides of their transactions would either stay away or really exact a premium. But the presumption of bailout changes that on its head and actually makes it go in the other direction. So it removes the incentive of the other market participants to impose what's known as market discipline. Because that's ideally in a capitalist society what happens is that the lenders and creditors and counterparties say, "Hey, we're not going to do business with you unless you clean house, slim down, be more transparent."

But when there's a presumption of bailout, that disappears. Because all those other market players can feel safe in the presumption that if anything goes bad at Citigroup, Uncle Sam is going to come in and make their bets whole.

Then you have the very real incentive for the executives at that institution to then pile on risk. Because they know that if the bets go well in the short term, they get paid. And they get paid very richly. But if it blows up and the risks go bad, no worry, the taxpayer's going to be on the other side of that bill.

That's what happened to Fannie Mae and Freddie Mac, before they collapsed. That's what happened to our biggest banks and global banks before they collapsed. And if you maintain that system, it is foolhardy to think that those incentives and pressures are not once again going to carry the day.

BILL MOYERS: At a conference a week or so ago, here in New York, you said playing ball for Wall Street has become a normal way of life, despite the panic of 2008. What does it mean, "playing ball for Wall Street"?

NEIL BAROFSKY: Well, what I saw when I was in Washington was this real pressure on myself, on other regulators to essentially keep their tone down. And I was told point blank by Assistant Secretary of the Treasury that, this is about in 2010.

And he said to me, he said, "Neil, you're a smart guy. You're a young guy. You're a talented guy. You got your whole future in front of you. You've got a young family that's starting out. But you're doing yourself real harm.” And the reason why you're doing yourself real harm is the harsh tone that I had towards the government as well as to Wall Street, based on what I was seeing down in Washington. And he told me that if I wanted to get a job out on the Street afterwards, it was going to really be hard for me.

BILL MOYERS: You mean on Wall Street?

NEIL BAROFSKY: Yes. And I explained to him that I wasn't really interested in that. And he said, "Well, maybe a judgeship. Maybe an appointment from the Obama administration for a federal judgeship." And I said, "Well, again, that would be great. But I don't really think that's going to happen with my criticisms." And he said it didn't have to be that way. "If all you do is soften your tone, be a little bit more upbeat, all this stuff can happen for you."

And that's what I meant by playing ball. I was essentially told, play ball, soften your tone, and all of these good things can happen to you. But if you stay harsh that was going to cause me real harm in those words.

BILL MOYERS: What made you able to say no to the temptation?

NEIL BAROFSKY: Well, I think part of it is the only job I ever wanted was to be a federal prosecutor.

BILL MOYERS: Send bad guys to jail?

NEIL BAROFSKY: It doesn't get much better than that. Really interesting, complicated work, and wear the white hat. So I didn't have those incentives that I think that were presented. And I think, look, you know, being trained in the U.S. Attorney’s Office for the Southern District of New York, I was trained to be a government employee and to take my oath of office very seriously.

But I wasn't really interested in their reindeer games. And I felt a real obligation and sense of duty to fulfill the oath that I took in Secretary Paulson's office on December 15th, 2008 to do the job that I was sent down there to do. But I wasn't really tempted with a big job on Wall Street. And frankly, if it meant getting a judgeship, compromising the job that I needed to do and was supposed to do, it just wasn't interesting to me.

But look, let me be very clear. I also have the fallback of I was a trial lawyer. I prosecuted a lot of big cases. And I knew that whatever happened, I could always go back and get a good job in New York, working at a law firm or doing legal work. So it gave me a degree of financial freedom even though I basically spent most of my career as a government employee and I didn’t have money. I didn't necessarily need to please anyone to be able to go back and still be able to feed my family.

BILL MOYERS: What happens to a political society, to a democracy, when we stifle or bribe or shoot the sheriff?

NEIL BAROFSKY: When I had my incident with the assistant secretary that my deputy, who had come down from-- who's another former federal prosecutor, who did narcotics work, said to me, Kevin Puvalowski. And he said to me, "Neil, you were just offered the bullet or the bribe, the gold or the lead."

And what he was referring to was a society just like that, which was Colombia, back in the day when Pablo Escobar and the drug kingpins really controlled society. And what he was referring to is that basically to corrupt society Escobar would go to a magistrate or a police officer, police chief, a politician, and say, "You have two choices. You can either take this giant pile of money and do my bidding. Or you can get the lead, a bullet in your head."

And Kevin was joking that I just received the Washington white collar equivalent of the gold or the lead. And it was funny, at the time, but that's kind of what happens in a society where the rewards and incentives are, again, nobody's getting shot in the head thank goodness. But it's a breakdown of the system.

And in some ways, it creates this false illusion that there are people out there looking out for the interest of taxpayers, the checks and balances that are built into the system are operational, when in fact they're not. And what you're going to see and what we are seeing is it'll be a breakdown of those governmental institutions. And you'll see governments that continue to have policies that feed the interests of -- and I don't want to get clich├ęd, but the one percent or the .1 percent -- to the detriment of everyone else.

BILL MOYERS: You make it clear in the book that the Obama administration fought against cutting down the size of these banks. And yet, in the second debate with Mitt Romney the president said, "We passed the toughest Wall Street reform since the Great Depression." As I hear you, it wasn't all that tough.

NEIL BAROFSKY: Well, that's a literally true statement. Because when you think of-- but it's a very low bar to clear. I mean, all of the regulatory reform since the Great Depression has been peeling back on those regulations. With really the big death knell happening in the end of the Clinton administration with, you know, a couple of bills, one that removed the last vestiges of the separation between commercial and investment banks.

BILL MOYERS: Glass-Steagall Act?

NEIL BAROFSKY: Glass-Steagall.

BILL MOYERS: It took down the wall between those two?

NEIL BAROFSKY: The last part of it. And then the second part by passing a bill that made it, essentially made derivatives out of bounds for regulation. So saying that it's the toughest is literally true. The problem is it hasn't been tough enough in where it most matters.

And again, you don't really have to take my word for it. You just look what the market has done. Based on the presumption of bailout, the banks get higher ratings from the credit rating agencies which means they can borrow money for less, because their debt is viewed by the credit rating agencies as being less risky. And they get these higher ratings on explicit presumption that the government will bail them out and make good on their debt.

So it didn't deliver the goods where it matters the most. Again, not saying that it doesn't have some good positive things for our system and for people. But it didn't deliver the most important thing that we need if we want to address the causes of the last crisis and help prevent the next one.

BILL MOYERS: What will it take to prevent the next one?

NEIL BAROFSKY: Got to break them up. I mean, it is not a simple thing to accomplish, necessarily. But it's a very simple solution. And what you see, I think, kind of amazingly, is how many more people have come to this view over the last year or so. It used to be a lonely perch that we sat on. Former special inspector generals, a couple of academics.

But now you have people like Sandy Weill, the architect of Citigroup. And sure, too little too late, after he made all of his money off creating these Frankenstein monsters. But even he now recognizes that we have to break up the banks. You have senior officials at the Federal Reserve recently coming out in favor of this. The vice chair of the FDIC, a very strong advocate for breaking up the banks. And you hear it a lot more in members of Congress-- that are supporting this notion. So to me, on the one hand, it's absolutely essential. If we really want to get to the point where we don't have to bailout a bank, we have to make it so that no bank is so systemically significant and large that its failure could bring down the system.

BILL MOYERS: Are they up to their old tricks?

NEIL BAROFSKY: The banks? Sure. I mean, you know, so we had this regulatory reform of Dodd-Frank in 2010, which, you know, left them intact and inside. But it had all of these rules and all of these regulations that needed to follow. And right now it is hand to hand, trench warfare, combat with those lobbyists spending all that money on campaign contributions, on, you know, flooding the decision makers and the regulators with comment letters and endless meetings.

And pressuring members of Congress to put pressure on the regulators, to water down the rules, to basically get as much back to the good old days where they would have free reign to print money, take advantage of their too big to fail status, bully and push out the little guys, take advantage of consumers. And that's what all of these efforts area about are to preserve these very, very core profit streams that they had before.

And that's right now is where the battle is being waged. Not on TV, you know, not necessarily out in front, but behind the scenes where the next set of rules are being forged on what they're going to be able to do and how they're going to be able to do it.

BILL MOYERS: What are you hearing in the campaign about all this?

NEIL BAROFSKY: Well, there's sort of two levels, right? There's the campaign rhetoric, which I think you just have to ignore. I mean, President Obama, for example, campaigned on this whole policy of no lobbyists. That he was going to take on these lobbyists when he came into office. That was in 2008.

In January 2009, do you know who they made as the chief of staff for Treasury Department? Former chief lobbyist for Goldman Sachs, Mark Patterson. So like, so you've got to look beyond what they're saying. And what they're saying is things like they're both, 100, totally convinced that they would never bailout a bank ever again. And Barack Obama says he won't do it because the Dodd-Frank mechanisms would work.

Mitt Romney is a little bit more mysterious. He says he would remove the regulatory reform and replace it with something else. But that he too would never bail out the banks again. Which again, sounds great, and I'm sure if you were to ask President Bush-- any time up until September of 2008, he would just as passionately tell you that he would never dream of bailing out the banks either.

But that's not realistic. If we're in a crisis, they're going to do exactly what they did in 2008. So you look to what are their policies? How are they going to accomplish that goal? And neither one really offers anything. Romney literally doesn't offer anything. We have no idea what his policies are. We don't know what that replacement is. But we do know, we hear him from interviews and some of his chief advisors, you know, say things like, against breaking up the banks through bringing back some of those Depression Era laws or again one of his advisors recently said that he's against having size caps, which is another way of breaking up the banks. By the way, two policies that are absolutely 100 percent identical with those of President Obama and his advisors. So neither one really has a very clear path forward to achieve that goal of making it so that it's not necessary to bailout banks once again.

BILL MOYERS: Is it too late to reverse course?

NEIL BAROFSKY: No, it's not too late. My sincere hope is that we get it done before the next financial crisis, because I think that the next one, given how big the banks have become and frankly how much less room we have because of the fiscal crisis, of dealing with the giant financial, that it'll be more devastating. I hope we can do it before then. But frankly, the end game for real reform has to unfortunately be in the aftermath of the next crisis.

BILL MOYERS: In the meantime, I hope everyone reads "Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street." Neil Barofsky, thank you very much for being with me.

NEIL BAROFSKY: Thank you for having me.

Friday, October 26, 2012

Larry Fink on Market Sell-Off: "Market Is Now Responding to the Pending Fiscal Cliff"

Larry Fink, chairman and CEO of BlackRock, on CNBC's Squawk Box, October 26, 2012.


Steve Liesman: Let's talk about the recent marekt sell-off. It's been sharp and it's causing a lot of concern. What's the cause in your opinion? Is the market telling us something about the economy that we don't already know?

Larry Fink: I think the market is now responding to the pending fiscal cliff. We're starting to approach the election. There's uncertainty about who will be President and how the fiscal cliff will be resolved. CEO's today are pensive about what to do next. They're just sitting back. They're not hiring as much. They're probably not spending as much. So, there's a deceleration in the economy and we all are starting to feel it. Additionally we were expecting a little more resolution in Europe. We're waiting for Spain to act and accept conditionality and that' s probably been delayed by a couple of weeks.

Sunday, October 14, 2012

Edward Griffin: 'The Fed's sole purpose: keeping the banks afloat'

G. Edward Griffith, in an address October 10, 2012, from the Casey/Sprott fall summit and posted by Casey Research:

Is the Federal Reserve really doing such a bad job… or does it actually do exactly what it's supposed to do, but the average American is in the dark about what that is?

In this explosive video, Casey Summit speaker G. Edward Griffin, author of The Creature from Jekyll Island, talks about the Fed's real role in the US economy and why – contrary to common belief – it is not this banking cartel's mission to act in the best interest of the American public.

Read the full text here.

Tuesday, October 2, 2012

Sam Zell: America Needs Presidential Leadership, Not Class-Warfare, and a Consensus in Congress, Not One-Party Imposed Laws Like Obamacare

Sam Zell, chairman of Equity Group Investments, on CNBC's Squawk Box
October 2, 2012
First Segment

Sam Zell,
October 2, 2012
Second Segment

Sam Zell
October 2, 2012
Third Segment


First Segment:

for the next two hours we are joined by one of the top real estate investors in the world. we are lucky enough to have sam zell, the chairman and co-founder of equity group investments here on set. thank you for coming in today.

my pleasure, it's fun.

nobody knows real estate like you do. we've been watching a lot of different things play out in this space. you were talking with joe off camera about qe3 and what you think about the fed's latest move. how does that shake things up in the real estate world? what does it mean for investing on the commercial and residential side?

the best answer i'd give you is that we were beginning to see the excess flow of capital, we're seeing too much capital chasing too few opportunities and consequently i think number one the effect of qe3 is nothing more than pushing up the stock market and yet the stock market is being pushed up at record levels of limited trading. we have low volumes and the market goes up, which is manipulation but it's a function of the fact, what's anybody going to do with money and nobody has any confidence in the future, so you limit your money to liquid. procter & gamble, anything that has a dividend is basically jumped for because there are no other alternatives. look at your capital numbers last week. nobody wants to make commitments beyond tomorrow. we run a company that does a lot of corporate enterprise installations and one of their triggers is when the enterprise projects start getting delayed, we're heading for a recession, and that's exactly what you're looking at right now. you're looking at capital expenditures across the board being deferred and being deferred for a very good reason. they have no confidence. there's nothing that's going on now, qe3 or nlrb, that ain't building confidence.

do the have any certainty when election comes?

i think the answer is the certainty of the election is that it will be over. which ever guy wins is going to have to do an enormous amount of stuff very immediately and very hard and based op. all of the other stuff we're looking at it's hard not to assume we're on the cusp of going back in a recession. that's frightening. well it's, the word frightening is too strong. the reality is that business is all about cycles. we did through positive and negative cycles and the opportunity for us is to take advantage of a positive cycles, so mitigate the negative cycles. what we've just come through is four years of a positive cycle that has been limited dramatically by political action. that's scary and that's not what's supposed to happen. we didn't get the bounce back that we were -- well, we created so many headwinds. we created so many issues and the environmental protection agency and you'd think on what it does t isn't part of america's education. nobody, no president, not me, not any other president could have done any better over the last four years, given what he was handed in this, when you heard bill clinton say that, bill clinton has not said that before. i could have done better. you could have done better. i think anybody who wasn't ideologically driven could have done better.

what would you have done? sorry? the meaningful steps. what wouldn't you have done?

we need jobs so therefore -- and we need exports so therefore the first thing you do is have the nlrb attack the number one exporter in the country on really preposterous grounds, then you in effect start yelling at business and threatening business and then you get on the tv and talk about las vegas and all of a sudden the hotel business dies. i mean, the answer is that we need leadership, not criticism. we need encouragement not discouragement and until that scenario changes i think the united states is quote/unquote, i hate to use this word, in a malaise. is that a function of new laws and legislation or a function of rhetoric? first of all it's both, okay, in other words, we hope that it's new laws. the reality is, it isn't new laws. it's using the executive branch to legislate by fear or by threat. you don't need a law. in effect the epa is doing stuff all over the place. the nlra is doing stuff that's not sanctioned by any law. it's a political decision and it's extraordinarily negative to our country and our economy. the journal did you read the lead editorial today how razor thin the obama care vote really was. we know scott brown they had to do reconciliation after he won. gym webb fairly won, al franken sort of harvested the votes to beat norm coleman. those made a difference. evan bayh and jim weber saying we wish we hadn't taken 20% of the economy with no republican votes and legislated the most unpopular bill in history that's still unpopular and really poisoned the whole political atmosphere, at the same time you weren't trying to add jobs. it was almost an impediment to adding jobs. using reconciliation process on prapts the most important piece of legislation in the last 20 years, it is basically contrary to what america was built on, america was built on consensus. america was built on getting people on board, and legislating accordingly, not in effect using a mickey mouse process to pass a staggering bill that nobody who voted for it had ever read. is this the way you run a country?

i guess chuck, our friend, pushed jim webb on, wish he hasn't voted for it. no, but even getting him to admit and evan bayh. he said he wouldn't? he didn't say he wouldn't, they both have great regrets about the way it was handled and that's what got me about, and i think a lot of -- the country just listening to bill clinton and nodding. you could see the approval ratings go up and that maybe we're not such, maybe he couldn't have done anything and all of a sudden one speech from clinton suddenly we're not at 8.1% unemployment for 43 months?

come on. the reality is that bill clinton was a politician. what we need in this country is a politician. hard as it is to say that. somebody to work with both sides. in effect who says my objective is this. now who do i have to corral to get from here to there. that's called leadership we know the stimulus bill is just sent down to nancy pelosi and she wrote it. president had no input. dodd-frank same thing, obama care similar. there's this cadre of people writing the laws of our country without input from at least half the country. what's the most important thing you think needs to be tackled head on. you think the fiscal cliff is the first issue? there are a multiple of issues that have to be acted on and obviously the fiscal cliff is a very important one. the trouble is the fiscal cliff is probably too easy to solve and kick down the road, and so therefore i doubt we would be in the fiscal cliff. i'm not sure, to be honest with you, that a fiscal cliff falling off the edge is not exactly what america needs.

is this a wake-up call do you think at this point?

it's a pretty severe wake-up call to get. you're describing a wake-up call to rip van winkle. how many years have we been kicking the can down the road. that's a wake-up call for rip van winkle, somebody who has been sleeping for a multitude of years.

you're suggesting play with fire a little bit?

i'm suggesting that i'm interested in solving the problem and have you ever solved a problem without playing with fire?

have you ever solved a problem without going to the edge? have you ever solved a problem with fear and uncertainty?

i certainly have. i do that every day. that's called taking risks. you assess risk and reward. that's how our system is predicated on, that's what built america and we have to look at every option with that in mind. we've tried everything under the sun and every solution has kept kicking the can down the road. erskine-bowles, it's inconceivable that wasn't endorsed by the president who in fact created the entity in the first place. so people keep playing games but the reality is time is running out. and if kicking the can down the road doesn't solve the problem, maybe you've got to do something else, and maybe the only way you can convince the american people that we really have a problem is to create one. we're going to talk more about this in a moment. we did have some people who were here earlier this week with some thoughts on simpson-bowles if there's a way to bring it back.

would you be in favor of that in.

i think that's too broad a question. there are obvious ents of erskine-bowles that are terrific and basically represent compromise, to say the whole enchilada is -- that's the problem if you pick it apart bit by bit what you like and what you don't. go back to our friend bill clinton, what was he so good at? getting both sides together. he got his rear end handed to him in the election. what did he do? he responded. what did president obama do? he went further to the left. so are you listening to me, american people, or are you ideologically driven, so that you in effect hear nothing. that's the $64 question or maybe $64 billion question. brilliant. we're going to talk more about this with sam zell, our guest for the rest of the program.

Monday, October 1, 2012

Fed's Evans: QE III and Fed's Monetary Policy Easing Will Continue Until Unemployment Falls Below 7%

CNBC's Steve Liesman interviews Chicago Federal Reserve President Charlie Evans
October 1, 2012

Rough Transcript:

let's get to our newsmaker of the morning. steve liesman joins us from chicago with a very exclusive interview. steve?

yes, thanks very much.

i'm here in chicago with the chicago federal reserve president charlie evans. nice to be here. a year ago you laid out this idea of pegging policy to unemployment, and to inflation, given what the federal reserve just did, do you feel vindicated and the follow-up to that is do you feel satisfied, is it enough?

well, last year i was here and i was talking a lot about our dual mandate responsibilities and i mentioned that with the unemployment rate at that time at 9% that was unacceptably high and we need to focus more on our dual mandate responsibilities. i feel good that our most recent statement and policy is focusing on strongly on the labor market, we're looking for substantial improvement in labor market conditions, the criteria for how long we're going to continue with very accommodative policies and that's a step in the right direction. a step in the right direction but is it enough?

you want the fed to do this for a particular reason, which was you felt it would make policy more effective. they haven't done exactly what you advocated which is to peg numbers to policies, so is it enough?

right to my own prescription has been that we become very explicit about our forward guidance and indicate the funds rate will remain low until at least the unemployment rate goes below 7%.

or if something goes wrong and inflation goes up to a higher tolerant range 3% maybe we should back off. i think that would be a clear guidance on top of our mid 2015 language.

what we're currently embarking upon with increasing our long duration assets on our balance sheet to the tune of $85 billion per month we're looking for substantial improvement in labor market conditions. for me, that seems like we ought to be seeing $200,000 increase in payroll employment per month, maybe a little higher than that for about six months really. we ought to see growth that is above trend which supports that continuing substantial improvement in labor market conditions. if we get those things to move at the same time, we'll see the unemployment rate go down. that would be movements towards having enough accommodation.

you have changed your growth forecast because of the fed's recent policy?

when we submit growth forecasts, we're supposed to do it under the assumption policy and i had been saying the last two years that policy ought to be far more accommodative than our actual actions should be. my most recent forecast has been for quite substantial improvements in the economy, premised on the idea that policy would be accommodative about like what we're seeing, i think we could do a little bit better by being explicit about our forward guidance, but so my forecast has unemployment coming down to the 7% range by the end of 2014 which is another reason why i think we should be accommodative. when do we get that above trend growth? during that period to get the unemployment rate continued to move down we would be seen above trend growth so we would be seeing growth next year, 2.5, 2.75 but after that above 3% substantially. as you might have imagine and read there's a lot of skepticism about the policy and how it's going to work.

can you explain how buying mortgages specifically will lead to lower unemployment?

well, to the extent that we make it more attractive and easier for people to refinance their mortgages it leaves that with more aftertax income to spend so if they need to save more, they can save more quickly. if they would like to spend and buy a durable good they put off buying for the last three years, buy a new car would increase demand. when you increase demand firms find their existing workforce isn't enough to meet demand. businesses are waiting for that demand to increase and they would begin to expand employment, more people come into the labor market they have higher income demand increases. if we could get things going a little bit more we have a lot of accommodation in place that can be more effective once mortgages are refinanced. interest rates were already so low. it seems like by the way that when it comes to home purchases, refinance something a different story but for home purchases there seems little sensitivity to the change of rates to actual home purchases.

why would even lower rates prompt people who essentially an american public trying to delever, why would they want to take more debt at lower rates?

financial conditions are not as accommodative as you're suggesting, they're pretty accommodating and every time we start talking about we might be concerned about inflation, we might have to increase the funds rate sooner than mid 2015, that imparts more restrict i haveness than is our intention with our policy. i think to the extent you get more people refinancing and having the opportunity to the extent that small business people find the environment more attractive to borrow. banks are looking for good quality creditor -- credits in order to make these loans to the extent we start to improve things, they'll be able to do that and things wil really start to burst forward i believe. in jeff lacquer's dissent he said further quantitative ease something unlikely to improve growth and likely to create inflation. i don't think we've seen inflationary concerns. our inflation outlook is for less than 2%. 2% is our long run observe jikt objective for inflation. i don't think we've done a good enough job describing ou attitudes. i don't see the inflationary pressures. the kind of concerns i hear from a lot of people are premised on the idea the natural rate of unemployment is substantially higher than what we really think about the current rate. if you believe that, you would believe inflation was going to take off and if you don't think inflation is going to take off now, instead well, i think this is going to depend on how things play out but eventually people will find inflation higher it's that inbetween period, i've never heard a good description of that describes how we get from our current period to higher inflation. i think the way we get to a point like that is you get the economy to grow, banks start lending and more money in circulation in a productive fashion. price pressures and interest rates would go up, that would be a healthy thing in terms of

Saturday, September 15, 2012

Marc Faber: "The Monetary Policies of the United States Will Destroy the World"

Marc Faber, publisher of the Gloom, Boom & Doom report, talks on September 14, 2012, about Federal Reserve policy and his investment strategy. Faber, speaking with Betty Liu on Bloomberg Television's "In the Loop," also discusses gold prices and the property market. (Source: Bloomberg)

Selected Quotes:

"Even if Romeny wins the election, the next Fed chairman will be a money printer. And so it will go on. The Europeans will print money. The Chinese will print money. Everybody will print money and the purchasing power of paper money will go down. And I don't like bonds. I don't particularly like equities, but I think equities are a better space to be in than bonds.”


"I own corporate bonds. I bought some bonds from Kazakhstan because Kazakhstan economically is a much sounder country than the United States or any European country."


"The fallacy in the United States is to think that this will go to the man on the street. It won't. It goes to the Mayfair economy of the well-to-do people and boosts asset prices of Warhols…Very happy. Very good for the Fed. Congratulations, Mr. Bernanke. I’m happy. My asset values go up but as a responsible citizen I have to say the monetary policies of the U.S. will destroy the world."


"There is a huge fallacy and assumption that money printing can actually improve employment. It goes first into the banking system and into financial institutions, into the pockets of well-to-do people. If you drop money into my pockets and you have at the same time increased government involvement in the economy and we have the government growing with its regulation and legislation that stifles economic development. I don't want to build a new business. But what I may do is look around the world, where are the distressed assets. So I will go and buy existing assets, takeovers. But takeovers don't add to employment. They destroy employment. "

Friday, September 14, 2012

Marc Faber: Bernanke Should Resign

Marc Faber is interviewed on CNBC at 5:30 am on September 14, 2012

Wednesday, September 12, 2012

Isaac: Dodd-Frank Is Killing Small Banks, Lending to Small Business, and Creating More Big Banks

Former FDIC Chairman Bill Isaac is interviewed on CNBC's Squawk Box September 12, 2012:

The following transcript has not been checked for accuracy.

all week long we've been looking at the future of the banking industry of another industry leader joining us now, bill isaac, a global head of financial institutions for fdi consulting and the former chairman of fdic. you didn't have to move to cincinnati to be chairman, did you? no, i didn't. it doesn't matter. you are anyway. they can say, you know who our chairman is? and they'll say bill isaac, and that gives them a lot of credit. have you been able to hear what mr. kovacevich has been saying today? i've heard some of it. do you guys agree? what do you agree on? and what do you disagree on with what he said? or is it shades of gray? oh, there i go. not fifty shades. how many shades of gray? we'll take any opportunity to take this right in the toilet. but -- what are you reading? no, i'm not. but i do know someone who is. and i'm not going to mention who. but seriously, what -- dick and i have been the best of friends since about 1982 or '83. we do disagree on some things, but i would say that i agree on 98% of what dick kovacevich says. no kidding. that's amazing. particularly his assessment of what went wrong. the safety nets that failed us, the safety valves that all gave out. i was going to talk to dick later because he has -- we've looked into the past, but you've referenced sort of the -- how we react to these things. and a lot of times we shoot ourselves in the foot. and everybody knows you go through something like this and you start regulating. and the biggest fear is we're going to overregulate, do something that's counterproductive. you've intimated you think we're there. really? dodd/frank? again,he question i asked was what regulatory authority does the federal reserve not have to rein in the rk of citi? so they already had it? they already had it. boy, he's hard to -- you weren't going to be able to make but your point is there's a perception that small business is not hiring and really can't get the credit it needs from the financial system to hire for some reason. you think it has to do with overregulation? or is it just the hangover from the crisis? bill, you weigh in. i think there was a time when credit was not available, just after. but i don't think that's the -- it's available. what's the problem now? well, the lack -- the companies who need the money, banks don't want to lend to. and the people who don't need the money are not investing because they have no confidence. no confidence in what? in the economy and the future. let's just look, again, small business has been the engine of growth in this country forever. and we have more small business customers, i talk to them all the time. here's what they say. i am so scared of the future. and let's just compare the impact of various administration policies on small business versus big business. let's take health care. most small businesses don't give health care. and now they know that not only are they going to be forced to do health care, it's going to be a large expense for them relative to what they have. they don't even know how large it is. health care companies have been giving health care forever. no impact. second, taxes. what people don't understand is that most successful small businesses are subchapter s. their capital -- we're told only only 2% of businesses are subchapter s. right, but they only -- you don't mention that when you tell me that. i said the successful ones. right. so they're getting double whammied. and remember, they have to earn enough money to have capital to expand. they're getting hit with their personal tax rate -- do all businesses tell you this? oh, yeah, that's what i'm saying. because there are people will tell you that's not what it is. it's not the -- go talk to them. it's the hangover from the biggest credit, right? wrong. wrong. now, let me say, big businesses, only the executives get hit with their personal taxes. the corporate tax rates stay the same. right. the third is regulation. now, let me just say this, i can't imagine being a small bank today under dodd/frank. it would be impossible to comply with the regulations of dodd/frank and make any money. they won't comply with everything because they can't afford it. now, would you agree that people -- the purpose of dodd/frank was to cause large banks not to get bigger? i'm telling you because of dodd/frank, there's going to be industry consolidation and the big are getting bigger. they already are. and so on because small banks have their -- they can't even breathe with all the regulation. agree with 98% of this? i probably agree 100%, but i would say that the -- the one thing dick hasn't mentioned is the capital cords, which are highly procyclical. what do you mean? well, they -- in good times they're backward looking models, and they don't require capital reserves to be built up the way they should. banks pay big dividends and salaries and they're fat and happen and not building up their capital reserves in good times. then when the bad times hit, which we're in right now, you can't have enough capital in reserves to satisfy those. and so what a lot of banks are doing -- and i think the bigger ones in particular -- they are shedding assets, not adding assets. and we have exactly the wrong regulatory policies in place. it's upside down. we should be requiring banks to add capital and reserves like crazy when they're making money, when times are good. not a capital issue so much. really it's about -- it is in some of the big banks. that would actually -- not wells fargo, but in some of the other big banks, they do not have enough capital to satisfy. and in europe, of course -- europe doesn't have any. they don't have any and they're selling them to us. what about these small business owners, though? do you think they're telling him these things because they just don't li? no, i believe that they've -- no, you don't. i believe they believe this stuff. you believe they believe it, but that's not -- but if demand were to go up in the -- if question to me it's a different question. it's the scale of what the small businesses can do and what the tax implications are all you have to do is try to measure it. can i say something? the proof of this is we're in the t of one of the worst recessions ever, right? right. there is more liquidity on corporate balance sheets than there has ever been even in good times. but if demand -- just a minute. at the highest opportunity cost. zero interest rates. if you -- the only reason you don't do this because you're paying the high prices is you don't have any confidence. right. i am telling you -- i am 100% sure that most business people out there do not have confidence in the future and therefore they're not -- bill clinton saying nobody, no president in history could've done better in recovering from the depth of this financial crisis. i'll tell you that ronald reagan did a lot better. we were in a severe crisis in the early '80s. interest rates at 21.5%. we had -- not -- we had a collapse in -- not even close. not even close. we had a depression in the agriculture sector, we had the ldc debt problems, we had 3,000 bank and thrift failures in the 1980s. and yet, we went -- we underwent the longest and strongest economic boom in history. because we followed the proper policies. i went through both, and the '80s were much tougher. how do you solve 12% unemployment? i mean 12% inflation? we have the lowest inflation we've ever had, we have the lowest interest rates we've ever had, and we can't get the engine going. look, i w 7 years old at the time. let me say, we've had lots of different economists and historians on, looked at the period who say that the financial crisis because it was a credit crisis was tougher. it was a crisis on all fronts. and it's one thing to be an economist and go back and read a book about it. it's another thing to live through it, which he did, as the head of a bank and i did as the head of the fdic. we were in the middle of it. we had the right -- i was head of citi bank's retail business. we had the right to our customers to say, remember those lines of credit you have? they're gone. you cannot borrow from us. that's how big this crisis was. now we're trying to beg people to borrow. i think we should have a bill -- let me add something about that. the national federation of independent business just came out with a survey. they -- of -- i don't know 30,000 or 40,000 small businesses. and uncertainty was -- amounted to 14 of the 20 reasons why small businesses are not investing right now. and not adding employment. 14 of the top reasons they are not -- theare not investing, they are not looking to grow is uncertainty about the economy, about the government, about tax policy, about monetary policy, about regulatory policy. there's no doubt that we are -- and add dysfunctional by both parties. one more thing. let's say the president gets reelected and we become certain taxes are going up, regulations are going up. all these things are going to happen. once they have the certainty, will they then be able to plan for it? all these things happen, will then we be able to rebound since we at least have certainty that we're going to have all this? i honestly believe that if the president is reelected, we are in for a long, dark period. because i don't believe he is going to be able to work across if we can't get together democrats and republicans get together and come up with solutions, and i think mitt romney showed he could do that in massachusetts and did do it. sure. we're going to continue this

This transcript is generated by automated closed captioning, has not been edited, and may not be entirely accurate.

Kovacevich: "If We Did Not Have Fannie and Freddie, This Crisis Would Never Have Occured"

Wells Fargo's ceo Dick Kovacevich talks about the causes of the financial crisis on CNBC's Squawk Box, September 12, 2012

The following transcript has not been checked for accuracy.

right now, though, more from our guest host today, dick kovacevich who is the former chairman and ceo of wells fargo. when we were talking a little bit ago, you were talking about how the financial crisis was caused, in your view, this was eight banks, 12 s & loans, citi, you could go back to those and go to the heads of those at that time. you think there were real problems happening. yeah, 11 and 12 s & ls, and one commercial bank, the rest were commercial banks. i think it was greed. they had to know that this stuff was not good. we went from -- there's always been subprime mortgages. we went from about 10% of the mortgage market to at the peak to 50% of the mortgage market being subprime lending. and this is no doc, low doc stated income, an open invitation for fraud. we know that mortgage brokers made up employment reports and their salaries and whether they were first-time homeowners and so forth and so on. all made up. why didn't we ever see any charges that came of out of this? for the life of me, i don't understand. i think that some people knew what they were doing and that it was bad and that they should be does it go to the top? well, i -- all -- i believe -- i don't know the top of the firm they thought they were doing something criminal. but they had to know that they were selling stuff that they would never want to buy. some firms were shorting the very things they were selling. where the aig thing came in. you said it was ancillary. but if you could get s&p to sign off on an aaa rating because you had the credit default, then it gave you cover. you're hitting right on it, joe. there's always been greed and malfeasance on wall street, but how did this get so big? the reason is there were five safety valves that usually keeps things under control that all failed. the first one was the credit rating agency. how could credit rating agencies in any set of circumstances rate some of this stuff aaa? it is inconceivable if you know anything about the mortgage business. if you rated something aaa, german savings banks would buy it and so on. right. do we get to barney frank in any of this? so the second one is fannie and freddie. fannie and freddie. 70% of all of these subprime mortgages were guaranteed -- subprime mortgages, alt-a, exotic mortgages by freddie, fannie, or another government agency. there is no way that anybody would've bought this stuff if it wasn't guaranteed implied of the government. if we would not have had fannie and freddie, this crisis would've never occurred. i see all kinds of people said fannie and freddie was a small player, they got in late. i'm with you. 70% of these things were fannie and freddie? they were underwritten by fannie and freddie. guaranteed. but what's important here to understand is that should never have happened. people -- i personally have been warning about the fannie and freddie blowing up for 20 years. and i've told barney frank a hundred times, i've written him letters and so on. every administration including the clinton administration. as he said in his book, he thought the third rail was social security. he said, no, i learned it was fannie and freddie. what about -- democrats in congress were a strong supporter of -- so democrats -- didn't w try to rein it in? i want to repeat, i don't believe -- if the credit rating agency would have been doing its job, if fannie and freddie had been doing their job -- you've got three more to go. the sec, who is the regulator for the credit ratings? the sec, who is the regulators of the investment banks that allowed the liquidity issues? and also, in charge, and we did mark to market accounting when the market wasn't functioning. right. why would anyone with a brain over -- well, you already said it was the government agency. so it wasn't anyone with a -- and who was fourth? the fourth were regulators. you know. which -- let's take an example. so wells fargo was the number one origior of home mortgages in the country. we were losing market share. the regulators knew that. so why wouldn't they say, why aren't you participating in the subprime business? what do you know? john paulson knew it didn't work. where were the regulators? who is this? the state regulators who had the brokers. they were the regulators of the brokers. mortgage brokers. 70% of all subprime originations by both mortgage brokers, there was absolute fraud by those people. but, dick, what a great -- when i was a stockbroker, we tried to get people to send us money. think if you can call people and say i'm sending you money with no doc, no address, and take a percentage of what i'm sending. a welcome invitation to fraud. i want to go back -- and 40%, at the peak of the market, 40% of these originations never made a single payment. 40%? 40%. so we had no checks -- all those checks and balances didn't work. isn't the new york times to blame here somewhere? can you throw them in at number six? now we do have to go. the point i'm trying to make -- that's the only time -- the point i'm trying to make, if we have the failure of all of our safety valves and check and balances, it's better to say that we don't have any. than to try to -- when they're ineffective. we're going to pick really smart people. when was the last time you heard anyone talk about those five organizations as the real cause -- we'll get her in and then we'll be fine.

This transcript is generated by automated closed captioning, has not been edited, and may not be entirely accurate.

Monday, September 10, 2012

Jim Rogers: Politicians' Green Light to ECB Sovereign Bond Purchases "Same Old Garbage"

Jim Rogers is interviewed on CNBC in London. Rogers dismisses recent developments in Europe where Germany's Chancellor Angela Merkel has agreed to some monetization of the debt via European Central Bank purchases of sovereign bonds from highly-indebted countries. This is not a game-changer and will make things worse because it will lead eventually to more debasement of the currency, high inflation and higher commodity costs. "These guys have been saying the same old garbage for a long time," he tells CNBC.

Friday, August 31, 2012

Washington Policies Spawned the Toxic Mortgages and Assets That Brought Us the Financial Crisis

Lecture to Ethics Class
Carey School of Business, Johns Hopkins University
Legg-Mason Building, Baltimore East Harbor Campus
Inner Harbor, Baltimore, Maryland

August 27, 2012

By Robert Stowe England

It’s nearly four years since the advent of financial crisis. Yet, for most Americans, a thick fog still shrouds its origins

Finding the answer to what went wrong is what compelled me to write Black Box Casino. In the end, it was a detective story where even a list of important actors could run into the hundreds.

At the center of origins of the crisis is a single industry – the mortgage industry.

As senior writer for Mortgage Banking magazine since 1988, I have reported on the vast changes sweeping through the industry for more than two decades.

The mortgage industry in 2008 was nothing like it was when I started covering it.

Twenty years ago the mortgage industry was disciplined by the free market. It was flexible and innovative. New loan products would appear and market players would experiment with flexible underwriting standards. Risky products were priced to cover expected losses. When players miscalculated, they were soon out of business.

Over time, however, the virtues of the mortgage market slowly failed and the market became an engine of toxic mortgages.

By the summer of 07 the entire private sector side of securitization had collapsed under the weight of bad mortgages. No investors would buy the securities that funded these mortgages, so no new lending could occur.

One year later in September 08 the government-sponsored enterprise or GSE side of the market – Fannie Mae and Freddie Mac – failed and had to be nationalized. So far, their failure has caused the taxpayers $187 billion.

Fannie and Freddie, once the benchmarks for prime credit, had become tarnished brands.

The decline in reputation was so severe, an executive from Freddie Mac confided to me a few years ago, “Our reputation ranks somewhere just above or just below the Ebola virus.”
Never has a market so large – at $11 trillion in ’08 one of the largest securities market in the world at the time – failed so thoroughly and spectacularly.

The failure of the mortgage industry is the underlying event that created trillions in toxic assets spread around the globe that set the stage for the financial crisis.

The extent of risky lending and shady accounting practices were hidden because so much activity had moved into black boxes – which are financial institutions or instruments that lack transparency.

Watching the once virtuous mortgage market collapse was a shock. It was also alarming to see the mortgage market crash mushroom into the financial crisis.

In the debate over who and what caused the crisis, it is important to understand the difference between fundamental causes that created the conditions for the crisis and the proximate causes that lit the match to the gunpowder that blew up of the financial system.

I think there is fairly widespread agreement that the Lehman Brothers bankruptcy is the explosion that brought us the crisis.

Using war military history a metaphor, Lehman’s failure’s role in the financial crisis is equivalent to the role of the 1914 assassination of the Archduke Ferdinand in Sarajevo to World War I.

Root causes

We need to go back to root causes to understand why the mortgage market failed. When we do that, we find that Fannie and Freddie were the key contributors to the fundamental transformation of the mortgage market from a sound one to an unsound one.

They were the central players in a large infrastructure of housing policies put together in Washington in the mid-1990s that set the mortgage market on the road to ruin.

Congress is the ultimate responsible party for the failure of Fannie and Freddie because Congress enacted a misguided law in 1992 to set up the rules and regulations that would govern the two GSEs. That law is called the Federal Housing Enterprises Financial Safety and Soundness Act. It is often shortened to the GSE Act.

Despite its name, the law’s provisions did not assure safety and soundness – indeed, they paradoxically worked to guarantee the institutions would fail in time.

The chief Congressional author of the plan was House Banking Committee Chairman Henry Gonzalez. This maverick Texan, who liked to boast he was one of the few in Congress who refused campaign contributions from PACs, secretly handed over the writing of the law to an informal alliance of housing activists, such as ACORN, and Jim Johnson, chairman of Fannie Mae. The agreements hammered out between the activists and Johnson – craftes to serve their own self-interests and not the public interest – were introduced as Gonzalez’s own bill and became law.

Virtually every provision in the GSE Act created moral hazard. In retrospect, the law seemed to have been set up to benefit politicians and reward executives at Fannie and Freddie first and foremost, and generate funds for community and housing advocates secondarily.

Safety and soundness provisions were weak. For example, capital standards were extremely low. Fannie and Freddie only had to hold less than half a percent capital (0.45) to back up the guarantees to pay principal and interest on their securities should any of them fail. That’s a staggering 200 to 1 leverage. As billions in loans have failed, it is the taxpayer that pays the investors in those securities.

The GSE Act gave a green light to Fannie and Freddie to build up portfolios that served no useful public purpose but which enriched shareholders and executives at the two companies. Again, capital standards at 2.5 percent were weak for these securities and loans.

The GSE Act established a regulatory agency to oversee Fannie and Freddie – the Office of Federal Housing Enterprise Oversight or OFHEO. Unlike other banking regulators, OFHEO was not an independent agency, but housed within the Department of Housing and Urban Affairs or HUD. You can blame the first Bush Administration’s Treasury Secretary Jim Brady. His Treasury Department had called for legislation to better regulate the GSEs but implausibly proposed a safety and soundness regulator captive to HUD.

Under the GSE Act, Fannie and Freddie did not have to audit their financial statements or make periodic public disclosures in filings with the SEC – assuring they would be black boxes where hidden risks could accumulate.

This lack of transparency allowed top executives to manipulate earnings to increase their compensation. Franklin Raines and Fannie, Leland Brendsel at Freddie did so with gusto, creating huge scandals at both companies. And, yet, they paid no penalty for their accounting control fraud.

The law also gave HUD the authority to set affordable housing goals that were really closer to mandates for Fannie and Freddie. The goals could be raised without regard for safety and soundness. OFHEO also had very limited authority to require Fannie and Freddie to raise their capital standards or reduce their assets to improve their safety and soundness if they took on too much risk.

Affordable housing goals were a political bonanza for members of Congress. Year after year, they could call for them to be raised higher and higher and were rewarded with lavish praise in the media. With no regulator to put on the brakes, the goals were raised higher and higher and the two companies adopted underwriting standards that went lower and lower. This process was so impossible to stop politically that it continued until Fannie and Freddie failed.

The affordable housing goal for low and moderate-income households, which was 30 percent in 1992, rose to 57 percent in 2008. A separate goal for low income only was raised from 11 percent to 27 percent over the same period.

The quest to achieve these goals – and in the process to further enrich its senior managers – led Fannie and Freddie to offer subprime and other highly risky loans such as interest only and loans that could be made without relying on the borrowers income or assets – in short, the borrower’s ability to repay the loan. Rather than publicly reveal this risky activity, however, the two companies concealed it, lying to public and to investors.

The risk appetite of Fannie and Freddie also boosted the market for riskier private label mortgage-backed securities. Their former regulator, Jim Lockhart, has said that Fannie and Freddie could not have met their affordable housing goals without buying the private label securities they loaded onto their balance sheet. In 2004, for example, the GSEs bought 45 percent of all subprime private label securities issued.

By mid-08, Fannie and Freddie held $2 trillion of $4.8 trillion in risky mortgages outstanding in the market. Most observers in the market, however, still believe their loans were prime. Another $900 billion from FHA, VA and other programs brought the government-related total for risky loans then outstanding to $2.9 trillion – greater than the $1.9 trillion represented by the even riskier private label mortgage-backed securities market.

Thus, the government share of risky mortgages was 60 percent versus 40 percent for those backed by private sector guarantees.

It’s no surprise then that the largest toll to taxpayers so far is to cover losses at Fannie and Freddie – far, far more than losses incurred in any of the other bailouts.

Private Sector

While Fannie and Freddie drove the trend to riskier and riskier mortgages in the 1990s and early 2000s, beginning around 03 and 04, the private sector took the lead.

Private label had gained a dominant share of mortgage securitization by 05 – not by doing more jumbo prime lending but by greatly expanding subprime and greatly weakening lending standards in the Alternative A or low documentation business.

Indeed the $1.8 trillion in risky mortgages in the private label side were of poorer credit quality than many, if not most of the risky loans in the government sector.

What went wrong?

Part of this derives from a decision by key players to go for market share at exactly the wrong time. The leader of the pack was Angelo Mozilo, chairman and co-founder of Countrywide, who set out to dramatically increase market share in 2003. At the time, the mortgage company’s share was 11 percent. Mozilo wanted to raise it to what anyone would deem to be an impossible dream – 30 percent by 2010.

Countrywide was able to reach a nearly 17 percent share of originations by 07 but at a great cost. The company was on the verge of failing. It was first rescued from collapse in August 07 and then acquired by Bank of America at the height of the crisis.

Mozilo and many other mortgage bankers, surprised perhaps at the degree to which investors were willing to fund subprime and Alt-A mortgages in the midst of the growing housing bubble, were able to pursue market share schemes and competitive strategies that would embarrass a novice riverboat gambler.

Fannie and Freddie responded to private label’s growing market share by jumping deeply into the adjustable rate mortgage or ARM market in 2004, becoming one of the nation’s biggest predatory lenders with atrocious products such as 2/28 ARMs for wage earners with both low FICOs and stated or no incomes.

The private sector, nor surprisingly got the short end of the stick when Fannie and Freddie decided to move lower into subprime credit scores to take market share. That’s because having an implicit government guarantee gave them a pricing advantage and they could undercut the private sector in whatever market they chose to enter.

Why didn’t the private market correct? Why didn’t investors in private label pull back?

The answer is that Wall Street found a way to short-circuit a market correction and keep the securitization party going by rolling unwanted BBB tranches of subprime securities into AAA subprime collateralized debt obligations or CDOs.

In my book I recount how Kyle Bass, a hedge fund manager from Texas who invested in subprime, inadvertently learned about Wall Street’s role when he attended a friend’s wedding in a small Mediterranean resort town in Spain. There he was introduced to someone from a major investment bank who clued him in on what Bass later called “the greatest bait and switch of all time.”

The investment banker told Bass that American institutional investors had stopped buying the BBB or non-investment grade tranches of private label subprime mortgage securities beginning in ’03 and the people who put these deals together were looking for a way to keep the party going.

The solution: Wall Street firms, such as Credit Suisse, began to create CDOs to acquire the unwanted BBB tranches and thereby turn 91 percent of them into AAA-rated CDOs. This was justified as sound financial engineering under the idea that geographic diversification of the loans would prevent sufficient losses to hit cash flow to the AAAs. The deals were structured to withstand high levels of defaults, up to 20 percent or more in regional markets, before losses would hit AAA tranches.

American investors were not particularly attracted to the CDO AAA’s, knowing full well they were BBB subprime securities disguised as AAAs.

The guy from the big investment bank at the wedding in Spain told Kyle Bass that it was foreign investors with dollar surpluses who needed dollar-denominated investments that were easy marks for selling the AAA subprime CDOs, including banks and investors in Asia and Europe. For these investors, the higher coupon on these triple A’s seemed irresistible and they snapped them up.

Wall Street would never have been able to engage in this financial alchemy without a key decision made by Basel Committee on Banking Supervision, representing the major central banks of the world.

Thanks to agreement among central bankers in Basel, Switzerland, it was recommended that private label mortgage securities be given the same low 1.6 percent capital requirement as Fannie and Freddie securities. That idea emerged in a Basel white paper in 1999, and was adopted by U.S. banking regulators and went into effect in ’02. Moody’s Investor’s Service strenuously objected to the idea in a letter to the Basel Committee in 2000, warning if it were adopted, it would create moral hazard.

What Moody’s realized then was that the new capital rules meant credit rating agencies would determine bank capital requirements as they handed out their credit ratings. Since the agencies had to rate each and every deal and not a broad class of investments, they would face intense pressure to give AAA ratings from the securities issuers who were paying to rate the deal, Moody’s warned.

We all now know Moody’s was right and the Basel Committee made an epic fail decision when it ignored Moody’s advice.

As the subprime CDO market took off in 05, Merrill Lynch and Citigroup expanded their business at the worst time and ended up holding more toxic CDO assets than any of the others by 07.  All the other major Wall Street firms, however, were also holding significant amounts toxic assets: Morgan Stanley, Goldman Sachs, JPMorgan Chase, Lehman and Bear Stearns.

Shadow Banking

Meanwhile another great secular trend – shadow banking – made the global markets more vulnerable to panics from the sudden disclosure of large hidden accumulations of toxic assets. Shadow banking is the part of the economy where securitization replaces lending and overnight lending replaces deposits – all in a bid to escape the prudential regulation of banks.

Indeed the growth of Fannie Mae and Freddie Mac greatly expanded shadow banking and they were the largest institutions in this segment.

A vast increase in overnight or repo lending at very low interest rates, used to acquire high-yielding assets, like subprime mortgages and CDOs, put the global financial system at risk. Trillions of dollars turned over every night.

Two hedge funds at Bear Stearns, relying heavily on overnight funding, used those funds to invest heavily in subprime mortgage securities and CDOs to maximize returns for investors. The collapse of the two funds in June 07 dramatically exposed the vulnerabilities of the shadow banking system.

Yet, the regulators failed to grasp the significance of what the failure of the Bear Sterns funds revealed about the broader financial system.

Less than two months later, in August ’07, the entire world of private label mortgage securities collapsed – and with it the entire market for all asset-backed securities and all asset-backed CDOs.

Synthetic CDOs magnified the extent of the impact of the crash of CDOs by greatly increasing the size of bets made on subprime mortgage securities.

Synthetic CDOs were made possible by creating a super senior tranche made up entirely of credit default swap contracts. Credit default swaps are private insurance contracts and unregulated. The Wall Street firms that arranged the CDOs guaranteed the timely payment of principal and interest on one side of the credit default swap contracts, with savvy hedge fund investors snapping up the other side of the contract, standing to benefit when subprime mortgage securities cratered.

Wall Street firms were able to put together synthetic CDOs because they could buy insurance protection via credit default swaps from AIG and others to cover their guarantees. The synthetic CDO was even more perverse than the cash CDO because it creating opposing interests betting for and against the deal.

Some investors did not understand the idea of opposing interests and assumed deals were put together to be good investments. Even at AIG, sophisticated financial market participants were slow to begin to ask whether or not their insurance against subprime loans might encourage CDO managers to deliberately create a pool of bad assets that would fail.

Some underwriters for these deals worked with the parties betting against them to identify what assets should go into the deal. This is how Goldman Sachs got into trouble in the Abacus deal that became the focus of a day-long hearing. Hedge fund manager John Paulson made $15 billion in 07 betting against subprime securities. These were zero-sum bets where other parties had to lose $15 billion.

It was really hedge funds, not Wall Street firms, that drove the process of adverse selection. Many of the funds sponsored CDOs so they could bet against subprime MBS referenced in the credit default swaps in the deal. As doubts rose about the CDOs and investors refused to buy the BBB tranches, Wall Street firms reached a gentleman’s agreement to buy one another’s BBB tranches to keep the CDO mania going. That was revealed in the final report of the Financial Crisis Inquiry Commission.

To make matters worse, Wall Street banks also held on to the super senior tranches when they could no longer obtain back-up insurance because they were deemed to be super safe.

A single Chicago hedge fund, Magnetar, sponsored $50 billion in CDOs that failed spectacularly. They made big gains betting against the deals they sponsored while publicly claiming to be neutral on the housing market.

The demand for weaker subprime credits had a perverse effect. To generate the BBB-rate subprime mortgage securities that went into the CDO, about ten times as many AAA and AA subprime securities had to be created. This was not too difficult, as Fannie and Freddie continued to be the biggest buyers of AAAs.

To meet the overall demand by CDOs for subprime private MBS, mortgage lenders began to expand and search out high volumes of subprime and risky mortgages – many of them to borrowers with dreadful credit ratings and little or no income.

In an outcome a James Bond villain would love, hedge funds and Wall Street were facilitating a flow of funds into the mortgage industry in search of bad credits.

While securitization was supposed to distribute risk widely and thus improve the safety and soundness of the global financial system, it instead did the opposite. It dramatically weakened the financial system.

Wall Street firms and some major banks ended up holding concentrations of toxic assets – something they typically avoided in the past.

While losses were spread across the globe, the losses were greatly magnified through the use of credit default swaps.

The overall level of bets in the credit default system hit $45 trillion in 2008 against actual underlying debt assets of $25 trillion, meaning that there were $20 trillion in naked credit default swaps made by people who held no interest in the underlying asset. These were pure casino bets. We don’t really know how much of that $20 trillion was bet on subprime – since the banking regulators did not track these assets for non-depository institutions, including most of the big Wall Street firms.

What if the subprime CDO market had never existed – would it have prevented the financial crisis of 2008?

If Wall Street had not developed the subprime CDO and the subprime originations had remained at the ’02 level, there would have been $1.12 trillion less in private label mortgage backed securities and, of course, none of the $700 billion in subprime CDOs. Without synthetic CDOs, the huge credit default swap casino bets would not have been made. At minimum, the crisis would have been greatly contained.

The hand of Fannie and Freddie should also be recognized in the CDO market. As the largest buyers of subprime MBS, they helped generate the raw material for the CDOs. Without them, the CDO market would have been smaller.

If Fannie and Freddie had limited themselves to buying sound prime loans and securities, there bubble would have burst sooner. And, after the bubble burst, housing prices would likely have seen lower price declines that the 30 plus percent level we have seen, which topped the declines in the Great Depression.

That would be the case because there would have been fewer bad mortgages likely to fail and, thus, less houses would have come on the market. With less supply of foreclosed homes, the hit to private label MBS would have been less pronounced. Ditto to the hit to the financial system and the economy.

Thus, there are two key fundamental factors in the mortgage market that fueled the housing bubble and set the stage for the crisis: Fannie and Freddie’s lending spree driven by lowering underwriting standards, combined with the creation and frenzied growth of toxic subprime CDO market. These excesses created so many bad loans that when the bubble burst, the subsequent hard landing was far worse than it would have been if the bubble had been fueled only by low interest rates, as it was in other countries.

Bear Stearns

As 2008 began, news of rising delinquencies and defaults rocked the financial world. Bear Stearns became the first major victim of the fears about the level of toxic assets on balance sheets. Alan Schwartz, former Bear Stearns CEO, has acknowledged this point as a cause in their demise.

The panic that was building around fears about toxic assets hidden on Bear Stearns balance sheet was aggravated by a regulatory change that had left markets more vulnerable to panics. In 07 the Securities and Exchange Commission did away with the uptick rule, which had been in place since 1938. This rule disallowed short selling of securities except on an uptick or small increase in the price of a security.

In particular, the end of the uptick rule made it easier for market manipulators to engage in naked short selling on a vast scale and conduct bear raids that could crash their target completely over a short period of time. A naked short sale is when some sells a security they do not own or have not borrowed – it is illegal.

Like a cloud of locusts over a cash crop ready for harvest, naked short sellers struck Bear Stearns with a swift devastating strike. It all began on March 11, 08, when an unidentified parties made a combined $1.7 million bet through put options that Bear Stearns would collapse within 10 days. It was a stunning bet that no one would make without “knowing something” the rest of us did not know.

Immediately false rumors were widely circulated on Wall Street that Bear Stearns was out of cash even though they had $18 billion on hand. Panicky investment funds began to pull out their brokerage accounts from Bear and overnight lenders refused to roll over cash from repos. In only few short days, Bear Stearns was down to $2 billion in cash and on the verge of collapse.

During the same period, unknown parties placed sell orders for more than millions of shares of Bear Stearns they did not own or borrow and failed to deliver when the settlement date arrived. This activity is consider fraud and is illegal.

Bear Stearns had a share price of $62 before the bear run. But in a matter of days, out of options, the company agreed to be sold to JPMorgan Chase for $2 a share or $236 million, less than the value of its corporate headquarters. Meanwhile, the parties who had placed the $1.7 million bet pocketed $271 million – more than the initial sale price of Bears Stearns to JPMorgan Chase.

While the collapse of Bears Stearns should have been a wake-up call to Chris Cox at the SEC and Hank Paulson at Treasury, no one took steps to prevent naked short selling from bringing down other investment banks – as many in the market now expected. The feds, as Paulson recounts in his book On The Brink, began to prepare for a potential rescue of Lehman or, failing that, a plan to limit the damage.

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

The regulators could have forestalled Lehman by earlier temporarily banning short sales on key financial firms – something they did after Lehman to stop a run on Morgan Stanley and Goldman Sachs – or reinstating the uptick rule on an emergency basis.

Having failed, thus, to take the steps that could have prevented the crisis, could they have still forestalled Lehman’s bankruptcy at the 11th hour?

That is often viewed as the most important question surrounding the crisis.

First, let me briefly explain what authorities were trying to do before the collapse. Under Treasury’s lead, federal officials were working over the summer to break Lehman into a good bank and bad bank. The good bank would be sold to a willing buyer looking to pick up Lehman’s best assets for a deep discount. While Andrew Ross Sorkin’s book Too Big To Fail she some light on this, and Paulson’s book shed more light, the Financial Crisis Inquiry Commission’s final report filled in a lot of still missing pieces.

Paulson wanted a consortium of big banks to buy Lehman’s bad assets and place them into a special purpose vehicle like the Maiden Lane entity set up for Bear Stearns’s bad assets in March.

Indeed, Paulson called together the heads of the major banks at the New York Fed in September – that scene was recreated in the HBO special Too Big To Fail. People like Jamie Dimon, Lloyd Blankfein, and John Mack engaged in marathon round-the-clock negotiations. They reached agreement to fund the purchase of the bad assets and place them in a new Maiden Lane vehicle. In principle, after much bickering, they agreed to share amongst them an estimated $10 billion in losses to remove the bad assets from Lehman’s books.

A private sector solution without a government bailout was about to be consummated. The only thing unsettled at this point was whether or not there was a buyer for the good assets.

After Bank of America backed out at the last minute, Barclays Bank, headquartered in the United Kingdom, agreed to buy the good assets at Lehman.

There was one hitch from Chancellor of the Exchequer Alistair Darling. He said that Barclays could not guarantee Lehman’s assets from the time the deal was struck until the time Barclays board could meet and agree on the deal, which could be 30 to 60 days. Another entity would have to take on that exposure.

The most likely candidate to take on the temporary risk was the Federal Reserve. Bernanke, in testimony, claimed the Fed could not engage in loans or guarantees at Lehman because the value of the assets at Lehman were insufficient to cover the Fed’s exposure.

Neither Bernanke nor Paulson have ever revealed what options they were considering when they let Lehman go bankrupt – nor have any of the books or films made on the subject. They did not say if they considered the option of having the Fed guarantee the trades. It was seem only natural that they did consider a Fed guarantee and possibly other options, such as a Treasury intervention to guarantee the trades.

Fed historian Allan Meltzer claimed the Fed had the authority to guarantee the trades and its failure to do so constitutes the biggest mistake the Fed has made in its entire history. In think future historians are likely to come to this same conclusion.

One should also lay more blame at the feet of Lehman’s chairman Dick Fuld, for failing to move in a timely manner to find a company to buy Lehman when it was still possible in the spring or early summer of 08.

As one observer put it, “They kept sending an ambulance and Dick Fuld refused to get in it.”

So what is the bottom line here? No major actor in the crisis who broke the law or engaged in reckless market manipulation and made fortunes in the process has been brought to justice. Recently a number of investigations by SEC and the Department of Justice have ended without any charges or even a settlement.

Further, those who made colossal policy blunders in Washington or foolish business decisions on Wall Street have issued no mea culpas and have shown no contrition.

The only enforcement bright spot is that the SEC is proceeding with its investigation of fraud by the top executives at Fannie (Daniel Mudd) and Freddie (Richard Syron). Their cause has been immeasurably strengthened because acting director Ed DeMarco at the Federal Housing Finance Agency ordered Fannie and Freddie to cooperate fully with the investigation. It’s not inconceivable that upcoming trials in these causes could lead to some actual convictions.

The nation faces the difficult task of reviving the mortgage market – that is the most important thing that needs to be addressed right now. On that front, surprisingly, there are some noteworthy developments, albeit tentative ones.

Timothy Geithner’s Treasury Department has demonstrated a good understanding of how housing, mortgage and financial markets work. Their white paper in early 2011 declared that a future vibrant mortgage and housing market should rely primarily on the private sector. They’ve recently moved to limit the potential for Fannie and Freddie by seizing all their profits going forward and forcing them to reduce their portfolios down to $250 billion each, a ¾ reduction from their peak levels.

Yet, thanks to Dodd-Frank, bank regulators are in the process of imposing severe restrictions that will significantly limit the availability of mortgage finance and further delay a full housing recovery. This moves increase, not decrease the need for Fannie, Freddie and the FHA.

In Congress, important work has been done under the guidance of Representative Scott Garrett, Chairman of the House Subcommittee on Capital Markets and Government-Sponsored Enterprises. Legislation has come out of that committee that gives the Federal Housing Finance Agency the power to set underwriting and securitization standards that could help spark a revival of private label securitization.

Ed DeMarco has also steadfastly refused to allow principal reductions for Fannie and Freddie, a move that would have increased taxpayer losses and reduced investor appetite for a revived mortgage securities market.

The recent federal and state attorneys national mortgage settlement, however, is seen by mortgage investors as a setback to their property rights and might both reduce the available of mortgage funding and the cost of that funding in the future.

Finally, rules affecting mortgage brokers has limited the revival in this part of the market that will be needed to expand the mortgage origination capacity of the industry and to make it competitive again.

Thus, we’re still a long way from a revival in the mortgage market. That, in turn, will inhibit the pace of the ongoing recovery in the housing market.