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Showing posts with label financialmarkets. Show all posts
Showing posts with label financialmarkets. Show all posts
Banks pressured to buy sovereign debt: When will government realize the problems from forcing banks to make risky loans?

Banks pressured to buy sovereign debt: When will government realize the problems from forcing banks to make risky loans?

Government forces banks to lend money to risky borrowers.  Now they force banks to lend money to governments.  When will the government learn that forcing banks to take on more risk than they want causes problems?  From CNBC:

US and European regulators are essentially forcing banks to buy up their own government's debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.
Regulators are allowing banks to escape counting their country's debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.
While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.
"Captive bank demand can buy time and can help keep domestic yields low," Lorenzen wrote in an analysis for clients. "However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn't used very prudently." . . .
Charlie Cook goes after Intrade

Charlie Cook goes after Intrade

Here is a suggestion: if Cook really believes that he is a lot better at guessing political outcomes than Intrade, he has a chance of making a lot of money. From the National Journal:
. . . On that Monday, the Intraders saw Republicans as having a 74.9 percent chance of keeping their House majority. Democrats had a 29.8 percent chance of regaining the chamber. These predictions strain credibility a bit, as the odds add up to more to than 100 percent, but that’s another matter. On this one wager, the numbers are not too far off The Cook Political Report’s prediction that Republicans have a 75 percent chance of holding the House (and, yes, Democrats have a 25 percent chance of taking it). In the Senate, Intrade says that Republicans have a 56 percent chance of taking control (its phrase, not mine). Democrats have a 27.9 percent chance. My hunch is that the odds of neither side controlling the Senate are 100 percent. At The Cook Political Report, we see the Senate as purely a 50-50 proposition. But it’s the 58.8 percent chance of Obama winning that interests me today, because that prediction stands in stark contrast to what most pollsters, Democrats and Republicans alike, whom I talked with privately, believe. The number crunchers who conduct and analyze polls, and others who study these things closely, see a lot of metrics pointing to a very close contest that could go either way. They don’t see an election in which either Obama, or Mitt Romney, is likely to have an almost six-in-10 chance of winning. . . .
Regulation is out of control in the US

Regulation is out of control in the US

From The Economist magazine:

A Florida law requires vending-machine labels to urge the public to file a report if the label is not there. The Federal Railroad Administration insists that all trains must be painted with an “F” at the front, so you can tell which end is which. Bureaucratic busybodies in Bethesda, Maryland, have shut down children’s lemonade stands because the enterprising young moppets did not have trading licences. The list goes hilariously on. . . .

Consider the Dodd-Frank law of 2010. Its aim was noble: to prevent another financial crisis. Its strategy was sensible, too: improve transparency, stop banks from taking excessive risks, prevent abusive financial practices and end “too big to fail” by authorising regulators to seize any big, tottering financial firm and wind it down. This newspaper supported these goals at the time, and we still do. But Dodd-Frank is far too complex, and becoming more so. At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929. Worse, every other page demands that regulators fill in further detail. Some of these clarifications are hundreds of pages long. Just one bit, the “Volcker rule”, which aims to curb risky proprietary trading by banks, includes 383 questions that break down into 1,420 subquestions. . . . .

of the 400 rules it mandates, only 93 have been finalized. . . .

Next year the number of federally mandated categories of illness and injury for which hospitals may claim reimbursement will rise from 18,000 to 140,000. There are nine codes relating to injuries caused by parrots, and three relating to burns from flaming water-skis. . . . .
"Dems push Fannie, Freddie regulator on mortgage write-downs"

"Dems push Fannie, Freddie regulator on mortgage write-downs"

Do Democrats have any idea what these types of policies will have on new loans being made? If you can have a loan you make marked down dramatically after you make it, why would you ever make that type of loan? From The Hill newspaper:

Congressional Democrats are expected to continue pushing a federal housing regulator to write down mortgage principal for government-backed loans if a settlement with banks doesn't help out enough homeowners.

The federal government is "very close" to an agreement with mortgage servicers that could help about a million homeowners, Housing and Urban Development Secretary Shaun Donovan said this week.

The deal, which also includes states' attorneys general, would require the nation's five largest banks — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial — to spend upward of $25 billion to help borrowers caught up in so-called robo-signing practices where servicers signed-off on foreclosure paperwork without properly reviewing documents. . . .
It turns out that governments might not be that great a giving out mortgages

It turns out that governments might not be that great a giving out mortgages

So is the government really able to do a good job lending out taxpayer money? Does a default rate three times higher than other financial institutions in the area look good? Of course, DC has lots of extra money that they don't mind throwing away. From the Washington Post:

D.C. housing officials have routinely subsidized home purchases that low-income buyers could not afford, paving the way for foreclosures, liens and financial hardships.

Nearly one in five buyers participating in the city’s 35-year-old loan program for first-time homeowners is behind on mortgage payments, city officials said — a default rate that’s at least three times higher than the overall rate in the region. Nearly 50 buyers have received notices of foreclosure in recent years, while more than 50 others have struggled with homeowner association or utility liens, The Washington Post has found.

DeAngelo McDonald, a Metro bus driver and father of six who earns $61,000 a year, financed a $338,000 house in 2008, in part with a loan from the city, paying double what city loan officials had estimated he could afford. His three-bedroom home in Southeast is now in foreclosure.

“I was a first-time home buyer thinking that everything was on the up and up,” said McDonald, 48, who declared bankruptcy in 2009. “At any minute, we could be out on the street. It’s heartbreaking. It’s scary. I don’t know what could happen, especially with my kids.”

For more than three decades, the District has helped buyers offset the cost of housing with loans for as much as $77,000. . . .


Now the state legislature in Washington State is talking about setting up a state bank.

The idea of a state bank - a favorite of the Occupy movement that sees it as an alternative to Wall Street - has strong support among the Democrats who control the state House. Speaker Frank Chopp called it a top priority last week in a speech opening this year's session of the Legislature.

"I think people see this as a form of empowerment, that we're going to try to do something in our state to regain control over the safety of our finances," said David Spring, a community-college instructor from North Bend who has spoken at Occupy rallies.Skeptics wonder where the money would come from to accomplish the bank's goals, such as making low-interest loans to college students and to local governments for public works.

Republican lawmakers and the Democratic state treasurer, Jim McIntire, say government programs already exist to serve those functions. The Public Works Trust Fund loans out hundreds of millions of dollars a year to Washington's local governments for infrastructure, and an alphabet soup of agencies have similar goals, including the Community Economic Revitalization Board, the Drinking Water State Revolving Fund, and the Transportation State Infrastructure Bank. . . .

"Why set up a whole new bureaucracy?" asked Rep. Barbara Bailey, R-Oak Harbor. "And one step leads to another step and next thing you know we have a full-blown financial institution that is in direct competition with our financial industry - which by the way is very good in this state." . . .

The proposed Washington state bank is modeled on the 93-year-old, state-run Bank of North Dakota. . . .
Person who lost MF Global's $1.2 billion is the financial adviser for the Environmental Protection Agency

Person who lost MF Global's $1.2 billion is the financial adviser for the Environmental Protection Agency

From the Fox News:

During two days of recent congressional hearings into how as much as $1.2 billion disappeared from MF Global customer accounts, the chief operating officer of the imploding investment firm responded again and again that he did not know.

Yet as the House and Senate interrogated Bradley I. Abelow and other top executives at MF Global Holdings Ltd., lawmakers did not mention Mr. Abelow’s role as a financial adviser for the Environmental Protection Agency, which as of Tuesday listed him as the chairman of its financial advisory board.

Even as he finds himself the public face of a bankruptcy and admitted to lawmakers that he had no idea how client funds disappeared, Congress and the administration have voiced no public concern about Mr. Abelow’s role advising the $8.6 billion government agency on its finances.

“EPA relying on Wall Street for financial guidance is like the blind leading the blind,” said Jeff Ruch, president of Public Employees for Environmental Responsibility, a nonprofit environmental advocacy group based in Washington. . . .
The Obama administration learned nothing from the financial crisis

The Obama administration learned nothing from the financial crisis

Remember how the pressure to give loans to individuals who couldn't afford them lead to the financial crisis (see here and here)? Failure to count welfare or unemployment payments as income is viewed as evidence of discrimination. Now the Obama administration forces Bank of America to pay record $335 million penalty for supposedly discriminating against minorities:

Bank of America Corp. will pay $335 million to settle allegations that its Countrywide Financial Corp. unit discriminated against black and Hispanic borrowers, in the largest residential fair-lending settlement in history.

The agreement, announced on Wednesday, involves more than 210,000 minority borrowers who were charged higher fees or who could have qualified for a prime mortgage, one offered to borrowers with the best credit histories, but instead were steered into a more costly subprime loan.

The case is the first by the Justice Department that accuses a lender of steering borrowers to more costly mortgages. The agreement also ends a separate discriminatory lending lawsuit filed by Illinois Attorney General Lisa Madigan in state court in June 2010.

Bank of America neither admitted nor denied the allegations in the settlement. The bank said it settled to resolve issues tied to Countrywide's practices before Bank of America's July 2008 purchase of the lender. The bank said it is "committed to fair and equal treatment of all our customers." . . .
The SEC sues Ex-Freddie, Fannie CEOs over Fraud

The SEC sues Ex-Freddie, Fannie CEOs over Fraud

Now even the SEC is accusing Fannie and Freddie of committing fraud.

The lawsuits filed today in Manhattan federal court were followed by an SEC statement that it had entered into “non- prosecution agreements” with each company. Fannie Mae, the government-sponsored enterprise which issues almost half of all mortgage-backed securities, and Freddie Mac, the McLean, Virginia-based mortgage-finance company, had “agreed to accept responsibility” for their conduct, the SEC said.
In the lawsuits, the SEC said Syron, Mudd and other executives understated exposure to subprime mortgage loans. From 2007 to 2008, Freddie Mac executives said the company’s exposure was from $2 billion to $6 billion when it was actually as high as $244 billion, according to one SEC complaint.
From 2006 to 2008, Washington-based Fannie Mae executives said the firm’s exposure to subprime mortgage and reduced- documentation loans was about $4.8 billion when it was almost 10 times greater, according to the regulator.
‘Told the World’
“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” Robert Khuzami, director of the SEC’s enforcement division, said today in a statement. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books.” . . .
The Federal Reserve's massive wealth transfer

The Federal Reserve's massive wealth transfer

The article neglects to mention that many banks were forced to take loans against their will. But it sure was a way to increase bank profits. From Bloomberg:

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue. . . .

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.” . . .
Is housing heading down again?

Is housing heading down again?

From CNN:

The besieged housing market has even further to fall before home prices really hit rock bottom.
According to Fiserv (FISV), a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices.
Several factors will be working against the housing market in the upcoming months, including an increase in foreclosure activity and sustained high unemployment, explained David Stiff, Fiserv's chief economist.
Should home values meet Fiserv's expectations, it would make it the third (and lowest) trough for home prices since the housing bubble burst. . . .
Home sales fall to 13 year low in 2010, foreclosures are expected to rise this year

Home sales fall to 13 year low in 2010, foreclosures are expected to rise this year

It is hard to believe that things could get worse in the housing market.

The number of people who bought previously owned homes last year fell to the lowest level in 13 years, and economists say it will be years before the housing market fully recovers. . . .
The National Association of Realtors reported Thursday that sales dropped 4.8 percent to 4.91 million units in 2010. That was slightly fewer than in 2008, which had been the weakest year since 1997.
The poor year for sales did end on a stronger note. Buyers snapped up homes at a seasonally adjusted annual rate of 5.28 million units in December, the best sales pace since May and the 12.8 percent rise from November was the biggest one-month surge in 11 years. . . .
Last year, a record 1 million homes were lost to foreclosures, and foreclosure tracker RealtyTrac Inc. predicts 1.2 million more will be lost this year. . . .

Guess what Metro Area has seen the biggest home price increases over the last year

Hopefully you guessed Washington, DC..


The indices have a base value of 100 in January 2000.
So how does the housing market look?

So how does the housing market look?

My own guess is that with the tax changes that are being discussed in Washington housing is not going to be a very good investment for years to come. From the Financial Times:

. . . Sales of existing homes grew by 5.6 per cent in November to a seasonally adjusted 4.68m properties, but that is 28 per cent below year-ago levels.

Although house prices rose 0.7 per cent in October, the index compiled by the Federal Housing Finance Agency has fallen 3.4 per cent over the preceding 12 months.

“We thought housing would bottom in 2010, but it looks like it will take another year,” said David Wyss, the chief economist at Standard & Poor’s.

Rising interest rates are also acting as a headwind by making it more expensive to refinance an existing mortgage or get a new loan. Purchase applications fell 2.5 per cent in the most recent week, while refinancing activity was down 25 per cent to its lowest level since April, according to the Mortgage Bankers Association.

If the cost of a 30-year fixed rate mortgage increases much beyond current levels of 5.07 per cent, half the borrowers will be outside the “refinancing threshold” and the rest will be locked out due to damaged credit or falling home prices, the MBA said. . . .
The end of Debit cards?

The end of Debit cards?

Here is a very easy prediction: there are going to be fewer debit cards, possibly a lot fewer cards. There seems to be so many substitutes. Not only do debit cards compete against each other, but credit cards are a substitute. There is also potential entry into the market. Discover (assuming that they don't already offer a debit card) could start to offer one. Other companies could directly offer a credit card themselves. Kmart and Kohl's have their own credit card and just like Sears went from having a Sears Card to Discover, they could do the same thing if there were all these extra profits to be had.

The new restrictions, most of which won't be made final until April 21, aim to cap the amount of money that debit-card issuers can charge merchants for so-called swipe fees. Banks would face a seven-to-12-cent-per-transaction cap on the interchange fees under either of the two proposals unveiled Thursday. That represents as much as an 84% drop from the current average of 44 cents. Analysts had been expecting a drop of up to 60%.

"Nobody expected it to be this draconian," said David Robertson, publisher of credit-card industry newsletter the Nilson Report. One bank executive said the cut was larger than the company's worst-case scenario. Banks, he said, will "push back."

Stocks of debit-card processors and banks that issue cards got hit. MasterCard Inc. plunged $25.73, or 10%, to $223.49. Visa Inc. tumbled $9.75, or 13%, to $67.19. . . .
Making foreclosures even more difficult

Making foreclosures even more difficult

Politicians undoubtedly think that they are going to be popular by forestalling some mortgage foreclosures. The problem is that they are making new mortgages more costly, raising future interest rates, and reducing the number of mortgages that will be made.

The Justice Department and other federal agencies have intensified their review of the banking industry's foreclosure documentation problems, using their powers over bankruptcy proceedings to scrutinize the treatment of troubled mortgages.

A key part of the effort is the Justice Department Trustee Program, the federal watchdog overseeing bankruptcies, which has launched a broad review of Chapter 13 bankruptcy filings by homeowners trying to halt foreclosure proceedings.

A U.S. official said Wednesday that 17 federal Trustee offices around the nation have recently stepped up efforts to scrub Chapter 13 filing documents, looking for documentation errors or improper practices such as inflated fees. Under Chapter 13 bankruptcy, a borrower seeks to halt foreclosure and comes up with a plan to catch up with their mortgage debt within five years.

Leading the federal response is Associate Attorney General Thomas Perrelli, the Justice Department's No. 3 official, who has been tapped to coordinate the efforts of multiple federal agencies, including the Treasury Department and the Securities and Exchange Commission, and also share information with state attorneys general.

The increased federal scrutiny puts more pressure on the banking industry, which is already dealing with probes by 50 state attorneys general into allegations of the improper use of "robo-signers" to foreclose on homes. The industry is also bracing for the results of a separate probe by the Federal Housing Administration, which is scrutinizing the way banks process mortgage payments. . . .
Barney Frank Finally Being Called on the Carpet for protecting Freddie Mac and Fannie Mae

Barney Frank Finally Being Called on the Carpet for protecting Freddie Mac and Fannie Mae

This story gets some of the historical facts wrong about the mortgage crisis. For example, it fails to note that Barney Frank's statement was in response to the Bush Administration's attempt to curtail Freddie Mac and Fannie Mae's risky behavior. Still it is about time that Barney Frank is being called to task for his actions in creating the financial mess.

Remarks about Fannie Mae and Freddie Mac by U.S. Rep. Barney Frank, D-Mass., during a 2003 committee hearing have become a campaign issue in 2010.

Frank said then that the two government enterprises were strong enough to withstand any threats -- and that if they did get into trouble they would not get a government bailout. Sean Bielat, the Republican seeking Frank's seat, has a clip from 2003 on his campaign Web site, "Retire Barney," and Frank has been struggling to explain himself, The Boston Globe reports.

Frank acknowledges what he said in 2003 was "wrong on both counts." He said he was defending Fannie and Freddie because he was afraid the Bush administration wanted to shut them down. . . .


Conservative Michael Graham has this piece in the Boston Herald:

Has any congressman ever wreaked so much economic damage on his nation?

Even Frank admits that he had “ideological blinders” about Freddie/Fannie. His push to put the taxpayer on the hook for high-risk loans to special-interest borrowers was done in the name of liberal politics, not economic rationality.

He now claims he just didn’t know any better. But everybody knew better in the summer of 2008 when Frank claimed “Freddie and Fannie are not in danger.”

Two months later they were bankrupt.

Here’s just one frightening phrase from a memo in Frank’s congressional committee: Fannie and Freddie participated in transactions “that would not normally be considered to be economically viable.”

“Not considered economically viable” could be Frank’s campaign motto. From opposing Reaganomics to opposing welfare reform to opposing the Bush tax cuts, Frank’s been wrong on nearly every major issue since taking office in 1980.

Then there’s Frank’s (ahem) winning personality. Voters looking for a shaken hand or a well-kissed baby shouldn’t count on Barney. He’s branded himself as the “congressman most likely to scream at you as if he forgot to take his meds.”

Many voters remember Frank insulting a Lyndon LaRouche fan at a town hall (“Talking to you is like talking to a dining room table!”). But not long after he attacked the intelligence of a Harvard law student for asking legitimate questions about Frank’s role in the financial meltdown.

Cruel, cutting and cranky - is there really a political market for this? . . . .
How to do your best to make sure that banks won't lend out money

How to do your best to make sure that banks won't lend out money

Does anyone understand how counterproductive this policy is? If you make these loans riskier, fewer loans will be given out and the interest rate will rise. See a related earlier discussion here.

President Obama will not sign into law a bill that would allow foreclosure documents to be accepted among multiple states, the White House said Thursday, arguing that it will make it easier to foreclose on homes.

But supporters of the legislation say the technical fix does nothing to accelerate the chance homeowners will face foreclosures, and the president doesn't even have the authority to "pocket veto" the legislation.

A "pocket veto" is a tactic that allows the president to not sign legislation while Congress is out of session, forcing it to go back to Capitol Hill. Supporters of the bill say the president can'teven use the measure because technically the Senate is not adjourned.

The bill had been criticized by consumer advocates and state officials who said it would make it difficult for homeowners to challenge foreclosure documents prepared in other states.

White House chief spokesman Robert Gibbs said Thursday that officials across the country had raised concerns about "unintended consequences" from the bill. The administration would work with Congress to revise it, he said. . . .


NPR has a leftwing defense of the veto here. What opponents see as the ability to mass produce documents is actually efficiency.
One reason that banks aren't lending to many whom they used to lend to, regulations

One reason that banks aren't lending to many whom they used to lend to, regulations

Previously regulation forced banks to make loans that they didn't want to make, now they probably can't make may loans that they would want to make.

Tighter regulatory requirements are compelling giant investment banks in the U.S. and Europe to tone down their risk-taking and shift to more staid strategies. Now hot on Wall Street: trading securities for clients, processing trades, exchanging currency, managing assets and advising clients on deals and financing.

The latest example of this new pressure came Monday, when a Swiss bank panel recommended that the country's banks be forced to raise their capital cushion against risky assets by a higher margin than standards issued last month by a global bank-reform group. Analysts say U.S. regulators could take similar steps as they implement the Basel III Accord.

Adding to the urgency to adopt plain-vanilla strategies: a recent slowdown in the volume of U.S. stock trading, traditionally a big source of revenue. If this shift continues, analysts say, it will pinch profits but also lead to less risk for the financial system.

Investor presentations by top bank executives in London last week, combined with increasingly dour projections for the third quarter that ended Thursday, are crystallizing the challenges banks face.

"The business models on the Street are going through dramatic changes," says Clayton Rose, professor of management practice at Harvard Business School, based on the most drastic shifts in the "political, regulatory, and economic environment since the 1930s in the financial industry." . . .


Isn't it ironic to see this story about the UK also today in the WSJ?

Osborne also directed his comments to the financial world, saying that if banks don't lend, the government wouldn't allow them to allocate "unimpeded bonuses." . . .
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