Commentaries

Government weighed down by bad mortgages

The Federal Housing Administration – the U.S. agency that actually enjoys full faith and credit of the government – is in quite a pickle. Reuters reporting that its capital reserves stand at a scant 0.53 percent, below the 2 percent regulatory minimum and without spitting distance of the “help me” threshold.

The deterioration has been fast and furious. Last year the ratio stood at 3% and the year before than 6.4%, according to The Wall Street Journal.

New York Times also has a nice data point:

The F.H.A., which insures loans made by private lenders, guaranteed more than $360 billion in mortgages in the last year, four times the amount in 2007.

The FHA has largely stepped in to fill the vacuum left behind by the banks that had been lending to subprime borrowers. Together with Fannie and Freddie, these housing agencies have kept the housing market from completely seizing up, but there’s a big downside: taxpayers are likely to foot the bill.

The FHA is putting on a brave face, saying reserves should remain above zero, but the still sick state of housing and high unemployment makes such promises sound hollow.

Fannie and Freddie are also feeling the heat. The delinquency rate on Freddie’s single-family mortgages have climbed to 3.33 percent, up from 1.22 percent a year ago. Fannie’s latest tally stood at 4.45 percent, up from 1.57 percent. Though they don’t have the explicit backing of the government – unbelievable but true – they still have a good chunk of the $400 billion equity line they can turn to if the losses accelerate.

AIG has debts that no honest man can pay

Here’s more evidence that it would be better for the federal government to order the break-up of AIG sooner rather than later.

Former AIG chief executive  and chairman Robert Willumstad, in a speech today, says the taxpayer-supported insurer “owes the government more than it has the ability to pay back.”

TheStreet.com’s Lara Tara LaCapra covered Willumstad’s talk and has all the details.

Bonus coverage: Dealbreaker on White House economist Austan Goolsbee calling out current AIG CEO Robert Benmosche. Finally.

Citi still loves Beantown

It appears Citi may not be pulling out of cities like Boston and Houston after all.

The Wall Street Journal is reporting that Citi is giving serious consideration to shrinking its retail banking presence in the US by retreating from cities where its laggard, such as Boston, Houston and Philadelphia. Instead, the bailed out banking giant would focus on six major US cities where its retail presence is strongest.

But the WSJ story only may be half right. I’m told that Citi does intend to put more focus on the six cities its strongest in and may close or sell some branches in the cities where it’s weakest. But for now, according to a source close to the bank, there is “no plan to dramatically change” Citi’s retail footprint in the US.

Seems to me, a retrenchment from three major metropolitan areas would be a dramatic change.

Now it’s possible there are people within Citi discussing a full-scale retail banking retreat, but I think it’s unlikely. If Citi were to abandon three major US cities it would spark a firestorm of protest on Capitol Hill and rekindle populist anger over the big bailout for the struggling bank.

And it would lead one to question whether it makes sense for US taxpayers to keep bailing out a bank that’s bailing on them?

Profiting from the bailout

What is it with this belief that somehow the federal government’s role should be to profit from the bank bailout?

I thought the purpose of the bailout was to save the financial system from collapse.  And that’s why I supported it last fall–even if it was poorly designed and poorly explained to the public.

If the government could somehow make money on its capital infusions, so much the better. But making a profit on the bailout–or even getting back all the government’s money–was not critical to judging the success of the bailout.

Now don’t get me wrong, I have no problem with the government recouping its investment. But the main goal of the bailout was to avert another Great Depression.

By that score, the bailout was a success. But big problems remain: banks still have too much toxic securities on their balance sheets and there’s serious doubts about the longterm viability of the biggest bailout recipients–Citigroup and AIG.

That’s why I called on the Obama administration to get tough with AIG and put into works a plan for dissolving the defacto government owned insurer. Forcing AIG to sell off it parts ASAP would recoup some of the $120 billion still owed to the government.

Critics contend my approach is wrong and it makes sense to keep AIG together as long as possible for the government to be made totally whole. But that assumes AIG is a viable company–something I don’t think it is.

Time to junk AIG

The federal government’s $180 billion effort to prop up American International Group has worked, averting an even bigger financial catastrophe. Now it’s time for the Obama administration to oversee the dismantling of the failed insurance giant with all due speed.

A report this week from the Government Accountability Office makes clear that AIG would crumble and likely reignite financial fears around the world without the government’s massive support.

And the report says it’s “unclear” whether AIG will ever pay back the $121 billion in government assistance that’s still coursing through its balance sheet.

The GAO report should provide the administration will all the ammunition it needs to get tough with AIG. The report’s conclusions should stiffen the spine of regulators in their dealings with Robert Benmosche, AIG’s new $9 million chief executive.

The former MetLife chief executive seems to act as if he has taken over a financial company that’s simply made one or two bad decisions — not one that nearly brought the global economy to its knees.

Benmosche’s plan to take his sweet time in selling off AIG’s assets might make sense if the insurer could someday stand on its own without the government’s help.

But the GAO report raises serious doubt about whether AIG will ever be self-sufficient again, noting that “the company continues to rely heavily on the federal government as its source of liquidity and capital.”

What did rating agencies know about AIG?

It’s time to start asking the big credit rating agencies just when they realized that American International Group might pose a systemic risk to the global financial system.

And what, if anything, did the rating agencies do to warn financial regulators of the global crisis that might ensue, if AIG’s debt ratings were suddenly slashed.

There’s been a lot of attention paid to the role the credit agencies played in the build-up to the financial crisis by slapping triple A ratings on complex securities built from mortgages to subprime borrowers.

But there’s not been enough scrutiny into the behind-the-scenes work the credit rating agencies did last summer as Lehman Brothers lurched toward bankruptcy and AIG’s cash crunch grew increasingly grave.

By virtue of their status as Nationally Recognized Statistical Rating Organizations, the major credit agencies are charged with making sure companies that sell bonds are able to make good on their obligations. Some 30 years ago, securities regulators effectively deputized Moody’s Investors Service, Standard & Poor’s and Fitch Ratings as gatekeepers for the financial system.

And with that lofty and privileged status, there should come a responsibility to help regulators keep an eye out for systemic financial risk.

“We rely on our gatekeepers to help insure that financial markets are safe and information is accurate,” says law professor Frank Partnoy.

A death panel for Citi

It’s way too soon for the federal government to contemplate reducing its considerable equity stake in Citigroup.

If anything, now’s the time for the feds to finally get tough with the troubled giant and establish a firm deadline for forcing Citi to shrink itself.

What better way to mark the anniversary of Lehman Brothers’ chaotic collapse and the birth of bailout nation than with a presidential directive giving Citi one year to reduce its $1.8 trillion balance sheet by half?

Harsh? Yes, but that’s the point. To restore the principle of moral hazard, the managers of giant banks need to know that there must be some consequences for their reckless actions.

Any “too big to fail” bank that gets bailed out shouldn’t be able to simply walk away to live another day as if nothing has happened.

Now don’t get me wrong. The bailout of the banking system was necessary to prevent a global financial meltdown. Propping up Citi with a $45 billion cash infusion and a federal guarantee on $300 billion in toxic assets prevented an out-of-control collapse of the mammoth bank that would have made Lehman’s bankruptcy look like a case in small-claims court.

But Wall Street historian Charles Geisst says Citi “hasn’t paid much of a price” for its many misdeeds — including SIVs, CDOs and subprime mortgages, not to mention reckless credit card and auto loans. And I suspect a lot of the populist anger over the bailout stems from the view that the banks have gotten away with murder.

Obama’s AIG timidity

I’ve been pretty amazed at how silent the Obama administration has been about Robert Benmosche’s antics since becoming the well-compensated CEO of American International Group–the defacto government owned insurer.

But after reading this story in The New York Times, I was shocked to learn that many in the Obama administration are warying of looking like they are injecting themselves into the company’s affairs. That’s the case, even though many on Team Obama are upset with Benmosche’s $9 million pay package and his desire to move slowly in selling AIG’s assets.

WTF? Intefere, please. The taxpayers didn’t bailout this company so its high-living CEO can do as he pleases. The Obama administration has never sought to put anyone on AIG’s board–maybe it should.

James Kwak at Baseline Scenario is equally puzzled and disturbed by the administration’s hands-off approach to AIG.

Lehman tales

Over the past two days, we’ve been treated to two long stories in The New York Times and The Wall Street Journal focusing on employees of Lehman Brothers, one year after the firm’s chaotic bankruptcy filing. Yawn.

Now, don’t get me wrong–both stories are well reported and well written.  I was glad to see that one of the people the Times did a mini-profile on was a former Lehman banker who packaged and sold rotting mortgages and is honest enough to admit he has “blood on my hands.”

But it’s not the Lehman employees I’m really concerned about–even if some of them are feeling remorse now. I’m more concerned about average Americans–and for that matter, average people around the globe–who were impacted by the collapse of Lehman and the collateral damage to the financial system.

A year later, we still don’t read or hear enough stories about the average folks who bought Lehman’s now worthless structured notes, which were pitched as conservative investments. Over the past five years, a Lehman subsidiary in Amsterdam sold some $30 billion of these notes to average investors–many of them retirees–in England, Belgium, Germany, Switzerland and elsewhere in Europe.

How are these people getting on?

Or what about the thousands of people in Thailand and Asia who bought similarly worthless Lehman mini-bonds?

And let’s remember, this crisis began long before Lehman with the meltdown in the housing market. The foreclosure crisis is still going on and it’s getting worse.

The capital games that banks play

Treasury Secretary Timothy Geithner’s call for the global banks to set aside bigger capital cushions to better absorb losses on souring securities and ailing loans is a good idea. But that alone won’t be enough to prevent another crisis.

Regulators must also clamp down on the kind of AIG-engineered deals that legally enabled German, French, Dutch, Danish and other European banks to dodge existing capital rules and free up some $400 billion on their balance sheets.

It has become all too popular to characterize last year’s bailout of AIG as an attempt by the federal government to funnel about $50 billion to Goldman Sachs and a handful of other banks.

But the collapse of AIG would have caused even greater hardship for dozens of largely unknown European banks that entered into so-called “regulatory capital relief” transactions with the giant insurer.

In these deals, European banks purchased credit default swaps from AIG to reduce the amount of capital they needed to set aside to cover potential losses on corporate loans and residential mortgages sitting in those banks’ portfolios.

The banks bought these derivatives, largely in 2007, to navigate the changes in capital holding requirements under a switch from the Basel I international banking accord to a revised one known as Basel II.

These CDS deals, underwritten by the insurer’s AIG Financial Products division, essentially permitted the banks to transfer the risk of loss on corporate loans and home mortgages to AIG. And that meant the banks were able to set aside less capital in reserves — freeing up some $400 billion for other purposes.