Commentaries

from Rolfe Winkler:

Lunchtime Links 12-21

Hedgie Tepper on pace to make $2.5 billion this year (WSJ) The moral hazard trade has a new face. Tepper bet big that government would rescue bank shareholders and creditors. He was right. Can we blame him? He didn't make the rules; he just played the game better than the rest once they were made.

Why can't Americans make things? Two words: Business school (Scheiber, New Republic) For 30 years we've been focused on teaching finance, not manufacturing...

At top subprime lender, policies were invitation to fraud (Heath, HuffPo)

Fannie/Freddie suspend foreclosures for holidays (AP) Citi, JP Morgan and BofA have followed suit.

Goldman threatens to move some London staff to Spain (Evans, Independent)

Citadel files for bankruptcy (Spector/McBride, WSJ) The syndicator of Don Imus' morning show is the latest radio company to struggle with debt. See also Clear Channel, Emmis and Regent....

GE uses UK libel law to gag doctor (Gerth, ProPublica) Ironic: GE wants to shut up a doctor for saying GE suppressed information. (ht, NG)

from Rolfe Winkler:

Evening Links 12-16

Fed repeats "exceptionally low" for "an extended period" (Fed statement) The Fed maintains that it isn't raising rates for the foreseeable future, but repeated that it plans to end MBS asset purchases by April next year. Too bad we can't get a surprise rate hike in order to chase risk back out of credit markets...

Wells' CLO deal called "landmark" (Paulden, Bloomberg) The return of CLOs would be the latest sign that Wall Street is dancing again.

Big decision looms on Fannie and Freddie (Timiraos/Hagerty, WSJ) Suggests Obama could expand his commitment to Fannie and Freddie beyond $400 billion while he's still able to unilaterally. If he waits till next year, Congress would have to approve.

Man of the Year: Ben Bernanke (Time) Ha! Ben should have said thanks but no thanks. Ten years ago Time christened Rubin/Greenspan/Summers as The Committee to Save the World. In the fullness of time, all have been proven failures. Time's endorsement is final confirmation that Bernanke too is a failure.

Norway raises rates (Kremer, Bloomberg) More fodder for yesterday's Norway thesis. Higher rates make for a more attractive currency...

Some debt-laden graduates wonder why they bothered with college (ABC News) Full of choice quotes: "You're led down this path of needing to go to college," [says one indebted grad]. "The college diploma is the new high school diploma."

Spend more. Get less. The worst fun city in America (Wachs/Eskenazi SFWeekly)

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.

Nooooo…not Fannie and Freddie

I know that the government already leaked the plan, but seeing it actually launched I can’t help but feel a little despair that the Obama Administration continues to use Fannie and Freddie to implement new housing policy.  I wrote a column when the idea was first floated to help state and local housing agencies access financing.

Simply, all things Fannie and Freddie at this point – more than a year into the conservatorship – should be squarely focused on sorting out what exactly they’re suppose to be. It seems absurd that they continue to operate in limbo given their enormous role in the housing market and credit markets. Either nationalize them, privatize them or unwind them, but don’t give them new tasks to perform.

If housing agencies need financing, then give them a grant or backstop their municipal debt. It’s more honest and efficient than the mind bending program launched today.

From Reuters:

The Treasury said it will purchase securities issued by Fannie and Freddie that are backed by new mortgage revenue bonds from the housing state and local housing agencies (HFAs). Treasury said the bond program can support “several hundred thousand” new mortgages for first-time homebuyers in the coming year, as well as refinancing “at risk” borrowers into more affordable loans.

The plan also aims to help jumpstart the private lending market for the state and local agencies. Before using proceeds of new mortgage bonds under the program, the state and local housing agencies must sell debt to private investors equal to 40 percent of the total amount borrowed via Fannie, Freddie and the Treasury.

The other GSE problem

It’s hard to keep all the U.S. housing agencies straight. Fannie Mae and Freddie Mac are still basket cases relying on government support, while the Federal Housing Administration and its partner, Ginnie Mae, are setting off alarm bells with their more aggressive efforts to support overstretched homeowners.

But the Federal Home Loan Banks, a government-sponsored enterprise (GSE) that is the lesser-known cousin to Fannie and Freddie, is one to watch — particularly as small regional banks grapple with deteriorating loan portfolios and fewer financing alternatives.

The FHLB is a system of 12 regional banks that provide cheap financing — thanks to the government’s implicit backing — to its 8,100 member banks. Set up during the Depression to support the home real estate market, the FHLB’s primary mission is still firmly rooted in making sure home buyers have access to credit by giving banks the funding they need to extend loans.

Some of the FHLB’s branches, however, made the classic bad investment choice during the credit market boom: They loaded up on subprime mortgages. Unlike Fannie and Freddie, the FHLB wasn’t forced by the subsequent losses into the arms of the government, but they have put a damper on their lending, according to Ben Garber, economist at Moody’s Investors Service.

Citing the Federal Reserve’s flow of funds data, Garber notes that FHLB lending to savings institutions shriveled by $166 billion, to $190 billion for the year ending in the second quarter — a 10-year low and nearly half of what the total was at the end of the first quarter of 2008.

In the big picture, this is positive since it means the much needed deleveraging of the financial system is taking place. But for smaller, regional banks weighed down by commercial real estate loans that are growing more delinquent with each passing day, this kind of number is worrisome, especially as other stop-gap measures begin to disappear.

The Federal Deposit Insurance Corp’s guarantee program, which was set up during the height of the crisis to bolster confidence in qualifying bank debt sold to investors, is scheduled to expire in October.

On MBS, Fed needs to point to the exit

When the medication is flowing, it’s hard to see straight.

Amid the giddiness in the markets and the cheers for the end of the recession, what often gets ignored is the fact that government stimulus is still fueling the reflation of financial markets.

Yes, the U.S. government has started to retire some programs — its backing of money market funds being the most recent. But there’s still a question mark about how it plans to wind down one of its largest supports — its $1.25 trillion mortgage-backed securities purchase plan — that is due to expire at the end of the year.

That’s dangerous, since a bungled hand-over of the market back to the private sector could derail a still fragile housing market.

This week, Ben Bernanke and his colleagues on the policy-making Federal Open Market Committee are sure to discuss how best to wind down its purchases of mortgage bonds guaranteed by state-run Fannie Mae and Freddie Mac. Some officials have already started to debate publicly whether they should pull the plug on the program before it reaches its $1.25 trillion limit.

But they shouldn’t wait to decide until November, as some now expect. They need to prepare investors elbowed aside by the government intervention. They should do this by laying the groundwork for an eventual departure, to avoid sudden spikes in mortgage rates that have been kept artificially low this year.

Unlike other initiatives, such as the Federal Deposit Insurance Corp’s insurance of bank debt, and the various lending facilities to nudge investors back into areas that had gone haywire during the financial crisis, the Fed’s direct purchases of MBS has done the opposite — it has squeezed investors out of the market.

Cleaning up the mess that remains

At least the Obama administration isn’t saying “Mission Accomplished.”

In marking the anniversary of Lehman Brothers’ demise, the administration understandably focused on how far we’ve come since, and on the various exit strategies in the works.

Lehman Brothers has been at the center of the narrative of what went wrong last year, and that makes it much easier for the administration to tell a story of triumph rather than the more uncomfortable legacy of dysfunctional companies and hidden toxic assets.

Coinciding with President Barack Obama’s speech in New York, the Treasury released a paper today, titled “The Next Phase of Government Financial Stabilization and Rehabilitation Policies.”

Its summary reads like a check list of emergency programs that are no longer needed now that the worst of the crisis is past. The insurance program for money market funds and the federal guarantee of qualifying bank debt can be tied directly to the fallout from Lehman’s spectacular end.

But last year’s turmoil didn’t begin and end with Lehman. Change the anniversary’s focus to, say, the government’s seizure of Fannie Mae and Freddie Mac that occurred a week earlier, or to American International Group, just a day after, and it’s clear that some of the messier legacies of the credit crisis still haunt the current administration a year later.

The government arguably isn’t any closer to figuring out what to do with the two giant housing finance companies than the previous administration was on September 7, 2008, when it announced Fannie and Freddie would be put into conservatorship.

Securitization survives the fall

A year after the government’s seizure of Fannie Mae, Freddie Mac and AIG , not to mention the bankruptcy of Lehman Brothers that sent the global financial system into a tailspin, very little has changed to prevent debt from being sliced and diced, again and again.

This is a mistake. Although there were many factors contributing to the downfall of the global financial system, the repackaging of toxic debt into esoteric financial products was at the heart of the credit crisis when it erupted in 2007.

It’s easy to forget, particularly when many are focused on anniversary tick-tock accounts of the last days of Lehman Brothers, how nasty CDOs — or worse, CDO squareds — became so incredibly popular in the first place.

Yet, after all the damage, the trillions of dollars lost and the biggest state intervention in financial markets since the Depression, there has been no movement to ban their creation.

Securitization in its broadest form — taking underlying collateral, bundling it together and selling it as tradable debt — is still hailed as an important 20th-century invention that has helped worthy borrowers get the credit they need to buy a home, car, or education that would otherwise be out of their reach.

Policymakers, understandably, are anxious to get it started again after the market snapped shut last year. Wall Street, and investors taking advantage of generous financing from the Federal Reserve, are happy enough to oblige.

And it has worked. As of last week, new bonds backed by consumer debt reached $100.5 billion for the year, according to Barclays Capital. While a fraction of the pre-crisis market, that deal volume represents a healthy revival of a near-dead business. Three-quarters of the new deals are eligible for Fed financing.

To buy, or not to buy MBS

It looks like the lines are being drawn within the Fed regarding its massive $1.25 trillion MBS asset purchase plan that’s due to expire at the end of the year.

New York Fed President William Dudley told CNBC earlier Monday that it’s too early to think about pulling back on these programs, and points to market expectations as a big reason the Fed should proceed carefully. The market expects the Fed to buy the full amount and is currently trying to figure out whether there’s a possibility the Fed will extend the program into next year to make for a smoother transition.

These purchases, if completed, will account for roughly a quarter of the outstanding MBS market. Without the Fed’s support, risk premiums are expected to shoot higher (and with them mortgage rates) to lure back investors who have moved into other areas of the credit markets to find juicier yields.

Dudley’s remarks come after Richmond Fed President Jeffrey Lacker indicated that improving financial conditions mean the central bank may not need to purchase the full amount of MBS.

With the economy leveling out and beginning to grow again later this year, and with bank reserve demand ebbing as financial conditions improve, I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide.

Both Dudley and Lacker are voters on the policy-setting FOMC.

Don’t be fooled by global stock stumble

Don’t blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.

Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.

In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.

So it’s only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.

Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.

These concerns carried over into Monday trading in Asia, where they mingled with homegrown worries. In China, a drop-off in direct foreign investment helped fuel a nearly 6 percent decline in the Shanghai stock index and concerns about the Japanese economy helped trim more than 3 percent from the Nikkei.

U.S. stock indices have followed suit, with the S&P 500 off 2.43 percent and the Dow Jones Industrial Average off 2 percent.