On vacation….

Reuters Staff
Jul 24, 2008 20:51 UTC

Hi readers. I’ll be on the Amazon River in Peru and the Galapagos Islands off Ecuador thru the first week of August. So if you don’t see any new posts for a couple weeks, you know why!

No doubt there will be lots of news on which to comment by the time I’m back…..

Obama The Practical

Reuters Staff
Jul 23, 2008 14:50 UTC

A guest perspective……..


It’s fun to watch Obamaniacs’ disillusion over Their Chosen One’s changes of position. They seem to view his modifications as a form of treason but it’s really been quite clear that what the man is is a very good politician. He seems to have always understood that the way to power was the path of the empty vessel—allowing himself to be filled by his fans with whatever they needed to see in a national leader. And so he was painted as a change agent, a new kind of politician. And much of this has come from a national perspective. But in Illinois the view has been just a little bit different.

The salient point to understand about Illinois is that it is one of the most politically corrupt states in the nation. We have one scandal after another, one trial after another, and we probably hold the record for the number of governors sent to the big house. Our current leader just may be on the first leg of that journey.

None of which is to say that Obama is corrupt. But he didn’t get where he got by failing to understand how the system works. And there is no question he has been part of that system.

The country is now familiar with the name Tony Rezko, the convicted political fraudster who’s now in jail for his unsavory gaming of the system. Rezko was the very first contributor to Obama when he was just starting his career. He was a man who was known as a purchaser of politicians, so it was more than a little odd that Obama allowed Rezko to essentially give him a several-hundred-thousand-dollar discount on his house by buying his backyard for him. When caught Obama says he made a mistake.

By comparison some of his political endorsements are hardly worth mentioning, but they say a lot about his method of operation…….


Kempner doubling-down on MBA’s future?

Reuters Staff
Jul 17, 2008 22:01 UTC

Like the rest of the real estate universe, the Mortgage Bankers Association is in trouble. Membership is in decline, meeting attendance is down and some of MBA’s largest conference sponsors are either out of business or cutting back. With this in mind, it seems a poorly-timed decision to double-down on real estate. But that’s precisely what CEO Jonathan Kempner did, using MBA’s reserve fund to construct brand new headquarters.

Taking the hit for MBA’s financial difficulties include a “low double-digit” number of staffers that were recently fired as well as a subset of members for whom dues will increase.

Kempner refused comment for this article through MBA’s SVP for Communications and Marketing Cheryl Crispen, but it seems clear he’s not sharing the financial pain. In the year ending September 2006—the latest for which MBA’s tax filing is available—he pocketed $1.15 million in salary, bonus, benefits and expense reimbursements, ranking him among the “top earning” trade association CEOs in the U.S. according to a National Journal article published earlier this year.

And his comments to National Journal suggest he isn’t expecting a pay cut any time soon. One would seem to be in order…..


Freddie’s Charm Offensive

Reuters Staff
Jul 13, 2008 17:37 UTC

Freddie Mac’s PR people are fighting back, even as Hank Paulson is floating a bailout plan that would make explicit the implicit taxpayer guarantee backing their debt. Yesterday the company began purchasing keyword-targeted online ads from Google. “Keyword-targeted” ads are pretty simple to understand. Websites that take advertising from Google install Google’s code on their page. Google’s computers read the content of the page, finding key words, and then serve ads by advertisers who wish their pitch to be seen next to those words.

Most articles with the words “Freddie Mac” in them tend to be critical these days. Freddie Mac wants to tell its side of the story. So you may be seeing more of the following ads in the weeks and months to come:

Freddie Mac
The Strength and Reserves To Fulfill our Mission.

The first ad was seen on NYT.com, next to an article regarding the difficulty some home-borrowers are having renegotiating their mortgages. The second ad was seen on CalculatedRisk, over an article reporting Paulson’s emerging bailout plan.

That these ads appear over a story regarding a bailout is ironic. When you click on the ads, they take you to a web page with a “statement by Freddie Mac.” The statement is full of jargon that suggests the company remains strong, that it has “substantial capital” over its regulator’s “statutory minimum.” The statement concludes with Freddie’s tagline, which you can also see in the second ad: that the company “makes home possible.”

Nonsense. Taxpayers make home possible by guaranteeing Freddie’s debt. That guarantee allows Freddie to borrow at substantially lower rates than it otherwise could, pumping billions of excess capital into home mortgages.


March of the Bailouts: A Lesson courtesy of IndyMac

Reuters Staff
Jul 12, 2008 00:11 UTC

First reported on the Implode-o-Meter yesterday, IndyMac bank’s $32 billion in assets have been taken over by the FDIC. This is the largest bank failure since the $40 billion bailout of Continental Illinois in 1984. Federal authorities estimate the bailout will cost taxpayers $4-$8 billion. (And that may be a fraction of what this down cycle costs the FDIC and, possibly, taxpayers).

It had to happen, of course. Having lost the ability to accept brokered deposits earlier this week, the bank desperately needed other sources of funding to keep its operations going. It had nothing to lose by offering the best rates on taxpayer-insured deposits, significantly higher than any other bank in the nation.

There is a lesson here, dating back to 1982, when Reagan’s Garn-St. Germain Act was signed into law. That act “took all restrictions off the interest rates S&Ls could offer for insured deposits and most restrictions off what they could do with the money” according to Martin Mayer’s definitive book on the S&L crisis. He continues:

Prior to 1983, when the act took effect, a bank or S&L that was in trouble would shrink, as depositors…withdrew money. There would be no way for such a bank or S&L to lure new money, because the government put a ceiling on interest rates. Once that ceiling was gone, a failing institution, desperate for funds and willing to take any gamble that promised a hope of recovery, would simply offer more interest than could be paid by any bank or S&L that had to earn what it paid its depositors by making normal loans and investments.

The lesson is that federal insurance of ANY kind severely distorts economic incentives. Let me explain…..


An oldie but a goodie

Reuters Staff
Jul 8, 2008 02:06 UTC

The cliff-diving in Fannie and Freddie shares has accelerated the last week, culminating in 15%+ drops for both stocks today. This gives me a great opportunity to reprint the Op-Ed I published in the Baltimore Sun back in January.

What will we do if the Big Two go bust?

By Rolfe Winkler
January 4, 2008

They don’t know it, but taxpayers stand to lose billions as the housing bubble bursts. And in a bipartisan effort to “do something” to save the housing market, President Bush and the Democratic Congress appear set to put taxpayers on the hook for billions more.

Until now, losses in the housing world have been confined to homeowners, mortgage lenders, banks and investors in toxic mortgage securities. But by virtue of the implicit federal guarantee backing mortgage giants Fannie Mae and Freddie Mac, U.S. taxpayers may be one of the largest mortgage lenders in the world – set to lose billions, like all the others.

Between them, Fannie Mae and Freddie Mac back more than $4 trillion in mortgages. If they fail, it could force an unprecedented taxpayer-funded bailout. And they are much closer to failure than most people realize.


S&L Redux: Men in Black at IndyMac?

Reuters Staff
Jul 6, 2008 22:54 UTC

New York Senator Chuck Schumer caught some flack last week for leaking his concerns about IndyMac to the press. Perhaps imprudent, but probably prescient. The FDIC is certainly looking very closely at the bank’s books after a mini bank-run last week. [Update: IndyMac announcing that certain operations will shut down in e-mail to employees.]

At $16.5 billion, IndyMac’s insured deposit base is far larger than the combined total of other failed banks rescued by the FDIC so far this year.

And the FDIC’s total liquid assets were only $51 billion at year end, of which only $4.2 billion was cash. (for details, see the balance sheet on page 63 of their 2007 annual report).

As banks drop like flies this year and next, its likely the FDIC will quickly run out of funds to pay depositor losses. The RTC may get an encore…


Wall Street Yard Sale

Reuters Staff
Jul 5, 2008 01:22 UTC

The NYT will report in tomorrow’s paper that Merrill is seeking a buyer for its 20% stake in Bloomberg LP, the maker of the ubiquitous financial terminals. According to the Times:

…Merrill, which has already raised $15 billion since John A. Thain took over as chief executive last fall, is finding it difficult to raise additional capital through previously used means, like selling preferred stock to sovereign wealth funds and other institutional investors, and it would prefer to avoid diluting the holdings of existing investors.

You can imagine SWFs are gun-shy since they’ve already lost billions on the first wave of Wall Street capital infusions made last year. I wonder if flush private equity players have been invited to invest recently.

Merrill hopes to get $5-$6 billion for their stake, which would imply a $25-$30 billion valuation for all of Bloomberg. Hizzoner owns a 72% stake, so that valuation would put his net worth between $18 and $22 billion. If the $5 billion raised from a Bloomberg sale isn’t enough, Merrill may raise another $10 billion selling its BlackRock stake.

Citigroup is also planning a fire sale in order to raise capital.

The more assets sold, the more capital will go back onto Wall Street balance sheets, which is good news…..theoretically, anyway.  The banks may finance some of these asset sales with their own balance sheets, which the Times article notes Merrill may do to sell the Bloomberg stake back to Bloomberg.

Obama & McCain Flip-Flops

Reuters Staff
Jul 4, 2008 14:30 UTC

Barack Obama has been sprinting to the center since he secured the Democratic nomination. If he’s not totally reversing himself on many issues, he’s certainly qualifying his views in significant, new ways:

All of the above happened just in the last three weeks.

I’m not commenting on his views, old or new. My point is that voters should get over the idea that Obama represents a “different kind of politics.” He may be young and fresh, but his tactics aren’t.

To be sure, McCain has reversed or qualified many of his own views:


Understanding Bernanke

Reuters Staff
Jul 2, 2008 04:57 UTC

If skyrocketing food and oil prices point to inflation on the rise, then why has the Fed risked even more inflation by lowering interest rates so much since last Fall? That’s a popular question these days. And one that’s hard to answer without knowing how the Fed works.

The trick to understanding the Fed is to have a basic understanding of inflation itself.

Generally speaking, inflation is considered to be an increase in the price of goods and services over time. One cause of higher prices is an increase in the supply of money relative to the amount stuff money can buy.

Say, for instance, the government decided to give every American citizen a million dollars tomorrow. Everyone would race to spend their windfall and prices would move upward as a result. No one would be any wealthier in terms of the AMOUNT of goods they were able to purchase. People would just have to pay higher prices for the same stuff they buy every day.

More money => higher prices = inflation.

So more money causes inflation. But what is money and where does it come from?