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News and Comment 12/15/08 The 17th Floor, Where Wealth Went to Vanish, Diana B. Henriques and Alex Berenson, NY Times. The epicenter of the Bernard L. Madoff fraud was the 17th floor of the Lipstick Building, on Third Avenue in Manhattan, called the “hedge fund” floor. Of estimated losses at $50 billion; reports account so far for $20 billion, with some big losers at the Palm Beach Country Club. Comment: The magnitude of this loss is comparable with the economic cost to NYC of 9/11. One difference is that the loss will be borne in the first instance primarily by individual investors.
12/12/08 Wall St. Wizard Magic Had Skeptics, Alex Berenson and Diana Henriques, NY Times. Bernard L. Madoff, a prominent Wall Street figure, was arrested for what authorities portrayed as the biggest Ponzi scheme in financial history, a $50 billion fraud. 12/13/08 For Investors, Trust Lost, and Money Too. 12/13/08 Pillar of Finance and Charity. 12/13/08 Hedge Funds Are Victims.Bio - Bernard Madoff. Documents: Letter from Aksia to Its Clients (pdf). Letter from UBP to Its Clients (pdf). S.E.C. Complaint (pdf). U.S. Attorney’s Office Statement (pdf). Comment: “You only find out who is swimming naked when the tide goes out.” Warren Buffett, Berkshire Hathaway, 2001 Chairman's Letter. A Ponzi scheme goes on until no new victims can be found.
MAY 2008
5/12/08 Land Values Computed from CoStar Data, NYC and 10 NJ Counties, Federal Reserve Bank of New York. The latest issue of Current Issues in Economics and Finance, 14:3 (April/May 2008) includes an interesting computation – by Fed staff members Andrew Haughwout, James Orr and David Bedoll – of average land values per square foot in New York City (excluding Staten island) and ten New Jersey counties. The values rise from $47/sf in 1999 to $89/sf in 2001. In 2002 the land values fall after 9/11 raises questions about NYC as a place to live or work. Recovery sets in quickly in 2003, with land values rising to $104/sf and soaring to $366/sf in 2006. As theory would predict, prices are highest in mid-Manhattan and fall as a property is more distant from the center. Comment: The report is interesting on many levels. CoStar charges for its data and is a successful operation, meaning that it can afford to spend money making sure the individual transaction numbers are reasonable and correspond to reality. The five-fold increase in property values from the post-9/11 dip in 2002 was a remarkable achievement for which Mayor Bloomberg deserves significant credit – property values are an excellent hedonic index of the desirability of living or working in a particular city. One would like to have comparable data from other cities to see NYC’s relative performance. The data show how changes in building values primarily reflect changes in the underlying land. As more data of this type become available, it will become easier to show that taxes on land (“site”) value are fairer and more efficient than taxes on buildings, which depreciate in value. Site value taxation was at the heart of recommendations for New York City presented at economic hearings before NYC Comptroller Liz Holtzman in 1993 by Columbia Professor William Vickrey, who was awarded the Nobel Prize in Economics in 1996 for his work on auctions and congestion pricing.
5/13/08 Senate Finance Grapples With Tax Code Overhaul, Congressional Quarterly Today Midday Update. Senate Finance Chairman Max Baucus (D-Mont.) today sought bipartisan agreement on tax legislation for the next Congress. He said the income tax base is “falling apart”. Witnesses said the country could benefit from a tax system that is simpler, broader-based, with lower rates and more uniform rules.
5/13/08 Rep. Frank Seeks to Pass Bill Offering Aid to Howeowners Facing Foreclosures, NY Times. Representative Barney Frank, chairman of the Financial Services Committee, has been trying for two months to win Republican support for his bill to help homeowners at risk of foreclosure. “The notion that this bill doesn’t keep people out of foreclosure is true,” he said. “It doesn’t combat global warming. It doesn’t get troops out of Iraq. It won’t help me lose weight. There are a lot of things this bill won’t do that I very much want to do. What it does is go to the aid of cities that have been victimized.” Comment: The Mortgage Bankers Association has put up a fund for counseling homeowners and is providing assistance to cities to help anticipate new foreclosures. But the multiple burdens created by the onslaught of new foreclosures is more than cities can handle.
5/12/08 Is Vallejo's Use of Chapter 9 a Portent for the Future?, San Francisco Chronicle. When Vallejo, Calif., filed for bankruptcy under Chapter 9, it was addressing a problem that many other local governments have - contractual obligations (to its own employees and retired employees) that they can't pay for. It could be a test case for these other governments. "There's a wave of this coming across the U.S.," avers one consultant. Comment: Public employees are famously organized. There are interesting legal and political issues as sacrosanct public-employee contracts are weighed against ability to pay in bankruptcy proceedings. Vallejo proceedings will be closely watched.
APRIL 2008
4/9/08 High School Seniors Fail at Finance, AP. Young people's financial know-how has gone from bad to worse. High school seniors, on average, answered correctly only 48.3 percent of questions about personal finance and economics, according to a nationwide survey paid for by the Merrill Lynch Foundation and released today by the Federal Reserve. That was lower than the 52.4 percent in the previous survey in 2006 and marked the worst score out of the six surveys conducted so far. Comment: To what extent are Wall Street's problems the result of financial ignorance? Financial misjudgments at the securitization (CDOs etc.) end were made by supposedly sophisticated financial experts, so the ignorance goes high up the skill spectrum. The abandonment of standards at the mortgage origination end resulted from deliberate decisions by financial institutions (e.g., not checking with the IRS on incomes). But it also depended on ignorance on the part of borrowers about such details as the implications of interest-rate step-ups for monthly payments. It's unacceptable that what young people know should be declining when Washington has been seeking to provide Social Security beneficiaries with nore discretion over how their funds are invested.
4/8/08
Why Bear Stearns Failed and Why Lehman Is In Trouble, David Einhorn. Bear Stearns failed because it was over-leveraged, a predictable consequence of the way that employees were compensated and how risk was measured. In this case it had little to do directky with CDOs. Lehman is in the same situation and may need the same aid. The victims are investors as well as employees. The problem areas are risk management inside investment banks/hedge funds and the monoline insurance companies, the rating agencies' lack of investigation, and a vacuum in regulatory oversight for the financial industry. Comment: This is a well-argued case for a clear diagnosis of Wall Street's underlying malady.
MARCH 2008
3/31/08 Fed up with the Fed, Fortune. Some wonder why Treasury Secretary Hank Paulson wants to expand the powers of an agency that sat idly by as the housing bubble took shape. The Treasury Secretary today formally unveiled his Blueprint for a Modernized Financial Regulatory Structure. The plan, in the works for almost a year, envisions an expanded role for the Federal Reserve in preserving market stability and overseeing the financial services industry. Treasury Secretary Paulson said: "The Federal Reserve's enhanced regulatory authority along with clear regulatory responsibilities would complement and attempt to focus market discipline to limit systemic risk." Yet Paulson's proposal leaves some observers wondering whether the Fed - which currently oversees the nation's banks as well as setting interest rate policy - is up to that task. "The Fed as a bank regulator has done a very poor job overall," says Joseph Mason, a professor at Drexel University's LeBow College of Business in Philadelphia. "There are tremendous risks of using [the credit crunch] as an excuse ... for an umbrella regulatory structure." Skeptics contend that under former chief Alan Greenspan, the Fed played two roles in inflating the housing bubble that has since burst with such serious consequences for the financial sector. It's well accepted that Greenspan helped to fuel the housing bubble by cutting interest rates as low as 1 percent back in 2003. But beyond that, some criticize Greenspan's Fed for failing to curb a sharp decline in mortgage underwriting standards that helped fuel the price run-up, particularly in hot markets such as California and Arizona. Indeed, Greenspan appeared at times to be defending some of the high-risk loans. Comment: The plan does move regulation of state-chartered banks to the FDIC.
3/31/08 Fierce debate expected over administration plan to revamp financial regulation, AP, International Herald Tribune. The Federal Reserve would be a big winner. The plan would abolish the OCC and CFTC. The plan envisions three main regulatory agencies: (1) The Fed would sit at the top with expanded responsibilities as the "market stability regulator," butwould lose its current powers over bank holding companies. (2) A prudential regulatory agency would take over from five agencies now responsible for regulating banks, thrifts and credit unions. (3) The powers of the Securities and Exchange Commission would go into a super agency responsible for business conduct and consumer protection. Some in the financial industry are concerned that Congress could rush to legislate. The chairman of the Senate Banking, Housing and Urban Affairs Committee, Sen. Christopher Dodd, said in a statement the recommendations deserved careful consideration, but he said he believed they "would do little if anything to alleviate the current crisis." House Financial Services Committee Chairman Barney Frank,a Democrat, said Paulson's plan was a "very constructive step forward." Comment: Some of the reforms, such as more unfiied bank supervision, were recommended 45 years ago, but were resisted in the name of "competition" among regulatory agencies. This competition reduced the power of the regulatory agencies because banking institutions could shop among regulators.
3/29/08 Treasury Wants to Reshape Regulation, Washington Post. The Treasury Department on Monday will propose a far-reaching overhaul of the nation's financial regulatory structure: (1) The Federal Reserve would gain the power to investigate any aspect of financial institutions that threatens the stability of the entire system, gathering information and taking action to combat risks to the financial system as a whole. The Fed would be given the authority to order investment firms to improve their systems for monitoring risk. However, the Fed would no longer be the primary regulator of the safety and soundness of state-run banks or bank holding companies. (2) The Prudential Financial Regulator, would regulate banks, which currently answer to five separate federal agencies. This new body would get rid of the Office of Thrift Supervision. (3) The Securities and Exchange Commission would lose some of its authority in the restructuring and be combined with the Commodity Futures Trading Commission, which regulates the trading of natural gas, oil and other goods. (4) Another major regulator would oversee consumer protection and business practices. (5) Treasury officials hope at least one proposal, the creation of a mortgage origination commission that would oversee the home-lending business and establish national standards for mortgage brokers, could be created this year. (6) The plan also calls for a federal regulator to be established in the coming years to oversee insurance companies, an industry that currently falls under the jurisdiction of state governments. Most of the plan will require congressional action. Some Republicans are conceding that Washington needs to keep a closer eye on Wall Street. Some Treasury officials estimate it may take more than five years to implement the plan. Sen. Charles E. Schumer (D-N.Y.), chair of the Joint Economic Committee, supports a unified regulatory structure, but said: "Very complex financial instruments have evolved in recent years [that] pose potential problems in terms of systemic risk. The Treasury Department should address these issues as well." Comment: We won't have to wait five years for congressional action on many pieces that are long overdue.
3/29/08 Treasury to Propose Consolidated Financial Overseers, Bloomberg. Treasury Secretary Henry Paulson is expected to recommend at 10 am on Monday, March 31 the consolidation and increased power of financial regulatory agencies as follows:
1. Expand the powers of the Federal Reserve. The Fed would have new responsibilities for regulation of mortgage bankers, insurance companies and Wall Street firms, including uniform minimum licensing qualification standards for state mortgage-market participants and broader oversight powers in maintenance of market stability. The proposal would legitimize the Fed’s involvement in the Bear Stearns crisis by giving it the power to lend money to federally chartered insurance companies and other financial institutions to resolve market instability. The Fed's ``normal'' lender-of-last resort discount window for banks to meet short-term credit needs would be unaffected.
2. Transfer supervision of state-chartered banks from the Fed to the FDIC.
3. Merge the ancient Office of Comptroller of the Currency (OCC) with the newly created Office of Thrift Supervision (OTS).
4. Merge the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The two agencies have been in conflict over the definition of a security, creating inefficiencies in the regulation of derivatives.
5. Expand the President's Working Group on Financial Markets into a government-chartered interagency body. The new body would coordinate regulatory policy for the entire U.S. financial sector. The body would include the Fed, SEC and CFTC as well as the OCC, FDIC, and OTS.
6. Separate financial regulatory functions. Divide regulatory functions into three groups: “prudential” financial regulation over financial institutions with explicit government guarantees such as deposit insurance, “business conduct” regulation (monitoring of disclosures, business practices, chartering and licensing) and “corporate finance” regulation over public securities markets.
Wall Street and banking institutions, which have in the past opposed change because the existing system offers the flexibility of being able to choose among federal and state oversight bodies, are this time supporting reform. “You've got three well-intentioned outfielders running after the same fly ball,”' said John Dearie, senior vice president of policy at the Financial Services Forum, a financial industry lobby group. The Securities Industry and Financial Markets Association (SIFMA) also praised the proposals to modernize a securities regulatory system that was born out of the crisis of the Depression.
3/28/08 We Have Breathing Room in the Financial Markets, But We Are Not Out of the Woods, Wall Street Journal. In an op-ed, Sen. Chuck Schumer (D-NY), Chairman of the Joint Economic Committee of Congress, argues that the financial regulatory system needs overhaul. Comment: Darn right. If the non-bank parts of the financial system are too important to fail, and are de facto part of the financial system that must be protected by the Federal Government, then the scope of the orderly markets objective that led to the creation of the Federal Reserve in 1913 must be expanded. The concept of the banking system must be expanded to include investment banks. A unified oversight body in Washington should keep track of leverage and risk. One approach would be to charge players for the extra risk they bring to the marketplace via premiums. Another is to limit leverage via capital-adequacy requirements.
3/27/08 Bailout Not Just for Fat Cats, CNN Money. Senators John McCain and Barack Obama raise questions about the Fed-supported bailout of Bear Stearns. Comment: Of the three main presidential candidates, Sen. Hillary Clinton is the most sympathetic to the bailout. Putting that together with the 3/20 story below, she is more interventionist both with regard to the Fed bailout and the possibility for a follow-on homeowner bailout.
3/27/08 Senate Banking Committee to Hold Hearings April 3, Bloomberg. Senate Banking Committee Chairman Christopher Dodd yesterday asked Fed Chairman Bernanke, Bear Stearns CEO Alan Schwartz, JPMorgan CEO Jamie Dimon, SEC Chairman Christopher Cox and Treasury Secretary Paulson to testify on the Bears Stearns bailout.
3/26/08 Report Blasts Improper Accounting at Orange County’s New Century, KPMG, Orange County Register. A federal bankruptcy examiner's report blames 'brazen obsession' with increasing loans and improper accounting for the bankruptcy last April 2 of New Century Financial Corp., based in Orange Co., Calif. High-risk loans and improper accounting by New Century created "a ticking time bomb”. A 581-page report by the examiner said New Century executives ignored signs that its loans were going to people who could not repay the money and signed off on accounting gimmicks that helped pad the executives' paychecks. The company's auditors, KPMG LLP, one of the nation's four largest accounting firms, ignored material financial misstatements and even suggested changes that were inconsistent with generally accepted accounting principles, or GAAP, the report said. New Century originated $60 billion in subprime loans in 2006. It was one of the triggers of the credit crunch that has ravaged world financial markets.New Century's accounting failures led the company to report a profit of $63.5 million in the third quarter of 2006 when a more accurate picture would have showed a loss. Comment: KPMG is a deep pocket for lawyers to seek to get their hands into on behalf of those who lost money with New Century’s bankruptcy.
3/26/08 Senate Finance Committee Asks Questions about Bear Stearns Deal, CQ Midday.The Senate Finance Committee today requested information about the Bear Stearns sale to JP Morgan Chase as part of its debate about new regulation of financial institutions. Finance Committee Chairman Max Baucus , D-Mont., and ranking minority member Charles E. Grassley R-Iowa sent letters asking about federal assets involved and names of the negotiators, lawyers and accountants. Their request was in the form of letters to the CEOs of the two companies, Treasury Secretary Henry M. Paulson Jr., Fed Chairman Ben Bernanke and NY Fed President Timothy Geithner. Comment: This is more than a request for information. The motivations of the leadership seem to differ. On the right, the Republican minority seems (in simplified terms) to be questioning any intervention in the free marketplace. The motivation on the left seems to be (again, in simplified terms) that the intervention saved some of the assets of wealthy Wall Streeters, whereas homeowners in foreclosure are not getting relief.
3/19/08 Orange County Loses $80 Million UK Investment, LA Times. Orange County, California appears to have lost all of an $80 million investment in a complex British fund that went bankrupt last month. The British judge overseeing Whistlejacket Capital Ltd.'s affairs will use what's left to pay off the earliest investors rather than sharing it among all investors, so payments won't get to Orange County, Treasurer Chriss Street said creditors are appealing, but the company has only $1.3 billion in cash and $6.5 billion in notes to pay off. Supervisor John Moorlach says the county is unlikely to be repaid. Orange County put $850 million into structured investment vehicles, 14 percent of its portfolio. Comment: Wouldn't the name "Whistlejacket" be enough of a red flag? Whistle as in whistle your money goodbye? Orange County's speculation in derivatives led it to bankruptcy in 1994. Mark Baldassare argues that California localities have been driven to look aggressively for high yields because of the passage in 1978 of Proposition 13, a constitutional amendment that rolled back property taxes and froze rates for existing homeowners, starving property-tax-dependent localities of funds to pay for services and pensions.
3/19/08 The Fed Is Too Easy on Wall Street, Business Week. "The Federal Reserve continues to bail out major financial institutions without imposing meaningful conditions to improve their conduct and performance," complains Peter Morici, professor at the Smith Business School at the University of Maryland. Here's a staggering figure to contemplate: New York City securities industry firms paid out a total of $137 billion in employee bonuses from 2002 to 2007, according to figures compiled by the NY State Office of the Comptroller. Comment: Laissez-faire in lush times and bailout in bad times is not a coherent government policy. The ending of the Glass-Steagall wall between banks and investment banks should have meant extending regulation to investment banks because it opened up again the potential for investment banks to bring down the commercial banks, as happened through the correspondent banking system in 1929-33.
3/15/08 Debt Reckoning: U.S. Receives Margin Call, WSJ. Long-festering U.S. problems like the nation's persistent current-account deficit are combining with the asset-valuation crisis to magnify the problem for Federal authorities. Comment: A clear summary of how America's triple storm of rising costs from dollar weakness, decline in housing prices and the credit crunch tightening like a noose around overextended financial entities, businesses and individuals.
3/14/08 Bernanke Calls for `Strong Oversight' of All Mortgage Lenders, Bloomberg. Fed Chairman Ben S. Bernanke said today that too many home loans have been ``neither responsible nor prudent'' and called for ``strong oversight'' of different types of mortgage lenders. In prepared remarks for a National Community Reinvestment Coalition conference in Washington, he said: ``the decline in home equity makes it more difficult for struggling homeowners to refinance and reduces the financial incentive of stressed borrowers to remain in their homes.'' Comment: This plan sounds a lot more likely to have an effect and become a reality than Bernanke’s March 4 exhortation to a bankers’ meeting in Orlando that lenders forgive portions of mortgages held by homeowners at risk of default. This practice is called a “short sale” because the sale price falls short of paying off the mortgage and the bank accepts an amount from the seller short of what is owed on the mortgage. The marketplace has been jammed with short sales without Bernanke’s urging, because they hasten the departure of problematic mortgages from a bank’s portfolio.
3/14/08 Inflation Continues High at 4 percent, 3.7 percent in NYC Area, BLS. Comment: The initial reports described the inflation rate as "unchanged" which is misleading. It might imply to some that there was no inflation. In fact the consumer price index (CPI) rose 4 percent from January 2006 to January 2007 nationally, which means that a federal funds target rate of less than 4 percent is generating negative real interest. The outlook is not comfortable, especially when the crude oil price per barrel has risen above $100 a barrel. The New York City area inflation rate has benefited from a decline in the price of gasoline - but how long will that last with crude oil prices going through the $100 threshold?
3/9/08 ‘Shift-and-Shaft’ Federalism, Peter Harkness, Congressional Quarterly Columnist. Twenty years ago, there was a sense of optimism in the states and localities that they could take on new responsibilities for solving national problems. Example: enactment of a national welfare policy overhaul in 1996 based on programs started in Wisconsin and Michigan. But today, the White House intergovernmental office is a purely political operation. Ray Scheppach, the executive director of the National Governors Association, says governors are frustrated with Washington. Don Borut, who runs the National League of Cities, calls the trend a move to “coercive federalism” or “shift-and-shaft federalism”. Comment: The difference between Washington and the states and localities is that Washington can print money, running huge budget deficits year after year. When the music stops, as it has recently, we see more clearly how federal deficits (1) weaken the dollar, (2) destabilize markets, (3) crowd out credit for private purposes and (4) make it harder for states and localities to finance their infrastructure needs. When Washington uses its dollars as incentives, it may be fair enough. But when Washington creates mandates without paying for them, it is unfair and painful.
3/5/08 Kenya: Danger of Rebound Back into Crisis, American Progress. Tribal, social and economic factors are intertwined as Kenya faces the realities of power-sharing. Comment: The rivalries are economic as well as tribal, but in the 45 years since independence Kenya's resources have drifted toward those in power. The resentment by those who have been excluded has been building.
3/3/08 NABE Survey Cites Credit Crisis as Top Economic Threat, Reuters. The combined totals of subprime mortgage defaults and heavy debt are again the top concerns of 259 business economists polled by the National Association for Business Economics (NABE). The poll was conducted in the first half of February and updated a poll in August 2007. More than half, 52 percent, of respondents, said that subprime mortgage defaults and heavy debt were their top concern.compared wth 32 percent in August. At the same time, the third-ranked concern was Inflation, listed by 10 percent or respondents, an incresae from 6 percent in August. Only 9 percent of members who responded said terrorism was now their top concern. Comment: A year ago, terrorism and the Middle East were listed by NABE respondents as their top economic concern (i.e., short-term economic threat). In August that was replaced by the combined threat of subprime loan defaults and excessive indebtedness. Only 20 percent of the the 258 members surveyed in August listed terrorism and the Middle East as their top concern in August, down from 35 percent in March 2007. Meanwhile, a combined total of 32 percent listed subprime and excessive debt - 18 percent listing the subprime debacle as their top concern and 14 percent citing “excessive household and/or corporate debt”. While inflation is listed by only 10 percent of respondents in February 2008, it is significant because the Fed is expected to continue lowering interest rates to maintain orderly markets and battle recession. Lower rates will exacerbate inflationsry pressures.
FEBRUARY 2008
2/29/08
Leveraged Losses: Lessons from the Mortgage Market Meltdown, Greenlaw et al. This new report on the implications of financial market turmoil for central banks confirms the view that current problems in financial markets are concentrated in institutions exposed to mortgage securities. Using several methods, the authors estimate the ultimate losses on these securities at about $400 billion, Comment: This estimate is in line with the $400 billion estimate of subprime losses by Mike Mayo of Deutsche Bank in mid-January and is within the $250-$500 billion range of a November 2007 Royal Bank of Scotland estimate. The UBS Europe estimate of $600 billion in losses is from all credit problems and is not restricted to the mortgage market. The Bank of America has estimated $700 billion of mortgages are "at risk of default", which is not the same as a prediction of required writedowns for financial institutions.
2/29/08 UBS Global Banking Puts Credit-Crisis Losses at $600 Billion, MarketWatch. Total industry losses from the financial crisis should reach $600 billion, with $350 billion coming from listed banks and brokers, UBS strategist Geraud Charpin said in a note to clients. Comment: This is the largest estimate so far relating to the financial sector's losses. The Royal Bank of Scotland in November had an upper limit of $500 billion. The UBS estimate specifically includes insurance companies. Of the $600 billion, banks and brokers have written off $160 billion, i.e., slightly more than one-fourth of the total estimated damage. The estimated loss is substantially greater than the losses from the S&L crisis in the 1980s.
2/28/08 Credit Cardholders Bill of Rights: "An Important First Step", Credit Slips. Adam Levitin has a post on behalf of the blog Credit Slips, which is maintained by a group of academics based at the University of Illinois (other universities represented are Georgetown, Harvard, Iowa, Michigan, Ohio) who are concerned about credit and bankruptcy issues. His post is in favor of the Credit Card Bill of Rights, although Levitin notes that the bill has some omissions - "it doesn’t deal with problems of price structure, rewards programs, antitrust, merchant fees, or identity theft prevention" - and "the card industry might well find other ways to extract rents from unwitting cardholders even if the ways enumerated in the bill are shut down." However, Credit Slips concludes that the bill is "an important first step to reining in an industry that has run wild in a regulatory no-man’s land of outdated and threadbare federal laws, preempted state laws, and somnolent consumer protection by federal banking regulators." Comment: A nice piece of writing as well as being an accessible primer on the ways that consumers have been hoodwinked on a grand scale by the ploys and practices of some credit card issuers.
2/28/08 Bernanke Stokes Inflation Concerns, Bloomberg. Federal Reserve Chairman Ben S. Bernanke's readiness to cut interest rates to avert a recession is stoking concerns that prices will get out of hand. ``Bernanke has really overweighted the economic risks relative to inflation,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, following the Fed chief's testimony to Congress yesterday. Investors' expectations for inflation over the next 10 years jumped to the highest since June after Bernanke pledged to the House Financial Services Committee to act in a ``timely manner'' to combat ``downside risks'' to growth. A day after wholesale costs were reported rising 7.4 percent in January from a year ago, Bernanke said the price outlook has deteriorated ``slightly.''
2/26/08 Credit Cardholders Bill of Rights. New York Representative Carolyn Maloney recently introduced H.R. 5244, the “Credit Cardholders’ Bill of Rights Act of 2008”. Maloney calls the bill "comprehensive credit card reform legislation" that does away with "abuses that unfairly hurt consumers". Click to Support the Credit Cardholders Bill of Rights.
2/25/08 Financial Hypocrisy, Joseph E. Stiglitz. The United States is not following the discipline that it preached to the rest of the world through the IMF. As a result, we have a financial mess at home and abroad.
2/25/08 Use GOLD to Hedge Your Portfolio Against Recession. "Investors are worried about a recession; you should consider GOLD futures/options as a hedge. Talk to the futures experts at XX." Comment: Received an ad for this service in an email. This doesn't make sense. The reason for buying gold or gold shares is worry about inflation, not recession. Just happens we have to worry about both right now.
2/22/08 Rescues for Homeowners in Debt Weighed, NY Times. Not since the Depression has such a large share of Americans been underwater on their mortgages, i.e., owed more on the homes than they are worth - 8.8 million homeowners, or 10.3 percent. [I.e., 10.3 percent of homeowners have mortgages that are upside down - and the figure is three times as high for recently acquired mortgages]. This is more than double the percentage a year ago, estimates Moody’s Economy.com. Administration officials say they still oppose any taxpayer bailout. But Washington is being forced to explore new ideas, among them the idea of a federal mortgage guarantee for troubled borrowers.
2/21/08 Victimizing Borrowers, Knowledge at Wharton. Legislation to curtail predatory lending has been proposed. Three Wharton finance professors think that some state laws aimed at predatory lending probably help. The North Carolina Predatory Lending Law of 1999 is widely considered a model, they say. It applies to mortgages of $300,000 or less that carry a rate of 8 percent above a benchmark U.S. Treasury rate. It prohibits negative amortization, interest-rate increases after a borrower default, balloon payments and other features associated with predatory loans.
2/21/08
California Faces $16 Billion Budget Gap, LA Times. Comment: Will spending cuts be able to close the gap, or will t*x increases be required?
2/20/08 U.S. inflation 0.4 percent seasonally adjusted, month-over-month (see numbers at right on that BLS page - 0.5 percent not seasonally adjusted). The inflation rate is higher than expected. Good commentary at The Big Picture. Stagflation seems to be upon us. (NYC area inflation is below the national pace.)
2/15/08 Comptroller-General David Walker to Leave, CQ. The head of the GAO, David Walker, will be leaving in March to head up a new foundation created by Peter Peterson of Blackstone. Comment: A good leader of GAO, Walker is well qualified to head up a foundation looking at pressing long-term U.S. policy issues, like the costs of Medicare and Social Security.
2/15/08 US Subprime Crisis Worst, Costs $7.7 Trillion, Says BofA, Agence France-Presse. The Bank of America concludes that the subprime credit issues have caused world-wide stock-market values to fall $7.7 trillion since October, in a report issued yesterday. The Bank says that the losses are worse than any in the past few decades, including Wall Street's Black Monday of 1987, the 1999 Brazilian real currency crisis and the collapse of hedge fund Long Term Capital Management (LTCM) in 1998. The decline in market cap is 14.7 percent, compared with a similar loss three months later of 13.2 percent after the LTCM crisis, 9.8 percent for Black Monday and 6.1 percent for the Brazil crisis. The losses were also greater than those suffered after the September 11, 2001, terror attacks, the Asian financial crisis starting in 1997, Argentina's default on its debt in 2001 and the 1994 Mexican peso crisis.
2/15/08 Municipal Bond Meltdown. Michigan has suspended a state loan program for 8,500 students, and the Port Authority of New York and New Jersey is facing a four-fold jump in interest rates on a loan auction - when an auction fails, the interest rate jumps up to a much higher default rate. The muni bond crisis means that unless something happens cities and states that issue tax-exempt bonds to raise money for infrastructure or student loans could be on hold. Yesterday Gov. Spitzer and NY State's insurance regulator, Eric Dinallo, came to Capitol Hill to sound the alarm. Comment: Historically, General Obligation munis have paid off with an infinitesimal loss rate. Revenue bonds are more risky. It's too bad that MBIA, Ambac and Fitch departed from a good business model (insuring munis) to a bad one (insuring CDOs), which has created the crisis in the muni markets because no one wants to risk their principal and now the insurance can't be counted on. John Mauldin's letter of today has an excellent exposition of the issues.
2/14/08 Comptroller of the Currency Blocked State Efforts to Rein in Predatory Lenders, Gov. Eliot Spitzer Op-Ed, Washington Post. The Governor of NY argues that a politicized Comptroller of the Currency (who charters national banks) blocked state efforts to intervene in overly aggressive (predatory, high-cost, high-risk) lenders.
2/14/08 Chairman Bernanke Urges Congressional Speed. The Fed Chairman would like to shore up the regulatory oversight functions in the mortgage arena. Comment: The horse may be out of the barn, but a new lock will protect the next horse.
2/12/08 Treasury and HUD Expand Default Aid, AP. The Federal rate freeze program has been expanded to active assistance to mortgage holders more than 90 days overdue in their payments. Washington is working with a group of large lenders to intervene so as to prevent foreclosure.
2/7/08 Connecticut Gov. Re-Proposes Property Tax Cap, Hartford Courant. Noting that Connecticut has avoided the budget deficits plaguing 35 other states, Gov. M. Jodi Rell proposed an $18.5 billion spending plan that adds 525 full-time state employees. He called for imposing a property tax cap on cities and towns, a proposal similar to one lawmakers rejected last year.
2/07/08, Winning the Edwards Vote, Common Dreams, Ron Blackwell and Thomas Palley. “... Modernizing financial regulation is another needed measure. The housing bubble and sub-prime mortgage crisis show the financial system is broken. Today, the only instrument of control is the blunderbuss of Federal Reserve interest rate changes that inflict unemployment or inflation. New ideas exist and should be given space through a national financial markets reform commission that airs all views, and not just those of Wall Street.” (Ron Blackwell is Chief Economist of the AFL-CIO. Thomas Palley is former Chief Economist of the U.S.-China Economic and Security Commission.)
2/5/08 Dwindling Dow. Within 5 minutes of the opening bell, the Dow fell 150 points. By the end of the trading day, the Dow was down 370 points to 12,265. The decline has been blamed entirely on the ISM report (see next entry) which suggests that the United States is in a recession.
2/5/08 ISM Non-Manufacturing Business Activity Index Drops to 41.9, Lowest Since October 2001, Institute of Supply Management. The ISM index measures the service economy, which is 68 percent of GDP. This 41.9 reading is the first negative (below 50) number since 2003.
2/5/08 Democrats Push Green Growth, Los Angeles Times. Democrats in Congress are seeking to add tax breaks for alternative-energy investment to the stimulus package.
2/5/08 Florida Fails with Prop 13-Type Proposal but It Will Be Reintroduced, St. Petersburg Times. Backers of a 1.35 percent Florida property tax cap modeled after California's Proposition 13 fail to get enough signatures for the November ballot, but Republican state Sen. Mike Bennett says he will introduce the idea as a bill for the upcoming legislative session.
2/3/08 Jim Rogers Predicts One of Worst Recessions Since the Depression, Fortune. Like Jonah watching Nineveh from a safe distance, Rogers in Singapore predicts that stagflation is a probability for the United States. Comment: Stagflation is a scary scenario, very difficult for Washington to deal with – it is the opposite of the Goldilocks era of the 1990s, with low inflation and low unemployment. If higher oil prices push inflation above 3 percent – as seems likely – then interest rates below 3 percent yield negative real returns, reducing foreign appetites for U.S. debt and raising what Americans have to pay overseas lenders. There may be more 11 percent preferred stock deals for cash-starved financial institutions with White Knight sovereign wealth funds. The gap that the Fed has to steer between the Scylla of inflation and the Charybdis of unemployment narrows to nothing.
2/2/08 City of Springfield Made Whole on $13.9 Million Mortgage Derivative Investment, Springfield (Mass.) Republican. Merrill Lynch agreed that in this case the city of Springfield did not give "express permission" for investing in instruments linked to the subprime mortgage market. The investment had fallen in value to an estimated $1.2 million. Pension fund investment issues.
JANUARY 2008
1/31/08 Brazil Adds Compulsory Deposit Rule for Some Accounts, Bloomberg. Brazil's central bank raised deposit reserve requirements to tighten credit, removing about $23 billion from credit markets. Inflation is near the central bank's 4.5 percent target. The requirement goes after the fastest-growing lending sectors. Banks that receive cash deposits from lease underwriters will have to use a portion of the funds to buy government bonds. Those deposits were previously exempt from compulsory deposit rules. The requirement will begin at 5 percent of deposits in May and climb to 25 percent by January 2009. The outlook for inflation in Latin America's biggest economy has worsened recently. The bank targets an annual inflation rate of 4.5 percent, plus or minus 2 percentage points to accommodate price shocks. Consumer prices (the IPCA-15 index) rose 4.55 percent in the 12 months through mid-January. The central bank said the increase in reserve requirements gives equal treatment for leasing companies' interbank deposits and term deposits, which have a 23 percent reserve requirement. Comment: The Central Bank of Brazil is using a tool – varying reserve requirements - that has been in disuse in the United States. This tool may provide an avenue for something not discussed much yet – how do Senators Clinton and Obama propose to reform the regulation of the financial sector to prevent a recurrence of the subprime meltdown in some new sector (say, commercial real estate or alternative energy)?
1/31/08 Employment Cost Inflation 3.3 Percent, BLS. Employment costs rose 3.3 percent in December year-over-year for the second year in a row. Comment: For an employer, this is a major component of costs. Another sign that it will be hard to keep consumer price inflation below 3 percent.
1/30/08 Fed Cuts Rate by Half-Point, NY Times Online, 4:15 pm. Fed statement: “Financial markets remain under considerable stress, and credit has tightened further for some businesses and households." The statement referred to data showing the housing market continuing to worsen and the job market “softening.” Comment: At the end of the day, all three major stock market indicators were down - i.e., the FOMC's reduction in the target fed funds rate was fully anticipated. The dollar weakened because lower interest rates in the United States make investments here marginally less attractive than investments in other countries that are paying a higher interest rate.
1/30/08 Government Ethics Issues Persist, Washington Post, A13. A new survey concludes only 30 percent of federal workers and 14 percent of state and local government workers believe their agencies have good ethics and compliance programs. One-fifth or more of federal employees surveyed reported seeing each of the following: abusive behavior, safety violations, lying to employees and putting personal interests ahead of the agency’s. Of those who witnessed misconduct, 58 percent did not report it because they did not believe managers would take action, and 30 percent feared they would face retaliation. Only one percent used anonymous hotlines. Comment – The good news: The new survey compares well with one in 2000 in that reports of stealing, bribery, sexual harassment and discrimination have declined. Also, ethics programs seem to work - in government agencies with well-implemented ethics programs and a culture of compliance, reported lapses fell 60 percent and the reporting to management of such lapses increased 40 percent.
1/21/08 Bombay’s Sensex Index Falls 7 Percent, Most in Nearly Four Years, Bloomberg. Fears of U.S. recession spark investor sales outflow, with all 30 stocks on the Sensex declining. Year-to-date loss is 13 percent.
1/21/08 Shareholders Sue Ambac for Hiding Risks, Crains NY Business. A law firm in Baltimore has joined one in San Diego in suing Ambac for covering up the riskiness of their insuring subprime collateralized debt obligations.
1/20/08 Wall Street; The Worst Lies Ahead, Crains NY Business. A cheerful forecast from NYC’s biggest booster. New amounts borrowed to cover subprime loan losses (partial list): Citigroup $20 bil.; Merrill Lynch $13 bil.; Morgan Stanley $5 bil.; E*Trade $2 bil.; MBIA $1 bil.
1/17/08 Wall Street Bonuses Fell 4.7 Percent, Business Week. NY State Comptroller Thomas DiNapoli reported the decline based on a survey of eight major Wall Street firms – Citigroup, Merrill Lynch, JPMorgan Chase, Goldman Sachs, Bear Stearns, Morgan Stanley and Lehman Brothers.
1/13/08 Daley Confronting $10 Billion Pension Underfunding,Chicago Tribune. If the four pension funds don't build up their revenues and assets, Chicago taxpayers will have to pay in to meet liabilities to former city employees.
1/13/08 Anna Schwartz Blames Fed for Subprime Meltdown, Sunday Telegraph. New Yorker Anna Schwartz, 92 years old, argues the Fed caused the subprime bubble by keeping interest rates at 1 percent too long after the dot-com bubble and 9/11 were over. Schwartz co-authored with Milton Friedman the monetary history of the 1930s that put most of the blame for the Depression at the feet of the Fed, an analysis that Chairman Bernanke has accepted.
01/11/08 Cleveland Sues 21 Banks over Foreclosure Crisis, Cleveland Plain Dealer. Mayor Frank Jackson is suing 21 financial institutions that he blames for the foreclosure crisis in Cleveland. Courts in Cleveland have been hostile toward banks seeking to foreclose.
1/11/08 Agencies Withdraw Funds from Orange County Treasurer, LA Times. Loss of confidence by four public agencies.
01/08/08. Baltimore Sues Wells Fargo under Fair Housing Act, Baltimore Sun. Mayor Sheila Dixon has sued Wells Fargo Bank for “a pattern of predatory lending in black neighborhoods.” Wells Fargo denied that race played any role. The law suit is a new tack. Previous law suits have sued under anti-fraud statutes (Ameriquest settled such a suit in 2006).
DECEMBER 2007
12/27/07 Wall Street Wizardry, Wall Street Journal. How subprime mortgage loans were repackaged and resold at prices that did not reflect their risk. The example of Norma, which created a "hairball of risk". (The subprime losses continue to be uncovered - according to one estimate, just one-fourth of the losses have been disclosed so far.)
12/07/07 Sunday's Detroit Free Press Has 122 Pages of Foreclosure Notices. The list of 2008 Tax Foreclosures for Wayne County suggests that one-fourth of the county's homeowners are in default on their mortgage payments. More… (General Business) Comment: The witches' brew of auto industry and subprime problems makes it not so surprising that Deutsche Bank finds itself with 900 properties in foreclosure in Cuyahoga county. That might be its fair share!
12/07/07 Mortgage Aid, Within Limits, NY Times. The Bush plan comes from the mortgage industry, which for many properties would rather have interest rates frozen if it means that the property that would have gone into foreclosure remains as a paying asset. The Bush administration has said that the rate freeze for ARMs could help 1.2 million subprime borrowers, but the Greenlining Institute says only one in eight subprime borrowers would benefit from the rate freeze. The Center for Responsible Lending gives an almost identical figure. Comment: Lenders like the fact that they can decide which borrowers will be permitted to pay the frozen rate. Investors are not all so happy about the plan.
12/06/07 Anatomy of Financial Crises, Knowledge at Wharton. A review of earlier financial crises and how they played out. Who got hurt.
12/06/07 Lenders' Stock Climbs on Mortgage Rate Freeze, Crain’s NY. (1) Based on the President plan to freeze interest rates for five years for homeowners with adjustable-rate mortgages, shares of most mortgage lenders rose. MBIA shares climbed 12.5%, then fell back for an increase of 8.7%. Ambac gained 11.8% for a while. (2) However, the Mortgage Bankers Association said the percentage of U.S. mortgages in foreclosure hit a record 0.78% in the third quarter, above the previous high of 0.65% in the second quarter. Delta Financial Corp.'s stock fell to 26 cents after it filed for bankruptcy. Comment: Call it a puzzle or cognitive dissonance, but the move is being sold as costless to the taxpayer. So why the stock-price improvement? A more orderly marketplace?
12/06/07 Bush to Outline Five-Year Mortgage Rate Freeze, AOL Money & Finance. The freeze would appear to be costly for lenders. It would benefit homeowners up to date with their payments but facing an interest-rate reset, it but would exclude homeowners who are most in trouble, i.e., delinquent.
12/06/07 Orange County Treasurer Announces $460 Million Securities Downgrade, LA Times. Chriss Street was a whistleblower on the $1.7 billion loss Orange County sustained on investments in derivatives. (The County's subsequent bankuptcy was the largest municipal bankruptcy in U.S. history.) Now the County may end up taking another investment bath on the whistleblower's watch, as Moody's has put a credit watch on 8 percent of the County's securities.
12/04/07 Treasury Sees Limited Aid, NY Times. Treasury Secretary Henry Paulson Jr. reports that aid to mortgage holders facing foreclosure because of higher interest rates on their mortgages will probably help only a small number of such borrowers. A similar plan in California is likely to help about 12 percent of borrowers in the state, according to Barclays Capital. About two million subprime mortgages will adjust upward through 2008 as their low introductory rates end.
12/04/07. Hearings on Credit Card Charges, CNN Money. Fees and high interest rates.
12/03/07 Rate Freeze on Subprime Loans in the Works, Washington Post. The teaser rates that were to rise may not.
12/03/07 The World’s New Financial Power Brokers, McKinsey Quarterly. The new brokers: Asian central banks, oil-rich countries, hedge funds and private-equity firms.
12/03/07 Innovating Our Way to Financial Crisis, Paul Krugman, NY Times. "The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance."
NOVEMBER 2007
11/29/07 Can You Retire Really Early?, Yahoo Finance. This couple did it.
11/28/07 Lenders Promise $100 Million Aid to Cities, Detroit Free Press. Mortgage lenders, responding to mayors' distress, agreed at the Conference of Mayors to provide $100 per foreclosed property (1 million foreclosures expected; the Joint Economic Committee estimates 2 million for the nation) for credit counseling and a free online database of owners of foreclosed properties.
11/28/07 Dow Soars 331 Points. Fed Vice Chairman Donald Kohn makes rate-cut-friendly comments, offsetting a previous impression that the Fed might not wish to provide further liquidity to help the financial sector in its subprime meldown. David Gaffen, on the Wall Street Journal’s Marketbeat blog, quotes (1) Sean Simko, head of fixed-income management at SEI: “They’ve been hard-set on the moral hazard and hard-set in talking about inflation in all of their comments, but this could be looked at as them maybe opening the door for additional rate cuts moving ahead.” (2) Howard Simons of Bianco Research: “The next time we run into a financial crisis everybody knows they’re backstopped by the central banks.” Comments attached to the blog express satisfaction that some short-sellers were hammered by the two-day turnaround in the Dow from Monday's decline.
11/28/07 Details on the $10 Billion Impact on NYC Area of the Subprime Losses, NY Sun. The story provides estimates of the impact on gross product and local taxes in the NYC area and other metro areas, from the U.S. Conference of Mayors, who were meeting in Detroit. The mayors proposed that the Mortgage Bankers Association create a free online database to allow local officials to find out who is responsible for maintaining foreclosed properties that are in limbo. Mayors also suggested cities provide and promote financial counseling services to would-be borrowers, educate young people about housing loans and outlaw predatory lending.
11/27/07 Stocks Rebound, The Dow rose 215 points based on two pieces of good news from the Middle East - (1) a $7.5 billion investment in Citigroup by the Abu Dhabi Investment Authority, a sovereign wealth fund (making the two largest Citigroup shareholders Middle East petrodollar investors) and (2) broad Middle East participation in the Annapolis peace talks about the future of Palestine.
11/27/07 Foreclosures Hit Largest U.S. Metro Economies, Detroit Free Press. A U.S. Conference of Mayors report expects property values in the nation will fall by $1.2 trillion through a combination of foreclosures, mortgage problems and weakening demand. The economic impact in major metro areas is estimated as follows: New York City, $10 billion; Los Angeles, $8 billion; Dallas, Washington, DC, Chicago and San Francisco, $4 billion; Detroit, Boston and Philadelphia, $3 billion; and Riverside, $2 billion.
11/26/07 Dow Declines 237 Points in Late Trading, Trading Markets. Harry Boxer, The Technical Trader, considers the decline on the first day of the week, with wannabe sellers outnumbering wannabe buyers 5-6 to 1, to be “negative” and “ominous”.
11/23/07 Asian Stocks Gain for First Time in Seven Days, Bloomberg. The Tokyo exchange is closed. The Hang Seng index rebounded from a two-month low after 79-year-old Lee Shau Kee, ranked #22 on the 2007 Forbes ranking of billionaires (his net worth is estimated at $17 billion), announced he was buying shares.
11/21/07 Local Governments Are Withdrawing from Florida Investment Pool, St. Petersburg Times. Local governments in Florida are concerned about the safety of their investments in a $20 billion state pool (see Bloomberg story on 11/15 below).
11/20/07 Japan's Stock Index Rises 1.1 Percent, AP. Tokyo's Nikkei 225 fell 1.9 percent by midday to the lowest point since July 2006, then recovered, ending up 1.1 percent for the day. Morning concerns focused on the impact on Asian exports of the prospect of a slow American holiday buying season. After some sushi, investors saw things in a better light and shopped for bargains in mining, machinery and bank stocks, pushing the Nikkei 225 up 169 points. The mining company Inpex Holdings Inc. rose 2.8 percent, machinery maker Komatsu Ltd. 4.5 percent, Mizuho Financial Group Inc. 2.5 percent, Shinsei Bank Ltd. 9.3 percent.
11/19/07 House Passes Mortgage Reform Bill, Congress.org. On November 15, by 291-127, the House passed H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, sponsored by Rep. Brad Miller. The bill would require brokers and lenders to guarantee that borrowers will be able to repay "adjustable rate" mortgages that reset to higher payments and would have to show that refinancing is to the borrower's benefit. Mortgage brokers and loan officers would have to be government-licensed. Supporters say the bill will help homeowners and protect the economy. Opponents make the transparent observation that while the bill satisfactorily bolts the stable door that had been open, it does nothing much about the horses that got out, namely the lost homes and bank writedowns, and makes it harder for those who want to buy houses in future to get a mortgage.
11/19/07 Moody’s: Credit Card Delinquencies Rise, AP. For the third quarter in a row, delinquency rates are higher (although they have been higher in the past). Also, the proportion of debt being paid off each month has fallen. This is the low end of the mortgage problem. At least borrowers with mortgages and home equity loans get a tax break.
11/19/07 Dow Down 200 Amid Banking Concerns, AP. Goldman Sachs estimated that Citigroup Inc. will have to write down $15 billion over the next two quarters because of subprime-linked and other risky debt. Forecasters are concerned that consumer worries about housing prices and debt will take $ out of the $ea$on.
11/16/07 Third Quarter Extended Mass Layoffs Hit Real Estate Credit Industry Hard, BLS. “Layoff activity in credit intermediation and related activities quadrupled over the year, mostly due to higher layoff activity in the real estate credit industry. Layoffs in the finance and insurance sector more than tripled over the year, and accounted for 12 percent of all mass layoff events and 15 percent of separations. The layoffs in the finance sector were primarily in the credit intermediation and related activities industry, which reported its highest number of events and separations in program history.”
11/15/07 Kansas City-Based NovaStar Financial Declares $600 Million Loss, May Be Bankrupt, AP. NovaStar may be delisted from the NYSE. It is included along with American Home Mortgage of Melville, NY, New Century Financial of Orange Co., CA, Countrywide Financial, #1 mortgage lender in 2006, of Calabasas, CA and 184 other mortgage lenders in bankruptcy, insolvency or deep financial stress.
11/14/07 Good, Bad or Ugly? Predicting the Future of the U.S. Economy, Knowledge at Wharton. In interviews, Wharton professors question whether anyone in the current global financial turmoil can accurately forecast how the U.S. economy will fare.
11/12/07 Barclays and RBS Stock Prices Rise, Bloomberg. Barclays denied that subprime losses were as serious as rumors indicated. Barclays and RBS stocks recovered some of their steep losses.
11/10/07 Banks Say Subprime Loan Losses Will Affect 4Q, AP.
11/09/07 Royal Bank of Scotland and Barclays Stocks Fall on Subprime Concerns, Bloomberg. RBS joins Barclays in speculation about subprime losses. An RBS analyst estimated that $250-$500 billion in subprime losses may eventually come to light. This is more than all S&L losses in the 1980s.
11/09/07 Stocks Fall as Wachovia and Barclays Reported Caught in Subprime Web, Forbes. In the S&L crisis of the 1980s, problems centered on individual S&Ls. This time round, securities based on subprime U.S. mortgage loans have been sold all over the world. Barclays was widely rumored on Friday to have a $10 billion writedown ahead. The bank has issued a strong denial.
11/09/07 U.S. Trade Gap Shrinks Unexpectedly, Bloomberg. The trade gap narrowed by a small percentage. A widening had been predicted. Is the weak dollar finally giving a significant boost to U.S. exports? Or will the main effect of the weaker dollar be soaring import prices goosing the inflation rate (a possible effect that Fed Chairman Ben Bernanke warned about in his congressional testimony)?
11/09/07 $1.4 Billion Loss Hits Fannie in Third Quarter, AP.
11/08/07 Credit, Housing Hurt AIG, AP. On November 7, AIG stock fell nearly 7 percent, fastest falling of the 30 DJIA industrials. It announced a 27 percent decline in its third-quarter earnings YOY, with subprime credit problems in several earning areas.
11/08/07 Financial Blogs.
OCTOBER 2007
10/25/07 2 Million Foreclosures Likely, Joint Economic Committee (Sen. Chuck Schumer, Chair; Rep. Carolyn Maloney, Vice-Chair). About $71 billion in housing wealth is likely to be destroyed directly and $32 billion indirectly. States are expected to lose more than $917 million in property tax revenue, with the biggest losses in California, Florida, Ohio, New York and Michigan. A 10 percent decline in housing prices implies an economic loss of $2.3 trillion.
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BlogPosts
DECEMBER 2008
 12/18/08 (HuffPost) Laurence Meyer on the Fed: What Is "Whatever It Takes"? Laurence H. Meyer, Vice Chairman of Macroeconomic Advisers and former Fed Governor (1996-2002) speaks frankly about high-stakes Fed issues. Q1. How bad is the current credit and economic crisis? A. The current crisis is more severe than any of the other postwar U.S. recessions. It's equivalent to the sum of these recessions.
12/17/08 (HuffPost) Economic Recovery -- Five Lessons from the Depression. The Washington Consensus is to do whatever it takes to ensure economic recovery. President-elect Obama has made clear he is prepared to undertake a major stimulus program. How should the U.S. Government best pursue economic recovery? Read Post
12/16/08 (HuffPost) The Fed's Zero-Interest Policy -- Tokyo on the Potomac. The Federal Open Market Committee has reduced the target fed funds rate to a range of zero to one-quarter of a percentage point, officially entering a very-close-to-zero interest rate policy. This policy is associated with the Bank of Japan. But the Fed is doing much more. Read Post. Comments.
MARCH 2008
3/23/08 (HuffPost) The Bankers Panic of 2008 -- New Regulation In late 1999, the bulwark bank regulation of 1933, the Glass-Steagall Act -- the wall between investment banks and commercial banks -- was torn down. This was a great victory for creative bankers, who had found the wall irksome and restrictive. What was outside the wall should have been brought under an expanded regulatory scope of the Federal Reserve or the SEC, or both.
3/18 (HuffPost): The Bankers Panic of 2008. American financial history is a sine curve of excess, crisis and reform. The Crash of 1906 and the Bankers Panic of 1907 led to the birth of the Federal Reserve System in 1913. The crash of 1929 and related bank failures led to the SEC and FDIC. The S&L meltdowns led to the Office of Thrift Supervision. The Enron and Worldcom bankruptcies led to the Sarbanes-Oxley law of 2002. Now credit laxity has led to the Bankers Panic of 2008. The Fed has responded with lower interest rates and bailouts of overstretched Wall Street firms. How should the Congress and the next President be responding? Six ideas... More: 3/18/08, John Tepper Marlin, Huffington Post, The Bankers Panic of 2008.
3/17 (HuffPost): After Bear Stearns: Brady Bonds? The Fed's over-the-weekend intervention was presaged on November 8, 2007 when bank announcements of billion-dollar writeoffs were being announced with an air of finality while analysts like Bob Janjuah of the Royal Bank of Scotland were saying that the losses would soar to $250-$500 billion. That November day, Chairman Bernanke told Congress to expect "temporary" slower growth and higher inflation (sounds like stagflation). How long is temporary? The Bear Stearns takeover by JPMorgan Chase may speed change. Brady bonds could also be useful. More: 3/17/08 John Tepper Marlin, Huffington Post, After Bear Stearns: Brady Bonds?
FEBRUARY 2008
2/28/08 (HuffPost): Credit Cardholders Overdue Bill of Rights. If there is any bill that is overdue, it is the Credit Cardholders Bill of Rights. Adam Levitin has posted on the subject today on Credit Slips, a University of Illinois-based joint blog site of a group of academics (the other universities represented: Georgetown, Harvard, Iowa, Michigan, Ohio) focused on credit and bankruptcy issues. Levitin favors the bill, H.R. 5244. He notes it has some omissions -- "it doesn't deal with problems of price structure, rewards programs, antitrust, merchant fees, or identity theft prevention" and he observes that even with the bill, "the card industry might well find other ways to extract rents from unwitting cardholders even if the ways enumerated in the bill are shut down." But the bill addresses the worst abuses of the industry. 2/28/08, John Tepper Marlin, Huffington Post, Credit Cardholders' Overdue Bill of Rights.
2/26/08 (HuffPost): Credit Cardholders Bill of Rights. New York Representative Carolyn Maloney, who serves as Vice Chair of the Joint Economic Committee (Senator Chuck Schumer is Chair), has performed a public service by introducing the Credit Cardholders Bill of Rights, H.R. 5244. She describes her bill as "comprehensive credit card reform legislation" that ends "abuses that unfairly hurt consumers." Comprehensive it does seem to be, and reasonable. 2/26/08, John Tepper Marlin, Huffington Post, Credit Cardholders Bill of Rights.
2/25/08 (Blogspot): Credit Cardholders Bill of Rights. The Credit Cardholders Bill of Rights, H.R. 5244 prohibits "arbitrary interest rate increases", requires a notice of any interest rate increase at least 45 days in advance, reserves to cardholders their right to pay off their existing balance at the current interest rate if the rate is increased, requires that cardholders who pay on time will not be "unfairly penalized", prohibits "due date gimmicks" and "misleading terms", allows cardholders to set their own limits on their credit, requires that credits and payments be posted "promptly and fairly", prohibits imposing "excessive fees" on cardholders and prohibits issuing subprime credit cards to people who can't afford them. 2/25/08, John Tepper Marlin, Blogspot, Credit Cardholders Bill of Rights.
2/24 (HuffPost): Banks Change Their Tune. The banking lobby used to sing “My Way” (1969) to get Congress to lighten up on regulation. In 1999, the lobby succeeded – in the name of financial innovation – in rolling back the very Glass-Steagall Act (1933) that was created to stop banks from making risky investments. Now the banks are singing “Buddy Can You Spare a Dime” (1932) again. Their ask this time, however, is for a lot more than a dime. The Bank of America has asked Congress to create a Federal Homeowner Preservation Corporation to buy up and refinance mortgages in default. The BofA estimates that $700 billion of mortgages are at risk of default in the next five years. John Tepper Marlin, 2/24/08, Huffington Post, The Banks Change Their Tune.
2/22 (Blogspot): Mortgage Industry Reform: Six Ideas for Rejection. Here are six ideas proposed by other people in print recently, with brief arguments for why they should be rejected:
1. “Make it a free-for-all. Let Wal-Mart compete. Could it be worse?” Comment: It already is a free-for-all. Yes, it could be worse.
2. “Require mortgage brokers to serve clients. The documentation is too hard to read and understand.” Comment: A mortgage broker has to serve both the lender and the client. A real estate purchase is a complicated transaction. The options are to check or get help.
3. "End loan fees and commissions. Too many people were put into the wrong mortgage because their broker was paid extra.” Comment: Loan fees have been shrinking. Brokerage has always been a commission business – brokers eat what they kill.
4. “Allow any organization in the mortgage-making process to rebate a business partner to get extra sales." Comment: Why would that be an improvement?
5. “Prohibit stated-income mortgages.” Comment: When stated-income mortgages were first introduced in 1980, they worked. They had special requirements. Bring back the requirements.
6. “End the size limit on conforming loans for government-sponsored mortgage packagers.” Comment: The conforming loan size limits make sense for several reasons. John Tepper Marlin, 2/22/08, Blogspot, Mortgage Industry Regulatory Reform.
2/16 (Blogspot): Question, Where Were the Regulators? Matt Padilla asks in the Orange County Register, Where Were the Regulators? Comment: With hindsight, they should have intervened earlier. Chairman Greenspan said he didn’t want to interfere with financial innovation, but innovation should not be permitted to interfere with job 1 for regulators, ensuring safe and orderly markets. Edward Gramlich takes a somewhat benign view of the 12 million homeowners financed by the subprime industry since 1993, but how many more will be left owning their homes in 2010 than would have if the industry had been reined in from its 2005-2007 excesses? Here are five ideas (list in formation): (1) Outlaw the dangerous SIV structures. (2) Mandate that the SEC - disastrously missing in action from oversight when CDOs were being cooked up - keep a risk-assessing eye on what is cooking in the Wall Street derivative kitchen. (3) Encourage the FDIC to price risk more aggressively in its deposit insurance premiums, and introduce the Basel II bank capital-adequacy guidelines ahead of schedule. (4) Raise the profile of the Fed's HOEPA consumer-protection activity and make basic financial education a national priority. (5) Establish an inclusive mortgage council with all the regulators - and include HUD. More: 2/16/08 John Tepper Marlin, Blogspot, Question: Where Were the Regulators.
2/16 (Blogspot) Issues with Federal Statistics. The Web site of the Economics and Statistics Administration of the U.S. Department of Commerce notes it will terminate on March 1. Forbes gave EconomicIndicators.gov a "Best of the Web" award. Is closing this site another misguided Bush Administration assault on collection of data the President doesn't like? Maurine Haver of Haver Analytics has long been concerned about underfunding of data collection programs like (1) Services sector jobs, when half the U.S. economy has been in the services industry since 1950 and the share grew in the second half of the 20th century to two-thirds. OMB's "ExpectMore" program notes that lack of coverage of services impairs the value of economic statistics. But the Census Bureau hasn't received the money to collect monthly data on service employment and wages in the service industries. (2) The cost of shelter, because the housing sample has shrunk since 1990 despite growth of the number of housing units, making CPI numbers suspect. These are serious issues. Closing ESA's website is not. It duplicates sites like FedStats, BEA, Census and BLS and the money, whatever it is, would be better spent on improving Census data. Update: The ESA website has been saved. (How much does it cost?)
2/15/08 (Blogspot): Subprime Losses. Deutsche Bank, the Royal Bank of Scotland and others have warned that subprime losses could hit $400-$500 billion. Now the Bank of America has reported that subprime-related credit problems have reduced global stock market capitalization since October by $7.7 trillion or 56 percent of current-dollar U.S. GDP. This is a decline in market cap of 14.7 percent, higher than the three-month losses of 13.2 percent after the LTCM crisis (1998) and 9.8 percent for Black Monday (1987) and all other recent crises. Local government agencies trying to raise money, like Michigan and the Port Authority of New York and New Jersey, know there is a crisis in the municipal auction markets. Some of the $7.7 trillion losses are likely to be showing up in pension fund portfolios and New York City taxpayers may not all know they have to make up the shortfall below a projected 8 percent annual return on the funds' assets. Stock-market losses mean that OMB and Mayor Bloomberg are going to have to go back to the City's financial plan and refigure. 2/15/08, John Tepper Marlin, Blogspot, Some Implications of the Subprime Crash.
2/15 (Blogspot) How Much House Can You Afford? CNNMoney. Similar calculators are provided by FannieMae, BankRate.com, Yahoo! Real Estate, SmartMoney, HomeFair (Moving.com), HOEPA and other sources. Question: Has anyone compared the answers that these - and other - calculators give? What is the range? Who was using these calculators in Arizona, California, Florida and Nevada during the last three years?
2/11/08 (Blogspot) Ideas for Bank Regulatory Reform. Vasos Panagiotopoulos recommended to me an article by Edward M. Gramlich, “Booms and Busts: The Case of Subprime Mortgages,” Economic Review, Federal Reserve Bank of Kansas City, Fourth Quarter 2007, 105-113 [official Summary here]. He provided a brief summary that I have amplified (excerpt follows): "The Monetary Control Act of 1980 ended usury limits for risky mortgages. The subprime industry since 1993 created 12 million new homeowners, raising the total by five percent [106]. The boom and bust has left, besides investor losses, about 88 percent of the homes still solvent [107]. But a “giant hole” in financial supervision has existed, exactly where supervision was needed the most." 2/11/08, John Tepper Marlin, Blogspot, Ideas for Regulatory Reform.
2/9/08 (Blogspot): Comment on Flat Tax. John Skolas of New Hope, PA read my 2/5/08 post on Chairman Rangel's talk on the tax code, and commented: “Thank you for sending this. As someone who started his career as a tax lawyer, I have always wanted to ask an economist why politicians talk about a flat tax being simpler. The vast majority of tax code complexity seems to be definitional, e.g., taxable income, business expense, transfer pricing - as to what is U.S. income and on and on. A flat tax could get rid of Schedule A for individuals, but leaves the whole rest of the alphabet of schedules and all the same issues for businesses, regardless of the tax rate.” 2/9/08, John Tepper Marlin, Blogspot, Rethinking Taxes.
2/6/08 (Blogspot): Ireland Bond. Senator Hillary Clinton proposed last year a new bond to raise money for the Northern Ireland economy, as reported in the Belfast Telegraph. The bonds would be sold (when markets improve) to international investors.2/6/08, John Tepper Marlin, Blogspot, Ireland Bond. The proposal echoes a more ambitious 1995 proposal linked to the Northern Ireland peace process.
2/5/08 (Comment - NY Sun): Rangel Thinks about the Tax Code. The official national debt is $9.2 trillion, according to the online National Debt Clock, which agrees with the physical clock at 6th Avenue and 44th Street in Manhattan. (The physical clock notes average U.S. debt per family of $78,000.) Slowing the growth in debt means less spending or higher taxes. Chairman Charles Rangel of the House Ways & Means Committee made a lot of sense on thsi topic at a lunch today. He said the entire code will be up for debate whichever candidate is elected President ("whoever she may be", he said). Some believers in tax simplicity want to impose a flat tax. For Chairman Rangel, issues of fairness are high among his concerns, as a weak economy punishes the "jobless, the homeless, the hopeless". (Warren Buffett has spoken out against the unfairness of a tax system that requires a higher rate of taxation for his secretary than for him.) The argument that risk-taking needs reward may apply to investors in hedge funds, he said, but he wonders why non-risk-taking managers of hedge funds get to pay income taxes on their income at these same lower capital gains rates. The lower rate may well be good for attracting people to such jobs, but Rangel wonders why the hedge fund industry is special. In the end, he said, the lobbyists for special interests are not nearly as important to political leaders than the biggest lobby of them all, the American public.
Comment on 2/4/08 NY Sun, Peter Kiefer, Panel To Convene on Seeking Big Reduction in Corporate Tax Rate.
2/4/08 (NY Sun) Wall Street Seeks Reduction in Corporate Capital Gains Rate. Some Wall Street leaders are looking for another cut in the corporate capital gains tax. But continuing deficits are unsustainable and in an election year broader issues will be on the table besides what is good for Wall Street. 2/4/08 NY Sun, Peter Kiefer,cites John Tepper Marlin, Panel To Convene on Seeking Big Reduction in Corporate Tax Rate.
JANUARY 2008
1/4/08 (Blogspot): Post-Mortem on the Meltdown. After the meltdown of the savings and loan industry in the 1980s, the Federal Home Loan Bank Board was ended and the Office of Thrift Supervision was put in its place in 1989 to end mortgage chicanery once and for all. With Meltdown II originating in the subprime loan business, it is clear that the 1989 reform was inadequate. Risks were mispriced, mortgage lenders were out of control and the effects are being felt with foreclosures and financial losses in every community in America. More: 1/4/08, John Tepper Marlin, Blogspot, Time for Reform of Financial Regulation. Pension Funds.
DECEMBER 2007
12/6 (HuffPost): Today is St. Nicholas Day. He has a special place in my life. The poem "A Visit from St. Nicholas" created the modern jolly Santa Claus. My Dutch-born mother used to play the part of St. Nick every year on December 6 and she wasn't jolly about it at all. I was reminded of this serious St. Nick by Ben Stein's widely discussed opinion piece, questioning Goldman's selling packages of mortgage securities at one window while traders were short-selling mortgage indexes at another. More: 12/6/07 John Tepper Marlin, Huffington Post, "What St. Nicholas Taught Me."
12/3 (Blogspot): Citing Allan Sloan's research for Fortune magazine, Ben Stein in yesterday's NY Times The Long and Short of It at Goldman Sachs") criticizes Goldman Sachs for packaging mortgage loans while simultaneously short-selling mortgage indexes. He also takes to task a Goldman economist for being excessively bearish on mortgages. Wall Streeters tend to divorce morality from markets. Okay, but what's left of the Glass-Steagall wall between banking activities and investment banking? More: 12/3/07 John Tepper Marlin, Blogspot, Ben Stein’s Challenge to Goldman.
12/3 (Blogspot): The attempts by Deutsche Bank to foreclose on dozens of properties in Cleveland have turned the attention of three Ohio judges - Judges Boyko and O’Malley of Cleveland and Judge Rose of Dayton - to the paperwork behind subprime loans. Deutsche Bank apparently owns as Trustee some 900 properties in Cuyahoga County. The global web of mortgage securitization seems to be missing the needed loan documents. Read this story from Callahan's Cleveland Diary. More:12/3/07 John Tepper Marlin, Blogspot, Weak Links in Mortgage Web Exposed in Ohio.
NOVEMBER 2007
11/20: Watch what they do, more than what they say. Based on the latest available data issued November 16, amid posturing at the recent OPEC meetings, oil exporters have been adding to their holdings of U.S. securities over the past year, from $114 billion to $126 billion. The biggest friends of the U.S. dollar have been the UK, which added $204 billion (to $266 billion), and Brazil, which added $64 billion (to $109 billion). These two countries more than account for the growth in foreign holdings of U.S. securities of $222 billion (to $2,247 billion). The top five holders of U.S. securities are Japan, PRC, UK, oil exporters (15 countries) and Brazil, which account for 66 percent of all foreign holdings. The euro rose from $1.27 in September 2006 to $1.39 in September 2007, so the euro value of U.S. securities fell 9 percent, canceling out what Uncle Sam is paying in interest. 11/20 Blogspot, Foreign Holdings of U.S. Securities.
11/16: Fed Chairman Ben Bernanke has warned Congress about risks both of higher inflation and lower growth in the near future. The total of inflation and unemployment is measured by the misery index, which in the United States was at its highest in June 1980 at 22 percent and at its lowest in July 1953 at 3 percent. In October, U.S. inflation was 3.6 percent and unemployment was 4.7 percent, giving a misery index of 8.3 percent. In New York City, the unemployment rate rose in October to 5.3 percent, an increase from 5.1 percent in September 2007. With NYC inflation at 3.1 percent year-over- year, the NYC misery index is 8.4 percent. 11/16 Blogspot, U.S. Misery Index 8.3 Percent.
11/12: Several overseas banks have written off multi-billion-dollar losses on securitized subprime loans. But it is still unclear how large the losses will be. The stock prices of Barclays and the Royal Bank of Scotland, which had fallen sharply on rumors that they will have to take large subprime losses (Sanford Bernstein projected last week that the two banks would have to write off $4.4 billion for these losses), recovered somewhat today as Barclays denied that its subprime loan losses were so serious. But investor confidence in both banks remains weak. 11/12/07, Blogspot, Subprime Loan Losses Overseas Large but Unclear.
11/11: Foreigners holding U.S. securities are losing money because of the decline in the value of the dollar. Now, widespread rumors suggest many of them may also be losing money on the securities themselves. Most recently, Barclays and the Royal Bank of Scotland appear caught in the web of Collateralized Debt Obligations. One RBS analyst put the magnitude of the loss from subprime debt at greater than $250 billion and possibly as high as $500 billion. This would be larger than S&L losses in the 1980s. But this time round, the rest of the world seems to be sharing in the pain. 11/11/07, Blogspot, Subprime Problems Exported.
11/8 (HUFFPOST): On October 19, I posted a comment about the relevance of cognitive dissonance to the equity markets. Investors were nervous because of conflicting information about the extent of the subprime losses. This has continued, with two more 300+ declines in the Dow through yesterday. The dissonance (the word disconnect works just as well, if you prefer) has been between two types of signals. One is the large writeoffs by Wall Street firms of losses in subprime loans and related assets. The other is the continuing expansion of the extent of the losses, like the 13th cuckoo that calls into question the ones that have come before. Or, as a Wall Street trader put it to me at noontime yesterday as we were listening to Fed Governor Kevin Warsh: "The equity markets have been saying one thing and the fixed-income markets another. They can't both be right." 11/08/07, Blog by John Tepper Marlin on HuffPost, Down Dows and Cognitive Dissonance.
11/8: "The relevance of cognitive dissonance - which John Tierney has since written about in the NY Times in a non-Wall Street context - continues through two more seriously down Dows, the second of being yesterday's 361-point decline. The cognitive dissonance is between signals that securitized subprime losses (and other bad news) are fully written off/discounted, and other signals suggesting that they are not. ... 11/8/07 Blogspot, Cognitive Dissonance - Equity vs. Fixed Income Markets.
10/4: "Who's at fault for the high level of credit card debt and the high fees that are being charged? The credit card issuers, who make it so easy to borrow, or we American consumers who run up five and even six-figure credit card bills we can't afford, until the credit stops?" 10/4/07 Blogspot, Predatory Credit Card Issuers?
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