Shoofly, North Carolina.
"Tobacco field in early morning where white sharecropper and wage laborer are priming tobacco."
Ilargi: On two consecutive days, we have two reports coming from the IMF. While the paper we dealt with yesterday predicted a significant improvement in US housing starting next year, today’s "Global Financial Stability Report" simply states that there’s no end in sight; it also confirms an earlier prediction of $1 trillion in losses from the US mortgage crisis.
Which leads me to what the rest I have to say today will consist of: a series of numbers taken from the articles posted below. Take out the calculators (you may also need that bottle of rye and the teddybear). Other than that: Don’t miss BusinessWeek on the safety of your bank, nor David Rosenberg’s claim that deflation will soon replace inflation.
And when you're done reading the numbers, you might want to check your wallet.
- Cost of the various US housing bail-out programs to date, through the Federal Reserve, the Federal Home Loan Banks, the Federal Housing Administration and Fannie Mae and Freddie Mac.: $1.46 trillion.
- Increase from 2006 to 2007 in Fannie Mae and Freddie Mac part of the bail-outs: $621 billion (expected to be much higher this year)
- Total new financing the Fed has made available to markets: $446 billion
- Cost for (non-Fan and Fred) housing part of the The Housing and Economic Recovery Act of 2008. a new program at the Federal Housing Administration for refinanced 30-year fixed loans: $300 billion. Homeowners "rescued": 400.000. Cost per home: $750.000.
- Increase in US debt limit to accommodate the bill: $800 billion, to $10.6 trillion from $9.816 trillion .
- Time the bill will be implemented: Summer 2009
- Taxpayers cost for explicit government guarantee for Fannie and Freddie: more than $1 trillion
- 2008 salary Fannie Mae CEO: $13.4 million .
- Increased amount of what FHLB calls “advances” to member banks: $274 billion,
- Total advances: $914 billion (second quarter of 2008).
NOTE: the FHLB has a "Superlien" with the FDIC. When banks go belly-up, they get their money first, before depositors do. The FHLB boasts that it has never lost a penny on a loan to its member banks.
- Decrease in average home value in the past two years in South Florida: $100,000, $4,100 a month, $136 a day, or $5.70 every hour.
- New record US budget deficit for period starting October 1: $490 billion
- George W. Bush February deficit forecast: $407 billion
- Funds required to meet the US transportation infrastructure demand: $225 billion a year
- Current spending: $100 billion per year
- Bridges in the U.S. that are either "functionally obsolete" or "structurally deficient: 25%
- Budget for House bill passed Wednesday for highway and mass-transit projects: $8 billion
- Expected 2009 Congress transportation bill $400 billion over 6 years.
- Worldwide asset writedowns and losses: $469 billion in the past year
- Capital raised: $345 billion
- Cost of payments distributed under US economic stimulus package: $168 billion
- Cost of invasions Iraq and Afghanistan: $10 billion to $12 billion a month
- Decrease in miles driven by Americans in past 7 months: 40 billion, 3.7%.
- Number of days one third of UK adults can survive on savings: 11
- Forecast increase UK unemployment: 1.6 million to 2.5 million over the next two years.
- U.S. Treasury securities outstanding: $4.67 trillion
- Amount held by Japan and China: more than $1 trillion combined.
Update 6.00 pm EDT Ilargi: I was gone for the afternoon, but it doesn't at all surprise me to see, when coming back, that financials have taken a skinning once more. As I've said before: who wants to own US financials' shares? What is there to expect from them but trouble?
Before confidence can be restored, they'll have to open up and show all assets, including Level 3 and off-balance, and apply honest assessments. But yes, I know, for more than a few that'll be the end of the road. Thing is, if this continues, that end will soon arrive anyway. Two or three more days like today, and we'll start seeing plans for take-overs, bail-outs and bankruptcies in the sector, with the Fed and the Treasury playing first violins. This cannot go on.
Here are the numbers, the Dow lost 2.11%.
IMF Says U.S. Housing Slump End 'Not Visible,' Credit to Worsen
The International Monetary Fund said there's no end in sight to the U.S. housing recession and warned that deteriorating credit conditions for consumers and banks may prolong a period of slow economic growth.
"At the moment, a bottom for the housing market is not visible," the IMF said in its Global Financial Stability Report, released today in Washington. "Stemming the decline in the U.S. housing market is necessary for market stabilization as this would help both households and financial institutions to recover."
The IMF, which a year ago failed to foresee the depth of the subprime mortgage collapse, stood by its April forecast for about $1 trillion in losses stemming from the U.S. mortgage crisis. While U.S. policy makers have helped contain the financial losses, "credit risks remain elevated" and banks need to raise more capital.
Worldwide asset writedowns and losses have totaled $469 billion in the past year and $345 billion has been raised.
The Washington-based lender in the report said the Federal Reserve's decisions to expand lending to Wall Street firms "have succeeded in containing systemic risks." Still, weakness in housing threatens to extend the slump.
"The growing concern is that, with delinquencies and foreclosures in the U.S. housing market rising sharply, and house prices continuing to fall, loan deterioration is becoming more widespread," the IMF said. Falling share prices are making it harder for banks to raise capital, increasing the risk of a downward spiral in the global economy, the IMF said.
The outlook for banks may make investors reluctant to provide fresh funds needed to restore the strength of financial institutions, the fund said. "As economic growth slows, banks will face continued headwinds in maintaining earnings due to falling credit quality, declining fee income, high funding costs, and exposures to monoline and mortgage insurers," Jaime Caruana, director of the IMF's monetary and capital markets unit, said in a statement.
The fund warned that the frailty of the financial system would be increased by the failure of Fannie Mae and Freddie Mac, the two largest sources of U.S. mortgage financing. Shares of both companies are down more than 80 percent in the past year.
The U.S. Congress two days ago passed legislation to stem foreclosures for 400,000 homeowners and aid Fannie Mae and Freddie Mac, its most sweeping effort to halt the biggest housing slump since the Depression. President George W. Bush may sign the bill into law this week.
IMF economists said that the global holdings of Fannie Mae and Freddie Mac debt meant that "there would have been systemic consequences had confidence in the debt come into question." The report said oversight of Fannie Mae and Freddie Mac was too weak. "Part of the problem stems from the current regulatory framework, which has allowed their balance sheets to expand to their current systemic significance," the fund said.
For central bankers, the risks of inflation as well as weaker growth are rising, the IMF said. On July 17 the IMF said inflation in developing and emerging countries would average 9.1 percent in 2008, up from a forecast of 7.4 percent in April. Their prediction for inflation in advanced economies for this year was raised to 3.4 percent, compared with a forecast of 2.6 percent in April.
"Policy trade-offs between inflation, growth and financial stability are becoming increasingly difficult," the fund said. "With inflation risks on the rise, the scope for monetary policy to be supportive of financial stability has become more constrained." IMF economists said the duration of the turmoil in credit markets was testing the resilience of emerging markets, leaving investors wary of putting money in countries with rising inflation and large trade deficits.
"There are now clear signs that investors are becoming more cautious about adding to positions," the fund said. "Outflows from emerging market equity funds have been concentrated on Asian markets where inflation and downside growth risks are most elevated."
U.S. Deficit to Hit Record $490 Billion in 2009
The U.S. budget deficit will widen to a record of about $490 billion next year, an administration official said, leaving a deep budget hole for the next president.
The projected deficit for the fiscal year that begins Oct. 1 is far higher than the $407 billion forecast by President George W. Bush in February. The official also confirmed a report in USA Today that the deficit this year will be less than the $410 billion estimated in February.
The bigger shortfall for fiscal 2009 may reflect dwindling tax receipts because of the U.S. economic slowdown, the cost of payments distributed under the $168 billion economic stimulus package and the continuing cost of the wars in Iraq and Afghanistan.
"We've already seen a pretty sharp cooling in tax receipts and it's just going to continue into next fiscal year," Stephen Stanley, chief economist at RBS Capital Markets, said in a telephone interview. White House press secretary Dana Perino refused to comment on the numbers, while adding that the administration said when the economic package passed in February that it might increase the deficit.
"That's the price we would pay" for boosting the economy, she said at a briefing this morning. The White House budget office will release its mid-session review of the government's balance sheets at 1:30 p.m. today. The cost of the wars in Iraq and Afghanistan are about $10 billion to $12 billion a month, which may leave little room for other new initiatives in such areas as education or transportation.
The Bush administration and Congress haven't dealt with the largest long-term fiscal problems: the growing costs of Medicare, Medicaid, and Social Security. Those three programs consumed an estimated 41 percent of the federal budget in 2007.
Obama was scheduled today to confer with his top economic advisers "on America's pressing economic challenges," his campaign said today. The Illinois senator was to meet with business and labor officials on oil, food and other commodities, topped with discussions with investor Warren Buffett, former Chairman of the Federal Reserve Paul Volcker, and former Treasury Secretary Robert Rubin, among others.
Record gasoline prices, plunging home values and shrinking credit access have thrust the economy to center stage. The Labor Department this week may report a seventh straight month of job losses. House Budget Committee Chairman John Spratt, Democrat of South Carolina, took the administration to task for a new deficit record, citing news accounts.
"If these reports prove accurate, they confirm the dismal legacy of the Bush administration: under its policies, the largest surpluses in history have been converted into the largest deficits in history," Spratt said in an e-mailed statement. A Bloomberg survey of 28 analysts completed July 25 showed the average estimate for the deficit at $447 billion next year and $407 billion this year.
Bush inherited a budget surplus when he took office in 2001. In his State of the Union address he pledged to submit a budget that would return the federal government to a surplus by 2012
Funds for US Highways Plummet As Drivers Cut Gasoline Use
An unprecedented cutback in driving is slashing the funds available to rebuild the nation's aging highway system and expand mass-transit options, underscoring the economic impact of high gasoline prices. The resulting financial strain is touching off a political battle over government priorities in a new era of expensive oil.
A report to be released Monday by the Transportation Department shows that over the past seven months, Americans have reduced their driving by more than 40 billion miles. Because of high gasoline prices, they drove 3.7% fewer miles in May than they did a year earlier, the report says, more than double the 1.8% drop-off seen in April.
The cutback furthers many U.S. policy goals, such as reducing oil consumption and curbing emissions. But, coupled with a rapid shift away from gas-guzzling vehicles, it also means consumers are paying less in federal fuel taxes, which go largely to help finance highway and mass-transit systems. As a result, many such projects may have to be pared down or eliminated.
The challenge comes at a time when surging costs for asphalt and other construction materials already are straining state and local transportation budgets. Those cost increases make it more expensive to maintain the nation's roads, bridges and rail networks.
In many areas, the ragged edges are already showing. About 25% of bridges in the U.S. are either "functionally obsolete" or "structurally deficient," like the Mississippi River bridge that collapsed in Minneapolis last August, killing 13 people.
Moreover, the pavement is rated "not acceptable" on one of every seven miles of the nation's roads, according to the National Surface Transportation Policy and Revenue Study Commission, whose job is to assess infrastructure problems and recommend fixes. Overall, the commission estimated, $225 billion a year is needed to meet the country's transportation infrastructure needs. Current spending is about 40% of that level.
"We were losing ground to these incredible increases in construction costs, but then to see the erosion in driving -- it's a double whammy," said John Horsley, executive director of the American Association of State Highway and Transportation Officials. On top of the federal gasoline tax, currently 18.4 cents a gallon, the states charge their own gasoline taxes, which are typically slightly above the federal rate.
The Bush administration is expected to release as early as Monday figures projecting a deficit of $5 billion or more in the Highway Trust Fund for next year. Thanks to steady increases in driving, since it was set up under President Dwight Eisenhower, the trust historically has run a surplus. It steers gasoline-tax revenue through a federal appropriations process before sending it back to the states.
The prospect of the highway fund running a big deficit has sparked a frenzy of lobbying on Capitol Hill, as business groups, ranging from the U.S. Chamber of Commerce to the National Stone, Sand & Gravel Association, have pressed lawmakers for a quick solution.
"We're going to spend a lot of time, money and effort on this," said U.S. Chamber of Commerce President Tom Donohue. "People need to understand that this infrastructure thing is not optional." In recent weeks, Mr. Horsley's group has circulated a memo estimating that the states will lose a total of about $14 billion and roughly 380,000 jobs if Congress doesn't act to shore up the fund soon.
On Wednesday, the House passed a bill targeting $8 billion for highway and mass-transit projects. The measure has a good chance of clearing the Senate as well, despite White House reservations. On Thursday, the House passed legislation that designates an additional $1 billion for bridge repair. House and Senate leaders are talking about including a significant increase in infrastructure spending in a possible second economic-stimulus bill.
The moves are a prelude to a debate expected next year as Congress considers a new, six-year transportation bill that could authorize more than $400 billion in spending.
Banks Are Still On The Short List
Some short-sellers on Wall Street are predicting more pain for financial-sectors stocks - despite the rally some shares posted this week in the wake of second-quarter results.
One investor, Bill Fleckenstein, president of Fleckenstein Capital, said he's far from calling the bottom on any financial sector stock tied to mortgages and still wouldn't buy a single one of them.
"All financials will make new lows, not because of this week's inflated rally, but because we have not factored in the interplay of lower home prices, a slower economy, and we don't have proper marks on assets in our investment banks," said Fleckenstein, who has recently authored a book called "Greenspan's Bubbles."
Mark Hanson, a mortgage consultant with the Field Check Group, who is used by Fleckenstein and an A-list roster of hedge-fund clients who each manage $1 billion to $10 billion in assets, recommended after the banks' earnings reports this week that they rush to call their options broker and load up on puts.
Puts are a bet that the price of a stock will fall. Stocks he suggested betting against were Lehman, Wells Fargo, Wachovia, US Bank, PNC Bank, H&R Block and Assured Guaranty. One Hanson recommendation played out big this week - Assured Guaranty.
Based on Hanson's detailed analysis six months ago that showed Assured had $21.5 billion of residential mortgage-backed securities (RMBs) exposure and that 17.3 percent were rated BBB or lower, he bet Wilbur Ross' $1 billion pledged investment wouldn't be enough for the double-digit billions that could come on Assured books to pay off defaulting mortgage bonds.
Fleckenstein shorted Assured Guaranty at $24. The company's shares are off nearly 59 percent in 2008 and 42 percent in the last five trading days, hitting a low of $8.89 last week. That's a nice return for FleckEnstein, who admitted he enjoyed being able to ring the cash register on his short play this week while warning financials will see more pain.
Treasuries seen favored if deflation prevails
Despite current concerns about global inflation, U.S. economic prospects are so grim that deflationary pressures will prevail and push investors to take shelter in the relative safety of the Treasury bond market, Merrill Lynch said.
"Investors should seek out safe yield as much as possible, whether in the Treasury market, the muni market or among other high-quality fixed-income vehicles," wrote David Rosenberg, North American economist with Merrill Lynch in a research report released Friday.
Rosenberg expects commodity markets, which have recently begun retreating from record highs, to continue their fall, easing inflationary pressures amid the U.S. housing market's ongoing two-year decline. "We do not see the prospective backdrop as inflationary," he wrote. "All one has to do is pick up the newspaper to see that autos, housing, or practically anything you want to buy in a department store is experiencing 'fire sale' conditions."
The next bubble that U.S. investors are likely to stoke will be in bonds, as commodities and stocks sell off during a painful economic period, comparable to the U.S. consumer recession of 1973-75, Rosenberg argues. "Back then, collapsing earnings and price-earnings multiples triggered a 40 percent peak-to-trough decline in the S&P 500," he recalled.
The S&P 500 stock index fell to 1,252 points on Friday, down about 20.5 percent from its lifetime peak in October 2007 and technically at the edge of bear market territory. As consumers continue to cut back and equities remain under pressure, "if there is another bubble around the corner, it is likely to be in bonds, and this will be particularly apparent once the commodity explosion reverses course," Rosenberg wrote.
U.S. households' bond exposure is not much more than 5 percent of their total assets, after the past two decades’ scrambles into stocks and then real estate. But a shift back toward the late 1980s and early 1990s level of between 7 percent and 8 percent of total assets "would imply the potential for $1.75 trillion of incremental demand," Rosenberg expects, most of which would go to Treasuries and other higher-quality bonds as riskier corporate debt feels the pinch of a tough economy.
"That potential home-grown demand for bonds can easily absorb the new government bond supply that is likely to come on stream to fight the economic downturn, not to mention serve as a huge offset to any prospective selling of Treasuries by global entities, even if foreign investors do own half of the Treasury market," Rosenberg wrote.
Of the $4.67 trillion U.S. Treasury securities outstanding, Japan and China alone hold more than $1 trillion combined. Consumers' rising inflation expectations as prices at the pump and the grocery story have surged in recent months have caused a bond market selloff, since inflation is anathema to bonds.
The benchmark 10-year Treasury note's yield, which moves inversely to its price yielded 4.10 percent on Friday, up from a five-year low yield of 3.29 percent hit in January. Yet a wave of deflationary pressures will soon eclipse consumers' inflation worries, Rosenberg forecast. Yields could move lower if inflation pressures start to ebb and the economy turns recessionary.
"The forces of deflation will outlast the cyclical inflation story," Rosenberg wrote, adding that Japan's experience in the 1990s of a lost decade of economic growth and deflationary pressures after equities and real estate bubbles there burst could mirror the unfolding situation in the United States more closely than many analysts reckon.
"Using the Japan post-bubble experience of the 1990s as a benchmark for comparison purposes may not be such a stretch as many people think it is because this is increasingly looking like a very similar secular bear market in equities," he wrote. Another lesson the United States now can draw from Japan's earlier experience is that tax rebates may not free the economy up from the long lasting constraints of a credit crunch, he wrote.
Ilargi: I think BusinessWeek takes a significant step today. The combined topics of bank safety and deposity insurance are a couple of hot irons. The magazine lets everyone have their say.
The significance lies in the fact that they are the first major respected business publication that reserves space for Aaron Krowne and his Bank-Implode-O-Meter, a move that decisively pushes the debate into a far more "gloomy" corner than the usual coverage. Needless to say, I think that is a very positive development: continuing to live in la-la land isn’t going to do anyone any good, except for a handful of bankers and politicians.
Is Your Bank Safe?
Nothing says hard times like people standing outside a bank demanding their money. IndyMac Bancorp's failure and the resulting chaos were reminiscent of Depression-era bank runs even if the country's economic condition doesn't marginally resemble that era.
But in an economic slowdown with few visual reference points—what does a subprime loan look like anyway?—IndyMac's failure carried a clear message for some: Stick your money under the mattress. Banks and federal officials have worked diligently in recent days to make images of bank runs vanish.
Some banks are now issuing tellers talking points to use to reassure customers that their money is safe, housed by an institution that is well-capitalized. BankAtlantic, a Florida-based regional bank, even sued an analyst after he pegged its parent BankAtlantic Bancorp near the top of a list that could be "next" after IndyMac. "A falsehood, when widely circulated, becomes its own truth," the bank's lawsuit says.
But critics contend that a dearth of information will only make customers more suspicious and open the door to dangerous rumors. Since IndyMac's failure, everyone from Treasury Secretary Henry Paulson to bureaucrats at the Federal Deposit Insurance Corp. have hit the media trail to reassure depositors their money is safe. Their chief message is built on the federal guaranty behind every deposit up to $100,000, even in cases where a bank collapses. Joint accounts, retirement accounts, and trusts are also insured, up to a limit.
But even as they explain the process, regulators are not willing to tell consumers everything. For instance, the FDIC compiles a quarterly watch list of troubled banks; there are 90 (out of 8,494 FDIC-insured banks) currently considered to be on shaky financial footing. The agency assesses each bank's capital position, the quality of its assets, and its management team, its earnings, its liquidity position, and the bank's sensitivity to broader market forces.
That list "is going to grow longer, given the stresses we have in the marketplace, given the housing correction," Paulson said on July 20 in an interview with CBS's Face the Nation. Just don't ask for the names of any banks on the list. The FDIC cannot discuss which firms are in danger of failing, given that the agency collects proprietary data from each bank and says it would be unfair to use the information to expose them publicly.
Such a release could also cause undue alarm, says FDIC spokeswoman Lajuan Williams-Dickerson, because "most banks on the problem list are very unlikely to fail." To some consumer advocates, that position seems to contradict the agency's stated goal of increasing consumer awareness. "On the one hand, the FDIC is promoting consumer education and empowering people," says Joe Ridout, a spokesman for Consumer Action, a national consumer education and advocacy group.
"But on the other hand, the FDIC is withholding the most critical piece of information." FDIC officials said the agency makes available reams of data that customers can use to determine whether their bank is healthy.
To be sure, far fewer banks are in trouble these days than during past downturns. Despite a wave of bank writedowns that have so far topped $400 billion to date, only seven banks have failed in 2008, compared to the hundreds that failed during the late 1980s and early 1990s. In 1990, about 10% of the 15,000 FDIC-insured banks were on the agency's problem list, compared with only about 1% today, FDIC spokesman David Barr said.
But that doesn't mean there's no cause for concern. Many more people now have deposits that are above FDIC-insured limits, meaning that if their bank failed they might get only a portion of that money back. In 1991, 82% of deposits were insured, according to FDIC estimates. The $100,000 insurance limit hasn't been raised since 1980. Today, only about 62% are insured.
Banks are certainly paying renewed attention to deposits. They are perhaps the most plain-vanilla products in a bank's repertoire, but their importance has been reinforced by the industry's current problems. Checking accounts, savings accounts, money-market accounts, and certificates of deposit give banks ready access to cheap cash with which to make loans. Without a strong base of deposits, a bank is doomed.
While writedowns will slowly erode a bank's balance sheet over several quarters, a run on deposits can hurt it far more quickly. In IndyMac's case, that process took just 11 business days. The Pasadena (Calif.)-based bank was founded in 1985 as Countrywide Mortgage Investment by Angelo Mozilo and David Loeb, who ran the bank in tandem with mortgage firm Countrywide Financial.
With total assets of $32 billion, IndyMac became the second-largest financial institution in U.S. history to collapse, after the 1984 failure of Continental Illinois. The Office of Thrift Supervision (OTS), a division of the Treasury Dept., says the run started after Senator Charles Schumer (D-N.Y.) sent a letter to federal regulators on June 26 expressing concern about IndyMac's financial state.
When the letter went public, IndyMac's customers rushed to bank branches to yank their money. After the dust settled, IndyMac was $1.3 billion poorer and no longer able to pay its creditors. On July 11, federal regulators took it over. On July 25, the government seized two small Western banks, First National Bank of Nevada and First Heritage Bank, of Newport Beach, Calif. Combined, the two most recent failed banks had 28 branches and assets of $3.6 billion. Mutual of Omaha Bank took over the banks' deposits and will serve the accounts.
For the vast majority of IndyMac customers, withdrawing their money made little sense. Only about 5% had deposits that were not insured, says Barr, the FDIC spokesman. But bad news tends to cascade, and once the run began it gained momentum. Regulators and bank officials placed much of the blame on Schumer and his "interference in the regulatory process."
Schumer pointed his finger in the other direction, saying regulators sought to "blame the fire on the person who calls 911." "The breadth and depth of the problems at IndyMac were apparent for years and they accelerated in the last six months," Schumer said in a statement. "But the OTS was asleep at the switch and allowed things to happen without restraint."
Schumer isn't the only one who has taken lumps for speaking up about banks. Richard Bove, an analyst at Ladenburg Thalmann (LTS), was sued along with his firm on July 21 by BankAtlantic, which accused him of defamation and negligence. Bove had placed BankAtlantic's parent company, BankAtlantic Bancorp, near the top of a list he released on July 13 ranking institutions based on their volume of nonperforming assets. In the suit the bank charged that Bove's report "relied upon, asserted, and implied demonstrably and obviously false facts about the financial condition of BankAtlantic and Bancorp."
In Florida, as in many other states, spreading false rumors about a bank is illegal. Eugene Stearns, a lawyer for BankAtlantic, said the bank is healthy and Bove used "the wrong numbers" to compile his report because he relied on a research firm's analysis of data rather than FDIC numbers. The suit particularly notes the danger of a bank run spurred by false information. Bove declined to comment on the lawsuit. Asked if he would continue making lists of troubled banks, he said, "I have no need to change anything I'm doing."
Stearns said he thinks Bove's report gained prominence in part because the FDIC's list is secret and people are hungry for information. "Because he was the only one to step up when the FDIC wouldn't list the banks that are in trouble, this story was repeated over and over," Stearns said. Data on banks can be hard to come by.
Mark Fitzgibbon, a principal at investment bank Sandler O'Neill & Partners, published a report on July 15 about U.S. banks with the most "jumbo" deposits, which have a $100,000 minimum and are less likely to be covered by FDIC insurance. Within days the firm called it "outdated" and would not release it. Fitzgibbon did not respond to several requests for comment; the firm declined to comment.
Indeed, anxiety is high in the industry. Many banks have started their own campaigns to reassure customers that they're not going anywhere. Wachovia's new president and CEO, Robert Steel, is featured in a video on the company's Web site aimed at bank customers. "Although the nation's financial news lately has been a bit troubling and Wachovia certainly isn't immune, I want you to know that our company is on exceptionally sound footing," he says.
Steel goes on to list the bank's capital ($50 billion), liquid funding capability ($150 billion), and says the bank has enough cash to meet its current long-term debt obligations for three and a half years. "My point in telling you all this isn't to brag or illuminate issues in the overall economy," he said. "I want you to know that Wachovia is ready to do business."
Other regional institutions have encouraged branch employees to talk about their bank's financial condition with customers. Associated Banc-Corp., a regional bank based in Green Bay, Wis., issued talking points to tellers and other bank employees the week after IndyMac's demise. It wanted customers to know, among other things, that it was well-capitalized and had issued dividends for 154 consecutive quarters.
"We encourage all of our folks to engage in conversations" about the bank, says Dave Stein, Associated's director of retail banking. "Often it starts with 'Wow, it's a tough time in the industry.' That's when our folks go into a nice job of launching" into the talking points. Associated has seen double-digit growth across all deposit categories over the past 30 days, says Janet Ford, a spokeswoman for the bank.
Because comprehensive FDIC data have not been released since the IndyMac closing, it's too early to tell which banks are seeing more deposits and which are seeing fewer. In general, it's rare for an average retail customer to move deposits around much, in part because it takes time and often costs to set up an account at a new bank, said Derek Ferber, an analyst at SNL Financial.
But even as banks try to reassure their customers, they are competing with increasingly vocal skeptics. Lists of troubled institutions continue to proliferate on the Internet. Aaron Krowne, a 28-year-old from Atlanta, started a series of blogs in 2006 called Implode-o-meters covering various industries, including hedge funds, mortgage lenders, and banks. Krowne, who has a background in computer science, considers himself an "armchair economist," but he partners with more established industry experts to compile the lists.
He hopes the sites become the base of a successful media company. On Krowne's Bank Implode-o-meter, he lists the failed banks and credit unions. Next to them is a list called "Writedown, Rundown, and General Distress" listing banks that could be in trouble. Krowne contends the banking and mortgage industries have not been telling consumers and investors the truth, and his job is to "put some counterspin on it."
His mortgage site was sued after it posted an e-mail from a whistleblower, but the bank site "hasn't received even a single nasty-gram." He said he does not claim banks are insolvent, and just highlights their trouble spots. Ridout, of Consumer Action, says such sites are subject to rumor and innuendo, but adds that Krowne's bank-monitoring site proved prescient on IndyMac, spotlighting troublesome signs well before the bank was seized by regulators.
So which bank will be next to fail? "I do have a sense but I can't tell you," says Krowne, "because then I would be spreading panic."
More bad news for European economies
Europe was hit by another wave of bad economic news on Monday, with surveys showing German consumer confidence worse than at any time since recession last struck and yet more house price falls in Spain and Britain.
Economists said high food and fuel costs were hurting German morale more than pay rises were helping it, compounding the risk that domestic demand would fail to compensate for weaker foreign demand for German goods as downturn hits other countries too. While world oil prices eased in recent days, they are still roughly 40 percent higher than at the end of last year.
Market research company GfK said German consumer confidence, which it measures in monthly surveys of 2,000 people, dropped to its lowest since June 2003, when the gross domestic product of Europe's largest economy last shrank for a brief period. "German consumers are increasingly becoming depressed," said Carsten Brzeski, an economist at Dutch bank ING.
The forward-looking GfK consumer sentiment indicator fell for a third month running, to 2.1 for August from a downwardly revised 3.6 in July. "With inflation eroding households' purchasing power, a substantial recovery in consumer spending has now become very unlikely," said Martin Lueck, economist at UBS.
That followed news last week that German business confidence as measured by the Ifo index registered its biggest fall in July since the September 11, 2001 attacks on the United States and bigger slides than anticipated too in France and Italy.
Spain and Britain produced further evidence of the downturn in housing markets which hit the U.S. before spreading to parts of Europe where building and liberal mortgage lending gave the biggest boost to the economy in recent years.
Spain's statistics office said house sales there plunged 34 percent year-on-year in May as households baulked at borrowing rates which have hit 8-year highs. The pace of the decline reverted to the striking levels seen earlier in the year after a somewhat milder drop of 7.1 percent in April.
Spanish house prices could drop by up to 30 percent in real terms in coming years, according to Spanish property firm Colonial and other industry executives. That is partly due to a glut of up to 1.5 million unsold homes after years of overbuilding, property firms say.
House sales in May tumbled to 50,161 units and mortgage lending plummeted 40 percent year-on-year. In Britain, figures from a government agency showed house prices in England and Wales fell 1.0 percent on the month in June.
The Land Registry said house prices were just 0.1 percent higher than a year ago last month -- the 10th month of slowing annual price growth and underlining the slowdown in the housing market. Earlier on Monday, property consultants Hometrack said house prices were 4.4 percent lower than a year ago in July. That was the biggest annual fall since its survey began in 2001.
The fear there is that a collapse in house prices will cause broader economic trouble because of the extent to which consumer spending was buoyed in recent years by both the need to furnish houses and the ease with which people had access to credit.
Despite a sharply decelerating rate of economic expansion, Spain remains plagued by high inflation levels that are making life difficult for households and for policymakers. Spanish Economy Minister Pedro Solbes said on Monday that his country's inflation rate could rise even further, after hitting a 13-year high of 5 percent in June.
The Spanish government slashed its economic growth forecasts for this year and next last week, to 1.6 percent and 1.0 percent respectively, from previous targets of 2.3 percent for both years. For the euro zone as a whole, short-term prospects have taken a marked turn for the worse as well of late.
A Reuters poll of over 80 economists, conducted from July 16 to 22, showed they forecast zero economic growth over the three months to end-June after a healthy 0.7 percent rate of growth in the euro zone in the first three months of 2008, quarter-on-quarter.
Merrill says likelihood rising that Goldman could buy a bank
Merrill Lynch analyst Guy Moszkowski said the likelihood of Goldman Sachs Group Inc acquiring a bank is rising, but not one of any particularly large size.
"We believe [Goldman] would not look entirely askance at the prospect of buying a depository, a significant change. We still would not ascribe very high probability, but if a bank with excess deposits were available at the right price, with no need for (Goldman) to exit existing businesses, we'd no longer rule it out," Moszkowski said.
He has a "buy" rating and a price target of $212 on the stock, which closed at $178.66 on Friday on the New York Stock Exchange.
'Stealth' Housing Bailout: It's Bigger Than You Think
[Now that Congress has given] the Treasury a blank check to lend money to Fannie Mae and Freddie Mac, it’s worth looking at how much money the government has already pumped into the system during the housing crisis.
The numbers are staggering and likely to get much larger. What we have here is, through a variety of programs, a stealth bailout where more than a trillion dollars of taxpayer guarantees have been extended to the housing market, both to keep it going and to clean up the mess from the past.
I looked at the changes over the past year to the balance sheets of four governmental and quasi-governmental agencies—the Federal Reserve, the Federal Home Loan Banks, the Federal Housing Administration and Fannie Mae and Freddie Mac. The objective was to see how much additional financing they have provided to the housing market. The total: $1.43 trillion.
I’ll walk you through the numbers in a minute, but it’s worth pointing out this is not an actual expenditure of taxpayer money—not yet anyway. It’s a tally of how much financing those organizations have put out into the marketplace that's largely related to the housing crisis.
The costs to the taxpayer will be directly related to how bad the housing crisis gets from here, how much of a buffer in the way of capital these organizations have to absorb losses, and how good their underwriting is for the new loans or collateral. Which is to say: We can count the exposure, but we can’t yet tally the losses.
The Fed: $446 billion A simple way to look at how much financing the Fed has pumped into the housing market is to look at the change in the weekly balance sheet. What you’ll see immediately is that the total amount of Treasurys on its books has fallen by $311 billion compared with a year ago. This has been replaced by $150 billion in collateral from the Fed’s Term Auction Facilities, in which it is taking in a variety of collateral, much of which is presumed to be housing-related.
Another $29 billion is on its books in the form of collateral from Bear Stearns, which greased the wheels of that firm's buyout by JPMorgan Chase. Add to that $14 billion in discount window lending to banks and $88 billion in repurchase agreements, which the Fed has always done, but not in such great amounts or for such periods. These repos are now from 15 to 90 days.
There’s another $65 billion in swap lines to the European and Swiss central banks that are designed to allow European banks to borrow dollars and finance their illiquid assets. We should also count the $100 billion of Treasurys the Fed loans out through another new facility designed to pump liquidity into the market. Through that system, the Fed loans Treasurys and takes in collateral—again, some of it housing-related.
The Fed doesn’t debit its Treasury line item for this because it says it’s only loaning out the securities, but those loans are backed up, in part, by a variety of assets, including some from housing. So the total for how much new financing the Fed has made available to markets: $446 billion. Fed officials have said they've never lost a penny on such lending in the past and they deal only with sound financial institutions. (If you’re not sound, you can’t borrow from the Fed, and staying current with the Fed is a good way to stay sound.)
They add that they have protection through haircuts or discounts, so that $100 of bonds could get only $95 of financing. In addition, to some extent, as the Fed has made more financing available to real estate-related securities, it’s made less financing available elsewhere. But overall, it’s opened up the spigots to finance real estate in a big way.
Note that the Fed won’t provide values of the types of collateral it holds against its loans.
Federal Home Loan Banks: $274 billion This is an easier calculation than for the Fed. The 12 Home Loan Banks provide financing to its 8,000-plus banks that, in turn, is used to fund mortgages. The amount of what FHLB calls “advances” to member banks has risen by $274 billion, to stand at $914 billion for the second quarter of 2008.
The FHLBs say existing capital and member banks will absorb losses if they occur. But there is an implicit government guarantee, on that Treasury Secretary Henry Paulson reiterated recently. The legislation in front of Congress allows Treasury to increase lending to FHLB.
Fannie Mae and Freddie Mac: $621 billion Another easy calculation. Just go look at the balance sheets of Fannie and Freddie and look at the increase in outstanding mortgage-backed securities. That number tells you how much more mortgage guarantees the two giants have out there. Combined, the figure is up by $582 billion. Add in a $39 billion increase in Fannie Mae’s portfolio to get to $621 billion. But note that this is comparing 2007 with 2006. The numbers are almost certainly larger now.
Federal Housing Administration: $90 billion Officials there tell me they have added $90 billion or so of insured loans since October. Moreover, they have added loans from people they formerly did not lend to: Now they're doing refinancings and funding delinquent borrowers, folks they previously wouldn't deal with.
They say the phone is ringing off the hook as subprime borrowers look to FHA to help them get out of onerous loans. This is a place where there could be real losses, and where losses are expected to grow. The legislation in front of Congress authorizes up to $300 billion of FHA lending.
The Fan/Fred Bailout Is a Scandal
Americans who work hard, pay taxes and play by the rules can't seem to get fair representation in Washington, D.C., these days. In the current debate over a government bailout of speculators, irresponsible banks, Fannie Mae and Freddie Mac, the responsible majority has once again been pushed aside in a legislative rush to "do something."
This should have been a perfect opportunity for Republicans, struggling to regain some standing with the American people, to rise united and demand real accountability and reform. Remember how Democrats put the collapse of Enron and the subsequent losses to shareholders at the feet of the Bush White House?
Freddie and Fannie are like Enron on steroids. There's a well-documented history of accounting corruption to benefit senior management; hundreds of millions of dollars spent lobbying against oversight and reform; and myriad connections to both Democratic committee chairmen and subprime lender Countrywide Financial.
Actions by Fannie and Freddie management and their regulators this year precipitated the current crisis. Under pressure from the Democrat-controlled Congress, the Bush administration lifted Fannie and Freddie's portfolio caps in February and reduced their capital reserve requirements in March. In this year's stimulus bill, Congress went further and nearly doubled the size of the loans that Fannie and Freddie can purchase or guarantee.
As a result of this reckless expansion, the government-sponsored enterprises (GSEs) now touch nearly 70% of all new mortgages. At the same time, they are insolvent by most measures. The ostensible purpose of Fannie and Freddie is to provide liquidity to America's housing markets. In practice, they are the source of systemic risk and instability in a time of need.
What is needed now is an orderly restructuring that protects taxpayers from such financial exposure in the future, such as the plan proposed by Rep. Jeb Hensarling (R., Texas). Mr. Hensarling's legislation would phase out the charter of either GSE over a five-year period if they access credit lines from the Federal Reserve or Treasury.
It also provides a receivership option if the GSEs continue to stumble. Instead, Treasury Secretary Henry Paulson offered the beleaguered GSEs and their patrons in Congress a blank check signed by the taxpayers, promising potentially unlimited funds to backstop the lenders. Not surprisingly, House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd accepted.
Just as House Speaker Nancy Pelosi predicted last week, President Bush withdrew his previous veto threats against the overall legislative package on Wednesday, having gotten virtually nothing in return. The emboldened Democrats have simply attached the Paulson proposal to their housing bailout legislation. Having repeatedly called for Fannie and Freddie restructuring in the past, Mr. Paulson now fights to defend them in their current form.
An explicit government guarantee for Fannie and Freddie could ultimately end up costing taxpayers more than $1 trillion, according to an analysis by Standard & Poor's in April. The entire spectacle reinforces a persistent public prejudice that the GOP routinely defends the interests of their big business and Wall Street cronies at the expense of the little guy. Messrs. Dodd and Frank won't likely wear this political albatross. Republicans who go along with this GSE bailout certainly will.
So what will congressional Republicans do? Ironically, a veto-sustaining majority of House Republicans -- led by House Minority Leader John Boehner, Financial Services ranking minority member Spencer Bachus, and Republican Study Committee Chairman Hensarling -- voted against the bill on the very same day that the Bush administration caved. "I'm deeply disappointed the White House will sign this bill in its current form," said Mr. Boehner in a statement.
"We must take responsible steps to ensure our financial and housing markets are sound, but the Democrats' bill represents a multibillion dollar bailout for scam artists and speculative lenders at the expense of American taxpayers."
The final Senate floor battle on the proposed housing bailout could prove to be a definitive one for Republicans. Will they be the party defending taxpayers that play by the rules, or will they continue to indulge the Beltway crony capitalism advanced by this bill? Will they be a compliant minority browbeaten into "doing something," or will they stand for accountability and fiscal responsibility?
When Mr. Paulson appeared before the Senate Banking Committee, only Jim Bunning (R., Ky.) directly challenged his proposed blank check. Jim DeMint (R., S.C.) is still fighting to offer an amendment that would prohibit Fan and Fred from lobbying while on the federal dole. That's a great first step. Expect these two brave senators to force a full and rigorous debate.
The American public is way ahead of the Beltway intelligentsia on this issue. Multiple polls show that majorities oppose a federal mortgage bailout by a two-to-one margin. For Republican senators, a "nay" vote on the mortgage bailout is both good policy and good politics
Fannie Mae bailout: Taxing America’s poorest citizens to help the richest
The federal government is soon to be ladling out tax dollars to bail out Fannie Mae. Who will pay for this? Joe Sixpack, a guy who works hard at two jobs, rents an apartment, and tries to support a couple of kids. Who benefits?
Stockholders in Fannie Mae. Holders of bonds issued by Fannie Mae. The 5,000 employees of Fannie Mae, including the CEO who helped himself to $13.4 million in salary this year. What do the stockholders, bondholders, and employees have in common? They are all richer than average Americans and they are all going to be sucking down tax dollars paid by poorer than average Americans (plus some tax dollars from the rich, of course).
Joe Sixpack might have been thinking that he could finally afford to rent a nicer apartment or maybe even buy a place. But now Congress is giving the states $4 billion to buy up property in crummy neighborhoods. Joe won’t be getting any bargains because he will have to compete with the government when he goes home-shopping.
Suppose he remains a renter? Higher real estate prices will result in higher rents, which aren’t going to be too affordable for Joe because he is about to be laid off from one of his jobs.
In Roman times the employees of Fannie Mae would be decimated, i.e., they would draw lots and 90 percent of them would beat the unlucky 10 percent to death with clubs. What would be a modern equivalent? At the very least taxpayers should have the satisfaction of seeing the highest paid 100 Fannie Mae employees fired with two weeks of severance pay (it can’t be that hard to find replacements given that the current staff’s primary achievements have been accounting fraud and then insolvency).
The newspapers say that it is important for foreigners to have confidence that the U.S. will pay its debt. Let’s pay foreign bond holders in full then, using tax dollars as necessary. After all, a guy in China could not be expected to understand that a bunch of crummy houses in Cleveland were not worth $250,000 each. Let the domestic shareholders get 10 cents on the dollar and let the domestic bondholders get whatever the bonds are actually worth.
Poor Americans already subsidize wealthy homeowners through the home mortgage deduction. Do they need to subsidize incompetent managers who have already been paid $billions? Do they need to subsidize rich guys who bought Fannie Mae bonds? Do they need to subsidize shareholders who didn’t realize that the easy money from Fannie Mae couldn’t last forever?
As Housing Act Passes Congress, Questions Emerge
The Senate on Saturday morning passed The Housing and Economic Recovery Act of 2008, a sweeping aid package designed to help a growing number of troubled homeowners, in the hopes that the legislation might help calm financial markets that have been increasingly on edge throughout July.
Senate members from both major parties overwhelmingly approved the bill 72-13 in a weekend session, after the House’s own approval earlier in the week. It now head to President Bush, who is expected to sign the bill with little fanfare; the White House has said it expects no formal signing ceremony for a piece of legislation that has been termed “the most important housing bill in a generation” by Mortgage Bankers Association chairman Kieran Quinn.
Among the bill’s key centerpieces are provisions which would authorize the Federal Housing Administration to endorse up to $300 billion in new 30-year fixed rate mortgages for troubled subprime borrowers; lenders and investors must, however, first write-down principal loan balances to 90 percent of current appraisal value.
The bill will also provide vast new authority for the U.S. Treasury to backstop the continuing operations of both housing GSEs Fannie Mae and Freddie Mac.
The bill will not go into effect until October 1, and on Friday House Financial Services Committee chairman Barney Frank (D-MA) warned servicers that they needed to halt foreclosure activity on qualifying loans until the new laws became effective.
“I would hope that no one would be foreclosed upon between now and October 1st who would have qualified for this program had the effective date been immediate,” Frank said in remarks during a committee hearing.
“I think it would be a shame, an embarrassment to all of us if people were to lose their homes and the neighborhood deterioration were to be advanced and the economy would suffer because to satisfy CBO and other rules, we delayed this a couple of months.”
But the delay could be much more than just a few months, according to a report Friday evening in American Banker, which cited HUD officials as saying that the provisions of the new housing bill wouldn’t like be effective until the middle of next year.
A HUD spokesperson told American Banker that it was “absolutely totally unlikely” that the new program would be ready by October 1, noting the process HUD must go through to implement new programs — including determining underwriting standards for the new loan program the housing bill would create.
Without those standards, which could take through the end of this year to finalize, servicers will have nothing to go on in terms of refinancing troubled borrowers under the new program.
Which means two things: servicers choosing to hold off on even some foreclosures now in the hopes that they’ll be able to write-down, write-off and refinance certain troubled loans face the uncertainty of not knowing which loans will actually qualify, as well as the unsavory likelihood that they’ll be self-imposing a moratorium that could last much longer than 60+ days.
It also means that Barney Frank is one ticked-off Congressman. “The notion that this takes a normal bureaucratic response when you have this social and economic crisis is unacceptable. … that would be incompetence bordering on malfeasance,” he said in an interview with American Banker on Friday. “I cannot believe that this would wait.”
HW’s key sources have suggested that servicer advances are likely the most critical piece of the puzzle going forward, and that the housing bill — if anything — further puts pressure in this area. “Servicers are being asked to put a voluntary moratorium on some unknown number of foreclosures, but nobody has addressed the servicer advances that must continue to be paid during this period,” said one industry consultant who asked not to be named.
“And worse yet, nobody knows just how long servicers would need to keep advancing their money to a trust, since apparently there is a good chance the program wouldn’t be in place by October.”
A few servicing managers HW has spoken with have suggested that the only way many servicers can survive the current environment is by having access to the discount window or FHLB advances, to help keep servicing operations afloat — meaning that the servicing shop has to be within a bank, generally speaking.
And that’s exactly the sort of capital strain, BTW, that many of the nation’s already-limping banks can ill afford to take on right about now.
No Free Bubble
The short take on the economic crisis of the 1970s was that regulation failed. Price controls failed; high taxes failed; regulation was outmoded.
The mortgage and banking crisis of 2008 feels diametrically different. What failed this time were markets. The lenders who were supposed to regulate mortgage borrowing — and the credit-rating firms who monitored them — failed utterly. The investors whose job it was to monitor the capital of financial institutions were asleep at the switch.
It is not really that simple, because investors were encouraged by the creeping government doctrine of “too big to fail.” But if, after the ’70s, the solutions in one way or another were about opening industry to the fresh breath of markets, today the remedies issue from Washington. It is quite possible that the great experiment in laissez-faire has, for this generation, run its course.
The Federal Reserve and the U.S. Treasury have lately widened the federal safety net more quickly and more aggressively than at any time since the New Deal era. Indeed, a recent front-page headline in this newspaper, “Confidence Ebbs for Bank Sector and Stocks Fall,” had distinctly Depression overtones. (You could almost envision the next line: “Hoover Urges Calm.”)
And not since the Depression (under the Reconstruction Finance Corporation) has the government bought significant equity in private firms, as the Treasury has sought the authority to do in the case of Fannie Mae and Freddie Mac. At least during the 1930s, legislation followed months of deliberation and public hearings. The proffered fixes to today’s fast-moving crises are worked out hastily and in private.
At a visceral level, it is deeply upsetting when institutions that once reaped fabulous profits (a goodly share of which were snared by their executives) are granted the protection of Uncle Sam. Robert Rodriguez, the C.E.O. of First Pacific Advisors (which has a fund I’m invested in), confessed to a “sickening” feeling at the news that the Treasury might guarantee the debts of Fannie and Freddie.
Rodriguez was one of the few fixed-income investors who, having noticed the bloated balance sheets of the mortgage giants, refused to buy their debt securities. Ordinarily, less prudent investors would have suffered a loss; instead, any pain will be borne by the taxpayers.
More troubling than the unfairness is the potential that the solutions will exacerbate moral hazard: that people who feel inoculated will run greater risks. As Rodriguez observed: “Nobody wants to take the pain for excesses. Each time the problem gets bigger.”
The entire U.S. policy of promoting homeownership, which during the boom raised the ownership rate from 64 percent to 69 percent, now looks to be a case study in unintended consequences. Encourage more housing than markets will support and you get — voilà! — mortgages that fail. Fannie and Freddie were among the chief implements of the policy.
Though judged by Standard & Poor’s to be only a Double A-minus credit, they were able, thanks to the widely held belief (since validated) that the United States would not allow them to fail, to borrow at lower than Triple A rates. As the balance sheets of the agencies swelled, they grabbed the profit margin that traditionally went to savings and loans. The thrifts complained, but they were no match for Fannie and Freddie’s well-heeled lobbyists.
And so housing was increasingly financed by lenders insensitive to market risk. Recently, as mortgage companies began to fail, the U.S. encouraged Fannie and Freddie (which already owned or guaranteed $5 trillion in mortgages) to buy still more mortgages. This aggravated the problem. Since the agencies’ capital was inadequate, they should have been reducing risk.
In a similar vein, federal regulators seized IndyMac, a Pasadena bank whose depositors had crowded the door demanding their money and which became the second-biggest bank failure ever. The head of the Federal Deposit Insurance Corporation immediately announced that IndyMac would stop foreclosing on mortgages.
No doubt this was pleasing to California homeowners, as well as to the 55 congressmen and senators who represent them (and who help to oversee the F.D.I.C.). But it amounted to yet another giant socialization of risk and to a dubious precedent. What if politically mindful regulators now lean on Freddie and Fannie to halt foreclosures? Exactly which losses are immunized and, just as important, who gets to decide?
Similar questions have been raised by the Fed’s various actions to protect Bear Stearns and other investment banks and their collective creditors. In the space of several months, a wide swath of American finance has ceased to operate under normal rules.
Fixes are being introduced, and the next administration will very likely initiate its own reforms. The Fed has tightened mortgage rules; higher capital requirements are coming. Also, better accounting and disclosure rules would help investors to understand the often-complex assets that banks own.
But there is a difference between increasing transparency, with regard to risk-taking, and underwriting losses. The government should get out of the business of assuming risk — which hinders markets in a function they can handle better. With investors conditioned to look for rescues, it will not be easy to get the genie back in the bottle.
A good first step would be to draw a bright line between Fannie and Freddie’s outstanding obligations, which total $1.5 trillion, and the borrowings they undertake in the future as their current paper matures. Their current debt is presumably socialized. But if the Treasury were to announce that new obligations were not protected, markets would gradually force the beleaguered twins to both raise more capital and shrink their asset bases.
The U.S. might even consider splintering the companies, AT&T style, into pieces. The goal should be to ensure not that they never fail, but that for Fannie and Freddie and for other institutions, failure reacquires its proper status in a capitalist society: that of a tolerable event.
JPMorgan Chase, Lenders May Gain New Borrowers from Housing Law
Bank of America Corp., JPMorgan Chase and Co. and U.S. lenders may sign up customers backed by the government, and shed bad home loans after Congress passed legislation to prop up Fannie Mae and Freddie Mac.
The bill lets the Federal Housing Administration guarantee new loans for 400,000 homeowners after lenders reduce the unpaid balance, and creates a new regulator for Fannie and Freddie, the government-sponsored companies that are the biggest providers of funding for U.S. mortgages. President George W. Bush will sign the legislation as early as this week, a spokesman said.
"We would expect to see an increase in the number of homebuyers who are seeking FHA financing to purchase a home, and that will be a benefit to us," said Dan Frahm, a spokesman for Bank of America, which became the biggest mortgage lender after acquiring Countrywide Financial Corp. this month.
The bank is the leading provider of FHA loans, he said. The legislation, which passed the Senate 72-13 yesterday and the House 272-152 on July 23, is Congress's broadest response to plunging home prices, a more than doubling of foreclosures in the second quarter and market turmoil that led to the collapse of Bear Stearns Cos. in March and the seizure of IndyMac Bancorp Inc. July 11.
Bankers and their lobbyists generally back the measure and say a tax credit for first-time buyers will create new borrowers, helping to trim an oversupply of available homes and slow the drop in home prices. The FHA program will let them cut the number of bad loans on their books and held by investors.
The legislation, unveiled in March, sped to approval after lawmakers added a plan proposed July 13 by Treasury Secretary Henry Paulson that lets him back up Fannie and Freddie. Treasury could buy shares of the companies, which own or back half of the $12 billion in U.S. mortgages.
The change prompted Bush to drop a veto threat. The bill creates a regulator for the two companies with the power to raise capital standards, and restrict asset growth and executive pay. The measure gives the Federal Reserve a consultative role in overseeing their capital.
"It should help reassure investors and people who are involved in the market that the government knows the importance of these institutions," Scott DeFife, senior managing director for government affairs at the Securities Industry and Financial Markets Association, said in an interview.
Financial stocks in the S&P 500 Index, including Fannie and Freddie, rallied 21 percent since July 15, spurred by action on the legislation along with better-than-estimated earnings at JPMorgan Chase, Citigroup Inc. and Wells Fargo & Co. The centerpiece is a three-year FHA program that lets banks shift loans unlikely to be repaid to the government, after they agree to cut the mortgage principal.
The Congressional Budget Office estimated in May the program will cost $1.7 billion and cover about 500,000 loans over five years. "The enhanced role of the FHA should bring stability to many communities that have been particularly hard-hit by the subprime crisis," said William Donovan, a partner at law firm Venable LLP in Washington who specializes in legislation affecting financial institutions.
The measure provides $180 million for foreclosure- prevention counseling and $4 billion to communities to buy and rehabilitate foreclosed homes. It raises Fannie Mae and Freddie Mac's loan limit to $625,500 from $417,000 in high-cost areas. Some banks may avoid the program since reducing the interest rate on a mortgage or arranging a payment plan with borrowers is less costly than cutting the loan balance.
"There may be some reluctance on the part of servicers to write down loans," said Celia Chen, director of housing economics at Moody's Economy.com. The law "will make a small dent in foreclosures." JPMorgan Chase, which services about $775 billion in mortgages, probably will tap the program since it will let investors shed deteriorating loans, spokesman Tom Kelly said.
"Before, you could cut the balance, but the investor is still holding this loan," Kelly said. "This moves the asset, locks in a price for the investor and allows them to move on." JPMorgan's home-lending business will benefit from the $7,500 tax credit for first-time homebuyers included in the bill by enticing more people to buy homes, Kelly said.
"This bill with the FHA guarantee around it is going to encourage banks to use the program more," Francis Creighton, vice president of legislative affairs at the Mortgage Bankers Association, a Washington-based industry group, said in a telephone interview. "It gives the borrower and lender another tool to avoid foreclosure."
The FHA program removes loans from the market that would have ended up in foreclosure or sold at a deep discount, helping to stabilize the market, said Rick Sharga, senior vice president at RealtyTrac Inc., an Irvine, California-based seller of foreclosure data. The group reported a 121 percent jump in foreclosures in the second quarter from a year ago.
"If you remove the properties that would have been the biggest losses for the banks, you raise the overall pricing," Sharga said. "It's going to help lenders minimize their losses and stabilize their mortgage businesses."
U.S. Housing, Bank Regulators to Meet on Housing Bill
U.S. housing and banking regulators have been summoned to Capitol Hill this week in a bid to speed enactment of sweeping housing legislation lawmakers passed this weekend, Senator Christopher Dodd said.
Dodd, a Connecticut Democrat, said he is "terribly disappointed" by remarks he attributed to Housing and Urban Development Secretary Steve Preston that it would take as long as a year to implement regulations to provide help for almost 400,000 homeowners at risk of foreclosure. A HUD spokesman said Preston didn't make the comment Dodd mentioned.
"We wrote this legislation specifically to bypass the normal rulemaking process," Dodd, chairman of the Senate Banking Committee, said at a news conference yesterday following the 72-13 vote in a rare Saturday Senate session. Congress passed the legislation to stem foreclosures and prop up Fannie Mae and Freddie Mac, its most sweeping effort to halt a rise in foreclosures in the biggest housing recession since the Depression.
President George W. Bush will sign the measure into law, putting aside his objections to some provisions, a spokesman said. Dodd said he has asked to meet with the leaders of HUD, the Federal Reserve, the Federal Deposit Insurance Corp. and Treasury Department in his Washington office July 29 "to tell me why they can't begin immediately to get this bill working."
HUD spokesman Stephen O'Halloran said Preston didn't make the comments that Dodd cited at the news conference, and he said the agency is committed to completing the work. "Despite that Congress provided no immediate funding for us to implement the entire bill, even though we specifically requested they do so, we will be working diligently to stand up the new refinance program," O'Halloran said. "Our goal is to make this a seamless transition and implementation."
The foreclosure-prevention measure, unveiled in March, sped through Congress after Treasury Secretary Henry Paulson asked lawmakers to tuck in a provision that would let him inject capital into Washington-based Fannie Mae and McLean, Virginia- based Freddie Mac through government loans and investments.
Paulson lobbied for the proposal, which creates a tough regulator for the two government-sponsored enterprises, and persuaded Bush to drop veto threats. "It is of the utmost importance to our market and economic stability that the GSE portions of this bill become law," Paulson said in a statement. "These components are orders of magnitude more important to turning the corner on the housing correction."
Senate Majority Leader Harry Reid said the bill will be sent to the White House tomorrow. The president will sign the measure without a formal ceremony, a White House spokesman said. "Oversight of the housing government-sponsored enterprises and the new temporary authorities requested by Secretary Pauslon are urgently needed now, and they'll contribute to confidence and stability in housing and financial markets," White House spokesman Tony Fratto said.
The legislation increases the loan limit at Fannie Mae and Freddie Mac to $625,500 from $417,000 in high-cost areas. It raises the nation's debt limit to $10.6 trillion from $9.816 trillion to accommodate the Paulson plan. The centerpiece of the legislation is a new program at the Federal Housing Administration, an agency of the U.S. Department of Housing and Urban Development, to insure up to $300 billion in refinanced 30-year fixed loans for about 400,000 borrowers struggling with their monthly payments after loan holders agree to cut their mortgage balance.
The measure offers $15 billion in tax breaks, including provisions offering the equivalent of interest-free loans worth up to $7,500 for first-time homebuyers. States may offer an additional $11 billion in mortgage revenue bonds to refinance subprime loans. Other provisions give states $4 billion to buy up foreclosed properties, create a new affordable housing program financed by Fannie Mae and Freddie Mac and offer $180 million for mortgage counseling programs.
Bank of America, Wells Fargo Say Loan Changes Rising
Bank of America Corp. and Wells Fargo & Co., the top mortgage lenders, told Congress they have accelerated the pace of loan modifications to avoid foreclosures amid criticism they are slow to help keep people in their homes.
Both banks added staff and contacted more homeowners to reduce loan rates or to arrange repayment plans to cut monthly payments, executives said today at a House Financial Services Committee hearing in Washington. Bank of America doubled its modifications in the first half of this year from the second half of 2007, and Wells Fargo increased staffing fivefold.
"Bank of America remains committed to helping our customers avoid foreclosure whenever they have a desire to remain in the property and a reasonable source of income," said Michael Gross, the Charlotte, North Carolina-based lender's managing director for loss mitigation, mortgage, home-equity and insurance services.
U.S. bank regulators, including Federal Reserve Chairman Ben S. Bernanke, and lawmakers are prodding mortgage servicers to help more borrowers who are falling behind on their payments. Foreclosure filings rose 121 percent in the second quarter from a year earlier, RealtyTrac Inc. of Irvine, California, reported.
Wells Fargo, which services one in eight U.S. mortgages, expanded its staff to more than 1,000, from 200 in 2005, to help borrowers, said Mary Coffin, executive vice president of Wells Fargo Home Mortgage. The San Francisco-based company contacted 94 percent of customers who are delinquent and helped 60 percent who agreed to work with the bank to avoid foreclosure, she said. "Foreclosures are a measure of absolute last resort," Coffin said.
Bank of America helped more than 117,000 homeowners avoid foreclosure from January through June, almost double the pace in the second half of 2007, Gross said. The bank will modify at least $40 billion in troubled mortgages by the end of 2009 to help more than 250,000 borrowers keep their homes, Gross said.
Voluntary efforts so far"have not ramped up" fast enough to curb foreclosures, said Julia Gordon, policy counsel at the Center for Responsible Lending, a Durham, North Carolina-based consumer group. "We have heard wildly different things about how much modification is going on," said Representative Brad Miller, a North Carolina Democrat. "We have heard from industry that they are modifying like crazy. And we've heard from consumer advocates that they are hardly modifying at all."
The assessment "sounds better than it is," said Representative Barney Frank, the committee's chairman and a Massachusetts Democrat, who plans another hearing in September. "There needs to be a sense of urgency," he said. "Yes, I'm glad you're doing what you're doing, but please don't take any comfort from it because we've got problems."
Bank of America and Wells Fargo are among mortgage lenders, servicers and counselors called the Hope Now Alliance, launched last year at the request of Treasury Secretary Henry Paulson to reach more borrowers at risk of default and change loan terms. Almost 1.7 million homeowners averted foreclosure through loan modifications from July 2007 to May 2008, Faith Schwartz, executive director of the Hope Now Alliance, said at the hearing.
Frank said he expected lenders to help more borrowers or he would consider changing the relationship between servicers and investors to remove contractual barriers to modifying loans. Servicers have said they are sometimes constrained from changing loans because by contract they must represent investors who own the mortgage.
"If it is the case that the servicers cannot respond appropriately, then that institution of a servicer acting on behalf of ultimate investors" can't continue, Frank said during the hearing. The bank executives told Frank their obligations to investors have led them to reduce loan interest rates before they cut mortgage balances.
"Reducing the interest rate will generally result in a lower loss to the investor than reducing the general balance," Gross said. "It is the preferred option. That is the option that we are contractually bound to offer." The House this week passed legislation written by Frank to create a government program to insure mortgages for struggling borrowers after servicers voluntarily agree to reduce the loan balance.
If servicers don't participate, "then next year we'll have to change the law to reduce the role of servicers," Frank told reporters after the hearing.
Housing Prices Drop By The Hour
These numbers are sobering: If you are a homeowner reading this right now, when you wake up in the morning, the value of your house will have dropped about 45 dollars. And that's if you sleep just 8 hours. If that isn't disturbing enough, wait until you see how much home prices have dropped in the past 2 years.
"I knew it was softening," said investor Philip Logue. " I just didn't realize how quickly, how fast the market was dropping." When Logue put his Coral Gables house on the market, he thought for sure it would sell. He started at $650,000 in 2006. A couple of years later, and a $175,000 price drop. He's now renting the house out.
"I was really surprised," said Logue. " Especially at the end when we really dropped our pants down and I felt we were giving it away, and we still couldn't sell it." Numbers out from housingtracker.com show Logue isn't alone. The average home value in South Florida has dropped $100,000 in just two years. That's roughly $4,100 a month, $136 a day, or $5.70 every hour.
"The markets go up, they go down," said Ray Jourdain, a broker with Urbaniza Realty. "They have for more than 100 years; 5 years, 10 years it'll be different then it is now." Jourdain isn't surprised by the numbers. He believes short sales and foreclosures that are keeping him busy are fueling the drop. He believes the bottom is still a ways off.
"Can you afford the payments? Can you have the insurance, the property taxes, the monthly payments with a normal 20% down sale? Does it work for the average person? And when that happens, when we hit that, that's when we hit the bottom," he said.
Homeowners like Logue hope it comes sooner than later. "I think it'll come back," said Logue. "You just have to have the staying power to weather the storm."
When a homeowner is losing $5.70 an hour right now, renters actually are the ones who are making money. The person who this really effects, is anyone who bought a home in the last 3 years. They moved into a house that has dropped in value now by six figures.
Why millions of Britons may be just 11 days from financial ruin
More than a third of adults could survive financially for only 11 days if they were to lose their job or be too ill to work, according to a survey. The finding gives a worrying insight into the lives of millions who are living on a financial tightrope.
Researchers looked at how much people spend every month and how much they have in savings. It found a massive gap between the two, which means most would be crippled by a sudden change in their circumstances. The research involved interviews with more than 2,000 adults about their typical weekly spending and their accessible savings, which excludes pension.
It found the average weekly spend is £333.56 including essentials, such as council tax, luxuries, such as eating out, and debt repayments. But a shocking 36 per cent of people have less than £500 in savings to use in an emergency. As a result, they could survive for just 11 days before their finances would implode. On average, women would be much less well prepared to cope than men.
Tanya Jackson of Yorkshire Building Society, which carried out the research, said: 'In the current economic climate, this research paints an extremely alarming picture. 'Many people's finances are already finely balanced due to the rising cost of living. 'But our research reveals that both state benefits and savings are not viable options for the majority of consumers to rely upon for any adequate length of time.'
The findings come as the likelihood of people losing their jobs is rising as bosses seek to cope with the economic downturn. Economists believe unemployment could rise from 1.6 million to 2.5 million over the next two years. On Wednesday, the Bank of England said it has found evidence of bosses starting to freeze or cut back on recruiting staff to reduce costs.
Overall, the research from Yorkshire Building Society found that a typical person could survive for 52 days before hitting financial disaster. They have monthly outgoings of £1,445 but savings of only £2,474, excluding any money tied up in a pension fund. Few have any insurance to protect themselves against the sudden financial shock of losing their job or becoming ill.
In fact, the research found they are more likely to have insurance which will pay out if they die than insurance to cover becoming ill or unemployed. The report said: 'The majority are therefore better prepared for their own death, than if they were unable to work due to illness.' One in five people said they had 'no idea' how they would cope if they were suddenly unable to work.
Some said they would sell their home if they needed to get money quickly, but this is no longer a practical option. The number of homes which are finding a buyer has halved over the past year, with many sellers forced to wait or slash their asking price. The Association of British Insurers has urged the Government to introduce incentives to persuade people to improve their financial security.
These include increasing the tax-free ISA savings allowance to £9,600 and promoting longterm investments rather than cash deposit accounts. The ABI said the average household had run up unsecured debts of £21,000, with people owing a further £102,000 on their mortgage.