Monday, March 30, 2009

E-mails Delayed

I am writing this on Tuesday even though I will have it say it posted on Monday. The entire blog network has had a delay in the e-mails being sent. The one you received yesterday was Sunday's post, and the one you will receive today is probably Monday's post. Google has said the problem has been fixed, but they are still delayed.

There will not be a post for today, and I am hopeful this will clear up the e-mail backlog for our blog.

Sorry for the inconvenience and confusion.

Thanks,
Robby

Quick Notes for the Day - March 30

Obama Wants Permanent Middle-Class Tax Cuts - President Obama says he wants to make good on a campaign promise to deliver long-term tax relief for the middle class. Such tax cuts have run into some trouble in budget negotiations on Capitol Hill because congressional leaders are pressing for reductions in spending to offset the revenue loss for government coffers. Obama said in an interview on CBS that the tax reductions in place for the next two years are something he'd like to see made permanent and that he'd revisit this issue in the budget next year and the year after.

Geithner Defends the Moves Made to Stabilize the Financial System - Treasury Secretary Geithner said there remains about $135 billion in funds uncommitted under the government's TARP. When asked directly about asking Congress for more funds for the TARP, he would not say yes they would need more, but he would also not say no that they would not. "The market will not solve this," Geithner said on ABC, his first Sunday talk-show interview. "We need banks to take chances, we need them to take risks again," he said in explaining the rationale behind the government's various big-bucks recovery moves. Geithner also said there is a greater risk in not doing enough than in doing too much, and there is much still to do.

Barclays Will Note Seek Government Asset Guarantee - U.K. bank Barclays will not seek a government deal to insure its risky assets after the U.K. Financial Services Authority's determined that the bank doesn't need more capital, according to a Bloomberg report citing a person familiar with the situation. The report said Barclays will inform the U.K. Treasury of its decision by the Tuesday deadline, adding that the bank's board has not made a final decision. Barclays said on Friday that it had passed the FSA's stress test, sending its shares sharply higher.

Treasuries Rise on GM Outlook - Treasury prices rose early on Monday, sending yields lower, after the White House said bankruptcy was a possibility for General Motors and Chrysler. Yields on the 10-year notes fell 6 basis points to 2.699%.

Crude Oil and Gold Fall Again - Crude oil fell on Monday morning as thinking that oil demand would not pick up quickly hit the market. Crude for May was down $1.42 (2.7%) at $50.96 a barrel in early trading. It ended last week's trading up 0.6%. Meanwhile, gold fell on a strengthening US dollar. Gold for April was down $10.50 (1.2%) at $912.70 an ounce in early trading. It ended last week's trading down 3.5%.

Sources: CBS News, ABC News, Marketwatch, Bloomberg

Sunday, March 29, 2009

The Lighter Side - When $32.4 Million Just Isn't Enough

We have been reading about and listening to news about a former CEO getting a divorce. In today's world, this is not an earth shattering event, but when the post-nuptial agreement calls for $32.4 million and it is labeled not nearly enough. Instead, the soon-to-be-ex-wife wants $100 million cash, alimony, and homes, jewelry and a couple of Mercedes-Benzes, for less than seven years of marriage... with no children.

There have been numerous stories about it lately, but it is a good idea to start with the editorial from Bloomberg.



Wife Calls CEO Divorce Threats Foreplay - By Ann Woolner - Bloomberg - "For people with any depth at all, divorce wrenches the soul. It transforms a loving life partner into an unrecognizable jerk they wish never to see again. For 66-year-old United Technologies Corp. Chairman George David, filing divorce petitions worked as a prelude to sex. At least, that’s how the story goes according to his soon- to-be ex-wife, Marie Douglas-David, 36, a Swedish socialite and former Lazard Freres asset manager."

Marie Douglas-David seeks $99m for talking about work - The Daily Telegraph - "A Swedish countess seeking a divorce from the former chairman of United Technologies Corp. is entitled to $99 million from him because they talked about his work, her attorneys argued today."

Countess in Dizzy Bizzy Boast - Firm's $ecret Weapon - By Laura Italiano - "Marie Douglas-David says she's such a financial wizard, her husband, George David, consulted her -- often on a daily basis -- on all manner of business issues. Earnings per share and revenue growth. Board of directors staffing. Transition planning for when he stepped down, eight months ago, as CEO, retaining his position as the company's chairman."

Sources: Steve Kelley, Bloomberg, The Daily Telegraph, The New York Post

Saturday, March 28, 2009

Obama and the Banks; Points of View - AIG, Healthcare, and Cap & Trade

Ahhh, the joys of spring. The flowers, the rain, the birds, the tax returns, The Masters, March Madness, etc. This weekend finds the entire staff at Rollins & Associates relaxing at their homes "barred" from going into the office.

For this Saturday, let's start with an article from The Wall Street Journal discussing Friday's meeting between 15 bank CEO's and President Obama. It seems that there was quite a bit of give and take from both sides. Also, there have been various themes during the week in economics and politics, so below are some of the different editorials from the week. It starts with a very interesting letter of resignation from a VP at AIG, covers the US healthcare system, and finishes with a favorable view of energy's Cap and Trade (more nuclear energy please)...

Bankers, Obama in Uneasy Truce - By Jonathan Weisman, Damian Paletta, and Dan Fitzpatrick - The Wall Street Journal - "That was one topic of discussion Friday at a meeting all sides described as cordial. According to participants, some of the chiefs told the president they want to return their bailout money later this year, but Mr. Obama told them that regulators would permit such a move only if the banks were truly healthy." "For his part, Mr. Obama told the group that bankers should be more modest in their compensation and spending practices, participants said. The bankers responded that the administration should try to cool its anti-Wall Street rhetoric."

Dear A.I.G., I Quit! - By Jake DeSantis - The New York Times - "I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down."

How U.S. Health Care Really Stacks Up - By Investor's Business Daily - "Facts: A movie has been made solely to criticize it. The left treats it as if it's an invader that must be repelled. Most Americans, however, are satisfied with this object of so much hate — America's health care industry."

The Carbon Cap Dilemma - By J. Wayne Leonard - The Wall Street Journal - "On the one hand, environmentalists claim that climate change is a 'planetary emergency,' perhaps the greatest threat ever to face humanity. On the other, nuclear energy is still verboten in the green catechism -- despite the fact that it provides roughly one-fifth of U.S. electricity, all of it free of carbon emissions. And without more nuclear power, it is nearly impossible to see even the glimmers of any low-emission future."

Sources: The Wall Street Journal, The New York Times, Investor's Business Daily

Friday, March 27, 2009

Quick Notes for the Day - March 27

First, continuing with yesterday's topic of paying back the TARP quick, I completely omitted that fact that Goldman Sachs has announced that it may repay the $10 billion it received as early as April. Also, Minneapolis Fed President Gary Stern said yesterday that the US recession could be over by mid-year. Some interesting news items to ponder indeed.

Goldman Eyes $10bn Tarp Exit - By Saskia Scholtes and Greg Farrell - Financial Times - "Goldman said it plans to pay back $10bn it received from the scheme as early as late April after the US Treasury completes the first round of its “stress tests” designed to separate strong banks from the weak. Goldman’s decision comes as a handful of smaller banks have signalled plans to pay back the government’s money, citing concerns over changes in the terms of the programme and compensation restrictions associated with the funds."

U.S. Recession Could End at Mid-Year: Fed's Stern - By Ros Krasny - Reuters - "The U.S. recession could end around mid-year, giving way to a subdued recovery before 'healthy' growth kicks in from mid-2010, Gary Stern, Minneapolis Fed President, said on Thursday. 'I am guardedly optimistic that many pieces are now in place to contribute to improvement in financial market conditions and in business activity,' Stern said. 'There is reason to think that improvement is not too far off.'"

Thursday, March 26, 2009

Quick Notes for the Day - March 26

There have been several firms that accepted TARP money that are now looking to repay those funds as quickly as possible. It is interesting that what was once looked at as the taxpayers just throwing money into a black hole is now going to be returned with interest by many of the firms that received it. We have heard from Wells Fargo, JP Morgan, and now Bank of America.

Also, a very good editorial written by a former hedge fund manager details the how short sellers drove down the market and what the government should do about it. A very good but somewhat technical article.

Bank of America CEO Eyes TARP Repay in April - Reuters - "Bank of America Chief Executive Kenneth Lewis said the largest U.S. bank wants to start repaying $45 billion of federal bailout money next month, after completing a government stress test, the Los Angeles Times reported on Wednesday."

Have We Seen the Last of the Bear Raids? - By Andy Kessler - The Wall Street Journal - "The short-sellers probably saved us five to 10 years of poor bank earnings... So is that it? Is the downturn over? After bouncing off of 6500, or more than half its peak value, and with Citigroup briefly breaking $1, the Dow Jones Industrial Average has rallied back more than 1200 points. So, is it safe to go back in the water? Best to figure out what went wrong first -- what I like to call a bear-raid extraordinaire."

Wednesday, March 25, 2009

Quick Notes for the Day - March 25

First, an editorial by Treasury Secretary Tim Geithner appeared in The Wall Street Journal. It is pretty much a must read, so read the summary and click the link.

Second, yes, some good news is starting to slowly creep its way into recent economic reports. New home sales rose in February, and durable goods orders were also positive. Granted the prices in the housing report showed a decline, but the fact that sales were up for the first time in seven months is indeed a positive.

My Plan for Bad Bank Assets - By Timothy Geithner - The Wall Street Journal - "The private sector will set prices. Taxpayers will share in any upside... The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises."

New-Home Sales Rise as Prices Fall - By Jeff Bater - The Wall Street Journal - "New-home sales climbed for the first time in seven months during February, another favorable sign for the housing sector, but the data also showed prices tumbled. Separately, durable-goods orders unexpectedly climbed during February, but demand in the prior month was revised down deeply, an adjustment countering the idea of a rebound in the slumping manufacturing sector."

Oil Falls as Inventories Rise - U.S. crude inventories rose 3.3 million barrels last week, the Energy Information Administration reported Wednesday. Analysts surveyed by Platts had expected an increase of 1.4 million barrels. Oil fell by $0.80 on the news.

The Dollar is the World's Currency - Treasury Secretary Timothy Geithner said Wednesday the U.S. dollar remains the main global reserve currency and he does not see a change in that status in the foreseeable future. His comments were made in response to comments made by China stating that there should be a global currency to replace the dollar.

Fed Purchased $7.5 Billion of U.S. Treasurys in First Purchase - The Federal Reserve Bank of New York bought $7.5 billion in Treasurys on Wednesday. It's the first such operation since the central bank announced last week that it intends to buy $300 billion in Treasury securities to help improve conditions in private credit markets and spur lending. The debt bought Wednesday included notes maturing between 2016 and 2019.

Sources: The Wall Street Journal, MarketWatch, Platts, Reuters

Tuesday, March 24, 2009

Quick Notes for the Day - March 24

Bernanke, Geithner, Dudley to Testify on the Hill - In what CNBC was calling, "The Grill on the Hill," Bernanke, Geithner and Dudley will appear before the House Financial Services Panel. Bernanke has already said that he wanted to file suit regarding the AIG bonuses, but Fed legal aides told him that Connecticut law would most likely mean that the Fed would lose thus pay out even more to the recipients.

Gold Continues to Fall - Gold fell early Tuesday for a third straight day as the dollar recovered from last week's loss. Gold dropped about $28 (2.9%) to $924.50.

Oil Falls on Inventory Data - Crude-oil dropped early Tuesday as expectations that U.S. crude inventories rose last week as demand declined. Crude has been trading at it highest level in close to 4 months. Analysts expect a build of 1.4 million barrels in U.S. crude stocks to be reflected in this week's oil inventory data from the U.S. Energy Information Administration and the American Petroleum Institute, a Platts survey showed Monday.

Chicago Fed's Evans: Financial Stabilization Efforts Working - Measures taken by the U.S. Federal Reserve and the Treasury Department have helped stabilize the financial system, Chicago Federal Reserve Bank President Charles Evans said Tuesday, according to news reports. Speaking at an event in Prague, Evans said the TALF has already improved credit conditions for consumers and small businesses since going into effect last month.

JP Morgan to Repay TARP Prior to Buying Jets - According to TheStreet.com, JPMorgan Chase has no plans to purchase new corporate jets or renovate a new hangar until the financial titan has repaid the billions it received in government funding. In a separate story, ABC News reported that JP Morgan had plans to buy two jets totaling $120 million and renovate a hanger for $18 million.

Sources: CNBC, Marketwatch, Platts, TheStreet.com, ABC News

Monday, March 23, 2009

Points of View - The Market, Housing

A good way to start off the week...

Now Is No Time to Give Up on Markets - An Interview with Nobel Economist Gary Becker - By Mary Anastasia O'Grady - The Wall Street Journal - "'What can we do that would be beneficial? [One thing] is lower corporate taxes and businesses taxes and maybe taxes in general. Particularly, you want to lower the tax on capital so you raise the after-tax return to investing and get more investing going on.'" "When you get a larger government, when you have the government taking over Social Security, government taking over health care and with further proposals now for the government to take over more activities, more entitlements, the rational response is to have less responsibility. You don't have to worry about things and plan on your own as much."

Downpayment Insurance Could Stabilize Home Prices - By Peter Niculescu and Beth A. Wilkinson - The Wall Street Journal - "Much of the government's housing policy to date has focused on helping struggling homeowners stay in their homes and resolving the problems caused by declining asset values. Both are important. But unless policies encourage people to buy houses and work off the current inventory backlog, house prices will continue to tumble."

Sunday, March 22, 2009

Points of View - Our Leaders

Some interesting articles have been written and cartoons made about our various political and economic leaders as of late, so below are a few of the ones that we have seen and discussed.


Are We Home Alone? - By Thomas L. Friedman - The New York Times - "I ran into an Indian businessman friend last week and he said something to me that really struck a chord: 'This is the first time I’ve ever visited the United States when I feel like you’re acting like an immature democracy.'"

Obama Is No Socialist - By Alan S. Blinder - The Wall Street Journal - "Ever since President Barack Obama released the budget last month, we have been hearing a fusillade of criticism claiming that the president, contrary to previous advertising, is not a centrist, but a "leftie" intent on leading the country down the path of socialism. Let's see. Socialism means public ownership and control of businesses, right? So which industries does the president propose to nationalize?"

Secretary of the Fed - By The Wall Street Journal - "In case there was any residual doubt, the Bernanke Fed threw itself all in this week to unlock financial markets and spur the economy. With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed's political independence are details that can be put off, or cleaned up, at a later date. Whatever else people will say about his chairmanship, Ben Bernanke does not want deflation or Depression on his resume."

Ben's $1.2 Tril Bet - By Investor's Business Daily - "An academic expert on the Depression, Bernanke no doubt understands that the government during the 1930s did too much tax-hiking, tinkering and regulating, and too little on the monetary side of things, and that this was a big reason why the economy collapsed."

Saturday, March 21, 2009

Points of View - AIG Bonuses

With all of the various rantings and ravings going on in the public, media, and Congress about the AIG bonus "debacle," it seemed appropriate to dedicate today's post to the topic. Rather than put all the editorials on here, I have put a short synopsis of each with a link. Choose the one(s) you like, and click on it to read the entire article (it will open a new window). The post will still be here to click on additional items when you get done.

Enjoy!

Mass Hysteria Over AIG Obscures Simple Truths - By Michael Lewis - Bloomberg - "U.S. government officials then went to great lengths to disguise from the public exactly what they had done, and why, going so far as to declare the ultimate list of recipients of taxpayer funds off limits to the taxpayer... This incredible act triggered hardly any political backlash. In effect, the U.S. taxpayer had paid off AIG’s gambling debts. The end recipient of the money was not AIG, but Goldman Sachs, Deutsche Bank and the others."

The Case for Paying Out Bonuses at A.I.G. - By Andrew Ross Sorkin - New York Times - "Maybe we have to swallow hard and pay up, partly for our own good. I can hear the howls already, so let me explain."

Congress' Bonus Babies - By Investor's Business Daily - "The AIG Affair: As Barney Frank compiles an enemies list, Chris Dodd confesses he did in fact author the AIG stimulus loophole. So just who is going to go after those million-dollar retention bonuses at Fannie Mae?"

Mob Rule In D.C. - By Investor's Business Daily - "Like most Americans, we found ourselves angry and perplexed that a company that took $173 billion in bailout aid because it had failed to run its affairs competently would hand out $165 million in 'bonuses' to its top employees... Yet, as with many things, the tale is a bit more complex than the sound bite. For one, Congress authorized the bonuses to be paid — at the direct instigation of Sen. Chris Dodd, D-Conn., who took $103,100 from AIG during the 2008 political cycle."

Anger Mismanagement - Charles M. Blow - New York Times - "Keep working on a solution, but stop trying to manage and manipulate our anger. Stop trying to squelch, mollify and exploit it. Just let it run its course. America needs this moment... We don’t expect you to understand Main Street anger, but we do need to register it. After all, we know that there’s no Main Street in Washington."

The 102% Tax - Forget stabilizing the financial system. Congress is hungry for revenge. - By James Taranto - The Wall Street Journal - "This last point is crucial. The purpose of bailing out financial institutions--whether or not it was a wise policy--was to promote stability, for the benefit not of those institutions but of the economy as a whole. Congress's lust to punish employees of financial firms, regardless of whether they individually were guilty of wrongdoing or mismanagement, only promotes instability. 'It's like they're throwing a grenade at the problem, hitting the good and the bad at the same time,' Wall Street recruiter Gustavo Dolfino tells the Journal."

Also, a quick "hat tip" to Gerry Davidson for helping to keep me on the straight and narrow.

Friday, March 20, 2009

Quick Notes for the Day - March 20

Citi Moves Lift Futures - Citigroup announced that current chief financial officer Gary Crittenden would become chairman of Citi Holdings (the new non-banking portion arm of Citi). With that move, the current head of global banking, Edward Kelly, was named the new CFO. The stock and market reacted positively to the news.

Upgrades & Downgrades - UBS came out this morning and upgraded Johnson & Johnson (JNJ) to "buy" from "neutral". They also started coverage of Ford (F) at a "buy" rating and General Motors (GM) at a "sell" rating. The coverage of the automakers is significant. The sell rating of GM is based on the predictions of a highly diluted common shareholder from present due to restructuring and other concessions.

Gold, Oil Pull Back - Gold fell about 1% on Friday morning due to profit taking. Gold exploded up almost 8% on Thursday following the Fed's announcement to buy Treasurys on Wednesday. Even with the pull back, gold was up 2% for the week. Oil followed the same trend as gold after jumping 7.2% on Thursday. This would make the fifth straight week of higher crude oil prices.

FDIC Sells IndyMac - The FDIC said that it has completed the sale of IndyMac Federal Bank. In the statement, the FDIC reported a $10.7 billion loss on the deal. OneWest Bank, a new California-based bank organized by IMB HoldCo LLC, will assume IndyMac's deposits. "As of January 31, 2009, IndyMac Federal had total assets of $23.5 billion and total deposits of $6.4 billion. OneWest has agreed to purchase all deposits and approximately $20.7 billion in assets at a discount of $4.7 billion. The FDIC will retain the remaining assets for later disposition," the FDIC said in a press release.

Fiat Will Not Assume Chrysler's Debt - Following rumors that Fiat would assume Chrysler's debt, the company released this statement, "Fiat Group intends to make it absolutely clear that the proposed alliance will not entail the assumption of any current or future indebtedness of Chrysler."

Nike Reorganizes By Geography - On Friday, Nike announced that it would restructure its management based on geography. The move is seen as a streamlining and cost-cutting move and to make changes easier via the regional level. The new divisions will be North America, Western Europe, Eastern/Central Europe, Greater China, Japan and emerging markets. The company hopes that through the move they can cut approximately 4% (1,400 employees) of the 35,000 employee force.

Source: Citi, Fiat, Marketwatch, CNBC

Thursday, March 19, 2009

Quick Notes for the Day - March 19

Several people said they liked the "shorties," so here they are again today.

GE Says Its Capital Division Will Be Profitable for 1st Quarter and 2009 - GE said Thursday in a presentation to analysts that it expects its GE Capital unit to be profitable in the first quarter and full year 2009. GE said GE Capital's ratio "reflects a very strong capital base" of tangible common equity to tangible assets at 6% including a recent $9.5 billion capital infusion by GE. GE said the unit will break even and not require additional capital even if unemployment peaks at 10% and GDP falls by more than 3% in 2009 -- a more severe scenario than currently forecast by The Fed.

U.S. Dollar Falls Following Fed and U.S. Jobless Claims - The dollar fell again early Thursday following the Fed's announcement Wednesday and jobless claims Thursday. The Fed announced new unprecedented measures to bring down borrowing costs including the purchase of Treasurys. The dollar index is currently at 83.163 versus 86.471 ahead of yesterday's Fed announcement.

Discover's Profit Increases, Cuts Dividend - Discover Financial on Thursday said its fiscal first quarter profit rose to $120 million (25 cents a share) versus $81 million (17 cents a share) a year ago. The firm also said its first-quarter managed charge off rate was 6.48%. Discover also decided to cut its quarterly dividend to 2 cents.

Treasurys Continue Rally - Treasurys were higher again on Thursday as they pushed 10-year yields to the lowest mark this year. Much of the rally Thursday morning was by foreign investors that were trading following the Federal Reserve's surprising announcement late Wednesday. The Fed said it would purchase $300 billion in U.S. notes. Ten-year yields fell to 2.48%. On Wednesday, yields dropped the most since the stock market crash in 1987. The Fed said that over the next six months, it plans to buy notes maturing in two to 10 years.

Oil, Gold Rally 6% Following Equities, The Fed - Oil futures climbed more than 6% to trade above $51 a barrel Thursday following the global equity markets' rally. Crude oil for April delivery rose $2.86 to $51 a barrel. Gold futures also rose more than 6% Thursday to above $940 an ounce on expectation that the Fed's plan to buy Treasurys may cause some inflation. Gold, a traditional hedge against rising prices, surged $56.50 to $945.60 an ounce.

Citi Requests a Reverse Stock Split - Citigroup said Thursday that it has filed with regulators for approval of its plan to issue common stock in exchange for convertible and non-convertible preferred and trust preferred securities. Citi said the plan would convert about $52.5 billion of preferred shares into common shares. In another move, Citi asked for approval to execute a reverse stock split of its common stock. A reverse stock split raises the price by reducing the shares outstanding, but the number of shares you own is also reduced by a like amount. For example a 1:3 reverse stock split means that 300 shares becomes 100 shares. The price is also adjusted by this same ratio. It does not mean the company is suddenly more valuable.

Sources: Citigroup, Marketwatch, CNBC, GE

Wednesday, March 18, 2009

Quick Notes for the Day - March 18

IBM in Talks to Buy Sun Microsystems - IBM is in talks to buy Sun Microsystems according to a Wall Street Journal published on Wednesday. If the deal goes through, IBM is expected to pay at least $6.5 billion in cash to acquire Sun Microsystems.

CPI, Fed Statement - The dollar was under slight pressure against major counterparts early Wednesday, after a report showed consumer prices rose more than expected in February, while traders awaited the policy statement from the Federal Reserve this afternoon. Consumer prices rose 0.4% in February, more than economists' expected. Excluding food and energy prices, the core CPI increased 0.2% for the second month in a row, boosted by higher prices for new cars, clothes and cigarettes.

Gold Falling as a Safe Haven - Gold futures fell Wednesday for a third straight session to below $910 an ounce on reduced safe-haven needs, as investors continued to move funds away from the metal.

Oil Falls Before Inventory Data - Oil futures dropped slightly to $48.84 as the market awaited a report on current inventories. Most analysts are predicting a 2 million barrel increase in crude inventories.

Bank of England Minutes - The minutes from the Bank of England's March meeting show that the central bank voted 9-to-0 in favor of a half point rate cut to 0.5% and the decision to buy 75 billion pounds of asset purchases via central bank reserves.

Valero Wins Auction to Buy 7 Ethanol Plants from VeraSun - VeraSun Energy which is a producer of ethanol, said late on Tuesday that it selected Valero Renewable Fuels and its $447 million bid as the winning bidder for seven of its facilities.

RBS Has a Positive Start to 2009 - Royal Bank of Scotland has benefited from "buoyant" corporate banking activity since the start of the year, the Financial Times reported Wednesday, citing an interview with the bank's Chairman Philip Hampton. The bank, which is now majority owned by the U.K. government, has seen other positives in 2009, including an increase in business as a result of the rise in corporate debt issuance and equity underwriting, the report added.

Sources: The Wall Street Journal, MarketWatch, Financial Times, Reuters, Associated Press

Tuesday, March 17, 2009

The U.S. Version of OPEC? - Natural Gas Companies

Over the past number of months, the Organization of Petroleum Exporting Countries (OPEC) has been cutting the rate of oil production in its countries to try to put a "floor" on the price of oil. At their most recent meeting, they decided not to cut any further production, but to try to make sure the member countries stayed within their production quotas.

During the past six months, the U.S. and the world has pressured OPEC to not cut production too rapidly since the global slowdown has caused a reduction in demand. If OPEC were to continue to try and keep the price of oil high (as some member countries want - namely Venezuela and Iran), then they would be compounding the economic issues. Saudi Arabia (the backbone of OPEC) has tried to balance the global economic issues while keeping the price of oil steady.

Now, we move to the U.S., and last night, Eddie sent me an article detailing how 45% of all natural gas rigs in the U.S. have ceased production since September. The energy companies that control these rigs just capped them for the moment.

Last July, natural gas hit a high of $13.22 along with all of the other commodities, then as energy prices cratered last year, natural gas followed along. Currently, natural gas just hit a multi-year low of $3.75, and this low has put increased pressure on the exploration and operation on the companies. In fact, Devon Energy and Chesapeake Energy recorded a combined loss of $7.68 billion in the most recent quarter. The vast majority of this came from the devaluing of properties that produce oil and gas.

These companies do not have formal meetings like OPEC to discuss production quota, but they do follow the market prices and know their operating costs. When the price of natural gas drops to where it actually costs them money to pull it out of the ground, they have a problem.

This reduction in production means that the price of natural gas should start to climb for both variable and fixed rates over the next year. With The Fed predicting a positive GDP in the 4th quarter, demand for energy should start to rise which coupled with a reduction in production and supply will definitely increase the price of natural gas - some analysts are predicting more than $7 from the current $3.75.

The chart below is of the average variable and fixed rates of natural gas in Georgia from July 2000 to March 2009. In 2004, the Georgia Public Safety Commission (PSC) changed the information put on their website to display a "apples to apples" charge. It makes it a rather large increase, but I know it tries to balance the rates to allow everyone to compare them versus just the price per therm.



Anyway, what is interesting about the chart is the rather flat line of the rates prior to Katrina. After Katrina, the rates are much more volatile. There are various reasons for this change - weather predictions (hurricanes), rise in demand, fall in demand, etc.

While most people do not do anything other than just pay their monthly natural gas bill, this may be a time that you look to lock in a fixed rate for the next 12 months. Obviously, in the summer months your bill will go down no matter what, but the low price you lock in now would take you through next winter.

Call your natural gas provider and check the rate. According to the PSC website, it should be somewhere around $0.86 per therm. This is the lowest price per therm since 2003.

--- Note ---

I did not want to get into this too much in the above post, but last year there were several huge finds of natural gas reserves in Louisiana and the Dakotas. They are still there, but until the price comes back to make the operations profitable, they will just continue to sit there.

One positive note is that U.S. has one of the largest reserves of natural gas in the world. If the U.S. transitions to natural gas over the new few decades, our reliance on outside sources for energy while drop dramatically. Clean, plentiful, and local - sounds pretty good for green energy.

Sunday, March 15, 2009

Thoughts on Walking Away From Your Home Loan - NYT

An editorial in The New York Times discussed several issues about just walking away from your existing mortgage. It makes several valid points, but we are not sure we really agree with all of them. The thought that your credit would not be that adversely impacted, based on historical norms, is not quite true, but who knows how FICO will treat it in the future.

Thoughts on Walking Away From Your Home Loan
By Ron Lieber
Published: March 13, 2009


If you’re among the millions of people who will not qualify for the Obama administration’s program to help troubled homeowners, you’re probably wondering what you’re supposed to do now.

Perhaps you no longer have enough income to pay your loans. Or you can afford the payments but don’t qualify for refinancing under the new plan because the value of your home is too far below the balance of the loan. If you’re far enough underwater, you’re probably questioning the wisdom of writing a monthly check on a place that may take 10 or 15 years to get back to the value it had two or three years ago. It isn’t easy to come up with the answer, and if you have moral misgivings about not making good on your mortgage, a religious officiant may offer as much useful guidance as a financial planner.

In an economic environment like this one, however, the consequences of giving up on your mortgage may not be as painful as they were a few years ago. Yes, it’s almost always preferable to negotiate a better deal on your existing mortgage than to walk away. But if you can’t work things out with your lender, you probably won’t be sued. You shouldn’t receive a major tax bill either. And the damage to your credit will not be permanent or insurmountable.

Let’s look at these last three in order.

YOUR LENDER First off, let’s define what we mean by “giving up” on your current mortgage. It may mean trying for a short sale, where the lender allows you to sell your home for less than the mortgage amount. You may also hand over the deed to the home in exchange for the lender agreeing not to start foreclosure proceedings (a “deed in lieu” in industry terms). Then, there’s foreclosure itself, and the possibility that bankruptcy judges may soon have the power to adjust the terms of primary mortgages.

That said, just because you’re ineligible under the Obama plan doesn’t mean that your lender or servicer won’t ultimately adjust your mortgage anyhow. Collectively, there are enough people in trouble or under water on their loans that they have plenty of leverage if they’re willing to play chicken with their lender and threaten to stop paying.

The problem is, the lender can play chicken, too, by threatening to come after you for the balance of any money you owe — whether it’s the difference between what you sell the property for yourself and the remaining mortgage, or the loan amount left over after the lender sells your property in foreclosure.

The lender may not follow through, though. “What our membership is telling us is that it can be cost-prohibitive to chase down a borrower who is already in financial distress,” said John Mechem, a spokesman for the Mortgage Bankers Association. “You can’t squeeze blood from a stone.” They may, however, still come after people with high incomes who walk away from jumbo loans that are way under water or loans on investment properties.

Some states have laws that may specifically prohibit lenders from pursuing borrowers for the balance of many mortgage loans after foreclosure, though the particulars vary. Arizona and California are among these states, according to Steven Bender, a professor at the University of Oregon School of Law. It’s best to talk to a lawyer to determine your state’s rules.

In fact, if you want to be sure your lender (or a collection agency that it may sell your loan to) won’t chase you down, it’s a good idea to have a lawyer involved with any short sale, deed in lieu or foreclosure itself. “You must get the bank to agree in writing that any deficiency is waived,” said Chip Parker, a lawyer specializing in foreclosure with Parker & DuFresne in Jacksonville, Fla.

The biggest challenge here may simply be finding someone at the bank to help. Having a second mortgage will also complicate matters.

YOUR TAXES You also need to consider the taxman. Often, forgiven debts are taxable as income. Recent legislative changes, however, eliminate the federal tax burden through 2012 on most primary residence debt that a lender has reduced through loan restructuring or forgiven during foreclosure.

Mark Luscombe, principal analyst for CCH, a tax information service, said that people who sell their home through a short sale or give up the deed in lieu of foreclosure can also qualify for tax relief if they use a special tax form, 1099-C, that reflects the amount of debt that the lender has forgiven.

People who live in states with their own income taxes may avoid a big bill as well. Some states, like Arizona and California, have introduced or passed legislation that echoes the federal laws, according to the National Conference of State Legislatures. Many others tend to mimic most or all federal income tax laws as a general rule, according to CCH. Check with an accountant in your state to be sure.

YOUR CREDIT A short sale, deed in lieu or foreclosure itself will almost certainly damage your credit report and score, and the black mark will last for up to seven years. But the amount of damage it does will depend on how much other credit trouble you’ve gotten yourself into with other lenders.

If you’re giving up the home you own, you’ll probably need to rent soon afterward. Will landlords turn you away once they check your credit and discover your troubled mortgage? “If it’s the only thing marring their credit, it’s probably not a big issue,” said Clay Powell, the director of the Rental Property Owners Association of Michigan, who added that good tenants could be scarce in economic environments like this one.

In fact, Todd J. Zywicki, a law professor at George Mason University, predicted that FICO may have to adjust its credit scores to lessen the impact of a foreclosure or similar incident. “It just seems obvious that a foreclosure in 2008 or 2009 doesn’t have as much information value as a foreclosure five years ago,” he said. “To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that.”

Craig Watts, a spokesman for FICO, said that was an interesting idea. “We try not to get involved too much in psychobabble around what is and isn’t predictive,” he said. “If the numbers show that foreclosure is less predictive, then we’ll take it into account in future redevelopments of the formula.” That would take a minimum of two to three years, though.

Some lenders aren’t waiting that long to initiate their own foreclosure destigmatization programs. The Golden 1, one of the nation’s largest credit unions, now has a mortgage repair loan for people who have lost a home to foreclosure but want to buy a new one.

It’s hard to imagine that there won’t be a parade of insurance companies, credit card issuers and mortgage lenders in Golden 1’s wake, even though Fannie Mae and Freddie Mac may be unwilling to guarantee the mortgages of such borrowers for several years. In fact, Aaron Bresko, the vice president of lending for BECU, another large credit union based in Washington State, is putting together a panel called “How to Lend to the Newly Credit Impaired” for a conference later this year.

“Good people have bad things happen to them, so how do you find those people and reach out to them?” he said. “As the year progresses, it’s going to be an emerging market.”

Source: The New York Times

Treasury Objects to AIG Bonus Payments

Embattled insurer American International Group (AIG) agreed to revamp its bonus structure on Saturday after Treasury Secretary Timothy Geithner objected to its plans to pay out substantial sums for 2008, Obama administration officials and the company's chairman said.

AIG, which has received three government bailouts totaling $180 billion, will sharply cut remaining salaries for 2009 for top executives of its AIG Financial Products unit and will work with Treasury to realign 2008 bonuses to reflect the company's restructuring and repayment goals, AIG Chairman Edward Liddy said in a letter to Geithner.

AIG Financial Products was the unit that made bad bets on toxic mortgages that led to the company's near collapse.

Liddy said the firm was legally obligated to make already-committed 2008 employee-retention payments, the value of which were set last year before problems arose at the Financial Products unit.

"Some of these payments are coming due on March 15, and, quite frankly, AIG's hands are tied," Liddy said, adding that he found the arrangements "distasteful."

But he said he would work with Geithner to resolve the issue.

An Obama administration official said it was unacceptable for Wall Street firms receiving government assistance to pay million-dollar bonuses, but concluded that the retention payments were legally binding.

The Treasury will continue to negotiate with AIG to bring these payments down and seek to recoup the funds through mechanism outside of these contracts.

Source: Reuters

Saturday, March 14, 2009

Points of View - Mark-to-Market

"We think it is absolutely true that the assets (meaning the impaired assets on bank balance sheets) are worth more than the current market conditions assigned to them and so that, yes, over time, there will be significant profits from these," FDIC Chairman Shelia Barr said in an interview with American Public Media.

"Ms. Bair's assessment would appear to substantiate the position that Vince (Farrell) and I share with Steve Forbes and lots of others that many, if not most bank assets have been marked down way, way too low. That's the fault of mark to market," Cashin wrote in his morning note to clients.

Lots of mark-to-market action this week, so the following two editorials - one from Steve Forbes in The Wall Street Journal and one from Floyd Norris in The New York Times.

In the end, it looks like change is coming for mark-to-market - "If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself," said Representative Paul E. Kanjorski (D - PA).

Obama Repeats Bush's Worst Market Mistakes - WSJ

Obama Repeats Bush's Worst Market Mistakes
Bad accounting rules are the cause of the banking crisis.

By Steve Forbes
Published: March 6, 2009


What is most astounding about President Barack Obama's radical economic recovery program isn't its breadth, but its continuation of the most destructive policies of the Bush administration. These Bush policies were in themselves repudiations of Franklin Delano Roosevelt, Mr. Obama's hero.

The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or "fair value" accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down.

That works when you have very liquid securities, such as Treasurys, or the common stock of IBM or GE. But when the credit crisis hit in 2007, there was no market for subprime securities and other suspect assets. Yet regulators and auditors kept pressing banks and other financial firms to knock down the book value of this paper, even in cases where these obligations were being fully serviced in the payment of principal and interest. Thus, under mark-to-market, even non-suspect assets are being artificially knocked down in value for regulatory capital (the amount of capital required by regulators for industries like banks and life insurance).

Banks and life insurance companies that have positive cash flows now find themselves in a death spiral. Of the more than $700 billion that financial institutions have written off, almost all of it has been book write-downs, not actual cash losses. When banks or insurers write down the value of their assets they have to get new capital. And the need for new capital is a signal to ratings agencies that these outfits might deserve a credit-rating reduction.

So although banks have twice the amount of cash on hand that they did a year ago, they lend only under duress, or apply onerous conditions that would warm Tony Soprano's heart. This is because they know that every time they make a loan or an investment there is a risk of a book write-down, even if the loan is unimpaired.

If this rigid mark-to-market accounting had been in effect during the banking trouble in the early 1990s, almost every major commercial bank in the U.S. would have collapsed because of shaky Latin American and commercial real estate loans. We would have had a second Great Depression.

But put aside for a moment the absurdity of trying to price assets in a disrupted or non-existent market, of not distinguishing between distress prices and "normal" prices. Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn't matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven't actually been impaired.

Mark-to-market accounting does just the opposite. When times are good, it artificially boosts banks' capital, thereby encouraging more investing and lending. In a downturn it sets off a devastating deflation.

Mark-to-market accounting is the principal reason why our financial system is in a meltdown. The destructiveness of mark-to-market -- which was in force before the Great Depression -- is why FDR suspended it in 1938. It was unnecessarily destroying banks.

But bad ideas never die. Mark-to-market was resurrected by the Financial Accounting Standards Board and became effective in the fall of 2007 (FASB rule 157) to the approval of the Bush administration, its Treasury Department, and the Securities and Exchange Commission. Even as FASB 157 began to take its toll on financial institutions last year, Mr. Bush refused to kill or suspend it. When Congress voiced displeasure last fall, the administration and regulatory authorities made some cosmetic changes, but the poisonous essence remained.

Another horrific Bush policy that Mr. Obama has left untouched concerns short selling. In 1938, the SEC, created by FDR, enacted the so-called uptick rule, which held that investors could not short a stock unless it went up in price. In July 2007, the SEC, whose commissioners were handpicked by the White House, got rid of the rule. Market volatility exploded.

Compounding this lunacy was the SEC's inexplicable failure to enforce the rule against "naked" short selling. Before an investor can short a stock, he is supposed to borrow the shares and pay a broker or stockholder a fee. What sellers soon realized was that the SEC was turning a blind eye to naked short-selling, thus adding even more pressure to beleaguered bank equities. Short sellers quickly saw how mark-to-market made seemingly invincible companies vulnerable to destruction. They picked their targets and relentlessly sold financial stocks short.

If the president really takes Roosevelt's legacy seriously, he should suspend mark-to-market accounting rules, restore the uptick rule, and enforce the prohibition against naked short selling. If he doesn't, historians will look back in utter amazement at Mr. Obama's preservation of Mr. Bush's worst economic policies.

Mr. Forbes is chairman and CEO of Forbes Inc. and editor in chief of Forbes magazine.

Source: The Wall Street Journal

Bankers Say Rules Are the Problem - NYT

Bankers Say Rules Are the Problem
By Floyd Norris
Published: March 12, 2009


If mark-to-market accounting is to blame for the current financial crisis, then the National Weather Service is to blame for Hurricane Katrina; if it hadn’t told us the hurricane hit New Orleans, the city would never have flooded.

This is the logic the bankers are using, and they are getting sympathetic ears in Congress. The bankers have gotten two members of Congress to introduce a bill to establish a new body that could suspend accounting rules for financial institutions.

Edward L. Yingling, the president of the American Bankers Association, says the proposal addresses “systemic risks that accounting standards can have on the economy.”

Steve Forbes, the publisher and erstwhile presidential candidate, goes even further. “Mark-to-market accounting is the principal reason why our financial system is in a meltdown,” he wrote in a Wall Street Journal op-ed piece.

They say the problem, in short, is not that the banks acted irresponsibly in creating financial instruments that blew up, or in making loans that could never be repaid. It is that someone is forcing them to fess up. If only the banks could pretend the assets were valuable, then the system would be safe.

On Thursday, members of a House subcommittee joined in demanding that the rules be suspended. It was a bipartisan lynching of the accounting rule writers.

The panel’s chairman, Representative Paul E. Kanjorski, Democrat of Pennsylvania, said the accounting rule “does provide transparency for investors,” but that “strict application” of the rule had “exacerbated the ongoing economic crisis.”

Then he issued the threat. “If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself.”

Sadly, a victory for the bankers would not help them much. Even if it were true that banks would be held in higher regard now if they had not been forced to write down the value of their bad assets — and that is, at best, debatable — changing the rules now would be counterproductive. Would you trust banks more? Would other banks be more inclined to trust banks?

It is true, as the bankers argue, that valuing illiquid instruments is tricky. And it is true that markets can overshoot. Some of these securities may well be undervalued now. But the solution is not to go to what Robert H. Herz, the chairman of the Financial Accounting Standards Board, calls “mark-to-management” accounting.

I call it “Alice in Wonderland” accounting, after Humpty Dumpty’s claim in that book that “When I use a word, it means just what I choose it to mean, neither more nor less.” After Alice protests, he replies, “The question is, which is to be master — that’s all.”

Although you would not know it from the angry complaints, the accounting board’s Statement 157 did not require mark-to-market accounting. That was already required under earlier rules. What it did do was clarify how such values should be determined. That stopped banks from defining “market value” as meaning whatever they chose it to mean.

Conrad Hewitt, who was chief accountant at the Securities and Exchange Commission when it conducted a Congressionally mandated review of the issue late last year, said at a recent Pace University accounting forum that he asked all the complainers if they had a better way to determine market value than the one prescribed by Statement 157. None did.

That statement set out procedures for dealing with illiquid markets and distress sales, and the board is now at work on setting out more guidelines on how to do that. You can bet that its efforts will not satisfy the banks.

But there are three steps that could improve the situation.

First, the regulators could make it clear they are committed to what is now called countercyclical regulating. They could ease capital rules when things are bad, and require more capital as the economy improves. As Ben S. Bernanke, the Federal Reserve chairman, said this week, regulations should allow capital “to serve its intended role as a buffer — one built up during good times and drawn down during bad times in a manner consistent with safety and soundness.”

In other words, accept that market values are low and report the facts to investors. But give the banks a break by not acting as if that will last forever.

Of course, many will doubt that the regulators will really get tough when things improve. They stood by mutely while the banks went on the binge that created this crisis. But we can hope.

The second step would be to force banks to disclose — to the public and to the other banks that trade with them — just which toxic assets they own.

The bankers assert that those assets are now trading for less than they will be worth at maturity. In fact that is unknowable, which is one reason we have markets. If the current deep recession turns into Great Depression II, then even today’s market values may prove to be too high.

But if we knew which securities each bank owned, and where it was valuing them, we could go over each security and reach our own conclusions as to values. We could also see which banks seemed to be more or less optimistic in their estimates of market value.

When I suggested that to a top official of one big bank, he dismissed the idea, saying it would damage his bank’s trading position to advertise what it had. Of course, he also complained that there was virtually no trading going on, so I’m not sure what the damage would be. But if the banks want to disclose the information with a three-month delay, so that there is no way to know if they still own the securities, that would be fine with me.

The final step would be to get the market for such securities functioning. Right now, it is largely blocked by the Obama administration’s slow efforts to design a program to stimulate such sales by offering generous financing and partial guarantees to buyers. No one wants to buy now if a much better deal might be available next week. The Treasury Department needs to get the details out, and then see who is willing to buy, and at what price.

Of course, any such government-subsidized market would need to make widely available what was on offer, to assure that the price received was the best one possible. It’s not a market price if market participants cannot bid.

It is possible that there will be few trades even then. Edward J. Kane, a finance professor at Boston College, suggests that banks, particularly those that know they need a miracle to regain solvency, will be unwilling to sell. “Cheap volatile assets with a huge upside are precisely the kinds of optionlike investments that clever zombie managers are energetically looking for,” he said. If they soar, the banks’ stock may be worth something. If not, the taxpayers will take the loss.

Next time you hear a banker denounce mark-to-market rules, ask if he runs his business that way. Will he offer you a mortgage loan based on what you think your home should be worth, which you can repay only if you make a lot more money than anyone will pay you? If so, then perhaps the bank should be able to use “Alice in Wonderland” accounting on its own books.

Or maybe that is not such a good idea. The banks already tried that, with liars’ loans. Those loans did not work out so well.

Floyd Norris’s blog on finance and economics is at nytimes.com/norris.

Source: The New York Times

Friday, March 13, 2009

Citi Chairman - Citi Does Not Need More Aid

Citigroup Chairman Richard Parsons said on Thursday that the bank does not need any more capital injections from the government and expressed confidence that Citi would remain in private hands.

Asked in an interview with Reuters whether Citigroup needed additional government capital injections, Parsons said: "No, I think actually, particularly with the latest conversion ... Citi is actually one of the better capitalized banks in the world."

Parsons was speaking on the sidelines of a Business Roundtable event where President Barack Obama addressed business executives.

The Citigroup leader also brushed aside any prospect of the U.S. government nationalizing the bank.

"I don't think the administration is heading in that direction," Parsons said. "But I have a lot of confidence in the future viability and strength of a privately held Citi."

The Obama administration and regulators including Federal Reserve Chairman Ben Bernanke have said they do not want the government to take full control of the nation's banks.

Citi's shares on Thursday closed 13 cents higher, or 8.4%, to $1.67 on the New York Stock Exchange. For the first time, Citi shares fell below $1 on March 5.

The U.S. government said last month it would boost its equity stake in Citigroup to as much as 36% through the conversion of up to $25 billion in preferred shares to common stock.

In total, Citi has received $45 billion of taxpayer-funded capital since October. This marked the third attempt by the U.S. authorities to prop up Citigroup in the past five months.

Citigroup is among many financial institutions that have received government bailout money to shore up their capital in a U.S. economy stuck in a recession during the credit crisis.

Earlier this week Citi said it was profitable in the first two months of 2009 and is confident about its capital strength, easing concerns about the bank's survival prospects.

As a precautionary measure U.S. regulators recently began work on a contingency plan to stabilize Citigroup if problems mounted, but no imminent rescue was planned, a person familiar with the planning said on Tuesday. The person declined to be named due to the sensitivity of the discussions.

Citi and other banks are waiting for the U.S. government to announce a plan to absorb soured assets banks are holding on their balance sheet.

Source: Reuters

Thursday, March 12, 2009

Finger Pointing - Economist Edition

The Federal Reserve's action and/or inaction under former Chairman Alan Greenspan has taken much of the blame for the current economic crisis. To put his spin on the events and "protect" his legacy, Greenspan has made the circuit with media outlets.

On Wednesday, Mr. Greenspan wrote an Op-Ed piece in The Wall Street Journal defending The Federal Reserve during his tenure. In his article he said, "...it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages."

As with any major event or leader, history will eventually be the judge.

The Fed Didn't Cause the Housing Bubble
Any new regulations should help direct savings toward productive investments.

By Alan Greenspan
Published: March 11, 2009


We are in the midst of a global crisis that will unquestionably rank as the most virulent since the 1930s. It will eventually subside and pass into history. But how the interacting and reinforcing causes and effects of this severe contraction are interpreted will shape the reconfiguration of our currently disabled global financial system.

There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

This should not come as a surprise. After all, the prices of long-lived assets have always been determined by discounting the flow of income (or imputed services) by interest rates of the same maturities as the life of the asset. No one, to my knowledge, employs overnight interest rates -- such as the fed-funds rate -- to determine the capitalization rate of real estate, whether it be an office building or a single-family residence.

The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier -- in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

U.S. mortgage rates' linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.

As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

That decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble. (The U.S. price bubble was at, or below, the median according to the International Monetary Fund.) By 2006, long-term interest rates and the home mortgage rates driven by them, for all developed and the main developing economies, had declined to single digits -- I believe for the first time ever. I would have thought that the weight of such evidence would lead to wide support for this as a global explanation of the current crisis.

However, starting in mid-2007, history began to be rewritten, in large part by my good friend and former colleague, Stanford University Professor John Taylor, with whom I have rarely disagreed. Yet writing in these pages last month, Mr. Taylor unequivocally claimed that had the Federal Reserve from 2003-2005 kept short-term interest rates at the levels implied by his "Taylor Rule," "it would have prevented this housing boom and bust. "This notion has been cited and repeated so often that it has taken on the aura of conventional wisdom.

Aside from the inappropriate use of short-term rates to explain the value of long-term assets, his statistical indictment of Federal Reserve policy in the period 2003-2005 fails to address the aforementioned extraordinary structural developments in the global economy. His statistical analysis carries empirical relationships of earlier decades into the most recent period where they no longer apply.

Moreover, while I believe the "Taylor Rule" is a useful first approximation to the path of monetary policy, its parameters and predictions derive from model structures that have been consistently unable to anticipate the onset of recessions or financial crises. Counterfactuals from such flawed structures cannot form the sole basis for successful policy analysis or advice, with or without the benefit of hindsight.

Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have "prevented" the housing bubble. All things considered, I personally prefer Milton Friedman's performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind."

How much does it matter whether the bubble was caused by inappropriate monetary policy, over which policy makers have control, or broader global forces over which their control is limited? A great deal.

If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle. If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue.

Global market competition and integration in goods, services and finance have brought unprecedented gains in material well being. But the growth path of highly competitive markets is cyclical. And on rare occasions it can break down, with consequences such as those we are currently experiencing. It is now very clear that the levels of complexity to which market practitioners at the height of their euphoria tried to push risk-management techniques and products were too much for even the most sophisticated market players to handle properly and prudently.

However, the appropriate policy response is not to bridle financial intermediation with heavy regulation. That would stifle important advances in finance that enhance standards of living. Remember, prior to the crisis, the U.S. economy exhibited an impressive degree of productivity advance. To achieve that with a modest level of combined domestic and borrowed foreign savings (our current account deficit) was a measure of our financial system's precrisis success. The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud -- not increased micromanagement by government entities.

Any new regulations should improve the ability of financial institutions to effectively direct a nation's savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis has unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions.

If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows. Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.

Mr. Greenspan, former chairman of the Federal Reserve, is president of Greenspan Associates LLC and author of "The Age of Turbulence: Adventures in a New World" (Penguin, 2007).

Source: The Wall Street Journal

Wednesday, March 11, 2009

Pondering a Real Housing Plan

Politics. That one simple word conjures up various thoughts in everyone's mind, and yet it is something we all must deal with every day.

In our office, we sometimes have some pretty lively debates regarding economic issues, the stock market, and most assuredly anything political. I bring this up because there has been one issue recently that has allowed us to come to the same conclusion - how to fix housing.

More than a month ago, we sat around listening to the talking heads on CNBC, CNN, Fox News, etc. go back and forth about how to fix housing. We have all heard about or seen some of the rants from both sides of the spectrum, and in the end, everyone walks away a little more fired up against the other side. Does it really have to be this way?

No.

Our solution is simple - allow every single conforming loan ($417,000 in most areas) of a primary residence to be refinanced by the homeowner(s) at 4.0% or 4.5%. That's the plan. (The current value of the home would be verified, but it would not stop a refinance.)

If every single homeowner were allowed to refinance and get a benefit, would everyone still be yelling about helping their neighbor? Everyone benefits, and for those that are renting, become a homeowner by purchasing a home with the $8,000 credit and a 4.5% loan.

Arguments Against the Plan

Still Cannot Afford It

Now this is an issue. If this is due to a change in income, then there may be no alternative to foreclosure. At the same time, by cutting the rate from 6.25% to 4.0%, a $200,000 mortgage goes from $1,231.43 a month to $954.83 a month. This is a savings of $276.60 a month, $3,319.20 a year, or $99,576 over the life of the loan. How stimulative would that savings be?

Also, the current Homeowner Affordability and Stability Plan could still be used to help those that really have a need. A reduction to 4% across the board though removes some of the work to allow those that are in dire need to be serviced more effectively.

Underwater

We have all listened to the arguments about "being underwater" in your mortgage. If being "underwater" in a loan is a reason for loan modification and a reduction of principal, I am buying a new car tomorrow. I could go buy that nice $50,000 Lexus, drive out, and refinance it for loan modification reasons immediately with probably $10k knocked off my principal on day one.

When you buy a new car, it is usually financed for 5 years, and most estimates are that you are underwater for the first 3 years. Do most people stop paying because they are underwater? The answer is no. Should a house be any different? The mortgage is for 30 years, and assuredly, you cannot be underwater for all of it.

I read an editorial that said some mortgages are now 160% of the value of the house. Once again, a new car drops in value by at least 20% in the first year. While 160% is high, the housing market will recover given time. We do not need to simply focus on the here and now but the future as well.

Another editorial said that without principal reduction, “they would be renting their homes from the lender.” For $950 a month in principal and interest payments, isn’t this as inexpensive or even less than renting a comparable house? Additionally, the mortgage interest is tax deductible, so it would be even more affordable once that is calculated in to the bottom line.

Arguments For the Plan

Reduction of Supply

If someone was on the fence about selling a house, they might just want to stay there. Go forward three years, and now, that 4.0% mortgage is very valuable. If I am thinking of selling my house in 2012, it is going to need to be a good deal because I will be giving up a great mortgage to go out and buy a house at current mortgage rates. This is going to keep the supply of the existing home sales down to those that really want to sell. A reduction of supply means generally higher home values for all (supply and demand).

Increased Spending, Saving, and Debt Reduction

The main goal of the plan would be to lower the debt payments which would create excess cash. This excess cash could be used to pay down debt or added to savings, but the truth is a sustained reduction like this would most likely be used as increased spending with only a small amount to debt reduction or savings.

Most of the data points to the fact that “large” stimulus payments are used for debt reduction or savings, but sustained increases are generally put back in the “budget” of the family and spent. This is one reason that President Obama’s American Recovery and Reinvestment Act included the Making Work Pay provision.

This provision would give a refundable tax credit of up to $400 for working individuals and $800 for married taxpayers filing joint returns (there are phase out provisions). For people who receive a paycheck and are subject to withholding, the credit would typically result in an increase in take-home pay of about $8-$10 per week.

Removing Toxic Assets

Since the vast majority of loans would be refinanced in this scenario, it allows Fannie Mae/Freddie Mac to regain some control and repackage the loans in an orderly fashion. This would also automatically reduce some of the “toxic assets” being held by the banks as they are refinanced. The remaining toxic assets could then be dealt with on a smaller scale, and the loan loss reserves set aside by the banks would most likely be more than adequate to handle any further issues.

Reducing the “Liar Loans”

One of the other added benefits from this plan is that since the old “Liar Loans” are no longer available, this plan would help verify the income using real standards. No longer will a loan with a made up income be used to push through underwriting. This would also help with the affordability and risk associated with each loan – once again to allow them to be packaged together with real risk ratings.

Conclusion

We are sure that somehow even this plan would be an issue because nothing is simple when you hand anything off to our government, but ANY plan should be more inclusive and not exclusive. Penalizing those that “have been responsible” is not the solution. When we allow as many people as possible to participate, the resulting stimulative effects just grow.

On the tax side of the plan, the mortgage interest would decrease thus the net taxable income side would increase. Yes, this would probably increase taxes just a hair because you would have a smaller deduction, but the net effect would still be extremely positive.

This is not a plan without expense, but it allows for greater involvement and thus acceptance by the public. This plan has both short and long term benefits since the interest rate decreases are for 30 years. We would be building a continued consumer boom with less debt accumulated and continued spending. This is much more responsible than continuing to push consumers to spend using credit instruments and building a debt mountain.

Your thoughts on the plan are welcomed.

Robby Schultz & Eddie Wilcox

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For those that would like to read some editorials that we read while contemplating this plan, this is a good list to start with (most deal with using principal reduction):

- Matters of Principal – New York Times – March 5, 2009
- Helping the House Poor – New York Times – March 6, 2009
- Obama’s Mortgage Plan is What We Need – The Wall Street Journal – March 6, 2009

Tuesday, March 10, 2009

Bernanke Outlines Steps to Avoid Future Crises

Federal Reserve Chairman Ben Bernanke on Tuesday outlined steps he thinks would help avert future financial crises, saying the time for such a longer-term discussion has come.

In remarks to the Council on Foreign Relations, Mr. Bernanke also issued a mea culpa of sorts for the current global financial crisis on behalf of the U.S. and some other big economies that failed to "prudently" invest the rush of capital inflows that started more than a decade ago.

"The responsibility to use the resulting capital inflows effectively fell primarily on the receiving countries, particularly the United States," Mr. Bernanke said. The "failure" of the U.S. and other big economies to do so "has led to a powerful reversal in investor sentiment and a seizing up of credit markets," he said.

"In the near term, governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit," Mr. Bernanke said. In the U.S., officials are determined "to ensure that systemically important financial institutions continue to be able to meet their commitments," Mr. Bernanke said.

"Until we stabilize the financial system, a sustainable economic recovery will remain out of reach," he said.

But even as Mr. Bernanke and others focus on stabilizing markets in the short term, he signaled it isn't too early to consider longer-term reforms including -- in the U.S. -- putting responsibility for addressing possible systemic risks with one authority, such as the Fed.

He outlined four steps related to: systemically important and interconnected firms; financial infrastructure; regulation; and addressing systemic risks under one authority.

Referring to big interconnected firms, known as "too big to fail," Mr. Bernanke said "any firm whose failure would pose a systemic risk must receive especially close supervisory oversight of its risk-taking, risk management, and financial condition, and be held to high capital and liquidity standards."

Mr. Bernanke also suggested ways to address the "potential fragility" of money-market mutual funds. "One approach would be to impose tighter restrictions on the instruments in which money market mutual funds can invest, potentially requiring shorter maturities and increased liquidity," Mr. Bernanke said.

"A second approach would be to develop a limited system of insurance for money-market mutual funds that seek to maintain a stable net asset value," he said.

Officials should also consider changes to deposit-insurance funding, Mr. Bernanke said, such as raising reserve ratios in good times to create a buffer that can be drawn on in down times.

As for placing responsibility for overall systemic risk with one authority, Mr. Bernanke noted that "some commentators have proposed that the Federal Reserve take on the role of systemic risk authority" while "others have expressed concern that adding this responsibility would overburden the central bank."

Whether the Fed's right for the job depends on how Congress defines the role of the new authority, Mr. Bernanke said.

"As a practical matter, however, effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role," he said.

The Fed Chairman also took several questions from the audience. He was asked about his views on mark-to-market, to which he responded that it did not need to be removed, but it should be altered. He continued that there is no easy way to price the securities (due to an illiquid market) so that aspect must be addressed. By simply removing mark-to-market, it would create an additional cloud of confusion and uncertainty and that is also not a good solution. There are some responsible solutions, but none have been put forward yet.

One question that was somewhat amusing to the Chairman was a question about The Fed essentially controlling the regulations that came out of Congress. Mr. Bernanke said that having The Federal Reserve try to control the very institution that created The Federal Reserve would be difficult.

Source: The Wall Street Journal

Monday, March 9, 2009

Some Myths About Banks

Some Myths About Banks
Nationalization would undermine confidence in the financial system.

By Kenneth D. Lewis
Published: March 9, 2009


The story of our economic crisis mirrors every great market bubble in history. Clearly, banks were key participants, but they were not alone. Mortgage lenders, borrowers, regulators, policy makers, appraisers, rating agencies, investors and investment bankers all played a role in pushing economic excesses forward. The institutions that gave in completely to the frenzy are no longer with us. Those that balanced the need to compete with the need to lend prudently survive today and are helping to stabilize the system.

Amid the turmoil, it has become clear that banks need to make changes in the way they run their business, from risk management to expense control to compensation practices. Most banks are making these changes in a good-faith effort to adjust to new economic realities.

And what role should government play in this? Speculation is rife about whether banks need more capital assistance from the government or whether they need to be nationalized. Unfortunately, our current debate has been riddled with misinformation that will not help us understand our current reality, or help us decide on a sensible path forward.

I would like to provide some clarity on a few key claims that have been repeated so often they are now taken to be fact. They are not.

- The banks aren't lending. This claim is simply not true. Yes, banks have tightened lending standards after a period in which standards were too lax. But, according to Federal Reserve data, bank credit has actually increased over the course of this recession, and business lending is trending up modestly so far in 2009. Also, mortgage finance volume is booming as a result of low interest rates. What's gone from the system is the easy credit that got us into this mess, as unregulated nonbank lenders have disappeared, and the market for many asset-backed securities has all but dried up. Most banks are making as many loans as we responsibly can, given the recessionary environment.

- The banks are insolvent. In the past 18 months, we've seen fewer than 50 bank failures. That compares to about 2,000 failures or closings of commercial banks or savings institutions between 1986 and 1991. There may be more to come, but the vast majority of banks will weather this economic storm.

- The Troubled Asset Relief Program (TARP) hasn't worked. Not true. Last October, when the TARP was enacted, systemic risk threatened our entire financial system and economy. The point of the program was to stabilize surviving banks, prevent a total meltdown, and enable banks to lend more. The TARP and other government programs have worked, and banks are making more loans as a result.

- Taxpayers have given the banks billions and won't get their money back. TARP funds are not charity. Banks that received TARP funds will make about $13 billion in dividend payments to the U.S. Treasury this year. TARP funds are loans yielding anywhere from 5% to 8% interest. This is a win-win: Banks are getting the capital they need, and taxpayers are getting a strong return on their investment.

- The banks that caused this mess must be held accountable. In fact, while all banks participated in the bubble economy to some degree, the companies that did the most to cause this mess are gone. The managers and shareholders of those institutions have been held accountable by the toughest, most unforgiving master of all: the free market.

- The only way to fix the banks is to nationalize them. This is a misguided premise. The announcement of nationalization would undermine confidence in the financial system and send shudders through the investment community. Politicizing lending decisions and the credit allocation process would be destructive for the economy. Nationalization also would give the false impression that all banks are insolvent. We agree with Federal Reserve Chairman Ben Bernanke's statement that nationalization of banks is not necessary to stabilize the banking system.

Getting our facts straight as we debate the important issues will help us rebuild a healthy financial services sector that can better support economic growth. I have two thoughts to help us get started.

First, our industry must continue to work in partnership with the government to solve our toughest problems. Congress and the administration have already taken several very positive steps. The Fed is providing sufficient liquidity and has helped lower mortgage rates. The $787 billion stimulus package will help boost economic activity. The Term Asset-Backed Securities Loan Facility (TALF) will help liquefy the credit markets. And the administration's housing and foreclosure relief plan will be very helpful to both homeowners and banks as we work to stabilize housing markets across the country.

Second, one of our greatest challenges is balancing the need to extend credit with the need of households to pay down excessive debt. In an economy that became too dependent on debt-driven consumption to create growth, the prospect of household deleveraging is sobering. The answer, in my view, is to let competitive forces lead us back to responsible lending practices, not the type of indiscriminate lending that has created so many problems.

Mr. Lewis is chairman, chief executive officer and president of Bank of America.

Source: The Wall Street Journal

Sunday, March 8, 2009

Who Got AIG's Bailout Billions?

Where, oh where, did AIG's bailout billions go? That question may reverberate even louder through the halls of government in the week ahead now that a partial list of beneficiaries has been published.

The Wall Street Journal reported on Friday that about $50 billion of more than $173 billion that the U.S. government has poured into American International Group Inc since last fall has been paid to at least two dozen U.S. and foreign financial institutions.

The newspaper reported that some of the banks paid by AIG since the insurer started getting taxpayer funds were: Goldman Sachs Group Inc, Deutsche Bank AG, Merrill Lynch, Societe Generale, Calyon, Barclays Plc, Rabobank, Danske, HSBC, Royal Bank of Scotland, Banco Santander, Morgan Stanley, Wachovia, Bank of America, and Lloyds Banking Group.

Morgan Stanley and Goldman Sachs declined to comment when contacted by Reuters. Bank of America, Calyon, and Wells Fargo, which has absorbed Wachovia, could not be reached for comment.

The U.S. Federal Reserve has refused to publicize a list of AIG's derivative counterparties and what they have been paid since the bailout, riling the U.S. Senate Banking Committee.

Federal Reserve Vice Chairman Donald Kohn testified before that committee on Thursday that revealing names risked jeopardizing AIG's continuing business. Kohn said there were millions of counterparties around the globe, including pension funds and U.S. households.

He said the intention was not to protect AIG or its counterparties, but to prevent the spread of AIG's infection.

The Wall Street Journal, citing a confidential document and people familiar with the matter, reported that Goldman Sachs and Deutsche Bank each got about $6 billion in payments between the middle of September and December last year.

Once the world's largest insurer, AIG has been described by the United States as being too extensively intertwined with the global financial system to be allowed to fail.

The Federal Reserve first rode to AIG's rescue in September with an $85 billion credit line after losses from toxic investments, many of which were mortgage related, and collateral demands from banks, left AIG staring down bankruptcy.

Late last year, the rescue packaged was increased to $150 billion. The bailout was overhauled again a week ago to offer the insurer an additional $30 billion in equity.

AIG was first bailed out shortly after investment bank Lehman Brothers was allowed to fail and brokerage Merrill Lynch sold itself to Bank of America Corp.

Bankruptcy for AIG would have led to complications and losses for financial institutions around the world doing business with the company and policy holders that AIG insured against losses.

Representative Paul Kanjorski told Reuters on Thursday that he had been informed that a large number of AIG's counterparties were European.

"That's why we could not allow AIG to fail as we allowed Lehman to fail, because that would have precipitated the failure of the European banking system," said Kanjorski, a Democrat from Pennsylvania who chairs the House Insurance Subcommittee.

TOXIC ASSETS/TOXIC WASTE

As part of its business, AIG insured counterparties on mortgage-backed securities and other assets. The collapse of the U.S. subprime mortgage market left the insurer and some of its policy holders facing possible ruin as the value of assets declined.

U.S. regulators failed to recognize how much risk AIG was piling on in credit-default swaps, and by the time they understood, they had no choice but to pour in billions of public dollars, Kohn and other officials told the Senate panel.

Senators were outraged by the lack of details about where the bailout money has gone.

"That we find ourselves in this situation at all is ... quite frankly, sickening," said Senator Christopher Dodd, the Democrat who chairs the committee. "The lack of transparency and accountability in this process has been rather stunning."

Eric Dinallo, superintendent of New York State's Insurance Department, railed on Friday against AIG's failed business model, likening its insuring credit-default swaps as gambling with somebody else's money.

"It's like taking insurance on your neighbor's house and even maybe contributing to blowing it up," he said at a panel sponsored by New York University's Stern School of Business.

U.S. lawmakers have said they are running out of patience with regulators' refusal to identify AIG's counterparties.

On Thursday, Richard Shelby, the top Republican on the banking committee, said: "The Fed and Treasury can be secretive for a while but not forever."

Source: Reuters