A Solution For The Banks…

I have been reading many of the various proposals to solve the financial crisis that we are facing here in the United States and the rest of the globe because the securities that are tied to the values of the troubled US assets were sold all over the world.

The United States is in a period that should be ripe for an instant and tremendous boom in growth. Energy prices are incredibly low, index rates are ridiculously low… and yet nothing is moving and credit, the lubricant of the economy, is not being extended or is extended at a premium.

First, a bit of a conversation about why banks are having solvency issues and are therefore either not lending or are lending at a premium….

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John McCain’s Letter Of Warning Re: Fannie And Freddie

Looks like he pretty much called it exactly like it happened….

That’s what I call judgement.

Props to Sweetness And Light

United States Senate
WASHINGTON, DC 20510
May 5, 2006

The Honorable William H. Frist, MD Majority Leader
United States Senate
Washington, DC 20510

The Honorable Richard C. Shelby
Chairman, Banking, Housing and Urban Affairs Committee United States Senate
Washington, DC 20510

Dear Majority Leader Frist and Chairman Shelby,

We are concerned that if effective regulatory reform legislation for the housing-finance government sponsored enterprises (GSEs) is not enacted this year, American taxpayers will continue to.be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. Therefore, we offer you our support in bringing the Federal Housing Enterprise Regulatory Reform Act (S. 190) to the floor and allowing the Senate to debate the merits of this bill, which was passed by the Senate Banking Committee.

Congress chartered Fannie and Freddie to provide access to home financing by maintaining liquidity in the secondary mortgage market. Today, almost half of all mortgages in the U.S. are owned or guaranteed by these GSEs. They are mammoth financial institutions with almost $1.5 Trillion of debt outstanding between them. With the fiscal challenges facing us today (deficits, entitlements, pensions and flood insurance), Congress must ask itself who would actually pay this debt if Fannie or Freddie could not?

Substantial testimony calling for improved regulation of the GSEs has been provided to the Senate by the Treasury, Federal Reserve, HUD, GAO, CBO, and others. Congress has the opportunity to recommit itself to the housing mission of the GSEs while at the same time making sure the GSEs operate in a manner that does not expose our financial system, or taxpayers, to unnecessary risk. It is vitally important that Congress take the necessary steps to ensure that these institutions benefit from strong and independent regulatory supervision, operate in a safe and sound manner, and are primarily focused on their statutory mission. More importantly, Congress must ensure that the American taxpayer is protected in the event either GSE should fail. We strongly support an effort to schedule floor time this year to debate GSE regulatory reform.

Sincerely,

(signed)

John McCain

Analysis Of “The McCain Housing Plan”

I will start off by saying that I think that McCain is on the right track with this one.  This is the best proposal I have heard thus far (other than what the Fed is doing currently with commercial paper) to solve the economic crisis America faces.

First, a bit of an explanation of the root problem…  and I am going to simplify as much as possible, talking about the major themes (and ignore important but smaller ones…)

The fundamental cause of the problems with the banks and the economy as a whole originate in the housing crisis.

The housing bubble led to greater and greater numbers of risky loans and exploded when Fannie Mae and Freddie Mac started acting much like a hedge fund and invested in the very paper they were insuring.  This led to an explosion in the market and decreasing underwriting standards, especially when Fannie Mae and Freddie Mac made the “Alt A” programs available. 

The banks began to group these loans (aka bank debt) together into packages and sell them off to other banks.  The bank that bought them took these packages of loans  and divided them into “risk tiers” and sold those tiers as derivatives.  These banks then grouped the derivatives together and divided them further, until the original group was chopped into so many loans it was impossible to tell what was where.

This, in theory, should have minimized the risk associated with the loans.

Because of the grouping and dividing and selling and grouping and dividing and selling, virtually all the banks were heavily invested in these MBSs (mortgage backed security) and CDO’s (collateralized debt obligation.)

Then the economy slowed…  and housing was the one beacon of light in a dimming economy, so the banks, hedge funds, investors, and consumers invested even more heavily in real estate.

As time went on, the banks began to discover that a much larger than expected percentage of the loans were given to people that should not have gotten them.  The bulk of these “bad loans” were found in the Alt A realm that banks would not have normally invested as heavily in, but for the actions and rules of Fannie and Freddie.

With the economy continuing to slow, eventually the housing sector peaked and the dam broke. 

Foreclosures began to happen at an epidemic rate because the people that should not have been in the loans they were given couldn’t pay.

So the banks/hedge funds and especially Fannie/Freddie realized that they should not have been offering all these loans tightened up their lending standards because they couldn’t continue to offer the crap loans they had been offering, which would have made the hole they were in that much deeper.

The side effect of this was that, especially in a slowing economy, fewer and fewer people could qualify for new loans to buy all the houses that were pouring on to the market from new construction projects (at an all time high) and from massive foreclosures.

The housing market glutted, the banks began to dump the foreclosures for next to nothing and all the other houses sat on the market for a year or more. 

With only the foreclosures selling, they were the only sales to peg the prices of houses against and property values started dropping like crazy, especially in places where the bubble was biggest…  CA, FL, NV.

This has caused the secondary crisis…  there are millions upon millions of people upside down on their houses right now.  Millions.

So because of the problems with 10-15% of the loans, and the foreclosures they led to, the values of the houses with credit worthy people now had problematic loans because their property was worth less than the mortgage was for.

Essentially, the banks no longer knew what any of their loans were worth, because the assets tied to the loan weren’t worth enough to cover the outstanding debts, increasing the balance sheet debts of the banks by billions and billions and billions of dollars.

This made the banks “uncreditworthy” and so they stopped loaning money to eachother, leading to near of total collapse of a huge number of banks.

So, in order to solve the valuation problem, keep people in their homes and prevent more foreclosures, and to prop up the prices of homes as much as possible, earlier this year, the Congress approved a program called the “FHA Secure.” 

This program basically works like this…  if you have a $300,000 loan and your house is only worth $225,000 now, if the bank will lower the balance to the $225,000 then the FHA will insure the loan, making the loan more immediately marketable.

The bill and the program went into effect October 1. 

Not a single bank has implemented this plan to date.

The problem is two fold; 

First, it is voluntary…  the banks don’t have to do it.

Second, it requires that the banks take HUGE writedowns and though it may help even out the bottom line in the long run, in the short term those HUGE writedowns would probably kill them at this point…  especially perceptually.

Nobody wants that.

Ok, so now that we are caught up to present times, we can talk about McCain’s housing plan.

John McCain has basically taken the FHA Secure program, and instead of making the banks take the writedowns and essentially forfeit hundreds of billions of dollars…  McCain wants to re-allocate the “Bailout” money to buy out the negative equity on these people’s houses.

Why is this great?

1.  The estimated cost, about $300 Billion…  A number that is less than half of the “Bailout” which only helps banks/Wall Street and does nothing directly for mainstreet.

2.  It keeps people in their homes, reducing their balances and their payments.

3.  It helps prop up housing prices, or at least stabilize them, because it will lead to fewer foreclosures.

4.  It bails out the consumer and the banks in one fell swoop. 

Helps the folks, helps the banks.  Bingo.  I think he has something right there!

Read more here

Brilliant.

As I said, this is the best idea to solve the crisis I have heard so far (other than the fed buying commercial paper… also brilliant.)

 

(and yes, it’s basically Hillary Clinton’s plan, but don’t tell the Republicans LOL)

House Passes Bailout

CNN

I don’t even know what to say…  I wanna barf.

Ever wonder what is in the $800 Billion Bill being voted on 10/3?

If you are like me, you occasionally wonder what our Congress is spending our tax dollars on.  I’ve been searching for an official copy of the bill and the usual summary that accompanies these things – and have not found it.  So in the interest folks knowing what is going on, I thought I’d offer up a two cent summary of the $800 Billion bill that will be voted on tomorrow. 

 

The bill is a combination of the 110 page House bailout bill with a FDIC temporary increase in the account size that can be insured  limit (which is not published – only Sunday’s 103 page House bill draft is available) plus various add-ons that are mainly tax bills already “approved” by both House and Senate but stuck and not passed because of various reasons (“tax cut not offset with expense cut” Blue Dog plus GOP opposition in House, “political timing must be post-election” in the Senate).  But there are a few additional items that I am told that are also already “approved” by both House and Senate, such as:

* The bill deals with creating parity for the insurance treatment of mental health problems.

* The bill details how state and local government will be given funds in lieu of taxes on federal lands within their boundaries.

 

 

And there are two National Security provisions that read like they are CYA for Bush Administration crimes and may well appeal to the House GOP:

* The bill makes permanent authority for undercover operations,

* and the bill makes permanent authority for disclosure of information relating to terrorist activities.

 

And then we have an “Energy” section that reads like more tax spending and has its own title in the bill – The Energy Improvement and Extension Act of 2008. which would:

* Extend the renewable energy tax credit for wind and refined coal facilities, and expands use of biomass.
* Extend tax credits for marine and hydrokinetic research, which involves energy created from waves and tides, as well as solar and fuel-cell research.

* Allow energy credits to be counted against the alternative minimum tax.

* Give steelmakers tax credits for purchase of renewable fuels.

* Let utilities issue tax-free bonds to promote use of clear, renewable fuels.

* Expand tax credits for investment in coal gasification programs.

* Extend by four years a temporary increase in the coal excise tax to fund black-lung disability programs for miners.

* Provide tax credits for carbon sequestration efforts.

* Allow producers of cellulosic bio-fuels to seek accelerated tax depreciation.

* Double the tax credit for production of bio-diesel and renewable diesel fuels.

* Extend a tax credit of $2,500 to plug-in electric hybrid vehicles. (should be larger IMHO!).

* Allow fringe benefit reimbursement for qualified bicycle commuters.

* Broaden the scope for issuance of conservation bonds.

* Extend current deductions for energy efficient commercial buildings and homes.

* Provide small tax credits for purchase of energy efficient dishwashers, washing machines and refrigerators.

* Accelerate tax deductions for use of smart meters that help a consumer regulate energy use to reduce peak-hour consumption.

* Reduce by 3 percent the tax deductions on income enjoyed by producers, refiners, transporters and distributors of oil and natural gas.

* Eliminate the difference in tax treatment of foreign oil and natural gas production and foreign oil-related income.

* Extend and increase by 3 cents a barrel the oil spill liability tax.

 

 

 

And then there is a section that admits it is specifically directed at the Tax Code which would:

* Raise the exemption level of the alternative minimum tax from the current $66,250/$44,350 for joint or single filers to $69,950/$46,200.

* Extend tuition deductions.

* Extend certain deductions for elementary and secondary school teachers.

* Extend an additional standard deduction on real property taxes for non-itemizers.

* Continue tax-free distribution from retirement plans to charities.

* Extend and modify the research tax credit.

* Extend restaurant improvement credits.

* Extend the tax credit for mine-rescue team training.

* Extend the tax credit for advanced mine safety equipment.

* Accelerate depreciation of business property on Indian reservations.

* Extend cost recovery period for motor racing tracks.

* Extend work opportunity tax credit for Hurricane Katrina employees.

* Extend increased rehabilitation credit for structures in Gulf of Mexico opportunity zone.

* Extend tax credit for investment in the District of Colombia.

* Increase tax deduction for charitable contributions to food inventory.

* Increase tax deduction for charitable book giving.

* Raise to $8,500 the income threshold for calculating the refundable portion of a child tax credit.

* Exempt from excise tax certain wooden arrow shafts for use by children. (prior tax on hunting arrows accidentally hit kid arrows killing industry in Oregon).

* Clarify income averaging for settlement amounts received in connection with Exxon Valdez litigation.

* Provide temporary tax relief for areas damaged by Midwestern storms, tornadoes and flooding and by Hurricane Ike.

 

 

And finally we have the House Bailout Bill as adjust for yjat FDIC insurance change that would:

* Provide the government an equity stake, through non-voting or preferred stock, in companies that are unloading bad assets. If these companies go bankrupt, these warrants convert to a type of debt that places the government at the head of the list of creditors in any bankruptcy proceeding.

* Give the Treasury secretary broad discretion to buy virtually any distressed asset in an effort to get it off the books of a troubled bank or financial firm and help unclog the credit markets. This is called the Troubled Assets Relief Program, or TARP.

* Provide $250 billion immediately to purchase mortgage-backed securities and other troubled assets, another $100 billion with the president’s authorization and the remaining $350 billion would be subject to separate congressional approval.

* Give the Federal Deposit Insurance Corp. the ability to borrow without limit from the Treasury to help stabilize banks it regulates, both large and small. This isn’t in the House legislation.

* Allow the FDIC to raise deposit insurance to $250,000 from the current $100,000. Affects the sum of deposits, not each account, in a depositor’s name at any given bank. This too isn’t in the House legislation.

* Require the comptroller general to monitor and evaluate TARP’s performance, especially whether it is helping to prevent foreclosures, providing stability in financial markets and protecting taxpayers. The Government Accountability Office will have authority to order corrections in the TARP effort.

* Order the comptroller general, the nation’s chief auditor, to report back to Congress by June 2009 on whether the government should curtail the ability of banks and others invest with borrowed money. Investment banks borrowed $30 to $40 against every $1 of their own capital they invested, helping create today’s global financial crisis.

* Limit courts from issuing restraining orders or injunctions against the Treasury secretary unless alleging a constitutional violation. In those cases, injunctions would have to be handled on an expedited basis by federal courts. Significantly, there is no limited liability expressed that would necessarily protect the federal government from lawsuits by investors when the government purchases distressed assets.

* Create a special inspector general for the TARP program, to supervise and audit the purchase of distressed mortgages and other bad assets.

* Raise the nation’s debt ceiling to $11.3 trillion.

* Hold hearings on the effectiveness of the program and issue a special report on proposed regulatory reform.

* Reaffirm that the Securities and Exchange Commission has the authority to suspend an accounting rule that some critics think has exaggerated the deflated prices of the toxic mortgage bonds at the heart of the financial crisis. The practice, called mark-to-market reporting, requires banks and other financial firms to report the present-day value of distressed assets that have a hold-to-maturity value. This also is called fair-value reporting, and it was implemented after the Enron scandal to discourage reporting of inflated prices.

* Limit the tax write-offs for executive compensation above $500,000 for companies that sell distressed assets to the government.

* Prohibit “golden parachutes” for executives of firms that are selling assets directly to the government. If the government purchases from a firm, via auction, $300 million or more in troubled assets, similar limits on bonuses and other executive compensation would apply.

 

 

There is still no salary cap on the CEO – remember the promise that the CEO should  “make no more than the highest paid government employee – the President’s $400,000”,  and the bill will be presented to the House under a no amendment rule, so our Financial CEOs will continue to get their 10’s of millions annual salary despite the mess they have caused and their use of the bailout bill to save their company and their job.

 

 

 

Karl Rove’s Take On The Day – Pelosi and Obama Failed

Reverse Auctions in Bail out – designed to not screw taxpayer?

Reverse Auction Design – will it be in the final bill?

With over 100,000 individual designed  mortgage-related securities, obligations, and other instruments outstanding, further divided  by multiple rated tranches, auctions to price each piece are not workable.  But the Mortgage Bailout Bill depends on price discovery via auction – and as far as I can tell does not have rules for that discovery.  So we are left with “trust me” and regulations to be announced later.  Knowing loan vintage, maturity, loan type, interest rate, location, payment history, FICO score, and initial loan/value ratio will not prevent are narrowly restricted, a package of some degree of heterogeneity in any package of loans.  Prior over-the-counter trading in mortgage-related assets has ended because computer models are no longer trusted for price discovery.

The Paulson program  of auctions for mortgage-related assets seems to be intended to be a one-time event – why I do not know since a standardized investment form and an exchange for that form would seem to be the best way to avoid our current problem in the future.  But as I understand the Bailout Bill, the plan is to have each asset hit the auction block once and then stopping there, or stopping once the money runs out.

In some statements Fed Chairman Ben S. Bernanke appeared to identify as the objective finding a “hold-to-maturity” value – but that means paying a great deal more than market value – later he indicated he was referring to the higher market value post auction because of US Gov ownership of the asset was the value he wanted to pay – this is a major difference – and still sounds like an “auction” with a floor that is above market value.  Will there be anything  in the Bill to address this? Treasury can not just offer to buy the Banks non-saleable assets – a Bank would be a fool if it did not greatly over price those assets in that situation. Treasury can not commit  to purchasing the entire quantity offered of a given package – it must allocate its budget among the various packages available for sale – buying a portion of each package.

The Packages (packages of assets since individual auctions for each asset design is impractical because every asset is an individual design) will give good price discovery, but by definition, the more heterogeneous the package the more likely the US Taxpayer will be screwed because of the adverse selection problem of relatively inferior assets being disproportionately offered for sale at the lowest prices. Treasury will end up buying the worst of the lot and, if a single price is paid for all units, overpaying, with Banks with higher quality assets asking for a higher bid, and finding they can not sell at that higher price – but with the high quality asset bank being screwed as it is forced to mark down its higher quality asset to the price given for the low quality package.

The order of sale of the packages will determine how badly the taxpayer is screwed – Treasury must start with packages of securities having severely depressed prices in their computer model, relatively simple features, and substantial face value owned  (e.g.,  straight pass-through securities with subprime mortgage collateral),  Will this requirement be in the Bill?

.
With luck we will be able to end the now stalled “over-the-counter” markets, replacing it with an exchange and standardized packages, with a non-standard package area in that exchange (as exists now at our exchanges).

We will still need to buy and sell some assets purely by looking at the computer model output – but where that output is not trusted today because input parameters are felt to be possibly incorrect, it will be easier to get to a sale once  the newly available market data generated by auctions are used, to estimate the contribution to value of the various asset characteristics. Applying the estimated models to the non-auctioned assets would then yield a predicted price for each asset. Transparency requires that today’s “proprietary” formulas be reveal – they caused this mess and have no value, so with luck they will be donated to Treasury and we will not pay the Banks for that bit of information.

Hillary Speaks Out On Mtg Crisis… Proposes Solutions

From Hillary’s Op-Ed in the WSJ

There is a broad consensus that Congress must act to stave off deeper turmoil on Wall Street. Irrespective of the final agreement yet to be reached, there are several principles that must be part of a broader reform effort that begins this week and continues in the coming months.

This is not just a financial crisis; it’s an economic crisis. Therefore, the solutions we pursue cannot simply stabilize the markets. We must also deal with the interconnected economic challenges that set the stage for this crisis — and reverse the failed policies that allowed a potential crisis to become a real one….

There is much more at the link.

It just proves what leader Hillary Clinton is, how well she knows her stuff…  and that she should have been the Democratic nominee.

Judicial Watch Files Ethics Complaints Against Obama!

It seems that the golden child Obama allegedly recieved a special interest rate from his bank when he got the mortgage on that house Rezko allegedly helped him buy that would result in a total interest savings of $125k.

Apparently, Judicial Watch has filed an ethics complaint with the Senate Ethics Committee, chaired by Barbara Boxer no less.

JW seems to think he recieved an improper gift and special treatment due to his position as a US Senator.

Info here… http://www.judicialwatch.org/documents/2008/obama-ethics-complaint.pdf

Oh, Barry, what will become of you!

 

 

Thanks to Alamom at www.capitalhillforum.com for pointing this out!