Wednesday, November 12, 2008

CRASH TALK

Sam Smith, Progressive Review - Unnoted in the cheering about the rewriting of some mortgages is that the plan only covers home buyers with down payments of ten percent or less. In other words, more conservative and careful homebuyers are being penalized. Why? Probably because it is the ten percenters that the lenders are most worried about. After all, if you foreclose on a house that has dropped 15% in value but you only lent 70% of the value, you're in much better shape than if you lent 90%.

Joe Nocera, NY Times - So now the mortgage finance giants Fannie Mae and Freddie Mac say they are going to institute a mortgage modification program. Well, good for them. Announced this afternoon, the plan calls for struggling homeowners with mortgages held by Fannie and Freddie to have their payments reduced to 38 percent of their gross income through a combination of interest rate reductions, principle reductions and longer repayment terms. This comes on the heels of Citigroup's announcement on Monday that it would undertake a mortgage modification program, which came on the heels of a similar announcement last week from JPMorgan Chase, which came on the heels of Countrywide's announcement, and so on.

In other words, just about everyone in the mortgage business has come to see the wisdom of mortgage modification - except one important player: Wall Street. You see, all of these programs deal only with "whole loans" - that is loans on the books of the institutions, unencumbered by securitizations. So far, the attitude of all involved when it comes to securitized mortgages is to throw up their hands and say - "it's too hard to deal with!" And it may well be: mortgages that were sold to Wall Street and wound up in mortgage-backed securities have been sliced and diced and sold and resold to investors with varying risk tolerances. They are serviced by people who owe a fiduciary duty to all these investors, no matter what their place on the risk continuum.

James Grosfeld, the former chief executive of Pulte Homes, summed up the problem in a recent e-mail message: "There are well over $1,000,000,000,000-$1,500,000,000,000 of mortgages trapped within mortgage-backed securities. These are the most risky mortgages ever issued - mortgages poorly underwritten and often with unaffordable payment shock at the end of teaser rate periods. Pool losses will be unprecedented. However, there has been no successful effort on a broad scale to reform these mortgages because of contractual obligations of trustees and servicers to bondholders. Simply put these fiduciaries are scared of being sued by bondholders if they modify loans into affordable new mortgages."

Dean Baker, Prospect - Are Ben Bernanke and Henry Paulson Crony Capitalists? The media should be asking this question. After all, they are trying to hide which banks are in trouble and refusing to give out information about who is borrowing from the Fed. This is exactly the behavior that the IMF and widely cited economists denounced when it was done by the East Asian countries during their financial crisis in the late 90s. Are these practices now good economics because our government is doing them?

Chris Carey, Bailout Slueth -
The Treasury Department posted a solicitation for companies who will help manage hundreds of billions of dollars worth of stock, warrants and debt it will receive from banks and other participants in its financial industry rescue program. The 16-page solicitation is a good illustration of the level of detail that the government requires from the contractors but does not pass along to the taxpayers who are funding the $700 billion program.

For example, companies bidding on the job must describe the composition and expertise of the employee team that will be overseeing the work, and must provide biographies of the senior members on the project. None of the contracts the Treasury Department has issued to date for work under the Troubled Asset Relief Plan included details on the managers or other key personnel. In one case, involving an accounting-services contract, the agency blacked out the names of the individuals assigned to the project when it posted the agreement on its web site.

The Treasury Department also requires bidders to describe their proposed fees, and the reasons and logic behind them. None of the contracts that the agency has made public included an explanation of how the compensation was determined. In several instances, the sections covering fees were either blacked out or redacted.

Although the price tag on the Treasury Department's Troubled Asset Relief Program is $700 billion, the full amount that the government has invested in its rescue effort for struggling financial institutions appears to be closer to $2.5 trillion. Bloomberg L.P., the parent company of Bloomberg News, said last week that it filed a lawsuit seeking information on the collateral that a group of banks pledged for some $2 trillion in emergency loans from the Federal Reserve. Bloomberg asked a federal court in New York to require the Federal Reserve to disclose the identity of the banks that borrowed money through certain financing mechanisms, and to disclose what assets they pledged against those loans.

Alice Gomstyn, ABC News
- The government said Monday that it was restructuring its AIG plan to include a total of $97.8 billion from the Federal Reserve and a $40 billion infusion from the Treasury Department. The Treasury Department would, in return, receive a stake in AIG in the form of preferred shares. The money for the government's investment would come from the $700 billion financial rescue plan approved last month.

The problem, critics say, is that it's unclear exactly how much money AIG actually needs because there is no certainty about how much the insurance giant will ultimately lose as a result of its credit default swaps -- insurance contracts that kick in when investments such as mortgage-backed securities fail.

"Not only do people not understand what's on the books, it's impossible to put a fair valuation on them," said Barry Ritholtz, the author of "Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy" and the CEO of the institutional research firm Fusion IQ.

Brookly McLaughlin, a spokeswoman for the Treasury Department, said she wouldn't speculate on whether the recently-restructured AIG package was enough. But, she said, "we think that the steps taken today are important to giving them a more sustainable capital structure and helping them to be better able to execute their asset disposition."

Phil Mattera, Dirt Diggers Digest -
When Treasury Secretary Henry Paulson chose his protégé Neel Kashkari last month to run the Big Bailout, we were led to believe Kashkari was some kind of whiz kid who would use his background in both engineering and finance to stop the meltdown of the financial sector. A month later, Kashkari has succeeded-in his own mind.

Appearing at an event sponsored by the Securities Industry and Financial Markets Association, the Interim Assistant Secretary for Financial Stability gave a speech with a surprisingly upbeat tone. Kashkari spoke of having made "tremendous progress" and of having "accomplished a great deal in a short period of time." He bragged that his team is "working around the clock" while "ensuring high quality execution." The only problem is that, to the outside world, the bailout is looking more and more like a disaster.

As Kashkari was speaking, news was circulating that American International Group, one of the biggest recipients of federal bailout aid, had reported a $25 billion quarterly loss. At the same time, Treasury revealed it was upping its rescue package for AIG to $150 billion in capital infusions and purchases of the company's toxic assets. Fannie Mae, another ward of the state, reported a $29 billion quarterly loss.

Also while Kashkari was speaking, readers of the Washington Post were learning that amid the initial phase of the bailout in September, the Treasury Department quietly announced a tax code change that gives a huge windfall (estimated by some tax lawyers at $140 billion) to banks that are buying up other financial institutions. The article reports that some tax experts believe the rule change was illegal.

Pro Publica - Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.The giant investment firm did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California's deepening financial misery. In Sacramento, officials said they were concerned that Goldman's strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers. "It could exaggerate people's worries about our credit," said Paul Rosenstiel, head of the public finance division of the treasurer's office. Such worries would tend to drive down the price of California bonds. That, in turn, would drive up the interest rate the state and its municipalities pay to borrow money. An increase of a single percentage point on a $1-billion bond issue would cost taxpayers an additional $10 million a year in interest.

Channel 4, DC - Metro is asking the Federal Reserve for help to delay paying back a loan to a Belgian bank. KBC Group loaned Metro $43 million in 2002, and insurance giant American International Group guaranteed the financing deal. But with AIG's collapse, there is no longer a guarantor for the loan, so KBC wants to immediately collect its money. . . . Metro officials met with members of the Federal Reserve on Monday and asked that the federal government step in and guarantee the loan in place of AIG. So far, no word from the Federal Reserve on Metro's proposal.

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