MONEY AND WORK

News from the Progressive Review, providing alternative news and comment for over four decades.

March 11, 2009

CRASH TALK

Stateline - More than 600 attorneys have volunteered to help New Jersey homeowners facing foreclosure in an unprecedented state-sponsored effort to keep people in their homes.

North Carolina has begun requiring subprime mortgage servicers to notify distressed borrowers and state officials 45 days before filing foreclosure proceedings so homeowners can work with housing counselors and attorneys to renegotiate the loan.

California launched a program late last year offering first-time homebuyers a chance to buy vacant, foreclosed homes at below market interest rates. As much as helping homebuyers, the goal is to stabilize neighborhoods ravaged by the worst foreclosure crisis in the state's history. . .

Last year, governors in 33 states signed 70 pieces of legislation addressing the foreclosure crisis, and nearly every state has adopted new rules to improve oversight of the state-regulated mortgage lending industry, according to a new report by the National Governors Association. . .

State efforts, the report said, have centered on mitigation, or reaching out to distressed borrowers to avoid foreclosure; stabilization, such as California's effort to prop up its decaying neighborhoods; and prevention, including tougher regulation of the mortgage lending industry. . .

NY Times - Rarely have so few people had so little time to prop up so many pillars of the economy as those in the Treasury Department under Timothy F. Geithner. . .

But even as he maintains a frenetic pace - unveiling plans, testifying before Congress and negotiating new bailouts with the likes of Citigroup, General Motors and the American International Group - there are signs that events are getting ahead of him.

Administration officials say they are postponing their plan to produce a detailed road map for overhauling the nation's financial regulatory system by April, in time for the Group of 20 meeting in London. Though officials say they will still develop basic principles in time for the meeting, the plan will not include much detail.

Treasury officials are also still scrambling to decide details of their plan to buy up as much as $1 trillion in toxic assets from the nation's banks, one month after being widely criticized for presenting a plan that lacked any specifics on how it would work.

Analysts say it is far too early to know if Mr. Geithner and his team will be effective. But some worry that political and financial constraints have made them reluctant to grapple with the full magnitude of the crisis. . .

Pro Publica - It's looking increasingly like the FDIC will have to turn to Treasury to help it weather the storm. FDIC's deposit insurance fund has plummeted in the past year as a growing number of banks have failed.

"We'd like a bigger cushion," FDIC Chair Sheila Bair said on CBS' Early Show. The fund relies on fees from member banks, and Bair held out hope that a recent bump in those fees would provide enough cushion. But if it doesn't, Bair said, people shouldn't be nervous about their FDIC-insured accounts: "It is important for people to understand, we're backed by the full faith and credit of the United States government. The money will always be there. We can't run out of money."

New legislation requested by the FDIC and the Fed seeks to make sure that's true, even if FDIC's cushion proves dramatically inadequate. The legislation would allow the FDIC to borrow $100 billion from Treasury and as much as $500 billion with White House approval. Currently, FDIC only has access to up to $30 billion.

Independent, UK
- A silent $1 trillion "Run on Britain" by foreign investors was revealed in the latest statistical releases from the Bank of England. The external liabilities of banks operating in the UK - that is monies held in the UK on behalf of foreign investors - fell by $1 trillion between the spring and the end of 2008, representing a huge loss of funds and of confidence in the City of London. . . This is by far the largest withdrawal of foreign funds from the UK in recent decades - about 10 times what might flow out during a "normal" quarter. The revelation will fuel fears that the UK's reputation as a safe place to hold funds is being fatally compromised by the acute crisis in the banking system and a general trend to financial protectionism internationally.

Reuters - Warren Buffett said on Monday the U.S. economy had "fallen off a cliff" but would eventually recover, although a rebound could kindle inflation worse than that experienced in the late 1970s. Speaking on CNBC television, the 78-year-old billionaire investor also said the economy was mere hours away from collapse last September when credit markets seized up, Lehman Brothers Holdings Inc went bankrupt and insurer American International Group Inc got its first bailout. "The world almost did come to a stop," he said. . .

Buffett called on banks to "get back to banking" and said an overwhelmingly number would "earn their way out" of the recession, even if stockholders don't go along for the ride.

Saying that "a bank that's going to go broke should be allowed to go broke," Buffett nevertheless added that the "paralysis of confidence" in the sector is "silly" because of safeguards such as deposit insurance.

Wired - A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists-even Wall Street quants-have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut-determining correlation, or how seemingly disparate events are related-and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched-and was making people so much money-that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008-when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

Penelope Lemov, Governing - Many states have programs to target the street people who make up the bulk of the chronically homeless. Few have comprehensive plans for families that become homeless and fewer still, programs to help the children who get stuck in that precarious and vulnerable situation. The extent of the problem and the ranking of states in their approach to it are in a study by the National Center on Family Homelessness, "America's Youngest Outcasts." Connecticut comes out on top, followed closely by the tight group of New Englanders. Bottom of the heap: Texas. Close to bottom: Florida. As Ellen Bassuk, president of the center, noted, "Extreme poverty is the driving force behind homelessness, and the top 10 states had poverty levels that were half that of the bottom 10 states."

THE TENT CITY RETURNS

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