Does Anyone feel like Bailing

[classicman]

Greenspan Slept as Off-Books Debt Escaped Scrutiny

`Magic Trick'

``I've always regarded it as a bit of a magic trick,'' Pauline Wallace, a partner at PriceWaterhouseCoopers LLP and team leader in London for financial instruments, said of off-balance- sheet accounting. ``Magicians come to parties, and they make things seem to disappear. The risk is somewhere, but you never knew where.''

Pushed by taxpayers angry about financing a bailout of Wall Street while their retirement accounts wither, Congress is likely to shake up bank and securities regulation, giving the Federal Reserve more power.

``I wouldn't be surprised if the Fed ends up officially becoming our systemic-risk regulator,'' said Robert Litan, an economist at the Brookings Institution in Washington.

That's ironic to Donald Young, an investor advocate and FASB board member from 2005 until June 30. He testified at the same Senate hearing on Sept. 18 that both the Fed and the SEC joined the banks they oversaw in resisting proposals for more disclosure of off-the-books assets.

``There was an unending lobbying of FASB'' by companies and regulators, Young told the committee.

`Lack of Transparency'

The former FASB board member made a similar point in a June 26 letter to Senator Reed. ``We lacked the ability to overcome the lobbying efforts that effectively argued that if we made substantive changes we would hamper the credit markets and hurt business,'' Young wrote. ``Our inaction did not hamper credit markets -- it helped to destroy them.''

The issue, Young said in an interview, was the ``lack of transparency'' that comes with off-the-books accounting.

``There is a perceived free lunch that they can take on risk and not reflect it, and make things look better than they are,'' he said. ``That encourages them to do it more and more.''

A spokesman for FASB, Neal McGarity, said in an e-mail that Young voted with the majority of the board in a January 2005 decision to expand the use of an off-balance-sheet vehicle.

UBS Writedowns

Regulators outside the U.S. didn't do a good job policing investments in subprime-mortgage assets either. Zurich-based UBS AG, hurt the most in Europe with writedowns and losses totaling $44 billion, told the Swiss Federal Banking Commission early last year that it was ``fully hedged, yes, even overhedged,'' director Daniel Zuberbuehler said at a press conference in April.

``This answer subsequently proved to be wrong, because UBS did not correctly capture its actual risk exposure and seriously overestimated its hedges,'' Zuberbuehler said. The Swiss commission now says it will force the bank to hold more capital in reserve and is negotiating with UBS over new capital requirements.

An International Monetary Fund report in April described how the housing turmoil in the U.S. ``spread quickly to Europe, prompting bank rescues and capital injections.'' It said that as of March, European banks still had $173 billion in subprime mortgage-backed securities and collateralized debt obligations, about the same amount as U.S. banks.

The accounting standards board, housed in a corporate office park in Norwalk, Connecticut, an hour northeast of New York City, operates in an unusual position between the public and private sectors. It was set up in 1973 as an independent rulemaking group, though the SEC gets a say in who is named to the board and can override its rules.

That same year Greenspan, Treasury Secretary Robert Rubin and SEC Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of the Commodity Futures Trading Commission, to study regulating over-the-counter derivatives.
In 2000, Congress passed a law keeping them unregulated.

Levitt said he went along with concerns by Greenspan and Rubin that Born's action might throw derivatives contracts into ``legal uncertainty.'' He said he now regrets that he didn't press a presidential advisory group ``to take a closer look'' at the issue. Rubin said in an interview that ``you could have had chaos'' if Born's plan found existing derivatives contracts invalid because they weren't traded on an exchange. Both Born and Greenspan declined to comment.

A sober and informative read.

[TheMercenary]

Interesting. I am no financial whiz but this sounds like an unstable situation that the experts can't decifer.

Federal Reserve puzzled by yield curve steepening

By Alister Bull - Analysis

WASHINGTON (Reuters) - The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank's strategy to combat the country's recession.

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.

Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.

Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities.

With officials still grappling to divine the factors steepening the yield curve, a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.

"I'm in wait-and-see mode," said one Fed official who spoke on the condition of anonymity. "We laid out the asset purchase plan and we're following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don't think we should be chasing a long-term interest rate," the official said.

continues:


http://www.reuters.com/article/ousiv...54U1NZ20090531

[ZenGum]

Which is roughly equivalent to saying: the cards predict that you will have an unexpected encounter with a stranger who seems helpful at first, but whose motives might be very different ...

[classicman]

Goldman to make record bonus payout

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.
Goldman is expected to be the biggest winner in the race for revenues that, in 2006, reached £186bn across the entire industry. While this figure is expected to fall to £160bn in 2009, it will be split among a smaller number of firms.

Barclays Capital, Credit Suisse and Deutsche Bank are among the European firms expected to register bumper profits, along with US banks JP Morgan and Morgan Stanley following the near collapse and government rescue of major trading houses including Citigroup, Merrill Lynch, UBS and Royal Bank of Scotland.

"These banks are intermediaries in the bond markets where governments and companies are raising billions of pounds of new money. There is also a lack of competition that means they can charge huge sums for doing business."

Last week, the firm predicted that President Barack Obama's government could issue $3.25tn of debt before September, almost four times last year's sum. Goldman, a prime broker of US government bonds, is expected to make hundreds of millions of dollars in profits from selling and dealing in the bonds.

[TheMercenary]

How about this little bit of info from Sept 30th 1999? Remarkable. If nothing more than for historical reference.

Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: Thursday, September 30, 1999
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LinkedinDiggFacebookMixxMySpaceYahoo! BuzzPermalink In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

http://www.nytimes.com/1999/09/30/bu...%201999&st=cse

[TheMercenary]

Interesting. I never thought anyone would take the time to look into this. IMHO I was just going to chalk it up to what the lengths they would go to in getting things done in the bailout. It is good to see them holding someone's feet to the fire and trying to get some answers to the mess of the bailout mergers.

Bernanke Defends His Role in Merrill Sale

http://www.nytimes.com/2009/06/26/bu...ef=global-home

[Griff]

“Importantly, the decision to go forward with the merger rightly remained in the hands of Bank of America’s board and management, and they were obligated to make the choice they believed was in the best interests of the shareholders and company.”

He sounded guilty as hell. It was like something from Atlas Shrugged.

[sugarpop]

Originally Posted by Griff

“Importantly, the decision to go forward with the merger rightly remained in the hands of Bank of America’s board and management, and they were obligated to make the choice they believed was in the best interests of the shareholders and company.”

He sounded guilty as hell. It was like something from Atlas Shrugged.

I agree they should not have been forced to go through with the deal, but according to Ken Lewis, the CEO of BoA, during the hearings about this issue, he said it was right decision, and that he wasn't forced to do it. In fact, in his opening statement, he said they had turned around and had brought in quite a bit of revenue from the deal.

[TheMercenary]

I still believe they pressured the hell out of BOA to do the deal. Now they are just covering their collective asses.

[tw]

Originally Posted by TheMercenary

I still believe they pressured the hell out of BOA to do the deal. Now they are just covering their collective asses.

Which is what Lewis (of BOA) was saying in December when the losses (when the spread sheets were corrected to report reality) became obvious. Ken Lewis is no longer saying that now that Merrill Lynch is becoming profitable again.

All this criticism of Bernanke sound like chasing Clinton's penis. As soon as Clinton was out of office, Paula Jones sudden had to pay her own bills. When Clinton was out of office, Paula Jones suddenly discovered her car registration was not even paid for. She did not even know she must register her car because political extremists no longer needed her. This Bernanke nonsense is classic politics rather than addressing the real problems such as Enron accounting.

If they were being honest, most criticism would be at Paulsen and Paulsen’s boss who approved all this. But there is no political advantage to addressing the real issue. The most ignorant among us get inspired when we chase Clinton's penis or how a near entire economic meltdown was averted ASAP.

Never forget faces on those Congressmen when they came out of a meeting with Paulsen and Bernanke. Even deer caught in the headlights do not show that much fear. What they did back then was that desperate and necessary. Only a political agenda would have us forget that reality.

[classicman]

“Much of what the Fed, the Treasury and other agencies did in these transactions remains shrouded in secrecy,” said Representative Edolphus Towns, Democrat of New York and chairman of the oversight committee, said in his opening statement. “It’s time to yank the shroud off the Fed and shine some light on these events.”

Unhappy about the huge bank bailouts that the Fed arranged with the Treasury Department during the Bush administration, many Republicans are even more displeased that Mr. Bernanke is now working hand-in-glove with the Obama administration.

other e-mail between Fed officials shows that Bank of America executives were pressuring the Fed and the Treasury up to the last minute on Dec. 30, when the deal was scheduled to close, to provide written promises that the government would provide billions in new capital and other protection.

Wow - interesting stuff.

[sugarpop]

Originally Posted by classicman

Quote:
“Much of what the Fed, the Treasury and other agencies did in these transactions remains shrouded in secrecy,” said Representative Edolphus Towns, Democrat of New York and chairman of the oversight committee, said in his opening statement. “It’s time to yank the shroud off the Fed and shine some light on these events.”

Unhappy about the huge bank bailouts that the Fed arranged with the Treasury Department during the Bush administration, many Republicans are even more displeased that Mr. Bernanke is now working hand-in-glove with the Obama administration.

other e-mail between Fed officials shows that Bank of America executives were pressuring the Fed and the Treasury up to the last minute on Dec. 30, when the deal was scheduled to close, to provide written promises that the government would provide billions in new capital and other protection.

Wow - interesting stuff.

Did you watch any of the hearings about this stuff? Apparently the reason WHY Paulson was pushing for the deal to go through is because of what happened after Lehman Bros was allowed to fail. Do you remember what happened after Lehman failed? They really thought if Merril failed as well, the economy would have gone off the deep end, like, for real. We would be in another great depression, like during the 30s. In fact, in a documentary I watched recently (I believe it was on Frontline), Paulson was shocked at how fast things spiralled out of control, because originally he had gotten all the biggest CEOs in a room together and told them to work it out, that they would get no government help. That all changed after what happened with Lehman Bros.


*edit* here is the link... http://www.pbs.org/wgbh/pages/frontl...eakingthebank/

[TheMercenary]

Treasury's Reform plan gives the credit raters a pass.

If world-class lobbying could win a Stanley Cup, the credit-ratings caucus would be skating a victory lap this week. The Obama plan for financial re-regulation leaves unscathed this favored class of businesses whose fingerprints are all over the credit meltdown.

The government-anointed judges of risk at Standard & Poor's, Moody's and Fitch inflicted upon investors the AAA-rated subprime mortgage-backed security. They also inflicted upon the world's nest eggs the even more opaque AAA-rated collateralized debt obligation (CDO). Without the ratings agency seal of approval -- required by SEC, Federal Reserve and state regulation for many institutional investors -- it would have been nearly impossible to market the structured financial products at the heart of the crisis. Yet Team Obama suggests only that regulators reduce the agencies' favored role "wherever possible."

It's a revealing phrase, implying that there are situations when it's appropriate to rely on ratings from the big three instead of actually analyzing a potential investment. Can anyone name one? Probably not, which makes one wonder how the ratings-agency lobby could be so effective.

The truth is that the strongest defenders of this flawed system are mutual funds, state pension administrators and the federal regulators now managing the various bailout programs. Digging into the underlying assets in a pool of mortgages or judging the credit risk in a collection of auto loans is hard work. But putting taxpayer or investor money in something labeled "triple-A" is easy. Everyone is covered if the government's favorite credit raters have signed off.

The Obama plan also calls for regulators to "minimize" the ability of banks to use highly-rated securities to reduce their capital requirements when they have not actually reduced their risks. Minimize, not eliminate? Does the Treasury believe that some baseline level of fakery is acceptable in bank financial statements? To review, a critical ingredient in the meltdown was the Basel banking standards pushed by the Federal Reserve. Among other problems, Basel allowed Wall Street firms to claim that highly-rated mortgage-backed securities on their books were almost as good as cash as a capital standard.

The Obama plan does make plenty of vague suggestions, similar to those proposed by the rating agencies themselves, to improve oversight of the ratings process and better manage conflicts of interest. The Obama Treasury has even adopted the favorite public relations strategy of the ratings agency lobby: Blame the victim. "Market discipline broke down as investors relied excessively on credit rating agencies," says this week's Treasury reform white paper. After regulators spent decades explicitly demanding that banks and mutual funds hold securities rated by the big rating agencies, regulators now have the nerve to blame investors for paying attention to the ratings.

Even the Fed, which until recently would accept as collateral only securities that had been rated by S&P, Moody's or Fitch, has lately acknowledged the flaws in this approach. The New York Fed has anointed two more firms, DBRS and Realpoint, to judge the default risk of commercial mortgage-backed securities eligible for the Term Asset-Backed Securities Loan Facility (TALF). Since the passage of a 2006 law intended to promote competition, the SEC has also approved new firms to rate securities that money market funds and brokerages are required to hold.

But inviting more firms to become members of this exclusive club isn't the answer. As long as government requires investors to pay for a service, and then selects which businesses may provide it, it's unlikely investors will get their money's worth. History says it's more likely that investors who use the agencies' "investment-grade" ratings as a guide will be exposed to severe losses -- ask people who went long on Enron and WorldCom.

It's time to let markets decide how to judge creditworthiness. One lesson of the crisis is that the unregulated credit default swap (CDS) market provided a more accurate measurement of the risk of financial firms than the government's chosen ratings system. Apparently even the largest provider of these government-required ratings, S&P, has taken this lesson to heart. The company recently introduced a new "Market Derived Signals" model that incorporates the prices of CDS contracts "to create a measure that facilitates the interpretation of market information."

This looks like a signal that even the prime beneficiaries of a government policy believe that the policy failed. So why won't the Obama Administration embrace real reform?

http://online.wsj.com/article/SB124562476664835519.html

[Aliantha]

According to the OECD, Australia is in the best shape in the developed world financially, and they've put it down to the govt stimulus packages, along with fairly strict regulations on banking and investments.

My point is of course that it might be too soon to tell if the stimulus package put together by your govt will boost your economy due to its size.

[tw]

Quoted from The Mercenary's WSJ quote:

To review, a critical ingredient in the meltdown was the Basel banking standards pushed by the Federal Reserve. Among other problems, Basel allowed Wall Street firms to claim that highly-rated mortgage-backed securities on their books were almost as good as cash as a capital standard.

How conveniently they rewrite history. But then the WSJ that reports the news is into facts. The WSJ that has opinions can forget those facts. They are two separate organizations.

Basel did not *allow* Wall Street firms to run up a 30:1 ratio. Basel I (that the George Jr administration impeded) required banks to maintain equity. Meanwhile, Wall Street got exemptions from the George Jr administration and created new financial instruments (Credit Default obligations, SIVs, etc) to bypass regulations and Basel I. For example, AIG wrote insurance policies so complicated as to make them exempt from insurance regulation. Today we know what those loopholes created.

Basel II was designed to close those loopholes. But again, George Jr's administration refused to let Basel II be implemented. That WSJ opinion also forgets to mention that part. But then the opinion is about promoting a political agenda - and therefore forgets all the facts.

As any MBA or stock broker will tell us, profits (not servicing America) is the only purpose of business. Basel II would have diminished profits by protecting banking stabity. MBAs and their political extremist supporters feared responsible policies - even delayed or subverts Basel I & II. The opinion even conveniently forgets to mention both Basels.

Basel I did not *permit* those economic threats. Those threats were created to get around Basel I and other regulations. Basel II, that would have addressed those new financial instruments, was simply subverted by the George Jr administration ... so that Wall Street banks could run up 30 to 1 debt to equity ratios.