Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1216 | 17 | 1.42% |
| Eurostoxx Index | 2230.7 | 27.740 | 1.26% |
| Oil (WTI) | 96.7 | 2.820 | 3.00% |
| LIBOR | 0.5698 | 0.003 | 0.49% |
| US Dollar Index (DXY) | 79.716 | -0.634 | -0.79% |
| 10 Year Govt Bond Yield | 1.86% | 0.05% |
Housing starts were better than expected at 685k, which more or less matches the post-recession high of 687k. Trouble is, a normal number is closer to 1500, and these “highs” are lower than the troughs in the last 8 recessions. So, yes it shows that housing is maybe, conceivably, hopefully picking itself up off the mat, but we are still in a deep freeze.
Joe Nocera is back on the revisionist history beat with an editorial claiming that Fannie and Fred didn’t have a role in the crisis. I propose that all liberal columnists who write columns defending Fannie address the American Dream Commitment, which was a $ 2 trillion piece of social engineering policy that has been thoroughly swept under the rug. Just because the media refuses to address it doesn’t mean it didn’t exist.
Filed under: Uncategorized |
All Things in Moderation 
Brent, isn't it true that FanFred did not enter the subprime market until 2005?Please explain. You suggested that I needed to know about ADC before, but when I looked, I did not see that FanFred had entered the subprime market to a great extent until 2005.I really do want to understand this.
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Following up, I earlier found this:Highlights of Fannie Mae's 2002 American Dream Commitment report include:Fannie Mae provided over $1.3 trillion for nearly 12 million families since 2000, including:$670 billion for almost 5.5 million families in 2002$67 billion for households headed by women$190 billion for families in city neighborhoodsFannie Mae met its voluntary commitment to lead the market in serving minority Americans. Last year, the company provided $136 billion for almost 1 million minority families, which:served 213,000 African-American families with $24 billion in financing;served 394,000 Hispanic families with $51 billion in financing;served 2,488 Native Americans living on tribal and trust lands with more than $217 million in financing;served 375,000 other minorities with $61 billion in financing; andled to Fannie Mae partnering with lenders and community groups to finance $8.2 billion through our efforts to facilitate Community Reinvestment Act-targeted business.****************But I found nothing that said these loans were bundled til 2005 and nothing that said the default rate on these loans was very high.Were these loans ever at the heart of the matter? Do you have a link?
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From the article:Fannie and Freddie got into subprime mortgages, with great trepidation, only in 2005 and 2006, and only because they were losing so much market share to Wall Street…The reality is that Fannie and Freddie followed the private sector off the cliff instead of the other way around.For the moment, let's pretend Nocera is correct. What we then have are two outfits whose leaders made bad decisions and regarding their subprime exposure. And, it is alleged, they lied about it to Congress. Those accused will have their day in court. Meanwhile, others make money off the story. This column appears to be part of a feud between Nocera and AEI's Peter Wallison. At this point it looks like Nocera wants to pad his rep and his wallet by publicizing it. Even if he's right, and I'm not saying he is, he makes himself small by writing stuff like this for public consumption.
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Paul Krugman commenting on an Op-Ed by Bill Gross:Gross ConfusionThe ugly side of ultra-cheap moneyA question/observation for the financial types here:I believe that Krugman is missing Gross's point which is that when you have the Federal Reserve push down interest rates to this low level, you actually suppress lending because at that "price" for money, only the absolute best credit risks are viable to lend to. I.e. in what may be termed a "paradox of interest rates" you may actually see more lending if rates were higher because the interest rates being charged would be more in synch with the perceived risk of the lending.Anyway, I'm mostly interested in knowing if you guys read the articles the same way.
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That PR also addresses non-traditional (read subprime) financing for people with low credit scores. In 2002. So I doubt the "Fannie didn't get into the subprime business until 2005" argument. But even if it is true, so what? The real estate market didn't peak until June 2007, two years later.You have to separate the two Fannies – the "securitization" fannie which securitizes pools of conforming (ie low-risk) mortgages and "hedge fund" fannie. The ADC addressed "hedge fund fannie"They didn't bundle and securitize these loans. They kept them for their balance sheet. And yes, the default rates on these loans are high – the FHA has been trying to move this merchandise by offering pools to the street for years. Further, the CBO has estimated the cost of the bailout will be $400B and some estimates have that number at $1 trillion. http://www.cnbc.com/id/37982580/Fannie_Freddie_Bailout_Could_Cost_Taxpayers_1_TrillionBy definition, that means a tremendous amount of defaults. Also, don't forget that Fannie Mae hasn't been able to issue audited financials since the early 00s. I think they originally announced accounting problems in 2004 or so. So who knows what the balance sheet really looks like? Financial entities who have accounting problems have bad asset problems. Almost by definition. I am not saying that the whole crisis was due to Fannie – a lot of jokers decided to piggy-back on Fannie's "cover bid" in the market. But check out the press release – it is a joint PR with Fannie and also Countrywide, Bank of America, JP Morgan, Doral, etc. These guys were partners with Fannie. Since Fannie couldn't originate subprime themselves, they told these "banksters" to originate these loans and they would purchase the loans from them. They did an end-around their charter. Fannie's balance sheet was originally intended to help stabilize markets, not to speculate. All I am saying is that a $2 trillion social engineering commitment ought to be discussed openly, not swept under the rug.
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"All I am saying is that a $2 trillion social engineering commitment ought to be discussed openly, not swept under the rug."Got it.********************On Krugman and Gross – outside the world of finance, in business, we think of borrowing at low interest as a way to invest in more productive assets or labor. So we think cheap money is good for growth. Inside the world of finance there is nothing to keep a banker from lending to a business at 5%, unless that business can get better terms somewhere else. So I think Gross is very "inside". And thus I do not think the effect he champions could be widespread.But I want to hear from john, Brent, and Scott, too.
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Today's Washington Post Editorial:Taken for a ride on commuting costs"At issue is a program started in the ’90s that allows workers through their employers’ benefits packages to set aside money before taxes to help offset the cost of their commutes. The amount has changed year to year, but for reasons that simply make no sense (we’re pretty sure politics were at play), workers who parked were able to set aside roughly twice as much as commuters who used public transportation. The 2009 stimulus package brought much-needed parity, allowing $230 to be set aside each month for both parking and transit. Without congressional action, though, the transit benefit on Jan. 1 will drop to $125 a month, while the parking rate will increase to $240 a month."Yet another tax exempt pot of money provided it is structured as an employer provided benefit. Sigh.
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Mark – for you:Made in Texas: Apple's A5 iPhone chip
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jnc:i.e. in what may be termed a "paradox of interest rates" you may actually see more lending if rates were higher because the interest rates being charged would be more in synch with the perceived risk of the lending.Krugman's point seems to be that there is nothing about the Fed's 0% policy that stops lenders from charging rates that are, to use your words, more in sycnh with their perceived risk of lending. The only thing that would prevent them from doing so would be competition, ie if borrowers could get better (read lower) rates elsewhere. And if that is the case, then by definition lending is not being restricted at lower rates.As you surely know, I am no fan of Krugman, but his counter to Gross makes sense to me.
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john…Hope you went short yesterday. It may have been your best chance.
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Re Gross vs Krugman:I think what he is saying is that when the risk-free rate is zero the traditional credit spread is not enough to compensate investors for the risk they are taking. A bond that traded 500 basis points over Treasuries might be an acceptable risk with the 10 year at 5% – the investor is getting 10%. If the 10 year is at 1.8%, then a 6.8% yield may not be enough. The other point he is making is that the risk a bond investor faces is both credit risk and duration risk. Duration risk is due to interest rate movements, and when interest rates are at the lower bound (and long-term rates are being influenced by QE), then investors are going to be reluctant to lend money at extended maturities. Krugman's model doesn't address duration risk. Krugman is an academic, not an investor. Gross is an investor, not an academic. Krugman thinks credit spreads should just expand in order to compensate investors for taking risk. He doesn't understand the incentives that motivate money managers. Gross looks at an investment, sees a terrible risk / reward, and decides to stay in cash. That partially explains why mortgage rates are at all time lows, but it is almost impossible to take advantage of them. The point Gross doesn't mention but is an issue is what is going on with pension funds. They are facing real issues with healthcare costs increasing at mid/high single digits and treasuries paying under 2%. It is causing real headaches for them.
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"As you surely know, I am no fan of Krugman, but his counter to Gross makes sense to me."I was mostly thinking in terms of mortgage rates. I.e. lowest rates since they have been recorded, but no one qualifies. However, that "market" may be too screwed up currently to be considered representative.
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Latest Matt Taibbi on Pretend and Extend and the lack of enforcement by the Obama administration. Nothing new, but worth a minute of your time nonetheless:Obama and the Rule of LawThe article he references is here:Obama and Geithner: Government, Enron-style
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jnc, the huge, multi-national Apple v. Samsung lawsuit has been THE big topic of conversation in Silicon Hills [Austin] for months. How they can continue to be "partners" is beyond all ken.
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I was listening to Bloomberg on the way into work the other day Tom Keene was talking with ex-SEC Chairman Arthur Levitt. He agreed that the SEC should be settling these weak cases. His point re indictments was that the consequences of the SEC going to court and losing a case are not zero, and could formally "permit" some behavior that was on the borderline of legal and illegal. Maybe Mark could weigh in on this..
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"I was listening to Bloomberg on the way into work the other day Tom Keene was talking with ex-SEC Chairman Arthur Levitt. He agreed that the SEC should be settling these weak cases. "I believe this is the key point in Jeff Connaughton's article on the Huffington Post:"Long silent and now contradictory, President Obama needs to deliver a clarifying speech about our financial markets and the rule of law. Speaking in Kansas on December 6, he said, "Too often, we've seen Wall Street firms violating major anti-fraud laws because the penalties are too weak and there's no price for being a repeat offender." Just five days later on 60 Minutes, he said, "Some of the least ethical behavior on Wall Street wasn't illegal." Which is it? Have there been no prosecutions because Wall Street acted legally (albeit unethically)? Or did Wall Street repeatedly violate major anti-fraud laws (and should thus find itself in the dock)?"President Obama should pick a narrative and stick with it.
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The only thing that would prevent them from doing so would be competition, ie if borrowers could get better (read lower) rates elsewhere. There's nothing that prevents lenders from charging different interest rates on loans in order to price in risk, is there?
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"There's nothing that prevents lenders from charging different interest rates on loans in order to price in risk, is there? "Regulations. See "Fair Lending Act", etc.
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Brent:Gross looks at an investment, sees a terrible risk / reward, and decides to stay in cash. That partially explains why mortgage rates are at all time lows, but it is almost impossible to take advantage of them.This is true, and it makes sense, but I don't see how the fed policy of 0% rates can be seen to exacerbate this as Gross implies. Surely there is a rate at which the risk/reward does make sense to Gross, regardless of what fed policy is. Why can't he get that rate? Presumably because demand for his money at that rate is not there. And that demand isn't there either a) because it is being fulfilled at better rates or b) because potential borrowers cannot afford those higher rates. If a) is the case, then lending is not being restricted by the fed policy, and if b) is the case a tighter fed policy is not going to change it.The only way that I can see how the fed's policy might be impacting this equation would be the expectations of borrowers. That is, borrowers refuse to pay the rate which makes the risk/reward worthwhile to lenders simply because, as a reult of Fed rate policy, they expect to do better. If that is the case, then I can see how the fed policy may in fact have a dampening effect on lending/borrowing by creating a gap between borrowers' expectations and lenders' requirements.
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the huge, multi-national Apple v. Samsung lawsuit has been THE big topic of conversation in Silicon HillsSo, what's the consensus? I think patent lawsuits are crap, and I think most of them know they are crap. I suppose they continue to work together because of their respective sizes, but still . . .A patent on the idea of recognizing certain types of data, like phone numbers, in a web page and making them clickable? That shouldn't be patentable. I have an idea of a device that you type into and it does things. Patent! I have an idea that we should connect computers and have them talk to teach other. Patent! Everyone owes me money or must get off the Internet right now. Of course, I think (as a lay person) patent law, especially as regards software patents, is crazy. I don't think you should be able to patent software concepts, personally–just copyright code. Apple originally sued Windows for ripping them off (even though they both arguably ripped off the Xerox PARC project, it's unlikely that Microsoft would have produced Windows, or a Windowing/mouse-based interface without Apple proving the market). Still, Apple could have spent that money on producing the Newton a year earlier than they did and thus owning the PDA market from it's inception. Could have positioned itself to produce the iPhone 2 years earlier than it did, the iPod a year earlier, and so on and so forth. Patent law encourages patent trolling and patent battles over competing through innovation. It needs to change.All right. Off my soap box. Most of the folks in DC are technically illiterate and are being led around by the nose by special interests. We laugh at Ted Stevens characterization of the Internet as a series of tubes, but his understanding was probably better than a lot of folks in government, who mostly seem to want to pass laws to punish consumers and (supposedly) benefit content producers (but not the creatives, just the money people, mostly). Wait, did I just get back on that soap box? Well, since I'm here: the music industry and the motion picture industry are in the position of the musicians' union when the phonographic record was invented: fight the inevitable, do whatever we can to crush this nascent market or make it unusable, get the government to craft the law around our personal interests, etc. The same attempt was made with cassette recorders and video recorders, and failed, ultimately (though that battle went to the supreme court–most of whom, with their busy schedules, depended on their Betamaxes for any must-see television by the time their heard the case, much to the entertainment industry's chagrin). A similar attempt was made to hobble digital audio cassettes, and was successful, and killed that market (in part because it made older technologies, like traditional cassettes, more attractive in versatility and cost). But, all through the technology industry, patent law is used to stifle competition, while the movie and music industries agitate to create new laws to stifle competition of independent publishers, or innovative distribution channels like Netflix, etc. Often, the argument is that it's to protect the artist, but, of course, the legislation leaves the door wide open for publishers and distributers to screw the artist–so it's generally not the artist that's going to benefit from copyright protection. Which allows me to conclude my ramblings with a simple, basic assertion: it's all the lawyers faults. Thank you, and good day.
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jnc4p: Regulations. See "Fair Lending Act", etc.So then, you can't price risk into lending? Is there any way to do this? If there isn't, then it seems inevitable to me that there would be less lending when interest rates are low. But there has to be some form. How can my credit card charge me 24% interest for consumer credit, otherwise? I mean, they aren't really pricing risk, but still . . . you could price risk and just come up with a category of loan that is of a higher interest rate that your more free with. Otherwise payday loans would have to be discriminatory.
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Scott, I see your point. However, Gross is a market taker, just like anyone else. If there is someone out there willing to lend at a low rate (no matter how small) then that sets the price. IMO, there are forced investors (pension funds, insurance companies) who have to take what the market gives them. It creates an artificial market, and a thin one as well. Borrowers don't want to pay up to the market price because they look at the fake market and believe they deserve that rate too.
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Brent:Borrowers don't want to pay up to the market price because they look at the fake market and believe they deserve that rate too. Yeah, I can see this. It goes along with the expectations caveat in my last. And in that I can see Gross may have a legitimate point.
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Kevin:it's all the lawyers faults.Now this I can understand. Sort of makes everything that preceded kind of unnecessary, I think. 😉
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"He agreed that the SEC should be settling these weak cases. His point re indictments was that the consequences of the SEC going to court and losing a case are not zero, and could formally "permit" some behavior that was on the borderline of legal and illegal."*******************Three points: 1] when we say that "behavior is on the borderline", we usually mean that whether or not it was illegal depends on the circumstances, including what was in the mind of the accused.2] When a particular venue hears a lot of cases [IP cases in USDC-WDTX; SEC cases in USDC-SDNY] the reputations of the prosecutors, the proclivities of the judges, and the tendencies of the juries become known to the players.3] Thus, big P verdicts or zero verdicts determine how cases will settle down the line. In major tort cases in state court in TX there is often a tacit agreement to try one every now and then so that the trial bar [both sides] and the judges know what to expect from the juries in this type of case. That happened for asbestos in Austin, so these cases settle for five years at a time, then a case considered a good benchmark gets tried. So, yes, SEC is not willing to benchmark this case and neither is Citigroup, so it should stand as a settlement.
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ScottC: Sort of makes everything that preceded kind of unnecessary, I think. Yeah, I was just venting.
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Exactly how insane is this?"The Federal Reserve could release draft rules as soon as Tuesday governing how much extra capital the biggest U.S. banks must hold to fulfill requirements of the Dodd-Frank financial reform legislation. The draft rules will cover a broad range of Dodd-Frank requirements, including the so-called capital surcharge for systemically important financial institutions (SIFIs), along with leverage limits, liquidity requirements, and credit-exposure limits.The draft rules will not detail the actual surcharge levied on individual banks, however. Those levels await agreement on global rules being negotiated by bank regulators through the Basel banking committee. In addition, the charge will be based on asset levels in 2013. U.S. officials have pledged not to subject American institutions to more stringent requirements than those faced by global competitors. The Basel committee has already decided that SIFIs will be forced to hold anywhere from 1 percent to 3 percent additional capital, depending on the size of the bank holding company. This is in addition to higher capital levels that all banks must hold along with higher quality capital."We couldn't successfully enforce one set of rules, so our reaction is to create a parallel universe of rules for the SIFIs. That's certain to do three things1) all the enforcement actions that DO occur will be against the non-SIFIs2) the increased capital requirements will draw more money OUT of the economy, since they already comprise a huge amount of the banking assets of this country3)the affected institutions will try to become even bigger, because they have nothing to lose. They are already subject to the provisions, so it only makes sense for them to try to augment their bottom line through acquisitions that will have an immediately accretive effect.Am I missing something?
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Am I missing something?Naivete?
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Gee, no one has ever called me that before. LOL
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john:I think he was saying you lack naivete. So your record is still intact.
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scott:Do you agree with my analysis though?
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Seems right to me.
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Yes, I was saying you lack naivete, John. Although attributing the problems you point out to naivete is probably a bit generous. While, not nearly as knowledgeable on this topic as either of you gentlemen, your analysis seems spot on to me, John.
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When something seems so obvious, I always go back to 9th grade Algebra class, where I got bad marks because I got the right answer, but coudn't show my work!
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john:I remember getting kicked out of my algebra class one day because I was arguing with the teacher over having to show the fact that if you subtracted X from one side of the equation, you had to show that you subtracted it from the other side of the equation as well. I stubbornly refused to do so because it went without saying to me that if you did it to one side, you had to have done it to the other. How the hell else could you get it to work? Why the need to "show" this manifestly obvious step?I was difficult even when I was 13.
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Apparently, intuitive reasoning does not have as much value in school as it does in the world of finance.
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"They are already subject to the provisions, so it only makes sense for them to try to augment their bottom line through acquisitions that will have an immediately accretive effect."_________I think BAC cannot make any more acquisitions – they are up against the 25% cap on deposits. I think JPM and C are getting close to the cap.I don't think we are seeing that many acquisitions now because P/B ratios are relatively weak (the XLF is at .8) so they don't want to use stock for deals, and they need to hold on to their cash. But I do agree that increased capital requirements will cause a whole new round of de-leveraging.
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Good piece from the NYT about a problem that simply isn't going away with an improving economy."Cuts For The Retired"http://www.cnbc.com/id/45736447
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Brent:Thanks, more juggling needed then. New issuance I would say is out of the question too.
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