Morning Report – the Mod Squad 12-27-12

Vital Statistics:

Last Change Percent
S&P Futures 1416.2 2.7 0.19%
Eurostoxx Index 2665.1 16.6 0.62%
Oil (WTI) 91.18 0.2 0.22%
LIBOR 0.311 0.001 0.32%
US Dollar Index (DXY) 79.44 -0.182 -0.23%
10 Year Govt Bond Yield 1.77% 0.01%
RPX Composite Real Estate Index 192.3 0.5

Markets are quiet again as desks are understaffed both in Europe and the US. Initial Jobless Claims fell to 350k, back to the bottom end of our 350k – 390k range. Bonds and MBS are down small and continue to dismiss the possibility of a cliff-induced recession.

President Obama heads back to Washington to try and craft a deal to avert the fiscal cliff. The WH seems to have backed off its proposal to increase taxes at 400k and has moved back to 250k. It is looking more and more like we will go over the cliff on Jan 1 and then pass some sort of tax cut package soon thereafter.  Treasury informed Congress that we will hit the debt limit on Monday, but they can play some games to keep the government funded through Feb.

Of course, once we climb the fiscal cliff, we will go right into the battle of the debt ceiling. Moody’s has already fired a shot across the bow, saying that they expect the government to raise the limit, but they may downgrade the U.S.’s credit rating unless we get a decrease in the debt / GDP ratio.

Yesterday’s WSJ report on possible new initiatives to mitigate the effects of the housing bust have already been met with skepticism. The first plan involved allowing deeply underwater non-agency loans to refi into Fan and Fred loans.  James Pethokousis of the American Enterprise Institute points out that allowing the GSEs to refi underwater non-agency mortgages is a non-starter with virtually all Republicans and many Democrats as it shifts risk from the private sector to the public sector.  Plus, you have to get the originators on board, and they won’t make 125%+ LTV loans without some sort of safe harbor against buyback risk.

A second plan would further expand HAMP, by changing the definition of “in danger of imminent default” to include anyone who is has a LTV over 125%, even if they are current on their mortgage. Such a move would not require Congressional approval. The American Securitization Forum is against the idea, given that these loans are worth their weight in gold.  They are current, have above-market coupons, and have virtually no chance of being prepaid for years. If enacted, investors would take an income hit (although Treasury would pay them the coupon difference for 5 years), and would see a capital loss as well. My sense is that ASF’s argument will be met with very little sympathy in the Administration, although state and federal pension funds will be quietly making the same argument as well. Still another hurdle would be servicers, who would have to buy off on the idea that modding a current loan is somehow good for the investor.

28 Responses

  1. Insight into the fiscal cliff negotiations from WSJ: http://online.wsj.com/article/SB10001424127887324669104578203360526219682.html?mod=WSJ_Opinion_LEFTTopOpinion

    “By KARL ROVE

    President Barack Obama wasn’t in the Christmas spirit during recent discussions with Speaker John Boehner to avoid the fiscal cliff.

    According to a recent report in The Wall Street Journal, when Mr. Boehner asked what he would get for offering $800 billion in new tax revenues, the president responded, “You get nothing,” adding, “I get that for free.”

    One of the speaker’s aides, Brett Loper, asked the president’s legislative liaison, “Can you get back into the zone of where you were in July 2011?”—when Mr. Obama and Mr. Boehner were close to a large deal on revenues, spending and entitlements. The president’s man replied, “No, we were probably overextended then, and there’s no way we would do it now.”

    No wonder they are getting nowhere….

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  2. Brent:

    I have to say, that horse left the barn in 2011. Boehner is bargaining from a weaker point now and tried to use the Way Back Machine to go back in time. . . he needs to deal with the present.

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    • The mechanics of this particular incapacity to govern are publicly clear.

      1] The Senate has passed a bill to extend the tax cuts to those earning less than $250K, in taxable income, as I recall. This was BHO’s original position on taxes.

      2] Boehner wanted less in tax increases and more in spending cuts. BHO floated $400K and some modification to CPI calculations on SS OASB.

      3] Boehner attempted to establish “Plan B” – tax increases on T.I. over $1 million – blessed by the Norquist, as his bargaining position. His caucus said “no”.

      We all saw it in real time and the entire breakdown is due to the TEAsymps in the HoR coupled with the R caucus rule that does not allow the R Speaker to count on D votes to make a majority.

      It does not matter that enough Rs would vote for the Senate bill to pass it with D support, never mind “Plan B”. The modern Speaker is actually the majority leader of his party – I think this was true for Pelosi, as well, but I am willing to be corrected. This was not true for Sam Rayburn. He passed the 1st Civil Rights Act in the House in 1957 with R votes, when only TX, some TN, some NC, and some FL Ds in the “solid south” voted for it.

      Different internal rules, today, and a R Party in the HoR crippled by its TEAsymps, are the very singular cause of this logjam. Obviously, and publicly.

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      • How far the Dems have come from the days of Harry Truman.

        For those of you not yet fully committed to the “Obama is never to blame” camp, you may want to consider other possibilities, like that the President never had any desire to negotiate a real compromise between spending and taxes in the first place. The idea that the “TEAsymps” are the only ones unwilling to seek a serious deal is belied by Obama’s approach to talks with Boehner:

        At one point, according to notes taken by a participant, Mr. Boehner told the president, “I put $800 billion [in tax revenue] on the table. What do I get for that?”

        “You get nothing,” the president said. “I get that for free.”

        Committed leftists will of course praise Obama’s approach, but anyone who is seriously interested in seeing a compromise and looks for a President to be the leader of the nation rather than just his party will see this as the failure of national leadership that it, er, obviously and publicly is. Obama has made a decision not to make any serious attempts to reduce government spending. That decision has consequences. It is typical of the last 4 years, though, that the buck never seems to stop with Obama.

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  3. “The modern Speaker is actually the majority leader of his party – I think this was true for Pelosi, as well, but I am willing to be corrected.”

    A good reminder. I would say Pelosi did not have quite as disciplined a caucus – the blue dogs often did not vote the party line. There does not seem to be a subset of Repubs who occasionally cross the line to vote with Dems.

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  4. Just FYI to folks, I’m getting on a plane tomorrow and jetting off to MI to spend New Year’s with family, so I’ll have limited-to-no access to the intertubes. Y’all be “good” and I’ll catch up with you next Wednesday.

    Happy New Year’s!

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  5. Have fun Michi. I’ m putting my sister on a plane today and our daughter left yesterday to head back home. We’re still enjoying our one full week of vacation a year though.

    I haven’ t watched any news, I assume we’re going over the cliff.

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  6. Welcome Back, Scott

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    • Tks, Brent. Not sure how long I will last, but as I am sure you know, there is a lot of boredom in the office this time of year.

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  7. Looks like this is the last, best hope for a deal but I’m doubtful it would or could pass the house. They’re meeting this afternoon to explore this possibility.

    Scott, I don’t see how anyone could technically blame the President over Boehner, who simply cannot corral his members over any compromised deal. I can’t read Obama’s mind but it seems to me he’s made efforts to broker a deal and most libs believe he truly wants a “grand bargain”. The fact that Boehner can’t accept an increase in taxes even when Obama offers cuts to SS or Medicare says more about Republicans than Obama as far as I can tell.

    House Republicans expect Obama may offer to extend the Bush-era tax rates for incomes under $400,000, as he had done previously before negotiations blew up. The president had originally argued that any scaled-back deal should set that threshold at $250,000. Republicans still may insist that it be set at $500,000.

    In addition, Republicans would be granted an extension of the current estate tax, which is a 35 percent rate over a $5 million threshold. The president wants a 45 percent rate on a $3.5 million threshold but would likely be willing to bend, in part because congressional Democrats are skittish about his proposal.

    The deal would include an extension of unemployment benefits and various tax breaks for businesses and lower-income workers. In a concession to Republicans, it would not include the infrastructure funding that the president has requested to help stimulate economic growth. It would also allow the current payroll tax cut to expire, meaning that individuals would see larger withholdings in their paychecks.

    The deal would delay sequestration, which if left in place would result in roughly $1 trillion in spending cuts over the next decade. It would leave the debt ceiling issue unresolved. That would give Republicans hope of using future leverage to secure additional spending cuts and entitlement reforms. A top Obama administration official has insisted that they don’t view an unresolved debt ceiling fight as too generous a concession because, as a matter of principle, the president will not negotiate with Republicans over raising it down the road.

    http://www.huffingtonpost.com/2012/12/28/fiscal-cliff-obama_n_2375976.html

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    • lms:

      The fact that Boehner can’t accept an increase in taxes even when Obama offers cuts to SS or Medicare says more about Republicans than Obama as far as I can tell.

      What you call a “fact” doesn’t seem to actually be one. It actually seems to be an inversion of the facts. Again, from the article linked below:

      At one point, according to notes taken by a participant, Mr. Boehner told the president, “I put $800 billion [in tax revenue] on the table. What do I get for that?”

      “You get nothing,” the president said. “I get that for free.”

      BTW, I read your huffpo link, and I could not find a single mention of any actual spending cuts being offered by Obama.

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  8. Here’s some of the offer that Boehner turned down and then couldn’t even get his House members on board with a small increase for millionaires only. And second link is a comparison of Obama’s plan to Simpson-Bowles. I’m not particularly worried about going over the cliff, I just don’t think it’s fair to blame Obama for all failures of the House to act. I assume if he has a plan, it’s real and if someone were brave enough to put it to a vote or even negotiate in good faith, he wouldn’t just say, “hahaha, just kidding”, which seems to be what you’re implying.

    http://www.huffingtonpost.com/2012/12/17/obama-fiscal-cliff-offer_n_2319075.html

    http://www.americanprogress.org/issues/economy/news/2012/12/19/48545/president-obamas-latest-proposal-largely-mirrors-the-bipartisan-simpson-bowles-plan/

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    • lms:

      Here’s some of the offer that Boehner turned down…

      And here’s the offer that Obama turned down.

      I just don’t think it’s fair to blame Obama for all failures…

      I’m not blaming him for all failures. I am challenging the notion that this particular failure lies exclusively with “TEAsymps” and that Obama has played no part in the failure. Of course he did. If we go over, it will be an undeniable fact of reality that Obama thinks it is better (for him?, his party?, the economy?…that I don’t know for sure) to go over the cliff than to reach a deal amenable to the R’s as a whole. That is a judgement he will have made. Likewise the R’s with regard to a deal amenable to D’s.

      To declare that party A did all it could to reach an agreement, so blame for failure lies with party B is to say nothing more than simply “I agree with party A’s position and I disagree with party B’s position”. Framing it as the “fault” of party B is just a partisan talking point.

      I assume if he has a plan, it’s real and if someone were brave enough to put it to a vote or even negotiate in good faith, he wouldn’t just say, “hahaha, just kidding”…

      I don’t assume that at all. I think it is entirely possible, perhaps even probable, that Obama is not negotiating in good faith at all, because he thinks politically it is better for him and his party to be able to blame the R’s for the absence of a deal than it would be to reach a deal. And he may well be right about that.

      BTW, I am not concerned about the cliff either. I just wish that the spending cuts were even more draconian than they are and included the real problems, SS and Medicare.

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  9. Scott, passing over the blame game you want to play, you consider SS and Medicare (the systemic structure as opposed to rising health care costs generally) to be the problem? I’m especially intrigued if you characterize SS as major problem.

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  10. Scott, as to “blame game”: bwahahaha to your response.

    Well, kudos for at least citing a purportedly liberal source. I don’t think SS is part of the fiscal problem, unless you can prove otherwise, and you have belatedly thrown Medicaid into the equation. Plus, can you distinguish Medicare systemically from the overall rising health care costs? I think not. You’re really reaching here.

    From your last link: “And if we do not do more to contain health care costs, our commitments will become unsustainable.” Emphasis added. What do you have to offer that shows we should severely curtail this spending rather than address health care costs overall?

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  11. It was a typical statement I responded to.

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    • In all seriousness, Okie, how is it that when Mark says “a R Party in the HoR crippled by its TEAsymps, are the very singular cause of this logjam” he is not playing a “blame game” but when I say “I am challenging the notion that this particular failure lies exclusively with “TEAsymps” and that Obama has played no part in the failure” and that “Framing it as the “fault” of party B is just a partisan talking point,” I am playing a “blame game”?

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  12. Scott, the “blame game” aspect of my comment was not the most important. We all have different perspectives on it. What about the rest of your comment?

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    • okie:

      Scott, the “blame game” aspect of my comment was not the most important.

      It is to me. You were obviously taking a snide dig at me. If you really weren’t interested in remarking on the “blame game” you wouldn’t have. And given what my posts were actually responding to, I think the dig was wholly unjustified. And so I ask the question: why do you dismiss/diminish what I say as a “blame game” but not what Mark says?

      What about the rest of your comment?

      I’m not much inclined to bother if you aren’t willing to answer my above question.

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  13. I’m not much inclined to bother if you aren’t willing to answer my above question.

    Ditto if you are not willing to comment on the meat of my previous comment. Into the weeds we go!!! (Ring any bells?)

    Scott, all else aside, the best and happy holidays to you and your family.

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    • okie:

      Ditto if you are not willing to comment on the meat of my previous comment.

      I am more than willing too..indeed I want to. And to prove my good faith:

      What do you have to offer that shows we should severely curtail this spending rather than address health care costs overall?

      This spending is precisely one of the drivers of increasing health care costs, so curtailing the spending is a necessary condition to curtailing health care costs.

      Now your turn to show your good faith. Why did my comment deserve to be dismissed as playing a “blame game” while Mark’s did not?

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  14. Scott, I have to tend to other matters now but hope you have a response as to questions raised other than “blame game.” I’ll check back.

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  15. I know better than to speak for Mark or anyone else but the sense I got from Mark’s comment was that it was born out of frustration. As for me, I see movement toward compromise from Obama and even Pelosi, of all people, but very little movement toward Dems from the R controlled House. I don’t think questioning Obama’s apparent (to me anyway) intent to actually give R’s something they want in regards to either SS or Medicare is all that helpful either.

    Just my opinion here but it feels as though R’s have painted themselves into a corner by being so emphatically against raising taxes and by convincing their base that Obama’s a socialist or worse that they’ve lost any room to maneuver. I think the Tea Party has something to do with that personally.

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  16. In some ways I suppose, they’re all to blame and we’re all left to suffer the consequences.

    Example one: the fiscal cliff. After two months of absurd political posturing, the country is four days away from a wholly preventable economic body-blow that will stall a fragile recovery. The same dynamic that occurred last summer during the debt-ceiling fiasco is repeating itself. The failure to compromise on fiscal policy is eroding consumer confidence and slowing the economy just as growth begins to take hold.

    The problem is not that American companies and workers are uncompetitive. It is not that manufacturing jobs are flowing overseas. Those economic trends have largely played themselves out. It is a new dynamic: political deadlock handicapping our economy.

    Michelle Meyer, senior U. S. economist at Bank of America Merrill Lynch, said this week that “fiscal cliff” gamesmanship is a drag on the economy. Even if the cliff is averted in the next few days or weeks, Meyer estimated that the U.S. economy will grow by just 1 percent in the first quarter of 2013, a third of the 3.1 percent posted in the third quarter of 2012.

    “What’s been missing in this recovery has been confidence,” Meyer told the New York Times. “We’d see a healthy recovery if it weren’t for this uncertainty and the potential shock from Washington.”

    http://blogs.reuters.com/david-rohde/2012/12/28/a-year-when-government-failed-us/

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  17. R’s have painted themselves into a corner by being unable to advance their own unified proposal to address the fiscal cliff that can actually pass. Boehner looks as weak as Harry Reid did in the 2010 lame duck. For all intents and purposes, Boehner is the head of a coalition of two parties, not one.

    Having said that, I now consider President Obama’s preelection statements to the Des Moines Register about how he still wanted the deal he had been offering the Republicans of $2.5 in spending cuts to $1 in tax revenue to basically be a lie he told to get a somewhat influential endorsement prior to the election.

    The President is simply not honest in his statements about controlling government spending.

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  18. FWIW, I am skeptical of the argument that Republican posturing over the fiscal cliff is preventing the economy from accelerating into 3% GDP growth.

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