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Please read and comment on the entries that follow.  The most current one will be highlighted on this page; earlier entries can be found under the archives link below.


Raines on Budget and GSEs

May 05, 2010

Frank Raines, former Chair and CEO at Fannie Mae, was a guest on CNBC's Power Lunch on May 4, 2010. Check out the video.

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Dodd Slams Critics

April 15, 2010

Senate Banking Committee Chairman Chris Dodd (D-CT) went to the Senate floor yesterday to push back on Republican critics of his financial services reform package.  

Republican leaders, both on and off the Banking Committee, have criticized the bill as creating higher risks for future bailouts of large financial institutions.  This in spite of months’ long negotiations that Dodd led, first with Ranking Minority Member Richard Shelby (R-AL) and then with Sen. Bob Corker (R-TN).  These ultimately did not lead to the bipartisan bill that Dodd was hoping for.  But it wasn’t for lack of effort.

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Premium Value for TBTF Banks?

April 12, 2010

One of the big "ah-ha's" of the financial meltdown has been the raw fact that many institutions had grown so large that they were effectively covered by the same government backing as Fannie Mae, Freddie Mac and the Federal Home Loan Banks.  The key difference was that those specially chartered institutions were the object of regulatory and political controversy over their status, including sharp and reasonable questions about the value of the backing and who actually captured it, while large banks largely escaped such attention.  Indeed, some of the criticisms of the GSEs was fueled by the same very large banks through their support of FM Watch and other means.

Now researchers at the Federal Reserve Bank of Philadelphia and DePaul University have published a paper that concludes that very large banks gained tangible value from become "too big to fail (TBTF)" through mergers and acquisitions.  They further concluded that acquiring banks did not pass on the full value of this new premium to the shareholders of acquired institutions.

In examining data from bank acquisitions and mergers, the researchers concluded that, 

These advantages may include becoming TBTF and thus gaining favor with uninsured bank creditors and other market participants, operating with lower regulatory costs, and increasing the organization’s chances of receiving regulatory forbearance. We find that banking organizations are willing to pay an added premium for mergers that will put them over a TBTF threshold. This added premium amounted to an estimated $14 billion to $17 billion extra that eight banking organizations in our data set were willing to pay for acquisitions that enabled them to become TBTF (crossing the $100 billion book value of total assets threshold).

The study notes that the research only looked at the results of mergers and acquisitions during the study period, meaning earlier or later actions would have added to the overall TBTF value generated, leading to a larger estimate in the aggregate.  

The researchers note that, 

These estimates provide an aggregate measure of the benefits accruing to large banking organizations from exceeding a TBTF threshold and do not indicate the relative contribution of any particular regulatory advantage or individual policy. By themselves, our results do not point out which particular policy directions would be most effective in addressing the benefits that large banking organizations may obtain once they become TBTF. However, our estimates of the benefits from exceeding a TBTF threshold appear large enough to cause increasing concerns as the megamerger trend continues in the U.S. banking industry. These trends could hinder the efficient allocation of financial resources across different sizes of institutions and, in turn, their customers and the overall macro-economy.

The financial regulatory reform legislation now pending in the Senate, and as passed by the House, attempts to address the TBTF issue through new resolution authorities and other means.  

But lost in that debate is the intriguing question of where the newly acquired value of TBTF has gone and who has benefitted the most from it.  Was it the managers and executives of the acquiring firms who enjoyed large bonuses and stock awards based on their success as corporate predators?  Was it shareholders, depositors, consumers?  Given the rapacious track records of some of these banks through high fees and aggressive marketing, it seems clear that consumers don't seem to have been at the head of the pack.

We haven't seen the end of this trend as the researchers make clear, noting that,

Our findings lead us to be concerned and cautious as the number of assisted mergers between weak TBTF financial institutions continues to grow through the financial crisis that started in mid-2007, resulting in TBTF banking organizations becoming even bigger than before the beginning of the crisis. Furthermore, a few of the recent assisted mergers were between TBTF banks and nonbank financial institutions, thus extending the federal safety net related to TBTF to cover those outside the commercial banking system.

Should these large institutions be required to pay higher deposit insurance fees, or some other assessment to cover the government's implied support?  Are higher capital requirements in order to further insulate the government from the potential consequences of TBTF institutions' failures?

There seems to be emerging consensus that the future structure of secondary mortgage support should be restricted to the securities that make mortgage finance liquid and affordable for consumers, but not extended to institutions that might issue and service those mortgages.  Their capital, the argument goes, should be fully at risk and no investor should be left with the impression that the government will come to their rescue should things fall apart. 

Where is the consensus approach on what to do about the even larger institutions that have acquired semi-official GSE status through this crisis?

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Good for the Goose

April 04, 2010

Friday's New York Times carried an article about its readers' reactions to the recently announced changes to the Making Home Affordable mortgage modification program.  These include the following:

 

· Requiring participating servicers under HAMP to offer at least 3 months’ forebearance of mortgage debt for unemployed borrowers, and encouraging such assistance for up to 6 months.

· Requiring participating servicers to use principal reduction as a primary means of reducing borrowers’ payments where loans are more than 115 percent of the current home value.

· Offering borrowers that are current on their mortgages but with debts greater than their home’s current value the opportunity to refinance into a lower cost, long-term fixed rate mortgage insured through the FHA if the current lender will agree to reduce principal owed by at least 10 percent and the total combined debt including any second liens would be no greater than 115 percent after the refinancing.

· Requiring HAMP servicers to work with borrowers in bankruptcy on mortgage modifications, and waive the trial period for such modifications if consumers have been successfully performing under bankruptcy settlements.

· Increasing the incentives to get second lien holders to reduce their claims to facilitate modifications.

· Clarifying that HAMP servicers must suspend all foreclosure actions and notices for borrowers that have sought modifications or are in trial modification periods, and requiring a written certification that a borrower is not HAMP eligible before an attorney or trustee can conduct a foreclosure sale.

The gist of the Times article was that these further accommodations for distressed borrowers are unfair, especially to those borrowers that are making their payments and will not have a chance to lower their mortgage prinicpal.    As the author of the article noted,

All of the comments, however, went right to the heart of the criticism of all of the government’s bailout programs. After all, the aid for homeowners comes in the wake of bailouts for the banks and the American International Group, and then the auto industry. In every case, taxpayer money was on the line. So you can understand all of the anger about paying to fix problems not of their own making.

While there is a smattering of comments supporting the changes and expressing sympathy for their potential beneficiaries, most of the comments range from the mildly annoyed to the downright vituperative.

Interestingly, none that I saw made the slightest connection to the generous extension of tax credits for homebuyers to prop up the housing market and keep builders and other real estate professionals to these measures.  I'm guessing most of the commenters didn't get one of these, either.  And if they did, I suspect they took it gladly, although there's really little or no difference between the two transactions.  

As economist Simon Johnson and his collaborator James Kwok pointed out in an October, 2009 Washington Post opinion piece,

The main argument for the tax credit is that it stimulates the economy and stabilizes the housing market. Seen purely as a stimulus, the tax credit is highly inefficient. The National Association of Realtors claims that the credit created 350,000 new sales; the Calculated Risk blog calculates that this means the government is paying $43,000 for every extra house sold (since most sales would have happened anyway).According to the Wall Street Journal, Goldman Sachs estimates 200,000 new sales, implying a cost of $80,000 per marginal sale.

Even at a price of $43,000, what are we getting? Given that these are first-time home buyers, and given the glut of homes on the market, most of these are financial transactions where a house changes hands in exchange for cash (and additional transaction costs). The $43,000 is not being invested; it isn't buying anything for the public, like a new road. It's just cash going into people's pockets.

The fact is that the government subsidizes homeownership and plenty of other consumption through tax breaks and other means.  Pushing lenders to reduce principal on loans that are hopelessly underwater to help keep current owners in place is a much cheaper alternative than the abandonment and neglect that has been the legacy of so many home foreclosures.  

What's that they say about the goose and the gander?

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Mind Boggling Factoids

April 04, 2010

If, like me, you are intrigued by random statistics about technology, population growth, and comparisons among nations, you will enjoy this video from YouTube.

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