Bernanke forecasts Low Interest Rates

Ben S. Bernanke, the Federal Reserve chairman, signaled on Wednesday that he did not plan to begin raising interest rates anytime soon, saying the economic recovery would remain halting for months to come. In presenting the Fed’s semiannual monetary report to Congress, Mr. Bernanke did not waver from the Jan. 27 statement of the central bank’s key policy making board, or from a Feb. 10 statement in which he explained to Congress the strategies for gradually reducing the vast sums that banks hold in reserves at the Fed.

When the Fed raised the emergency loan rate for banks, panic and forecasts flew out the Wall Street windows, founts of knowledge that entirely missed the financial crisis. What do they know now? About as much, I'd have to say.

Look at that chart in the background: Net worth of US households - $17.5 trillion of wealth destroyed from July 2007 to March 2009 on the downward trajectory. The perpendicular green arrow indicates when the stimulus bill was signed, February 17, 2009. The upward trajectory indicates $5 trillion recovered since the stimulus. That leaves a net of 12.5 trillion dollars of wealth lost. Surely it is not yet time to raise interest rates and put a brake on the economic recovery. Wonder why those sages who forecast for Wall Street firms can not figure that one out.

While Mr. Bernanke did not change his outlook on interest rates or the economy, he did announce two significant steps to improve transparency and accountability of the Fed, after a period in which the central bank has faced considerable criticism. Significantly, Mr. Bernanke said that the Fed would “support legislation that would require the release” of the names of borrowers that used the extraordinary lending programs the Fed created in 2008 to prop up the markets for commercial paper, money market funds and even consumer loans. The Fed lent to investment banks for the first time and helped arrange the sale of the investment bank Bear Stearns and the rescues of the American International Group and Citigroup.

Not worth THAT much

Several Wall Street firms seeking to buy back warrants held by the government as part of the $700 billion financial bailout are complaining that the Treasury Department is demanding too high a price, according to people familiar with the matter.

Driving a hard bargain is not nice when they're on the short side, apparently.

The Treasury has rejected the vast majority of valuation proposals from banks, saying the firms are undervaluing what the warrants are worth, these people said. That has prompted complaints from some top executives. J.P. Morgan Chase & Co. Chief Executive James Dimon raised the issue directly with Treasury Secretary Timothy Geithner, disagreeing with some of the valuation methods that the government was using to value the warrants.

The inability to agree on a price has already prompted J.P. Morgan to take the next step in a complex process to remove the warrants from the hands of the government. The bank has waived its right to buy the warrants and will allow the Treasury to auction them in the public market, which bank executives say will result in an actual market price.

Let the market determine value. Seems reasonable.

The disagreement between banks and the Treasury indicates that the banking sector, despite being pilloried for its role in the financial crisis, is becoming increasingly confident in its dealings with Washington. Some banks have begun pushing back against some government initiatives, a move fraught with political risk.

AIG bonuses furor? One can imagine how it'll look when a source close to the Secretary speaks on background to reporters about the hardball tactics banks are playing, refusing to cooperate fully with the Treasury.

It also is an indication of how tricky it is going to be for the government to extricate itself from its unprecedented investment in the financial sector. The U.S. has flooded the financial sector with hundreds of billions of dollars, most of which is expected to eventually be repaid and, possibly, create a profit for taxpayers.

Possibly? It had better.

Some banks argue they shouldn't have to pay much, saying the government's investment was essentially a short-term loan they accepted under duress to help stabilize the financial sector.

Under duress? Quite a stretch to interpret it that way. It isn't as if the banks could have gotten through without being bailed out.

Others argue that the government shouldn't be draining bank capital at such a fragile time. At least one bank has argued it shouldn't have to pay the government anything at all.

Nice. Nothing at all? One wonders who that genius is.

But the Treasury is under pressure to extract as much money as possible for the warrants and avoid seeming to favor Wall Street over taxpayers. Lawmakers and the bailout's independent overseers have warned the Treasury against settling for too low a price and robbing taxpayers of a richer return.

The banks are tone-deaf, politically deaf, if they can't see the word robbery.

Treasury officials are cognizant that their actions will be highly scrutinized, with likely congressional hearings and reports, and are taking a firm line.

Geithner could not possibly allow a high-profile embarrassment to happen, by approving a low price.

While banks could bid on their own warrants through a public auction, some are reluctant to go that route since it could drive up the price for the warrants and let them out of their control.

And that's the point: they want to get their warrants on the cheap, not a market price: they do not want to buy their warrants in a market, but at an arranged, low price.

I.M.F. Puts Bank Losses From Global Financial Crisis at $4.1 Trillion

This number does not begin to cover over-all losses and monies pumped into economies to stimulate recovery.

I.M.F. Says Recovery Will Be Slow and Sluggish

Do they get it?

I doubt it.

Banks Ramp Up Foreclosures

J.P. Morgan, Wells Fargo and others are stepping up foreclosures on delinquent homeowners, a move that could further depress home prices.

Drug Makers, Hospitals Raise Prices

Drug companies and hospitals are raising prices despite the economic slump and pressure to rein in health care costs.

Wall Street Still Finds Ways to Hire Foreigners

Some big U.S. banks are getting around TARP restrictions on the hiring of foreign workers by placing recruits in overseas offices.

TARP Cop

Recession Job Losses Top 4 Million is today's headline. The government has poured trillions of dollars into stabilizing the financial system, trying to stave off an economic calamity. Part of that is attempting to steady banks by giving them capital. It is essential that credit markets work again. The Troubled Assets Relief Program, a bumbling piece of legislation that Bush and Paulson left the nation saddled with, is a 700 billion dollar rescue package. 700 billion is a lot of money, a lot of taxpayer money, and the government has a right, and an obligation, to make sure it is spent prudently and wisely. The first part of $350 billion disappeared into a banking black hole.

Neil Barofsky, the man overseeing the $700 billion bailout, is armed with broad authority, including the right to carry a handgun and the power to subpoena. As special inspector general for the Troubled Asset Relief Program, he is charged with tracking the bailout funds. In the process, Mr. Barofsky is ruffling feathers on Wall Street and in Washington, demanding access and information some aren't eager to provide.

The mentality that got us inot this mess has not changed much.

Lawyers at institutions that have received government aid are trying to figure out how much leeway they have to push back against Mr. Barofsky, say people familiar with the matter. Some government officials say they are concerned about Mr. Barofsky's aggressive approach.

Instead of being open and forthcoming, institutions that have received TARP funds are using lawyers to finesse it, to hide, to conceal.

Mr. Barofsky ... is a former prosecutor who has tackled white-collar crime and international drug traffickers. He keeps a wooden knife from Colombia as a reminder of just how violent crime can become. Now he can roam the halls of Wall Street almost unfettered. His powers, granted by Congress last fall, give him the right to investigate and audit "the purchase, management and sale of assets under TARP."

His mission is clear, unequivocal: investigate and audit TARP funds.

He takes his mission seriously and views his mandate broadly. In an interview, Mr. Barofsky says his office has "the right to investigate and audit any TARP dollar, anywhere it goes" and to go after any type of TARP-related fraud.

It is good, for a change, that the government is the party with the hard-charging, focused, aggressive lawyer.

The position carries greater reach and independence than the other two "special" inspector generals overseeing the Iraq and Afghanistan reconstructions. Those officials answer to the secretaries of state and defense, while Mr. Barofsky answers directly to Congress.

Good charter. Intention seems quite clear.

Some within the government worry Mr. Barofsky's approach is scaring away participation in the government's rescue programs, rendering them less effective. Government officials say they saw a spike in banks withdrawing TARP applications after Mr. Barofsky said he would require documentation on how they are using the funds. Some of that spike could be due to congressional rumblings about stricter oversight.

Want the money? Answer questions, and be (o, that word) transparent.

Some hedge funds are leery about the Fed's lending facility because of the heightened scrutiny that would result, a condition included at the behest of Mr. Barofsky.

Lack of accountability and clarity are exactly the reasons why we are in this mess.

Mr. Barofsky says his purpose is to make sure taxpayer money is spent the way Congress intended, and to go after anyone, inside or outside government, who misuses the funds. "Members of Congress told me repeatedly that they want me to be the person who goes after the people who want to steal," he says.

Amen.

Congress is moving to head off any challenges to his authority. Legislation passed by the Senate, soon to be considered by the House, would codify Mr. Barofsky's authority to peer into any firm benefiting from TARP dollars.

As if it were not already crystal clear.

The Rant List

March 5, 2009 -Op-Ed Columnist

The Rant List

By Gail Collins

I am having a tough time dealing with news that the former president of Countrywide Financial, the mortgage company that did so much to dig the hole in which we all now reside, is making a killing buying up delinquent mortgage loans from the government at bargain basement rates.

“It’s like Jeffrey Dahmer selling body parts to a clinic,” sniped one of my friends.

As Eric Lipton reported in The Times, Stanford Kurland, who was president of Countrywide during the years when it was selling mortgages with temporary low “teaser” rates that later turned into permanent unaffordable ones, now leads Private National Mortgage Acceptance Company, known to its friends as PennyMac.

In what one company official said was “off-the-charts good” business, PennyMac buys troubled mortgages from the government (which got them from failed banks) at rates like 38 cents on the dollar. Then it offers the beleaguered homeowners a chance to refinance at far more favorable terms. PennyMac makes money, the homeowner gets an affordable mortgage and the government gets a share of the profit.

Everybody’s happy! Except, of course, those of us who helped come up with the other 62 cents on the dollar.

Once again, we are reminded that life is not fair. Lately these unfairness bulletins have been coming so fast and furious that there isn’t time to get upset about all of them. Prioritization is essential.

Given the competition, I can’t get all that worked up about defaulting homeowners who are looking to the government for a rescue. True, a lot of them got in over their heads betting that housing prices would rise forever. But when it comes to stupid financial decisions to vent about, I’m sticking with Alan Greenspan.

Clearly, not everybody agrees. In Congress, warnings about “rewarding those who acted irresponsibly” have bogged down a bill that would allow federal judges to reduce mortgage debt as part of a bankruptcy settlement. A watered-down version is finally coming up for a vote on Thursday in the House. From there it goes to the Senate, whose capacity for watering things down is second only to Category 5 hurricanes.

Earlier efforts by the White House to come to the aid of the hopelessly indebted homeowners sparked the now world-famous unfairness explosion by the CNBC reporter Rick Santelli. “How many of you people want to pay for your neighbors’ mortgage that has an extra bathroom and can’t pay their bills?” howled Santelli, in one really impressive display of righteous wrath and misplaced modifiers.

He got a ton of publicity for his tirade, a reward that was pretty unfair in and of itself. As a Chicagoan, he was even mentioned very, very briefly as a possible replacement for Senator Roland Burris of Illinois.

Although Burris isn’t leaving. While we’re talking unfair, can we point out that Burris, who clearly misled people about what he did to pry the Senate seat out of Rod Blagojevich’s hot little hands, is never going to give it back. Illinois officials can yell all they want. A guy who has already erected his own mausoleum with a list of achievements running down two sides of it is not going to let anybody add “resigned from the U.S. Senate in disgrace” after “President of the National Association of State Auditors, Comptrollers and Treasurers.”

And can we also mention that Blagojevich has gotten a book deal? True, only six figures, but much better than his other offer, an $800-a-month contract to play baseball for the Joliet JackHammers. Have you ever listened to Blagojevich talk? Do you think anybody’s going to want to read a whole book? Phoenix Books, why are you encouraging this person?

When I walked into work on Wednesday, the big unfairness issue people were talking about was not Countrywide, or Illinois pols, but the finale of “The Bachelor,” when the guy who had just picked his lifetime love on national television returned to the airwaves to dump her for the woman who came in second.

“I had to hurt people in a way, but I feel I did it with integrity,” said the bachelor in question, whose name is Jason Mesnick.

The big objection to Mesnick’s behavior is not the dumping but the fact that he waited until everybody had gathered together for a follow-up special to break the news to his about-to-be-ex fiancée. Mesnick told People magazine that he would have preferred to spare the poor woman the humiliation of being rejected in prime time, but the producers wouldn’t allow it. “That was part of the deal,” he said.

Unfair, but not making my Top 10. A woman who volunteers to find true love on a reality TV show is really uniquely qualified to get past this sort of trauma. Plus, at least Mesnick made good on his contract. Not enough of that going around these days.

Ex-Leaders of Countrywide Profit From Bad Loans

Some things are just distasteful.

Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering.So it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess.

This is one.

As hundreds of billions of dollars flow from Washington to jump-start the nation’s staggering banks, automakers and other industries, a new economy is emerging of businesses that hope to make money from the various government programs that make up the largest economic rescue in history.

I wonder if they think this is socialism.

But to some, it is disturbing to see former Countrywide executives in the industry again. “It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it,” said Margot Saunders, a lawyer with the National Consumer Law Center, which for years has sought to place limits on what it calls abusive lending practices by Countrywide and other companies.

Distasteful. But it's capitalism, even if its uglier side.

Mr. Kurland acknowledges pushing Countrywide into the type of higher-risk loans that have since, in large numbers, gone into default. But he said that he always insisted that the loans go only to borrowers who could afford to repay them. He also said that Countrywide’s riskiest lending took place after he left the company, in late 2006, after what he said was an internal conflict with Mr. Mozilo and other executives, whom he blames for loosening loan standards.

Not my fault; the other guys did it.

“Kurland is seeking to capitalize on a situation that was a product of his own creation,” said Blair A. Nicholas, a lawyer representing retired Arkansas teachers who are also suing Mr. Kurland and other former Countrywide executives. “It is tragic and ironic. But then again, greed is a growth industry.”

Amen.

PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.

That is how some of the economic problems are going to get fixed.

Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.

$56o face value for $43.2 in cash: a $516.8 million discount. 7.7 cents on the dollar; the other 31 cents must be for additional costs and fees. Still: 62 cents off the dollar; if the bank recovers a dime, it is all profit.

Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.

Well, that's good, that the government will get something.

Spending More Than $800 Billion Is the Easy Part

Last night, on ABC News, Paul Krugman and George Will were interviewed, discussing the idea of whether the Stimulus Package is large enough, or too large. George Will quoted Secretary of the Treasury Mongenthau, FDR's Secretary, to the effect that all the stimulating did not lift the economy. Yes, 70 years ago.

“There’s a real danger in looking at Japan, or even our own experience during the 1930s, for what works or doesn’t work,” said Jeffrey E. Garten, a professor at the Yale School of Management who helped develop the Clinton administration’s economic strategies for Asia.

Does analyzing what happened 20 years, or 70 years, ago help?

“Those problems arose at a different moment in the history of the global economy, when banks around the world were not so intertwined and when the financial sector wasn’t so critical to global growth,” Mr. Garten said. Japan’s troubles, he said, barely affected international trade.

“The challenge is a political one: with the government putting a lot of funds into the banking system, Congress wants to see results, tangible results,” said Laurence H. Meyer, who served on the Federal Reserve from 1996 to 2002 and is vice chairman of Macroeconomic Advisers.

“But you don’t want the government in the position of deciding on loans,” he said, “because they are not going to be any better at that than the private sector was last year.” Moreover, once the government is involved in the decision there will be enormous pressure to lend to borrowers who might not be creditworthy, perpetuating the problem that triggered the problem.

“The fact is,” Mr. Meyer said, “there are a lot fewer creditworthy borrowers now than there were a year ago,” thanks to job losses and the erosion of assets.

Mr. Meyer and other economists, however, say they are encouraged by the Obama administration’s exploration of ways to draw private investors back into the market for “toxic assets.” If the price of those assets drops low enough, and the government is willing to guarantee investors against losses, “I think there is a lot of money on the sidelines that may come in to buy these up,” Mr. Meyer said. “There’s a great profit opportunity here.”

How bad is it?

January 21, 2009, 4:00 pm - Should Obama Seize Citigroup?
By Eric Etheridge (New York Times, 21 January 2009)

This is probably not a news story that a new president wants to read on his first full day in office. Bloomberg.com reports: U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis."

Roubini got it right; back in 2005 he rained on Greenspan's parade, and even Summers criticized his conclusions. He can not be dismissed.

Last week’s bad news from Citigroup and Bank of America had already prompted a round-robin discussion in the blogosphere on the wisdom of nationalization. With tongue somewhat in cheek, John Quiggin blogged at Crooked Timber on Monday:

All reasonable commentators now agree that nationalisation of big banks like Citigroup, Bank of America and Royal Bank of Scotland must take place soon, explicitly or otherwise. As I said at just before the second (failed) Citigroup bailout, banks like Citi are not only too big to fail, they’re too big to rescue with any of the half-measures that have been tried so far.

Why didn't TARP get used to buy troubled assets? Thank goodness Hank Paulson is gone from Treasury.

Others were wary of this solution: At his New Yorker blog, The Balance Sheet, James Surowiecki wrote the same day, “I think that as the ‘nationalize now’ meme has taken hold in the blogosphere, people are talking about nationalization ‘awfully casually.’ . . . [T]he idea that most of Barack Obama’s Presidency will be spent presiding over a government-run banking system is a daunting thought.”

Nationalizing banks would be a bear (pun intended).

And at Marginal Revolution, Tyler Cowen listed his concerns about how a nationalization strategy would play out:

How many years of profits are needed to create the cushion of capital which is required for re-privatization? And how many years of government ownership will be needed to generate that many years of profits? Will banks owned by the government be allowed to pursue profits, rather than lending to troubled industries in the districts of influential Congressmen? Or will government just stick money in the bank and hope they have thereby created a sound enterprise?

The idea of nationalized banks is enough to make one shudder. The idea of banks not being nationalized makes one shudder.

Quiggin’s argument is that current rescue efforts — especially including leaving current bank managers in place — simply won’t work. Blogging today in response to Surowiecki and others, Quiggin writes:

Financial restructuring is going to be a huge challenge, involving both a radical redesign of national regulations and the construction of an almost completely new global financial architecture. To attempt this task while leaving the banks under the control of discredited managers nominally responsible to shareholders whose equity has, in the absence of massive transfers from taxpayers, been wiped out by bad debts, seems like doing live electrical work while wearing a blindfold and standing in a pool of water.

He has no doubts, does he?

In Britain, where the banks and the pound are collapsing, and the government announced its new, just-short-of-nationalization rescue plan on Monday, Financial Times blogger Willem Buiter is leading the charge for going all the way.

Yesterday he laid out his thinking in a long post, which began with a comparison of the recent banking excesses in Iceland and the U.K.:

Both countries allowed the unbridled growth of banks that became too large to fail. In the case of Iceland, the banks also became too large to rescue. In the UK, the jury is still out on the ‘too large to rescue’ issue, but I have serious and growing concerns. Incrementally, the British authorities have guaranteed or insured ever-growing shares of the balance sheets of the UK banks. And these balance sheets are massive. RBS, at the end of June 2008 had a balance sheet of just under two trillion pounds. The pro forma figure ws £1,730 bn, the statutory figure £1,948 (don’t ask). For reference, UK GDP is around £1,500 bn. Equity was £67 bn pro forma and £ 104bn statutory, respectively, giving leverage ratios of 25.8 (pro forma) and 18.7 (statutory), respectively.

With a 25 percent leverage ratio, a four percent decline in the value of your assets wipes out your equity. What were they thinking? The fact that Deutsche Bank used to have a leverage ratio of 40 and is now proud to have brought it down to just below 34 is really not a good excuse.

Look at this figures:

RBS, at the end of June 2008 had a balance sheet of just under two trillion pounds. The pro forma figure ws £1,730 bn, the statutory figure £1,948 (don’t ask). For reference, UK GDP is around £1,500 bn. Equity was £67 bn pro forma and £ 104bn statutory, respectively, giving leverage ratios of 25.8 (pro forma) and 18.7 (statutory), respectively.

With a 25 percent leverage ratio, a four percent decline in the value of your assets wipes out your equity. What were they thinking? The fact that Deutsche Bank used to have a leverage ratio of 40 and is now proud to have brought it down to just below 34 is really not a good excuse.

RBS has a bigger balance sheet than the UK's GDP? With a 25 percent leverage ratio, a four percent decline in the value of your assets wipes out your equity. Amazing.

Buiter goes on to argue that the near-nationalization rescue plans will only make things worse:

In the name of preventing a collapse of the UK banking system, we are witnessing the socialisation — at first gradual, but now quite rapid — of all balance sheet risk of the UK banks by the UK government. This is risky and, in my view, unwise. The manner in which it is done also seems designed to maximise moral hazard. The good news is that it is unnecessary for restoring and maintaining the flow of new credit in the the British economy. . .

Socialization, er, socialisation of bank balance sheet risk.

My belief that the UK government should take over all UK high street banks (on a temporary basis) is based on the simplification this would provide as regards the governance of these institutions under extreme circumstances, when private ownership and governance have clearly failed, and on its positive effect on incentives for future bank behaviour (’moral hazard). When the public interest and the interests of the existing private shareholders and the incumbent managers and boards of directors diverge as manifestly as they do in this crisis, the sensible thing to do is to buy out the existing shareholders (as cheaply as possible). That way the failed and failing management and boards can be restructured (fired without golden parachutes) and the new owner can insist on and enforce an open, verifiable valuation of toxic and dodgy assets, on and off the balance sheet of the bank.

That makes sense.

He then lays out his four-point plan:

(1) Take into complete state ownership all UK high street banks. This has to be mandatory, even for the banks that still like to think of themselves as solvent.

(2) Fire the existing top management and boards, without golden or even leaden parachutes, except those hired/appointed since September 2007.

(3) Don’t issue any more guarantees on or insurance for existing assets - regardless of whether they are toxic, dodgy or merely doubtful. Issue guarantees/insurance only on new lending, new securities issues etc. A simple rule: guarantee the new flows, not the old stocks. This will reduce the exposure of the government to credit risk without affecting the incentives for new lending.

(4) Transfer all toxic assets and dodgy assets from the balance sheets of the now state-owned banks (or from wherever they may have been parked by these banks) to a new ‘bad bank’. If possible, pay nothing for these toxic and dodgy assets. Since the state owns both the high-street banks (I won’t call them ‘good’ banks) and the bad bank, the valuation does not matter.

Back in the States, watching Tim Geithner’s confirmation hearing today, Kevin Drum seizes on this remark by the soon-to-be Treasury Secretary:

The tragic history of financial crises is a history of failures by governments to act with the speed and force commensurate with the severity of the crisis. If our policy response is tentative and incrementalist … then we risk greater damage to living standards, to the economy’s productive potential, and to the fabric of our financial system … In a crisis of this magnitude, the most prudent course is the most forceful course.

Well, I barely understand some of what the professor is saying, but how can we go ahead ignoring existing assets whether they are toxic, dodgy or merely doubtful? What happens to them? Creating a bank to assume bad assets is a good idea, indeed. What are "high-street banks", I wonder?

Drum’s conclusion?

Nationalization fans should rejoice at hearing this. More and more, that includes me, by the way. The news out of Britain is beyond grim right now, and [throughout] this financial crisis the U.S. has never been more than a couple of months behind the UK. If that stays the case, nationalization of at least a couple of big banks will hardly even be a debatable option a few weeks from now.