naked capitalism

Deep-fried beer invented in Texas Telegraph (hat tip reader Martin W)

Old star wallows in ’steam bath‘ BBC (hat tip reader John M)

Man Lost $1.4 Million Corot Painting After Boozing, Suit Says Bloomberg (hat tip reader Buzz Potamkin). There is a second story on this matter up, but this version is remarkably unclear (it may be revised by the time readers access it).

Mervyn Kinkead crosses Irish Sea in a bath BBC (hat tip reader John M)

‘Charitable’ Behavior Found in Bacteria Science Daily (hat tip reader John M)

Latest Attempt To Create Federal Journalism Shield Law May Carve Wikileaks Out Of The Protections TechDirt

Will Russia’s Bloggers Survive Censorship Push? Der Spiegel (hat tip Richard Smith)

Child’s Ordeal Shows Risks of Psychosis Drugs for Young New York Times. Separate but related: I’ve noticed a subset of people under 40 who have thinking patterns that I don’t see in my age cohort or people older than me, of a difficulty discriminating between what is important and what isn’t, and a tendency to look almost obsessively for information on a topic with no particular strategy at hand (there is a certain stage in information gathering when milling about is inevitable; you don’t know what you don’t know, but once you have learned a bit, most people start targeting their queries. These people seem unable to get past the milling about stage). I’m not sure if this is the result of excessive multitasking or meds, but I’ve seen a fair bit of this starting maybe 3 years ago.

Poll Suggests Unpopular Individual Mandate Hurts Health Care Reform’s Popularity Firedoglake

German military report: Peak oil could lead to collapse of democracy Raw Story (hat tip reader John D)

Women Are Dying Out On Wall Street Clusterstock (hat tip reader John D) and the longer form version, Casualties of the Crisis: Stress, Sexism and Layoffs Thin the Ranks of Women on Wall Street Fins (hat tip reader

SEC Probes Canceled Trades Wall Street Journal

Economy Avoids Recession Relapse as Data Can’t Get Much Worse Bloomberg. Reader Michael D hones in on the truly remarkable lead sentence: “The U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good” as “Amazing double speak and balls!!”

Germans show signs of taking the risk-averse route of Japan Financial Times

Hedge Fund Manager’s Secret Insider Trading Code: “How’s The Weather In Healthcare?” Clusterstock (hat tip reader Francois T). Get this:

A former hedge fund manager basically just bragged that he traded on inside information and doesn’t mind paying the SEC a fraction of his profits on said (alleged) insider trade.

A Dream House After All Mark Thoma. A defense of homeownership. Frankly, I’ve owned and rented. The hassle re renting is the landlord can get flaky on you. But if you have a stable and decent landlord, then the optionality of renting works in your favor, and the ease of exit is a huge plus (and let us not forget there are also such things as flaky, even batshit crazy, co-op and condo associations, a plague of urban “homeowners”). And my rental in Sydney was fantastic.

Antidote du jour:

Chris Whalen has a particularly tough-minded post at Reuters in which he explains why QE does little for the real economy (similar to the conclusions reached by the Bank of Japan regarding its own QE) and why its benefits for banks fade over time. Key sections:

When interest rates are low, savers move their preference for liquidity to infinity, especially after the past several years of market breakdown. Retirees spend less because the interest earned on bonds and savings has plummeted….

When the Fed buys securities through QE, it is removing duration from the markets, pushing down yields and volatility. For a while this boosts the net interest margin (NIM) of leveraged investors such as banks, who are able to borrow at lower rates to fund current assets. As assets re-price to the low rates maintained by the Fed, however, NIM begins to disappear. Over the medium to longer term, think of duration and NIM as being linked, so obviously a sustained period of QE is bad for NIM. This is why NIM in the U.S. banking sector is starting to fall.

Just as the earnings of leveraged investors like banks are starting to suffer due to zero rate policy, so too the spending by all manner of savers, from retirees to companies and not-for-profits to municipalities, is falling too. Fed Chairman Bernanke and the other members of the FOMC are killing the real economy to save the banks — but none of the benefit flowing to the banks is reaching U.S. households. In fact, the Obama Administration has been providing political cover for the Fed to conduct a massive, reverse Robin Hood scheme, moving trillions of dollars in resources from savers and consumers to the big banks and their share and bond holders.

Yves here. A big error the Fed made during the crisis was overly sharp rate cuts when markets swooned. The cliche was “75 [basis points] is the new 25.” A lot of commentators got nervous when the Fed cut its Fed funds rate below 2% because that put it on the path to ZIRP. But there were so many other distractions that concerns about the level of policy interest rates got lost in other crisis issues.

Whalen further argues that increased concentration in the banking industry has allowed the big banks to strangle credit:

“In every Fed easing event during my career in finance (1986, 1992, 1998, 2002), it was the wave of refinancing of debt after the Fed eased interest rates that put permanent disposable income into the hands of households,” notes a former Fed official who worked in the banking industry for decades. “In this last easing, however, FNM, FRE and the TBTF banks have conspired to break the transmission mechanism for monetary policy and are now strangling the U.S. economy to save themselves from past errors.”….

First, the Obama Administration should use the power provided in the Dodd-Frank legislation to force an accelerated cleanup of bad assets and to mandate refinancing and principal reductions for performing loans with viable borrowers….

Second, President Obama also needs to focus on the growing competitive problem in the U.S. mortgage sector…

The top three banks control 55% of all mortgage originations. The top 10 banks control 95%. The top five run the only surviving channels to sell loans to Fannie Mae (FNM) and Freddie Mac (FRE), and force their pricing upon the entire banking industry. Small banks give up half the economics of a typical loan to sell a loan to FNM or FRE indirectly, through WFC or JPM. Why is there no antitrust investigation of the top banks by the Department of Justice?

The Obama Administration should move to restructure FNM and FRE now, not in 2011. The Treasury should use its existing authority under the conservatorship to force FNM and FRE to make rules changes to allow for the refinancing of all existing residential mortgages, if only to reduce the current cost of the debt and increase disposable income for households…

President Obama should make some political hay over the fact that loan origination margins for the top four banks have gone from ½ point to over 4 points in the last two years. This is the subsidy for Wall Street above and beyond the zero interest rate policy of the Fed.

My quibble about the Fannie/Freddie refi idea is that this more deeply entrenches the role of the GSEs when Whalen argues against their powerful role, and it also creates large amounts of low yield paper which if we escape our near deflation conditions, will mean big time losses to the chump holders (and until we get over causing pain to bondholders, having Bill Gross hold a lot of securitized low yield mortgages means Bill Gross will be lobbying for more ZIRP and QE). Plus this move (by design) is a subsidy to homeowners and not renters. I’d prefer more straightforward ways of getting cash to ordinary consumers. But putting more heat on the banks is very much in order. And if they don’t like official criticism, they have only themselves to blame.

Lordie, if this isn’t disingenuous, I don’t know what is. From the Financial Times:

US universities are producing too few engineers to meet industry demand, Indian outsourcing companies say, leaving such businesses little choice but to hire foreign skilled workers to fill jobs in America

And why are there so few students studying computer science? Because there are no (well, more accurately, hardly any) entry level jobs. I’ve been reading about this on Slashdot for YEARS, about the utter dearth of anything resembling a career path in IT. Yes, there are no doubt ways to brute force getting trained, but that cold reality is not the sort of situation that encourages college students, particularly ones that have student loans, to pursue a technically-oriented field of study.

And the proximate cause is that companies only want to hire people that they don’t need to train (the cliche is that they can “hit the ground running”), and that they can get away with it because a lot of junior level work is farmed out to outsourcers.

But you’d never glean this from the FT, which takes the outsourcers’ complaints at face value:

“If you look at the core of what we do, the technology work, the US simply doesn’t have the talent base today,” said Francisco d’Souza, Cognizant president and chief executive. “Although unemployment in the US today is high, IT unemployment is still very low.”

Yves here. Yes, IT unemployment might be very low now, but for how many years was it higher than in other industries? My sample (high end IT consultants, the sort that can build mission critical systems and do cutting edge Web and apps development) is admittedly biased, but lots of high end shops shuttered, and another I know went through a Chapter 11. Things have gotten much better for them lately, but most of the last decade was pretty grim. So if the guys who weren’t competing with outsourcers had it rough, how was it for the rest of the industry?

Indian outsourcing companies usually keep a small portion of their workforce in the US to work closely with clients, supported by the bulk of their staff in development centres in India.

But the protectionism move – a senator who sponsored the legislation described Indian outsourcing companies as “chop shops”, a reference to garages that dismantle and sell stolen cars – may have little impact.

About 70 per cent of US PhD students are foreign born and are often hired in the US, making their way into Silicon Valley or government agencies such as Nasa, said Partha Iyengar, of Gartner, the consultancy.

Yves here. I’d like some reader comment, but the idea of a PhD as the proxy for talent in this space sounds questionable. The one highly regarded systems architect I know who does have a PhD has it in physics, not computer science.

Mr. Iynengar does comment on the real problem now that the horse has left the barn and is in the next county:

“The bigger challenge for the US is, if they start to lose this talent at the lower end, the innovation engine that has been driving the economy starts to dry up,” Mr Iyengar said.

→ Washington’s Blog

The government and BP claim that the combination of Corexit and crude oil is less toxic than crude oil by itself.

Is that true?

Well, scientists have found that when Corexit is applied to the actual crude oil from BP’s well, it releases 35 times more toxic chemicals into the water column than would be released with crude alone.

And the tests conducted by the EPA which purport to show that dispersant plus crude is less toxic than oil alone used a combination of Corexit with Louisiana light crude oil. However, the oil coming out of BP’s leaking well contains an unusually high concentration of methane. As CBS notes:

The oil emanating from the seafloor contains about 40 percent methane, compared with about 5 percent found in typical oil deposits, said John Kessler, a Texas A&M University oceanographer who is studying the impact of methane from the spill.

It is doubtful that the EPA used such unusually methane-rich oil in their testing.

More importantly, EPA toxicity tests on the dispersant-oil mixture were conducted at sea level pressures (in other words, the pressure at the surface of the ocean). But enormous quantities of Corexit have been applied 5,000 feet under the ocean at the leaking wellhead.

As the New York Times noted in May:

There has been significant research in response to spills over the past few decades, especially the Exxon-Valdez spill in Alaska in 1989 and the Prestige spill in 2002 off the coast of Spain.

But all of the scientific precedent is from spills from tankers or near shore.

“We are working with reliable knowledge from that science,” Plumb said, “but it is limited and not across the scale or scope of the ecosystem we are in now.”

Scientists and responders are prepared to deal with oiled birds and shoreline effects, because those are the usual problems. An ongoing oil spill a mile under water is unchartered ground.

“We’ve never dealt with this kind of deep water, we’ve never dealt with this amount of dispersants, we’ve never dealt with the Gulf,” [Roger Helm, chief of the contaminants division of the Fish and Wildlife Service] said. “We’re in a very early phase of the science here; there is not a lot of experimental work or practical work upon which to base the work we’re doing.”

Marine biologist and toxicologist Dr. Chris Pincetich – who has an extensive background in testing the effects of chemicals on fish – told me yesterday that scientists have no idea what compounds will be formed when Corexit dispersant and oil interact under the high pressures present at BP’s deepwater spill site (Dr. Pincetich directed environmental toxicity testing as a consultant and lab supervisor for many years, and now works to protect endangered sea turtles at the Sea Turtle Restoration Project, http://www.seaturtles.org).

And as Scientific American notes, breakdown products from the dispersant might be toxic as well:

For example, more testing will be needed to determine if the breakdown of Corexit 9500 – either into other chemicals or when metabolized by animals – produces toxic products of its own. “In toxicology, it’s quite often not the original compound that’s the toxic entity,” [toxicologist Cary Mitchelmore of the University of Maryland, who co-authored a National Research Council report on dispersants in 2005] notes.

Indeed, even Sergio Alex Villalobos, toxicologist for Nalco – maker of the Corexit dispersant – says:

Once it’s mixed with oil, that’s where you get the most impact, that’s where you see most of the toxicity.

Government Testing is “Embarrassing”

Dr. Pincetich says that he’s “embarrassed” that the government is using inadequate tests regarding the toxicity of Corexit. For example, when I asked whether he thought the EPA’s screening level for Corexit in the Gulf of 750 parts per million is based on sound science, Dr. Pincetich said no. He pointed me to a 1996 study which found that exposures of less than 20 ppm can adversely affect abalone.

Dr. Pincetich also noted that the tests being used in the Gulf are not the standard type of tests used to measure toxicity of long-term chronic exposure, but are typically only used for initial screening of effluent from coastal dischargers. There is no scientific evidence to support using only such a short-term, acute exposure test. The EPA training manual contains dozens of better testing protocols, and toxicity tests are usually run on 7 different species when there is a screening of unknown toxic chemicals involved (and even basic national pollution discharge standards require testing for 3 species), but – in the Gulf – the EPA has only been testing using 2 species.

Dr. Pincetich has also noted that EPA toxicity testing for Corexit is woefully inadequate, since EPA testing was only for mortality and only used a 48- and 96-hour time frame. His doctoral research found that fish that were alive at 96 hours after exposure to pesticide were dead at two weeks, so the chemicals were considered non-lethal for the purposes of the test:

Dr. Pincetich explained that many standardized EPA bioassay toxicity testing protocols exist to measure growth and reproduction in marine early life stage organisms, but EPA is just using the cheapest possible tests. He says that standard tests should be run, and BP should pick up the tab.

Corexit May Delay Recovery of the Gulf for Years … Or Even Decades

Dr. Pincetich told me that he believes that use of dispersant may – in certain circumstances – delay recovery of the ecosystem for years.

Indeed, PhD toxicologist Ricki Ott noted in a New York Times Op Ed that dispersants like Corexit can persist in the ocean for decades:

[Dispersants] can linger in the water for decades, especially when used in deep water, where low temperatures can inhibit biodegradation.

Some experts have also said that the use of Corexit has prolonged by decades the presence of toxic crude oil, because the dispersant sinks the oil beneath the ocean surface, where it cannot be quickly broken down by sun, waves and microbes.

And the head of Lawrence Berkeley National Laboratory’s Ecology Department – Terry Hazen – argues that the use of dispersants can delay recovery of ocean ecosystems by decades:

Hazen has more than 30 years experience studying the effects of oil spills. He says the oil will be damaging enough; toxic dispersants will just make it worse. He points to the 1978 Amoco Cadiz Spill off the coast of Normandy as an example. He says areas where dispersants were used still have not fully recovered, while areas where there was no human intervention are now fine.

As Hazen has noted:

“The untreated coastal areas were fully recovered within five years of the Amoco Cadiz spill,” says Hazen. “As for the treated areas, ecological studies show that 30 years later, those areas still have not recovered.”

Admittedly, chemicals other than Corexit were used in the Amoco Cadiz spill. But the precautionary tale still holds: chemicals should not be applied to oil spills unless scientists are positive that they will provide a net long-term benefit.

Disturbingly, Corexit is apparently still being sprayed in the Gulf. See this, this and this.

The “lax” is clearly a tad inflammatory, but tweaks in Basel III rules to allow dubious quality items like mortgage servicing rights as Tier I capital speak volumes. In addition, the various noises from policy makers makes clear that they aren’t willing to make banks raise capital level by much due to fears of the impact of lower loan availability on economic growth (more equity behind lending means higher lending costs, since equity is more expensive than debt). And with that not-very-strong starting point, the banks have pushed for even weaker rules.

Should this come to pass, Credit Suisse, via a Wall Street Journal story, is already predicting the outcome: more bank mergers. This is would be yet another example of the costs of not taking a tough enough line with banks (the 2009 example being explicit and covert bailouts, without forcing changes in top management and boards at the struggling banks, was diverted to a significant degree to record bonuses, rather than its intended aim, building up capital levels). The latest antiicpated bad outcome, per the Journal (hat tip Richard Smith):

Interesting, therefore, that analysts at Credit Suisse, have just published a research report entitled “Opportunity Knocks,” which sees a “blue-sky” 78% potential upside from current share price levels based on higher returns, lower-than-expected cost of equity and benign macroeconomic scenarios.

If the blue-sky background does indeed pan out and profits rise as bad loans decline, bank share prices will improve to the extent that they will start to have the confidence to start looking at acquisitions that are more than just the opportunistic ones seen post-crisis.

This will especially be the case if, as expected, the new Basel III capital rules are pitched at such a level that many banks turn out to have excess capital. Most bankers have enough sense not to talk about this openly just now, but acquisitions will be one way of spending the money. One assumes that in this new banking environment, acquirers will have to convince regulators that the resulting solvency position is more than adequate. Given the ability of bankers to destroy value for their shareholders this would seem to be fundamental.

We doubt many readers are of the “benign macroeconomic scenario” school, but this is classic bad incentives at work. I haven’t seen any international studies, but US studies of bank efficiency have consistently found larger banks to be slightly MORE costly to operate as asset size rises, once a not very high threshold is reached. So the widely touted rationale of cost savings is bunk; each bank in a merger could have achieved the same cost level on its own.

So why do deals like this continue? Because banks CEO pay is positively correlated with bank size. Empire building is a very profitable exercise for bank executives. And the top echelon of the acquired bank is bought off via golden parachutes.

The result is more TBTF banks, the last thing we want from a policy standpoint. But it looks like fear of taking the banksters down a notch is going to lead to more of the same, which is ultimately more looting of taxpayers.

Drunk baboons plague Cape Town’s exclusive suburbs Telegraph (hat tip reader Paul S)

How Many Lone Nuts Does It Take To Make A Party Mix? Firedoglake. The title isn’t too hot, but the article makes a good point.

Simpson to disabled vets: You cost too much Daily Kos (hat tip Brad DeLong)

Obama’s Iraq Challenge Michael Hirsh, Newsweek

Iraq and the collapse of neo-con illusions ABC (hat tip reader Skippy)

Oil Tests Positive for Dispersants in the Mississippi Sound George Washington

The Land-Residual vs. Building-Residual Methods of Real Estate Valuation Michael Hudson

Obama was too cautious in fearful times Financial Times

Home truths for complacent economists Dean Baker, Guardian

Canada’s Housing Bubble: An Accident Waiting to Happen Canadian Centre for Policy Alternatives. Be sure to look at the scenarios for the bubble unwind. Ouch.

CrowdQuery: Will Ratings Agencies Escape Justice? Barry Ritholtz

Robert Barro’s Questionable Claim Mark Thoma (hat tip reader Don B)

The Backward Slide Into Recession Mike Whitney, Counterpunch (hat tip reader Scott A). Not that this is news, but a good treatment.

Probe chief to issue Wall St data Financial Times. The Angelides Commission is going to have its revenge.

Policy tools that could lower interest rates further Jim Hamilton, Econbrowser

A deregulation conundrum John Hempton (hat tip reader Scott). This is a very good post from a few days ago that I managed to miss. A must read.

Antidote du jour:

The English language needs a new word to describe the nature and degree of disconnectedness from reality represented by Dick Fuld. He occupies a weird funhouse realm in which he did no wrong, those mean people in DC and the evil shorts brought down a viable enterprise. Remember, this is the man who certified financial statements goosed up to the tune of $50 billion via Repo 105, a ruse that ought to have been an accounting fraud but wasn’t, says he never heard of it, yet considers himself sufficiently well informed about what was happening at his former firm to be a qualified judge of whether it could have survived. Frank Partnoy concluded:

The Valuation section is 500 pages of utterly terrifying reading. It shows that, even eighteen months after Lehman’s collapse, no one – not the bankruptcy examiner, not Lehman’s internal valuation experts, not Ernst and Young, and certainly not the regulators – could figure out what many of Lehman’s assets and liabilities were worth. It shows Lehman was too complex to do anything but fail.

The report cites extensive evidence of valuation problems. Check out page 577, where the report concludes that Lehman’s high credit default swap valuations were reasonable because Citigroup’s marks were ONLY 8% lower than Lehman’s. 8%? And since when are Citigroup’s valuations the objective benchmark?

Or page 547, where the report describes how Lehman’s so-called “Product Control Group” acted like Keystone Kops: the group used third-party prices for only 10% of Lehman’s CDO positions, and deferred to the traders’ models, saying “We’re not quants.”

Economics of Contempt comes to a simpler conclusion, that Lehman was misrepresenting the size of its liquidity pool “in a huge way.”

But no matter how you look at it, even with the voluminous Valukas report, no one has come up with a plausible explanation as to the magnitude of Lehman’s black hole. As we noted:

But the numbers do not add up. The bankruptcy administrator has put the losses at $130 billion (although that number is still in play) and was (remarkably) denying that Lehman had a solvency problem at the time of its collapse, when the tenor of the Government section suggests the reverse. In addition, Lehman’s net worth as of May 31, 2008 was reported at $26 billion. So if we accept the $130 billion estimate, the swing from reported net worth to losses realized was over $150 billion. We still have no satisfactory explanation of how that took place.

“Denial” and “pathological” are near cliches and therefore far too weak to describe the fantastically distorted lens through which Dick Fuld views the world. He seems to believe if he can get enough people to repeat his delusions, that will make them true. Bloomberg apparently had an advance version of his written submission to the Financial Crisis Inquiry Commission (sadly, I don’t see it yet at the FCIC website), and it appears to be a doozy. From Bloomberg:

Richard Fuld, former chief executive officer of Lehman Brothers Holdings Inc., said regulators relied on “flawed information” in denying his company aid that was extended to competitors.

“Other firms were hurt by their plummeting stock prices,” Fuld, 64, said in prepared remarks submitted to the Financial Crisis Inquiry Commission for a hearing in Washington today. “Lehman was the only firm that was mandated by government regulators to file for bankruptcy. The government was then forced to intervene to protect those other firms and the entire financial system.”….

“Lehman was forced into bankruptcy not because it neglected to act responsibly or seek solutions to the crisis, but because of a decision, based on flawed information, not to provide Lehman with the support given to each of its competitors and other nonfinancial firms in the ensuing days,” said Fuld.

Yves here. There is a wee problem with this account. With Lehman’s books unreliable (this is something pretty much everyone on the Street knew prior to its collapse, that its asset values were inflated in a serious way), a government remedy was out of the picture. Even with the monster AIG rescue, there were a lot of decent assets that could serve as collateral for loans. But was there really anything solid at Lehman? The gaping maw of losses in fact confirms that the hesitation of any actor to step into the breach was warranted.

Or maybe Fuld still believes in the tooth fairy:

The market responded with enthusiasm to reports that the Tooth Fairy has agreed to acquire Lehman. The purchase price has not yet been determined and will be set by Dick Fuld wishing upon a star, clicking his heels three times, and being transported back to that magical place where Lehman still sells for over $70 per share.

In related news, Lehman has agreed to sell all of its level III capital, including CDOs, ABSs, pet rocks, baseball cards, slightly used condoms, and credit default swaps written by MBIA and Ambac. Lehman’s level III capital will be acquired for 150% of its face value by Tinkerbell, who will carry it off to Neverland to be fed to a crocodile. Lehman is financing 90% of the acquisition at an interest rate that has not been announced; Tinkerbell’s up-front payment consists of a handful of pixie dust, three crickets, and a bullfrog. Analyst Dick Bove estimates that the bullfrog could eventually be transformed into three princes and a pumpkin coach. The deal gives Lehman no recourse to any of Tinkerbell’s assets other than the Level III capital. If Tinkerbell defaults, Lehman’s successor entity will stick its hand down the crocodile’s throat and attempt to get it to regurgitate. The firm’s historical value-at-risk analysis shows that sticking your hand down a crocodile’s throat is completely safe.

A key paragraph in a post on a new paper by Jim Hamilton:

We can summarize the implications of that forecast in terms of the following scenario. Suppose that the Federal Reserve were to sell off all its Treasury securities of less than one-year maturity, and use the proceeds to buy up all the longer term Treasury debt it could. For example, in December of 2006, this would have required selling off about $400 B in bills and notes or bonds with less than one year remaining, with which the Fed could have effectively retired all Treasury debt beyond 10 years. The figure below summarizes the implied average change in forecast for the 1990-2007 period as a result of this change for interest rates of various maturities. Yields on maturities longer than 2-1/2 years would fall, with those at the long end decreasing by up to 17 basis points. Yields on the shortest maturities would increase by almost as much. While our estimates imply that the Fed could make a modest change in the slope of the yield curve, it would not make any difference for the average level of interest rates.

Note Hamilton clearly states that the Fed could clearly lower rates further. As Scott Fulwiler commented via e-mail:

They just have to announce the rate they want and be willing to buy everything offered at that price. Since the real point of QE2 is to cut longer-term rates, the only conclusion is that they don’t understand the fundamental fact that their operations are about price, not quantity.

Also, Hamilton’s evidence should work in reverse–i.e., don’t fear the Chinese dumping all their lt Treasuries . . . 17bp for every $400B.

I’d love to see a study that parses out the impact of Fed announcements. It might be that talk really is cheaper than action.

This post first appeared on February 22, 2008

Man, not only does the Administration tell whoppers, but it is completely shameless about them. The latest sighting comes from Reuters:

Treasury Undersecretary Robert Steel told the Reuters Housing Summit it is proper for homeownership to hold a special status….

“If I default on my credit card debt, no one here knows and it has no affect on your credit card debt. If I am your next-door neighbor and I get foreclosed and thrown out, and the grass goes to heck and the home is boarded up … that affects you,” he said at the Reuters Summit in New York and Washington.

With that in mind, Steel said, the Treasury Department is working to develop programs that aid borrowers who are facing foreclosure, but a government bailout of the housing sector is not now needed.

Let’s deal with the minor misrepresentation before dealing with the larger one. Do the people in the Treasury live in the real world? Rising defaults on credit cards ARE affecting other credit card borrowers. The issuers are cutting back on credit lines and raising their interest charges and fees even higher. The effect of abandoned houses on a neighborhood is obvious, but Steel is disingenuous to pretend that rising credit card defaults don’t impose costs on other borrowers. The industry is pulling out all stops to both contain risks and increase revenues.

And while losing your access to credit cards isn’t as awful or visible as losing your home, it isn’t as invisible as Steel suggests. I certainly notice when people pay only in cash. I figure they either have credit issues or are trying not to leave a paper trail (in New York, one reason might be that they are claiming residence in a lower-tax state).

Now to the bigger issue. A Treasury representative has the gall to get up and say the Treasury doesn’t do bailouts when the idea floated by the Office of Thrift Supervision has all the earmarks of being one. As reported in the New York Times (which repeated the canard that the Administration “oppose[s] any taxpayer bailout”):

A more modest plan is being developed by John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies. His plan, still in rough form, would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home.

It would take the remainder of the mortgage as a “negative amortization certificate,” a lien that the investor could recoup if the house were later sold for its original mortgage value or higher.

In an interview, Mr. Reich said he hoped that most of the old mortgages would be replaced by cheaper mortgages insured through the F.H.A.

Let’s parse this. The plan is to take mortgages now in the hands of private investors (remember a lot of this paper is in securitized vehicles; there will need to be a substitution of assets; that alone is problematic, but let’s assume the Fed will sprinkle fairy dust so this can happen) and substitute is with a new fixed rate mortgage probably from the FHA plus a “negative amortization certificate”. (Note that the Washington Post story on this plan was more definitive, that the FHA would provide the mortgage).

Intuitively, I don’t see how this will fly if the FHA doesn’t also guarantee the certificate too, and that was Tanta’s first reaction (I’m sure well see her usual robust analysis soon enough):

Apparently, only the FHA mortgage would be a lien against the property, with the certificate being an obligation of FHA? It certainly surprises me that the OTS feels confident it can work out the legal kinks with that quickly enough to make a difference.

Now I may be making the mistake of assuming this plan is earnest. It may be a deeply cynical effort to muddy the waters, with the real intent of simply stymieing the proposal to allow judges to modify mortgages in bankruptcy (as we discussed in an earlier post, the idea isn’t as heinous as its critics make it sound). Given the difficulties with asset substitution in securitized deals, this could take a long time to see the light of day (if ever), which may be the whole point.

But if the powers that be seriously intend to move ahead with it, the presentation treats the public as too dumb to understand that the government is indeed stepping in and assuming considerable financial risk, which will lead to hard costs. The “this is not a bailout” really means “we don’t don’t have to ask Congress to authorize a disbursement.” The idea that increasing FHA mortgages to weak borrowers isn’t a liability that will result in losses down the road is absurd. The FHA didn’t qualify these borrowers initially (remember, the reason the FHA lost share to subprime is that they have good procedures as far as borrower screening is concerned). For this program to have any impact, the FHA almost certainly will have to relax its lending criteria considerably. And even if a fixed rate obligation reduces the homeowner’s payment stress, the presence of the negative equity certificate will lower his incentive to keep the home. The market will have to appreciate considerably for him to show any gain.

There are good odds that homeowners may go through the hassle of getting the new financing and conclude in a year or two if their housing market doesn’t improve, that they are better off giving up on the house (remember, research is now concluding that falling housing prices play a far bigger role in defaults than previously recognized).

So we’ll see a transfer of losses. Instead of investors taking foreclosure-related losses now, we’ll see the FHA taking foreclosure-related losses later. But that isn’t a bailout because the Bush Administration is sticking its successors with it.

As Joseph Goebbels said,

The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly – it must confine itself to a few points and repeat them over and over.

So expect to see every homeowner rescue program assigned the preferred tag line “private sector solution” no matter how much in the end winds up coming from the public purse.

ACLU Sues U.S. Over Targeted Killing of Citizens Bloomberg

NC farm produces emerald shaped into massive gem Associated Press (hat tip reader John M)

British Airways No Longer Forcing Women to Sit Next to Children Flying Solo Helaine Olen. Hah, I had this done to me once.

Climate Skeptic Bjørn Lomborg Reverses Himself on Climate Change Firedoglake

Broken Politics, Bubble Pricing, Environment, and Agriculture Joe Costello

How the Germans Are Hurting the Recovery Noam Schreiber, The New Republic

Dragon could get burnt Sydney Morning Herald (hat tip reader Crocodile Chuck)

Backlash over China curb on metal exports Ambrose Evans-Pritchard, Telegraph (hat tip reader Don B)

China to Job-Seeking C.E.O.’s: Come Work for Us Michael Wines, New York Times (hat tip reader Don B)

Lehman Derivatives Records a `Mess,’ Barclays Executive Says Bloomberg (hat tip Economics of Contempt). There have been rumors about this, but this report if anything is even worse than the scuttlebut.

US pay law branded ‘logistical nightmare’ Financial Times. Ahem, the lady doth protest WAY too much.

BOJ Is `Too Little, Too Late’ in Tackling Yen, Nakahara Says Bloomberg

Beware those who think the worst is past Carmen Reinhart and Vincent Reinhart. A short recap of their Jackson Hole paper.

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