Not All Financial Woes Are Created Equal

The failure of Indymac Bank – according to The New York Times the largest lender to fail in more than two decades – can be laid squarely at the feet of the lax (or nearly non-existent) underwriting that is part of (a big part of) the sub-prime mess. The chickens simply came home to roost.

The troubles of Fannie Mae and Freddie Mac are quite different. Freddie and Fannie underwrote loans carefully; their difficulties are a result of the unprecedented decline of home values.

In 2006, going against the conventional wisdom that single-family home prices never decline (they might stop rising for awhile, but they never decline), we predicted that single-family prices could decrease 10 to 20 percent. Painfully, that forecast turned out to be very correct – but also optimistic. We’re in a cycle now in which housing declines already are greater than at any time since the Great Depression of the 30s. And we’re not at the bottom yet.

If you don’t want to be disappointed by housing performance in the near term, disregard forecasts that the bottom is just around the corner – unless that corner is in Timbuktu. The bottom is NOT coming soon. And when it does arrive, it will not be obvious, like the bottom in the chart of the DJIA. The housing “bottom” will become apparent only in the rear-view mirror, when you realize that prices have stopped falling. Don’t expect a sharp rebound.

We will stay at the bottom for quite a while. How long that lasts will vary, as always, market-by-market.

Phil Collins

Private securitization relies upon rating agencies, S&P, Fitch, and Moodys. Look at how well they did rating SubPrime MBS in 2006 and 2007! And these are the entitites Poole thinks can control mortgage underwriting standards?

The fact is the housing crisis was not created by Fannie and Freddie, but they have gotten sucked into it. They failed to properly manage their hedging portfolios, which is where most of their losses come from, not from loans secured by single family houses.

The fact is that the market is set by the dumbest lender. Fannie and Freddie have never been the dumbest lender. Maybe the dumbest risk managers, pushed by greed to get larger bonuses, but not dumb SFD lenders.

Bottom line, the housing market is simply characterized by long term assets funded by short term liabilities. When credit becomes dear, the market locks up and fails to function until confidence in the players returns. The market will always behave in ways we cannot predict and hence, regulation cannot protect market participants over the long run without periods of correction.

The Commercial Mortgage Securities Association (CMSA) today praised House Financial Services Committee Ranking Member Spencer Bachus (R-AL) for announcing his opposition to a year-end timeframe for changes to FASB Statement 140 and Interpretation FIN 46(R: 64.12, +0.12, +0.18%). In a letter to Christopher Cox, Chairman of the SEC, and Robert Herz, Chairman of the Financial Accounting Standards Board (FASB), Ranking Member Bachus voiced his strong opposition to making rushed and sweeping changes to these accounting rules. The Congressman recommended an extension of the deadline until January 1, 2010 to “permit all stakeholders to have a full and fair opportunity to debate all policy alternatives and their consequences.”

2. http://www.fdic.gov/news/news/pr…8/ pr08060a.html

Currently, there are no statutory or regulatory prohibitions on the issuance of covered bonds by U.S. banks. Therefore, to reduce market uncertainty and clarify the application of the FDIC’s statutory authorities for U.S. covered bond transactions, the FDIC issued an Interim Policy Statement to provide guidance on the availability of expedited access to collateral pledged for certain covered bonds by IDIs in a conservatorship or a receivership.

Covered bonds are general, non-deposit obligation bonds of the issuing bank secured by a pledge of loans that remain on the bank’s balance sheet. Covered bonds originated in Europe, where they are subject to extensive statutory and supervisory regulation designed to protect the interests of covered bond investors from the risks of insolvency of the issuing bank. By contrast, covered bonds are a relatively new innovation in the U.S. with only two issuers to date: Bank of America, N.A. and Washington Mutual. These initial U.S. covered bonds were issued in September 2006.

I’m of two minds about Poole. On the one hand, stripping away the palliatives that have buffered the middle class and exposing them directly to the incredibly predatory policies favored by the minions of the plutocrats like Poole might be galvanizing, in a Leninist way. It would entail an uprising against Reaganism that would definitely consign it to history. And, of course, far from “not aiding” American competitiveness, it would cause a freefall in which the last shred of American economic power would be dissipated. In some distant way, some good might come of that.

But the non-Leninist in me recognizes that this is one of the stupidest suggestions to find its way to the NYT Op Ed page since – well, since last week’s Bennie Morris piece. In fact, housing is a pretty large and functional part of the mixed economy America has created to sustain its prosperity. Economics should always serve the culture – not some abstract thing like “competitiveness”, the benefits of which seem, by some wondrous magic, to accrue solely to the top one percent. – Except insofar as consumers can get tres rich buying cheaper toys from Mattel.

In the next decade, the housing market is going to have to be a significant part of any energy policy the U.S. comes up with. More than likely, that means more State interference “disturbing” the god given market to shift the homebuying market to more concentrated clusters, less sprawl, more energy efficient houses. It is true that the GSEs have supported sprawl and done their best to make sure that, instead of living in hovels and saving their pennies so that someday, some great grandchild of can go to school for… I don’t know, butlering, to serve on one of the great hedgefunders estates (oh, the joy of a society in which the successful, the truly successful don’t have to deal with peons), the GSEs have wastefully and with criminal intent helped people take on long term loans for houses. The horror! And they’ve only been around in the shape they have since 1968 – and you can tell, looking about, that since that time the economy has been reduced to rubble. They are state parasites encouraging rentseeking, unlike such sterling private enterprises like Citibank, which would never, ever allow rentseeking by, say, allowing its CEO to amass beaucoup cash selling it a ringer, and in which the management compensation structure reflects their moral mission of optimizing profit. Yes indeed, and there are plenty of other fairy tales like that which can be purchased at your local libertarian bookstore.

One of the funny things about conservative economics is that its sense of the economy is much like the old fashioned bloodletter – let the fever go! harm the body! those business cycles are good for ya! Because counter-cyclic policies introduce “disturbances” into God’s own market. Next thing you know, they’ll be inventing medicines for the weak and harming the health of the race. Poole is mounting the same tired arguments that will be mounted against any government program that “entitles” the middle class – why this is supposed to be bad is beyond me – and those arguments are political non-starters for good reason: the only people they will help are in the country clubs in which they originate.

Let me offer my sincere apologies. I have been blogging only since March so I truly am an amateur. I obviously do not understand the rules and etiquette of the blogosphere. My mistake was in assuming that it was supposed to be an open, uncensored forum for the free exchange of ideas and opinions.

In the future, I assure you that I will try harder to conform. Thank you for your constructive criticism of my writing and please put in a good word for me with Yves so that I may occassionally leave a comment here.

I’ve written before to encourage Yves to act. Your use of comments for self promotion offends me. Your comments are mundane, your tone is self-important, and you regularly and blatantly try to steer traffic to your blog.

I read a fair number of blogs, and no one pulls your “Here are my thoughts” with a link trick. Far more successful bloggers than you leave comments here and at other places. It shows you to be a clumsy amateur.

It would be no loss if Yves blocked your IP address.

Want to resolve problems like Fan/Fred? Then you’ve got to support the strict regulation of “speech” on radio and TV (both cable and broadcast) so that money doesn’t play a role. Also, you’ve got to ensure that RightWing firebrands like O’Reilly and Limbaugh aren’t allowed to overtly campaign for a specific party.

Obviously, in present-day America, this will not happen. That’s why over US$ 2B will be spent this campaign cycle, over 70% on TV.

Given our system of government, periodic implosions like Fred/Fan are inevitable.

The banks are still up against it. The FDIC fund will have to be replenished after WaMu and Wachovia bow out. Inflation will continue to explode. It will push back on the FCB purchase of Treasuries. I don’t know the exact tipping point, but the pressure is still increasing…

Have the government set up a window of opportunity for buying the insurance and limit it to a specific time frame (e.g. next 18 months). The window closes after that date, limiting governement exposure.

This process should also have the effect of drawing an implicit line in the sand that clearly communicates to future investors of GSE paper- This investment does not automatically include government backing (no more winking and nodding otherwise). Consequently, newly issued GSE paper will probably carry higher rates that reflect actual market risk. Mortgage rates will be slightly higher as a result. Mortgage rates have probably also been artificially restrained in the past by this government protection facade.