Treasury Department Issues Emergency Recall Of All US Dollars

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20 Videos of the week: Economy – recovery or relapse? - Prieur du Plessis  – Investment Postcards from Cape Town

  Hello.

good commentary – Made in USA Is Alive and Well: Manufacturing Goes High-End and the USA is Still the Global Leader – Mark Perry – … For every $1 of value produced in China’s factories, America generates $2.50. … -  Carpe Diem
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U.S. Bailout = 74 Marshall Plans ( and counting… ) – Global downturn: In graphics – Alea Blog
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option arm controversy very detailed – An Open Letter to Tom Brown at BankStocks.com – by Rolfe Winkler – RE: Your blog post criticizing 60 Minutes for its piece on Herb and Marion Sandler and their option ARM loans. – Option Armagaddeon

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Merrill Lynch Subprime-Related Derivative Suit Dismissed and Other Web Notes – by Kevin LaCroix – Even after Merrill Lynch’s recent $550 million settlement of the subprime-related securities and ERISA lawsuits pending against the company …. the derivative litigation was recently dismissed, because of the company’s January 2009 acquisition by Bank of America. – read on – D&O Diary
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Suggestion: Grandfather the Assets – Allow toxic assets to be sold by banks – CHRISTINE CHMURA  – … Here is my colleague’s proposal to start thawing out the credit market: “Grandfather” in the asset-backed securities with respect to the risk-based capital calculations and mark-to-market requirements for a period of time, maybe 10 years. … – RICHMOND TIMES-DISPATCH

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Bank Capital Adequacy: If They Weren’t Stress Testing Banks What Were They Doing All These Years? - … Geithner’s announcement that regulators are going to “stress test” banks is a nice politically correct way of saying that enforcement of safety and soundness rules is back in style and self regulation is out. – has detaiuls – Mark Sunshine Blog
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1.  Joint Statement by the Treasury, FDIC, OCC, OTS, and the Federal Reserve on the Capital Assistance Program – … Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government. … – Released by the Board of Governors of the Federal Reserve System

2.  lots of info – The Federal Reserve Board on Monday launched a new section of its website expanding the information provided about the policy tools the Federal Reserve has employed to address the financial crisis and simplifying access to that information.  The new section of the Board’s website can be accessed at:  -      FR Board Press Release

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more on Santelli Rant: Is Our Government Intentionally Tanking The Markets? – … What was deeply troubling about the recent Rick Santelli/CNBC incident was the administration’s blatant attempt to lay “down the law,” so to speak, as to how the markets must bow down to their agenda- and not the other way around. It wasn’t that press secretary Robert Gibbs was attacking and belittling Santelli the “taxpayer” …- but that he was attacking what Santelli represents- the financial markets.  … The President of the United States and the government know that there are certain tools and actions available to them that can immediately reverse the markets to the upside- and therefore begin to immediately restore wealth to investors and lessen the panic out there- while the government figures out exactly what it is they want to do. Yet, the refuse to do so. Such as: (has 4) … – GT McDuffy – BloggingStocker

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2009 CONFORMING LOAN LIMITS INCREASED BY AMERICAN RECOVERY AND REINVESTMENT ACT – … The increase affects 250 counties across the United States.
For these areas, identified in the attached table, Fannie Mae and Freddie Mac loan limits
will return to their late-2008 levels, which were up to $729,750 for one-unit properties in
the continental United States. Loan limits in other areas are not changed by the
legislation. … – FHFA News Release

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Bankruptcy Mortgage Modification Must be Simple, Efficient and Predictable – By David Leibowitz, Illinois and Wisconsin Bankruptcy Attorney – Mortgage Law Network -  thanks to Morgan King for providing this 

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Dismissal Partially Denied in Subprime-Related Rating Agency Shareholder Suit - Kevin LaCroix -  In the lists of those supposedly responsible for the current financial mess, the rating agencies are among those usually featured prominently. Numerous investors have in fact sued the rating agencies claiming the ratings misled them into making their investment …  but in a recent ruling, at least one court has held that much of the subprime-related securities lawsuit brought against Moody’s by its own shareholders can go forward. – D&O Diary

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Musical Chairs? – AmEx Encourages Cardholders to Leave – By MARY PILON – It used to be that credit-card companies lured customers with cash rewards. Now American Express Co. is paying to get rid of them. The card issuer is offering selected customers a $300 AmEx prepaid gift card if they pay off their balances and close their accounts. … “This is a huge paradigm shift,” says Curtis Arnold, founder of CardRatings.com, a credit-card review Web site. He says he expects other large companies to follow suit with offers to entice consumers to pay off their balances, as card issuers cope with increasing defaults. … -   – Wall Street Journal   (Prediction from BC – if Amex does this, all will. Balances will be transferred, so someone will be left holding the bag)

Thanks to CR at Calculated Risk for hat tip. 

My best friend since childhood, Jonathan, shared this with me, and now I share it with you.  Thanks J! – BC

This singing summary includes market commentary.

Today’s Must Read – The Future Of Residential Mortgages – Maybe – … The premise I’m starting with is that we really don’t have a private mortgage industry anymore … To deliver on all of this, the government has only two choices. One is to become a mortgage bank. In other words buy the loans originated by the private sector and hold them or two: to buy them, package them as mortgage backed securities and sell them off. The second alternative can only succeed if the government attaches its guarantee to the securities ... Once low mortgage rates take their place as an entitlement any reversion to a private market in which the risk is market priced will be impossible. … – Tom Lindmark – But Then What

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Bigger problem for Jumbo Originations? – A Possible Drag on Bank Lending  – BOB TEDESCHI – SMALL community banks have been among the few reliable sources for home loans in the last year. Now a proposal from the Federal Deposit Insurance Corporation could make it harder to get a mortgage from these institutions. – NY Times 

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Some Things That Just Should Not Be – by John Mauldin – I’ll Pay You to Hold My Cash; Pushing on a String; Free Money with that Credit Default Swap?; Oil Does a Strange Contango Dance; The Tragedy of Bernie Madoff – John Mauldin’s Weekly E-Letter 

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Fed report on Americans’ net worth is a painful read – Los Angeles Times 

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More CRA Idiocy – Barry Ritholz  – … “The national wave of home foreclosures, many concentrated in lower-income and minority neighborhoods, has created a strong temptation to find the villains responsible.”  What can you say about an Op-Ed whose very first sentence is a giant pile ***** ? That statement is demonstrably false. As the prior post on foreclosures shows, the concentration is mostly middle class and upper middle class white suburban neighborhoods. … – The Big Picture

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has neat chart – Chicago: High-rise headache – Alby Gallun – Chicago’s downtown condominium developers got all the loans they wanted during the real estate boom. Now they’re asking lenders for something else: time. – Crain’s Chicago Business
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REWORKED LOANS AREN’T WORKING AT INDYMAC BANK – By TERI BUHL – The mortgage-modification program of IndyMac Federal Bank, hailed by many as a template for allowing delinquent homeowners keep their houses, is an outright failure, an eye-opening report by a mortgage analyst reports. -  NY Post

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4 Loan Limit? – Investor Report: Rethinking Controversial Limits -  Kenneth R. Harney – Here’s some potentially good news for investors from the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. James Lockhart, who runs the agency, says there’s been some “re-thinking” underway on the controversial limits on the numbers of rental properties investors can own if they’re seeking new financing. – Realty Times

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1.  Central Banks Can Do Better Than Just Mopping Up: Caroline Baum - … Until now, central bankers pretty much cared about asset bubbles only to the extent that asset prices affected their ability to deliver price stability and, in the case of the Federal Reserve’s dual mandate, maximum employment. Otherwise, the operative doctrine was laissez-faire-’til-after-they-burst. That’s about to change, said William White, who recently retired from the Bank for International Settlements … – Bloomberg

2.  Deflation Says Buy Bonds; Supply Flood Says Sell: Mark Gilbert – Bloomberg 

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   IRA ARTMAN SECTION – thanks Ira: 

Link to Dilbert comment on CDO’s ( I think)

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How We Got Here:  Capitalist Fools – Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion. – by Joseph E. Stiglitz January 2009 -   Vanity Fair 
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2 From Knowledge @Emory:
1.  What’s Hot – What Lies Ahead for U.S. Automakers?
2.  Finance and Investment – What’s Ahead for U.S. Financial Institutions?
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2 views from the left at Alternet:
1.  Stimulus Is for Suckers: We Need a Recovery Plan that Will Last for Years – By James Galbraith, Mother Jones

2.  Let’s Cut Out the Banks and Finance American Innovation – The the U.S. government can be an investor instead of a reluctant donor. – By Sander Hicks, AlterNet.

The Top Cottage guides went out of their way to explain that more than 60 years after his death, many don’t fully grasp that FDR “was unable to stand, let alone walk unaided, yet he was determined to maintain his independence.” 

Two recent publications focus on what will be needed to maintain the future financial independence of the country’s retirees.   If you happen to sell mortgages – particularly Ginnie Mae’s -  for a living, the articles reinforce the importance of government guaranteed obligations in times like these.

Brookings’ Gary Burtless: Stock Market Fluctuations & Retiree Income – An Update

As Gary Burtless puts it in his 30 Oct 2008 paper:

• The recent dive in stock prices and home values offers a painful reminder of why government-guaranteed pensions seemed like a good idea in the 1930s…
• The collapse of stock prices and [thousands of bankruptcies] … wiped out the lifetime savings of millions of retirees and aging workers.   Many … pension plans became insolvent, leaving former pensioners with no dependable source of income in old age…
• Recent market gyrations give a vivid demonstration of the impact of lower asset prices on retirement incomes. Between October 2007 and [October 2008, US ] … stock market prices … fell [more than 40%].

Center for Retirement Research: How Much Risk Is Acceptable?

Alicia Munnell, Anthony Webb, and Alex Golub-Sass cover similar ground in their Nov 2008 Brief.  Their work examines how much “risk is acceptable” in a new tier of retirement accounts that could be included in a reformed  US retirement income system.

In developing their analysis, they include the following disturbing graph [Figure 5, Page 3] that should prove invaluable to anyone who sells bonds for a living, or plans on retiring when they don’t:

                          
Source: Center for Retirement Research at Boston College, Investment Brief 8-20 (See References).

As the caption indicates, it depicts the real (inflation adjusted) 15 year average returns provided by stocks and bonds investments held before the indicated date. 

Notice how that red (equity) line keeps seating itself  as it repeatedly comes back home to the gray one. Think it’s a keeper. 

 
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I used to work with numbers for a living, and would like to do so again, even if that looks like the most risky thing in the world that one could do. Till next time.

REFERENCES [Accessed 19 Nov 2008]

 
G. Burtless, The Brookings Institution – Stock Market Fluctuations and Retiree Income: An Update,  31 Oct 2008. 

 
A.H. Munnell, A. Webb, & A. Golub-Sass, Boston College Center For Retirement Research -  How Much Risk is Acceptable?, Number 8-20, Nov 2008.

Quotes:
FDR,  Wikiquote – Advice to his son James on how to make a public speech, as quoted in Basic Public Speaking (1963) by Paul L. Soper, p. 12. 
Eleanor Roosevelt, Eleanor Roosevelt National Historical Site, Val – Kill.

 
Abbey Lincoln & Stan Getz, You Gotta Pay The Band – Brother Can You Spare A Dime, Rhapsody/Verve International, 1991.

Dave Brubeck & Paul Desmond, Brubeck Time – Brother Can You Spare A Dime, Rhapsody/Columbia, 1955.

The fellow pictured on the left is Nat Philbrick, the author whose book, In The Heart of the Sea, won the National Book Award for Nonfiction in 2000.

The fellow pictured on the right is King Philip, the war chief of the New England Pokanoket Indians. He had changed his name from Metacom to Philip in the spring of 1660, and led the Pokanokets against the English colonists in the bloody 1675-76 war that we now call “King Philip’s War.”

If you were lucky enough, as I was, to grow up with Nat in Pittsburgh, PA, there’s a good chance that you already knew about King Philip. That’s because Nat’s 2006 book – Mayflower – explores both the Pilgrims’ voyage to America as well as their Plymouth Colony settlement.

As Thanksgiving draws near, it’s the perfect time to take another (or first) look at Nat’s Mayflower. His wide-ranging story contains 300-year-old tales of the pitfalls of socialist property ownership as well as the perils of land speculation that hit close to home, particularly today. [1]

PROPERTY OWNERSHIP

The “First Thanksgiving” may have occurred in late September or early October, 1621. The popular Thanksgiving story tells how the colonists would not have survived that first year without Massasoit, the Pokanoket leader (and Metacom’s/King Philip’s father) who provided assistance to the colonists (as Nat puts it on page 120) in the “hope that the Pilgrims would continue to honor their debt to the Pokanokets long after the English settlement had grown into maturity.”

Although the first year had passed, hard times continued. “Debilitating food shortages” plagued Plymouth. As Nat writes on page 165:

• “For the last two planting seasons [prior to 1623], the Pilgrims had grown crops communally – the approach … used at … other English settlements. But as the disastrous harvest of the previous fall had shown, something drastic needed to be done to increase the annual yield” [emphasis added].

These days we have a name for “something drastic”. We (and Nat) call it “capitalism“:

• [William] Bradford [the governor of Plymouth] had decided that each household should be assigned its own plot to cultivate, with the understanding that each family kept whatever it grew.
• The change in attitude was stunning. Families were now willing to work much harder than they had ever worked before…
• Men had [previously] tended the fields while the women tended the children at home. “The women now went willingly into the field,” Bradford wrote, “and took their little ones with them…”
• The Pilgrims had stumbled on the power of capitalism. Although the fortunes of the colony still teetered precariously in the years ahead, the inhabitants never again starved.

Federal control and ownership of the banking system becomes more extensive, and well accepted, with each passing day. Years from now, I expect that we will have a new “banking crisis” which – when properly analyzed – will be seen to be the consequence of today’s interventions and rescues. When that day comes, I hope those of you that read this piece and Nat’s book will remember the lessons of 1623 when everyone searches for “something drastic” to be done.

LAND SPECULATION

If you want to learn how and why Massasoit began selling off land to the colonists, you’ll have to read Mayflower yourself, beginning on page 169.

By 1667, however, Massasoit had died, and his son, Philip, had become the leader of the Pokanokets only to discover for himself the pitfalls of land speculation.

Following rumors of Pokanoket treachery … the English developed a “need for land” as their population grew and filled up the coastal lands. This was matched by Philips’ “growing need for money” [page 213]. As noted in official records:

• Many in our colony are in want of land … all such lands as the Indians can well spare shall be purchased.

Philip began a prodigious and unsustainable “sell-off of Native land”, as the pace of his land sales more than quintupled. Over time, the Pokanokets and the colonists even discovered the joys of home owe-nership. While mortgages had been illegal in the colony, the laws were revised, so that when Philip’s son-in-law could not pay back money “owed on a horse” he “took out a mortgage on a parcel of land.”

To settle subsequent disputes between the Indians and Plymouth, Philip was “forced to sign” [page 218] a treaty in which he agreed to 1) give up all his weapons, 2) pay a stiff fine, and 3) pay recurring annual tributes. To survive as Pokanoket leader, Philip “must now go to war.”

As Nat writes on pages 218 – 219:

• He immediately began to make plans for obtaining more muskets – but to pay for the new weapons, he was going to need [lots of] money…
• Philip … launched into a calculated strategy of selling land for weapons… [and would sell] almost every parcel of land he owned [which would seem to be irrational except that] … it was all to fund a war to win those lands back.
• …English greed [played into Philip's strategy.] Rather than wonder how he [Philip] and his people could possibly survive once they’d … [sold off all of their land], or speculate where all this money was going, the English went ahead and bought more land – even … when it meant that the Pokanokets might no longer be able to feed themselves.

That’s where Nat leaves things on page 219 of his account that will not conclude until page 360. If you want to see how the “arms for land” tale ends, you’ll simply have to read it yourself.

But even without knowing “how the story ends” we can draw some simple conclusions with respect to unsustainable land sales (or home price increases) that were experienced then (and relatively recently).

Most specifically, they ARE unsustainable, and while we don’t know WHEN they will end, end they must. We should NOT be surprised when they end.  The only thing that can be surprising is the timing of the end. If we have built businesses that depend upon perpetual and unsustainable home price increases, we have no one to blame but ourselves.

[1] THANSKGIVING

Those of you that closely read my posts must have noticed an occasional pun or two. If you want to know where it comes from, I’m afraid that you must blame me … AND Nat.

I did NOT talk or write with Nat about the content of this piece before it’s posting. While I may have quoted from his book extensively, all conclusions, set-up, and opinion are mine and mine alone. But the puns…

Years ago, Nat and I walked “uphill both ways” from our homes on Linden to Taylor Allderdice High School – a distance of 1.6 miles each way that seemed longer with our backpacks. In the mid-1970’s, along with everything else to talk about on our walk – we had our puns. Each day was a progression of can-you-top-this wordplay, where we would try to make every word in the sentence have at least two meanings.

I enjoyed it tremendously then, and now. Every day that I write, I hope that something somewhat more numerical will turn up. But, until then, along with everything else that I have to be thankful for, I have my puns and appreciation for wordplay. Thank you, Nat.

Happy Thanksgiving.

 
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I used to work with numbers for a living, but now I walk into them most frequently when I run the “Word Count” routine. Till next time.

REFERENCES

 
I. Artman, Sterling Slivers – No Pace Like Homes, 2 Nov 2008.

 
N. Philbrick -  Mayflower: A Story of Courage, Community, and War, Viking, 2006.

 
King Philip: Paul Revere/Wikipedia – Philip, King of Mount Hope, Plate from Benjamin Church’s The Entertaining History of King Philip’s War, 1772.

 
Nathaniel Philbrick.com – Nathaniel Philbrick.

 
Stan Getz, The Artistry of Stan Getz, Volume 2 – Thanks For The Memory,  Rhapsody/Verve Records, 1992.

Here’s a silly question.  When the Chairman of the Federal Reserve’s Board of Governors and the Secretary of the Treasury speak, do their colleagues listen?

I don’t know.  But if I tell you why I’m confused, then perhaps you’ll be able to tell me where I ran aground.

[Note: Those NOT in the mortgage business may have a tough time following this post.  To help those of you that are NOT, or anyone that does not know what an “APM” is, read my prior piece (Buyout Drive-By and The Perfect Storm) before continuing, as well as the quick "flashcards" that appear at the end of this post.]

On 15 Oct 2008, Chairman Bernanke spoke in New York. His topic – Stabilizing the Financial Markets and the Economy. A portion of his talk dealt with TARP, and brief excerpts of his comments appear below.

• The Troubled Asset Relief Program (TARP) … will allow the Treasury … to undertake two highly complementary activities.
• First, the Treasury will use the TARP funds to help recapitalize our banking system by purchasing non-voting equity in financial institutions…
• Second, the Treasury will use some of the [bill’s] resources … to purchase troubled assets from banks and other financial institutions, in most cases using market-based mechanisms. Mortgage-related assets … will be the [program's] focus…
• With time, the provision of equity capital to the banking system and the purchase of troubled assets will help credit flow more freely, thus supporting economic growth.

Source: Chairman Ben S. Bernanke, Stabilizing the Financial Markets and the Economy , 15 Oct 2008.

About a month later, Treasury Secretary Henry Paulson announced that the Treasury, Fed, and the FDIC had re-examined the relative benefits of purchasing illiquid mortgage-related assets (the second TARP item in Chairman Bernanke’s speech), and concluded that this was not an effective way to use TARP funds.

However, even as Secretary Paulson set aside TARP’s original “troubled asset” purchase program on 12 Nov, he reaffirmed Chairman Bernanke’s focus on strengthening banks’ capital positions and balance sheets.

So why then did HUD issue APM 08-23 on 7 Nov, about three weeks after Chairman Bernanke spoke, and less than one week before Secretary Paulson reconfirmed the importance of bank capital in the bailout process?

As I noted in Buyout Drive-by and The Perfect Storm, APM 08-23 makes it more (NOT! less) difficult to resecuritize delinquent GNMA loans that are bought out of GNMA pools. (See my earlier article or APM 08-23 for the details.)

Let me be blunt.  If the goal of the “Bailout” effort is to direct additional capital to the banking system – to “help credit flow more freely” – why would you make it more difficult, now, to generate capital through the GNMA buyout process?

To put it another way, IF the government is “bailing”, why are some Federal agencies acting as if they are trying to sink the “boat”? 

Early on, many focused on the difficulty that TARP administrators would have in setting a price that was “just right”:

• Overall, the trick [with respect to the purchase of troubled assets] is for the government to walk a fine line between offering a sufficiently attractive price to the securities’ holders so that trading can be rejuvenated while also avoiding paying so much that taxpayers recover too little money on the securities’ ultimate resale…
• ”If you end up paying too little to these institutions, … you’re not giving them the support that they need,” …[one Senator] told government officials … ”If you end up paying too much, then there’s no upside potential for the taxpayer … And the details of how you find the right balance here are the ones that …  all of us need to understand better.”

Source: S. Marcy, BNA Accounting Policy and Practice – Bailout Bill Offers Few Clues for Valuing Assets for US Purchase, 3 Oct 2008.

However, it is NOT unusual for government entities to allow for mortgage-related transactions at prices that differ from market. In fact, it is a well-established component of the GNMA buyout process, in which buyouts occur at par. Furthermore, the price differential, between the buyout price and the market value,  is what generates the returns from an efficiently managed GNMA buyout program.

Here’s a modest proposal.  

IF  it is important to direct more capital into banks, then let’s start by withdrawing APM 08-23, and revert back to the GNMA repurchase policy that prevailed prior to 7 Nov 2008. 

THEN, let’s encourage the increase of bank capital by withdrawing, or rolling back,  APM 02-24.  APM 02-24, like APM 08-23 referenced above, makes it very difficult to conduct an effective GNMA buyout program.

OR maybe I’m just confused.  Time for our closing number.

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I used to work with numbers for a living, but now I’m rolling with the punches as I look for a job or at least my next ‘idea’.   Till next time.

FLASHCARDS – Reperforming Loans, Non-Performing Loans,  &  APMs

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REFERENCES [Accessed 15 Nov 2008]

 
M. Adelson & E. Bartlett, Nomura Fixed Income Research – Home Equity ABS Basics, 1 Nov 2004.

 
I. Artman, Sterling Slivers – Buyout Drive-by And The Perfect Storm, 9 Nov 2008.
 
Chairman B. Bernanke, Board of Governors of The Federal Reserve System – Stabilizing the Financial Markets and the Economy,  15 Oct 2008. 

 
Ginnie Mae/HUD, Change to Ginnie Mae’s Policy for Pooling Repurchased Loans – APM 08-23, 7 Nov 2008; and New Policy for Repurchase of Loans – APM 02-24, 6 Nov 2002.
Ginnie Mae/HUD, Ginnie Mae 2003 Annual Report.

 
S. Marcy, BNA Accounting Policy and Practice – Bailout Bill Offers Few Clues for Valuing Assets for US Purchase, 3 Oct 2008.

 
Secretary H. Paulson, US Treasury, Remarks on Financial Rescue Package and Economic Update – HP-1265,  12 Nov 2008.

 
WikiMedia Commons, Ben Campbell Steamboat, circa 1855.

 
Ike and Tina Turner, Workin’ Together – Proud Mary & Get Back, Rhapsody/Capitol USA, 1971.