Northern Country

How globalization changes capitalism, the economy and politics

Posts Tagged ‘Fed

The U.S. economy and housing – part II

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foreclosuremapAug09               Foreclosure rates and Unemployment by state

Risky lending practices have led to a stellar rise in home prices and subsequent plunge when the housing bubble started to burst in the so-called sand states of California, Florida, Nevada and Arizona. It is no surprise that delinquency rates for missed or late mortgage payments have spiked strongly in those areas but also around the country.

In the second quarter of 2009 according to the Mortgage Bankers Association (MBA) delinquency rates for one-to-four-unit residential properties have reached a seasonally adjusted rate of 9.4 percent of all loans outstanding. These numbers set the record for highest late payments rates ever recorded.

Foreclosed properties are also at record high with 4.3 percent at the end of the second quarter, leading to a total combined 13.7 percent of loans past due, also the highest amount of non-current payments in the history of the MBA survey. A welcomed exception are loans 30 days past due which are still well below the record set in the second quarter of 1985.

A sure sign that mortgage problems are being driven by economic recession rather than non-conforming lending practices is the increase in foreclosure rates with prime fixed rate loans. Foreclosure filings are now spreading to areas hit by the economic downturn. The combined percentage of foreclosure filings in the sand states has decreased slightly to 44 percent from 46 in the first quarter.

The State of Oregon is a good example with its unemployment rate rising to 11.9 percent in July compared to last year, at the same time foreclosures in the state are up a whopping 84 percent. The problem seems to be unemployment rather than toxic loans. Many first time home owners who bought at the peak of real estate prices simply have not enough equity in their homes and cannot afford current mortgage payments due to the weak economy.

Of course the actual foreclosure rates are very hard to predict. Government moratoriums have effectively created a hidden backlog of foreclosures that one day have to be dealt with. There are also more warning sign of homeowners under duress emerging as fewer are catching up on lapsed mortgages.

A report from Fitch Ratings found that cure rates for prime loans collapsed to 6.6 percent in July from an average 45 percent for the years 2000 through 2006. Cure rates have also fallen dramatically for non-conforming loans of Alt-A and subprime category. Fitch looked only at a return to current payment for loans bundled into securities, excluding GSE and non-securitiezed loans. 

This dramatic shift in the recovery of delinquent loans towards current payment is partially caused by the economic recession and fall in home prices, which puts a significant number of homeowners under water with little hope of ever recovering their investments. With toxic loans from non-conforming lending practices on the one hand and economic recession on the other, it is no surprise the outlook for both the economy and housing remains highly uncertain.

Few signs of a turn around in housing are starting to emerge. According to Case/Shiller nationwide home prices are showing tangible signs of improvement month over month in June and May of this year. In some areas where prices have fallen dramatically investors are coming back to the market hoping to snap up properties on the cheap.

The Outlook remains uncertain and yet a recovery will by and large depend on the pace of turn around in the economy. While it is no secret that recessions caused by a slump in businesses of the financial services industry tend to last longer, on average almost five years, the depth of the economic trough and the pace of recovery is still unclear.

Key to answering the question whether we will have a V, W, U, or L shaped recovery lies with the American consumer. In the past abundance of credit fueled conspicuous consumption and a debt driven economy. No wonder many are fearing a new found admiration for frugality that is exemplified by an increased savings rate in the U.S. today.

Even though less consumption in the U.S. would almost certainly have implications reverberating around the global economy, the results of this dramatic shift in behavior would be felt most severely in the U.S. itself. While there likely will have to be some shift towards a more export driven economy it is hard to imagine that policymakers in the U.S. are willing to completely adjust to this new set of paradigms without recourse to pre-crisis conditions.

In fact strong signs of reoccurrence of pre-crisis behavior are starting to emerge. Reports of once-again record compensation packages among employees in the financial services industry have angered critics who see the industry at the center of the economic storm and would like to see more humbleness instead of the same old greed.

Even more daunting is another bad habit that many consider at the heart of the financial meltdown through its manipulative prowess in credit distribution behavior. Many banks still stuffed with risky mortgage loans from frothy days of real estate exuberance are once again engaging in what some call resecuritization of real estate mortgage investment conduits.

At the heart of Wall Street’s newest innovation is the re-remic, an impaired bond that does not necessarily have a natural buyer but by splitting it into two bonds may find a buyer for both of them. Investors who take on a really risky pool of securitized loans agree to lose money first if the deal goes sour. Investors in the safer pool of assets get paid first, therefore securitized loans in this category are slapped with a AAA-rating. Sound familiar?

The financial meltdown shooting out from non-conforming lending practices is in part credited to the failed securitization of mortgage loans deemed useful by false credit ratings. Yet, here we go again relying on financial repackaging of inferior securities dubbed suitable once again by rating agencies.

Sifma and the European and the American Securitization Forums (ESF and ASF) are ambitiously drafting new rules to rebuild confidence in structured credit markets reacting to a call from financial regulators to enhance transparency in this notoriously shrouded over-the-counter market. There is clearly a consensual desire to clean up the securitization markets, no wonder given its impact on the current financial crisis.

Initiatives aimed at standardizing issuer disclosure, facilitating and broadening investors’ access to transaction information and enhancing the usability of information are all welcomed but do they really justify the inherent risks purported by this form of financial engineering? Wall Street’s history and its future always has been and always will be abusive in nature, which should give everyone a moment’s thought, unless the crisis was for naught.

While this initiative has been started more than a year ago it does not seem to get into gears. The first drafts of reform were to be implemented at the beginning of 2009 but new rules are still in the workings and have not taken off ground yet. The MBAs proposal to standard procedures for servicing non-conforming residential mortgage loans and ASF’s Project Restart aimed at the securitization market are now trying to put the squeeze on regulators to let more players get sucked back into this ailing market.

So far the magic wand of enhanced transparency did not help to lift the freeze in in the securitization market. During Goldman Sachs’ second quarter the securitization powerhouse was only able to sell $12.9 billion in securitized loans, with meager $496 million outside of safe government agency bonds. That dwarfs in comparison to upwards of $30 billion at the beginning of 2007.

Inquisitive minds might argue that policy makers are not too successful in their attempt to hawk back to pre-crisis conditions. The emperors new clothes in the form of enhanced transparency seems not sufficient to once again resurrect bad habits from the dawn of the credit crisis.

Nevertheless much will depend on future success of the credit-distribution-lifter in form of securitized mortgage or other asset backed loans. Without it the American consumer might well be maxed out, with it the financial services industry and investors will probably once and for all loose their last shirt over it. Much like the Federal Reserve also Wall Street seems to be damned if they do and dammed if they don’t.

While these contradictions contribute to the overall uncertainty credit markets in general are still not healthy. Recently the Fed extended its Term Asset-Backed Securities Loan Facility (TALF) for another six months. It was scheduled to expire at the end of 2009.

In the UK, Bank of England governor King detonated a bomb last week when it became known that he voted for an even bigger increase in the bank’s quantitative easing policy. The minutes of the August meeting revealed King wanted to expand the program by 75 billion instead of 50 billion pounds.

In this apparent game of confidence policymakers are hitting the monetary accelerator full throttle to make sure the public can have trust in their abilities to revive the economy. Yet under these strange conditions a sustained recovery in housing, the economy and on Wall Street seems to be still ways off.

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Bernanke in a town-hall meeting, shopping for popularity

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bernankeintownhallmeeting

Last Sunday Ben Bernanke, chairman of the Federal Reserve responded to questions from the public in a town-hall style meeting. For the first time in history an acting Federal Reserve chair stepped into the arena that is usually the prerogative of obligations among elected officials. We truly live in interesting times.

What could have provoked this extraordinary move by the chairman given the daunting unpopularity of cumulative actions taken by the Fed in the last twenty four months? The answer is already given in the question. Ben Bernanke is shopping for popularity in order to better his approval ratings. His term as chairman ends in January 31, 2010, when he is up for reappointment by president Obama.

I can only imagine it must have been scary and embarrassing for the chief to step in front of the very same audience he led down over the course of the last ten years. He certainly did not mean to inflict any harm upon his fellow countrymen, but together with his predecessor Greenspan he helped lay the foundations of a shaky economy based on bubble economics.

Sure he gave birth to many millionaires and even some billionaires, but for most people Greenspan’s and Bernanke’s policies were rather harmful. Certainly one cannot expect any sensational outcome of such meetings with both a preselected audience and preselected questions. Organizers won’t let that happen though the chairman won’t suffer any lasting damages. It would have been nice though to read Bernanke’s mind.

To his defense the chairman admitted that he was disgusted from bailing out giant Wall Street firms like AIG, Bear Stearns or Merrill Lynch and rescuing them from going bankrupt. Though we certainly respect his wish not to reside over a second Great Depression, of course we have to believe him that there were no other options at the time. I might also add we are not yet with absolute certainty out of the woods with regard to another Great one.

Asked about his too-big-to-fail policy he seemed to indicate sympathy for the public’s frustration and promised to make it better in the future. Though his credibility was called into question by reiterating his opposition to an independent outside audit of the Fed. Why no audit if he has nothing to hide? Yes there is the issue of independence of the Fed, but just how much independence was there say in the last ten years?!

The Federal bank closest to Wall Street, and therefore in a special position with regard to the nation’s largest financial institutions, is the Federal Reserve Bank of New York. During the financial crisis Federal Reserve and Treasury Department officials made all major decisions, but the New York Fed executed them.

In the meantime the New York Fed has been criticized as too close to Wall Street. William Poole, a former Fed president, missed a longer-run perspective among the Fed’s staff. They adopted a trader mentality instead and did not pay enough attention to a system skewed towards too much risk taking by numerous bailouts of large Wall Street firms.

The Fed’s board of directors is composed of powerful bankers and corporate titans like Jamie Dimon, the head of JPMorgan Chase, and Jeffrey Immelt, General Electric’s chief. Richard Fuld had to resign after Lehman’s bankruptcy and Stephen Friedman called it quits over a conflict of interest with the other board he served, of investment power house Goldman Sachs. The corporate-federal officials network seems too tight to ever disintegrate.

It is not only the Federal Reserve that has to fear for its independence. The lobbying departments of large financial institutions have expelled their tentacles even into the Financial accounting Standards Board (FASB) of the United States and the International Accounting Standards Board (IASB) of Europe.

According to a recent report by an international team of former regulators and corporate officials, the Financial crisis Advisory Group deplored efforts by politicians to prescribe changes on accounting standards. The integrity of valued assets on the books of financial institutions should not be called into question in an effort to save those institutions from potentially harmful bets gone awry. In April, 2009, FASB already caved in to heavy financial lobbying and paused fair-value accounting rules for illiquid assets.

Beside all the regulatory and statutory powers bestowed on elected or appointed officials their most potent tool still remains the integrity of the person and organization in question. It is by no means sufficient for Fed chair Bernanke to communicate his objection to the bailouts on Wall Street even if it is within such an elaborate setting of a town-hall meeting. There is not enough meet on the bone to undo what has already happened.

A Gallop poll, conducted in mid-July, found that only 30% rated the Fed as doing an excellent/good job. The bank had the lowest score out of nine government agencies and it was down sharply from the 53% who still approved of the Fed’s job in 2003. This time even the CIA and the Internal Revenue Service scored better than the Fed. Bernanke will have to do better. It will most certainly be like walking a tightrope.

A Wild Ride

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I’ve never known such erratic movement in the Eur/USD currency cross.

Here is a statement from the dailyfx.com:

“Definitely a very interesting session of morning trade with the price action potentially signaling a shift in market sentiment towards the USD. Initially, following the release of the better than expected NFP number, the USD was sold quite heavily, but the move was not to be sustained with a fierce reversal taking place to massively overshadow any initial USD weakness post the release. Heavy stops were tripped in currencies with the Greenback extending gains from previous sessions and accelerating on the back of comments from Fed Lockhart who said that the central bank would soon need to consider raising rates. It seems as though market participants have started to factor a recovery in the global economy as potentially being somewhat USD bullish.”

EURUSDJune5-2009

Written by Alfred

5. June 2009 at 10:11 pm

Die Ergebnisse des Banken-Stresstests

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Jetzt ist die Katze aus dem Sack. Nach unzähligen leaks hat die Federal Reserve gestern um 5 p. m. NYT die Ergebnisse ihres Supervisory Capital Assesment Program (SCAP) bekannt gegeben. Die Fed hat dabei versucht herauszufinden, wie gut die 19 größten Finanzinstitute Amerikas ein widriges Geschäftsumfeld, bei sich verschlechternder wirtschaftlicher Gesamtlage bis 2010, mit genügend Kapital überstehen können. Nicht verwunderlich war das Ergebnis wesentlich besser als befürchtet ausgefallen. Nur 10 der 19 Banken brauchen demnach noch zusätzliches Kapital. Der Gesamtbedarf Amerikanischer Banken beschränkt sich auf magere 74.6 Milliarden Dollar wobei ein Großteil auf die Bank of  America, nämlich 33.9 Milliarden Dollar, entfällt. Das scheint eine durchaus überschauliche Summe zu sein, aber das SCAP stößt dabei nicht nur auf Zustimmung. Die Verschiebung der Veröffentlichung der Ergebnisse um  fast eine Woche hat den faden Beigeschmack hinterlassen, dass die Banken nach wie vor das Geschehen bestimmen. Namhafte Kritiker aus der Wirtschaft und der Finanzwelt haben sich negative zu diesem Stresstest geäußert. Fest steht das es den Banken hilft, ob es auch schon das Ende der Finanzkrise bedeutet ist mehr als fraglich.

Written by Alfred

8. May 2009 at 3:22 pm