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[New Fannie Policy] Renters Rewarded For Meeting Obligations

December 15, 2008 | 1:02 am | |

Don’t fulfill your contractual obligations and you get bailed out.

Fulfill your contractual obligations and you get evicted.

That’s the way the process has played out.

Chauntay Barnes, 30, moved into a single-family home with her two kids in November 2007 on a quiet street in Hamden, Conn. She never missed a payment on her $800 rent — never had so much as a late fee — and yet in mid-September she opened her mail to find an eviction notice.

If you are going to solve the housing crisis, you can’t treat tenants who met the their obligations as a throwaway. Fannie Mae is going to work with some tenants to prevent eviction. Still, only a fraction of the evictions will be prevented.

In a move that provides relief to thousands of renters who face eviction but draws the federal government even deeper into the housing market, the loan giant Fannie Mae said Sunday that it would sign new leases with renters living in foreclosed properties owned by the company.

In recent months, skyrocketing foreclosure rates have exposed as many as 70,000 renters to evictions, even though many never missed rent payments, according to analysts who track housing data. In many cities and states, renters can be evicted after their home goes into foreclosure, regardless of how long their lease stretches into the future.

Yes, properties may be easier to market when vacant, but the reality is the property will likely see extended marketing times with the surplus inventory levels. Why not keep income coming in to the taxpayer while the market finds it groove?

“We’re not in the business of managing rental properties, and we’re not in the business of being a landlord,” said Thomas Kelly, a spokesman for JPMorgan Chase, which owns about two million loans. “Clearly the renter is caught in the middle in cases like this. When a property is in foreclosure, we follow the law.”

When will the renter stop being treated like a second class citizen? Is the American dream of homeownership myopic?

Aside: The National Community Reinvestment Coalition, a consumer advocacy group has an amazing public relations sensibility. I would guess that coverage of this issue in the NYT and WSJ was a perfectly placed pitch. Kudos to them on this important issue.


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Bailing Out Mets Fans, Appraising Opening Day At US Treasury Field

November 24, 2008 | 11:55 pm |

citfieldsign

I’ve discussed the curse of stadium naming. The new Citi Field stadium name is in danger of going Enron on us. After all, the naming rights are only a paltry $400M and the Sunday’s Citi bailout was $326B.

For the past few years (for security reasons?) appraisers have been required to provide private financial information to Citi in order to consider whether the appraiser was solvent enough to work for them. Appraisers I know fought tooth and nail against this. In our case, we had been working for them for more than 20 years and now they want to know how much money we make? In other words, they wouldn’t want an appraiser to go under during the middle of a $400 appraisal assignment. It would be (apply sarcastic tone here) devastating to the entire financial system I would think.

The irony here is amazing given Citi’s need for a bailout.

Don’t get me wrong, we work for other areas of Citi which are sophisticated and professional. I am simply fed up with the “efficiency” theory of banking as it applies to backroom operations of large retail banks. They have lost their way. Incidentally, nothing has changed in this regard since the credit crunch began in the summer of 2007.

A few months ago, Citigroup’s retail banking appraisal group based in Missouri put my appraisal firm out to pasture (demoted to backup) in favor of appraisal management companies (those big national companies known for high speed, low costs and virtually zero quality (aka “army of form fillers”) aka AMCs and high volume appraisal shops/factories.

Of course, Citigroup gets a bailout.

citilogo

Here’s a sampling of our former clients who are national banks that went with appraisal management company factories and ended up getting into financial trouble.

  • Citigroup – went with AMCs
  • Washington Mutual – Residential mortgage lending gone – went with AMCs – NY AG tried to sue them for collusion with eAppraisIT to pressure appraisers (an AMC)
  • Countrywide – absorbed by Bank of America – lots of litigation in the future
  • US Trust Company – went with AMCs – such a disaster they actually came back to their appraisers only to be purchased by Bank of America and then we were dumped again
  • Bank of America – went with AMCs – rumors that it was such a bad experience, returning to appraisers
  • Wachovia – created their own AMC, Bought by PNC.

ustreasury

Coincidence?

Not really. Like the stadium naming deal, the shift to an AMC symbolizes the point when a mortgage lender goes too far and loses touch with it’s understanding of risk. The corporate culture loses the ability to understand the importance of assessing the value of the collateral to which they are lending. Common sense evaporates.

For the most part, the individual review appraisers that worked at these lenders were professional and competent and could see the issue at hand, but they just didn’t have the political weight, so to speak.

Hopefully those institutional politics will be crushed by the time we reach seventh inning stretch (at US Treasury Field).

This just in: Tiger Woods now needs to rustle up lunch money.


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[FHFA /OFHEO] On A Mission, With Bear Oversight

November 19, 2008 | 4:38 pm | |

I have been particularly impressed with the way that the newly created Federal Housing Finance Agency has been keeping us informed on what they have been doing to help with the housing market since the credit crunch began in the summer of 2007.

Organized, neat, outspoken, timely. You only have to read the FHFA mission statement to understand what they are all about:

Promote a stable and liquid mortgage market, affordable housing and community investment through safety and soundness oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Sounds like a necessary regulatory agency to me.

The FHFA’s predecessor, Office of Federal Housing Enterprise Oversight (OFHEO) was also responsible for regulatory oversight during the Fannie Mae accounting scandal and the collapse of the GSEs leading to their bailout in September 2008, had a remarkably similar mission statement as FHFA’s.

OFHEO has an important and compelling mission

to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

Before the global credit crunch and US housing market decline, where was the actual oversight of Fannie Mae and Freddie Mac? Today the new institution replacing the old one is run by the same person (whom I find to be quite well-spoken) and their new web site is nearly identical to the old one yet the mission has now expanded to include the Federal Home Loan Banks.

The implication of promoting liquidity in the revised mission statement isn’t a new concept since that was one of the primary reasons for the existence of Fannie Mae and Freddie Mac in the first place. And OFHEO’s advocacy of affordable housing seemed to morph from low income housing to simply making housing finance costs cheaper.

Still, I have higher hopes for all federal regulators going forward now that they have been lulled from hibernation.

After all, there’s a bear out there.


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[Housing Our Amenities] Conspicuous Consumption Is Dead

November 18, 2008 | 2:00 am | |

we just don’t know it yet…

I think my use of the phrase “pet spas and on-site sommeliers” has made the rounds long enough and others like it over the past several years to be put to rest…please.

As housing and consumers benefited from the era of easy credit, the surplus of new development entering the housing market necessitated more creative marketing to differentiate the vast array of product under the now tired “lifestyle” moniker. (cliche alert: Location 3x, Lifestyle)

The Conspicuous consumption goes out of style article in Sunday’s International Herald Tribune (or Friday’s New York Times’ In Hard Times, No More Fancy Pants) confirmed what I had been observing for the past few months as the credit crunch bore down on all of our lives.

The US economy is faltering under a significant global financial crisis. A new presidential administration/party is taking over the reigns.

Individuals seeking the biggest and the best will probably do so with less fanfare. Housing demand will likely be re-defined by the marketing shift to austerity.

Times have changed and we don’t have the luxury of asking “Wassup!” of someone without regretting we asked. Speaking of bailouts (c’mon, you were thinking about it), here’s a prime example of how GM continues to miss the market: “My Hybrid Is Bigger Than Your Hybrid.


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[Government Bailout Leviathan] Short Huge, Brutish, Nasty

November 17, 2008 | 12:21 am | |

In many ways, the free market financial/mortgage system, without regulatory oversight could be described as Nasty, brutish and short:

Nasty, brutish and short aren’t a firm of particularly unpleasant lawyers but a quotation from Thomas Hobbes’ Leviathan, or the matter, forme, and power of a commonwealth, ecclesiasticall and civill, 1651. The fuller quotation of this phrase is even less appealing – “solitary, poor, nasty, brutish, and short”. Hobbes described the natural state of mankind (the state pertaining before a central government is formed) as a “warre of every man against every man”.

I was struck by a recent case of massive number numbness that was inflicted upon me when I saw the Fannie and Freddie losses for the 3rd quarter:

Fannie Mae: ($29B)
Freddie Mac: ($25B)

For perspective, Fannie Mae and Freddie Mac each averaged a $2B loss per quarter in the preceding three quarters. The GSEs were bailed out in early-September and represented the last 3 weeks of 3Q. I know the Freddie loss just reported included a $14B non-cash charge so it lost about $12B cash-wise.

The current administration is leaving still advocating free markets, which a disconnected concept when compared to the situation we find ourselves with – day late and a few trillion short. Dismal Scientist calls it right.

I remember when President Bush decided to call a summit 3 weeks ago, during a crisis which needed daily attention:

The first decision I had to make was who was coming to the meeting. And obviously I decided that we ought to have the G20 nations, as opposed to the G8 or the G13.

hmmm…what flavor of free market thinking will work going forward that didn’t work before?

One of the things we did, we spent time talking about the actions that we have taken. The United States has taken some extraordinary measures. Those of you who have followed my career know that I’m a free market person — until you’re told that if you don’t take decisive measures then it’s conceivable that our country could go into a depression greater than the Great Depressions. So my administration has taken significant measures to deal with a credit crisis. And then we worked with Congress to deal with the credit crisis, as well.

Call me crazy, but how about simple common sense oversight? Despite the actions of the administration, I find that Congress is finally starting to make some sense.

Here’s a series of plans to fix housing summarized by Capital Commerce.

What worries me about much of this is that government has a hard time “thinking big” which should not be confused with “spending big.” Evidence of this is found with Treasury’s foreclosure plan versus FDIC’s Blair. Bair wants to think big.


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[In The Media] Theory Of Negative Milestones Means A New Beginning

November 9, 2008 | 8:30 pm | | Milestones |

I have long believed in what I call the “theory of negative milestones.” There are seminal events that mark new periods of real estate activity. (both map mashups courtesy of NYT)

This weekend’s New York Times real estate cover story was based on my firm’s ongoing research of the Manhattan housing market. The content in the article was thoroughly fleshed out by my friend Noah over at Urban Digs so I won’t elaborate.

In 2008, the influence of the credit crunch has been characterized by various levels of impact on segments and a lower level of activity. Everyone who lives in Manhattan can feel it, especially those in the real estate brokerage business. The events of the past two months have marked a new milestone with the bailout of Frannie, the $700B stimulus package, collapse of Lehman, the purchase of Merrill, the reclassification of Morgan and Goldman to commercial bank status, aggressive actions including cutting rates by the Fed, a culmination of 22 months of campaigning, a new party taking over the executive branch and gaining power in Congress. In other words, change.

The promise or anticipation of change makes people in real estate pause and reflect.

Still, there is real estate activity, albeit at a slower pace. Informed buyers are signing contracts. Many participants are optimistic about the new direction promised by the new administration, and in the short term, that may cause a slight bump up in activity. However, the credit crunch continues to overshadow housing markets in the US.

Stabilize credit, then and only then, can the housing improve.

Speaking of wolves at the door…


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[Jackass Analogy] Securitization Explained

October 20, 2008 | 10:49 am |

Matrix is the blending of economics, real estate and of course, farm animals. Here’s the latest low-brow explanation of how the bailout works, as passed around that series of tubes (Hat tip to Marty).

So here goes:

Young Chuck moved to Texas and bought a donkey from a farmer for $100.
The farmer agreed to deliver the donkey the next day.

The next day he drove up and said, ‘Sorry son, but I have some bad news, the donkey died.’

Chuck replied, ‘Well, then just give me my money back.’ The farmer said, ‘Can’t do that. I went and spent it already.’

Chuck said, ‘Ok, then, just bring me the dead donkey.’ The farmer asked, ‘What ya gonna do with him? Chuck said, ‘I’m going to raffle him off.’ The farmer said You can’t raffle off a dead donkey!’ Chuck said, ‘Sure I can – watch me. I just won’t tell anybody he’s dead.’

A month later, the farmer met up with Chuck and asked, ‘What happened with that dead donkey?’ Chuck said, ‘I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $998.’ The farmer said, ‘Didn’t anyone complain?’ Chuck said, ‘Just the guy who won. So I gave him his two dollars back.’

Chuck now works for Goldman Sachs.


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[The Navigator] Strategic Planning Can Get Appraisers Under The TARP

October 20, 2008 | 10:13 am | |

Joseph P. Egan is a Massachusetts Certified General Real Estate Appraiser with over 25 years of professional valuation experience. The assignments performed by his firm, Joseph P. Egan & Associates, cover a broad range of commercial real estate properties as well as family and closely-held businesses in Cape Cod, Nantucket and Southeastern Massachusetts. This experience intersects with all major industries such as the automotive, food service, healthcare, lodging, marine, professional services, recreational, and retail sectors. Joe is a thoughtful and thorough writer who draws on this experience when delivering unique insight on issues that impact appraisers in today’s market. I am deeply grateful to have Joe’s to help us “navigate” this challenging environment for appraisers.
– Jonathan Miller



Earlier this month the Troubled Assets Relief Program (TARP) became a done deal and the U.S. Treasury has since been diligently crafting a global strategy to implement the greatest government bailout or rescue since the 1930’s.

Despite the many unknowns of the $700 billion program, one underlying theme being increasingly acknowledged is that TARP related assets will stimulate demand for experienced workout related professionals. Given what we know, it appears the increase will largely concern asset collateralized by commercial real estate and new construction assets.

One piece of evidence of the growing demand are the widely published reports of the FDIC’s efforts to employ more workout professionals beginning with retirees possessing prior on the job experience gained in the prior S&L bailout. In the private sector, Anthony LoPinto of SelectLeaders a leading commercial real estate recruiter stated in a recent blog post that due to “a meltdown of the financial system” and the need to “contend with the large pools and billions of dollars of commercial real estate loans that will be maturing over the next 12 to 36 months”, demand for experienced workout and restructuring professionals is expected to increase. An anecdotal review of available job postings, hiring news, and general industry dialogue all seem to corroborate Mr. LoPinto’s front line perspective.

The positive news is advisory and valuation companies of all types will likely have opportunities to meet the growing need for workout services. Professionals and organizations with prior workout exposure may have a leg up and perhaps be most inclined to seize opportunities. Less experienced professionals seeking to diversify into the arena can still adopt strategic and focused measures to explore opportunities.

Regardless of your level of workout experience, before dipping into this inviting yet clouded pool, it may be best to develop a reasonable short list of what we currently perceive to be in store under TARP and highlight a few differences between the last time workout services was a growth industry. Armed with this perspective (which is being further refined at this moment) a range of possible workout opportunities likely to be offered in the marketplace can be brought into closer focus.

Fully recognizing that the range of differences is an evolving topic, as TARP unfolds the short list of current differences include:

  • The financial and systemic magnitude of the TARP program and the solution it hopes to provide are much larger and more global than the S&L bailout. From a structural perspective, the range and diversity of market participants, stake holders and service providers will be broader as well.
  • Using the establishment of FIRREA in 1989 as the starting point, the S&L bailout lasted into the mid 1990’s. The timeframe for the TARP program is unknown due to dependent variables such as the type of assets to be acquired, price levels achieved, the degree to which assets are performing, holding periods (some assets may be held to maturity), and the manner in which Treasury adjusts their terms over time. Continued bank mergers and failures along with the dysfunctional state of the commercial credit pipeline, thus triggering the degree to which banks will need to participate in the TARP program, all remain significant variables as well.
  • In the S&L bailout, the bulk of assets acquired by the RTC and resold comprised whole asset sales acquired from a neat profile of U.S. banks. A significantly higher percentage of the troubled assets to be acquired under TARP, however, are expected to comprise internationally held whole mortgages and other financial instruments of many blends, rather than primarily hard assets such as real property. In addition, the troubled assets will be divided among the yet to be named asset managers in two groups handling either whole loans or securities backed by a multitude of mortgages.
  • Based on available information, gaining adequate control of securitized assets, aptly assessing risk, and developing reliable pricing and buy/sell mechanisms, particularly for securitized assets, will be the major challenges.
  • Through the consistent introduction of “innovative debt” structures and greater reliance on private rather than institutional capital, a broader pallet of international stakeholders now exists. The consistent formation of new private venture funds keen on opportunities to acquire distressed assets at favorable terms is just one example of how this realm is already expanding. Another stakeholder may comprise tax payers like you and me under a plan being considered where Treasury financing would be provided in selected joint venture transactions. The equity partnerships are aimed at promoting assets sales while providing the opportunity for tax payers to be a stakeholder.
  • Qualifying banks deciding whether to retain or acquire collateralized assets not sold to Treasury will represent another type of potential workout client. Certainly, the relaxing of market to market requirements, changes on the treatment of distressed assets in whole mergers, along with restrictions on executive pay, equity participation, and recoupment could provide incentives for banks to strongly consider holding or acquiring assets, except for the most seriously impaired. As part of this decision making process, banks will require workout related guidance on assets collateralized by real property.
  • The range of sophisticated analytical tools and the level of readily accessible public and proprietary market data, software applications and information technology have significantly increased since the 1990’s. Consequently, on the regional or local level appraisers providing the most sought after workout services will be required to demonstrate the high value capabilities and specialized technical expertise not readily decipherable from third party data sources or based on remotely developed software models.
  • Participating appraisers must fully understand the needs and structure of this evolving process which over time will ultimately become a sophisticated and highly channeled niche market. Consequently, a new long-term commitment to being properly positioned on the right regional and national radar screens will be paramount. Getting there first, establishing your targeted expertise, and being “top of mind” is even better.
  • Due to the magnitude of the current rescue plan as we know it, efficiency and credible assignments results will even rank higher. Project management skills, accountability, the ability follow defined scope of work requirements, and the willingness to provide high touch follow up service will no doubt reign supreme.
  • Given the volume of assets to be managed and Treasury’s emphasis on the “paramount need for expeditious implementation”, asset managers and other workout clients will seek out service providers with the capacity to reliably complete multi-property or portfolio assignments in the most optimum manner possible.

With these observations in mind, in addition to appraisals, some ideas on the types of targeted workout related services to be requested will include:

  • Liquidation Value The ability to estimate reasonable and adequately supported liquidation values will be needed area of expertise. Assisting banks in the development of “fair value” estimates on ORE properties could perhaps be another related service to be requested. (See FDIC, FIL 62-2008, Guidance on Other Real Estate, issued July, 2008)
  • Development Consulting Professionals and organizations with a firm local and regional grasp on absorption rates, development costs, unit pricing, sales concessions, bulk sale analyses, etc. or the more encompassing market and feasibility studies, will be sought out. Depending on your geographic region, through properly developed scope of work scenarios this niche service sector can offer good opportunities for developing a solid niche and attracting ongoing and repeat assignments.
  • Market Analysis Providing market data and specialized analysis to a range of clients are examples of the type of work out related assignments likely to be requested. Possible scenarios include requests for supplemental market data and analysis to be considered by a client in connection with an existing appraisal they are currently reviewing. Individuals and organizations performing advisory or valuation services in a market area where you have superior expertise or better resources may comprise another client group. The need for up to date and reliable market data and trend analyses to be utilized in connection with a client’s internal portfolio review processes is another area where market analysis services will have a good fit in the workout arena. Since the ability to assess a borrower’s capacity to continue to pay on a performing loan will be front and center, one offshoot in this area could possibly involve assignments supporting the underwriting and risk assessment processes with greater precision. Recognizing that the original mortgage was created at both a different time and underwriting scenario, such clients may require more on the ground intelligence addressing critical topics such as the state of the immediate market area and the competitive environment.
  • Property or Subject Specialization Professional advisory and firms with specialized areas of expertise will be sought out to provide reliable solutions concerning unique properties and problems. And based on what we already know about lax underwriting and loose credit standards, there will be many unique properties and problems. In a workout environment, prudent asset managers realize they cannot know every market or every property type and are inclined to turn to specialists for answers. The byproduct — timely and sound decision making is what they need most. One obvious example of specialized subjects involves the broad category of distressed properties with the possibility of further segmentation. Additional examples may include specialization by property type (e.g., gas stations, net leased restaurants, lodging properties, recreational properties, food processing plants, interval ownership resorts, etc.), by region or perhaps based on very specialized knowledge within a closely aligned field (e.g., geology, agriculture, environmental engineering, etc.).

The preceding review of the major aspects of the TARP program and brief list of likely workout services serve as only a brief back drop to the anticipated growing need for professional workout services. Certainly, many other key observations are worth noting and no doubt these waters will become clearer in coming weeks. Nevertheless, the preliminary list serves its purpose of being a vehicle to inspire interested professionals to begin to strategically consider the key questions surrounding the future for workout assignments, essentially the who, what, where, when, how, and why of it all. Naturally, for those among us already experiencing a steady increase in workout related assignments sharing your valued observations would be a true reflection of professionalism as we join together and prepare to meet the serious challenges before us in the coming financial and economic environment.


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[Bloggingheads] Solutions To Crunch: Derivatives Are Derivative

October 14, 2008 | 12:29 am |

I like to check in with bloggingheads.tv periodically – the topics can get pretty abstract for my limited intellectual capacity, but every so often it strikes a chord and today was one of those days – I saw two clips that appealed to me (They caught my attention initially because I know and admire 3 of the 4 the participants). The two sessions were covering the “subprime” situation but seemed at odds about interpreting the risk of existing financial instruments. Great comments on these posts as well.

A commenter from Yves and Dan’s excellent but far too short “Slums of Greenwich, CT” writes:

An intereresting thing here was that the interlocutors implied that the shadow banking system, and here one suspects that they mean the derivatives market, poses greater risk to the financial system than do the poorly underwritten residential mortgages. This is the reverse of what the majority of people think. It makes sense to think that the greater risk is posed by the securities which underly derivatives, that the risk posed by derivatives is entirely derivative.

In the next segment, The Subprime Solution, Professor Shiller, who has been making the rounds with his recent book suggests we don’t “blame” anyone for the crisis and discusses his ideas for a solution – the devil seems to be in the details. In the background hovers his life’s work, the advocacy of a housing derivatives market to enable investors to manage risk.

Here’s a representative comment on the post:

I understand his work-out proposal, and insofar as it would remove some uncertainty and provide a mechanism to adjust nominal terms or contract-time expectations to unexpected situations I can see the appeal, but wouldn’t all of this be incorporated into the expectations of the lender, secondary purchasers, and buyer at the time of the contract? It seems like the plan would have to make mortgages more expensive (relative to today’s–or really yesterday’s market price) to the borrower and less attractive to the secondary market. If the new contract terms were fully incorporated into the mortgage price up front, how will this solve the problem; it seems like it would shrink the market for mortgage lending without affecting the asset bubble dynamics overall. Homeownership is extremely politically popular–how would Prof. Shiller counteract this fact, in his (correct) push to remove the many subsidies for home purchases?

A fun way to deliver commentary, bloggingheads is available as a download, but it’d be a lot easier if it was a videocast via itunes.


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[Bailout Lobbying] Can’t See The Houses For The Trees

October 1, 2008 | 12:55 am |

Let’s try something different, take another path through the forest….

Close your eyes for a minute and imagine a Congress that will vote for its constituent’s behalf and their conscious. Imagine they will vote on the issue and not worry about the election in a month.

Did you seriously listen to me? Kick yourself for being so darn naive…

One of the great things about technology, is the trend toward transparency. According to MapLight.org, a public database used to provide more political transparency through the tracking of donations, found a clear pattern in the votes cast in the bailout bill H.R. 3997, the Emergency Economic Stabilization Act of 2008.

House Democrats split their votes on this bill, 140 voting Yes and 95 voting No. Democrats voting Yes received an average of $212,700 each, about twice as much as those voting No, $107,993.

House Republicans also split their votes on this bill, 65 voting Yes and 133 voting No (and 1 not voting). Republicans voting Yes received an average of $273,181 each, 50% more than those voting No, $181,688.

About a 50% vote spread with the takers dominating the takees.

From McCain pulling that last minute ride in and save the day to Obama using this turmoil to aggressively raise funds, it sure seems like the impending financial crisis has gotten lost in the politics.

The US Senate is voting on a revised bailout bill today:

would also raise federal deposit insurance limits to $250,000 from $100,000, as called for by the two presidential nominees only hours earlier.

The move to add a tax legislation — including a set of popular business tax breaks — risked a backlash from House Democrats insisting they be paid for with tax increases elsewhere.

Here are some thoughts on the bailout at Politico

This morning I listened to the president’s commentary on BBC about the failure of Congress to vote for the bill (after he touted the strength of the economy as recently as 2 months ago), this address probably fell on deaf ears and that’s a shame. He’s a lame duck with a 70% disapproval rating. The administration didn’t appear to be aware of the extent of the crisis until the GSE bailout.

Here are some less hyped thoughts on a bailout.


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[Moral Hazard] No Atheists In Foxholes, No Ideologues In Financial Crises

September 22, 2008 | 12:01 am | | Milestones |

A lot has been made of the lack of moral hazard on Wall Street, festering into the current crises.

Michael Lewis, author of a number of great books, including Liars Poker comments in his recent column titled: Bright Side of a Total Financial Market Collapse:

No sooner did Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart.

He’s left not only a mess but a void. No matter how well- educated we become in our financial affairs, we still need public officials to look up to, unthinkingly.

Slate’s new The Big Money is an excellent resource for financial news commentary. Martha White’s article: What Is a Moral Hazard? The economic reasoning behind bailout or no bailout is a good read.

While bailout seems to be the financial term du jour, right behind it is the more ambiguous “moral hazard.” Treasury Secretary Henry Paulson cited moral hazard as the reason not to swoop in to save Lehman Bros. and Merrill Lynch. Puzzling to many, though, was that while moral hazard was discussed in conjunction with the rescues of Bear Stearns, AIG, Fannie Mae, and Freddie Mac, it wasn’t a deal breaker in any of those cases.

…moral hazard is the idea that insurance in any form makes people riskier.

When I was 15 years old back in the Bicentennial summer of 1976, I rode my bicycle 4,400 miles zig zagging across the US with a group formerly called Bikecentennial. Of 4,000 people who participated, 3 people actually died riding that summer, and within our own group of a dozen riders, those who did wear helmets experienced wrecks and those who didn’t wear helmets (like me), were fine.

I often wondered if wearing a helmet made the riders more prone to take risks. I don’t think so – they represented a cross section of temperaments in our group. In fact, I bought a helmet when I got home and have worn one ever since – and no wrecks.

Perhaps it is more as an argument of convenience. Throw it in if it helps make the case?

The absence of moral hazard of the current situation was created by the GSE structure to begin with. Investors assumed the US would bail out ‘Mac & ‘Mae if they ever ran into trouble because they were “government sponsored”. I can only imagine what would happen to the financial system if the former GSEs were allowed to fail. “Faith and credit of the US” would have meant nothing forever, or at least as long as the current Yankee Stadium is old.

And the system seems to be unraveling quickly judging by more actions this weekend.

Paulson and Bernanke have been making moves faster than Congress or the President can seemingly comprehend. Expect Congress to start fighting the changes once they get it.

There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues last week, according to one meeting participant.

A bit unnerving but the Bush administration has been disconnected from the crisis until a few days ago, when it began to back Paulson’s actions. In fact, that was a requirement of Hank’s acceptance of the position to begin with, unlike his predecessors in the current administration.

And the candidates, until a few weeks ago, didn’t discuss the issue directly – and still don’t seem to get and at the very least, didn’t see it coming. Paulson and Bernanke need to move fast.

The lesson learned from this bailout of epic (trillions) proportions, was best said by Floyd Norris in his Reckless? You’re in Luck

If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated. The regulators need to know what risks are being taken, and by which institutions, in time to act before a crisis develops.

Had the government bothered to do that in years past, it might not have faced the decisions it faced this week. First, it let one big firm go down, and then it became scared enough to nationalize another one to keep it afloat.

Now, showing no sign of embarrassment over how badly they failed before, the current crop of regulators seem to be unified in their determination not to let the markets force them to make a similar choice on some other big financial institution.

It’s not about more regulations, its about regulations that deal with today’s markets.

Paulson and Bernanke will have to wrestle with these issues later, right now, they are suggesting we all wear a helmet.


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[The Surge Redefined] This Time It’s Financial, International

September 9, 2008 | 1:08 am |

Not surprisingly the Dow surged today, signaling the US Treasury is moving in the right direction. This size of this action was beyond the ability of the Fed’s balance sheet.

Do you really think this action was taken to protect the housing market? The GSEs were too big to fail? Dan Gross at Newsweek sees things a bit differently:

The bailout of Fannie Mae and Freddie Mac will be sold and marketed as efforts to shore up the U.S. housing market. That could be. But they are really meant at shoring up our damaged international financial standing, preserving leadership and making sure the U.S. Treasury Secretary doesn’t get tarred and feathered at the next G-8 meeting. In a world of significant global financial imbalances, the doctrine of “too big to fail,” has been replaced by the doctrine of “too international to fail.”

There is a very well laid out explanation of the US government’s balance sheet in Randall Forsyth’s column in Barrons called: Beginning of the Financial “Surge”. If you don’t subscribe to Barrons Online, you should consider since the financial markets and the housing/credit market are now joined at the hip.

The Treasury Sunday acknowledged the federal government’s role in creating the “ambiguity” leading investors to assume it would stand behind Fannie and Freddie debt and MBS. Now it said it had a “responsibility” to “avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and mortgage backed securities,” totaling some $5 trillion held by investors around the globe. That doesn’t include the trillions more in derivatives contracts entered into by Fannie and Freddie.

Trillions: I wonder what those derivatives contracts are worth in relation to outstanding MBS? My very limited experience working with Wall Street and housing related derivative products last year tells me it has got to be a mind boggling amount. All the more important to facilitate stabilization now.

Another Barrons piece by Steven Sears, “The Fannie Mae, Freddie Mac takeover signals big trouble, not an all-clear.

indicates there are a lot of market gyrations in the future for investors…

“Once the euphoria ends, we need to decide where to go,” Credit Suisse’s strategists told clients…Investment-bank traders, who cannot be identified because they are not allowed to speak to media, say trading is very slow and what they are seeing gravitates toward adjusting bearish positions. “No call buyers,” is what one trader said.

In other words, its really a new playing field. Let’s not let our expectations surge too soon.


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