Friday, June 25, 2010

Who is on First?

Go on, take a break, click on the title above and enjoy a little classic Abbott and Costello.

By the way, the intro dancers include a guy that looks like a very young ex-president. See if you can find him.

Summary Of Major Provisions In Financial Overhaul Bill

WASHINGTON -(Dow Jones)- The sweeping financial overhaul legislation negotiators wrapped up early Friday morning would constitute the biggest overhaul of U.S. financial regulations since the 1930s. The legislation, broadly, is designed to close the regulatory gaps and end the speculative trading practices that contributed to the 2008 financial market crisis. Major components of the bill include:

NEW REGULATORY AUTHORITY: Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm's collapse could destabilize the financial system. Sets up a liquidation procedure run by the FDIC. Treasury would supply funds to cover the up-front costs of winding down the failed firm, but the government would have to put a "repayment plan" in place. Regulators would recoup any losses incurred from the wind-down afterwards by assessing fees on financial firms with more than $50 billion in assets.

FINANCIAL STABILITY COUNCIL: Would establish a new, 10-member Financial Stability Oversight Council, comprising existing regulators charged with monitoring and addressing system-wide risks to the nation's financial stability. Among its duties, the council would recommend to the Fed stricter capital, leverage and other rules for large, complex financial firms that are judged to threaten the financial system. In extreme cases, it would have the power to break up financial firms.

VOLCKER RULE: Would curb propriety trading by the largest financial firms, though banks could make de minimus investments in hedge and private-equity funds. Those investments would be limited to 3% or less of a bank's Tier 1 capital. Banks would be prohibited from bailing out a fund in which they are invested.

DERIVATIVES: Would for the first time extend comprehensive regulation to the over-the-counter derivatives market, including the trading of the products and the companies that sell them. Would require many routine derivatives to be traded on exchanges and routed through clearinghouses. Customized swaps could still be traded over-the-counter, but they would have to be reported to central repositories so regulators could get a broader picture of what's going on in the market. Would impose new capital, margin, reporting, record-keeping and business conduct rules on firms that deal in derivatives.

SWAPS SPIN-OFF: Would require banks to spin off only their riskiest derivatives trading operations into affiliates, in a late-night compromise struck to scale back a controversial provision championed by Sen. Blanche Lincoln (D., Ark.). Banks would be able to retain operations for interest-rate swaps, foreign-exchange swaps, and gold and silver swaps among others. Firms would be required to push trading in agriculture, uncleared commodities, most metals, and energy swaps to their affiliates.

CONSUMER AGENCY: Would create a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new watchdog would have authority to examine and enforce regulations for all mortgage-related businesses; banks and credit unions with assets of more than $10 billion in assets; pay day lenders, check cashers and certain other non-bank financial firms. Auto dealers won a hard-fought exemption from the Bureau's reach.

PRE-EMPTION: Would allow states to impose their own stricter consumer protection laws on national banks. National banks could seek exemption from state laws on a case-by-case, state-by-state basis if a state law "prevents or significantly interferes" with the bank's ability to do business - a higher bar than federal regulators currently must meet to pre-empt state rules. State attorneys-general would have power to enforce certain rules issued by the new consumer financial protection bureau.

FEDERAL RESERVE OVERSIGHT: Would mandate a one-time audit of all of the Fed's emergency lending programs from the financial crisis. The Fed also would disclose, with a two-year lag, details of loans it makes to banks through its discount window as well as open market transactions - activity the Fed currently doesn't disclose. Would eliminate the role of bankers in picking presidents at the Fed's 12 regional banks. Would also limit the Fed's 13(3) emergency lending authority by barring the central bank from using it to aid an individual firm, requiring the Treasury Secretary to approve any lending program and prohibiting the participation of insolvent firms.

OVERSIGHT CHANGES: Would eliminate the Office of Thrift Supervision, but after a fight, the Fed retained oversight of thousands of community banks. Would empower the Fed to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.

BANK CAPITAL STANDARDS: Would set new size- and risk-based capital standards, including a prohibition on large bank holding companies treating trust-preferred securities as Tier 1 capital, a key measure of a bank's strength. Would grandfather trust-preferred securities for banks with less than $15 billion in assets, enabling them to continue treating the securities as Tier 1 capital. Larger banks would have five years to phase-out trust-preferred securities as Tier 1 capital.

BANK FEE: Would mandate the Oversight Council to impose a special assessment on the nation's largest financial firms to raise up to $19 billion to offset the cost of the bill. The fee would apply to financial institutions with more than $ 50 billion in assets and hedge funds with more than $10 billion in assets, with entities deemed high risk paying more than safer ones. The fee would be collected by the FDIC over five years, with the funds placed in separate fund in the Treasury and would not be usable for any other purpose for 25 years, after which any left-over funds would go to pay down the national debt.

DEPOSIT INSURANCE: Would permanently increase the level of federal deposit insurance for banks, thrifts and credit unions to $250,000, retroactive to January 1, 2008.

MORTGAGES: Would establish new national minimum underwriting standards for home mortgages. Lenders would be required for the first time to ensure that a borrower is able to repay a home loan by verifying the borrower's income, credit history and job status. Would ban payments to brokers for steering borrowers to high-priced loans.

SECURITIZATION: Banks that package loans would, broadly, be required to keep 5% of the credit risk on their balance sheets. Would direct bank regulators to exempt from the rules a class of low-risk mortgages that meet certain minimum standards. Regulators could permit alternative risk-retention arrangements for the commercial mortgage-backed securities market.

CREDIT RATING AGENCIES: Would revamp the credit-rating industry, establishing a new quasi-government entity designed to address conflicts of interest inherent in the credit-rating business after the SEC studies the matter. Would also allow investors to sue credit-rating firms for a "knowing or reckless" failure to conduct a reasonable investigation, a lower liability standard than the firms were lobbying to get. Would establish a new oversight office within the SEC with the ability to fine ratings agencies and empowers the SEC to deregister a firm that gives too many bad ratings over time.

INVESTMENT ADVICE: Would give the SEC the authority to raise standards for broker dealers who give investment advice after the agency studies the issue. Would permit, but not require, the SEC to hold broker dealers to a fiduciary duty similar to the standard to which investment advisers are held.

CORPORATE GOVERNANCE: Would give shareholders of public corporations a non- binding vote on executive pay and "golden parachutes," and would give the SEC the authority to grant shareholders proxy access to nominate directors.

HEDGE FUNDS: Would require hedge funds and private equity funds to register with the SEC as investment advisers and to provide information on trades to help regulators monitor systemic risk.

INSURANCE: Would create a new Federal Insurance Office within the Treasury Department to monitor the insurance industry, recommending to the systemic risk council insurers that should be treated as systemically important. Would require the new office to report to Congress on ways to modernize insurance regulation.

-By Victoria McGrane, Dow Jones Newswires; 202-862-9267; victoria.mcgrane@

(Michael R. Crittenden, Sarah N. Lynch and Jessica Holzer contributed to this story)

(END) Dow Jones Newswires
Copyright (c) 2010 Dow Jones & Company, Inc.

Why Keynes is wrong

This is a summary of by Jack Crooks excerpted from his daily comment on Friday May 28 this year.

It discusses Jacks opinion of a masterpiece of Economic thought that argues, in my opinion very convincingly, that John Maynard Keynes and the whole Keynsian economic philosophy that Western governments have based their economic policies on is the cause of our present economic woes.

This is the book:
The Failure of the “New Economics,” written by Henry Hazlitt, published in 1959.

The entire book deconstructs John Maynard Keynes masterpiece —The General Theory of Employment Interest and Money, published in 1936.

Henry Hazlitt did the seemingly impossible, something that was and is a magnificent service to all people everywhere. He wrote a line-by-line commentary and refutation of one of the most destructive, fallacious, and convoluted books of the century. The target here is John Maynard Keynes's General Theory, the book that appeared in 1936 and swept all before it.

In economic science, Keynes changed everything. He supposedly demonstrated that prices don't work, that private investment is unstable, that sound money is intolerable, and that government was needed to shore up the system and save it. It was simply astonishing how economists the world over put up with this, but it happened. He converted a whole generation in the late period of the Great Depression. By the 1950s, almost everyone was Keynesian.

But Hazlitt, the nation's economics teacher, would have none of it. And he did the hard work of actually going through the book to evaluate its logic according to Austrian-style logical reasoning. The result: a 500-page masterpiece of exposition.

This book is available on

You economist wonks should devour it. The rest of us should heed the lessons of this man and Milton Friedman.

This economic stuff really isn’t hard.

This economic stuff really isn’t hard.

“Taxing moves money and spending moves resources.”
In other words, why on God’s green earth would anyone with a pulse believe taking money (taxes) from the most productive side of the economy (private sector), which uses resources efficiently thanks to the invisible hand of the market, and give it to the most unproductive side of the economy (government) who continually wastes finite resources (spending), thanks to the visible boot of the market?
Three answers:
1) Brainwashed by the Temples of Keynesian Hell, often referred to as Ivy League economics departments
2) Hubris, and a deep-seated belief in one’s ability to structure the lives of others
3) Pay off political cronies and “interest” groups

I had the privilege of listening to the Nobel Prize winning economist Milton Friedman in a lecture series during my MBA Economics classes say much the same thing.

This opinion is courtesy of Jack Crooks at Black Swan Capital and the link to the full discussion is above. An interesting argument.. read it, it dosnt take long.

Thursday, June 24, 2010

Technically speaking, the market looks bad

Courtesy of Steve Reitmeister, Executive VP, Zacks Investment Research quoted from Profit from the Pros - 6/24/10

Technically speaking, the market looks bad given a 2nd straight close under the 200 day moving averages. Fundamentally speaking, I did not care for the change in the Fed's language today. They are no longer saying that the economy is "strengthening". Rather they said that the economic rebound is "proceeding". This may sound like semantics, but the Fed is VERY particular about their choice of words and this marks a clear change in their sentiment. To make matters worse they stated; "financial conditions have become less supportive of economic growth ... largely reflecting developments abroad (read: Europe)." The smart money took this as a signal to move more cash to safety as can be seen by the further drop of the yield on 10 year treasuries to the lowest level since May 2009 (when it looked like the world was going to fall off a cliff). And perhaps many investors feel that is going to happen again. So I am taking this as a sign to lighten up my long positions. I even added a hefty ETF short position into the mix. I believe it will be hard for the market to press higher until we get forward looking guidance from Corporate America that makes us feel better about the economy. That won't happen for another few weeks. That says to me that the market is more likely to head lower over the next few weeks.

US home forfeitures

This page is about distressed sales of homes. Its a little dry but is vital reading for all.

The main questions are whether the backlog is being cleared and whether distressed sales are affecting prices.

Thank you Clear on Money.

23 Jun 2010.

The underlying trend in US distressed home sales has been upward for about a year. Despite some ambiguity and incompleteness in the seven available data series, it is clear that the upward trend remains intact.

House prices are inversely related to the fraction of all sales that is distressed, where bank sales and short sales constitute the distressed category. The rate of change in house prices is inversely related to the inventory of existing homes, measured in months of supply. Both of these measures now suggest falling prices.

Investor demand climbs for Fannie, Freddie, Ginnie debt

Investors continue to look for safe investments,
pushing up prices of mortgage securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. The agency
bonds are trading at more than their face value, yielding about 1.5% more than comparable Treasurys. Foreign
investors are attracted to the bonds because they are guaranteed by the government. The Wall Street Journal

Fannie Mae plans to crack down on "strategic defaulters"

Fannie Mae plans to get tough on borrowers who
can afford to make their mortgage payments but walk away because the loan balance is bigger the the
property's value. People who engage in a "strategic default" would be banned from Fannie loans for seven
years. In some cases, the U.S. government-controlled company would tell loan servicers to go to court to get
back money owed to Fannie. Los Angeles Times

Analysis: U.S. home sales crash after tax credit ends

Sales of homes in the U.S., along with their prices,
soared after Congress gave first-time buyers an $8,000 tax credit. When the subsidy expired, so did the boost,
with only 28,000 home sold in May, the lowest number recorded for that month. The tax credit did nothing
about high inventory, unemployment close to 10% and millions of underwater homeowners, according to The
Economist. "And Americans are now left wondering when housing's second dip will find its bottom and real
recovery begin," The Economist notes. The Economist

Wednesday, June 23, 2010

Mortgage Workout 4: The real urgency

Its no longer inauguration day. There is no more hope in the air. has not come. HAMP and HARP are failed solutions to the wrong problem. They simply dont work.Forcing a refinancing on a homeowner that consumes 60% or more of disposable income is not a sustainable solution. It is a depressing process without a hopeful ending.

Where is the incentive for that homeowner, often innocent of any wrongdoing and merely a victim of relentlessly reducing home values,to stay in an unaffordable home?

The sensible thing to do is to hand back the keys to the house to whomever can prove they own the note on it and move on to find housing for the family that IS affordable.

It is time for politicians to be patriotic and not parochial.

Everyone must acknowledge that the problem is NOT how to rejigger the current mortgage to somehow cajole the homeowner to pay up. The current mortgage modification practises are structured to encourage the exact opposite result...because that is where the money lies for the banks and mortgage servicers. These guys get fees every step of the way.

Servicers get to charge fees to try and modify a mortgage; they get subsidies from the government to give it a try. The big five banks get to charge interest and just have no incentive to kill the cash cow that borrowing from the Government at effectively zero cost and lending the money right back at a 2+% profit with no risk, has become.

Why should anyone lend to some risky person offering collateral that is declining in value when they can lend the free money right back at a risk free profit?

Government MUST rescue the homeowners of this great nation or the American Dream of home ownership will be lost forever.

Government cannot abandon its citizens!

This is a moment in history that a simple, transparent process of mortgage normalization could turn into a triumph of affordable prosperity for this great nation and for the world!The United States MUST lead!

They must do this for the benefit of the country. To do anything other than a clean fix aimed laserlike at the problem of home valuation is to charge the country headlong out of the current recession into a second Great Depression of unimagined magnitude and consequence.

Here is an example of how this would work, without using additional bailout money, without cramping the style of politicians who want to free up money for stimulating economic activity and would restore the great hope of prosperity for this great nation and the world:


John Smith Family owns a house with a current mortgage of $700,000. It is their primary residence (they live in it).
Smith household income reported on 2009 Federal tax return was $125,000 gross before any deductions ( NOT their taxable income, their take home pay with tax added back).

Current US 30 year Treasury Bonds have an interest rate of 4.059%.

Principle no 1: 30% of $125,000 means Smith can afford to pay no more than $37,500 per year or $3,125 per month for Principal & Interest on the mortgage.

Smith gets a new mortgage under this program with a 30 year term at 4.55% (4.059+0.5 servicing fee) for a nominal value of approx $600,000.(arrived at through Discounted Cash Flow analysis based on what Smith can afford to pay). The Government gets the right to 80% of the difference between $600,000 and the original mortgage amount of $700,000 when the house is sold.

Ten years from now Smith sells the house for $700,000

He has paid about $2,900/month in interest for 10 yrs or $348,000 that has gone back into the US treasury.

He has paid about $27,000 in principal. He owes $573,000 on the new government mortgage, and $100,000 difference between his old and new mortgage originally financed by the US govt.

His gross profit on the sale of his house is $127,000. He owes 80% of this or $101,600, under his mortgage contract so that the Government gets the $573,000 and its $100,000 back and $1,600 more.

Smith has had his property written down to a reasonable value and his mortgage therefore becomes valuable in a resale. The Federal Reserve can resell it if they wish. Smith has lived with a new lower payment and still got the tax deduction for interest. He has made a profit on the sale of the home!

Most importantly, Smith is not tempted to hand the keys of the house to the bank because he is upside down in the mortgage. The Bankruptcy/foreclosure process is completely avoided.

There is a very real potential for gain by the Government( thats us - the taxpayer). Interest and principal payments on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established. The Fed will hire the necessary personnel to administer the program.

The banking system is unclogged and consumer confidence is restored.

Just imagine the rush of consumer confidence unleashed! Homeowners with new purchasing power!
Banks with capital to lend to credit worthy businesses who can hire new employees who now have an income! Hundreds of thousands of people seperating from the Government Welfare rolls!

This can happen, now. It must happen... anything that has been tried up to now has failed and will lead this nation and the world over the cliff to oblivion.

Change course now!

Mortgage Workout 3: Benefits to Mortgage Holders and Homeowners under water on the Mortgage

a. Current law-abiding households who are are seeing negative real value of their primary residence will be able to remain in their homes at affordable cost with a potential for some upside appreciation in the value of their property; and they get to see a participation in the realization of that potential together with Government on sale of their property.
b. Banks and other mortgage owners will have a value, real and ascertainable, assigned to each and every such distressed mortgage. AND they will have, therefore a viable asset to sell to mortgage repackagers on Wall Street; this frees up capital to lend out on new mortgages under more appropriate terms (20% downpayment, 30% max housing cost to household income)
c. Government gets a real, visible path to recovery of money appropriated to this program, with interest.
d. Government will be helping citizens who most need help and restoring their confidence in The American Dream.
e. Government will restore confidence in the banking system worldwide by establishing a system of mortgage valuation that establishes a valuation methodology that could easily be cloned by private investors and capitalized on by the Financial Services industry worldwide.
f. Bankers and other lenders will now have a method of assessing the value of collateral offered interbank and lending between institutions, currently effectively at a trickle, can be reinvigorated.
g. No new government burocracy needed. FNMA/FHLMC become effective arms of the Federal Reserve who is charged with housing stability as a third mandate.

The result will be a very viable, self-funding solution to the current housing/banking crisis.

Mortgages then become easy to value as the underlying properties have a recognized value. Homeowners have an affordable mortgage payment, freeing up discretionary income for spending on other goods and services.

Most importantly, homeowners will not be tempted to walk away from unaffordable payments, or houses worth less than they owe. Foreclosure or bankruptcy can be avoided completely.
There is a very real potential for gain for the Government. Interest on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established.

The banking system is unclogged and consumer confidence is restored. All without requiring additional tax burdens on unborn generations.

Mortgage Workout 2, Updated: Funding

FUNDING for this Program:

Congress will authorize Treasury to issue up to $700 billion annually in 30 year Treasury bonds, at prevailing rates, to implement this program. ( and use the unspent $300 Billion unused funds already voted in the TARP)

These funds will be placed in a separate segregated Federal Reserve Bank administered fund that cannot be invaded by anyone or used for any other purpose than mortgage refinancing. These funds will be used to purchase mortgages on PRIMARY RESIDENCES from homeowners at the value of the amount of principal outstanding on these mortgages.

Chairman of Fed to be responsible for disbursements and oversight of the program so co-ordination with Monetary policy will be maximized.

Reporting: to Congress on program status twice a year.

A Mortgage Workout for the People of the USA 1: The Plan Revised and updated

This is a plan I first suggested two years ago and again on Inauguration day, to help every citizen of the USA whose current mortgage obligation exceeds the value of their primary home.

Principle no 1: No household should pay a housing cost (mortgage payment: principal + Interest only) that exceeds 30% of their gross income( before any deductions) as reported on their latest Federal Tax Return.

Principle no 2: The Federal Government will refinance existing mortgages, through The Federal Reserve Bank; (buy the existing mortgage and reissue a new mortgage to homeowner). This will apply ONLY to homeowners whose mortgage debt on their PRIMARY residence is larger than the current value of their property.

Principle no 3: New mortgages issued under this program, based on household ability to pay, will contain a provision that allows The Federal Reserve Bank to recover, on sale of secured property, 80% of the difference between the nominal value of the new mortgage issued and the then sale price of the property, until full amount of original refinanced mortgage is recovered. The Federal Reserve Bank will be allowed to charge a 0.5% fee in addition to 30yr Treasury Bond rate to cover cost of implementing the program.

Principle no 4: Federal Reserve Bank will be allowed to continue to repackage these new mortgages in CMO’s etc for resale through traditional resale channels.