Bloomberg's Tom Keene continues to slip in my estimation with almost every program of his that I view. His guests are of uneven quality, and Keene tends to project this naivete that makes you wonder if he's really up to cross-examining his guests. I'm guessing not.
Yesterday he had two women guests discussing the US housing situation. First was, I believe, Laurie Goodman, a principal with an asset manager.
Goodman declined to attribute responsibility for how we came to have 20% of all mortgages in existence five years ago now delinquent, and 23% of all US mortgages underwater.
Keene was totally in love with a trend chart purporting to illustrate that job growth was dependent upon housing, so without housing growth, the US economy is dead. He never questioned whether perhaps this had been a short-term (only a decade or so, I believe) and artificial correlation that is, in fact, unhealthy for the US economy.
Goodman sensibly said that thing will get better as new construction stops, thus forcing the huge foreclosure overhang to be worked off. And that two other events need to occur.
One, which Lew Ranieri explained over six months ago on CNBC, is the appearance of a government program allowing local investors to buy foreclosed properties and rent them. The second is to process as many foreclosures as possible in order to eliminate the old, high costs bases and allow new owners to buy at market prices.
She added that lending for these new mortgages is stalled, presenting a stumbling block.
The second guest, Stephanie Meyer, now with BofA Merrill Lynch, echoed Goodman's sentiments. She was clear about the need for foreclosures to move along and allow repricing of housing stock.
Interestingly, and another incident of Keene's failure to adequately question his guests, neither woman, nor Keene touched on the political issue of dumping so many existing delinquent homeowners out of their homes. That the current administration is trying to prevent this by threatening 'cramdowns' and such forcible taking of investor value to reward delinquent homeowners.
Disappointing, too, was Keene's failure to challenge whether the housing sector should ever have become so central to the US economy, and whether its removal of mobility for homeowners was a mistake in our modern economy?
Still, the raw information from these two guests concerning what would move the housing sector forward was refreshing.
Showing posts with label Mortgage Lending. Show all posts
Showing posts with label Mortgage Lending. Show all posts
Wednesday, November 30, 2011
Friday, November 18, 2011
More Housing Missteps By Congress
Yesterday's Wall Street Journal's lead staff editorial reported the disappointing news that, with so much public attention focused on Fannie Mae and Freddie Mac, the FHA is being granted a rise of about $100K in value, to almost three quarters of a million dollars, in the size of mortgages it can guarantee.
Various data detailing the FHA's precarious capital position (about .25%, rather than the mandated 2.5% or so) and enormous, though underestimated future defaults on its portfolio.
FHA was supposed to be the original low-income government-assisted housing loan program. I recall selling my first home some twenty years ago to a veteran who received special treatment under the FHA loan for which he applied. Incredibly, as the seller, I had to pay his points. Imagine my surprise at the closing when I learned the couple had therefore gone and borrowed significantly more than they had initially represented in their purchase offer, sticking me with higher fees for selling my house.
The FHA program was designed long ago as a vehicle to assist the emerging middle class in what was then viewed as a laudable goal- home ownership.
It's hard to see how even in the New York Metro area, at this time, a $725K home can be considered either a starter, or deserving of any sort of special government assistance.
No doubt those defending this increase in FHA mortgage size will claim it is to boost housing demand in order to rescue the housing sector, create sales and, somehow, magically, ignite housing starts.
How many times have you heard pundits and, of course, National Association of Realtors officers blather on about how a US recovery must begin with housing? How we have to get housing fixed to fix the economy? How much the US economy relies on the construction sector which is sustained by housing?
What happened to letting the US economy, with its hundreds of millions of actors, determine sector activity through their genuine demand for various goods and services?
From my youth, to now, I can cite three industries which were supposed to be the backbone of the US economy in their day- steel, autos and, now, housing.
Each had a parasitic union which ultimately sapped its host nearly to death. Each sector had its productivity peak, the bulk of its value-added fall victim to lower-wage, and thus, higher-productivity foreign competitors. Which led to the exit of US producers as the products became more commoditized and the US lost competitive advantage in those products.
Housing, being a locally-produced and -consumed good, didn't get sent offshore. We killed this one by over-subsidizing it.
I've been very impressed by the studies I've read that demonstrate home ownership to be the enemy of the once-vaunted mobility of the US labor market. And never moreso than....at the low end of the income distribution. The absolute worst thing you can do for the lower income worker is to chain her/him to a home, so that when their semi-skilled job vanishes, they can't pick up and move immediately. Oh, and by the way, when that job does vanish, probably with hundreds or thousands of others like it, local property values will plummet, causing them to lose what little savings they had, as the home goes upside down with respect to its mortgage.
Maybe it's time we finally just stop subsidizing any sectors out of an arrogance which assumes a few legislators, with the 'help' of lobbyists for a sector, know what's best for American consumers and the US economy.
As of 2011, we've reaped a moribund housing industry from too many years of subsidizing the consumption of ever-larger houses by ever-more Americans. We've binged on housing, and now the value of that housing stock has fallen.
Market economics would lead us to let housing prices go where supply and demand take them. In this case, falling to a point where a newly-enabled tranche of buyers can afford that which was previously beyond their means, and at realistic interest rates and by appropriately careful lending standards.
No other path will resolve the housing sector's ills, nor cause it to have a positive effect on the US economy.
Rather than listen to politicians and pundits who declare we need this or that special program to incent consumers or business owners to behave in a certain way, to 'jump start' the US economy, perhaps, now, after several years of lackluster growth and a subsidized-housing-sector financial crash, we might just let market forces, in their own time, produce a real, sustained recovery driven by genuine market demand and, consequently, supply.
Various data detailing the FHA's precarious capital position (about .25%, rather than the mandated 2.5% or so) and enormous, though underestimated future defaults on its portfolio.
FHA was supposed to be the original low-income government-assisted housing loan program. I recall selling my first home some twenty years ago to a veteran who received special treatment under the FHA loan for which he applied. Incredibly, as the seller, I had to pay his points. Imagine my surprise at the closing when I learned the couple had therefore gone and borrowed significantly more than they had initially represented in their purchase offer, sticking me with higher fees for selling my house.
The FHA program was designed long ago as a vehicle to assist the emerging middle class in what was then viewed as a laudable goal- home ownership.
It's hard to see how even in the New York Metro area, at this time, a $725K home can be considered either a starter, or deserving of any sort of special government assistance.
No doubt those defending this increase in FHA mortgage size will claim it is to boost housing demand in order to rescue the housing sector, create sales and, somehow, magically, ignite housing starts.
How many times have you heard pundits and, of course, National Association of Realtors officers blather on about how a US recovery must begin with housing? How we have to get housing fixed to fix the economy? How much the US economy relies on the construction sector which is sustained by housing?
What happened to letting the US economy, with its hundreds of millions of actors, determine sector activity through their genuine demand for various goods and services?
From my youth, to now, I can cite three industries which were supposed to be the backbone of the US economy in their day- steel, autos and, now, housing.
Each had a parasitic union which ultimately sapped its host nearly to death. Each sector had its productivity peak, the bulk of its value-added fall victim to lower-wage, and thus, higher-productivity foreign competitors. Which led to the exit of US producers as the products became more commoditized and the US lost competitive advantage in those products.
Housing, being a locally-produced and -consumed good, didn't get sent offshore. We killed this one by over-subsidizing it.
I've been very impressed by the studies I've read that demonstrate home ownership to be the enemy of the once-vaunted mobility of the US labor market. And never moreso than....at the low end of the income distribution. The absolute worst thing you can do for the lower income worker is to chain her/him to a home, so that when their semi-skilled job vanishes, they can't pick up and move immediately. Oh, and by the way, when that job does vanish, probably with hundreds or thousands of others like it, local property values will plummet, causing them to lose what little savings they had, as the home goes upside down with respect to its mortgage.
Maybe it's time we finally just stop subsidizing any sectors out of an arrogance which assumes a few legislators, with the 'help' of lobbyists for a sector, know what's best for American consumers and the US economy.
As of 2011, we've reaped a moribund housing industry from too many years of subsidizing the consumption of ever-larger houses by ever-more Americans. We've binged on housing, and now the value of that housing stock has fallen.
Market economics would lead us to let housing prices go where supply and demand take them. In this case, falling to a point where a newly-enabled tranche of buyers can afford that which was previously beyond their means, and at realistic interest rates and by appropriately careful lending standards.
No other path will resolve the housing sector's ills, nor cause it to have a positive effect on the US economy.
Rather than listen to politicians and pundits who declare we need this or that special program to incent consumers or business owners to behave in a certain way, to 'jump start' the US economy, perhaps, now, after several years of lackluster growth and a subsidized-housing-sector financial crash, we might just let market forces, in their own time, produce a real, sustained recovery driven by genuine market demand and, consequently, supply.
Friday, October 28, 2011
The Folly of Mortgage Forgiveness
Alan Blinder's editorial in the October 20 edition of the Wall Street Journal, How to Clean Up the Housing Mess, contains shockingly bad recommendations regarding America's housing hangover from the Greenspan era of easy credit.
For example, Blinder contends, in the opening paragraphs of his editorial,
"Sadly, however, we did almost nothing to stop the predicted foreclosure wave, which is now drowning us. The issue at this late date is how we can mitigate the damage.
One oft-repeated answer comes from the intellectual descendants of Andrew Mellon and Herbert Spencer: liquidate, liquidate, liquidate. Let the housing market find its natural bottom, and the chips fall where they may.
I beg to differ. Some of the reasons are humanitarian. Millions of foreclosures are ruining millions of lives and devastating many communities. We can do better than Social Darwinism."
Blinder refuses to acknowledge that the housing foreclosure mess and overbuilding involved borrowers getting themselves into loans which they should have declined, mostly for houses they could not afford. Simply declaring that they must be spared is a pipe dream. Liquidation of foreclosures doesn't necessarily mean evictions, but we must have an attribution of the loss of value to some party. And that party would, according to mortgage contracts, seem to be the borrowers. If they default and the lenders can't recoup all of their loan value, then they, too, will share some of the loss.
Next, Blinder makes a baldface misstatement,
By now, massive underbuilding during the slump far exceeds the overbuilding during the boom. So, by rights, a shortage of houses should be pushing up house prices, incentivizing home builders, and boosting growth in gross domestic product. Instead, actual and prospective foreclosures hang over the housing market like a wet blanket."
On Monday afternoon, two economists who were guests on Bloomberg television agreed that the recent rise in housing starts is bad news. That the US still suffers from a surplus of housing. So Blinder is wrong to claim that there has been a "massive underbuilding during the slump" that "far exceeds the overbuilding during the boom." If that were true, we wouldn't have a foreclosure dilemma, because demand would be supporting housing prices.
Blinder claims the following regarding federal mortgage relief,
"The first is money. Given the huge magnitude of the aggregate gap between house values and mortgage balances, a comprehensive anti-foreclosure solution requires hundreds of billions of dollars. (Note, however, that this money would be lent, not spent.)"
How does he know the money would "be lent, not spent?" Losses will eventually have to be realized, which means 'spent' money which artificially paid for value that just isn't there.
"The second barrier is a host of legal complications—stemming from such things as securitizations, second mortgages, and the like—that make it difficult to design and execute a comprehensive plan. The details would put you to sleep. But the bottom line is that most serious solutions entail modifying somebody's property rights—which is something we don't do lightly in America, and for good reason."
So Blinder doesn't take this lightly, but, what the heck, let's do it anyway. We'll just say, you know, that we 'didn't do it lightly.'
"The third barrier may be the biggest: politics. Apparently, many Americans view it as unfair to bail people out of unaffordable mortgages. Do you remember the famous Rick Santelli rant on CNBC in February 2009—the one that gave the tea party movement its name? Mr. Santelli was griping about President Obama's new foreclosure mitigation programs—the ones I just characterized as half-hearted. It would have been a brave politician indeed who pushed to make those programs larger and more generous.
Most economists see principal reductions as central to preventing foreclosures. That takes money, of course—plus ignoring the Rick Santelli rant. Perhaps the cost to taxpayers could be reduced by giving the government—or even private investors—some of the upside when house prices finally start climbing."
For some reason, perhaps because he's a liberal, and Rick Santelli is not, Blinder delights in demonizing the CNBC on-air staffer. Calling the process of saddling taxpayers with the losses of injudicious borrowers for homes they could not afford "politics" is a convenient way to disguise and endorsement of moral hazard, as well as bad policy.
"Many vacant houses could be converted into rental units by enterprising developers. The government could make such investments more attractive, e.g., by using mechanisms similar to what the Federal Reserve and the Treasury did during the worst of the financial crisis. Back then the government lent money to investors who were willing to buy mortgage-backed securities; this time it could lend money to investors who are willing to invest in certain rental properties."
Ironically, Lew Ranieri complained on CNBC earlier this year that such federal loan programs for small investors, which were a key part of the 1980s S&L crisis recovery, were not offered in the most recent mortgage-related crisis. Once again, though, one has to ask, who will have born the losses on these houses as they return to the market at lower prices?
Blinder is all for mandated loan forgiveness, forgetting that such losses will make banks take losses, further imperiling their capital adequacy. Large US banks wouldn't even be at the table discussing the issue, had the federal government not intimidated them with baseless litigation as the price of declining to join the talks.
As I explained to a friend the other day, housing value losses are a fact. There are only three groups which can absorb them- homeowners, banks and taxpayers. Blinder wants banks to absorb the losses. That will, as I have explained in this piece, cause capital adequacy issues, as well as reward borrowers for taking excessive risk. If homeowners are left to follow available legal options, including bankruptcy, then housing prices will fall to market-clearing levels and others who can now afford such houses will buy them. If the government, either directly or through GSE pass-through securities, assumes the losses, that means, in effect, taxpayers are bailing out homeowners.
That's no way to treat a private sector, nor to resolve the US housing problems. Blinder's ideas for dealing with the housing sector's woes and coming foreclosure boom should be ignored.
For example, Blinder contends, in the opening paragraphs of his editorial,
"Sadly, however, we did almost nothing to stop the predicted foreclosure wave, which is now drowning us. The issue at this late date is how we can mitigate the damage.
One oft-repeated answer comes from the intellectual descendants of Andrew Mellon and Herbert Spencer: liquidate, liquidate, liquidate. Let the housing market find its natural bottom, and the chips fall where they may.
I beg to differ. Some of the reasons are humanitarian. Millions of foreclosures are ruining millions of lives and devastating many communities. We can do better than Social Darwinism."
Blinder refuses to acknowledge that the housing foreclosure mess and overbuilding involved borrowers getting themselves into loans which they should have declined, mostly for houses they could not afford. Simply declaring that they must be spared is a pipe dream. Liquidation of foreclosures doesn't necessarily mean evictions, but we must have an attribution of the loss of value to some party. And that party would, according to mortgage contracts, seem to be the borrowers. If they default and the lenders can't recoup all of their loan value, then they, too, will share some of the loss.
Next, Blinder makes a baldface misstatement,
By now, massive underbuilding during the slump far exceeds the overbuilding during the boom. So, by rights, a shortage of houses should be pushing up house prices, incentivizing home builders, and boosting growth in gross domestic product. Instead, actual and prospective foreclosures hang over the housing market like a wet blanket."
On Monday afternoon, two economists who were guests on Bloomberg television agreed that the recent rise in housing starts is bad news. That the US still suffers from a surplus of housing. So Blinder is wrong to claim that there has been a "massive underbuilding during the slump" that "far exceeds the overbuilding during the boom." If that were true, we wouldn't have a foreclosure dilemma, because demand would be supporting housing prices.
Blinder claims the following regarding federal mortgage relief,
"The first is money. Given the huge magnitude of the aggregate gap between house values and mortgage balances, a comprehensive anti-foreclosure solution requires hundreds of billions of dollars. (Note, however, that this money would be lent, not spent.)"
How does he know the money would "be lent, not spent?" Losses will eventually have to be realized, which means 'spent' money which artificially paid for value that just isn't there.
"The second barrier is a host of legal complications—stemming from such things as securitizations, second mortgages, and the like—that make it difficult to design and execute a comprehensive plan. The details would put you to sleep. But the bottom line is that most serious solutions entail modifying somebody's property rights—which is something we don't do lightly in America, and for good reason."
So Blinder doesn't take this lightly, but, what the heck, let's do it anyway. We'll just say, you know, that we 'didn't do it lightly.'
"The third barrier may be the biggest: politics. Apparently, many Americans view it as unfair to bail people out of unaffordable mortgages. Do you remember the famous Rick Santelli rant on CNBC in February 2009—the one that gave the tea party movement its name? Mr. Santelli was griping about President Obama's new foreclosure mitigation programs—the ones I just characterized as half-hearted. It would have been a brave politician indeed who pushed to make those programs larger and more generous.
Most economists see principal reductions as central to preventing foreclosures. That takes money, of course—plus ignoring the Rick Santelli rant. Perhaps the cost to taxpayers could be reduced by giving the government—or even private investors—some of the upside when house prices finally start climbing."
For some reason, perhaps because he's a liberal, and Rick Santelli is not, Blinder delights in demonizing the CNBC on-air staffer. Calling the process of saddling taxpayers with the losses of injudicious borrowers for homes they could not afford "politics" is a convenient way to disguise and endorsement of moral hazard, as well as bad policy.
"Many vacant houses could be converted into rental units by enterprising developers. The government could make such investments more attractive, e.g., by using mechanisms similar to what the Federal Reserve and the Treasury did during the worst of the financial crisis. Back then the government lent money to investors who were willing to buy mortgage-backed securities; this time it could lend money to investors who are willing to invest in certain rental properties."
Ironically, Lew Ranieri complained on CNBC earlier this year that such federal loan programs for small investors, which were a key part of the 1980s S&L crisis recovery, were not offered in the most recent mortgage-related crisis. Once again, though, one has to ask, who will have born the losses on these houses as they return to the market at lower prices?
Blinder is all for mandated loan forgiveness, forgetting that such losses will make banks take losses, further imperiling their capital adequacy. Large US banks wouldn't even be at the table discussing the issue, had the federal government not intimidated them with baseless litigation as the price of declining to join the talks.
As I explained to a friend the other day, housing value losses are a fact. There are only three groups which can absorb them- homeowners, banks and taxpayers. Blinder wants banks to absorb the losses. That will, as I have explained in this piece, cause capital adequacy issues, as well as reward borrowers for taking excessive risk. If homeowners are left to follow available legal options, including bankruptcy, then housing prices will fall to market-clearing levels and others who can now afford such houses will buy them. If the government, either directly or through GSE pass-through securities, assumes the losses, that means, in effect, taxpayers are bailing out homeowners.
That's no way to treat a private sector, nor to resolve the US housing problems. Blinder's ideas for dealing with the housing sector's woes and coming foreclosure boom should be ignored.
Thursday, October 27, 2011
Citigroup's Mortgage Fraud Case
Thursday's Wall Street Journal reported that Citigroup will pay $285MM to settle fraud charges involving the bank's selling mortgage-backed securities to investors while simultaneously shorting some of those same instruments.
This is the same sort of behavior for which Goldman Sachs was excoriated before a Congressional committee, and settled related charges for $550MM.
In Citigroup's case, it seems rather odd to me that the US taxpayer rescued this firm. In effect, rather than let such a management fail, our government saw fit to rescue the management team responsible for such fraud. Something seems very wrong with that.
Wouldn't it have seemed more sensible, given the overcapacity of the financial sector, and the many mistakes made by management in some very large firms, to put those which failed into an orderly Chapter 11 process?
Instead, we have our government using our tax dollars to prop up and revive a management which actively engaged in large-scale fraud of investors in its mortgage-backed securities.
This is the same sort of behavior for which Goldman Sachs was excoriated before a Congressional committee, and settled related charges for $550MM.
In Citigroup's case, it seems rather odd to me that the US taxpayer rescued this firm. In effect, rather than let such a management fail, our government saw fit to rescue the management team responsible for such fraud. Something seems very wrong with that.
Wouldn't it have seemed more sensible, given the overcapacity of the financial sector, and the many mistakes made by management in some very large firms, to put those which failed into an orderly Chapter 11 process?
Instead, we have our government using our tax dollars to prop up and revive a management which actively engaged in large-scale fraud of investors in its mortgage-backed securities.
Tuesday, July 12, 2011
Housing's Misplaced Role in Personal Finance
Robert Bridges, described as "professor of clinical finance and business economics at the University of Southern California's Marshall School of Business," wrote a very useful editorial in yesterday's edition of the Wall Street Journal entitled A Home Is a Lousy Investment.
I found, as I read his piece, that much of what he contends meshes well with some of the points I made in this July 4th post.
Bridges begins by providing some factual evidence that homeownership in a state once considered home to many Americans who grew prosperous with the nation's and state's economy has actually been a comparatively bad deal,
"Between 1980 and 2010, the value of a median-price, single-family house in California rose by an average of 3.6% per year—to $296,820 from $99,550, according to data from the California Association of Realtors, Freddie Mac and the U.S. Census. Even if that house was sold at the most recent market peak in 2007, the average annual price growth was just 6.61%.
So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
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Here's another way of looking at the situation. If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850."
Note that Bridges provides data on end values before the recent financial crisis destroyed so much California residential real estate wealth.
If you argue that California became a less-desirable state in which to own a home over the period, that, too, is evidence. Who, nowadays, can predict a state's spending and taxation climate over 30+ years? Or even 20 years?
My current state of residence, New Jersey, went from a fiscally more responsible neighbor to New York to one of the nation's worst economic disasters from 1970 to today.
Bridges continues, based upon his knocking the supports out from under the 'housing as investment' argument, to ask why we, as a nation, are so preoccupied with housing as an driver of our economy,
"In light of this lackluster investment performance, and in the aftermath of the recent housing-market collapse, why is there such rapt attention to the revival of the homebuilding industry and residential property markets? The answer is that for policy makers whose survival depends on economic recovery, few activities have such direct, intense and immediate positive economic impact as new home construction.
Home values may gain value over time, but home equity is locked-in until the house is sold. The profits may then be reinvested or spent, creating significant stimulative effects, but usually this happens when market conditions are strong, exacerbating unsustainable market booms. When troubled assets are dumped, or when defaults occur during weak market conditions, the trough is deepened.
Housing markets may be forever doomed to cyclicality for many reasons, but public policies that stimulate new construction or home purchases by tax and financing subsidies, reduction of qualifying incomes, buyer credits, mortgage backstopping, and preferential zoning and permitting, only intensify these cycles. Efforts to reduce loan balances and to create special rescue programs have reduced the security of loans, challenged the enforceability of contracts, and driven up real borrowing costs. Nearly a third of our states do not allow lenders the recourse provisions necessary to go after a borrower's personal assets in case of default on a residential mortgage. The sanctity of mortgage obligations has become the rough moral equivalent of the 55-mile-per-hour speed limit."
Next, Bridges debunks the myth of home as emergency piggy bank,
"There is also a misconception that paying off a home mortgage is a path to financial or retirement security. The reality is that tapping the equity is expensive: Home-equity loans or lines of credit made with low qualifying incomes often command high interest rates and costs. If an emergency occurs—the loss of a job, or a business setback—it's likely that the same conditions creating the problem will lower the value and impede the marketability of the home and curtail the availability of financing for a buyer. Funds set aside for emergencies should always be liquid assets."
Having cast serious doubt over the wisdom of homeownership, Bridges then directly asks,
"Is it wise for coming generations to continue to view ownership as the cornerstone of personal finance? Young people planning for retirement increasingly face a choice between house payments and contributions to retirement accounts. They simply can't afford both. With the specter of looming cuts in Social Security and other entitlement programs, or even possible systemic insolvency, the challenge for tomorrow's retirees is income self-sufficiency.
A nation of house buyers becomes captive to the economic cyclicality caused by bursts of construction activity, and it is not lifted or sustained by the limited levels of service employment related to existing housing. By contrast, a nation of business startups and investors supports our capital markets and creates long-term employment, income, exports and the myriad technological advancements desperately needed by an expanding American society.
New home construction and the markets for existing homes should be recognized as activities secondary to, and dependent on, employment. Healthy job markets create healthy property markets, not the reverse. Housing demand driven by job growth creates conditions capable of sustaining a stable level of construction employment, attracting private equity investment, sustaining competitive private debt markets, encouraging capital growth, and ensuring the lowest possible housing prices."
The observation that "healthy job markets create healthy property markets, not the reverse," is, I believe, more important historically than Bridges realizes.
Much as I contended in my recent, linked post, that much bad US social welfare policy was posited on a brief, passing period of economic hegemony from 1945-75, so, too, I realized, after reading Bridges' excellent piece, has been US housing policy and beliefs thereabout.
For, contemporaneous with returning GIs, the rise of suburbs, etc., after WWII, was the new phenomenon of widespread middle-class ownership of non-farm homes.
I read an editorial in the Journal sometime within the past two years which contrasted US cities having advanced technology jobs with those having more blue-collarish, heavy industry employment. This isn't an exact list, but the former included San Francisco, whereas the latter included St. Louis and Cleveland.
What the author found was that homeownership was associated with cities having older, more industrial job bases. In effect, employees of high technology firms expected to be more mobile and, thus, didn't bother to own homes in as high proportions as blue-collar workers.
Could it be that much of our American view of the importance, the near-necessity of homeownership, result from a short period of just 30 years after WWII, when so many middle-class, blue-collar Americans enjoyed the fruits of the nation's unchallenged economic supremacy?
I did a little informal survey of friends last winter. All are college-educated and work in white-collar jobs. I asked what their grandparents did for work, and in what sort of homes they lived?
Without exception, most grandparents were not college-educated and lived in rental housing. One of my friends had a grandmother whose lumberjack husband was crushed to death on the job, requiring her to become a maid and laundress to support her children.
The mythic imagery of poorer, less-educated ancestors sacrificing so that future generations could own homes as a major part of "the American Dream," is, I believe, a curiously materialistic side-effect of a temporary period of American economic power.
It takes little thought to see that education is the most valuable asset a person can ever possess. It's portable, can be applied as creatively as the person to whom it belongs and, once acquired, is never truly lost.
Physical homes are different. They are, in truth, expensive luxuries in an unpredictable world. As investments, they are lumpy, costly to buy and sell, and require constant, expensive maintenance.
How we got to the point of subsidizing those who could barely afford to own homes is less a mystery than the continued misguided conclusions of Americans and their government, from 1945 onward, that the nation had come into some sort of economic and financial Promised Land of eternally rising living standards. In short, the exception became the norm, became the expected birthright of employed, educated Americans.
Bridges ends his piece with this passage,
"Owner-occupied homes will always be the basis for healthy and stable neighborhoods. But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence."
I would go further. Owned homes may be "part of a good life," but, more correctly, they would be part of "a good, predictable, dependable economic life."
Otherwise, they are a cursed millstone. I suspect that while land or judiciously-chosen investments in rental properties would be good investments, homes, generally, across all economic eras, are not. And won't be in the future.
I found, as I read his piece, that much of what he contends meshes well with some of the points I made in this July 4th post.
Bridges begins by providing some factual evidence that homeownership in a state once considered home to many Americans who grew prosperous with the nation's and state's economy has actually been a comparatively bad deal,
"Between 1980 and 2010, the value of a median-price, single-family house in California rose by an average of 3.6% per year—to $296,820 from $99,550, according to data from the California Association of Realtors, Freddie Mac and the U.S. Census. Even if that house was sold at the most recent market peak in 2007, the average annual price growth was just 6.61%.
So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
Note that Bridges provides data on end values before the recent financial crisis destroyed so much California residential real estate wealth.
If you argue that California became a less-desirable state in which to own a home over the period, that, too, is evidence. Who, nowadays, can predict a state's spending and taxation climate over 30+ years? Or even 20 years?
My current state of residence, New Jersey, went from a fiscally more responsible neighbor to New York to one of the nation's worst economic disasters from 1970 to today.
Bridges continues, based upon his knocking the supports out from under the 'housing as investment' argument, to ask why we, as a nation, are so preoccupied with housing as an driver of our economy,
"In light of this lackluster investment performance, and in the aftermath of the recent housing-market collapse, why is there such rapt attention to the revival of the homebuilding industry and residential property markets? The answer is that for policy makers whose survival depends on economic recovery, few activities have such direct, intense and immediate positive economic impact as new home construction.
Home values may gain value over time, but home equity is locked-in until the house is sold. The profits may then be reinvested or spent, creating significant stimulative effects, but usually this happens when market conditions are strong, exacerbating unsustainable market booms. When troubled assets are dumped, or when defaults occur during weak market conditions, the trough is deepened.
Housing markets may be forever doomed to cyclicality for many reasons, but public policies that stimulate new construction or home purchases by tax and financing subsidies, reduction of qualifying incomes, buyer credits, mortgage backstopping, and preferential zoning and permitting, only intensify these cycles. Efforts to reduce loan balances and to create special rescue programs have reduced the security of loans, challenged the enforceability of contracts, and driven up real borrowing costs. Nearly a third of our states do not allow lenders the recourse provisions necessary to go after a borrower's personal assets in case of default on a residential mortgage. The sanctity of mortgage obligations has become the rough moral equivalent of the 55-mile-per-hour speed limit."
Next, Bridges debunks the myth of home as emergency piggy bank,
"There is also a misconception that paying off a home mortgage is a path to financial or retirement security. The reality is that tapping the equity is expensive: Home-equity loans or lines of credit made with low qualifying incomes often command high interest rates and costs. If an emergency occurs—the loss of a job, or a business setback—it's likely that the same conditions creating the problem will lower the value and impede the marketability of the home and curtail the availability of financing for a buyer. Funds set aside for emergencies should always be liquid assets."
Having cast serious doubt over the wisdom of homeownership, Bridges then directly asks,
"Is it wise for coming generations to continue to view ownership as the cornerstone of personal finance? Young people planning for retirement increasingly face a choice between house payments and contributions to retirement accounts. They simply can't afford both. With the specter of looming cuts in Social Security and other entitlement programs, or even possible systemic insolvency, the challenge for tomorrow's retirees is income self-sufficiency.
A nation of house buyers becomes captive to the economic cyclicality caused by bursts of construction activity, and it is not lifted or sustained by the limited levels of service employment related to existing housing. By contrast, a nation of business startups and investors supports our capital markets and creates long-term employment, income, exports and the myriad technological advancements desperately needed by an expanding American society.
New home construction and the markets for existing homes should be recognized as activities secondary to, and dependent on, employment. Healthy job markets create healthy property markets, not the reverse. Housing demand driven by job growth creates conditions capable of sustaining a stable level of construction employment, attracting private equity investment, sustaining competitive private debt markets, encouraging capital growth, and ensuring the lowest possible housing prices."
The observation that "healthy job markets create healthy property markets, not the reverse," is, I believe, more important historically than Bridges realizes.
Much as I contended in my recent, linked post, that much bad US social welfare policy was posited on a brief, passing period of economic hegemony from 1945-75, so, too, I realized, after reading Bridges' excellent piece, has been US housing policy and beliefs thereabout.
For, contemporaneous with returning GIs, the rise of suburbs, etc., after WWII, was the new phenomenon of widespread middle-class ownership of non-farm homes.
I read an editorial in the Journal sometime within the past two years which contrasted US cities having advanced technology jobs with those having more blue-collarish, heavy industry employment. This isn't an exact list, but the former included San Francisco, whereas the latter included St. Louis and Cleveland.
What the author found was that homeownership was associated with cities having older, more industrial job bases. In effect, employees of high technology firms expected to be more mobile and, thus, didn't bother to own homes in as high proportions as blue-collar workers.
Could it be that much of our American view of the importance, the near-necessity of homeownership, result from a short period of just 30 years after WWII, when so many middle-class, blue-collar Americans enjoyed the fruits of the nation's unchallenged economic supremacy?
I did a little informal survey of friends last winter. All are college-educated and work in white-collar jobs. I asked what their grandparents did for work, and in what sort of homes they lived?
Without exception, most grandparents were not college-educated and lived in rental housing. One of my friends had a grandmother whose lumberjack husband was crushed to death on the job, requiring her to become a maid and laundress to support her children.
The mythic imagery of poorer, less-educated ancestors sacrificing so that future generations could own homes as a major part of "the American Dream," is, I believe, a curiously materialistic side-effect of a temporary period of American economic power.
It takes little thought to see that education is the most valuable asset a person can ever possess. It's portable, can be applied as creatively as the person to whom it belongs and, once acquired, is never truly lost.
Physical homes are different. They are, in truth, expensive luxuries in an unpredictable world. As investments, they are lumpy, costly to buy and sell, and require constant, expensive maintenance.
How we got to the point of subsidizing those who could barely afford to own homes is less a mystery than the continued misguided conclusions of Americans and their government, from 1945 onward, that the nation had come into some sort of economic and financial Promised Land of eternally rising living standards. In short, the exception became the norm, became the expected birthright of employed, educated Americans.
Bridges ends his piece with this passage,
"Owner-occupied homes will always be the basis for healthy and stable neighborhoods. But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence."
I would go further. Owned homes may be "part of a good life," but, more correctly, they would be part of "a good, predictable, dependable economic life."
Otherwise, they are a cursed millstone. I suspect that while land or judiciously-chosen investments in rental properties would be good investments, homes, generally, across all economic eras, are not. And won't be in the future.
Wednesday, May 18, 2011
Jason Zweig's Questionable Home Mortgage Hedging Column
In this past weekend's edition of the Wall Street Journal, Jason Zweig wrote in his The Intelligent Investor column about hedging your home mortgage. I think it may be time for him to change the name of that column.
First, this is hardly a new idea. I've thought about it for decades, as I'm sure have many other intelligent, educated people who've worked in the financial sector. Why would you not consider how to hedge the value of what, for most people, is their largest asset purchase, when it reaches a lofty value?
My own ideas have included simply selling it to someone while simultaneously leasing it back. Zweig's column mentions a few firms that purport to offer value insurance for about 1.5% of value.
Frankly, that's obviously very cheap if you have had to buy into a housing market that's frothy or even merely tight and probably, at least currently, overvalued.
Of course, your home isn't just another asset. You live in it and it's probably the most ill-liquid asset you'll own. If you get a hedge on it wrong, it could have life-altering consequences beyond those of an IRA gone wrong. Plus, for real estate exposure, there are other ways to invest, if that's what you want.
Perhaps you shouldn't buy into overheated markets, and go long on undervalued ones. Simple and effective, without the major risk I'll get to shortly.
Leaving aside the regulatory hurdles, consider the challenge of making this a truly ubiquitous product. That is, consider it while recalling what happened to AIG due to its financial products unit which sold so many derivatives which were meant to function as hedges.
To me, the primary issue is counterparty risk for something so massive. Sure, it may be feasible for someone to offer home value hedging just for Syracuse, New York, as one firm mentioned in Zweig's article does.
But US home ownership is a large chunk of value. I don't have my fingers on the exact number, but it's very large. So ask yourself this.
What exists as a countervailing asset that can be reliably expected to fund a massive drop in US residential real estate values?
These sorts of bets typically come unglued when reality overwhelms prior expectations, resulting in a "black swan" event that transcends stress tests.
We're not talking about real estate values dropping by 3% or 10%. Let's talk 30% and more.
What other US-based asset class will be likely to remain able to pay off a 50% decline in the value of all US residential real estate?
Long ago, during the first great collateralized mortgage frenzy, when Lew Ranieri ran his famous group at Salomon Brothers, I discussed this issue with my boss, Gerry Weiss, SVP of Corporate Planning & Development. He had sent me to a CMO conference in Manhattan, and wanted to debrief me from my two-day experience.
In short, I said that the repackaging of cashflows into CMOs by the fixed-income wizards, who were suspiciously silent on things like 'negative convexity,' which would affect the duration and value of longer-lived tranches, could not, by themselves, magically eliminate risks of mortgage lending.
In effect, in exchange for a few percentage points of fees to create, sell and service the CMOs, investment banks were simply recutting and spreading existing risk while extracting a fee.
Risk is conserved- it can't be eliminated. It can be hedged, assuming a perfect, reliable counterparty.
Thus, while many unwashed thought the CMO craze made the world safe for mortgage risk, all it really did was pay Wall Street investment banks to allow troubles S&L's to liquefy their damaged mortgage loans while simultaneously allowing investors to more finely select mortgage risks subject to duration and other factors.
So when I read Zweig's piece, the first thing that came to mind was, just who will be a reliable counterparty for a substantial portion of the value of all US residential real estate?
How will that work? What source of asset value will be either unaffected by, or move in opposition to, the value of US residential real estate at a time of huge value reduction of the latter?
Granted, should such a ubiquitous residential real estate hedge become available, it might provide some minor relief for a family which, due to one of the parents' careers, moves every 5-7 years. But that's a steep price for such short-term coverage.
But for the worst case scenario involving residential real estate hedges, beyond holding an instrument that purports to be that hedge, a reliable party with an asset that will perform on that hedge have to both exist amidst an expected turbulent financial and/or economic environment.
It's not the "greatest idea never sold." It's a mirage.
First, this is hardly a new idea. I've thought about it for decades, as I'm sure have many other intelligent, educated people who've worked in the financial sector. Why would you not consider how to hedge the value of what, for most people, is their largest asset purchase, when it reaches a lofty value?
My own ideas have included simply selling it to someone while simultaneously leasing it back. Zweig's column mentions a few firms that purport to offer value insurance for about 1.5% of value.
Frankly, that's obviously very cheap if you have had to buy into a housing market that's frothy or even merely tight and probably, at least currently, overvalued.
Of course, your home isn't just another asset. You live in it and it's probably the most ill-liquid asset you'll own. If you get a hedge on it wrong, it could have life-altering consequences beyond those of an IRA gone wrong. Plus, for real estate exposure, there are other ways to invest, if that's what you want.
Perhaps you shouldn't buy into overheated markets, and go long on undervalued ones. Simple and effective, without the major risk I'll get to shortly.
Leaving aside the regulatory hurdles, consider the challenge of making this a truly ubiquitous product. That is, consider it while recalling what happened to AIG due to its financial products unit which sold so many derivatives which were meant to function as hedges.
To me, the primary issue is counterparty risk for something so massive. Sure, it may be feasible for someone to offer home value hedging just for Syracuse, New York, as one firm mentioned in Zweig's article does.
But US home ownership is a large chunk of value. I don't have my fingers on the exact number, but it's very large. So ask yourself this.
What exists as a countervailing asset that can be reliably expected to fund a massive drop in US residential real estate values?
These sorts of bets typically come unglued when reality overwhelms prior expectations, resulting in a "black swan" event that transcends stress tests.
We're not talking about real estate values dropping by 3% or 10%. Let's talk 30% and more.
What other US-based asset class will be likely to remain able to pay off a 50% decline in the value of all US residential real estate?
Long ago, during the first great collateralized mortgage frenzy, when Lew Ranieri ran his famous group at Salomon Brothers, I discussed this issue with my boss, Gerry Weiss, SVP of Corporate Planning & Development. He had sent me to a CMO conference in Manhattan, and wanted to debrief me from my two-day experience.
In short, I said that the repackaging of cashflows into CMOs by the fixed-income wizards, who were suspiciously silent on things like 'negative convexity,' which would affect the duration and value of longer-lived tranches, could not, by themselves, magically eliminate risks of mortgage lending.
In effect, in exchange for a few percentage points of fees to create, sell and service the CMOs, investment banks were simply recutting and spreading existing risk while extracting a fee.
Risk is conserved- it can't be eliminated. It can be hedged, assuming a perfect, reliable counterparty.
Thus, while many unwashed thought the CMO craze made the world safe for mortgage risk, all it really did was pay Wall Street investment banks to allow troubles S&L's to liquefy their damaged mortgage loans while simultaneously allowing investors to more finely select mortgage risks subject to duration and other factors.
So when I read Zweig's piece, the first thing that came to mind was, just who will be a reliable counterparty for a substantial portion of the value of all US residential real estate?
How will that work? What source of asset value will be either unaffected by, or move in opposition to, the value of US residential real estate at a time of huge value reduction of the latter?
Granted, should such a ubiquitous residential real estate hedge become available, it might provide some minor relief for a family which, due to one of the parents' careers, moves every 5-7 years. But that's a steep price for such short-term coverage.
But for the worst case scenario involving residential real estate hedges, beyond holding an instrument that purports to be that hedge, a reliable party with an asset that will perform on that hedge have to both exist amidst an expected turbulent financial and/or economic environment.
It's not the "greatest idea never sold." It's a mirage.
Thursday, March 03, 2011
Foreclosures: Pro & Con
Last week brought a pleasant surprise to David Faber's CNBC program. Former Salomon Brothers Vice-Chairman and mortgage-backed securities pioneer Lew Ranieri gave his first live televised interview.
Ranieri is a seriously smart and sophisticated guy, so I hung around within range of a television after I'd finished what I was doing, just to listen to his entire set of comments.
His version of how the late 2000s mortgage lending bubble occurred is objective and credible. He gives weight to both so-called Wall Street houses for securitizing questionable mortgages, and to the GSEs for accepting them to back their own securities, too. He cited some numbers regarding GSE explosion of pass-throughs which were simply incredible.
To his credit, Ranieri personally apologized for not having screamed louder and longer as the bubble grew beyond any sustainable size. He identified poor underwriting standards and an over-reliance on FICO scores, rather than prior, more involved and often qualitative mortgage lending standards.
When the conversation turned to foreclosures, Ranieri cited a stunningly large supply of unsold or foreclosed housing. I don't recall the exact numbers, but I believe he said several months supply had been the historical norm, but today's supply was something like almost two years' worth, if not more.
Never the less, he came out against massive foreclosures. He said that foreclosures destroy neighborhoods and cause them to rapidly degenerate into ghettos. He also cited a lack of government programs to promote and assist local entrepreneurs in buying foreclosed properties, repairing/renovating them and putting them back up for sale at new, lower, market-clearing prices.
Separately, Joseph Mason, a professor of banking at Louisiana State University, wrote an editorial in the Wall Street Journal last week entitled Why Regulators Should Let Banks Foreclose.
Mason providing evidence that foreclosure delays don't help
"On Capitol Hill last week, federal banking regulators suggested that the government may soon reach a comprehensive settlement with banks on foreclosure procedures and servicing. In theory such a settlement could unlock housing markets and boost the economy. But recent statements by Comptroller of the Currency John Walsh and FDIC Chair Sheila Bair suggest that they remain focused on using the settlement to extend, rather than end, ongoing foreclosure delays.
Meanwhile, states including New Jersey and Hawaii are considering imposing their own moratoriums on foreclosure that, if they conflict with federal policy, may lead to protracted litigation. This approach is the wrong medicine for our ailing economy.
For borrowers, delaying foreclosure only provides false hope. Today, a borrower faces a foreclosure sale only after failing to make a payment for more than a year. There is no reason to believe a brief additional time-out will allow such borrowers to become current. To the contrary, data from the Mortgage Brokers Association indicate that loans reaching the foreclosure stage almost never avoid default, and that borrowers who become 90 days delinquent cure their default only about 1% of the time.
Similarly, recent research done for the National Bureau of Economic Research demonstrates that loan-modification programs have mixed effectiveness. Data suggest that many delinquent borrowers have the means to afford their mortgage payments, but are so deeply "under water" on their mortgages that they are simply no longer willing to pay. Others have insufficient income to afford any reasonable mortgage payment.
For those who do obtain modifications, roughly half become delinquent again within six months. Thus, while modification efforts are laudable, they are not the solution.
The unfortunate reality is that efforts to lengthen the foreclosure process will not substantially alter borrower outcomes. They will only extend a painful time for borrowers and the economy. During that time, uncertainty will prevent borrowers from moving on with their lives, including starting to pay rent and make purchases that would inject money into the economy.
For neighborhoods, every day without foreclosures means another day of deteriorating home values. A recent study of the Cleveland area published in Urban Affairs Review found that neighborhood home values are largely unaffected by foreclosures that take less than a year. But foreclosures that take longer than a year have a negative impact on home values as the effects of neglect and vandalism mount.
One of the root causes of the economic crisis was a deterioration of underwriting standards: We stopped focusing on whether people could afford the homes they were buying. Continuing to delay foreclosures reflects the same kind of wishful thinking. California's 90-day moratorium in 2009 did not improve the state's economic performance, and moratoriums in other states would only prove again that a delay can't turn an unaffordable mortgage into an affordable one.
Kicking the foreclosure problem down the road creates uncertainty that discourages investment—and delays our desperately needed economic recovery."
Mason seems to provide evidence contradicting Ranieri on foreclosures. Rather than worry about allowing them, Mason suggests getting them over quickly is the better alternative. And his end-game is Ranieri's, too- repurchase of foreclosed properties at lower, market-clearing prices.
Personally, I believe it's foolish to delay foreclosures, especially when it's governmentally-coerced. It unfairly penalizes some while allowing others to evade the proper consequences of their failure to fulfill financial contracts, as well as discriminating against all those who behaved properly and did not buy an unaffordable home, only to see such behavior rewarded.
Ranieri is a seriously smart and sophisticated guy, so I hung around within range of a television after I'd finished what I was doing, just to listen to his entire set of comments.
His version of how the late 2000s mortgage lending bubble occurred is objective and credible. He gives weight to both so-called Wall Street houses for securitizing questionable mortgages, and to the GSEs for accepting them to back their own securities, too. He cited some numbers regarding GSE explosion of pass-throughs which were simply incredible.
To his credit, Ranieri personally apologized for not having screamed louder and longer as the bubble grew beyond any sustainable size. He identified poor underwriting standards and an over-reliance on FICO scores, rather than prior, more involved and often qualitative mortgage lending standards.
When the conversation turned to foreclosures, Ranieri cited a stunningly large supply of unsold or foreclosed housing. I don't recall the exact numbers, but I believe he said several months supply had been the historical norm, but today's supply was something like almost two years' worth, if not more.
Never the less, he came out against massive foreclosures. He said that foreclosures destroy neighborhoods and cause them to rapidly degenerate into ghettos. He also cited a lack of government programs to promote and assist local entrepreneurs in buying foreclosed properties, repairing/renovating them and putting them back up for sale at new, lower, market-clearing prices.
Separately, Joseph Mason, a professor of banking at Louisiana State University, wrote an editorial in the Wall Street Journal last week entitled Why Regulators Should Let Banks Foreclose.
Mason providing evidence that foreclosure delays don't help
"On Capitol Hill last week, federal banking regulators suggested that the government may soon reach a comprehensive settlement with banks on foreclosure procedures and servicing. In theory such a settlement could unlock housing markets and boost the economy. But recent statements by Comptroller of the Currency John Walsh and FDIC Chair Sheila Bair suggest that they remain focused on using the settlement to extend, rather than end, ongoing foreclosure delays.
Meanwhile, states including New Jersey and Hawaii are considering imposing their own moratoriums on foreclosure that, if they conflict with federal policy, may lead to protracted litigation. This approach is the wrong medicine for our ailing economy.
For borrowers, delaying foreclosure only provides false hope. Today, a borrower faces a foreclosure sale only after failing to make a payment for more than a year. There is no reason to believe a brief additional time-out will allow such borrowers to become current. To the contrary, data from the Mortgage Brokers Association indicate that loans reaching the foreclosure stage almost never avoid default, and that borrowers who become 90 days delinquent cure their default only about 1% of the time.
Similarly, recent research done for the National Bureau of Economic Research demonstrates that loan-modification programs have mixed effectiveness. Data suggest that many delinquent borrowers have the means to afford their mortgage payments, but are so deeply "under water" on their mortgages that they are simply no longer willing to pay. Others have insufficient income to afford any reasonable mortgage payment.
For those who do obtain modifications, roughly half become delinquent again within six months. Thus, while modification efforts are laudable, they are not the solution.
The unfortunate reality is that efforts to lengthen the foreclosure process will not substantially alter borrower outcomes. They will only extend a painful time for borrowers and the economy. During that time, uncertainty will prevent borrowers from moving on with their lives, including starting to pay rent and make purchases that would inject money into the economy.
For neighborhoods, every day without foreclosures means another day of deteriorating home values. A recent study of the Cleveland area published in Urban Affairs Review found that neighborhood home values are largely unaffected by foreclosures that take less than a year. But foreclosures that take longer than a year have a negative impact on home values as the effects of neglect and vandalism mount.
One of the root causes of the economic crisis was a deterioration of underwriting standards: We stopped focusing on whether people could afford the homes they were buying. Continuing to delay foreclosures reflects the same kind of wishful thinking. California's 90-day moratorium in 2009 did not improve the state's economic performance, and moratoriums in other states would only prove again that a delay can't turn an unaffordable mortgage into an affordable one.
Kicking the foreclosure problem down the road creates uncertainty that discourages investment—and delays our desperately needed economic recovery."
Mason seems to provide evidence contradicting Ranieri on foreclosures. Rather than worry about allowing them, Mason suggests getting them over quickly is the better alternative. And his end-game is Ranieri's, too- repurchase of foreclosed properties at lower, market-clearing prices.
Personally, I believe it's foolish to delay foreclosures, especially when it's governmentally-coerced. It unfairly penalizes some while allowing others to evade the proper consequences of their failure to fulfill financial contracts, as well as discriminating against all those who behaved properly and did not buy an unaffordable home, only to see such behavior rewarded.
Tuesday, February 08, 2011
How GSE's Stifle Mortgage Finance Innovation
Peter Wallison wrote a clearly expressed editorial in a recent edition of the Wall Street Journal explicitly identifying the GSE-provided subsidy to conventional 30-year, fixed-rate mortgages.
Wallison's point was that many people mistakenly believe that you can't offer an uninsured 30-year, fixed-rate mortgage, completely ignoring the existence of the jumbo-loan market. He went on to catalogue the mistakes Fannie Mae made in easing eligibility requirements for its mortgage guarantees, including downpayments of as little as 3%.
The editorial got me thinking about the reasons for such long duration mortgages. Wallison pointed out that they build equity value very slowly, maximizing the interest expense deductions available in the current tax code.
If I'm not mistaken, part of the reason for the lengthy duration was the experience Americans had with balloon-payment mortgages of shorter duration during the 1930s. When monetary policy brought about a severe contraction of the monetary base, money simply wasn't to be had. And many borrowers probably couldn't requalify for a mortgage during the Depression.
I'm familiar with the current existence of shorter-duration mortgages, but, of course, those leave a homeowner vulnerable to needing to refinance at an inopportune time. Those mortgages don't typically get the exposure that traditional 30 year fixed-rates do. However, many homeowners never come close to living in their home for 30 years.
Is it possible that the GSE's backing of selected mortgages stifled innovation in the field? Wallison concentrates on the dubious policy of government subsidies to conventional mortgages. But it occurs to me that another cost of those subsidies is to make it harder for other, more innovative mortgages to gain popularity. I'm not talking about lower downpayments but, rather, a homeowner choosing to take duration risk in exchange for a lower rate.
It would seem that, as is frequently the case, government-sponsored distortions in credit markets may have created unintended consequences which rob consumers of more choices in their buying behaviors. In this case, in choosing the duration of their mortgage, should they have reason to believe they do not need a 30-year funding commitment.
Wallison's point was that many people mistakenly believe that you can't offer an uninsured 30-year, fixed-rate mortgage, completely ignoring the existence of the jumbo-loan market. He went on to catalogue the mistakes Fannie Mae made in easing eligibility requirements for its mortgage guarantees, including downpayments of as little as 3%.
The editorial got me thinking about the reasons for such long duration mortgages. Wallison pointed out that they build equity value very slowly, maximizing the interest expense deductions available in the current tax code.
If I'm not mistaken, part of the reason for the lengthy duration was the experience Americans had with balloon-payment mortgages of shorter duration during the 1930s. When monetary policy brought about a severe contraction of the monetary base, money simply wasn't to be had. And many borrowers probably couldn't requalify for a mortgage during the Depression.
I'm familiar with the current existence of shorter-duration mortgages, but, of course, those leave a homeowner vulnerable to needing to refinance at an inopportune time. Those mortgages don't typically get the exposure that traditional 30 year fixed-rates do. However, many homeowners never come close to living in their home for 30 years.
Is it possible that the GSE's backing of selected mortgages stifled innovation in the field? Wallison concentrates on the dubious policy of government subsidies to conventional mortgages. But it occurs to me that another cost of those subsidies is to make it harder for other, more innovative mortgages to gain popularity. I'm not talking about lower downpayments but, rather, a homeowner choosing to take duration risk in exchange for a lower rate.
It would seem that, as is frequently the case, government-sponsored distortions in credit markets may have created unintended consequences which rob consumers of more choices in their buying behaviors. In this case, in choosing the duration of their mortgage, should they have reason to believe they do not need a 30-year funding commitment.
Monday, January 03, 2011
Housing Price Trends
Despite dire warnings for the just-finished year 2010, the S&P500, according to today's Wall Street Journal, posted a 15.06% return for the year.
Yet home prices continue to be a sobering economic backdrop for the US economy in 2011. Thursday's Journal featured an editorial by Peter Schiff entitled Home Prices Are Still Too High.
Schiff details the meteoric rise of the Case-Shiller 10-City Index gains of an average of 19.2% per year from January, 1998 to June, 2006. Schiff contrasts this with the index's co-creator, Robert Shiller's calculation that the average US home price increase for 1900-2000 was only 3.35% per year. Using this datapoint, Schiff's Big Point is that the current Case-Shiller Index "remains well above the long-term trend."
Doing the math, Schiff contends that "this would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line."
Ouch!
Schiff adds these observations,
"From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.
In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with."
Listening to quite a few economists, one is reminded that, while sectors like technology have continued to grow, housing in the US remains mired in recession, or at least a doldrums. Schiff makes reasonable points concerning the government's continued actions to unrealistically prop up housing values and (unfairly)discriminate in favor of current homeowners, rather than prospective ones, at lower prices.
That 20.3% further decline, even if only in the once-hottest real estate growth markets, would seem to portend some economic pain for 2011. And just a few weeks ago, pundits, including S&P's David Blitzer, have warned of the second part of the notorious 'double-dip' recession.
Sometimes equity markets feast on short-term trends, amidst larger, longer and more painful economic trends. There was at least one equity bull market during the Great Depression of the 1930s.
With an allegedly more fiscally conservative Republican House majority and the US at record levels of foreign-held debt, it's unclear how much longer the federal government can mask the true weakness of the housing markets. We know that the nation's large commercial banks continue to sit on many properties which should be foreclosed and resold on public markets, which will almost certainly drive prices down again across many areas in the US, thus causing more damage to household net worths and, probably, spending.
Whether this purported housing sector weakness, as Schiff suggests, will spill over into the general economy in 2011, is something to seriously consider.
Yet home prices continue to be a sobering economic backdrop for the US economy in 2011. Thursday's Journal featured an editorial by Peter Schiff entitled Home Prices Are Still Too High.
Schiff details the meteoric rise of the Case-Shiller 10-City Index gains of an average of 19.2% per year from January, 1998 to June, 2006. Schiff contrasts this with the index's co-creator, Robert Shiller's calculation that the average US home price increase for 1900-2000 was only 3.35% per year. Using this datapoint, Schiff's Big Point is that the current Case-Shiller Index "remains well above the long-term trend."
Doing the math, Schiff contends that "this would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line."
Ouch!
Schiff adds these observations,
"From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.
In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with."
Listening to quite a few economists, one is reminded that, while sectors like technology have continued to grow, housing in the US remains mired in recession, or at least a doldrums. Schiff makes reasonable points concerning the government's continued actions to unrealistically prop up housing values and (unfairly)discriminate in favor of current homeowners, rather than prospective ones, at lower prices.
That 20.3% further decline, even if only in the once-hottest real estate growth markets, would seem to portend some economic pain for 2011. And just a few weeks ago, pundits, including S&P's David Blitzer, have warned of the second part of the notorious 'double-dip' recession.
Sometimes equity markets feast on short-term trends, amidst larger, longer and more painful economic trends. There was at least one equity bull market during the Great Depression of the 1930s.
With an allegedly more fiscally conservative Republican House majority and the US at record levels of foreign-held debt, it's unclear how much longer the federal government can mask the true weakness of the housing markets. We know that the nation's large commercial banks continue to sit on many properties which should be foreclosed and resold on public markets, which will almost certainly drive prices down again across many areas in the US, thus causing more damage to household net worths and, probably, spending.
Whether this purported housing sector weakness, as Schiff suggests, will spill over into the general economy in 2011, is something to seriously consider.
Thursday, October 21, 2010
The Spreading Mortgage Foreclosure Mess
Things has certainly gotten out of hand in the mortgage foreclosure processing mess, haven't they?
With the NY Fed weighing in on a lawsuit against BofA, things have escalated to an unprecedented level.
Yet, at root, it continues to appear to be much ado about nothing. A tempest in a proverbial teapot.
According to a Wall Street Journal editorial which ran yesterday, the number of inappropriate foreclosures they could find numbered no more than dozen, in a nation of over 300 million people.
So the bottom line is that almost nobody who has not been delinquent on their mortgage is being foreclosed.
Meanwhile, I listened to a Fox News report yesterday which included an interview with the owner of a home with a modified mortgage. I won't get the numbers exactly right, but the woman's mortgage declined from about $1,800/month to something in the neighborhood of $700/month after modification.
Talk about injustice! This is why so many people resent those who made unwise home purchases, then receive generous modifications which leave them in homes they can't actually afford. Rather than putting those homes on the market at the market-clearing, lower prices which others could afford.
To me, the allegations of robo-signed foreclosures is a red herring. The real issue remains that politicians have been improperly leaning on and coercing banks to suspend legitimate foreclosures since the presidential primaries of 2008.
With the NY Fed weighing in on a lawsuit against BofA, things have escalated to an unprecedented level.
Yet, at root, it continues to appear to be much ado about nothing. A tempest in a proverbial teapot.
According to a Wall Street Journal editorial which ran yesterday, the number of inappropriate foreclosures they could find numbered no more than dozen, in a nation of over 300 million people.
So the bottom line is that almost nobody who has not been delinquent on their mortgage is being foreclosed.
Meanwhile, I listened to a Fox News report yesterday which included an interview with the owner of a home with a modified mortgage. I won't get the numbers exactly right, but the woman's mortgage declined from about $1,800/month to something in the neighborhood of $700/month after modification.
Talk about injustice! This is why so many people resent those who made unwise home purchases, then receive generous modifications which leave them in homes they can't actually afford. Rather than putting those homes on the market at the market-clearing, lower prices which others could afford.
To me, the allegations of robo-signed foreclosures is a red herring. The real issue remains that politicians have been improperly leaning on and coercing banks to suspend legitimate foreclosures since the presidential primaries of 2008.
Friday, October 15, 2010
Franklin Raines On CNBC This Morning
It's difficult to decide which was more surreal this morning- CNBC for inviting disgraced former Fannie Mae CEO Franklin Raines as a guest, or Raines, with his inaccurate, self-serving comments.
There's little doubt the CNBC management made a significant error by lending credibility to Raines via his appearance this morning. By allowing Carlos Whathisname, the morning program's raging liberal, to begin the interview with Raines, a tone of fawning deference was set right off the bat.
Carlos earnestly asked Raines what should be done about the mortgage foreclosure process faux-issue, and whether major banks could be hurt by it. Of course, Raines wouldn't have any special knowledge, having been gone from Fannie Mae for six years. But that didn't stop him from pontificating on the situation while ignoring facts.
For example, Raines alleged that you need Fannie Mae because no private conduits are willing to securitize mortgages.
That's a lie, of course. The truth is that Fannie and Freddie pressed for ever-higher mortgage value ceilings to be eligible for them to buy and securitize, thus crowding out most private mortgage securitizers.
Of course nobody bothered to ask Raines if he's yet complied with the federal court order to return his $90MM bonus payments from his days as Fannie's CEO. Bonuses found later to be unwarranted and unearned, because Fannie engaged, under Raines, in questionable accounting, and overrreached itself, resulting in subsequent losses and, now, 'conservatorship,' a federal equivalent of Chapter 11.
When the more conservative Joe Kernen took his turn with Raines, things got more surreal.
Kernen didn't touch the bonus issue, either, to my regret and disgust, but he did at least challenge Raines on his management of Fannie and its subsequent failure. Raines then said something that you'd have to actually hear to fully comprehend.
He first took credit for Fannie's role, as a former CEO, then, when accused of having set it up to fail, defended himself as only 'one of thousands of employees.'
Pricelessly arrogant.
Raines then went on to declare that, flawed and ruined as Fannie may well be, since all competitors had vanished, the US had to support it now, because there is no alternative. To further the inanity of his responses, he impugned one of Kernen's questions by implying that the co-anchor was misstating the facts. A surefire tactic to attempt to discredit uncomfortable allegations.
All pretty bold and brazen words from the guy who almost single-handedly wrecked the nation's mortgage industry.
Oh, and somewhere in all the questions, Raines naturally tarred the country's commercial and investment banks as the real culprits, contending that they all threw caution to the winds for profit. Technically, his statement is true, but grossly out of context. Fannie and Freddie started the party by buying, guaranteeing and securitizing questionable mortgages to begin with.
To add insult to injury, retiring Indiana Democratic Senator Evan Bayh continued the charade, feeding Raines softball questions to advance their mutually-embraced liberal agendas.
Sadly, this entire episode conferred unwarranted credibility on Raines. The CNBC co-anchors' bowing and scraping to this charlatan only reinforced the impression that he was somehow blameless for starting the mortgage-related excesses that led to the financial sector meltdown of 2007-08.
It provides yet another example of how one must be very wary of what one sees on CNBC as having much resemblance to the truth.
There's little doubt the CNBC management made a significant error by lending credibility to Raines via his appearance this morning. By allowing Carlos Whathisname, the morning program's raging liberal, to begin the interview with Raines, a tone of fawning deference was set right off the bat.
Carlos earnestly asked Raines what should be done about the mortgage foreclosure process faux-issue, and whether major banks could be hurt by it. Of course, Raines wouldn't have any special knowledge, having been gone from Fannie Mae for six years. But that didn't stop him from pontificating on the situation while ignoring facts.
For example, Raines alleged that you need Fannie Mae because no private conduits are willing to securitize mortgages.
That's a lie, of course. The truth is that Fannie and Freddie pressed for ever-higher mortgage value ceilings to be eligible for them to buy and securitize, thus crowding out most private mortgage securitizers.
Of course nobody bothered to ask Raines if he's yet complied with the federal court order to return his $90MM bonus payments from his days as Fannie's CEO. Bonuses found later to be unwarranted and unearned, because Fannie engaged, under Raines, in questionable accounting, and overrreached itself, resulting in subsequent losses and, now, 'conservatorship,' a federal equivalent of Chapter 11.
When the more conservative Joe Kernen took his turn with Raines, things got more surreal.
Kernen didn't touch the bonus issue, either, to my regret and disgust, but he did at least challenge Raines on his management of Fannie and its subsequent failure. Raines then said something that you'd have to actually hear to fully comprehend.
He first took credit for Fannie's role, as a former CEO, then, when accused of having set it up to fail, defended himself as only 'one of thousands of employees.'
Pricelessly arrogant.
Raines then went on to declare that, flawed and ruined as Fannie may well be, since all competitors had vanished, the US had to support it now, because there is no alternative. To further the inanity of his responses, he impugned one of Kernen's questions by implying that the co-anchor was misstating the facts. A surefire tactic to attempt to discredit uncomfortable allegations.
All pretty bold and brazen words from the guy who almost single-handedly wrecked the nation's mortgage industry.
Oh, and somewhere in all the questions, Raines naturally tarred the country's commercial and investment banks as the real culprits, contending that they all threw caution to the winds for profit. Technically, his statement is true, but grossly out of context. Fannie and Freddie started the party by buying, guaranteeing and securitizing questionable mortgages to begin with.
To add insult to injury, retiring Indiana Democratic Senator Evan Bayh continued the charade, feeding Raines softball questions to advance their mutually-embraced liberal agendas.
Sadly, this entire episode conferred unwarranted credibility on Raines. The CNBC co-anchors' bowing and scraping to this charlatan only reinforced the impression that he was somehow blameless for starting the mortgage-related excesses that led to the financial sector meltdown of 2007-08.
It provides yet another example of how one must be very wary of what one sees on CNBC as having much resemblance to the truth.
Monday, October 11, 2010
David Faber's CNBC Program: Goldman Sachs: Power and Peril
I didn't see David Faber's CNBC program Goldman Sachs: Power and Peril, when it first aired on October 6. But I did record it for later viewing.
While I like Faber's wit and style, it seems pretty obvious that CNBC is having difficulty using his intellect for entertainment purposes. It's just not good fit, and this latest Faber effort illustrates this point yet again.
The hour-long program broke virtually no new reporting ground whatsoever. If you are already familiar with investment banking and trading, this was nearly a wasted hour of your time. If you don't, it was too narrowly focused on Goldman Sachs to really give you a proper, broad sense of the topic.
Faber's House of Cards documentary on CNBC, aired last year, was better, but also deeply flawed, with its complete omission of Fannie Mae, Freddie Mac and Congress as the first movers in America's mortgage finance and, then, general banking system meltdown.
This hour-long examination of Goldman Sachs was, for me, an odd mix of the company's history, now largely irrelevant, combined with what I believe to be an unfair portrayal of the firm in its current state of evolution.
The first and last thirds of the piece merely recounted information you could find elsewhere. While the firm's history from the 1950s was mildly interesting, it's really of no particular import today. The later part of the program, focusing on various mortgage-finance-related activities of the firm before, during and after the 2008 financial crisis, was both unfairly one-sided and largely a repetition of old news.
But, for me, the truly interesting portion of Faber's program was about 10-15 minutes of the middle third of the documentary. This portion contained the most revealing interviews with Goldman personnel, past and present. At this point, Faber also explained that the promised, conclusive, long interview with Lloyd Blankfein had been cancelled.
There are two major aspects of Goldman Sachs which this handful of interviews revealed in a rather startling fashion. Mind you, again, they are not 'news' to anyone remotely familiar with the firm, but they conveyed the points in a rather chilling manner.
First, an ex-Goldman staffer, now an asset manager and CNBC 'contributor,' told a story of being required to attend a 5pm meeting on a Friday starting the Labor or Memorial Day weekend. The partner holding the meeting did not arrive until 10pm, by which time an unspecified, but significant number of the recent hires had left in frustration. The staffer recalled that when the partner arrived, he circulated a sheet for signatures of the remaining employees, then explained the reason for the meeting, i.e., that they were junior in rank to him, a more important person, and this meeting was to teach them patience for when they would, one day, have to wait, or be forced to wait, on some large, important client, with no recourse other than to simply endure until the client allowed them access.
He then replied to Faber that those who left the meeting before 10pm were soon fired from Goldman.
When I heard this story, I knew I'd made the right choice in graduate school by never interviewing for either consulting or investment banking positions. Back then, seeing who applied for those slots, and having a friend at Booz Allen Hamilton, I guessed that, at least early on, success in those two fields was more a matter of submitting to indefinite face time and groveling, more than intellectual prowess and performance. That the main ingredient in the early years of the jobs was simply time, which everyone could provide and, thus, did not play to the strengths of those with particular skills or intelligence.
The other aspect of Goldman Sachs which surfaced from the interviews was perhaps the most important one which now defines the firm, and differentiates it from the days of its last unimpeachable leader, John Whitehead.
Back in Whitehead's day, the firm was explicitly aware of the problems of conflict of interest. So it eschewed proprietary trading, or any activities in which it would knowingly meet its clients elsewhere in the financial marketplace as a principal.
After Whitehead's reign, the firm simply ignored the problems and plunged headlong into a wide range of activities, in order to book proprietary business profits otherwise unobtainable.
Thus, several of the interviewees now give voice to a ludicrous notion that Goldman accepts conflicts of interest as a fact of life, and simply strives to 'successfully manage' them, whatever that means. Despite this charade, several staffers, and Blankfein, in a recorded phone address to the firm's employees, claim that Goldman still puts its clients first, and that this therefore prevents any true conflicts and solves everything.
It's a lie, of course. The Big Lie, if you will. Made worse by the mock-candor with which so many Goldman employees repeat it with a straight face. A very Stepford Wives-like robotic expression of the lie over and over by every Goldman employee.
Faber related that some customers do business with Goldman because they have to, or want the firm's talent working for them, but remain fearful of the firm and, on balance, don't trust it to work in their- the customer's- best interests.
Simply put, Whitehead's clear, simple, true statements regarding conflicts of interest when doing too much principal business, have been conveniently forgotten and trampled.
In their place is a new attitude which seeks to pretend to serve clients while, in truth, serving only one real client- Goldman Sachs itself. In that, Faber was correct as he closed the program.
I've written plenty of posts discussing Goldman's hypocrisy on this point. And that every responsible party who hires Goldman to do work for them, or trades with the firm in any capacity, should be wary and not trust it. So, again, Faber's interviews and assertions are hardly news. And I'm certainly neither the first, nor only other person to have elaborated these views before Faber.
But, in this regard, Faber loads up the program with Congressional members blustering about Goldman's shoddy, deceptive practices. Numerous clips of Congressional testimony and hectoring of Goldman staff by members of the House and Senate are included in the program.
Ironically, the only real video clip of merit in all of it is the few seconds in which Blankfein responded to questioning by Carl Levin that buyers of Goldman's own CDOs didn't know, nor care to know, whether or not Goldman was taking other positions on the same underlying instruments, possibly on the other side of the trade.
When Levin stated that he 'knows how Wall Street works,' then excoriates Blankfein for his answer, Levin only displays his ignorance of the Street's practices, and, further, his arrogance regarding his ignorance.
Blankfein correctly noted that his firm's customers want to buy, or sell, various specific risks. They don't necessarily care who differs with them in assessing those risks. Or whether others, including Goldman, are selling the risk when that party is buying, or vice versa.
That said, Goldman is potentially everywhere in the financial markets, potentially on any side of a particular risk situation. That's what being, in effect, as one guest pundit echoed, a publicly-traded hedge fund means. Which is what Goldman Sachs currently is.
Again, this is hardly news. Entertainment, when packaged sensationally in an hour-long format? Probably for the less-informed viewers.
But certainly not news. Not really fair....and incredibly biased.
While I like Faber's wit and style, it seems pretty obvious that CNBC is having difficulty using his intellect for entertainment purposes. It's just not good fit, and this latest Faber effort illustrates this point yet again.
The hour-long program broke virtually no new reporting ground whatsoever. If you are already familiar with investment banking and trading, this was nearly a wasted hour of your time. If you don't, it was too narrowly focused on Goldman Sachs to really give you a proper, broad sense of the topic.
Faber's House of Cards documentary on CNBC, aired last year, was better, but also deeply flawed, with its complete omission of Fannie Mae, Freddie Mac and Congress as the first movers in America's mortgage finance and, then, general banking system meltdown.
This hour-long examination of Goldman Sachs was, for me, an odd mix of the company's history, now largely irrelevant, combined with what I believe to be an unfair portrayal of the firm in its current state of evolution.
The first and last thirds of the piece merely recounted information you could find elsewhere. While the firm's history from the 1950s was mildly interesting, it's really of no particular import today. The later part of the program, focusing on various mortgage-finance-related activities of the firm before, during and after the 2008 financial crisis, was both unfairly one-sided and largely a repetition of old news.
But, for me, the truly interesting portion of Faber's program was about 10-15 minutes of the middle third of the documentary. This portion contained the most revealing interviews with Goldman personnel, past and present. At this point, Faber also explained that the promised, conclusive, long interview with Lloyd Blankfein had been cancelled.
There are two major aspects of Goldman Sachs which this handful of interviews revealed in a rather startling fashion. Mind you, again, they are not 'news' to anyone remotely familiar with the firm, but they conveyed the points in a rather chilling manner.
First, an ex-Goldman staffer, now an asset manager and CNBC 'contributor,' told a story of being required to attend a 5pm meeting on a Friday starting the Labor or Memorial Day weekend. The partner holding the meeting did not arrive until 10pm, by which time an unspecified, but significant number of the recent hires had left in frustration. The staffer recalled that when the partner arrived, he circulated a sheet for signatures of the remaining employees, then explained the reason for the meeting, i.e., that they were junior in rank to him, a more important person, and this meeting was to teach them patience for when they would, one day, have to wait, or be forced to wait, on some large, important client, with no recourse other than to simply endure until the client allowed them access.
He then replied to Faber that those who left the meeting before 10pm were soon fired from Goldman.
When I heard this story, I knew I'd made the right choice in graduate school by never interviewing for either consulting or investment banking positions. Back then, seeing who applied for those slots, and having a friend at Booz Allen Hamilton, I guessed that, at least early on, success in those two fields was more a matter of submitting to indefinite face time and groveling, more than intellectual prowess and performance. That the main ingredient in the early years of the jobs was simply time, which everyone could provide and, thus, did not play to the strengths of those with particular skills or intelligence.
The other aspect of Goldman Sachs which surfaced from the interviews was perhaps the most important one which now defines the firm, and differentiates it from the days of its last unimpeachable leader, John Whitehead.
Back in Whitehead's day, the firm was explicitly aware of the problems of conflict of interest. So it eschewed proprietary trading, or any activities in which it would knowingly meet its clients elsewhere in the financial marketplace as a principal.
After Whitehead's reign, the firm simply ignored the problems and plunged headlong into a wide range of activities, in order to book proprietary business profits otherwise unobtainable.
Thus, several of the interviewees now give voice to a ludicrous notion that Goldman accepts conflicts of interest as a fact of life, and simply strives to 'successfully manage' them, whatever that means. Despite this charade, several staffers, and Blankfein, in a recorded phone address to the firm's employees, claim that Goldman still puts its clients first, and that this therefore prevents any true conflicts and solves everything.
It's a lie, of course. The Big Lie, if you will. Made worse by the mock-candor with which so many Goldman employees repeat it with a straight face. A very Stepford Wives-like robotic expression of the lie over and over by every Goldman employee.
Faber related that some customers do business with Goldman because they have to, or want the firm's talent working for them, but remain fearful of the firm and, on balance, don't trust it to work in their- the customer's- best interests.
Simply put, Whitehead's clear, simple, true statements regarding conflicts of interest when doing too much principal business, have been conveniently forgotten and trampled.
In their place is a new attitude which seeks to pretend to serve clients while, in truth, serving only one real client- Goldman Sachs itself. In that, Faber was correct as he closed the program.
I've written plenty of posts discussing Goldman's hypocrisy on this point. And that every responsible party who hires Goldman to do work for them, or trades with the firm in any capacity, should be wary and not trust it. So, again, Faber's interviews and assertions are hardly news. And I'm certainly neither the first, nor only other person to have elaborated these views before Faber.
But, in this regard, Faber loads up the program with Congressional members blustering about Goldman's shoddy, deceptive practices. Numerous clips of Congressional testimony and hectoring of Goldman staff by members of the House and Senate are included in the program.
Ironically, the only real video clip of merit in all of it is the few seconds in which Blankfein responded to questioning by Carl Levin that buyers of Goldman's own CDOs didn't know, nor care to know, whether or not Goldman was taking other positions on the same underlying instruments, possibly on the other side of the trade.
When Levin stated that he 'knows how Wall Street works,' then excoriates Blankfein for his answer, Levin only displays his ignorance of the Street's practices, and, further, his arrogance regarding his ignorance.
Blankfein correctly noted that his firm's customers want to buy, or sell, various specific risks. They don't necessarily care who differs with them in assessing those risks. Or whether others, including Goldman, are selling the risk when that party is buying, or vice versa.
That said, Goldman is potentially everywhere in the financial markets, potentially on any side of a particular risk situation. That's what being, in effect, as one guest pundit echoed, a publicly-traded hedge fund means. Which is what Goldman Sachs currently is.
Again, this is hardly news. Entertainment, when packaged sensationally in an hour-long format? Probably for the less-informed viewers.
But certainly not news. Not really fair....and incredibly biased.
Thursday, September 09, 2010
Those Pesky Bank-Held Mortgages
Andy Kessler, a periodically-published editorialist in the Wall Street Journal and former hedge fund manager, wrote a piece at the end of August entitled TARP and the Continuing Problem of Toxic Assets.
Leaving aside recent better-than-expected housing data, and Kessler's own wacky, unworkable ideas for handling the problem assets, he did a service by reminding readers that the problem remains with us.
In his editorial, he wrote,
"Home sales dropped 27% from a year ago July to a 3.83 million annual rate, which was blamed on the May expiration of the $8,000 home buyer's tax credit. Dig deeper and its even scarier. Existing home inventory (the number of homes for sale) now stands at four million units- that's a 12.5-month supply versus the average 6.2-month supply since 1999. As late as 2005, home inventory was just 2.5 million. Using that as a baseline or normal number, there are now around 1.5 million "extra" homes on the market that are not selling and either empty or soon to be foreclosed.
And those toxic mortgage assets? As far as I can tell, most are still there, valued at "mark to wish" since the Financial Accounting Standards Board's relaxation of "mark to market" accounting rules. Who knows what they're really worth? The stock market is guessing not much, sending finance stocks like Bank of America, Wells Fargo and even J.P.Morgan down close to 52-week lows.
...without a housing turnaround, jobs in construction, decoration, mortgage banking, auto sales and finance will stay in the doldrums. Delinquency rates, which are a leading indicator of foreclosures, are on the rise. According to the latest Mortgage Bankers Association survey, in the second quarter, prime adjustable-rate mortgage (ARM) delinquency rates rose to 9.3%, with prime fixed-rate mortgages seeing delinquencies up 4.75%. On the subprime side, ARM delinquencies hit 30.9% with fixed at 22.5%.
This is not good for banks that still own toxic assets of any type of mortgage, subprime or not. If home prices fall further, and I can't see too many scenarios where they won't, these toxic assets are all set to drop in value. At some point, buyers of bank debt will get nervous. If this toxic sludge were sitting on a shelf at the Treasury or Fed, it really wouldn't matter. But, instead, even a small uptick in foreclosures could take down the banking system- again."
Let's recall that major banks halted foreclosures in early 2009 due to coercion by the incoming administration. Having been forced to take TARP funds only months earlier, all the major money center banks were pretty much vulnerable to such intimidation.
That doesn't mean they don't still hold the toxic stuff, as Kessler reminds us. And that, with a continuing weak housing market, the toxic mortgages remain impaired, and could easily become worse.
At this point, I don't really think there are any better solutions than forcing banks back to "mark to market" valuations. None of Kessler's various sleight-of-hand suggestions for fixing the problem seem reasonable or feasible.
To me, this all leads back to employment. Not the construction- and housing-related employment to which Kessler referred, but the simple notion that, without an imminent, healthy expansion of non-government, non-stimulus-sourced, genuine private sector jobs, the housing sector, and toxic mortgages, will continue to ail, then grow worse.
Eventually, if that happens, it's going to affect equity values- again.
There's no long term substitute for letting asset values find their own, real, un-manipulated value. Nearly two years' worth of government subsidies, coercion and other actions to try to wave a magic wand over housing prices and related mortgage values have all failed to fix anything. For that, we'll finally have to just let housing values and their associated mortgages find real, market-based values. Until then, nobody will really believe current 'values' anyway. Certainly not as a basis for long term investments.
Leaving aside recent better-than-expected housing data, and Kessler's own wacky, unworkable ideas for handling the problem assets, he did a service by reminding readers that the problem remains with us.
In his editorial, he wrote,
"Home sales dropped 27% from a year ago July to a 3.83 million annual rate, which was blamed on the May expiration of the $8,000 home buyer's tax credit. Dig deeper and its even scarier. Existing home inventory (the number of homes for sale) now stands at four million units- that's a 12.5-month supply versus the average 6.2-month supply since 1999. As late as 2005, home inventory was just 2.5 million. Using that as a baseline or normal number, there are now around 1.5 million "extra" homes on the market that are not selling and either empty or soon to be foreclosed.
And those toxic mortgage assets? As far as I can tell, most are still there, valued at "mark to wish" since the Financial Accounting Standards Board's relaxation of "mark to market" accounting rules. Who knows what they're really worth? The stock market is guessing not much, sending finance stocks like Bank of America, Wells Fargo and even J.P.Morgan down close to 52-week lows.
...without a housing turnaround, jobs in construction, decoration, mortgage banking, auto sales and finance will stay in the doldrums. Delinquency rates, which are a leading indicator of foreclosures, are on the rise. According to the latest Mortgage Bankers Association survey, in the second quarter, prime adjustable-rate mortgage (ARM) delinquency rates rose to 9.3%, with prime fixed-rate mortgages seeing delinquencies up 4.75%. On the subprime side, ARM delinquencies hit 30.9% with fixed at 22.5%.
This is not good for banks that still own toxic assets of any type of mortgage, subprime or not. If home prices fall further, and I can't see too many scenarios where they won't, these toxic assets are all set to drop in value. At some point, buyers of bank debt will get nervous. If this toxic sludge were sitting on a shelf at the Treasury or Fed, it really wouldn't matter. But, instead, even a small uptick in foreclosures could take down the banking system- again."
Let's recall that major banks halted foreclosures in early 2009 due to coercion by the incoming administration. Having been forced to take TARP funds only months earlier, all the major money center banks were pretty much vulnerable to such intimidation.
That doesn't mean they don't still hold the toxic stuff, as Kessler reminds us. And that, with a continuing weak housing market, the toxic mortgages remain impaired, and could easily become worse.
At this point, I don't really think there are any better solutions than forcing banks back to "mark to market" valuations. None of Kessler's various sleight-of-hand suggestions for fixing the problem seem reasonable or feasible.
To me, this all leads back to employment. Not the construction- and housing-related employment to which Kessler referred, but the simple notion that, without an imminent, healthy expansion of non-government, non-stimulus-sourced, genuine private sector jobs, the housing sector, and toxic mortgages, will continue to ail, then grow worse.
Eventually, if that happens, it's going to affect equity values- again.
There's no long term substitute for letting asset values find their own, real, un-manipulated value. Nearly two years' worth of government subsidies, coercion and other actions to try to wave a magic wand over housing prices and related mortgage values have all failed to fix anything. For that, we'll finally have to just let housing values and their associated mortgages find real, market-based values. Until then, nobody will really believe current 'values' anyway. Certainly not as a basis for long term investments.
Wednesday, August 18, 2010
Bill Gross' Self-Serving Advice On Fannie & Freddie
Yesterday's business news was filled with various reports concerning the federal government's big Fannie/Freddie conference.
Perhaps the most misrepresented and self-serving of all the comments on the event belonged to PIMCO senior executive Bill Gross.
Appearing on CNBC in the afternoon, after apparently making his views known at/to the conference, Gross, almost alone among financial market participants and pundits, declared that the feds must do more in mortgage finance through Fannie and Freddie, not less.
At least Susan Wachter, whom I remember from my days at Wharton, acknowledged that a GSE-free mortgage market was preferable. But she simply contended it was, for at least the next half-decade, simply no longer feasible.
But Gross went much, much further.
As the guy who is primarily responsible for PIMCO's reportedly huge inventory of GSE paper, he went all in to protect his career and investors, insisting that government guarantees of Fannie and Freddie paper be ironclad, continuing and even more generous in the future.
The amazing part is how reverentially CNBC's anchors treated Gross during his appearance. They lobbed softballs at him, carefully avoiding mention of how he is simply lobbying to protect his book, nevermind the overall health of the financial markets. Instead of exposing this bias, they treat Gross as some sort of expert pundit on the matter.
Why? Probably access. If anyone on CNBC ever really challenged Gross' comments and positions for being as self-serving as they are, he'd likely never return. Then CNBC would be shut out of interviews with the most senior guy at what is arguably the largest, or one of the largest, fixed-income holders of all institutional investors.
So, to retain access, CNBC's on air staff turn a blind eye to Gross' obvious biases when he comments on the structure of the US residential finance sector.
Perhaps the most misrepresented and self-serving of all the comments on the event belonged to PIMCO senior executive Bill Gross.
Appearing on CNBC in the afternoon, after apparently making his views known at/to the conference, Gross, almost alone among financial market participants and pundits, declared that the feds must do more in mortgage finance through Fannie and Freddie, not less.
At least Susan Wachter, whom I remember from my days at Wharton, acknowledged that a GSE-free mortgage market was preferable. But she simply contended it was, for at least the next half-decade, simply no longer feasible.
But Gross went much, much further.
As the guy who is primarily responsible for PIMCO's reportedly huge inventory of GSE paper, he went all in to protect his career and investors, insisting that government guarantees of Fannie and Freddie paper be ironclad, continuing and even more generous in the future.
The amazing part is how reverentially CNBC's anchors treated Gross during his appearance. They lobbed softballs at him, carefully avoiding mention of how he is simply lobbying to protect his book, nevermind the overall health of the financial markets. Instead of exposing this bias, they treat Gross as some sort of expert pundit on the matter.
Why? Probably access. If anyone on CNBC ever really challenged Gross' comments and positions for being as self-serving as they are, he'd likely never return. Then CNBC would be shut out of interviews with the most senior guy at what is arguably the largest, or one of the largest, fixed-income holders of all institutional investors.
So, to retain access, CNBC's on air staff turn a blind eye to Gross' obvious biases when he comments on the structure of the US residential finance sector.
Wednesday, June 23, 2010
Housing & The Infamous "Double Dip" Recession
Kelly Evans wrote her usual interesting piece in the Wall Street Journal yesterday. The topic was housing, published before the dismal existing home sales data which came out a little later in the morning.
Evans points out that new home sales declines, after some earlier increases, are less troubling than they might seem at first glance. She mentions the now infamous "double dip" term, applying it to housing, but suggests that a dearth of new home sales isn't a bad thing, as it will help trim inventories, leading more quickly to eventual price firming.
That term, "double dip," is about as overused and nauseating these days as "green shoots" was last year at this time.
The other day, on CNBC, Maria Bartiromo, with that distinctive, distracting lisp of hers, was yammering away at everyone in sight about "a double dip," as well.
To me, whether there's a technical negative quarter or two of negative GDP growth in the near future, or not, is probably less relevant than whether the best quarterly rates of growth will ever get to the levels typically associated with vibrant, robust recoveries of prior decades.
Then you have Art Laffer, in a Journal editorial about which I wrote this post two weeks ago, predicting an outright US economic collapse next year, thanks to tax rate increases and additional taxes, too.
One thing Evans did mention, toward the end of her piece, was the role employment and wages play in a housing recovery. How's that going, do you suppose?
Last I recall, the president was in front of cameras after the latest jobs report, trying to explain why a pathetic 41,000 new private sector jobs in the prior month was a good thing.
Let's be honest. We don't want housing and housing finance to ever return to the level of economic importance it possessed during the 2002-2007 period. In the wake of that disastrous period and the excesses which drove it, lenders will understandably be focused on more verifiable, dependable employment in order to judge housing loans as of reasonable quality. I don't think we can count on home loans to temporary census workers or newly-minted federal government hires to drive US economic growth for the next five years.
If private sector employment isn't picking up, housing isn't going to, either. And yesterday's data suggests as much.
As it is, a CNBC report described how some homeowners are simply choosing not to pay their mortgages anymore, thus driving retail clothing, appliance and dining sector growth.
Housing growth depends on employment growth. Employment still isn't growing sufficiently to suggest a robust, healthy US economic recovery right now.
Meddling with housing finance assistance programs may paper over short term valuation issues, but it can't make the US economy grow in the absence of the growth of well-paying, long term private sector job growth.
Double dip or just anemic economic growth, it sure doesn't look, yet, like the US is in the process of enjoying a snappy, sharp economic upturn.
Evans points out that new home sales declines, after some earlier increases, are less troubling than they might seem at first glance. She mentions the now infamous "double dip" term, applying it to housing, but suggests that a dearth of new home sales isn't a bad thing, as it will help trim inventories, leading more quickly to eventual price firming.
That term, "double dip," is about as overused and nauseating these days as "green shoots" was last year at this time.
The other day, on CNBC, Maria Bartiromo, with that distinctive, distracting lisp of hers, was yammering away at everyone in sight about "a double dip," as well.
To me, whether there's a technical negative quarter or two of negative GDP growth in the near future, or not, is probably less relevant than whether the best quarterly rates of growth will ever get to the levels typically associated with vibrant, robust recoveries of prior decades.
Then you have Art Laffer, in a Journal editorial about which I wrote this post two weeks ago, predicting an outright US economic collapse next year, thanks to tax rate increases and additional taxes, too.
One thing Evans did mention, toward the end of her piece, was the role employment and wages play in a housing recovery. How's that going, do you suppose?
Last I recall, the president was in front of cameras after the latest jobs report, trying to explain why a pathetic 41,000 new private sector jobs in the prior month was a good thing.
Let's be honest. We don't want housing and housing finance to ever return to the level of economic importance it possessed during the 2002-2007 period. In the wake of that disastrous period and the excesses which drove it, lenders will understandably be focused on more verifiable, dependable employment in order to judge housing loans as of reasonable quality. I don't think we can count on home loans to temporary census workers or newly-minted federal government hires to drive US economic growth for the next five years.
If private sector employment isn't picking up, housing isn't going to, either. And yesterday's data suggests as much.
As it is, a CNBC report described how some homeowners are simply choosing not to pay their mortgages anymore, thus driving retail clothing, appliance and dining sector growth.
Housing growth depends on employment growth. Employment still isn't growing sufficiently to suggest a robust, healthy US economic recovery right now.
Meddling with housing finance assistance programs may paper over short term valuation issues, but it can't make the US economy grow in the absence of the growth of well-paying, long term private sector job growth.
Double dip or just anemic economic growth, it sure doesn't look, yet, like the US is in the process of enjoying a snappy, sharp economic upturn.
Tuesday, June 15, 2010
More Findings On The Dis-Utility of Homeownership in America
Richard Florida, listed in the Wall Street Journal as "a director of the Martin Prosperity Institute at the University of Toronto,"wrote a provocative editorial a week ago in the paper entitled Homeownership Is Overrated.
Florida's central contention is that today's world of greater job mobility has made homeownership a much less valuable activity than it was in the past in America.
A few years ago, the Journal published a piece by a researcher in Washington, D.C., providing evidence for this among low-income workers. Her findings were that the lower-income group of Americans had to move to follow work, as they are semi- or unskilled. Thus, houses tie them to places that may lose work, and cause them to default on the mortgage.
Florida, however, did something a little different. He examined relationships between homeownership, local economies and incomes. What he found is, at least to me, astounding.
Here's what he wrote,
"But cities with high levels of homeownership- in the range of 75%, like Detroit, St. Louis and Pittsburgh- had on average considerably lower levels of economic activity and much lower wages and incomes. Far too many people in economically distressed communities are trapped in homes they can't sell, unable to move on to new centers of opportunity.
The cities and regions with the lowest levels of homeownership- in the range of 55% to 60% like L.A., N.Y., San Francisco and Boulder- had healthier economies and higher incomes. They also had more highly skilled and professional work forces, more high-tech industry, and according to Gallup surveys, higher levels of happiness and well-being."
Thus, Florida found not only the same downsides to homeownership among lower-income workers as the earlier researcher, but he also found associations between higher incomes and less homeownership in cities with healthier economies, as well.
Isn't it ironic that our federal government began to push homeownership so heavily, from both parties, just when our economy began to value mobility more than ever? Especially as pensions have become more portable?
Perhaps, as Florida suggests, we really should reconsider the sacred mortgage deduction and let homeownership drift down to the 55-60% range. Based upon his research, it would seem that propping up homeownership beyond that interferes with the natural mobility of labor and economic activity in America.
Yet another in the growing list of federal government-originated market-distortions in our modern economy.
Florida's central contention is that today's world of greater job mobility has made homeownership a much less valuable activity than it was in the past in America.
A few years ago, the Journal published a piece by a researcher in Washington, D.C., providing evidence for this among low-income workers. Her findings were that the lower-income group of Americans had to move to follow work, as they are semi- or unskilled. Thus, houses tie them to places that may lose work, and cause them to default on the mortgage.
Florida, however, did something a little different. He examined relationships between homeownership, local economies and incomes. What he found is, at least to me, astounding.
Here's what he wrote,
"But cities with high levels of homeownership- in the range of 75%, like Detroit, St. Louis and Pittsburgh- had on average considerably lower levels of economic activity and much lower wages and incomes. Far too many people in economically distressed communities are trapped in homes they can't sell, unable to move on to new centers of opportunity.
The cities and regions with the lowest levels of homeownership- in the range of 55% to 60% like L.A., N.Y., San Francisco and Boulder- had healthier economies and higher incomes. They also had more highly skilled and professional work forces, more high-tech industry, and according to Gallup surveys, higher levels of happiness and well-being."
Thus, Florida found not only the same downsides to homeownership among lower-income workers as the earlier researcher, but he also found associations between higher incomes and less homeownership in cities with healthier economies, as well.
Isn't it ironic that our federal government began to push homeownership so heavily, from both parties, just when our economy began to value mobility more than ever? Especially as pensions have become more portable?
Perhaps, as Florida suggests, we really should reconsider the sacred mortgage deduction and let homeownership drift down to the 55-60% range. Based upon his research, it would seem that propping up homeownership beyond that interferes with the natural mobility of labor and economic activity in America.
Yet another in the growing list of federal government-originated market-distortions in our modern economy.
Wednesday, May 05, 2010
Congress Remains Silent On The Modern Bank of The United States- Fannie & Freddie
Robert Wilmers, CEO of M&T Bank Corporation, wrote a hard-hitting editorial in yesterday's Wall Street Journal entitled, bluntly, "What About Fan and Fred Reform?"
In the past few weeks, much has occurred in Congress and the administration which smacks of trying to supercharge the rush to poorly-thought, badly-drafted finance so-called "reform."
The Dodd bill is, of course, quite far from real, effective reform. And that's if we actually believed that the Congressional panel formed to investigate the recent financial crisis had completed its job. And various pundits and officials had contributed credible, objective testimony, while meaningful, measurable criteria were advanced and adopted for assessing the US financial system's health and effectiveness.
Mr. Wilmers is the CEO of a rather quotidian commercial bank. It's not a former investment bank now reborn as a commercial bank. It's not a money center bank in New York.
Thus, Mr. Wilmers' observations have some credibility and a lack of obvious bias.
He wrote, at length, about how huge and problematic Congress has allowed the two GSEs to become,
"Congress may be making progress crafting new regulations for the financial-services industry, but it has yet to begin reforming two institutions that played a key role in the 2008 credit crisis—Fannie Mae and Freddie Mac.
We cannot reform these government-sponsored enterprises unless we fully confront the extent to which their outrageous behavior and reckless business practices have affected the entire commercial banking sector and the U.S. economy as a whole.
At the end of 2009, their total debt outstanding—either held directly on their balance sheets or as guarantees on mortgage securities they'd sold to investors—was $8.1 trillion. That compares to $7.8 trillion in total marketable debt outstanding for the entire U.S. government. The debt has the implicit guarantee of the federal government but is not reflected on the national balance sheet.
To date, the federal government has been forced to pump $126 billion into Fannie and Freddie. That's far more than AIG, which absorbed $70 billion of government largess, and General Motors and Chrysler, which shared $77 billion. Banks received $205 billion, of which $136 billion has been repaid.
Fannie and Freddie continue to operate deeply in the red, with no end in sight. The Congressional Budget Office estimated that if their operating costs and subsidies were included in our accounting of the overall federal deficit—as properly they should be—the 2009 deficit would be greater by $291 billion."
Does anyone seriously doubt that any attempt at effective regulatory change of this sector will fail without addressing- and fixing- Fannie and Freddie?
Then Mr. Wilmers concludes with this knockout blow,
"According to a 2004 Congressional Budget Office study, the two GSEs enjoyed $23 billion in subsidies in 2003—primarily in the form of lower borrowing costs and exemption from state and local taxation. But they passed on only $13 billion to home buyers. Nevertheless, one former Fannie Mae CEO, Franklin Raines, received $91 million in compensation from 1998 through 2003. In 2006, the top five Fannie Mae executives shared $34 million in compensation, while their counterparts at Freddie Mac shared $35 million. In 2009, even after the financial crash and as these two GSEs fell deeper into the red, the top five executives at Fannie Mae received $19 million in compensation and the CEO earned $6 million.
This is not private enterprise—it's crony capitalism, in which public subsidies are turned into private riches. From 2001 through 2006, Fannie and Freddie spent $123 million to lobby Congress—the second-highest lobbying total (after the U.S. Chamber of Commerce) in the country. That lobbying was complemented by sizable direct political contributions to members of Congress.
Changing this terrible situation will not be easy. The mortgage market has come to be structured around Fannie and Freddie and powerful interests are allied with the status quo. I recall a personal conversation with a member of Congress who, despite saying he understood my concerns about the two GSEs, admitted he would never push for significant change because "they've done so much for me, my colleagues and my staff." "
When I read these last three paragraphs, I was instantly reminded of President Andrew Jackson's campaign against Nicholas Biddle's Second Bank of the US. A quasi-governmental entity so entwined with the federal government's officials and Congress that the two could not wean themselves from the Bank.
Biddle contributed to many Congressional campaigns, calling to mind Wilmers' reference to his member of Congress friend.
The Second Bank of the US dominated politics for four years. Fannie and Freddie could do so, now. They are that powerful, corrupt, and entangled with the nation's financial troubles and system.
In the past few weeks, much has occurred in Congress and the administration which smacks of trying to supercharge the rush to poorly-thought, badly-drafted finance so-called "reform."
The Dodd bill is, of course, quite far from real, effective reform. And that's if we actually believed that the Congressional panel formed to investigate the recent financial crisis had completed its job. And various pundits and officials had contributed credible, objective testimony, while meaningful, measurable criteria were advanced and adopted for assessing the US financial system's health and effectiveness.
Mr. Wilmers is the CEO of a rather quotidian commercial bank. It's not a former investment bank now reborn as a commercial bank. It's not a money center bank in New York.
Thus, Mr. Wilmers' observations have some credibility and a lack of obvious bias.
He wrote, at length, about how huge and problematic Congress has allowed the two GSEs to become,
"Congress may be making progress crafting new regulations for the financial-services industry, but it has yet to begin reforming two institutions that played a key role in the 2008 credit crisis—Fannie Mae and Freddie Mac.
We cannot reform these government-sponsored enterprises unless we fully confront the extent to which their outrageous behavior and reckless business practices have affected the entire commercial banking sector and the U.S. economy as a whole.
At the end of 2009, their total debt outstanding—either held directly on their balance sheets or as guarantees on mortgage securities they'd sold to investors—was $8.1 trillion. That compares to $7.8 trillion in total marketable debt outstanding for the entire U.S. government. The debt has the implicit guarantee of the federal government but is not reflected on the national balance sheet.
To date, the federal government has been forced to pump $126 billion into Fannie and Freddie. That's far more than AIG, which absorbed $70 billion of government largess, and General Motors and Chrysler, which shared $77 billion. Banks received $205 billion, of which $136 billion has been repaid.
Fannie and Freddie continue to operate deeply in the red, with no end in sight. The Congressional Budget Office estimated that if their operating costs and subsidies were included in our accounting of the overall federal deficit—as properly they should be—the 2009 deficit would be greater by $291 billion."
Does anyone seriously doubt that any attempt at effective regulatory change of this sector will fail without addressing- and fixing- Fannie and Freddie?
Then Mr. Wilmers concludes with this knockout blow,
"According to a 2004 Congressional Budget Office study, the two GSEs enjoyed $23 billion in subsidies in 2003—primarily in the form of lower borrowing costs and exemption from state and local taxation. But they passed on only $13 billion to home buyers. Nevertheless, one former Fannie Mae CEO, Franklin Raines, received $91 million in compensation from 1998 through 2003. In 2006, the top five Fannie Mae executives shared $34 million in compensation, while their counterparts at Freddie Mac shared $35 million. In 2009, even after the financial crash and as these two GSEs fell deeper into the red, the top five executives at Fannie Mae received $19 million in compensation and the CEO earned $6 million.
This is not private enterprise—it's crony capitalism, in which public subsidies are turned into private riches. From 2001 through 2006, Fannie and Freddie spent $123 million to lobby Congress—the second-highest lobbying total (after the U.S. Chamber of Commerce) in the country. That lobbying was complemented by sizable direct political contributions to members of Congress.
Changing this terrible situation will not be easy. The mortgage market has come to be structured around Fannie and Freddie and powerful interests are allied with the status quo. I recall a personal conversation with a member of Congress who, despite saying he understood my concerns about the two GSEs, admitted he would never push for significant change because "they've done so much for me, my colleagues and my staff." "
When I read these last three paragraphs, I was instantly reminded of President Andrew Jackson's campaign against Nicholas Biddle's Second Bank of the US. A quasi-governmental entity so entwined with the federal government's officials and Congress that the two could not wean themselves from the Bank.
Biddle contributed to many Congressional campaigns, calling to mind Wilmers' reference to his member of Congress friend.
The Second Bank of the US dominated politics for four years. Fannie and Freddie could do so, now. They are that powerful, corrupt, and entangled with the nation's financial troubles and system.
Thursday, April 29, 2010
Tuesday's Senate Hearings On Goldman Sachs
Tuesday's post, written midday, didn't take into account the later appearances of Goldman Sachs' CFO, as well as its CEO, Lloyd Blankfein.
By now, some of the shock of the day-long hearings featuring former and current Goldman Sachs employees of varying degrees of seniority has worn off. For me, several things seem clear through the calmer hindsight of the Senate hearings.
First, the Goldman employees were very well coached and, being very intelligent, did an amazing job of both carefully responding to over-reaching, deliberately entrapping questions, plus a few of them actually adapted to the questions over time, becoming increasingly more adroit at finding ways to make positive statements either about Goldman's role or actions, or the process of the securities markets in which the actions took place.
Second, the Senators themselves behaved differently toward more senior Goldman officials. By the time Blankfein appeared, well into the evening, after markets had closed, Senators were going out of their way to give him the benefit of the doubt in answering their questions. Nobody bullied nor attacked Blankfein the way they had lower-level employees, such as Swenson, Sparks and Birnbaum, earlier that day.
Third, the entire context and process of such a Congressional investigation sub-committee hearing should give any business person pause about doing other than relying on fifth amendment protections when appearing, as ordered.
For example, Carl Levin used a particularly obnoxious tactic. He would ask a heavily-contexted, detailed question about a single exhibit from a book literally several inches thick which had been provided to each Goldman witness. When any, which is to say, all, of the Goldman employees would either take time to verify the proper exhibit, or ask a clarifying question, Levin would explode with anger, declaring that the witness was either simply wasting time, in order to 'run out the clock,' or deliberately avoiding giving a direct response.
Never mind that Levin would often ask questions, the answers to which were simply not within the capability of the witnesses to answer with known veracity. Knowing they were under oath, and that their testimony could be used in civil and criminal legal actions, each Goldman witness had to allow themselves to become whipping boys and appear guilty of whatever behavior of which a Senator decided to accuse them. Most Senators would end their question time with a non sequitor, constituent-oriented summary statement which typically accused Goldman's actions of rendering 'millions' of either US residents or their constituents homeless, penniless and jobless.
Fannie Mae and Freddie Mac were never, of course, mentioned by any Senator of either party, at least while I watched.
The very nature of these investigations leaves business people looking guilty of something, if only attempting to be profitable during whatever crisis may have been occurring. It's a near-perfect coincidence of defenseless business witnesses and omnipotent politicians who control the agenda. There is simply no way any witness from a business which Congress has decided to crucify is going to be able to leave an impression of innocence in that venue.
Finally, despite all the posturing, biased and wrongly-framed questions, and other tricks calculated to make Senators look serious and concerned, even crusading for 'the truth,' and Goldman and its employees look guilty of something, if not clearly anything actually illegal, a few things did become clear.
First, despite Blankfein's insistence that the firm went public reluctantly, and only to remain competitive, much of the root of Goldman's current predicament stems from its going public, then skating to the edge of solvency, and, then, falling upon the Fed to allow it to become a chartered commercial bank, and taking TARP funds.
Much of what transpired Tuesday would have been unremarkable had Goldman been either, or both, a privately-owned investment bank and had not taken TARP funds.
In discussions with a colleague yesterday, I noted that Blackstone did not need a TARP-funded bailout.
I suspect much of Goldman's conflicts of interest, due to their proprietary activities, will not be avoidable without the firm splitting itself into pieces, so that underwriting and proprietary activities aren't co-domiciled. That said, there will always be sophisticated counterparties and even underwriting clients who don't have problems with Goldman's internal conflicts of interest. Those firms are capable of making their own decisions regarding risks and positions with respect to all manner of asset classes.
Rather, it is most likely a large group of less-sophisticated clients, including, perhaps, many state and municipal entities, which will now shy away from Goldman Sachs.
In any case, Goldman has not just a public relations problem to manage, but a real problem of conflicts to manage. Not conflicts among clients who may be competitors, both of whom for which Goldman Sachs wants to do underwriting or advisory work.
No, the conflict is that, on one hand, Goldman may represent the firms to the market, underwriting their securities, while, in proprietary activities, explicitly selling the same securities which another part of the firm is soliciting the firm's clients to purchase.
There's no way even Lloyd Blankfein can convince most of America that this is a viable combination. He can talk until he's blue in the face about how clients wish to purchase risk and take positions opposite those of Goldman. But that won't convince most people that Goldman's mix of businesses puts it in a position to, quite often, sell from its own account, because of a belief that the value of an instrument has peaked, that which it is, elsewhere, convincing its clients to purchase and hold.
The Senators' grilling of the various Goldman employees may well be the most extreme example of hard questions regarding Goldman's actions. They may have been over the top, poorly-framed, asked from positions of near-total lack of understanding of the businesses involved.
But the questions did raise discomforting issues for Goldman. Being exposed for selling securities which were thought, internally, to be of poor quality, just looks very bad, and is hard to explain.
Clearly, per yesterday's lead staff editorial in the Wall Street Journal, regulatory 'reform' can't seriously require underwriters or brokers of securities to guarantee that the value of those securities will rise.
But it's hard to see how such reform won't, and probably shouldn't, attempt to force underwriters to disclose opinions about the quality of the securities. Perhaps requiring all underwriters to hold some minimal percentage of the securities for a specified amount of time.
In the final analysis, Goldman Sachs brought the SEC suit and Senate investigation upon itself as a result of having run into the arms of the government for help in 2008. Having made that pact with the devil, it is now having to pay the price.
Perhaps, in retrospect, Goldman would have been better off filing for bankruptcy, as it faced imminent insolvency when credit lines would have been curtailed, in order to have had time to reorganize, restructure funding, and emerge in a better-financed condition.
There's no denying that the firm is now paying for its poor judgement in asking the federal government to rescue it when it was on the edge of collapse.
By now, some of the shock of the day-long hearings featuring former and current Goldman Sachs employees of varying degrees of seniority has worn off. For me, several things seem clear through the calmer hindsight of the Senate hearings.
First, the Goldman employees were very well coached and, being very intelligent, did an amazing job of both carefully responding to over-reaching, deliberately entrapping questions, plus a few of them actually adapted to the questions over time, becoming increasingly more adroit at finding ways to make positive statements either about Goldman's role or actions, or the process of the securities markets in which the actions took place.
Second, the Senators themselves behaved differently toward more senior Goldman officials. By the time Blankfein appeared, well into the evening, after markets had closed, Senators were going out of their way to give him the benefit of the doubt in answering their questions. Nobody bullied nor attacked Blankfein the way they had lower-level employees, such as Swenson, Sparks and Birnbaum, earlier that day.
Third, the entire context and process of such a Congressional investigation sub-committee hearing should give any business person pause about doing other than relying on fifth amendment protections when appearing, as ordered.
For example, Carl Levin used a particularly obnoxious tactic. He would ask a heavily-contexted, detailed question about a single exhibit from a book literally several inches thick which had been provided to each Goldman witness. When any, which is to say, all, of the Goldman employees would either take time to verify the proper exhibit, or ask a clarifying question, Levin would explode with anger, declaring that the witness was either simply wasting time, in order to 'run out the clock,' or deliberately avoiding giving a direct response.
Never mind that Levin would often ask questions, the answers to which were simply not within the capability of the witnesses to answer with known veracity. Knowing they were under oath, and that their testimony could be used in civil and criminal legal actions, each Goldman witness had to allow themselves to become whipping boys and appear guilty of whatever behavior of which a Senator decided to accuse them. Most Senators would end their question time with a non sequitor, constituent-oriented summary statement which typically accused Goldman's actions of rendering 'millions' of either US residents or their constituents homeless, penniless and jobless.
Fannie Mae and Freddie Mac were never, of course, mentioned by any Senator of either party, at least while I watched.
The very nature of these investigations leaves business people looking guilty of something, if only attempting to be profitable during whatever crisis may have been occurring. It's a near-perfect coincidence of defenseless business witnesses and omnipotent politicians who control the agenda. There is simply no way any witness from a business which Congress has decided to crucify is going to be able to leave an impression of innocence in that venue.
Finally, despite all the posturing, biased and wrongly-framed questions, and other tricks calculated to make Senators look serious and concerned, even crusading for 'the truth,' and Goldman and its employees look guilty of something, if not clearly anything actually illegal, a few things did become clear.
First, despite Blankfein's insistence that the firm went public reluctantly, and only to remain competitive, much of the root of Goldman's current predicament stems from its going public, then skating to the edge of solvency, and, then, falling upon the Fed to allow it to become a chartered commercial bank, and taking TARP funds.
Much of what transpired Tuesday would have been unremarkable had Goldman been either, or both, a privately-owned investment bank and had not taken TARP funds.
In discussions with a colleague yesterday, I noted that Blackstone did not need a TARP-funded bailout.
I suspect much of Goldman's conflicts of interest, due to their proprietary activities, will not be avoidable without the firm splitting itself into pieces, so that underwriting and proprietary activities aren't co-domiciled. That said, there will always be sophisticated counterparties and even underwriting clients who don't have problems with Goldman's internal conflicts of interest. Those firms are capable of making their own decisions regarding risks and positions with respect to all manner of asset classes.
Rather, it is most likely a large group of less-sophisticated clients, including, perhaps, many state and municipal entities, which will now shy away from Goldman Sachs.
In any case, Goldman has not just a public relations problem to manage, but a real problem of conflicts to manage. Not conflicts among clients who may be competitors, both of whom for which Goldman Sachs wants to do underwriting or advisory work.
No, the conflict is that, on one hand, Goldman may represent the firms to the market, underwriting their securities, while, in proprietary activities, explicitly selling the same securities which another part of the firm is soliciting the firm's clients to purchase.
There's no way even Lloyd Blankfein can convince most of America that this is a viable combination. He can talk until he's blue in the face about how clients wish to purchase risk and take positions opposite those of Goldman. But that won't convince most people that Goldman's mix of businesses puts it in a position to, quite often, sell from its own account, because of a belief that the value of an instrument has peaked, that which it is, elsewhere, convincing its clients to purchase and hold.
The Senators' grilling of the various Goldman employees may well be the most extreme example of hard questions regarding Goldman's actions. They may have been over the top, poorly-framed, asked from positions of near-total lack of understanding of the businesses involved.
But the questions did raise discomforting issues for Goldman. Being exposed for selling securities which were thought, internally, to be of poor quality, just looks very bad, and is hard to explain.
Clearly, per yesterday's lead staff editorial in the Wall Street Journal, regulatory 'reform' can't seriously require underwriters or brokers of securities to guarantee that the value of those securities will rise.
But it's hard to see how such reform won't, and probably shouldn't, attempt to force underwriters to disclose opinions about the quality of the securities. Perhaps requiring all underwriters to hold some minimal percentage of the securities for a specified amount of time.
In the final analysis, Goldman Sachs brought the SEC suit and Senate investigation upon itself as a result of having run into the arms of the government for help in 2008. Having made that pact with the devil, it is now having to pay the price.
Perhaps, in retrospect, Goldman would have been better off filing for bankruptcy, as it faced imminent insolvency when credit lines would have been curtailed, in order to have had time to reorganize, restructure funding, and emerge in a better-financed condition.
There's no denying that the firm is now paying for its poor judgement in asking the federal government to rescue it when it was on the edge of collapse.
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