Fed prepping preemptive bailout of commercial real estate

Voltron says: could cost $2 trillion.

http://www.ft.com/cms/s/0/19a4e968-14c9-11de-8cd1-0000779fd2ac.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=apX0Vu7khgHU

Speculating on residential housing

Voltron says: Robert Schiller's company - Micro Markets - is creating an ETF
that tracks national residential housing prices via his Case-Schiller
housing index. There are already futures and options contracts on
individual housing markets (but the contracts are quite large ~$75k). The
initial public offering will be May 11th. The ETF is triple leveraged based
on CUMULATIVE change in the residential housing index, whereas SRS is double
leveraged based on the DAILY changes in the commercial real estate index.
Even though housing is still 20 percent overvalued vis-à-vis rents,
inflation could cause house prices and/or rents to rise. There are also
issues with the way the index is computed and revised.

More info: http://www.macromarkets.com/macroshares/housing.asp

Stress test results

Voltron says: the word on the street is that Citi, BofA and Wells Fargo need to raise money. Strange since they all reported record "profits"

http://www.nakedcapitalism.com/2009/04/citi-and-bank-of-america-e.html

Negative interest rates

Voltron says: The Federal Reserve is losing it's grip on reality

Fed study puts ideal interest rate at -5%

The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve's last policy meeting.

The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.

A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent.

Fed staff separately estimated what size and type of unconventional operations, including asset purchases, might provide this level of stimulus. They suggested that the Fed should expand its asset purchases by even more than the $1,150bn (€885bn, £788bn) increase policymakers authorised at the last meeting, which included $300bn of Treasury purchases.

http://www.ft.com/cms/s/0/23b62bfc-338b-11de-8f1b-00144feabdc0.html
http://www.nytimes.com/2009/04/19/business/economy/19view.html
http://www.nytimes.com/2009/04/26/business/26backpage.html

Janet Tavacoli (video)

Janet Tavacoli (Author and University of chicago professor of derivatives finance) explains the crisis and lays blame.

http://www.tavakolistructuredfinance.com/CSPAN.html

Fannie Mae Creates Housing Mirage

April 24 (Bloomberg) -- Give money away. That was a solution to the housing crisis mortgage giant Fannie Mae hit on last year.

Faced with growing numbers of homeowners unable to make mortgage payments, Fannie decided to fund loans to borrowers that were instant losers.

The point was to buy time. Even though those loans resulted in a $453 million loss, they helped keep troubled homeowners from defaulting. That meant Fannie for now didn’t have to make good on loan guarantees that may have cost it as much as $2.4 billion.

The big game of kick the can strikes at a deep-seated fear among many investors -- that banks and others faced with mounting housing losses are finding all manner of dubious ways to push a day of reckoning into the future.

If that’s the case, any improvement in the housing outlook might be a mirage obscuring even greater pressures building in the financial system. That would eventually counter better-than- expected first-quarter results from many banks.

Investor angst was made worse by the knowledge that the government is leaning hard on banks to modify troubled loans any way they can. Prevent foreclosures and worry about the consequences later is the mantra of the day.

In a perverse way, there is some logic to such maneuvers. Today’s troubled borrower may be in better shape if given time to wait for fractured markets to heal. Or, if today’s losses can’t be cured, the company facing them may be better able to deal with them at a less-stressed future date.

...Based on market prices, Fannie said the loans had a value of just $8 million. That’s right, the loans, which are in many cases just months old, were worth 1.7 cents on the dollar.

full article: http://www.bloomberg.com/apps/news?pid=20601039&sid=aColIYAe.RaU

MERS

Excerpt:

Created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. From an office in the Washington suburbs, it played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership.

full article: http://www.nytimes.com/2009/04/24/business/24mers.html

The government should join GASG

Voltron says: The government's plan to convert the Treasury's holdings of
bank preferred stock to common stock follows a now familiar pattern. It's a
gamble. By swapping senior debt for the lowest rung equity shares, the
government is increasing it's risk instead of just spending a known amount
of money. Why is the government gambling with our money? There is not
political will to say, "hey it's going to take XYZ amount of money/work to
get out from under this" Instead, it's a series of increasingly desperate
gambles. Right now, the debt is a manageable percent of GDP (40% + 45% for
Social Security and Medicare). If we keep going down this path, pretty soon
it won't be. Again, I don't mean to get on a soapbox. I'm just pointing
out that we are going to be forced to inflate away this debt, because no one
is willing to work it off.

http://www.nytimes.com/2009/04/20/business/20bailout.html

P.S.: GASG stands for "Gambling Addiction Support Group" which was the name
of the email list that was the predecessor to this blog.

Wells Fargo's margins are thin

http://online.wsj.com/article/SB124045047376046243.html?ru=yahoo&mod=yahoo_hs

Mortgage Fraud

Voltron says: The government has been making a lot of noise about "mortgage scams" advising people not to pay fees and to use only free government approved housing counselors. The government approved housing counselors are not allowed to advise you to default even if it is in your best interest - at least not until ALL of your retirement savings are drained. They exist to protect the banks. The government wants to steer you away from companies like "You Walk Away LLC" that look after your interests. The government is creating a straw man - the fact is most mortgage fraud being investigated by the FBI is perpetrated by well known mortgage servicers. They will intentionally mar your credit rating to prevent you from refinancing while they concoct fees, game the system and force a foreclosure.

If you have a mortgage, you should read this: http://www.msfraud.org/howtheysteal.html

More info:

http://mandelman.ml-implode.com/2009/04/holder-and-geithner-lied-about-loan-modification-scams/

http://www.msfraud.org/LAW/lounge/pmiocwenandersonreport.pdf

Freddie Mac CFO Commits Suicide

http://www.wcbs880.com/Freddie-Mac-Chief-Commits-Suicide/4249204

Pre-paid tuition

Voltron says: I'm a big fan of pre-paid college tuition plans. They are offered in 19 states and allow you to lock in the current tuition rate and pay with a lump sum or payment plan. This differs from a "529" college savings plan where your returns are dependent on the investments in the plan. The "529" plans have been decimated by the market downturn, but pre-paid tuition plans are guaranteed by the state.



http://www.stateline.org/live/details/story?contentId=393552

Bank Profits Appear Out of Thin Air

Excerpt:

Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.

But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

http://www.nytimes.com/2009/04/21/business/21sorkin.html

Wells Fargo: Bulls vs. Bears

Voltron says: The bull case is bullsh!t (hat tip to G-man)

"I've accepted the point of view that if a loan is not in default, it's
worth what it says it's worth. And that means I think the markdowns are
excessive in the sector."

http://money.cnn.com/2009/04/20/pf/wells_fargo_analysts.fortune/index.htm

No way out

Voltron says:

The major banks have all reported good earnings last quarter, using every accounting trick in the book, in order to repay the TARP loans to get the government off of their backs so they can continue paying themselves enormous bonuses. The problem is they've slammed the door to further bailouts and put the government in the horns of a dilemma on how to deal with the results of the stress test they conducted. It's a gigantic game of brinksmanship where clearly all the players know the gig is up very soon.

As the banks implode, the Fed will continue to try and fill the enormous balance sheet hole with printed money. Given that the Fed is willing to do anything, legal or illegal, to increase the money supply, I think they will succeed, but there will be no political will reverse gears quickly enough to soak up the excess liquidity afterwards and massive inflation will result.

The only ways this won't happen is if the economy seizes up so thoroughly that the velocity of money goes to zero (people hoard money instead of spending it, regardless of how much excess they have) or if the government comes to it's senses and reverses course, which is vanishingly unlikely (although former Fed Chairman Paul Volker has recommended yanking the Fed's leash (http://www.bloomberg.com/apps/news?pid=20601087&sid=auvswgtfT6_Q)

Fed officials suggest worst of recession is over

Paul Volcker, a senior economic adviser to the Obama administration and a former Fed chairman himself, said the rate of the economy's decline is set to slow.

Voltron says: That's supposed to inspire confidence? Actually, I'd expect the rate to slow as we settle into the long slow slide like Japan had.

http://finance.yahoo.com/news/Fed-officials-suggest-worst-rb-14964702.html?.v=4

Bank Regulators Clash Over U.S. Stress-Tests Endgame

Excerpt:

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said.

Voltron says: I'm waiting for the results with my baby seal club . . . grinning. I won't wait six seconds.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQM1Cmt7cY24

Wells Fargo is full of it

Voltron says: according to bloomberg, Wells Fargo took Wachovia's reserve for loan losses and applied it to their own losses. They simply assumed that Wachovia would not have any losses. If Wachovia had no impending loan losses, why did they collapse into the arms of Wells Fargo? They also reported $44.2 billion in "other assets". Other accounting shennanegans abound

http://www.bloomberg.com/apps/news?pid=20601039&sid=a6sv0hG.nW7g

Shitibank is full of it

Excerpt:

Citigroup posted a $2.5 billion gain from accounting rules that allow companies to profit when their own creditworthiness declines. The rules reflect the possibility that a company could buy back its own liabilities at a discount, which under traditional accounting methods would result in a profit.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atwu65G62peY

Voltron says: Citibank's earnings conference call was mostly jibberish, causing analysts to believe that they are trying to dazzle us with bullsh!t

http://blogs.reuters.com/felix-salmon/2009/04/17/citigroups-horrible-conference-call/

Have banks hit bottom?

Voltron says: well, now all four major banks have put forth their phony "earnings" by using dubious and newly-legalized "creative accounting". That's it . . . no more "good news"

Excerpt:

John Carney from Clusterstock.com: We're still in the dark. We're probably even more in the dark than ever before because the amount of noise coming out of the government is confusing the signals that the market would normally send to us.

link: http://marketplace.publicradio.org/display/web/2009/04/17/pm_weekly_wrap/#