Letters to the Editor – Restore Glass Steagall

Interesting commentary.    Let me explain a bit:

• Glass Steagall is the act that separated investment banking from “regular” banking after the Great Depression.
• It was repealed in 1999 – because it was “different this time.”
• As Yves Smith at Naked Capitalism has called it, the separation of Casino Banking from Traditional banking.

Now we’ve got at least three people:

• The former chairman of the Federal Reserve
• The current English equivalent to Ben Bernanke
• A former chairman and CEO of Citigroup

All saying that we need to separate the big institutions so that the risks that are taken by the Morgan Stanleys and the Merrill Lynch’ of the world don’t jeopardize the First State Banks of the country who have the deposits of the general population.

I’m not sure I’d bet against these three, would you?

Tom Vanderwell

Letter – Volcker’s Advice – NYTimes.com

Re “Volcker’s Voice, Often Heeded, Fails to Sell a Bank Strategy” (front page, Oct. 21):

As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.

This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.

John S. Reed
New York, Oct. 21, 2009

The writer is retired chairman of Citigroup.

There are some things that I just can’t add anything to……

Ms. Watkins, why does Charlie have lit dynamite? « naked capitalism

Ms. Watkins, why does Charlie have lit dynamite?

You are a teacher at a local primary school. Each school day you and some of your colleagues watch over the children at the school playground to make sure all of the children follow the rules and keep their hands to themselves. Your role is to keep the children safe. Mind you, this is a Montessori School where the philosophy is to let children explore within set boundaries. But, if a child hurts another or a child’s behavior poses an immediate risk to others, you always step in.

In fact, one child, Charlie has been a bit of a problem recently. Charlie is one of the biggest kids at the school, a boisterous sixth grader who likes to push and play with matches. Last July 4th, it seems he got a hold of a video on the Internet blog Credit Writedowns on how not to use fireworks. Contrary to the video’s intention, he rather liked seeing things blow up and courting danger. You see Charlie is a bit of a pyromaniac. You have repeatedly had to stop Charlie from bringing matches to the playground and lighting things on fire. But, recently you have had to confiscate firecrackers and suspend him from school.

But, one day a new headmaster comes to the school. He doesn’t believe much in the need for teachers to monitor the children. The children can monitor themselves. Unfortunately, Charlie has a bit of a following at school and before you know a lot of the kids are lighting firecrackers on the schoolyard. No one gets seriously hurt – just a few minor burns here and there. So Charlie ups the ante to M-80s like he saw in the video. There was a serious close call when he put the frog in a jar with the M-80, but self-monitoring has worked pretty well and there have still been no major casualties.

That’s when little John comes up to you and asks, “Ms. Watkins, why does Charlie have lit dynamite?”

In case it’s not obvious:

* Charlie is a too big to fail bank.
* The matches are debt, the firecrackers are derivatives, the M-80s are asset-backed securities and the dynamite is OTC derivatives.
* You (Ms. Watkins) are Brooksley Born
* The headmaster is Alan Greenspan
* Little John is another smaller community bank
* The other children are banks and citizens of the broader economy
* The frog-glass incident was LTCM’s collapse
* The lit dynamite incident was Lehman Brothers

Technorati Tags: Dynamite, Naked Capialism

125% Refinance Loans – Wow here’s another way to look at it….

Anyone who’s been a reader of Straight Talk for a while has known that I’ve been an avid reader of what Yves Smith at Naked Capitalism writes.   Well, she’s got a somewhat cynical but very thought provoking look at the new 125% refi program.

Take the time to read it…..

Tom Vanderwell

naked capitalism: Freddie, Fannie to Provide 125% LTV Mortgages, Worse Than Extremes of Subprime Frenzy

Freddie, Fannie to Provide 125% LTV Mortgages, Worse Than Extremes of Subprime Frenzy

If you had any doubt that the intent of policy, such as the heroic efforts by the Fed to channel money to the mortgage market my manipulating spreads of mortgage paper so as to lower borrowing costs, was not merely to clear inventory but boost prices, today’s action should put your mind at rest.

The powers that be have just put in a big time above market bid, now permitting refis of 125% LTV for borrowers who are current. That is, assuming they get any takers.

The effort is presumably to address borrowers who are already under water, and so would be swapping out of a mortgage that is in negative equity land for one that has a lower coupon. That lowers their payments (ex costs) and frees up some of the money formerly spent on the mortgage to spend on other stuff, like paying down their credit card debt (that was a lame attempt at humor, the authorities hope this will lead to more consumption). In addition, the new mortgage in theory is less prone to default than the old, since it consumes less of the borrowers’ income.

But theory may not map on to practice, First, in most states, a purchase money mortgage is non-recourse, but a refi is. So some borrowers will put themselves in worse shape it they take up this offer.

Second, defaults are more likely with negative equity loans, apart from payment stress. Why? Let’s face it, even if you make your payments, you still expect a big bill when you sell the house unless the market appreciates enough to enable you to sell it for your mortgage balance. The other exit is negotiating a short sale with the bank, but that still leaves the hapless seller with a large tax bill if prices fail to recover by the time the forgiveness window closes (2012?).

Lousy endgames leave buyers not highly motivated to work hard to make payments when adversity arises. They realize, correctly, that they are better off not throwing good money after bad.

But this program nevertheless suggest that the authorities sincerely believe that current price levels for housing are the result of panic, and not a return to historic relationships of housing prices to incomes and rental prices.

Naked Capitalism

naked capitalism: Guest Post: “If You Can’t Tell Who The Sucker Is….”

I was quite taken with this post of our occasional guest blogger Cassandra (who holds forth at Cassandra Does Tokyo). I hope you enjoy it as well.

From Cassandra:

Thumbing through the sell-side research from their multitudes of Strategists, I notice some recurring phrases, small and innocuous as they may be, that trouble me. Time and again, they repeat, in various contexts, the mantras: “when things return to normal”, “when markets return to normal”, and “when x, y or z normalizes” with “normal” implied to be that which has been common over the past decade-or-so in respect of liquidity, leverage, asset prices, equity risk premiums, speculative activity, growth.

Mulling this over, I wonder to myself: “is this not just the perfect “recency bias” example, defined by wikipedia as “a cognitive bias that results from disproportionate salience of recent stimuli or observations”?

For as I consider what precisely is meant by “normal”, it seems to me that there is a reasonable good chance insofar as this IS “The Big One” (as Bridgewater Associates precsiently termed it nearly a year ago) that all these things – debt, leverage, consumption vs. income, relative asset prices – are ALREADY returning to normal, and the strategists, demonstrating the old poker joke about “if you look around the table and you don’t know who the sucker is, its you….”, simply haven’t yet fathomed the appropriate interval frame of the normality to which things are returning towards……

naked capitalism: Guest Post: “If You Can’t Tell Who The Sucker Is….”.

Tom here – what’s the point with all of what Cassandra has to say?  I’ll say it very simply:

Normal has changed.   Normal most likely won’t be the same again.  Get used to it.   Stop looking at the last 5 to 10 years as the way things should be…..

Hmmm, food for thought, don’t you think?

Or does “It’s different this time ring a bit hollow?”

Tom Vanderwell

Redefault Rate on Mortgage Mods 55% Within Six Months

Proponents of mortgage modifications contend that the cost of even a deep principal reduction still puts the lender ahead of foreclosure, and experience in past real estate downturns would bear that contention out.

So why is this time different? Data from the Office of the Comptroller of the Currency show that 55% of mortgage mods redefault within six months. Even more discouraging, the three month re-default rate was higher for loans modified in the second quarter of 2008 than the first.

It is hard to know for certain without digging further into the data. With housing prices down nearly 30% nationwide, and foreclosure costs averaging $50,000, banks could afford significant principal reductions and still come out ahead. However, borrower advocates contend that many mods in fact reduce interest, but unless the principal is cut, the reduction in payments is insufficient to make enough difference with many borrowers. Without mining the data further, it is hard to know where the truth lies.

naked capitalism: Redefault Rate on Mortgage Mods 55% Within Six Months.

In the history of loan payments, 6 months is not very long.   However, the data does suggest that putting too much faith in loan modifications is not going to pan out unless:

1. The modifications are done on a case by case basis and truly reflect the needs of that particular case.
2. They are steep and significant enough to make a difference.

I had a potential customer contact me once who wanted me to refinance her house.   She had an “option arm” that had ballooned to an 11% rate (we were currently at 6%.   She wanted to keep her house, get a better rate and get a fixed rate.

I couldn’t do anything because she owes more than the house is worth.   However, she was going to go back to the existing bank and attempt to persuade them to do a loan modification to drop her rate, not down to current market rates, but even just down to 8%.   We figured it out and that would be more than enough for her to live comfortably and make her payments.

Why did I tell you her story?  Because if a loan modification is steep enough and custom tailored enough to the individual means, it could work.   If it’s a one size fits all, it won’t.

Tom Vanderwell

Analysts Expect Reports on Spending, Home Sales to Show Decine in November – Naked Capitalism

Yves has a thought provoking article about the economic reports.  Read it, and then I’ll have more comments afterwards….

……Despite a not-as-bad-as-feared Black Friday (the day after Thanksgiving), retail sales fell in November. Analysts expect the financial releases next week to show a continued contraction in consumer spending (a broader measure, including services, is due for release this week). And housing data is anticipated to be not-so-hot either.

I don’t pretend to have any feel for markets, but I was struck earlier in the month how the stock market shrugged off almost all bad news, but did not react much to the announcement of the auto industry rescue. True, at that point, observers may have assumed that it HAD to happen, so the confirmation that it was on was a big yawn.

But I wonder if investors are somewhat uneasy that the Fed (and soon the Administration) are moving into uncharted territory with the size of the programs on tap. Although the consensus among economists is that these programs will succeed (albeit with the risk of substantial inflation down the road) the flip side is the consensus among economists was that (until recently) we’d have no or only a shallow recession.

naked capitalism: Analysts Expect Reports on Spending, Home Sales to Show Decine in November.

Yves raises a couple of good points:

1. The fact that the markets shrugged off almost all bad news makes me wonder what’s happening there.   Is it acceptance or denial?
2. The government announced the last minute band aid for the auto makers and the market said, “Oh yeah, whatever.”  It would seem to me that the reality of the government’s need to intervene would be a sobering effect on the market.
3. The consensus among economists are that the programs will work, but these are the same economists who said, “This will only be a mild recession.”   Economist credibility is kind of an oxymoron don’t you think?

Have a good day and stay tuned……

Tom Vanderwell

Fed Ponders Issuing Debt to Finance Its Mushrooming Balance Sheet

I’m only going to make three comments about this article:

1. There is a lot more to this than initially meets the eye.   Click on the link at the bottom and read the entire article that Yves has written up.
2. When the Treasury is too busy borrowing money to help the Fed borrow money, you know that they are borrowing a LOT of money.
3. This is the type of “event” that I’ll be able to dig into further once “Straight Talk – The Bigger Picture” is rolled out.   More on that later.

Stay tuned,

Tom Vanderwell

Fed Ponders Issuing Debt to Finance Its Mushrooming Balance Sheet

The Wall Street Journal, in a typically anodyne bit of reporting, tells us that the Fed is considering selling its own debt to finance its balance sheet, Its good old buddy, the Treasury Department, which heretofore has been selling bills in part on behalf of the Fed, now has a big enough financing calendar in the offing that it no longer can lend a helping hand.

naked capitalism: Fed Ponders Issuing Debt to Finance Its Mushrooming Balance Sheet.

naked capitalism: Bill Gross Says Stocks May Not Be So Cheap

Gross focuses on the role of leverage versus deleveraging, as well as government intervention, in the prospects for stocks. He concludes that those two factors mean that stocks might not be so cheap after all. Note he first looks at measures like the famed Q ratio, which suggests stocks are a bargain, and then P/E ratios, which are only a tad below their mean for the last 100 years.

Key excerpts from his monthly missive (boldface his):

We will not go back to what we have known and gotten used to. It’s like comparing Newton and Einstein: both were right but their rules governed entirely different domains. We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people’s money. ….

My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5,000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well. One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well.

naked capitalism: Bill Gross Says Stocks May Not Be So Cheap.

Tom here – what’s Bill Gross talking about?   It’s a different angle to something I’ve been thinking for quite some time….

We are going through a massive deleveraging in our economy.   What does that mean?

1. We finally met a loan we didn’t like.   Our country has been living on borrowed money for a very long time and because of that we could spend more, buy more, invest more and it drove the prices on everything up.
2. We’re in the process of coming to the realization that we can’t keep borrowing forever.
3. When we don’t borrow money to buy stocks, it’s going to make the value of the stocks go down.

So, are stock prices cheap?  I have no idea, but Bill lays out a very complex but convincing case that if all investing is done with cash, it will be harder to pay the current prices.

What do you think?

Tom Vanderwell

Someone else is saying the same thing that I’m thinking!

As we said in a post last evening on this program:

There are a few problems with this approach:

1. The banks have already been given support right, left and center. They are still not lending,

2. Some of the stinginess is warranted. Um, a credit bubble means a lot of people got loans who shouldn’t have. Do we want banks again to make unsound loans? I should hope not, but I could be wrong here. A fair bit of consumer credit ought to contract. And even if a lot of good customers also have their credit lines cut, do you really think the banks are going to turn around and reverse these decisions on a meaningful scale. Ain’t happening.

3. Consumers are scared about employment and the loss of their home equity piggybank. They also know they borrowed too much. They want to lower debt levels. So as a reader put it, “Even if you throw the horse in the lake, you can’t make him drink.”

4. Banks are so desperate to restore profits that they are jacking up prices on existing consumer credit, even as the Fed and Treasury have been provided lots of low-cost support. Citibank and American Express are raising interest rates on existing loan balances for a a significant proportion of customers, and they no doubt have company. If consumers face higher charges on their outstanding debt. it considerably reduces the odds that they can or will take on more debt.

naked capitalism: Federal Reserve, Treasury Announce $800 Billion Plan to Support Consumer Lending.

naked capitalism: FDIC: “Problem Banks” Reach 13 Year High

Gee,if you took it at face value, the FDIC’s report, which says that problem banks increased by 46%, reaching a level not seen since the mid-1990s, says things are not as bad as in the savings and loan crisis. But of course, we are seeing this deterioration despite the Fed and Treasury throwing money at banks. Oh, just large banks.

“Declining asset quality is the main reason for the weakness in earnings,” said Bair, 54.

The erosion was concentrated in residential mortgages and construction and development loans, she said.

The banking industry wrote off $27.9 billion in loan losses at the end of September, an increase of 157 percent from the $10.9 billion reported in the third quarter a year earlier.

Yves here. Translation: “Banks are squeezing their customers as hard as they can, but they cannot get blood from a turnip.”

“We anticipate that a challenging credit environment will persist for some time to come,” Bair said.

Yves again. Translation: Things are sure to get worse in 2009.

naked capitalism: FDIC: “Problem Banks” Reach 13 Year High.

Okay, a couple of thoughts….

1. If we think that the Citigroup bailout was the last of it, we’re delusional.

2. If Citi had to be bailed out twice in 2 months (October and November) then what we’re doing now had better work or we need to come up with another plan…..

I’ll have more thoughts on my “plan.”   But later.

Tom Vanderwell

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