by Calculated Risk on 1/27/2009 07:08:00 PM

From the WSJ: U.S. House Panel Approves Mortgage Measure (hat tip Ken)

A measure to allow judges to reduce the principal amounts of mortgages for troubled borrowers in bankruptcy cleared a key hurdle Tuesday when it was approved by a U.S. House panel.
...
Under the legislation, borrowers would be eligible to have a bankruptcy judge reduce the principal balance on their home loan -- a move known as a "cram down."
...
In key concessions to the banking industry, Mr. Conyers agreed to alter the legislation to allow court-ordered modifications only for existing mortgages and to require that borrowers contact their lender at least 15 days before filing bankruptcy.
...
In another change, the legislation will now require recipients of cram downs who resell their home within five years to share the proceeds with their lender.

Tanta argued that cram downs would help discipline lenders in the future. So I think she'd consider the concession to make the legislation applicable to only existing mortgages significant. Excerpting from Tanta's Just Say Yes To Cram Downs

I am fully in favor of removing restrictions on modifications of mortgage loans in Chapter 13, but not necessarily because that helps current borrowers out of a jam. I'm in favor of it because I think it will be part of a range of regulatory and legal changes that will help prevent future borrowers from getting into a lot of jams, which is to say that it will, contra MBA, actually help "stabilize" the residential mortgage market in the long term. Any industry that wants special treatment under the law because of the socially vital nature of its services needs to offer socially viable services, and since the industry has displayed no ability or willingness to quit partying on its own, then treat it like any other partier under BK law.

by Calculated Risk on 1/26/2009 02:48:00 PM

This was from about 10 days ago, but I missed it. Starting Jan 1, 2010, all loans purchased by Freddie and Fannie are required to have loan-level identifiers so that performance can be tracked by orginators and appraisers.

FHFA Announces New Mortgage Data Requirements

Washington, DC – James B. Lockhart, Director of the Federal Housing Finance Agency, announced today that, effective with mortgage applications taken on or after Jan. 1, 2010, Freddie Mac and Fannie Mae are required to obtain loan-level identifiers for the loan originator, loan origination company, field appraiser and supervisory appraiser. ...

FHFA’s requirement is consistent with Title V of the Housing and Economic Recovery Act of 2008, the S.A.F.E. Mortgage Licensing Act, enacted July 30. With that Act, Congress required the creation of a Nationwide Mortgage Licensing System and Registry. In prior years, both Enterprises worked with the Mortgage Bankers Association of America (MBAA) and the National Association of Mortgage Brokers (NAMB) on a similar initiative. However, that effort was thwarted due to the absence of a national registration and identification system. With enactment of the S.A.F.E. Mortgage Licensing Act, identifiers will now be available for each individual loan originator.

“This represents a major industry change. Requiring identifiers allows the Enterprises to identify loan originators and appraisers at the loan-level, and to monitor performance and trends of their loans,” said Lockhart. “If originators or appraisers have contributed to the incidences of mortgage fraud, these identifiers allow the Enterprises to get to the root of the problem and address the issues.”

The purpose of FHFA’s requirement is to prevent fraud and predatory lending, to ensure mortgages owned and guaranteed by the Enterprises are originated by individuals who have complied with applicable licensing and education requirements under the S.A.F.E. Mortgage Licensing Act, and to restore confidence and transparency in the credit markets. In addition, the Enterprises will use the data collected to identify, measure, monitor and control risks associated with originators’ and appraisers’ performance, negligence and fraud.
...
To implement the requirement, FHFA has been working with the Conference of State Bank Supervisors (CSBS) and the FFIEC Appraisal Subcommittee. Within the next 30 days, both Fannie Mae and Freddie Mac will be issuing guidance related to implementation of the requirement.

by Calculated Risk on 1/24/2009 10:07:00 PM

From the NY Times: Obama Plans Fast Action to Tighten Financial Rules

Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis.
...
Officials said they want rules to eliminate conflicts of interest at credit rating agencies ...

Aides said they would propose new federal standards for mortgage brokers ... They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.
...
The administration is also preparing to require that derivatives like credit default swaps ... be traded through a central clearinghouse and possibly on one or more exchanges.

It sounds like the Obama administration will propose the stimulus plan, the new bank bailout, and significant regulatory changes for financial system all in short order.

by Calculated Risk on 1/06/2009 09:16:00 AM

From Reuters: Lawmakers set new mortgage bankruptcy bill

Legislation designed to stem foreclosures by allowing bankruptcy judges to erase some mortgage debt will be introduced by Congressional Democrats on Tuesday, and hopes are high that it will pass after a similar plan failed last year.
...
The legislation would change allow bankruptcy judges to modify home loans in the same way that they currently may modify other unsettled obligations, such as credit card debt.

For a discussion of the cram-down issues, see Tanta's:

Just Say Yes To Cram Downs Oct, 2007

Here are a couple more posts from Tanta on cram-downs:

House Considers Cram Downs Sept, 2007

MBA and Cram-Downs Feb, 2008

by Calculated Risk on 11/23/2008 01:15:00 AM

The WaPo has an article reviewing how the Office of Thrift Supervision (OTS) failed to properly regulate lenders: Banking Regulator Played Advocate Over Enforcer

OTS is responsible for regulating thrifts, also known as savings and loans, which focus on mortgage lending. As the banks under OTS supervision expanded high-risk lending, the agency failed to rein in their destructive excesses despite clear evidence of mounting problems, according to banking officials and a review of financial documents.

Instead, OTS adopted an aggressively deregulatory stance toward the mortgage lenders it regulated. It allowed the reserves the banks held as a buffer against losses to dwindle to a historic low.
...
The agency championed the thrift industry's growth during the housing boom and called programs that extended mortgages to previously unqualified borrowers as "innovations." In 2004, the year that risky loans called option adjustable-rate mortgages took off, then-OTS director James Gilleran lauded the banks for their role in providing home loans. "Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion," he said in a speech.

The article references the infamous chainsaw incident:

In the summer of 2003, leaders of the four federal agencies that oversee the banking industry gathered to highlight the Bush administration's commitment to reducing regulation. They posed for photographers behind a stack of papers wrapped in red tape. The others held garden shears. Gilleran ... hefted a chain saw.

This photo from 2003 shows two regulators: John Reich (then Vice Chairman of the FDIC and later at the OTS) and James Gilleran of the Office of Thrift Supervision (with the chainsaw) and representatives of three banker trade associations: James McLaughlin of the American Bankers Association, Harry Doherty of America's Community Bankers, and Ken Guenther of the Independent Community Bankers of America.

The article also discusses how the OTS dragged their feet when new lending guidelines were proposed by the Office of the Comptroller of the Currency:

In 2006, at the peak of the boom, lenders made $255 billion in option ARMs ... Most option ARMs were originated by OTS-regulated banks.

Concerns about the product were first raised in late 2005 by another federal regulator, the Office of the Comptroller of the Currency. The agency pushed other regulators to issue a joint proposal that lenders should make sure borrowers could afford their full monthly payments. "Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning," Comptroller of the Currency John C. Dugan said in a speech advocating the proposal.

OTS was hesitant to sign on ... [John] Reich, the new director of OTS, warned against excessive intervention. He cautioned that the government should not interfere with lending by thrifts "who have demonstrated that they have the know-how to manage these products through all kinds of economic cycles."

Back in 2005 I posted frequently on the progress of the proposed new guidance. I spoke with a number of regulators in 2005 and 2006 who were involved in the process, and a number of them expressed frustration with the OTS and the Fed.

Here is an excerpt from the NY Times from July 2005: A Hands-Off Policy on Mortgage Loans

For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans.

First they issued new "guidance" to banks about home-equity loans, warning against letting homeowners borrow too much against their houses. Then they expressed worry about the surge in no-money-down mortgages, interest-only loans and "liar's loans" that require no proof of a borrower's income.

The impact so far? Almost nil.

"It's as easy to get these loans now as it was two months ago," said Michael Menatian, president of Sanborn Mortgage, a mortgage broker in West Hartford, Conn. "If anything, people are offering them even more than before."

The reason is that federal banking regulators, from the Federal Reserve to the Office of the Comptroller of the Currency, have been reluctant to back up their words with specific actions. For even as they urge caution, officials here are loath to stand in the way of new methods of extending credit.

I was outraged by the foot dragging at the time ... the regulators knew there was a lax lending problem in early 2005 (they were already late), and the continual foot dragging just made the inevitable crisis worse (as an example the peak year for Option ARM lending was in 2006).

This willful lack of oversight by certain regulators was outrageous.

by Calculated Risk on 9/30/2008 11:01:00 PM

"Suspending mark-to-market accounting, in essence, suspends reality."
Beth Brooke, global vice chair at Ernst & Young LLP, WSJ, Sept 30, 2008

"Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick."
analyst Dane Mott, JPMorgan Chase & Co., Bloomberg

"Suspending the mark-to-market prices is the most irresponsible thing to do. Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings."
Diane Garnick, Invesco Ltd., Bloomberg

by Calculated Risk on 9/30/2008 04:09:00 PM

From Bloomberg: SEC, FASB Said to Issue Guidance on Fair-Value Accounting Rules

The SEC may say companies can rely more on assumptions ...in assessing how much assets are worth ... The SEC and FASB will probably [NOT] suspend the accounting rules ...

More work for accountants.

by Calculated Risk on 9/23/2008 09:44:00 PM

Update to make this clear: I never focused on Section 8 (oversight) of the Paulson Proposal because I felt this was obviously going to be changed. To be fair, sometimes people put an offensive clause in a proposed agreement as a negotiating ploy. I think Paulson learned that negotiating ploys don't go over very well with Senators!

From Paulson's proposal:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Paulson today:



If Paulson really wants transparency, give us a website, updated daily, with the details of all transactions!

by lama on 8/30/2008 09:46:00 AM

Here's an article featuring regulators reacting to 3 to 5 year-old news.
http://www.bloomberg.com/apps/news?pid=20601068&sid=aBDDcYvIKUdE&refer=economy

I have some observations about regulators:
1. They are retstrained by Congressional inaction or mission statements.
2. They are not actively in the marketplace, so they miss the first signs of trouble. More than a year ago, a retail store owner could have told you the economy was sinking. For our small consulting firm, 9 months ago it became easier to find accounting talent. Are regulators in the Ivory Tower?
3. There are more inputs into any economic analysis than there ever were before. In the early 90's recession, Asia meant Japan, Europe was 3 countries, the Middle East was just a gas station and The Americas was the US. Now, there are so many more countries with real economies, what's the benchmark?

What can regulators do? What should they do?

by Calculated Risk on 8/10/2008 04:10:00 PM

Paulson interview starts at about 1 min 30 secs and runs to about 28 minutes. Brokaw ask him what happened to "containment" and about President Bush's comment about Wall Street getting drunk.

by Calculated Risk on 7/26/2008 06:01:00 PM

From the NY Times: Congress Sends Housing Relief Bill to Bush

Here is the WSJ version: Congress Passes Housing Bill

First, I think the impact of the original part of the housing bill will be minimal. The provision allows the FHA to insure up to $300 billion in new mortgages for certain borrowers. The key is that the current lender has to voluntarily agree to write down the loan balance to 85% of the current appraised value before the FHA will insure the new loan.

The CBO has estimated that the FHA will only insure $68 billion in loans for about 325,000 homeowners. The number will be limited because only certain homeowners actually qualify, and also because lenders probably will not be eager to write down loans to 85% of the current appraised value.

My biggest concerns with this provision are appraisal fraud and adverse selection.

The other major provision of the housing bill is the Paulson Plan to support Fannie and Freddie. The cost to taxpayers is very uncertain, although I doubt it will be zero (the CBO's base case). The GSE support does appear to be almost unlimited (limited only by the debt ceiling that was increased to $10.6 trillion from $9.815 trillion).

The actual cost of the Paulson Plan is a huge concern.

There are many other provisions. As the NY Times mentions:

There are provisions, for example, that grant or extend Section 8 federal housing subsidy eligibility to residents of specific properties in Malden, Mass., and San Francisco. And there is a provision tailored narrowly for Chrysler to ensure that it can benefit from a corporate tax incentive even though the company is now structured as a partnership not a corporation. The bill does not name Chrysler but rather describes an unnamed automobile manufacturer “that will produce in excess of 675,000 automobiles” between Jan. 1 and June 30, 2008.

Weird.

The bill also has a tax credit for new home buyers (up to $7,500). This appears to be structured as a no interest loan that has to be repaid within 15 years.

The bill has many other provisions too, including permanently increasing the conforming loan limit to 115% of the local area median home price (with a ceiling of $625,000, from $417,000), and eliminating FHA related Downpayment Assistance Programs (DAPs). Tanta and I have been advocating eliminating DAPs for years.

Note: I could have some of the specifics wrong - I've read several stories, and the details vary.

I think the bill doesn't match the heated rhetoric on the internets (I've seen people write this is the "end of capitalism" and the "dollar is doomed"). Although I'm sure some commenters will confuse me with Pollyanna!

by Calculated Risk on 7/23/2008 09:47:00 AM

Note: Down Payment Assistance Programs (DAPs). Tanta and I have written extensively (and negatively) about DAPs for years.

From the WaPo: Congress Is Set to Limit Down-Payment Assistance (hat tip Bob_in_MA)

[T]he FHA said seller-funded down payments present the single biggest challenge to its solvency. Borrowers who take part in these arrangements go to foreclosure at nearly three times the rate of borrowers who put their own money down, according to the agency.

The fate of these seller-funded down-payment-assistance programs has been in limbo for weeks. The Senate version of the housing bill would have banned them. The House version would not. Negotiators crafting a compromise bill have agreed to the Senate's position, which also is supported by the Bush administration.

"We're going to yield to the Senate on that," said Rep. Barney Frank (D-Mass.)

Good riddance.

A few of our previous posts:

FHA Going After DAP Again? Tanta, June 10, 2008

DAP for UberNerds, Tanta, Oct 19, 2007 **** READ this one for nerdy details! ****

FHA to Ban DAPs, CR, Sept 29, 2007

Housing: IRS Raps DAPs, June 2, 2006

More on Housing, CR, Feb 24, 2005

by Tanta on 7/17/2008 08:43:00 AM

We had so much fun--I use this word advisedly--with IndyMac and moral hazard yesterday that I have to return to the well. It's a nice deep one.

From Bloomberg this morning:

July 17 (Bloomberg) -- IndyMac Bancorp Inc.'s collapse may spur withdrawals from banks ranging from First BanCorp in Puerto Rico to Los Angeles-based Nara Bancorp Inc. as customers trim accounts below the $100,000 limit on deposit insurance, according to Sandler O'Neill & Partners LP.

``IndyMac's failure has people worried about others,'' Mark Fitzgibbon, a principal at Sandler O'Neill, said in an interview. Fitzgibbon told clients in a report this week that signs of weakness may prompt customers ``to more actively move deposits to banks that are perceived to be healthier.''

The result could be a liquidity squeeze at banks that rely on ``jumbo'' deposits, Fitzgibbon said. His report, published July 15, included more than 50 companies with jumbo time accounts, typically certificates of deposit, that exceeded 25 percent of first-quarter deposits.

Topping the list was First BanCorp at 72 percent. Puerto Rico-based Doral Financial Corp. had 60 percent and Nara Bancorp had 53 percent, according to Sandler. Bank of America Corp., the biggest U.S. consumer bank, stood at 12 percent at the end of 2007; the report didn't have more recent data.

If any of you would like my personal opinion, for what it is worth, I wouldn't put $12.72 in a bank with 72% jumbo deposits. Certainly not after this:

Alan Cohen, senior vice president of marketing at First BanCorp, said in an interview that Fitzgibbon's report contained ``grave inaccuracies.'' In an e-mailed statement, the company said Sandler should have excluded brokered CDs, ``a stable source of funding.'' Without those, jumbo time deposits equal about 8 percent of total deposits, the bank said.

Whoa, Nellie.

Really, the issue with "jumbo" deposits is, precisely, the extent to which such large deposits are "brokered" versus "core." A bank's "core deposits" are those made by individuals and businesses in the bank's local market areas who have some retail relationship with the bank--checking accounts, loans, what have you. Brokered deposits are also frequently referred to as "hot money," and the idea that First BanCorp considers them a "stable source of funding" ought to raise a few eyebrows. Here's the federal regulators' take on the subject:

Deposit brokers have traditionally provided intermediary services for banks and investors. Recent developments in technology provide bankers increased access to a broad range of potential investors who have no relationship with the bank and who actively seek the highest returns offered within the financial industry. In particular, the Internet and other automated service providers are effectively and efficiently matching yield-focused investors with potentially high-yielding deposits. Typically, banks offer certificates of deposit (CDs) tailored to the $100,000 FDIC deposit insurance limit to eliminate credit risk to the investor, but amounts may exceed insurance coverage. Rates paid on these deposits are often higher than those paid for local market area retail CDs, but due to the FDIC insurance coverage, these rates may be lower than for unsecured wholesale market funding.

Customers who focus exclusively on rates are highly rate-sensitive and provide less stable funding than do those with local retail deposit relationships. These rate-sensitive customers have easy access to, and are frequently well informed about, alternative markets and investments, and may have no other relationship with or loyalty to the bank. If market conditions change or more attractive returns become available, these customers may rapidly transfer their funds to new institutions or investments. Rate-sensitive customers with deposits in excess of the insurance limits also may be alert to and sensitive to changes in a bank's financial condition. Accordingly, these rate-sensitive depositors, both under and over the $100,000 FDIC insurance limit, may exhibit characteristics more typical of wholesale investors.

It was, after all, one of Senator Schumer's biggest complaints about IndyMac in his famous letter to the regulators that, as of June 2008, 32% of IndyMac's total deposits were brokered and that the bank was insufficiently capitalized to withstand that risk.

We had a number of folks arguing yesterday that the $100,000 insurance limit should be raised to account for inflation. Atrios suggested that yesterday. Part of my own wariness over that stems from the fact that so many of the "jumbo deposits" of these banks are, indeed, "hot money," not your basic middle-class family with $250,000 in the local bank in nice stable core deposits. At First BanCorp, it appears that only a shade over 10% of jumbo deposits are core deposits.

Of course, it's hard to say how stable core depositors are, these days. The trouble with trying to assess the risk of bank runs or deposit destabilization is that people are, well, people, and they can respond very differently to the same situation. From Bloomberg:

Martha Duran made the 75-mile drive from Running Springs, California, to close her CDs. She waited from 8:30 a.m. to 4 p.m. on July 14, ending up with sunburn on her neck and an appointment for noon on July 15.

``This is a scare of a lifetime,'' said Duran, a 70-year-old retired office administrator. ``I worked hard for my money. I may not be a millionaire, but every little bit counts.''

Not everyone visiting the bank was there for withdrawals. Sanford Mazel, a 74-year-old retired U.S. Postal Service employee from Altadena, California, came to make a deposit, saying he was reassured by the government protection.

``It's FDIC, so who gives a damn?'' Mazel said. ``Let the world go to hell. The money will be there.''

I think it would be hard to write any banking policy that would discourage Martha from being part of a bank run or encourage Sanford to panic.

by Tanta on 7/14/2008 01:59:00 PM

I would be remiss if in the excitement today of the banking system apparently going to hell in a handbasket, I neglected to take notice of this:

July 14 (Bloomberg) -- The Federal Reserve tightened its mortgage rules by requiring lenders to determine a borrower's ability to repay and barring other practices that led to the collapse of the U.S. housing market.

The Fed Board of Governors voted in Washington today to require that lenders verify a homebuyer's income or assets, and create an escrow account for property taxes and homeowners' insurance. The rules curb penalties for repaying a loan early.

Just because they've waited until the children's 21st birthday to finally ground them doesn't mean they're not responsible parents.

They also left alone the practice of broker "yield spread premiums":

Bernanke questioned a staff recommendation not to ban a practice that lets lenders pay brokers based on the interest rates they charge a consumer, which he said sets an incentive for brokers to steer people into more expensive loans.

"Staff considered a rule that would ban that type of payment, but we ran into some serious, practical problems," Ryan said. She said it would be difficult to distinguish between the practice and legitimate payments to brokers.

Heaven forbid the regulators should have to make "difficult" distinctions. Far better to let consumers try to tell the difference, I guess.

by Tanta on 7/11/2008 02:00:00 PM

I hate prepayment penalties and always have. In theory, they work just like an early withdrawal penalty on a certificate of deposit: you are paid a higher rate of interest in exchange for giving up liquidity for a stated period of time. In the case of mortgage loans, you are (presumably) offered a lower interest rate in exchange for giving up liquidity for a stated period of time.

In reality, few borrowers are, in my experience, capable of calculating the relative savings of the penalty loan accurately, or fully assessing the risk they take by accepting the penalty. This is without even getting into issues of predation or steering or failure to disclose adequately.

Case in point, from the Sacramento Bee:

When Carol Wallace sold her Sun City Roseville home two years ago, she got an expensive reminder from her lender.

She owed $5,964. Why? She had paid off her adjustable-rate mortgage early.

The lender offered to waive it, Wallace said, if she'd buy another house with one of their loans. But here was the point: She had cancer and didn't intend to buy again. She had to pay up.

Two years later, still ill, Wallace still fumes.

"It's written in my paperwork when I die to remind my kids," she said. "It says if there's a class action lawsuit, to remember me, to get my $6,000." . . .

Wallace said she knew she had a prepayment penalty. "But I didn't think it would be a problem because I didn't think I would have to move," she said.

Very few people, I suspect, make any decision about buying or financing a home, including but not limited to the prepayment penalty option, based on their fear that they might be diagnosed with a disabling disease in the next three years. We tend to think that people who obsess about very low-probability, very high-severity events are, well, obsessives.

Wallace was, unfortunately, the one it happened to. I suspect she thought--perhaps we all think--there should be some sort of "hardship exclusion" in her case. But there isn't one, and people sign these things all day without worrying that there isn't one. Perhaps they think to themselves, as Wallace did, that they would only move if they were forced to. By a hardship. Which isn't excluded.

And Wallace thinks she should be part of a "class action." I am trying to imagine how large a "class" of borrowers who suffered a very low-probability event would be.

I have myself come to the conclusion that prepayment penalties should be banned entirely. Not because Ms. Wallace's logic makes any sense to me, but because it doesn't make any sense to me but I suspect it does to most people with a prepayment penalty. And that is evidence enough that consumers cannot understand them.

by Tanta on 7/11/2008 08:44:00 AM

The whole essay is worth reading, if only as a refreshing change from the overheated rhetoric of the last few days. Note that Pearlstein will be having an online chat today at 11:00 Eastern to discuss Fannie and Freddie.

A financial crisis like this one calls for policymakers and regulators who can keep a cool head and remain flexible and practical rather than insisting on strict adherence to economic orthodoxies. Not every instance of regulatory forbearance need be viewed as a step down a slippery slope toward Japanlike stagnation. Nor is it particularly constructive to characterize every instance of government involvement in the private sector -- whether it be refinancing a troubled home mortgage, opening the Fed lending window to cash-strapped investment banks or orchestrating a private-sector rescue of a failing hedge fund -- as a massive government bailout.

As for Fannie and Freddie, nobody would be particularly happy if it became necessary for the Treasury to inject some fresh capital into the mortgage giants, in exchange, say, for newly issued preferred stock that could be sold back at a profit when the mortgage market recovers. But even the editorialists at the Wall Street Journal acknowledged yesterday that this wee bit of socialism might be the most effective and least costly way to keep the mortgage market functioning and prevent a meltdown in global credit markets.

A financial crisis is not a morality play. What matters most isn't the precedents that are set, the amount of taxpayer money that's implicated or whether people are made to suffer fully for their financial misjudgments. In the end, what matters most is that we get through it as quickly as possible with an economy and a financial system intact.

If this blog's comment threads are any kind of representation of a slice of reality--I am often agnostic on that question, but still--there are more than a few people who are more interested in getting a front-row ticket to a morality play than working through a financial crisis with the least (further) damage to the banking system. Lord knows that a lot of bad policy can be floated along under the guise of "pragmatism," but I for one would rather try debating with a pragmatist than a purist or a moralist.

by Calculated Risk on 7/10/2008 10:06:00 AM

From the WSJ: Bernanke, Paulson Push For New Regulatory Powers

Treasury Secretary Henry Paulson ... made a point to address the issue of Fannie Mae and Freddie Mac.
...
They play an important role in our housing markets today and need to continue to play an important role in the future," Mr. Paulson said. He noted that the firms' regulator, the Office of Federal Housing Enterprise Oversight, stressed earlier this week that "they are adequately capitalized."

Mr. Paulson also said the collapse of Bear Stearns and the ongoing market turmoil have "convinced me that we must move much more quickly to update our regulatory structure and improve both market oversight and market discipline."
...
"For market discipline to be effective, market participants must not expect that lending from the Fed, or any other government support, is readily available," Paulson said. Added Mr. Paulson, "For market discipline to effectively constrain risk, financial institutions must be allowed to fail."

Here is Bernanke's testimony (just a repeat of earlier comments)

Note: the collapse in Fannie (off 15%) and Freddie (off 23%) stock prices continues this morning.

by Calculated Risk on 7/08/2008 02:55:00 PM

From Bloomberg: SEC Probe of Raters Reveals Conflicts in Grading Debt (hat tip DD49)

A U.S. Securities and Exchange Commission investigation into credit-rating companies found the firms improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.

What a surprise. And the article provides this email:

The SEC report details an e-mail in which an analyst at an unidentified credit-rating company refers to the market for collateralized debt obligations as a ``monster.''

``Let's hope we are all wealthy and retired by the time this house of cards falters,'' said the e-mail, which was sent Dec. 15, 2006, to another analyst at the same firm.

Nice.

by Calculated Risk on 7/03/2008 01:28:00 AM

From the LA Times Money & Co: Regulators to Schumer on IndyMac: Please shut up

From a letter to Schumer today, John M. Reich, director of the Office of Thrift Supervision wrote:

"Dissemination of incomplete or erroneous information can erode public confidence, mislead depositors and investors, and cause unintended consequences, including depositor runs and panic stock trades. Rumors and innuendo cause damage to financial institutions that might not occur otherwise and these concerns drive our strict policy of privacy."

The LA Times also quotes John D. Hawke, the U.S. comptroller of the currency (regulator of national banks) from 1998 to 2004:

"If Schumer continues to go public with letters raising questions about the condition of individual institutions, he will cause havoc in the banking system," Hawke said.

"Leaking his IndyMac letter to the press was reckless and grossly irresponsible. I don't see how he can be trusted with confidential information in the future. What this incredibly stupid conduct does is put at risk the willingness of regulators to share any information with the [congressional] oversight committees. After this, you'd be crazy to share information with Schumer."

I agree. Naming an individual institution was reckless and irresponsible. I was very surprised that a letter like Schumer's was made public.

by Calculated Risk on 6/26/2008 09:32:00 PM

From the WSJ: Schumer Asks Regulators For Greater IndyMac Scrutiny (Thanks to all!)

Sen. Charles Schumer sent letters to federal regulators asking them to monitor more closely the financial health of IndyMac ...

The New York Democrat wrote that he is "concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers and that the regulatory community may not be prepared to take measures that would help prevent the collapse of IndyMac or minimize the damage should such a failure occur."

Here is the AP story: Schumer: concerned over IndyMac stability

I'm very surprised a letter like this was made public. And I'm surprised a U.S. Senator is mentioning a specific bank. Oh well, anyone with more than the FDIC insured limit deposited with IndyMac has had ample warning.