by Calculated Risk on 9/18/2009 02:09:00 PM

Professor Hamilton, at Econbrowser, excerpts from the WSJ on curbing bankers' pay, and adds some important comments: Regulating compensation in the banking sector

One of the key questions for understanding the causes of our current problems is the following. Suppose that in 2005, the individuals who were putting together securities derived from subprime and alt-A mortgage loans could have known, with perfect foresight, events that were going to unfold in 2008. Would they have still done the same things they did in 2005? My concern is that, for many individuals, the answer might be "yes", insofar as they were richly rewarded personally in 2005 for making exactly the decisions they did. It was other parties (namely you and me) who later down the road were forced to absorb the downside of their gambles. Capitalism functions well when individuals are rewarded for making socially productive decisions. It is a disaster when individuals are rewarded for making socially destructive decisions. For this reason, I am quite supportive of the broad idea of the above proposal.

For some people I don't think there is any question the answer would have been "yes". For many others, they would have ignored the "perfect foresight", and rationalized away the risks. The result is the same, but the second group can feel better about themselves while living large.

Hamilton also adds some comments on regulatory capture - another important issue.

by Calculated Risk on 9/18/2009 11:26:00 AM

From the BLS: Regional and State Employment and Unemployment Summary

Twenty-seven states and the District of Columbia reported over-the-month unemployment rate increases, 16 states registered rate decreases, and 7 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50 states and the District of Columbia.
...
Fourteen states and the District of Columbia reported jobless rates of at least 10.0 percent in August. Michigan continued to have the highest unemployment rate among the states, 15.2 percent. Nevada recorded the next highest rate, 13.2 percent, followed by Rhode Island, 12.8 percent, and California and Oregon, 12.2 percent each. The rates in California, Nevada, and Rhode Island set new series highs.
emphasis added

Click on graph for larger image in new window.

This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).

Fourteen states and D.C. now have double digit unemployment rates.

Illinois, Indiana, and Georgia are all close.

Four states are at record unemployment rates: Rhode Island, Oregon, Nevada, and California. Several others - like Florida and Georgia - are close.

by Calculated Risk on 9/18/2009 10:26:00 AM

From the WSJ: FDIC Considers Borrowing From Treasury to Shore Up Deposit Insurance

Federal Deposit Insurance Corp. Chairman Sheila Bair said her agency is considering borrowing from the U.S. Treasury to replenish its deposit insurance fund.

"We are carefully considering all options" including borrowing from the Treasury, Ms. Bair said Friday after a speech in Washington.

UPDATE: Bair is responding to comments by Barney Frank (see this speech at 25 mins, ht Kevin)

Here is a reference to a recent letter from Sen Levin, via Dow Jones: FDIC Should Borrow From Tsy, Not Charge Banks Fee

Sen. Carl Levin, D-Mich. ... said in a letter to FDIC Chair Sheila Bair that he was concerned about the possibility of the agency charging banks a second special assessment this year. ... Such fees could hurt smaller banks, Levin wrote.

"Adding yet another major financial obligation during this crisis could further deplete the capital of these small financial institutions, making it difficult for them to extend the credit needed to turn our economy around," Levin said in the letter.

The Deposit Insurance Fund (DIF) had $10.4 billion in assets at the end of Q2, but the total reserves were $42 billion. Note that accounting for the DIF includes reserves against estimate future losses, so that is the difference between the total reserves and the reported assets. Total reserves of the Deposit Insurance Fund (DIF) stood at $42 billion. From the FDIC:

Just as insured institutions reserve for loan losses, the FDIC has to provide for a contingent loss reserve for future failures. To the extent that the FDIC has already reserved for an anticipated closing, the failure of an institution does not reduce the DIF balance. The contingent loss reserve, which totaled $28.5 billion on March 31, rose to $32.0 billion as of June 30, reflecting higher actual and anticipated losses from failed institutions. Additions to the contingent loss reserve during the second quarter caused the fund balance to decline from $13.0 billion to $10.4 billion. Combined, the total reserves of the DIF equaled $42.4 billion at the end of the quarter.

Of course the FDIC cut a check to MB Financial Bank last week for approximately $4 billion as part of the Corus Bank seizure. For the Corus deal, MB Financial Bank assumed all of the deposits of Corus Bank (approximately $7 billion) and agreed to purchase approximately $3 billion of the assets (mostly cash and marketable securities). The FDIC wrote a check for the difference. The FDIC retained the remaining $4 billion in assets for later disposal, and estimated the losses would be $1.7 billion. But writing a $4 billion check was a significant hit to the cash reserves of the DIF.

by Calculated Risk on 9/18/2009 08:38:00 AM

From the WaPo: Housing Agency's Cash Reserves Will Drop Below Requirement

The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency's cash reserves will drop below the minimum level set by Congress, FHA officials said.

The FHA guaranteed about a quarter of all U.S. home loans made this year, and the reserves are meant as a financial cushion to ensure that the agency can cover unexpected losses.

"It's very serious," FHA Commissioner David H. Stevens said in an interview. "There's nothing more serious that we're addressing right now, outside the housing crisis in general, than this issue."
...
[Stevens] said he is planning to announce Friday several measures that should help the reserves rebound quickly.
...
An independent audit due out this fall will show that the agency's reserves will drop below the 2 percent level as of Oct. 1, the start of the new fiscal year, Stevens said.
...
For one, he will propose that banks and other lenders that do business with the FHA have at least $1 million in capital they can use to repay the agency for losses if they were involved in fraud. Now, they are required only to hold $250,000. Second, he will propose that lenders also take responsibility for any losses due to fraud committed by the mortgage brokers with whom they work.
emphasis added

Here is a table of FHA lenders with 2 year default rates of 15% or more (only lenders with 100+ originations included). There are ten lenders with "perfect" records (100% default), but they only have one or two originations each. Many of these lenders will probably go away with the new rules.

The FHA is banking on a "recovery in the housing market":

The new audit shows that even without any new measures, the reserves will rebound to the required level within two or three years largely as the result of the recovery in the housing market, Stevens said. This calculation is based on projections of future home prices, interest rates and the volume and credit quality of FHA's business.

Yeah, if house prices increase, everything will be OK!

Note: here is a post from a couple of weeks ago: FHA: The Next Bailout?

by Calculated Risk on 9/17/2009 10:25:00 PM

From Reuters: "Option" mortgages to explode, officials warn

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.
...
In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, Terry Goddard, told Reuters after the meeting.

"It's the other shoe," he said. "I can't say it's waiting to drop. It's dropping now."

This was a meeting of state AGs discussing mortgage scams with the Obama Administration, and based on the comments, there was an emphasis on Option ARMs.

I guess that deserves a Hoocoodanode?