Posts Tagged ‘financial crisis’

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Fewer Couples Are Going to the Chapel

Tuesday, December 27th, 2011

The number of American couples marching down the aisle to get married is in decline, with just 51 percent of adults reporting that they are married, according to the Pew Research Center and the Census Bureau.

The Pew Center’s study determined that new marriages in the United States fell five percent between 2009 and 2010; the slow economy likely was a contributing factor.  Compare the current record low of 51 percent of married adults with the 72 percent who were in wedded unions in 1960, according to the Pew Center.  The median age at first marriage for brides stands at 26.5 and for grooms it is 28.7.  That is the oldest Americans have ever been when they first married.

Researchers noted the United States is not alone in seeing a significant decline in marriage rates; other advanced, post-industrial societies are seeing the same long-term declines.  The Pew Center said that it is “beyond the scope” of the group’s analysis to “explain why marriage has declined.”

Some respondents just don’t like the idea of marriage. Nearly 40 percent of respondents believe that marriage is becoming an archaic institution.  They also report that in 2010, approximately 61 percent of adults who have never been married would like to be one day.

“The most dramatic statistics to me are when you look at the share of younger adults who are married now compared with in the past,” report author D’Vera Cohn, a senior writer at Pew Research Center, said.  “That’s really been where you’ve seen the big decline.”  Pew researchers analyzed U.S. Census data from 1960 and data from the American Community Surveys from 2008 – 2010.

Flat wages are another factor. “The incentive to get married – because you could rely on a man whose real wages would continue to rise, who would get a pension at the end of it – has been undermined as well,” Cohn said.

According to Census Bureau statistics, 7.5 million couples lived together without being married in 2010, a 13 per cent increase when compared with the previous year.  The financial crisis has forced people to move in with partners.  Marriage rates are highest among college graduates (approximately two-thirds).  Less than half of high school graduates are married.

Not surprisingly, divorce is a factor impacting the ranks of the currently married, although it is unclear how important it has been.  Divorce rates rose in the 1960s and 1970s, but have leveled off in the past 20 years.  Approximately 72 percent of adults have been married at least once, down from 85 percent in 1960.

“If current trends continue, the share of adults who are currently married will drop to below half within a few years,” according to the Pew report.  “Other adult living arrangements-including cohabitation, single-person households and single parenthood-have all grown more prevalent in recent decades.”

“Well, it does not mean that marriage is dead,”  said Stephanie Coontz, a historian on family life at Evergreen State College in Washington state.  Many of those 20-somethings will sooner or later tie the knot.  “But what it does bring home to us is that we can no longer pretend that marriage is the central organizing principle of society. We have to take account of the many, many social networks and relationships that people cycle through, marriage being just one of them,” Coontz said.

“This marks a continuation of a long term trend,” said Paul Taylor, executive vice president of the Pew Research Center.  “If this trend continues, we are approaching a turning point where fewer than half of all adults in this country will be married.”

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Banks Getting Healthier

Tuesday, December 13th, 2011

Bank earnings rose to their highest level in more than four years, while the number of troubled banks declined for the second consecutive quarter.  The Federal Deposit Insurance Corporation (FDIC) said the banking industry earned $35.3 billion in the 3rd quarter, an increase from the $23.8 billion reported in the same timeframe last year.  More than 60 percent of banks reported improved earnings.  According to the FDIC, there currently are 844 banks on its confidential “problem”, or roughly 11.5 percent of all federally insured banks.  That was down from 865 between April and June, and was first quarter in five years to show a decline.

“After three years of shrinking loan portfolios, any loan growth is positive news for the industry and the economy,” said Martin Gruenberg, FDIC’s acting chairman.  Lending has not yet reached healthy levels.  So far in 2011, 90 banks have failed.  That’s a significant improvement over the 157 banks that were shuttered last year — the most for one year since the darkest days of the 1992 savings and loan crisis — and the 140 in 2009.

The FDIC’s so-called problem bank list consists of the institutions considered most likely to fail, though few actually are shuttered.  Only 26 of the nation’s 7,436 banks failed in the 3rd quarter, 15 fewer than the same period of 2010.  “The trend has been improving, but the current number of failures and problem institutions remains high by historical standards,” Gruenberg said.

Banks whose assets exceed $10 billion drove of the earnings growth. They account for just 1.4 percent of all banks but accounted for about $29.8 billion of the industry’s earnings in the 3rd quarter.  Those are the biggest banks, such as Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.  The majority of these banks have recovered with help from federal bailout money and record-low borrowing rates.

Writing on MarketWatch, Ronald D. Orol says that “It is unclear whether the reduction in troubled banks on the list is a result of institutional failures or improvements.  In the 3rd quarter there were 26 bank failures and 21 banks dropped off the problem bank list.  In the 2nd quarter there were 22 bank failures and 23 banks came off the problem bank list.  It is possible that a bank fails so fast that it is never on the problem list.  FDIC-insured institutions posted net income of $35.3 billion in the 3rd quarter, an increase of $11.5 billion, or 48 percent, compared to a year earlier.  The profits were at the highest level since the 2nd quarter of 2007, the FDIC said.  However, Martin Gruenberg said that even though the industry is generally profitable, the recovery is ‘by no means’ complete.  He noted that a central concern for the agency is whether banks can generate income from a greater demand for loans, something that is still lacking.  He said that the industry has seen income gains generated from improvements in credit quality and the ability to reduce loss provisions but that to really generate income and revenue, funding for loans is going to have to expand and that ‘depends on the overall economy.’  The key issue is going to be whether there can be a pick up in economic activity and generate demand for loans.  Ongoing distress in real-estate markets and slow growth in jobs and incomes still pose a threat to bank credit quality.”

The majority of banks that have struggled or failed have been small or regional institutions.  They rely a lot on commercial property and development loans, sectors that have lost a lot of money.  As companies closed during the recession, they vacated shopping malls and office buildings financed by those loans.  Nevertheless, large banks are less profitable than they were before the financial crisis hit in the fall of 2008, leading to some sizable layoffs.  Some credit rating agencies have been warning that the European debt crisis could hit the largest American banks.  Financial companies’ stocks have been especially beat up in the stock market’s volatility in recent months.

“We continue to see income growth that reflects improving asset quality and lower loss provisions,” Gruenberg said.  “U.S. banks have come a long way from the depths of the financial crisis.  Bank balance sheets are strong in a number of ways, and the industry is generally profitable, but the recovery is by no means complete.”  The banking industry also saw a 0.5 percent rise in net operating revenue compared with 2010, thanks in part to a $3.2 billion — or 5.8 percent — increase in non-interest income, the first year-over-year increase in nearly two years.  “Absent these unrealized gains, net operating revenue would have posted a year-over-year decline for a third consecutive quarter,” Gruenberg concluded.

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Recent College Grads Can Expect Starting Salaries 10 Percent Below 2000 Levels

Tuesday, November 8th, 2011

Recent college graduates can expect to earn 10 percent less than they did as long ago as 2000.  In fact, one of the longest-lasting legacies of the great recession may be its negative impact on the lifetime careers of young graduates.  The current high unemployment rate will leave many of them a step behind throughout their careers.  A study conducted by Yale School of Management economist Lisa Kahn determined that workers who graduated from college during the recession of the early 1980s were still in worse shape financially than workers who graduated in better times after approximately 2006.  When young college graduates do get a job, it frequently won’t pay well.  According to Census Bureau statistics, the median annual earnings of a worker 25 to 34 years old with a bachelor’s degree was $40,875 last year, a significant decline from the $45,200 reported in 2000, adjusting for inflation.

Despite the dismal salary news, there is good news in that fact that hiring for 2011 graduates is up 10 percent when compared with last year.  Meanwhile, unemployment rates among those with a degree is less than half the national average.  It’s those with just a high school education whose unemployment rates are above the national average.

The typical wage for recent college graduates has fallen by nearly $1 per hour over the last 10 years, according to the Economic Policy Institute (EPI).  Despite the lack of growth in entry-level wages, a college degree remains a worthy investment.  According to the EPI’s Heidi Shierholz, “After gains in the 1980s and particularly in the 1990s, hourly wages for young college-educated men in 2000 were $22.75, but that dropped by almost a full dollar to $21.77 by 2010.  For young college-educated women, hourly wages fell from $19.38 to $18.43 over the same period.  Now, with unemployment expected to remain above 8 percent well into 2014, it will likely be many years before young college graduates — or any workers — see substantial wage growth.”

There is some upbeat news for the class of 2011. Students who will graduated this year received job offers with starting salaries averaging $50,034 annually, a 3.5 percent increase over last year, according to a survey from the National Association of Colleges and Employers (NACE).  Employers said they plan to increase hiring of college graduates by 13.5 percent compared with 2010.  Business majors were the best positioned, with the average starting salary rising nearly two percent to $48,089.  Accounting majors received salary offers of $49,022, up 2.2 percent, while finance majors were offered an average of $50,535, an increase of 1.9 percent.  Starting salaries for business administration/management graduates fell slightly to $44,171, down 2.3 percent.  Engineering graduates — typically one of the highest-paying fields — didn’t see a big change, with the average starting salary down 0.3 percent but still impressive at $59,435.

Certain engineering majors saw noteworthy increases, with electrical engineering majors receiving an average salary offer of $61,690 — up 4.4 percent over 2010.  Mechanical engineering salaries rose 3.8 percent to $60,598, although it didn’t pay as well to graduate with a degree in civil engineering, with starting salaries in that field slipping 7.1 percent to $48,885.  While the association’s survey didn’t break out starting salaries for individual liberal arts majors, offers were up an impressive 9.5 percent to $35,633.  That compares to a steep decline of 11 percent last year.

The financial crisis is forcing Americans to re-think what they want out of a college education. “Students and families are becoming more savvy consumers about how they get their degrees, where they go to school and how they pay for it.  I think that is long overdue,” said Edie Irons, the Institute for College Access and Success’s communications director.  “It used to be that a college degree seemed like a ticket to ride, but there are no guarantees anymore that once you get that degree, you’re going to get a great job and do really well financially.  There’s been research that has shown students graduating in a recession earn lower incomes throughout their lifetimes than those graduating in a boom,” Irons said.  “It is a real concern, and we think graduates need good information about how to manage their debt.”

According to Brandon Lagana, director of admissions at Northern Illinois University, students are being more fluid in their approach to college.  Some chose a more affordable university, others start at a two-year institution then finish at a four-year school, and some wait a few years before starting any schooling.  “We’re certainly seeing students using more options to a degree than they ever did before,” he said.

Read my recent Huffington Post article about college education and debt here.

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Federal Reserve Asks for Comments Before Implementing the Volcker Rule

Monday, October 24th, 2011

Federal regulators have requested public comment on the Volcker Rule – the Dodd-Frank Act restrictions that would ban American banks from making short-term trades of financial instruments for their own accounts and prevent them from owning or sponsoring hedge funds and private-equity funds.  The Volcker rule, released by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency, is intended to head off the risk-taking that caused the 2008 financial crisis.  The rule, which is little changed from drafts that have been leaked recently, would ban banks from taking positions held for 60 days or less, exempt certain market-making activities, change the way traders involved in market-making are compensated and assure that senior bank executives are responsible for compliance.

Analysts say the proposed rule could slash revenue and cut market liquidity in the name of limiting risk.  Banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc., have already been winding down their proprietary trading desks in anticipation of the Volcker Rule kicking in.  Banks’ fixed-income desks could see their revenues decline as much as 25 percent under provisions included in a draft, brokerage analyst Brad Hintz said.  Moody’s Investors Service said the rule would be “credit negative” for bondholders of Bank of America Corporation, Citigroup, Inc., Goldman Sachs, JPMorgan and Morgan Stanley, “all of which have substantial market-making operations.”  The rule, named for former Federal Reserve Chairman Paul Volcker, was included in the 2010 Dodd-Frank Act with the intention of reining in risky trading by firms whose customer deposits are insured by the federal government.

John Walsh, a FDIC board member and head of the Office of the Comptroller of the Currency, said that he was “delighted” that regulators had reached an agreement on the proposed rule, “given the controversy that has surrounded this provision — how it addressed root causes of the financial crisis.”  “I expect the agencies will move in a careful and deliberative manner in the development of this important rule, and I look forward to the extensive public comments that I’m sure will follow,” Martin J. Gruenberg, the FDIC’s acting chairman, said.  The rule will be open for public comment until January.

Not surprisingly, Wall Street opposes the rule, saying it will cut profits and limit liquidity at a difficult time for the banking industry.  Moody’s echoed those concerns, saying the current version of the Volcker rule would “diminish the flexibility and profitability of banks’ valuable market-making operations and place them at a competitive disadvantage to firms not constrained by the rule.”  Some Democratic lawmakers and consumer advocates are pushing to close loopholes in the rules, especially the broad exemption for hedging.  Supporters of the Volcker rule take issue with a plan to excuse hedging tied to “anticipatory” risk, rather than clear-and-present problems.  “Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute,” said Marcus Stanley, policy director of Americans for Financial Reform, an advocacy group.  Additionally, the Securities Industry and Financial Markets Association raised concerns about whether the exemption for trades intended to make markets for customers is too narrow.

According to Moody’s, the large financial firms all have “substantial market-making operations,” which the Volcker Rule will target.  The regulations also will recreate compensation guidelines so pay doesn’t encourage big risk-taking.  Derivatives lawyer Sherri Venokur said restrictions on compensation are “intended to create a sea change in the mindsets of those who create the culture of our banking institutions — to value ‘safety and soundness’ as well as profitability.”

Equity analysts at Bernstein say that the Volcker Rule — if implemented in its current form – will slash Wall Street brokers’ revenues by 25 percent, and cut pre-tax margin of their fixed income trading businesses by 33 percent.  According to Bernstein, the Volcker Rule’s potential limitations are a surprise because it appears to prohibit flow trading in “nonexempt portions” of the bond-trading business.  Bernstein says inventory levels – and, in all probability, risk taking – must be based on client demands and not on “expectation of future price appreciation.”

A Bloomberg.com editorial offers support to the Volcker Rule, while admitting it won’t be perfect.  According to the editorial, “This week, the first of several regulatory agencies will consider a measure aimed at ending the practice.  Known as the Volcker rule, after Paul Volcker, the former Federal Reserve chairman, the measure would curb federally insured banks’ ability to make speculative bets on securities, derivatives or other financial instruments for their own profit — the kind of ‘proprietary’ trading that can lead to catastrophic losses.  Whatever form it takes will be far from perfect.  It will also be better than the status quo.  The bank bailouts of 2008, and the public outrage over traders’ and executives’ bonuses, laid bare a fundamental problem in big institutions such as Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co.

“They attempt to combine two very different kinds of financial professionals: those who process payments, collect peoples’ deposits and make loans, and those who specialize in making big, risky bets with other peoples’ money.  When these big banks run into trouble, government officials face a dilemma. They want — and in some ways are obligated — to save the part of the bank that does the processing and lending, because those elements are crucial to the normal functioning of the economy.  But in doing so, they also end up bailing out the gamblers, a necessity that erodes public support for bailouts and stirs enmity for banks.  Separating the bankers from the gamblers is no easy task. Commercial banks’ explicit federal backing — including deposit insurance and access to emergency funds from the Federal Reserve — is attractive to proprietary traders, who can use a commercial bank’s access to cheap money to boost profits.  Bank executives like to employ traders because they generate juicy returns in good times that drive up the share price and justify large bonuses. In effect, both traders and managers are reaping the benefits of a government subsidy on financial speculation.  The Volcker rule will not — and probably cannot — fully dissolve the union of bankers and gamblers.”

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AIG Repays Another $2 Billion in TARP Money

Thursday, September 8th, 2011

The Treasury Department is laughing all the way to the bank. Insurance Giant AIG repaid $2.15 billion that it had borrowed through the Troubled Asset Relief Program (TARP).  In 2008, the government helped the giant get back on its feet with a $180 billion loan.  AIG has been gradually repaying the money.  The most recent repayment is the result of the sale of AIG’s Taiwan-based subsidiary Nan Shan Life Insurance Company. One of AIG’s strategies for cutting its debt has been to raise funds by selling assets.  “We continue to make progress in helping the Treasury and taxpayers recoup their investment in AIG,” according to AIG CEO Robert Benmosche.

Not surprisingly, the Treasury Department is pleased with the transaction.  “This is another important milestone in AIG’s remarkable turnaround,” Tim Massad, the assistant secretary for financial stability, said in a statement. “We continue to make progress in recovering the taxpayers’ investments in AIG.”  AIG still owes Treasury $51 billion.  TARP legislation was passed by Congress in late 2008 to rescue the financial sector, which was on the verge of collapse.

Benmosche is still weighing whether to retain a stake in AIA Group Ltd. while repaying TARP funds. AIG sold 67 percent of Hong Kong-based AIA last year in an IPO that raised $20.5 billion. The remaining interest added $1.52 billion to AIG’s second-quarter profit as the Asian insurer’s stock price surged. AIA has soared 19 percent this year and is the number one gainer in the 73-company Bloomberg World Insurance Index. “It’s been a great investment, so they may want to hold onto it,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP.

Now that the Nan Shan deal has closed, AIG’s final significant disposal will be International Lease Finance Corporation, or ILFC, which purchases airplanes to lease them to airlines.  The company is considering an initial public offering (IPO) for ILFC later this year.  Using Nan Shan proceeds to repay the special purpose vehicle gives AIG “more flexibility as to what to do with ILFC and other assets, too.  It adds in general to their cash-flow flexibility.”  He is telling his clients to buy AIG stock.  Treasury holds a $9.3 billion preferred interest in the special-purpose vehicle after accepting proceeds from the Nan Shan sale, according to AIG.  Benmosche may delay or forego selling AIA shares.  AIG’s agreement with underwriters lets Benmosche reduce or hedged the stake in October.  “We’re looking potentially at monetizing other assets that we have so that AIA might be sold much later on, if at all,” he said.

Writing in The Hill, Peter Schroeder says that “In many ways, AIG came to serve as a symbol of much of the public’s anger over the bailout, as it found itself at the center of the historic financial crisis and reliant on substantial government support.  That dissatisfaction came to a head in 2009, when executives at the company planned to distribute hundreds of millions of dollars in bonuses after billions in losses during the financial crisis.  In January, AIG completely repaid the Federal Reserve Bank of New York with a $47 billion payment, and the Treasury in May agreed to sell 200 million shares of AIG stock, raising nearly $9 billion in that offering.  The latest payback from AIG means the Treasury has recovered $313 billion of the investments it made under the Troubled Asset Relief Program (TARP) — roughly three-quarters of the $412 billion it originally dished out to keep the financial system afloat.  The Treasury announced in March that it had officially turned a profit on the bank portion of TARP.  It followed that up with a July announcement that it had exited its investment in Chrysler, ahead of schedule but losing about $1.3 billion in the process.”

On the Huffington Post, Jason Linkins has a cynical take on AIG’s recent repayment of TARP money. “Okay, I’m just going to stop it right there, because when it comes to ‘AIG’s remarkable turnaround,’ the devil is in the details.  Time and time again we’re asked to celebrate the success of TARP.  Back in March, the good news was that, ‘The Treasury currently estimates that bank programs within TARP will ultimately provide a lifetime profit of nearly $20 billion to taxpayers.’  But this profit that the government has turned on the bailout of AIG rings pretty hollow in light of the four different restructurings of the original agreement that the government has acquiesced to since the fall of 2008.

“When the Fed first stepped in to prevent AIG from collapse in September 2008, the deal was actually pretty good — it carried a punitively-high interest rate appropriate for a bailout, the CEO was dismissed and the company was going to sell itself off in parts, ending its too-big-to-fail status.  If the government were turning a profit on a deal like this, it would indeed be good news.  The trouble is, AIG’s new management didn’t break up the company very quickly.  And even as it paid out lavish bonuses to its top-performing traders and executives, it couldn’t make good on its interest payments to the government.  So the feds stepped in again — and again, and again — throwing more money at the company, reducing the interest that it would pay taxpayers and eventually converting the government’s loans to common stock, abandoning concrete repayment obligations in favor of whatever the stock might someday be worth.”

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Rick Mattoon on the Economy: On the Brink or On the Mend?

Tuesday, August 30th, 2011

Emerging from a financial crisis of the enormity that the United States has lived through the last several years, it is natural that the road to recovery is slower and bumpier than in a typical recession.  This is the opinion of Rick Mattoon, a Senior Economist and Economic Advisor at the Federal Reserve Bank of Chicago,  Previously a Policy Advisor to the governor of Washington, he is also a lecturer at the Kellogg School of Management at Northwestern University.

According to Mattoon, the irony of the Monday after Standard & Poor’s downgraded the United States’ credit rating from AAA to AA+ is that while the Dow Jones Industrial Average nosedived by 635 points, investors were still putting their money into Treasury notes.  Treasuries, which theoretically should have been affected by the credit downgrade, remain attractive to savvy investors.  The most significant impact of the credit downgrade is its effect on municipal bond issuances and the cost of certain kinds of credit that historically have been backed by the United States’ AAA standing.

From the Federal Reserve’s perspective, Mattoon says the central bank is going to continue making it easy for people to borrow and lend money to create the favorable conditions that will turn the economy around.  At present, he says the issue isn’t so much one of supply but demand.  A lot of people would like to take advantage of the current low interest rates, but can’t because they are not considered creditworthy due to tighter lending standards.  The Fed’s policy of quantitative easing (QE) has had some success, primarily — and until recently – the stock market rally and low interest rates.

The expression of “stall speed” is used to describe the pace of economic recovery as compared with the five percent rate of growth the country needs.  Mattoon says that this is a difficult process that has not been helped by other one-time shocks to the economy.  A case in point is March’s Japanese earthquake and tsunami, which caused supply-chain disruptions.  Another was the unanticipated spike in oil prices that dampened consumer spending.

The slow pace of job creation – just 117,000 created in July after two months of little employment growth – is also negatively impacting the economy.  The way the public sees it, job creation is currently the # 1 economic factor – particularly to the approximately 50 percent of the unemployed who have been jobless for six months or longer.

One game changer lies in the fact that Americans are currently saving more money than they did in the past – as much as six or seven percent of income when compared with a few years ago.

In terms of commercial real estate, the 1st half of the year saw tremendous amounts of capital raised for acquisitions, primarily for core $100 million transactions.  The market’s comeback depends on job growth.  According to Mattoon, if office employment ticks up, there will be greater demand for commercial real estate, especially in gateway cities like New York.  Retail will be the most difficult sector to recover, especially in strip malls, which were significantly overbuilt.  The demise of some big-box retailers – most notably Circuit City and Borders – is opening significant retail space that often anchored shopping centers.

To listen to Rick Mattoon’s full interview on whether the economy is on the brink or on the mend, click here.

icon for podpress  Rick Mattoon on the Economy: On the Brink or On the Mend?: Download

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Warren Buffet Bullish on U.S. Credit Rating

Monday, August 22nd, 2011

Standard & Poor’s may have downgraded the United States credit rating from AAA to AA+ and the bears may have taken over Wall Street, but the Berkshire Hathaway chairman and billionaire Warren Buffett believes that the nation deserves a AAAA rating.

In a recent appearance on CNBC, Buffett said that he still believes that the United States’ debt is AAA and that he’s not changing his mind about Treasuries based on Standard & Poor’s downgrade.  “If anything, it may change my opinion on S&P,” according to the Oracle of Omaha.  “I wouldn’t dream of putting it anywhere else,” Buffett said, noting that at Berkshire, the only reason he’s sold Treasuries in the past is to purchase stocks or make acquisitions.  Berkshire is still buying T-bills, even though yields have declined.  “If I have to buy (Treasuries) at a zero percent yield, I will,” he said.  “I don’t like it, but we’ll do it.”

Buffett has something of a vested interest in criticizing Standard & Poor’s.  Berkshire Hathaway is one of the biggest shareholders in Standard & Poor’s main competitor Moody’s with about 28 million shares. But the billionaire has long urged people to make their own decisions about an investment’s prospects without relying on credit rating agencies.  Buffett said the action doesn’t change his view on the soundness of U.S. Treasury bills.  At least $40 billion of Berkshire Hathaway’s approximately $48 billion cash and equivalents is in U.S. Treasury bills, and Buffett won’t consider investing it elsewhere.

According to Buffett, America’s leaders may have a difficult time agreeing on the country’s financial future and the value of the dollar may slide, but that won’t keep the world’s richest nation from paying its debts.  The United States has a GDP of about $48,000 per person, and the Federal Reserve can always print more money.  “Our currency is not AAA, and in recent months the performance of our government has not been AAA, but our debt is AAA,” Buffett said.

Writing on the InvestorPlace.com website, Jeff Reeves says that “Before you scoff that Buffett is just a bygone relic of an era during which stocks like General Electric truly did have bulletproof dividends and it would have been unfathomable for stocks like General Motors to go bankrupt, consider this: In September 2008, the depths of the financial crisis when nobody knew which bank would fail next, Buffett and Berkshire dumped $5 billion into preferred stock of Goldman Sachs.  Thanks to the 10 percent interest on those shares, Berkshire Hathaway earned a cool $500 million per year in dividends before Goldman bought back the stock several months ago.  What’s more, the investment bank paid a hefty 10 percent premium to buy back those preferred shares.  Maybe it was crazy to jump into banks headfirst when the market was going haywire in 2008.  But it was awfully profitable for Buffett.  You might think it’s crazy to stick to your buy-and-hold strategy now, or to continue to rely on U.S. Treasury Bonds.  But take a deep breath and remember that not everyone is screaming and running for the hills.  Yes, persistent problems with unemployment, the political bickering in Congress and the flatlining of our American economy are serious issues.  But they are hardly new.”

Not everyone agrees with Buffett.  According to the Equity Master website, “We must say that we do not agree with Mr. Buffett.  We are not arguing with the credibility of S&P, whose reputation admittedly became tainted when it gave the highest rating to many mortgaged backed securities in the months leading up to the demise of Lehman.  But that does not mean that the U.S. is without some serious problems.  Indeed, the U.S.’ mounting debt is a huge cause for concern and the government’s latest move to raise the debt ceiling is only likely to postpone an eventual default and not entirely extinguish it.  Moreover, the claim that the U.S. can pay its debt because it can print more money is a dangerous one to make.  Printing money never really solved America’s problems.  The two big quantitative easing programs and their failure to revive the sagging U.S. economy is testimonial to the fact.  One thing that it will certainly do is bring down the value of the dollar and cause inflation to accelerate posing a fresh set of problems for the U.S.  So, while criticisms can be piled on S&P, downgrading of the U.S.’ credit rating is something that the world’s largest economy had a long time coming.”

Firstpost agrees that Buffett is wrong.  “Among other things, he said that the U.S. deserved a AAA credit rating when the S&P decided to bring it down to AA+. He also believes the U.S. will avert a double-dip recession.  Well, Mr. Buffett, you are already half-wrong. A slow-growing nation with a 100 percent debt-to-GDP ratio cannot be AAA by any stretch of economic logic.  It makes India’s 70-72 percent debt-GDP ratio look like the epitome of prudence.  As for the other half of your prediction – that the U.S. will avoid a double-dip recession – the jury is out on that one, but the recession wasn’t the reason for the S&P downgrade anyway.  There are two reasons, or maybe three, why the U.S. is in a mess.  One is that it is overleveraged – in deep debt – both at the level of government and the common people.  Two, the law that the U.S. can indefinitely live beyond its means has a flaw.  It was built on the assumption that dollar debts can be paid off by printing more of the green stuff forever.”

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HUD Head Says Housing Bottoms Off

Wednesday, July 20th, 2011

American home prices may start rising as soon as the 3rd quarter as a foreclosure decline makes more homes available for sale, according to Housing and Urban Development Secretary Shaun Donovan.  “It’s very unlikely that we will see a significant further decline,” Donovan said.  “The real question is when will we start to see sustainable increases.  Some think it will be as early as the end of this summer or this fall.”  Home sales have increased in six of the past nine months; the number of homeowners in default is declining, Donovan said on CNN’s “State of the Union” program.

“In the long run, it’s a good time to buy,” Donovan said.  “It’s so affordable today compared to where it’s been for generations.”  Contracts to purchase previously owned homes rose 8.2 percent in May, following a revised 11 percent drop in April, according to the National Association of Realtors (NAR).  Another NAR report showed sales of existing houses, which make up about 96 percent of the market, fell in May to a six-month low.  Home prices fell four percent in April over 2010, the biggest decline in 17 months according to the S&P/Case-Shiller index of values in 20 cities.  An estimated 1.7 million U.S. homes were in the foreclosure process and expected to be put on the market in April, representing an 18 percent decline from the peak, as fewer loans entered delinquency and more distressed homes were sold, CoreLogic Inc. said.

Additionally, Donovan said that foreclosures are down approximately 40 percent when compared with last year.  Although 1.3 million homes are still in the foreclosure process, Donovan said that housing prices are stabilizing in the aftermath of the worst financial crisis since the Great Depression.  According to Donovan, “So, we are making progress, but rightly, the American people recognize we’re not where we need to be.  We still have a ways to go.”

On the subject of requiring 20 percent downpayments to buy homes, Donovan said there should be a way for qualified people to buy a home with less money upfront.  “We can’t go so far in the other direction that we cut off home ownership for people who really can be successful homeowners.  We can get back to the place where it’s a good investment and we will be able to make money over time,” Donovan said, noting that Americans should no longer view their homes as ATMs.

Financial analyst A. Gary Shilling, writing in The Christian Science Monitor, isn’t as optimistic.  In fact, he thinks that housing prices are likely to fall another 20 percent before bottoming out.  According to Shilling, “Many housing optimists a year ago believed not only that the housing collapse was over, but also that a robust rebound was under way.  Low mortgage rates and collapsed housing prices, not to mention the $8,000 federal tax credit for new home buyers and other initiatives, seemingly were going to kick-start housing activity nationwide.  Then a funny thing happened on the way to the housing recovery.  The tax credits expired, home sales dried up, and prices resumed their declines from their 2006 peak.  Excess inventories piled up due to overbuilding and mounting foreclosures.  In the meantime, buying those lower-priced houses became more difficult as lenders, burned by the housing crash, tightened lending standards and increased downpayment requirements.  As a result, the housing sector not only has failed to bolster the weak economic recovery but is also likely to continue to struggle for years.  And that’s bad news for the economy, which has softened in recent months.  Excess inventories are the mortal enemy of housing prices.  Lower prices are needed to unload surplus inventory, but in turn, lower prices bring forth more inventory from anxious sellers.  The anxiety of house sellers and the reluctance of buyers are enhanced by the realization that house prices can fall – and are falling for the first time in 70 years.”

The idea of owning a home is becoming less attractive as many people realize that it may be many years before prices stop falling and stabilize, let alone revive.  As proof, the national homeownership rate has fallen from its late 2009 peak of 69.2 percent to 66.4 percent in the 1st quarter of 2011 – the exact same level as in late 1998.  As homeownership loses its luster, rental apartments are gaining.  The homeownership rate is likely to continue to decline to its earlier long-term trend of around 64 percent as people continue to separate their abodes from their investments and as the baby boomers age, retire, and downsize.  That means approximately 4.5 million new renters in coming years.  Apartment construction, which normally totals 300,000 units annually, will be vigorous once surplus vacancies disappear.

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Bernanke Talks Tough on Bank Regulation

Wednesday, May 18th, 2011

The Federal Reserve is identifying risks in the financial system that could someday erupt into a new financial crisis, but regulators must be careful not to unintentionally hamper lending as they set up new oversight, according to Chairman Ben Bernanke.   “We want the system to be as strong and resilient as possible,” and more intense oversight and changes such as requiring banks to hold more capital will help, said Bernanke at the Federal Reserve Bank of Chicago’s Bank Structure & Competition conference.  “If we can’t arrest risks, we want to make sure the financial system is defending itself,” he said.  The Dodd Frank Act establishes governmental structures to analyze risk aimed at preventing another financial failure as harsh as the one that almost brought down the world’s economy in the fall of 2008.

Through the Financial Stability Oversight Council and within the Fed, regulators are still analyzing what can cause “systemic risk,” – identified as risk that can cause widespread financial failure, Bernanke said.  Similar actions are underway in other nations; Bernanke said that regulators worldwide are communicating with each other while implementing their own systems.  If the new structures had been in place previously, Bernanke said, the 2008 financial crisis likely would not have happened. The old system of regulation spread authority across too many entities, was poorly coordinated, and problems “fell through the cracks.”  As the Federal Reserve develops a structure for analyzing risk, Bernanke said the focus must go beyond “fighting the last war.”  Future financial threats may differ from those of the past, which is why the banking industry currently is facing new oversight.  When some banks announced plans to pay shareholders dividends, regulators applied “stress tests” to their finances to determine if the institutions would be sound even if the economy weakened.  According to Bernanke, the government’s new stress testing system has provided accurate assessments of bank finances.

Even so, the regulations – the first new ones in 70 years — will be written to encourage bank compliance.  “No one’s interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit,” Bernanke said.  “Regulators must aim to avoid stifling reasonable risk-taking and innovation in financial markets, as these factors play an important role in fostering broader productivity gains, economic growth, and job creation.”

Bernanke and Fed officials are trying to balance the need to diminish the risk of another financial crisis with the aim of stimulating the economy after the worst recession since the Great Depression. The Dodd-Frank Act gives the Fed the job of overseeing the biggest financial companies.  “While a great deal has been accomplished since the act was passed less than a year ago, much work remains to better understand sources of systemic risk, to develop improved monitoring tools, and to evaluate and implement policy instruments to reduce macro-prudential risks,” Bernanke said.

Lawmakers who solidly opposed the financial overhaul legislation, say Dodd-Frank goes too far and might make it more difficult for American banks to compete globally.  Some are working to cut funding for agencies established by the law and limit the scope of new rules.  According to the General Accounting Office, the law will cost nearly $1 billion to implement in 2011.

Additionally, Bernanke cited the sovereign-debt concerns in Europe as an example where the analysis led to the May 2010 decision by the Federal Open Market Committee to authorize “dollar liquidity swap lines with other central banks in a pre-emptive move to avert a further deterioration in liquidity conditions.”

To listen to our podcast on financial reform with Anthony Downs of The Brookings Institution, click here.

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Want to Buy a Toxic Asset? The Treasury Department Is Selling Them

Monday, April 18th, 2011

The Treasury Department is planning to sell $142 billion worth of toxic assets that it acquired during the financial crisis.  According to Treasury, it wants to sell approximately $10 million worth of assets every month, depending on market conditions and hopes to end the program next year.  Treasury acquired the securities — primarily 30-year, fixed-rate mortgage-backed securities guaranteed by Fannie Mae or Freddie Mac –between October, 2008 and December, 2009 to stabilize the home loan market.

The Treasury has decided to sell the securities now because the market has “notably improved.”  According to Treasury officials, the sale could net $15 billion to $20 billion in profits for taxpayers.  The sale will have a negligible impact on the U.S. debt limit but could delay the ceiling’s arrival by a few days.  In early March, Treasury estimated the U.S. would hit the $14.294 trillion ceiling between April 15 and May 31.  The Treasury in 2008 retained State Street Global Advisors, a leading institutional asset manager, to acquire, manage and dispose of the mortgage-backed securities portfolio.

“We will exit this investment at a gradual and orderly pace to maximize the recovery of taxpayer dollars and help protect the process of repair of the housing finance market,“ Mary Miller, assistant secretary for financial markets, said.  “We’re continuing to wind down the emergency programs that were put in place in 2008 and 2009 to help restore market stability, and the sale of these securities is consistent with that effort.”

Congress gave Treasury the authority to buy securities guaranteed by Fannie Mae and Freddie Mac.  The value of these mortgage-backed securities declined significantly after the housing bubble burst, prompting fears that write-downs could drag down individual banks and further plunge the financial system into panic.  The Treasury said that three years after the worst point of the crisis, the market for asset-backed derivatives is now much more robust.

The government bought $221 billion of these bonds, as part of the Housing and Economic Recovery Act of 2008.  Treasury announced that it would buy the bonds on the day the government took over Fannie and Freddie.  “The primary objectives of this portfolio will be to promote market stability, ensure mortgage availability, and protect the taxpayer,” Treasury said at the time.  The portfolio is now just $142 billion.  The Congressional Oversight Panel, which supervised the Troubled Asset Relief Program, said that as of February of 2011, Treasury had received $84 billion in principal repayments and $16.7 billion in interest on the securities it holds.

“It was a bit of a surprise, though will likely be easy to digest,” said Tom Tucci, head of government bond trading at Capital Markets in New York.  “We spent a year and a half at levels that were unsustainable because they weren’t based on economic fundamentals, they were based on fear.  “Now some of the fundamentals are starting to come back into place.”

Republicans are asking for deeper cuts in government spending before they will agree to raise the debt limit.  Treasury Secretary Timothy Geithner has cautioned that failure to raise the borrowing limit would cause an unparalleled default by the government on the national debt.  Without question, this would drive up the government’s cost of borrowing money.

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