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The Fed’s Secret Bank Loans Revealed

Wednesday, December 7th, 2011

In a stunning revelation, Bloomberg has obtained 29,000 pages of Federal Reserve documents detailing the largest bailout in American history.  According to an article that will appear in the January issue of Bloomberg Markets magazine, the “Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on December 5, 2008, their single neediest day.  Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy.  And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.”

The $7.77 trillion that the central bank made available stunned even Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009.  According to Stern, he “wasn’t aware of the magnitude.”  It overshadows the Treasury Department’s better-known $700 billion Troubled Asset Relief Program (TARP) program.  When you add up guarantees and lending limits, it becomes clear that the Fed had committed $7.77 trillion as of March, 2009 to rescuing the financial system. That is more than half the value of the U.S. GDP that year.  “TARP at least had some strings attached,” said Representative Brad Miller (D-NC), a member of the House Financial Services Committee.  “With the Fed programs, there was nothing.”

According to Bloomberg’s editors, “Even as they were tapping the Fed for emergency loans at rates as low as 0.01 percent, the banks that were the biggest beneficiaries of the program were assuring investors that their firms were healthy.  Moreover, these banks used money they had received in the bailout to lobby Congress against reforms aimed at preventing the next collapse.  By keeping the details of its activities under wraps, the Fed deprived lawmakers of the essential information they needed to draft those rules. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, was debated and passed by Congress in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival.  Similarly, lawmakers approved the Treasury Department’s $700 billion Troubled Asset Relief Program to rescue the banks without knowing the details of the far larger bailout being run by the Fed.

“The central bank justified its approach by saying that disclosing the information would have signaled to the markets that the financial institutions that received help were in trouble.  That, in turn, would make needy institutions reluctant to use the Fed as a lender of last resort in the next crisis.  Fed officials argue, with some justification, that the program helped avert a much bigger economic cataclysm and that all the loans have now been repaid.”

Derek Thompson, a senior editor at The Atlantic, argues that the Fed’s secret bailout is a sign that it was doing its job.  According to Thompson, “First, you can be furious that the Federal Reserve ‘committed’ $7.7 trillion — a sum of money equal to half of the U.S. economy — to save the financial system.  I understand the shock, but we were at the precipice of catastrophe and that money wasn’t ‘spent’ so much as it was put at risk and subsequently recouped.  The economy has struggled in the three years since, but we avoided meltdown.  The trillions worked.

“Second, you can be furious that the banks made a profit off of their own mistakes — but $13 billion is a small price to pay for staving off Armageddon.  Third, you can be furious that the Federal Reserve went to court to keep this information out of the hands of journalists.  There, I’d agree.  It’s Congress’s job (not the Federal Reserve’s job) to pass laws that govern the banking sector, but Congress needs information to make good decisions about regulating banks and it’s disappointing that the Federal Reserve withheld details about its bailouts while the commission and the Dodd-Frank debate were ongoing.  Fourth, you can be furious that our central bank basically did the right thing when it had to, and its counterpart in Europe won’t — at the risk of a continental meltdown.”

Times’ Massimo Calabresi agrees. According to Calabresi, “But the Fed saved the world economy through all this lending without losing a penny in the process.  And after its initial heavy breathing, the article does give the Fed an opportunity to explain itself.  ‘Supporting financial-market stability in times of extreme stress is a core function of central banks,’ said William B. English, director of the Fed’s Division of Monetary Affairs.  “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.’  In other words, lending money to banks in a crisis is the whole point of the Fed:  saving the world economy by flooding the system with money when it is about to freeze up is exactly what the central bank was created to do.”

The Fed has been lending money to banks since just after it was established in 1913. By the end of 2008, the Fed had created or expanded 11 lending facilities catering to financial firms that were unable to obtain short-term loans from their usual sources.  “Supporting financial-market stability in times of extreme market stress is a core function of central banks,” said William English, director of the Fed’s Division of Monetary Affairs.  “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”

 

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Home Delinquencies Fall; Foreclosures Rise

Tuesday, December 6th, 2011

Fewer borrowers currently are delinquent on their home loans, a Mortgage Bankers Association (MBA) report shows.  Curiously, new foreclosures are rising in states like California.  This is evidence that the nation still must endure significant pain before the housing crisis finally comes to an end.  According to some analysts, the nation is only halfway through the wrenching grip of the foreclosure epidemic.  That’s reflected in the housing market, where sales and prices continue to sag despite record low interest rates.  Five years after the crisis began, 7.99 percent of all mortgages were behind by at least one payment in the 3rd quarter but not yet in foreclosure.  Nevertheless, that’s down by nearly half a percentage point from the 2nd quarter and more than one percent when compared with last year.

The percentage of American mortgages that were somewhere in the foreclosure process at the end of the 3rd quarter was 4.43 percent, a slight increase over last year.  The rate of homes in foreclosure was highest in the East and Midwest that route residential repossessions through the courts, with Florida at more than 14 percent and New Jersey at eight percent.

Rather surprisingly, new foreclosures rose to 1.08 percent of all loans from 0.96 percent in the prior three months, according to the MBA. The rate had been declining since the 3rd quarter of 2010, when regulators began investigating robo-signing.  Some of the nation’s largest banks temporarily halted foreclosures while they addressed claims of flaws in their court documents.  The moratoriums clogged the entire foreclosure pipeline as banks investigated their procedures, said Patrick Newport, an economist at IHS Global Insight.  “Banks are starting to speed up the process now that they’ve cleaned up their paperwork,” Newport said.  “We’re seeing the backlog begin to move.”

Unfortunately, the improvement may be short lived.  For the 4th quarter, the pace probably will slow to 2.3 percent, according to the median estimate among 86 economists surveyed by Bloomberg.  The pace likely will slow to two percent in the first three months of 2012, according to the estimates.  “While the delinquency picture changed for the better in the 3rd quarter, the foreclosure data indicated that we are not out of the woods yet and that the issues continue to vary by geography,” Michael Fratantoni, the Mortgage Bankers Association’s vice president of research and economics, said.

“That’s really just reflecting the modest improvement we’ve seen in the economy broadly and the job market in particular,” Fratantoni said. “Job growth is not what we want it to be, but it’s been good enough to keep the unemployment rate at least level and that’s been beneficial here with fewer people falling behind.”

“While foreclosure activity in September and the 3rd quarter continued to register well below levels from a year ago, there is evidence that this temporary downward trend is about to change direction, with foreclosure activity slowly beginning to ramp back up,” said James Saccacio, chief executive officer of RealtyTrac.  “Third quarter foreclosure activity increased marginally from the previous quarter, breaking a trend of three consecutive quarterly decreases that started in the fourth quarter of 2010,” according to Saccacio.  “This marginal increase in overall foreclosure activity was fueled by a 14 percent jump in new default notices, indicating that lenders are cautiously throwing more wood into the foreclosure fireplace after spending months trying to clear the chimney of sloppily filed foreclosures.”

Foreclosure were filed on 214,855 U.S. properties in September, a six percent decrease from August and a 38 percent decrease when compared with September of 2010.  September marked the 12th consecutive month where foreclosure activity decreased on a year-over-year basis.

A report issued by the Center for Responsible Lending found that 6.4 percent of mortgages created between 2004 and 2008 ended in foreclosure.  Another 8.3 percent of mortgages are at “immediate, serious risk.”  According to Fratantoni, “Given the pace of foreclosure sales — about one million foreclosure sales a year — it’s a three- or four-year process to get it back to a more typical level of foreclosed properties.”

The refinance share of mortgage activity fell to 77.3 percent of total applications from 78.6 percent the previous week.  The adjustable-rate mortgage (ARM) share of activity increased to 6.1 percent from 5.8 percent of all applications.  In October, 50.6 percent of refinancing applications opted for fixed-rate 30-year loans, 28.8 percent opted for 15-year fixed loans and six percent went with ARMs.  In terms of applications for home purchase mortgages, 85.5 percent were for fixed-rate 30-year loans, 6.9 percent for 15-year fixed loans and 5.9 percent for ARMs, the lowest share of that vehicle for purchases since January.

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Italy Asks IMF to Oversee its Debt Reduction Efforts

Tuesday, November 29th, 2011

Italy’s Prime Minister Silvio Berlusconi has asked for international oversight of his efforts to slash the eurozone’s second-largest debt, even as his unraveling coalition threatens efforts to build a wall against Europe’s debt crisis.  Berlusconi’s government asked the International Monetary Fund (IMF) to assess its debt-reduction progress, and turned down an offer of financial assistance.

“It hasn’t been imposed, it was requested,” Berlusconi said.  The IMF will carry out quarterly “certifications” of the euro region’s third-largest economy, he said, noting that the current sell-off of Italian debt is “a temporary trend” even as the nation’s borrowing costs soared to record highs.  Berlusconi is under mounting pressure as Italy tries to avoid yielding to the sovereign-debt crisis.

Italy’s 10-year borrowing costs are getting dangerously close to the seven percent level that forced Greece, Ireland and Portugal to ask for bailouts.  The yield on the nation’s benchmark 10-year bond surged to a euro-era record of 6.404 percent, the highest since the creation of the single currency.  “If the current Greek tragedy is not to turn into an Italian tragedy, with far more serious and far-reaching consequences for the eurozone, Berlusconi must resign immediately,” Marc Ostwald, a fixed-income strategist at Monument Securities Ltd., said.  Berlusconi may be “remembered as the architect of Italy’s descent into an economic inferno.”

IMF managing director Christine Lagarde hopes that quarterly monitoring will start by the end of November to verify that the reforms Berlusconi promised are implemented.  “It’s verification and certification if you will, of implementation of a program that Italy has committed to,” she said. “It’s one of the best ways to have an independent view…to verify that promised measures are actually implemented.”  She agreed that Italy doesn’t need IMF funding.  “The problem that is at stake — and that was clearly identified both by the Italian authorities and its partners — is a lack of credibility of the measures that are announced,” according to Lagarde.  “The typical instrument that we would use is a precautionary credit line.  Italy does not need the funding that is associated with such instruments so the next best instrument is fiscal monitoring, which is what we have identified.”

Lagarde isn’t certain that the proposed reforms are credible. “The problem that is at stake and that was clearly identified both by the Italian authorities and by its partners is a lack of credibility of the measures that were announced,” Lagarde said.  Additionally, the IMF will provide funds to stimulate Italy’s economy, although under strict conditions.

Will Berlusconi’s regime survive this crisis?  “Historically, technocrat governments in Italy have been able to pass pro-growth structural reforms, including politically difficult labor market reforms,” said Barclays Capital analyst Fabio Fois.  Governments such as those led by Carlo Azeglio Ciampi and Lamberto Dini – who had served as central bankers — in the early 1990s saved Italy from financial crises even worse than the present one.  “I think the political parties would have a big incentive to go through the painful policy adjustment now, before the next election due in 2013, so that whoever wins won’t have to do it later,” Fois said.

Berlusconi seemed almost nostalgic for the days when the lira was Italy’s currency. “You don’t get much in your supermarket trolley for €80 today, whereas you used to get a lot for 80,000 lire,” he said.

He insisted that Italy’s economy is generally prospering.  “The restaurants and vacation spots are always full, nobody thinks there is a crisis,” he said, noting that, considering its low household debt levels, Italy has Europe’s second-strongest economy, after Germany and was stronger than France or the U.K.  The country’s €1.9 trillion in public debt, the equivalent of nearly 120 percent of GDP, was a legacy problem, had not grown in the past 20 years, and had been consistently serviced, Berlusconi said.

Berlusconi admitted that his government “might have made a mistake” in assuming the public debt was sustainable without more aggressive fiscal and reform action.  When asked what he thought about frequent warnings from European Union partners that Italy demonstrate credibility with the promised reforms, Berlusconi said the criticism reflected prejudice about past Italian behavior.  “If we don’t enact the reforms Italy will be in trouble,” he said.  “But we will enact them.”

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Generation Gap in Americans’ Net Worth

Wednesday, November 23rd, 2011

Households headed by older adults have made impressive gains when compared with those headed by younger adults in their economic well-being over the past 25 years, according to a Pew Research Center analysis. In 2009, households headed by adults aged 65 and older had 42 percent more net worth (assets minus debt) than households headed by their same-aged counterparts had in 1984.  During this same period, the wealth of households headed by younger adults declined.  In 2009, households headed by adults younger than 35 reported 68 percent less wealth than in 1984.

As a result of these trends, in 2009 the typical household headed by someone in the older age group had 47 times as much net wealth as the average household headed by someone younger – $170,494 versus $3,662 in 2010 dollars.  In 1984, this had been a less asymmetrical ten-to-one ratio.  This means that the oldest households in 1984 had median net wealth $108,936 higher than that of the youngest households.  By 2009, the disparity had grown to $166,832.

Writing for CNN Money, Annalyn Censky notes that “So why the growing chasm?  Housing trends have played a major role, the Pew Center said.  While rising home equity helped drive wealth gains for the older generation over a long timeframe, the younger generation has had less time to ride out the housing market’s volatility — especially its most recent boom and bust.  Meanwhile, the younger generation is also taking longer to enter the labor force and get married.  And surging college costs are also leaving them burdened by more student loans than prior generations.”

According to the Pew report, “Most of today’s older homeowners got into the housing market long ago, at ‘pre-bubble’ prices.  Along with everyone else, they’ve been hurt by the housing market collapse of recent years, but over the long haul, most have seen their home equities rise.  For young adults who are in the beginning stages of wealth accumulation, there has been no such luck, at least so far.”

The impact of the Great Recession on individual wealth was taken into account by the Pew Researchers. We don’t know what the future will bring, but things are happening much more slowly for this generation,” said Paul Taylor, director of Pew Social & Demographic Trends and co-author of the analysis.  “If this pattern continues, and this difficult start plays out and slows this generation down, then you start to call into question the basic tenets of the American dream, which is that every generation does better than the one before.”

While the recession hurt people of all ages, the older group was much better sheltered, and saw its median net worth drop just six percent between 2005 and 2009.  Generally speaking, it has increased 42 percent since 1984 when the Census Bureau first began measuring wealth according to age.  The median net worth for the younger-age households fell 55 percent since the recession and 68 percent when compared with 25 years ago.

Net worth consists of the home’s value, possessions and savings, minus debt such as mortgages, college loans and credit-card debt.  Fully 37 percent of younger households reported that they have a net worth of zero or less, nearly double the amount reported in 1984.  That percentage remained at approximately eight percent for households headed by a person 65 or older.  “It makes us wonder whether the extraordinary amount of resources we spend on retirees and their healthcare should be at least partially reallocated to those who are hurting worse than them,” according to Harry Holzer, a labor economist and public policy professor at Georgetown University.

The news isn’t all bad for young people.  For example, they may have more student debt.  That’s good news because it means that more of them are going to college, a choice that will show returns in the long-run, according to the study.  Education is essential  to making money in today’s economy, said Steven Klineberg, a professor of sociology at Rice University.  Unlike in the past, the availability of blue-collar jobs and unions that could boost a worker into the middle class no longer exist.  “The ability to keep learning is a critical requirement,” Klineberg said.

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Retailers Making it Easier to Shop Until You Drop on Black Friday

Wednesday, November 16th, 2011

Black Friday – the day after Thanksgiving notable for its power shopping – just got longer as several leading national retailers announced plans to open at midnight. Instead of sleeping off that turkey coma, throngs of shoppers will be waiting in line at Macy’s and Target, both of which will open four hours earlier than normal.

“We’ve been looking at our hours and demand as the holiday approaches and we think the customer will respond,” Macy’s spokesman Jim Sluzewski said.  “In dollars and cents, it probably gives the retailers that are opening extra early another fraction of a day’s sales,” said Scott Rothbort, finance professor at Seton Hall’s Stillman School of Business.  “But it does engender publicity and in this environment that is very valuable.”

“People want to shop through the night,” said Martine Reardon, Macy’s executive vice president of marketing.  She said the expanded hours were in response to customers’ requests.  One year ago, Macy’s opened eight stores at midnight, and the rest at 4 a.m.  According to Reardon, the midnight openings were highly successful.

Retailers have been extending their Black Friday hours for several years; additionally they’re trying to outdo each other by announcing some of their best deals weeks in advance.  They also are responding to shoppers who strategize bargain-hunting weeks in advance.  Already, Black Friday circulars are starting to be leaked to deal sites like Blackfriday.com and Blackfriday2011.com. Just a few years ago, stores were secretive about their discounts and hours until a few days before Thanksgiving.

Some retail industry experts think the early openings are a bad idea. The news is not good for workers, many of whom are desperate for jobs.  “What these retailers have to worry about is: Are they going to have an employee revolt?” said retail analyst Britt Beemer, chairman of America’s Research Group.  “You could be pushing people to the limit of what they are willing to accept.”  Beemer’s research suggests this Black Friday will be the biggest ever, with 50 percent or more of consumers heading out to shop the day after Thanksgiving.  And for the sake of the craziest shoppers, this year’s deals should be worth losing sleep over.

Writing in the International Business Times, Cavan Sieczkowski said that “But with the current unstable economic climate, stores are planning ahead for Black Friday sales and hoping that an early start will allow them to capitalize on increased consumer spending. On Black Friday 2010, retail spending hit $10.69 billion in one day.”

“Consumers are really walking a tightrope here.  They don’t have much room and it’s easy for them to lose balance with very modest shifts in hiring, the cost of food and everything,” said Steve Blitz, senior economist, ITG Investment Research in New York.

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Harrisburg, PA, Goes Broke

Monday, November 14th, 2011

Pennsylvania’s capital city, Harrisburg,  filed for a rare Chapter 9 bankruptcy protection, listing debts of $500 million and assets of $100 million, according to an attorney for the city council.  Mark D. Schwartz said he filed the documents by fax to a federal bankruptcy court.  Such a filing could not be confirmed with the U.S. Bankruptcy Court in Harrisburg.  The filing comes on the heels of the city council’s 4-3 vote Tuesday night to seek bankruptcy protection.  “This was a last resort,” said Schwartz.  “They’re at their wits end.”

“They were tired of being humiliated and denigrated,” Schwartz said, referring to the four council members who voted for a bankruptcy filing.  Chapter 9 is “a much better forum if you really want to address the financial problems of the city,” Schwartz noted.  Chapter 9 bankruptcy allows the financial reorganization of cities, towns, taxing districts, counties, school districts and municipal utilities.

Unfortunately, this is a scenario that other cash-strapped cities across the country could face in the future.  This comes on the heels of Topeka, KS, repealing a law against domestic violence because of the cost of prosecuting offenders.

“This really is our only option out there, ” Councilman Brad Koplinski said. “I believe this is the only thing that will work.”  Controller Dan Miller said that Harrisburg had attempted to tackle the debt problem for years and that he felt the state of Pennsylvania had tried to “railroad” the city’s citizens.  “It’s unfortunate that it came to this,” Miller said.  In June, the Pennsylvania legislature passed a bill saying bankruptcy would result in the loss of state aid, and added an amendment to the bill in September that permits a state takeover of Harrisburg.  The city must repay $310 million in bonds and restructure its debt, as well as reimburse Dauphin County and insurer Assured Guaranty Municipal, which both made payments that the city missed on its incinerator project.

“The size of the outstanding bond debt is overwhelming,” according to the bankruptcy filing.  “Negotiations are impracticable with one group of creditors where negotiations with another key group have hit an impasse.”  Harrisburg’s bondholders include Ambac Financial Group, Inc., with more than $70 million of revenue bonds, and Covanta Holding Corporation, with about $120 million of bonds and advances of funds.

“The city meets the ‘generally not paying’ definition of insolvency, because it has repeatedly failed to pay the guaranteed incinerator bond debt as it has become due,” according to Harrisburg’s filing.  “Under the guarantees the city would need to cover a combined $83 million of past due payments and the 2011 debt service.”

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Federal Regulators Floating the Idea of 20 Percent Downpayment Mortgages

Thursday, November 10th, 2011

Is a 20 percent downpayment on a house or condominium on the horizon?  If some federal regulators get their way, buyers may have to put down $60,000 on a $300,000 house to get the best possible mortgage interest rate.  Although this sets the bar high, regulators believe it will prevent the risky lending practices that ended in a rash of foreclosures.

Numerous groups immediately announced their opposition to the proposal, contending that a 20 percent downpayment is too burdensome for many working class would-be homebuyers.  If the proposal goes into effect in summer, it is not likely to have a major impact on the housing market for a while because the majority of mortgages are insured by federal agencies and are exempt from the rule.  John Taylor, chief executive of the National Community Reinvestment Coalition, said “If we require 20 percent downpayments to get a loan, we will ensure broad swaths of working- and middle-class people will not be able to get a loan.”  According to Tom Deutsch, executive director of the American Securitization Forum, believes the 20 percent requirement will do little to encourage banks to make loans without federal backing.  “The extremely rigid proposals…will further prolong the U.S. government’s 95 percent market share of the credit risk of newly originated mortgages,” he said.

Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, disagrees.  “Properly aligned economic incentives are the best check against lax underwriting,” she said.  The Federal Reserve and Treasury Department also support the move, and other federal regulators are expected to get behind the new requirement.  The move comes as the Obama administration is working to end Fannie Mae and Freddie Mac, the government-backed mortgage companies, by reducing the competitive advantage they have over banks.  One proposal is to require the agencies to charge higher fees to draw private firms back into the mortgage market.

Mortgage Bankers Association CEO John Courson warns that the 20 percent downpayment requirement would further damage already sluggish housing demand.  “We believe that such a narrow construct of the risk retention exemption would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problem loans,” Courson said.  Ron Phipps, president of the National Association of Realtors, said the new rules will further restrict mortgage credit and housing recovery overall.  “Adding unnecessarily high minimum downpayment requirements will only exclude hundreds of thousands of buyers from home ownership, despite their creditworthiness and proven ability to afford the monthly payment, because of the dramatic increase in the wealth required to purchase a home,” Phipps said.

Treasury Secretary Timothy Geithner, who is leading the regulatory effort, said “Risk retention will help promote better standards for underwriting and securitizing mortgages, which is good for the long-term health of the housing market and for our nation’s economy.”  An element of the Dodd-Frank Act that impacts the residential market, known as “risk retention”, is a rule that requires that mortgage lenders and securitizers to invest a minimum of five percent of the risk on qualified residential mortgages. The rule will play a crucial role in determining how much risk banks have to retain from mortgages they originate or package into bonds known as mortgage backed securities (MBS) and then subsequently sell into the market.  “If this proposal goes through, the way it’s written, I think the housing market will not recover for years to come,” says Joe Murin, chairman of consulting firm The Collingwood Group.

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Spending Rises as Savings Fall

Monday, November 7th, 2011

Are Americans shopping until they drop again? It could be, judging by the latest government report showing that consumer spending rose by a surprisingly vigorous 0.6 percent in September, even as personal incomes barely grew.  Adjusting for inflation, after-tax income declined slightly by 0.1 percent, according to the Department of Commerce.  The bottom line is a sharp drop in the saving rate in September, to just 3.6 percent.  That’s the lowest level since 2007 and a drop from a healthy five to six percent during most of the last two years.

Scott Hoyt, who studies consumer spending for Moody’s Analytics, says it’s possible that the September numbers may have been inflated by spending for repairs and other things after Hurricane Irene.  At the same time, other data suggest that people are spending more because lenders are suddenly more willing to give credit and as households — which had deferred buying new cars and other goods — feel more optimistic about the direction of the economy.  Consumer spending is perceived as a critical economic component,  and is often cited as representing 70 percent of the nation’s GDP.

The improvement in consumer spending helped boost the economy through the 3rd quarter while policymakers ranging from President Barack Obama to the Federal Reserve took additional action to stimulate growth and hiring.  Unless paychecks grow, Americans may not be able to continue their spending sprees.  “Given the state of consumer sentiment and the savings rate, we should see moderate spending, at best, going forward,” said Sean Incremona, a senior economist at 4Cast Inc., who accurately predicted the consumer spending boom.  “The savings rate is just one of those warning signs that says we’re not pulling ourselves out vigorously, so the economy still has a lot of vulnerability.”

Fed policymakers are considering options for additional monetary easing even as the economy improves.  Vice Chairman Janet Yellen said that a 3rd round of significant asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”

“Consumers today are still facing inflationary pressures on food, high unemployment, minimal job and income growth and waning consumer confidence,” BJ’s Restaurants, Inc., Chief Financial Officer Gregory Levin said after the chain reported a 6.5 percent increase in sales for the 3rd quarter.  “It is difficult to ascertain if the current trends represent the trend we will end up seeing throughout the remainder of this year, or how strong the holiday retail selling season will be.”

“Income growth will have to be watched closely in coming months as the recent trend of spending at the expense of savings is not sustainable,” economists at Nomura Securities wrote.  Inflation rose 0.2 percent in September, based on the latest analysis of the personal consumption expenditure price index.  The PCE (Personal Consumption Expenditures) grew by 2.9 percent over the past year.

“Sluggish growth in U.S. consumer income in September led households to cut back on saving to increase their spending, casting doubts over the durability of the economy’s third-quarter growth spurt,” Reuters wrote.

According to The Hill, “Purchases of new and used cars drove spending.  Clothing sales rose 1.1 percent.  Purchases such as utility payments were up 0.2 percent, as consumers paid to cool their homes during a brutally hot summer.

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A Long Night in Brussels Ends With a Greece Debt Deal

Tuesday, November 1st, 2011

The midnight oil burned in Brussels as European finance ministers, heads of state, bankers and the International Monetary Fund (IMF) try to reach an agreement to restructure Greek debt.  In the deal, private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to reduce Athens’ immense debt load to sustainable levels.  Although it required more than eight hours of negotiations that did not end until 4 a.m., the deal also anticipates a recapitalization of hard-hit European banks and a leveraging of the bloc’s rescue fund, the European Financial Stability Facility (EFSF), to give it €1 trillion ($1.4 trillion).

Significant work remains to be done to assure that the rescue works as envisioned.  Several aspects of the deal, including the technicalities of boosting the EFSF and providing Greek debt relief, could take weeks to firm up; the plan to rebuild confidence after two years of crisis could unravel over the details.  “I see the main risk is that we are left waiting too long again for the implementation of these agreements,” European Central Bank (ECB) policymaker Ewald Nowotny said.  “Speed is very important here.”  According to Greek Prime Minister George Papandreou, “The debt is absolutely sustainable now.  Greece can settle its accounts from the past now, once and for all.”

European Union (EU) President Herman Van Rompuy said that the deal will slash Greece’s debt to 120 percent of its GDP by 2020.  Under current conditions, it would have soared to 180 percent.  Achieving this will require that banks assume 50 percent losses on their Greek bond holdings — a hard-to-swallow pact that negotiators now must sell to individual bondholders.  According to Van Rompuy, the eurozone and IMF — which have both propped up Greece with loans since May of 2010 — will give the country another €100 billion ($140 billion).  That’s slightly less than amount agreed in July, primarily because the banks now must pick up more of the slack.  “These are exceptional measures for exceptional times.  Europe must never find itself in this situation again,” European Commission President Jose Manuel Barros said.

While some question whether Greece will be able to meet its debt obligations by the drop-dead date, the fact that leaders were able to finally put concrete numbers to what had previously been little more than vague promises represents an important step forward.  “It’s great news that we’ve got an agreement,” said Deutsche Bank economist Gilles Moec.  “When Europe puts its heads together, they do actually begin to cooperate.”

Greece, whose crippling debt load has in principle been cut in half in the deal that Papandreou says marks “a new day for Europe and for Greece,” emerges as the biggest winner.  Although the necessary austerity measures will be tough for the Greek people to live with, the new plan has set the country on a sustainable debt trajectory, according to Moec.  “At least the deal gives Greece a fighting chance.  It’s not great, it would be much better if we could get the debt below 100 percent…but it’s doable.”

Germany, which had been the driving force behind compelling the banks to take a bigger “haircut” or write down on Greek debt, is another winner.  “If you look at the vote in German parliament outlining what Germany was going to ask for at the summit, and then you see the results of the summit, it’s basically identical,” Moec said.  German Chancellor Angela Merkel believes that the deal is a victory for Europe in general.  “Everybody was aware that the whole world was looking at this meeting,” she said.  “I think that tonight we Europeans have taken the right measures.”

Writing for Reuters, Global Economics Correspondent Alan Wheatley sees some reason for skepticism. “Greece, however, has become something of a sideshow.  Investors long ago judged that it was not just illiquid, but insolvent.  Much more critical is what the eurozone could do to prevent the debt rot from spreading to bigger, systemically important but stagnant economies, notably Italy.  Markets will have to wait for details as to how the EFSF will be scaled up; whether the likes of China will top up the bailout fund; and how operationally it will enhance the credit of member states’ new bonds.  But some analysts are skeptical.  Economists at Royal Bank of Scotland said they expected markets to re-price sovereign debt across the euro area given the size of the losses imposed on Greece.  Expressed as the ‘net present value’ of the bonds, the proposed loss will be close to 70 percent, much more than the 40 percent hit that banks had volunteered to take, RBS said.  What’s more, the EFSF will be too small to offer help to any country that might need it for any length of time.  And a promise by governments to help banks regain access to long-term bond market funding implies they will have to assume extra contingent liabilities, thus adding to their debt burdens.”

Time’s Bruce Crumley is more hopeful. According to Crumley, “Let’s hope that upbeat attitude persists, but let’s not be stunned if it doesn’t.  Because let’s be honest about another reality of Thursday’s development: it was only the most recent play by governments in a global confidence game that’s certain to shift and surge again before it’s all over.  That’s not ‘confidence game’ in the usual, illicit ‘con’ sense.  Instead it more literally describes attempts by EU leaders to inspire confidence and calm in financial markets so they’ll cease the doubt-inspired dumping of bonds, and bets against iffy sovereign debt that severely complicates efforts by eurozone officials to overcome current crisis.  To that end, the relatively timid action taken earlier by European leaders was subsumed by the far more dramatic measures adopted  – an emphatic upward ratcheting designed to prove their determination to tackle the evolving catastrophe once and for all.”

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Obama Bypasses Congress to Boost Housing

Monday, October 31st, 2011

President Barack Obama executed an end run around Congress when he announced a significant retooling of a plan designed to help homeowners who are paying their mortgages, but still underwater, refinance their loans at a more affordable interest rate.  Administration officials said the changes will streamline the government’s Home Affordable Refinance Program (HARP) and could dramatically increase the number of borrowers who have refinanced their loans under the program past the current 894,000.  They did not specify how many borrowers might be eligible or likely to participate.  The program, which is voluntary to lenders, will be available only to homeowners whose mortgages were sold to Fannie Mae and Freddie Mac on or before May 31, 2009, and who have a loan-to-value ratio above 80 percent.

The downside is that hundreds of thousands more could not qualify – primarily because of the previous 125 percent loan-to-value limit on the program or because banks refused to take on the risk.  Raising the loan-to-value restrictions may help a limited number of borrowers, according to Jaret Seiberg, an analyst for MF Global Inc.’s Washington Research Group, which analyzes public policy for institutional investors.  The difficulty is that mortgage holders still must be up-to-date on their payments for the past six months — with no more than one missed payment in the past year.  Additionally, they also must qualify for a new loan.

Qualifying homeowners will be able to refinance their mortgages at the current low rates, which are currently near four percent. Obama’s move comes at a time when there is a fast-growing consensus that the nation’s declining housing market is negatively impacting the economic recovery.  Home values are at eight-year lows; and more than 10 million people are underwater, meaning that they owe more than their homes are worth.  “It’s a painful burden for middle-class families,” Obama said.  “And it’s a drag on our economy.”  The administration’s proposal underscores the scale of the problem, as well as the limits of public policy in resolving it.  By cutting monthly payments, the Obama administration hopes to make cash available for consumers to spend elsewhere.

According to housing regulators, one million borrowers might be eligible to participate in the program.  Unfortunately, that is just 10 percent of the number of homeowners who need help.  Although the Obama administration’s estimates say the average homeowner could save $2,500 per year, other projections said savings would be in the range of $312 annually.  This depends on the upfront fees the borrower pays, which can include thousands of dollars in closing costs.

Obama promoted the plan under his “We Can’t Wait” campaign, in which he will use the executive branch’s existing tools to improve the economy while Congress debates further legislation.  “We can’t wait for an increasingly dysfunctional Congress to do its job,” he said.  “Where they won’t act, I will.”

“We know there are many homeowners who are eligible to refinance under HARP and those are the borrowers we want to reach,” said Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), which administers Fannie Mae and Freddie Mac. The program expires at the end of 2013.  “We believe these changes will make it easier for more people to refinance their mortgage,” DeMarco said.  “Breaking this vicious cycle is one of the most pressing issues facing policy makers,” Federal Reserve Bank of New York President William C. Dudley said.  The HARP revamp is part of multiple efforts the government is making to boost home prices and consumer spending.  “It’s the equivalent of a tax cut for these families,” HUD’s Donovan said.

Mortgage lenders are “particularly gratified” at the revised plan, said David H. Stevens, president and chief executive officer of the Mortgage Bankers Association.  “These changes alone should encourage lenders to more actively participate.”

Writing in The Atlantic, Daniel Indiviglio believes that the revised program has potential.  “The administration appears to have accounted for all of the major obstacles to refinancing and eliminated them.  A home’s value no longer matters.  The cost should be less prohibitive to borrowers.  Much legal red tape has been cut.  Other loans tied to the home won’t stand in the way.  Ample time to refinance is provided.  This should help to allow at least a million Americans to refinance who haven’t had the opportunity to do so in the past.  If this works as hoped, then those consumers will have more money in their pockets each month.  Borrowers who see their mortgage interest rates drop from five percent or six percent to near four percent will often have a few hundred dollars more per month to spend or save.  If they spend that money, then it will stimulate the economy and create jobs.  If they save it or pay down their current debt, then their personal balance sheets will be healthier sooner and their spending will rise sooner than it would have otherwise.  The effort may even prevent some strategic defaults, as underwater borrowers won’t feel as bad about their mortgages if their payment is reduced significantly,” Indiviglio said.

Felix Salmon, writing in Reuters, could not disagree more. “For many reasons, it is very difficult to project the number of mortgages that may be refinanced under the enhancements to HARP, including the future path of interest rates, borrower willingness to undertake a refinance transaction and the number of lenders and servicers who choose to offer the program.  Given current market interest rates, our best estimate is that by the end of 2013 HARP refinances may roughly double or more from their current amount but such forward-looking projections are inherently uncertain.  First, by the end of 2013?  Never mind mortgage relief now, we’ll try and get you mortgage relief in two years’ time?  Secondly, the current pace of HARP refinancing is pathetic.  We’ve been managing to do less than 30,000 HARP refinancing a month.  And in the 28-month history of HARP, we’ve managed a grand total of 894,000 HARP refinancing, which works out to about 32,000 per month.  The FHFA is projecting that the pace of HARP refinancing won’t increase at all as a result of this plan. We’ll still average out at about 30,000 per month — maybe a bit more, maybe a bit less, but you’re never going to make a dent in the mountain of 11 million underwater mortgages at that rate.”

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