On May 15, the Senate voted to vote to reverse the FCC’s 2007 decision to cross own a broadcast station and a newspaper in the same market.
On to the house.
Category: regulation
Economics Update
On the good news side, Leading indicator increased 0.1% to 102, the first back to back gain in about 6 months. I’m calling a dead cat bounce.
One of the reasons is because of good news like, southern California house sales “surging” 22% from March to April, where the reporter ignores the fact that while this is a month-to-month gain, year over year, it’s still a 19% drop, and one of the weakest Aprils on record.
So Cal has a Mediterranean climate, which means that March is wet. People don’t house sit when it’s wet.
It also ignores the small fact that 34% of those sales were REOs, real-estate owned properties. So these were basically foreclosed properties.
It’s why California Luxury home prices fell for the 2nd straight quarter.
Not only are real estate prices still falling, but Commercial property prices are falling, the most since 2000. (A critique of the financial press on this in a later post)
In contrast to Bernanke and Paulson, Jean-Claude Trichet, head of the European Central Bank is saying that the credit crunch is ongoing. I think that this is true, and portends a major shift in the financial markets. (Again, I’ll go into more detail in a later post)
As to why, perhaps the fact that banks are doing accounting backflips to keep $35 billion in losses off of their balance sheets justifies a lack of faith in the financial markets and financial industry.
Of course, boneheaded moves like UBS blowing $24 billion by deciding to expand into asset based securities further erodes people’s confidence in financial “professionals”.
My cats could do better on the cat-turd futures market than these guys.
As a result, we are seeing another big LBO foundering, this time the the $51.8 billion Bell Canada takeover, what is (was?) to be the largest LBO ever.
Freddie Mac Using Funny Accounting…Only I’m Not Laughing
It appears that Freddie Mac has made some significant changes to its accounting system, to the tune of 2.6 billion dollars.
“They put a lot of lipstick on this pig including several accounting changes that have given them a one time step-up,” said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York.
Only they are implicitly backed by the taxpayers.
Once again, it’s, “Level 3 assets, a category that indicates the holdings are so illiquid that they can only be priced using the firm’s own valuation models.”
There’s that word again, illiquid. And it’s the valuation model for level 3 assets that got us into this mess.
They’ve just found a pile of crap, and concluded that there is a pony beneath.
Polar Bear Added to Protected Species List
Truth be told, I did not expect this action from Bush and His Evil Minions™ in the Department of the Interior.
Not only does it make things more difficult for big oil operating in the Arctic, it is also an acknowledgment of global warming.
Finding a Solution, and Applying it to Narrowly
In looking at the role of speculation on oil prices, a Senate committee is looking at increasing margin requirements:
“I think there’s an orgy of speculation that we ought to be deciding to do something about,” said Sen. Byron Dorgan, D-North Dakota.
He and others raised the idea of changing the margin or amount investors must pay up front in order to engage in oil speculation. It would be a hugely significant change in financial markets. Dorgan said stock speculation requires a 50% margin, but commodities like oil demand a much lower threshold, just 5% or 7%.
If you look at the credit crunch generally, the real problem is excessive leverage. Margins should be raised to the 75% range, where they were for stocks before the Fed cut them around 1980, and they should be applied to all investments.
Volker Calls for More Regulation
In testimony before Senator Charles Schumer’s (D-NY) Joint Economic Committee, Paul Volker called for more, and more effective regulation of the financial markets.
There is a back story to all of this. Volker was one of the Fed members who tried to keep depression era policies in place, with folks like Alan “Bubbles” Greenspan out maneuvering him on things like the emasculation of Glass Steagall by the Fed before the law was repealed.
Good News: H-1b Changes Appear Dead for 2008
The H1b program as it is now structured is a bad program, because it is used primarily to get low cost work, as opposed to its stated purpose, which is to allow the employment of people with unique skill sets.*
In any case, the Democrats have decided that an increase in the H1b limit, because the Dems have tied this to comprehensive immigration reform, and the Republicans can’t go along with that, because their base is a bunch of racists.
*The fix is actually pretty simple: Make the fees high enough that any H1B hired would be more expensive than a citizen or permanent resident. At that point, the fraud stops. You could auction off slots to set a price.
Really Really Bad Ieas, Pension Edition
In search of increased returns, pension fund are diversifying into commodities.
If they are right, poor people starve. If they are wrong, people lose their pensions.
Life is good, huh? This is what deregulation defined as privatizing profits and socializing debts get us.
More on College Endowment Abuse
I can’t believe that I’m agreeing with a regular contributor to the National Review’s “The Corner”, Jim Manzi, but I do.
The guy is a moron though, in the last ‘graph he claims that because Harvard employees (professors) give to Dems, the institution should not be tax exempt.
He is spot on when he calls Harvard a tax exempt “Hedge Fund”.
But he runs the numbers:
Receipts = $2 billion of operating revenue + $7.3 billion of investment income + $0.6 billion of gifts to the endowment = ~$10 billion.
Operating costs = ~$3 billion.
Profit = $10 billion – $3 billion = ~$7 billion.
This explains why Harvard’s net assets increased about $7 billion in 2007, from about $35 billion to about $42 billion.
This actually segues nicely into my previous post on executive compensation. Just how much is too much anyway?
If Harvard never generated another penny in investment, tuition, or gifts, they would be able to continue to operate for 12 years.
Too much is too much, and by making income (and donations) tax deductible, we are subsidizing “too much”.
I clearly understand how Harvard is the most egregious case of endowment abuse, but once we have determined that there is a problem and that it needs to be fixed, we are, as the joke goes, just haggling over price.
Dutch to Curbe Excessive Executive Pay
This is a a good start on a very serious problem, and pay of Dutch executives is on the order of 1/4 that of US executives.
The Dutch finance minister, Wouter Bos, sent a bill to parliament to crack down on this, and I agree with his sentiments:
“I believe cohesion in society is not served by inexplicable inequalities,” Bos said at a recent seminar of center-left politicians, held at a country-house hotel north of London. “Public support for entrepreneurship around the globe is eroded if you let this continue, and this is not in the interests of our economy or entrepreneurship.”
His proposal would place a 50% tax on golden parachutes in excess of €500,000 (about $800,000), and, “would increase by 15 percent the employer tax contributions to company pensions for executives who make €500,000 a year or more.” (Not exactly clear on the specifics of Dutch pension law, so I would appreciate an explanation here)
In our system of economics, wages are very much a zero sum game, with a fixed pool of money for compensation, and the mega-compensation that exists takes money from everyone else.
I remember once running the numbers on Michael Eisner’s $550 million pay package in the mid 1990s. It came to something like $6000 for every employee of Disney, and had that money been distributed to the employees, there would have been a payback in terms of less turnover and a higher quality employee that would have increased profits.
Of course, they find some rich guy, in this case Ad Scheepbouwer, who got a €1 million ($1.6 million) bonus to argue that it will create an environment unfriendly to entrepreneurs:
Scheepbouwer argues that the Dutch government now, with its proposed limits, is encouraging a climate that penalizes entrepreneurs.
“For really talented and really exceptional performers this is not a very attractive place,” he said. “It is not accepted that people are outside the normal. The only people that are accepted outside the normal are musicians or football players.”
The my answer:
- These people are not entrepreneurs. They are highly compensated employees.
- The “talented and exceptional” bit is largely a myth, as shown by the financial executives with billion dollar packages who are now failing abysmally in the financial world. People get to where they are because of connections and luck at least as much skill.
- So you’re telling me that you would not do it for €1 million/year? That you have to have €20 million, or €100 million, or €1 billion?
This is another toxic export of the American capitalism model, where highly compensated executives sit on each others’ boards of directors, and vote each other raises.
Crucial Interest Rate Metric to be Reworked
As I’ve mentioned earlier, there are concerns that one of the crucial interest rate indices, the LIBOR, is not accurate because the member banks are not accurately reporting interest rates.
It now appears that the , “benchmark interest rate for at least $347 trillion of derivatives and 6 million U.S. mortgages” will be modified to address these concerns. (Yes, that “t” after the $347 is correct)
The British Bankers’ Association, which is responsible for reporting the rates, has, “report based on discussions with member banks to its independent Foreign Exchange and Money Market Committee.”
There are estimates that the reported rate could be as much as 30 basis points too low, or about 10%.
SEC to Require Additional Bank Disclosure
The SEC is proposing regulations that would requireinvestment banks to make more detailed disclosures about their liquidity and capital positions.
The head of the SEC, Christopher Cox, is also calling for legislation to create a specific authority to supervise investment banks. (the current disclosure program is voluntary).
Hopefully, this is the harbinger of more, and more aggressive, regulation of the financial services industry.
Your Government at Work
Yes, the US Department of Agriculture is taking cattle ranchers to court to prevent them from doing Mad Cow tests on beef intended for export.
A number of foreign customers, particularly the Japanese, are demanding this, but the Ag Department wants to prevent testing, because it might “confuse” consumers.
The real reason is that they are in big beef’s pocket, and they are fairly sure that if testing were done, they would get some native home grown positives.
Deal Between Bush and Senate May Be Close on FEC
It’s being presented as a grand compromise, with separate votes allowed so that Hans von Spakovsky would be voted but, as Josh Marshall so ably notes, it’s really another f&%# you from Bush and His Evil Minions™ to the Senate.
The problem right now is that the FEC does not have a quorum, so it can make rulings, which means, among other things, McCain’s bungee jumping into and out of the public financing system cannot be approved by the board.
Additionally, one of the remaining members of the board, FEC chairman David Mason has been very vocal about McCain’s law breaking on the matter, which is an embarrassment.
Bush has renominated von Spakovsky, but is now saying that they can take a separate vote on the nominees, which Spakovsky, would lose, but he is now also submitting a replacement for Mason too, with the idea that once he is removed, McCain gets what he wants on a party line vote.
Fannie Mae is Doomed
Here’s a little tidbit buried in a Washington Post story on Fannie’s recent losses:
To help homeowners caught in the market crisis, Fannie Mae said it would take the unusual step of allowing borrowers whose homes are worth less than their mortgages to refinance up to 120 percent of the property value. That option would be offered to homeowners whose loans are owned by Fannie Mae and who remain up to date on their mortgage payments.
They have just condemned themselves to death.
They will be lending on houses already underwater, and the increase in walkaways as a result will have them needing a government bailout.
Yes, There Are Similarities. Corruption is as Corruption Does
Senator Whitehouse (D-RI) is noting that the firing of Mary Gade as regional administrator of region 5 for her attempts to keep dioxin out of the environment resembles the US attorney scandal.
Of course. When one believes that government is an unmitigated evil, as movement conservatives do, the only role for government agencies is to do favors for friends and allies.
Dow is a friend, poor children who you put at risk for cancer are not.
Well, Now We Know What You Have to Do to Get Fired by Bush and His Evil Minions™
Do your job competently and zealously.
Mary Gade, regional administrator of U.S. EPA Region 5, was fired for trying to keep dioxin out of the environment in the Midwest.
Dow is more important to Bush and His Evil Minions™ than children dying of cancer, I guess.
I Disagree With Paul Krugman
In his latest post, he thinks that Barack Obama gave too much credit to the Republicans in his Fox interview.
I agree with him on that. The ideas in question have been floating around in academic circles, and have been proposed by politicians on both sides for years.
What I disagree with is his classification of emissions trading as a successful policy.
Emissions trading is not a success relative to a tax of some sort.
They’ve never been shown to be more effective than a tax on emissions, they reduce revenues available to government, and they are more difficult to administer, which increases the regulatory load, and hence costs to taxpayers.
Additionally, if you think that mortgage backed securities are a morass of corrupt arbitrage, just wait until Wall Street gets its hands on actual dirt.
Carbon trading is a solution, it’s just a bad one.
Fed, OTCS, and NCUA Moving to Regulate Credit Cards
Seeing how it’s Bush and His Evil Minions™, my question is why they would move against practices they call “deceptive and unfair”.
Deceptive and unfair is what Bush and His Evil Minions™ do.
My guess is that there are moves to restrict this in congress, and that this is primarily a way to get in front of these.
The FDIC is Proposing a Home Loan Program Run Directly by the Treasury
It’s called the Home Ownership Preservation Loan program.
Looking at the program, I think that it is directed primarily at the people who should have known better, mortgage lenders and home builders, with benefits “trickling down” to ordinary programs.
So once again, we see socialism for the fat cats, and capitalism for the tax payers.
As Tanta of CR notes, this would be at little cost to the government, at least if the borrower does not walk away from the home, and there are incentives to prevent that, but the lender (more accurately the holder of the loan) may not be willing to make the concessions to qualify.
If the borrower is at low risk of default, why should the lender take a haircut, if it they are at high risk, do they want to be at the behind the US Treasury in line?
Tants’s take, and mine, is that it’s PR more than a serious program.
The FDIC proposal from their web page:
Home Ownership Preservation Loans
The FDIC is proposing that Congress authorize the Treasury Department to make loans to borrowers with unaffordable mortgages to pay down up to 20 percent of their principal. The repayment and financing costs for these Home Ownership Preservation (HOP) loans would be borne by mortgage investors and borrowers. This approach is scaleable, administratively simple, and will avoid unnecessary foreclosures to help stabilize mortgage and housing prices.
This proposal is designed to result in no cost to the government:
- Borrowers must repay their restructured mortgage and the HOP loan.
- To enter the program, mortgage investors pay Treasury’s financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment.
- Treasury would have a super-priority interest — superior to mortgage investors’ interest — to guarantee repayment. If the borrower defaulted, refinanced or sold the property, Treasury would have a priority recovery for the amount of its loan from any proceeds.
- The government has no continued obligation and the loans are repaid in full.
Mortgage Restructuring:
- Eligible, unaffordable mortgages would be paid down by up to 20 percent and restructured into fully-amortized, fixed rate loans for the balance of the original loan term at the lower balance. New interest rate capped at Freddie Mac 30-year fixed rate.
- Restructured mortgages cannot exceed a debt-to-income ratio for all housing-related expenses greater than 35 percent of the borrower’s verified current gross income (‘front-end DTI’). Prepayment penalties, deferred interest, or negative amortization are barred.
- Mortgage investors would pay the first five years of interest due to Treasury on the HOP loans when they enter the program. After 5 years, borrowers would begin repaying the HOP loan at fixed Treasury rates.
- Servicers would agree to periodic special audits by a federal banking agency.
Process:
- Mortgage investors would apply to Treasury for funds and would be responsible for complying with the terms for the HOP loans, restructuring mortgages, and subordinating their interest to Treasury.
- Administratively simple. Eligibility is determined by origination documentation and restructuring is based on verified current income and restructured mortgage payments.
Funding:
- * A Treasury public debt offering of $50 billion would be sufficient to fund modifications of approximately 1 million loans that were “unsustainable at origination.” Principal and interest costs are fully repaid.
Eligible Mortgages:
Applies only to mortgages for owner-occupied residences that are:
- Unaffordable – defined by front-end DTIs exceeding 40 percent at origination.
- Below the FHA conforming loan limit.
- Originated between January 1, 2003 and June 30, 2007.