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HomeCongress Establishing Financial Crisis Inquiry Commission
Posted by Larry Doyle on May 21st, 2009 5:18 PM |
The law firm of Wilmer Hale recently released the following statement:
CONGRESS TO ESTABLISH FINANCIAL CRISIS INQUIRY COMMISSION
May 7, 2009By Reginald J. Brown, Jamie Gorelick, Anne Harkavy, Randolph D. Moss, William R. McLucas, Howard M. Shapiro, Michael J. Sharp,Matthew A. Chambers
Yesterday, the House of Representatives passed S. 386, the Fraud Enforcement and Recovery Act of 2009, by a 367-59 vote. Among other things, S. 386 establishes a Financial Crisis Inquiry Commission (the “Commission”), with broad authority to examine the domestic and global causes of the current U.S. financial and economic crisis. The Senate passed a similar bill in late April and final passage, most likely of the House version, is expected soon.
Under both versions of the bill, the Commission will have roughly 18 months to investigate the circumstances that led to the financial crisis and issue a report to Congress with its findings and recommendations. The Commission will have broad investigative authority, including subpoena power, and the ability to refer any evidence of criminal activity to the U.S. Attorney General and state attorneys general. Other key provisions, as described in the House bill, include the following:
Membership:
The Commission will have ten members, who must be private citizens and may not be employed by any government entity. [§ 5(b)(2)(B)] Commission members will be appointed as follows: Three each appointed by the Speaker and Senate Majority Leader; two each appointed by the minority leaders in the House and Senate. [§ 5(b)(1)(A-D)] The Chair and Vice Chair must be from different parties and will be selected jointly by the respective leaders. [§ 5(b)(3)] Members are expected to be prominent U.S. citizens with national recognition and depth of experience in fields such as banking, regulation of markets, taxation, finance, economics, consumer protection and housing. [§ 5(b)(2)(A)] (more…)
Is The Government Bond Bubble Getting Ready To Burst? UPDATE #2 >>
Posted by Larry Doyle on May 21st, 2009 2:41 PM |
With equities down 2-2.5% on the day, one might think the safety of U.S. Treasury debt would be in vogue. Well, not so. In fact, the Treasury market is BREAKING down as I write this. The 10yr U.S. Treasury note has backed up to a 3.36% rate, which is a full 16 basis points higher on the day. This is a very significant move. What’s happening?
Well, let’s revisit my original commentary on April 30th and my subsequent update on May 7th.
What has changed today from then? Very little aside from S&P putting U.K government debt on watch for potential downgrade. Can the U.S. be far behind?
The demand for credit by global governments is swamping the market. If equities go up, down or sideways, I think U.S. Treasury 10 year notes are headed to at least a 4% rate and potentially much higher. (They started the year at approximately 2%, so they have already gotten pummeled).
Please recall that U.S. Treasury funding needs this year will very likely exceed the debt issued in 2006, 2007, and 2008 combined!! As I see it, the overall delevering process – in which individuals, corporations, and governments need to pay down debt via asset sales or refinance the debt – continues unabated. On May 7th, I wrote:
I have tried to highlight my concerns on interest rates for the entire year. Despite the Federal Reserve “cutting checks” to buy hundreds of billions in U.S. Treasury bonds and mortgage-backed securities, the global demand for credit (meaning global governments, companies, and municipalities issuing MASSIVE supply of bonds) is driving rates higher.
As I wrote in my post from April 30th, the U.S. Treasury market has been faced with underwriting tens and now hundreds of billions in government debt on a regular basis. The 30yr government bond auction today was not well received and interest rates have moved higher by 10-20 basis points (.10 to .20%).
What are the implications of higher rates?
1. Increased cost of financing the deficit.
2. Upward pressure on other rates, primarily mortgage rates.
3. Longer time for economy to improve given higher interest costs.
4. Given the massive global government deficits, the access to credit for private enterprise is negatively impacted. This is known as crowding out.As I referenced the other day, “We Still Have To Pay The Bill.”
Bloomberg reports, Treasuries Tumble as Bond Sale Draws Higher Than Forecast Yield.
From my piece at the end of April:
The equity markets have rebounded significantly over the last seven weeks. The Dow and S&P are now down approximately 4-6% on the year. The tech heavy Nasdaq has distinguished itself and is up approximately 10% on the year.
At this juncture, if the equity markets are implying that the economy will not slip into Depression, then the bill for the stability in equities is being transferred to participants in the bond market. Government bonds are facing an almost weekly avalanche of tremendous supply. This week the market is absorbing over $100 billion in 2yr, 5yr, and 7yr Treasury securites. Take a deep breath and next week the market is faced with over $75 billion in 3yr, 10yr, and 30yr government securities. The Treasury is likely going to sell 30yr government debt on a monthly basis!!
The Federal Reserve has been the biggest buyer of Treasury and mortgage-backed securities. The Fed’s balance sheet may be large but it is not endless. What have 10 yr. Treasury securities done on the year? Even in the face of massive buying of these securities by the Fed, the 10yr has backed up almost 1% to a current level of 3.1%. That rise in rates is very significant.
I have maintained and continue to maintain that interest rates will move higher given the overwhelming demand for funds by global governments to pay for deficit spending. Central banks around the world may try to hold the respective bond markets up and interest rates down but investors will continue to demand a higher rate of interest in the process.
As government rates move higher, mortgage rates, and other corporate rates will likely move higher as well. If we get a whiff of early signs of inflation which I believe is coming these rates could ratchet higher and the bubble in the government market would not merely burst but would actually explode.
Having fewer banks on Wall Street means larger slices of the profit pie for those still standing. However, having fewer banks also means lessened liquidity and risk-taking overall. Bigger deficits mean higher rates which lead to a slower economy and longer recovery period. Turbo-Tim, Big Ben, and Barack need to factor that dynamic into their economic equations. Principles of Economics 101.
LD
Mary Schapiro Still Not Being Questioned; Independent Investigation Still Required
Posted by Larry Doyle on May 21st, 2009 5:45 AM |
When you are the head of the SEC and you do not get invited to a dinner to discuss investor protections and financial oversight, you know you have a problem.
As the Wall Street Journal reports, SEC Objects to Idea of Shifting Oversight:
SEC officials have expressed concern that the administration’s plans are proceeding without much SEC input. Some top Obama officials, including Treasury Secretary Timothy Geithner, National Economic Council Director Lawrence Summers and former Fed Chairman Paul Volcker met Tuesday night over dinner to discuss the regulatory revamp.
Is this a power play by “the boys?” Was Ms. Schapiro merely a figurehead in the first place? Her confirmation process was the highway equivalent of an E-Z pass. The Wall Street investment banking model was laid to waste in 2008 and Ms. Schapiro was treated with kid gloves during her confirmation. On January 16, 2009 I wrote, Let’s Really Question Ms. Schapiro:
The WSJ did yeoman work yesterday in highlighting that under Ms. Schapiro, the number of cases and collection of fines by FINRA has diminished by 30% and 36% respectively. The WSJ did not expose any info, though, from FINRA’s financials. The $2.1 billion in equity in this tax exempt entity that paid Ms. Schapiro $3 million dollars is invested in a variety of sectors, including common equities, fixed income, private equity, hedge funds, and fund of funds!!! Additionally, as of the end of 2006, FINRA acknowledged that the assumed portfolio held a cool $647 million dollars in Auction Rate Securities!!!
Perhaps Ms. Schapiro knows too much information or is too close to the financial industry as many maintain. That said, she has not distinguished herself in her first few months at the SEC. She has held a series of perfunctory meetings and is seemingly involved in an internal turf war with the DEA in regard to the Stanford Financial investigation.
Add it all up and in the space of 4 months, Mary Schapiro has effectively been relegated to a figurehead.
While Ms. Schapiro has clearly been frozen out, the SEC as a whole is also shown no respect. As the WSJ reported:
The SEC is one of the federal agencies most at risk in the regulatory revamp under study by the administration and Congress. Its reputation suffered a blow from its failure to catch money manager Bernard Madoff’s Ponzi scheme and its light regulation of Wall Street investment banks during the boom.
Closed door sessions without full representation does not engender confidence as to the motivations of those involved. I am not a Mary Schapiro fan, but for Obama and team to comport themselves in such a fashion smacks of “insider dealing” and “Chicago-style” politics. We need total transparency and integrity in our regulatory review. I have been calling for that, as evidenced in my piece Future Financial Regulation: Not A Question of Sufficiency, But of Transparency and Integrity.
In fact, let’s go one step further with our review process and fast track to what we really need, an Independent Investigation Required.
For those who have read this review, I hope you find it further insightful in light of current developments. For those reading it for the first time, I hope it makes you ponder as to what is really going on behind the closed doors at Finra, the SEC, on Wall Street and Washington.
How does our economy and country move forward after having experienced rampant abuses throughout our financial industry? It is disheartening that we have not already seen an aggressive pursuit and prosecution of many involved in these financial improprieties. Bloomberg releases a story today indicating House Speaker Pelosi Wall Street Probe Modeled on Pecora After Wall Street Crash.
While a thorough investigation is critically important to improve the health and well being of our markets and economy, I would propose we employ an independent investigation. Why?
Our financial industry is intertwined with the regulatory and political oversight which is supposed to monitor it. If we employ a currently sitting legislative body to investigate Wall Street, can or will we receive a truly unbiased analysis? Do we recall Franklin Raines of Fannie Mae being questioned by members of Congress who had received significant campaign contributions from Fannie? The “investigation” of Freddie and Fannie was certainly more theatre than true investigation. Will we get the same with Ms. Pelosi’s probe? Bloomberg offers:
House Speaker Nancy Pelosi plans to push for a comprehensive inquiry, saying that three-quarters of Americans want to know what led to the bankruptcy of Lehman Brothers Holdings Inc. and the collapse of Bear Stearns Cos. and Merrill Lynch & Co. She favors one patterned after Senate Banking Committee hearings led by Ferdinand Pecora starting in 1933, according to her spokesman, Nadeam Elshami.
The Pecora review “was probably the single most important congressional investigation in the history of our country, except perhaps the Watergate hearings,” Donald Ritchie, associate historian for the U.S. Senate, said in an interview. (more…)
Review of the Federal Reserve’s Minutes: ‘Where Are Those Green Shoots?’
Posted by Larry Doyle on May 20th, 2009 8:00 PM |
The Fed released the minutes from their April 28-29 meeting. Let’s dive right in straight from the Fed’s own website. Minutes of the Federal Open Market Committee:
Almost all participants viewed the near-term outlook for economic activity as having weakened relative to the projections they made at the time of the January FOMC meeting, but they continued to expect a recovery in sales and production to begin during the second half of 2009. With the strong adverse forces that have been acting on the economy likely to abate only slowly, participants generally expected a gradual recovery: All anticipated that unemployment, though declining in coming years, would remain well above its longer-run sustainable rate at the end of 2011; most indicated they expected the economy to take five or six years to converge to a longer-run path characterized by a sustainable rate of output growth and by rates of unemployment and inflation consistent with the Federal Reserve’s dual objectives, but several said full convergence would take longer.
Call me cynical, but where are the ‘green shoots’ in that review? In my opinion, this review is akin to a CYA analysis, as in things are going to get worse before they get better . . . I hope.
By every measure, the Fed governors are revising their calls on unemployment, output, and inflation to worsen in 2009 relative to their call in January. Were they merely being overly optimistic in January? Perhaps these minutes are similar to the regular revisions provided each and every month depicting the economy to be in tougher shape than previously advertised.
I did find it very interesting to see the assessment targeting a 5 to 6 year time horizon–and perhaps longer–for the economy to regain the trajectory consistent with Fed objectives.
Given that these minutes are aggregated in a closed door session, they may actually more accurately embody a sense of veracity and integrity. How ’bout that!!
How did the equity market respond to these minutes? The DJIA reversed course from being up 100+ points in the morning to close down 52 points.
LD
Hotel California Revisited: Prisoners Here of Our Own Device
Posted by Larry Doyle on May 20th, 2009 4:30 PM |
“Tonight we have heard from the voters and I respect the will of the people who are frustrated with the dysfunction in our budget system,” Gov. Arnold Schwarzenegger said.
The Wall Street Journal provides full coverage, “California Voters Reject Budget Measures.”
What does California’s budget nightmare mean? The state will be forced to cut upwards of $20 billion from an $82 billion budget. How and why? In the face of the the massive recession, California’s tax revenues are insufficient to meet the state’s fiscal needs.
In years past, California and other states would tap the municipal bond market with bond insurance provided by a monoline insurer, such as MBIA or Ambac. Given the enormous losses suffered by these monolines, primarily on structured mortgage deals, they are no longer strong enough to provide insurance sufficient for California to raise funding. In a similar vein, California can no longer source a letter of credit provided by a large money center bank.
Where is California looking for a backstop to its financial woes? Well, much like the United Auto Workers, the strongly Democratic constituencies in California will look toward Washington for a backstop/bailout.
California’s representatives are downplaying the severity of the situation. California Treasurer Bill Lockyer, much like Barney Frank, condescendingly comments on the historically low level of defaults in municipal finance. Do I have to remind Bill and Barney that historical analysis was also highlighted in providing AAA ratings to sub-prime mortgage deals? (more…)
Bank Stress Tests: Vigorous or Sham? Let’s Review HELOC Losses
Posted by Larry Doyle on May 20th, 2009 9:26 AM |
If you want to know just how inaccurate government loss assumptions were in the recently released Bank Stress Tests, let’s enter the world of HELOCs (Home Equity Lines of Credit).
Before we address loss statistics on HELOCs, let’s go to the Federal Reserve for a clearcut definition of the product. What is a Home Equity Line of Credit?
A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills, and choose not to use them for day-to-day expenses.
With a home equity line, you will be approved for a specific amount of credit. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75%) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage.
This mortgage product, often a second mortgage, developed as an enormously popular vehicle for homeowners to tap the equity in their home, especially during the period of significant home price appreciation earlier this decade. Make no mistake, though, it is just another form of leverage. (more…)
Real Regulatory Review: “Gut Check”
Posted by Larry Doyle on May 20th, 2009 6:00 AM |
The Washington Post reports the “Administration Weighs Creating New Regulator for Financial Products.”
Will the new regulator merely address the effects of lax oversights in certain targeted financial products, or will the public get some satisfaction and the regulator address the causes of the massive regulatory breakdowns? I am not optimistic, but I am adamant to address this topic. The Post offers:
The proposal, which remains fluid, would centralize the enforcement of laws that protect consumers of financial products. That task currently is spread out across a patchwork of agencies, many of whom regard consumer protection as a low priority. Some financial products are not regulated at all.
Any proposal could also trigger a major regulatory turf war, with agencies such as the Securities and Exchange Commission and the banking regulators fighting to preserve authority.
I am all for implementing effective regulation which levels the playing field and promotes free, fair, and equitable business practices. There is no doubt we need a thorough review of our existing regulations to see where they are sufficient and where they are delinquent. That said, as I wrote the other day, “Future Financial Regulations: Not a Question of Sufficiency, But Of Transparency And Integrity.”
In regard to housing finance, we need to develop effective oversight of the mortgage industry. We also need to accept the fact that our mortgage finance problems went a lot deeper than rogue mortgage brokers fraudulently underwriting unsuitable products to unsophisticated borrowers. If Obama and team really want to address the root causes, let’s return to the Congressional hearings throughout the 90s and up until 2006 and replay the testimony of the executives of Freddie Mac and Fannie Mae. The simple fact is the Clinton administration, with Congressional backing, promoted increased rates of homeownership without simultaneously implementing the necessary safeguards in the mortgage origination and underwriting process. (more…)
Increasing Inflation or Playing With Fire
Posted by Larry Doyle on May 19th, 2009 4:09 PM |
There is a reason parents tell their children not to play with matches. Small campfires can take down an entire forest. In similar fashion, heightened levels of inflation also have the potential to explode in a ball of fire. Are our central bankers playing this 
game as a means of addressing our massive government and non-governmental debt burden? In my opinion, they most definitely are rubbing those sticks together mighty hard.
I have highlighted three means for central bankers to address excessive debt: default, restructure, devalue. Individuals and corporations are increasingly defaulting and will default at an increasing rate as evidenced by my post earlier this morning highlighting the surge in delinquencies. Individuals and corporations are looking to renegotiate and restructure debt burdens wherever possible. Our government is restructuring debt through the legislative process and not always consistent with generally accepted market and legal principles. Despite words to the contrary, I am convinced that Ben Bernanke and Tim Geithner are on course to devalue our debt, as well, via a promotion and acceptance of higher inflation.
I was somewhat surprised to read that two economists whom I highly respect are encouraging Bernanke specifically to raise the inflation target. Greg Mankiw, an Economics professor at Harvard, shied away from providing an actual inflation target but did offer that Bernanke should work towards a “significant” level of inflation. Kenneth Rogoff, also a Harvard professor and former chief economist at the IMF, believes Bernanke should target an inflation rate of 6%.
Rogoff and Mankiw are both highly regarded. In my opinion, they are calling for higher inflation because they are clearly concerned that the mix of stimulus programs (monetary, fiscal, and budgetary) will not be sufficient to jumpstart our economy. (more…)
Welch on Obama: “He’s Fooling People”
Posted by Larry Doyle on May 20th, 2009 11:57 AM |
“Fool me once, shame on you. Fool me twice . . . ”
Jack Welch, former CEO of General Electric scorched Barack Obama’s plans in a presentation yesterday in Boston. Welch, author of Jack, Straight From the Gut, pulled absolutely no punches. Bloomberg reports:
Who in Washington and our mainstream media are calling Obama and team on the carpet for this charade? In order for capitalism, free markets, and ultimately democracy to thrive there needs to be accountability and transparency in the process.
We will not achieve the necessary accountability and transparency without serious questioning and rigorous debate on the issues. Given the current makeup of our legislative bodies, the risks to our country are significant. Without a legislative check, the pressure on the media to expose the massive costs – financial and otherwise – of the Obama agenda are paramount. Aside from Bloomberg and typically the Wall Street Journal, what other outlets are holding Obama accountable? (more…)
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