Wall Street Banks Still Whining (Kevin Drum-Mother Jones)

Regulators aren't saying that mortgage originators can't make

any kind of loan they want.  20 percent down, 10 percent down,

5 percent down, whatever. Go to town. What they are saying is that

if mortgage loans are bundled up into securities and resold,

they want the issuer of the security to retain 5 percent of the total offering.

Mother Jones
By: Kevin Drum
June 10, 2011

The Fed and other regulators have proposed a set of rules that would put new limits on home mortgages: Borrowers would have to put 20 percent down and would have to show that their mortgage payments would amount to no more than 28 percent of their gross monthly income. The Washington Post makes this sound like doomsday:

Nearly three out of every five U.S. borrowers who bought homes last year would not have met the proposed restriction on total debt, according to an analysis by mortgage research firm CoreLogic....If the rules were in effect now, Todd Pearson of Ashburn predicts he'd be shut out of the market. Pearson wants to sell his house and buy another in Chevy Chase. He says he has no debts other than his mortgage. But he figures his mortgage payment alone would exceed the threshold proposed by the new rules.

You have to admit, these rules do sound pretty tough. In fact, they'd pretty much shut down the entire mortgage industry. So what's going on?

Answer: Lots of financial industry whining. As it turns out, regulators aren't saying that mortgage originators can't make any kind of loan they want. 20 percent down, 10 percent down, 5 percent down, whatever. Go to town. What they are saying is that if mortgage loans are bundled up into securities and resold, they want the issuer of the security to retain 5 percent of the total offering. That's part of Dodd-Frank, and it's designed to give issuers an incentive to make sure their mortgage securities aren't full of toxic waste. If they have to keep a piece of the action on their own books, they'll want to make sure their securities are safe and sound.

However, there's an exception: If your mortgages all conform to the new rules, you don't have to retain that 5 percent chunk. That's all that's happening. You can make any kind of loan you want, but if it's anything other than super safe, you have to keep a piece of it on your books.

The financial industry is in an uproar over this, claiming that it would shut millions of people out of the housing market. That's nonsense. Neither Todd Pearson nor anyone else is being denied a loan on whatever terms they can get one. All that's happening is that when their mortgages get bundled up and resold, the ABS issuer has to keep a 5 percent stake. The mortgage industry is on a rampage over this, claiming that it will dramatically raise the cost of mortgages, but that's nonsense too. Being forced to keep a 5 percent stake probably will have an impact on ABS issuers—that's the whole intent, after all—but the financial impact is almost certainly pretty minuscule. Tom Lawler at Calculated Risk roughly estimates it at perhaps 20 basis points at most on a nonconforming loan. In other words, the rate on nonconforming mortgages might go up 0.2 percentage points. At most. Something on the order of 0.1 percentage points or less is probably closer to reality.

This is yet another case of the financial industry biting the hand that's trying to help it out. The truth is that it would probably be a good idea to require ABS issuers to retain a 5 percent stake in every mortgage bundle they sell. But Dodd-Frank threw them a bone in the form of an exemption for loans that were transparently high quality and virtually certain not to default. And the result? Endless whining, a massive lobbying effort, and glossy four-color demagoguery about hardworking middle-class families being shut out of the mortgage market. Welcome to Wall Street.

FDIC throws a dart and bank failure losses reduced by $8 billion and Sheila Bair caved in to the banksters

The obvious reason why Sheila caved in to her banksters

(taken directly from the FDIC Restoration Plan):

The FDIC has concluded that given the continuing stresses on the earnings of insured depository institutions and the additional time afforded to reach the reserve ratio required by Dodd-Frank, that it will forego the uniform 3 basis point increase in initial assessment rates scheduled to take effect on January 1, 2011.

By Victoria McGrane

Of Dow Jones Newswires
10/19/10 

WASHINGTON (Dow Jones)--The Federal Deposit Insurance Corp. Tuesday killed a scheduled rate hike for bank deposit insurance after new projections show bank failure losses will be less than previously thought.

In a sign that the effects of the financial crisis are starting to mediate, FDIC staff said that they now expect $52 billion in losses to the fund through 2014, down from the $60 billion predicted in June.

SAY WHAT!!??

Since their June guess (a.k.a. analysis), the banks are in a heap of hurt and unkown foreclosure fraud liability territory and no one has any clue of the impact of this fradulant mess.

As a result, staff recommended the FDIC board forgo levying a three-basis-point increase in assessment rates, slated to go into effect Jan. 1. Without the rate increase, staff predict the insurance fund will still reach a reserve ratio of 1.15% by the end of 2018.

The Dodd-Frank financial regulation law requires that the FDIC devise a plan to bring the insurance fund's reserve ratio to 1.35% by Sept. 30, 2020.

But the FDIC put off until 2011 a decision on the method it will use to make sure small banks aren't hurt by recapitalization of the insurance fund, a protection required by the Dodd-Frank law.

Banks welcomed the decision to halt the rate increase. The move will save banks about $2.5 billion a year, according to an estimate by the American Bankers Association.

"Simply put, the FDIC's decision to forgo the premium increase means that banks will have $2.5 billion every year that can now be used for loans in their communities," said James Chessen, ABA's chief economist.

In a separate action, the board approved an initial plan to set the deposit insurance fund's long-term designated reserve ratio at a minimum of 2% ahead of a possible banking crisis, significantly above the 1.35% minimum specified in the Dodd-Frank Act enacted in July.

The minimum designated reserve ratio was 1.15% prior to Dodd-Frank.

The FDIC wants a larger fund to avoid having the deposit insurance fund plunge into negative territory during a crisis as it did in the 1990s and again in the recent crisis, when it hit a record low of negative $20.9 billion in December 2009.

In exchange for having a higher reserve ratio, banks would get more stable, predictable premiums as opposed to being hit by high assessments when they can least afford to pay such rates, FDIC officials said.

The FDIC assesses member banks a fee to back the deposit insurance fund, which in turn guarantees the safety of depositor funds.

Under the proposed plan, the FDIC would also lower assessment rates when the reserve ratio hits 1.15%. And instead of issuing dividends when the fund reaches a certain size, the FDIC would continue to adopt lower rate schedules when the reserve ratio reached 2% and again at 2.5%. FDIC officials said that would cause average rates to decline about 25% and 50%, respectively.

"While it is difficult to make long-term projections, we are trying to give the industry greater certainty regarding what rates will be over the long run," FDIC Chairman Sheila Bair said in a statement. "The trade off we are proposing is lower, more stable and predictable premiums, but a higher reserve."

FDIC staff estimated that the fund's reserve ratio could hit 2% by 2027, but stressed that the projection is far from solid given how far in the future it required them to look.

There is likely to be push-back against the FDIC's goal of growing the fund's reserve ratio larger than 2%. While there's consensus that the fund should be larger, some banking industry officials argue that going bigger than 2% is unnecessary, especially since higher capital standards in Dodd-Frank are supposed to make insurance fund losses less likely in the future.

The initial proposal is now open to public comment for 30 days, and subject to future changes by the FDIC.

The Publilc has already commented Sheila!

Geithner Myth: TARP was a gift for Wall Street that did nothing for Main Street. UPDATE: Wall Street Pay: $144 BILLION

Tim Geithner tackles TARP Myths in his

October 10th Washington Post Op-Ed piece

Myth #2

The TARP was a gift for Wall Street that did nothing for Main Street.

Geithner's Myth Buster

To protect Main Street from the damage caused by a financial crisis, you must first put out the financial fire. That is precisely what the government did. And we focused resources directly on the victims of the crisis, rather than on the institutions that helped cause it.


By Liz Rappaport, Aaron Lucchetti and Stephen Grocer
10/11/10
The Wall Street Journal

Pay on Wall Street is on pace to break a record high for a second consecutive year, according to a study conducted by The Wall Street Journal.

About three dozen of the top publicly held securities and investment-services firms—which include banks, investment banks, hedge funds, money-management firms and securities exchanges—are set to pay $144 billion in compensation and benefits this year, a 4% increase from the $139 billion paid out in 2009, according to the survey. Compensation was expected to rise at 26 of the 35 firms.

The data showed that revenue was expected to rise at 29 of the 35 firms surveyed, but at a slower pace than pay. Wall Street revenue is expected to rise 3%, to $448 billion from $433 billion, despite a slowdown in some high-profile activities like stock and bond trading.

Overall, Wall Street is expected to pay 32.1% of its revenue to employees, the same as last year, but below the 36% in 2007. Profits, which were depressed by losses in the past two years, have bounced back from the 2008 crisis. But the estimated 2010 profit of $61.3 billion for the firms surveyed still falls about 20% short from the record $82 billion in 2006. Over that same period, compensation across the firms in the survey increased 23%.

"Until focus of these institutions changes from revenue generation to long-term shareholder value, we will see these outrageous pay packages and compensation levels," said Charles Elson, director of the Weinberg Center for Corporate Governance.

Firms surveyed said it is too early to comment on 2010 compensation levels. Many firms say that if they don't adequately compensate employees, they risk losing top talent.

The pay numbers show that firms, benefiting from low interest rates and strong international markets, continue to base their pay on economic and market conditions rather than the level of pressure coming from regulators in Washington and overseas.

Still, politicians and market watchdogs have been successful in influencing the structure of pay, if not its levels. They have pushed for more compensation in stock and other deferred instruments. Firms have found other ways to limit the risks employees take for short-term gains, which was mandatory for firms that accepted government funds during the financial crisis.

Many large Wall Street firms have come out from under the Treasury Department's rules about pay. But with the passage of financial-overhaul legislation that aims to change pay policies, many public firms are still awaiting specific rules. Those rules, as required by the Dodd-Frank financial regulatory bill, won't be written for several months.

"The current wave of regulation is helping keep comp relatively flat," said Steven Eckhaus, a partner at law firm Katten Muchin Rosenman LLP.

There are some signs that pay might slow down in coming quarters. Tough new rules about how much capital banks must hold could force Wall Street to cut back on compensation in an effort to preserve returns on equity for shareholders, analysts say. Since Wall Street firms pay out up to half of their revenue in compensation, cutting back on that large cost can meaningfully increase profits left for shareholders. Complete WSJ Article

SEC Loses Exemption from Freedom of Information Act and is forced to turn in their Hide and Seek Game

Obama bans Hide and Seek at the SEC

and God forbid our elected "officials"

would actually read a bill prior to voting!

By Dunstan Prial
10/6/10

President Obama on Tuesday repealed a controversial provision in the recent financial reform legislation that made it easier for the Securities and Exchange Commission to deny requests for information.

Gone is a little-noticed measure, Section 9291, that said the SEC no longer had to comply with virtually all requests for information from the public, including those filed under the Freedom of Information Act.

The provision came under fire just days after the massive Dodd-Frank Wall Street Reform bill was signed into law in July. The FOX Business Network first reported the provision and its potential impact after the SEC cited the new law in a FOIA action brought by the network.

“We’re very pleased that the repeal of 9291 is complete. The American public deserves the right to know what the SEC is doing,” Steven G. Mintz, an attorney representing FOX Business in its FOIA cases, said Tuesday.

The effort to repeal the measure quickly gathered bipartisan support, unusual for any legislation given the divisive atmosphere in Washington, D.C. Opponents of the measure said the SEC should be more transparent, not less.

The law exempted the SEC from disclosing records or information derived from "surveillance, risk assessments, or other regulatory and oversight activities." Critics had charged that given that the SEC’s role as a regulatory body, the provision covered almost every action by the agency and therefore shielded it from being forced to disclose its actions.

After FOX Business reported on the law and it was widely covered by the media, many members of Congress admitted that they were unaware of its inclusion in the vast Dodd-Frank reform bill.

The SEC defended the provision, suggesting it would help the agency in its efforts to expand its surveillance and investigations by ensuring that information obtained from banks and other financial institutions remained confidential.

SEC Chairman Mary Schapiro made that case last month before a Congressional committee while arguing against repealing the provision.

But the SEC wasn’t deaf to the criticism targeting the new law. The agency in September issued guidance to its employees apparently intended to ensure that SEC staffers did not withhold information that should be released to the public.

Meanwhile, Congressman Darrell Issa, R-Calif., who spearheaded the repeal effort, said in a letter to Schapiro last month he feared the SEC would use the provision to “avoid embarrassment and hide evidence of its regulatory and management failures.”

Critics such as Issa have argued that more transparency is needed if government regulators hope to avoid more well-publicized debacles such as Bernie Madoff’s $65 billion Ponzi scheme and the alleged fraud orchestrated by financier R. Allen Stanford.

FDIC to decide who might still get a bailout...wait a minute, Obama stated 'There will be no more tax-funded bailouts—period,"

The Wall Street Journal
10/3/10

Read my lips

"There will be no more tax-funded bailouts—period," said President Obama on July 21, the day he signed the Dodd-Frank financial reform into law. This week, the board of the Federal Deposit Insurance Corporation will use the new powers it received under Dodd-Frank to decide which bank creditors will receive . . . tax-funded bailouts.

On July 21, Mr. Obama said that "there will be new rules to make clear that no firm is somehow protected because it is 'too big to fail,' so we don't have another AIG." But under the new law, firms deemed too big to fail by the new Financial Stability Oversight Council can be protected from bankruptcy, if regulators so desire, and instead put into an alternative process managed by the FDIC. The idea is to provide the firm with taxpayer cash that would not be available in a bankruptcy, and then try to recover the taxpayer's money over time from sales of the company's assets.

If the taxpayers don't come out whole, Plan B is to seek money from the firm's other creditors after the crisis has passed. Failing that, the government will assess fees across the financial industry, including firms that had nothing to do with the failure. Regulators and the bill's authors have unanimously agreed not to call this a bailout program.

Let's see...whom do I choose?

The issue for the FDIC board this week is the pecking order for creditors of companies undergoing FDIC resolution. During the Congressional debate on Dodd-Frank, we warned about the discretion afforded the FDIC to discriminate among such creditors, offering bailouts to some while punishing others.

Last week, FDIC Chairman Sheila Bair confirmed that the problem exists, though she still won't use the word "bailout." Ms. Bair said, "The authority to differentiate among creditors will be used rarely and only where such additional payments are 'essential to the implementation of the receivership or any bridge financial company.'"

She was quoting the Dodd-Frank law, and the question is which creditors to a failing firm will be considered "essential" and therefore eligible for a bailout. Backers of the FDIC process have promoted the idea that taxpayer money flowing into the failed business will be used to pay the electric company to keep the lights on or vendors of basic office supplies. But who else will enjoy the coveted "essential" status? The opportunities for political favoritism are enormous.

Ms. Bair promised last week that "long-term bondholders, subordinated debt holders, and shareholders of a financial company" will never be considered "essential." That's nice, and from her we even believe it. But why not simply say that "all financial counterparties" will never be considered essential? Is the FDIC Chairman saying that short-term bondholders, however defined, may get a rescue?

We eagerly await the public release of information from the FDIC. But leaving the door open for a rescue of, for example, lenders due to be repaid within six months or a year would only encourage the short-term funding model that helped destroy Bear Stearns and so many other firms in 2008. Rather than eliminating moral hazard, it will simply concentrate it in a particular category of financial instruments.

We don't mean to pick on Ms. Bair, who deserves credit for at least trying to rule out certain bailouts. We suspect she is facing the usual pressure from the Treasury Department to keep all options open when it comes to rescuing unwise lenders from the consequences of their decisions.

Whether Washington calls firms "essential," or "systemic," or "nationally recognized" as in the case of credit-ratings agencies, the government always goes wrong when it anoints particular firms for special favors they can't secure in the market or before a judge. Repealing ObamaCare has captured the public imagination for obvious reasons, but the next Congress should also repeal the new system of bailouts enabled by Dodd-Frank.