Friday, October 31, 2008

Economic EKG

During this election the economy has been a big issue.  So what is the real state of the economy?  If you listen to the media it is the worst that it has ever been since the great depression.  Similarly the Democrat and Republican presidential candidates suggest the same thing.
 The U.S. consumer sentiment index has fallen to 57.6 in late October.  The index was 70.3 in late September.  What made the index drop some much so quickly?  At first I thought it was due to the bailouts by the federal government of mortgage giants Fannie Mae and Freddie Mac on 9/7/2008.  This couldn’t be the reason because the bailouts happened in early September when the U.S. consumer sentiment index was 70.3 in late September.  It wasn’t the $85 billion bailout for the insurer AIG in mid September because again the rate in late September was still 70.3.  Was it the $700 billion bailout in late September? It doesn't seem likely because again the rate was 70.3 then.  Just like an EKG the stock market radically changed each time the government stepped in.

Was it the election that impacted the study?  Maybe considering that on September 26 the first presidential debate took place at the University of Mississippi.  The vice-presidential debate was hosted October 2 at Washington University in St. Louis.  The second presidential debate took place October 7 at Belmont University.  The third and final presidential debate was hosted at Hofstra University on October 15.  In each debate the economy was discussed.  The second Presidential debate was to focus on the economy.  During the debate season the NYSE DJIA dropped 2,500 points.

During each debate the economy was beaten and battered by the candidates.  Americans were also bombarded with 30 second spots telling us how bad the economy is.  The hearing of the same thing over and over again is a form of propaganda.  Of course the mind is susceptible to being influenced by others.  This is why we have slogans such as the don’t drink and drive or don’t do drugs.  When we hear that the economy is bad we tend to believe it.

Now that the debates are over the same stock market has climbed nearly 1,000 points.  Maybe the economy isn’t as bad as everyone tells us it is.  

Thursday, October 30, 2008

Promises to the American people

It seems that daily we are inundated by the presidential candidates and their promises to the American people.  This election isn’t really any different than previous elections.  Although more money has been spent during this election it really is like others and both candidates make promises to help.  On July 28, 1988 former President Ronald Regan said,”The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.”

The older I get the more his statement means to me.  In the aftermath of hurricane Katrina President Bush said 3 years ago that, "We will do what it takes, we will stay as long as it takes, to help citizens rebuild their communities and their lives"  He also said, "Katrina exposed serious problems in our response capability at all levels of government."  President Bill Clinton said some 15 years ago that, "Under our health care system, all Americans will have access to quality and affordable health care through coverage from their employer, or if they're unemployed, through their government.”  President George H.W. Bush said during his campaign for president, "Read my lips, no new taxes."  President Jimmy Carter promised, ''I'll never lie to you''
During this election we have been promised lower taxes again.  Mr. Obama promised to “spread the wealth around."  Similarly Mr. McCain said, "I believe the role of government is to help the needy and to give people a level playing field."  We are getting spoon fed the same promises as before. Change?  The only real change has been the names on the ballots.  Other than that these Presidential candidates are likely to put the American people farther in debt and maybe spread the wealth around a little.

1972 Nixon won having 97% of the electorial college votes.
1976 Carter won with 56%
1980 Regan won with 91%
1984 Regan won with 98%
1988 Bush I won with 79%
1992 Clinton won with 69%
1996 Clinton won with 70%
2000 Bush II won with 50.3%
2004 Bush II won with 53%

Wednesday, October 29, 2008

Confidence in Capitalism

During the past many months many things have changed in the economic world.  The United States, most of its allies in Western Europe, Japan, and South Korea have all funded private banks through recapitalizations. A handful of countries, including the United States, took the more radical step of buying assets directly from private firms.  President Bush said that U.S. bank takeovers were "not intended to take over the free market, but to preserve it."

Karl Marx posited that socialism would be achieved via class struggle and a proletarian revolution which represents the transitional stage between capitalism and communism.  A proletarian revolution is a social and/or political revolution in which the working class attempts to overthrow the bourgeoisie.  The bourgeoisie are members of the upper or merchant class, whose status or power comes from employment, education, and wealth.

In this presidential election Mr. Obama has approximately 3 million donors that do not have to be disclosed under federal law because they gave less than $200.  These donors have contributed just over $300 million.  Also contributing to Mr. Obama was approximately 300,000 more donors who donated another $300 million.  In the 2008 democrat presidential primaries 12.1 million votes out of 22 million  were cast for Mr. Obama and in 2004 Senator John Kerry garnered nearly 10 million votes of the 16 million cast.  

Senator Obama has promised to give 95% of Americans a tax cut.  A third of Americans do not pay income taxes.  The top 5% of income earners paid 59.67% of all income taxes; this group earned $2.7 trillion.  The Tax Policy Center estimates that Mr. Obama’s tax package would add $3.5 trillion to the total debt.  Obama has proposed new tax breaks for low- and middle-income taxpayers, including a tax credit of up to $500 for individuals and $1,000 for married couples. He would expand the earned income tax credit, a tax break that benefits the working poor. And seniors with income of $50,000 or less would pay no federal income tax.  

It seems that although both candidates plan to increase the federal debt it is more interesting to watch Obama and his plan.  So far watching and listening to Obama we learn that he uses the political realm to achieve class struggle.  The next step is to create a social and or a political revolution to so that he can get a trifecta.
The people are already enraged by the bourgeoisie and the Wall Street elite.   

Monday, October 27, 2008

What happened to the Gold Standard?

After the Second World War, a system similar to the Gold Standard was established by the Bretton Woods Agreements.  In the Agreements the US agreed to fix the price of gold at $35 per ounce.  When the World War II (WWII) ended, the U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold.  Many of the European countries that were involved in WWII were highly in debt.  To satisfy the debts the Europeans transferred large amounts of gold into the United States.  Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system.

To ensure economic stability and political peace, states agreed to cooperate to regulate the international economic system. The pillar of the U.S. vision of the postwar world was free trade.  Harry Dexter White said, “the absence of a high degree of economic collaboration among the leading nations will…inevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale.”

In the 1960s there was a growing U.S. balance-of-payments deficit.  Due to this foreign governments were accumulating large amounts of dollars the aggregate volume far exceeding the U.S. government's stock of gold.  In the second week of August 1971, the British ambassador turned up at the Treasury Department to request that $3 billion be converted into gold.  In response, on August 15, 1971, President Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window," making the dollar inconvertible to gold directly, except on the open market.  He also refused to pay out any of our remaining 280 million ounces of gold.

Today the value of the Gold held is the US is worth $210,585,164,529.42 at today's prices.

Friday, October 24, 2008


Do you find pleasure felt at someone else's misfortune?
Schadenfreude is a normal human emotion.  If you have looked at your retirement accounts lately you surely aren’t feeling Schadenfreude.  The Economic Stabilization Act of 2008 hasn't helped yet.  President Bush sign the legislation on October 3, 2008 only three weeks ago.  On October 3, 2008 the DJIA’s closed at 9258.1 and it closed on October 24, 2008 8159.21.  This represents a 12% change.  The Economic Stabilization Act of 2008 has an ownership stake in Fannie Mae, Freddie Mac, AIG, Citigroup, JPMorgan Chase, Wells Fargo, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, Bank of New York and State Street.  The Economic Stabilization Act was sold to America as a program which was to buy mortgage assets from any U.S.-based financial institution.  The US Treasury said Tuesday it had hired accounting firms PricewaterhouseCoopers and Ernst & Young to help with its emergency buyouts of toxic assets from troubled financial institutions.  The Treasury announced on October 13 it had hired Ennis Knupp & Associates as its investment adviser for the massive Troubled Asset Relief Program.  Everyone is starting to feel that things are not changing fast enough.

Initially the Europeans had an outburst of schadenfreude about the US financial crisis. Now, evidence is piling up that Europe is facing a serious slowdown. Meanwhile there are doubts whether Europe is reacting quickly enough.  Europe lacks the flexibility of US in dealing with this crisis.

History tells us that if the US enters recession the rest of the world will follow, but the US will be the first to emerge from a recession.

Bank of America...................47.93% - loss in value
Barclays............................69.35% - loss in value 
Citigroup............................57.71% - loss in value
Credit Suisse.......................41.09% - loss in value
Deutsche Bank.....................70.62% - loss in value
Freddie Mac........................97.74% - loss in value
HSBC................................32.97% - loss in value
IKB...................................94.60% - loss in value
JP Morgan Chase..................15.67% - loss in value
Merrill Lynch.......................66.81% - loss in value
Morgan Stanley....................68.30% - loss in value
Paribas..............................22.44% - loss in value
Royal Bank of Scotland............88.24% - loss in value
UBS..................................71.50% - loss in value
Wachovia...........................84.53% - loss in value

Tuesday, October 21, 2008

Are We Talking Ourselves into a Recession?

Can gloomy talk doom the economy? In the past, economists dismissed the notion. The theory went that no matter how many downbeat headlines people read, the theory went, the outlook always comes down to basics such as jobs, incomes, and profits.

But in today's economy things are so much more complicated and confusing for the populous. In these times psychology does indeed have a huge impact on the stock market, and never before has the market played such a big role in real economic activity. It was the market's psychology more than fundamentals that drove financial share prices up so rapidly in early 2000s. The resulting surge in wealth was the jet fuel to the financial crisis.  Then the chairman of the Federal Reserve, Ben Bernanke starts to bailout financial giants.

Now, psychology has turned sharply. In addition to market worries and a negative spin by the press on almost every new piece of data, the chairman of the Federal Reserve, Ben Bernanke warns of a possible "protracted slowdown.” Such talk is meant to promote the idea of a new U.S. stimulus plan, but downbeat sound bites continue to hit home. No wonder households are becoming more pessimistic.

Sentiment, especially on Wall Street, is so negative right now that the surprisingly big shift in the Federal Reserve's thinking about the possible need for lower interest rates failed to lift spirits. In fact, the stock market went south in a hurry after the Fed's decision to start bailouts, even though the central bank shifted its major concern for the future away from inflation and toward economic weakness. 

Monday, October 20, 2008

Nationalize this! Nationalize that!

Current members include AIG, Freddie Mac, Fannie Mae, AIG, Citigroup, JP Morgan Chase, Wells Fargo, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, Bank of New York and State Street Bank.  I have a couple of question.  Where is all of the money coming from?  The major foreign owners of U.S. Treasury Securities are 

#1 Japan.......................................$593.4 billion 22.17%
#2 Mainland China............................$518.7 billion 19.38%
#3 United Kingdom............................$290.8 billion 10.87%
#4 Oil exporters...............................$173.9 billion 6.50%
#5 Brazil........................................$148.4 billion 5.54% 
#6 Caribbean banking centers................$133.5 billion 4.99%

There are many other countries that own U.S. Treasury Securities.  The total of all of the foreign owners of U.S. Treasury’s is $2676.4 billion as of July 2008.  At that time the national debt was $10,024.7 billion.  In 2008 $4.216 trillion were Intragovernmental Holdings.  There was also $5.809 trillion which was debt held by the public.

Where is the bailout money coming from?  It looks like we have spent $1 trillion in the last few months.   

Friday, October 17, 2008

Nationalizing the Banking System

On Monday Oct 3rd nine major banks in the U.S. met at the Treasury Headquarters.  On one side of the table sat Treasury Secretary Henry Paulson, who was flanked by Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corporation Shelia Bair.  On the other side there were executives of Citigroup, JPMorgan Chase, Wells Fargo, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, Bank of New York and State Street Bank.  The executives were told of the chosen course which is an attempt to shore up consumer confidence.  During the meeting they were told of the $250 billion share purchase program.  The U.S. Treasury Department and Federal Reserve Bank had each decided to put up $125 billion to start.

In a move that is reminiscent of Don Corleone they were told that they would not be allowed to negotiate.  They were also told that they needed to sign onto the program while in the meeting which ended at 6:30.  Also during the meeting they were told that it was for the good of the country.

These banks will receive $25,000,000,000 each.

Citigroup had 2007 net earnings of $3,617,000,000.   
The average of last five years is $19,260,000,000.  
JPMorgan Chase had 2007 net earnings of $15,365,000,000.  
The average of last five years is $ 5,770,600,000.  
Wells Fargo had 2007 net earnings of $8,057,000,000.  
The average of last five years is $7,003,000,000. 
These banks will receive $12,500,000,000 each.

The Bank of America had 2007 net earnings of $14,982,000,000.   
The average of last five years is $1,849,000,000.  
Merrill Lynch had 2007 net earnings of $3,733,000,000.   
The average of last five years is $1,849,000,000.  
Goldman Sachs had 2007 net earnings of $11,599,000,000. 
The average of last five years is $6,408,000,000.
Morgan Stanley had 2007 net earnings of $11,000,000,000.  
The average of last five years is $4,105,000,000.

Finally the earnings of the Bank of New York and State Street each received $ 2-3 billion.

The earnings of the Bank of New York and State Street Bank were not located.

Wells Fargo Chairman Richard Kovacevich initially rejected the Treasury Secretary Henry Paulson’s offer.  Later the Chairman was told that if he turned the investment down and later found it needed more capital, the government wouldn't be as generous the second time around.

By the end of the day all of the sheets were handed in signed. 

They should have also invited the Commissioner of Internal Revenue Douglas Shulman, so that all the made men would be represented.

Take a look at this BBC clip

Tuesday, October 14, 2008

The media lies!

We have arrived at a moment in history once again where the truth is something that is easy for people to believe whether it is true or untrue. The methodology for creating that belief is repetition. Say something enough times and it becomes, for millions of people, the truth. The economy is in a recession.   This is why control of the media equals control of the populace. The economy is in a recession.   This is why a state run television news channel is so very dangerous.  The economy is in a recession.   Now there are those who would argue this has already happened.  For example an aide to a President becomes an election analyst.  Or a certain cable news networks are actually covert extensions of our government. The economy is in a recession.   There is another cable news network that is run by a high-ranking party official.  There is an anchor person from the same network that became a White House spokesman.  There is another top-ranking party official that becomes an on-air news commentator who is often used to make this argument. The economy is in a recession.   Of course, this fact would be entirely inconsequential if the often repeated falsehoods weren’t an attempt to fix firmly into the spirit of the times something that was simply amusing, or at worst, insanity.  But, unfortunately, that is not the case. The economy is in a recession.   The heavy repetition of lies and smears for political gain are by no means inconsequential. The economy is in a recession.   Which is why each and every one of us must use whatever resources we have at our disposal to disseminate the actual truth? The economy wastn't really in a recession.  
Are you a victim of ad nauseum propaganda?

Saturday, October 11, 2008

The bailout / rescue mission is changing

In June 2008 there were foreclosures in all home mortgage markets.  These include Prime 217,088, Alt-A 118,018, and Subprime 154,955 these numbers are based on information provided by Bank of America, Citibank, First Horizon, HSBC, JPMorgan Chase, National City, USBank, Wachovia, Wells Fargo, Countrywide, IndyMac, Merrill Lynch, Wachovia FSB, and Washington Mutual.  Some of these financial institutions are no longer in business.  On October 3, 2008 the U.S. Treasury Secretary Henry Paulson said that the administration may use the authority granted in the $700 billion rescue plan to take ownership stakes in financial institutions to stabilize and restore confidence in them.  This isn’t this what we were being told to sell us on the idea?  The U.S. current has holdings of 79.9% in both Fannie and Freddie.  If AIG fails to manage their company properly then the U.S. holds 79.9% of the company.  This begs the question, who is next?

Friday, October 10, 2008

How big is the Credit Default Swaps market?

Credit derivatives have grown rapidly over the past several years as dealers increasingly used them to structure securities to help meet investor demand for higher yields. From 2003 to 2007, credit derivative contracts grew at a 100% compounded annual growth rate. Given current credit market turmoil, credit derivative growth has eased. In the first quarter, credit derivatives grew only 4%, or $581 million, to $16.4 trillion.  Credit default swaps represent the dominant product at 99% of all credit derivatives notionals.  Notionals are the nominal or face amount that is used to calculate payments made on swaps and other risk management products. This amount generally does not change hands and is thus referred to as notional.  As is often the case with a new and rapidly growing market, operational issues became a supervisory concern in the credit derivatives market in recent years.   

Thursday, October 9, 2008

How the farm bill caused the economic crisis.

The origins of the financial crisis isn't as simple as black and white.  Many people believe that the numbers of foreclosures and poor payment history are the reason.  Many believe in was derivatives and credit default swaps.  In 1936 there was a act of Congress called the Commodity Exchange Act in which all commodities and activities and requires all futures and commodity options to be traded on organized exchanges.  In the act prohibits fraudulent conduct in the trading of futures contracts. In 1974, Congress amended the Act to create a more comprehensive regulatory framework for the trading of futures contracts and created the Commodity Futures Trading Commission, replacing the Commodity Exchange Authority CFTC.  Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, ensuring their integrity, protecting market participants against manipulation, abusive trading practices, and fraud, and ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk. The Commodity Futures Modernization Act of 2000 has been cited as a public policy decision significantly contributing to Enron's bankruptcy in 2001 and the much broader liquidity crisis of September 2008 that led to the failure of Lehman Brothers and American International Group and to the creation of the U.S. Emergency Economic Stabilization fund.  The bill was signed by President Bill Clinton on December 21, 2000.  The then president was considered a lame duck since he had left office one month later.  The act repealed the Shad-Johnson jurisdictional accord, which had banned single stock futures in 1982. The legislation also provided certainty that products offered by banking institutions would not be regulated as futures contracts.  The Shad-Johnson Jurisdictional Accord is an agreement reached between the Chairmen of SEC and CFTC in 1981 to resolve a dispute concerning jurisdiction over securities-based derivatives.   In September 2007, Senator Carl Levin introduced Senate Bill S.2058 to specifically close the "Enron Loophole".  This bill was later attached to H.R. 6124, the Food, Conservation, and Energy Act of 2008, aka "The 2008 Farm Bill". President Bush vetoed the bill, but was overridden by both the House and Senate, and on June 18th, 2008 the bill was enacted into law. One specific reason behind its introduction was to address the record high oil prices of the 2000s energy crisis. Since it was enacted, average gas prices of regular unleaded gasoline in the U.S. have dropped $0.357, from their record high of $4.114 on July 17, 2008 to an average of $3.757 as of September 21, 2008.  The value of the Dow Jones Industrial average has dropped nearly 2,500 points during the same time also.  Many economists and politicians wanted to stop its proposed regulation of energy futures trading, a market that was famously abused when Enron Corp. manipulated California’s electricity prices in 2001.  The current crisis that we find ourselves in can be attributed to the executive and the congress and the lack of a reasonable time frame for the law to become effective.

Tuesday, October 7, 2008

Private mortgage insurance and credit default swap

Private mortgage insurance, or PMI, is insurance that most lenders require of borrowers who put less than 20 percent down on a home (or greater than 80 percent loan-to-value or LTV).  Once the principal is reduced to a LTV of  80, the PMI is often no longer required.   Whether it be that the principal has been paid down to a LTV of 80 or that the home has appreciated or both.  The cost of a PMI policy with a down payment of 0-4.99 percent is 0.96 percent of the mortgage.    The national average cost of a home for the subprime buyer is $183,917.  The average LTV of a subprime buyer is 87.18.  This means that the down payment combined with the difference paid for the home versus the actual appraised value is $2,109.62.  The annual PMI policy premium in this case is $1,434.55 using 0.78 times the mortgage as the preimium or monthly it is $119.55.  The monthly payment using the average interest rate of a subprime buyer which is 8.81 percent has a total payment in the amount of $1574.31 including the PMI policy.  

PMI protects the lender not the home owner in the event that the house is foreclosed on.   It also pays the lender the costs that it can't recover after foreclosing on the loan and the costs associated with selling the mortgaged property.  PMI does not protect the owner of the policy.  Even if you have a PMI policy a foreclosure from being in default on payments will result in the loss of the home.  The subprime market currently has 57.3 percent of loans that are past due.  Another 10.7 percent in the subprime market are in foreclosure.   
When the government bailed out AIG it put the government in the PMI business.  AIG's subsidiaries include United Guaranty Residential Insurance Co., the fifth-largest private mortgage insurer in the United States with a 12 percent share of the $357 billion in new private mortgage insurance written in 2007.  The largest is GIC Investment Corp.   Last year it lost $613.6 million.  About 85.6 percent of the loans MGIC insures are prime, with 10 percent classified as A-minus and 4.2 percent as subprime/bad credit.   It is difficult to find the total amount of mortgages that have PMI insurance. 

Credit default swaps (CDS) are typically used to obtain capital relief. In this structure, the mortgage lender enters into a credit default swap agreement with an intermediary bank that guarantees to repay foreclosure-related losses on the lender’s mortgage portfolio.  When you think about PMI it is a CDS.

Friday, October 3, 2008

Wall Street didn't do this ... part 2

In a 2002 proposal delivered to Congress, Bush would allow the Federal Housing Administration to guarantee loans for the full purchase price of a home, plus any down-payment costs. As a practical matter, the FHA would guarantee mortgages as high as 103% of the value of the underlying home.  The Community Reinvestment Act passed in 1977 ordered banks to make loans to low and moderate income people. In 2005 homeownership reached its high of 69.1 percent.  Today homeownership is 67.3 percent.  Since 2005 the percentage of households headed by renters increased to 32.2 percent, from the 2002 rate of 30.9 percent.  The American Dream Downpayment Initiative, signed into law in Dec. 2003 didn't work as hoped.  The foreclosures from homeowners who used the American Dream Downpayment Initiative were nearly 45 percent.  Freddie Mac and Fannie Mae held 44 percent of the home loans using this plan. Nationally, 7.5 million homeowners now face foreclosure, another five million have zero or negative equity in their homes. The subprime loan foreclosure rate was 10.7 percent and only 57.3 percent were current with their payments.  Would-be home buyers and anyone facing foreclosure might wish the government would try to make things harder, not easier.

Banking Panic

The chain of bankruptcies this year has caused some banking panic and might cause a long economic recession. Many of the recessions in the United States were caused by banking panics.  In August 2007, Countrywide Financial suffered a bank run as a consequence of the subprime mortgage crisis.  In January 2008, Bank of America announced that it planned to purchase Countrywide Financial for $4.1 billion in stock.  In September 2007, the British bank Northern Rock arranged an emergency loan facility from the Bank of England, which it claimed was the result of short-term liquidity problems.  In March 2008, a bank run began on the securities and banking firm Bear Stearns.  In July 2008, U.S. mortgage lender IndyMac Bank was seized by federal regulators.  In September 2008, the Office of Thrift Supervision was forced to shut down Washington Mutual, the largest savings and loan in the United States and the sixth-largest overall financial institution, due to a massive run.  Citigroup's move to buy Wachovia's banking operations was widely seen as an effort to shore up its deposit base, which will now look less solid.  In September, Wachovia had suffered a silent run. The exact amount of the run withdrawn is still unknown.  In September 2008, a deal was announced for Citigroup to buy Wachovia banking operations for $2.1 billion.  Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That's the most write-downs of any U.S. bank.  Wachovia said in October 2008, that it had agreed to be acquired by Wells Fargo & Co. in a $15.1 billion all-stock deal this deal trumped Citigroup's plan to acquire Wachovia's banking operations.  The deal wouldn’t require government assistance, like the Citigroup deal had.  The question now is who is next?  I think that Citigroup is going down within a year. 

Interesting keywords: number are is millions
Stock market reports 14.8
Stock market report for today 22.4
Stock market report today 15.6
Stock market reporting 5.14
bank of America 41.2
bank of the west 26.0
bank of india 14.2
federal reserve 27.8
federal register 12.1
Federal reserve banks 6.99
Federal reserve system 3.21
Federal reserve bank of new York 1.10
dow jones 36.1
dow jones today 26.9
dow jones news 15.8
bail out program 2.14
bail out bill 2.16
energy crisis 2008 5.89
energy crisis in the world 6.36
energy solution 1.6
privacy policy how to 889
loan-to-value ratio 0.7
subprime crisis 4.56
subprime losses 2.67
Credit default swaps rates 2.15
bank panics 0.992
Constitution law 9.71
Freddie Mac fannie mae comparison 10.4
Freddie Mac fannie mae difference 8.59
Freddie Mac fannie mae news 3.46
Government Sponsored Enterprises 0.848
credit derivatives 1.3
credit derivatives swap 1.07 swaps 1.530
h.r. 6124 1.03
h.r. 6193 0.92
Community Reinvestment Act problems 1.26
Department of Housing and Urban Development 2.28 hud 2.43
market to market accounting 35.0
Financial Accounting Standards Board fasb 1.15 boards 2.5

Wall Street didn't do this ... part 1

We are getting sold out.   Who said that the Constitution will never fail you, but your leaders will and be wary of anyone who tries to convince you that it's the other way around.  When did we as a country start heading down the prim rose path to socialism?  It seems that the Emergency Economic Stabilization Act of 2008 is going to help us move down that path.  The act simply believes, from each, according to his ability; to each, according to his need.

The Department of Housing and Urban Development said in 2005 that Fannie and Freddie should increase financing for low-income areas or moderate-income regions with high minority populations to 37 percent of new business from 34 percent in 2001 through 2004. That rose to 39 percent last year.  Since many people wanted their own home subprime mortgages were given to people with poor credit scores.  In 2006 Dan Mudd, a former CEO who left in late 2008, said in a 2006 interview that he planned to expand the companies' holdings to include more higher-risk loans.  A short time later it was said that Freddie wouldn’t lose anything on about 95 percent of its uninsured subprime bonds unless more than 90 percent of borrowers already two months late are foreclosed upon and more than half of the rest default, according to slides from a company presentation in August.  It seems that he was right because that was pretty much what happened. 

As of August 2008 57.3% of their entire subprime loans were past due and 10.7% were in foreclosure.   The former CEO of Freddie Mac had his salary last year was $900,000, although in a radio interview last month, he didn't deny reports that he raked in a total of $43 million in stock options, bonuses and overall compensation from 2005 to 2008.  When Fannie Mae and Freddie Mac went into conservatorship the Government Sponsored Enterprises became the owner of 79.9% of the company.  This means that the government now holds the mortgages of 55 million families at Fannie Mae and Freddie Mac holds 30 million.  The U.S. government controls at least 85 million homes with more on the way as Freddie and Fannie are to manage the subprime mortgage securities. 

Wednesday, October 1, 2008

Fannie Mae almost failed in the 80's

Fannie Mae under the leadership of James A. Johnson worked to keep up with Wall Street expectations.  The company began holding on to more mortgages and mortgage-backed securities for investment purposes. The same practice nearly drove the company into bankruptcy in the early 1980s, when interest rates strayed into the double digits. Its smaller rival, Freddie Mac, copied the strategy. 

Around the time Freddie Mac's accounting scandal broke in 2003, the companies' combined portfolios totaled $1.5 trillion.  Then-Federal Reserve Chairman Alan Greenspan and others came to fear that a sudden meltdown at Fannie Mae could bring down the financial markets with it -- an argument that Johnson and his successor, Franklin D. Raines, fought at every opportunity. 

They assured investors and policymakers that no such thing could happen because the company was so well managed.  James was also a managing director with Lehman Brothers (1985-1990).  Mr. Johnson has been a director of Goldman Sachs since May 1999.  Its sizable profits made during the 2007 Subprime mortgage financial crisis led the New York Times to proclaim that Goldman Sachs is without peer in the world of finance.  Then a crisis hit and in September 2008 Goldman Sachs became a traditional bank.  It had been an investment bank since 1869 during which time it had survived the Great Depression. 

Franklin Raines served from 1991 to 1996 he served as the vice chairman of Fannie Mae.  He left the company in 1996 to join the Clinton Administration as the Director of the U.S. Office of Management and Budget, where he served until 1998.  In 1999, he returned to Fannie Mae as CEO, "the first black man to head a Fortune 500 company."  In 2004 the New York Times reported that regulators "have said that of the $90 million paid to Mr. Raines from 1998 to 2003 at least $52 million—more than half—was tied to bonus targets that were reached by manipulating accounting." Raines agreed to a $24.7 million settlement with a federal regulator in exchange for charges being dropped, but he admitted no wrongdoing.  As so often happens with large scandals, the cost will fall on everyone except the responsible parties.  He was forced to leave Fannie Mae in 2004, when regulators discovered it had broken accounting rules "in an effort to conceal fluctuations in profit and hadn't maintained adequate risk controls."  In 2006, federal regulators sued Franklin Raines and two other Fannie Mae executives to recover $115-million of compensation. The case was settled for $3-million, plus the surrender of some of the then probably valueless stock options and other contingent benefits. The $3-million was paid from Fannie Mae’s own insurance.  An editorial in The Wall Street Journal called it a "paltry settlement" which allowed Raines and the other two executives to "keep the bulk of their riches."

Jamie S. Gorelick, whose official résumé describes her as "one of the longest serving Deputy Attorneys General of the United States," a position she held from 1997 to 2003.  Although she had no background in finance, she joined Fannie Mae in 1997 as vice chair and departed in 2003.   Gorelick collected a staggering $26.4 million in total compensation, including bonuses, during her time at Fannie Mae. Once again Fannie Mae was under investigation.  Investigators would later say that "Fannie Mae's management directed employees to manipulate accounting and earnings to trigger maximum bonuses for senior executives from 1998 to 2003." The New York Times called the manipulations an "$11 billion accounting scandal." Gorelick, it should be noted, has never been charged with any wrongdoing.  Then again she was a Deputy Attorneys General of the United States during the period in question.  She also served on the 9/11 commission.


It looks like a bailout of the subprime securities market is going to happen although it is very unpopular with the U.S. people.  The question now is how the U.S. government will value the subprime mortgage backed securities.  For example according to census estimates in 2007 the average price of a home was $183,917.  The U.S. Census Bureau and Federal Reserve Bank of New York estimates that there are 2,919,604 subprime home loans.  This means that the total amount paid at the average subprime interest rate of 8.46% is $504,255 per loan and a total paid to interest is $321,414.  The total of all loans is $1,472,227,309,095 and the interest paid will be $58,767,833,432. Lehman reduced its subprime Alt-A mortgage valuations to 39% of face value compared with 63% of face value in the previous quarter.  Similarly, Lehman reduced values on subprime securities and second loan securities from 55% of face value at the end of the second quarter to 34% of face value at present. If all values on subprime securities were valued at 36.5 % of face value which is $1,472,227,309,095 it would reduce the face value to  $  441,728,098,320.  The number includes considerations that 10.7% are in foreclosure and 9.7% are 90+ days past due.  The question is what will the reduction to the face value be?  If is anything above 36.4% they will make profits for the holders of the subprime securities.