Friday, December 17, 2010

Today's Links

1--Congress Passes Tax Deal, Wall Street Journal

Excerpt: Congress passed the most far-reaching tax bill in a decade late Thursday, averting across-the-board tax increases, enacting new breaks for individuals and businesses and laying a marker for how Washington might work in an era of divided government.

The bill goes to the White House for President Barack Obama's signature after the House overcame persistent liberal opposition and passed it with an unexpectedly large bipartisan majority of 277-148. The measure passed the Senate earlier in the week also with an overwhelming majority..... Wage-earners will get a new payroll tax break; wealthy heirs get a lower estate-tax rate; and businesses gain an unexpected plum—a big tax write-off for new equipment purchases.

The $858 billion bill breaks a stubborn political impasse prompted by the Bush-era tax cuts, which were due to expire at the end of this year. The bill provides a two-year extension for all income brackets, kicking the issue into the next Congress and into the middle of the 2012 election....Higher-income people took the most cash from the deal. The average gain for households with $500,000 to $1 million in income was $3,859 compared to current tax levels. Democrats had wanted tax rates for this group to rise.

2--From Wikileaks: US embassy cables: Mervyn King says in March 2008 bailout fund needed, The guardian

Excerpt: 1. (C/NF) Since last summer, the nature of the crisis in financial markets has changed. The problem is now not liquidity in the system but rather a question of systemic solvency, Bank of England (BOE) Governor Mervyn King said at a lunch meeting with Treasury Deputy Secretary Robert Kimmitt and Ambassador Tuttle. King said there are two imperatives. First to find ways for banks to avoid the stigma of selling unwanted paper at distressed prices or going to a central bank for assistance. Second to ensure there's a coordinated effort to possibly recapitalize the global banking system. For the first imperative, King suggested developing a pooling and auction process to unblock the large volume of financial investments for which there is currently no market. For the second imperative, King suggested that the U.S., UK, Switzerland, and perhaps Japan might form a temporary new group to jointly develop an effort to bring together sources of capital to recapitalize all major banks. END SUMMARY

3--Wall Street Whitewash, Paul Krugman, New York Times, via Economist's View

Excerpt: Last week,... all four Republicans on the deficit commission voted to exclude the following terms from the report: “deregulation,” “shadow banking,” “interconnection,” and, yes, “Wall Street.”

When Democratic members refused to go along with this..., the Republicans went ahead and issued their own report... That report ... tells a story that has been widely and repeatedly debunked...

In the world according to the G.O.P. commissioners, it’s all the fault of government do-gooders, who used various levers — especially Fannie Mae and Freddie Mac... — to promote loans to low-income borrowers. Wall Street — I mean, the private sector — erred only to the extent that it got suckered into going along with this government-created bubble....

But the G.O.P. commissioners are just doing their job, which is to sustain the conservative narrative ... that absolves the banks of any wrongdoing...

4--This is how the GOP Congress will regulate Wall Street?, Andrew Leonard, Salon via Economist's View

Excerpt: Last Wednesday, just hours after securing the position of chairman of the House Financial Services Committee, Spencer Bachus, R-Ala., told the Birmingham News that "in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks."

In the very next paragraph, the newspaper reported that Bachus "later clarified his comment to say that regulators should set the parameters in which banks operate but not micromanage them." But the damage was already done. ...

The candor of Bachus' initial statement is eyebrow-raising, no doubt about it, but the fuss and bother over his revelation is a little bit disingenuous. ... Together with his fellow Alabaman Republican, Sen. Richard Shelby, the powerful ranking member of the Senate Banking Committee, he's part of a dynamic duo of market fundamentalist crusaders who will likely set the tone for how banking reform and regulatory oversight aimed at Wall Street are implemented for the next two years.

Immediately after the midterm elections were over, and long before his confirmation as chairman, Bachus got quickly to work on his anti-regulation agenda. The day after the election, in fact, Bachus sent a letter to the Financial Stability Oversight Council, that, as I wrote last month, was written as if dictated by bank lobbyists. His main target: the so-called Volcker rule...

Let's recap: Who hates the Volcker rule the most? The banks. Who is most annoyed by the Consumer Financial Protection Agency? The banks. Whose agenda is Spencer Bachus already serving to the best of his ability? The banks'.

5--So where's the Inflation? Economist's View

The latest estimate of the CPI was released today. Via the Atlanta Fed's Inflation Project:

Though most CPI indexes rose slightly in November, core measure remains near historical low, Atlanta Fed: The Bureau of Labor Statistics reported that the all-items consumer price index (CPI) rose an annualized 1.5 percent in November. The indexes for energy, food, and core prices all increased slightly. The core CPI edged up 0.1 percent in November after no change in the past several months. In fact, the core CPI is up only 0.7 percent from a year earlier, nearly its slowest year-to-year advance in more than 50 years.

And, from the Cleveland Fed:

Cleveland Fed Estimates of Inflation Expectations: The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.64 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. ... Estimates are updated once a month, on the release date of the CPI.

6--Jail time for mortgage bankers? John Prior, Housingwire

Excerpt: Iowa Attorney General Tom Miller told distressed homeowners that he supports criminal prosecutions and other settlements against bank executives found guilty of breaking due process laws in dealing with foreclosure affidavits.

Miller met with homeowners Tuesday at a church in Des Moines, Iowa, to hear questions and go over possible settlements to the investigation into robo-signing allegations at mortgage servicing companies. Major banks froze foreclosures in October when employees signed affidavits en masse and without a review of documentation as required by state law. A joint investigation from federal regulators and a coalition of the 50-state AGs followed.

"We will put people in jail," Miller told homeowners in the meeting, according to the PICO faith-based network, a consumer advocacy group.

Miller also said he would support settlements with the banks that require significant principal rate reductions, loan modifications and compensation for citizens defrauded of their homes.

"There should be some kind of compensation system for people who have been harmed," Miller said. "And the foreclosure process should stop while loan modifications begin. To have a race between foreclosures and modifications to see which happens first is insane."

7--BarCap: Private sector to boost MBS purchases in 2011, Jon Prior, Housingwire

Excerpt: Private investors could buy as much as $365 billion in agency mortgage-backed securities in 2011, taking over the government's role in the secondary market, according to the analysts at Barclays Capital.

In the early part of the decade, Fannie Mae and Freddie Mac have led purchases, followed in recent years by the Federal Reserve and the Treasury Department as the housing market tries to recover. But by 2011, both the Fed and the government-sponsored enterprises "will be in run-off mode."

Barclays analysts expect banks and money managers to be aggressive buyers of agency MBS next year, purchasing roughly $150 billion each over the next 12 months. Recent increases in MBS yields will also help demand as it reduces the heavy risk.

"In fact, it is worth noting that the Fed has already gone from being long the basis to effectively being short (by allowing portfolio run-off while buying Treasurys) this year. And yet agency MBS performance has not been too shabby," analysts said.

New issuance, however, will remain low with increased buyouts, weak new home sales and still bottoming home prices. But the biggest key to the 2011 secondary market will be the Treasury Department's long-term plan for the GSE's to be submitted in January. But like JPMorgan Chase (JPM: 40.21 0.00%) analysts said last week, reform is still a few years away.

8--Squeeze on GSEs to write down mortgages lacks grip, Jon Prior, Housingwire

Excerpt: The Obama administration's stepped-up pressure on Fannie Mae and Freddie Mac to write down more underwater mortgages through a government program may not be as rejuvenating to the housing market as hoped, according to MF Global, a Washington-based policy research group.

The Federal Housing Administration launched its Short Refi program Sept. 7 to place underwater borrowers into new government-insured mortgages if the lender or investor writes off the unpaid principal balance of the original first-lien by at least 10%. The Treasury Department set aside $14 billion of the Troubled Asset Relief Program for the short refinances....

Program guidelines state that the second lien does not have to be touched as part of the writedown, so long as the combined loan-to-value ratio of both the first and second is less than 115%. Also, second-lien holders who accept a haircut receive a subsidy, while first-lien holders do not. This, according to MF Group creates little incentive for the first-lien holder to participate.

"These also are performing loans, which raises the question of why the servicer would want to write down principal in the first place," Seiberg writes....

But Laurie Goodman, an analyst at Amherst Securities, said the Short Refi program holds no risk to investors. The pass-throughs, or the monthly payments the servicer passes to the security holder, are guaranteed by the government.

9--Housing is still stuck in the mud, Bloomberg

Excerpt: “Housing remains stuck in the mud,” said Aaron Smith, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who correctly forecast the pace of starts. “Builders are in a wait-and-see mode. Foreclosures are still problematic and the recent backup in mortgage rates poses a significant threat.”...

Americans have pulled back on house purchases following the expiration of a tax incentive of as much as $8,000, which required that contracts be signed by April 30 and closed by Sept. 30. Sales of new and existing properties fell in October. Figures for November are due next week.

The recent increase in mortgage rates may also cool demand. The average rate on a 30-year fixed loan was 4.61 percent in the week ended Dec. 9, up from the record-low of 4.17 percent reached in November, according to McLean, Virginia-based Freddie Mac, which began keeping data in 1971..

Home values are poised to drop by more than $1.7 trillion in 2010, according to Zillow Inc., a closely held provider of home price data. This year’s estimated decline, more than the $1.05 trillion drop in 2009, brings the loss since the June 2006 home-price peak to $9 trillion, Seattle-based Zillow said on Dec. 9.

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