Wednesday, May 25, 2011

Today's links

1--NY & California AGs Are Prosecuting Bank Fraud, The Big Picture

Excerpt: Last week, we heard the announcements by New York Attorney General Eric Schneiderman that his office is investigating fraud in mortgage securitization — originally focused on Goldman Sachs, Bank of America, and Morgan Stanley, this morning expanded to include JPMorgan, UBS, and Deutsche Bank.

Previously, the Florida AG had published a brutal analysis on Florida foreclosure fraud.

We now learn that California is stepping up to the plate: California Attorney General Kamala Harris is creating a 25-person task force to target mortgage fraud of any size. It includes a team of 17 lawyers and eight special agents from the state Department of Justice. The focus will be on three key areas:

• Corporate fraud: including instances in which bundled mortgages were sold as securities to the state or its pension funds under false pretenses, using California’s False Claims Act, which makes false claims submitted to the state a felony;

• Scams: including instances in which consultants, lawyers and others took fees from people in foreclosure, saying they would help the homeowners get loan modifications or other remedies, but delivered nothing.

• Origination Fraud: Fraudulent lending practices, including deceptive marketing, failure to fully disclose loan terms. This includes qualifying people for loans who couldn’t afford the terms.

2--German Engineering and Greece's Debt Crisis, The Street

Excerpt: In all their piety, the barons of Europe -- German politicians and the European Central Bank -- are pressuring Greece to sell off assets, raise taxes and curb spending to resolve its debt crisis. After all, irresponsible southern EU states are in need of rehabilitation and some lessons in Teutonic thrift.

Sadly, selling assets won't lower Greece's debt enough to make it manageable. Further, cutting spending and increasing taxes further will thrust Greece into a deep and prolonged recession and severe deflation. That might raise Greek exports enough to service its euro-denominated debt, but not without turning much of Greece into a Great Depression era Appalachia....

Prosperous Germany, unburdened by an obligation to share significant enough tax revenues with poorer EU states, used the wealth it obtained exploiting a single market to provide generous pensions, gold-plated employment security and jobless benefits, and the shortest workweek on the planet. Meanwhile, governments in Greece and other poorer EU states struggled to keep up, piled up lots of debt and couldn't scale back spending too much without risking political upheaval. Their voters don't understand why the much touted single EU market imposes equal responsibilities without ensuring more equal benefits....

In the end, the only viable option is to restructure its debt -- ask bondholders to accept long maturity and lower interest rates, or a more explicit write-down of amounts owed. The ECB has threatened to abandon Greece's private banks if Athens restructures.

That would force Greece's banks into failure and surely thrust Greece into a depression. And it begs the question: if the ECB won't support the only reasonable solution for Greece, why should Greece remain in the euro?

Thanks to German and ECB intransigence on restructuring, Greece has no choice but to require sovereign and private creditors to take haircuts; abandon the euro and reinstate the drachma; and rethink its welfare state.

3-- Euro-Zone Growth Slows to 7-Month Low, Wall Street Journal

Excerpt: Growth in the euro zone's private sector eased more than expected to its weakest pace in seven months in May, led by a sharp slowdown in manufacturing, the preliminary results of a survey by financial-information firm Markit showed Monday.

The flash reading of the euro zone's composite-output index, a gauge of activity based on partial results of a survey of manufacturing and services firms, dropped to 55.4 in May from 57.8 in April. A reading above the 50 level indicates an expansion in activity. The level of activity is in line with the average of last year, but the fall in the main index was the sharpest since November 2008, Markit said. Economists were expecting the headline reading to drop to 57.4.

The manufacturing-purchasing-managers' index dropped much more than expected to 54.8 in May, from 58.0 the previous month, while the euro-zone services-business-activity index fell to a five-month low of 55.4, from 56.7 in April. Economists had predicted a manufacturing reading of 57.5 and an unchanged services reading of 56.7.

4--The IMF cannot afford to make a mistake with Strauss-Kahn's successor, Joseph Stiglitz, Telegraph

Excerpt: Europe has decided it cannot or will not manage the crisis on its own and has turned to the IMF. But Europe is in an awkward position. Its own Central Bank is at the centre of managing the very crisis that was helped into being by the flawed economic philosophy and policy to which it and the US Federal Reserve adhered.

Those who thought that all that was needed for the euro to succeed was fiscal discipline should have learned their lesson – Ireland and Spain had surpluses before the crisis.

Behind the scenes there is a battle – between those who put the interests of the banks first and those who put the interests of the people first. Debt restructuring would affect the balance sheet of the banks. The longer restructuring is postponed, the more debt moves onto the books of the public, the more the banks are protected.

But there is a high cost of this strategy: the citizens of the country suffer enormously in the interim and taxpayers pay the price in the long run. Even after all this, there are likely to be more crises, especially given the reluctance of those in the US and European Union to adopt adequate financial regulations.

An effective and fair IMF is essential – an institution that looks not just after creditors in the lending countries but after the well-being of all. And whatever the result of the case against Strauss-Kahn, this much is clear - he was an impressive leader of the IMF and he re-established the credibility of the institution.

He breathed fresh air into the IMF as he re-examined old doctrines such as those concerning capital controls. He raised new issues as he emphasized the critical role of employment and inequality for stability. He reasserted the role of economic science, including Keynesian economics, over the mishmash of long-discredited Wall Street doctrines, which had been central to the IMF's failures in East Asia, Latin America, and Russia.

He also listened to the increasingly vocal and informed voices of those in emerging markets. He supported the movement for reforms in the institution, including voting rights and governance.

As the IMF transitions, it is important to maintain the reforms, and carry them forward. But the hard-fought gains of the institution could easily be lost. That's why the choice of the head – and the process by which the choice is made – is so important....

The response to the IMF's major change of course on capital controls is more evidence of the lack of confidence in the institution. A decade ago, the IMF tried to change its Articles of Agreement to allow it to force countries to liberalize their capital markets. Now, it recognizes that at times, capital controls may be desirable.

Rather than responding enthusiastically to this long overdue change, emerging markets and developing countries have said: "Keep out of this. Today, you may be open, but at any moment you can be recaptured by Western financial markets that have done so well by these unstable capital flows, making money as funds flow in, and making more money in the aftermath of the havoc created as funds flow out."

5--Fed scholars: A run on the repurchase market caused the financial crisis and will probably happen again, Repowatch

Excerpt: The authors draw five lessons from the panic of 2008. Here are brief summaries:

-Bank regulation can reduce the likelihood of liquidity crises, but cannot eliminate them entirely.

-During a liquidity crisis, the Fed should act as a lender of last resort.

-The Fed should announce its policy for liquidity crises, explaining how and under what circumstances it will come into play.

-Deposit insurance is part of the answer, but has a limited role.

-The Fed’s lending in a crisis should be targeted toward preserving market liquidity, not particular institutions.

Avoiding liquidity crises altogether is probably more than we can hope for. What we can do is put in place mechanisms to make such crises infrequent and to make their effects manageable.

6---As Lenders Hold Homes in Foreclosure, Sales Are Hurt, New York Times

Excerpt: The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.

“It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.”

(From Calculated Risk: Although REO inventory might be overstated in the story, the number of loans in the foreclosure process is much higher than 1 million. The MBA reported last week that 4.52% of homes with first-lien mortgages were in the foreclosure process. There are approximately 50,000,000 homes with first-lien mortgages, and 4.52% would be 2.25 million. There are another 1.8 million homes were the borrower is more than 90 days delinquent.)

7---FHA tipping point, Dr Housing Bubble

Excerpt: “(NY Times) In the first quarter, 17.7 percent of new loans were F.H.A., according to Inside Mortgage Finance, an industry data provider, while P.M.I. had a 5.4 percent market share. Applications for F.H.A. loans jumped 20 percent in the month preceding the price increase, then tumbled when it went into effect, according to the Mortgage Bankers Association.

In addition to lower minimum down-payment requirements, F.H.A. has laxer rules for credit scores and debt-to-income ratios. Right now, it also has lower interest rates, said Thatcher Zuse, the president of Sound Mortgage, a lender and broker in Guilford, Conn. “Almost as a rule, as the rates stand right now, the less equity you’re putting down, the better the F.H.A. deal becomes.”

The toxic loan market in terms of Alt-A and option ARM loans is largely nonexistent but there is no doubt that we have a questionable loan products through FHA insured loans. The default rates are soaring because giving loans to people with very little down payment makes absolutely no sense especially when household incomes are so fragile. I’m surprised how many people come to defend the FHA as it inches closer and closer to a bailout. Why not agree on the fact that if FHA’s mission is for lower income households why not cap it at the median U.S. home price? Look at this insanity reported from the CBO regarding the FHA’s missions:

“(CBO) To target the program toward low- and moderate-income borrowers, the law limits the size of a mortgage that may be insured. The limits vary by geographic region a depend on such factors as the ceilings that apply to mortgages that are legally eligible for purchase by Fannie Mae and Freddie Mac, appreciation in home prices, and the cost of living in an area. Currently, the limit for a one-unit property in most areas is $271,050, although in some high-cost areas FHA can insure loans up to $729,750.....

How in the world is $729,750 a price geared to low to moderate income buyers? This is the kind of mentality that led us into the bubble in the first place. The higher limit will come down but it is absurd to think that this product is somehow for the “working” people of the country. It is merely another shadow bailout to protect the banking interests to keep loan volume churning.

8--When Austerity Fails, Paul Krugman, Commentary, New York Times

Excerpt: Europe’s troubled debtor nations are, as we should have expected, suffering further economic decline thanks to those austerity programs, and confidence is plunging instead of rising. It’s now clear that Greece, Ireland and Portugal can’t and won’t repay their debts in full, although Spain might manage to tough it out.

Realistically, then, Europe needs to prepare for some kind of debt reduction, involving a combination of aid from stronger economies and “haircuts” imposed on private creditors... Realism, however, appears to be in short supply.

On one side, Germany is taking a hard line against anything resembling aid to its troubled neighbors, even though one important motivation for the current rescue program was an attempt to shield German banks from losses.

On the other side, the E.C.B. is acting as if it is determined to provoke a financial crisis. It has started to raise interest rates despite the terrible state of many European economies. And E.C.B. officials have been warning against any form of debt relief...

If Greek banks collapse, that might well force Greece out of the euro area — and it’s all too easy to see how it could start financial dominoes falling across much of Europe. So what is the E.C.B. thinking?

My guess is that it’s just not willing to face up to the failure of its fantasies. And if this sounds incredibly foolish, well, who ever said that wisdom rules the world?

9--Puru Saxena on Why QE3 is Inevitable, The Big Picture (video)

Why QE3 is inevitable

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