Paulson Hedge Fund Buys Into Mortgage Securities

John Paulson, the hedge fund manager (not to be confused with Treasury Secretary Henry Paulson), who was called before Congress last week to discuss the huge profits ($3.7 billion) he made by foreseeing the collapse of the subprime mortgage market and shortng mortgage backed securities, has started to buy securities backed by residential mortgages.

US residential mortgage securities fell in value last week after Hank Paulson, Treasury secretary, said that the federal government had decided against buying toxic assets as part of its $700bn troubled asset relief program.

Paulson has told his investors that he started buying troubled mortgage-backed securities at the end of last week, hoping to capitalise on price falls that followed the Treasury announcement,according to FT.

Martin Feldstein On The Money Supply and Current Crisis

Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan and the George F. Baker Professor of Economics at Harvard University, recently penned a WSJ Op-Ed calling for a program to stop a downward overshooting of house prices and the resulting mortgage defaults. A mortgage-replacement loan program may be the best way to achieve that, he wrote.

Since the latest leg of the downturn in the mortgage market, and now the overall economy, seems to be the result of the fact that the Federal Reserve crashed money supply growth over the summer, I have often wondered what Feldstein's take was on the Fed's activities this summer. I got the chance to ask him. Feldstein was a part of a panel that included Wilbur Ross Jr., Juan Williams and Ron Insana, before 4,000 at the AFP conference.

During the panel discussion, Feldstein stated that the Federal Reserve was doing an excellent job providing liquidity to the system but it wasn't working and that is why further measures, such as his "mortgage-replacement loan program" needed to be implemented.

During the Q & A, I asked him how he could say that the Fed was providing liquidity to the system since M2 growth crashed over the summer from a March peak of 12.5% annualized growth to growth of only 1.5% annualized in September. I further stated to him that, in addition, over the summer the Fed was sterilizing the cash infusions they were making by selling off Treasury securities, thus maintaining a net liquidity neutral stance as part of its various rescue operations.

Feldstein did not answer the question about where he saw liquidity coming from the system over the summer( How could he, since there wasn't any net liquidity added to the system?), but he did address the fact that money growth slowed over the summer. He said it likely occurred because of the problems in the economy (which in his view apparently took time for the Fed to adjust too.) He then said that money supply M2 was back growing at an annualized rate of 4.5%, which was correct. He said that this was about the correct growth rate given current GDP growth. This is a hoot, since money supply in September was at 1.5% annualized, and it then jumped to 2.3%, and now is at 4.5%, the Fed clearly has its foot on the monetary accelerator. I don't believe money supply at 4.5% is anything but a very brief transition point. Within weeks money supply growth could be at double digit rates. Indeed, the money supply numbers due out this Thursday could show M2 growth much higher than 4.5%. Feldstein clearly hasn't figured out that Ben Bernanke's Fed is clueless. When he does, I wonder what his prescription for the economy will be?

Barney Frank: We Should Have Done Things Differently

Yesterday, Congressman Barney Frank also spoke before the AFP conference, via video hook up.

The good news is that it is clear that Congressman Frank understands it was a mistake for government to drive the nation towards a housing market that resulted in more people buying homes than would otherwise occur, and that things should have been done differently..

The bad news is that he thinks the mistake was that not enough money was directed by government into the rental market!

The thought that the free market could handle both housing and rental market does not seem to have ever crossed his mind. The man is a regulationist. And, of course, he has no clue about the business cycle. He never even mentioned it.

Although, he took questions from the audience, questions weren't allowed by reporters, thus I was turned away when I reached the microphone.

This is the question I wanted to ask: Given that this weekend the Wall Street Journal reported that it is a dirty little secret that Paulson's Plan to buy up mortgages would not work and indeed would cause more problems for banks, and that is why Treasury shifted to infusing capital directly into banks, at what point was Congress notified of this situation, if at all? Further, given this huge error in the design of the $700 Billion Paulson Plan, do you think Secretary Paulson should resign?

I will be submitting these questions to Congressman Frank's office.

It's Not A Frozen Credit Market, It's A Sane, Getting Back To Basics, Credit Market

JPMorganChase Chairman Jamie Dimon on a conference call yesterday:

The [mortgage] origination business, and I think it's true for a lot of people in the industry, ...people have gone back to old fashioned 80% LTV, real verified income, more disciplined appraisals, and then in some areas they won't even go to 85% LTV because of expected home decreases so we are not at 85% in California, Nevada, or Florida we're at 65. So that's why it's down. I think it's true for us and everybody else.

Banned Saturday Night Live Skit On the Sub-Prime Mortgage Crisis

Here's the link to an online version of the SNL skit, about the sub-prime mortgage crisis, that NBC has yanked off of YouTube. The economics are off just a bit, but what it is lacking in economic understanding is made up for with great wit and courage.

Note: This video has gone viral so you may have to hit the refresh button a few times before the video runs.

France Said to Seek Emergency G8 Meeting

France is proposing through diplomatic channels that the Group of Eight industrialized nations hold an emergency summit to contain the U.S.-triggered financial crisis, according to a published report in the Japanese business daily Nikkei.

Since the solution to the crisis is to allow the markets to work things out, there is nothing positive to expect from a G8 meeting, only the possibility of international market manipulation and rigging.

Naturally, the Oligarchy will be well represented at such a gathering. For starters, Carlyle managing director Oliver Sarkozy is the half brother of France's President Ncholas Sarkozy.

MUST SEE: 60 Minutes On The Mortgage Crisis and Credit Default Swaps

60 Minutes has a must see report on the Mortgage Crisis and Credit Default Swaps. As a long term critic of econometrics and its role in the sub-prime crisis, I certainly consider the remark made by Frank Partnoy, a former derivatives broker and corporate securities attorney, who now teaches law at the University of San Diego, and carried in the 60 Minutes report, as one of the most important remarks I have heard from MSM on the current crisis (our emphasis)

These complex financial instruments were actually designed by mathematicians and physicists, who used algorithms and computer models to reconstitute the unreliable loans in a way that was supposed to eliminate most of the risk.

"Obviously they turned out to be wrong," Partnoy says.

Asked why, he says, "Because you can't model human behavior with math."

"How much of this catastrophe had to do with the instruments that Wall Street created and chose to buy…and sell?" Kroft asks Jim Grant [Of Jim Grant's Interest Rate Observer].

"The instruments themselves are at the heart of this mess," Grant says. "They are complex, in effect, mortgage science projects devised by these Nobel-tracked physicists who came to work on Wall Street for the very purpose of creating complex instruments with all manner of detailed protocols, on who gets paid when and how much. And the complexity of the structures is at the very center of the crisis of credit today."

"People don't know what they're made up of, how they're gonna behave," Kroft remarks.

"Right," Grant replies.

This was exactly my point when I wrote just yesterday:

This is a point we have been emphasizing for years. The problem consists in the fact that econometricians can't design equations without at least one constant. Since there are no constants in the world of human action, econometricians take a variable that has held fairly constant over some period of time and assume it is a constant. This works fine, and can for long periods of time, until Wenzel's Observation #1 comes into play: Any variable has the potential to eventually start to dance. A dancing variable is one that no longer acts like a constant and moves considerably outside its previous assumed range of movement.

Congratulations to Steve Kroft and Producer L. Franklin Devine for an excellent overall report, and for finding and reporting on the role of econometricians in the sub-prime disaster.

The video and transcript of the report are here.

Obama-ACORN Root Causes of Mortgage Crisis?

A Republican front organization, AmeriPac, is sending an email out linking Barack Obama to the mortgage crisis. The email is a bit of a stretch, but not a complete stretch. The mortgage crisis was chiefly caused by the easy money printed by the Federal Reserve during the Alan Greenspan era and the early-Ben Bernanke era, and by the econometricians who used faulty equations to justify the financing of sub-prime mortgages. That said, the banking industry's heavy focus on sub-prime mortgages was also influenced by heavy lobbying pressure by left wing groups to provide mortgages to minorities and the poor. Chief among the agitating groups was ACORN, which is an extremely powerful group that the general public has little awareness of.

Obama has ties to ACORN as a "leadership" teacher for the organization, and he seems to keep an eye out to ensure that funding heads their way whenever he is in a position to influence such funding.

Here are key excerpts from the AmeriPac email:

The high-risk subprime mortgage social engineering community service experiment by left-wing ACORN and Obama has created the largest financial crisis since The Great Depression. The full reach of the corruption and scandal may never be known but those who created it must not be rewarded. The architects, primarily left-wing Democrats, created laws, took donations, looked the other way and instead were too busy overseeing donations to their own presidential campaigns and robbing main street blind. Now these same left-wing Democrats blame everyone else and get up on their high horses and say, "we are here to save you" from the crises they created.

Yes, Mr. Obama knows a great deal about the mess. He is a central figure in the left-wing ACORN exploitation of financial institutions and pressuring them to make high risk loans. The very same left-wing ACORN was guilty of voter fraud in the last presidential election.

Now these same Democrats want to do another high risk "community service," social engineering experiment. They want to elect a high-risk, low experience, socialist one of the same community organizers that created the mess to be our next president...

Fannie and Freddie acted in response to Clinton administration pressure to boost homeownership rates among minorities and the poor. However compassionate the motive, the result of this systematic disregard for normal credit standards has been financial disaster. ONE key pioneer of ACORN's subprime-loan shakedown racket was Madeline Talbott - an activist with extensive ties to Barack Obama. She was also in on the ground floor of the disastrous turn in Fannie Mae's mortgage policies.

t would be tough to find an "on the ground" community organizer more closely tied to the subprime-mortgage fiasco than Madeline Talbott. And no one has been more supportive of Madeline Talbott than Barack Obama.

When Obama was just a budding community organizer in Chicago, Talbott was so impressed that she asked him to train her personal staff.

He returned to Chicago in the early '90s, just as Talbott was starting her pressure campaign on local banks. In those years, he also conducted leadership-training seminars for ACORN's up-and-coming organizers. That is, Obama was training the army of ACORN organizers who participated in Madeline Talbott's drive against Chicago's banks.

More than that, Obama was funding them. As he rose to a leadership role at Chicago's Woods Fund, he became the most powerful voice on the foundation's board for supporting ACORN and other community organizers. In 1995, the Woods Fund substantially expanded its funding of community organizers - and Obama chaired the committee that urged and managed the shift.

That committee's report on strategies for funding groups like ACORN features all the key names in Obama's organizer network. The report quotes Talbott more than any other figure; Sandra Maxwell, Talbott's ACORN ally in the bank battle, was also among the organizers consulted.

More, the Obama-supervised Woods Fund report acknowledges the problem of getting donors and foundations to contribute to radical groups like ACORN - whose confrontational tactics often scare off even liberal donors and foundations.

Indeed, the report brags about pulling the wool over the public's eye. The Woods Fund's claim to be "nonideological," it says, has "enabled the Trustees to make grants to organizations that use confrontational tactics against the business and government 'establishments' without undue risk of being criticized for partisanship."

The Woods Fund report makes it clear Obama was fully aware of the intimidation tactics used by ACORN's Madeline Talbott in her pioneering efforts to force banks to suspend their usual credit standards. Yet he supported Talbott in every conceivable way. He trained her personal staff and other aspiring ACORN leaders, he consulted with her extensively, and he arranged a major boost in foundation funding for her efforts.

And, as the leader of another charity, the Chicago Annenberg Challenge, Obama channeled more funding Talbott's way - ostensibly for education projects but surely supportive of ACORN's overall efforts.

In return, Talbott proudly announced her support of Obama's first campaign for state Senate, saying, "We accept and respect him as a kindred spirit, a fellow organizer."

In short, to understand the roots of the subprime mortgage crisis, look to ACORN's Madeline Talbott. And to see how Talbott was able to work her mischief, look to Barack Obama.

Puttng Power In The Hands of Hank Paulson

From Treasury Secretary Paulson's bailout proposal that was sent to Congress:

The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States....

The Secretary is authorized to take such actions as... issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act...

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time...

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency...

-Robert Wenzel

Paulson Statement on Comprehensive Approach to Market Developments

September 19, 2008
hp-1149

Statement by Secretary Henry M. Paulson, Jr. on Comprehensive Approach to Market Developments

Washington, DC--

Last night, Federal Reserve Chairman Ben Bernanke, SEC Chairman Chris Cox and I had a lengthy and productive working session with Congressional leaders. We began a substantive discussion on the need for a comprehensive approach to relieving the stresses on our financial institutions and markets.

We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. And this morning we've taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry.

Despite these steps, more is needed. We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses.

The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners.

A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them. These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged.

These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.

To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem.

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible. The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.

I believe many Members of Congress share my conviction. I will spend the weekend working with members of Congress of both parties to examine approaches to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies. Our economic health requires that we work together for prompt, bipartisan action.

As we work with the Congress to pass this legislation over the next week, other immediate actions will provide relief.

First, to provide critical additional funding to our mortgage markets, the GSEs Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities (MBS). These two enterprises must carry out their mission to support the mortgage market.

Second, to increase the availability of capital for new home loans, Treasury will expand the MBS purchase program we announced earlier this month. This will complement the capital provided by the GSEs and will help facilitate mortgage availability and affordability.

These two steps will provide some initial support to mortgage assets, but they are not enough. Many of the illiquid assets clogging our system today do not meet the regulatory requirements to be eligible for purchase by the GSEs or by the Treasury program.

I look forward to working with Congress to pass necessary legislation to remove these troubled assets from our financial system. When we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy, and more closely links the regulatory structure to the reasons why we regulate. That is a critical debate for another day.

Right now, our focus is restoring the strength of our financial system so it can again finance economic growth. The financial security of all Americans – their retirement savings, their home values, their ability to borrow for college, and the opportunities for more and higher-paying jobs – depends on our ability to restore our financial institutions to a sound footing.



-30-

The State of Florida Real Estate Tonight...

as Woody from Crash Landing sees it, here.

It's Time The Fed Adopts Volcker Religion

By Robert Wenzel

Federal officials and market players are struggling with the same issues, WSJ reports.Why haven't the steps taken so far calmed the system? What can policy makers do next?

In our book, the answer is simple. The boom was fueled by the Fed's money printing under Alan Greenspan and the early Ben Bernanke.

As we have been emphasizing in lone wolf fashion--with no regulator or other commentator coming close to mentioning this most important event of the current crisis environment--the Fed over the recent months has for all practical purposes stopped printing money. That's why the market continues to struggle.  The Fed has turned this from just a mortgage crisis, to the beginnings of a major full-fledged economic crisis.

Over the last three months M2 money supply has been growing at a 1.8% annualized rate. This can be compared to earlier this year when M2 annualized money growth was over 10%. In fact, as recently as March, three month annualized money growth was at 12.7%. Few seem to recognize the dramatic shift downward.

A lot of headline watching commentators are even reporting that the Fed is adding gobs of liquidity through their bailout operations, when in fact the Fed has been sterilizing its bailout operations, including the Term Auction Facilities, by either liquidating or loaning out the Treasury securities already in their portfolio.

WSJ reflects current beliefs when it reports:

The Federal Reserve has already slashed interest rates to counteract a deepening credit freeze and instituted its broadest expansion of lending facilities since the Great Depression to keep financial markets functioning.

As mentioned the lending facilities have been sterilized so as not to increase money supply. And we should have learned from the Volcker period that you don't target interest rates to impact the economy, you target money supply. The current Bernanke Fed has seemingly, without being completely aware, slipped into interest rate targeting.

At this point we must add that ideally the Fed shouldn't be monkeying and manipulating the money supply at all, but in realworld economik if the Fed is going to be messing with the money supply, they should be good at it. This means reverting back to Volcker's rejection of targeting interest rates, and instead targeting money supply. In Volcker's case, he targeted money supply to fight inflation, in Bernanke's case, money supply targeting is required to battle economic crisis.

This economy isn't going anywhere until Bernanke gets Volcker "Target The Money Supply" Religion. Failure to do so will lead to an enormous economic crisis which in one sense can be viewed as a cleansing of the mal-investments caused by the money manipulations of Greenspan and Bernanke. However, in the land of realworld economik, the crisis is likely to lead to untold suffocating new regulations, restrictions etc., given that the two current presidential candidates, John McCain and Barak Obama, display no knowledge of the fundamental workings of an economy. 

Robert Wenzel is an economic consultant and Editor & Publisher of EconomicPolicyJournal.com. He can be reached at rw@economicpolicyjournal.com.

Rockwell: Stop The Bailout

Lew Rockwell nails it:

Let me state this very plainly: I do not believe for one second that if the government fails to nationalize Freddie and Fannie, that the world as we know it will come to an end. Those who are saying that are trying to scare the population, the same as with every other major demand by the regime. It was the same with Nafta, the WTO, the war on terror, the war on bird flu, the nationalization of airport security, and everything else.

If the government did nothing but sell off the assets of the mortgage giants, we do not know for sure what would happen, but the market has a way of finding value and readjusting. I would expect about 18 months of difficulties. Banks would fail just as many businesses in the free market fail every day. Housing prices would fall more, just as all market prices are subject to change. But the process of readjustment would be smooth and rational. Most important, we would all stop living a lie and believing an illusion

His complete column is here.

-Robert Wenzel

Fed Vice Chairman Kohn: "More Resilent Financial System Is Going To Take Awhile"

In a speech in Washington D.C. at the Brookings Panel on Economic Activity, federal Reserve Vice Chairman Donald L. Kohn warned, "that restraint on credit supplies is likely to persist because intermediaries have some way to go to rebuild their balance sheets. The process of adjustment to a safer, more resilient financial system is going to take a while."

He also stated that he encouraged that the pace of declines in housing prices abating in a number of markets. However, partly owing to the feedback of price declines on lenders, mortgage conditions have tightened some since the late spring, and the jury is still out on whether housing prices are close to finding a bottom.

-EPJ Frontdesk

Chris Whalen: Government Will Be Buying Preferred Stock of Banks Before the Year Is Over

Watch his comments on CNBC, here.

Buffett Orders A Major Halt In Insuring Bank Deposits; 1,500 Banks Impacted

Is Warren Buffett scared of the risks in the banking sector? I think so.

Buffett's Berkshire Hathaway Inc. has told one of its subsidiaries to stop insuring bank deposits above the amount guaranteed by the federal government, WSJ is reporting.

The subsidiary, Kansas Bankers Surety Co., is notifying about 1,500 banks in more than 30 states that it will no longer offer a program called "bank deposit guaranty bonds."

-Robert Wenzel

WaMu CEO Forced Out

Kerry Killinger is being ousted as chief executive of Washington Mutual, according to WSJ.

Succeeding  Killinger will be Alan Fishman, currently chairman of New York commercial mortgage broker Meridian Capital Group.

WaMu's shares have fallen about 85% in the past year. It has large holdings of mortgages made in regions where house prices have fallen sharply. More than $50 billion of its holdings are option adjustable-rate mortgages.

Four Million Homeowners With Mortgage Problems

The Mortgage Bankers Association is reporting  that more than 4 million American homeowners with a mortgage - a record 9 percent - were either behind on their payments or in foreclosure at the end of June.

The latest quarterly figures broke records for late payments, homes entering the foreclosure process and for the inventory of loans in foreclosure. The trade group's records go back to 1979.

The percentage of loans at least one month past due or in foreclosure was up from 8.1 percent in the January-March quarter, and up from 6.5 percent a year ago, using figures that were not adjusted for seasonal factors.

New foreclosures rose from the first quarter in 35 states and Washington, D.C. The biggest increases were in Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio.New foreclosures actually declined in Texas, Massachusetts and Maryland. Both Maryland and Massachusetts recently passed laws to slow the foreclosure process and give borrowers more time to catch up on their payments.

Almost 500,000 homeowners, or about 1 percent, entered the foreclosure process in the second quarter.

But for the first time since the mortgage crisis started, delinquencies on subprime adjustable-rate loans declined. While more than one out of every five homeowners with a subprime ARM is still in default, that portion dipped 1 percentage point from the first quarter to 21 percent.

What's driving up the delinquency rate now is the number of homeowners with risky, adjustable-rate prime loans made with little or no proof of the borrowers' income or assets.

More than one out of 10 borrowers with a prime ARM is now delinquent or in foreclosure. That portion, 11.3 percent, was up from 9.7 percent in the first quarter, and is expected to rise as more homeowners see their monthly payments spike.

Many of these loans allowed the borrower to pay only the interest on the loan for a fixed period. Others gave the borrower the option to "pick-a-payment," adding any unpaid interest to the principal balance.

With home prices plummeting, particularly in California, Nevada, Arizona and Florida, many borrowers with these exotic loans now owe more on their homes than they are worth.

Worse still, these loans reset to higher monthly payments when borrowers reach maximum debt limits - typically around 10 to 25 percent more than the original loan.

Those resets can increase the borrower's monthly payment by more than $1,000 a month on average, Fitch Ratings said in a report this week.

And nearly half of these pay-option loans are expected to reset to higher monthly payments by the end of 2010, Fitch said.

Source AP via NyPo

Fitch: Pay-Option Adjustable-Rate Mortgages Face Dramatically Increasing Defaults

Of the $200 billion of option ARMs outstanding, Fitch expects $29 billion to recast by the end of 2009 and another $67 billion to recast in 2010. The potential average payment increase on those recasting loans is 63%, or an extra $1,053 a month, on top of the current payment, reports WSJ.

A feature of the loans, the negative amortization cap, causes the recasts to occur before the five years are up - once the balance of the mortgage grows by more than a certain percentage. This is especially expected to affect loans originated in 2005 and 2006.

Alert: Problem Bank List Due Today

The list that the FDIC maintains of "problem" banks will be publicly updated today. The last list, issued in March, totaled 90 institutions with $26.3billion in assets.

The FDIC does not list the individual banks, just the total number of banks and total assets of the banks. Both are expected to be much higher.

LaTi: Osama bin Laden Caused the Mortgage Crisis

That's what the Los Angeles Times wants you to think.

LaTi takes readers on a wild ride this morning.

First LaTi tells us that the FBI saw the threat of the mortgage crisis:

Long before the mortgage crisis began rocking Main Street and Wall Street, a top FBI official made a chilling, if little-noticed, prediction: The booming mortgage business, fueled by low interest rates and soaring home values, was starting to attract shady operators and billions in losses were possible.

"It has the potential to be an epidemic," Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said

Of course, the mortgage crisis is a lot worse than a few bad brokers. The FBI may have spotted some bad seeds moving into the mortgage brokerage industry, but they always move into the hot areas. They are probably operating in the homeland security sector, now. The real criminals were the money pumpers, Greenspan and Bernanke.

But Lati wants us to think it was a few morally challenged brokers, so they proceed:

In 2007, the number of agents pursuing mortgage fraud shrank to around 100. By comparison, the FBI had about 1,000 agents deployed on banking fraud during the S&L bust of the 1980s and '90s...

The tepid response reflects a broad realignment of law-enforcement priorities at the Justice Department in which mortgage fraud and other white-collar crimes have been subordinated to other Bush administration priorities...

Of course, the new priorities are to snoop on Americans to see if any are candidates for waterboarding. So we end up with the resource and priority challenged FBI, going after the morally challenged brokers

Absent a major shift in priorities and resources...it is likely that the Justice Department and the FBI will continue on their current path of focusing on simple cases...

What does Lati want us to think other than it is all Osama bin Laden's fault, causing the reassignment of agents that were responsible for protectng us against the mortage crisis?

It's a nutty theory, but when you don't know basc economics, that's what you get.

Mortgage Applications at Lowest Level Since 2000

Applications for U.S. home mortgages last week fell to their slowest pace since December 2000.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity declined 1.5 percent to 419.3 in the week ended Aug. 15.

The MBA's seasonally adjusted index of refinancing applications dropped 3.7 percent to 1,034.5 last week, marking the fourth drop in five weeks.

The Banking Crisis and Your Money

With the likelihood that many more banks will fail as a result of the current banking crisis, it is a prudent time to review how safe your money is, how safe your bank is and what will happen if a bank where you have money fails.

First, as most know, almost all bank deposits in the United States are insured by the FDIC up to $100,000, with additional insurance of $250,000 for money you have at a bank in an IRA. Insurance coverage of more than $100,000 at a single bank in non-IRA accounts is possible when deposits are held in different "ownership categories," such as a single, joint and trust accounts. Although most banks are FDIC insured, to check to see if a specific bank is insured you can use the FDIC's Bank Find service or by calling the FDIC toll-free at 1-877-275-3342

You can increase your FDIC insurance beyond the levels set, by opening accounts at multiple banks. The same insurance levels will apply for each bank where you place money.

Thus, the most prudent step to take, is to make sure you never have more money than the maximum insured amount at any one bank. In fact, because you will be earning interest in most of these accounts it is best to keep your balances at least 10% below the maximum so that your interest is also insured in the event of bank failure.

If you have a business with a large payroll, it may be too complex to have multiple accounts, even though your balances may climb over $100,000. In these cases, you will have to examine your bank much closer to determine how vulnerable your bank is to a bank run.

It should be noted that the current structure of bank balance sheets in the United States, indeed the world, is faulty and makes all banks vulnerable to a bank run, because they borrow short-term and make long-term loans. So if for any reason a bank has trouble attracting depositors, a liquidity crisis may occur and the FDIC could be knocking at the door and taking over the bank. Again, THIS MAKES ALMOST ALL BANKS THEORETICALLY VULNERABLE TO A LIQUIDITY CRISIS.

That said, there are some banks that are more vulnerable to bank runs then others. Banks with "hot money" deposits are extremely vulnerable. "Hot money" deposits are deposits made by those seeking the highest yields in the country and the depositors are often delivered to a bank by brokers. Therefore, "hot money" deposits are also sometimes called brokered deposits. The money is "hot money" because a bank receives these deposits by only paying a top interest rate, if the bank stops paying a high rate the hot money will move on. Further, hot money deposits are often deposits over $100,000, thus this is very nervous money that can be pulled at the slightest negative news or rumor. At IndyMac, the California bank that failed recently, $1.3 billion in deposits vanished during the days before the bank failed. 37 percent of all IndyMac's deposits were brokered accounts

So if you are putting more than $100,000 in a bank, you certainly will want to find out if your bank is dealing with hot money. Ask the bank how much money it has from depositors outside the banks region. If a bank has a sizable amount of money from depositors outside the region of the branch system, this is a sign of hot money. Also find out how much of the money that is deposited at the bank is not covered by FDIC insurance, the higher the percentage, the more likely a small rumor could cause big liquidity troubles for a bank. Since money that is not insured, because a depositor has more than $100,000 at the bank, is likely to be pulled at the frst sign of trouble. Thus, you don't want to have your money at a bank where there is sizeable brokered deposits (measured by out of region deposits) or where a lot of deposits are over the single customer limit of $100,000.

Another factor to look for that may be a signal that a bank is more vulnerable than most to failure is to look at the number of "non-performing assets" a bank is reporting relative to its loan loss reserves plus common equity. This is known as the "Texas ratio".

Developed by Gerard Cassidy and others at RBC Capital Markets, the Texas ratio is calculated by dividing the value of the lender's non-performing loans by the sum of its tangible equity capital and loan loss reserves.

In analyzing Texas banks during the early 1980s recession, Cassidy noted that banks tended to fail when this ratio reached 1:1, or 100%. He noted a similar pattern among New England banks during the recession of the early 1990s.

“Non-performing assets” of a bank include bad loans, late loans, foreclosed assets. Divide the non-performing assets by loan loss reserves plus common equity. To be safe,a ratio above 40% would be considered the danger zone and somwhere you don't want to keep uninsured money.

Another test that can be performed is to compare non-performing assets of a bank by all of its outstanding loans. A ratio above 5 percent suggests danger. The overall industry ratio is below 2 percent.

An alternative to banks for large sums of money is to buy Treasury bills directly from the Treasury.

Treasury securities can be purchased on original issue directly from the Treasury after opening either an online TreasuryDirect account at http://www.savingsbonds.gov/tdhome.htm or a Legacy Treasury Direct account. Once an account has been set up, securities can be purchased through the account (TreasuryDirect) or by using Electronic Services to purchase by telephone or web (Legacy Treasury Direct.

Treasury securities are currently available to the general public in maturities ranging from 4 weeks to 30 years. Among bills auctioned on a regular schedule, there are four terms: 4 weeks, 13 weeks, 26 weeks, and 52 weeks. All Treasury bills are issued and held electronically.

More Proof A Lot Of Bankers Should be Bounced Out of the Business

WSJ is featurng a story today on the infamous "incentives" home builders were giving buyers in the early stages of the housing crisis. Nick Timiraoswrites at WSJ:

The FBI ... confirmed that it is looking at cases where the disclosures of incentives "haven't made it all the way to the ultimate lender," says William Stern, financial crimes supervisor for the FBI in Palm Beach County, Fla., and the bureau's former national mortgage-fraud coordinator.

Interviews with real-estate agents, home buyers and former employees at home builders describe an industry where competitive pressures fueled unusually creative giveaways in a last-ditch attempt to prevent price cuts....

"You weren't buying a house. You were buying a package," says Dana Ellis, who worked as an escrow manager for Centex from 2004 to 2006. To qualify, Centex required the buyer to use the company's in-house mortgage unit to originate the loan, and the loan application included an incentive "addendum" that listed the incentives but wasn't always sent to the lender. "They weren't disclosing any of this. That was on separate paper that was pulled," she says.

Centex says that the program was confined to about 50 sales and was shut down in June 2006, about six months after it began. Centex averaged 63 home sales a month for the year beginning April 2006. "These incentives did not reflect standard corporate practice and, once discovered, the practice was immediately halted," Centex spokesman David Webster says. Centex says only one of the loans was government-backed, through the Veterans Administration home-loan program, and the builder has promised to stand behind all of those loans.

Elsewhere, developers offered "sweat equity," or payments for buyers to receive home improvements such as landscaping. "You're basically getting banks to give you a cash advance," says Chip Hickman, the general manager of Easy Street Realty in Las Vegas. He said such programs weren't heavily advertised and were offered by many area builders, although he declined to name them. "It was more sales agents in the model home saying, 'Look, tell me what you need and I got a lot of money to play with.' "

There aren't any strict limits on incentives, but they could run afoul of federal regulations if they cause the mortgage to increase by more than the cost of the incentive. "It's a phantom incentive to mask it in an excessive loan," says Brian Sullivan, a Department of Housing and Urban Development spokesman.

So big deal, the banker just sends in his own appraiser to tell him what the house is worth?

But WSJ drops this bomb:

Stronger due diligence by banks might have caught some of these problems. Banks, however, say they relied on professional appraisal companies to insure property pricing. Mortgage-fraud experts say appraisers sometimes cooperated with builders because it was the only way to get business...

What banker in his right mind would use an appraiser that was in bed with builders? Further, the special incentive programs were no secret, stories were featured about them last year in WSJ. A banker with his ear to the ground would have also picked up the scent.

All of this could have led to a simple form provided to buyer and seller that said, "Please provide complete details with regard to any incentives that have or will be provided as a result of this transaction being completed."

A real banker would have caught this problem before $1 left the bank vault.

US Foreclosure Filings Surge 55 Percent

Nationwide, more than 272,000 homes received at least one foreclosure-related notice in July, up 55 percent from about 175,000 in the same month last year and up 8 percent from June, RealtyTrac Inc. said. That means one in every 464 U.S. households received a foreclosure filing last month.

More than 77,000 properties were repossessed by lenders nationwide in July, the company said.

Nevada, California, Florida, Arizona, Ohio, Georgia and Michigan had the highest foreclosure rates. Foreclosure filings increased from a year earlier in all but eight states.

RealtyTrac noted that it had more than 750,000 foreclosed homes in its database of properties for sale, equal to about 17 percent of the 4.5 million U.S. homes that were up for sale in June.

To speed up the disposition of the 54,000 foreclosed properties it owns, Fannie Mae is opening offices in California and Florida and is considering selling those properties in bulk to investors. "I do not think this is a time to be holding onto (foreclosed properties) hoping for a better day," CEO Daniel Mudd said last week.

Greenspan Takes A Shot At Calling The Bottom In Housing

Alan Greenspan has taken a lot of heat for his role in creating the housing bubble and his attempts to paint a picture that removes him from the scene of the crime. Charges that Greenspan was a a major factor responsible for the housing bubble rest on a strong factual basis of Fed money printing during the Greenspan Era at the Fed. However, the dissing of Greenspan has gone well beyond his role in the housing disaster. If Greenspan were to pronounce that the moon circles the earth, there would be critics today. This leads us to new pronouncements from Greenspan with regard to his analysis of when the housing crisis might bottom.

We contend that Greenspan is one of the best analyzers, in the country, of economic data, and when he doesn't have a political agenda or agenda to protect his disintegrating reputation, he can provide insights into economic numbers that few can. There's no obvious agenda, outside of being accurate, for Greenspan's recent comments to WSJ's David Wessel, on the housing market. Thus, it makes sense to carefully consider these Greenspan comments made to Wessel:

Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009...he cautioned that even at a bottom, "prices could continue to drift lower through 2009 and beyond...

His desk, couch, coffee table and conference table are strewn with print-outs of spreadsheets and multicolored charts of housing starts, foreclosures and population trends siphoned from government and trade association sources.

An end to the decline in house prices, he explained, matters not only to American homeowners but is "a necessary condition for an end to the current global financial crisis" he said.

"Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world's mortgage-backed securities. We won't really know the market value of the asset side of the banking system's balance sheet -- and hence banks' capital -- until then."...

Mr. Greenspan's housing forecast rests on two pillars of data. One is the supply of vacant, single-family homes for sale, both newly completed homes and existing homes owned by investors and lenders. He sees that "excess supply" -- roughly 800,000 units above normal -- diminishing soon. The other is a comparison of the current price of houses -- he prefers the quarterly S&P Case Shiller National Home Price Index because it includes both urban and rural areas -- with the government's estimate of what it costs to rent a single-family house. As other economists do, Mr. Greenspan essentially seeks to gauge when it is rational to own a house and when it is rational to sell the house, invest the money elsewhere and rent an identical house next door.

"It's the imbalance of supply and demand which causes prices to go down, but it's ultimately the valuation process of the use of the commodity...which tells you where the bottom is," Mr. Greenspan said, recalling his days trading copper a half century ago. "For example, the grain markets can have a huge excess of corn or wheat, but the price never goes to zero. It'll stabilize at some level of prices where people are willing to hold the excess inventory. We have little history, but the same thing is surely true in housing as well. We will get to the point where there will be willing holders of vacant single-family dwellings, and that will no longer act to depress the price level."

Here's another interesting insight Greenspan made during the Wessel interview:

He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy.

He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."

More JPMorgan Writedowns

JPMorgan Chase incurred losses of about $1.5 billion since July, according to the bank.

JPM said trading conditions have "substantially deteriorated" in the third quarter compared with that of the second, and spreads on mortgage-backed securities and loans have "sharply widened"

JPM was forced to write down the value of its $33 billion in mortgage-backed securities as prices continued to drop in July, according to FT.

As of June 30, JPMorgan held an aggregate $19.5 billion of prime and Alt-A mortgage exposure, $1.9 billion of subprime mortgage exposure, and $11.6 billion of commercial mortgage-backed securities (CMBS) exposure, a recent filing showed.

"These mortgage exposures could be adversely affected by worsening market conditions, further deterioration in the housing market and market activity reflecting distressed sellers," the company said.

Report: Sovereign Fund To Be Major Buyer of Foreclosed U.S. Homes

NyPo reports:

One sovereign fund, said to have earmarked $29 billion to purchase foreclosed residential real estate, recently hired a West Coast mortgage broker and is starting to search for bargains...

The search is concentrating on single- and multi-family REO (real estate owned) homes, or homes that have already been taken over by the mortgagee...

A sovereign fund would have two distinct advantages over other investors - the depressed value of the US dollar makes the homes a bargain, and sovereign funds have deeper pockets.

The sovereign fund of Abu Dhabi, for example, has a reported $875 billion in assets, while Norway has $391 billion, Singapore has $303 billion and Kuwait has $264 billion in their sovereign funds...

At $200,000 per house, $29 billion buys 145,000 homes. The current inventory of homes for sale is just over 4 million.

Bank United: Non-Performing Assets Increase Sharply

Florida-based Bank United buried their 3Q results with a late Friday afternoon release. The release included the following:

The ratio of non-performing assets as a percentage of total assets increased to 7.73% at June 30, 2008, from 4.75% at March 31, 2008, and 0.86% at June 30, 2007.

Fannie Hits The Toilet In Q2

Fannie Mae says it lost $2.3 billion, or $2.54 a share, for the quarter that ended June 30. The loss compares with profit of $1.95 billion, or $1.86 a share, in the period last year.

Analysts surveyed by Thomson Financial had expected a loss of just 68 cents a share.

Fannie lost $2.51 billion, or $2.57 per share, in the first quarter of 2008.

CEO Mudd says things are going from bad to worse:

Volatility and disruptions in the capital markets became even more pronounced in
July. In addition, credit performance has continued to deteriorate and, based on
our experience in July, we anticipate further increases in our combined loss
reserves.

Fannie also cut its dividend, for the second time this year , this time by 86% to five cents a share, a move expected to save the company $1.9 billion in capital through 2009.

Freddie CEO: Home Prices Could Fall Another 20%

U.S. house prices will fall by as much as 20 percent nationally and the current mortgage finance crisis is about half-way through, according to Richard Syron, the chairman and CEO of Freddie Mac.

"Previously, we said house prices would fall at least 15 percent nationally, peak to trough. Today's challenging economic environment suggests that the housing market is far from stabilizing," Syron, told investors in a conference call held to discuss the company's earnings."As a result, we now believe that national home prices will fall 18 to 20 percent peak to trough. ... The long and short of it is that we now think that we are half-way through the overall peak-to-trough decline."

These "half-way through" forecasts are being derived by forecasters looking at the potential number of future problems, including payment option mortgages. They then look at when specific problems should hit and the size of the problems. This is a pretty good basic forecasting method, with one BIG caveat: Ben Bernanke. If the Fed continues to slow money growth, like it has over the last three months, things could be much worse, on the other hand, if the Fed spikes money growth, the housing market problems could clear up much faster than expected. Bernanke is the key.

Payment Option Mortgages the Next Big Debacle

Ruth Simon at WSJ explains:

Like many mortgage lenders, FirstFed Financial Corp. is struggling with rising losses. The bank posted a loss of nearly $70 million in the first quarter -- reversing years of profit. Forty percent of its borrowers became at least 30 days delinquent after the payments on their adjustable-rate mortgages were recast. The number of foreclosed homes held by the bank doubled in the second quarter from the first quarter.

But FirstFed isn't another bank grappling with the fallout from subprime mortgages that went to less-creditworthy borrowers. In fact, FirstFed was ranked last year as one of the top five banks in the nation by a trade publication, partly because it appeared to have pared back on risky mortgage loans. Yet this year, the Los Angeles bank is on the front lines of what could be the next big mortgage debacle: payment option mortgages. These loans went mainly to people with good credit, but they are likely to experience defaults that are nearly as high as -- in some cases higher than -- those for subprime.

Barclays Capital estimates that as many as 45% of option ARMs, as they are often called, originated in 2006 and 2007 could wind up in default. Another analysis, by UBS AG, suggests that defaults on option ARMs originated in 2006 could be as high as 48%, slightly higher than its estimate for defaults on subprime loans. Both studies looked at loans that were packaged into securities.

Option ARMs typically carry a low introductory rate and give borrowers multiple payment choices, including a minimum payment that may not even cover the interest due. Borrowers who make the minimum payment on a regular basis -- as many do -- can see their loan balance rise, known as negative amortization. Monthly payments can increase by 60% or more once borrowers begin making payments of principal and full interest. That typically happens after five years or earlier if the amount owed reaches a preset amount, typically 110% to 125% of the original loan balance...

FirstFed joined the crowd and business boomed. But as the Federal Reserve boosted short-term rates, the gap between the introductory rate, used to set the minimum payment, and actual rates swelled to as many as 7.5 percentage points. That meant that borrowers making the minimum payment weren't covering even the interest due...

Many borrowers took out home-equity loans with other lenders after getting an option ARM from FirstFed. These borrowers account for 25% of FirstFed's mortgage loans but represented nearly 50% of its delinquencies in the third quarter of 2007, the company says. It is harder to modify the terms of these loans because FirstFed often needs the approval of the holder of the home-equity loan...

In addition, many borrowers submitted loan applications that overstated their financial condition, making it more likely that they won't be able to afford even a modified loan. FirstFed figured that some borrowers had fudged their incomes and tried to protect itself with tighter credit standards. "But we were shocked by the magnitude of the lies," Ms. Heimbuch says. "You expect a 20% fudge. You don't expect 500%."<

S&P: Home Prices Drop By Record 12-Month Decline of 15.8% Through May

Home prices fell by the steepest rate ever in May, acco