EZ-pass bailout for housing agency

Automatic overdraft protection for the FHA

The Federal Housing Administration is burning through its cash reserves like mad — no surprise given the collapse of the housing market. But it won’t have to face Congress to beg for more dough like most corporations.  It can just keep writing checks, courtesy of the US taxpayer, and keep on going. According to the borrow-and-go story in today’s Washington Post, the agency keeps excess reserves in an account at the Treasury:

The government is legally required to ensure that the balance in the FHA’s emergency reserve fund does not drop below 2 percent of outstanding FHA loans. Over the past five years, starting during the years of the housing boom and continuing into the bust, FHA’s reserves have tumbled and are now below that threshold, according to the agency.

Under a 1990 law, the FHA turns over to Treasury each year whatever excess money the agency expects to have left over after it pays losses on insured mortgages from what is known as the financing fund. The excess money is credited to the FHA’s emergency reserve fund. In those years when the FHA underestimates its needs, it automatically gets an infusion from Treasury to make up the difference.

via FHA’s reserve fund hits 7-year low – washingtonpost.com.

State regulators shame SEC, ponder ditching rating agency role

Why doesn’t the Securities & Exchange Commission have the nerve to strip away the powers they gave to the ratings agencies decades ago? In this scoop from the Wall Street Journal, we learn that state regulators are trying to  do just that for insurance companies, mega-bond investors who lost tons in the mortgage security melt-down:

Regulators of some of the biggest bond buyers in the world are considering cutting credit-ratings firms’ role in the market in response to botched ratings of complicated mortgage securities.

Ratings firms including Standard & Poor’s and Moody’s Investors Service are facing fresh dissent from state insurance regulators, who are considering moving away from the firms ratings’ as a way of measuring the health of insurer portfolios of mortgage-backed bonds.

via Regulators of Big Bond Buyers Challenge the Raters – WSJ.com.

This is a really big deal. Insurance companies lost billions as a result of rating agency incompetence:

Insurers have a lot riding on the outcome of the debate. Life insurers are big owners of mortgage-backed securities, which represent about 8.5% of insurers’ portfolios, according to A.M. Best Co. U.S. life insurers had to ante up a total of $2 billion in capital in 2008 to back up residential mortgage-backed securities to satisfy regulators seeking assurance companies have enough money to pay claims, the American Council of Life Insurers said. As of June 30, the insurers were facing a year-end bill of $11 billion to back up such securities, the trade group said.

So here’s the score: Statists-1; federalists-0.

Geithner, Summers said to envisage super-Fed from the start

Geithner whispers to Summers

The Washington Post offers a behind-the-scenes narrative on how regulatory reform was birthed at the White House.

Time and again, lawmakers, regulators and industry lobbyists pressed their concerns behind closed doors at the White House and the Treasury Department, according to participants.

Turf-conscious regulators opposed the idea to consolidate banking oversight agencies and took their appeal over the Treasury directly to the White House. Ultimately the administration spared all but one agency.

A few key lawmakers argued against merging the two federal agencies that oversee the stock and commodity markets. That did not happen.

Insurance companies fought over whether a national regulator should oversee them. The White House dropped the proposal.

But on those elements that mattered most to the administration, particularly expanding the powers of the Federal Reserve, Obama’s senior advisers were unyielding.

via Core Reforms Held Firm As Much Else Fell Away – washingtonpost.com.

The Federal Reserve, which sat idly by as Wall Street piled on enough leverage to blow up the global economy, is now the No. 1 policeman for too-big-to-fail institutions. And who was president of the NY Fed during this time: Treasury Secretary Timothy Geithner.

The Post makes clear just how strongly Geithner feels about the importantce of his former home:

On May 8, lobbyists representing many of the nation’s banks and hedge funds huddled with senior White House advisers in the Roosevelt Room, seeking to snuff out an administration plan to increase the Fed’s authority to regulate them, when Treasury Secretary Timothy F. Geithner stuck his head in the door.

Fresh from meeting with Obama, Geithner asked the lobbyists what they were up to. When they explained they preferred that a council of regulators, rather than the central bank, safeguard the financial markets, Geithner silenced the discussion with a string of obscenities, according to people who were present.

“I don’t believe in rule by committee,” he said.

The funny thing is, the markets did in essence end up with a council of regulators with a souped-up Federal Reserve. The funny thing is, banking analyst Richard Bove told Bloomberg News that no one needed any new powers: If the regulators had simply been doing their jobs for the past decades it’s unlikely we would be in the mess we’re in now.

Still, the results show just how little political will there is to de-Balkanize the regulatory system. It’s a big disappointment.

Photo via Getty

The Monster Under Our Bed: AIG's Untold Story

Monster? What monster?

Six months into the bailout, American International Group asks in a PowerPoint presentation pitched to anxious regulators “AIG: Is the Risk Systemic?” It’s a real nail-biter. In fact, it’s a new literary genre, the mystery-horror slideshow. It may look like any other mind-numbing Wall Street deck — dense, disorganized, and repetitive — but like AIG itself, it’s both scarier and more bloated.

The central message: AIG is big, really big, really, really, really big and if anything were to happen to AIG, any of its affiliates, subsidiaries or distant cousins, taxpayers around the world would suffer. But don’t ask too many specific questions. AIG is the monster under your bed and as we speak it is plotting to swallow you and your dollars before you can ask even one question. Don’t try running down the hall to Mom and Dad. He’s already taken care of them.

So grab your blankie, America, and get ready for a blood-curdling tale. There’s a yellow-eyed monster under your bed. And it wants the mother of all bonuses.

Quickly flip through the slides, and try to find the answer to the central question — did US taxpayers really need to bail out AIG? Did it pose systemic risk?  In 21 blood-stained slides, you will learn in 17 different ways that the risk is “significant”: For example, in Europe last September, there were “significant  ‘runs on the bank’ in various Asian and European countries.”  I can’t help but wonder: How many insignificant runs on the bank were there and how is the global financial system surviving? Did anyone rescue those poor banks? Did we lose a country or a system (other than Iceland), but never get notification?  Interest rates don’t suggest banks aren’t lending to one another, a big problem back in the fall of 2008. In February the one-month Libor, a key indicator of banks’ willingness to lend, averaged 0.4628%, down from 2.927% in September 2008. Other credit market indicators do not suggest that anyone expects imminent runs on the bank; or if there had been one, the problem is under control.  But we should take note: AIG Consumer Finance Group operates in Latin America, Europe, and Asia.

Slide after slide describes lots o’ “impact”.  The impact may be  “sweeping” for insurers or “cascading”  on the economy at large. Sometimes, it is simply an impact, like an airplane dropping from the air.

At regular intervals, the AIG horror show implies that the world as we have come to know it, even in our current reduced state, would cease to be:

A failure of AIG would have a devastating impact on the U.S. and global economy.
The economic effects may include:
• Potential unemployment for a large portion of the 116,000 employees, including 50,000 employees in all 50 states and the District of Columbia (generating annual U.S. salaries totaling $3.5 billion)
• Adverse impact on AIG’s 74 million customers worldwide, including 30 million U.S. customers in its general insurance, life insurance and retirement services, and financial services businesses

AIG probably has the largest concentration of actuaries in the world, many of them who have manipulated numbers to create profits for AIG’s numerous and sprawling insurance units. Actuaries, you may recall, were the people in your college statistics class who annoyed (or tutored) the psych majors. Why weren’t they asked to prepare scenarios — best, likely, and worst — for the regulators? They always have calculators in their pockets. The scenarios sprinkled throughout this PowerPoint presentation are clearly designed to terrify — which leads me to wonder: When did level-headed insurance geeks, probability whizzes,  turn into monstrous propagandists? Clearly, the goal of this document is designed to scare every single dollar out of the government that it possibly can. A serious business document, it certainly is not.

This week the one year demise of Bear Stearns, a firm initially deemed as too interconnected to fail. But one year later, we really don’t know if that was true. Lehman flamed out in a spectacular bankruptcy the very same weekend that Uncle Sam rushed to save AIG. Yet six months later, we are still in the dark: What happened to the $600 billion in debt plus the $400 to $500 billion in financial instruments tied to Lehman? Derivatives defenders note that the contracts were settled for a net $6 billion; the number is so small because many investors had offsetting trades that netted out to zero. But not so fast — not everyone participated in that round of settlements; many counterparties have holes in their pockets. The flow of money remains a mystery.

AIG launches its mystery-horror tale by reminding us of the perils of interconnectedness, the term the Federal Reserve chairman relied on in cobbling together the Bear Stearns deal. In the heat of the moment, it’s hard to know if it was the right assessment. But somebody, somewhere in government should be analyzing what went right and what isn’t so right in these deals. AIG  doesn’t analyze either; it terrifies by noting that “interdependencies” in the system that “could potentially bankrupt or bring down the entire system or market if one player is eliminated, or a cluster of failures occurs at once.”

It’s time these financial whizzes showed more rigor in analyzing the risks. AIG shouldn’t be putting out sales propaganda. (AIG didn’t return a call to discuss the slideshow.) Of course, many will note that they were wrong about how they analyzed risk the past few years. That just simply means they should be getting in the people who saw what was coming and made money from it. Those people aren’t very hard to find. (Of course, they could get it wrong; but that’s no excuse for not trying.)

Before saying good night, let’s take a look at one last slide, No. 3, “Risk Assessment Summary”. It pretends to solve the mystery at hand.  It states: “In the fall of 2008, the Federal Reserve and Department of the Treasury determined that the systemic risk of a failure of AIG was so great that they should provide a support program by injecting liquidity and equity capital into AIG.”  Translation: We take no responsibility for the bailout. The Fed and Treasury decided that they needed your money to prevent a systemic meltdown. So, never mind. You don’t need this presentation. Just stick it under your bed.

Hedge funds win from AIG's bad mortgage bets

Hedge Funds knew. Investment banks knew. But someone forgot to clue in AIG. According to today’s Wall Street Journal, hedge funds saw the writing on the wall for mortgages and began shorting the housing market big time back in 2005. Hedgies placed the bets with investment banks like Goldman Sachs and Deutsche Bank. Those firms wanted the hedge fund business, but not the exposure to the subprime dreck. As a result, some slice of the $52.5 billion in housing losses at AIG may end up lining the pockets of savvy hedge fund investors, the WSJ says.

“Up until AIG exited the market in 2006, ‘AIG was by far the single largest ultimate taker of risk in the [subprime mortgage] CDO space,’ says a senior investment banker whose firm bought credit protection from the insure,” the Journal reports.

Even more galling: both the investment banks and hedge funds appear to be getting paid 100 cents on the dollar, says the New York Times: “What upsets some people is that the government paid the counterparties in full even though the underlying securities had not experienced widespread, or perhaps even any, defaults.”

NYT writer Gretchen Morgenson observes: “Every day, insurance companies sell policies to homeowners to cover the cost of damage in the case of fire. Why would those companies agree to pay out in full to a policyholder even if a fire had not occurred?”

The bailout package was thrown together in haste. Now it is a multi-armed monster; no one knows where the next appendage will come from to grab another fistful of taxpayer money. Congress and the White House are busy playing the blame game, threatening to wrest $165 million back from some seriously amoral AIG executives as billions and billions of dollars slip through the cracks of the financial rescue program to unintended recipients.