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Another View: Common interests subdue pessimism
A few examples show Democrats and Republicans can work together, and bipartisan bills on housing finance reform are a clear possibility. Senate Majority Leader Harry Reid (Nev.) never brought the Johnson-Crapo bill to the floor.
This July 10, 2014 file photo shows a home for sale in Quincy, Mass. Housing finance reform to replace the once-bankrupt, now quasi-nationalized Fannie Mae and Freddie Mac is one area where common interest could produce congressional progress.
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AP Photo/Michael Dwyer, FileThis July 10, 2014 file photo shows a home for sale in Quincy, Mass. Housing finance reform to replace the once-bankrupt, now quasi-nationalized Fannie Mae and Freddie Mac is one area where common interest could produce congressional progress.
By The Washington Post
Posted Nov. 3, 2014 @ 11:45 am
This appeared in Sunday’s Washington Post:
We would say that it’s conventional wisdom that Washington is paralyzed by partisan conflict — but that term would not adequately express how deeply this pessimistic view has embedded itself in the political culture. Like many widely held beliefs, “Washington is broken” has a basis in reality, and then some. Only a truly blithe optimist would deny that obstacles to legislative compromise are formidable, or that they will persist no matter who wins Tuesday’s elections.
Also like many widely held beliefs, however, the “hopeless gridlock” meme has gotten a bit overdone. Beneath the conflictual surface, there are a surprising number of policy areas in which bipartisan agreement is not only imaginable but incipient, and where the two parties could produce results in the next Congress.
We have in mind work that Republicans and Democrats, mostly but not exclusively in the Senate, have done on issues that may not attract the most attention but matter a lot to people’s lives: shoring up the postal system, for example, or pushing through a sustainable transportation bill instead of the patched-together measure that currently governs federally assisted highway and subway construction. As we hope to show in this and future editorials, the building blocks of incremental but meaningful legislative progress are in place and might finally be cemented after voters have had their say. This pragmatic agenda may be achievable even if, as expected, President Obama still finds himself confronted by a Republican House, and no matter which party controls the Senate.
To be sure, on the bloodiest partisan battlefields — health care, climate change and the like — green shoots of compromise are difficult to discern. If Obama acts too precipitously on his own to bypass Congress on immigration, it could have damaging spillover effects to other issues. Conversely, the two parties find it all too easy to join in popular but irresponsible causes, such as blocking even the most modest of trims to military pensions. It’s still possible, alas, to assemble majorities on behalf of unpaid-for spending increases or tax cuts — including, perhaps, the annual grab-bag of business breaks known as “tax extenders,” which may come up in a lame-duck session.
Still, consider what already has happened in the complex but vital area of housing finance reform. Permanently replacing the once-bankrupt, now quasi-nationalized Fannie Mae and Freddie Mac is the great unfinished task of post-crisis financial repair. If achieved, a new system could supply home buyers, home builders and home lenders with something they all badly need: certainty. Before campaign 2014 began in earnest, Senate banking committee Chairman Tim Johnson, D-S.D., and ranking member Mike Crapo, R-Idaho, moved a reform bill through their panel, on a 13-to-9 vote that included six Democrats and seven Republicans in the majority. The Obama administration has also signaled support for the concept, which was first developed by Republican Bob Corker (Tenn.) and Democrat Mark Warner (Va.).
http://www.lenconnect.com/article/20141103/OPINION/141109811/10079/OPINION
Banks budget billions to settle currency probes
Major U.S. and overseas banks are budgeting billions of dollars for potential settlements of charges they manipulated the $5.3 trillion-a-day foreign exchange trading market.
London-based banking giant HSBC (HSBC) on Monday became the latest bank to disclose its plans for expected penalties, saying it had set aside $378 million for a potential settlement with Great Britain's Financial Conduct Authority.
HSBC said it was in "ongoing" talks with the FCA over the bank's "systems and controls relating to one part of its spot FX trading business in London."
"Although there can be no certainty that a resolution will be agreed, if one is reached, the resolution is likely to involve the payment of a significant financial penalty," HSBC said in a statement with the bank's third-quarter interim management statement.
Separately, HSBC said it had also set aside $550 million for a potential settlement with the U.S. Federal Housing Finance Authority to resolve an investigation of mortgage-backed securities that were sold to mortgage finance giants Fannie Mae and Freddie Mac.
HSBC shares were down nearly 2% at $50.04 in Monday morning trading.
The disclosures came after Citigroup (C) surprised investors Thursday with news that the New York-based bank had cut its third-quarter earnings by $600 million due to an increased allowance for legal expenses. The bank said the increase resulted from "rapidly-evolving regulatory inquiries and investigations, including very recent communications with certain regulatory agencies related to previously-disclosed matters."
AMERICA'S MARKETS
Citigroup's $600M about-face
JPMorgan Chase (JPM) in October reported a $1 billion after-tax legal expense, up roughly $400 million from the last quarter. The cost resulted in a 26 cents per share after-tax decrease in earnings, the bank said. JPMorgan CFO Marianne Lake told financial analysts at the time of the disclosure that the cost largely related to the foreign exchange probes.
Similarly, British banking giant Barclays on Thursday reported it had budgeted nearly $800 million in additional legal provisions "relating to ongoing investigations into Foreign Exchange with certain regulatory authorities."
Royal Bank of Scotland set aside more than $639 million for potential conduct costs related to the foreign exchange investigations, the bank disclosed on Friday.
The banking giants are among roughly a dozen global banks whose foreign exchange trading is being investigated by the FCA and authorities and regulators in the U.S., including the Department of Justice, the Federal Reserve, the Commodity Futures Trading Commission and the Office of the Comptroller of the Currency.
FEEDBLITZ
The parallel investigations on opposite sides of the Atlantic could produce a collective settlement soon, rather than separate deals by individual banks, The Wall Street Journal reported Friday, citing several people familiar with the discussions. FCA investigators hope to conclude their investigation this year, while the U.S. probes are likely to continue into 2015, the Journal reported.
The foreign exchange investigations are one of several multinational examinations focused on financial benchmarks that affect trillions of dollars in personal and business transactions. Separate probes have focused on suspected manipulation of oil prices, interest rate swaps, precious metal pricing and the London Interbank Offered Rate, or Libor — used to set rates on mortgages, credit cards and loans.
The mammoth foreign exchange currency market traditionally operated with little outside oversight. The investigations center on suspected rigging of the rates for 160 world currencies that have been calculated and distributed by a joint venture of the WM Co. and Thomson Reuters.
Investigators suspect that traders at major banks conspired in efforts to nudge rates up or down, thereby boosting their trading profits. Several banks have fired or placed traders on leave since the investigations began last year.
The foreign exchange investigation has also prompted legal challenges from investors. A group of financial funds and public employee pension systems is pursuing a federal class-action lawsuit filed in New York against 11 major banks, including Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley.
In an October legal filing, plaintiff attorneys disclosed they had held two meetings with Department of Justice officials seeking ways they could obtain records and documents from the banks without interfering with the federal investigation.
http://www.usatoday.com/story/money/business/2014/11/03/major-banks-readying-for-forex-fines/18403167/
Bill Ackman Drops One Of His Fannie Mae Lawsuits
by Michael IdeNovember 03, 2014, 7:47 am
What looks like a tactical change of course puts even more emphasis on Court of Federal Claims’ rulings
http://www.valuewalk.com/2014/11/ackman-drops-one-fannie-mae-lawsuits/?utm_campaign=trueAnthem:+Trending+Content&utm_content=csCNm4&utm_medium=trueAnthem&utm_source=facebook#!csCNm4
The focus of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) litigation has narrowed even more, with Bill Ackman’s Pershing Square Capital Management filing a notice of voluntary dismissal for its lawsuit in the DC District Court on Friday. This doesn’t mean that Ackman has given up the fight, his lawsuit in the Court of Federal Claims under Judge Sweeney is still ongoing, and if you listen to some Fannie Mae bulls, it could even be a smart tactical move.
annie Mae – Ackman focuses on Federal Claims
Last month, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders took a big hit when US District Judge Royce Lamberth threw out Perry Capital’s and Fairholme Fund’s cases. While it is a major setback, both plaintiffs are appealing and it’s only half of the overall argument against government actions regarding the GSEs: the cases in front of Judge Lamberth claim that the government violated the Administrative Procedures Act by overstepping the authority given in HERA, while the cases in front of Judge Sweeney claim that the full income sweep violates the Takings Clause.
Ackman’s case hadn’t yet been thrown out by Judge Lamberth, but it’s hard to see what could cause Lamberth to reach a different conclusion for what is nearly an identical case, and Ackman’s decision to drop the matter means that he doesn’t think the Administrative Procedures Act is going to work out and doesn’t want to follow through with a lengthy appeals process. It’s not great news for shareholders, but it’s not a fundamental shift either.
Dropping the suit may be a tactical move
Another interpretation is that Ackman is reacting to recent government tactics that are meant to shift attention the other way, toward the DC District Court ruling. Justice Department lawyers have argued that Judge Sweeney should halt the Fairholme case until after the appeals have played themselves out since the two lawsuits have so much overlap. By dropping his case in the DC District Court, Ackman may prevent them from using the same tactic against him.
There is one other possibility that can’t be ignored. If Ackman has decided to bow out of the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) fight altogether this could be the first of two such announcements. Anyone invested in the GSEs might want to keep an eye on trade volumes as well.
Freddie Mac: Mortgages rates rise from yearly lows
By admin on Saturday, November 1st, 2014 | No Comments
Mortgage rates moved away from last week’s yearly lows and slightly increased across the board, Freddie Mac’s Primary Mortgage Market Survey said.
The 30-year, fixed-rate mortgage averaged 3.98% for the week ended Oct. 30, barely up from last week’s 3.92%. A year ago, the 30-year, FRM came in at 4.10%.
In addition, the 15-yr, FRM jumped from 3.08% last week to 3.13% this week, but still is down from 3.20% a year ago.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage increased to 2.94%, up from 2.91% a week prior and 2.96% a year ago.
The 1-year Treasury-indexed ARM slightly escalated to 2.43%, compared to 2.41% the previous week. In 2013, the 1-year, Treasury was 2.51%.
“Mortgage rates grew across the board this week, rebounding from the lowest rates of the year. New home sales grew at an annual rate of 467,000 sales in September, the fastest rate observed during the recovery,” said Frank Nothaft, vice president and chief economist with Freddie Mac.
“Meanwhile, the National SP Case-Shiller House Price Index grew at a seasonally adjusted annual rate of 0.4 percent in August,” he added.
Bankrate also reported a rise in rates, with the 30-year, FRM rising to 4.10%, up from 4.05% last week.
The 15-year, FRM grew to 3.27%, up from 3.21%, while the 5/1 ARM increased to 3.17%, up from 3.14%.
Posted in Freddie Mac | Tags Freddie mac, Mortgages
http://originatortimes.com/
Thomas M. Goldstein Elected to Freddie Mac Board of Directors
By admin on Saturday, November 1st, 2014 | No Comments
MCLEAN, VA–(Marketwired – Oct 31, 2014) – Freddie Mac (OTCQB: FMCC) today announced that Thomas M. Goldstein was elected as a director on the company’s board. Goldstein, 55, has held a variety of senior executive positions with several prominent companies over the course of his career and has extensive financial services, insurance, mortgage banking and risk management experience.
“Tom will be an excellent addition to the Freddie Mac Board of Directors,” said Christopher S. Lynch, Freddie Mac’s non-executive chairman. ”He is an experienced senior executive with demonstrated leadership skills and a deep understanding of mortgage banking and risk management practices. We expect Tom to bring valuable insights to the board during a critical time for the national housing finance industry.”
From April 2011 to June 2014, Goldstein was senior vice president and CFO of the Protection Division of Allstate Insurance Company. Goldstein also served in several executive and finance positions for LaSalle Bank Corporation, including as chairman, CEO and president of ABN AMRO Mortgage Group from 2005 to 2007 and as CFO of LaSalle Bank Corp. from 2002 to 2004. Previously, he spent ten years with Morgan Stanley Dean Witter in several roles, including as vice president and head of finance, risk management, model development and investor relations of SPS Transaction Services.
Goldstein earned a bachelor’s degree from Union College and a master’s degree in business administration from the Wharton School at the University of Pennsylvania.
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Today Freddie Mac is making home possible for one in four home borrowers and is one of the largest sources of financing for multifamily housing. Additional information is available at FreddieMac.com, Twitter @FreddieMac and Freddie Mac’s blog FreddieMac.com/blog.
http://originatortimes.com/
Withdraw and Correct the Error of Thy Ways: The Perry Capital full Epstein article 11/01/14
In my previous two posts on Forbes.com, found here and here, I have attacked for a variety of reasons the recent memorandum opinion of Judge Royce Lamberth in Perry Capital LLC v. Lew, which he issued before discovery and without hearing oral arguments from either. In this post, still writing as a consultant for several institutional investors, I refer to those statutory provisions that Judge Lamberth (the Perry Capital opinion) either ignored or misconstrued. In my judgment, these errors of omission and misinterpretation, when joined with the mistakes I referred to in the earlier posts, are so serious and one-sided, that he should withdraw his decision, in order to reconsider this position.
More specifically, the Perry Capital opinion plays fast and loose with the statutory framework of the 2008 Housing and Economic Recovery Act (HERA) in ways that paint a totally false picture of its treatment of three key points. First the opinion seriously misstates the rights and duties of the Federal Housing Finance Agency (FHFA) as a conservator. Second, it seriously misstates the authority of Treasury under HERA. Third, he refuses to allow any evidence on the possible collusion between FHFA and Treasury in fashioning the Third Amendment.
First, let’s examine FHFA’s rights and duties. In his opinion, Judge Lamberth quotes 12 U.S.C. § 4617(a)(2), which provides “[FHFA] may, at the discretion of the Director, be appointed conservator or receiver for the purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated entity.” His implication is that both conservators and receivers have all the powers listed in this section. But he fails to quote the provision that deals exclusively with the duties of FHFA as conservator:
12 U.S.C. 4617(b)(2) (D) Powers as conservator
The Agency may, as conservator, take such action as may be—
(i) necessary to put the regulated entity in a sound and solvent condition; and
(ii) appropriate to crry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.
Note that this last provision does not refer to any ability of the conservator to “wind up” the operations, which is a power given exclusively to a receiver. Nor does it contemplate in the slightest, as Judge Lamberth suggests in footnote 20 any “fluid progression” that allows FHFA secretly to morph itself from a conservator to a receiver, without going through any formal process to work that change. It is wholly incorrect for him to write “FHFA can lawfully take steps to maintain operational soundness and solvency, conserving the assets of the GSEs, until it decides that the time is right for liquidation. See 12 U.S.C. § 4617(b)(2)(D) (“[p]owers as conservator”).” The cited section, quoted in full above, negates that fanciful suggestion. That conclusion is reinforced by 12 U.S.C. § 4617(b)(2)(E), immediately following, which addresses separately the “additional powers as receiver” to organize a liquidation of assets. The choice of form matters. The FHFA needs to initiate a formal proceeding to make the shift from one role to the other, which it has never attempted.
Second, Treasury’s authority under HERA. Indeed, the stringent limits on FHFA referred to above fit into the parallel limitations that HERA imposes on Treasury. In footnote three the Perry Capital opinion has this to say about the key provisions in HERA:
The purpose of HERA’s provision authorizing Treasury to invest in the GSEs was, in part, to “prevent disruptions in the availability of mortgage finance”—disruptions presumably due to the challenges confronting the GSEs in 2008. See 12 U.S.C. § 1455(l)(1)(B); 12 U.S.C. § 1719(g)(1)(B) (“Emergency determination required[.] In connection with any use of this [purchasing] authority, the [Treasury] Secretary must determine that such actions are necessary to—(i) provide stability to the financial markets; (ii) prevent disruptions in the availability of mortgage finance; and (iii) protect the taxpayer.”
The passage is accurate insofar as it goes, but it does not go far enough, because it ignores the sections just before and just after it. Thus Judge Lamberth does not deal with 12 U.S.C. § 1719(g)(1)(A), which makes it clear that any bailout requires the “mutual agreement between the parties,” such that the Secretary cannot unilaterally impose a deal. Similarly he ignores 12 U.S.C. § 1719(g)(1)(C), which lists among the relevant considerations “[t]he corporation’s plan for the orderly resumption of private market funding or capital market access,” and further “[t]he need to maintain the corporation’s status as a private shareholder-owned company. The Third Amendment, which precludes any return to the private market, is flatly inconsistent with these provisions. Nor does he mention that there is not one single reference to a receiver or receivership in this entire section of HERA that deals with Treasury’s powers. Any modification of the initial 2009 deal to impose a receivership is beyond the powers of Treasury. The same fate should await the de facto liquidation under the Third Amendment.
Third, Treasury’s oversight of FHFA. The Perry Capital opinion does quote section 4617, (a)(1)(7) which notes that when acting “When acting as conservator or receiver, the Agency shall not be subject to the direction or supervision of any other agency of the United States or any State in the exercise of the rights, powers, and privileges of the Agency.” That provision appears to preclude FHFA from taking directions from Treasury as the plaintiffs alleged. Nonetheless, this section is dismissed in the opinion as irrelevant because of defect in the plaintiff’s pleadings.
However, “records” showing that Treasury “invented the net-worth sweep concept with no input from FHFA” do not come close to a reasonable inference that “FHFA considered itself bound to do whatever Treasury ordered. The plaintiffs cannot transform subjective, conclusory allegations into objective facts.
The Perry Capital opinion appears to concede indirectly that the Treasury came up with this idea on its own but, nonetheless, dismisses the plaintiff’s contention as “conclusory allegations.” It is at this point, that the procedural posture of the claim matters. At no point, did Judge Lamberth allow for any discovery to establish the nature of that connection. That seems wrong. And, at no point does the opinion make reference to the Jeffrey Goldstein memo of December 20, 2010, reported by Gretchen Morgenson of the New York Times, with its bald assertion that “’the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.” Nor has anyone proffered any independent work by FHFA preparatory to the Third Amendment that might bear on the supervision issue. Judge Lamberth should have surely allowed for discovery on this key issue, which he refused to do.
I regard these deficiencies as incurable, and Judge Lamberth should rethink this opinion. He already senses the uneasiness of the situation when he writes:
It is understandable for the Third Amendment, which sweeps nearly all GSE profits to Treasury, to raise eyebrows, or even engender a feeling of discomfort. But any sense of unease over the defendants’ conduct is not enough to overcome the plain meaning of HERA’s text.
Judge Lamberth’s decision flunks his own test. It is not possible to show fidelity to HERA’s text by ignoring or misreading its most salient provisions. If Judge Lamberth does not reconsider his opinion, the Court of Appeal should instruct him to do so in no uncertain terms. And in the interim, Judge Margaret Sweeney should continue with her discovery on all disputed questions of fact until the full record comes out.
http://www.forbes.com/sites/richardepstein/2014/10/10/withdraw-and-correct-the-error-of-thy-ways-the-perry-capital-opinion/
Slash confuses me. Do you think sweeny will deny stay or will she allow stay?
Ackman Commons Injunction: NOTICE OF VOLUNTARY DISMISSAL
01 Saturday Nov 2014
Posted by timhoward717 in Fannie Mae Freddie Mac
˜ 5 Comments
Not surprised to see Ackman /Commons withdraw their injunction case from Judge Lamberths obviously corrupted court. I may update with further analysis later. (PDF below) Keep the Faith
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
LOUISE RAFTER, et al.
Plaintiffs,
v.
THE DEPARTMENT OF THE TREASURY, et al.
Defendants.
Civil Action No. 14-1404
NOTICE OF VOLUNTARY DISMISSAL
Pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(i), Plaintiffs Louise Rafter,
Josephine Rattien, Stephen Rattien, and Pershing Square Capital Management, L.P. hereby give
notice of their voluntary dismissal without prejudice of this action.
Respectfully submitted,
Dated: October 31, 2014
/s/ James E. Gauch
Thomas F. Cullen (D.C. Bar No. 224733)
Michael A. Carvin (D.C. Bar No. 366784)
James E. Gauch (D.C. Bar No. 447839)
Paul V. Lettow (D.C. Bar No. 502440)
JONES DAY
51 Louisiana Avenue, N.W.
Washington, D.C. 20001
T: (202) 879-3939
F: (202) 626-1700
jegauch@jonesday.com
Counsel for Plaintiffs
Case 1:14-cv-01404-RCL Document 16 Filed 10/31/14 Page 1 of 1
10:31:14NOTICE OF VOLUNTARY DISMISSAL
http://timhoward717.com/2014/11/01/ackman-commons-injunction-notice-of-voluntary-dismissal/
Jim Grant On Complexity: The Hidden Cost Of Central Bank Actions
Tyler Durden's picture
Submitted by Tyler Durden on 10/30/2014 17:46 -0400
Authored by Jim Grant of Grant's Interest Rate Observer,
Central banks are printing rules almost as fast as they’re printing money. The consequences of these fast-multiplying directives — complicated, long-winded, and sometimes self-contradictory — is one topic at hand. Manipulated interest rates is a second. Distortion and mispricing of stocks, bonds, and currencies is a third. Skipping to the conclusion of this essay, Grant’s is worried.
“One would not think at first sight that government had much to do with the trade of banking,” Walter Bagehot, the famed Victorian writer on finance, mused a century and a half ago. As time rolls on and regulation gives way to regimentation, the question presents itself: Do bankers have much to do with the trade of banking anymore?
One sees a certain measure of justice in the humbling of the regulated financial titans who put themselves in this position of vulnerability; many of them were going broke. Then, again, there’s irony in the regulatees ceding power to the regulators. The latter seemed to know even less about the corrupted structure of money and credit than the former.
The US Fed keeps talking about raising interest rates, and maybe the time has come, or will come in this lifetime, for the Federal Open Market Committee (FOMC) to act. Even the talk, though, places the Fed many cyclical furlongs ahead of its foreign counterparts. The central banks of Japan and Europe haven’t begun to acknowledge the eventual need for tighter money. Besides quantitative easing (QE) of one kind or another, Haruhiko Kuroda and Mario Draghi are dropping broad hints about the desirability of cheapening their respective currencies. Concerning the Swissie, the Swiss National Bank is reiterating its determination to print them up by the boxcar-full to protect the domestic Swiss economy against an export-thwarting Swiss/euro exchange rate.
What the mandarins share — ours and theirs — is faith in radical nostrums. Few would have contemplated these measures, let alone espoused them, much less implemented them, before 2008. The conventional monetary belief system changed in the blink of an eye. In 2002, in a speech in Washington, DC, then Fed Governor Ben S. Bernanke invoked Milton Friedman’s idea for emergency monetary stimulus. When banks are impaired and the price level sags, the stewards of a fiat currency could hire pilots and deliver their stimulus by air instead of by land, Bernanke observed. Hence the phrase “helicopter money.” Wall Street, bemusedly reading the transcript of Bernanke’s speech, dubbed the future chairman of the Federal Reserve “Helicopter Ben.” It seemed funny.
The Council on Foreign Relations lent its imprimatur to the concept of helicopter money in the September/October number of Foreign Affairs (Grant’s, 5 September). Martin Wolf, columnist at the Financial Times (FT), does the same in his new book, The Shifts and the Shocks.
You think you know what Wolf is going to say — he rarely surprises in the FT — but here he throws a curve ball. Murray Rothbard, the great capitalist, long ago made the case against fractional reserve banking. No need to run for your money in a Rothbard-approved banking system; it would never have left the vault. Wolf echoes the call for 100% reserve requirements.
The Federal Reserve's Securities Portfolio
Source: Federal Reserve (click image to expand).
The argument has its appeal. The semi-socialized, thoroughly cartel-ized big banks keep stepping on the same rake. QE chiefly benefits the rich because it acts through banking channels to boost asset prices. And then QE boosts them some more. By and by, there’s another crisis.
Thinking you know Wolf, you wait for him to urge an even more draconian regulatory system than the one in place. He doesn’t. Big Regulation is a failure, he allows, though not for lack of regulatory effort. In the wake of the Great Depression came the Glass–Steagall Act; it ran to 37 pages. “This time,” as he relates, “the Dodd–Frank Act ran to 848 pages and requires almost 400 pieces of detailed rule making by regulatory agencies. The total response may amount to 30,000 pages of rule making. Europe’s rule making will almost certainly be bigger still.” If the goal — always and everywhere — is to keep it simple, complexity is poison.
The answer, so Wolf proposes, is to let the government end-run the banking system by printing the money with which to pay the government’s vendors or clients. In plain English, he advocates the methods of the Continental Congress in the 1770s and the French Directory in the 1790s. Wolf is inclined to overlook the legendary inflation that turned the US Founding Fathers against fiat currency. A fine one for the silken phrases of modern economics, the columnist puts his proposition thus: “The direct monetary funding of public spending, particularly higher investment, or tax cuts would be a debt-free and highly effective way to generate additional demand.”
Debt free? Here we come to the crux of the matter. Even the 21st century paper dollar pays some small homage to classical methods. On the Fed’s balance sheet, notes and bonds “secure” greenbacks and deposits. You can’t convert a wad of dollars into Treasuries or mortgage-backed securities (MBS), but the assets do — in a formal bookkeeping sense — anchor the liabilities. A note is a promise to pay; it is a debt instrument. The bills in your wallet, you US readers, are Federal Reserve “notes.” The nomenclature is a kind of echo, a tip of the hat to the distant days of gold convertibility. Under the Wolf plan, the newly printed dollars would be secured (or backed or mirrored) by no asset. The Wolfian dollar, pound, or euro would be the purest kind of scrip, a wolf in wolf’s clothing.
What’s new here aren’t the ideas; it’s their respectability. More than five years after the start of QE1, the consumer price index (CPI) is, if anything — according to the Federal Reserve — too well contained. Interest rates have shriveled. Why not put into place a still more radical doctrine? “If you had agreed with all the academics, billionaires and politicians who denounced Federal Reserve monetary policy since the financial crisis,” Bloomberg taunted the sound money tribe, “you missed $1 trillion of investment returns from buying and holding US Treasuries.” Most nutty ideas never reach the policy-implementation stage. We would not be so quick to write off “direct monetary funding.”
It’s the way of radical monetary gimmicks that one begets another. The more they’re tried, the less they succeed. The less they succeed, the more they’re tried. There is no “exit.”
Let us say, as we happen to believe, that ultra-low interest rates do not stimulate enterprise but rather depress it. If so, the European Central Bank’s embrace of a kind of QE (the asset-backed securities purchase program outlined several weeks ago) will prove worse than unsuccessful. Failing to stimulate, it will call forth new, still more counterproductive measures.
Some will retort that the Fed has not failed but grandly succeeded — neutralized the “worst financial crisis in history” (as Bernanke now characterizes 2008), nourished a sickly banking system back to health, gilded the asset-holding portion of the community, and, by ignoring the naysayers, patched together a serviceable business recovery.
The apologists are too modest. If they’re right, the Fed has more than succeeded. It has made monetary policy history. A survey of Forty Centuries of Wage and Price Controls, by Robert L. Schuettinger and Eamonn F. Butler, concluded thus: “In all times and in all places [governmental attempts to control wages and prices] have invariably failed to achieve their announced purposes.” Interest rates are prices. Does the Fed not “control” them? It smothers them through open-market operations and influences them by speech-making. It talks up “risk assets” in general. The sum total of these policies constitute control, or attempted control, with attendant financial (and ultimately economic) distortions. We continue to take shelter from the failure of post-crisis monetary improvisation.
Federal Reserve Policy Rates
Source: Bloomberg, Federal Reserve (click to expand).
“Control no prices” is a macroeconomic commandment. “Keep it simple, stupid” (KISS) is a law of living. The Fed and its regulatory counterparts flout them both. As for KISS, banking regulation is becoming complex enough to foil not only the regulatees but also the regulators.
Let us say that you, gentle reader, are Janet Yellen. You are the most empathetic chair in Fed history. You are a believer in the efficacy of post-crisis — that is, radical — methods.
You want higher asset prices to induce the promised results of the so-called wealth effect. You want higher consumer prices to forestall “deflation.” You want stronger business activity to energize the labor market. And as much as you desire even faster rising wages and a higher labor force participation rate, you want a solvent banking system.
Once upon a time, the funds rate alone did the policymaking trick. Now the Fed fixes, or administers, three money-market policy rates. Interest paid on excess reserves (IOER) is the first. The reverse repo rate (RRP) is the second. The good, old-fashioned funds rate, or interest on borrowings in the federal funds market, is the third.
Readers who have been away for a while will hardly believe how much things have changed. To tighten monetary policy was once a snap. In receipt of the appropriate instructions, the Federal Reserve Bank of New York sold Treasury bills to its chosen network of primary dealers. The sales drained cash from the banking system, thereby reducing the volume of excess reserves. By reducing the marginal supply of liquidity, the Fed increased the marginal cost of liquidity. Up went the funds rate.
QE has steamrolled the funds rate and marginalized the funds market. Excess reserves stood at $1.8 billion when the Fed started to crank up its emergency purchases of Treasuries, mortgages, and kitchen sinks in the waning days of 2007; now such balances weigh in at $2.7 trillion. Not only is the federal funds rate low, but it also is increasingly irrelevant.
“Bills only” was the name of the doctrine by which the Fed operated exclusively at the short end of the yield curve — the idea was to minimize disruption in the pricing of longer-term securities. “Bonds only” is virtually the Fed’s modus operandi today. Out of a $4.2 trillion securities portfolio, the Fed owns just $9.8 billion of T-bills; 56% of its holdings are locked up in issues maturing in 10 years or more. The very purpose of the Fed’s immense post-crisis intervention has been to disrupt the normal pricing of longer dated securities — to promote higher house prices through lower interest rates.
Question: Without T-bills to sell, how could the Fed lift the funds rate, assuming it ever wanted to? The techniques under consideration are still in beta testing. The Fed might raise the IOER, now fixed at 25 bps. But the IOER does not by itself set the floor in rates. We know that for a fact because the funds rate is quoted at just 9 bps. Federal funds are trading at a discount to the IOER for reasons that you certainly would not care to explore in detail. The short of it is that Fannie Mae and Freddie Mac are heavy lenders of federal funds. Foreign-chartered banks (regulatory advantaged in ways that you may also not care to explore in full) are heavy borrowers. The foreign banks deposit these balances at the Fed to earn the 25 bp IOER. The risk-free arbitrage gift comes courtesy of the taxpayers; of the $2.6 trillion in total reserves in existence on 30 June, $1.1 trillion, or 40% of the total, was credited to the US branches of foreign banks. Wait till the Tea Party finds out.
The aforementioned RRP pays 5 bps, but neither does it constitute a dependable lever for rate-raising. Where the RRP came from, what it does, what it means, and what risks it poses are subjects covered in the 2 May issue of Grant’s. Suffice it to say that QE has brought about a redistribution of cash and securities. The Fed, buying everything in sight, has accumulated securities. The banks and the money funds, selling to the Fed, have reciprocally accumulated cash. From time to time, the money funds especially seek to borrow securities; accommodating them, the Fed lends collateral for cash. In this exchange of paper, the funds earn their 5 bps, lest they actually starve to death.
Stock jockeys, unfamiliar with money-market lingo and not dying to learn it, may now be holding their heads in their hands. To them we say, “Courage!” As it paid to invest the time to get up to speed on the rudiments of subprime mortgages in 2007, so it will pay to become conversant with the basics of money and of central banking operations in 2014. With apologies to Hyman Minsky, this is a monetary moment.
The central bankers themselves are trying to figure things out. In 2012, then-Chair Bernanke talked about “learning by doing.” Two years later, the mandarins are still in the job-training mode. Thus, from the minutes of the 17–18 June FOMC meeting: “Most participants said that they expected to learn more about the effects of the Committee’s various policy tools as normalization proceeds.”
It will be a learning experience for all of us. The close of the gold era gave the Fed a freer hand at propagating money and jiggling interest rates — the right to exchange dollar bills for the Treasury’s gold at a fixed rate was a major inhibitor of monetary policy creativity. But even now, in the age of QE, the policymakers work under some constraints. One of these fetters is the Fed’s own post-crisis rule-making.
Last month, Bloomberg reported that Citibank, in a new report, conveys the message: “Don’t Hate Credit, Just Use Leverage for 10% Returns.” Even if Citi were prepared to put post-2007 events out of mind, not everybody is. The Fed surely isn’t. The central bank is pushing hard to limit the banks’ reliance on short-term borrowing.
Whether this initiative will forestall or ameliorate the next financial crisis remains to be seen. Already, the initiative seems certain to complicate the next rate-raising initiative. “By curtailing wholesale funding by banks,” colleague Evan Lorenz observes, “the Fed will be curtailing the scope of money funds to invest their already virtually sterile balances. At last report, bank-issued paper accounted for 33.6% of money fund assets, according to Peter G. Crane, president and publisher of Crane Data LLC. If the banks stopped issuing CDs and commercial paper, money-fund managers would have even fewer places to invest their redundant cash. And as one regulation tends to beget another, the so-called ‘net stable funding rule,’ still on the drawing board, might require a companion directive to neutralize the net stable funding rules’ (NSFRs)’ unwanted interest-rate side effects. What form could such a workaround take?”
There ain’t no such thing as a free lunch, of course. The Bank of Yellen may choose to throw a bone to the fund industry by expanding the RRP, the facility by which the money funds exchange their cash for the Fed’s securities to earn those pre-tax 5 bps. But this too would introduce complications. As many have pointed out — President William C. Dudley of the New York Fed among them — an expanded RRP facility could prove a money magnet in the next crisis. There would be few more inviting places to run, during a run, than to the Fed itself. To counter the potential disintermediating effects of the RRP, the Fed is, as previously reported in these pages, weighing a companion repo rate (Grant’s, 2 May). The head spins.
I'm Not a Teller, I'm With The Government. Why Are You Withdrawing $50?
Liquidity is another top item on the banking regulatory docket. The Fed wants the big dumb banks (BDBs) to hold enough “high-quality, liquid assets” to tide them over a 30-day funding disruption. According to published estimates, the BDBs are $100 billion short of the $2.5 trillion in Treasuries and other easily marketable securities they are meant to stockpile. At the margin, the new liquidity requirements — by boosting the demand for short-dated instruments — would tend to push down money-market yields, even as the Fed, hypothetically, was trying to raise the yield on those instruments.
“I can’t tell you yet how we will do it,” said Dudley in a 20 May speech, “but I am fully confident that we have the necessary tools to control the level of short-term rates and the credit creation process.” Count us as nonbelievers.
In response to a complaint from the San Francisco Fed that investors refuse to believe that the Fed will do what it says — specifically about the “expected path” of interest rates over the next two years — Bianco Research (James Bianco, proprietor) has issued the following:
“Despite some talk of raising rates sooner than anticipated, the markets know by now to ignore this type of conjecture. In each of the instances below, the Fed said one thing only to act in another manner when push came to shove:
As QE1 came to a close, they claimed there would be no more QE.
As QE2 came to a close, they claimed there would be no more QE.
They claimed Operation Twist would end on 30 September 2012, only to extend it.
Calendar guidance was offered and abandoned.
Forward guidance was offered and largely abandoned.
Economic thresholds (6.5% unemployment and 2% inflation) were offered as guideposts and largely abandoned.
“In each of these instances, the market correctly ignored the Fed and priced in a more accommodating policy. Why should this episode of ‘the boy who cried wolf’ be any different?”
“Forecasting” is a word that clothes the art of educated guessing with a measure of scientific dignity. Concerning the nearby future, we guess that the Bank of Yellen will stumble over its very own policies. The interest rates it has imposed will prove to be the wrong rates — too low, we expect. Its regulatory policies will prove a stumbling block to the timely normalization of interest rates. So, befuddled by complexity, Yellen, et al., will bungle their zero-percent-interest-rate exit strategy.
Another guess: The next financial crisis will be exacerbated, not ameliorated, by the very same policies. With money market interest rates still under government control near the “zero bound,” the Fed would lack a rate to cut when the time again comes to cut. And if a Countrywide or a Merrill Lynch got into trouble again, to whom could the feds turn to perform the patriotic favor of absorbing the failing firms into a stronger balance sheet? Probably not Bank of America, which, as John Plender recently noted in the Financial Times, has already paid $16.7 billion in fines, or tribute, for trying to do its bit in 2008.
Needing to do something, the Fed would do just about anything. Helicopter money? It’s no longer inconceivable. The idea is becoming respectable.
http://www.zerohedge.com/news/2014-10-30/jim-grant-complexity-hidden-cost-central-bank-actions
Harrop: Fannie and Freddie must go. Everyone is entitled to an opinion but one so misinformed should not make it into a newspaper.
By Froma Harrop
Creators Syndicate
Posted: 10/30/2014 03:51:05 PM MDTAdd a Comment | Updated: 102 min. ago
A man uses a Bank of America ATM on Tryon Street on Oct. 24 in Charlotte, N.C. The federal government is suing Bank of America Corp. for $1 billion over
A man uses a Bank of America ATM on Tryon Street on Oct. 24 in Charlotte, N.C. The federal government is suing Bank of America Corp. for $1 billion over mortgages sold to Fannie Mae and Freddie Mac. (John Adkisson, Getty Images)
Say we didn't hear that. Say we didn't hear that rules for mortgages guaranteed by the taxpayers are going lax once again.
Oh, but we did. For starters, the push is on to lower the minimum down payment required for Fannie Mae and Freddie Mac mortgages to only 3 percent.
During the housing bubble, Fannie and Freddie bought a lot of substandard mortgages. That's why, when house prices cratered, so did they. The government had to bail them out to the tune of $188 billion. It makes little difference that the taxpayers were eventually paid back. Assuming the risk was not their job.
Taxpayers, you are being handed the bag once again. What makes you particularly vulnerable are the potent political forces determined to keep the game going -- an odd alliance of Wall Street financiers and advocates for low-income Americans.
Fannie and Freddie are "government-sponsored enterprises." They buy mortgages from lenders and package them into securities, which they then sell to investors. As long as these securities carry the government guarantee, investors need not lose sleep over the quality of the mortgages. Taxpayers should.
There have been attempts since the financial meltdown to dismantle Fannie and Freddie. But powerful banking interests have fought every move to transfer risks from the taxpayers' shoulders to their own.
In response to an angry public, they said, "Rather than end the guarantees, let's add safeguards to better protect taxpayers." Some new rules were made. Now they're being unmade.
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The Federal Housing Finance Agency wants the minimum down payment required for a Fannie-backed mortgage, raised to 5 percent, lowered to 3 percent. The prudent rule is for at least 20 percent down.
So-called advocates joined the push for easier mortgage terms -- and they should be ashamed, by the way. "Easy money" has been no friend of the poor's.
Wall Street feasted during the real estate orgy, preying on the unsophisticated with abusive fees and exploding interest rates. Folks of modest means -- drawn into its web by no- and low-down-payment loans -- lost their homes.
But before going on, let's properly assign blame for the recent financial mess. It was not, as many on the right insist, programs forcing upstanding bankers to lend money to marginally qualified borrowers -- read "minorities."
By the late '90s, half of subprime loans were made by mortgage companies not subject to the much-maligned Community Reinvestment Act. And in any case, the George W. Bush administration gutted the CRA regulations in 2004.
Low down payments often come with higher interest rates -- and a requirement to also buy mortgage insurance. Far from being compelled to lend to poor people, Wall Street seeks them out as appealing targets. And when taxpayers assume the risk, it's a no-lose proposition, is it not?
As for this passing on of risk from lenders to taxpayers, you don't have to be a conservative to despise it. Barney Frank, the former Massachusetts rep who once headed the House Financial Services Committee, was appalled at the killing of another rule -- one that made lenders assume at least 5 percent of the risk for less-than-supersafe mortgages that were rolled into securities.
Frank was extra-pained to see advocates for the poor helping the banking and real estate interests pull this off.
In most of the Free World, governments do not guarantee mortgages. Nonetheless, their people own homes. In this country, bankers and allied interests extract both lax rules and taxpayer guarantees.
And to think, Fannie and Freddie aren't even out of conservatorship yet.
It's time this story moved from the business pages to the front pages. Fannie and Freddie must go.
http://www.denverpost.com/opinion/ci_26831081/fannie-and-freddie-must-go
Fannie Mae: A Primer To Senior Preferred Shares And Warrants
Oct. 30, 2014 5:58 PM ET | 1 comment | About: Fannie Mae (FNMA)
Disclosure: The author is long FNMA. (More...)
Summary
The Fannie Mae conservatorship, and Treasury’s Senior Preferred Shares and Warrant, are governed by seven documents.
These documents are a credit to the legal scriveners’ art, making the moderately complex obscure to the lay reader.
This article will translate from the legalese the provisions that holders of Fannie stock will want to know.
This article comes out of a request by two readers for both a primer and a deep dive into the rights granted Treasury under the Senior Preferred Stock Purchase Agreement and related documents with regard to Fannie Mae (OTCQB:FNMA). As always, the goal is to translate the legalese into concepts any interested investor can follow.
The documents covered in this article will be:
Senior Preferred Stock Purchase Agreement dated September 7, 2008, (PSPA). (My thanks to the reader who sent me the link to this document.)
Senior Preferred Stock Certificate
Federal National Mortgage Association Warrant to Purchase Common Stock
Amended and Restated Senior Preferred Stock Purchase Agreement dated September 26, 2008, (Restated PSPA)
Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement dated May 6, 2009, (1st Amendment).
Second Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement dated December 24, 2008, (2nd Amendment).
Third Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement dated August 17, 2012, (Sweep Amendment).
These documents are a credit to the legal scrivener's art, making the relatively complex completely obscure to the lay reader.
Essentially, there is an original Senior Preferred Stock Purchase Agreement which has been amended four times. The first amendment is titled with Amended and Restated. The next three amendments are numbered first, second and third. Each numbered amendment replaces specific paragraphs in the Restated PSPA. Subsequent amendments also replace paragraphs some of which were changed by prior amendments.
The correct way to do this is to restate the agreement and incorporate the new provisions with the old to produce one comprehensive document. This is what was done with the Restated PSPA. After that, the parties simply executed amendments. As a result, the reader must review the Restated PSPA and each of the three subsequent amendments to verify all the changes. I have seen worse, but it is still a mess.
For readers new to the Fannie saga, the factual background to these transactions is found in prior articles here and here.
Before going further, some basic stock concepts a reader requested: Preferred stock is stock which is has some feature which gives it a "preference" over common stock. The usual preferences are liquidation and dividends. A liquidation preference is a right, in the event the company is liquidated, to receive a fixed amount per share before the owners of the common receive anything. A dividend preference is a right to receive a fixed periodic dividend, again before the common receives any dividends. Common stock has a right to a dividend only if the Board of Directors of the company, in its discretion, elects to declare one. A warrant is a right to purchase stock of the company giving the warrant. The warrant will specific the type of stock which may be purchased, the number of shares which may be purchased, the price to be paid for the shares and the date by which the shares must be purchased. After that date, the warrant expires and becomes worthless. (I ask the indulgence of more experienced investors in only covering features which apply here.)
Under the Restated PSPA, Treasury agreed to make $100B available to Fannie (Commitment). The Commitment was increased to $200B in the 1st Amendment. In the 2nd Amendment the Commitment was increased to $200B plus any Deficiency Amounts (defined as the excess of Fannie's liabilities over Fannie's assets, excluding amounts due under the Senior Preferred Stock (SPS)).
In return for the Commitment, FHFA, as conservator of Fannie agreed to a number of things
1) To issue to Treasury 1M shares of SPS. The SPS has a dividend of 10% of the Liquidation Preference. Here, Liquidation Preference is defined to be:
a) $1,000 per share (1M shares X $1,000 per share = $1B); and
b) A prorated amount equal to each draw of the Commitment. Thus, the Liquidation Preference goes up with each draw on the Commitment and goes down with each re-payment of a draw on the Commitment. This is a critical point.
2) To issue the Warrant, which permits:
a) The purchase of that number of common shares to equal 79.9% of all outstanding common stock;
b) At a price per share of "one one-thousandth of a cent ($0.00001) per share;"
c) Expiring on September 7, 2028.
3) To pay a Periodic Commitment Fee "intended to fully compensate [Treasury] for the support provided by the ongoing Commitment."
a) The fee to be set each five years by agreement of FHFA and Treasury "subject to their reasonable discretion and in consultation with the Chairman of the Federal Reserve." Treasury has the right to annually waive the Periodic Commitment Fee "in its sole discretion based on adverse conditions in the United States mortgage market."
b) The fee is payable in cash or by adding the unpaid amount of the fee prorata to the Liquidation Preference of the SPS.
This brings us to the infamous, Third or Sweep Amendment. In the Sweep Amendment, the dividend of 10% of the Liquidation Preference was changed: Beginning January 1, 2013, "Dividend Amount shall be the "Net Worth Amount" minus "Capital Reserve". In more detail, and in equation form, this is:
Total Assets (not including the Commitment)
- Total Liabilities (not including any capital stock liabilities)
= Net Worth
- Capital Reserve
= Dividend
The Capital Reserve was $3B in 2013, but reduced annually ratably to be zero in 2018.
Bottom line: Under the Sweep Amendment, every quarter, all assets of Fannie over the Capital Reserve amount are transferred to Fannie. In 2018, the Capital Reserve goes to zero. At that point, every penny of Net Worth goes to Treasury every quarter.
On the other hand, so long as the Sweep is in place, the Periodic Commitment Fee does not accrue and is not payable. Very kind.
When does the Sweep end? Funny you should ask. This was the most indecipherable part of all seven documents.
There is no explicit provision which ends the Sweep. However, since the Sweep is the dividend to the SPS, the way to end the Sweep is to pay down the Liquidation Preference ($1B plus all the draws). Paying down the Liquidation Preference causes the SPS to be retired. Thereafter, no dividend is due.
Here's the rub: since the payments under the Sweep are "dividends" and not repayment of the Liquidation Preference, there is no way for Fannie to accumulate any funds to repay the Liquidation Preference. (There's a lot more, but that's the bottom line.)
Three more interesting provisions: First, §5.3 of the Restated PSPA forbids FHFA from terminating the conservatorship without Treasury's written consent. FHFA may, however, place Fannie into a receivership without Treasury consent.
Second, §5.7 of the Restated PSPA places a maximum limit on the amount of Mortgage Assets Fannie may own as a given date. It also requires that Fannie own no more than a defined percentage of the maximum each year thereafter. The final revision, in the Sweep Amendment, revises the maximum Mortgage Assets to be not more than $650B as of December 31, 2012, and each year thereafter to be not more than 85% of the previous year's maximum at each December 31. Fannie will not be required to own less than $250B. By my calculations, the $250B should be reached in 2018.
Third, §6.7 of the Restated PSPA provides that:
"If any order, injunction or decree is issued by any court of competent jurisdiction that vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of Conservator as conservator of Seller or otherwise curtails Conservator's powers as such conservator (except in each case any order converting the conservatorship to a receivership) … [Treasury] may … declare this Agreement null and void, whereupon all transfers hereunder (including the issuance of the Senior Preferred Stock and the Warrant and any funding of the Commitment) shall be rescinded and unwound and all obligations of the parties (other than to effectuate such rescission and unwind) shall immediately and automatically terminate. (Emphasis added.)
Translation: if any court issues any order against FHFA which Treasury doesn't like, Treasury can unwind all the transactions discussed in this article "including the issuance of the [SPS] and the Warrant." Fannie would have to repay all the draws, of course. My speculation is that this was designed as a nuclear option to make any litigant fearful of having to repay the Commitment at Treasury's option. This is no longer a viable threat given Fannie's profitability but does reflect an interesting mindset.
With the documents outlined, let's talk about the implications.
First, the warrant: Did any reader earn a Gold Star by noticing the typo in the consideration for the warrant? The price per share of "one one-thousandth of a cent ($0.00001) per share" is wrong. "Thousandths" is three zeros to the right of the decimal, not four. I guess a $100B transaction just doesn't buy the same degree of proofreading it once did. Or, as my government employed friends would say: "Close enough for government work." The rule of construction is that in the event the numerals and written words differ, the written words govern. The difference in the exercise price is $90 and as a holder of Fannie common I want every penny.
On a more serious note, exercise of the warrants will increase the number of shares of common to the point that Treasury will own 79.9% of the outstanding common shares. The holders of the existing outstanding common shares will only represent 20.1% of Fannie. The exercise of the warrant will not cause the existing outstanding common to be eliminated or the current junior preferred to be converted into common.
The 79.9% number is not random. Under equity accounting rules, the owner of 80% or more of the common stock of an equity must consolidate the liabilities of that entity on the owner's books. Here, Treasury did not want to reflect Fannie's liabilities on Treasury's books. Thus, the Treasury warrant is only for 79.9% rather than 80% or more.
Second, the reduction of the maximum amount of the Mortgage Assets: At first blush this looks like part of a liquidation effort requiring Fannie to reduce its fixed income portfolio. Readers should review Bill Ackman's presentation on Fannie given in May 2014, if you have not already, to get the second blush. Ackman makes the point that Fannie has two business lines: buying, selling and holding fixed income securities, which makes money on interest spreads, and collecting guarantee fees.
Of the two business lines, the fixed income asset line is much riskier due to leverage and interest rate exposure while the guarantee fee line is more lucrative. On reflection, in the event Fannie is returned to the shareholders, reducing the mortgage assets and the associated risks, may not be a bad thing. On the other hand, I welcome any reader analysis of the relative cash flow and profit implications of the two lines.
Third, I think the reduction in the Capital Reserve is more nefarious than the portfolio reduction. Every company needs equity on the balance sheet. Reducing Fannie's equity to zero is an effective way of ensuring Fannie remains a ward of the Government, dependent on Government financing.
Fourth, in light of the legal arguments about whether Fannie has come under the control of Treasury, for what it's worth, in my opinion, the original PSPA was drafted by a Treasury attorney. Why do I say this? When an attorney prepares an agreement, he does so with his client's perspective. If the client is the seller, it's a sales contract. If the buyer is a purchaser, it's a purchase contract. Plus, it's usual, although not required, to name the seller first in a purchase and sale agreement. Review the first paragraph of the original PSPA. That paragraph lists the purchaser, i.e., Treasury, first. Very unusual, unless Treasury is your client and you view the world from Treasury's perspective. Does this have any legal bearing on the argument? Nope. But to a transactional attorney, it's telling.
Fifth, there's point about the original 10% dividend I haven't seen anywhere else. The literature about "lender of last resort" indicates that the interest rate should be "punitive" to literally punish poor business judgment. Yet, the rate should not be so high as to cripple the entity receiving the help or the purpose of the lender of last resort, to help stabilize entities, is defeated. The Government has argued that the Sweep Amendment was necessary because Fannie was unable to pay the 10% dividend. That would seem to me to be an argument that the initial 10% rate was far too much if it was so high the Government did not think Fannie could reasonably pay the dividend. The 10% interest rate smacks of ulterior motive.
Finally, in my career, I have helped raise the rent on farmers' elevators 6,000%, threatening to seize the livelihoods of entire farm communities (and been upheld by the 7th Circuit!), sold property where I knew my client had no title (quitclaim deeds), extracted 15 - 20 times the market value of a product when my client had a monopoly (free market), successfully fended off environmental agencies and finally, (arguably) cheated an order of nuns.
Yet, I'm a mere piker and stand in awe of the counsel who prepared the PSPA documents. To take every penny from the public shareholders and set up an economic servitude in perpetuity under the veil of rescue takes a special callousness which, so far, has been beyond me.
Request for reader help: I'm considering an article setting out the various Fannie suits in a chart, characterizing the approaches and discussing the high end strategies and end games for each approach as it relates to the common shares. Any reader help to forward links to complaints I don't already have would be appreciated. General articles have indicated that there are 19 or 20 Fannie Sweep or PSPA related suits. The only ones I have so far are:
Perry v. Lew, DC District Court (which includes the Fairholme suit also in the DC District Court)
Continental Western v. FHFA, Southern District of Iowa,
Fairholme v. FHFA, Court of Federal Claims
Rafter and Pershing Square v. USA, Court of Federal Claims
Washington Federal v. USA
Some of these, such as the ones before the Court of Federal Claims may be consolidated. Again, any help would be appreciated.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.
http://seekingalpha.com/article/2620535-fannie-mae-a-primer-to-senior-preferred-shares-and-warrants
Home prices are within 6% of peak levels set in 2007
By Brent Nyitray, CFA, MBA - Disclosure Oct 30, 2014 3:11 pm EDT
The Federal Housing Finance Agency’s (FHFA) House Price Index
The FHFA House Price Index (or HPI) differs from other house price indices such as Case-Shiller and Radar Logic. HPI only looks at houses with mortgages guaranteed by Fannie Mae and Freddie Mac. This means the home prices are below the conforming threshold of $417,000. It also means the borrower has a mortgage that eliminates cash-only transactions. Finally, the FHFA HPI eliminates jumbos. This makes it more of a central tendency index.
FHFA House Price Index
In August, home prices increased 0.5% month-over-month. They’re up 4.8% year-over-year. Prices are now within 5.8% of their April 2007 peak. They correspond to July 2005 levels.
Real estate values drive consumer confidence and spending. They have an enormous impact on the economy. The phenomenon of “underwater” homeowners—homeowners who owe more than their mortgage is worth—has been a major drag on economic growth. Underwater homeowners are reluctant to spend. They can’t relocate to where the jobs are. So, real estate and mortgage professionals watch the real estate indices closely.
Real estate prices also drive credit availability in the economy. Mortgages and loans secured by real estate are major risk areas for banks. When real estate prices start falling, banks become conservative. They reserve funds for losses. Increasing real estate prices makes the collateral worth more than the loan. This encourages banks to lend more.
Implications for homebuilders
Rising real estate prices are helpful for builders like Lennar Corporation (LEN), PulteGroup, Inc. (PHM), D.R. Horton, Inc. (DHI), and Toll Brothers Inc (TOL). The prices make it possible for them to raise prices and increase their gross margins. That said, it appears buyers are beginning to experience sticker shock. Prices and mortgage rates increased over the past year. Builders are noticing a drop-off in traffic. This could mean the days of double-digit average selling prices (or ASPs) are over.
Investors who are interested in trading in the homebuilding sector should look at the SPDR S&P Homebuilders ETF (XHB).
http://marketrealist.com/2014/10/home-prices-within-6-peak-levels-set-2007/?source=google
Top News U.S. Fed buys $5.3 billion of mortgage bonds, sells none
Thu, Oct 30 19:13 PM GMT
NEW YORK (Reuters) - The Federal Reserve bought $5.318 billion (3.32 billion pounds) of agency mortgage-backed securities in the week from Oct. 23 to Oct. 29, compared with $5.796 billion purchased the previous week, the New York Federal Reserve Bank said on Thursday.
In a move to help the housing market begun in October 2011, the U.S. central bank has been using funds from principal payments on the agency debt and agency mortgage-backed securities, or MBS, it holds to reinvest in agency MBS.
The New York Fed said on its website the Fed sold no mortgage securities guaranteed by Fannie Mae (FNMA.OB),
Freddie Mac (FMCC.OB) or the Government National Mortgage Association, or Ginnie Mae, in the latest week. It sold $175 million the prior week.
http://uk.mobile.reuters.com/article/idUKKBN0IJ2EE20141030?irpc=932
Q&A: Mark McCool, President of Berkadia Commercial Real Estate Services
Mortgage Observer: How did you get started in real estate?
Mark McCool: I’ve been with Berkadia and its predecessor companies for 27 years. I got my start underwriting and originating real estate loans for GMAC Financial, and then was asked to be the liaison with the commercial mortgage group back in 1998. I joined the commercial mortgage company and never looked back.
We generally hear about servicing when a property is distressed. How much of your business covers those sorts of properties?
Our portfolio covers the entire gamut—performing and non-performing loans. A few years ago, our portfolio was circling around 10 percent distressed properties. That’s come down. Agency loans and life company loans had always performed pretty well. In general, delinquency is much lower than it has been in the last couple years. If you have a borrower who is willing to work with you as you try to find the appropriate strategy to resolve the problem that typically makes for a better resolution.
There’s been talk in Congress of reforms and possible replacements for Fannie Mae and Freddie Mac. What sort of impact do you think that will have on Berkadia?
We’re the No. 2 Freddie Mac lender, the No. 5 Fannie Mae lender. We garner a lot of business from that sector, and we continue to watch it closely. I don’t think any announcement or change is imminent. There’s been a clearer distinction between the single-family side and the multifamily side of the companies, which is, in our opinion, good for us. With both companies being very profitable of late there’s less pressure for drastic changes.
Berkadia has a significant presence overseas. How did that happen?
We have a very large operation in Hyderabad, India. We’ve been there for over 12 years. We call it a hybrid servicing model. We’ve added $120 billion in servicing over the last 18 months with this model. We opened the office in 2002. It was seen initially as an opportunity to find greater efficiency—labor arbitrage. We realized that the quality of work and the quality of people allowed us to grow that platform. We have almost 700 people there today, over half of Berkadia’s 1,300 total employees. The only thing we’ve held off doing there is heavy client relations. Virtually all the back office work is done in India.
Do you hire locally?
Yes, we have no expatriates there right now. We started the operation with a couple and when it reached a level of maturity we no longer felt that was necessary. Our manager now has 19 years of mortgage experience and received his degree from Indiana State, but he is an Indian national and lives and resides in India. Last year we had 70 trips to and from Hyderabad for training and management.
What sort of people are you hiring?
We’re hiring very sharp, young people as they graduate with master’s degrees in finance. It’s no longer about the scale … of how much money we can save. It’s about the quality of people we can attract and hire.
Are any competitors outsourcing like this, or is it something that’s overlooked?
I don’t think it’s overlooked. I think the barriers to entry are significant. We’ve spent millions of dollars on the platform. We’ve been there for 12 years. There’s no one else in the industry that has something like this—some have operations, but not of this scale and not of this maturity level. Bank of America had about 30 employees in Hyderabad. They were selling their servicing rights, and we hired all their employees last year.
What’s the reaction from clients?
Clients all ask the same question: whether their data is secure.
Has Berkadia considered expanding to work with properties in India?
The next level expansion would be to provide third-party servicing directly from Hyderabad. Right now, we act as the intermediary in the U.S. and the office there does the work. The India real estate market is something we’re looking at very carefully. Berkadia is conservative by nature. We’re not interested in entering something that we don’t understand completely. We’ve been asked to service in Europe as well, which we’re considering.
Have you opened offices in other locations?
I was on the management team at the time that decided to go to India. We had looked at multiple areas: South America, [the] Virgin Islands … we had an office in Ireland at the time. We were also in Manila for a while, and we decided to close that operation about 18 months ago, because we did not have the same success. It was an issue about quality. We weren’t happy with the execution.
http://commercialobserver.com/2014/10/qa-mark-mccool-president-of-berkadia-commercial-real-estate-services/
No , Data was a very white android with maybe a blueish hue. Maybe a hint of cyanne. LOL
It means that the treasury can steal less from FnF. The treasury may have a disappointing Christmas.
Massive Civil Rights coalition calls for Reform and release of Fannie and Freddie. (Hint: This is huge)
30 Thursday Oct 2014
Posted by timhoward717 in Fannie Mae Freddie Mac
˜ 29 Comments
The real news today was a letter sent by The Leadership Conference on Civil and Human Rights to Mel Watt concerning affordable housing goals.They wrote in part: “Second, the GSEs require capital if they are to serve their historic mission. As your agency embarks upon decision-making on affordable housing policy, it naturally must be balanced with FHFA’s statutory obligation as conservator to the safety and soundness of these enterprises. We applaud FHFA for its announcement this week on the expansion of lending to middle class borrowers, this expansion will require capital. We note that some of the current proposals to raise g-fees and to impose new requirements on private mortgage insurers will increase the costs of borrowing, and would still fall short of building the capital needed to grow a robust and healthy housing market. This is especially true given the GSE’s status in, what Congresswoman Maxine Waters (D-CA) describes as seemingly “permanent conservatorship,” where they are unable to rebuild capital. In light of this, in order to ensure the best path forward for increasing homeownership in the communities we represent, we believe it is vital to initiate serious discussions about unwinding the conservatorship and allowing Fannie and Freddie to begin rebuilding their capital”
The significance of this letter is huge. This resoundingly confirms that we indeed are on the right path. Many of the points and thoughts in their letter reflect many of the ideas shared here. The tide has truly shifted; America is awakening to the reality of what life without Fannie and Freddie would be like. I want to commend those who are now coming to Fannie and Freddie’s defense. As I shared before what precipitated my trip to DC was “a profound impact, our blog had on certain congressional members”. Well, I will say tonight that I stand humbled as I see many of the ideas that I shared on that trip coming to fruition. You are now having a profound effect in ensuring that Fannie and Freddie will continue to provide equal access to the dream of home ownership in America. We need to work as a team and deliver a unified message. A simple/truthful message that conveys the truth about Fannie and Freddie. It will not be an easy task as the river of lies our opponents have unleashed runs deep. I hope all of our readers now better understand why our “Summary of Truth” is so vitally important at this critical junction. Please everyone read the letter,I will be sharing more on this ground breaking development tomorrow. Keep the Faith!
Folks the light of truth is finally shining through their clouds of lies. Millions of Americans have heard our pleas and are joining us in our fight to save these two great American Institutions. Read the membership list. All walks of life across America are represented. Our persistence and unwavering goal to ensure the truth about Fannie and Freddie is paying off.
http://timhoward717.com/
Hopefully the judge will not consider a greater good to allow the federal government to userp private companies from the owners and to violate citizens constitutional rights
Is the US heading toward another housing bubble?
This article is related to: Finance, Mortgages, Sheila Bair, Freddie Mac, Fannie Mae
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SHARELINES
t?
Is the U.S. headed toward another housing bubble?
Have new mortgage rules made it easier to buy a house?
October 29, 2014, 11:23 AM
New federal mortgage regulations don't require significant down payments. And that's only inviting a repeat of the 2008 financial crisis.
The new rules come at the behest of “housing advocacy groups, mortgage bankers and even some bond investors” who want to keep housing credit flowing, reports The New York Times. Regulators, apparently fearing loss-leery banks wouldn't lend under a new rule requiring they retain 5 percent of mortgages they sell, included exemptions that allow no-down-payment loans conveniently labeled as low-risk.
Government-backed Fannie Mae and Freddie Mac guarantee about half of mortgages and typically require about 20 percent down. But many other mortgages will be more likely to default under these new rules. And when they do, there will be “much bigger losses with zero percent down than 20 percent down,” warns Sheila C. Bair, former FDIC chairwoman.
Minimizing losses once defaults occur is an important rationale for requiring down payments. But the fundamental reason is that down payments help minimize default risk upfront. And they're evidence that borrowers have the financial wherewithal and, equally important, the discipline to make mortgage payments on time and in full.
Like looser auto-loan requirements lately, the new rules foolishly prize mortgages' availability over their quality. Which will fuel another housing bubble. Which makes another financial crisis more, not less, likely.
http://www.sun-sentinel.com/opinion/commentary/sfl-is-the-us-heading-toward-another-housing-bubble-20141029-story.html
Fitch: FHFA Proposals to Have Muted Impact on Mortgage Industry
The following is from Fitch Ratings on Oct. 27:
The Federal Housing Finance Agency's (FHFA) announcement last Monday that it plans to further refine representation & warranty requirements and allow Fannie Mae and Freddie Mac to purchase mortgages with slightly higher loan-to-values (LTV) signal a continued shift in direction.
Fitch believes the proposed changes tend to help the GSEs maintain their dominant position, potentially leaving less room for private capital in the mortgage market.
Fitch sees the changes proposed by FHFA as incrementally helpful to residential real estate market activity only if banks become more willing to ease lending standards. While the initial market reaction to the proposed changes has been positive, it is not clear if banks will loosen their credit overlays on agency loans and increase lending volume. Currently, the GSEs' credit standards remain lower than those of originators, despite the revised rep & warranty framework put in place in early 2013. Banks have been much more cautious about underwriting because of the scale of loan putbacks imposed by the GSEs post-crisis.
We believe the proposed increase in LTV levels to 97 percent from 95 percent may result in some benefit to the active private mortgage insurers (MIs), which provide coverage on most GSE loans with LTVs above 80 percent.
The decline in downpayment requirement could increase the number of loans eligible for private mortgage insurance coverage and would extend the average length of policies' coverage. The benefit to the MIs, however, also depends on banks' willingness to lend at higher LTVs. It may also increase the riskiness of their insured books with more high-LTV loans. The Private Mortgage Insurance Eligibility Requirements, a new set of capital rules set to be finalized by the end of 2014, remain an uncertainty for the industry and potentially another long-term challenge for MIs.
Additional information is available on fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at fitchratings.com. All opinions expressed are those of Fitch Ratings.
http://insurancenewsnet.com/oarticle/2014/10/30/fitch-fhfa-proposals-to-have-muted-impact-on-mortgage-industry-a-571009.html#.VFInFLl0xqM
Mortgage Bonds Stare Down End of QE as Gains PersistBy Jody Shenn October 29, 2014 The end of the Federal Reserve’s third round of bond purchases is proving to be a non-event for mortgage-backed debt.
That’s partly because even though the U.S. central bank won’t be adding more home-loan securities to its balance sheet, policy makers will still be buying enough to prevent its holdings from shrinking. Those purchases are having a greater impact as the pace of net issuance slows to a quarter of the amount last year amid a weaker property market.
The $5.4 trillion market for government-backed mortgage bonds is defying predictions for a slump tied to the wind-down of the Fed stimulus program, whose completion was announced today. Yields on benchmark Fannie Mae notes have shrunk 0.17 percentage point this year relative to government debt, narrowing to within 1.05 percentage points of an average of five- and 10-year Treasury rates.
Story: The Hawaiian Tropic Effect: Why the Fed's Quantitative Easing Isn't Over
“This strong performance was in sharp contrast to the consensus view at the beginning of the year,” Gary Kain, president of Bethesda, Maryland-based American Capital Agency Corp. (AGNC:US), said yesterday on an earnings call.
The Fed’s asset purchases are “essentially done at this point and the mortgage market remains well supported,” said Kain, whose firm is the second-largest real-estate investment trust that buys home-loan debt.
Tighter Spreads
The yield spread on the Fannie Mae securities is 0.46 percentage point less than the average during the past 15 years as of 3 p.m. in New York, according to data compiled by Bloomberg. It’s also 0.08 percentage point tighter than when the Fed started its third round of quantitative easing, known as QE3, in September 2012.
Video: Will the Fed End QE Next Week?
The U.S. central bank has also been buying Treasuries under the program, which has swelled its balance sheet by $1.66 trillion to a record $4.48 trillion. The Fed said last month it will keep buying enough mortgage bonds to maintain the size of its holdings, which total $1.71 trillion excluding some unsettled purchases, until after policy makers start raising their benchmark interest rate.
Money markets are now predicting that won’t happen until the end of next year after the recent global economic and political turmoil pushed out expectations for a tightening.
Fed Buying
While the Fed “will still be in the market for some time” with its reinvestments, more demand from investors will need to emerge in the longer run to offset the exit of the market’s biggest buyer, said Kevin Grant, chief executive officer of Waltham, Massachusetts-based CYS Investments Inc. (CYS:US)
Video: QE Made `Positive Difference' for Economy: Hunter
“We don’t know who that is and the market probably does not need that buyer right now given the low supply, but eventually the market will need that new buyer,” Grant said on the mortgage REIT’s Oct. 21 earnings call.
The central bank’s reinvestments absorb about $20 billion of mortgage securities each month, according to BNP Paribas SA (BNP) estimates, limiting supply now amid what is a seasonal slowdown. BNP Paribas predicts the debt will outperform and reiterated its recommendation today after the Fed statement.
“As we are entering seasons where purchase activity and net issuance declines, this lack of supply should be more pronounced,” BNP Paribas analyst Anish Lohokare wrote in an Oct. 23 report.
Video: Fed Ends QE as Hawks Focus on Employment Gains
Net issuance, or sales adjusted for the repayment of outstanding debt, fell to $47 billion in the first nine months of 2014, and will probably reach $62 billion for the year, according to Citigroup Inc. (C:US) analysts led by Ankur Mehta.
Home Sales
That’s about a quarter of the $245 billion issued last year, reflecting an uneven recovery in the housing market and banks that are retaining more loans instead of selling them by packaging them into securities.
Home resales haven’t regained their 2013 peak as tepid wage growth and tighter credit restrain purchases. Contracts to buy existing homes rose less than forecast in September, after dropping 1 percent in August, the National Association of Realtors said Oct. 27.
Video: QE End Is Already Factored Into Markets: Merrin
Growth of the agency mortgage-bond market will remain a fraction of 2013’s pace next year at $75 billion as the housing market only shows “some improvement,” the Citigroup analysts forecast. Agency mortgage bonds are those guaranteed by Fannie Mae (FNMA:US), Freddie Mac or Ginnie Mae.
Debt Gains
Muted supply and a potentially longer time-line for near-zero interest rates from the Fed may bode well for home-loan securities.
Agency mortgage bonds have returned 5.4 percent this year through Oct. 27, gaining 0.5 percentage point more than similar-duration U.S. government notes, according to Bank of America Merrill Lynch index data. The debt lost 1.4 percent last year, its first annual decline since 1994.
“The end of QE3 didn’t create the dislocations” that “some people expected,” said American Capital Agency’s Kain, whose REIT has almost $70 billion of mortgage-bond investments and is among firms using borrowing based on short-term rates to invest in the market. Furthermore, “there’s a greater probability that the Fed is now going to be on hold for multiple years.”
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Caroline Salas Gage, Chapin Wright
http://www.businessweek.com/news/2014-10-28/mortgage-bonds-stare-down-end-of-qe-as-gains-persist
Yea that makes sense. Like DT has said in the past. The 30 year motgage must remain in tact. FnF the only game in town and China etc. must have confidence if they are going to buy the debt.
Can anybody connect the end the fed's QE with release of conservatorship?
Fed shuts off liquidity tap Published October 29, 2014
Washington, Oct 29 (EFEUSA).- The U.S. Federal Reserve on Wednesday announced that it will end its quantitative easing program at the end of October and will keep interest rates at 0.25 percent or lower for "a considerable time."
The shutting off of the liquidity tap, which the Fed had opened in 2012 for the third time since 2008, was something that Chairwoman Janet Yellen had already suggested the central bank would do because of the ongoing improvement in the country's economy.
This third round of QE, or the injection of liquidity into the economy by buying Treasury bonds and mortgage-backed securities, had been launched by Yellen's predecessor Ben Bernanke in 2012 to stimulate economic growth after the bursting of the financial bubble.
Bernanke, with Yellen as his vice chairwoman, resorted to "unconventional monetary measures" in three rounds - 2008, 2010 and 2012 - given that he could not reduce interest rates, which already stood at zero, any further.
The Fed then began conducting a monthly QE program to stimulate the economy under which it has bought a total of $4.5 trillion worth of Treasury bonds and mortgage bonds issued by Fannie Mae and Freddie Mac.
In January 2014, however, the Fed announced the start of a gradual $10 billion per month tapering or reduction of the program from the original $85 billion per month in bond purchases until Wednesday, when it said that the $15 billion still remaining would also be halted.
The Fed released a statement after the two-day meeting of its rate-setting committee saying that "the substantial improvement in the outlook for the labor market ... (and) sufficient underlying strength in the broader economy" were the reasons it was halting the bond-buying program.
The U.S. unemployment rate in September was 5.9 percent, far below the 8.1 percent it stood at when the program was launched in 2012. EFEUSA
http://latino.foxnews.com/latino/news/2014/10/29/fed-shuts-off-liquidity-tap/
Unfortunately we have not seen mid term players acting on this. Maybe it will be too late in 2016 because we will be free by then.
I forgot the date, can somebody tell me when 3rd. Quarter earnings are due to be released?
DEFENDANT’S MOTION TO STAY PROCEEDINGS PENDING APPEAL OF THE DISTRICT COURT’S SEPTEMBER 30, 2014 DECISION IN PERRY CAPITAL, LLC v. LEW ET AL. (Fairholme Lawsuit)
29 Wednesday Oct 2014
Posted by timhoward717 in Fannie Mae Freddie Mac
˜ 22 Comments
We had to know this was coming, the government is requesting that Judge Sweeney issue a stay in the “Fairholme Lawsuit” PENDING APPEAL OF THE DISTRICT COURT’S SEPTEMBER 30, 2014 DECISION IN PERRY CAPITAL, LLC v. LEW ET AL. Unbelievable the lengths they will go to cover up their brazen crime. Judge Sweeney will not fall for this. I will likely add more analysis on this later,check back. Keep the Faith
Let’s not let the motion to stay proceeding in the “Fairholme lawsuit” distract us from our important work on the “Summary of Truth”. There have been numerous fantastic comments on yesterdays post. We are making great progress. Some folks keyed in on a big issue regarding the “Truth number three: Fannie and Freddie were used as a tool to save failing banks shortly after they were put into conservatorship in 2008.”
We need the exact dollar amount of the sub-prime MBS that Fannie and Freddie were forced to buy.
I have attached a pdf of the motion: 9:28:14 DEFENDANT’S MOTION TO STAY PROCEEDINGS PENDING APPEAL OF THE DISTRICT COURT’S SEPTEMBER 30, 2014 DECISION IN PERRY CAPITAL, LLC v. LEW ET AL.
http://timhoward717.com/
If it is from WSJ it is not bad news just bad journalism. I am sure there will be plenty of knowledgeable people right here on Ihub that will poke holes in that article.
It seems as though you are looking for some legal reason that those things can be done. To date I have not read or heard of any legal reasons unless you accept the federal governments reasoning of "because we say so". That is a big part of why I am holding. I will leave these questions up to plaintiffs to ask the defendants and count on defendants to settle rather than be exposed in discovery. If they don't settle I will rely on the judge's ruling to expose the injustice.
Civil Rights And Shareholders Groups Ask For FHFA Action
Discussion › Recent News › Civil Rights And Shareholders Groups Ask For FHFA Action
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October 29, 2014 at 8:11 pm #2483 Reply
Civil Rights And Shareholders Groups Ask For FHFA Action
Oct. 29, 2014 3:59 PM ET | About: Fannie Mae (FNMA), Includes: FMCC
Disclosure: The author is long FNMA, FMCC. (More…)
Summary
Civil rights groups ask FHFA to preserve Fannie and Freddie.
The American Dream of Homeownership must be preserved for the middle class and minorities.
Fannie and Freddie must be allowed to rebuild capital.
As several pre-conservatorship shareholder lawsuits appear to be resolved with Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC), shareholders have been looking to their future. This includes the possibility of action by FHFA Director Mel Watt to end the conservatorship and strengthen the housing market.
This week, the Leadership Conference on Civil and Human Rights (civilrights.org) sent Director Watt a letter asking for the conservatorship to end.
Among their goals, they want to:
Preserve the 30-year Fixed Rate Mortgage,
Promote the American Dream of Homeownership among the middle class and minority groups,
Strengthen Fannie Mae and Freddie Mac by raising and retaining capital, and
Ending the “permanent conservatorship” of the GSEs.
Here is the text of the letter.
October 28, 2014
The Honorable Melvin L. Watt, Director
Federal Housing Finance Agency
400 7th Street SW, Ninth Floor
Washington, DC 20024
Re: RIN 2590-AA65: 2015-2017 Enterprise Housing Goals
Dear Director Watt:
On behalf of The Leadership Conference on Civil and Human Rights, we write in response to the Federal Housing Finance Agency’s (FHFA) request for comment regarding the 2015-2017 Enterprise Housing goals’ proposed rule. We greatly appreciate the leadership you have shown to date at FHFA to ensure the financial safety and soundness of the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, and for policies that will help to secure a fair and affordable housing market.
Click the link for more.
…
http://seekingalpha.com/article/2612545-civil-rights-and-shareholders-groups-ask-for-fhfa-action
http://investorsunite.org/discussion/topic/civil-rights-and-shareholders-groups-ask-for-fhfa-action/
Deutsche Bank AG (DBK), Germany’s biggest lender, is replacing its finance and legal chiefs as mounting litigation expenses wiped out quarterly profit and the firm begins talks to settle probes into alleged market rigging.
The bank swung to a net loss in the three months through September after setting aside 894 million euros ($1.1 billion) for litigation, the company said today. Yesterday, the Frankfurt-based lender named Goldman Sachs Group Inc.’s Marcus Schenck to succeed Stefan Krause as chief financial officer and promoted Christian Sewing to the board to oversee the firm’s legal affairs.
Deutsche Bank is among institutions accused of attempting to manipulate currency markets and said today it’s in talks with authorities to resolve its role in the industrywide rigging of benchmark interest rates. It is also under investigation for doing business with countries subject to U.S. sanctions, including Iran, while authorities in Germany and the U.S. have criticized its accounts and regulatory reports.
http://www.businessweek.com/news/2014-10-29/deutsche-bank-swings-to-third-quarter-loss-on-legal-costs
Former treasury official from Reagan era slamming Holder about his lies concerning big banks. Who is in bed with who. It was scathing and just put on youtube today. Originallyinterviewed around Oct 23rd. I went back to find out what news agency it was and it had already been removed. This censorship shit is amazing.
Damn I just watched it
Must watch this video. Right in our faces!
Congressional Democrats Assist Ackman In Wall Street Feud
by Guest PostOctober 29, 2014, 8:47 am
Congressional Democrats assist billionaire hedge-fund manager in Wall Street feud by Josh Kaib and Will Swaim of Watchdog.org / Franklin Center
Two years ago, billionaire hedge-fund manager William Ackman announced boldly — from a stage in a Manhattan conference center — that his Pershing Square Capital Management had taken a $1 billion short position on publicly traded Herbalife Ltd. (NYSE:HLF), the Los Angeles-based maker of nutrition products.
Bill ackman
He was, in other words, betting that Herbalife would fail.
Hoping to persuade investors to bail on the company’s stock, he has repeated the claim he made then — that Herbalife unfairly targets the poor, and especially Latinos, in what he calls “the best-managed pyramid scheme in the history of the world.”
But two years on, Ackman’s high-profile multimedia battle has apparently failed — and even backfired. He recently admitted that another glossy presentation, in July, inadvertently set off a rise in Herbalife’s stock.
Many would give up. But not William Ackman.
In his crusade against Herbalife, Ackman has lately taken the fight for hearts and minds to a place where the minds are a little smaller: Capitol Hill.
Buying influence in D.C.
Through several K Street lobbying firms, Ackman has reached out to Democrats, especially those in the Latino caucus. His goal: To get those Democrats to use the threat of a Federal Trade Commission investigation to accomplish what Ackman’s high-powered media campaign and the marketplace could not – the takedown of an entire company.
“It’s terrifying,” said Veronique de Rugy, a senior research fellow at the free-marketMercatus Center at George Mason University in Virginia.
“This is the danger of a government that is almost limitless in its power and reach,” she said. “It gives private actors the incentive to use government influence to manipulate the marketplace.”
She said Ackman’s tactics were “a kind of crony capitalism” in which the wealthy use their access to achieve through politics what they cannot win in the free market.
Ackman says he won’t profit from is Wall Street play. Speaking on CNBC at the dawn of his campaign against Herbalife, he called the nutrition-maker’s profits “blood money,” and said he would give any of his own profits on the deal to charity.
“I don’t want to make any money off of this,” he said.
Ackman’s critics say his promise extends only to his own income after expenses, and not to other investors in his hedge fund.
However pure his motives, government documents reveal Pershing Square’s attempt to use the federal hammer on Herbalife, spending $250,000 this year alone on such high-profile lobbyists as Moffett Group , Wexler & Walker Public Policy Associates, Ibarra Strategy Group and Mayer Brown LLP. Such disclosures do not identify officials with whom the lobbyists met, nor do they specifically mention Herbalife. Disclosures from all four firms use the same language to describe the subject of their meetings on Capitol Hill: “Issues relating to enforcement of consumer protection laws and securities regulations relating to pyramid schemes.”
Former Obama adviser Bill Burton, now with Global Strategy Group, also is reportedly assisting Pershing Square with messaging.
Targeting congressional Democrats
Not leaving everything to lobbyists, Ackman reportedly “personally lobbied” California Rep. Linda Sanchez, D-Calif., and U.S. Sen. Edward J. Markey, D-Mass. Brian Herr, a Republican who is running for Markey’s seat in November, filed an ethics complaint against Markey, complaining the incumbent had abused his office in the Ackman case. Following his meeting with Ackman, Markey became the only member of the U.S. Senate to call for an FTC probe of Herbalife, Herr said. The company’s stock dropped after Markey’s complaint went public, and dropped again when the FTC announced that it would investigate Markey’s charges. A Boston Globe investigation concluded that Markey’s letter to the FTC overstated constituent complaints against Herbalife.
“Ackman is a liberal hedge-fund ‘master of the universe’ who seeks to profit by manipulating the political system with the help of allies like Ed Markey,” said Phil Kerpen, president of the free-market group American Commitment. “The scheme would be career-ending if these guys were Republicans, but Democratic bad behavior just doesn’t have the ability to shock anymore.”
Markey has admitted he met with Ackman, but said he did not know that Ackman had shorted Herbalife stock.
Markey was following a path to the FTC blazed by Rep. Linda Sanchez. On June 5, 2013, she wrote to FTC Chair Edith Ramirez, an Obama appointee, expressing her “concern about the marketing and business practices of Herbalife, Ltd. In particular, I am troubled by allegations that this company may be harming consumers — especially those from our country’s most vulnerable populations.”
Evidence uncovered by the New York Times suggests Ackman had advance knowledgeof the letter. According to the Times, Ackman told fellow hedge-fund managers at a Midtown Manhattan steakhouse that Linda Sanchez sent a letter to the FTC just a day after it was sent. But the letter was not yet public, and the commission’s disclosures reveal that the letter was not yet stamped as received.
Linda Sanchez’s office tried to smooth this over later, releasing the letter as part of a July 3, 2013, news release — backdated to look as if the letter had been made public the day it was sent to the FTC, June 5.
That would make Ackman’s role in the process appear cleaner. But it wasn’t true. Linda Sanchez’s office later admitted it backdated the news release, but defended the move, saying the congresswoman believed the letter had been made public as soon as it was mailed to the FTC, according to the Times. Her office also admitted sending Ackman a copy of the letter a month before putting it online as part of the news release.
Ackman’s FTC strategy became a sister act. In July 2013, Eduardo Lerma, a senior aide to Linda Sanchez’s sister, U.S. Rep. Loretta Sanchez, D-Calif., emailed staff associated with members of the Congressional Hispanic Caucus. Lerma’s goal: to convene a July 18 conference call to persuade caucus members to press the Federal Trade Commission into service on Ackman’s behalf.
Indicating Loretta Sanchez’s sympathy with Ackman’s position, Lerma’s email said he and his colleague Jessica Fernandez “would be on hand to answer any questions you might have.” But don’t worry about their expertise on the subject of Herbalife: “We will also be joined by Roy Katzovicz, the chief legal officer for Pershing Square Hedge Fund to offer further background on the issue,” Lerma wrote in the July 16, 2013, email.
Lerma didn’t have to tell caucus staffers who Pershing Square is. Perhaps indicating the full-court lobbying effort, his email said, “Many of your Members have been approached on this issue and should be familiar with it.”
Fernandez, now a lobbyist, did not respond to a request for comment.
‘A type of bullying’
What happened at the Kill Herbalife caucus call isn’t clear. What’s clear is that 10 days later, on July 26, 2013, Loretta Sanchez and caucus colleague Michelle Lujan Grisham,D-N.M., signed off on a letter to the FTC’s Ramirez. The letter pretended to a kind of objectivity — “we have met with groups representing both sides of this issue,” they declared — but listed a who’s-who of Latino pressure groups (including Hispanic Federation and the League of United Latin American Citizens) as evidence that “concerns” about Herbalife were so nearly universal that the FTC, with its “expertise,” ought to fully investigate the business.
A month later, on Aug. 27, 2013, Ramirez wrote back. The FTC chair’s response was noncommittal, restating Snachez and Lujan Grisham’s complaints about Herbalife and even their request for an FTC investigation. “As you know,” Ramirez wrote, the FTC is charged with protecting consumers, and “takes seriously” the general harm done by “illegal pyramid schemes.” It then lays out a lengthy catalogue of successful FTC actions against “purportedly legitimate multi-level marketing companies” — a history dating back to 1996.
The letter studiously avoided any promise to investigate. That would come after Markey complained a few months later. Eduardo Lerma, Loretta Sanchez’s aide and the man behind the July 2013 Kill Herbalife caucus meeting, says there’s been nothing new since then, and the congresswoman has nothing to add.
“I think we made our voice clear in that (letter),” Lerma told Watchdog.org. “The main thing now is we just want to see what the FTC decides.”
But who needs more than that letter or the FTC’s response anyhow? Who needs a real FTC finding that Herbalife is guilty of wrongdoing?
Certainly not William Ackman. The billionaire hedge-fund manager already has the stage props he needs, and he’s using them on his own website and in presentations (andhere).The letters name Herbalife alongside a rogues gallery of notorious FTC targets. They appear on congressional or FTC letterhead. They seem to threaten imminent federal action that would destroy any American company.
They seem designed to stampede Herbalife investors toward the exits.
“When it comes to investing, all’s fair in love and war. But that ends when an investor recruits the government to get involved,” said Ryan Ellis, tax-policy director at Americans for Tax Reform. “Hiring lobbyists and radical pressure groups in order to incite liberal Congressmen against your business competitor is not fair. In fact, it’s a type of bullying, and it should be out of bounds in American business competition.”
http://www.valuewalk.com/2014/10/ackman-herbalife-lobbying/
Fannie Mae joins JPMorgan to launch new risk-sharing bond deal
One distinction: cash used as collaterol
Ben Lane
October 29, 2014 12:50PM
In its continuing effort to offload some of the credit risk it carries, Fannie Mae is preparing to launch a new credit-risk sharing deal with the help of JPMorgan Chase (JPM).
In its previous four risk-sharing deals, Fannie has released the deals itself under its Connecticut Avenue Securities platform. Its last Connecticut Avenue offering was its largest, checking in at $2.05 billion.
The previous Connecticut Avenue offerings included reference loans with original loan-to-value ratios of up to 97%.
Now, Fannie is partnering with JPMorgan to launch a new risk-sharing vehicle, J.P. Morgan Madison Avenue Securities Trust. The first offering in the series checks in at $989 million, but there are differences from the Fannie’s previous risk-sharing offerings, according to Fitch Ratings’ presale report.
Fitch said that the deal will simulate the behavior of an approximately $989 million pool of JPMorgan-originated mortgage loans that will secure Fannie Mae-guaranteed mortgage-backed securities.
But there are several key differences, Fitch said. According to Fitch’s report, the bonds will be issued from a special-purpose trust whose security interest consists of the cash collateral account, an interest account, a retained interest-only strip and a reserve account, all of which will be used to pay principal and interest on the notes, instead of Fannie issuing the notes itself.
“Payments will be made to Fannie Mae for mortgage loans that become 180 days or more delinquent or when certain other recourse events occur,” Fitch said. “Upon the occurrence of a recourse event, a payment will be made to Fannie Mae from amounts in the CCA not to exceed 4.75% of the initial mortgage pool balance.”
According to Fitch, all of the mortgages were originated by JPMorgan and purchased by the trust, which will sell the mortgage loans to Fannie Mae to be held in a newly issued Fannie Mae-guaranteed MBS.
“The issuer will retain an IO strip of 26.88 basis points off the mortgage pool and issue the class M securities and class X-IO certificates,” Fitch explained. “Payments to class M-2 certificates and X-IO certificates are subordinated to class M-1.”
Fitch issued a BBB- rating to the $19.78 million M-1 class and will not issue ratings to any of the other classes.
“Proceeds from the sale of class M notes will be deposited in a CCA,” Fitch said. “Payments to M-1 notes will be paid from amounts on deposit in the CCA, interest account and reserve account. Amounts received from the retained IO strip will be deposited in the interest account to pay interest to class M securities.”
Fitch said that the collateral pool is high quality, featuring prime-quality, 30-year, fully amortizing and fully documented fixed-rate mortgages to borrowers with strong credit profiles and low leverage. The pool is also geographically diverse, which Fitch said is a positive.
In total, there are 3,792 loans in the JPMMA 2014-1 pool, with an average loan balance of $260,846. The underlying collateral carries a weighted average loan-to-value ratio of 76% and an average FICO score of 750.
The average seasoning on the underlying loans is two months.
The risk retention structure is different than the Connecticut Avenue deals as well.
“Unlike the CAS transactions where Fannie Mae retains the first loss class and a vertical slice of the class M securities, Fannie Mae will only absorb losses once the 4.75% protection provided by the class M securities is depleted,” Fitch said.
“While Fitch views more positively those transactions that more closely align the interests of the subordinated noteholders with those of the senior holders, there is little incremental risk, if any, with this transaction, as Fitch expects Fannie Mae to maintain and enforce its policies nondiscriminately across all its approved seller/servicers.”
When contacted, JPMorgan and Fannie Mae both declined to comment on the new offering.
http://www.housingwire.com/articles/31879-fannie-mae-joins-jpmorgan-to-launch-new-risk-sharing-bond-deal
Fannie,’ ‘Freddie’ don’t need to comply with foreclosure law
Controversial lawsuit filed by AG dismissed
By: Pat Murphy October 29, 2014
Fannie Mae and Freddie Mac cannot be compelled to comply with the state’s new foreclosure law requiring mortgage holders to participate in “buyback” transactions that allow borrowers to remain in their homes under more favorable loan terms, a U.S. District Court judge has ruled. The lawsuit, filed by Attorney General Martha Coakley in June, alleged that ...
I am not going to register for a special offer just to read the rest of this so it is a teaser.
http://masslawyersweekly.com/2014/10/29/fannie-freddie-dont-need-to-comply-with-foreclosure-law/
We will give them a bull scat slap... Yea, I know. Gross...but funny.
Already posted but note the link. Cnbc is actually promoting this
analysis on the future of Freddie Mac and Fannie Mae, authored by senior risk-management expert and University of Maryland business professor, Clifford Rossi.
Join the Conversation: Visit our discussion board and follow us on Twitter
Titled Forging a Path Out of Conservatorship for Fannie Mae and Freddie Mac, the paper demonstrates how the Federal Housing Finance Agency (FHFA) has the statutory authority to end the conservatorship — despite the fact that after 6 years, and $218 billion in realized profits offsetting the government's 2008 cash infusion, it has refused to do so. Pagliara, Rossi and restructuring expert Matt Seu will discuss how FHFA can release Fannie and Freddie from the conservatorship and begin the process of re-capping and reforming them.
Panelists will respond to Rossi's proposals and address key challenges and solutions to ending the conservatorship.
WHO:
Tim Pagliara is Executive Director of Investors Unite, a Fannie Mae and Freddie Mac shareholder, and Chairman and CEO of CapWealth Advisors.
Cliff Rossi is founder and principal at Chesapeake Risk Advisors and Executive-in-Residence & Professor of the Practice at the Robert Smith School of Business, University of Maryland. Prior to entering academia, Dr. Rossi had nearly 25 years' experience in banking and government as a senior risk management expert for the largest financial services companies and for Fannie Mae and Freddie Mac.
Matt Seu serves as Principal with Actualize Consulting, focusing on mortgage and fixed income practice areas and managing the firm's accounts on the GSEs. Prior to this, he served as VP at Freddie Mac where he focused on large scale business and technology change efforts. Mr. Seu was responsible for redesigning a significant portion of Freddie Mac's operational infrastructure and served as head of the corporate enterprise data program.
WHEN: Wednesday, October 29, 2014; 3:00 PM EDT
NOTE: Please RSVP to info@investorsunite.org
About Investors Unite: Formed by Tennessee investor and CapWealth Advisors Chairman and CEO, Tim Pagliara, Investors Unite (www.investorsunite.org) is a coalition of over 1,100 private investors from all walks of life, committed to the preservation of shareholder rights for all invested in Fannie Mae and Freddie Mac. The coalition works to educate shareholders and lawmakers on the importance of adopting GSE reform that fully respects the legal rights of Fannie Mae and Freddie Mac shareholders and offers full restitution on investments.
Contact: info@investorsunite.org
http://www.cnbc.com/id/102132466
Mortgages Stare Down End of QE as Rally Persists: Credit Markets
Jody ShennOct 29, 2014 6:15 am ET
(For more credit-market news, click TOP CM. To be sent this column daily, click SALT CMW.)
Oct. 29 (Bloomberg) -- The end of the Federal Reserve’s third round of bond purchases is proving to be a non-event for mortgage-backed debt.
That’s partly because even though the U.S. central bank won’t be adding more home-loan securities to its balance sheet, policy makers will still be buying enough to prevent its holdings from shrinking. Those purchases are having a greater impact as the pace of net issuance slows to a quarter of the amount last year amid a weaker property market.
The $5.4 trillion market for government-backed mortgage bonds is defying predictions for a slump tied to the wind-down of the Fed stimulus program, whose completion economists predict will be announced today. Yields on benchmark Fannie Mae notes have shrunk 0.14 percentage point this year relative to government debt, narrowing to within 1.09 percentage points of an average of five- and 10-year Treasury rates.
“This strong performance was in sharp contrast to the consensus view at the beginning of the year,” Gary Kain, president of Bethesda, Maryland-based American Capital Agency Corp. said yesterday on an earnings call.
The Fed’s asset purchases are “essentially done at this point and the mortgage market remains well supported,” said Kain, whose firm is the second-largest real-estate investment trust that buys home-loan debt.
Tighter Spreads
The yield spread on the Fannie Mae securities is 0.43 percentage point less than the average during the past 15 years, according to data compiled by Bloomberg. It’s also 0.05 percentage point tighter than when the Fed started its third round of quantitative easing, known as QE3, in September 2012.
The U.S. central bank has also been buying Treasuries under the program, which has swelled its balance sheet by $1.66 trillion to a record $4.48 trillion. The Fed said last month it will keep buying enough mortgage bonds to maintain the size of its holdings, which total $1.71 trillion excluding some unsettled purchases, until after policy makers start raising their benchmark interest rate.
Money markets are now predicting that won’t happen until the end of next year after the recent global economic and political turmoil pushed out expectations for a tightening.
Fed Buying
While the Fed “will still be in the market for some time” with its reinvestments, more demand from investors will need to emerge in the longer run to offset the exit of the market’s biggest buyer, said Kevin Grant, chief executive officer of Waltham, Massachusetts-based CYS Investments Inc.
“We don’t know who that is and the market probably does not need that buyer right now given the low supply, but eventually the market will need that new buyer,” Grant said on the mortgage REIT’s Oct. 21 earnings call.
The central bank’s reinvestments absorb about $20 billion of mortgage securities each month, according to BNP Paribas SA estimates, limiting supply now amid what is a seasonal slowdown. BNP Paribas predicts the debt will outperform.
“As we are entering seasons where purchase activity and net issuance declines, this lack of supply should be more pronounced,” BNP Paribas analyst Anish Lohokare wrote in an Oct. 23 report.
Net issuance, or sales adjusted for the repayment of outstanding debt, fell to $47 billion in the first nine months of 2014, and will probably reach $62 billion for the year, according to Citigroup Inc. analysts led by Ankur Mehta.
Home Sales
That’s about a quarter of the $245 billion issued last year, reflecting an uneven recovery in the housing market and banks that are retaining more loans instead of selling them by packaging them into securities.
Home resales haven’t regained their 2013 peak as tepid wage growth and tighter credit restrain purchases. Contracts to buy existing homes rose less than forecast in September, after dropping 1 percent in August, the National Association of Realtors said Oct. 27.
Growth of the agency mortgage-bond market will remain a fraction of 2013’s pace next year at $75 billion as the housing market only shows “some improvement,” the Citigroup analysts forecast. Agency mortgage bonds are those guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
Debt Gains
Muted supply and a potentially longer time-line for near- zero interest rates from the Fed may bode well for home-loan securities.
Agency mortgage bonds have returned 5.4 percent this year through Oct. 27, gaining 0.5 percentage point more than similar- duration U.S. government notes, according to Bank of America Merrill Lynch index data. The debt lost 1.4 percent last year, its first annual decline since 1994.
“The end of QE3 didn’t create the dislocations” that “some people expected,” said American Capital Agency’s Kain, whose REIT has almost $70 billion of mortgage-bond investments and is among firms using borrowing based on short-term rates to invest in the market. Furthermore, “there’s a greater probability that the Fed is now going to be on hold for multiple years.”
--With assistance from Jeff Kearns in Washington.
http://washpost.bloomberg.com/Story?docId=1376-NE5XQA6JTSES01-5EDMMMN4VP1JM78OE1865KDV01