The nation’s banks are holding a much higher rate of defaulted mortgages on their books than mortgage giants Fannie Mae and Freddie Mac, according to a report released Wednesday by the Office of the Comptroller of the Currency, which regulates national banks.

The report said that some 19.7% of mortgages held in banks’ portfolios were delinquent at the end of March. By contrast, nearly 6.8% of mortgages backed by mortgage giants Fannie Mae and Freddie Mac were nonperforming, and 11.4% of all mortgages that are serviced by banks.

Read it all.

Estimates of monthly GDP indicate that the only growth in the first quarter of 2011 was from February to March. After a temporary rise in March, the economy began sliding again in April, with declines in real wages, in durable-goods orders and manufacturing production, in existing home sales, and in real per-capita disposable incomes. It is not surprising that the index of leading indicators fell in April, only the second decline since it began to rise in the spring of 2009.

The data for May are beginning to arrive and are even worse than April’s. They are marked by a collapse in payroll-employment gains; a higher unemployment rate; manufacturers’ reports of slower orders and production; weak chain-store sales; and a sharp drop in consumer confidence.

Read it all.

Read it all.

Foreign banks were among the biggest beneficiaries of the $3,300bn in emergency credit provided by the Federal Reserve during the crisis, according to new data on the extraordinary efforts of the US authorities to save the global financial system.

The revelation of the scale of overseas lenders’ borrowing underlines the global nature of the turmoil and the crucial role of the Fed as the lender of last resort for the world’s banking sector.

Read it all.

The U.S. government will face pressure to bail out struggling states in the next 12 months, said Meredith Whitney, the banking analyst who correctly predicted Citigroup Inc.’s dividend cut in 2008.

While saying a bailout might not be politically viable, Whitney joined investor Warren Buffett in raising alarm bells about the potential for widespread defaults in the $2.8 trillion municipal bond market. She said state and local issuers have taken on too much debt and that the gap between public spending and revenue is unsustainable.

“People will think the federal government will bail these states out,” Whitney, 40, the founder of Meredith Whitney Advisory Group Inc., said in an interview on Bloomberg Television’s “In the Loop.” “It’s going to be an incredibly divisive issue.”

Read it all.

Winston Churchill once moaned about the long, dishonourable tradition in politics that sees commerce as a cow to be milked or a dangerous tiger to be shot. Businesses are the generators of the wealth on which incomes, taxation and all else depends; “the strong horse that pulls the whole cart”, as Churchill put it. No sane leader of a country would want businesspeople to think that he was against them, especially at a time when confidence is essential for the recovery.

From this perspective, Barack Obama already has a lot to answer for. A president who does so little to counter the idea that he dislikes business is, self-evidently, a worryingly negligent chief executive. No matter that other Western politicians have publicly played with populism more dangerously, from France’s “laissez-faire is dead” president, Nicolas Sarkozy, to Britain’s “capitalism kills competition” business secretary, Vince Cable (see article); no matter that talk on the American right about Mr Obama being a socialist is rot; no matter that Wall Street’s woes are largely of its own making. The evidence that American business thinks the president does not understand Main Street is mounting

Read it all.

Pundits are restless, an election looms ”“ so this week, President Barack Obama is proposing yet another round of special favors, aimed at improving the economy. Prominent columnist Paul Krugman wants the plans to be “bold” and to involve huge amounts of money. Here’s a contrasting view: government should stop declaring recovery plans, bold or otherwise.

Maybe the constant announcing of new plans ”“ especially plans backed by borrowing or tax cuts ”“ is, itself, an impediment to economic growth.

Read it all.

The Obama administration and the Federal Reserve want to fix the United States economy by spending more money. But while that approach might work for Europe, it is risky for the US. The nation would be better off embracing traditional American values like self-reliance and small government.

There’s no question about it: The 20th century was America’s era. The United States rose rapidly from virtually nothing to become the most politically powerful and economically strongest country in the world. But the financial crisis and subsequent recession have now raised doubts about its future. Are we currently witnessing the beginning of the end of the American era?

Read it all.

We don’t have alternative universe laboratories to run control bailout experiments, but we can imagine the alternative outcomes if different actions were taken.

So let’s do just that. Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood Capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history); 3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

In my counter factual, the bailouts did not occur. Instead of the Japanese model, the US government went the Swedish route of banking crises: They stepped in with temporary nationalizations, prepackaged bankruptcies, and financial reorganizations; banks write down all of their bad debt, they sell off the paper. Int he end, the goal is to spin out clean, well financed, toxic-asset-free banks into the public markets.

Read it all.

The administration’s second assumption, meanwhile, is a matter of academic theories about the sizes of the relevant economic multipliers. Textbook Keynesian economics tells us that government-purchases multipliers are larger than tax-cut multipliers. And, as we have seen, the Obama administration’s economic team consulted these standard models in deciding that spending would be significantly more effective than tax cuts.

But a great deal of recent economic evidence calls that conclusion into question. In an ironic twist, one key piece comes from Christina Romer, who is now chair of Obama’s Council of Economic Advisers. About six months before she took the job, Romer teamed up with her husband and fellow Berkeley economist David Romer to write a paper (“The Macroeconomic Effects of Tax Changes”) that sought to measure the influence of tax policy on GDP. Crucial to the Romers’ method was their effort to identify changes in tax policy made during times of relative economic stability, and driven by a desire to influence economic behavior or activity (to encourage growth, say, or reduce a deficit), rather than those changes made in response to a recession or crisis. By studying such “exogenous” tax-policy changes, the Romers could be more confident that they were in fact measuring the effects of taxes and not those of extraneous conditions.

The Romers’ conclusion, which is at odds with most traditional Keynesian analysis, was that the tax multiplier was 3 ”” in other words, that every dollar spent on tax cuts would boost GDP by $3. This would mean that the tax multiplier is roughly three times larger than Obama’s advisors assumed it was during their policy simulations.

Read it all.

A new Time poll reveals just how hard the task is: Two-thirds of respondents say they oppose a second government stimulus package. And 53% say the country would have been better off without the first one.

The result is a White House pulled in three directions at once as it tries to repair the economy ”” and ensure that Obama and the Democrats can survive a rising tide of public anger. First, the Obama team is improvising ways to pass piecemeal spending items through a Congress where stimulus has become a toxic word. At the same time, the White House is signaling its concern about that budget deficit that has Tea Partyers raging ”” both through token gestures, like a White House contest that lets the public vote on cost-cutting ideas submitted by federal employees (the winner gets to meet Obama and see his or her idea go in the President’s next budget), and through Obama’s support for the work of a bipartisan deficit commission. And finally, the White House is trying to explain to angry liberals that it’s doing everything possible to keep the economy moving and fight Republican resistance to new spending.

It’s a delicate balancing act, on a par with Obama’s effort to pass health care reform without appearing to get too involved in the details. And just as it did in the health care battle, the future of Obama’s presidency ”” as well as the fate of the American economy ”” may hang on the outcome.

Read it all.

To believe Christopher Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee, the end of government bailouts is near. In truth, the financial-overhaul legislation now before Congress would do little to arrest the bailouts already in progress.

When the U.S. government rescued American International Group Inc. in 2008, it reasoned that a disorderly failure of the financial-services giant would lead to an economic catastrophe. What the Treasury and Federal Reserve said they needed was a way to wind down systemically important institutions without sending them into bankruptcy courts, to keep the companies from triggering defaults on their obligations that would cascade throughout the broader financial system.

Congressional leaders say their final bill will deliver the resolution authority regulators have been seeking. “It will end bailouts, ensuring that failing firms can be shut down without relying on taxpayer bailouts or threatening the stability of our economy,” Dodd said June 10 at the House-Senate conference committee where the differences between the two chambers’ bills are being negotiated.

It wouldn’t end AIG’s rescue, though. The reason AIG hasn’t failed is that the Fed and the Treasury continue to stand behind it. There’s no sign this will change anytime soon. Nor would the legislation force the government to do otherwise.

Read the whole thing.

It is past time to end the conspiracy of silence about Fannie Mae and Freddie Mac, government-sponsored companies that buy and sell mortgages and related securities. Both were taken over by the Treasury Department in 2008. So far Washington has shelled out $140 billion to keep them afloat. A Congressional Budget Office study says their losses could reach $400 billion. Other estimates put them at $500 billion.

In contrast, the net cost to date of TARP, after loan repayments and other government income, is $172.5 billion, nearly half of which is owed by the auto industry.

While optimists foresee the repayment of most TARP funds, the same cannot be said of Fannie and Freddie, which own well over a trillion dollars in risky mortgages and mortgage-backed securities.

Unlike TARP funds, the subsidies to Fannie and Freddie do not show up in the government’s budget. If they did, it would be even further out of balance.

Read it all.

The US economy is in a mess ”“ even if growth has resumed, and bankers are once again receiving huge bonuses. More than one out of six Americans who would like a full-time job cannot get one; and 40% of the unemployed have been out of a job for more than six months.

As Europe learned long ago, hardship increases with the length of unemployment, as job skills and prospects deteriorate and savings gets wiped out. The 2.5-3.5 million foreclosures expected this year will exceed those of 2009, and the year began with what is expected to be the first of many large commercial real-estate bankruptcies. Even the Congressional Budget Office is predicting that it will be the middle of the decade before unemployment returns to more normal levels, as America experiences its own version of “Japanese malaise….”

Three things can make a difference: a second stimulus, stemming the tide of housing foreclosures by addressing the roughly 25% of mortgages that are worth more than the value the house, and reshaping our financial system to rein in the banks.

Read it all.

It is payback time for Fannie Mae and Freddie Mac on some mortgages sold to the finance companies by lenders.

Stuck with about $300 billion in loans to borrowers at least 90 days behind on payments, Fannie and Freddie have unleashed armies of auditors and other employees to sift through mortgage files for proof of underwriting flaws. The two mortgage-finance companies are flexing their muscles to force banks to repurchase loans found to contain improper documentation about a borrower’s income or outright lies.

The result: Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Fannie Mae won’t disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009.

“Because taxpayers are involved, we’re being very vigilant,” said Maria Brewster, who oversees Fannie’s repurchase team. “No taxpayer should have to pay for a business decision that caused a bad loan to be sold to Fannie Mae.”

Read it all from the weekend Wall Street Journal.

AIG and the Federal Reserve Bank of New York have become targets of an investigation into whether the overseer had instructed the troubled insurer not to disclose certain key information to the public.

Neil Barofsky, special inspector general for the $700 billion bailout, is set to tell the House Oversight Committee on Wednesday that he has initiated an investigation into whether the New York Fed instructed AIG (AIG, Fortune 500) not to disclose more than a dozen controversial counterparty transactions to the Securities and Exchange Commission.

Read the whole article.

Scott Brown has a lot to answer for. His stunning Senate victory for the Republicans in Massachusetts sent the White House into a spin. President Obama promptly decided on the populist gesture of targeting Wall Street with vague proposals to outlaw banks’ risky activities and limit their size. Though seemingly hastily wheeled out, the ideas were first floated a few months ago by Paul Volcker, former chairman of the Federal Reserve Board, a man widely regarded as the best US central banker of the modern era. As a result they have some credibility, though they are far from being a panacea.

Many believe the banks have brought this on their own heads. The return of big bonuses so soon after a crisis of their own making, for which ordinary people will be paying for years, showed crass insensitivity and greed. America’s banks rushed to pay off their obligations to taxpayers under the Tarp (troubled asset relief programme) precisely so that they could get back on the bonus gravy train. The behaviour of the banks, however, is no excuse for flawed policy. Nobody yet knows the detail of Mr Obama’s plans, probably not even the president. But from what we know so far, they suffer from two serious shortcomings.

The first is that they would not have stopped the current crisis….

Read the whole thing.

A professor at Columbia University, Mr. Stiglitz uses his experience teaching to give the lay reader a lucid account of how overleveraged banks, a shoddy mortgage industry, predatory lending and unregulated trading contributed to the meltdown, and how, in his opinion, ill-conceived rescue efforts may have halted the freefall but have failed to grapple with more fundamental problems.

He is eloquent on how the American economy was sustained before the crisis by “a debt-financed consumption binge supported by a housing bubble” and impassioned in describing what he sees as the government’s failure to make substantial reforms to the economic system: though “excesses of leverage will be curbed,” he writes, “the too-big-to-fail banks will be allowed to continue much as before, over-the-counter derivatives that cost taxpayers so much will continue almost unabated, and finance executives will continue to receive outsized bonuses.” In each case, he writes, “something cosmetic will be done, but it will fall far short of what is needed.”

Read it all.

The effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009. That’s largely thanks to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets.

For all the panic last year, asset values never quite reached the lows that marked other bear-market bottoms, and now the rally has made several markets look pricey again. In the American housing market, where the crisis started, homes are priced at around fair value on the basis of rental yields, but they are overvalued by almost 30% in Britain and by 50% in Australia, Hong Kong and Spain.

Stockmarkets are still shy of their record peaks in most countries. The American market is around 25% below the level it reached in 2007. But it is still nearly 50% overvalued on the best long-term measure, which adjusts profits to allow for the economic cycle, and is on a par with two of the four great valuation peaks in the 20th century, in 1901 and 1966.

Read it all.

The second important lesson involves understanding why markets often do not work the way they are meant to. There are many reasons for market failures. In this case, too-big-to-fail financial institutions had perverse incentives: if they gambled and succeeded, they walked off with the profits; if they lost, the taxpayer would pay. Moreover, when information is imperfect, markets often do not work well – and information imperfections are central in finance. Externalities are pervasive: the failure of one bank imposed costs on others, and failures in the financial system imposed costs on taxpayers and workers all over the world.

The third lesson is that Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster. Other countries succumbed to the old orthodoxy pushed by the financial wizards who got us into this mess in the first place.

Whenever an economy goes into recession, deficits appear, as tax revenues fall faster than expenditures. The old orthodoxy held that one had to cut the deficit – raise taxes or cut expenditures – to “restore confidence.” But those policies almost always reduced aggregate demand, pushed the economy into a deeper slump, and further undermined confidence – most recently when the International Monetary Fund insisted on them in East Asia in the 1990’s.

The fourth lesson is that there is more to monetary policy than just fighting inflation….

Read it all.

The last two quarters were even more extreme: Productivity in the nonfarm business sector grew at a shocking 8.1% annual rate. There are two possible explanations. One: The last two quarters were among the most technologically innovative and entrepreneurial in the history of the United States. Two: Fearful businesses pared payrolls to the bone. If the second is closer to the truth, payrolls are extraordinarily lean right now. Which means that firms will need to hire more workers as their sales and production grow. Which means that employment may start growing sooner than the pessimists think.

I have been pointing this out for months, but until the last employment report, it was a hypothesis supported by no evidence. Not anymore. While payrolls continued to decline in November, it was by only a scant 11,000 jobs; and the job counts for September and October were revised upward. The data now show a clear trend that suggests that net job creation may be only a month or two away. We’ll see.

There is more to the case for optimism. For one thing, less than 30% of February’s $787 billion fiscal stimulus has been spent to date; over 70% is still in the pipeline. Pessimists dote on the fact that the rate of increase of stimulus spending has probably peaked and will be lower in 2010. True. But the level of GDP will continue to get support from fiscal policy, and a second job-creation package (“Please don’t call it a stimulus!”) looks to be in the works.

Read it all.

Federal regulators initially told Citigroup and other troubled banks that they would be required to hold on to the federal aid for some time as they return to health. But in recent months, the government switched to pushing the companies to repay the money as soon as possible. All nine firms that took federal money last October now have approved plans to pay it back.

This urgency has come despite the lingering concerns of many financial experts about the companies’ health. These analysts said they worry that the firms could face rising losses next year as high unemployment and economic weakness continue to drive great numbers of borrowers into default.

“They are rolling the dice big time,” said Christopher Whalen, a financial analyst with Institutional Risk Analytics. “My fear is that the banks will definitely have to raise a lot more capital next year. The question is from whom and on what terms.”

Read it all.

The animus towards the Fed is striking, considering that its unprecedented market interventions almost certainly averted a financial meltdown last year and a far more severe recession. But many congressmen care less about the disaster avoided than the injustice of bailed-out bankers taking home record bonuses as unemployment keeps rising. The Fed is now guilty by association, seen as too close to banks, too quick to bail them out and too generous and secretive when it does so. The Fed’s structure supplies fodder for this critique. The compromise that led to its creation in 1913 split responsibility for monetary policy between politically-appointed governors in Washington, dc, and the presidents of 12 regional banks, whose boards are appointed in part by private bankers.

Read it all.

Yet the urgent problem now isn’t TBTF [too big to fail], or even banker bonuses. These are distractions. The urgent problem is the giant riverboat gamble that Washington can save the economy by doing what comes naturally””spending money carelessly, creating massive new entitlements without funding them, dishing out cheap credit to politically favored sectors, telling business people where and how to invest.

Mr. Feinberg is an apt symbol indeed, for this gamble is built on the conceit that Washington can hector the recipients, whether auto companies, banks or homeowners, into behaving in ways that are “responsible.” So far, however, human nature is proving a disappointment: Take the outbreak of tax fraud related to the government’s emergency home-buyer’s credit.

Nor is the larger gamble looking so good either. Banks continue to fail at an alarming rate, the dollar is under assault, and Washington is looking at a future of trillion-dollar deficits. One might have guessed it would take a decade of Obamanomics to produce European welfare state levels of youth unemployment, but at 18.5% we’re there.

Read it all.

The scale of that help is huge. Loans from central banks and debt guarantees alone amount to $2.7 trillion. As with any private industry in receipt of almost unlimited cheap public funds, finance now has every incentive to be as big as possible””beyond the point of usefulness. Change the assumptions behind this weird system, and everything else, including pay and the heads-I-win, tails-you-lose culture, will move too.

Removing the explicit side of the state’s commitment is relatively simple. Some guarantees are still plainly needed now, but a firm deadline of, say, five years for the final expiry of the governments’ various crisis-induced pledges should be set globally. With the world economy in better shape, this looks more realistic than it did six months ago. But even then the implicit assumption will linger that banks will always be bailed out. This is the core problem. There are two possible responses to it: regulate banks to try to make them safer, and attempt to limit the implicit guarantee. Both approaches are now needed.

Read it all.

One year after the demise of Lehman Brothers Holdings Inc. paralyzed the financial system, “mega-banks,” as Fine’s group calls them, are as interconnected and inscrutable as ever. The Obama administration’s plan for a regulatory overhaul wouldn’t force them to shrink or simplify their structure.

“We could have another Lehman Monday,” Niall Ferguson, author of the 2008 book “The Ascent of Money” and a professor of history at Harvard University in Cambridge, Massachusetts, said in an interview. “The system is essentially unchanged, except that post-Lehman, the survivors have ”˜too big to fail’ tattooed on their chests.”

Read it all.

The biggest spur to deal-making among banks isn’t private-equity cash or foreign investors. It is the federal government.

To encourage banks to pick through the wreckage of their collapsed competitors, the Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks.

Read it all.

“The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy,” Treasury Secretary Timothy F. Geithner said in an interview.

The worry for consumers is that the bailouts skewed the financial industry in favor of the big and powerful. Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing. That imbalance could eventually squeeze out smaller competitors. Already, consumers are seeing fewer choices and higher prices for financial services, some senior government officials warn.

Those mergers were largely the government’s making. Regulators pushed failing mortgage lenders and Wall Street firms into the arms of even bigger banks and handed out billions of dollars to ensure that the deals would go through. They say they reluctantly arranged the marriages. Their aim was to dull the shock caused by collapses and prevent confidence in the U.S. financial system from crumbling.

Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation’s deposits despite a rule barring such a practice. In several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice’s antitrust guidelines typically allow, Federal Reserve documents show.

Read it all.

Why hasn’t President Obama insisted on public hearings over what happened during this financial crisis?

Not a single top executive of a Wall Street securities firm responsible for causing the financial crisis has had the courage or the decency to step forward in front of the cameras and explain to the American people in his own words exactly how and why he allowed his firm to cause the crisis. Both Mr. Fuld and Alan Schwartz, the chief executive of Bear Stearns at the end, in their Congressional testimony blamed the proverbial once-in-a-century financial tsunami. Do they or any of their peers really think this is true?

There may be a way to find out. There is much talk nowadays coming from top bankers ”” Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JPMorganChase, John Mack of Morgan Stanley and even Ken Lewis of Bank of America ”” about seeing how quickly they can repay to the Treasury the TARP money Mr. Paulson forced on them. One precondition of their being allowed to repay the funds should be a requirement that each gives a public deposition and explains, under oath, what truly happened and why.

This piece was given an astonishing full page on yesterday’s New York Times op-ed page. Read it all.

Many of Mr. Obama’s supporters surely thought this young, dynamic generation of public leaders would elevate the hip, cutting edge of the U.S. economy — nanotechnology, genomics, robotics, even health and medicine technology. Instead, we’ve gotten the Old Economy on dialysis. General Motors has been commanded to restart aging UAW factories to output product on behalf of the administration’s hybrid-car obsession. Where’s the New Economy in any of this?

Or ObamaCare. How will a build-out of Medicare (b. 1965) to cover everyone and costing $1.2 trillion over 10 years not kill innovation in medical and health technology by siphoning away growth capital and its potential financial rewards?
All of this seems so out of sync with the persona and promise Barack Obama conveyed in the campaign. A lot of his Web-based supporters probably thought Mr. Obama was going to be about promoting young guns with new ideas seeking risk capital for the next big thing. Instead, it looks as if the Obama years will be about managing soft landings for mature industries and old unions in the American autumn.

Congress is talking about a “bad behavior” tax on beer and soda pop to reduce obesity and fund mega-Medicare. How about a bad-behavior tax on government? Slim as the president looks, Uncle Sam is looking like quite the fat boy.

Read it all.