Posts Tagged ‘department of treasury’

Obama Administration Sets Its Sights on Housing Reform

Tuesday, September 14th, 2010

Obama administration turns to reforming the root of the financial crisis – the housing market.  The Obama administration – fresh from its financial regulation reform legislative victory – is not resting on its laurels.  Next on the busy agenda is reforming the American housing market, which is viewed by many as the root of the financial crisis. In a response to collapsing housing prices and waves of foreclosures, the administration it looking at overhauling the government’s housing policy, although the specifics of the proposed legislation are still under discussion.

The new approach could include bigger downpayments and higher interest rates, as well as more barriers to lower-income people purchasing houses they cannot afford.  The goal is to create a more stable housing market that puts fewer taxpayer dollars on the line and lessens the risk that owners will be unable to pay their mortgages.  Reform also could bring changes to the financial markets as investors are forced to find new investment vehicles if the government removes incentives for putting their money in the mortgage market.  Since the financial crisis began in 2008, the federal government has spent hundreds of billions of dollars to keep housing afloat and assure that borrowers can get loans – and much of that money will never be recovered.  Since the federal government seized Fannie Mae and Freddie Mac, the two mortgage giants and the Federal Housing Administration have more or less been the sole sources of backing for new mortgages for nearly two years.

The Treasury Department’s new Office of Capital Markets and Housing Reform is studying options and has decided that federal policy should highlight “sustainable homeownership” rather than merely growing the rate of ownership.  According to Vincent O’Donnell of the Local Initiatives Support Corporation, “My impression is that the administration at pretty much every level is serious about a balanced policy.  Their purpose is to make more workable rental housing programs.”

Is CRE Seeing Light at the End of the Tunnel?

Wednesday, May 19th, 2010

First quarter bank returns for commercial real estate not as bad as once predicted.  As the 1st quarter 2010 numbers come in, banks across the country are still uneasy about the short-term outlook for commercial real estate – and their portfolios in particular.  At the same time, there is a growing sense that the potential for disaster has faded and that problems are being resolved.

In general, banks reported that troubled loan assets were moving through their books.  Older construction loans are being converted to term loans, which gives borrowers an opportunity to hang on when cash flow is sluggish.  At the same time, banks are reporting that new non-performing commercial real estate loans were coming in at a slower pace.  Some loans labeled as non-performing were moving into the real estate owned (REO) grouping, meaning that they will eventually be sold back into the marketplace.  The International Monetary Fund’s April 2010 Global Financial Stability Report offers a fairly optimistic point of view for bank losses in the near future, as anticipated write-downs on U.S. bank’s loan and securities books diminished in comparison to late last year.

“These improved short-term losses are due primarily to two factors.  First, signs of an improving economic environment have decreased loss expectations,” said Mark Fitzgerald, senior debt analyst for CoStar Group.  “Second, some write-downs have simply been pushed forward as external factors, including low interest rates, have enabled banks to push off distress into the future.  What are the implications for commercial real estate investors?  The banks supply approximately 50 percent of all debt capital to the sector, so lending capital could be constrained for some time.  However, there is a bright side.  If we continue to follow our current path, and distressed assets bleed slowly into the market over time, then healthy lenders may have enough capacity to meet low transaction volumes (especially with depressed pricing).  The large banks that have recently reported healthy earnings (primarily due to their trading and fixed-income operations) are a potential source of capital, and these banks have historically been under-allocated to commercial real estate compared to the overall banking sector.”

Financial Reform Legislation Faces Uphill Battle in the Senate

Wednesday, April 14th, 2010

The most sweeping financial reform legislation since the 1930s will be debated in a polarized Senate.  Senator Christopher Dodd (D-CT), chairman of the Senate Banking Committee, introduced revised legislation to regulate the nation’s financial system.  The plan would create a nine-member council, led by the Treasury secretary, to be on the alert for systemic risks, and direct the Federal Reserve to oversee the nation’s largest and most interconnected financial institutions.

The bill, which would be the most comprehensive change in financial rules since the Depression, would preserve much of the existing regulatory system, which has been criticized as being too disjointed.  Additionally, it would rely on a new mechanism for seizing and liquidating large financial companies on the verge of failure.  This would reduce, but not eliminate, the possibility of future bailouts.

The legislation incorporates a version of the Volcker Rule, a proposal from former Federal Reserve Chairman Paul Volcker that would make certain that legislators ban banks from investing in or owning hedge and private-equity funds.  Republicans and Wall Street strongly object to that idea.  Dodd’s legislation takes a fairly tough line with financial firms in general.  The proposed consumer protection agency would be given the authority to write and enforce rules for banks with more than $10 billion in assets.  The oversight also would apply to mortgage companies, credit card issues and other lenders – a move that Republicans oppose.

“Our regulatory structure, constructed in a piecemeal fashion over many decades, remains hopelessly inadequate,” Dodd, who is retiring from the Senate at the end of this term, said.  “There hasn’t been financial reform on the scale that I’m proposing this afternoon since the 1930s….  It is certainly time to act.”

Volcker Rule Seeks to Regulate Financial Markets

Wednesday, March 31st, 2010

President Obama’s proposed Volcker Rule financial regulation bill faces an uncertain future on Capitol Hill.  A draft of President Barack Obama’s financial reform legislation has been sent to Congress.  Dubbed the Volcker Rule in honor of the former Federal Reserve chairman’s  aggressive pursuit of these regulations, the five-page proposal will ban proprietary trading and mergers that give banks more than a 10 percent market share as measured by liabilities that are not insured deposits.  Passage of the bill would bar banks from owning or investing in private equity firms and hedge funds.

The rule, designed to reduce the possibility of another financial crisis, exempts mergers that exceed the market-share limit in instances where a firm takes over a failing bank so long as regulators approve.  Also exempted are trading in Treasury and agency securities, including debt issued by Ginnie Mae, Fannie Mae and Freddie Mac.

The legislation, which has been criticized by both Republicans and Democrats, would reduce banks’ ability to take risks.  It is a reaction to the more than $1.7 trillion in writedowns and credit losses that followed the subprime mortgage meltdown in late 2007.  Congressman Barney Frank (D-MA), chairman of the House Financial Services Committee, prefers a five-year transition period rather than the two years suggested in the president’s proposal.

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York says the exemptions may help avoid market disruptions that could impact small investors.  “The market is made up of many unseen hands with different objectives and investment horizons, and if you pull out the speculators making short-term bets, like prop trading banks, then” the individual investor is “going to be the one who suffers.”

TARP Banks Lending on the Rise

Tuesday, March 2nd, 2010

Lending by banks that received TARP assistance rose 13 percent in December.  Eleven American banks that received money from the Troubled Asset Relief Program (TARP) originated 13 percent more loans in December than they had the previous month. The Department of the Treasury released this information in its monthly survey of loans made by recipients of the $700 billion government bailout money.

According to the Treasury Department, total loan balances fell one percent during the same timeframe.  This report does not include statistics from banks that repaid their TARP funds in June of 2009; future reports will not include data from banks that are exiting the TARP program.

A total of $178.1 billion in new loans was made during December, according to the Treasury.  Bank of America led the pack in originating loans, with $64.6 billion, an 11 percent increase over November.  Wells Fargo & Company occupied second place with a six percent increase, reporting $58.3 billion in new loans.  Citigroup lent $16.3 billion, an 11 percent increase.

Successful TARP Extended Through Most of 2010

Monday, February 22nd, 2010

Geithner extends TARP program through most of next year.  An independent audit released by the bipartisan Congressional Oversight Panel (COP) has found the $700 billion Troubled Asset Relief Program (TARP) to be effective, so much so that the Department of the Treasury has extended it to October 3, 2010.  Treasury Secretary Timothy Geithner plans to use the remaining funds to assist families facing foreclosure and give loans to small businesses.

The COP was unable to fully gauge TARP’s impact because of other forces such as the $787 billion American Recovery and Reinvestment Act, tax cuts and actions by the Federal Reserve and Federal Deposit Insurance Company.  “Even so, there is broad consensus that the TARP was an important part of a broader government strategy that stabilized the U.S. financial system by renewing the flow of credit and averting a more acute crisis,” according to the report.  “Although the government’s response to the crisis was at first haphazard and uncertain, it eventually proved decisive enough to stop the panic and restore market confidence.”

That said, after 14 months of TARP, the panel admits that problems remain.  Banks are still skittish about making loans, toxic mortgage-related assets are still sullying banks’ balance sheets and smaller banks are susceptible to difficulties in the commercial real estate sector.  And, with 13 million additional home foreclosures expected over the next five years, “TARP’s foreclosure mitigation programs have not yet achieved the scope, scale and permanence necessary to address the crisis.”

Repayments from banks that received TARP dollars are expected to total $116 billion, including $45 billion that is being returned by Bank of America.  The government is likely to receive as much as $175 billion in repayments from companies it rescued by the end of 2010.

Bernanke Edges Closer to Closing the Cash Floodgates

Wednesday, February 17th, 2010

The Fed needs to start paying its own bills from the financial bailout.  Federal Reserve Chairman Ben Bernanke is starting to look at ways to back off from the central bank’s heroic efforts to keep the nation’s economy afloat through the financial crisis of the past 18 months. The trick to raising short-term interest rates, which have been at historic lows for more than a year, is to time them with extraordinary precision to avoid new damage to the still-fragile economy.

At present, the Fed has $2.29 trillion on its balance sheets, an increase from the $934 billion reported in September, 2008, when the financial crisis was at its worst. Bernanke plans to sell some of the Fed’s mortgages, Treasuries and debt by offering reverse repurchasing agreements.  Under these arrangements, the Fed sells its securities to a third party while agreeing to re-buy them at some point in the future.

The Fed’s next step is to sell banks and financial firms the equivalent of certificates of deposit.  In these cases, the Fed gets a portion of the bank’s reserves in exchange for paying interest at a fixed rate.  Called a “term deposit facility,” these deposits would be auctioned off and banks couldn’t count their investment in the Fed as cash or reserves.

“These programs, which imposed no cost on the taxpayer, were a critical part of the government’s efforts to stabilize the financial system and restart the flow of credit,” Bernanke said in testimony at a Capitol Hill hearing.  “As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs.”

Obama Takes Big Banks to the Woodshed Over Bonuses

Wednesday, January 27th, 2010

Obama seeks TARP restitution through a fee to be levied on banks – if Congress agrees.  President Barack Obama is angry with the big Wall Street banks that took TARP dollars and plans to do something about it.  “We want our money back and we’re going to get it,” Obama said in a White House speech when he proposed the Financial Crisis Responsibility Fee.  “If these companies are in good enough shape to afford massive bonuses, they surely are in good enough shape to afford to pay back every penny to taxpayers.”

The President’s proposal – which requires Congressional approval – would apply to approximately 50 of the nation’s largest financial institutions and rake in $9 billion a year for at least a decade.  Envisioned is an annual 0.15 percent fee on liabilities – except for insured deposits – and would be assessed on banks, insurance companies and financial firms with a minimum of $50 billion in assets.  The objective is to counterbalance $117 billion in losses from TARP.  The 10 largest financial firms would pay approximately 60 percent of the fee.

“My commitment is to recover every single dime the American people are owned,” according to the President.  “And my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people, folks who have not been made whole and who continue to face real hardship in this recession.”

Not surprisingly, banks were not pleased with President Obama’s proposal.  “Two-thirds of the TARP investment from banks has already been repaid, with a large profit to the taxpayer,” countered Steve Bartlett, president of the industry trade group, the Financial Services Roundtable.  “This tax is strictly political.”

Another viewpoint advanced is that banks that haven’t repaid TARP funds haven’t done so because they served the original intent of the program – they made loans to consumers and businesses.

Czar Kenneth Feinberg Wants Across-the-Board Executive Pay Cuts

Thursday, January 14th, 2010

Pay czar Ken Feinberg thinks Wall Street executives make too much money.  Compensation czar Kenneth Feinberg – officially, the Obama administration’s special master for executive compensation – believes that the pay reductions he mandated at seven taxpayer-rescued firms should become the model  for Wall Street and corporate America.

“There is entirely too much reliance on cash and there’s got to be a better way to tie corporate performance to long-term growth,” Feinberg said.  “I’m hoping that the methodology we developed to determine compensation for these individuals might be voluntarily adopted elsewhere.”  The Obama administration is holding unregulated risk-taking fueled by excessive pay partially responsible for the financial crisis, which has caused $1.6 trillion in losses and write-downs globally, as well as 7,200,000 jobs in the United States.  Between Feinberg’s ruling and Federal Reserve guidelines for banker compensation, the government has inserted itself directly into decisions normally made by corporate boards.

Feinberg has restructured cash “guarantees” into stock that the recipients must hold over the “long term”, according to a statement from the Treasury Department.  “Guaranteed minimum amounts give employees little downside risk in the event of poor performance – but upside when times are good.”

Meanwhile, the Federal Reserve has proposed new guidelines on pay practices at that nation’s banks and plans to review the 28 biggest firms to assure that compensation packages don’t create incentives that lead to the risky investments that caused the worst financial crisis in 70 years.

TARP Savings Could Finance Jobs Program

Wednesday, January 6th, 2010

Returned TARP funds could finance jobs creation program.  The $700 billion Troubled Asset Relief Program (TARP) cost $200 billion less than originally anticipated,  according to a new Treasury Department report.  That reflects faster repayments by big banks, as well as less spending on rescue programs as the financial sector recovers more quickly than expected.

And it’s good news for President Obama’s new job creation stimulus.  In a speech delivered at the nonpartisan Brookings Institution,  President Obama outlined a wide-ranging plan to create jobs that could be partially financed by the $200 billion in TARP funds that the government now expects to get back.

Among the job creation proposals detailed by President Obama are:

  • A tax cut for small business to encourage hiring.
  • Eliminate capitals gains on these businesses for one year.
  • Redirect leftover TARP money to support small business growth.
  • Invest new money in rebuilding roads, bridges and other infrastructure improvements.
  • Start a “Cash for Caulkers” plan that would give rebates to people who make their homes more energy efficient.

“Small businesses, infrastructure, clean energy:  these are areas in which we can put Americans to work while putting our nation on a sturdier economic footing,” according to President Obama.  “That foundation for sustained economic growth must be our continuing focus and our ultimate goal.”

The President’s proposals require Congressional approval.