Posts Tagged ‘Obama administration’

JP Morgan Chase’s $2 Billion Loss Under Investigation

Monday, May 21st, 2012

As the Department of Justice and the FBI open their investigation into how JP Morgan Chase lost $2 billion, the government is investigating to determine if any criminal wrongdoing occurred.  The inquiry is in the preliminary stages.  Additionally, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which regulates derivatives trading, are also looking into JPMorgan’s trading activities.  JPMorgan CEO Jamie Dimon said that the bank made “egregious” mistakes and that the losses tied to synthetic credit securities were “self-inflicted.”

The probe is perceived as necessary, given the ongoing debate about bank regulation and reform, and one expert said it raised the level of concern around what happened.  “The FBI looks for evidence of crimes and goes after people who it alleges are criminals.  They want to send people to jail.  The SEC pursues all sorts of wrongdoing, imposes fines and is half as scary as the FBI,” said Erik Gordon, a professor in the law and business schools at the University of Michigan.

According to Treasury Secretary Timothy Geithner, the trading loss “helps make the case” for tougher rules on financial institutions, as regulators implement the Dodd-Frank law aimed at reining in Wall Street.  Geithner said the Federal Reserve, the SEC and the Obama administration are “going to take a very careful look” at the JPMorgan incident as they implement new regulations like the “Volcker Rule,” which bans banks from making bets with customers’ money.  “The Fed and the SEC and the other regulators — and we’ll be part of this process — are going to take a very careful look at this incident and make sure that we review the implications of what that means for the design of these remaining rules,” Geithner said.  Under review will be “not just the Volker Rule, which is important in this context, but the broader set of safeguards and reforms,” Geithner said, noting that regulators will also scrutinize capital requirements, limits on leverage and derivatives markets reforms.  “I’m very confident that we’re going to be able to make sure those come out as tough and effective as they need to be,” Geithner said.  “And I think this episode helps make the case, frankly.”

Geithner said that Dodd-Frank wasn’t intended “to prevent the unpreventable in terms of mistakes in judgment, but to make sure when those mistakes happen — and they’re inevitable — that they’re modest enough in size, and the system as a whole can handle them.”  The loss “points out how important it is that these reforms are strong enough and effective enough,” he said.

With the passage of Dodd-Frank, banks are required to hold more capital, reduce their leverage and assure better cushions across the financial system to accommodate losses.  Geithner’s comments are similar to those made by other White House officials, who have avoided blasting the bank for its bad judgment, and instead used the event to bolster the case for the financial overhaul.

“We are aware of the matter and are looking into it,” a Justice Department official said “This is a preliminary look at what if anything might have taken place.”  The inquiry by the FBI’s financial crimes squad is in a “preliminary infancy stage,” the official said, and federal law enforcement agents are pursuing the matter “because of the company and the dollar amounts involved here.”

JPMorgan’s and the financial system’s ability to survive a loss that large showed that reforms put in place after the 2008 financial crisis have succeeded.  Nevertheless, the loss by the nation’s largest bank highlights the need for tough implementation of the Volcker Rule on proprietary trading and other rules that regulators are still finalizing.  “The whole point was, even if you’re smart, you can make mistakes, and since these banks are insured backed up by taxpayers, we don’t want you taking risks where eventually we might end up having to bail you out again, because we’ve done that, been there, didn’t like it,” according to President Obama.

Mark A. Calabria, Director of Financial Regulation Studies for the Cato Institute, takes a contrarian view.  Writing in the Huffington Post, Calabria says that “Unsurprisingly, President Obama and others have used the recent $2 billion loss by JPMorgan Chase as a call for more regulation. Obviously, our existing regulations have worked so well that more can only be better!  What the president and his allies miss is that recent events at JPMorgan illustrate how the system should — and does — work.  The losses at JPMorgan were borne not by the American taxpayer, but by JPMorgan.  The losses also appear to have been offset by gains so that in the last quarter JPMorgan still turned a profit.  This is the way the system should work.  Those who take the risk, take the loss (or gain).  It is a far better alignment of incentives than allowing Washington to gamble trillions, leaving someone else holding the bag.  The losses at JPMorgan have also resulted in the quick dismissal of the responsible employees.  Show me the list of regulators who lost their jobs, despite the massive regulatory failures that occurred before and during the crisis.

According to Calabria, “President Obama has warned that ‘you could have a bank that isn’t as strong, isn’t as profitable making those same bets and we might have had to step in.’  Had to step in?  What the recent JPMorgan losses actually prove is that a major investment bank can take billions of losses, and the financial system continues to function even without an injection of taxpayer dollars.  It is no accident that many of those now advocating more regulation are the same people who advocated the bailouts.  Banks need to be allowed to take losses.  The president also sets up a ridiculous standard of error-free financial markets.  All human institutions, including banks and even the White House, are characterized by error and mistake.  Zero mistakes is an unattainable goal in any system in which human beings are involved.  What we need is not a system free of errors, but one that is robust enough to withstand them.  And the truth is that the more small errors we have, the fewer big errors we will have.  I am far more concerned over long periods of calm and profit than I am with periods of loss.  The recent JPMorgan losses remind market participants that risk is omnipresent.  It encourages due diligence on the part of investors and other market participants, something that was sorely lacking before the crisis.”

EPA Putting the Lid on Coal-Fired Power Plants

Monday, April 16th, 2012

The Environmental Protection Agency (EPA) announced new greenhouse-gas standards for power plants, following through with the authority conferred by a 2007 Supreme Court ruling declaring carbon dioxide a pollutant under the Clean Air Act.  The new regulation effectively bans new coal-fired power plants unless they capture and sequester carbon dioxide.  Advanced natural-gas plants would meet the standard without mitigation, while existing power plants would be grandfathered in.  The regulation would require new power plants to emit no more than 1,000 pounds of CO2 per megawatt‐hour of electricity generated.

What are the implications?  It is clear that the short-term impact will be minimal: cheap natural gas derived from plentiful shale deposits is already overtaking coal as a source of power.

An average coal-fired plant generates more than 1,700 pounds of carbon dioxide per megawatt. The majority of natural-gas fired plants – and the bulk of power plants currently under construction – emit less than the new standard, approximately 800 pounds per megawatt.

Environmentalists praised the proposed restrictions, while the coal industry warned that the change would lead to higher electricity prices.  “Today we’re taking a common-sense step to reduce pollution in our air, protect the planet for our children, and move us into a new era of American energy,” said EPA Administrator Lisa Jackson.  “We’re putting in place a standard that relies on the use of clean, American-made technology to tackle a challenge that we can’t leave to our kids and grandkids.”  Currently, there is no consistent national limit on the amount of carbon emissions that new power plants can release.  According to an EPA fact sheet, the agency was obliged by the landmark 2007 Supreme Court ruling “to determine if (the emissions) threaten public health and welfare.”  In December of 2009, the EPA formally confirmed that greenhouse gases “endanger the public health and welfare of current and future generations.”

Older coal plants have already been going offline, thanks to low natural gas prices and weaker demand for electricity. Nevertheless, some accused the Obama administration of clamping down on low-priced, domestic energy sources and said the regulation raises questions about the seriousness of the president’s pledge for an “all-of-the-above” energy policy.  “This rule is part of the Obama administration’s aggressive plan to change America’s energy portfolio and eliminate coal as a source of affordable, reliable electricity generation,” said Representative Fred Upton, (R-MI), chairman of the House Energy and Commerce Committee.  “EPA continues to overstep its authority and ram through a series of overreaching regulations in its attacks on America’s power sector.”

“There are areas where they could have made it a lot worse,” said Scott Segal, director of the Electric Reliability Coordinating Council, a coalition of power companies.  Nevertheless, “the numerical limit allows progress for natural gas and places compliance out of reach for coal-fired plants” not planning to capture carbon dioxide.  Steve Miller, CEO and President of the American Coalition for Clean Coal Electricity, a group of coal-burning electricity producers, was more negative about the proposal.  “The latest rule will make it impossible to build any new coal-fueled power plants and could cause the premature closure of many more coal-fueled power plants operating today,” Miller said.

Writing for Reuters, John Kemp, Senior Market Analyst, Commodities and Energy notes that “Because natural gas is currently so much cheaper than coal, the agency projects gas-fired units will be the facilities of choice until at least 2020.  ‘Energy industry model ling forecasts uniformly predict that few, if any, new coal-fired power plants will be built in the foreseeable future,’ according to the proposed rule.  The key word is ‘foreseeable’.  No one can predict the economics of natural gas as far ahead as 2020, let alone 2030.  Recent development of abundant gas reserves through fracking may have caused prices to plunge, leading to a ‘golden age of gas’, but just seven years ago the industry was gripped by panic about gas production peaking and thought America stood on the brink of needing to import increasing quantities of expensive gas.”

Jeff Goodell of Rolling Stone writes “So this new rule is, at best, a baby step in the right direction.  As always with the climate crisis, physics is moving much faster than politics.  Just yesterday top scientists warned that global warming is close to irreversible now. In the biggest sense, we’re still doing next to nothing to confront this crisis.  Global carbon pollution is rising faster than ever, and the weather – to say nothing of future our future climate – is getting wilder.  The urgency of our situation just underscores the need for an economy-wide price on carbon, or cap-and-trade system, which would impact all major emissions sources and actually limit the amount of carbon we dump into the atmosphere, rather than just speeding the shift from coal to gas.  Still, this is an important moment, a small sign of progress.  Goodbye, Mr. Coal.  Don’t let the door hit you on the way out.”

Treasury Makes $25 Billion in Successful MBS Sale

Wednesday, April 4th, 2012

The Treasury Department just raked in a cool $25 billion for the American taxpayer. It sold the agency-backed mortgage-backed securities (MBS) that it bought during the financial crisis.  “The successful sale of these securities marks another important milestone in the wind-down of the government’s emergency financial crisis response efforts,” said Mary Miller, Treasury assistant secretary for financial markets.  The Treasury’s mortgage purchases were one part of the government’s support for banks and the financial markets.  The associated takeover of Fannie Mae and Freddie Mac cost another $151 billion.

Treasury bought the mortgage debt in an attempt to stabilize the housing industry, with funds approved by the Housing and Recovery Act of 2008.  Critics claim that it did more to prop up Wall Street than Main Street.  Anti-bailout anger fueled both the conservative Tea Party movement and Occupy Wall Street on the left.  Treasury Secretary Timothy Geithner argues that the government’s action helped prevent a deeper economic downturn.  TARP funds enabled the government to purchase preferred stock in banks, other financial firms and some automakers in return for the public investment.  Some of the preferred stock ultimately was converted to common stock.  According to a Treasury official, to date $331 billion has been repaid, including dividends and interest earned on the preferred shares.  While TARP currently is $83 billion in debt, Treasury projects losses will eventually number about $68 billion.  The nonpartisan Congressional Budget Office forecasts a lower loss of just $34 billion.

The Obama administration has stressed the TARP bank program’s performance, which has returned about $259 billion, more than the $245 billion lenders received.  At present. there are 361 banks remaining in TARP.

In all, Treasury bought $225 billion worth of mortgage-backed securities during the depths of the financial crisis between October of 2008 and December of 2009.  Some of those securities were backing loans believed to be worthless, according to some financial analysts at the time.  Treasury’s portfolio, however, was comprised mostly of 30-year fixed-rate mortgage-backed securities and were guaranteed by Fannie Mae or Freddie Mac, enhancing their value.  Congress authorized $700 billion for TARP, but Treasury only paid out $414 billion.  Of that, $331 billion has been paid back, including profits, interest and dividends made from investments.

Writing for The Hill, Peter Schroeder notes that “Now, with markets surging and the financial crisis in the rearview mirror — and with the presidential campaign rapidly approaching — the government is backing away from its outsized presence in the markets.  The move marks the latest in a series of steps by the government to exit its crisis-driven investments.  In July, the Treasury announced it was no longer invested in Chrysler, ending with a roughly $1.3 billion loss.  However, the government has fared better with investments in the banking sector.  The Treasury announced roughly one year ago that it had officially turned a profit on that portion of the bailout, and ultimately estimates it will turn a $20 billion profit on the $245 billion that was pumped into banks.”

All industry analysts are not as optimistic. Economist Douglas Lee, of the advisory firm Economics from Washington, said it is inevitable that the government will end up with “substantial losses” on the bailout, but that it was appropriate to try to reap gains where possible.  “A lot of these assets that were acquired were distressed at the time that they were bought so the chance of coming out ahead in selected areas is quite good,” Lee said.  For the long term, however, the effort to rebuild a reliable housing finance system means that costs for subsidizing operations of firms like Fannie Mae and Freddie Mac will continue to be expensive.  Investments in insurer AIG and in automakers might prove hard to recoup 100 percent.  Recently, Treasury said it was selling 206.9 million shares of AIG, which would reduce the government’s stake in the company to 70 percent from 77 percent.  “You have to say that these programs have worked in the sense that it’s restored a sense of stability that we sought,” Lee said, “but now it is right to have the government back out and let the private sector get on with their job.”

Want an Energy Efficient Home? Push the Green Button

Wednesday, March 28th, 2012

Want more control over electrical use in your home?  The Green Button Initiative might be the answer. “Imagine being able to shrink your utility bill, or knowing the optimal size and cost-effectiveness of solar panels for your home, or verifying that energy-efficiency retrofit investments have successfully paid for themselves over time” said Aneesh Chopra, Chief Technology Officer for the United States.  “Far too often these and similarly important — and potentially money-saving — opportunities are unavailable to us.  Why?  Because consumers haven’t had standard, routine, easy-to-understand access to their own energy usage data.”

To help achieve that goal, the Obama Administration recently announced a major step forward in solving this problem.  According to Chopra, “I announced the launch of the Green Button initiative, an Administration-led effort based on a simple, common-sense goal: provide electricity customers with easy access to their energy usage data in a consumer-friendly and computer-friendly format via a ‘Green Button’ on electric utilities’ website.  With this information in hand, customers can take advantage of innovative energy apps to help them understand their energy usage and find ways to reduce electricity consumption and shrink bills, all while ensuring they retain privacy and security.”

Access to household energy use data is key to helping consumers conserve energy and save money. Because Green Button is available to everyone, it is already driving innovation among website and software developers interested in using that standard to provide innovative services –  from information about how to save energy or choose appropriately sized solar panels to fun Facebook apps.  Additionally, the Green Button is likely to support a new generation of interactive thermostats and virtual energy audits that will recommend retrofits that will improve efficiency in homes and businesses.

“Green Button marks the beginning of a new era of consumer control over energy use, and local empowerment to cut waste and save money,” Chopra said.  “With the benefits of open data standards, American app developers and other innovators can apply their creativity to bring the smart grid to life for families — not only in California but in communities all across the nation.”

Writing for the View on Energy blog, Jeanne Roberts says that “What it means for consumers is a way to monitor and take charge of their home energy use, via computer technology, and hopefully to lower monthly utility bills as a result. In short, a little bit of ‘green’ technology that could allow consumers to save a lot of green if used wisely.  As an added advantage, energy use reduction nationwide by residential consumers could help the nation reach Obama’s stated goals of energy security (by reducing dependence on oil) and energy efficiency, both of which lead to a ‘clean’ energy future.”

Philip Henderson of GreenBiz.com has an interesting take on the Green Button after perusing his difficult-to-read electric bill.  “If my bill were entered in a Worst Utility Bill contest, it probably would not win — I’ve seen some that are worse.  This is NOT to denigrate my utility company — it is a power company, after all, not a design shop.  This is why the ‘Green Button Project is so interesting and important.  It’s based on a simple concept — give the customer his or her utility billing information in a form that actually usable.  Click a green button on the utility’s website and billing data is delivered and can be used by various apps.  With my data, I will be able to use any billing presentation system I want — I can find the one that suits me best.  (Can’t you hear the iPhone developers tapping away to create cool new tools?)”

As Foreclosures Decline, Federal Government Makes Deal With 49 States

Tuesday, February 21st, 2012

In good news for beleaguered homeowners, the Obama administration announced a $26 billion mortgage settlement, which 49 out of 50 state attorneys general signed on to.  The deal won praise from such groups as the Mortgage Bankers Association, the industry trade group for lenders, and the Center for Responsible Lending, a public interest group advocating for borrowers.

Conservatives suggested that the Obama administration is overreaching, and that the agreement rewards homeowners who haven’t been paying their mortgages.  On the other side, some liberal groups say it falls far short of providing the needed level of help to troubled homeowners hurt by the housing bubble, problems they blame on Wall Street banks and investors.  They would prefer additional relief for homeowners who are underwater on their mortgages.

“It’s a big check with narrow immunity,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and currently an analyst with FBR Capital Markets in Arlington, VA.  “You get the state attorneys general off your back, but you’re not getting immunity from securitizations, which could come with their own steep cost down the road.”

Regulators are “aggressive” on pursuing securities claims and have set up a task force to do so, said Department of Housing and Urban Development Secretary Shaun Donovan.  The $26 billion deal doesn’t protect banks from claims related to faulty loans sold to government-owned Fannie Mae and Freddie Mac, he said.  “It wasn’t the servicing practices that created the bubble, nor caused its collapse,” Donovan said.  “It was the origination and securitization of these horrendous products.”

Writing on Salon, Matt Stoller says that the deal lets the banks down relatively easily.  “Rather than settling anything, this agreement is simply a continuation of the policy framework of both the Bush and the Obama administrations.  So what exactly is that framework?  It is, as Damon Silvers of the Congressional Oversight Panel which monitored the bailouts, once put it, to preserve the capital structures of the largest banks.  ‘We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks,’ said Silvers in October, 2010.  “’We can’t do both.’  Writing down debt that cannot be paid back — the approach Franklin Roosevelt took — is off the table, as it would jeopardize the equity keeping those banks afloat.  This policy framework isn’t obvious, because it isn’t admissible in polite company.  Nonetheless, it occasionally gets out.  Back in August 2010, at an ‘on background’ briefing of financial bloggers, Treasury officials admitted that the point of its housing programs were to space out foreclosures so that banks could absorb smaller shocks to their balance sheets.  This is consistent with the president’s own words a few months later.”

Very gradually, the foreclosure crisis seems to be easing. The number of homes in foreclosure declined by 130,000, or 8.4 percent last year to 830,000, according to a report from CoreLogic, an economic research firm.  That compares with 1.1 million homes foreclosed in 2010.  These are homes whose owners had fallen far behind on payments, forcing lenders to put them into the foreclosure process.  The homes remain in the foreclosure inventory until they’re sold — either at auction or in a short sale, which is when a home is sold for less than the mortgage value — or until homeowners are current again on payments

There are two reasons for the decline in the foreclosure inventory, according to Mark Fleming, CoreLogic’s chief economist.  “The pace at which properties are entering foreclosure is slowing,” he said.  “And servicers nationwide stepped up the rate at which they were able to process distressed assets.”

In the last few years, homes have entered foreclosure more slowly because lenders carefully scrutinized applicants; only low-risk borrowers are granted loans.  Along with a measured improvement in the economy, this equals fewer borrowers getting into trouble.  Even borrowers in default are avoiding foreclosure in many instance and are being held up by judicial and regulatory constraints, according to Fleming.

The practice of robo-signing, in which banks filed slapdash and sometimes improper paperwork, made lenders more cautious about getting their paperwork in order before foreclosing.  When a bank does put a home into foreclosure, they are trying to speed the process.  One way they’ve done that is by encouraging short sales.  Another is that they’ve stepped up their foreclosure prevention efforts — often with the aid of government programs such as Home Affordable Modification Program (HAMP), which the government says has helped nearly one million Americans stay in their homes.

After foreclosures are completed and the homes are back in the lenders’ hands, they sell quickly.  “This is the first time in a year that REO sales (those of bank-owned properties) have outpaced completed foreclosures,” Fleming said.  In December, there were 103 sales of bank-owned homes for every 100 homes in the foreclosure inventory.  That was a significant increase from November of 2010, when there were only 94 REO sales for every 100 homes in the foreclosure process.

As of December of 2011, Florida still topped the nation’s foreclosure inventory at 11.9 percent, followed by New Jersey with 6.4 percent and Illinois 5.4 percent.  Nevada, consistently the number one foreclosure state in the nation, has fallen to fourth place with 5.3 percent.

Are Gas-Sipping Cars Leaving Hybrids in the Dust?

Tuesday, February 7th, 2012

When Cadillac is staking its comeback on a compact car that boasts fuel economy approaching 40 mpg, what does it mean for hybrid and electric vehicles?  Cadillac’s ATS sedan is one example of how carmakers at the Detroit Auto Show are re-emphasizing small, powerful models with more fuel-efficient engines such as sport-utility vehicles; even, please note that we are talking gas here, hybrids are taking a back seat. Additionally, General Motors’ luxury brand says that the ATS will have a turbo-charged four-cylinder 270-horsepower engine that offers impressive fuel economy. Meanwhile, Ford is dropping plans for a hybrid version of its popular Escape SUV.

Although recent auto shows have been stocked with gas-electric hybrids and SUVs, slow hybrid sales have brought a dose of reality.  Carmakers realize they can give buyers what they want and avoid the expense of electric motors and batteries by making cars smaller and getting significantly improved fuel economy from traditional gas engines.

“The advantages of hybrids are getting harder to justify,” said Scott Corwin, a vice president with consulting firm Booz & Co.  “It’s the cost differential. Consumers are rational and they understand the cost of ownership.”  Hybrid sales slowed in 2011 to just 2.2 percent of auto sales, down from 2.4 percent in 2010, according to researcher LMC Automotive.

Mike Jackson, CEO of Fort Lauderdale, FL-based auto retail chain AutoNation Inc., said that approximately 75 percent of his customers want to talk about hybrids, although they constitute only 2.5 percent of his sales.  “What happens from the 75 percent consideration to the 2.5 percent commitment?” Jackson said. “They look at the price premium for the technology, which is already subsidized and discounted, and say “the payback period is too long; not for me.  It’s a back-of-the envelope conversation on the part of the American consumer.”

After a decade of hybrids and oil hovering near $100 a barrel, consumers still aren’t ready to pay the premium for hybrid models, said Reid Bigland, president of Chrysler Group LLC’s Dodge brand.  “The delta you get in fuel-economy lift with a hybrid is continuing to shrink because of the efficiencies with the internal combustion engine” through direct engine, turbochargers and advanced transmissions, Bigland said. “The pure economics are a tough case.”

The Chevrolet Volt plug-in hybrid lures people into the showroom, said Chris Perry, Chevrolet’s vice president of U.S. marketing. With fewer than 8,000 sales last year, consumers often went to a Chevy dealer to look at the Volt and settled on something else less pricey.

Despite slower-than-anticipated sales, the Obama administration has defended tax incentives for electric vehicles.  Transportation Secretary Ray LaHood said that the program has worked, “It’s real money and people have utilized it.”

The administration is advocating aggressive fuel efficiency mandates for the U.S. fleet to decrease oil dependence, particularly through more electrical vehicles. President Barack Obama would like to see one million electric vehicles on the roads three years from now, a goal that industry insiders say is too optimistic. The industry is simultaneously investing in battery technology while making more affordable gains through improvements in conventional engine and transmission systems.  Administration officials are fighting Congressional and consumer skepticism about the wisdom of the $7,500 tax credit that mainly has benefited more well-heeled buyers, who experts say would have been able to purchase the technology without it.

Jeremy Anwyl, CEO of online consumer research group Edmunds.com, said plug-ins are most popular on the West and East coasts with “early adopters,” or educated consumers passionate about using less gasoline.  “For these folks, affordability is not the issue,” Anwyl said.

Automakers have little choice but to promote more hybrids as they prepare for fuel-efficiency requirements that will require significant increases by 2020. However, advances such as Ford’s EcoBoost technology have raised mileage for gas-powered engines —the new Fusion midsize sedan can get 37 miles to the gallon — though bigger gains are still needed.

That’s why many are bullish on alternative engines.  “Internal combustion can’t get all the way there, so you need an alternative,” said Russell Hensley, a partner with the consulting firm McKinsey & Company. “The only alternative we have at the moment is electrification.”  McKinsey listed “uncertainty around future adoption of hybrid/electric powertrain technology” as one of several challenges facing automakers in coming years. According to McKinsey, hybrids could account for up 25 percent of sales by 2020, with battery-powered cars making up five percent. It confirmed that internal-combustion engines would dominate the industry through at least 2030.

Over at the Rocky Mountain Institute, Randy Essex and Ben Holland point out that when gas-electric hybrids first rolled out in 2000, the Honda Insight and Toyota Prius had sales of just 9,350. Those figures looked anemic at the time, too. But in the ensuing years, the technology caught on and more than two million hybrids have been sold in the United States. If that’s any prologue, it could bode well for future plug-ins.

“But is this comparison apt? On the one hand, the new generation of electric vehicles enjoy a few advantages that Priuses didn’t. Gasoline prices sat below $2 per gallon back in 2000, considerably lower than today. What’s more, the latest round of fuel-economy standards, under which carmakers have to get their fleet averages up to 54.5 miles per gallon by 2025, should give the big auto companies incentive to roll out more plug-in vehicles in the coming years.  But then again, today’s electric cars also face special hurdles that the old hybrids didn’t. For one, there’s ‘range anxiety,’ in which would-be buyers of electric cars sometimes fret that their batteries will run out of juice and leave them stranded.”

Government Wants to Sell Foreclosed Properties in Bulk as Rentals

Tuesday, January 24th, 2012

The Obama administration plans to work closely with federal regulators, Fannie Mae and Freddie Mac to start a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials.

There currently are approximately 250,000 foreclosed properties on the books of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), and millions more are expected.  Last year’s foreclosure processing delays created an enormous backlog of properties yet to be processed and are just now being restarted. One of the program’s initiatives is for the federal government to mitigate and manage new foreclosures.  Late-stage delinquencies still number close to two million, according to a report from Lending Processing Services (LPS).  Foreclosure starts are double foreclosure sales and “the trend toward fewer loans becoming delinquent, which dominated 2010 and the 1st quarter of 2011, appears to have halted,” according to LPS.

“I think there is a fair amount of money in the wings waiting to buy, investors doing cash raises to buy properties on a large scale,” said Laurie Goodman of Amherst Securities. “But that means they have to build out a rental organization; it means they build out a management company, because if you’re accumulating a hundred homes in Dallas that’s very different than running a multifamily building.”

This is good advice. The recession began with housing, and is one of the main things holding back the recovery.   The most recent unemployment numbers — which showed that non-farm payrolls grew by 200,000 in December, and the jobless rate declined to 8.5 percent from 8.7 percent  — join other cautious signs of an improving economy, although the housing situation is worsening.  There’s still a serious risk it might put a halt to and not just delay expansion.

“Foreclosed homes are a complex problem. We need some creative thinking and new processes to solve the problem of so many distressed homeowners.  I would love to see the market handle it on its own but what makes sense for a single home is likely to destroy confidence in the housing market in aggregate,” said Jafer Hasnain, Partner at Lifeline Assets.  “Housing distress needs a Michael Dell to think about streamlining process details, and a Steve Jobs to make it elegant and human.”

House prices fell again in October, according to the S&P/Case-Shiller index.  The pipeline of delinquencies and future foreclosures is full, which continues to dim the prospects of a quick recovery.  Efforts so far, such as the Home Affordable Modification Program (HAMP), have helped, but less than hoped.

According to the Federal Reserve, there are no simple answers, but it makes several suggestions that Congress should examine.  One is to encourage conversions from owner-occupied to rental because that market has strengthened in recent months: Rents have risen and vacancies have declined.  A faster conversion rate would hold down rents and ease the pressure of unsold homes on house prices. Fannie, Freddie and the Federal Housing Administration account for about 50 percent of the inventory of foreclosed properties.  Many of these are viable as rentals.  A government-sponsored foreclosure-to-rental program to clear away regulatory hurdles would make a big difference.

A second suggestion is to encourage refinancings.  The administration tweaked the existing HAMP program in October, easing some of the earlier restrictions on eligibility.  Even more could be done, according to the Fed.  One possibility involves the fees that lenders pay to Fannie and Freddie for assuming new risks when loans to distressed borrowers are refinanced. These charges could be cut or eliminated, even though Congress just voted to increase them to help pay for the payroll-tax extension.

Some institutional investors have shown interest in bulk REO deals, but the plan has to incorporate ways to help facilitate financing.  That has been one of the biggest barriers to deals already in the works between hedge funds and the major banks.  There is plenty of cash to buy properties, but creating a management structure for the rentals is costly, and some investors are finding the math doesn’t add up to make it worth their while.

Larger investors want to get real scale in any government program, in the range of 50, 100, 500 properties per deal, or $1 billion-plus in assets. That’s why the government is looking to test several different approaches.  Fannie Mae did a $50 million sale in June, although that was on the small side. Officials are evaluating what larger asset sales would look like.

“We expect several pilots that will involve both local investors and institutional investors. The goal here is to reduce supply by converting foreclosed homes into rental units,” says Jaret Seiberg of Guggenheim Securities. “Less supply – even less fear about a flood of foreclosed homes hitting the market – could stabilize (home) prices.”

Santa Brings More Than 200,000 New Jobs in December

Monday, January 16th, 2012

The United States added more than 200,000 jobs in December of 2011, building on a strengthening employment market that dominated the second half of the year.  This brought the unemployment rate down to 8.5 percent from the revised 8.7 percent, which had been predicted in November.  The primary growth was in transportation — primarily courier services that hired for the holidays — healthcare and manufacturing, according to the U.S. Bureau of Labor Statistics.

“It would have been even better without the drag from Europe,” said John Canally, economic strategist at LPL Financial, a stock brokerage firm. “The Europe situation created uncertainty, and uncertainty was used as a reason not to hire until now.”  The year ended even more strongly than economists had predicted.  They had forecast that employers would add a net 150,000 jobs in December, according to a survey by Factset. They also had predicted that the unemployment rate would tick up to 8.7 percent from November’s 8.6 percent; this is the lowest rate since March 2009.

In the end, November’s unemployment rate was revised up in this report, to 8.7 percent.  The better-than-expected monthly gain of 219,000 private-sector jobs means American businesses have replaced more than three million of the 4.2 million private-sector jobs that were lost the past 13 months. The private-sector jobs gained since employment bottomed in February of 2010 marks the strongest recovery since the 1990-1992 recession, when U.S. businesses added 4.2 million jobs in the same amount of time.

The new job numbers highlight the fact that the U.S. economy is on its way to recovery even as strains in Europe persist,” said David Watt, senior currency strategist at RBC Capital in Toronto. The fact that the labor market is gaining traction should be good news to the Obama administration, whose economic policies are relentlessly attacked by the political opposition.

This string of better-than-anticipated economic indicators has highlighted the stark contrast between the recovery in the world’s biggest economy and Europe, which faces bad times for months or even years.  Even with the good news, the American economy needs an even faster pace of job growth over a sustained period to make a noticeable dent in the pool of the 23.7 million people who remain out of work or underemployed in the wake of the 2007-09 recession.

December marked the 15th consecutive month that employment numbers have risen. Marcus Bullus, trading director at MB Capital, said: “That’s one hell of a number. Such an impressive fall in both the number of jobless Americans and the unemployment rate will cheer everyone bar Republican spin doctors.  The Obama administration could be forgiven for showboating over this convincing evidence that America’s economy is pulling away from Europe’s.  From a market perspective, strong US data like this will add to optimism, but nobody doubts the considerable downward pressure the Eurozone will continue to place on the global marketplace during 2012.”

Automatic Data Processing’s (ADP) numbers for December are even more impressive, saying the government added 325,000 jobs in December.  ADP’s figures do not always match the government’s, and economists warned that seasonal factors could have boosted the figures. Even so, all the major measures of the job market appear to be on the upswing.

Lasting payroll gains are needed to chip away at joblessness and support household spending, which accounts for approximately 70 percent of the world’s largest economy. The labor market figures come on the heels of recent data showing increased manufacturing and a rebound in consumer sentiment that show the U.S. is barely impacted by Europe’s debt crisis.  “You got the trifecta — more people working, wages up and the average work week up,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc., who accurately forecast the December payroll gains.  “You can’t really argue that that isn’t a sign of significant improvement in the job market.”

Yearly benchmark revisions showed the unemployment rate averaged 8.9 percent in 2011, down from 9.6 percent and 9.3 percent in the previous two years. It still ranks as the worst three-year period since 1939 to 1941.

Writing in the Wall Street Journal, Phil Izzo says the increase is “for real.” According to Izzo, “While the unemployment rate has been falling in part due to people leaving the labor force, a large portion of this month’s number appears to come from people finding jobs.

“The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The actively looking for work’ definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force.

“The key to the drop in the broader unemployment rate was due to a 371,000 drop in the number of people employed part time but who would prefer full-time work, that comes on top of big drops in that category over the past two months. That number could reflect people having their hours increased or part-time workers moving on to full time work,” Izzo concluded.

Federal Regulators Floating the Idea of 20 Percent Downpayment Mortgages

Thursday, November 10th, 2011

Is a 20 percent downpayment on a house or condominium on the horizon?  If some federal regulators get their way, buyers may have to put down $60,000 on a $300,000 house to get the best possible mortgage interest rate.  Although this sets the bar high, regulators believe it will prevent the risky lending practices that ended in a rash of foreclosures.

Numerous groups immediately announced their opposition to the proposal, contending that a 20 percent downpayment is too burdensome for many working class would-be homebuyers.  If the proposal goes into effect in summer, it is not likely to have a major impact on the housing market for a while because the majority of mortgages are insured by federal agencies and are exempt from the rule.  John Taylor, chief executive of the National Community Reinvestment Coalition, said “If we require 20 percent downpayments to get a loan, we will ensure broad swaths of working- and middle-class people will not be able to get a loan.”  According to Tom Deutsch, executive director of the American Securitization Forum, believes the 20 percent requirement will do little to encourage banks to make loans without federal backing.  “The extremely rigid proposals…will further prolong the U.S. government’s 95 percent market share of the credit risk of newly originated mortgages,” he said.

Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, disagrees.  “Properly aligned economic incentives are the best check against lax underwriting,” she said.  The Federal Reserve and Treasury Department also support the move, and other federal regulators are expected to get behind the new requirement.  The move comes as the Obama administration is working to end Fannie Mae and Freddie Mac, the government-backed mortgage companies, by reducing the competitive advantage they have over banks.  One proposal is to require the agencies to charge higher fees to draw private firms back into the mortgage market.

Mortgage Bankers Association CEO John Courson warns that the 20 percent downpayment requirement would further damage already sluggish housing demand.  “We believe that such a narrow construct of the risk retention exemption would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problem loans,” Courson said.  Ron Phipps, president of the National Association of Realtors, said the new rules will further restrict mortgage credit and housing recovery overall.  “Adding unnecessarily high minimum downpayment requirements will only exclude hundreds of thousands of buyers from home ownership, despite their creditworthiness and proven ability to afford the monthly payment, because of the dramatic increase in the wealth required to purchase a home,” Phipps said.

Treasury Secretary Timothy Geithner, who is leading the regulatory effort, said “Risk retention will help promote better standards for underwriting and securitizing mortgages, which is good for the long-term health of the housing market and for our nation’s economy.”  An element of the Dodd-Frank Act that impacts the residential market, known as “risk retention”, is a rule that requires that mortgage lenders and securitizers to invest a minimum of five percent of the risk on qualified residential mortgages. The rule will play a crucial role in determining how much risk banks have to retain from mortgages they originate or package into bonds known as mortgage backed securities (MBS) and then subsequently sell into the market.  “If this proposal goes through, the way it’s written, I think the housing market will not recover for years to come,” says Joe Murin, chairman of consulting firm The Collingwood Group.

Bernanke: No QE3

Wednesday, October 5th, 2011

Federal Reserve Chairman Ben Bernanke, in a long-awaited speech in Jackson Hole, WY, announced no new steps the Fed will take to prop up the shaky U.S. economy.  Rather, he expressed optimism that the economy will continue to recover, based on its inherent strength and from assistance provided by the central bank.  Bernanke restated the Fed’s determination to keep the federal funds rate “exceptionally low” for a minimum of two years.  He did not say what many had been hoping to hear: that the Fed would begin another round of quantitative easing – usually referred to as QE3.

 Bernanke said that he expected inflation to remain at or below two percent.  Additionally, he acknowledged that the recent downgrade of the nation’s AAA credit rating had undermined both “household and business confidence.”  He implied that there was only so much more the Fed can do to stimulate the economy, and that the time has come for Congress and the Obama administration to create “policies that support robust economic growth in the long term,” to reform the nation’s tax structure and to control spending.

“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.  We discussed the relative merits and costs of such tools at our August meeting.  We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September,” Bernanke said.  He went on to clarify the Fed’s guidance about how long interest rates will remain exceptionally low.  “In what the committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.”

As Bernanke delivered his remarks, the government cut its estimated 2nd quarter GDP growth to a paltry rate of one percent, a revision from the 1.3 percent previously reported.  The revision was expected and primarily due to weaker exports.  In more positive news, private spending and investment in April through June were slightly higher than initially estimated.  The GDP grew by an annual rate of just 0.4 percent in the 1st quarter.  The 2nd half of 2011 is expected to be somewhat stronger, but a major driver of the economy — consumer spending — remains weak amid slow hiring and sluggish income gains.

“This economic healing will take a while, and there may be setbacks along the way,” Bernanke said.  “Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery.  Although important problems certainly exist,  the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said. “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”

“Economic performance is clearly subpar, and from that standpoint the case for some sort of further economic-policy assistance is just being made by the poor performance,” said Keith Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management.  Although Bernanke said the Fed has stimulus tools left, “the threshold to utilizing them is going to require fairly different conditions than what we have today,” such as lower inflation or a return of financial instability, Hembre said.

Bernanke also used the occasion to scold Congress for its tardiness in resolving the deficit debate. “The country would be well served by a better process for making fiscal decisions,” Bernanke said at the Federal Reserve Bank of Kansas City’s annual economic symposium.  “The negotiations that took place over the summer disrupted financial markets and probably the economy, as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.”  Bernanke implied that a return to economic prosperity is at stake.  “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome,” he said.  The budget process, according to Bernanke, would be more effective if negotiators set “clear and transparent budget goals” and established “the credibility of those goals.” 

Bernanke reassured investors that United States prospects for growth are sound over the long term and that the Fed has tools to aid the recovery if needed, even though he is not planning another stimulus at this time.  “What no action will do is give confidence to investors that things are not as bad as many people perceive, otherwise he would’ve acted,” Keith Springer, president of Springer Financial Advisors in Sacramento, CA, said.  “Investors will eventually see the positives.”