Senator Chris Dodd Financial Reform

11 page summary

full bill

Here’s the Washington Post on the matter:

The Senate banking committee voted along party lines Monday to transform the regulation of financial markets, sending another piece of far-reaching legislation to the full Senate a day after Congress approved an overhaul of the nation’s health system.

After Republicans decided to save their objections for the Senate floor, Sen. Christopher J. Dodd (D-Conn.), the committee chairman, pushed forward with a financial-regulation bill that sheds several compromises reached with opposition lawmakers and instead hews more closely to the blueprint advocated by the Obama administration.

Blast From The Past: Bear Stearns' 2006 Annual Global Credit Conference - Groupthink Defined

Blast From The Past: Bear Stearns' 2006 Annual Global Credit Conference - Groupthink Defined

via zero hedge - on a long enough timeline, the survival rate for everyone drops to zero by Tyler Durden on 3/22/10

Ah, the halcyon days of 2006, when the bubble was cranking, rates were stable and rising, Bernanke was brand new and few realized he would was yet to become the destroyer of capitalism, when subprime was only known to a select few future billionaires, when Bear Stearns was alive and well and was organizing credit conference at the Waldorf Astoria (instead of arranging credit for itself in advance of going bankrupt in 2008) during which nobody said anything relevant (that includes Bear's then chief economist David Malpass) and where participants merely reinforced each other's fallacious groupthink, capped by Peyton Manning as keynote speaker of all people. Companies presenting were all the current and future LBO hits (which would soon undergo Chapter 22 and in some cases 33). We are only amazed that Bear hasn't risen from the dead to recreate the credit conference below, coupled with full bubble frothiness and all other bells and whistles.

From: TERRY CASSIDY, BEAR, STEARNS & CO.
At:  5/12 12:49:49

The Bear Stearns Fifteenth Annual Global Credit Conference will be held on Tuesday, May 16 and Wednesday, May 17, 2006 at the Waldorf=Astoria in New York City. Attached please find an updated conference agenda and
information on the keynote presentations and panel discussions.  We look forward to seeing you at the conference.

Tuesday, May 16
 
KEYNOTE PRESENTATIONS; PANEL DISCUSSIONS

8:15 a.m.               "Economic Outlook: More-Than-Expected Growth, Profits, Inflation and Rate Hikes" (Astor Salon)

David R. Malpass, Senior Managing Director & Chief Economist, Bear, Stearns & Co. Inc.
*         For now, plentiful liquidity
*         Late in 2006, a shift to a capital diet and wider credit spreads
 
9:00 a.m.             "Impact of Credit Derivatives on the High Yield Market" (Astor Salon)

Michael Mutti, Managing Director Principal, Bear Stearns Corporate Credit Strategist
This presentation will include a discussion of CDX indices, 2005 credit events, recovery market and common CDS trades.

9:00 a.m.               Competitive Broadband Panel: Bundling Video, Voice and Data (West Foyer)
                              Moderator: Todd Henrich, Managing

Director, Bear, Stearns & Co. Inc.
Peter D. Aquino, President & Chief Executive Officer, RCN
Roy Chestnutt, Chief Executive Officer, Grande Communications
Rodger L. Johnson, President & Chief Executive Officer, Knology, Inc.

Chief Executive Officer's from three of the nation's largest competitive broadband service providers will discuss the ways each of them continues to compete for and win new customers by offering bundled video, voice
and data services.

9:45 a.m.               "Everything You Always Wanted to Know About Second Lien Financings" (Astor Salon)
 
Marc D. Jaffe, Partner, Latham & Watkins LLP
Michele O. Penzer, Partner, Latham & Watkins LLP
Mark A. Broude, Partner, Latham & Watkins LLP
Partners from Latham & Watkins LLP, the leading law firm in leveraged finance and a pioneer in second lien financings, discuss recent developments in second lien bank and bond financings, differences in the bank and bond products and important bankruptcy considerations.

10:30 a.m.            "Views Across Corporate Credit - Themes,Strategies and the Search for Value" (Astor Salon)
 
                               Victor Consoli, Senior Managing Director, Bear Stearns Corporate Credit Strategist

Is the corporate credit market broken, where fundamentals can be at odds with technicals? In this technically driven market, fueled by the bid from structured products and the lack of an apparent adverse catalyst, credit investors have seldom been more challenged to find value.

11:15 a.m.            "Can It Be More Borrower Friendly?" (Astor Salon) Moderator: Bram Smith, Leveraged Loan

Capital Markets & Distribution, Senior Managing Director, Bear, Stearns & Co. Inc.
Diane Exter, Managing Director, Sankaty Advisors
James Ferguson, Founding Partner and Senior Portfolio Manager, Octagon Credit Investors, LLC
Christopher Jansen, Managing Partner and Fund Manager, Stanfield Capital Partners LLC
Greg Stoeckle, Managing Director, Senior Portfolio Manager and Head of Bank Loan Group, INVESCO Inc.

Bram Smith, head of Bear Stearns' Leveraged Loan Capital Markets and Distribution, along with a panel of institutional investors, will discuss how loan investors can cope in today's issuer-friendly market. The panel will examine the impact of liquidity on loan pricing, changing investor landscape, changing loan structures, and investors' investment
strategies.

12:00                     Keynote Luncheon: "National SecurityChallenges and American Intelligence" (Grand Ballroom)

John E. McLaughlin, Former Acting CIA Director & Deputy Director


2:00 p.m.               "Petrozuata and Cerro Negro: The Beginning of the End?"(Astor Salon)
                               Gersan R. Zurita, Senior Director, Global Project Finance, Fitch

This presentation will discuss the evolution of the credit characteristics of two of Venezuela's heavy oil strategic  associations - Petrozuata and Cerro Negro. The operating outlook of the projects will be discussed within the context of government policy.


2:45 p.m.               "Health Care Panel Discussion:  Medicare Payment Spotlight - Perspectives from The Centers for Medicare & Medicaid Services" (Conrad Suite)
  
                             Moderator: Todd Corsair, Associate Director, Senior Health Care Analyst, Bear Stearns High Yield Research


Laurence D. Wilson, Director, Chronic Care Policy Group, Center for Medicare Management (Former Director, Division of Institutional Post Acute Care)

This presentation will discuss Dialysis, Skilled Nursing Facilities, Inpatient Rehabilitation Facilities, Durable Medical Equipment, Hospice and Home Health

Lambert van der Walde, Capital Markets Advisor to the Administrator This presentation will discuss long-term care hospitals, acute-care hospitals, diagnostic imaging, and any other Medicare-related topic including the new drug benefit.

2:45 p.m.               "The Growing Role of State Owned Oil Companies--Credit and Relative Value Implications" (Astor Salon)

Ted Izatt, Managing Director Principal, Senior Energy & Basic Materials Analyst, Bear Stearns High Grade Research

Theodore M. Helms General Manager, New York Office, Petroleo Brasileiro S.A. Petrobras

What trends are driving the growing influence of the national oil companies and will they continue?  What will the impact of these trends be on energy prices and on the publicly traded energy companies?  What are the risks and opportunities for investors?

3:30 p.m.               "Quantifying and Managing Gulf of Mexico Hurricane Risk to the Offshore Energy Market" (Astor Salon)

Ted Izatt, Managing Director Principal, Senior Energy & Basic Materials Analyst

Bear Stearns High Grade Research

Kenneth A. Travers, CFPS, CET, ARM, MBA, Senior Vice President, ABS Corporate Solutions/EQECAT

This presentation will discuss the impact from Recent Hurricane Seasons, Potential Hurricane Risk to Offshore Assets and Production, Quantifying Risk to Property and Business Interruption and Alternative Risk Transfer Solutions - Capital Markets.


Wednesday, May 17

KEYNOTE PRESENTATIONS; PANEL DISCUSSIONS

9:00 a.m.             "Implications of a Slowing Housing Sector" (Astor Salon)
 
Dale Westhoff, Senior Managing Director, Head of Bear Stearns Quantitative Research

This presentation will cover origination trends and the changing mix of the outstanding mortgage universe,
including the rapid growth of ARMs and new affordability products. In addition, it will highlight the mortgage sectors most exposed to a slowing housing segment.

Sue Berliner, Managing Director Principal, Senior REIT & Homebuilders Analyst

Bear Stearns High Grade Research

This presentation will highlight the softer markets, use of incentives, cancellation rates and costs


9:45 a.m.               U.S. Auto Sector: Outlook for the U.S. Auto Manufacturers and Suppliers in 2006-7 (Astor Salon)

Moderator: Alexi Coscoros, Managing Director Principal, Senior Auto Supplier Analyst Bear, Stearns High Yield Research
Kim Korth, President, IRN, Automotive Sector Market Research and Management Consultancy
Erich Merkle, Director of Forecasting, IRN, Automotive Sector Market Research and Management Consultancy

This panel discussion will include a short presentation followed by a moderated question and answer session on the current sales and production trends in addition to the outlook for new product launches for the U.S. and "New Domestic" Auto Manufacturers and the impact of new products and current OEM capacity reduction plans on the US Auto Suppliers.


10:30 a.m.            U.S. Auto Manufacturers and Suppliers: The Bear, Stearns Credit Research and Credit Trading View on Investing in the Sector (Astor Salon)

Moderator: Alexi Coscoros, Managing Director Principal, Senior Auto Supplier Analyst

Bear, Stearns High Yield Research
Dan Ilany, Managing Director, Senior Autos Analyst, Bear, Stearns Investment Grade Research
James Kenny, Senior Managing Director, Head of Credit Flow Trading, Auto Manufacturers and Auto Suppliers
Tom Pernetti, Senior Managing Director, Senior High Yield Trader, Auto Suppliers
Dan Frommer, Senior Managing Director, Senior High Yield Credit Derivatives Trader, Auto Suppliers


This panel will include the presentation of Bear, Stearns Credit Analysts' views and investment recommendations on the U.S. Auto and Auto Supplier sectors followed by a moderated question and answer session mainly focusing on Bear, Stearns Credit Trading views on market technicals, trading liquidity, fund flows, trading patterns, etc.


11:15 a.m.            "Outlook for the Economy, Rates, and Credit"
(Astor Salon)

John Ryding, Senior Managing Director & Chief U.S. Economist, Bear, Stearns & Co. Inc.

*         Why economic growth is likely to remain robust?
*         How serious is the inflation threat?
*         How far will interest rates rise?
*         Outlook for the consumer and corporate America


12:00                     Keynote Luncheon: "Leadership" (Grand Ballroom)

Peyton Manning, Quarterback, Indianapolis Colts

Agenda 5

The Letter by Lehman Whistle-Blower Matthew Lee

 

Commercial Real Estate Apocalypse in 2011-2012

Commercial Real Estate Apocalypse in 2011-2012

via Mish's Global Economic Trend Analysis by noreply@blogger.com (Michael Shedlock) on 2/22/10

Inquiring minds are digging deep into a 190 page PDF by the Congressional Oversight Panel regarding Commercial Real Estate Losses and the Risk to Financial Stability.

Executive Summary

Over the next few years, a wave of commercial real estate loan failures could threaten America's already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation's mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present "underwater" – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.

The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010.

Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.

A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.

It is difficult to predict either the number of foreclosures to come or who will be most immediately affected. In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession.

Present Condition of Commercial Real Estate

The commercial real estate market is currently experiencing considerable difficulty for two distinct reasons. First, the current economic downturn has resulted in a dramatic deterioration of commercial real estate fundamentals. Increasing vacancy rates and falling rental prices present problems for all commercial real estate loans. Decreased cash flows will affect the ability of borrowers to make required loan payments. Falling commercial property values result in higher LTV ratios, making it harder for borrowers to refinance under current terms regardless of the soundness of the original financing, the quality of the property, and whether the loan is performing.

Second, the development of the commercial real estate bubble, as discussed above, resulted in the origination of a significant amount of commercial real estate loans based on dramatically weakened underwriting standards. These loans were based on overly aggressive rental or cash flow projections (or projections that were only sustainable under bubble conditions), had higher levels of allowable leverage, and were not soundly underwritten. Loans of this sort (somewhat analogous to "Alt-A" residential loans) will encounter far greater difficulty as projections fail to materialize on already excessively leveraged commercial properties.

Economic Conditions and Deteriorating Market Fundamentals

The health of the commercial real estate market depends on the health of the overall economy. Consequently, the market fundamentals will likely stay weak for the foreseeable future. This means that even soundly financed projects will encounter difficulties. Those projects that were not soundly underwritten will likely encounter far greater difficulty as aggressive rental growth or cash flow projections fail to materialize, property values drop, and LTV ratios rise on already excessively leveraged properties. New and partially constructed properties are experiencing the biggest problems with vacancy and cash flow issues (leading to a higher number of loan defaults and higher loss severity rates than other commercial property loans).

For the last several quarters, average vacancy rates have been rising and average rental prices have been falling for all major commercial property types.





Current average vacancy rates and rental prices have been buffered by the long-term leases held by many commercial properties (e.g., office and industrial). The combination of negative net absorption rates and additional space that will become available from projects started during the boom years will cause vacancy rates to remain high, and will continue putting downward pressure on rental prices for all major commercial property types. Taken together, this falling demand and already excessive supply of commercial property will cause many projects to be viable no longer, as properties lose, or are unable to obtain, tenants and as cash flows (actual or projected) fall.

In addition to deteriorating market fundamentals, the price of commercial property has plummeted. As seen in the following chart, commercial property values have fallen over 40 percent since the beginning of 2007.



For financial institutions, the ultimate impact of the commercial real estate whole loan problem will fall disproportionately on smaller regional and community banks that have higher concentrations of, and exposure to, such loans than larger national or money center banks. The impact of commercial real estate problems on the various holders of CMBS and other participants in the CMBS markets is more difficult to predict. The experience of the last two years, however, indicates that both risks can be serious threats to the institutions and borrowers involved.

Although banks with over $10 billion in assets hold over half of commercial banks' total commercial real estate whole loans, the mid-size and smaller banks face the greatest exposure.

The current distribution of commercial real estate loans may be particularly problematic for the small business community because smaller regional and community banks with substantial commercial real estate exposure account for almost half of small business loans. For example, smaller banks with the highest exposure – commercial real estate loans in excess of three times Tier 1 capital – provide around 40 percent of all small business loans.

Foresight Analytics, a California-based firm specializing in real estate market research and analysis, calculates banks' exposure to commercial real estate to be even higher than that estimated by the Federal Reserve. Drawing on bank regulatory filings, including call reports and thrift financial reports, Foresight estimates that the total commercial real estate loan exposure of commercial banks is $1.9 trillion compared to the $1.5 trillion Federal Reserve estimate. The 20 largest banks, those with assets greater than $100 billion, hold $600.5 billion in commercial real estate loans.

Figure 17: Commercial Real Estate Loans by Type (Banks and Thrifts as of Q3 2009)







As seen in the Foresight Analytics data above, the mid-size and smaller institutions have the largest percentage of "CRE Concentration" banks compared to total banks within their respective asset class. This percentage is especially high in banks with $1 billion to $10 billion in assets. The table above emphasizes the heightened commercial real estate exposure compared to total capital in banks with $100 million to $10 billion in assets. Equally troubling, at least six of the nineteen stress-tested bank-holding companies have whole loan exposures in excess of 100 percent of Tier 1 risk-based capital.

Risks

In the years preceding the current crisis, a series of trends pushed smaller and community banks toward greater concentration of their lending activities in commercial real estate. Simultaneously, higher quality commercial real estate projects tended to secure their financing in the CMBS market. As a result, if and when a crisis in commercial real estate develops, smaller and community banks will have greater exposure to lower quality investments, making them uniquely vulnerable.

As loan delinquency rates rise, many commercial real estate loans are expected to default prior to maturity. For loans that reach maturity, borrowers may face difficulty refinancing either because credit markets are too tight or because the loans do not qualify under new, stricter underwriting standards. If the borrowers cannot refinance, financial institutions may face the unenviable task of determining how best to recover their investments or minimize their losses: restructuring or extending the term of existing loans or foreclosure or liquidation.

On the other hand, borrowers may decide to walk away from projects or properties if they are unwilling to accept terms that are unfavorable or fear the properties will not generate sufficient cash flows or operating income either to service new debt or to generate a future profit.

Delinquent Loans

Although many analysts and Treasury officials believe that the commercial real estate problem is one that the economy can manage through, and analysts believe that the current condition of commercial real estate, in isolation, does not pose a systemic risk to the banking system, rising delinquency rates foreshadow continuing deterioration in the commercial real estate market. For the last several quarters, delinquency rates have been rising significantly.



The extent of ultimate commercial real estate losses is yet to be determined; however, large loan losses and the failure of some small and regional banks appear to some experienced analysts to be inevitable. New 30-day delinquency rates across commercial property types continue to rise, suggesting that commercial real estate loan performance will continue to deteriorate. However, there is some indication that the rate of growth, or pace of deterioration, is slowing. Unsurprisingly, the increase in delinquency rates has translated into rapidly rising default rates.



The increasing number of delinquent, defaulted, and non-performing commercial real estate loans also reflects increasing levels of loan risks. Loan risks for borrowers and lenders fall into two categories: credit risk and term risk. Credit risk can lead to loan defaults prior to maturity; such defaults generally occur when a loan has negative equity and cash flows from the property are insufficient to service the debt, as measured by the debt service coverage ratio (DSCR).

If the DSCR falls below one, and stays below one for a sufficiently long period of time, the borrower may decide to default rather than continue to invest time, money, or energy in the property. The borrower will have little incentive to keep a property that is without equity and is not generating enough income to service the debt, especially if he does not expect the cash flow situation to improve because of increasing vacancy rates and falling rental prices.

Broader Social and Economic Consequences

Commercial real estate problems exacerbate rising unemployment rates and declining consumer spending. Approximately nine million jobs are generated or supported by commercial real estate including jobs in construction, architecture, interior design, engineering, building maintenance and security, landscaping, cleaning services, management, leasing, investment and mortgage lending, and accounting and legal services.

Projects that are being stalled or canceled and properties with vacancy issues are leading to layoffs. Lower commercial property values and rising defaults are causing erosion in retirement savings, as institutional investors, such as pension plans, suffer further losses. Decreasing values also reduce the amount of tax revenue and fees to state and local governments, which in turn impacts the amount of funding for public services such as education and law enforcement. Finally, problems in the commercial real estate market can further reduce confidence in the financial system and the economy as a whole. To make matters worse, the credit contraction that has resulted from the overexposure of financial institutions to commercial real estate loans, particularly for smaller regional and community banks, will result in a "negative feedback loop" that suppresses economic recovery and the return of capital to the commercial real estate market. The fewer loans that are available for businesses, particularly small businesses, will hamper employment growth, which could contribute to higher vacancy rates and further problems in the commercial real estate market.

Conclusion

There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public. An extended severe recession and continuing high levels of unemployment can drive up the LTVs, and add to the difficulties of refinancing for even solidly underwritten properties. But delaying write-downs in advance of a hoped-for recovery in mid- and longer-term property valuations also runs the risk of postponing recognition of the costs that must ultimately be absorbed by the financial system to eliminate the commercial real estate overhang.

Any approach to the problem raises issues previously identified by the Panel: the creation of moral hazard, subsidization of financial institutions, and providing a floor under otherwise seriously undercapitalized institutions.

There appears to be a consensus, strongly supported by current data, that commercial real estate markets will suffer substantial difficulties for a number of years. Those difficulties can weigh heavily on depository institutions, particularly mid-size and community banks that hold a greater amount of commercial real estate mortgages relative to total size than larger institutions, and have – especially in the case of community banks – far less margin for error. But some aspects of the structure of the commercial real estate markets, including the heavy reliance on CMBS (themselves backed in some cases by CDS) and the fact that at least one of the nation's largest financial institutions holds a substantial portfolio of problem loans, mean that the potential for a larger impact is also present.

There is no way to predict with assurance whether an economic recovery of sufficient strength will occur to reduce these risks before the large-scale need for commercial mortgage refinancing that is expected to begin in 2011-2013.

The Panel is concerned that until Treasury and bank supervisors take coordinated action to address forthrightly and transparently the state of the commercial real estate markets – and the potential impact that a breakdown in those markets could have on local communities, small businesses, and individuals – the financial crisis will not end.

Reflections on the Report

At 190 pages, that was a very detailed report. One key take away is the huge numbers of banks at risk of failure as noted in Figure 19. There are 358 banks in the size of $1 to $10 billion with excessive CRE concentrations. There are an additional 2,115 banks in the size of $100 million to $1 billion with excessive CRE concentrations. Only 1 of the top 20 banks (greater than $100 billion) has excessive CRE concentrations. However, because of size, that 1 is important as well.

Certainly not all of those banks will fail, but hundreds of them will. Moreover, of all the banks, a whopping 2,988 out of 8,108 have excessive CRE concentrations. With inadequate loan loss provisions as noted in the following chart, is it any wonder banks are not lending?

Assets at Banks whose ALLL exceeds their Nonperforming Loans



The above chart courtesy of the St. Louis Fed.

Because allowances for loan and lease losses (ALLL) are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings (and capitalization ratios) are wildly over-stated.

Systemic Risk

The report noted that "Treasury officials believe that the commercial real estate problem is one that the economy can manage through, and analysts believe that the current condition of commercial real estate, in isolation, does not pose a systemic risk to the banking system."

The key words in that paragraph are "in isolation".

• What about credit card defaults?
• What about another wave down in housing?
• What about the cumulative effect of banks being so undercapitalized they could not lend if they wanted to?
• What if more businesses decide to walk away for properties?
• What happens to mortgage rates and rates for commercial loans when the Fed stops buying mortgage backed securities?
  

A quick look at the above questions shows risk is overwhelmingly to the downside.

Here is the key question as far as the "recovery" goes. Where is the source of jobs with all the above constraints and questions?

As I suggested in Yield Curve Steepest In History: Is The Meaning Different This Time?

Those who think the steep yield curve guarantees the economy will soon be humming are in for a rude awakening. In the aftermath of a deflationary credit bust, credit conditions, debt levels, and attitudes are far more important than a steep yield curve, and those conditions are god awful.

Add commercial real estate to the list of conditions that are god awful.

Perhaps the economic miracle fairy waves her wand and cures all of these systemic risks, but I would not bet on it.

Coroner’s Post Mortem on Lehman

Coroner’s Post Mortem on Lehman

via The Big Picture by Invictus on 3/12/10

All 2200 pages.

Restoring American Financial Stability Act

Posted By Barry Ritholtz On March 17, 2010 (12:30 am) In Regulation, Think Tank

Here is an overview of the Senate package:

Financial Reform Summary Final

Article taken from The Big Picture - http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2010/03/restoring-american-financial-stability-act/

Former Lehman Exec: If You Think Repo 105 Is Bad, Just Imagine What Goldman ...

Former Lehman Exec: If You Think Repo 105 Is Bad, Just Imagine What Goldman Sachs Is Doing

via Clusterstock by John Carney on 3/17/10

In the end, every story on Wall Street comes back to Goldman Sachs.
And so it is with the Repo 105 story uncovered by the Lehman bankruptcy examiner.
In Max Abelson's column in the New York Observer, a trio of obnoxious bankers brush of the entire scandal as something only of interest to unsophisticated people. But you know what they think is a big deal?
That's right. Some unspecified financial chicanery at Goldman Sachs.
"If Valukas went into Goldman Sachs, what do you think the report would look like?" one of the executives asks Ableson, referring to the court-appointed examiner, Chicago attorney Anton Valukas. "This would be a fairy tale compared to that."
Join the conversation about this story »
See Also:

• Nasty Arrogant Former Lehman Executives Say Repo 105 Was No Big Deal
• Lehman Brothers Was Dramatically Over Valuing Its CDOs
• Dick Fuld Thinks The Lehman 105 Repo Report Is Good News

NYTimes.com: DealBook: Auditor Could Face Liability Over Lehman

Auditor Could Face Liability Over Lehman

March 15, 2010, 3:47 am

Lehman Brothers may have collapsed a year and a half ago, but fallout from its demise has created a potential legal liability for its former accounting firm, Ernst & Young, The New York Times’s Michael J. de la Merced writes.
A 2,200-page report by a court-appointed examiner, Anton R. Valukas, on Lehman’s collapse has plenty of criticism for various players involved with the investment bank. But some of his harshest words are reserved for Ernst & Young and the accounting maneuvers it permitted.
Mr. Valukas writes that he found enough evidence to support at least three claims against the accounting firm for not looking more closely into Lehman’s use of questionable accounting. Lehman used the tactics, known inside the bank as Repo 105, to hide as much as $50 billion off its balance sheet to temporarily reduce its debt levels.
His report concludes that sufficient evidence exists to bring claims of malpractice against the accounting firm on the grounds of failing to disclose or investigate the technique. Legal and accounting experts say that Ernst & Young could now face potentially damaging civil litigation by private plaintiffs or the Securities and Exchange Commission — or even criminal charges by the Justice Department.
The examiner’s report has again led financial experts to question how accounting firms can fail to closely scrutinize their clients’ bookkeeping. Ernst & Young’s actions came after the passage of laws like the Sarbanes-Oxley Act of 2002 in the wake of the Enron and WorldCom accounting scandals and the collapse of Arthur Andersen for its role in those frauds.
Ernst & Young itself paid an $8.5 million fine to the S.E.C. in December for its role in allowing another client, Bally Total Fitness, to avoid restating its earnings in 2002 when accounting rules changed.
Charlie Perkins, an Ernst & Young spokesman, said in a statement that the firm’s last full audit of Lehman was for the 2007 fiscal year and that it stood by its results. “After an exhaustive investigation the examiner made no findings in his report that Lehman’s assets or liabilities were improperly valued or accounted for incorrectly in Lehman’s November 30, 2007 financial statements,” he said.
“One thing Sarbanes-Oxley reminded us of is that technical compliance isn’t enough,” said Lawrence A. Cunningham, a law professor at George Washington University. “Accounting firms need to be sitting back the whole time and thinking, is this a fair presentation?”
He added that any large judgment against the accounting firm, let alone tough regulatory action, could prove enormously damaging in terms of both money and future business.
“If a breach of liability is established here, this could be disastrous in my view,” he said.
According to the report, Ernst first learned of Lehman’s use of Repo 105 in 2001, shortly after it was designed. Partners of the accounting firm told Mr. Valukas that at the time, Ernst had not signed off on Repo 105 on anything more than a “theoretical” level, and gave approval only of Lehman’s internal policy regarding the practice, The Times said.
At no point did Ernst review the approval letters by the British law firm Linklaters, the only outside legal counsel Lehman could find that would sign off on the practice.
By 2007, Mr. Valukas writes, Ernst was aware of $29 billion in Repo 105 transactions. While Ernst knew of the practice for years, the issue of Repo 105 was thrust to the fore in spring 2008. On June 12, two Ernst partners, William Schlich and Hillary Hansen, met with Matthew Lee, a Lehman executive who had written senior management a letter to complain of what he saw as accounting improprieties.
The firm was “also dealing with a whistle-blower letter, that is on its face pretty ugly and will take us a significant amount of time to get through,” Mr. Schlich wrote in a June 5 e-mail message to colleagues, the examiner’s report said.
At that meeting, Mr. Lee informed the two accountants that Lehman was using Repo 105 to move $50 billion of the firm’s assets off its balance sheet at the quarter’s end to make its debt levels look smaller. The firm reassumed those assets about a week later.
But the next day, Ernst spoke to Lehman’s audit committee — but did not disclose Mr. Lee’s allegations on Repo 105, The Times said.
Mr. Perkins said Ernst never concluded its review of Mr. Lee’s claims because Lehman filed for bankruptcy before the firm could finish its audit.
Go to Article from The New York Times »
Go to Related Item from DealBook »

Wall Street Mobilizes to Shape Look of CDS Rules

By SUSANNE CRAIG, MARK GONGLOFF and CASSELL BRYAN-LOW

Investors expressed frustration and anger Wednesday after reports that U.S. and European governments were eager to place new curbs on the use of credit-default swaps. But some on Wall Street acknowledged that changes to the arcane trading area are inevitable, with some suggesting remedies that might increase transparency while forestalling greater government intervention.

Wednesday, European officials appeared to soften some of their previous statements calling for rules on the swaps, including a possible ban on using them for "speculative" trading. Greece's prime minister said that he wasn't trying to "scapegoat" traders for the country's current budget crisis.

The remarks came after comments Tuesday by the head of the Commodity Futures Trading Commission, who suggested stronger swap rules were essential to broader financial change in America.

Credit-default swaps function like insurance for the default of a bond. If a borrower defaults, the CDS holder is paid by the seller of the protection. But traders don't need to own the bonds to buy the protection; instead, they can use CDSs to make "naked" bets on the bonds' direction.

Defenders say CDS buyers often are the smart money who can sniff out problems of, say, a country or company and bet on its decline. They shouldn't be flogged for good investing sense, they say.

"It's like blaming a thermometer for the temperature outside," says Brian Yelvington, director of fixed-income research at Knight Libertas LLC, a Greenwich, Conn., trading firm.

Christopher Iggo, fixed-income chief investment officer at the investment unit of French insurer AXA SA, says he views rising levels of CDS trading as "a gauge of sentiment." But he says that high CDS volume can offer an indication that the negative sentiment is overdone and that there may be an opportunity to invest, rather than as a sign to pile on against an issuer.

Yet political consensus for the need to improve oversight of the CDS industry is growing, as the lack of regulation is viewed as having exacerbated declines in stock or bond prices of companies and countries alike.

Defenders of CDSs also note that, while there is some $25 trillion in notional CDS exposure outstanding, most of those bets cancel each other out, and the amount of money actually at risk amounts to about $2.5 trillion in total, according to data compiled by the Depository Trust & Clearing Corp. There is roughly $80 trillion in debt outstanding around the world.

Also, defenders say, it might be difficult for regulators to identify which CDS uses are purely speculative. For example, a "naked" CDS trade, in which investors buy CDS protection on a borrower without owning that borrower's debt, often is used by large investors as indirect hedges of other risks. Banning such trades outright could lead investors to buy fewer bonds or stocks or lend less—an outcome policy makers might later regret.

In a speech Tuesday, CFTC chairman Gary Gensler noted that some observers have said that "as buyers of credit default swaps had an incentive to see a company fail, they may have engaged in market activity to help undermine an underlying company's prospects."

The near collapse of insurer American International Group Inc., which made a series of bad CDS bets, also remains fresh in the memories of many regulators. Some of these people say that, while outright bans on the trading would be inappropriate, other measures could improve the market.

H. Rodgin Cohen, chairman of law firm Sullivan & Cromwell and one of the nation's pre-eminent banking lawyers, said government legislation isn't the solution to curbing the abuse of derivatives on Wall Street. In a recent speech, he called for improved transparency of the use of derivatives, especially in cases when firms use them solely to make directional bets on the health of a country or company.

H. Rodgin Cohen

"To me, trying to restrict usage by artificial means is never productive," he said in an interview, referring to calls to curb the use of derivatives through legislation. "The better way is to have transparency, but also to assess the risk for regulatory capital purposes. The more risk you have, the more capital banks should be required to put up. The largest problem is that capital levels are not sufficiently aligned with risk."

Many investors are on board with the idea—also advocated by Mr. Gensler—of having standard CDSs cleared and traded on a regulated platform such as an exchange.

"There needs to be an exchange-settlement mechanism in place; as it stands now the counterparty risk is too high," said Michael Kastner, head of fixed income at Sterling Stamos Capital Management.

Sterling Stamos traded billions of dollars in CDSs in 2008, but got out of the market after the Lehman Brothers collapse. Mr. Kastner suggested the firm might return if clearing and exchange issues were settled. "Even with its flawed nature, it's a useful market," he said.

Citigroup Inc. credit-strategist Michael Hampden-Turner, a CDS-market defender, says one alternative to banning some uses of CDSs would be to curb the size of trades hedge funds or others could take by limiting the amount of leverage an investor could use. Currently, a hedge fund or other investor need only put up a relatively small amount of capital—often less than 10%—when buying CDS protection.

A higher amount, he said, "would still enable funds to take positions but [would] reduce the leverage with which they could do it."

—Sarah N. Lynch contributed to this article. Write to Susanne Craig at susanne.craig@wsj.com, Gregory Zuckerman at gregory.zuckerman@wsj.com and Cassell Bryan-Low at cassell.bryan-low@wsj.com

CFTC Chair Gary Gensler Addresses Markit OTC Derivatives Markets Conference

CFTC Chair Gary Gensler Addresses Markit OTC Derivatives Markets Conference

via WSJ.com: MarketBeat by WSJ Staff on 3/9/10

From the CFTC:
Keynote Address of Chairman Gary Gensler, OTC Derivatives Reform, Markit's Outlook for OTC Derivatives Markets Conference
March 9, 2010
Good afternoon. It's good to be with you today to discuss much-needed regulatory reform of the over-the-counter derivatives markets. In particular, I will focus on credit default swaps (CDS), products that directly contributed to the financial crisis.
Characteristics of Credit Default Swaps
The market for credit default swaps has grown exponentially within the last decade. According to the International Swaps and Derivatives Association's historical survey of the size of the CDS market, the marketplace grew from a notional value of around $630 billion in the second half of 2001 to $36 trillion by the end of last year. That's equivalent to roughly two and a half times the amount of goods and services sold in the American economy annually. Bank for International Settlements data indicates that more than 95 percent of credit default swap transactions are between financial institutions.
The 2008 financial crisis had many chapters, but credit default swaps played a lead role throughout the story. They were at the core of the $180 billion bailout of AIG. The reliance on CDS, enabled by the Basel II capital accords, allowed many banks to lower regulatory capital requirements to what proved to be dangerously low levels. They also contributed to weak underwriting standards, particularly for asset securitizations, when investors and Wall Street allowed CDS to stand in for prudent credit analysis.
Credit default swaps have many characteristics similar to other over-the-counter derivatives. They are used to hedge risk, and their value is based on a reference entity. They also have characteristics that distinguish them from other derivatives. While the value of interest rate or commodity derivatives generally adjusts continuously based on the price of a referenced asset or rate, credit default swaps operate more like binary options. A seller of CDS could one month collect its regular premium with little expectation that the insured company may default and in the next month be on the hook for billions if the insured company goes bankrupt. A credit default swap can quickly turn from a consistent revenue generator into ruinous costs for the seller of protection. This "jump-to-default" payout structure makes it more difficult to manage the risk of credit default swaps. Credit default swaps also have characteristics similar to bond insurance issued by mono-line insurance providers. Further, credit default swaps based upon a single company relate directly to that company's capital formation and to the price of their equities, bonds and other securities.
Over-the-Counter Derivatives Reform
Credit default swaps have unique characteristics and played a central role in the financial crisis, but we also must bring comprehensive reform to the rest of the over-the-counter derivatives marketplace. The recent chill winds blowing through Europe, including the discovery that derivatives were used to help mask Greece's fiscal health, are reminders of the pressing need for comprehensive regulation. The 2008 financial crisis demonstrated how over-the-counter derivatives – initially developed to help manage and lower risk – can actually concentrate and heighten risk in the economy.
A comprehensive regulatory framework governing over-the-counter derivatives should apply to all dealers and all derivatives, no matter where traded or marketed. It should include interest rate swaps, currency swaps, foreign exchange swaps, commodity swaps, equity swaps, credit default swaps and any new product that might be developed in the future. Effective reform of the marketplace requires three critical components:
First, we must explicitly regulate derivatives dealers. They should be required to have sufficient capital and to post collateral on transactions to protect the public from bearing the costs if dealers fail. Dealers should be required to meet robust standards to protect market integrity and lower risk and should be subject to stringent record-keeping requirements.
Second, to promote public transparency, standard over-the-counter derivatives should be traded on exchanges or other trading platforms. The more transparent a marketplace, the more liquid it is, the more competitive it is and the lower the costs for companies that use derivatives to hedge risk. Transparency brings better pricing and lowers risk for all parties to a derivatives transaction. During the financial crisis, Wall Street and the Federal Government had no price reference for particular assets – assets that we began to call "toxic." Financial reform will be incomplete if we do not achieve public market transparency.
Third, to lower risk further, standard OTC derivatives should be brought to clearinghouses. Clearinghouses act as middlemen between two parties to a transaction and guarantee the obligations of both parties. With their use, transactions with counterparties can be moved off the books of financial institutions that may have become both "too big to fail" and "too interconnected to fail." Centralized clearing has helped to lower risk in futures markets for more than a century.
Regulation of Credit Default Swaps
Regulating derivatives dealers and requiring transparent trading and central clearing of standardized derivatives would greatly reduce risk in the credit default swap market. Additional reforms, however, should be considered to address the unique characteristics of the products. The CFTC is very fortunate to have a strong working relationship with the Securities and Exchange Commission (SEC). Under the Administration's regulatory reform proposal, both agencies have a role to play, consistent with longstanding precedent, in regulating the CDS markets. The SEC would take the lead on single-issuer and narrow-based CDS, and the CFTC would take the lead on broad-based products. While the views expressed in this speech are my own, we are closely consulting with the SEC on appropriate regulatory reform of credit default swaps and the broader over-the-counter marketplace.
Market Manipulation
The CFTC and the SEC should have clear authority to police the over-the-counter derivatives markets for fraud, manipulation and other abuses. It is important that these markets serve to help people hedge risk as well as provide for efficient and transparent price discovery markets.
At the height of the crisis in the fall of 2008, stock prices, particularly of financial companies, were in a free fall. Some observers believe that CDS figured into that decline. They contend that, as buyers of credit default swaps had an incentive to see a company fail, they may have engaged in market activity to help undermine an underlying company's prospects. This analysis has led some observers to suggest that credit default swap trading should be restricted or even prohibited when the protection buyer does not have an underlying interest.
Though credit default swaps have existed for only a relatively short period of time, the debate they evoke has parallels to debates as far back as 18th Century England over insurance and the role of speculators. English insurance underwriters in the 1700s often sold insurance on ships to individuals who did not own the vessels or their cargo. The practice was said to create an incentive to buy protection and then seek to destroy the insured property. It should come as no surprise that seaworthy ships began sinking. In 1746, the English Parliament enacted the Statute of George II, which recognized that "a mischievous kind of gaming or wagering" had caused "great numbers of ships, with their cargoes, [to] have . . . been fraudulently lost and destroyed." The statute established that protection for shipping risks not supported by an interest in the underlying vessel would be "null and void to all intents and purposes."
For a time, however, it remained legal to buy insurance on another person's life in England. It took another 28 years and a new king, King George III, before Parliament banned insuring a life without an insurable interest.
The debate over the role of speculators in markets did not end in the 18th century. That debate continued as the CFTC's predecessor and the SEC were set up following an earlier crisis and that debate continues on to this day. In the case of futures, Congress determined that speculators should be able to meet hedgers in a centralized marketplace. In the oil market, for example, a speculator that will neither produce nor purchase oil is able to buy or sell oil futures. But Congress did require that all such futures trading be regulated, that markets be protected against fraud and manipulation and that regulators be authorized to limit the size of the position that a speculator can take.
The Administration has recommended – and the House financial regulatory reform bill that passed in December includes – critical steps to address the use of CDS to manipulate markets or possibly commit other abuses. With regard to single-issuer CDS or narrow-based CDS, the SEC should have consistent authority over all financial instruments subject to its jurisdiction. The SEC should have the same general anti-fraud and anti-manipulation rulemaking authority with respect to credit default swaps under its jurisdiction as it has with regard to all securities and securities derivatives under its jurisdiction. In addition, the SEC should have authority to set position limits in single-issuer and narrow-based CDS markets as it now has for other single-issuer or narrow-based securities derivatives. The House bill allows the SEC to aggregate and limit positions with respect to an underlying entity across markets, including options, equity securities, debt and single-stock futures markets.
Bankruptcy
Credit default swaps also can play a significant role once a company has defaulted or gone into bankruptcy. Bondholders and creditors who have CDS protection that exceeds their actual credit exposure may thus benefit more from the underlying company's bankruptcy than if the underlying company succeeds. These parties, sometimes called "empty creditors," might have an incentive to force a company into default or bankruptcy. These so-called empty creditors also have different economic interests once a company defaults than other creditors who are not CDS holders.
These incentives result from the separation of economic risk from beneficial ownership. In the capital markets, assuming economic risk usually comes with some type of governance right. Shareholders place their investment at risk, which brings the right to vote and to inspect books and records. Debtholders may extend credit or buy bonds along with rights as outlined in various debt covenants and indentures, as well as having rights in bankruptcy court.
Though reform efforts to date have yet to address the bankruptcy laws, we should seriously consider modifications to address this new development in capital markets. One possible reform would be to require CDS-protected creditors of bankrupt companies to disclose their positions. Another is to specifically authorize bankruptcy judges to restrict or limit the participation of "empty creditors" in bankruptcy proceedings.
Adequate Capital and Risk Management
Credit default swaps also play a significant role in how banks manage their regulatory capital requirements. Under the Basel II capital accords, large banks and investment banks could significantly decrease their regulatory capital by relying on "credit risk mitigants," including CDS positions on existing exposures. U.S. standards under the Advanced Capital Adequacy Framework, though more conservative on this matter than Basel II implementation elsewhere, also allows for some reduction of regulatory capital when a bank purchased CDS protection from an eligible entity. So, a bank can essentially rent another institution's credit rating to reduce its required capital.
Two lessons emerge from the role of CDS in this context. First, bank capital regulation should be modified to make the use of CDS for capital reduction more restrictive. For example, possibly only CDS subject to collateral requirements could be allowed to provide capital relief, or a bank's exposure to particular CDS protection sellers could be limited. These measures are within the current regulatory authority of bank regulators, and I am hopeful that internationally coordinated and consistent revisions to the capital adequacy regime that are currently underway will consider such suggestions.
Second, as credit default swaps played such a central role across the financial industry failure of 2008, I believe to the extent Congress were to have any end-user exemption from trading or clearing, there should be no such exemption for CDS products. Fully 95 percent of this market is between financial institutions.
Asset Securitization
Lastly, credit default swaps also played a significant role in how mortgage and other asset securitizations were done leading up to the crisis. Though CDS at first was promoted as an important market innovation, their development ultimately contributed to lower underwriting standards. Investment banks and other packagers of mortgages wrapping securities with credit protection for sale to investors could reduce their efforts in analyzing the risk that due diligence would otherwise require. The crisis certainly shows the disastrous effects of investors and underwriters relying far too heavily on this protection. It is important that reform enable the CFTC and SEC to write rules to establish recordkeeping and reporting rules as well as business conduct standards to help address these risks.
Closing
We need broad regulatory reform of over-the-counter derivatives to best lower risk and promote transparency in the marketplace. While similar to other derivatives, credit default swaps have unique features that require additional consideration. Only with comprehensive reform can we be sure to fully protect the American public.

The Problem with Deficit Neutrality

The Problem with Deficit Neutrality

via Greg Mankiw's Blog by noreply@blogger.com (Greg Mankiw) on 3/9/10

Imagine you have a friend who has a budget problem.  Every month he spends more than he earns.  His credit card bills are piling up.  He is clearly on an unsustainable path.  Then one day he comes to you with an idea.

Friend: I am going to take off a few days from work and fly down to Bermuda for a quick vacation.


You: But isn't that expensive?  Won't that just add to your growing debts?


Friend: Yes, it is expensive.  But my plan is deficit-neutral.  I have decided to give up that half-caf, extra shot caramel macchiato I order at Starbucks twice every day.  I really don't need that expensive drink.  And if I give it up for the next three years, it will pay for my Bermuda trip.


You: Well, then, how are you going to solve the problem of your growing debts?


Friend: I am going to figure that out as soon as I return from Bermuda.


You: But in light of your budget problem, maybe you should give up Starbucks and skip the Bermuda vacation.  Giving up Starbucks could be the easiest way to start balancing your budget.


Friend: You really aren't any fun, are you?

This conversation is meant to illustrate why claims of deficit-neutrality in the healthcare reform bill should not give much comfort to those worried about the U.S. fiscal situation.  Even if you believe that the spending cuts and tax increases in the bill make it deficit-neutral, the legislation will still make solving the problem of the fiscal imbalance harder, because it will use up some of the easier ways to close the shortfall.  The remaining options will be less attractive, making the eventual fiscal adjustment more painful.

Ten Things Worth Reading, Mostly Economics: March 8, 2010

Ten Things Worth Reading, Mostly Economics: March 8, 2010

via Grasping Reality with All Six Feet by Brad DeLong on 3/7/10

1) Rebecca Wilder: The end game for Europe: wage cutting and the battle for exports:

Latvia's model: drop wages to increase export income. Greece: drop wages to increase export income. France, Germany, Spain, Portugal, etc., etc. It's impossible that the whole of the Eurozone will drop wages to increase export income. It's especially bad for countries like Latvia or Hungary, where the lion's-share of trade occurs withing the boundaries of Europe. And what happens when export income does not provide the impetus for aggregate demand growth? Well, there's not much left. Can't devalue the currency (via printing money), and tax revenues will fall faster than a ten-pound weight: rising deficits; rising debt; rising debt service (via surging credit spreads). Sovereign default seems like a near-certainty somewhere in the Eurozone!

2) William Baumol (1999): Retrospectives: Say's Law:

Becker and Baumol (1952) argued, citing some evidence, that Say and other writers recognized that the zero value of the sum of excess demands, or supply creates its own demand ("Say's identity"), may not hold in the short run. Say's passage in his Letters to Malthus, quoted above, even suggests an explanation-a desire to hoard or, as we would now put it, a temporary excess demand for money. But they thought the market would fairly quickly and automatically restore equilibrium ("Say's equality"). I can easily provide passages suggesting that the classical economists at least sometimes held a view closer to that than to the identity, but this is clearly not the place to pursue the issue. My themes here are that the supposed identity between supply and demand is hardly all there was to the "Law," that the relationship between supply and demand that did exist did not preclude depression or unemploy- ment in the minds of its advocates, and that the term "Say's Law" itself may be a misnomer.

3) Rainer Buergin and Philipp Encz: Volcker Says Too Soon to Cut U.S. Monetary, Fiscal Stimulus:

Paul Volcker said it's too soon for U.S. policy makers to withdraw the stimulus measures and interest-rate cuts used to fight the worst slump since the Great Depression. "This is not the time to take aggressive tightening action, either fiscally or monetary-wise," said Volcker in an interview in Berlin March 6, pointing to "high" unemployment. "So I think we have to, as best as we can, maintain the expectation that it will be taken care of in a timely way." The Federal Reserve and the Treasury are trying to withdraw the emergency measures introduced during the financial crisis without causing a relapse in the economy. Fed Chairman Ben S. Bernanke said Feb. 24 the U.S. is in a "nascent" recovery that still requires keeping interest rates near zero "for an extended period" to spur demand once stimulus wanes. At the same time, the Treasury's resources are under strain from the loss of 8.4 million jobs since December 2007, stimulus spending, wars in Afghanistan and Iraq and health care programs. The Obama administration predicts the budget deficit will swell to a record $1.6 trillion in the fiscal year ending Sept. 30. Volcker, whose recommendations inspired the restrictions on bank trading that President Barack Obama sent to Congress last week, said U.S. lawmakers must now prove they can pass the "comprehensive" legislation needed to prevent another financial crisis. "That is the test," said Volcker. "Congress has not been very good at passing any comprehensive legislation in various areas." Banking rules "shouldn't be a matter of partisan dispute. But everything seems to be infected by partisan disputes in the U.S. now."

4) Calculated Risk: Housing: A Tale of Boom and Bust and a Puzzle:

I've heard a number of stories of homeowners staying in their homes and not paying their mortgage, and the banks not foreclosing - and, at the same time, there is intense competition for any home that comes on the market. This is a real mystery right now. With 14 percent of mortgages delinquent or in foreclosure according to the MBA - why aren't the lenders foreclosing? Is this because of modifications? Are lenders waiting for the HAFA short sale program? And why do Fannie, Freddie and the FHA have a record number of REOs waiting to sell if the market is so "intense"?

5) PICTURE OF THE DAY: Yes, I get my most reliable news from The Onion: why do you ask?

6) DELONG SMACKDOWN OF THE DAY: Jonathan Bernstein: Obama's Biggest Failure:

Brad DeLong suggests filling the empty Fed vacancies with recess appointments; Matt Yglesias dissents.  I mostly agree with Yglesias here.  The problem of unfilled executive branch positions is to some extent the Senate's fault, but to a much larger extent Barack Obama's fault.  It's hard to blame the Senate for failing to confirm people who haven't been nominated. As far as confirmation problems are concerned, what Obama needs to do is: (1) Convince the Senate he cares.  The best way to do that is to nominate people for all the vacancies (and this goes for judicial vacancies, as well). (2) Establish a believable threat of recess appointments.  That's going to require some actual recess appointments, either in cases where a successful filibuster stopped confirmation, or where the Senate is just going slowly, or both. It seems to me that the first of these is far more important than the second.... [I]f Obama suddenly raises the visibility of the entire issue of executive nominations, which would require actually appointing a lot of people, then recess appointments would be seen in the context of Senate stalling and/or Republican obstruction.  In my view, this has been Obama's biggest failure as a president to date.  Presidents often get bashed unfairly  for episodes in which they lose.  But presidents are bound to lose on some issues, even if they play the cards they're dealt perfectly.  Here, however, is an example of a president who isn't even bothering to play the game.

7) SECOND BEST NON-ECONOMICS THING I HAVE READ TODAY:
8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Spencer Ackerman: This Is How You Know The Cheneyites Lost:

Ben Smith obtains a letter from a collection of lawyers objecting strenuously to Keep America Safe's disgraceful slander that DOJ lawyers who represented Guantanamo detainees are sympathetic to Usama bin Laden. (Or, the 'al-Qaeda Seven', as the Cheneyites' add said.) "Shameful," the signatories call it, writing, "The American tradition of zealous representation of unpopular clients is at least as old as John Adams' representation of the British soldiers charged in the Boston massacre." Signatories include veterans of the Bush legal apparatus like Pentagon ex-detentions chief Matt Waxman and — this is an actual surprise to me — David Rivkin, a Reagan veteran and usually a go-to conservative lawyer for most everything war-on-terror and lawless. Keep America Safe overreached with this one. They went after unobjectionable legal behavior — and, more importantly, an action that any lawyer would sympathize with performing.... [L[ook at how Bill Kristol tries to dig Keep America Safe out of its miscalculation.... Kristol would need the press to have not actually seen the Keep America Safe video for anyone to take seriously the idea that an ad that calls these lawyers "The al-Qaeda Seven" isn't an attack on them. (Good on Ben for the contextualized reminder.) And if he's reduced to saying that the group isn't calling for the lawyers' heads, that's a sure sign that the group is running away from its mistake, rather than pressing the attack. People like Tony West, who defended John Walker Lindh, leads the Justice Department's civil branch and has nothing to do with detentions policy. KAS didn't do the slightest bit of due diligence on this ad, and that helps explain why they were unprepared for the backlash.

9) STUPIDEST THING I HAVE SEEN TODAY: Martin Peretz and Andrew Roberts, as observed by Matthew Yglesias. Supporters of Southern African apartheid, you see, really don't like Jews much either: Israel Deserves Better Defenders Than Andrew Roberts:

I like to check in on Marty Peretz's blog now and again, and what do I find but "The FT's Devastating Critique Of Itself": "Yes, I've been harping on the FT's coverage of Israel. Perhaps, you haven't agreed with my complaints. Well, read what the paper has to say about the subject this morning. The column is by the historian Andrew Roberts, and it's a must read." Andrew Roberts?... [I]n addition to being an apologist for Boer War-era concentration camps and the Amritsar Massacre is really not the kind of friend Israel needs as it seeks to rebut allegations of similarity to apartheid-era South Africa: 'In 2001, Roberts spoke to a dinner of the Springbok Club, a group that regards itself as a shadow white government of South Africa and calls for "the reestablishment of civilized European rulethroughout the African continent." Founded by a former member ofthe neo-fascist National Front, the club flies the flag of apartheid South Africa at every meeting. The dinner was acelebration of the thirty-sixth anniversary of the day the white supremacist government of Rhodesia announced a Unilateral Declaration of Independence from Great Britain, which was pressingit to enfranchise black people. Surrounded by nostalgists for thisracist rule, Roberts, according to the club's website, "finished his speech by proposing a toast to the Springbok Club, which hesaid he considered the heir to previous imperial achievements." The British High Commission in South Africa has accused the club ofspreading "hate literature." Yet Roberts's fondness for the Springbok Club is not an anomaly; it is perfectly logical toanybody who has read his writing, which consists of elaborate andhistorically discredited defenses for the actions of a white supremacist empire–the British–and a plea to the United States to continue its work.' I half-suspect the FT's editors of playing some kind of elaborate prank here. Surely Israel deserves better than this.

10) HOISTED FROM THE ARCHIVES: DeLong (September 2006): I'm Not Going Back Over There!! [to Slate, that is]:

Some correspondents are asking me to go back to http://slate.com. They don't know what they're asking. You don't know what it's like over there. I can't go back. I can't. Please don't make me. PGL and Kevin Drum find Mickey Kaus complaining about all those rich people artificially inflating our poverty figures by taking the year off from work: Angry Bear: "...affluent people who, by reason of their affluence, are able to take off a year with no income and therefore show up as 'poor' in the income stats..." Yep. Rich people who don't work, so they don't have any earned income; don't have pensions and Social Security; don't own property, so they don't have any rental income; don't own stocks, so they don't have any dividend income; they don't have any oil wells or literary properties, so they don't have any royalty income; and don't own bonds or have bank accounts, so they don't have any interest income. Rich people without any earned income, pension income, Social Security income, rental income, royalty income, dividend income, or interest income. But they are "affluent." There are sure a lot of them. Why, I run into thousands every day. At Safeway. PGL and Kevin can deal with Mickey Kaus as they want. I'm not going back over there.