Monday 14 July 2008

The mortgage lender illusion

It’s dispiriting indeed to watch the U.S. financial system, supposedly the envy of the world, being taken to its knees. But that’s the show we’re watching, brought to you by somnambulant regulators, greedy bank executives and incompetent corporate directors.

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Guanyu said...

The mortgage lender illusion

By Gretchen Morgenson
Sunday, July 13, 2008

NEW YORK: It’s dispiriting indeed to watch the U.S. financial system, supposedly the envy of the world, being taken to its knees. But that’s the show we’re watching, brought to you by somnambulant regulators, greedy bank executives and incompetent corporate directors.

This wasn’t the way the “ownership society” was supposed to work.

Investors weren’t supposed to watch their financial stocks plummet more than 70 percent in less than a year.

And taxpayers weren’t supposed to be left holding defaulted mortgages and abandoned homes while executives who presided over balance sheet implosions walked away with millions.

Over the course of this 18-month financial crisis, we have lurched from land mine to land mine.

Last week it was all about Fannie Mae and Freddie Mac, the giant government-sponsored enterprises set up to provide affordable housing.

By issuing debt, these shareholder-owned companies guarantee or own more than $5 trillion in home mortgages. Got that? $5 trillion.

Because the federal government established the companies, investors view them as backed, at least implicitly, by taxpayers. And that implied guarantee is what drove Fannie and Freddie’s business models.

The advantages the companies gained from this unique arrangement were huge.

They had to keep less cash on hand than traditional lenders, for example.

They also made more money on their mortgages than lenders because they paid less to borrow money in the bond market. These profits enriched Fannie and Freddie shareholders over the years and bestowed significant wealth on the companies’ executives.

Now it looks as if the bill for that largess is coming due. Of course it will be borne by the usual bag holders: U.S. taxpayers. You and me.

For years, anyone warning that Fannie and Freddie should beef up their financial positions was ridiculed or run over by the lobbying machines these companies kept oiled and close at hand. So their lucrative arrangement remained the same: business as usual, with all its riches, was the goal. After all, wasting money by inflating their cash cushions would just crimp their style.

Suddenly, Fannie and Freddie’s relatively anemic capital supply is a concern.

Last week, Fannie’s stock plummeted to $10.25, down 74 percent in 2008. Freddie’s shares also dived, closing at $7.75, a loss of 77 percent this year.

Even as investors were stampeding out of these stocks, the claque in Washington rushed to reassure them. Both Ben Bernanke, the Federal Reserve Board chairman, and Henry Paulson Jr., the Treasury secretary, said the mortgage giants’ regulators confirmed that the companies were “adequately capitalized.”

That was supposed to signal that the companies wouldn’t have to raise capital immediately because regulators had the problem firmly in hand.

But investors have good reason to be skeptical. In the first half of 2007, both Bernanke and Paulson sang a similar tune when they opined that problems in the mortgage market were “contained” to subprime loans.

Talk of adequate capital also brings to mind comments made last March, when Bear Stearns was on the ropes, by Christopher Cox, the chairman of the Securities and Exchange Commission. He tried to calm investors by telling them that Bear Stearns passed financial muster.

Days later, the firm was toe-tagged.

Which brings us to the main problem: credibility. Wall Street and our senior regulators seem to be running out of that precious commodity almost as quickly as cash.

The surprise is not that Fannie and Freddie grew too large for the taxpayers’ good. That was to be expected among companies run by executives whose pay is based on profit growth.

Rather it is that Congress and the various financial regulators, especially the Fed and the Office of Federal Housing Enterprise Oversight, did little to keep the companies from getting out of control.

Maybe the loans held or backed by Fannie and Freddie will turn out to be better performers than those held by other lenders. That would mean fewer losses than investors seem to be anticipating now and would still the cries for fresh capital.

But if their losses follow the patterns seen at other lenders, some sort of regulatory takeover may occur. That would mean a lot of pain for a lot of folks - especially both companies’ stockholders and the broader community of people depending on a secure, smoothly functioning mortgage market.

“The real outrage is that none of this had to happen,” said William Fleckenstein, co-author of “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve” and president of Fleckenstein Capital in Issaquah, Washington. “We did not have to ruin the financial system and ruin the financial lives of a huge chunk of the middle class in the United States.

“It is crystal clear,” he adds, “that the Fed not only made mistakes, they had the pompoms out, cheering for deregulation. Until people recognize why we are in this mess, I don’t see how we get out of this thing.”

A week ago, Bridgewater Associates, a research firm, estimated that losses from the credit crisis we’re now mired in might amount to $1.6 trillion when all is said and done.

We’ll have to wait years to see if this is accurate. But whatever the number is, it will also represent, in stunning red ink, the cost to society of financiers who are shortsighted and greedy and regulators who don’t regulate.

Anonymous said...

“It is dangerous to be right when the government is wrong.” - Voltaire (French Philosopher and Writer. One of the greatest of all French authors, 1694-1778)

Anonymous said...

唯独你是不可取替 (世界中の谁よりきっと) - 许志安

曾听说有许多恋爱
没有结果却剩伤心者感慨
令我都刻意避开
是我不敢相信真爱

但你不惜真心真意对待
竟令我再感到意外
让我献出同样被爱
全面喝采

如果今天将失去眼前的一切
剩低清风两袖也不计
唯独你一个是不可给取替
是我生命里的一切 wooh

如早知今生跟你有幸可相爱
在当初应更努力为未来
其实我知道是可一不可再
下半生准我留住你一直相爱

谁似你这般欣赏我
谁也说不上你一般清楚我
问我可需要甚么
愿你终身交托给我
让我一生好好把你照料
请让我体恤你需要
为你献出全部热爱
从来没缺少

如果今天将失去眼前的一切
剩低清风两袖也不计
唯独你一个是不可给取替
是我生命里的一切 wooh
如早知今生跟你有幸可相爱
在当初应更努力为未来
其实我知道是可一不可再
下半生准我留住你一直相爱
其实我知道是可一不可再
下半生准我留住你一直相爱

Anonymous said...

Dollar Gains as Paulson Seeks Equity Stakes in Freddie, Fannie

By Stanley White and Kosuke Goto

July 14 (Bloomberg) -- The dollar rose for the first time in four days against the euro after U.S. Treasury Secretary Henry Paulson announced funding plans for Freddie Mac and Fannie Mae to restore confidence in financial markets.

The currency climbed against the yen after Paulson asked Congress for the authority to buy unlimited stakes in the two largest U.S. mortgage finance companies and the Federal Reserve offered them loans through its discount window. The South Korean won fell, following its biggest weekly gain in a decade, as oil above $140 a barrel prompted overseas investors to sell local shares.

``Speculators who sold the dollar are now sure to buy it back,'' said Koji Fukaya, senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``Paulson is basically saying he won't let Freddie Mac and Fannie Mae fail as they play an important role in the U.S. financial system.''

The dollar climbed to $1.5894 per euro at 7:26 a.m. in London, from an earlier low of $1.5971 and $1.5938 late in New York on July 11. The U.S. currency reached a record low of $1.6019 on April 24. It bought 106.52 yen from 106.28 yen at the end of last week. The euro fell 0.1 percent to 169.30 yen after earlier reaching 169.75, the strongest level since the single currency was introduced in 1999.

The dollar may rise to $1.58 per euro and 107 yen this week, Fukaya forecast.

South Korea's currency fell to 1,004.60 per dollar from 1,002.45 at the end of last week. Investors abroad sold Korea shares today, the 26th consecutive day they have sold more equities than they bought, according to stock exchange data.

The Australian dollar rose to 96.86 U.S. cents, near a 25- year high of 97.16 cents touched July 11, on speculation the economy will withstand losses among U.S. financial institutions.

Paulson Plan

Paulson proposed that Congress enact legislation giving the Treasury temporary authority to buy equity ``if needed'' in Fannie and Freddie, and to increase their lines of credit with the department from $2.25 billion each. The Fed authorized the companies to borrow directly from the New York Fed.

Global banks and securities firms have reported losses of about $400 billion as the subprime mortgage market collapsed. Fannie Mae and Freddie Mac shares lost about half their value last week on concern they will run short of capital.

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, was little changed at 72.097, ending three days of losses. U.S. Treasuries declined for a third day and Standard & Poor's 500 Index futures contracts advanced.

Mortgage Support

``Asia can't decide whether this issue is a reason for dollar buying or not,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third-biggest bank. ``New York's market response will determine that.''

The dollar may move between 105.80 yen and 107 yen, and $1.5870 and $1.5970 a euro today, he said.

Bill Gross, manager of the world's biggest bond fund, turned bearish on the euro for the first time since the currency's inception in 1999.

A growing number of the world's biggest investors say a slowdown in the region's economy may be more severe than in the U.S., forcing the European Central Bank to reverse this month's rate increase. By January, the euro will be lower against the dollar, yen and the pound, according to the median estimate of strategists surveyed by Bloomberg.

Pimco and Euro

``We might have hit a point where the euro doesn't have a lot to stand on,'' said Emanuele Ravano, co-head of European strategy in London for Gross's Pacific Investment Management Co., which runs the $129 billion Pimco Total Return Fund. ``The euro is ultimately very overvalued. It could be quite a bit lower at some point in time over the next couple of years.''

Gains in the dollar may be limited by speculation Fed Chairman Ben S. Bernanke will highlight risks to the economy in his semi-annual testimony on monetary policy before the Senate Banking Committee tomorrow.

``Bernanke will talk about inflation and the downside risk of the U.S. economy,'' said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. in Tokyo. ``With U.S. economic fundamentals deteriorating amid financial turmoil, the markets will be more fixated by his remarks on the slowing economy. This will lead to dollar-selling.''

The dollar may fall to $1.5990 a euro this week, she said.

ZEW Survey

Losses in the euro may accelerate on speculation investor confidence in Germany, Europe's largest economy, fell to a 15- year low, weakening the case for higher interest rates.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations fell to minus 55 in July from minus 52.4 in the previous month, according to a Bloomberg News survey. The ZEW will release the data tomorrow in Mannheim.

``We expect money market flows to the euro-zone to ease as data signal growth weakness and the market realizes that the ECB cannot hike rates any more,'' analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, wrote in a research note on July 11.

The Dollar Index may decline to reach a record low of 70.70 should it close below so-called support at 71.82, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc., the world's biggest securities firm.

The index has fallen through the lower boundary, or support, of an ascending channel that connects the lows of March 17, April 22 and May 22, London-based Edgeley said in a research note yesterday. The next support level at 71.82 is the low set on May 22, he said. Support is a level where buy orders may be clustered.

Anonymous said...

Freddie Mac and Fannie Mae

The muddle-through approach

Jul 14th 2008
From Economist.com

America’s government tries a quick fix for the intractable problems of Fannie Mae and Freddie Mac

FANNIE MAE and Freddie Mac, the two government-supported mortgage giants at the centre of America’s housing market, pose a particularly acute problem for the Bush administration. Not only are they too big to fail. They are almost too big to rescue.

They hold or guarantee some $5.2 trillion of the nation’s $12 trillion of mortgages, backed by the thinnest wafer of capital, meaning their collapse would imperil the already paralysed American housing market. Yet as Joshua Rosner, an analyst at Graham Fisher, a research firm, points out, nationalising them, a stark choice for the government since their shares tumbled last week, would “result in a doubling of the federal deficit, a further collapse of the dollar and unthinkable implications for the Treasury’s cost of funding in the debt markets.”

Those two unpalatable options—failure or rescue—led the Treasury on Sunday July 13th to announce several stopgap measures aimed at restoring confidence in the two institutions, although it fell short of fundamentally reshaping them. The measures may buy a bit of time, but they are unlikely to put to rest highly sensitive questions about the future of Fannie and Freddie, leaving a large cloud looming over global financial markets.

The Treasury’s three-part plan, announced by Hank Paulson, the Treasury secretary, is to increase its line of credit to the government-sponsored entities (GSEs), which currently stands at a paltry $2.25 billion each. The Treasury also seeks authority to buy stakes in each company if necessary, and wants to give the Federal Reserve a greater role in oversight of the GSEs. Separately, the Fed's governors said that they had granted the New York Fed licence to lend to Fannie and Freddie if necessary, against suitable collateral.

Mr Paulson’s announcement, made overnight on the steps of the Treasury just before Asian financial markets opened, gave some support to the dollar, which had wobbled last week as the share prices of Fannie and Freddie halved. As Mr Paulson made clear, part of the problem with the two institutions is that their debt is held by investors around the world. That includes many central banks. The fear is that a sudden collapse of either institution might pose a threat to the dollar and the global economy.

The Paulson plan is aimed at ensuring that both institutions have enough liquidity to conduct their day-to-day businesses of buying mortgages. It came on the eve of a $3 billion debt-auction by Freddie Mac on Monday, which the government will be eager to succeed, to show that the GSEs are still able to raise money in the capital markets. The drying up of liquidity has bought down firms such as Bear Stearns, an American investment bank, and Northern Rock, a British mortgage lender, with devastating speed in the past year. Last week regulators took over IndyMac Bancorp, a mortgage lender, in one of the biggest bank failures in American history. Even though Fannie and Freddie have always been considered, because of their size, to have implicit government support, the Treasury will not have wished to put confidence in that to the test at an auction.

Less clear is the status of shareholders in Fannie and Freddie. The two firms are considered “the odd couple” in American finance because they are owned by shareholders, yet investors have always believed in that implicit government backing. Now that support has become explicit, shareholders must be worried about the price they will have to pay. They may have to provide more capital to Fannie or Freddie, or risk losing their stakes to the government. As double-or-quits bets go, there cannot be many worse than that—not least because a system that provides privatised profits with socialised losses cannot be allowed to persist.

Anonymous said...

Fannie Plan a `Disaster' to Rogers; Goldman Says Sell

By Carol Massar and Eric Martin

July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Rogers is betting that Fannie Mae shares will keep tumbling.

Goldman Sachs Group Inc. analyst Daniel Zimmerman said the mortgage finance companies' shares may fall another 35 percent and lowered his share-price estimate for Fannie Mae to $7 from $18 and for Freddie Mac to $5 from $17. Freddie Mac fell 18 cents, or 2.3 percent, to $7.57 at 11:16 a.m. in New York Stock Exchange trading, while Fannie Mae rose 13 cents, or 1.3 percent, to $10.38.

``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''

The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go'' and advised buying agricultural commodities.

Going `Bankrupt'

Rogers, a former partner of hedge fund manager George Soros, predicted the start of the commodities rally in 1999 and started buying Chinese stocks in the same year. He traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''

Fannie Mae and Freddie Mac each surged more than 20 percent in pre-market trading today after Paulson moved to stem a collapse in confidence in the two companies that purchase or finance almost half of the $12 trillion in U.S. home loans.

Fannie Mae's market value is now about $10 billion, down from $38.9 billion at the end of 2007. Freddie Mac's market value has shrunk to about $5 billion from $22 billion at the end of last year.

``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. ``What's going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?''

Last Week's Slump

Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.

The Federal Reserve separately authorized the firms to borrow directly from the central bank.

Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders.

Former St. Louis Federal Reserve President William Poole last week said in an interview that Freddie Mac is technically insolvent under fair value accounting, which measure a company's net worth if it had to liquidate all its assets to repay liabilities. Poole said Fannie Mae may also become insolvent this quarter.

Shorts Uncovered

Rogers said he had not covered his so-called short positions in Fannie Mae and would increase his bet if it were to rally. Short sellers borrow stock and then sell it in an effort to profit by repurchasing the securities later at a lower price and returning them to the holder.

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.

``They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson ``are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.''

Anonymous said...

Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings

By Bradley Keoun

July 14 (Bloomberg) -- At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank's $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.

Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.

Now, as Citigroup prepares to announce second-quarter results July 18, those off-balance-sheet assets, used by U.S. banks to expand lending without tying up capital, are casting a shadow over earnings. Since last September, at least $100 billion of assets have flooded back onto Citigroup's balance sheet, accompanied by more than $7 billion of losses.

``If you start adding up all the potential exposures, it's a huge number,'' said Sam Golden, a former ombudsman for the U.S. Office of the Comptroller of the Currency who now heads the financial-industry practice for restructuring adviser Alvarez & Marsal in Houston. ``The banks will say that it was disclosed. Investors are saying, `Yeah, but it was cryptic. We really didn't know what you were telling us.'''

U.S. banks already are reeling from more than $165 billion of writedowns and credit losses, so shareholders are wary of unknown obligations that might force them to take responsibility for additional troubled assets. The risks have become so obvious that accounting officials are proposing new rules -- some of which Citigroup opposes -- that would force many assets back onto balance sheets.

On the Hook

Seven of the biggest U.S. banks, including Citigroup, are on the hook for at least $300 billion of credit and liquidity guarantees for off-balance-sheet loans and bonds, according to a June 30 report from consulting firm RiskMetrics Group Inc. in Rockville, Maryland. Such guarantees were remote when pledged as an inducement to bond buyers. Now, the first year-over-year decline in housing prices since the Great Depression and rising home-loan, commercial-mortgage and credit-card delinquencies have begun to trigger them.

``You will rapidly realize what a farce these off-balance- sheet things are,'' said Ladenburg Thalmann & Co. analyst Richard X. Bove. ``You could pick up a lot of loan losses with the stuff you're putting back on.''

It's impossible to predict what the losses might be from off-the-books assets or liabilities because disclosures are thin relative to what is required for balance-sheet assets, said Neri Bukspan, chief accountant for Standard & Poor's in New York.

``A lot of information tends to disappear or becomes second or third class,'' Bukspan said.

Second-Quarter Loss

Citigroup has had to bail out at least nine investment funds in the past year, including seven structured investment vehicles, or SIVs, whose funding withered. The bank had to assume $45 billion of securities from those SIVs, which are now included in the $400 billion of on-balance-sheet assets Pandit says he's trying to unload in the next three years.

The bank probably will report a second-quarter net loss of $3.7 billion later this week, according to the average estimate of seven analysts surveyed by Bloomberg. A loss would be the company's third straight and add to $15 billion of losses recorded during the previous two quarters.

Citigroup plunged 69 percent in the past year in New York Stock Exchange composite trading. It closed at $16.19 on July 11, down 52 percent from April 6, 1998, when Citicorp agreed to form the modern company by merging with Sanford ``Sandy'' Weill's Travelers Group Inc.

JPMorgan, Merrill

JPMorgan Chase & Co., which has more than $400 billion of off-balance-sheet assets, also reports second-quarter results this week. The New York-based bank, the largest U.S. bank by market value, may say second-quarter profit fell 55 percent to $1.9 billion, analysts estimate.

Merrill Lynch & Co., the third-biggest U.S. securities firm by market value, also reports results this week. New York-based Merrill had to buy about $4.9 billion of mortgage-linked assets last year from an off-balance-sheet financing vehicle, resulting in a $170 million loss. It may post a second-quarter loss of $1.56 billion after reporting about $14 billion of net losses in the previous three quarters, according to a Bloomberg survey of 11 analysts.

``The riskiest assets we had, our CDOs, weren't even on our balance sheet,'' Merrill Chief Executive Officer John Thain said on a June 11 conference call with investors. Merrill would have to provide $15 billion in financing for CDOs and related obligations under a ``severe stress scenario,'' according to a Merrill regulatory filing published in May.

VIEs, QSPEs

The Financial Accounting Standards Board, the five-member panel in Norwalk, Connecticut, that sets U.S. accounting rules, voted [=^]earlier[^=] this year to eliminate ``qualifying special- purpose entities,'' or QSPEs, a category of off-balance sheet financing exempted from tighter standards enacted following the collapse of U.S. energy trader Enron Corp. FASB also plans to clamp down on ``variable interest entities,'' or VIEs, that banks used when their vehicles couldn't qualify as QSPEs. And it voted June 11 to force banks to consolidate off-balance-sheet assets whenever an ``obligation to absorb losses can potentially be significant.''

Banks are required to disclose their off-balance-sheet assets in annual reports. According to Citigroup's most recent financial statement, filed in May, the bank's $1.1 trillion of off-the-books assets as of March 31 included $760 billion of QSPEs and $363 billion of unconsolidated VIEs.

`Full Disclosure'

``Our quarterly financial report provides full disclosure of our off-balance-sheet assets, including our maximum exposure to assets in unconsolidated VIEs,'' Citigroup spokeswoman Shannon Bell said. That figure was $141 billion as of March 31 and included funding commitments and guarantees, company reports show.

To lose the full amount, all the assumed assets would have to be written down to zero. The figure exceeds Citigroup's market value of about $90 billion, which dropped more than $180 billion since the end of 2006.

Citigroup's financial statement also says that about $517 billion of the QSPEs are related to mortgage securities, and that they are ``primarily non-recourse,'' which means the risk of future credit losses is transferred to purchasers.

Sharon Haas, an analyst at Fitch Ratings, said anyone who has studied Citigroup's disclosures would be familiar with the off-balance-sheet risks.

``A lot of these so-called off-balance-sheet exposures, there's no mystery about this,'' Haas said. ``Whether they're on or off balance sheet is frankly not as important from an analytical perspective as understanding the inherent nature of the businesses that they're involved in.''

`Impractical' Rule

Pandit, 51, who replaced Charles O. ``Chuck'' Prince III as CEO in December, said in a June 27 report posted on Citigroup's Web site that regulatory reform must include ``public disclosures to investors about pertinent risk and financial information that give the market a chance to make informed judgments.''

The comments came after Robert Traficanti, Citigroup's deputy controller, sent a letter to FASB Chairman Robert Herz on June 9 objecting to a provision that would force banks to reevaluate their off-balance-sheet assets and liabilities every quarter. Citigroup has more than 7,000 VIEs and more than 100 QSPEs, he wrote.

``We believe that this model is impractical from an operational standpoint,'' Traficanti wrote. ``We would not be able to perform this analysis given the resources we currently have. We would need to hire many more accountants.''

Capital Concerns

Regulators may part ways with accounting overseers and grant banks a waiver from having to raise capital against assets that have to be consolidated on the balance sheet, said Tanya Azarchs, a managing director at Standard & Poor's in New York.

``They really don't want to introduce any more instability into the banking system,'' Azarchs said.

Mortgage-finance agencies Freddie Mac and Fannie Mae plunged to their lowest in 17 years in New York trading last week, partly on concern that off-the-books assets might swamp their capital.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight in Washington, said on July 8 that an ``accounting principle should not drive a capital decision by a regulator.''

That doesn't mean regulators aren't paying attention. Examiners keep offices inside the headquarters of large banks, and they have access to non-public records that help them analyze off-balance-sheet risks, said Bill Isaac, a former Federal Deposit Insurance Corp. chairman who is now chairman of Secura Group, a consulting firm in Vienna, Virginia.

What-If Scenarios

``The bank examiners are probably more thorough now and even skeptical in looking at these things,'' Isaac said. ``They're probably doing more what-if scenarios and stress tests. People thought there was a 1-in-100 chance of something happening, and as we see now, it has happened.''

Citigroup had $25 billion of ``liquidity puts'' -- a kind of guarantee -- last year on off-balance-sheet ``commercial paper CDOs'' set up to sell short-term debt known as commercial paper, according to the May financial statement. In the second half of the year, after a surge in market rates for the commercial paper, the bank had to preempt the formal exercise of the guarantees by buying the debt, according to the statement.

By the end of 2007, the full amount had been brought back on the books. The assets had to be written down by $4.3 billion in the fourth quarter and $3.1 billion in the first quarter. The remaining balance stood at $16.8 billion as of March 31.

Failing SIVs

The commercial-paper CDO assets are in addition to the assets Citigroup took over last December from its failing SIVs. In that case, the bank didn't have a contractual guarantee; it intervened to cushion the losses for its clients. Citigroup had $212 million of losses related to the SIVs in the first quarter, according to the financial statement.

``People say they don't have any liquidity backstop, they don't have any guarantee,'' said Russell Golden, the FASB's technical director. ``But then they act like they always had a guarantee.''

Murkier still are the $15 billion of assets Citigroup has had to import this year from four off-balance-sheet hedge funds that unraveled. They include the Old Lane hedge fund that Pandit helped open in 2006. Citigroup bought Old Lane Partners LP last July for about $800 million. Earlier this year, the bank said it would close the fund because Pandit and other Old Lane founders had moved on to management jobs at the bank.

Citigroup incorporated about $9 billion of Old Lane assets into its trading desk.

`Back to Roost'

``You had risks off the balance sheet that came back to roost,'' said Marc Siegel, head of accounting research and analysis at RiskMetrics.

While Citigroup has more off-balance-sheet assets than its peers, it isn't alone. Bank of America assumed about $6.6 billion of commercial paper issued by off-balance-sheet CDOs last year. About $5 billion related to ``written put options'' and $1.6 billion related to ``other liquidity support,'' according to the Charlotte, North Carolina-based bank's financial statements.

Bank of America held $32.1 billion of VIEs on its balance sheet as of March 31, compared with $22.4 billion at the end of 2006. It still has $43.2 billion of VIEs off balance sheet.

JPMorgan has off-balance-sheet ``conduits'' with about $54 billion of commercial paper outstanding, according to its first- quarter financial statement. The bank says it is ``not obligated under any agreement'' to buy the debt. Even so, the bank provided a chart showing the impact if assets had been consolidated: First-quarter net income would have been $2 billion instead of $2.4 billion.

``As soon as the cycle turned, all of these risks started to come back, and companies weren't prepared,'' Siegel said. ``It wasn't transparent to the investors what was going on.''

Ivo Cerckel said...

The show of the USA financial system being taken to its knees began on 15 August 1971
when Richard Nixon, president of the republic of the USA, broke the Bretton Woods system.

The Bretton Woods system linked (the rest of the world to the US dollar and) the US dollar to gold, repriced at $38 an ounce in 1971 and at $42 in 1973.

Since then, we are told that the US dollar would be freely floating, while being fixed at $42 an ounce of gold.

Since Aristotle, the Principle of Non-Contradiction says however that it is impossible to be and not to be at the same time and in the same respect.
Contrary to what many authors argue, this principle is a law of thought, not a law of reality.
Thought is submitted to the Principle.
Reality is not.

How can we be made to think that the dollar is, at the same time and in the same respect, fixed to gold and freely floating?


OIL-TRADE SETTLEMENT

Although the US dollar is a worthless piece of paper with no intrinsic value whatsoever,
the fact that this piece of paper is still being used as the intermediary numéraire for oil-trade settlement, as the intermediary basic “standard” by which values are measured for oil-trade settlement, gives this dollar-paper the backing of oil (an indispensable valuable).

Once oil will see no more reason to support/back the dollar, oil will “openly” shift towards GOLD and back it (through demand for gold) so as to create the new market for physical gold in association with the gold-friendly euro-numéraire.


FREELY FLOATING GOLD

Oil and gas are being traded on this planet for gold and the oil producers have only the real value of gold, not the present US dollar-denominated value of gold in mind.

The dollar-regime should let the price of gold freely float
so as to no longer being able to decide the value of the wealth produced by the owners of oil and gas.

The dollar-regime should accept that all individuals can consolidate the fruits of their wealth production in the FreeGold wealth consolidator.

That's why gold pricing should be de-linked (100% severed) from currency, so as to achieve freely floating gold prices.

The US dollar unit is NOT a wealth consolidator because it cannot be converted into gold/wealth.

If the said regime is not prepared to voluntarily let the price of gold freely float, it will be forced to do so by the increasing imbalances.

For the moment, the regime can still unilaterally impose the exchange rate of the US dollar which is, as I said, still being used as the intermediary numéraire for oil-trade settlement.

I also said that at the moment oil will see no more reason to support/back the dollar, oil will back gold and gold-friendly euro. I now add that at that moment, the US dollar will be reduced to its intrinsic value.

At that moment US treasury gold will be too highly priced at 42 dollar an ounce.

At that moment, the system will explode.

At that moment oil prices will experience an “unlimited” increase

Nixon did not want a freely floating price of gold.

And yourself why.