Archive for the 'Fed' Category
June 25th, 2009, 9:32 am by Mathew Padilla
Bloomberg reports:
The Federal Reserve will let one of its emergency programs expire and trim two others in a sign that improving financial markets allow a first step toward ending its unprecedented interventions.
The three programs provide funds or Treasury securities to securities brokers and money-market funds. They are authorized under a provision allowing loans to nonbanks under “unusual and exigent circumstances.”
Five other emergency facilities, including foreign currency-swap lines with central banks around the world, will be extended by three months through Feb. 1, the Fed said in a statement in Washington. They would have expired Oct. 30.
“Conditions in financial markets have improved in recent months, but market functioning in many areas remains impaired and seems likely to be strained for some time,” the Fed said in its statement.
The Fed didn’t announce the changes yesterday following the Federal Open Market Committee meeting because it needed to coordinate the extension of the currency swap lines with other central banks, a Fed official told reporters on a conference call.
Interesting. Things have improved somewhat, but aftershocks may continue.
Posted in: Bailout Buzz • Fed | Post a Comment »
June 24th, 2009, 12:52 pm by Mathew Padilla
The Federal Reserve today said it will continue to buy up to $1.25 trillion in mortgage securities by the end of this year and that it is maintaining its target for a benchmark interest rate at between zero and 0.25 percent.
Some market watchers have hoped the Fed would buy more securities than previously announced to push down mortgage rates, which are above 5%.
But the Fed also has to face concerns a $1 trillion expansion of its balance sheet over the past year to $2.07 trillion will fuel inflation, drive up interest rates, and hamper any potential economic recovery. The Fed said:
The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
Read the full statement HERE.
 What do you think?
Should the Fed expand its purchases of mortgage securities?
Posted in: Bailout Buzz • Fed • Polls | 6 Comments »
June 17th, 2009, 8:03 am by Mathew Padilla
The Washington Post late yesterday revealed details of the Obama administration’s plan to overhaul regulation of financial markets. Under the plan the Federal Reserve would play a bigger role, “creating stronger and more consistent oversight of the largest financial firms,” the Post says.
Many of the ideas in the Post story have already been leaked. But the paper’s Web site is the first to have the administration’s white paper on reform.
The President is expected to officially announce details of the plan today.
Posted in: Fed • Regulation | 1 Comment »
May 11th, 2009, 5:38 pm by Mathew Padilla
Ben Bernanke, head of the Federal Reserve, today said banks told to raise capital after stress tests have 30 days to form a plan to raise the money and six months to implement it. He also responded to private reports that found the stress tests were too soft on banks (I put in bold the line where he basically says we had access to information the critics have not had access to — an odd claim since the big banks are public companies and the cancer on their balance sheets is clear to all who care to look.):
First, studies differed in the time frames over which losses were calculated. Some outside reports included cumulative losses from the beginning of the financial crisis in mid-2007, and others included projections of losses over the lifetimes of currently held loans and securities. Our estimates are for potential losses in 2009 and 2010 and, indirectly, for 2011, through the estimate of the end-2010 loan loss reserve. Our estimates do not include the sizable losses that have already been recognized by the 19 banks–about $325 billion of loans and securities in the last six months of 2007 and in 2008–because they are already reflected in the firms’ balance sheets. Moreover, while we exclude losses beyond 2011, this limit would only be material for sizing the capital buffer if those losses were expected to substantially exceed pre-provision earnings after 2011, an outcome that we do not expect.
Second, a few private-sector estimates implicitly or explicitly assumed mark-to-market or liquidation prices for loans, which effectively incorporate a substantial liquidity discount in today’s market. However, because banks are portfolio lenders with core deposit funding and the ability to hold loans to maturity, our estimated valuations are based on projected cash flow credit losses related to a borrower’s failure to meet its obligation, not a liquidation value.
Third, some private-sector studies may not have taken into account the markdowns in asset valuations that occurred in the context of acquisitions of other firms. In particular, in the course of acquisitions by the 19 bank holding companies in 2008, the value of troubled loans was written down by almost $65 billion. These potential losses should only be realized once and thus are excluded from our estimates of prospective losses for 2009 and 2010. Of course, we took full account of these writedowns in our sizing of required capital buffers.
Fourth, in contrast to some outside estimates, estimated losses for the capital assessment program are for the 19 firms, not the entire banking system. Moreover, numerous adjustments were necessary to reflect particular facts and circumstances at these firms. That level of analysis simply has not been done–nor could it be done–by outside observers without the level of access available to supervisors.
Despite the care and rigor of this process, I would be the first to acknowledge that any loss forecast is inherently uncertain. The assessment program did not address some risks that institutions still need to consider in their own internal stress tests, such as operational, liquidity, and reputational risks. For all 19 firms, and particularly those with trading and investment banking businesses, those risks are important and will need to be monitored by both the firms and the supervisors. Ideally, the stress tests used in the assessment program should be part of a broader palette of internal stress tests conducted by firms; indeed, we do not intend that the capital assessments should be taken as all that those firms need to do.
It’s crystal clear Bernanke and others in the Obama Administration want the public to have faith in banks and in the response of Fed and Treasury officials to the banking crisis. In fact the next line in the speech is: “A principal goal of the capital assessment process is to help increase confidence in the banking system.” Duh.
However, I tend to agree with critics who charge these government officials are basically hoping banks can earn their way out of the crisis amid low borrowing costs. This is a gamble, and if it backfires we will be worse off in the months ahead.
One possible benefit from the process is regulators getting a sense of systemic risk. In the future, to avoid another meltdown, regulators will have to act on threats to the system and not just individual banks. Unfortunately, a political worldview that all government does is bad and all private markets do is good contributed to the crisis, and such a view could always return.
In other news…
Posted in: Bailout Buzz • Bank failures • Bank woes • Fed • Meltdown | 6 Comments »
May 4th, 2009, 1:51 pm by Mathew Padilla
The Federal Reserve released today results from an April survey of loan officers. One key finding:
“Respondents indicated that demand for loans from both businesses and households continued to weaken for nearly all types of loans over the survey period, an exception being demand for prime mortgages, a category of loans that registered an increase in demand for the first time since the survey began to track prime mortgages separately in April 2007.”
And here are some highlights on underwriting standards:
- 40% of loan officers surveyed said their banks tightened credit standards on loans to businesses, down from 65% in January.
- 65% said they tightened standards on loans against commercial real estate vs. 80% in January.
- 50% said they tightened standards on prime residential mortgages, up slightly from January.
- 60% said they tightened standards on credit card loans, about the same as in January.
Read more HERE.
And in other news…
Posted in: Fed • Loan underwriting • Loan volume • Meltdown • numbers | 4 Comments »
April 24th, 2009, 2:38 pm by Mathew Padilla
The Federal Reserve today revealed how the nation’s biggest banks are being tested for resiliency to the recession and housing downturn. It did not say how much capital they need.
Nineteen banks, each with more than $100 billion in assets, have submitted details and projections of their holdings, income and expected losses through 2010. They have essentially made their case for solvency. (Download the report by CLICKING HERE.)
Regulators then analyzed the documents and may have asked for more paperwork or explanation from the banks before drawing their own conclusions. Banks, which are learning the results today, have a week or so to dispute the results, which will be released the week of May 4.
Banks were asked to project income and loan losses based on two scenarios, one more adverse than the other. Some economists have argued there are signs the more adverse scenario projected is already here, or will be soon.
For example, the adverse scenario envisions GDP contracting 3.3 percent in 2009; but GDP shrank 3.9% in the fourth quarter of 2008 (not exactly an apples-to-apples comparison, but troubling).
Unemployment in the adverse scenario is seen hitting 10.3% next year. The most recent figure was 8.5%, and Cal State Fullerton predicts the rate will reach 9.5% by year-end and hit double digits next year.
In other news…
Posted in: Bailout Buzz • Bank failures • Fed • Meltdown | Post a Comment »
April 23rd, 2009, 1:20 pm by Mathew Padilla
The Federal Reserve today said it signed an agreement with First Regional Bancorp, limiting its ability to distribute or borrow money.
The Century City-based bank must get prior approval from the San Francisco Fed office before paying dividends or taking on new debt, among other things. The Fed said it took action to “maintain the financial soundness” of the bank. It gave no further explanation.
The bank, which caters to small and mid-size businesses, had nearly $2.5 billion in assets at the end of last year, according to an FDIC filing. As of June, it had nearly $87 million in deposits at an Irvine regional branch. The company’s Web site also lists a loan production facility in Anaheim.
Company officials were not immediately reachable for comment.
In other news…
Posted in: Bank woes • Fed • Meltdown | 5 Comments »
April 21st, 2009, 6:00 pm by Mathew Padilla
The Federal Reserve has no particular exit strategy in mind for the $1.25 trillion in net mortgage-backed securities it plans to buy this year, said former Fed governor Randall Kroszner, according to National Mortgage News. (See my previous post on the Fed’s ballooning balance sheet HERE.)
Here’s more from NMN:
Speaking at the Mortgage Bankers Association’s National Secondary Market Conference, Mr. Kroszner said the central bank will “do whatever it takes” to keep rates in check until the MBS market returns to some semblance of normalcy. For the most part, the central bank is now the secondary market for mortgage-backed securities issued by Fannie Mae and Freddie Mac, having purchased more than $300 billion worth of the bonds in the first quarter. But the MBA is worried that when the Fed reaches its goal, its exit from the market will cause mortgage rates to shoot upward. Mr. Kroszner, who spent three years at the central bank before returning to the University of Chicago in January, said, “The real challenge is to thread the needle. Whether the Fed will purchase more or less will depend on the facts and circumstances at the time.” If the central bank is satisfied by 2010 that the market is coming back, it will reduce it purchases, said Mr. Kroszner, who was a member of the President’s Council of Economic Advisors from 2001 to 2003, and “mortgage rates should rise at a normal pace.”
In other news…
Posted in: Fed • Mortgage securities | 3 Comments »
April 21st, 2009, 1:54 pm by Mathew Padilla
Scott Anderson, an economist with Wells Fargo, recently wrote (bold type added):
The Great Credit Freeze of 2008 shows continued signs of defrosting. The Fed’s lending programs, asset purchases and currency swaps are adding much needed support to economic activity. For the most part, these programs are working as intended, but the scale of these programs continues to grow as the Fed redoubles its efforts to restart lending and financial intermediation. The Fed’s balance sheet has doubled since the fall, and given current commitments, we could see the Fed’s balance sheet double again this year to around $4 trillion dollars. The Fed is ramping up its purchases of agency debt and agency MBS at a rapid clip, which has been instrumental in reducing the spread between conventional 30-year mortgage rates over the 10-yr. Treasury yield, dropping it by approximately one full percentage point, or 100 basis points. This is touching off a substantial refinancing boom, as struggling homeowners look for ways to cut their housing expenses. The Fed’s out-right purchases of longer-term Treasury bonds is working in concert toward the same goal, but more work needs to be done to ignite a sustainable virtuous cycle in motion that will turn around consumer spending and the housing market for good. Credit spreads remain stubbornly high for investment-grade and high-yield corporate bonds, suggesting that bankruptcy risks remain high for U.S. corporations. Emerging market credit spreads have been on a steady decline for months now, suggesting that the worst may be over for some of these faster growing countries. Other signs of healing can be found in bond issuance trends. Both investment grade corporate bond issuance and agency bond issuance are hitting new highs as improved credit flow surfaces in some key markets.
One hopes Anderson is right where he is optimistic. But what might be the consequences of the Fed expanding its balance sheet?
Paul Krugman, a Nobel laureate economist, has said the Fed’s expanding balance sheet (dubbed quantitative easing), such as by buying Treasuries and mortgage securities, could spark inflation, but that is the point. (However, I don’t recall him specifically addressing a $4 trillion balance sheet target.) Krugman says:
The whole reason for quantitative easing is that normal monetary expansion, printing money to buy short-term debt, has no traction thanks to near-zero rates. Gaining some traction — in effect, having some inflationary effect — is what the policy is all about.
Krugman and some other economists see inflation as good right now because it lowers the burden in real dollars of debt. Deflation terrifies such economists, since they say it increases the burden on debtors — and today Americans and American businesses have a lot of debt. A whole lot.
But Krugman says the Fed’s policy will come at a cost. At some point the Fed will want to sell the assets on its balance sheet to control the inflation it created. But since interest rates will likely be higher the asset prices will be lower. In essence, the Fed is engaging in deficit spending. Krugman estimates if the Fed buys $1 trillion in Treasuries and mortgage securities as previously announced, it could see a loss of $200 billion.
In other news…
Posted in: Credit stats • Fed • Bubbles | 14 Comments »
April 17th, 2009, 3:16 pm by Mathew Padilla
 Ben Bernanke, head of the Federal Reserve, said today the idea of financial innovation has fallen on hard times. He explained, “Subprime mortgage loans, credit default swaps, structured investment vehicles, and other more-recently developed financial products have become emblematic of our present financial crisis. Indeed, innovation, once held up as the solution, is now more often than not perceived as the problem. I think that perception goes too far, and innovation, at its best, has been and will continue to be a tool for making our financial system more efficient and more inclusive.”
However, he added that financial innovation can be harmful, and officials need to be alert to its risks.
I add that in the aftermath of the Great Depression, government regulation focused on safety and soundness in banking, including rules that limited bank activity and ownership and the creation of FDIC insurance.
Within that regulatory framework, the country went 50 years without a deep financial crisis. Up to the Depression, such fiascoes occurred as often as every 15 years.
Since the Reagan Administration, Congress has dismantled much of that framework. On such fertile ground, Wall Street harvested every manner of financial creation. Such invention combined with Alan Greenspan’s low interest rates, gave birth to the greatest credit bubble since the Depression.
So where do you think we should go from here?
What's best for U.S. financial markets?
Posted in: Fed • Polls | 4 Comments »
April 8th, 2009, 5:30 pm by Mathew Padilla
The Federal Reserve today released minutes from its last meeting, sharing these thoughts on its efforts to buy securities backed by mortgages (bold type added):
The Federal Reserve’s programs to buy direct debt obligations of the federal housing agencies and agency-guaranteed MBS were on track to reach their initial targets of $100 billion and $500 billion, respectively, by the end of June. Participants agreed that the asset purchase programs were helping to reduce mortgage interest rates and improve market functioning, thereby providing support to economic activity. Some participants stated a preference for communicating the Committee’s intention regarding such purchases in terms of the growth rate of Federal Reserve holdings rather than a dollar target for total purchases. However, others noted that the pace of MBS issuance was likely to be especially brisk over the next few months, in part because of the Administration’s new Making Home Affordable program, and observed that it could be advantageous to be able to front-load purchases to accommodate the pattern of mortgage refinancing. Participants also discussed the relative merits of increasing the Federal Reserve’s purchases of agency MBS versus initiating purchases of longer-term Treasury securities. Some participants remarked that experience suggested that purchases of Treasury securities would have effects across a variety of long-term debt markets and should ease financial conditions generally while minimizing the Federal Reserve’s influence on the allocation of credit. However, purchases of agency securities could have a more direct effect on mortgage rates, thus providing greater benefits to the housing sector, and on private borrowing rates more generally. Also, some participants were concerned that Federal Reserve purchases of longer-term Treasury securities might be seen as an indication that the Federal Reserve was responding to a fiscal objective rather than its statutory mandate, thus reducing the Federal Reserve’s credibility regarding long-run price stability. Most participants, however, saw this risk as low so long as the Federal Reserve was clear about the importance of its long-term price stability objective and demonstrated a commitment to take the necessary steps in the future to achieve its objectives.
…
In the discussion of monetary policy for the intermeeting period, Committee members agreed that substantial additional purchases of longer-term assets eligible for open market operations would be appropriate. Such purchases would provide further monetary stimulus to help address the very weak economic outlook and reduce the risk that inflation could persist for a time below rates that best foster longer-term economic growth and price stability. One member preferred to focus additional purchases on longer-term Treasury securities, whereas another member preferred to focus on agency MBS. However, both could support expanded purchases across a range of assets, and several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain. Members agreed that the monetary base was likely to grow significantly as a consequence of additional asset purchases; one, in particular, stressed that sustained increases in the monetary base were important to ensure that policy was consistently expansionary. Members expressed a range of views as to the preferred size of the increase in purchases. Several members felt that the significant deterioration in the economic outlook merited a very substantial increase in purchases of longer-term assets. In contrast, the potential for a large increase over time in the size of the balance sheet from the TALF program was seen as supporting a more modest, though still substantial, increase in asset purchases. Ultimately, members agreed to undertake additional purchases of agency MBS of up to $750 billion and of agency debt of up to $100 billion, and they also agreed to purchase up to $300 billion of longer-term Treasury securities. The Committee believed that purchases of these amounts would help to promote a return to economic growth and price stability. The period for conducting the agency debt and MBS purchases was extended from the next three months to the next nine months; members agreed to allow the Desk flexibility within this horizon to respond to market conditions. Treasury purchases were to be conducted over the next six months. Members also noted the recent launch of the TALF, and they agreed to include in the Committee’s statement an indication that the range of assets accepted as eligible collateral for the TALF was likely to be expanded. Committee members decided to keep the target range for the federal funds rate at 0 to 1/4 percent and to communicate to the public the Committee’s view that the federal funds rate was likely to remain exceptionally low for an extended period.
In other news…
Posted in: Bailout Buzz • Fed • Mortgage rates • Mortgage securities | 3 Comments »
March 20th, 2009, 5:23 pm by Mathew Padilla
Reuters reports investors applied for less than 2.4 percent of the $200 billion the Fed pledged to lend in one of its efforts to alleviate the credit crisis.
And applications for the the Term Asset-Backed Securities Loan Facility, or TALF, came from 19 hedge funds and firms that manage between $3 billion and $5 billion. Those numbers are fewer and smaller than expected.
Reuters blames the furor over AIG bonuses as scaring away bigger companies.
As I understand the logic of TALF, the idea is to have companies post as collateral securities backed by loans or other assets. Then the companies get financing, presumably cheap financing, from the Federal Reserve.
This is part of the Fed’s grand strategy of using its balance sheet in unconventional ways to boost liquidity and spark an economic recovery. It remains to be seen if this strategy will work. And unlike the Fed’s purchases of mortgage-backed securities, another cog in its plan, this one relies heavily on private participation.
The latest banking/lending stories …
Posted in: Bailout Buzz • Fed • TALF | 1 Comment »
March 19th, 2009, 5:18 pm by Mathew Padilla
One day after proposing to spend up to $1 trillion on mortgage and Treasury securities in a bid to lower interest rates, the Federal Reserve said it will expand the type of collateral it will accept for loans under the Term Asset-Backed Securities Loan Facility (TALF).
It will expand acceptable types of asset-backed securities to include those backed by mortgage servicing advances; loans or leases relating to business equipment; leases of vehicle fleets; and floorplan loans.
Here’s more from the Fed statement:
Mortgage servicing advances are loans extended by residential mortgage servicers to cover payments missed by homeowners. Accepting ABS backed by mortgage servicing advances should improve the servicers’ ability to work with homeowners to prevent avoidable foreclosures. The additional new ABS categories complement the consumer and small business loan categories that were already eligible–ABS backed by auto loans (including auto floorplan loans), credit cards loans, student loans, and SBA-guaranteed small business loans.
The new categories of collateral will be eligible for the April TALF funding. Additional details on the April funding will be released on March 24. Subscriptions for the April funding will be accepted on April 7, and those loans will settle on April 14.
The subscription period for the first TALF funding ends today. The requested loans will settle on March 25.
The Board authorized the TALF on November 24, 2008, under section 13(3) of the Federal Reserve Act. Under the TALF, the Federal Reserve Bank of New York extends three-year loans secured by AAA-rated ABS backed by newly and recently originated loans.
On February 10, 2009, the Board announced that it is prepared to undertake a significant expansion of the TALF. Today’s announcement marks the first step in that expansion; a number of other asset classes are under review.
The Fed is throwing everything it can think of at the credit crunch.
The latest banking/lending stories …
Posted in: Bailout Buzz • Fed | 1 Comment »
March 18th, 2009, 10:27 pm by Mathew Padilla
David Greenlaw of Morgan Stanley wrote on the Wall Street Journal’s Real Time Economics blog that the Federal Reserve’s statement today shows it is committed to lowering mortgage rates, and that could boost the household sector of the economy:
In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year.
Yes, and the mortgage brokers and bankers will be busy. (Hat tip to Calculated Risk on Greenlaw’s quote.)
Actually, not all homeowners will be able to refi — some have lost all their equity and others have lost their jobs. Others have already refinanced at close to 5 percent and may decide against doing it again unless the Fed manages to push rates closer to 4 percent or 4.5 percent with no points.
But even so, people are saving money on their mortgages and some of that will translate into spending.
Posted in: Bailout Buzz • Fed • Mortgage rates | 5 Comments »
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