Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

Emerging Market Bonds, Currencies Drop; Argentina Will Seize Pension Funds: Emerging-market bonds, currencies and stocks plunged from Brazil to Russia as speculation Argentina may default added to concerns of a global recession.


Brazil May Use Federal Banks to Rescue Companies: Brazilian President Luiz Inacio Lula da Silva authorized federally controlled banks Banco do Brasil SA and Caixa Economica Federal to buy stakes in financial institutions to ease a credit crunch that's hurting small and medium-size lenders.


Mass layoffs highest since 9/11: Government report says job cuts of 50 or more up significantly last month.

NEW YORK (CNNMoney.com) -- The number of layoff announcements involving at least 50 workers rose in September to the highest level since the Sept. 11 terrorist attacks seven years ago, the government said Wednesday.

There were 2,269 mass layoff actions, up 497 from August, according to statistics released by the Labor Department.

"At large firms, basically what I see is an across-the-board, shotgun approach," said Paul Sarvadi, Chairman and CEO of human resources outsourcing firm Administaff in Houston. "If they anticipate revenues going down, then they see how much they need to cut to reach operating targets, and equate that cost to a number of people."

Overall, the number of initial claims for unemployment benefits related to mass layoffs rose by 61,726 to 235,681. That was the highest level since September 2005, after Hurricane Katrina devastated the Gulf Coast.

My Comment: So even if the Bush administration can claim to "have prevented another 9/11" [if one assumes that the mere fact that no mass terror attacks occurred on U.S. soil since then constitutes proof of "prevention"], but they seem to have given us another economic 9/11, and more. Rousing success, that. I suspect 2009 will prove to be an even more devastating year as far as job cuts are concerned than 2008 was, since mass layoffs tend to lag economic slowdowns. And speaking of mass layoffs:

Yahoo slashes 10% of workforce: The beleaguered Internet company says it will layoff more than 1,500 employees in the fourth quarter; sales and profits for third quarter match forecasts.


Rating agencies get grilled on Capitol Hill: Internal documents show credit outfits knew that they inflated ratings of bonds backed by subprime loans.

WASHINGTON (AP) -- There's plenty of blame to go around for the ongoing credit crisis, and a House panel investigating the meltdown Wednesday cast much of it on credit ratings agencies like Standard & Poor's for giving good-as-gold ratings to securities backed by subprime mortgage loans.

Internal company documents revealed by a House investigative panel show that company executives were well aware that there was little basis for giving AAA ratings to thousands of increasingly complex mortgage-related securities, but that the companies often vouched for them anyway.

The big credit ratings agencies - Standard & Poor's, Moody's and Fitch, Inc. - made enormous profits as they issued ratings on a ballooning number of mortgage-related securities, many of which were given top ratings so long as housing prices went up.

Now, S&P has downgraded more than two-thirds of its AAA-rated securities, while Moody's has downgraded more than 5,000 mortgage-backed securities.

'Colossal failure'

"The story of the credit rating agencies is a story of colossal failure," said Rep. Henry Waxman, chairman of the House Oversight and Government Reform Committee.

The California Democrat said, "Millions of investors rely on them for independent, objective assessments. The rating agencies broke this bond of trust, and federal regulators ignored the warning signs and did nothing to protect the public. The result is that our entire financial system is now at risk."

My Comment: As Waxman notes, the failure was as much one on the part of government oversight as it was of fraud perpetrated by the ratings cartel. What Waxman does not note is that the "inherent conflict of interest" mentioned in the full article [namely that the ratings agencies get paid by the issuers of the securities they are asked to rate rather than by investors looking for objective ratings on said securities] was built into the system as part and parcel of the governmental imprimatur given to the "specially designated" rating agencies at the center of the scandal. Not that anyone will ever wind up going to prison for this trillion-dollar fraud, mind you - mustn`t go punish the white-collar criminals who committed these crimes or the regulators who failed utterly in their oversight role, since we need them to "help" the government orchestrate the massive financial-sector bailout. After all, they *are* the experts...


Cerberus may carve up Chrysler: Chrysler LLC could be sold in pieces to other companies as its majority shareholder Cerberus Capital Management LP seeks to exit the auto business, according to a person briefed on the discussions.

My Comment: If the author of the above article wanted to be "mythologically correct", a turn of phrase like "Cerberus may chew up Chrysler and spit it out, times three" would have been better. Or perhaps "Dogged by losses, Cerberus faces hellish decision about Chrysler".


Oil dips below $70 as inventories rise: Oil prices remained sharply lower Wednesday, reaching prices not seen since June of last year, after the government reported a greater-than-expected rise in crude stockpiles - an indication that the slow economy may have impacted demand for fuel.


Russia may divert oil to affect price: One of the world's largest oil producing countries is considering storing crude to gain more influence over global prices.

MOSCOW (AP) -- Russia's top energy official said Wednesday that the nation may set aside an oil reserve to influence global prices - but won't cut output, news reports said.

Deputy Prime Minister Igor Sechin, who is in charge of the energy sector, said the government was considering creating an oil production reserve "which would allow it to work more efficiently with prices on the market."

Sechin would not name the amount of the reserves, but said they should be "enough to reach efficient pricing parameters," Russian news agencies reported.

He confirmed that Russia would not cut oil output, unlike OPEC nations which are expected to slash production by 1 million barrels.

My Comment: so let me get this straight ... Russia thinks current oil prices are too low, so it wants to spend a whole lot of money creating an oil reserve to store some of its oil production until prices recover to more-desirable levels. Why not just pump less out of your "existing reserves", namely the ground? Strategic oil reserves make sense for net importers of oil who want to guard against supply disruptions, not for net exporters. I suspect this is just a (rather pathetic) attempt to "jawbone the markets" and drive prices higher on speculation of "what the big bad Russian bear may do". In related news, check out the the breakeven prices for oil required by some of the emerging economies [especially Venezulea and Iran] in the following Bloomberg article:

OPEC Risks Split Over Oil Production Cuts as Economies Reel, Prices Plunge: OPEC, founded five decades ago to unify oil producers, risks dividing members as the group plans to cut output and raise prices just as developed nations face their worst recession since 1983.

[cheesehead]

Originally Posted by ewmayer

My Comment: so let me get this straight ... Russia thinks current oil prices are too low, so it wants to spend a whole lot of money creating an oil reserve to store some of its oil production until prices recover to more-desirable levels. Why not just pump less out of your "existing reserves", namely the ground? Strategic oil reserves make sense for net importers of oil who want to guard against supply disruptions, not for net exporters.

Actually, it makes sense for exporters, too.

Let's consider an analogy: farmers storing harvested crops in silos on their farms, waiting for higher market prices that they would get in the future than they would get if they sold their harvests right away. The cost of buying the silo is amortized over several years, more than paid-for by the better prices the farmer gets for crops by timing his sales optimally.

I think Russia has every right to build such an oil reserve, for its own interests.

As for just pumping less: The flow of oil underground toward a well is affected by the amounts going up the pipe. Managing a producing oil well for optimum production over the long term may require adjusting its flow to rates not necessarily in line with current market conditions (about which the oil knows nothing). Having a large enough domestic oil storage allows an exporting country to manage its production and sales optimally, with the difference between the two either going into, or coming out of, storage.

I suspect this is just a (rather pathetic) attempt to "jawbone the markets" and drive prices higher on speculation of "what the big bad Russian bear may do".

No, Russians aren't simplistic.

[ewmayer]

Originally Posted by cheesehead

Let's consider an analogy: farmers storing harvested crops in silos on their farms, waiting for higher market prices that they would get in the future than they would get if they sold their harvests right away. The cost of buying the silo is amortized over several years, more than paid-for by the better prices the farmer gets for crops by timing his sales optimally.

A poor analogy - unlike oil, crops not harvested in timely fashion will rot or be eaten by animals and insects. Obviously an oil-exporting nation needs some kind of short-term storage capability to buffer supply and demand fluctuations, but since the Russians aren't exactly new to this game, why the sudden loud talk about a Strategic Petroleum Reserve? And when it comes to energy exports, I believe the Russians, like so many of their oil-exporting brethren and the market commodity bulls, *have* been simplistic - they assumed that demand from the U.S. and emerging economies of the world would continue to go up in more-or-less a straight line, and that oil prices would do similarly. Now that that assumption [like the analogous one about housing in the U.S. and many other countries] has been smashed, the Russian markets are in freefall and the government is verging on panic, of course while continuing to present a brave face to the world. Like other big oil exporters, absolutely the most frightening scenario for the Russians is that the rest of the world suddenly doesn't need their oil anymore. They bet big on oil exports, failed to significantly diversify their economy, and are now paying the price for that simplistic approach.


Today's News Roundup


Goldman May Slash 3,200 Jobs, 10% of Workforce, as Credit Turmoil Worsens

Goldman Sachs Group Inc., the only firm among Wall Street's five biggest to remain profitable through the credit crisis, will shed about 3,200 workers, or 10 percent of its staff, as the revenue outlook worsens, according to a person briefed on the plan who declined to be identified.

The cuts add to more than 130,000 jobs eliminated in the financial industry since mid-2007, eclipsing the 83,000 lost after the Internet bubble burst in 2001.

GM Will Cut More Jobs, Halt Matching Payments to Employees' 401(k) Plans: General Motors Corp., the largest U.S. automaker, is suspending matching payments to employee 401(k) savings plans as it cuts costs amid a U.S. sales slump.


The Right-Wing Fannie/Freddie/CRA/Subprime-Blame Meme

Some people actually look at the data, while others foolishly parrot talking points. Consider this [sic] Federal Reserve Board data, compiled by McClatchy. It shows that:

* More than 84% of the subprime mortgages in 2006 were issued by private lending institutions.
* Private firms made nearly 83% of the subprime loans to low- and moderate-income borrowers that year.
* Only one of the top 25 subprime lenders in 2006 was directly subject to the CRA;
* Only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.
* Mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.

My Comment: Aw, why let a bunch of "un-American liberal facts" get in the way of a catchy right-wing propaganda campaign?


Housing Prices Tumble the Most in 17 Years as Foreclosures Soar to Record: U.S. home prices tumbled the most in at least 17 years in August as a record jump in foreclosures reduced property values and a global credit crisis weakened the economy, according to separate reports today.

Home prices dropped 5.9 percent from a year earlier, the biggest decline since 1991, when the Federal Housing Finance Agency data starts. Foreclosure filings increased 71 percent to the highest on record in the third quarter from a year earlier, according to Irvine, California-based RealtyTrac, a seller of foreclosure data.

The surge in home foreclosures is dragging down real estate prices in neighborhoods across the U.S. as houses are sold at foreclosure auctions. A recession that began in the third quarter is deepening the housing slump and adding to mortgage defaults as companies shed jobs, according to Jay Brinkmann, chief economist for the Mortgage Bankers Association.

Every foreclosure cuts the value of all surrounding homes by a total of about $220,000 as it stigmatizes the block and sells at a discounted price, according to the Federal Deposit Insurance Corp. At the end of June, U.S. banks held $9.9 billion of foreclosed properties, up from $8.5 billion three months earlier, according to an FDIC report. Every three months, another 250,000 homes enter foreclosure, the report said.

A total of 765,558 U.S. properties got a default notice, were warned of a pending auction or were foreclosed on in the quarter, the most in records began in January 2005, according to the RealtyTrac study.

A prior measure of August home prices, issued by the National Association of Realtors in Chicago on Sept. 24, showed the U.S. median sale price plummeted 9.5 percent in August to $203,100 from $224,400 a year earlier, the biggest drop on record. The Realtors' study included all homes sold, regardless of price, while the federal study excluded properties purchased with mortgages higher than the so-called conforming loan limit. For most parts of the U.S. that maximum is $417,000, though Congress voted in February to temporarily raise the cap to $729,750 in some high-cost markets.

Lehman Credit-Default Swaps Settled "Without Incident"

"Hundreds of traders who placed bets on Lehman Brothers’ creditworthiness before it went bankrupt have settled their positions “without incident,” according to a company that tracks derivatives contracts.

The company, Depository Trust & Clearing Corporation, processes large numbers of investment transactions. It said that only $5.2 billion had to change hands for all the traders to close out their positions, a much smaller amount than had been predicted a week ago.

The settlement process had been seen as a major test of the market for credit-default swaps, and whether it could handle the unprecedented stress of a big Wall Street firm going bankrupt. The overall system appears to have borne the shock successfully, although individual firms might have taken painful losses they have not yet disclosed.

At the same time, the contrast between this week’s orderly settlement process and last month’s financial turmoil, which also involved credit-default swaps, raised anew policy questions over the market for credit derivatives and its failure to limit systemic risk. Because the swaps are private contracts between two parties, there is still almost no information in the public domain over who holds which positions, or who might be left teetering the next time there is a major default."

My Comment: The Lehman CDSs settling without issue is a big relief, but this market is clearly in dire need of transparency and regulation.


U.S. Equity Markets headed for a "Lost Decade"?

In 1990 the Nikkei peaked at 38,900. It is sitting at 8,438 as I type. After 19 years of ups and downs including one big rally of 140%, the Nikkei is down a whopping 78%!

If you think that can't happen here, then consider this chart of the S&P 500 over the same period.

Someone buying the S&P 500 in 2000 is down 40% nine years later. Buy and hold dollar cost averaging has been an absolute disaster. You would be behind on nearly every addition no matter when you started.

The important point is that we are still on track for a downside target of 450-600 on the S&P 500. That does not mean we get there, it just means it is a likely target.

If we do get to the 450-600 target area, do not expect to see the stock market blasting to new highs for as long as two decades, just as happened in Japan. Indeed, from the current look of things, Japan can still be decades away from new highs.

[ewmayer]

Nice article in today`s NY Times about the potential effects of dropping oil prices in three highly oil-price-dependent economies, namely those of Venezuela, Iran and Russia. The snippet I quote below is from the Russia-related portion of the article:

3 Oil-Rich Countries Face a Reckoning

Still, at least in terms of its domestic economy, Mr. Halloran and other experts said Russia was better positioned to weather lower prices than were many other oil and gas producers, because it had adopted conservative fiscal practices in recent years.

The country deposited a significant portion of its oil revenues into two stabilization funds, which totaled $190 billion at the beginning of this month. The Russian budget is pegged to an oil price of roughly $70 a barrel — most revenues exceeding that have gone to these so-called rainy-day funds.

The Kremlin also succeeded in recent years in establishing control over many of the pipelines that transport oil and gas in the region — an achievement that will endure despite the lower prices.

The Kremlin has started tapping into its stabilization funds to prop up the banking industry and the stock market, which has been hard hit by the international financial crisis, dropping by more than two-thirds since May. The government may also rescue many of Russia’s oligarchs, the industrial magnates who were thriving with the high price of natural resources but have now been suffering steep losses.

These bailouts, combined with declining oil and gas revenues, could make it difficult for the Kremlin to carry out plans to modernize the country’s aging infrastructure, from highways to schools, and still promote Russian ambitions abroad.

Even so, opposition politicians in Russia said they did not perceive sagging prices as undermining Mr. Putin’s power.

“I think that it’s too early,” said Grigory A. Yavlinsky, an opposition leader. “The crisis at the moment is not related to the population enough. The banks are still open, and unemployment is not yet going higher. It’s a threat, but it’s only a potential threat.”

My Comment: That $190 Billion rainy-day fund was a very good idea, but it could easily be wiped out by the eventual cost to rescue the Russian banks. In no small part due to its foreign-debt default in the late 1990s, Russia, unlike the U.S., can't simply "print money" [e.g. by issuing bonds] and force foreign countries to buy its debt at rock-bottom prices. [Would that the U.S. had had to live with that kind of externally imposed fiscal discipline, I know...]

[cheesehead]

Originally Posted by ewmayer

A poor analogy - unlike oil, crops not harvested in timely fashion will rot or be eaten by animals and insects.

No, the proper analogy is that the crops could be shipped off to market as soon as they were harvested, instead of being stored on-farm (or rented silos elsewhere). Harvesting is like bringing the oil out of the ground -- the reason I mentioned flow management is that oil production is not completely deferable, either. But it's not a perfect analogy.

[cheesehead]

"Greenspan 'shocked' at credit system breakdown"

http://news.yahoo.com/s/nm/20081023/...cial_greenspan

Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and said he was "partially" wrong to resist regulation of some securities.

Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006.

Note the third paragraph. Trust in the moral goodness of "family fathers" is a characteristic aspect of the "strict father" worldview of conservatives, which leads them to ignore the lessons of history about the need for regulation to curb unethical behavior of those in charge.

(See also: accumulation of power by the executive branch of government).

. . .

"PARTIALLY" WRONG

. . .

Waxman cited a series of public statements by Greenspan saying the market could handle regulation of derivatives without government intervention.

"My question is simple: Were you wrong?" Waxman asked.

Greenspan said he was "partially" wrong in the case of credit default swaps, complex trading instruments meant to act as insurance against default for bond buyers.

[hhh]

From www.titanic-magazin.de:

Nachdem der Dax vor einiger Zeit die psychologisch wichtige Marke von 6000 Punkten durchbrochen hatte, durchbrach er nacheinander und in Rekordgeschwindigkeit die ebenfalls psychologisch wichtigen Marken von 5500, 5000 und 4500 Punkten. Sollte der Dax so weitermachen, dann könnte er in Zukunft so lange weitere psychologisch wichtige Marken durchbrechen, bis er die psychologisch unwichtige Marke Null erreicht hat, vermuten Experten. Anschließend will er nach übereinstimmender Einschätzung aller Beteiligten ein Bier trinken gehen.

[KriZp]

Originally Posted by hhh

die psychologisch wichtige Marke

I'm dissapointed that even german media talk about psychologically important numbers. I thought you guys were supposed to be all rational and analytical. I must have had my stereotypes partially wrong or something.

[ewmayer]

Originally Posted by KriZp

I'm dissapointed that even german media talk about psychologically important numbers. I thought you guys were supposed to be all rational and analytical. I must have had my stereotypes partially wrong or something.

I suspect you are thinking of these kinds of Germans.

But, your Teutonic-as-ultrarational-persons prejudice grows tedious ... now is the time on der Subprimerealitätenmarktkernschmelzepanik thread ven ve dance to the bitter music of the global economic crisis, ja? Personally, I find the agony of the financial markets gorgeous. Do you find my taking such perverse pleasure disturbing? Yes, ve are doomed and I am filled with remorse, and it is most delicious.

On to today`s Finanznachrichten:

-----------------------

Russian default risk tops Iceland as crisis deepens: Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

Hans Redeker, currency chief at BNP Paribas, said markets no longer believe Russia is strong enough to guarantee the estimated $530bn of foreign debts accumulated by its companies during the break-neck expansion of the oil boom. "The surge in Russian CDS spreads is paralysing the whole system. The government can offer very little help to the banks at this point because its own sovereign debt is in question," he said.

"This crisis is starting to look like the Black Wednesday in 1992. Unless we see an extension of central bank swaps in dollars and euros to Eastern Europe within days to stop this uncontrolled process of deleveraging, this could get out of control and do serious damage to Western Europe. We could see the euro fall to parity against the dollar by next year," he said.

Kingsmill Bond, chief strategist at Russian investment bank Troika Dialog, said Russia's Achilles Heel is the lack of a proper rouble bond market. This had forced companies to raise half their money abroad, in foreign currencies.

U.S. Stocks Slide After Rout Overseas: Stocks in the United States continued a sharp sell-off that started in Asia and Europe after a round of dismal corporate earnings reports and economic data.

Home Resales Jump 5.5%, More Than Forecast, as Foreclosures Reduce Prices: Home resales in the U.S. rose more than forecast in September, aided by foreclosure-driven declines in prices that indicated the market was stabilizing before the latest slump in financial markets.

Crude Oil Drops on Signs OPEC Cut Won't Halt Price Slide as Economies Slow: Crude oil tumbled to a 16-month low as OPEC's decision to slash production by 1.5 million barrels a day failed to ease concern that the global economic slump is curbing fuel demand.

IMF Said to Consider Emergency Loans of Up to Five Times Members' Quotas: The International Monetary Fund is considering loans of up to five times the quota contributions of member nations, in an unprecedented effort to avert an economic collapse in emerging markets.

`Out of Control' Wall Street Chiefs Spurned Davos Warnings, Chose to Party: Once upon a time, the World Economic Forum was the ultimate Wall Street jamboree.

Now, in the riptide of the worst financial crisis since the Great Depression, WEF officials and delegates say many of the chief executive officers who gathered in Davos, Switzerland, over the last five years didn't listen to warnings from their peers. Davos organizers also say they failed to play tough with the financial-industry bosses, opting to accept their funding and let them turn Davos into a rave-up for Wall Street excesses.

``The partying crept in,'' says Klaus Schwab, the 70-year- old WEF founder and executive chairman. ``We let it get out of control, and attention was taken away from the speed and complexity of how the world's challenges built up.''

The fallout has left the WEF riddled in buyer's remorse, with officials throughout the organization asking what they have wrought and, like Wall Street, whether they offered too much of a good thing.

Schwab says the delegates treated him like ``Cassandra'' whenever he questioned the logic of their wisdom on asset-price bubbles in housing, stocks and other financial instruments.

WEF Chief Operating Officer Kevin Steinberg says the vast sums of money that rolled in from Wall Street celebrities for marquee billing in Davos contributed to complacency among forum organizers and often obliged them to publicly massage the viewpoints, wishes and status of their superstar guests.

``We catered to what the financial leaders wanted: solo speaking slots, luxury hotels and VIP treatment we wouldn't afford anyone else,'' Steinberg, 38, says. ``We gave them a soapbox. It was all political. We try to minimize the politics, but can't.''

`Psychological Denial'

In his office outside Geneva, about a three-hour drive from Davos and overlooking the French Alps, Schwab says the WEF began issuing warnings in 2003 to investment banks, insurance companies and hedge funds about the systemic risk gnawing at the foundation of the global economy.

``But the financial community didn't listen,'' Schwab says. ``They were told that any serious look at the economic fundamentals showed that we were in an unstable situation. It was denial, total psychological denial.''

My Comment: Other more-sober viewpoints like those of George Soros and economist Nouriel Roubini were routinely dismissed at the Davos conclaves. Pretty much a "Dude, you`re harshing my buzz" attitude from the hooker-and-booze-fueled Financial-Industry execs.

In 2005, Schwab says WEF's delegates from Wall Street were eyebrow-deep in booming markets, easy money and intense pressure to take greater risks, borrow more and seek higher returns.

One of WEF's sessions that year was ``Spotting the Next Bubble Before It Bursts.'' Goldman Sachs Group Inc. CEO Lloyd Blankfein ran the meeting with Syron, then CEO of Freddie Mac, the now-discredited U.S. government-sponsored mortgage buyer and reseller that along with Fannie Mae in September required a $200 billion U.S. government bailout.

My Comment:At yesterday`s hearing on Capitol Hill, chief bubble-blower Alan Greenspan was [finally] grilled by several lawmakers [especially California`s Henry Waxman, Ohio`s Dennis Kucinich and Indiana`s Mark Souder] on whether he at any point realized there was a bubble in housing. That prompted the now-usual obfuscation and denial by Greenspan, who went on to classify the resulting crisis as "a once-in-a-century event", implying that it was unforeseeable and any regulation capable of preventing such a debacle would necessarily be "onerous". Liar - all it would have taken was some attention to the kinds of basic economic factors which are indicative of an asset bubble and a willingness to take the measures needed to keep it from inflating out of control. Instead, Greenspan and his cronies did exactly the opposite, first by denying the obvious, and at the same time implementing policies [e.g. too-low interest rates for years on end and complete lack of oversight of irresponsible and predatory lending] and encouraging "exotic" mortgages and the kind of securitization of same which deliberately obscured their toxicity.


Mish Shedlock`s take on yesterday`s proceeding on The Hill is here.

[ewmayer]

Chrysler to cut 1 out of 4 white-collar jobs: About 5,000 workers will be asked to leave the company by the end of the year.


One failed bank gets the housing fix right: When the FDIC seized mortgage lender IndyMac it was one of the biggest bank failures ever. Now the Calif.-based outfit might just help lead us out of the housing mess.

NEW YORK (Money) -- The battered economy is in desperate need of a housing fix, and one failed bank just may have the answer.

Yesterday FDIC Chairwoman Sheila Bair told the Senate Banking Committee about the success her agency has had in helping struggling borrowers at IndyMac, which the FDIC took over this summer.

Bair, the nation's leading bank regulator, thinks this foreclosure prevention program can work for other banks.

"Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country," she told the committee.

She's not alone. While individual lenders, loan servicers and non-profit foreclosure prevention outfits have been chipping away at the staggering housing crisis on a case by case basis, IndyMac, under the FDIC's leadership, became the first bank to establish a set protocol to modify home loans.

...

IndyMac services more than 60,000 loans that are either more than 60 days past due, in bankruptcy, in foreclosure or are otherwise not currently being paid. About two-thirds of those customers are eligible for the program, according to Bair, and more than 3,500 IndyMac borrowers have had their loans modified to affordable levels so far. Borrower payments have been cut on average by $380, she said.

Currently most lenders assess each loan on a case-by-case basis, which takes a tremendous amount of time and resources, and can hold up the process for months. Establishing set rules that a lender can apply to thousands of borrowers will speed the process, and help right the housing market more quickly

Under IndyMac's program, the lender modifies a loan so that the borrower's new mortgage payment, including insurance and taxes, eats up no more than 38% of their pre-tax income. This percentage, known as a debt to income ratio, topped 50% for some loans during the boom.

To achieve this lower payment, IndyMac can lower the interest rate, extend the life of the loan to, say, 30 or 40 years, defer some principal to the final years of the loan, or a use a combination of these strategies.

IndyMac is also trying to simplify the process for borrowers. It is overnighting loan forms to eligible customers with a signature required upon receipt. "It doesn't show up with your regular mail, coupons and junk mail, because the key is getting the consumer to open it," said FDIC spokesman David Barr.

The papers clearly spell out a borrower's new loan terms, including the interest rate and monthly payments over the life of the loan. The borrower simply signs and returns the documents with the first lower monthly payment.

My Comment: Kudos to Ms. Bair for her strong advocacy of the we-need-to-help-struggling-borrowers-not-just-bail-out-banks approach, which is the *only* government intervention to date - and surely the least expensive one - to address the root problem. Note that the FDIC-promoted IndyMac loan modification program DOES NOT FORGIVE DEBT, it simply restructures it according to some mix of the above-mentioned options in order to make the ongoing servicing cost more manageable. Thus it avoids both the moral hazard inherent in the government`s bailouts of the banks, and also avoids the massive expense of the latter kinds of top-down interventions. While the basic nature of the housing bubble means that restructured loans will still eat up much more of the borrower`s capital over their lifetimes than the purchase of a non-bubble-priced home would have, we can`turn back the clock on the bubble, so this seems the most sensible approach to dealing with the problem.

[cheesehead]

Just heard a radio interview describing Alan Greenspan as an Ayn Rand devotee/follower/worshipper or something. (Edit: "acolyte", that's the word)

My recollection of Ayn Rand (it's been a while) is: "Government get out of the way and let the mediocre fail. The competent entrepreneurs and free market will do what's best." Is that accurate? Do I recall correctly that her novels described some very economically-grim times?

http://www.time.com/time/printout/0,...842879,00.html

"What Would Ayn Rand Have Done?"

... the Ayn Rand Center for Individual Rights, an outpost of free-market, anti-government thinking located just a few blocks from the newly aggressive and highly interventionist Department of Treasury in downtown Washington.