AMERICAN FUTURE

The next time you hear Newt trashing Fannie and Freddie, consider what he had to say about Government Sponsored Enterprises in April 2007, at which time the housing meltdown was already underway:

Certainly there is a lot of debate today about the housing GSEs, but I think it is telling that there is strong bipartisan support for maintaining the GSE model in housing. There is not much support for the idea of removing the GSE charters from Freddie Mac and Fannie Mae. And I think it’s clear why. The housing GSEs have made an important contribution to homeownership and the housing finance system. We have a much more liquid and stable housing finance system than we would have without the GSEs. And making homeownership more accessible and affordable is a policy goal I believe conservatives should embrace. Millions of people have entered the middle class through building wealth in their homes, and there is a lot of evidence that homeownership contributes to stable families and communities. These are results I think conservatives should embrace and want to extend as widely as possible. So while we need to improve the regulation of the GSEs, I would be very cautious about fundamentally changing their role or the model itself.

But when questioned during the November 9 Republican debate about his ties to Freddie, he said:

I offered them advice on precisely what they didn’t do. I have never done any lobbying, every contract that was written during the period when I was out of the office specifically said I would do no lobbying, and I offered advice. And my advice as a historian…I said to them at the time: This is a bubble. This is insane. This is impossible.

And a statement from his campaign said:

Gingrich advised that a business model that involved lending money to people with bad credit and no money down was unsustainable and a bubble, and that it was dangerous to buy securities made up of these mortgages.

Multiple choice question:

1. Gingrich liked GSEs before he disliked GSEs.
2. Gingrich disliked GSEs before he liked GSEs.
3. All of the above.

In a video posted by the Telegraph, Bank of England Governor Sir Mervyn King urges banks to brace themselves for a potential eurozone collapse amid fears that Britain is caught in a second credit crunch.

The occasion for King’s remarks was the release earlier today of the BoE’s semi-annual Financial Stability Report. Here is the Report’s Executive Summary:

The Interim Financial Policy Committee (FPC) agreed the following policy recommendations at itsmeeting on 23 November:

• Following its recommendation from September, and given the current exceptionally threatening environment, the Committee recommends that, if earnings are insufficient to build capital level sfurther, banks should limit distributions and give serious consideration to raising external capital in the coming months.

• The Committee reiterates its advice to the FSA to encourage banks to improve the resilience of their balance sheets without exacerbating market fragility or reducing lending to the real economy.

• The Committee recommends that the FSA encourages banks to disclose their leverage ratios, as defined in the Basel III agreement, as part of their regular reporting not later than the beginning of 2013.The Committee judged that this advice was appropriate in light of its conclusions about the outlook for financial stability.

Risks

Sovereign and banking risks emanating from the euro area remain the most significant and immediate threat to UK financial stability. These risks have intensified materially since the June 2011 Report. Against a backdrop of slowing global growth prospects, market concerns about the sustainability of government debt positions of smaller economies have broadened to larger euro-area economies. Capital market functioning has deteriorated and risky asset prices have fallen sharply. Risk capital has been reallocated, as investors have sought to reduce exposures to vulnerable euro-area countries and to riskier assets more broadly.

European authorities announced a package of measures in October 2011 to stem the crisis. Market reaction, however, suggests that concerns remain over their implementation and effectiveness.

UK banks have significant refinancing needs. And while their direct exposures to the sovereign debt of the most vulnerable economies are limited, they have larger exposures to the private sectors of some weaker euro-area economies. They also have significant exposures to major European banking systems, which in turn are highly exposed to weaker euro-area countries.

Resilience

UK banks have made significant progress in improving their capital and funding resilience since the height of the crisis. But progress has been set back recently and they have been affected by strains internationally in bank funding markets. While UK banks’ credit default swap premia generally remain below those of many euro-area banks, they are mainly higher today than at their peak in 2008. This indicates ongoing concerns about UK banks’ solvency and the weakening outlook for banks’ profitability.

The Committee is concerned that current strains are being amplified by ongoing structural vulnerabilities in the financial system, particularly a high degree of intra-financial system exposures. Opaque and overly complex regulatory risk-weight calculations and inconsistent and incomplete disclosure have increased uncertainty about bank resilience. The growing use of central counterparties (CCPs) is reducing interconnectedness, but increasing the financial stability risks in the unlikely event that a CCP were to face severe distress or fail. That highlights the importance of robust risk management practices and the establishment of effective crisis management arrangements.

Credit conditions

Credit conditions could tighten in the United Kingdom if term funding conditions remain strained or banks’ profits are reduced by higher credit losses on exposures to the euro area. There are early indications from market contacts that some banks may be starting to pass on higher funding costs to household and corporate customers through higher prices. And there are signs already of a credit contraction in the euro area, with considerable uncertainty around banks’ plans to reduce balance sheets. Tightening credit conditions internationally could exacerbate the adverse feedback loop of weak macroeconomic activity and deteriorating bank asset quality, which could ultimately harm the resilience of the financial system.

I’ve previously commented on the fact that our representatives and senators (and their staff members) are exempt from insider trading laws and that attempts to change this inexcusable situation have been buried in committee.

If at first you don’t succeed try, try again. On November 15, the Republican Senator from Massachusetts introduced S.1871 (the “Stop Trading on Congressional Knowledge Act”), a bill

To prohibit commodities and securities trading based on non-public information relating to Congress, to require additional reporting by Members and employees of Congress of securities transactions, and for other purposes.

The bill has been read twice and referred to the Committee on Homeland Security and Governmental Affairs.

That’s where similar bills have languished in the past. Only if there is public outcry will this time be different.

The following was uploaded by a user to scribd.com; its URL is scribd.com/doc/74383327/Paulson-3q-2011-Report

Coordinated action by the world’s major central banks was largely responsible for the four percent jump in U.S. equity prices on Wednesday. Even if they didn’t know with certainty the precise nature of the action that would be taken or the exact date on which such a “headline event” would take place, investors who had a concrete reason, above and beyond the logic of the situation, for anticipating this event would have had a significant advantage over those who did not. They could position themselves to take maximum advantage of the event when and if it materialized and position themselves to minimize their losses while waiting for it to take place.

An article (“Wall Street Pushed Federal Reserve for Europe Action” — no link) in today’s Wall Street Journal strongly suggests that there is, in fact, a group of advantaged investors.  These investors, of which there are twelve, are members of the Investor Advisory Committee on Financial Markets, which was established in the wake of the financial crisis to give New York Federal Reserve Bank President William Dudley a pipeline into investors’ thinking.  The Committee and Dudley met on September 27.

Members of the group include some of the biggest names on Wall Street, including Keith Anderson of Soros Fund Management; Mohamed El-Erian of Allianz SE’s Pacific Investment Management Co.; Peter Fisher of BlackRock Inc.; Joshua Harris of Apollo Management LP; Alan Howard of Brevan Howard Asset Management; Deryck Maughan, a former chief executive of Salomon Brothers who now is at Kohlberg Kravis Roberts & Co.; and David Tepper of Appaloosa Management LP.

The Journal article says that:

The Sept. 27 meeting with Mr. Dudley exemplifies the private meetings some Wall Street investors have with top Fed officials, in which they can gain access to potential early clues about Fed actions. Hedge funds have been pushing to get more information about the inner workings of the Fed, according to people familiar with the situation . . .

Later in the article comes this:

There is no indication the meeting had any impact on the participants’ own investments. Minutes of the meeting obtained by The Wall Street Journal include notes taken by Fed staff members—but no record of comments by Mr. Dudley or any Fed officials at the meeting.

The Journal, then, would have us believe that, despite their “access to potential early clues about Fed actions,” there “is no indication the meeting had any impact on the participants’ own investments.“

Strictly speaking, this may be accurate: there may, in fact, be no “indication.” As yet. But who among us is naive enough to believe that the investment decisions of these privileged few were not influenced by the early clues to which they were exposed at the meeting. It’s impossible for their decisions to not have been influenced.

I have a distinctly bad taste in my mouth. I can understand why the Fed would want to meet with investors. But any such meetings should be webcast so that the playing field is level.