The Federal Home Loan Bank (FHLB) system was established in 1932 to fill the need for a stable funding source for residential mortgages created by the undermining of the American banking system during the Great Depression. Today, the 12 Federal Home Loan Banks and their members are the largest source of residential mortgage financing in the country. Yet until this year, no one had taken a hard look at how membership in the FHLB system affected commercial bank risk.

“Although our findings suggest that the cumulative impact of FHLB membership and advances on bank risk is modest, we caution that our sample period was one of robust economic growth, and that serious moral-hazard problems could arise in bank leverage ratios revert to historical norms,” explains Tim Yeager, associate professor of finance at the university of Arkansas’ Sam M. Walton College of Business and co-author of the study which was published in the Journal of Banking and Finance. “The increasing reliance on these advances is a potential safety and soundness concern because access to them can undermine market discipline, and the FDIC [Federal Deposit Insurance Corp.] cannot raise premiums sufficiently to deter risk-taking.”

Yeager and his colleagues, Dusan Stojanovic at the Federal Reserve Bank of Chicago and Mark Vaughn at the Federal Reserve Bank of Richmond, VA, found that liquidity and leverage risk were modestly higher for FLB members than for non-members. Credit risk and overall risk of bank failure were unaffected byFHLB membership. FHLB members were exposed to less interest rate risk, which measures the effect of variable interest rates on bank earnings or equity, than non-members.

“Although the evidence fails to produce a ’smoking gun’ the worrisome incentives embedded in FHLB advances should give policymakers pause,” Yeager said. “We argue that bank supervisors should remian vigilant, and only careful monitoring by state and federal supervisors can prevent distressed banks from responding to the moral-hazard incentives associated with FHLB funding and underpriced deposit insurance.”

Commercial banks have turned to FHLB advances to help close the gap between loans and deposits since the early 1990’s when legislation opened the system, previously restricted to thrifts whose focus was on accepting deposits and orginating home mortgages, to commercial banks and credit unions. Researchers suggest future legislation or regulation may impose usage restrictions on advances similar to those used on brokered deposits on a capital charge on institutions having large amounts of collateralized obligations. The FDIC recently announced that it will be FHLB advances into account when setting deposit insurance premiums in 2009.

The issue of bank risk, whether associated with FHLB membership or not, should not greatly worry insured depositors. Uninsured depositors and those wishing to ascertain the health of their bank should monitor the risk levels of their financial institutions. Detailed information on specific banks can be found on the FDIC web site at fdic.gov. According to Yeager, if a bank’s core capital is below 5 percent and has been falling over time, the bank’s solvency may be an issue.

Share This

Source [blownmortgage]

Share This

Filed under: Good news, Employees, Boeing Co (BA)

After a 52-day strike, Boeing Co. (NYSE: BA) has reached a tentative deal with its 27,000 member machinists union. Tentative details suggest that workers will get a 15% wage increase over three years, an $8,000 bonus over four years, and a freeze of medical costs at 2005 levels. Furthermore, the new contract limits the amount of work that can be outsourced and will last a year longer than the previous pact. But even though the contract has not been ratified, this is good news for Boeing and its workers.

Limiting outsourcing could be good for Boeing and the workers depending on how it’s accomplished. One of the reasons for the delay in delivering its very popular 787 aircraft was that Boeing outsourced the majority of the design and manufacture of the components and later discovered that it was not doing enough to manage those subcontractors. As a result, Boeing suffered unpleasant surprises in its delivery schedule.

If Boeing and its machinists agreed to give the union a chance to bid on work under consideration to be outsourced, then both parties might be better off. That’s because if the union offered a competitive price and excellent quality, Boeing would likely find it easier to manage its union workers than those of a subcontractor located half way around the world.

Continue reading Boeing reaches deal with machinists. Is its engineering union next?

Boeing reaches deal with machinists. Is its engineering union next? originally appeared on BloggingStocks on Tue, 28 Oct 2008 10:10:00 EST. Please see our terms for use of feeds.

Read | Permalink | Email this | Comments

Via [bloggingstocks]

Share This

There was an eruption across news networks and websites earlier this week as Henry Paulson announced that the Federal bailout package, dubbed the TARP (Troubled Asset Relief Program) would no longer function as a program to purchase troubled assets. Sparing no time to allow the irony of this to sink in, Paulson proceeded to outline what many of us have been suspecting all along. The first portion of the bailout money, approximately $260 billion, has been set aside to purchase stock in banks.This has been fittingly dubbed the Capital Purchase Program (CPP).

There are a few different ways to look at this, but it would seem that the Treasury believes that their primary goal is to ensure that survival of the American banking system, and that the best way to do this is to provide them with excess capital and allow banks to meet the demand for loans. It also would seem that the Treasury is making it up as they go along, but that’s another discussion for another day.

So what to do with all those bad, ugly subprime loans that they were going to purchase? Is there some way to make them, well, not so bad? Ah, yes, by rewriting them! The Federal Housing Finance Agency, in an almost simultaneous announcement, outlined a plan to restructure delinquent and troubled mortgages held by Fannie Mae and Freddie Mac. Homeowners would have the terms of their loan adjusted as follows: payments could not exceed 38% of their household income, the maturity date of the loan could be extended to 40, rather than 30 years, and a portion of the loan principle could be deferred.

I won’t bother to elaborate on the philosophical quandaries presented by this proposal, but rather I will focus on the issues of practicality. First, the fact is that only 20% of the subprime mortgages in America are owned by Fannie and Freddie. Second, of that 20%, only a fraction are actually the whole loans. Since loans have been chopped up, bundled, and sold in fractional shares to investors, any one of those investors could stop the loan modification from going through.

But then why would those investors want to block the restructuring? After all, doesn’t that help them retain the value of their investment? Well, yes and no. Most of those investors are not individual retail investors, but rather are institutional investors, such as banks, investment banks, trusts, hedge funds, etc. That means that in addition to holding the mortgage backed security, they also own the collateralized debt obligation (CDO) tied to that security, and more likely than not have also probably issued a CDO or two (or several) on that security. So whereas with a traditional investment in a security, you have a winning bet and a losing bet, with mortgages and mortgage-backed securities, you could have one winning bet, but multiple losing bets. Michael Lewis, the celebrated author of the Wall Street classic “Liar’s Poker,” describes the situation succinctly in this article.

Let’s not forget that additionally, from the perspectives of homeowners, it would exacerbate the plunge in home values across the country, and could potentially encourage non-delinquent homeowners to stop paying their mortgage in hopes of a loan modification.

Is it any wonder that we’re in this mess?

Share This

Source [blownmortgage]

Share This

Filed under: General Motors (GM), Politics, Financial Crisis

General Motors Co. (NYSE: GM) Chief Executive Rick Wagoner, the longest serving head of an automaker, is personally lobbying members of Congress to back a federal bailout of the struggling automaker, which wants to merge with its much weaker rival Chrysler LLC.

Bloomberg News, which broke the story, reported that Wagoner’s “involvement includes attending meetings, such as one with Treasury Department officials last week in Washington.” You can bet that Michigan’s powerful senior member of Congress, John Dingell, is attending many of the same meetings as Wagoner. GM no doubt is employing an army of lobbyists — both Republicans and Democrats — to press its case. The company, which for now may be the largest, has little choice.

GM and Chrysler would need between $10 billion and $12 billion to integrate their operations, according to a Citigroup note cited by Bloomberg. Combining the two fading industrial behemoths would be a logistical nightmare. Imagine trying to combine disparate systems for everything from personnel to purchasing to accounting. Let’s not forget the byzantine IT systems at both companies as well.

Economically, it’s hard to justify bailing out GM. Decades of incompetent management at the Big Three resulted in the industry drowning in billions of debt. The problem with telling the industry “no” is political. Dingell is a 1,000-pound gorilla in Congress. The auto industry continues to have considerable clout in Washington as well. Their argument is simple: if Wall Street fatcats can get a federal bailout, why not us?

The problem with rescuing Wall Street is that lots of struggling industries are going to pass the hat in Congress. What about the airlines? The retail sector? Pharmaceuticals? When does it end?

Can GM CEO Rick Wagoner’s lobbying help land federal bailout? originally appeared on BloggingStocks on Tue, 28 Oct 2008 13:12:00 EST. Please see our terms for use of feeds.

Read | Permalink | Email this | Comments

Via [bloggingstocks]

Share This

The spin is out in full force folks. The Southern California housing numbers are now out and once again they show a dismal and pathetic market. Yet even in the face of falling prices ala the Wal-Mart commercials, you can rest assured that some are going to spin the data for all it […]
Related Posts:
■Foreclosures? Housing Bubble? In Southern California? Impossible!
■Real Homes of Genius: Today we Salute you Compton. Once, Twice, Three times a Short Sale.
■Emerging Economic Trends: Housing Swaps, Frugality, and Selling Homes in Lower Priced Areas.
■C.A.R. says 2007 will see a -2% Drop in California. Does This Feel like a 2% Yearly Drop?
■Doing The Housing Bubble Math Dance for California.

The spin is out in full force folks. The Southern California housing numbers are now out and once again they show a dismal and pathetic market. Yet even in the face of falling prices ala the Wal-Mart commercials, you can rest assured that some are going to spin the data for all it is worth. You also need to remember that the recent data on Southern California is for the month of July, a historically strong month simply because of seasonal factors. In addition, the month of August should look similar to this month but expect the report for September due out in October to show the actual pay option ARM smack down.

But even with seasonality the spinsters are going to use the current minor bump in home sales as a major positive:

“(DQNews) La Jolla, CA—The number of Southern California homes sold last month edged up to its highest level in more than a year as bargain hunters swept up foreclosure properties in affordable neighborhoods, a real estate information service reported.

A total of 20,329 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 16.7 percent from 17,424 the previous month and up 13.8 percent from 17,867 for July a year ago, according to San Diego-based MDA DataQuick.

Last month’s sales count was the highest since 21,856 homes were sold in March 2007, though it still fell 23 percent short of the average July sales total since 1988, when MDA DataQuick’s statistics begin. From last September through June, sales for each month were at an all-time low for that particular calendar month, with the exception of April which was the next lowest. Last month’s sales total was the first since September 2005 to rise above the year-ago level.”

Bargain hunters? Foreclosures in affordable neighborhoods? Isn’t that an oxymoron? If the neighborhood was affordable in the first place you wouldn’t be seeing large number of foreclosures but that is an entirely different subject. Even though this report is trying to spin the 21,856 sales as a significant jump it is nowhere close to the sales that occurred during the bubble frenzy. Take a look at this data:

July 2004: 32,988

July 2005: 31,069

July 2006: 25,628

July 2007: 17,867

July 2008: 20,329

It helps to put things in perspective doesn’t it? Of course they aren’t going to say that sales for Southern California are off by 38% from their peak July month only a few years ago. And when they say that the jump was bolstered by “affordable neighborhoods” what they mean is that the majority of the sales were fueled by the Inland Empire were homes are being sold for whatever the market will take. Let us look at the details of the report:

I first direct your attention to the stunning jump in sales for Riverside and San Bernardino Counties. These two counties make up the Inland Empire. But what the report doesn’t highlight is the actual median price of both these counties. They are now down 34 and 35 percent on a year over year basis and carry a median price of $260,000 and $230,000. Do you realize that Riverside County for example hit a high median price of $432,000 in December of 2006? So if we take that peak price to the current median price we get:

$430,000 - $260,000 = $170,000 (A 39% Discount)

Los Angeles County hit a peak of $550,000 and is now at $400,000. Nice $150,000 discount. Orange County? Orange County had a median price of $645,000 in June of 2007. That is a drop of $184,000 in one year. Would you wait a year for $184,000? I think most would.

Across the board prices are getting hammered. The reason sales jumped last month was in large part to the big jump in the Inland Empire. And of course homes are now selling for 50 to 60 percent off peak sales prices. To think this won’t happen in Los Angeles County and Orange County is simply unrealistic. It will happen. Just wait until the pay option ARM loans in these areas hit their anniversary dates.

You’ll love some of the reasons given for the fall off in prices:

“What we’re looking at is a fire sale of properties in newer affordable neighborhoods that were bought or refinanced near the price peak with lousy mortgages. What we’re still not seeing is this level of distress spreading to more expensive or established neighborhoods,” said John Walsh, MDA DataQuick president.

The median price paid for a Southland home was $348,000 last month, down 2.0 percent from $355,000 in June and down 31.1 percent from $505,000 for July 2007. That peak of $505,000 was reached in March, April, May and July of last year.

The median has fallen because of depreciation, especially in inland markets, and because of the steep drop off in home financing in the so-called jumbo category, which until recently was defined as loans above $417,000.

Before the credit crunch hit in August 2007, nearly 40 percent of Southland sales were financed with jumbo loans. Jumbos last month accounted for 15.8 percent of Southland sales.”

First, what qualifies as a more established neighborhood? Are we talking about Malibu or Newport Coast? Sure, those areas are positive but only a fraction of the entire 20,000,000+ people that live in Southern California live there. That reminds me of something said during the Crash of 1929. Mr. Rockefeller during the crash of the Great Depression announced that he was buying stocks while everyone was selling. To paraphrase a market observer, “of course he is buying. He’s the only one left with money.” Well of course these areas are doing fine! They always do well irrespective of the economy. Yet I draw your attention to the chart above again. Every single county is down from 26.9% to 35.2%. That is a major correction in one year and we are yet to see the truly “lousy” mortgages hit the actual market.

Another interesting part of the report is the implication that jumbo loans are somehow hurting the market. Did you look at the overall Southern California median price? It’s at $348,000! You don’t need a stinking jumbo loan anymore. What you need is good credit and a solid income to buy a home and not some banana republic mortgage from the bubble days. Given that our unemployment rate is at 7.3% who really wants to buy a home when their income is at risk? You think those 200,000 state workers are hungry to buy a home given that Arnold is trying to cut them down to the minimum wage? What about all the jobs in housing that are now no longer bringing in good paychecks? If you connect the dots prices are going down because the entire state was turned into a housing casino and mortgages were used as chips.

I recall clearly a few months ago hearing on the radio here in Southern California, these permabull brokers talking about how great the Hope Now program would be for buyers. When this failed, it was going to be the fantastic Fannie Mae and Freddie Mac bailout. Well of course all these idiotic programs failed because they missed one simple yet obvious fact. The economy is in distress! This is like offering lobster to a person with no taste buds. Or offering someone that lives in Palm Springs an Eskimo jacket. They don’t need gimmicks. What we need is for the state to get its budget in order and not offer tax breaks for subprime lenders. We need an infrastructure that is sustainable and not one built around finance, insurance, and real estate. Did people really think that we were going to trade homes to one another ad infinitum? Sure makes that $729,500 loan limit seem like an absolute boneheaded move.

I was going through some of the historical “help” that was going to save the market and have compiled a list here for your mental historical note keeping:

Of course these programs are all failing because they fail to address the structural problems of the system. That is, this was a bubble of epic proportions and the only way to sustain it is to bring back the toxic credit that fueled the market. I was digging through some images I have saved and found this screenshot of Hank Paulson on CNN from December of 2007:

Subprime help is indeed on the way. On the way out the door that is.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information

Post from: Dr. Housing Bubble Blog

Southern California Housing Report: New Housing Motto: Foreclosure Data is so Bad, it has to be Good! Median Price Down 31% to $348,000.

Share This

Related Posts:
■Foreclosures? Housing Bubble? In Southern California? Impossible!
■Real Homes of Genius: Today we Salute you Compton. Once, Twice, Three times a Short Sale.
■Emerging Economic Trends: Housing Swaps, Frugality, and Selling Homes in Lower Priced Areas.
■C.A.R. says 2007 will see a -2% Drop in California. Does This Feel like a 2% Yearly Drop?
■Doing The Housing Bubble Math Dance for California.

Via [DrHousingBubble]

Share This

Filed under: Commodities, Oil, Recession

This post was written by Minyanville contributor Adam Warner:

Smarter minds than yours truly have noted that the oil ETF United States Oil Fund (AMEX: USO) is not the best bullish play on crude here. My understanding of the product is that USO owns futures, and must roll each cycle. And right now oil is in deep contango, which always sounds pornographic but actually just refers to the fact that there’s a particularly steep and upward sloped curve in the futures as you go out in time.

I’ll take their word for the contango part, but I’m not entirely sure why that necessarily will knock down USO. They’ll roll when they roll, and even if the spread is wide, won’t it then just depend on what happens in the next month AFTER the roll? I’m thinking out loud here, so if anyone has something enlightening to add on this topic, I am all ears.

I sold and am selling more Nov. puts anyway, so it should not matter a great deal from my standpoint. And I’m not sure I really have a great alternative if I want to do something bullish in oil options.

I don’t trade futures or futures options, and as far as pure oil there’s Super Double Ultra Octane Special (AMEX: DBO), which does not have liquid options.

There’s also Ultra Oil & Gas ProShares (AMEX: DIG) and UltraShort Oil & Gas ProShares (AMEX: DUG), but those track energy stocks.

Playing oil with the United States Oil Fund (USO) ETF originally appeared on BloggingStocks on Tue, 28 Oct 2008 14:42:00 EST. Please see our terms for use of feeds.

Read | Permalink | Email this | Comments

Via [bloggingstocks]

Share This

Filed under: Earnings reports, Home Depot (HD), Sears Holdings (SHLD), Lowe’s Cos (LOW)

Well, seems like Lowe’s Companies, Ic. (NYSE: LOW) did much better than expected during the third quarter. And I was apparently too pessimistic in my earnings preview. The call was for $0.28 per share. The home-improvement retailer beat expectations by $0.05 per share, according to Thomson Reuters estimates. Hey, I tip my hat to management.

But I wouldn’t buy the stock just now (unless, of course, you have a very long-term horizon, are willing to ride out the bear market, and intend on improving your cost basis through dollar-cost-averaging). My reasoning is simple: total sales increased only 1.4%, and same-store sales decreased nearly 6%. It’s that bad drop in the comps that really has me worried. All retailers are suffering through lousy comps right now, and I think sales are destined to remain weak.

Yet, the market seems to be saying something else to me. Lowe’s saw its shares rise over 4% on Monday, on good volume, and on a bad day for the major indexes, too. Is the market saying that all the bad news is priced in? You know, I understand the earnings game and how the market loves it when a business beats estimates, and certainly a $0.05 beat is cool, but I’m not sure that better prices are ahead for those who follow Lowe’s and its stock. Consumers just won’t be spending enough to justify the buying seen in Lowe’s equity yesterday.

Continue reading Lowe’s beats earnings in Q3, but I’m not buying

Lowe’s beats earnings in Q3, but I’m not buying originally appeared on BloggingStocks on Tue, 18 Nov 2008 13:00:00 EST. Please see our terms for use of feeds.

Read | Permalink | Email this | Comments

Via [bloggingstocks]

Share This