Eleven banks, including Bank of America, Citi, and Morgan, have begun sending checks to "victims" of the robo-signing scandal, by which banks foreclosed on mortgage defaulters without observing proper procedures. The cost to the industry, and therefore their shareholders and depositors is $9.3 billion. Of the $9.3 billion settlement, $3.6 will be distributed to the victims in the form of cash payments. There are 4.2 million of these victims; a case-by-case review has found that only 53 of the 4.2 million were not actually in default. (Yes, the number is 53.) So the others (4.2 million minus 53) were in default. This is why they are being compensated.
It's a little sad that people who actually paid their mortgages are not being compensated. But such is the way of the world.
Wednesday, April 10, 2013
Monday, April 8, 2013
"Frustrated central banks move into riskier assets"
This is the title of an article on page 2 of today's Financial Times. Central Bank Publications and RBS have surveyed 60 central banks and these banks expressed dissatisfaction with artificially low interest rates on reserves currencies and fear for the consequences of unbridled monetary expansion as practiced by the Fed and others. These banks hold $10.9 trillion dollars, most of which reserves are in Asia and the Middle East. They have been diversifying into non-traditional currencies like the Canadian and Australian dollars, the Chinese renminbi, and the Scandinavia currencies. Here is a quote: "The response to the crisis by these monetary authorities has had a profound effect, the poll found: more than four-fifths of the respondents said the aggressive monetary easing of the US Federal Reserve and the European Central Bank had altered their behaviour."
The chance of a dollar crisis is rising, but it is hard to see where central banks will go.
The chance of a dollar crisis is rising, but it is hard to see where central banks will go.
Thursday, April 4, 2013
Chairman Ben and the lost boys (and girls) in Neverland
Each
year, when it releases its full transcripts of the Federal Open
Market Committee (FOMC) from five years ago, the Fed invites us to
cast our minds back to a place long ago and far away. The
conversation around the conference table at the Fed's Washington
headquarters on January 30 and 31, 20071
seemed to take place in Neverland rather than on the verge of the
worst financial crisis since the Great Depression.
Housing starts had fallen
steeply from almost 2 million (annual rate) in early 2006 to about
1.1 million at year end, just before the FOMC met. The Feds were not
worried however (there are few worries in Neverland) because their
model predicted that the rate would soon rebound to a normal 1.3
million level. Problem solved! (But in fact, starts fell to 400
thousand by the end of 2008.) The FOMC did fret pleasantly about
inflation, however.
In fact, only a relatively few
paragraphs of the 200+-page transcript were devoted to the housing
crisis. Here is a sampling. Moskow of the Chicago Fed said that
that “the economy is clearly showing more underlying strength than
we thought in December.” Lacker of Richmond commented that “each
batch of housing data has bolstered my confidence in the trajectory
we sketched out last fall – namely, that a drag from housing will
mostly disappear by midyear with spillover having been relatively
limited.” Gov. Bies said, “we feel very good about overall
credit quality.” Gov. Mishkin commented, “we're not seeing
anything out of the ordinary or a persistent pattern, and that gives
me more confidence that nothing bad is going to happen here.”
(Mishkin had co-authored a study proving that nothing bad could
happen in Iceland either.) Bernanke summarized: “The general view
was that housing would cease to subtract from growth later this
year.” Yellen of San Francisco agreed: “Housing remains a
concern, but I think the prospects for a really serious housing
collapse that spreads to consumer spending have diminished
substantially. . . To me the upside risk to inflation seems palpable,
especially because labor markets have tightened.” (Yellen is the
reputed front-runner to succeed Bernanke, assuring a continuation of
.. . ah . . continuity; the magical Veil of Nescience that Dr.
Greenspan bequeathed to Chairman Bernanke seems to sit well on her
brow.)
The
Fed GDP forecast at the meeting was a cheery 2.2% rate in the first
half of 2007, 2.4% in the second, and 2.5% for 2008, not the 2% for
2007, 0% in 2008, and -4% in 2009 that actually befell the world
outside of Neverland. Back on planet earth alarm bells were ringing
non-stop.2
Barrons had suggested in August 2006 that housing prices could drop
30%. At the Davos conference just before the Fed meeting, Nouriel
Rubini made dire predictions, and the Bank for International
Settlements warned of a deepening crisis. Despite these warnings,
the Fed stuck to its rosy scenario because in Neverland every time
someone says “I don't believe in fairies” a fairy dies.
Even
Euromoney
seems to have got it right! In the
January 2007
cover story, “The world on the cusp,” which was well-illustrated
by a drawing of a world on a cusp, Clive Harwood introduced a series
of articles that presented “the view that the state of global
imbalance must come to an end soon, and with painful consequences.”
Charles Dumas predicted “a hard landing followed by poor
recovery,” that would “likely cause severe deflation.” Brian
Reading followed by stating that “the world is suffering
unprecedented financial imbalances” and that “their inevitable
reduction . . . will dominate global growth prospects. . .”
But
even in Neverland where all stories have happy endings, drama exists.
Think of Hook and the crocodile. At the Fed meeting, drama came in
the form of the interim president of the Atlanta Fed, Mr. Pat Barron,
a practical, energetic, and brilliant man who rose from auto mechanic
at Buckhead Chrysler Plymouth to COO of the Atlanta Fed. He is a
practitioner not of mathematical economics, like Dr. Ben, but of
“descriptive economics,” which is now derided in academe and
defined as explaining “economic phenomena as they are without
making any statements about how they ought to be.” He expressed a
“contrarian view” that the housing market was in deepening
crisis. The Lost Boys (and Girls) listened politely to this real
world Wendy and moved on.3
History suggests that investors
should assign a correlation of -1 to the forecasts of certain central
bankers. Ben says the exit from QE will be orderly. Where is he
leading us? “Second star to the right and straight on till
morning.” That's where you'll find Neverland.
1http://www.federalreserve.gov/monetarypolicy/fomchistorical2007.htm
2See
Tee,Gillian, Fool's Gold,
Free Press, New York, 2009, especially chapter 10: “Tremors.”
3
According to Tett's book, Geithner was also worried, but ever the
good subordinate, he kept his peace.
Subscribe to:
Posts (Atom)