GSEs and their CFOs

"Freddie Mac recorded a $151 million net loss for the first quarter as changes in accounting policies offset higher costs related to U.S. home-mortgage defaults. Without the accounting changes, the loss would have exceeded $2 billion, Buddy Piszel [BP], chief financial officer, said in an interview. But he said the accounting changes mean results better reflect the underlying business. ... Freddie also reported that the 'fair value,' or estimated market value, of its net assets was a negative $5.2 billion as of March 31, compared with a positive $12.6 billion three months earlier. ... Piszel said the negative fair value reflects current distressed prices for mortgage securities and has 'no impact' on the operations of a company like Freddie that is a long-term holder of mortgages. ... Freddie's main regulator .... Ofheo, 'is aware of all of the accounting changes and has taken no exception to them,' Mr. Piszel said. ... Joshua Ronen, an analyst of Graham Fisher & Co., a New York research firm, said the accounting changes 'put a lot of lipstick on this pig'," WSJ, 15 May 2008.

"Fannie Mae and Freddie Mac are 'a point of vulnerability for the financial system' because their capital is meager in relation to their mortgage assets and obligations, the companies' main regulator said. With that skimpy capital cushion, the government-sponsored companies 'could pose significant risk to taxpayers as well as financial institutions and other investors,' the regulator, James Lockhart, director of [Ofheo] said at a conference in Chicago. ... Fannie and Freddie each have 'core' capital equalling less than 2% of the mortgages they own or guarantee", WSJ, 17 May 2008.

I agree with Ronen. This looks like the "regulatory forbearance" that prolonged the S&L crisis of 1979-86. BP sounds like an accountant. I use that as a term of opprobrium. BP apparently doesn't understand Freddie is a highly-leveraged potential disaster area. I found out how many Freddie shares BP purchased recently: none. I found a Form 4 indicating he was awarded 12,538 shares on 31 January 2008 for services and owns 120,851 shares. Prices: $30.01 on 31 January and $25.73 per share currently. Hey, BP, if you believe Freddie is a good deal, buy say 100,000 shares with your sign on bonus. Right! Who is BP? Why did Freddie hire him? A 19 October 2006 press release indicates BP was once a Deloitte & Touche partner. My guess: Freddie hired BP to provide it "regulatory cover" with the SEC, PCAOB, etc., etc., ad nauseum. If BP's like 95% of the Big 87654 partners I've met, he's an economic ignoramus. Chuck Chaplin, CFO of MBIA wrote a letter the the WSJ, 19 May 2008, attacking "mark to market" accounting. It seems, he's another CFO who does not understand the economics of his own business.

"Could pose"? No, do pose.

Real Estate Update-2

"The share of homes vacant and for sale, an important measure of the nation's housing supply, set a record in the first quarter in a signal that the glut of homes on the market isn't improving. The homeowner vacancy rate, which measures the number of vacant homes for sale, rose to a record 2.9% in the first quarter from 2.8% in the fourth quarter, about one percentage point higher than normal, according to new Census Bureau data. ... Meanwhile, a record 4.1 million vacant homes are for rent, with the rental vacancy rate rising to 10.1% in the first quarter", WSJ, 29 April 2008.

"Home-price declines are accelerating nationwide, pushing a hoped-for turnaround in the housing market further down the road. The [S&P]/Case/Schiller index that measures home prices in 20 major metro areas dropped 12.7% in February from a year earlier--the sharpest decline in the data's two-decade history. ... 'There is no sign of a bottom in the numbers', said S&P analyst David Blitzer. ... All 20 cities in this measure showed price drops from January to February, and almost all showed year-to-year declines; the Charlotte, N.C., area showed a modest 1.5% increase. ... Home prices in the Las Vegas, Miami and Phoenix markets fell by more than 20% from a year earlier. ... Overall, the 20-city index has declined 14.8% since peaking in July 2006", WSJ, 30 April 2008.

"In the latest sign that the housing market is deflating at a record pace, the National Association of Realtors said prices declined in more metropolitan areas in the first quarter than at any time in the past three decades. ... Nationally, the median home price fell to $196,300, down 7.7% from a year ago. ... Home prices fell 12.3% to $296,300 in the West and dropped 7.5% to $164,200 in the South", WSJ, 14 May 2008.

Be patient, this will get worse.

Welcome London Banker

"When I was a young central banker, we often spent our lunchtimes debating how best to rob our employer. ...I can now see I was a central banker of very little brain--and lacking ambition. The way to rob a central bank efficiently is to be a bank executive so skilled in financial engineering that I take my bank to the edge of extinction. I can then swap all my unpriceable, illiquid, engineered credit instruments for good central bank cash and Treasuries. That's larceny without risk, making the central bank a complicit partner in the looting of its vaults, and earning gratitude and bonuses instead of audits and indictments", London Banker (LB) at http://www.rgemonitor.com/, 15 May 2008.

This is LB's first post at RGE Monitor. Read it. I love you LB. Enjoy. Laugh. Cry. LB is RGE's Spengler. I have said things like LB for years. Willie Sutton (WS), bank robber, spent about 35 of his 79 years in prison for bank robbery. When last released he was asked if he would do it again. WS said no, He would become an accountant. WS is asked why? WS responds because you can steal ten times as much with a pencil as with a gun. And if you're caught you don't go to jail, you just get fired. The bank you stole from doesn't even report what you did because it doesn't want to be publicly embarrassed. http://www.rgemonitor.com/financemarkets-monitor/252626/looting_the_vaults_at_the_central_banks.

Moody's Image

"Moody's Investors Service is clarifying its code of conduct to convince regulators and investors that its bond-rating analysts aren't too close to the companies they cover. ... Self-imposed reforms could help Moody's and rivals [S&P] and Fimalac SA's Fitch Ratings stave off a regulatory crackdown. ... The report concluded that analysts shouldn't make proposals or recommendations about the design of structured-finance products, since such consultations can been seen as compromising objectivity in rating bond deals", WSJ, 15 May 2008.

Big deal. I wouldn't put any credence in "self-imposed reforms". I've seen their history of failure in the CPA profession. See my 6 October and 28 December 2007 posts.

Volker on the Fed

"Former [Fed] Chairman Paul Volker said the Fed's independence could be hurt by the wide variety of assets it has taken on its balance sheet to combat the credit cruch. ... It has so far not directly purchased [loans backed by subprime mortgages]. It did, however, make an unprecdented loan of $29 billion to facilitate the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. ... Volker [said] 'If its' going to be looked to as the rescuer or supporter of a particular section of the market, that is not strictly a monetary function in the way it's been interpreted in the past.' ... Volker also laid part of the blame for the current crisis at the feet of banking regulators, including the Fed. 'Why were [the banks] permitted to set up those off-balance-sheet entities that may or may not have had some formal relationship with the bank? They were not regulated and [banks] didn't hold an adequate amount of capital against them. Why did that happen after the experience of Enron?' ... In 2003 and 2004, the Fed and other regulators ruled that the new accounting standards wouldn't compel banks to hold aditional capital for such entities. But when investors refused to refinance the entities' commerical paper last year, some banks were forced to take the entities back on their own balance sheets", WSJ, 15 May 2008.

I agree with Volker, See my 6 February 2008 post on the banks QSPE accounting.

Krugman on Oil

"'The Oil Bubble: Set to Burst?' That was the headline of an October 2004 article in National Review, which argued that oil prices, then $50 a barrel, would soon collapse. Ten months later, oil was selling for $70 a barrel. 'It's a huge bubble,' declared Steve Forbes, the publisher, who warned that the coming crash in oil prices would make the popping of the technology bubble 'look like a picnic.' ... So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren't why have so many commentators insisted, year after year, that there's an oil bubbble? ... The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding--an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling. But it hasn't happened this time. ... Traditionally, denunciations of speculators come from the left of the political spectrum. ... After all, a realistic view of what's happened over the past few years suggests that we're heading into an era of increasingly scare, costly oil. ... Again, I wouldn't be shocked if oil prices dip in the near future--although I also take seriously Goldman's recent warning that the price could go to $200. But let's drop all the talk about an oil bubble", Paul Krugman (PK) at the Houston Chronicle, 13 May 2008.

I agree with PK. The commentators are being misled because they think in terms of dollars as opposed to other currencies.

Inflation?????

"Inflation is rising just about everywhere. Why is this and what can be done about it? To get some basic concepts clear: inflation is a sustained rise in the general price level. ... In a fiat money world, central banks cause inflation, or, more precisely, only central banks are responsible for inflation. Other shocks, real and nominal, can influence the general price level if the central bank does not respond swiftly and determinedly, but these non-central bank induced changes in the general price level can always be offset by the central bank, given enough time, freedom to act and courage. But, in the medium and long term (at horizons of two years and over, say--central banks choose the average rate of inflation. Not globalization; not indirect taxes; not bad harvests; not OPEC and the price of oil; not the Chinese and their exchange rate management. There is no oil inflation, food inflation or cost-push inflation. There is only inflation. Inflation may be accompanied by changes in key relative prices--in the real prices of oil, of and labor for instance. ... Sometimes the central bank is the political captive of the fiscal authority. ... But with an operationally independent, sufficiently well capitalized central bank, the monetary authorities can, on average in the medium and long term, achieve the inflation rate they want. They are responsible, no-one else. ... The die-hard core inflationists there will point out that core inflation is only 2.4%, but the only appropriate answer to that is: so what? Core inflation is of interest only to the extent that it is a superior predictor of headline inflation. ... The oil price shocks of 1973/74 and 1979/80 did not cause inflation. ... Without central bank accomodation and expansionary fiscal policy to try to uindo the negative effects of the oil price shock on non-oil production and employment, there would at most have been a one-off increase in the general price level", William Buiter (WB) at http://www.blogs.ft.com/, 14 May 2008.

Thanks Yves Smith for leading me to this article. I agree with WB. I remember the 1973-74 oil shock. At Chicago we debated the significance of the Fed's "accomodating" an increase in relative prices. I take issue with one thin WB wrote, "an operationally independent ... central bank". Ain't no such animal. Fuggedaboudid.

When All Else Fails

"Phillipine President Gloria Macapagal Arroyo said she is considering rolling back government rice-import subsidies--a move proponents say could help curb corruption and free up funds to stimulate local rice production. ... Last week, the Phillipines agreed to buy more than 300,000 tons of rice from Thailiand, Vietnam and Pakistan at an average price of more than $1,100 a ton--up from $360 a ton at the beginning of the year. ... Arroyo said ... 'In the longer term, with prices being where they are now and if they continue to stay where they are, then it would be good economics to look at producing more of it ourselves.' ... [T]he Phillipines ... uses high import tarriffs of 50% on rice to protect local farmers and stimulate rice production. ... Sen. Edgardo Angara, a former secretary of agriculture, argues that if private-sector rise traders are allowed to import and sell rice without any restriction, supply and prices will stabilize. Removing subsidies will also remove opportunities for unscrupulous traders to sell subsidized rice--both imported abd locally produced--at commerical-market prices. ... In addition, Mr. Angara says that by removing subisidies, the Phillipines will have more funds to develop rice production". WSJ, 28 April 2008.

What's so hard to understand? Now if Hank Paulson talked like Angara, we might be able to resolve the 'housing crisis" quickly.

Government Stupidity

"A windfall profits tax would prevent oil companies from increasing supply because it would disincentivize further production. We need these companies to increase production, not decrease production if we want the supply to increase", Frank Stalzer letter to the WSJ, 8 May 2008.

"The first windfall profits tax, passed in 1980 (It was repealed in 1988), caused more devastation than a loss of 3% to 6% in domestic oil production. The industry never recovered. ... That wasn't all the devastation: the impact on the oil servicing industry was significant as it reduced that industry's investment as well. Many just closed shop never to return. There were about 2,000 active drilling rigs working in the U.S. during the 1970s. Their number dropped to around 800 during the 1980s. The rig count has returned to 1,700 now, but that's not enough for the work that needs to be, or should be, done. ... The cost of replacing reserves not only increases due to inflation but also due to drilling in more difficult places and formations. Major oil companies need to administer their businesses on the basis of true replacement costs, not historical accounting costs", David McElevain (DM) letter to the WSJ, 8 May 2008.

"Myanmar's badly conceived agricultural policies are compounding the country's already dire food situation. In recent years, Myanmanr's reclusive military rules have plowed large tracts of rice--and vegetable-growing land to plant jatrophia--an inedible plant used for making biodiesel. ... And villagers in the highland regions are often given rice strains requiring expensive fertilizers that they can't afford. ... Now the folly of such policies is becoming apparent in the wake of the cyclone that devastated the country last weekend. ... The most notorious example of errant policy making refelcts the fascination of 75-year-old junta leader Senior-Gen. Than Shwe with biodiesel as a way to break the country's dependence on expensive imported oil. ... 'This was the whitest of the junta's white elephants,' says Monique Skidmore, a professor at the Australian National University and an author of two books on Myanmar", WSJ, 9 May 2008.

Stalzer doesn't even need to be a Havard economics professor to understand this.

Boy is DM right. Politicians can never seem to understand the concept of marginal cost. In the oil industry, marginal cost is the cost of the next barrel you find, not you lift. Current reserves are a stock, not a flow number. Marginal cost is not just lifting cost of existing reserves. Don't feel too bad. Uncle Miltie blew this one in 1973. I remember. It wasn't until about 1976 that he realized it. But Uncle Miltie was an intellectually honest guy.

Myanmar should get out of the business of "managing" its economy. As should Uncle Sam.

FBI v. DOJ?

"Federal agents raided the Office of Special Counsel, a government agency involved in several high-profile and politically sensitive investigations. The agents seized computer files and documents from its chief, Scott Bloch, and his staff. ... The [DOJ] joined the case as the inquiry was widened last year to include possible obstruction of justice, which is a criminal offense. ... The [DOJ] had no comment about Tuesday's raid. A Special Counsel spokesman said, 'we are cooperating with law enforcement.' ... In the Tuesday raid, 20 agents from the [FBI] and an inspector general's office served grand jury subpoenas on Mr. Bloch and searched his office and home. ... Among the office's recent inquiries was whether former White House political director Karl Rove and others improperly used U.S. agencies to help elect Republicans. ... Bloch's investigative role made him a target for both political parties. He was sharply criticized in Congress, even by Republican members", my emphasis, WSJ, 7 May 2008.

Bloch must be the stupidest man in Washington. Doesn't he know it is impossible for "Karl Rove and others [to have] improperly used U.S. agencies to help elect Republicans". It would only have been possible for Rove to have improperly used these agencies to help elect Democrats. If we get a Democratic administration in 2009, Rove's actions could become criminal. The thought of Bush's DOJ investigating Bloch for improper conduct is a joke. I suspect it's really investigating Bloch to continue to conceal Rove and others malfesance. "Even by Republican members"? Idiot, of course by Republican members. Apparently Bloch did not realize his real job was more "window dressing".