Can taxpayers begin to get off the hook?

This week’s attempt by the FDIC (Federal Deposit Insurance Corp.) to sell securities backed by residential mortgages and construction loans marks a huge milestone in the road back to normalcy for the financial markets this week. Let’s hope the markets pass the test.

The FDIC has bundled together some of the mortgages and loans it owns after taking over failed banks into a mortgage-backed security of the kind that was the mainstay of the mortgage market before the financial crisis.

That market has been essentially closed for new business since the crisis with only Fannie Mae (FNM) and Freddie Mac (FRE) willing to buy these securities with funds provided by taxpayers. Banks use this market to sell mortgages that they have originated so they can put the proceeds back into new mortgages. When this market is frozen, banks have to hold onto the mortgages they’ve originated and that reduces the money they have available for new mortgages. If banks know they can’t securitize and sell their mortgages, they become more reluctant to lend. And that reduces the availability of mortgages.

Because private investors haven’t been willing to buy these securities post-crisis, taxpayers through Fannie Mae and Freddie have been left as the only buyers. That’s been necessary to keep the market functioning at all, but Fannie and Freddie can’t keep expanding their books forever. At some point private investors need to step back into this market.

The mortgage-backed securities that the FDIC will offer for sale this week are designed to entice private investors back into the market. Read more

Reassuring talk isn’t ending the euro crisis

Talk is cheap. And not terribly effective, even when it’s coming out of the mouths of Europe’s financial leaders, in ending a financial crisis like the one that continues to engulf Europe this morning (February 8).

The current phase of the crisis started in Greece, when the Greek government finally admitted that its budget figures were a fiction and the budget deficit would be a huge 12.7% of GDP. Traders and investors have sold Greek bonds and stocks ever since.

 As of noon today in London the prices of Greek bonds were down again with the yield on the two-year Greek government bond rising to 6.61%. (For comparison, the yield on the two-year German government bond is just below 1% and the yield on the two-year U.S. Treasury note is 0.77 %.)

Greek stocks haven’t fared any better. National Bank of Greece and EFG Eurobank Ergasias, the country’s two biggest banks, were down 4% this morning.

Over the weekend, European financial officials talked tough about the crisis. “The European members of the G-7 will make sure it is managed,” French Finance Minister Christine Lagarde said on Saturday, February 6, after a meeting of Group of 7 financial ministers and central bankers in Canada. The European Central Bank is “confident” that Greece will cut its deficit to the 3% European Union limit by 2012, said European Central Bank President Jean-Claude Trichet.

Even U.S. Treasury Secretary Timothy Geithner weighed in. “I just want to underscore they made it clear to us, they the European authorities, that they will manage this with great care,” he told reporters.

Trouble is that everyone knows that there’s not much backing up the rhetoric. Read more

How do you stamp out Wall Street greed? Maybe by charging for it

Hmmm, maybe, finally, a good idea on how to curb the worst excesses of Wall Street pay.

Regulators at the Federal Deposit Insurance Corp. (FIDC), the Financial Times reports, are talking about linking the amount that banks have to pay into the fund that provides government insurance to bank depositors with risky pay policies at banks. The more that a pay structure encourages short-term risk taking—like that which led to and then deepened the U.S. mortgage and mortgage-backed securities bust—the more a bank would have to pay into the fund.

For example, a pay policy that gave big cash bonuses to bank executives on the basis of one-year performance targets would lead to a higher FDIC fee because that kind of policy rewards executives for taking short-term risks even if the long-term result (say, in two or three years) is a disastr. A pay policy that paid out bonuses in stock that vested over time might be deemed neutral to the bank’s FDIC fee payment—since it does at least make a bonus payout depend on the longer-term performance of the stock. And a pay policy with claw-back provisions that lets a bank take back bonuses if long-term performance falls below short-term results might get a discount on fees paid to the FDIC.

This idea would get around what strike me as the three main drawbacks of the excessive-pay rules that I’ve seen so far. Read more

First Dubai–Now Greece and Portugal?

Things are getting serious in the market for sovereign debt. You know, the paper issued by countries with big deficits that need to borrow to stay in business.

Just before Thanksgiving Dubai World, a government-controlled conglomerate in Dubai, suspended debt payments. That raised doubts about the solvency of Dubai itself and of other member countries in the United Arab Emirates.

Those doubts led investors, lenders, and credit rating companies to take a closer look at other indebted countries that might face a tough time paying back what they owe.

And today that closer look claimed its first two victims. Standard & Poor’s Rating Service placed its A-rating for Greece on CreditWatch with negative implications. That’s a step that often leads to an actual downgrade on the country’s debt. S&P also downgraded its long-term outlook on the credit rating of Portugal to negative from stable. Read more

Pressed for cash, states go after pension pot of gold

Wonder how governments will close the huge budget gaps created by the Great Recession and the bailouts of the financial crisis?

New York State’s recent budget move provides a pretty good road map. And you can sum it up concisely. Go after retirement programs. It’s where the big money is.

In New York the target was broad and very, very inviting. Legislation that goes into effect on January 1 will raise the retirement age for new state workers to 62 from 55, impose a 38% penalty on non-uniformed workers retiring before 62, and increase the minimum years of service to qualify for a pension to 10 from 5.

The two biggest unions that represent state employees went along with the plan in order to protect a 3% raise promised for this year and to prevent threatened layoffs of 8,700 workers.

New York State has the third largest pension fund in the country with $126 billion in assets as of September 30.

The changes will save the state a projected $40 billion to $49 billion, depending on which politician is doing the math, over 30 years.

Now you may not have much sympathy for new workers who will lose the right to retire at 55. Retiring with a full pension at 62 doesn’t sound so bad to many of us. The retirement age for Social Security is now 67 after all and some of us are planning to work far longer than that.

But it’s the trend that matters. I think actions like those in New York State are just the beginning of a move to cut benefits and extend the retirement  age. Read more