mostly palaver

Wasting time on a Friday afternoon

Let's speculate on VP candidates.  These are some pairings I've seen over the last week or so:

McCain:  Charlie Crist 

Clinton: Ted Strickland

Obama: Jim Webb

Thoughts?

Pushing on a string

A couple of articles in yesterday's WSJ together nicely illustrate my thinking.   First, this:

Nonetheless, [Bernanke] showed more concern that the economy will grow more slowly than the already-sluggish performance envisioned a month ago, due to the possibility that housing, the job market or credit conditions may deteriorate more than expected. The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Mr. Bernanke said.

His comments cemented market expectations that the Fed will lower its short-term interest-rate target to 2.5% from the current 3% at its next meeting, March 18.

A particular risk Mr. Bernanke highlighted in response to questions from lawmakers was that the Fed's 2.25 percentage points of interest-rate cuts since September aren't being fully passed through to consumers and businesses because banks, other lenders and the capital markets have become more reluctant to lend.

A major reason for their reluctance is that losses related to subprime mortgages and other risky loans have depleted the capital of many banks and other major financial intermediaries, such as government-sponsored mortgage giants Fannie Mae and Freddie Mac. Mr. Bernanke called on such institutions to raise additional capital so that they could resume normal lending activity. [emp. added]

I've said this before, and I'll say it again, the Fed is pushing on a string right now, and all they are doing is priming the pump for some really nasty inflation later on.  And frankly, the more they push on the string, the more uncomfortable I get.  They are addressing the wrong problem with the wrong tool.    

The problem is not liquidity, it's solvency - the banks don't have the capital to lend out right now.  What we've seen in recent weeks are rising mortgage and credit card interest rates at a time when the Fed is cutting rates, increasing the interest spreads for the banks which mean that banks are (1) readying themselves for higher chargeoffs or (2) replacing lost income streams with interest income or (3) pricing the risk they are incurring more accurately due to the fact that they now have to hold many of these accounts on their own books or (4) a combination of all 3. 

The Fed cutting rates is taking some pressure off the bank margins (and may be killing them there too depending on what their deposit portfolios look like), but it is doing nothing for the ability of banks to lend or for borrowers to borrow.

Which brings us to the second article today:

A new round of higher debt costs confronts some states and cities as another usually humdrum part of the credit markets runs into trouble. This time, the culprits are variable-rate demand notes. And banks that guarantee they will act as buyers of last resort face something they never expected -- having to purchase many of them at once....

The largest participants in the backstop business include Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc. and State Street Corp. Also, Depfa Bank of Dublin and several other European banks have a sizable presence...

One banker at a large backstop provider said his bank has taken back about $500 million in variable-rate demand notes out of a total portfolio of more than $20 billion in backstops. That bank hadn't inherited any municipal bonds in 30 years, but more are likely this week and next, the banker said. Holding the bonds isn't necessarily financially bad for the banks, because the securities collect 6% on high-quality municipal debt But for some banks with balance-sheet pressures, taking back lots of bonds at once could be burdensome. [emp. added]

This is where all the capital is getting vacuumed up. When banks get these things crammed back down their throats, it eats up capital that they could be lending.  And it seems like the cramming is coming from all sides these days.  Variable-demand notes, auction-rate securities, mortgages, credit card receivables, these are all things that banks were able to get off their books not that long ago, but those days are over for now. 

Book Recommendation

After Dark by Haruki Murakami.  I read, and liked, Kafka by the Shore and was pleased by this book as well.  One of the things I really liked about the book is Murakami's ability to sketch with words.  Take this passage:

After a quick survey of the interior, our eyes come to rest on a girl sitting by the front window.  Why her? Why not someone else?  Hard to say.  But, for some reason, she attracts our attention -- very naturally.  She sits at a four-person table, reading a book.  Hooded gray parka, blue jeans, yellow sneakers faded from repeated washing.  On the chair next to her hangs a varsity jacket.  This, too, is far from new.

I can see him as at ease with a sketch pad as with a notepad, grabbing just enough essential detail to set the scene.  He does that repeatedly in the book and it works.  Murakami's style is pretty trippy at times and may be an acquired taste but, After Dark being a short read, I'd recommend it without reservation. It's worth the time.

The most wonderful time of the year

Starts Saturday, with Het Volk, the first of the spring semi-classics.  I prefer the spring races to any other, including the Tour de France. This race is in Belgium, run over cobbles and those nasty Flemish hills, and generally in pretty miserable weather.  It is a good test for those riders looking to do well in the full classics in April (Flanders, Paris-Roubuaix) and we'll know who is reasonably fit and who is not by the end of the weekend.  Some things to watch for:

• How will High Road perform?  They are a team that should do well in the classics, this is going to be their first test.
• Ditto for Slipstream. Backstedt is their big gun but he's out with a broken collarbone.  Will someone else step up for them? 
• Frank "The Brittany Spears of Cycling" Vandenbroucke makes yet another  return to the peleton after a few years off for bad behavior, drug use and attempted suicide.  Will he be fit?  Will he finish?  Will he collapse in tears at the feed?  Who knows, tune in to see!  For those of you who don't know, Frank comes from a family of famous cyclists and had a fair bit of success early on in his career.  He was a child prodigy who imploded fairly spectacularly. 

My predictions on riders to watch (and for those of you familiar with the strength of my predictions, please bet accordingly):

• Filippo Pozzato from Liquigas (won it last year)
• Boonen, Bettini and Steegmans from Quick Step (all ungodly strong classics riders)
• Glenn D'Hollander from Silence-Lotto

Hopefully it'll snow.

Housing

Wow.  From today's WSJ:

The S&P/Case-Shiller national home-price index for the fourth quarter fell 8.9% from a year earlier, the largest drop in its 20 years of data. And the Office of Federal Housing Enterprise Oversight's index -- which tracks only homes purchased with mortgages guaranteed by home-loan giants Fannie Mae or Freddie Mac -- was down 0.3%, the first year-to-year decline in the measure's 16 years.

More wow, from AP

The delinquency rate for a wide range of home loans that provide the payments for mortgage bonds has spiked in the past year, Standard & Poor's said Wednesday...S&P examined how dependably people are repaying their debt for five types of loans: home-equity lines of credit, subprime loans, Alt-A loans, closed-end second-lien loans and prime jumbo loans.

For nearly all these categories, delinquencies have accelerated in the past year.

The delinquency rate was the worst for pooled subprime loans, or loans to people with bad credit. For pooled subprime loans issued in 2005, the delinquency rate is 34.4 percent, S&P said. Delinquencies have soared as much as 15 percent for some subprime loan pools. Delinquencies on closed-end home-equity loans, which involve a fixed amount of cash lent as opposed to an open-ended line of credit, have jumped as much as 12 percent. In Alt-A, which are mortgage loans for which borrowers did not have to document their income, delinquencies have surged as much as 18.1 percent.

Delinquencies on prime jumbo loans are up as much as 18.2 percent. Jumbo refers to home loans with good credit quality but that are too big to be eligible for purchase by Fannie Mae and Freddie Mac. [emp. added]

And yet more wow from Calculated Risk.

Nothing really to add right now.

Not Unexpected

When egomaniac meets egomania personified:

Cipollini was happy with his return, but not with the fiasco surrounding the team and Ball's backing of Tyler Hamilton, Oscar Sevilla and Santiago Botero. The riders, all allegedly linked with Operación Puerto, were barred from racing by the organiser, but continued along daily by riding behind the race caravan and signing autographs for fans at the stage villages.

"For a week I had an infinite amount of patience ... Maybe it was my great desire to return to racing with an important project. However, like this we can't go forward. We are not able to continue to pull along this heavy weight that ruins our image, and now Ball also understands this. It is not enough to advertise and show off models."

I love Cipollini and love the fact that he is going to drive Michael Ball absolutely crazy until they sever their partnership (I'm betting right after Milan-San Remo).

The Last Debate

So, did you watch it? 

I have to admit I've skipped the last couple, debate fatigue and all, but caught most of this one.  My observations:

Tim Russert is awful.  His NAFTA questions, his finger pointing, his hypothetical situations, they are all terrible and they add nothing to the debate.  He is bluster masquerading as toughness.  All of this has been said before about him, but jesus, why does he still get to moderate debates?  His treatment of Clinton (talking over her, pointing at her) did wonders to validate her "the media is unfair to me" theme.

Obama played her to a draw on most issues and trumped her on some critical ones. The 16 minutes on health care turned so confusing that I couldn't follow it.  I thought that he has a good point about the subsides and she a good one about mandates.  In all though, that part was a draw on a topic Clinton needed to win big.  I thought his use of the word "whining" was interesting and tried to portray her as weak - not sure it worked though. 

I thought she had a great response to the question as to whether or not Obama is ready to be commander-in-chief, but her answer got blown away by a reformulated Obama judgment riff (about the bus and the ditch). BTW - Obama came off looking very hawkish last night - talked about Pakistan, about "retaining the right to protect Americans" in reponse to Russert's idiotic question on Iraq.  That will help him in the general and, amazingly, I thought he came off as more hawkish than Clinton last night. 

Didn't see the Farakhan thing, so no comments there. Didn't see the FEC thing, so no comments there either.

In all, I'd call this one a draw but Clinton can't afford draws at this point in the campaign.  This is over on Tuesday.

Thoughts?

Do you believe in miracles?

MBIA and Ambac retained their AAA ratings. 

NEW YORK (Reuters) - Moody's Investors Service on Tuesday dropped its immediate threat to cut the top "Aaa" rating of MBIA Inc's insurance unit, staving off the prospect of more bank losses and market declines.

While downgrades are still possible, especially if MBIA, the world's biggest bond insurer, splits its business lines, the latest action eased market concerns over rating downgrades of bond insurers and the debt they guarantee.

I'm not going to even pretend that I understand it, but there it is. 

Willfully ignorant, or simply dishonest?

It's a question I frequently ask of the WSJ editorial page.  Take today's example:

The plan also borrows an idea from House Judiciary Chairman John Conyers to repeal a long-standing provision in bankruptcy law and allow judges to reduce the amount borrowers owe on their homes. Judges can do this now with credit-card debt -- a big reason rates on credit cards are so much higher than those for mortgages. [emphasis added]

"A big reason..."?  Really?  Funny, I had always believed that the reason credit card rates were higher than mortgage rates was because that mortgages were secured by a lien on the property, while credit card rates were unsecured loans.  I guess I was wrong. 

"A big reason" why the rates on mortgages is lower is because judges can reduce the amount of credit card debt outstanding when someone goes into bankruptcy?  That's the argument they are putting forth?  Sounds about as lame as the administration's FISA arguments. 

I'm going with dishonest on this one.

Calculated Risk is a great website for all things mortgage-related.  Tanta, one of the contributors, had an excellent post on this very idea a few days ago [note: having judges reset the mortgage is known as a "cram-down"]:

You are, of course, really and truly living in Wonderland if you think that larger down payments and higher credit-risk premiums aren't already starting to get here in part and will only get more "severe" until we return to something like normal lending practices... This is "serious" credit tightening only in the context of the egregiousness of the last few years, of course. But it's rather amusing that the MBA [Jim: mortgage bankers association] seems to think that we could avoid reversion to mean lending standards if only we didn't approve bankruptcy changes to allow cram-downs.

[...]

The mortgage industry's major lobbying group is coming out and telling you, explicitly, that cram-downs would ruin the party because we'd either have to disclose these bankruptcy-in-the-making loans to "the market" and watch it slap a punitive bid on the things, resulting in a rate the borrowers could never afford, or we'd have to stop making bankruptcy-in-the-making loans. Or perhaps we are being told that the MBA knows of no possible way to screen loan applications to cull out the ones most likely to end up in BK [Jim: bankruptcy]. That's rather a startling point of view from the folks who are supposed to be experts in mortgage lending.

For the near future, banks will likely have a difficult time securitizing mortgage loans so I'd imagine that if they are going to keep rather than dump them, that underwriting is going to be more rigorous and they are actually going to insist that borrowers put some equity into the purchase (no more 100% LTV's).  They are also going to have to raise rates to cover losses for mortgages in their portfolios.  We're seeing it right now with credit cards - the fed keeps cutting but the banks, if anything, are raising credit card interest rates.  A similar thing will have to happen with mortgages, and it's got nothing to do with bankruptcy reform.

As for the nonsense in today's WSJ, if a borrower was actually going through the pain-in-the-ass that is Chapter 13, getting to the point where a judge actually crammed-down the mortgage, I'd have to be pretty happy if I were a bank.  The alternative is jingle mail (one of my favorite new expressions - means to drop your house keys into an envelope and mail them back to the bank - the bank gets "jingle mail") or foreclosure proceedings.  I'd be willing to bet that the banks will get far more from a person enduring Chapter 13, than from one willing to walk away and mail in the keys.

This legislation could be a good thing for both banks and borrowers, provided, of course, that banks are willing to return to lending standards that allow people to actually repay loans they take out.

Tour of California

Well, the Tour of California (ToC) is over and Levi Leiphiemer won it. The happy news was that George Hincapie won the final stage giving Team High Road its first (and only) win of the race (for a primer of the difference between stage and overall wins, see my primer here).  George rode a very aggressive race, in a couple of long breakaways in horrible weather conditions, so I was glad to see it all come good for him.  Levi, well, who knows. I'd like to believe he's clean, but the jury on Astana and Bruneel is still very firmly out.  We'll see (more on Astana's issues here).

Plus side: There were an unprecedented number of drug tests (no failures), horrible weather most days (I love watching races held in bad weather)and some very spirited racing.

Minus side: Nasty GI illness took out a number of riders, Slipstream didn't win anything (on an individual rider level, they won some team prizes). 

All in all, I have to say I was pleasantly surprised by the race and how the race was contested.