Public Attention Is Dangerous to Occupied White House; Do Not Be Fooled

I took the opportunity yesterday of watching seven hours of the Office of Thrift supervision forum on home funding, with four panels and several speakers.

Secretary of the Treasury Paulson scooped all the real news by announcing his vague plans to get the mortgage servicing industry to commit to freeze rates and bail out the industry.

((Mortgage servicers put together lenders with sources of funds. It's this group that came up with 'bundled' securities that got good ratings and attracted investors, although they are made up of questionable items like subprime mortgages along with other good investments. Other proposed sources of funds include "viaticals" which for awhile have been allowed and now are under intense scrutiny, whereby a life insurance policy is sold to produce funds needed now.))

Paulson's tactic presented a 'plan' which financial writers had to go back to the office and write up, thereby keeping them from reporting the actual state of the economy. The real news of the forum of course would not have been easy for the occupied White House to face, so it was very Rovian tactics to send financial reporters back to their offices to write up the bone throw to them.

An admission came from a group of financial advisers led by Ron Insana that the next 12 months will be grim, with housing prices falling throughout the country in addition to the huge losses by mortgage firms and investors who took their securities' ratings as true - and will then come more ARM mortgage rate hikes. The word recession was used several times, but still as a possibility rather than as a certainty.

Insana admitted the Federal Reserve failed to stop the housing bubble because Alan Greenspan maintained that the diversity and width of the coming bust would allay its effects. The usual line that "no one could have imagined" that the housing pricing dive would be universal was linked to the use of many financial devices that investors for the most part don't actually understand, that in the past eight years regulators have allowed the mortgage servicers to bring over from corporate finance.

An unidentified questioner brought out that 'financial servicers' were maintaining that they could not take a loss or would be prosecuted for a failure of fiduciary duty, so couldn't lower mortgage rates/costs to homeowners looking at foreclosure. This would mean that Paulson's announcement was merely a diversion to keep the media from getting at the real situation. Also the questioner pointed out that the "servicers" would prefer the extra funds they'd collect by going on to foreclosure, rather than lower or maintain present mortgage rates even temporarily, as fees are the main source of income and additional fees accrued in the event of actual foreclosure. The panel did not disagree, and later I believe he was identified when Office of Thift Management head used the line he'd begun with, that everyone was being awfully polite, and associated that line with a John Montgomery, as I understood him. I did not find any reference to a financial person by that name, so am not sure, but the questioner was known to and not refuted by the Insana panel.

Insana did praise the firms that failed to lower investment grade ratings for beginning to realize how few of the 'triple AAA' rated securities were holding up their value, and at last began to lower the ratings, but panelists suspected that when that happened investors realized the bath they were about to take, and began bailing out. At present, huge financial firms and individual investors, teachers' retirement funds and small community banks, foreign and U.S., among others, are holding securities that no one will buy.

Insana had asked for a rating from one unidentified investor of the securities held by another, and was given a good sounding rating. When he inquired if they would pay that amount quoted for the securities, the response was panicky refusal.

The media report that I could find that included findings from the all-day forum on one of the biggest threats we face contained a few nuggets.

Washington Mutual Chief Executive Kerry Killinger said problems are starting to show up in home loans made to borrowers with strong credit records because real estate prices continue to slide.

The CEO of Seattle-based WaMu — the country's biggest thrift and a major mortgage lender — said he supports additional interest-rate cuts by the Federal Reserve, as well as temporary extensions of Fannie Mae and Freddie Mac's funding capacity.
(snip)
Mark Zandi, chief economist at Moody's Economy.com, predicted that, if the economy were to slip into a recession or if efforts to modify loans don't pick up substantially, the housing market downturn could last through the end of the decade.

"This is the most serious housing downturn since the Great Depression," Zandi said.

Many analysts say next year is likely to be worse.

Another report gave other interesting and dismal news.

How an obscure lender to midsized German firms lost big in America's housing bust is a tale of globalized risk-taking run amok. It also hints at a larger challenge: Despite decades of regulatory reforms, the world's financial system is as vulnerable as ever to serious crises, some experts say.

"There may be more risk in the system today than a century ago," says Robert Bruner, dean of the business school at the University of Virginia in Charlottesville. "We have more complexity today because of the sheer size of the capital markets and the presence of new and unpredictable players."

This environment teems with financial opportunities as well as threats. But it's the dangers that loom large now for consumers and businesses in the U.S. and beyond.

Losses from complicated investments in risky U.S. mortgages have rippled outward, affecting other channels of lending, not just mortgages for the weakest borrowers. This tightening of credit, in turn, has increased the risk of a U.S. recession. Already:

• Many U.S. homebuyers, even high-income ones, are having a tougher time getting home loans.

• Because of mortgage-related losses, banks have less money to lend in general, not just for housing. The worry that a credit crunch could pinch U.S. economic growth is one factor behind the recent drop in U.S. stock prices.

• Even some of the safest investments — money-market mutual funds — have recently faced questions of soundness because of mortgage-linked investments.

• The problems extend beyond U.S. shores. The drying up of money flows to mortgage markets, although triggered by events in the U.S., caused depositors to stage the first run on a British bank in a century. A government bailout of the bank, Northern Rock, may now pave the way for a buyout by media mogul Sir Richard Branson.

All these factors put a tangible face on the threat of recession. Some economists now think that tighter credit, coupled with declining home values and high oil prices, is pushing the U.S. into a slump.

Others think that risk can be still averted. The Federal Reserve, for one, has recently begun to lower short-term interest rates to stimulate the economy.

While several of the mortgage industry representatives in yesterday's panels said 'consumer confidence' may pull out our economic planners from the disaster that they've produced, and that the Paulson plan might have the desired effect, for the most part that was admitted to be rather unlikely.

The deregulation of this executive disaster has shown itself for what it is in many ways. Poisoning the public by deregulating food safety wasn't enough. The economic imbroglio produced here may be with us into the next administration, leaving another Democratic administration to pull the U.S. out of the inevitable mire that deregulation produces.

The only good result looks like a lesson plan for why the party of GoPervs is not qualified for high office.