QE3 Kremlinology; Mel Watt Has an Open Mind About Principal Reduction

Receiving Wide Coverage ...

QE3 Surprise: In a departure from recent statements, Federal Open Market Committee indicated a willingness to step up bond purchases. Previously the Fed had hinted only that it might reduce monthly purchases. Now the official line is they could go up or down, depending on inflation and job growth. The upshot of all this Kremlinology: The shift to a neutral stance means the economy is still pretty weak. Wall Street Journal, Financial Times

Mel Watt: Obama's pick of the North Carolina congressman to head the FHFA signals "the administration's desire to preserve a substantial role for the government in the future of the housing market," according to the Post. However, Watt tells the Times, "I am committed to finding a new model, and that model includes winding down Fannie and Freddie." He even says that as FHFA director, he'd be obliged to look at principal reduction "from the homeowner's perspective and the taxpayer's perspective," not just the former. "There are a lot of things I might have to approach differently as a director of this agency." (He's been a big advocate of principal writedowns, which acting FHFA director Ed DeMarco staunchly opposes.) In any event, Watt faces a tough confirmation battle in the Senate, with Bob Corker, a Republican member of the Senate Banking Committee, saying flatly, "I could not be more disappointed in this nomination." The Times also notes, "While Mr. Watt is known for promoting lending to low-income and minority borrowers, he is not considered unfriendly to banks. Financial firms … are among his biggest donors, in no small part because Charlotte, part of which is in Mr. Watt's district, is a banking center." New York Times, Washington Post

Wall Street Journal

Another day, another trial balloon about regulatory capital. "The Fed and Federal Deposit Insurance Corp. are considering requiring certain large, complex banks to maintain a minimum level of unsecured long-term debt, according to people familiar with the discussions." The idea is to "place a greater burden on creditors, rather than taxpayers, in the event of a bank's demise," and also help stabilize funding costs. Makes sense (Former FDIC Chairman Sheila Bair and others have made similar arguments). The article says these deliberations are part of a broader effort by regulators "to force banks to shrink voluntarily by making it expensive and onerous to be big and complex." (Force voluntarily?) This follows the FT's report yesterday that the Fed was thinking about setting a higher leverage ratio for U.S. banks than required under Basel III. Actually, a Google search just reminded us the FT reported in December that the long-term debt thing was being considered, and quoted an actual human being, Fed Gov. Daniel Tarullo.