Why Not Start Principal Writedowns with the Worthless Liens?

Receiving Wide Coverage ...

Backdoor Bailout? The campaign to make Fannie Mae and Freddie Mac write down principal balances is a stealth attempt to bail out the big banks. So says Federal Housing Finance Agency acting director Edward DeMarco in an interview with the FT. That’s because the megabanks are holding large quantities of second mortgages, which are supposed to be wiped out before the first mortgages held by Fannie and Freddie take any hit. Writing down the first mortgage on an underwater home without touching the second would restore the latter asset’s value, transferring wealth from Fannie and Freddie (and hence the U.S. taxpayer) to the banks, DeMarco tells the FT. Gretchen Morgenson makes the same argument in her Sunday Times column. Financial Times, New York Times.

Wall Street Journal

In addition to the ongoing debate about regulation of money market mutual funds, there’s an interesting accounting issue that more directly concerns banks. Sponsors sometimes have to shore up money funds to avoid “breaking the buck,” the fate of the Reserve Primary Fund. According to a speech SEC commissioner Elisse Walter gave last week, “from August 2007 to December 2008, more than 100 funds in 18 complexes — or nearly 20% of the money market fund universe — received support from managers or their affiliates.” So if a bank sponsors a money fund and provides implicit support, should the institution be required to reflect the vehicle on the balance sheet? No, say the banks and, in its initial position, the FASB. Yes, says the Journal’s “Heard on the Street” column, noting that banks’ liabilities for structured investment vehicles were hidden until those notorious vehicles needed backstopping. “Money-market funds are seen as far safer than SIVs. And they are tightly regulated. Yet the implicit support banks offer them opens the door to similar balance-sheet risk.” Banks should either warn money market fund investors at the outset that there’s no parental guarantee and they can lose money, or acknowledge there is a guarantee and show the assets on their books, the column argues.

Our political system may seem dysfunctional, and mistrust of banks appears to be higher in the U.S. than at any time in recent memory, but a Journal dispatch from Zimbabwe puts the situation here in perspective. There, the banks are starved for deposits because consumers have “mortal fear” of financial institutions, the central bank can’t act as a lender of last resort because it’s broke, and people literally launder their U.S. greenbacks (the official currency since 2009, when hyperinflation led the government to ditch the Zimbabwean dollar) with washing machines and clotheslines.

Consumer advocates fear credit card issuers may be using social media to get around the CARD Act’s restriction against marketing on college campuses.

Columnist Al Lewis looks at a report from the Dallas Fed that calls for an end to “too big to fail.” He finds it pleasantly surprising to hear this message coming from a part of the Fed system, and encourages readers to move their money to community banks and credit unions.

Financial Times

If Ally Financial, which is almost three-quarters government-owned, tries to put its albatross mortgage unit into bankruptcy, it could create another political and legal mess for President Obama like the one that resulted from the Chrysler bankruptcy.

“Investment banks are to shrink their balance sheets by another $1tn or up to 7 per cent globally within the next two years,” according to a new report by Morgan Stanley and Oliver Wyman.

New York Times

The manager of a hedge fund that tanked during the financial crisis blames Goldman Sachs. In a previously undisclosed testimony obtained by the Times, this investor says Goldman’s securities lending desk failed to borrow shares as promised for his short sales, leaving him high and dry when it came time to cover the shorts.

Speaking of Goldman, Greg Smith, who wrote that incendiary kiss-off op-ed a few weeks ago, is said to be looking for a book deal.

An editorial in the Sunday Times calls on President Obama to hang tough in the face of pressure from banks to water down Dodd-Frank’s derivatives rules, particularly the one that would move trades to a centralized exchange.