April 23, 2024

Fight Over U.S. Budget Weighs on Shares

Concerns about the strength of the economy and the potential for a budget fight in Washington pushed the stock market down on Monday.

The Dow Jones industrial average fell 49.71 points, or 0.32 percent, to 15,401.38, while the Standard Poor’s 500-stock index dropped 8.07 points, or 0.47 percent, to 1,701.84. The Nasdaq composite index declined 9.44 points, or 0.25 percent, to 3,765.29.

The Dow jumped 147 points on Wednesday to close at a record after the Federal Reserve decided to keep its huge economic stimulus program intact. But that rally has been wiped out by anxiety over a budget and debt fight in Washington.

Investors initially cheered the Fed’s surprise decision to keep its stimulus in place because the program has helped sustain a bull run in stocks dating to March 2009.

Doubts have crept into investors’ minds, however, because the central bank thinks the economy is not strong enough for it to pull back the stimulus.

William C. Dudley, the president of the Federal Reserve Bank of New York, said on Monday that while the economy was improving, “the headwinds” created by the financial crisis were only easing slowly.

Kate Warne, an investment strategist at Edward Jones, said that while the stimulus looked positive at first blush, “at second blush, it says conditions weren’t as strong as we were previously thinking.” She added: “Markets are now responding to that.”

The Fed is buying $85 billion in bonds each month to hold down long-term interest rates and encourage borrowing and spending.

Financial stocks fell the most among the 10 industrial groups in the S. P. 500 index. Investors sold on concerns that earnings would be hurt by lower trading volumes of bonds and foreign currencies at investment banks.

Utilities were the best performing industry group in the S. P. 500 as investors sought less risky places to put their money.

Nike and Visa, along with Goldman Sachs, also began trading on the 30-member Dow Jones industrial average on Monday, replacing Alcoa, Bank of America and Hewlett-Packard.

The threat of a looming political showdown over the budget also weighed on investors.

The House of Representatives voted to defund President Obama’s health care law on Friday, a gesture that reminded Wall Street that the Republican-led House and the Democratic-controlled Senate are poised for a showdown over spending.

The debt ceiling must be raised by Oct. 1 to avoid a government shutdown, and a potential default on payments, including debt, later in the month.

“There seems to be a higher probability there will be more of a battle over that,” said Scott Wren, a senior equity strategist at Wells Fargo Advisors. “That could inject some volatility into the market.”

Also on Monday, the financial data firm Markit said its so-called flash, or preliminary, manufacturing purchasing managers index for the United States retreated to 52.8 this month from 53.1 in August, confounding analysts’ forecasts for an improvement. A reading above 50 indicates expansion.

Output growth accelerated but new orders slowed, suggesting “production growth is likely to weaken in the fourth quarter unless demand picks up again in October,” said Chris Williamson, Markit’s chief economist.

In government bond trading, the price of the benchmark 10-year Treasury note rose 10/32, to 98 9/32, and its yield fell to 2.70 percent, from 2.74 percent late Friday.

Article source: http://www.nytimes.com/2013/09/24/business/daily-stock-market-activity.html?partner=rss&emc=rss

Fed Officials Play Down Fears of Quick Retreat on Stimulus

The officials, including William C. Dudley, president of the Federal Reserve Bank of New York, said that the Fed sees reason for optimism about economic growth, but that the goals of its stimulus campaign and the likely timeline remain unchanged.

The remarks, delivered in separate but similar speeches, reflected the Fed’s frustration with a tightening of financial conditions that began in May and accelerated last week after the Fed’s chairman, Ben S. Bernanke, said stronger economic growth likely would allow the Fed to reduce its monthly bond purchases later this year.

Wells Fargo, the nation’s largest mortgage lender, has raised its standard interest rate on 30-year loans from 3.9 percent to 4.625 percent. Yields on junk bonds have jumped 2 percentage points in less than two months, according to Barclays. Governments are facing higher borrowing costs to fund infrastructure projects.

“Market adjustments since May have been larger than would be justified by any reasonable reassessment of the path of policy,” Jerome H. Powell, a Fed governor, said in Washington. “In particular, the reaction of the forward and futures markets for short-term rates appears out of keeping with my assessment of the committee’s intentions.”

On Thursday, Wall Street stock indexes — already up strongly before the speeches — added to their gains for a rise of about 1 percent. Yields on 10-year Treasury bonds fell 5.8 points to 2.478 percent.

The message delivered by the three officials combined reassurance and tough love. While insisting that the Fed would not allow the broader economy to falter, they reiterated that they do not see a need to continue the present level of support for much longer. And they said that a certain level of negative reaction from investors was a predictable and perhaps necessary part of the readjustment process.

“It’s important not to overinvest in what the markets have done,” Mr. Dudley said. While the Fed would pay close attention to financial conditions, which can affect the broader economy, he said, the pace of growth would be determined by the sum of a strengthening private sector and a shrinking public sector. He said he was optimistic that by next year the result would be increasingly strong growth.

The Fed is struggling in a world of its own creation. The central bank, seeking new ways to stimulate the economy, has sought increasingly to manage investor expectations about the path of monetary policy. By convincing investors that it will keep interest rates low tomorrow, it can reduce borrowing costs today.

In essence, the Fed is asking investors to stake vast amounts of money on the proposition that it will do what it says. And investors, not surprisingly, have become increasingly paranoid about any sign that the Fed may change its plans.

The latest round of trouble began when Mr. Bernanke said that the Fed intended to reduce the volume of its monthly bond buying later this year. It currently buys $85 billion a month in Treasury securities and mortgage-backed securities, and officials are concerned that the purchases are destabilizing financial markets.

Mr. Bernanke insisted that the Fed was not altering its primary stimulus program, its stated intention to hold short-term interest rates near zero at least as long as unemployment remains above 6.5 percent and inflation stays under control.

But investors, wrote Jan Hatzius, chief economist at Goldman Sachs, “seem to believe that Fed officials must have become at least somewhat more willing to consider earlier hikes if they are sufficiently comfortable with the economic outlook to preannounce” the reduction in monthly bond buying.

Perhaps most strikingly, market pricing has shifted to reflect an expectation that the Fed will begin to raise interest rates by the end of 2014, despite the fact that 15 of 19 Fed officials indicated last week that they did not expect an increase until 2015.

“Some commentators have interpreted the recent shift in the market-implied path of short-term interest rates as indicating that market participants now expect the first increases in the federal funds rate to come much earlier than previously thought,” Mr. Dudley said in New York. “Such an expectation would be quite out of sync with both F.O.M.C. statements and the expectations of most F.O.M.C. participants,” he added, referring to the Federal Open Market Committee.

Article source: http://www.nytimes.com/2013/06/28/business/economy/fed-has-not-changed-commitments-official-says.html?partner=rss&emc=rss

Economix Blog: Nancy Folbre: Mortgaged Diplomas

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Current and prospective college students are receiving real-world instruction in the dismal political economy of public finance.

Today’s Economist

Perspectives from expert contributors.

Unless Congress can overcome its partisan differences, interest rates on federally guaranteed Stafford loans, an important means of paying for college, will double to 6.8 percent in July.

With the Bank on Students Loan Fairness Act, Senator Elizabeth Warren, Democrat of Massachusetts, proposes to reduce this interest rate to the same level that large banks pay for loans from the Federal Reserve Bank — 0.75 percent — for at least one year, during which longer-term remedies could be explored.

The bill, one of many aimed at addressing the scheduled interest-rate increase, seems unlikely to win passage. But it highlights the double standard that puts the interests of banks and other businesses well ahead of those of students and ordinary people when it comes to debt relief.

As Robert Kuttner explains (both in The New York Review of Books and in his new book “Debtors’ Prison”), bailouts and bankruptcy proceedings both provide a means for businesses to get out from under bad debt. The obligations of a college loan, by contrast, “follow a borrower to the grave.”

The rolling thunder of accumulating student debt sounds a lot like the perfect storm of mortgage liabilities that threatened major financial institutions and precipitated the Great Recession in 2007.

According to a recent study by the Federal Reserve Bank of New York (nicely summarized in a publication by the Federal Reserve Bank of St. Louis), the dollar value of college loan debt in the United States now surpasses both auto loan and credit card debt.

As states have steadily reduced their support for public higher education, tuition and fees have increased far more rapidly than the rate of inflation. Slow economic growth and persistently high unemployment rates have made it harder for parents to help with tuition bills, while students feel increasing pressure to gain a credential that could improve their job market chances.

The number of student borrowers increased 54 percent from 2005 to 2012, while the average debt per borrower increased 56 percent, to $25,000.

Whether or not you call it a bubble, evidence shows something is likely to pop.

Both delinquency and default rates have increased substantially since 2005. According to the Institute for Higher Education Policy, only a little more than a third of 1.8 million borrowers who entered repayment in 2005 repaid their student loans successfully without delay or delinquency for the first five years.

Low-income minority students, disproportionately likely to attend for-profit schools, are the most vulnerable.

Like the tranches of mortgage securities that were labeled “sub-prime,” their federally guaranteed loans, often arranged by for-profit schools positioned to cash in on them, are the least likely to be repaid.

The New York Fed study reports that students at private, for-profit colleges account for nearly half of all student loan defaults, though they represent only 10 percent of total enrollment.

In a speech titled “Subprime Goes to College,” Steve Eisman, one of the few major investors to anticipate and profit from the earlier mortgage crisis, has drawn explicit parallels between loan-peddling in both realms.

In both cases, federal and state regulation was weak. Yet regulatory tools clearly work. Default rates on college loans declined sharply in the early 1990s, after federal policy makers began penalizing for-profit colleges with default rates greater than 25 percent.

More recent efforts to impose higher loan-repayment standards on colleges have run into legal obstacles.

Meanwhile, many students, like older family members who found themselves underwater on home mortgages, don’t fully understand the complex process of loan renegotiation. The new Consumer Financial Protection Bureau, a hard-won political response to the mortgage crisis, has noted that students who feel confused about the terms of their loan are particularly likely to default. The National Consumer Law Center offers a detailed policy agenda for reducing default rates.

The Obama administration has put in place an important income-based repayment system that could considerably alleviate stress for many student borrowers by limiting the amount they pay monthly to a fixed percentage of their income. Yet the details are complicated, and some students may fear the prospect of paying a larger total amount of interest if they spread their payments out over time.

Like mortgage debt, which discouraged many homeowners from either selling their homes or buying new ones, student loan debt has knock-on effects, making it harder for young people to buy cars or homes.

The reduction in major purchases by the younger generation slows economic growth and contributes to persistently high unemployment and underemployment rates that leave some college graduates with no recourse but default.

High default rates in turn, raise the cost of the loans, fueling the conservative argument that interest rates on them should be set much higher than those on loans to banks.

Of course, loans to large banks are more secure in part because they are bailed out when they get into temporary trouble. My students wish that they, too, were too big to fail.

Article source: http://economix.blogs.nytimes.com/2013/06/03/mortgaged-diplomas/?partner=rss&emc=rss

Today’s Economist: Simon Johnson: The Legacy of Timothy Geithner

Timothy F. Geithner, who is stepping down as Treasury secretary, with President Obama at the White House last week.Larry Downing/Reuters Timothy F. Geithner, who is stepping down as Treasury secretary, with President Obama at the White House last week.DESCRIPTION

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

“Too big to fail is too big to continue. The megabanks have too much power in Washington and too much weight within the financial system.” Who said this and when?

Today’s Economist

Perspectives from expert contributors.

The answer is Peggy Noonan, the prominent conservative commentator, writing recently in The Wall Street Journal.

As Timothy F. Geithner prepares to leave the Treasury Department, most assessments focus on how his policies affected the economy. But his lasting legacy may be more political, contributing to the creation of an issue that can now be seized either by the right or the left. What should be done about the too-big-to-fail category of financial institutions?

Mr. Geithner came to Treasury in the middle of a severe financial crisis, a set of problems that he helped to create and then worked hard to prevent from worsening. As president of the Federal Reserve Bank of New York, starting in 2003, he watched over – and failed to defuse – the buildup of systemic risk. In fact, the New York Fed was relatively on the side of allowing large, seemingly sophisticated financial institutions to fund themselves with more debt relative to their thin levels of equity.

This was a major conceptual mistake for which there still has not been a full accounting. In fact, blank denial continues to be the reaction from the relevant officials.

Mr. Geithner was also in the hot seat as more explicit government support for large financial institutions began in earnest in early 2008. The New York Fed brokered the sale of failing Bear Stearns to relatively healthy JPMorgan Chase, with the Fed providing substantial downside insurance to JPMorgan, against potential losses from assets they were acquiring.

Mr. Geithner also acquiesced to Jamie Dimon, the chief executive of JPMorgan Chase, allowing him to remain on the board of the New York Fed even as his bank was suddenly the recipient of very large additional subsidies (the insurance for his acquisition of Bear Stearns). This was the beginning of a deeper public realization that there had come to be too little distance between some parts of the Federal Reserve and the big banks.

For some senior officials within the Federal Reserve System, the appearance of this potential conflict of interest was a cause for grave concern. Unfortunately, their concerns were ignored by the New York Fed and by leadership at the Board of Governors in Washington. The result has been damage to the Fed’s reputation and an unnecessary slip toward undermining its political independence.

From March 2008, when Bear Stearns almost failed, through September 2008, very little was done to reduce the level of risk in the financial system. Again, Mr. Geithner must bear some responsibility.

In fall 2008, Mr. Geithner worked closely with Henry Paulson – Treasury secretary at the time – in an attempt to prevent the problems at Lehman Brothers from spreading. They were unsuccessful, in fairly spectacular fashion. The failure to anticipate the difficulties at American International Group must stand out as one of the biggest lapses ever of financial intelligence – again, a responsibility in part of the New York Fed (although surely other government officials share some blame).

As the problems escalated, Mr. Geithner came to stand for providing large amounts of unconditional support for very big banks – including Citigroup, where Robert Rubin, his mentor, had overseen the dubious hiring of a chief executive and more general mismanagement of risk. (While a director of Citigroup, Mr. Rubin denied responsibility for what went wrong.)

Rather than moving to change management, directors or anything about the big banks’ practices, Mr. Geithner favored more financial assistance – both from the budget (through various versions of the Troubled Asset Relief Program), from the Federal Reserve (through various kinds of cheap loans) and from all other available means, including insurance for private debt issues provided by the Federal Deposit Insurance Corporation.

In official discussions, Mr. Geithner consistently stood for more support with weaker (or no) conditions. (See “Bull by the Horns,” by Sheila Bair, former chairwoman of the F.D.I.C., for the most credible account of what happened.)

Mr. Geithner’s appointment as Treasury secretary in January 2009 allowed him to continue to scale up these efforts.

In retrospect, what helped stem the panic was the joint statement of Feb. 23, 2009, issued by the Treasury, the F.D.I.C., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve, that included this statement of principle:

The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.

Mr. Geithner is often given credit for pushing bank stress tests in spring 2009 as a way to back up this statement, so officials could assess the extent to which particular financial institutions needed more loss-absorbing equity. But such stress tests are standard practice in any financial crisis.

Much less standard is unconditional government support for troubled banks. Usually such banks are “cleaned up” as a condition of official assistance, either by being forced to make management changes or being forced to deal with their bad assets. (This was the approach favored by Ms. Bair when she was at the F.D.I.C.; her book lays out realistic alternatives that were on the table at critical moments. The idea that there was no alternative to Mr. Geithner’s approach simply does not hold water.)

Any fiscally solvent government can stand behind its banks, but providing such guarantees is a recipe for repeated trouble. When Mr. Geithner was at Treasury in the 1990s and Mr. Rubin was Treasury secretary, the advice conveyed to troubled Asian countries – both directly and through American influence at the International Monetary Fund – was quite different: clean up the banks and rein in the powerful people who overborrowed and brought the corporate sector to the brink of financial meltdown.

In Mr. Geithner’s view of the world, the 2010 Dodd-Frank financial reform legislation fixed the problem of too-big-to-fail banks. Outside of Treasury, it’s hard to find informed observers who share this position. Both Daniel Tarullo (the lead Fed governor for financial regulation) and William Dudley (the current president of the New York Fed) said in recent speeches that the problems of distorted incentives associated with too big to fail were unfortunately alive and well.

Ironically, despite the fact that the Obama administration failed to rein in the megabanks and allowed them to become larger and arguably more powerful, this has not helped the Republicans in electoral terms.

As Ms. Noonan puts it bluntly: “People think the G.O.P. is for the bankers. The G.O.P. should upend this assumption.”

This is a significant opportunity for anyone with clear thinking on the right – someone looking for a Teddy Roosevelt trustbusting or Nixon-goes-to-China moment. Again, Ms. Noonan gets it right: “In this case good policy is good politics. If you are a conservative you’re supposed to be for just treatment of the individual over the demands of concentrated elites.”

Recall that some grass roots conservatives are already there: House Republicans initially voted down TARP, the former presidential candidate Jon Huntsman’s plan to end too big to fail received widespread applause from many Republicans and a number of influential commentators, including George Will and Ms. Noonan, have advocated ending too big to fail.

This would play well in the Republican presidential primaries – and even better in the general election. Watch PBS “Frontline” on Jan. 22 for an articulate presentation of why serious potential financial crimes were not prosecuted during the first Obama administration, and think about how to turn these facts into political messages.

A smart candidate could even mobilize plenty of financial-sector support in favor of breaking up or otherwise restricting the too-big-to-fail financial entities. The megabanks have very few genuine friends.

The lasting legacy of Timothy Geithner is to create the perfect electoral issue for Republicans. Will they seize it?

Article source: http://economix.blogs.nytimes.com/2013/01/17/the-legacy-of-timothy-geithner/?partner=rss&emc=rss

Germany to Move 674 Tons of Gold

Except, many people learned for the first time last year, it didn’t.

More than two-thirds of Germany’s gold reserves, valued at €137 billion, or $182 billion, is abroad, stored in vaults in Paris, London and above all New York. In fact, there is considerably more German gold in Manhattan than in Frankfurt.

On Wednesday, the German central bank said it would begin gradually repatriating some of the reserves, the second-largest stock in the world, after that of the United States. The Bundesbank was responding to a public outcry last year after a clash in Parliament about whether all the gold was properly accounted for.

The goal is to house more than 50 percent of German gold in Bundesbank vaults in Frankfurt by 2020, up from a little less than a third today, the bank said. About 45 percent of the reserves are 80 feet, or 24 meters, below street level in a vault at the Federal Reserve Bank of New York.

The move will include complete withdrawal of German gold stored at the Banque de France in Paris, about 11 percent of the total. Bundesbank officials were anxious to note that the decision was not a reflection of French trustworthiness. Rather, it is because France and Germany now share the euro, so there is no need for reserves as insurance against currency crises.

“The gold in Paris is in the best of hands,” Carl-Ludwig Thiele, a member of the Bundesbank executive board, said Wednesday. “We are thankful to the Bank of France for storing it.”

Still, news of the planned transfer caused some tongue-clucking in financial circles after news leaked out Tuesday. “Central banks don’t trust each other?” William H. Gross, a founder and managing director of the investment firm Pimco, asked on Twitter.

Mr. Thiele denied there was any mistrust. “We have no doubts about the integrity of other central banks,” he said. “We’re not aware of any irregularities.”

Moving the 300 tons of gold from New York and 374 tons from Paris is likely to be a logistical and security challenge, and there were questions from some German reporters about whether the transfer made financial sense. Citing security reasons, Mr. Thiele refused to say how the transfer would be accomplished or estimate the cost. But he said the Bundesbank had plenty of experience moving around large sums of money.

The presence of so much German gold abroad is a reflection of postwar German and geopolitical history.

After the end of World War II, vanquished Germany had no gold reserves. The Nazis used most of it to finance the war, and much of what was left vanished mysteriously in the postwar chaos.

But as its economy recovered and Germany became the export powerhouse it is today, the country accepted gold as well as dollars from the central banks of its trading partners to cover the financial imbalance created by German trade surpluses.

During the Cold War, West Germany followed a policy of storing its gold as far west as possible in case of a Soviet invasion. While that worry is gone, there is still an argument for keeping some gold in major financial centers like New York and London.

Gold remains the one currency that is accepted everywhere. If there were ever a currency crisis, the gold could be quickly deployed in financial markets to help restore confidence.

German reserves peaked in 1968 at about 4,000 tons, several years before the collapse of the so-called Bretton Woods system of fixed international exchange rates, which was underpinned by gold reserves. The end of Bretton Woods in 1973 eliminated some though not all of gold’s importance as a universal currency. The total has fallen to about 3,400 tons, after Germany transferred some of its treasure to international institutions in which it participates, including the European Central Bank and the International Monetary Fund.

Mr. Thiele acknowledged that Germans could get emotional about their gold, but he insisted that the Bundesbank made its decision to repatriate the treasure independently, and not because of a public outcry last year that followed reports suggesting the gold was not properly accounted for.

In a report to Parliament, the government auditing agency, the Bundesrechnungshof, called on Bundesbank officials to conduct an inventory of the thousands of bars of German gold that are stacked in foreign vaults.

Mr. Thiele said that he and other Bundesbank officials personally visited the German gold abroad, and was satisfied that it was all there.

At a packed press conference attended by armed security guards, Bundesbank officials demonstrated how they test the bars for quality and authenticity. No two bars have exactly the same weight and purity, so each must be assessed separately.

Even after Germany completes the transfer at the end of 2020, half of its gold will remain abroad — about 37 percent in New York. The Bundesbank does not plan to move any gold out of the Bank of England, which will continue to store 13 percent of the total.

The New York Fed stores the German gold without cost on the theory that the presence of foreign gold supports the dollar’s status as the global reserve currency. A spokesman for the New York Fed declined to comment.

The Bank of England, by contrast, charges about €550,000 a year for storage, Bundesbank officials said.

Despite the public criticism, the Bundesbank has not let go of its gold easily. It has continually rejected periodic attempts by political leaders to convert the reserves to cash, and has not sold any gold on world markets.

The central bank has, however, sold some of its holding to the public — in the form of commemorative deutsche marks.

Article source: http://www.nytimes.com/2013/01/17/business/global/german-central-bank-to-repatriate-gold-reserves.html?partner=rss&emc=rss

Economix Blog: Another Asterisk for Asset Purchases

Federal Reserve officials have complained for years that the rest of the government is impeding the effectiveness of monetary policy. The Fed keeps making it cheaper to borrow, but the nation’s favorite kind of borrowing is the mortgage loan, and the mortgage market — well, let’s just say it’s a little broken.

In the latest variation on this important theme, researchers at the Federal Reserve Bank of New York presented evidence in a recent paper that a government policy aimed at helping underwater borrowers also is helping lenders pad profits, reducing the benefits for borrowers — and the economy.

Notwithstanding such frustrations, the Fed’s policy-making committee is expected to announce Wednesday afternoon that it will keep buying Treasury securities and mortgage-backed securities to stimulate the economy.

There is ample evidence that asset purchases work, at least a little. The new Fed study simply adds to the list of reasons that it does not work better.

The federal government encourages mortgage companies to refinance borrowers whose debts exceed 80 percent of the value of their homes by instructing Fannie Mae and Freddie Mac to buy the new loans and to relax some of their usual conditions and safeguards. But the Home Affordable Refinance Program offers those terms only to the company controlling the original loan.

This unique financial advantage means lenders can charge higher interest rates while still underpricing potential competitors. The Fed study calculates that average rates are about 0.5 percentage points higher than on comparable loans.

That’s a problem for two reasons. First, it limits the number of people who can benefit from refinancing. Second, it means borrowers are saving less money. Instead, banks are booking larger profits — and much of the money either leaves the country or sits on balance sheets, waiting for brighter days. Borrowers, by contrast, are much more likely to take their savings and spend it.

The Fed announced in September that it would expand its holdings of mortgage-backed securities by about $40 billion a month until the outlook for the job market showed “sustained improvement.” The purchases are akin to removing multiple seats from a game of musical chairs. Other buyers are forced to accept lower interest rates — that is, they are forced to pay upfront a larger share of the money they are entitled to receive as the bond matures.

That reduces interest rates for borrowers, too. Borrowers pay higher rates to lenders than lenders pay to investors. That’s how lenders make money. But as investors charge less, lenders also can charge less without sacrificing profit.

The average rates that lenders charge borrowers, however, have fallen by less than the average interest rates that investors demand from lenders. Over the last decade, the median difference was about 0.4 percentage point, according to Bloomberg News. It now stands at more than 1.2 percentage points.

In other words, as my colleague Peter Eavis wrote in August, the Fed’s campaign is helping lenders much more than it’s helping borrowers.

That 3.55 percent rate for a 30-year mortgage could be closer to 3.05 percent if banks were satisfied with the profit margins of just a few years ago. The lower rate would save a borrower about $30,000 in interest payments over the life of a $300,000 mortgage.

The question is why: If profit margins have grown so fat, why aren’t some lenders trying to win business by offering lower prices? One popular theory is that the financial crisis decimated the ranks of lenders, but the New York Fed calculates that competition actually has increased over the last year. Another theory is that lenders lack the capacity to meet demand for loans, so they have little incentive to compete by cutting prices. The study discounts that explanation, too.

Instead, the study suggests that many borrowers do not benefit from competition because companies will make loans only with government subsidies, and the government is offering to subsidize only one lender for each borrower.

In addition to the evidence that companies are charging higher interest rates on HARP loans, the study found evidence of similar pricing in a companion program for people who owe less than 80 percent of a home’s value.

Notwithstanding these frustrations, the Fed is likely to persist in its efforts because officials remain convinced that buying mortgage bonds is the best way to reduce mortgage rates, and reducing mortgage rates is the best way to help the economy.

As William C. Dudley, the New York Fed president, put it in a recent, typically understated summation, “our policy has been and continues to be effective — though it is certainly not all-powerful in current circumstances.”

Article source: http://economix.blogs.nytimes.com/2012/12/12/another-asterisk-for-asset-purchases/?partner=rss&emc=rss

DealBook: House Report Details Collapse of MF Global

Jon Corzine, the former chief of MF Global, at a House panel in 2011.Alex Wong/Getty ImagesJon Corzine, the former chief of MF Global, at a House panel in 2011.

2:52 p.m. | Updated

WASHINGTON – Congressional Republicans on Thursday delivered a long-awaited “autopsy” report on MF Global, sharply criticizing regulators for failing to share information as the brokerage firm was reeling.

The 100-page report, from Republican members of the House Financial Services Committee’s oversight panel, describes a “disorganized and haphazard” approach to regulatory oversight in the week before MF Global collapsed in 2011. The Commodity Futures Trading Commission and the Securities and Exchange Commission, according to the report, failed to coordinate as the firm was on the brink.

Two days before the collapse of the firm, top S.E.C. officials joked about three conference calls among regulators being scheduled for 10 a.m. “Ahhhh, coordination in action!” Mary L. Schapiro, chairwoman of the S.E.C., wrote in an e-mail to Robert W. Cook, the agency’s head of trading and markets.

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In the final hours before bankruptcy, the report said, MF Global officials said the futures commission “pressured” the firm to transfer $220 million to plug a hole in customer accounts. It did so over the objections of the S.E.C. and other regulators. When Ms. Schapiro learned of the futures commission’s orders, she responded in an e-mail to a colleague, “Without telling us? That is unacceptable.”

The e-mails underscored the breakdown in communication among federal officials that, according to the report, contributed to the firm’s demise. The report also took aim at the Federal Reserve Bank of New York, saying it “should have exercised greater caution” when approving MF Global’s application for the coveted status of selling securities on the Fed’s behalf.

Lawmakers suggested that investors and customers would have been better served if the S.E.C. and the futures commission streamlined their operations or combined into a single agency that oversaw all capital markets, citing “an apparent inability” of the regulators to coordinate their actions.

Mary Schapiro, chairwoman of the Securities and Exchange Commission, and Gary Gensler, chairman of the Commodity Futures Trading Commission, at a House panel in June.Daniel Rosenbaum for The New York TimesMary L. Schapiro, chairwoman of the Securities and Exchange Commission, and Gary Gensler, chairman of the Commodity Futures Trading Commission, before a House panel in June.

“We didn’t need additional regulation. We needed regulators actually doing their job,” Representative Randy Neugebauer, a Republican from Texas who led the investigation as chairman of the oversight panel, said at a news conference on Thursday.

Futures commission officials declined to comment. John Nester, a spokesman for the S.E.C., said his agency would review the panel’s findings. He added that the report did not mention the S.E.C.’s having informed the C.F.T.C. about capital charges imposed on MF Global in August.

The report, a sort of public shaming of MF Global’s employees and federal watchdogs, further traced the debacle to the firm’s top executives. Republicans placed blame on the former chief executive, Jon S. Corzine, who they say ratcheted up a bet on European debt without regard for internal controls or the danger to clients. The report also argued that the firm was not “forthright with regulators or the public” about the massive trade and its broader health.

Republicans released the report months later than anticipated and without the support of House Democrats.

Some dissent was sowed in Congressional hearings that at times featured political bickering among members. On Wednesday, the oversight panel’s top Democrat, Representative Michael Capuano of Massachusetts, declined to endorse Mr. Neugebauer’s findings, saying he agreed with a number of the conclusions but needed additional time to review the document. He said he would soon file an addendum to the report.

For the targets of the report, the splintered support provides a path to undermining the findings. Democratic regulators and Mr. Corzine, a former Democratic senator from New Jersey, could dismiss the investigation as a partisan attack.

House Republicans, however, say the examination relied on an exhaustive review of evidence rather than political motivations.

The report, the outgrowth of several Congressional hearings with MF Global’s executives and other officials, is the culmination of a yearlong investigation that sought to chronicle the firm’s undoing and rebuke those at fault. The House panel cobbled together its findings from dozens of interviews with former employees and more than 240,000 documents.

While short on revelations, the document is the most significant Congressional effort yet to seek redress for MF Global’s errors.

Criminal authorities investigating MF Global’s collapse are leery of filing charges against the top executives, suspecting that chaos and lax controls resulted in customer money going missing. And while regulators are still pursuing civil enforcement actions, in which the legal bar is lower, officials have not yet decided a course.

Even after a year of overlapping investigations, MF Global’s customers remain in the lurch. Farmers and ranchers, who traded futures contracts through MF Global to protect themselves from the price swings of their crops, have recovered about 82 percent of their money but are still owed millions of dollars.

James W. Giddens, the court-appointed trustee seeking to recover money for MF Global’s customers, has joined a lawsuit against several top MF Global executives, including Mr. Corzine, to make up for the missing funds.

In a report that largely tracks the findings issued by Congressional Republicans, Mr. Giddens criticized MF Global employees for tapping customer money to pay the firm’s own bills in a last-ditch bid for survival.

Article source: http://dealbook.nytimes.com/2012/11/15/house-report-details-collapse-of-mf-global/?partner=rss&emc=rss

DealBook: A Reprieve for New York Fed in Libor Case

Representative Randy Neugebauer, left, leads the oversight panel of the House Financial Services Committee.Luke Sharrett for The New York TimesRepresentative Randy Neugebauer, left, leads the oversight panel of the House Financial Services Committee.

5:06 p.m. | Updated

Congress has eased demands that the Federal Reserve Bank of New York turn over thousands of documents that detail interest rate manipulation at big banks, whittling down the request and granting the regulator more time.

The reprieve will afford the New York Fed an additional month to comply, according to people briefed on the matter. The agency had been under pressure to meet a deadline on Saturday.

The original request for documents came in July, when the oversight panel of the House Financial Services Committee sought volumes of records about the London interbank offered rate, or Libor, which affects the cost of trillions of dollars in mortgages and other loans. The interest rate is at the center of an investigation that has ensnared more than a dozen banks.

In a letter in July, the oversight panel asked the New York Fed to detail its correspondence with employees from the banks that help set Libor. The oversight panel, led by Representative Randy Neugebauer, Republican of Texas, also ordered the New York Fed to turn over its internal Libor-related documents and any communication with other government authorities.

In addition to the one-month extension, the subcommittee is narrowing the scope of its request. Lawmakers are now seeking communications among government authorities and documents circulated internally at the New York Fed, the people briefed on the matter said.

Libor Explained

By steering clear of e-mails from bankers, the Congressional inquiry could avoid complicating a wide-ranging criminal investigation. Once the initial documents are received, Congress may still ramp up its request to include some information from the banks, one of the people briefed on the matter said.

The New York Fed already produced reams of transcripts this summer related to phone calls officials had with Barclays employees. Barclays was the first bank to settle accusations that it tried to manipulate Libor for its own benefit. It reached a $450 million settlement with the Justice Department as well as regulators in the United States and Britain.

Regulators and criminal authorities around the world are investigating more than a dozen other big banks, including HSBC and Deutsche Bank, in the manipulation of Libor, a measure of how much banks charge one another for loans. Banks are suspected of reporting false rates during the financial crisis to bolster profits and shore up their image.

The scandal has consumed the banking industry and called into question the New York Fed’s oversight powers. In the case of Barclays, the New York Fed learned in 2008 that the British bank had been submitting false rates.

During the crisis, when high borrowing costs were a sign of poor financial health, banks were artificially depressing the rates to project a stronger image.

Rather than push for a civil or criminal crackdown, the New York Fed advocated policy changes to the rate-setting process, some of which were adopted. But with the crisis in full swing, the New York Fed moved on to more pressing concerns, and Barclays continued to submit false rates.

The regulator’s approach has drawn sharp scrutiny from the oversight panel.

“As you know, the role of government is to ensure that our markets are run with the highest standards of honesty, integrity and transparency,” Mr. Neugebauer wrote in a letter to the New York Fed dated July 23. “Therefore, any admission of market manipulation — regardless of the degree — should be swiftly and vigorously investigated.”

This post has been revised to reflect the following correction:

Correction: August 29, 2012

An earlier version of a caption accompanying this article misstated the role of Representative Randy Neugebauer. He leads the oversight panel of the House Financial Services Committee, not the committee itself.

Article source: http://dealbook.nytimes.com/2012/08/29/new-york-fed-receives-reprieve-on-libor-request/?partner=rss&emc=rss

DealBook: Congress Presses New York Fed for More Details on Rate-Rigging Scandal

Representative Randy Neugebauer, the chairman of the House Financial Services Subcommittee, wrote a letter  to the New York Fed on Monday.Jay Mallin/Bloomberg NewsRepresentative Randy Neugebauer, the chairman of the House Financial Services Subcommittee, wrote a letter  to the New York Fed on Monday.

Congress widened its inquiry into the interest-rate manipulation scandal, pressing the Federal Reserve Bank of New York to further disclose its knowledge of the multiyear scheme.

On Monday, the oversight panel of the House Financial Services Committee sent a letter to the New York Fed seeking volumes of records about the London interbank offer rate, or Libor, a measure of how much banks charge each other for loans. Lawmakers are demanding that the New York Fed detail its communications with employees from all 16 banks that help set the interest rate, which affects the trillions of dollars in mortgages and other loans.

The letter follows an Congressional request that the New York Fed turn over transcripts from phone calls its officials had with just one bank: Barclays.

In June, the British bank became the first to settle accusations that it tried to manipulate Libor for its own benefit. Authorities around the globe are investigating more than 10 other big banks for their role in rigging the interest rate.

The initial transcripts released this month showed that the New York Fed learned about wrongdoing at Barclays in 2008. That revelation called into question whether the New York Fed pursued the matter fully.

Libor Explained

“We know that we’re not posting um, an honest” rate, a Barclays employee told a New York Fed official in April 2008, according to transcripts. At the time, because high borrowing costs were a sign of poor health, banks were submitting artificially low rates to project a better image of their finances.

The transcript, among other documents, only fed the firestorm over what regulators might have known about the rate-rigging scandal. The New York Fed and other authorities are under scrutiny for failing to thwart the illegal activities that, at Barclays, continued to 2009.

“There are still many outstanding questions that merit further investigation,” Representative Randy Neugebauer, the chairman of the House Financial Services Subcommittee on Oversight and Investigations, wrote in the letter on Monday.

The latest request is likely to produce reams of memos and e-mails. The subcommittee is demanding “all communications and documents” between the New York Fed and the 16 banks over a five-year span, from 2007 to 2012. The New York Fed, which has until Sept. 1 to provide the documents, must also turn over its internal documents and any correspondence with authorities in the United States and abroad.

The New York Fed has defended its actions, saying it briefed regulators about the broad problems with Libor.

But lawmakers have questioned why the New York Fed, despite its awareness of misconduct at Barclays, did not refer the illegal acts to regulators or the Justice Department. Instead, the New York Fed circulated in June 2008 a plan to fix Libor, producing a six-point plan to revamp the rate-setting process.

“As you know, the role of government is to ensure that our markets are run with the highest standards of honesty, integrity and transparency,” Mr. Neugebauer wrote. “Therefore, any admission of market manipulation — regardless of the degree — should be swiftly and vigorously investigated.”

Article source: http://dealbook.nytimes.com/2012/07/23/congress-presses-new-york-fed-for-more-details-on-rate-rigging-scandal/?partner=rss&emc=rss

DealBook: New York Fed Was Aware of False Reporting on Rates

9:27 p.m. | Updated

The Federal Reserve Bank of New York learned in April 2008, as the financial crisis was brewing, that at least one bank was reporting false interest rates.

At the time, a Barclays employee told a New York Fed official that “we know that we’re not posting um, an honest” rate, according to documents released by the regulator on Friday. The employee indicated that other big banks made similarly bogus reports, saying that the British institution wanted to “fit in with the rest of the crowd.”

Although the New York Fed conferred with Britain and American regulators about the problems and recommended reforms, it failed to stop the illegal activity, which persisted through 2009.

British regulators have said that they did not have explicit proof then of wrongdoing by banks. But the Fed’s documents, which were released at the request of lawmakers, appear to undermine those claims.

The revelations fuel concerns that regulators are ill-equipped to police big banks and that financial institutions can game the system for their own purposes.

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Even after authorities have beefed up oversight and lawmakers have enacted new rules, blowups on Wall Street continue to occur with some regularity. Amid the rate-manipulation scandal, regulators are also dealing with the fallout from the multibillion-dollar trading losses at JP Morgan Chase and the collapse of a second brokerage firm, just months after the failure of MF Global.

“I wish I could say I’m shocked, because it is shocking,” said Frank Partnoy, the George E. Barrett professor of law and finance at the University of San Diego School of Law. “But regulators have not been particularly effective or aggressive in the past two decades of finance.”

Regulators are now expanding their global investigation into the manipulation of key interest rates, a multiyear inquiry that has already examined more than 10 big banks, including UBS, JPMorgan Chase andCitigroup. In June, Barclays agreed to pay $450 million to settle claims that it reported bogus rates to deflect concerns about its health and bolster profits.

The Barclays case is the first major action stemming from the inquiry into how big banks set major benchmarks like the London interbank offered rate, known as Libor. The rate is essentially how much interest banks would pay to borrow money on a short-term basis from other financial firms, a process that is overseen by the British Bankers’ Association, an industry trade group. Such benchmarks are used to determine the price of trillions of dollars of financial products, including mortgages and credit cards.

Since the Barclays settlement, lawmakers have focused their attention on regulators’ role in the rate-manipulation controversy.

“As much as $800 trillion in financial products are pegged to Libor, so any manipulation of this rate is of serious concern,” said Representative Randy Neugebauer, the chairman of the House Financial Services Subcommittee on Oversight and Investigations, which initially requested the documents from the New York Fed. “We’ll continue looking into this matter to determine who was involved in this practice and whether it could have been prevented by regulators.”

I'm pleased that the New York Fed responded to my request in a timely and transparent fashion, Representative Randy Neugebauer said.Andrew Harrer/Bloomberg News“I’m pleased that the New York Fed responded to my request in a timely and transparent fashion,” Representative Randy Neugebauer said.

Timothy F. Geithner, who served as the head of the New York Fed during the crisis years, and other regulators raised concerns about Libor. But they did not stop the problems. As the regulators sought more information about the rate-setting process, they were consumed with trying to save the global financial system after the near collapse of Bear Stearns in 2008 and the failure of Lehman Brothers later that year.

Mr. Geithner, who is now the Treasury secretary, will most likely address the matter in Congressional testimony this month. The New York Fed has defended its actions.

“Following the failure of Bear Stearns and shortly before the first media report on the subject, we made further inquiry of Barclays as to how Libor submissions were being conducted,” the New York Fed said in a statement. “We subsequently shared analysis and suggestions for reform of Libor.”

The New York Fed learned about concerns over the integrity of Libor in summer 2007, when a Barclays employee e-mailed a New York Fed official, saying, “Draw your own conclusions about why people are going for unrealistically low” rates. Barclays wrote in a September report, “Our feeling is that Libors are again becoming rather unrealistic and do not reflect the true cost of borrowing.”

But the New York Fed thought the reports amounted to market chatter and did not provide definitive proof of widespread manipulation. “In the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and e-mails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor,” the New York Fed statement said.

The regulator started to identify real problems with the interest rates several months later. In April 2008, the Barclays employee mentioned to a New York Fed official, “where I would be able to borrow” in the Libor market, “without question it would be higher than the rate that I’m actually putting in.”

That same day, New York Fed officials wrote in a weekly internal memo that banks appeared to be understating the interest rates they would pay.

“Our contacts at Libor contributing banks have indicated a tendency to underreport actual borrowing costs,” New York Fed officials wrote, “to limit the potential for speculation about the institutions’ liquidity problems.”

After the April 2008 conversation, the New York Fed started notifying other American regulators, including the Treasury Department. Mr. Geithner reached out to British authorities as well, notably Mervyn King, the governor of theBank of England, and his deputy, Paul Tucker. Mr. Geithner suggested British authorities should “eliminate incentive to misreport.”

In response, Mr. King passed on the recommendations to the British Bankers’ Association , according to documents released by the Bank of England Friday. Mr. Tucker also arranged to talk toWilliam C. Dudley, the current president of the Federal Reserve Bank of New York, who was then executive vice president of the regulator’s markets group.

Angela Knight, the chief executive of the British Bankers’ Association, who is stepping down at the end of the summer, said the suggestions from United States authorities would be included in a review of Libor. The trade body published its initial findings days after receiving Mr. Geithner’s recommendations.

But regulators never addressed the fundamental problems with the rate-setting process. When the New York Fed raised concerns in 2008, Barclays has been trying to manipulate the interest rate for nearly three years, and the practice continued until 2009.

Mark Scott contributed reporting

Article source: http://dealbook.nytimes.com/2012/07/13/barclays-informed-new-york-fed-of-problems-with-libor-in-2007/?partner=rss&emc=rss