March 29, 2020

Fair Game: The Housing Market Is Still Missing a Backbone

Mr. Obama vowed to keep mortgage costs affordable for first-time home buyers and working families, pleasing those who think that the government should have a large role in this arena. His call for investment in rental housing was a welcome change from past mantras that focused solely on increasing homeownership across the country.

Playing to taxpayers who are angered by the government’s takeover of Fannie Mae and Freddie Mac in 2008, Mr. Obama said he wanted to wind these companies down. That’s an important goal.

But as if to prove how hard this will be, both companies later in the week announced enormous profits for the second quarter of this year, most of which go to the government in the form of dividends. Together, the companies reported $15 billion in profits; with Treasury on the receiving end of this lush income stream, it will be tempting to keep the mortgage finance giants in business.

Yet with the government backing or financing nine out of 10 residential mortgages today, it is crucial to lure back private capital, with no government guarantees, to the home loan market. Mr. Obama contended that “private lending should be the backbone” of the market, but he provided no specifics on how to make that happen.

This is a huge, complex problem. In fact, there are many reasons for the reluctance of banks and private investors to fund residential mortgages without government backing.

For starters, banks have grown accustomed to earning fees for making mortgages that they sell to Fannie and Freddie. Generating fee income while placing the long-term credit or interest rate risk on the government’s balance sheet is a win-win for the banks.

A coming shift by the Federal Reserve in its quantitative easing program may also be curbing banks’ appetite for mortgage loans they keep on their own books. These institutions are hesitant to make 30-year, fixed-rate loans before the Fed shifts its stance and rates climb. For a bank, the value of such loans falls when rates rise. This process has already begun — rates on 30-year fixed-rate mortgages were 4.4 percent last week, up from 3.35 percent in early May. This is painful for banks that actually hold older, lower-rate mortgages.

Private investors, like mutual funds and pension managers, aren’t hurrying back to the residential mortgage market, either. Deep flaws remain in the mortgage securitization machine, and it needs to be retooled before investors will begin buying these securities again.

Perhaps the largest problem for investors who might otherwise be willing to return to the mortgage market is the lack of transparency in privately issued securities. Investors interested in mortgage instruments are not allowed to analyze the loans going into these pools before they buy them.

The banks putting together the deals typically provide some data, like borrowers’ incomes and credit scores, as well as whether the loans backed primary residences or second homes. But investors don’t get access to actual loan files that can tell them what they need to know about the quality and types of the mortgages packed inside the deals.

A CIVIL case filed by the Justice Department last week against Bank of America highlights the downside of nondisclosure. In that matter, prosecutors accused the bank of misleading investors when it sold them a mortgage security in early 2008. Although the bank contended in marketing materials that the security contained prime loans that met its underwriting standards, more than 40 percent of those loans did not comply with those standards, prosecutors said.

Lawrence Grayson, a Bank of America spokesman, said the bank was fighting the case.

“These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that,” he said in a statement last week.

But the Justice Department contends that the bank failed to disclose important facts to investors about the quality of the mortgages in the $850 million pool, which wound up performing badly. As of June 2013, prosecutors said, 15.4 percent of those mortgages had defaulted, indicating that they were of a far lower quality than advertised. The Justice Department estimates that investors will lose more than $100 million on the deal.

Then there’s another issue. Investors are also unlikely to take an interest in mortgage securities because serious conflicts of interest are still embedded in the process.

For example, in the aftermath of the crisis, investors learned that they could not rely on the trustee banks charged with overseeing these loan pools to do their jobs. The trustees are supposed to make sure that firms administering the loans treat investors fairly. These duties include taking in and distributing payments as well as foreclosing on borrowers.

Even though the trustees are supposed to work for investors, these watchdogs are actually hired by the big banks that not only package the mortgage securities but also provide administrative services for them. So it was perhaps not surprising that the trustees failed to make the big banks buy back loans that didn’t meet the quality standards set out when the securities were originally sold. Such buybacks could have prevented billions in losses for investors, and the trustees’ inaction indicated where their allegiances lay.

Yet another reason for investors around the country to steer clear of mortgage securities is the recent action by Richmond, Calif., to seize underwater home loans and reduce the amount of debt outstanding on the properties. Many of the loans that the city officials want to restructure are held by mutual funds and pensions.

Pimco and BlackRock, two huge mortgage investors, are among those represented in a lawsuit filed last week against Richmond, contending that such a plan would violate the contracts that investors agreed to when they purchased the loans. And the Federal Housing Finance Agency, the overseer of Fannie and Freddie, has concluded that Richmond’s action could threaten the safety and soundness of the companies’ operations, harming taxpayers.

Mr. Obama’s views on the path forward for housing finance are welcome. But much work needs to be done before private capital will come back to this market. Eliminating conflicts of interest and increasing transparency in the securitization process will go a long way to achieving that end.

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Europeans Planted Seeds of Crisis in Cyprus

But the path that led to Cyprus’s current crisis — big banks bereft of money, a government in disarray and citizens filled with angry despair — leads back, at least in part, to a fateful decision made 17 months ago by the same guardians of financial discipline that now demand that Cyprus shape up.

That decision, like the onerous bailout package for Cyprus announced early Monday, was sealed in Brussels in secretive emergency sessions in the dead of night in late October 2011. That was when the European Union, then struggling to contain a debt crisis in Greece, effectively planted a time bomb that would blow a big hole in Cyprus’s banking system — and set off a chain reaction of unintended and ever escalating ugly consequences

“It was 3 o’clock in the morning,” recalled Kikis Kazamias, Cyprus’s finance minister at the time. “I was not happy. Nobody was happy, but what could we do?”

He was in Brussels as European leaders and the International Monetary Fund engineered a 50 percent write-down of Greek government bonds. This meant that those holding the bonds — notably the then-cash-rich banks of the Greek-speaking Republic of Cyprus — would lose at least half the money they thought they had. Eventual losses came close to 75 percent of the bonds’ face value.

The action had an anodyne name — private-sector involvement, or P.S.I. — and, it seemed at the time, a worthy goal: forcing private investors to share some of the burden of shoring up Greece’s crumbling finances. “We Europeans showed tonight that we reached the right conclusions,” Chancellor Angela Merkel of Germany announced at the time.

For Cypriot banks, particularly Laiki Bank, at the center of the current storm, however, these conclusions foretold a disaster: Altogether, they lost more than four billion euros, a huge amount in a country with a gross domestic product of just 18 billion euros. Laiki, also known as Cyprus Popular Bank, alone took a hit of 2.3 billion euros, according to its 2011 annual report.

What happened between the overnight session in 2011 and the one that ended early Monday morning is a study of how decisions made in closed conference rooms in Brussels — often in the middle of the night and invariably couched in impenetrable jargon — help explain why the so-called European project keeps getting blindsided by a cascade of crises.

“I cannot remember that European policy makers have seen anything coming throughout the euro crisis,” said Paul de Grauwe, a professor at the London School of Economics and a former adviser at the European Commission. “The general rule is that they do not see problems coming.”

Simon O’Connor, the spokesman for the union’s economic and monetary affairs commissioner, Olli Rehn, declined to comment on whether Mr. Rehn had taken a position on the possible impact of the Greek debt write-down on Cypriot banks.

As well as hitting Cyprus over its banks’ holdings of Greek bonds, the European Union also abruptly raised the amount of capital all European banks needed to hold in order to be considered solvent. This move, too, had good intentions — making sure that banks had a cushion to fall back on. But it helped drain confidence, the most important asset in banking.

“The bar suddenly got higher,” said Fiona Mullen, director of Sapienta Economics, a Nicosia-based consulting firm. “It was a sign of how the E.U. keeps moving the goal posts.”

Cyprus, she added, “created plenty of its own problems” and was not aided by the fact that the country’s last president, a communist who left office in February, and his central bank chief were barely on speaking terms. But decisions and perceptions formed more than 1,500 miles away in Brussels and Berlin “didn’t help and often hurt,” Ms. Mullen said.

Cyprus banks, bloated by billions of dollars from overseas, particularly from Russia, had many troubles other than Greek bonds, notably a host of unwise loans in Cyprus at the peak of a property bubble, now burst, and, critics say, to Greek companies with ties to Laiki’s former chairman, the Greek tycoon Andreas Vgenopoulos.

James Kanter contributed reporting from Brussels, and Dimitrias Bounias from Nicosia.

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Federal Reserve Transcripts Open Window on 2007 Housing Crisis

Officials decided not to cut interest rates. The Fed did not even mention housing in a statement announcing its decision. The economy was growing, and a transcript of the meeting that the Fed published on Friday shows officials were deeply skeptical that problems rooted in housing foreclosures could cause a broader crisis.

“My own bet is the financial market upset is not going to change fundamentally what’s going on in the real economy,” William Poole, president of the Federal Reserve Bank of St. Louis, told his colleagues at the meeting.

That was on a Tuesday. By Thursday, the European Central Bank was offering emergency loans to continental banks, the Fed was following suit, and an alarmed Mr. Poole had persuaded the board of the St. Louis Fed to support a reduction in the interest rate on such loans. The somnolent Fed was lurching into action.

“The market is not operating in a normal way,” the Fed chairman, Ben S. Bernanke, told colleagues on a hastily convened conference call the next morning. Mr. Bernanke, a former college professor and a student of financial crises, was typically understated as he explained that the Fed was pumping money into the financial system because private investors were fleeing. “It’s a question of market functioning, not a question of bailing anybody out,” he said. “That’s really where we are right now.”

More than five years later, the Fed continues to prop up the financial system, and the transcripts of the 2007 meetings, released after a standard five-year delay, provide fresh insight into the decisions made at the outset of its great intervention.

They show that Mr. Bernanke and his colleagues continued to wrestle with misgivings about the need for action, because at the time there was little evidence of a broader economic downturn. Several officials worried that the economy would instead overheat, causing inflation to rise. By December, as the Fed began to act with consistent force, the economy was already in recession.

Officials lacked clear information, relying on anecdotes like a reported conversation with a Wal-Mart executive who said Mexican immigrants were sending less money home. They were also limited by economic models that could not simulate the problems that seemed to be unfolding.

“This may be a situation in which you will have to resolve your ambivalence quickly,” Timothy F. Geithner, then president of the Federal Reserve Bank of New York, warned in September. “You may not be able to resolve it.”

They questioned, too, the Fed’s ability to stimulate the economy, an issue that is still at the center of the debate about its policies.

“There’s no guarantee whatsoever that this thing will do what we’re trying to do,” Donald Kohn, then the Fed’s vice chairman, said at a meeting later in August. As the Fed debated a strategy to encourage bank lending, he said, “I just think it’s worth giving it a try under the circumstances.”

But eventually, Mr. Bernanke and his colleagues concluded that they could see the future, that they did not like what they saw and that it was time to act.

“At the time of our last meeting, I held out hope that the financial turmoil would gradually ebb and the economy might escape without serious damage,” Janet L. Yellen, then president of the Federal Reserve Bank of San Francisco, said in December. “Subsequent developments have severely shaken that belief. The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real.”

The Fed’s eventual response, which it expanded significantly in 2008 and 2009, is now widely credited with preventing an even more catastrophic financial crisis and a deeper recession. It is not clear that quicker or stronger action in the fall of 2007 would have made a big difference. Critics focus instead on the Fed’s earlier failure to keep banks healthy and to prevent abusive mortgage lending, and on its later role in allowing the collapse of the investment bank Lehman Brothers.

“The outcome would have been different only if the Fed and others had reacted back in 2004, 2005, 2006” to curtail subprime mortgage lending, Mr. Poole, now a senior fellow at the libertarian Cato Institute, said on Friday in an interview on CNBC.

The transcripts show that the Fed entered 2007 still deeply complacent about the housing market. Officials knew that people were losing their homes. They knew that subprime lenders were blinking out of business with each passing week. But they did not understand the implications for the rest of the nation.

“The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained,” Mr. Bernanke said in March.

Officials said at the time that they took particular comfort in the health of the largest banks. Even as the housing market deteriorated, the Fed approved acquisitions by some of the banks with the largest exposure to subprime mortgages, like Citigroup, Bank of America and the Cleveland-based National City.

Annie Lowrey contributed reporting from Washington.

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S.& P. Raises Greek Credit Rating to B- From ‘Selective Default’

The agency said the upgrade to B-, the highest grade it has given Greece since June 2011, reflected its view that the other 16 European Union countries using the euro are determined to keep Greece in the currency union.

It also gave Greece a stable outlook, meaning it is less likely to change its rating again soon.

“The stable outlook balances our view of euro zone member states’ determination to support Greece’s euro zone membership and the Greek government’s commitment to a fiscal and structural adjustment against the economic and political challenges of doing so,” the agency said in a statement.

Greece’s finance minister welcomed the upgrade. “It’s a decision that creates a mood of optimism, but we are well aware that we still face a long uphill course ahead,” the minister, Yannis Stournaras, said. “We are not relaxing in our efforts.”

An upgrade was expected since S. P. this month had temporarily lowered Greece’s rating to the bottom of its scale — “selective default” — because the country was buying back its own debt. The agency said that because the buyback had not forced any investors to sell their bonds back — which would have constituted a default — it was raising the rating back up.

The bond buyback was successfully completed last week, and will reduce the country’s debt by about $26 billion.

The size of the upgrade suggests European leaders are seeing results in bringing Greece’s debt load under control. But the credit rating is steadily losing relevance as there are few private investors still holding Greek bonds. Greece today owes most of its debt to euro zone states, the International Monetary Fund and the European Central Bank.

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Spanish Banks Agree to Layoffs and Other Cuts to Receive Rescue Funds in Return

The most significant cuts will be made by Bankia, the giant lender whose collapse and request for 19 billion euros, or $25 billion, in additional capital last May led the Spanish government to negotiate a banking rescue of up to 100 billion euros ($130 billion) a month later.

The money approved Wednesday is part of that negotiated amount and will come from the European Stability Mechanism, the rescue fund for the euro zone.

Joaquín Almunia, the European Union’s antitrust commissioner, said the approval of the restructuring plans of the four banks — Bankia, Novagalicia Banco, Catalunya Banc and Banco de Valencia — was “a milestone.”

Although the Spanish government can tap into more of the money to help other troubled banks stay afloat, the government has said it will not need the full amount in any case.

Presenting its restructuring plan on Wednesday, Bankia said it would lay off 6,000 employees, or 28 percent of its work force, and cut its branch network by 39 percent. The bank predicted it would return to profit next year and reach earnings of 1.5 billion euros ($1.9 billion) by 2015.

Still, the Spanish government has yet to draw a line under its banking crisis. The next step is expected in December with the creation of a so-called bad bank, which the government is trying to create by teaming up with private investors as equity holders. But the valuation of the bad bank’s assets has proved to be a thorny issue because of the effect such valuations could have on other real estate assets.

Even though the future of the four rescued banks is now clearer, “our banking sector is still in the middle of a road to nowhere,” said Juan Ignacio Sanz, a professor of banking at the Esade business school in Barcelona. He noted that banks had not resumed lending, “as nobody trusts that Spain’s economy will recover in the near future.”

He added, “Everybody is just waiting to see how the bad bank can operate, whether it will have any private investors and how it will affect the Spanish real estate market.”

The government wants to limit the assets in the bad bank to 90 billion euros ($116.6 billion). Bankia said Wednesday that it was hoping to transfer bad property loans valued at 24.6 billion euros ($31.9 billion), a discount of 27.9 percent compared with their current book value.

The International Monetary Fund also highlighted the difficulties in setting up the bad bank during a correction in the housing market. In a report issued Wednesday about Spain’s finance sector, the fund said that future transactions by the bad bank could “become reference prices for the market, given low turnover in the housing market.” After a prolonged recession, the I.M.F. predicted, Spain’s economy would grow 1 percent in 2014.

Caixabank, one of Spain’s largest institutions, is set to acquire Banco de Valencia, one of the four rescued banks, for a symbolic euro. Banco de Valencia is expected to receive 4.5 billion euros ($5.8 billion) of the European bailout money approved Wednesday.

Of the four rescued banks, Banco de Valencia was the only one for which Brussels reached the conclusion that “the bank’s viability could not be restored on a stand-alone basis.” The commission, which is the executive arm of the European Union, said the other three banks had the potential to rebound once their balance sheets were cleaned. By 2017, the balance sheet of each bank will be reduced by more than 60 percent compared to 2010, the commission forecast.

The conditions set by Europe are intended to ensure that the bailout does not distort competition in the banking sector. Mr. Almunia said the restructuring plans presented by the four banks were “very serious and very demanding.”

“I very much hope that the results that we expect to obtain from these decisions will allow the taxpayers — in this case the euro area countries’ taxpayers who are also taking risks, not only the Spanish taxpayers — to get an adequate return for these efforts,” he said.

Over all, Spain’s banking industry could need as much as 59.3 billion euros ($76.8 billion) in additional capital, according to an independent banking assessment published in September by Oliver Wyman, a consulting firm. Of the 14 banks assessed by Oliver Wyman at the government’s behest, half were not in need of any emergency funds, including the three leaders: Santander, BBVA and Caixabank.

Trading of shares in Banco de Valencia and Bankia was suspended Wednesday. Bankia’s collapse in May prompted lawsuits against the former management led by Rodrigo Rato, who had previously been managing director of the I.M.F. Disgruntled shareholders, who bought shares when Bankia floated them last year, assert that the bank and its auditors produced an inaccurate listing prospectus for what was at the time one of the few successful initial public offerings in Europe.

Bankia and other banks are also facing legal action from holders of preferred shares.

Raphael Minder reported from Madrid and James Kanter from Brussels.

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DealBook: In a Switch, Investors Are Buying European Bank Bonds

Bank of Ireland raised $1.27 billion on Tuesday in its most significant bond issue in more than three years.Shawn Pogatchnik/Associated PressBank of Ireland raised $1.27 billion on Tuesday in its most significant bond issue in more than three years.

LONDON — European bank debt, once an investment pariah, is suddenly popular.

In recent weeks, money managers have been readily buying the new bonds of the region’s financial institutions, deals that just months ago would have seemed unpalatable. Bank of Ireland, which received a bailout in 2010, sold $1.3 billion of bonds on Tuesday and found strong demand. It was the largest offering by an Irish bank without a government guarantee in almost three years.

The gradual thawing of the capital markets is a good sign for the region’s banks. In the midst of the crisis, institutions, especially in troubled economies like Ireland and Portugal, have been struggling to raise money from private investors. The latest deals will help bolster banks’ capital levels and strengthen their balance sheets.

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But the bonds could leave investors exposed, especially given the precarious situation in Europe. The sovereign debt crisis continues to weigh on the economy. The financial markets remain volatile. And profit at the region’s banks is flagging.

“It’s a great time to be issuing high-yield debt but not to be investing in it,” said Robin Doumar, managing partner at the private equity firm Park Square Capital.

For now, bondholders are taking comfort in the policy makers’ response to the sovereign debt crisis.

On Thursday, the British bank Barclays sold $3 billion of 10-year bonds at 7.6 percent.Neil Hall/ReutersOn Thursday, the British bank Barclays sold $3 billion of 10-year bonds at 7.6 percent.

In late August, the European Central Bank began an unlimited bond-buying program aimed at lowering countries’ borrowing costs and breathing life into local economies. By essentially offering a blank check to help Europe’s troubled governments, policy makers calmed short-term fears that some of the region’s banks might need to be bailed out, reviving interest in the companies’ bonds.

“The biggest driver of demand has been the policy responses from the European Central Bank,” said Melissa Smith, head of European high-grade debt capital markets at JPMorgan Chase in London. “It’s provided stability as policy makers have stated their commitment to preserving the euro zone.”

With interest rates at record lows, European bank debt looks especially appealing to investors.

On Thursday, the British bank Barclays sold $3 billion of 10-year bonds at 7.6 percent. The Portuguese lender Banco Espírito Santo recently issued $958 million worth of debt at 5.9 percent.

By comparison, a 10-year Treasury is paying 1.8 percent. Germany has offered a negative yield on some of its sovereign debt maturities this year.

Even the yields on junk bonds, the risky corporate debt that pays high interest rates, are coming down as investors pile into such securities. The average yield is now just 5.8 percent, according to a Bank of America Merrill Lynch index. Historically, they have paid 10 percent or even more.

“There’s been a huge contraction,” said Robert Ellison, head of European debt capital markets for financial institutions at UBS in London.

The industry has been quick to capitalize on investors’ desperate hunt for returns. Banks in Europe have issued a combined $318 billion of unsecured debt so far this year, almost triple the amount raised by their American counterparts, according to the data provider Dealogic.

The capital markets are being discerning. This year, well-financed companies in Northern Europe, like Nordea Bank of Sweden, have been able to sell the largest lots of bonds at relatively reasonable rates. Smaller banks, particularly in Southern Europe, have had to offer investors better rates to win support for their bond deals.

Even so, it is a stark contrast from almost a year ago. With the capital markets paralyzed, the European Central Bank then had to step in to stabilize the banks, offering $1.3 trillion in short-term, low-cost loans to financial companies.

As they find renewed interest from private investors, European banks can more easily raise money, fortifying their balance sheets in case of unexpected losses. At regulators’ behest, financial institutions in the region have been increasing their capital levels.

But bond investors, in their thirst for yield, may be overlooking signs of potential trouble.

Barclays, for instance, sold a controversial type of debt, known as contingent convertible bonds. With these so-called CoCo bonds, investors can be wiped out if the bank’s capital falls below a certain threshold. While Barclays’ balance sheet is in good shape, bondholders’ willingness to accept such conditions highlights the risks in the market. Traditional bondholders can usually recoup at least some of their principal even if a company goes bankrupt.

At the same time, many European financial institutions are still in fragile shape. The Bank of Ireland, in which the Irish government still has a small stake, is struggling to divest itself of many risky loans that it made before the financial crisis. Portugal’s economy is also expected to contract 3 percent this year, which will probably depress the earnings of Banco Espírito Santo.

The question for investors is whether the reward is worth the risk.

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Markets Brush Off S&P Downgrades, Focus on Greece

LONDON (AP) — European markets responded calmly on Monday to Standard Poor’s decision to cut the credit ratings of a number of euro countries, including France.

The downgrades, which were based on concerns over Europe’s ability to handle its two-year debt crisis and the lack of economic growth, had been anticipated for weeks so the market impact was muted, especially since the U.S. is on holiday for Martin Luther King Day.

Europe will likely remain the focus of attention all week as a number of bond auctions are due and Greece tries to clinch a debt deal with its private creditors. Last October, Greece’s partners in the eurozone sanctioned a deal whereby Greece’s creditors agree to take a cut in the value of their Greek bond holdings to help lighten the country’s debt burden.

The deal with private investors, known as the Private Sector Involvement, or PSI, aims to reduce Greece’s debt by euro100 billion ($126.5 billion) by swapping private creditors’ bonds for new ones with a lower value. It is a key part of a euro130 billion international bailout, the second one for Greece.

It is expected that talks on the PSI will resume this coming week after being abandoned last Friday.

On Tuesday, representatives of Greece’s creditors — the European Union, the European Central Bank and the International Monetary Fund — will visit Greece for yet another round of inspections of its efforts at fiscal and structural reform and negotiations for the next tranche, the seventh, from the first bailout.

Without a deal with its private creditors, Greece has been told it won’t get the next tranche of money due from its first bailout.

Without that money, Greece would be unable to pay a big bond redemption in March and would face the prospect of defaulting on its debts, potentially triggering more mayhem in financial markets.

Gary Jenkins, a director of Swordfish Research, reckons the Greek debt restructuring poses more risks to the markets in the short-term than SP’s decision to strip France of its cherished triple A credit rating or to downgrade eight other euro countries, including Italy.

“The progress or otherwise of these negotiations will probably dictate how the market trades over the next few weeks,” said Jenkins.

Greece’s Prime Minister Lucas Papademos insisted in an interview with CNBC that a deal will be hammered out.

“Some further reflection is necessary on how to put all the elements together,” he said. “So as you know, there is a little pause in these discussions. But I’m confident that they will continue and we will reach an agreement that is mutually acceptable in time.”

While investors awaited developments, markets were slightly lower, trading in fairly narrow ranges.

In Europe, Germany’s DAX was 0.3 percent higher at 6,161 while the CAC-40 in France rose 0.1 percent to 3,198. The FTSE 100 index of leading British shares was down 0.1 percent at 5,623. The euro was also relatively steady, up 0.2 percent at $1.2672. ON Friday, it had fallen to a 17-month dollar low of $1.2623 as speculation swirled in the markets of SP’s downgrades.

Earlier in Asia, markets responded more negatively to the SP downgrades, which were confirmed after U.S. and European markets had closed on Friday. Asian markets had already closed by the time speculation of the downgrades emerged.

Japan’s Nikkei 225 index slid 1.4 percent to close at 8,378.36 and Hong Kong’s Hang Seng lost 1 percent at 19,021.20. South Korea’s Kospi dropped 0.9 percent to 1,859.25.

In mainland China, the Shanghai Composite Index lost 1.7 percent to 2,206.19, while the smaller Shenzhen Composite Index dropped 3.3 percent to 818.17. Almost 70 companies plunged the daily limit of 10 percent.

In the oil markets, traders are fretting over simmering tensions in the Middle East and Nigeria.

The U.S. is trying to rally global support for sanctions against Iran for its alleged efforts to develop nuclear weapons. Iran, the world’s fourth-largest oil exporter, has vowed to retaliate by shutting down the Strait of Hormuz, the passage for one-sixth of the world’s oil. That could send prices skyrocketing.

Meanwhile, a threatened strike by oil workers in Nigeria, a top oil supplier to the U.S., has further complicated the picture. The threat is in response to the government’s decision to end fuel subsidies, which more than doubled the price of gasoline in a country where most people live on less than $2 a day.

Unsurprisingly, oil prices edged higher on the combination of concerns — benchmark oil rose 63 cents to $99.33 per barrel in electronic trading on the New York Mercantile Exchange.


Pamela Sampson in Bangkok contributed to this report.

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Energy Secretary Chu Defends Solyndra Loan

Companies fail when “the bottom of the market falls out,” Dr. Chu testified before a subcommittee of the House Energy and Commerce Committee. That, he said, is what happened to the solar panel business, for two reasons that he maintained could not be foreseen.

“This company and several others got caught in a very, very bad tsunami,” he said. New plants to manufacture solar panels started up in China and elsewhere, while the market for the panels was softening because of economic troubles in Europe. Prices dropped 70 percent in two and a half years, he said.

But Republicans pursued the theme that the problem was incompetence and political influence. Clifford Stearns of Florida, chairman of the oversight and investigations subcommittee, which held the hearing, said, “it is readily apparent that senior officials in the administration put politics before the stewardship of taxpayer dollars.”

Dr. Chu said he had come into office in January 2008 trying to speed up a loan guarantee process that had been established by a 2005 law, but which had not at that point resulted in any actual loans. His goal, he said, was to create jobs in a faltering economy.

Dr. Chu also stressed that private investors had put more than half a billion dollars into Solyndra, which had a new design for lightweight solar modules.

“When it comes to the clean energy race, America faces a simple choice: compete or accept defeat,” he said. “I believe we can and must compete.”

His prepared testimony also made an indirect dig at some members of Congress. “We appreciate the support the loan programs have received from many members of Congress — including nearly 500 letters to the department — who have urged us to accelerate our efforts and to fund worthy projects in their states,” the statement said.

Mr. Stearns, though, complained that the policy was an effort to keep President Obama on a “green jobs pedestal.”

“Two of the first three deals approved under Secretary Chu’s acceleration policy have now blown up and filed for bankruptcy,” he said, referring as well to a Massachusetts energy storage company, Beacon Power. “No one has admitted any fault whatsoever, and the president and our Democrat colleagues just shrug and say, “Hey, sometimes things don’t work out.’ ”

Dr. Chu was the only witness.

The hearing has two focuses: the business judgment of the Energy Department and the White House, and the possibility of political influence. The chairman of the Energy and Commerce Committee, Fred Upton, Republican of Michigan, asked in an opening statement, “What did Secretary Chu know about the situation at Solyndra, and when did he know it, and how did he act on this information, if at all?”

The form of the question mirrors what was asked 35 years ago about President Richard Nixon’s involvement in the Watergate break-in.

“We have heard from President Obama, and even from you, Secretary Chu, that nobody had a crystal ball and no one could have predicted Solyndra’s demise,” he said. “But the truth is, the D.O.E. staff did predict this — one of the models reviewed by D.O.E. staff specifically showed that Solyndra would run out of cash in September 2011.”

And the company’s auditors said six months after the initial loan agreement was completed that Solyndra would have problems, he pointed out.

For the most part, Democrats are not defending the government’s judgment in making the loan.

But Representative John D. Dingell, also of Michigan, questioned in his opening statement the Republicans’ other contention, that the loan was rushed through because one of the investors, George Kaiser, an Oklahoma oil and gas billionaire, was a “bundler” for the Obama campaign.

“I have yet to be presented with a single piece of evidence that President Obama, Vice President Biden or any of their staffs used political pressure on D.O.E. to circumvent the normal vetting process, an assumption/presumption that my Republican colleagues continue to propagate for media attention,” he said.

Representative Joe Barton, Republican of Texas, said that political influence by Mr. Kaiser was inevitable.

“It’s the elephant in the room,” he said. “Everybody and their dog at D.O.E. knew who he was.”

Republican questioners were alternately respectful of Dr. Chu, who won a Nobel Prize in physics, and condescending.

Joe Barton of Texas praised Dr. Chu’s integrity but asked about a decision that Dr. Chu approved, to allow Solyndra to restructure its loan and take in new money, putting the government second in line for reimbursement in case of liquidation. He said the 2005 law that established the loan program that said that in case of liquidation, the government “shall be”  first in line.

“Do you understand what the word ‘shall’ means?” he asked.

Mr. Stearns asked Dr. Chu whether the White House’s appointment of an outside expert to review the loan guarantee program reflected badly on the secretary. “Doesn’t this mean, simply, it does to me, that the president has lost confidence in you, your acumen, your financial acumen?” he asked.

Dr. Chu replied, “we welcome outside eyes.”

Mr. Stearns said, “you don’t take it as a personal affront on your integrity?”

“No,” said Dr. Chu.

Speaking to reporters at the end of about five hours of statements and testimony, all parties sounded feisty. Dr. Chu said: “We really have nothing to hide; we really have nothing to be ashamed about.”

He added that the government would have to help incubate new manufacturing industries, because this played to “the U.S. technological sweet spot,” which is the development of new technologies.

Mr. Stearns was later asked if he thought Dr. Chu should be fired. “My personal opinion is I think possibly he should be reassigned,” he said.

Mr. Barton was more charitable, but darker. “I think Secretary Chu is trying to be a team player,” he said. “I think probably he is taking the heat for some decisions out of his control.”

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A Gold Rush of Subsidies in Clean Energy Search

The project is also a marvel in another, less obvious way: Taxpayers and ratepayers are providing subsidies worth almost as much as the entire $1.6 billion cost of the project. Similar subsidy packages have been given to 15 other solar- and wind-power electric plants since 2009.

The government support — which includes loan guarantees, cash grants and contracts that require electric customers to pay higher rates — largely eliminated the risk to the private investors and almost guaranteed them large profits for years to come. The beneficiaries include financial firms like Goldman Sachs and Morgan Stanley, conglomerates like General Electric, utilities like Exelon and NRG — even Google.

A great deal of attention has been focused on Solyndra, a start-up that received $528 million in federal loans to develop cutting-edge solar technology before it went bankrupt, but nearly 90 percent of the $16 billion in clean-energy loans guaranteed by the federal government since 2009 went to subsidize these lower-risk power plants, which in many cases were backed by big companies with vast resources.

When the Obama administration and Congress expanded the clean-energy incentives in 2009, a gold-rush mentality took over.

As NRG’s chief executive, David W. Crane, put it to Wall Street analysts early this year, the government’s largess was a once-in-a-generation opportunity, and “we intend to do as much of this business as we can get our hands on.” NRG, along with partners, ultimately secured $5.2 billion in federal loan guarantees plus hundreds of millions in other subsidies for four large solar projects.

“I have never seen anything that I have had to do in my 20 years in the power industry that involved less risk than these projects,” he said in a recent interview. “It is just filling the desert with panels.”

From 2007 to 2010, federal subsidies jumped to $14.7 billion from $5.1 billion, according to a recent study.

Most of the surge came from the economic stimulus bill, which was passed in 2009 and financed an Energy Department loan guarantee program and a separate Treasury Department grant program that were promoted as important in creating green jobs.

States like California sweetened the pot by offering their own tax breaks and by approving long-term power-purchase contracts that, while promoting clean energy, will also require ratepayers to pay billions of dollars more for electricity for as long as two decades. The federal loan guarantee program expired on Sept. 30. The Treasury grant program is scheduled to expire at the end of December, although the energy industry is lobbying Congress to extend it. But other subsidies will remain.

The windfall for the industry over the last three years raises questions of whether the Obama administration and state governments went too far in their support of solar and wind power projects, some of which would have been built anyway, according to the companies involved.

Obama administration officials argue that the incentives, which began on a large scale late in the Bush administration but were expanded by the stimulus legislation, make economic and environmental sense. Beyond the short-term increase in construction hiring, they say, the cleaner air and lower carbon emissions will benefit the country for decades.

“Subsidies and government support have been part of many key industries in U.S. history — railroads, oil, gas and coal, aviation,” said Damien LaVera, an Energy Department spokesman.

A Case Study

NRG’s California Valley Solar Ranch project is a case study in the banquet of government subsidies available to the owners of a renewable-energy plant.

The first subsidy is for construction. The plant is expected to cost $1.6 billion to build, with key components made by SunPower at factories in California and Asia. In late September, the Energy Department agreed to guarantee a $1.2 billion construction loan, with the Treasury Department lending the money at an exceptionally low interest rate of about 3.5 percent, compared with the 7 percent that executives said they would otherwise have had to pay.

That support alone is worth about $205 million to NRG over the life of the loan, according to an analysis performed for The New York Times by Booz Company, a strategic consulting firm that regularly performs such studies for private investors.

When construction is complete, NRG is eligible to receive a $430 million check from the Treasury Department — part of a change made in 2009 that allows clean-energy projects to receive 30 percent of their cost as a cash grant upfront instead of taking other tax breaks gradually over several years.

Californians are also making a big contribution. Under a state law passed to encourage the construction of more solar projects, NRG will not have to pay property taxes to San Luis Obispo County on its solar panels, saving it an estimated $14 million a year.

Assisted by another state law, which mandates that California utilities buy 33 percent of their power from clean-energy sources by 2020, the project’s developers struck lucrative contracts with the local utility, Pacific Gas Electric, to buy the plant’s power for 25 years.

Eric Lipton reported from Washington and Clifford Krauss from Houston.

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Solyndra’s Restructuring Was Unusual, but Illegal? Not Clear

But the hearing did not shed light on whether the arrangement violated federal law, something the Energy Department denies. In fact, much of the hearing focused on whether the subcommittee would release a six-page opinion by Energy Department lawyers arguing that the arrangement was within the legal authority of the energy secretary. House Democrats wanted the memo released, and Republicans were reluctant, arguing that they would hold a separate hearing later on the Energy Department’s memo.

In the end, the memo was released at the hearing. The memo justified the loan restructuring, including the “subordination” of the government’s interest. The memo said that the law required that at the time the loan was made, the government had to be first in line for repayment. But it said the terms could be changed later: “It is not a continuing obligation or restriction on the authority of the secretary.”

The Investigations and Oversight Subcommittee of the House Energy and Commerce Committee is looking into the decision to promise Solyndra $535 million in federal loan guarantees; the company borrowed $528 million, and declared bankruptcy in September.

Solyndra was in default on the loan by December 2010, having violated a financial requirement, according to the Energy Department’s memo, but the government did not cut off a remaining $95 million the company was promised.

This year, with the company running out of cash, the government allowed it to borrow an additional $75 million from private investors that had already invested money; as part of the transaction, the private investors were put first in line to recover money if the company was liquidated.

The arrangement is customary in commercial finance. But Gary H. Burner, the chief financial officer of the Federal Financing Bank, which made the loan, and a Treasury employee for 28 years, and Gary Grippo, who was appointed deputy assistant Treasury secretary for government financial policy by President Obama, said they had not heard of such “subordination” before.

The two officials said that it was not up to them to determine the Energy Department’s legal authority. At one point, Treasury officials suggested that the Energy Department seek a Justice Department opinion, but Energy officials said that was not necessary because the government was not forgiving interest or principal.

Energy officials say that without the injection of $75 million from private investors, the company would certainly have failed sooner. With the fresh cash, there was a possibility that the company would be viable and could repay the government. Now the company is exploring whether to restructure or liquidate.

Asked by committee Republicans why the Treasury Department did not push harder to get the Justice Department involved in interpreting the law, Mr. Grippo said, “It’s not our statute; we did not have all the facts.”

“We were identifying a question,” he said. “We weren’t answering it or drawing any conclusions.”

Two senior Democrats, Representative Diana DeGette of Colorado, the ranking minority member of the subcommittee, and Representative Henry A. Waxman of California, the ranking member of the full Energy and Commerce Committee, had asked Republicans to call Energy Department witnesses to testify on the question of whether they should have gone to the Justice Department for legal advice.

But Representative Cliff Stearns, Republican of Florida and chairman of the Subcommittee on Oversight and Investigations, replied that when the head of the Energy Department loan guarantee office, Jonathan Silver, testified a month ago,  the Democratic lawmakers had been “conspicuously mum” on the question of whether the restructuring of the loan violated the law.

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