Market Talk

Treasury Department will begin unloading its $142 billion stash of mortgage-backed securities in an “orderly wind down” beginning this month, which raises an interesting question: Will these sales shed any light on the valuations of MBS that commercial banks are still sitting on?

Banks have not been eager sellers of their inventory of troubled MBS and other non-performing real-estate loans, as bids for the stuff have generally been well below what the banks are willing to accept. And as long as FASB isn’t forcing banks to mark these securities to market, then there’s no strong incentive to sell.

But the Treasury has incentive to sell, noting in its Q&A on the wind-down that its “mission does not typically include managing a large mortgage portfolio.” At least Treasury’s willing to admit it now. The Fed hasn’t yet reached that conclusion.

As of now, Treasury plans to sell $10 billion in MBS per month until it’s all gone, but could suspend sales “if market conditions become less favorable.” Any suspensions or slow pace of sales should offer some gauge on whether bidders continue to low ball, or if Treasury — like banks — is still asking too high a price for the debt.

Treasury says it’ll post its portfolio holdings at the end of each month,  including any sales that were completed, broken down by coupon and agency here.

It’s no secret that banks are parked over a mother lode of bad loans, mainly residential and commercial mortgages, and they prefer to not publicly acknowledge (by marking to market) what those loans are really worth. That tactic has helped banks recuperate and appear healthy, but it’s a stance that’s also costing at least of few jobs, in a roundabout way.

We’re a little late to this story, but our new-found fascination with state WARN notices led us to find one from a California company called Kondaur Capital, which said about a month ago that it plans to lay off 161 workers by April 18. A little searching brought up an article last month by the accomplished Paul Muolo at National Mortgage News.

Seems Kondaur buys nonperforming loans, and finds itself needing to layoff workers because there aren’t enough bad loans available to buy.

Come again? Aren’t banks still sitting on mountains of toxic debt? Can’t find enough to buy? Continue reading…

The most overlooked government intervention during the bailout phase of the credit crisis was Congressional pressure on the FASB to drop mark-to-market accounting. This one change allowed the nation’s banks, and the so-called too-big-to-fail banks in particular, to just hide whatever losses were on their books owing to the housing meltdown.

It was one of a number of actions your government took to save the banks. Not the banking system, mind you, the banks. The sum total of these actions was a blatant admission on the part of your elected and appointed leaders that connected parties would be saved at all costs. The alone explains why the stock market is putting in multi-year highs while unemployment remains pegs around 10%, while one-in-three working families are categorized as “low income,” while Wall Street bankers are getting their fat bonuses again.

John Hussman explains, again, how we were bamboozled:

If you carefully observe what happened in 2008, the large-scale collapse of the financial markets and the U.S. economy started literally sixty seconds after TARP was passed by Congress on Oct. 3, 2008. At that moment, the world was told not that the smooth operation of the global financial system would be ensured by taking receivership of failing financial institutions; not that the focus of policy would be the protection of depositors, customers, and U.S. fiscal stability; but instead that insolvent private balance sheets would now be defended, subject to the arbitrary decisions of policy makers in which nobody had confidence. Lehman’s failure simply told investors that these decisions could be completely arbitrary, since there was really no operative distinction between Bear Stearns, which was saved, and Lehman, which was not. Moreover, in order to pass TARP, the public had to be convinced that a global meltdown would result if financial institutions weren’t preserved in their existing form. In this way, policy makers created a crisis of confidence.

Skip forward and carefully observe what happened in 2009, and you’ll see that the crisis was suspended once the FASB threw out rules requiring financial companies to report their assets at market value, while at the same time, the Federal Reserve illegally broadened the definition of “government agency” in Section 14(b) of the Federal Reserve Act in order to purchase $1.5 trillion of Fannie Mae and Freddie Mac obligations. These actions replaced the arbitrary discretion of policy makers with confidence that no major institution would be at risk of failing because, in effect, meaningful capital standards would no longer apply.

Thus, our policy makers first created a crisis of confidence, and then resolved it by legalizing a global Ponzi scheme.

Bernie Madoff was a small-time crook compared to what your own elected officials have done. In your name.

Keep in mind, too, as Hussman points out, that the major banks have enough debt among its bondholders to absorb all the losses it could possibly take, without hitting the depositors or customers. So why did the banks need to be bailed out?

Now, do you really think Congressional leaders, all on their own, came up with the idea to suspend mark-to-market? Do you really?

Who’s being naive, Kay?

US stocks suffer their biggest drop in more than three months and fall to lowest close since Oct. 19. Fears over a slowdown in Chinese economic growth, European sovereign-debt woes and criticism of Fed’s QE2 hit market hard.

DJIA drops 178 (1.6%) to 11024, its third decline in last four sessions and 12th largest drop of the year. Travelers and Alcoa lead blue chips lower. S&P 500 falls 19 (1.6%) to 1178 and Nasdaq Comp declines 44 (1.8%) to 2470.

S&P 500 is down 4% since hitting fresh 52-week high earlier this month. The move was delayed for a few days, but the sell-on-the-news reaction to QE2 appears to have picked up steam throughout last few sessions.

Forget pondering whether or not Ben Bernanke and his band of merry pranksters is going to unleash QE2 on the land; it’s a done deal at this point. The questions to ponder now is (besides, do I have any Zimbabwean neighbors who can counsel me on how to adjust to hyperinflation and where can I buy a wheelbarrow for carrying my cash) one, how much are they going to blow on this experiment and, two, will it work?

The very sharp John Hussman, who runs the Hussman Funds and is one of the beleaguered bears who gets grief for “missing” the big rally last year but less credit for avoiding the crash before that, looks at the question today in his weekly commentary. To summarize his opinion: not likely. But the interesting part to me is that he gets into this whole misnomer about the “success” of QE1. But what really made the difference, he points out, wasn’t the trillion-plus bond-buying scheme:

One of the arguments for quantitative easing is the notion that the Fed’s purchase of $1.5 trillion of Fannie Mae and Freddie Mac debt somehow “pulled the U.S. economy back from the abyss” of a Depression. But a closer examination of the past 19 months suggests that a much more specific mechanism – suspension of truthful disclosure – was actually the key element. Unfortunately, the benefits of this suspension are also impermanent, because the underlying solvency problems have been left unaddressed.

Continue reading…

Christopher Whalen over at Institutional Risk Analytics is one of the sharpest banking critics out there. This is his succinct take on this weekend’s Basel III capital-ratio rules. Notice, too, he harps on a point some others have made as well: the changes to accounting rules in the wake of the credit crisis, and accounting rules in general, mean far more than capital ratios.

“Basel III is entirely irrelevant to the economic situation and even to the banks,” notes Christopher Whalen of Institutional Risk Analytics, which publishes stress ratings for all US banks.  “Through things like minimum capital levels, the Basel II rules provided the illusion of intelligent design in the regulation of banking and finance.  In fact, Basel II made the subprime crisis possible and the subsequent bailout inevitable.  Now Basel III is being criticized as hurting the economic recovery.  In fact, Basel III is a sideshow and is dwarfed in terms of its economic impact by changes in accounting rules and securities laws in the U.S. and EU.  The only people who care about Basel III are the economists and regulators who are employed to support this ridiculous process.”

- Several big name hedge-fund managers are placing bullish bets on Citi (C) and Bank of America (BAC). “Paulson, Soros, Falcone, Tepper, Ackman, Ainslie, Loeb — you name it, they own one or the other…or both,” Joshua Brown writes at The Reformed Broker. “And they own them in size.” But why the sudden interest?

- Goldman Sachs (GS) may be on the verge of resolving SEC’s fraud charge by agreeing to a settlement worth hundreds of millions of dollars, according to FT. But FusionIQ CEO Barry Ritholtz is still perplexed why GS chose to fight this charge in the first place. “Even if GS were to prevail in court, they have already lost. The reputational damage is already measured in billions of dollars, and will last years if not decades.”

- Furious decline in newspaper ad sales eased in 1Q, but struggling industry still isn’t showing signs of rebounding. “The less-awful sales in the first months of this year gave publishers the gift of a bit more time to fundamentally reposition their businesses,” Newsosaur blogger Alan Mutter says. “But there is nothing in the first-quarter numbers to suggest that the storm for newspapers has blown over.”

- S&P 500 has averaged a 0.12% gain on the Friday before Memorial Day since 1971, with positive returns coming 59% of the time, Bespoke Investment Group reports. But the performance hasn’t been so hot recently, with the index averaging a 0.28% decline throughout the last 10 years, firm notes. And the measure has dropped more than 1% on three instances in last decade.

- Warren Buffett’s testimony next week before FCIC is subpoena-driven, writes Fortune senior editor-at-large Carol Loomis, a pal of the Berkshire Hathaway (BRKA BRKB) chairman.

- FASB publishes proposal that would overhaul how companies value many assets and liabilities they hold. “Tremble US financial institutions, for FASB is about to fair value your assets,” FT’s Alphaville says.

- There are still calls for more (yes, more) government spending. “The long-term deficit needs attention, but right now it’s critical for government to spend,” says former labor secretary Robert Reich. “Otherwise we have no hope of getting free of the gravitational pull of this recession.”

- If enough tech giants go after a market, will it eventually catch on? Just a week after Google unveiled details of Google TV, Engadget reports Apple (AAPL) will take another crack at its three-year-old Apple TV product. But as MarketWatch’s John Dvorak pointed out in a column last week, it may be a hard slog, even for the biggest of behemoths.

- “The Great Recession is over, and the Great Transition is here,” James Picerno writes. In theory, distinguishing between the two is a piece of cake. In practice, reading the tea leaves is going to get complicated at times.”

- The Apple faithful struggle figuring out the best way to carry around the iPad. Aw, poor fanboys, such a conundrum – what are they gonna do??

Don't know what your problem is, everything looks great to me.

We’re a little surprised at how well stocks have behaved in the aftermath of the examiner’s report on the Lehman bank-out. Granted, the market hasn’t exactly been tightly tethered to reality anyway, but still, a little surprised.

One might think this thing with Lehman would put investors on the defensive in the same way Enron and Worldcom rattled their faith years ago, and they’d be particularly suspicious of what lurks behind the curtains in the financial sector. Gullible enough to believe Lehman was the only outfit playing games with its balance sheet? Looks that way.

No proof that Lehman wasn’t alone, but considering what many of these leveraged-up institutions faced in 2008 and ’09 (and arguably still today) with their “sticky” assets, the choice to get “creative” seems easy. Go with an almost-certain trip down the tubes, or a fix-up job on the balance sheet that an incompetent SEC might, by some off-chance, stumble on, some day. No brainer, right?

And what appears unshakeable now is investors’ willing suspension of disbelief. That was necessary with the hiatus of mark-to-market accounting a year ago, and investors continue to steadfastly buy the illusion that banks have fixed all their problems.

Continue reading…

- Fed’s latest move to boost discount rate prompts thoughts that central bank’s ready to tighten. “Let’s hope that this is wrong,” Paul Krugman says, noting Fed waited almost three years to tighten after 2001 recession. “Assuming that the recession technically ended in June 2009, comparable behavior now would say no rate rise – and no tightening through other measures, such as shrinking the Fed’s balance sheet – for at least another two years.”

- Consumer staples and discretionary are only two overbought sectors in S&P 500, while telecom remains the lone oversold sector, according to Bespoke Investment Group. “These levels are in stark contrast to where we were at the start of last week,” when seven out of ten sectors were trading in oversold territory, firm says.

- Insider selling hit a fresh 2010 high last week, while buying also rose but remains near historically low levels, according to Pragmatic Capitalist. “Insider buying has been unusually low throughout the rally
as economic fundamentals remain questionable. Recent signs of recovery have done little to encourage insiders to invest their personal dollars in their own companies.”

- Volcker Rule endorsements keep increasing. “The writing is on the wall for all to see – the major ‘systemic’ banks will ultimately lose their vast prop trading operations,” Josh Brown notes. “The new question becomes, where will all of those exciting and typically profitable trading operations wind up?”

- Regulators and the media focusing on the crisis seem to think regulating derivatives is the best way to prevent a future crisis. But derivatives are only part of the problem, Roger Ehrenberg says. “The issue isn’t derivatives; it’s all financial transactions whose objective is to deceive or to weaken financial transparency.”

- There’s much more than commercial real estate to worry about. “Perhaps the economic miracle fairy casts her wand and cures all these system risks,” Michael Shedlock says. “But I would not bet on it.”

- Hype surrounding Apple’s (AAPL) iPad and the notion it will somehow become traditional media’s savior is getting tiresome, Kara Swisher writes. “Like Goldilocks, that’s just a fairy tale until the iPad is actually out in the wild and subject to consumer use when it begins to be rolled out in late March,” she says.

- Apple’s removed more than 3% of the apps in its App Store since last week, when it began enforcing a stricter policy about risque offerings. The purge continues to anger developers, who take issue with AAPL’s view of what is overtly sexual content.

- Obama proposes nearly $1 trillion, 10-year health-care plan that would allow US to deny or roll back insurance-premium increases and delay a tax on high-end plans until 2018.

- All the recent chatter concerning the Fed’s exit strategy is puzzling, Tim Iacono says. Maybe it’s “simply a way for policymakers to generate confidence that might not otherwise be there.”

- Keep an eye on cumulative breadth, number of stocks moving up and down on a given day, for clues about future market performance, Bespoke Investment Group says.

- Despite the aughts being a lost decade for the stock market, 401(k) savers did ok, at least according to Fidelity Investments. “But unless market performance picks up in this decade even dedicated 401(k) savers could come up short in their retirement savings,” LA Times’ Walter Hamilton says.

- Google’s (GOOG) $2 million donation to Wikipedia “cements a kind of symbiotic relationship” between the two companies, Mathew Ingram writes at GigaOm. “For better or worse, it sounds like Wikipedia and Google will be joined at the hip for some time to come — not just because of the money, but because the relationship benefits both sides equally.”

- Obama administration’s tolerance of AIG is just astounding, Yves Smith says.

- Backlash against Google Buzz has reached a new level. A class action law suit has been filed in San Jose (CA) federal court alleging Google (GOOG) acted illegally when its new social networking tool shared personal data without consent, according to SF Chronicle blog.

- Greece should approach the IMF, former IMF chief economist Simon Johnson says. “Our baseline view is still that the IMF’s role will be only ‘technical,’ but behind the scenes the prospect of greater IMF engagement (and even a standby loan) is a powerful card that Greece should threaten to play.”

- Wall Street’s bailout hustle – Taibbi’s latest missive.

- Chris Dodd plans to introduce a new bill next week to overhaul financial regulation.

- The pilot that crashed a small plane in Austin posted an anti-government manifesto and may have targeted IRS offices after a tax dispute.