Randomly Noted

It’s hard to imagine how the European credit crisis that hit hard many of the banks there could have an effect on bondholders of a housing agency in the U.S. whose reason for being is to provide affordable loans for first time home buyers. But that’s what could play out for investors – likely Mom and Pop types – who hold some $3 billion of mortgage revenue bonds issued by the Ohio Housing Finance Agency.

The housing agency, and apparently many other municipalities, have invested some of their funds in guaranteed investment contracts issued by a company called Pallas Capital Corp. The Ohio agency has some $106 million tied up with the Pallas GICs.  Some investors look to GICs as a means to extract a little extra yield. It’s not known what these particular securities were yielding.

Pallas sold GICs and then invested those proceeds in reverser repurchase agreements that were collateralized by a pool of structured finance and corporate assets, according to Moody’s Investors Service Inc. Moody’s recently downgraded the Pallas GICs because “the GICs are a direct pass-through rating of the reverser repo counterparty, DEPFA Bank. You know what’s coming next – DEPFA was recently downgraded on its ability to pay back short term loans.

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If you are wondering how exactly the further empowered Federal Reserve and the bevy of other U.S. bank regulators plan to do a better and faster job the next time a financial crisis comes around, take a look at some common sense dispensed by Eric S. Rosengren, president of The Federal Reserve Bank of Boston.

In the text of a Sunday speech in Washington, Rosengren uses sophisticated language and slides to get to this basic point: when things are headed south in the financial sector, get to the banks’ dividends, early and decisively.

With the benefit of hindsight, Rosengren notes that certain clear signs emerged in the latter part of 2007 that real trouble was brewing. Still, ”the dividends on common stock declared by the largest banking organizations … actually increased in the fourth quarter of 2007, and did not show dramatic reductions until after the financial crisis hit a crescendo in the fall of 2008.”

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It’s fashionable to call TARP (Troubled Asset Relief Program, to be official) the most effective program that everyone hates. Hated because of the perception the big banks got bailed out for what’s perceived as their own mistakes, hated because of the notion that Main Street was handed the short end of the stick while Wall Street pretty much gets to merrily ramble on.

With expectations now that even the humbled insurance giant, AIG, is coming around to payback time, government officials are touting TARP as the plan that saved us from financial disaster and ends up not destroying the taxpayer.

“The direct budget cost of the program and our full investment in the insurer AIG is likely to come in well under $50 billion – $300 billion less than estimated by the Congressional Budget office last year.” So wrote Treasury Secretary Timothy Geithner in an “op-ed” article published Sunday in The Washington Post.

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