Randomly Noted

In a just-published potpourri of options said to be under review by the Federal Reserve if it decides its long-standing and remarkable policy of zero short-term interest rates isn’t enough to spur a recalcitrant U.S. economy, one idea jumps out as a particularly bad one.

The notion in question, as published in a Washington Post article today by Neil Irwin, is that the U.S. central bank could publicly commit to an even longer period of keeping short-term interest rates at the emergency level of zero to 0.25%.

To paraphrase the view of the lone and chronic dissenter on the rate-setting Federal Open Market Committee, Federal Reserve Bank of Kansas City President  Thomas Hoenig, and a lyric from Bruce Springsteen, it’s already been one long emergency.

Hoenig wants the Fed to raise short rates to the still-quite-easy 1% and then pause and gauge the impact. That certainly reasonable step, of course, is not going to happen.

Irwin reports in the Washington Post that under consideration is the extension of the current blanket commitment to exceptionally low rates for an “extended period,” perhaps “adding specifics about which economic conditions would lead them to raise rates.” Irwin adds that some policymakers would be sure to object to this because of the limits it places on future Fed policy flexibility.

One would hope there are some objections. As it already stands, few expect the Fed to raise rates at all until at least the middle of 2011. That’s about a year away.  Assuming that scenario, short rates will have stood at zero for more than a couple of years.

Time for the caveat: it’s good that the Fed, along with the rest of humanity, has noticed an apparent deceleration in the growth path of the U.S. economy from slow growth to marginal growth.

Marginal growth is not good. It won’t allow for any significant decrease in unemployment, which in turn won’t let growth climb much from marginal. Given this reality, the Fed should think about what else it could do.

But while the Fed should think about what it might do in a weakening economy scenario, the Fed should hold its fire. The central bank has essentially done what it can. To do more might simply be pushing on a string, loading liquidity into an economic scenario where it has no growth-acceleration power. That would simply make the Fed look weak and demoralize the rest of us.

The economy is in the process of a major deleveraging. It’s slow and painful and necessary and it will restrain growth for some time. But there are no short cuts. To try to take short cuts at this point will invite greater pain later on.

The U.K.’s biggest mortgage lender is wanting its money back.

Certainly that’s one possible message of the ads that appeared in the U.K. papers this morning from Lloyds TSB, a unit of Lloyds banking Group PLC, which has about a quarter of the U.K. mortgages on its books.

Lloyds is advertising that “Now’s a great time to reduce how much you owe on your mortgage” because of low interest rates. To help nudge homebuyers along it’s doubling the size of mortgage overpayments that can be made without incurring penalties on variable rate mortgages.

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My first reaction to news that most Americans polled by a mutual-fund trade group continue to have a favorable view of 401(k) retirement plans was to marvel at the apparent near amnesiac state  of those queried.

My second thought was that even if 90% of the households surveyed for the Investment Company Institute had a favorable opinion of retirement plans, it didn’t mean self-directed 401(k)s are an appropriate retirement savings device for all Americans.

“The 401(k) system has a long and productive future ahead in providing retirement security for millions and millions of Americans,” said Paul Schott Stevens, who heads the ICI mutual fund trade group.

Has everyone forgotten the gallows humor of relabeling the ubiquitous retirement plans, typically based on mutual fund investments, 201(k)s to symbolize the bear market’s rough treatment of their value?

If you were going to retire somewhere in 2008, even if you had a balanced 401(k) investment plan, odds are the bear market ripped through that plan, prompting you to work longer or live more modestly.

This bear market, and maybe that marks its rarity, was not respectful of asset allocation. Stocks and bonds went down and there were precious few places to hide.

Some structural alternatives ought to be considered. I suggested that creative minds on Wall Street would come up with structures that took more and more risk out of accumulated savings as retirement approached.

Maybe they will. Or maybe the bull market in stocks from the bottoms in March 2009 has done enough repair work to 401(k) portfolios to cause a pleasant amnesia and dull the desire for change.

Perhaps it’s as simple as allowing people to keep safe increasing percentages of their retirement funds from the vagaries of markets as they age.

The U.S. Treasury just pumped another $3.79 billion into GMAC Financial, the struggling finance company that is now majority owned by you and me. GMAC got itself into a financial pickle by getting too heavily involved in the mortgage business and in particular, the subprime mortgage business.

As part of the cash infusion today, the company also reclassified some mortgage assets it hopes to sell. And to pretty those assets up for sale, GMAC took additional write offs on some of those assets. But a rough, back-of-the-envelope calculation makes one wonder if these assets have been written down enough.

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Brazen. That’s the word that comes to mind when you read the complaint filed today by the Securities and Exchange Commission against three former officers of one-time mortgage giant New Century Financial Corp.

According to regulators, these three not only failed to disclose to investors that their business was cratering, but they failed to do so while they were desperately trying to raise much needed capital to replace capital that had been flying out the door because the business was blowing up.

The net-net: they cost investors millions of dollars while continuing to pay themselves handsomely for running what regulators say was a fraud.

The complaint is also a stark reminder of how little regulation there was (and is) of the mortgage business. Another thought that comes to mind is you really wonder how regulators exercising even an ounce of common sense didn’t see this train wreck coming. New Century’s problems began with something called the 80-20 loan. It was essentially two loans that allowed a borrower to buy a property without putting up a dime out of his/her own pocket. Loan number one was worth 80% of the purchase price and loan number two the remaining 20%. The above chart shows how dependent New Century was on this product.

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The Wall Street Journal reported earlier, and it was later confirmed, that GMAC has tossed out its CEO (Alvaro de Molina) and replaced him with Michael Carpenter, “a board member with extensive financial services experience,” as GMAC noted in its press release announcing the moves.

GMAC further gave a run down on that experience – at Citigroup, Salomon Smith Barney, Travelers and Kidder Peabody as well as senior positions at GE Capital (GE once upon a time owned Kidder.) Sounds like the kind of background needed to turn around an extremely troubled auto financing company that played too heavily in subprime mortgages.

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The above chart tells the story of one of the few good things going on at GMAC. Auto-finance companies have been getting hammered in recent years in part because of their leasing business. Basically, the value of cars coming off their leases has been far greater than the price companies like GMAC would get for then selling the cars into the used-car market. But that trend has finally turned around and, as you ca see above, GMAC made money as it could once again sell cars for more than the values implied by the leasing contracts.

The good news stops there. Okay, they saw lower provisioning for losses in their subprime mortgage portfolio. But it is still a large $704 million. And they are increasing reserves to buyback bad mortgages that were securitized under terms of those deals. Car loans that are delinquent for more than 30 days now comprise 4.36% of the portfolio, up from 2.90% a year ago. As my colleague Aparajita Saha-Bubna reported earlier, the mortgage arm of GMAC (ResCap) reported nearly $10 billion in losses in 2007 and 2008 and while the numbers in 2009 aren’t as large, they are still big. In the most recent quarter, ResCap reported a loss of $747 million.

One of the company’s executives said during an earnings conference call today that GMAC hopes to find a resolution for ResCap by the end of the year. We’re sure the U.S. government, which now owns 35.4% of GMAC, would like to see a resolution, too. But it’s likely to be a costly one.

At our morning news meeting, I mentioned to the assembled editors that about 61% of the operating earnings at Ford this quarter didn’t come from the traditional auto-making business. Instead, it was from its finance arm. To which one editor quipped – that trend again. For a number of years, Ford Motor Credit and GMAC made millions if not billions of dollars from not only selling auto loans and leases, but, in the case of GMAC, from selling mortgages. In turn, the automakers were making big bucks but not from selling cars but instead from financing car sales.

So today, Ford’s shares rallied more than 8% as the company reported much stronger than expected earnings. But it wasn’t even because of how it was in the good old days – selling more loans and leases. Instead, it was because of lower provisions for loan losses, lower operating costs and lower depreciation expenses for leased vehicles. It noted the gains from these was partially offset by lower loan volume. (It certainly wasn’t from selling more cars).

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Madeleine Lim and Paul Vigna talk about funding issues facing two federal agencies. And they discuss a refinancing problem facing Japan’s third-largest consumer finance company.

Think of it like this. You are running a one-mile race along with 20 or so other people. After a sprint at the end, you win by seconds. Your time: 15 minutes, 43 seconds, a good 12 minutes off the world record. And slower than the 14-minute-mile you ran the week before. Would you even think about sending a brag to the local newspaper?

That’s kind of how you have to look at the press release put out earlier today by American Express: “American Express Ranks Highest In Customer Satisfaction Among Credit Card Companies For the Third Consecutive Year.” The press release is a factual representation of a study released today by J.D.Power. Amex goes on to say how it is honored, how focused it is on the customer etc. Now read the J.D. Power release and you learn how overall, consumers are dissatisfied with the fees and rates they are charged,  and many of the other services. A pretty downbeat accounting for the industry.

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