Monthly Archives: May 2010

Political Regulatory Moves Not Helping Markets

Posted on May 19, 2010 by | Leave a comment

BaFin, the German financial watchdog, has prohibited using credit default swaps to speculate on European government bonds. Germany also temporarily banned naked short selling. The prohibitions, which are efforts to cope with “exceptional volatility,” also apply to shares of some banks and insurance companies. The ban will be in effect until the end of March 2011.  This is politically motivated and completely unintelligent regulation that will only pressure markets already under significant stress due to fiscal mismanagement in Europe.  Here in the U.S., we have the uncertainty of what looks to be weak and off-the-mark financial reform moving through Congress.  It’s no wonder markets are down every day.  See this Wall Street Journal article for more details on Germany’s ban: Germany To Ban Some Naked Short-Selling.

Peter Boockvar of Miller Tabak wrote the following:

At least for now, Germany is finding no company in the EU to implement the silly ban on the naked shorting of euro area debt and of naked purchases of CDS on sovereign debt. The nonsense of the rule, among others, is that it only impacts those transactions done on the German market. Foreign branches of German banks outside the UK won’t be affected. The other fear is that other countries in the Euro Zone will eventually agree to a more uniform ban just as the area needs as many investors as possible to buy their debt. All this does is scare them off. I’ve used this before but politicians when it comes to markets should pull a George Costanza and do the opposite of their instincts.

We can only hope that happens because the U.S. stock market is sitting at a precarious point as we open trading this morning.  Here is Barry Ritholtz’s analysis:  “Yesterday’s close took us below the May 6th Flash Crash closing prices. The DJI, S&P 500 and NASDAQ that session’s intraday lows (at 10,241, 1094 and 2228, respectively). Closing below May 6th’s end of day prices is technically significant…The downside target is that intra-day flash crash low. If the volume lightens up as we approach it, that would suggest a ‘successful’ retest of the lows, and set up the next up leg.”

Futures were down significantly earlier this morning, but have been improving throughout the pre-opening session.  A close below the May 6 intra-day low on heavy volume would be like having the floor drop out from the markets—the next level of resistance is a long way down.  However, I also believe that another leg up after a “successful” retest of the lows is possible.  Second quarter earnings have been solid, macroeconomic news in the U.S. has been improving, inflation remains almost nonexistent, troubles in Europe are forcing the Fed to keep rates near zero, which is also holding down mortgage rates, and equity markets are still trading well below the levels they held just before the Lehman Bros. bankruptcy in September 2008.  Add to those facts the reality that many good companies are trading at single-digit price-to-earnings multiples and there is good reason for equity markets to move higher.  We just need the politicians to back off, carefully consider what the real causes of the financial crisis (as the Financial Crisis Inquiry Commission is doing and will report in December 2010), and deal intelligently with those without destroying markets out of some sense of public vengeance.

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Posted in Central Banks, Economy, Investing, Market Commentary, Personal Finance, Stocks

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Permanent Home Loan Modifications Rise Almost 13 Percent in April 2010

Posted on May 18, 2010 by | Leave a comment

The U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD) today released April data for the Administration’s Home Affordable Modification Program (HAMP) showing permanent modifications for almost 300,000 homeowners – an increase of 68,000 or almost 13 percent over March. New in this month’s report is information about servicer-specific conversion rates to permanent modifications and servicer performance in giving homeowners timely decisions. The data show that there is wide variation among servicers in these areas, further demonstrating the need for transparency regarding servicer performance.

“The number of homeowners receiving significant relief through a mortgage modification continues to rise,” said Chief of Treasury’s Homeownership Preservation Office (HPO) Phyllis Caldwell. “Our focus now is on improving the homeowner experience and holding servicers accountable for their performance. Increased transparency through more robust reporting of servicer-specific data will contribute handily to those efforts.”

“As the number of homeowners receiving permanent modifications continues to increase, the Administration’s comprehensive efforts are making an impact in the housing market’s overall recovery,” said FHA Commissioner and HUD Assistant Secretary for Housing David Stevens. “Today, mortgage rates remain at historic lows, around five percent; foreclosure starts are down 27 percent from last year this time; and home prices and the pace of home sales have stabilized in recent months.”

Last week, as part of a continued effort to improve servicer performance, the Administration hosted a summit with representatives from participating mortgage servicing companies to discuss ways to move qualified homeowners into permanent modifications, improve homeowners’ HAMP experience, quickly implement the Second Lien Modification Program and Home Affordable Foreclosure Alternatives, and maintain the pace of new trial modification starts. The Administration also outlined for servicers its plans to begin reporting more detailed performance measures. By July 2010, this reporting will include the eight largest servicers and will focus on servicer compliance, program execution, and homeowner experience.

Reporting will include the following:

Servicer Compliance with Program Guidelines

  • Results of servicer-level loan-file reviews assessing whether loan files were appropriately evaluated
  • Identification of all compliance activities performed for servicers and a summary of areas identified for future compliance focus

Program Execution

  • Average time from start of trial modification to start of permanent modification
  • Servicer implementation timelines for program updates
  • Information about alternatives made available to homeowners ineligible for HAMP
  • Information about alternatives made available to homeowners who fall out of HAMP trial modifications. Alternatives may include non-HAMP modifications, payment plans, and short sales.

Homeowner Experience

  • Servicer handling of calls from homeowners (speed to answer, hang-up rates.)
  • Time it takes to resolve homeowner problems that have been reported by third parties such as housing counselors, attorneys, and congressional and other government offices
  • Servicer share of homeowner complaints to the Homeowner’s HOPETM Hotline

In the coming months, the Administration will continue to enhance its methods of holding servicers accountable for their obligation to provide helpful and timely assistance to struggling homeowners. While enabling eligible homeowners to modify their mortgages is vital to addressing the housing crisis, this program is just one part of the Obama Administration’s multi-faceted approach to assisting homeowners and stabilizing the housing market, which also includes state and local housing agency initiatives, tax credits for homebuyers, neighborhood stabilization and community development programs, mortgage refinancing, and support for Fannie Mae and Freddie Mac.

The April HAMP report can be found here: http://www.financialstability.gov/docs/April%20MHA%20Public%20051710%20FINAL.pdf

Republican Response to HAMP Report

The Treasury Department today released a report examining implementation of the $75 billion Home Affordable Modification Program (HAMP), the most active and highest profile of the Obama Administration’s foreclosure mitigation programs. Earlier this year, House Oversight and Government Reform Committee Ranking Member Darrell Issa (R-CA) and Domestic Policy Subcommittee Ranking Member Jim Jordan (R-OH) released a report highlighting HAMP’s shortcomings.

“As long as the Administration continues to ignore the future of Fannie Mae and Freddie Mac, it is inconceivable how ongoing misadventures into the mortgage market will provide relief to the nearly four million households facing the threat of foreclosure,” Issa said regarding the new Treasury Report.

The report found that the program produced the fewest new trial mortgage modifications [37,021] since at least last June and that the number of cancelled trials during the month far outweighed the new ones, with 122,467 failures in April.

“The bottom line is more than 4 times as many people were kicked out of the program last month as the number of people that entered it,” Issa said. “There’s a real problem with the Treasury Department continuing to use the metric of trial modification offers as evidence of their success despite a bipartisan consensus that this metric is meaningless. It creates the appearance that the Administration is more concerned about creating a false image of success than actually helping troubled homeowners.”

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Posted in Banking, Economy, Housing

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Treasury Guides on Small Business Health Care Tax Credit

Posted on May 18, 2010 by | Leave a comment

The following is helpful information from the Treasury Department for small businesses needing help understanding how the new health care tax credit may be applied:

May 17, 2010
TG-698

Administration Releases New Guidance on Small Business Health Care Tax Credit

Small Businesses May Receive Both State and Federal Tax Credits,

Dental and Vision Coverage Eligible for Credit

“Small businesses face unique challenges to providing health insurance for their employees, including higher costs and fewer choices.  The small business health care tax credit in the Affordable Care Act provides an important incentive to help small businesses overcome these challenges and cover the cost of health insurance for the hardworking Americans they employ,” said Secretary Geithner.

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Key Facts about New Guidance on the Small Business Health Care Tax Credit:

  • Provides detailed information to make it easier for small businesses to determine whether they are eligible and how large a credit they will receive.

  • Resolves a number of key implementation issues in ways that allow employers to receive the maximum credit available under the law.

  • Clarifies that a business’s credit will not be reduced because the business also receives a health care tax credit or subsidy from a state.

  • Allows small businesses to receive the credit not only for regular health insurance but also for add-on dental, vision, and other limited-scope health  insurance coverage.

Key Elements:

·         Detailed Guidance.  To help small businesses make employee benefit decisions with full knowledge and to provide a clear incentive to offer health insurance coverage, new IRS Notice 2010-44 released today lays out detailed guidance on how a business can determine whether it is eligible and how large a credit it will receive.

  • No Reduction Due to State Credits.  Responding to a number of taxpayer questions about the interaction of the credit with state-level health care tax credits and subsidies, the guidance announces that the new tax credit will not be reduced by a state health care tax credit or subsidy (except in limited circumstances to prevent abuse of the credit).   In particular, an employer that receives such a state tax credit or subsidy will also receive the full federal credit based on its entire contribution so long as the federal credit does not exceed the employer’s net contribution.  According to lists compiled by the National Conference of State Legislatures, about 20 states offer these benefits.[1]

·         Dental and Vision Coverage Qualify.  The guidance clarifies that small businesses can receive the credit not only for traditional health insurance coverage but also for add-on dental, vision, and other limited-scope coverage.  The employer must meet the requirements for limited-scope coverage that are similar to those that apply for single coverage:  the employer must offer to pay at least 50% of the premium.

·         Employers Can Choose Most Favorable Method of Determining Hours Worked.  Because the tax credit’s matching rate is highest for employers with 10 or fewer full-time equivalent employees (FTEs), the number of hours worked is an important factor in calculating the credit.  The new guidance allows employers to choose among 3 different methods of determining hours to minimize their bookkeeping duties while receiving the maximum tax credit for which they are eligible.  Employers can look at actual hours of service, or can use simple rules of convenience to estimate hours based on total days or weeks of service.

·         Transition Relief for 2010 Formalized.  Because the tax credit is effective for 2010 but was not enacted until March 23, some small businesses that are providing health insurance in 2010 may not meet all the requirements for a qualifying health insurance offer.  To ensure that these businesses benefit from the credit, the Administration is providing special transition relief for tax year 2010.  The transition rules simplify the requirements for what constitutes a qualifying health insurance offer while maintaining the core requirement that an employer make a significant contribution to the employee’s coverage.  The transition relief was first mentioned in FAQs released on the IRS website on April 1, and has now been formalized in the new notice.

Example of Interaction with State Credit

Auto Repair Shop Receiving 40% State Credit Also Receives Full Federal Credit – Together Covering 75% of Employer’s Health Insurance Costs

Main Street Mechanic:

·         Employees: 10

·         Average Annual Wage: $24,000

·         Employer Contribution to Health Insurance (before any credits): $100,000, or $10,000 per worker

·         State Small Business Health Care Tax Credit: $40,000

Net Employer Contribution:  $60,000 ($100,000 minus $40,000)

Employer Contribution Qualifying for Federal Tax Credit:  $100,000

Federal Tax Credit:  $35,000 (35% of $100,000)

Combined Federal and State Credits: $75,000 ($40,000 plus $35,000)

Example of Benefit for Offering Limited-Scope Coverage

Manufacturing Firm with 10 Employees Gets $3,500 More for Offering Vision and Dental Coverage

Acme Air Conditioning, LLC:

·         Employees: 10

·         Average Annual Wage: $25,000

·         Employer Cost for Regular Health Insurance: $60,000, or $6,000 per worker

·         Employer Cost for Add-On Vision and Dental Plan: $10,000, or $1,000 per worker

Tax Credit for Regular Health Insurance: $21,000 (35% of $60,000)

Additional Tax Credit for Vision and Dental Plan:  $3,500 (35% of $10,000)

Total Tax Credit:  $24,500 (35% of $70,000)

REPORTS

  • Five additional ways health reform helps small businesses

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    Posted in Economy, Tax Incentives

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    Asian Bonds Could Benefit at Europe’s Expense

    Posted on May 17, 2010 by | Leave a comment

    Jung Kwang Sik, head of the fixed-income division of Shinhan BNP Paribas Asset Management, said investors might shift from European debt to Asian bonds. “The regional markets will have a chance of so-called re-rating in the wake of the latest developments in Europe,” Jung said. Budget deficits of Asian governments are generally lower than those in Europe, he said, and domestic investors hold most of the Asian sovereign debt.

    More on this at Bloomberg: Europe Debt Woe May Spur Asia Bond Investment, Shinhan BNP Says.

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    Posted in Corporate Bonds, Fixed-Income, Investing, Personal Finance

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    Banks Need Swaps Trading to Manage Risk

    Posted on May 14, 2010 by | Leave a comment

    Among the amendments being considered by the Senate as part of its bill to overhaul the financial system is one that would force financial institutions to divest their derivatives, and especially swaps, trading operations.

    Ben Bernanke, chairman of the Federal Reserve, sent a letter to Senate Banking Committee Chairman Christopher Dodd, D-Conn., warning about a proposal in Dodd’s bill for financial-regulatory overhaul that would separate commercial banks and their swaps-trading operations. Bernanke said the measure would hinder the central bank’s ability to monitor systemic risk. “I am concerned that section 716 in its present form would make the U.S. financial system less resilient and more susceptible to systemic risk and, thus, is inconsistent with the important goals of financial reform legislation,” Bernanke wrote.

    Used properly (and that’s essentially what regulators failed to control before the financial crisis) derivatives and swaps are valuable tools for mitigating risk. “Prohibiting depository institutions from engaging in significant swaps activities will weaken the risk mitigation efforts of banks and their customers,” Bernanke wrote. “Depository institutions use derivatives to help mitigate the risks of their normal banking activities.”

    The provision, crafted by Senate Agriculture Committee Chair Blanche Lincoln, D-Ark.,  would ban the Fed from lending to any swaps dealer or major swap participant, regardless of whether it is affiliated with a bank, Bernanke wrote. “Experience over the past two years demonstrates that such broad-based facilities can play a critical role in stemming financial panics and addressing severe strains in the financial markets that threaten financial stability,” Bernanke wrote in the letter, which was also sent to Senate Banking Committee Ranking Member Richard Shelby, R-Ala., and Sen. Kirsten Gillibrand, D-N.Y.

    Sen. Dodd has characterized derivatives as gambling.  “Really what it amounts to in simple terms that most Americans can understand is, it’s a bet. It’s a wager,” said Dodd. “I don’t think it’s fair to characterize this as bets, any more than when a bank makes a loan they’re making a bet that maybe someday they’ll get paid back,” said Cory Strupp, a representative of the Securities Industry and Financial Markets Association.

    Used improperly, one can see why many people would perceive the financial instruments that way.  But the reason this provision came from the Senate Agricultural Committee is that derivatives began as a way for farms to lock in prices for their crops well in advance of the harvest.  This allowed farmers to budget properly and hedge against price risk.  The farmer would enter into an agreement in which he or she would agree to deliver so much corn, for example, at a future date.  The other party would agree to accept the delivery at a certain price on that date.  Thus, no matter where prices for corn went in the meantime, the farmer had a guaranteed price.  Banks use derivatives in much the same way to lock in positions and create opportunities for their clients.  Again, it was the abuse of derivatives, not derivatives themselves, that exacerbated the financial crisis.

    We do not need to fundamentally alter how banks go about their business—the unintended consequences of ripping away risk-mitigation tools from financial institutions may be worse than the ills such actions seeks to solve.  Rather, we need regulators who understand financial markets and the business of banking inside and out and who can determine the difference between risk mitigation efforts and gambling.  Part of that includes better information about derivatives trading, and so bringing them onto some kind of exchange or requiring them to pass through clearinghouses makes sense.  Transparency and active, intelligent regulators are the keys to getting our financial system back to good health.

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    Posted in Banking, Economy, Regulatory Reform

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