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Submitted by Ramsey Su via The Acting Man blog,

Legal Mumbo-Jumbo

As promised, the Johnson/Crapo bill has finally arrived.  Here are the 442 pages of legal mumbo jumbo, guaranteed to cure all forms of insomnia and those suffering from low blood pressure.   

Allow me to provide a summary. 

The Bill calls for the elimination of FNMA and FHLMC.  It will be replaced by FMIC with a 5 member board appointed by the president.  There will be a 9 member advisory board to assist FMIC and the OCMA.  An internal OIG will be funded by the FMIC to inspect the FMIC.  The FMIC and the OCMA would update Congress on the MIF and audited by the Comptroller General.  FMIC can create any office but must establish the Office of Underwriting, Office of Securitization and the Office of Federal Home Loan Bank Supervision.  The OCMA would administer the Market Access Fund.  Of course, we cannot forget multifamily housing.  There will be an Office of Multifamily Housing.  As for regulations, FMIC starts with the Standard Form Credit Risk-Sharing Mechanism.  Then there will be rules for the Mortgage Insurance Fund.  FMIC would be exempt from SEC but there will be a Securitization Platform with a Platform Board.  Regulations to come include servicers, IDI, PMI and the authority to issue any regulation they desire ……… I am sorry, I need to stop here, I can't read any more.  My head is hurting too much, trying to compute the compliance cost.  (MND has a good summary for those interested.)

 

House Price Inflation and the Fed

Instead of wasting time on the details, I would like to approach Freddie and Fannie reform from a different perspective – the origination and loss recovery.  

In hindsight, it is clear that the agencies did not lead the sub-prime bubble but they were nevertheless dragged into the cesspool.  They never provided no-doc no-qualification NINJA loans, but cannot escape the simple maths of lending 95% LTV loans when the V (value) was artificially inflated by 40%-50%-or more, resulting in all the negative equity loans outstanding today.  Regardless of how qualified a buyer may appear to be at origination, if the property's value declines by, say 20%, all 95% LTV loans will be in trouble.  

Is double digit home price appreciation a reasonable expectation, when inflation (as imagined by the Fed) is non-existent, income growth is negligible and GDP growth is barely a couple of percent?  Is the bill going to prevent the new agency from insuring loans secured by inflated assets? 

It is unclear how the Fed justifies buying agency MBS when home prices are appreciating at an unsustainable pace and agency loans command 90% of the mortgage market.  Are they trying to use a housing bubble to rescue the economy?  Are the Fed's actions disregarding any consequences to the real estate market?  Is the purchase of agency MBS a real tool for monetary policy, or is it just something the Feds were allowed to do?  

Greenspan, Bernanke and Yellen all confessed that they were wrong about sub-prime.  They all underestimated the consequences.  Yet, they are still empowered to openly manipulate the real estate market, something they admitted that they know very little about.  For agency reforms to be meaningful, Congress should first remove the power of the Fed to buy agency MBS, allowing some type of orderly free market price setting mechanism to return.

 

Making Rules Up on the Fly

As regards loss recovery, there were Federal Laws, State Laws and local government ordinances, the rules and procedures that a lender must go through when a borrower defaults on a mortgage.  They have all been ignored during the aftermath of the sub-prime bubble.  Order has not been restored.  No one can really say what the rules will be if the industry suffers another down turn.  The Johnson/Crapo Bill adds to the confusion:

Sec.305. Authority to protect taxpayers in unusual and exigent market conditions.

 

If the Corporation, the Chairman of the Federal Reserve Board of Governors and the Secretary of the Treasury, in consultation with the Secretary of Housing and Urban Development, determine that unusual and exigent circumstances threaten mortgage credit availability within the U.S. housing market, FMIC may provide insurance on covered securities that do not meet the requirements under section 302 including those for first loss position of private market holders.

In other words, Section 305 explicitly states that if the Fed, the Treasury and HUD decide market conditions are "unusual and exigent", whatever that means, they can have taxpayers directly fund any bailout and change the rules as they see fit.  To have the gall to say they are protecting taxpayers is an insult to the intelligence of the taxpayers.  Hmmmm. "Intelligence of the taxpayers"?  I need to think about that one.

How can risk managers assess mortgage risk when the rules are moving targets, subject to changes that are dependent upon the prevailing political winds?

The agencies have been providing cheap financing to borrowers, courtesy of the Fed.  The agencies have been providing cheap and bullet proof insurance for bond investors, courtesy of the Treasury.  The Bill somehow expects some mysterious private capital will come in to insure the first loss position and the Government (including the FOMC) can gracefully exit its role in the mortgage monopoly. That is more than overly optimistic.  Can anyone quantify that in dollars as well as mortgage rates?

 

Conclusion:

In summary, the Bill is going to increase mortgage compliance costs.  It will confuse, rather than clarify, the mortgage application and approval process.  It is a disaster.  Fortunately, I opine the Bill has no chance of passing in its present form.

 

Alan Greenspan and Ben Bernanke – Clueless, but intervening anyway …

via Zero Hedge http://ift.tt/1oVG5xz Tyler Durden

Venezuela’s exchange rate is a Gordian Knot of rules and regulations meant to baffle onlookers with bullshit and, we suspect, hide the hyperinflation from prying eyes just a little longer.

Today’s launch of SICAD II, a new currency market which allows the free-market to bid for USD (in Bolivars), appears to be an effort to provide liquidity to a black-market for dollars. SICAD II priced at 55 Bolivars today – an 88% devaluation from the official rate of 6.29 (and another auction-based rate SICAD I – applicable to some firms – of 10.8).

 

This new SICAD II rate will replace SICAD I as the official tourist rate.

Confused? You should be – the bottom line is that Maduro and his cronies continue to suppress the reality of a hyperinflating currency as student marches grow ever more popular and outspoken.

 

The positive ‘spin’ is that SICAD II has lowered the black market rate but simply due to the additional liquidity and transparency that the platform provides – an 88% devaluation is nothing to be too excited about!!

 

Via Reuters,

“It is going to cover 7, 8 percent of real (dollar) demands, seeking equilibrium as regards the flow of foreign currency necessary for the functioning of the economy,” Maduro said in a speech on Friday.

 

Sicad 2 essentially revives a previous system, known locally as the “permuta” or “swap” market, which Chavez shuttered in 2010 after accusing speculators of manipulating it.

 

Opposition politicians have long criticized the government’s currency controls. Still, they are lambasting Maduro for what they call a “stealth devaluation” via the new system.

 

“Today will be ‘black Monday’. Sicad 2 is another devaluation for our currency,” Tweeted opposition leader Henrique Capriles. “Nicolas has also finished off the bolivar. Another blow to the poor.”

 

Venezuela’s annual inflation rate, currently at more than 56 percent, is the highest in the Americas.

As Bloomberg adds,

“This is a devaluation any way you look at this,” Tamara Herrera, chief economist at financial research firm Sintesis Financiera, said by phone. “The government is trying to bring down the black market rate with this new market, with the consensus that the dollar should be trading for about 50 bolivars.”

via Zero Hedge http://ift.tt/1gjijJW Tyler Durden

Trading desks are awash with chatter over which FX desk just got a tap on the shoulder as it appears beaking 141.00 in EURJPY soon after the European close sparked a mini-avalanche of sell USD orders and sent stocks ramping briefly. Some talk of US term strcuture bets gone awry (as the EUR move occurred as 5s30s broke to 2009 lows) There is little if any fundamental news to pin to this move – but when has there ever been – and gold and bonds hardly budged on the ramp.

 

 

Some chatter that a 5s30s steepener bet finally unwound as the term structure broke to 2009 lows…

 

but no one is confirming.

via Zero Hedge http://ift.tt/NKQQVF Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.

Emmanuel Saez and Thomas Piketty are leading lights in the exploration of rising wealth inequality. Both are academic economists who have devoted considerable time and effort to assembling data that deepens our understanding of the issues.

For example, Saez's recent essay Striking it Richer: The Evolution of Top Incomes in the United States, provides an in-depth look at the widening gulf between the top 1% and the bottom 90% from 2009 to 2012.

Here is a chart of the top 10% share of income, based on their research: (the note in red marking the beginning of financialization in 1982 is my own)

What is the primary driver of this era's widening wealth inequality? Thomas Piketty's new book Capital in the Twenty-First Century provides an answer: financialization. While definitions vary, mine is:

Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage.

Another way to describe the same dynamics is: financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.

When the profits from financializing collateral and leveraging those bets to the hilt far exceed generating wealth by creating products and services, the economy is soon hollowed out as the perverse incentives of financialization start driving every business decision and strategy.

Author David Cay Johnston recently wrote an insightful review of Piketty's book,Trickle-Up economics:
 

Coming out of the Great Recession in 2009, inequality increased dramatically, the opposite of what happened when the Great Depression ended nearly eight decades earlier. Why?

The short answer: When investment returns exceed economic growth, the rich get richer, increasing inequality.

When an economy grows at 1 percent annually but investment returns are 5 percent, the already wealthy need to reinvest only a fifth of their gains for their fortunes to grow at the same rate as the overall economy. The rest can be spent on a sumptuous lifestyle.

Since by definition the very rich do not need to consume 80 percent of their incomes — the portion by which investment returns exceed the growth of the economy in Piketty’s model — they can reinvest most of their annual gains in the market. Over time this accumulating capital will snowball.

The official American income numbers, crunched by Piketty and his sometime colleague Emmanuel Saez, show that in the 21st century wealth and income increases are almost all taking place among the tiniest sliver of the wealthiest and highest-earning.

The top 1 percent of Americans raked in 95 cents out of every dollar of increased income from 2009, when the Great Recession officially ended, through 2012. Almost a third of the entire national increase went to just 16,000 households, the top 1 percent of the top 1 percent, Piketty and Saez’s analysis of IRS data shows.

The income changes for the vast majority are just as revealing. The bottom 90 percent saw their average incomes rise 8.8 percent in 1934 over the prior year, while in 2012 the same statistical group had to get by on 15.7 percent less than in 2009.

Piketty shows that whether capital is taxed or not, inequality will grow under current policies because savings from current wages and salaries cannot grow as much as returns to existing riches.

The process of accumulating “becomes more rapid and inegalitarian as the return on capital rises and the [overall economic] growth rate falls,” Piketty writes.

It's important to note that capital is not monolithic, nor is all capital qualitatively equal. Capital that is invested in rigged financier games funded by the Federal Reserve (for example, carry trades and high-frequency trading) is entirely different from capital that is placed at risk in a start-up company.

Capital invested in building a house is quite different from capital invested in pyramiding the mortgage into mortgage-backed securities (MBS) and exotic financial instruments based on the MBS.

Productively invested capital is at risk and generates additional production of goods and services. Financialized capital skims profits from leveraging debt: nothing of any real-world value is produced, it's just a giant skimming operation based on information asymmetry (or outright fraud and misrepresentation) and leverage.

Fed-funded financialization creates a perverse set of incentives: talent and capital flow to unproductive skimming operations because that's what generates the outsized profits, effectively starving the real economy of talent and capital.

The Fed makes essentially limitless funds available to banks and financiers at near-zero interest rates. Try borrowing $100,000 from the Fed at 0.1% interest; you can't. That privilege is reserved for financial predators and parasites.

Financier skimming operations stripmine productive assets and labor. With the Fed providing free money to financiers and no limits on debt, leverage, information asymmetry and sleight-of-hand accounting, the only result possible is widening wealth inequality.

You want to fix wealth inequality? Abolish the Fed, eliminate the too-big-to-fail banks, tax speculative profits from high-frequency trading and other skimming operations at 90% and lower the corporate tax rate on productively invested capital to 5%. The only way to reduce wealth inequality is to change the incentives and disincentives to favor productive investments and innovation rather than financialization.

via Zero Hedge http://ift.tt/OSkObi Tyler Durden

While the NSA is busy justifying its spying of every American its existence thanks to famous Moscow resident Edward Snowden, its Russian counterparts have been busy intercepting even more phone Ukrainian conversations.

After a month ago a leaked phone call between US assistant secretary of state Victoria Nuland and the US envoy to the Ukraine, Geoffrey Pyatt confirmed that it was the US that was pulling the strings in what was about to be a violent coup overthrowing Ukraine’s president Yanukovich, “someone” has just leaked another phone conversation, this time between parliamentarian Nestor Shufrych and former PM and ideological leader of the Ukraine “revolution” Yulia Tymoshenko and most probable future president of West Ukraine, in which Tymoshenko is makes the following threats, “It’s going too far! Bugger! We must grab arms and go whack those damn katsaps [a Ukrainian word used to refer to the Russians in a negative tone] together with their leader”, “I’ll use all my connections, I’ll raise the whole world – as soon as I’m able to – in order to make sure.. Bugger!.. not even scorched earth won’t remain where Russia stands” although all her empty threats collapse in the last sentence of the phone conversation in which she says, regarding the Crimea annexation, that “we are going to take it to the Hague International Criminal Court.” Good luck with that.

But the smoking gun, and where Putin once again shows just how masterful of a chess player he is, is the following statement by Tymoshenko, after asked, rhetorically, by her counterparty, “what should we do now with the 8 million Russians that stayed in Ukraine. They are outcasts“… to which she replies: “They must be killed with nuclear weapons.”

Needless to say, that is not how you make Russian friends, or diffuse geopolitical tensions with your superpower neighbor, who just happens to be set on recreating USSR 2.0. Because just like that Putin has his provocation carte blanche, as the second something, anything happens to any ethnic Russian in east Ukraine, Putin can point to precisely this conversation as proof of how Ukraine’s “government” feels toward the ethnic minorities in the east, and why “they deserve to be protected” the Russian bearhug. Which has been precisely Putin’s plan all along.

It is not surprising that after this recording was leaked, that Tymoshenko admitted the validity of the recording except for this part, because she knows just how greatly it can and will be used against her once Putin decides it is time to expand a little further beyond just Crimea.

??????? ????, ??? ??? 8 ??? ?????? ? ??????? – ??????. ????????? ???????: ??????? ? ??????? – ?? ????????.?????? ???:) ??????? ?? ??????????

— ???? ????????? (@YuliaTymoshenko) March 24, 2014

Some of the other statements, transcribed by RT, confirming just how powerless Ukraine truly is in this struggle between David backed by the world’s most insolvent and natgas hungry countries, and an ascendent Kremlin goliath:

Tymoshenko, who plans to run in Ukraine’s presidential election, expressed confidence that she would have found “a way to zap those assholes [Russia].”

 

“I’ll use all my connections, I’ll raise the whole world – as soon as I’m able to – in order to make sure.. Bugger!.. not even scorched earth won’t remain where Russia stands,” she promised.

 

Despite being incapacitated by spinal disc hernia the ex-PM stressed she’s ready to “grab a machine gun, you know what I’m saying, and go shoot this bastard [Putin] in the forehead.”

Full recording below:

via Zero Hedge http://ift.tt/1psTb3R Tyler Durden

“When you bundle bots, clicks fraud, viewability and the lack of transparency [in automated ad buying], the total digital-media value equation is being questioned and totally challenged,” warns one advertising group executive as the WSJ reports about 36% of all Web traffic is considered fake, the product of computers hijacked by viruses and programmed to visit sites. This means, simply put, that marketers, who are pouring billion of dollars into online advertising, are confronting an uncomfortable reality: rampant fraud… and the fraud is only going to get worse…

 

Via WSJ,

Spending on digital advertising—which includes social media and mobile devices—is expected to rise nearly 17% to $50 billion in the U.S. this year. That would be about 28% of total U.S. ad spending. Just five years ago, digital accounted for 16%.

The big question is whether attitudes will change if signs of fraud increase.

Billions of dollars are flowing into online advertising. But marketers also are confronting an uncomfortable reality: rampant fraud.

 

About 36% of all Web traffic is considered fake, the product of computers hijacked by viruses and programmed to visit sites, according to estimates cited recently by the Interactive Advertising Bureau trade group.

 

So-called bot traffic cheats advertisers because marketers typically pay for ads whenever they are loaded in response to users visiting Web pages—regardless of whether the users are actual people.

The fraudsters erect sites with phony traffic and collect payments from advertisers through the middlemen who aggregate space across many sites and resell the space for most Web publishers. The identities of the fraudsters are murky, and they often operate from far-flung places such as Eastern Europe, security experts say.

Big advertisers are in “crisis”

Chief Executive Vivek Shah, the chairman of the Interactive Advertising Bureau, said at the group’s annual conference last month that Internet advertising was facing a “crisis.”

 

…

 

“The clients we work with would love to spend more money in digital,” says Quentin George, a co-founder of ad-technology consulting firm Unbound. “But until we give them more control and transparency on how the money is being spent, they will continue to have questions and hold money back.”

 

…

 

“We’re aware of the concerns within the industry about ad fraud and are working to address those concerns as they pertain to our business,” a GM spokeswoman says.

One wonders just how “valuable” all those social media companies really are if the bots and fraud was removed? This isn’t the first time we have discussed this, but it seems even the advertisers are now doubting the new word order of “social” and “mobile” as the panacea for ad spend.

via Zero Hedge http://ift.tt/1jnhB1i Tyler Durden