Wednesday, July 29, 2009

The Future of Public Housing (Hsiu Jui Chang, William Cunningham, Jui Kai Li)

On July 29th, the Subcommittee on Housing and Community Opportunity held a hearing on Academic Perspectives on the Future of Public Housing. Testifying were Dr. Thomas D. Boston, Professor, School of Economics, Georgia Institute of Technology, Orlando Cabrera, Chief Executive Officer, National Community Renaissance and Nixon Peabody, Dr. James Fraser, Associate Professor, Department of Human and Organizational Development, Vanderbilt University, Dr. Edward Goetz, Director, Center for Urban and Regional Affairs, University of Minnesota, Dr. Laura Harris, Assistant Professor, School of Urban Affairs and Public Policy, University of Memphis, Mr. David R. Jones, President and Chief Executive Officer, Community Service Society of New York, Dr. Mark Joseph, Assistant Professor, Mandel School of Applied Social Sciences, Case Western Reserve University, and Dr. Susan Popkin, Director, Program on Neighborhoods and Youth Development, The Urban Institute.

In the opening statement, several representatives expressed their views on public housing. The chairwoman maintained that there are problems with public housing such as neglecting the needs of existing public housing residents and underfunding. Rep. Lynch noted the shortage of staff required to maintain the quality of public housing. One congressman said flexibility in public housing programs is important. Most of the testimony concerned the HOPE VI program. The testimony is summarized below and copies of the written statements are available at;

Highlights from Testimony:

One recurring problem identified had to do with the screening process. People receiving public housing are selected by private sector agents who may unfairly restrict applicants’ access to public housing services by the imposition of irrelevant credit requirements. Industry representatives responded that credit guidelines served to protect investors’ interests. Social responsible investors might counter by pointing out that credit guidelines imposed on subprime mortgage borrowers were also supposed to protect investors’ interests. They did not do so leaving some to question their relevance and fairness.

In general, fully evaluating the benefit of a public investment by simply looking at returns to a narrow group of people is inappropriate. One of the suggested program improvements involved making sure that HOPE VI program participants did not experience increased isolation as a result of participating in the program. In the table below, we show the interaction between isolation and improved housing. Thus, the most likely program outcome is a decline in quality of life for program participants.



No Change

Slightly Better

Much Better

No Change


Quality of Life improves

Quality of Life improves

Slightly Worse

Quality of Life declines

Quality of Life declines

Quality of Life improves

Much Worse

Quality of Life declines

Quality of Life declines

Quality of Life declines

Wednesday, July 22, 2009

U.S. lost 53% supporting Goldman Sachs

According to, "The U.S. government made a 23% return supporting Goldman Sachs during the global financial crisis, the investment bank said Wednesday as it unwound one of the last taxpayer-funded investments it received last year." This is incorrect. If you include the $13 Billion that Goldman received through AIG (to make Goldman whole on Credit Default Swap transactions) we lost around 53%.

Tuesday, July 21, 2009

Humphrey Hawkins Hearing on Monetary Policy(Jui Kai Li)

On July 21st , Federal Reserve Chairman Ben Bernanke testifies before the Full committee of the House Financial Services Committee for his semiannual Humphrey Hawkins Hearing on Monetary Policy.

Mr. Bernanke’s testimony is summarized as follows and copy of the written statement is available on the committee’s web site at:

Mr. Bernanke’s early responses to the Wall Street Journal (wsj) were cited by Barney Frank (D., Mass.), the Committee’s chairman as his opening statement. Mr. Bernanke’s quotes on the WSJ also became some of the lawmakers concerns.

Expansion of GAO audit
According to the WSJ’s article “Bernanke Heads to Congress Battling Calls to Tame the Fed”, Mr. Bernanke strongly opposed the proposal to audit the Fed, calling it "self-defeating and dangerous." He said that the risk is that if investors see the Fed facing new political oversight, they will doubt its ability to take unpopular steps to fight inflation -- one of the Fed's top jobs. Fearing inflation, bond investors will push interest rates up, hurting the weak economy.

The first firework quickly came when Rep. Texas, Ron Paul asked Mr. Bernanke to respond to his quotes. Also, according to Mr. Bernanke’s testimony, he expressed his concerns that the legislation could compromise Fed’s independence. “In doing so(expand the audit authority of the GAO), the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy,” said Mr. Bernanke.

Bernanke asserts that the Fed’s program to purchase Treasury securities isn’t an active intervention but a common open market operation aimed at making it easier for the government to issue debt. But, Mr. Paul worried that the program would cause inflations.

Macroeconomic Report
Although there are a lot of critics of Fed’s efforts in the credit crisis, Mr. Bernanke started his report by giving some good news. “More recently, the pace of decline (the U.S. economy) appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization…. Consumer price inflation, which fell to low levels late last year, remained subdued in the first six months of 2009.” Also, Mr. Bernanke indicated “Consumer spending has been relatively stable so far this year, and the decline in housing activity appears to have moderated.”

Some improvement has been seen in the credit markets. “Interest rate spreads in short-term money markets, such as the interbank market and the commercial paper market, have continued to narrow. The extreme risk aversion of last fall has eased somewhat, and investors are returning to private credit markets.”

However, the high unemployment rate is still a headache of the Fed. “Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook,” said Mr. Bernanke.

Small Business Concerns
To ease the consumer and small business tight credit, the Fed implemented the Term Asset-Backed Securities Loan Facility (TALF), an unusual Fed program. The loan facility will support the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

Mr. Bernanke was asked if the Fed plan to extend its $1 trillion TALF to back securitizations for commercial real estate loans. Mr. Bernanke said that there is a significant amount of commercial real estate loans coming up for refinance “and they may not get done.”

The most common criticism of the program was the lack of clarity around the requirement that any underlying ABS collateral be "newly or recently issued exposures to US-domiciled obligors." Although Mr. Bernanke noted that “the Fed is urging banks to help creditworthy borrowers refinance”, some critics worried that unclear credit requirement will repeat the mistake of the credit crisis.

Consumer Protection

Several lawmakers expressed their concerns about the role of the Fed. Although the Obama administration has proposed promoting the Fed to the role of systemic risk regulator, the Fed’s power to regulate consumer products will be placed by a new consumer protection agency. Mr. Bernanke implicitly mentioned some conflicts of power of shift. Mr. Bernanke tells lawmakers that the Fed “would be interested” in keeping its consumer-protection responsibilities.

“If I were writing it, I would keep the consumer protection with the federal banking agencies, with additional measures to ensure a strong commitment,” he said, arguing that the Fed is “well-placed” to regulate consumer products offered by the financial firms it supervises. “I’m proud of the work we’ve done,” he added.

Investment Concerns

Although stocks dropped first right after Bernanke’s testimony, Mr. Bernanke proved to help stocks push higher today. The Dow Jones industrial average extended its longest rally in two years, climbing 68 points, or 0.8 percent, to close at 8,916.(sources Google Finance).

Bernanke's History

Looks like they got that one wrong.

On January 17, 2008, the Chairman of the Federal Reserve Board, Mr. Bernanke, testified that "A recession is probably not on the horizon, but quick passage of an economic-stimulus package plus aggressive action by the Federal Reserve are the appropriate prescription for the ailing economy.."

What we got wrong.

We note that on June 18, 1998, in a letter to Betsy White, Senior Vice President at the NY Fed, we said:

"Finally, it is our continuing belief that the Federal Reserve Board should be designated a 'Superregulator,' with broad responsibility for overseeing the activities of banks, thrifts, pension funds, insurance companies, mutual fund companies, brokerage firms and investment banks. We note our belief that financial institution convergence, driven by recent advancements in financial and computer technology, requires the creation of such a 'Super-regulator.' "

We, and others, no longer believe the Federal Reserve independent or objective enough to serve as "Superregulator" or as "Systemic Regulator." They are, thus, unqualified for the role, which should be filled by an entirely new entity.

Thursday, July 16, 2009

Hearing on the Community and Consumer Advocates' Perspectives on the Obama Administration's Financial Regulatory Reform Proposals(Jui-Kai Li)

On July 16th , the Full committee of the House Financial Services Committee held a hearing on community and consumer advocates’ perspectives on the Obama administration’s financial regulatory reform proposals. Testifying were Joseph L. Flatley- Massachusetts Housing Investment Corporation, Oliver Ireland- Morrison & Foerster LLP, Edmund Mierzwinski-U.S. Public Interest Research Group, Janet Murguia, National Council of La Raza, Travis Plunkett-Consumer Federation of America, John Taylor- National Community Reinvestment Coalition, and Nancy Zirkin- Leadership Conference on Civil Rights.

In his opening statement, Chairman Barney Frank replied to yesterday’s arguments on the “plain vanilla” mortgages. There were concerns that “plain vanilla” mortgage product would have the impact of reducing consumer choice and hurt financial innovations. He explained that the innovations are important. But, innovations should be in the context of regulations. He claimed that although excessive regulations are problems, appropriate regulations provide safety and soundness to the financial environment. Thus, he anticipated that the congress and the private sectors can work together to make suitable regulations.

The testimony is summarized below and copies of the written statements are available on the committee’s web site at

Two consecutive hearings are held to present the views both from the banking perspectives and community and consumer advocates’ perspectives. However, the community and consumer advocates spoke in different voices contrary to the banking perspectives. Most of the witnesses support the establishment of the CFPA.

What they see and expect in the new agency are as follows:

Community Reinvestment Act (CRA)
“The Administration’s proposed CFPA contemplates a massive, unprecedented shift in oversight of Federal laws involving consumer protection.” said Joseph Flatley, President and Chief Executive Officer, Massachusetts Housing Investment Corporation on behalf of NAAHL. But, he also expressed his concern on the transfer of CRA to CFP. “NAAHL bankers have raised concerns about splitting the “Siamese twins” of CRA evaluation (going to CFPA) and the diminished influence of CRA in the regulatory application approval process (retained with the banking regulatory agencies),”said Mr. Flatley.

“Since CRA is a central component of consumer protection and CFPA will be the central agency to protect consumers, CFPA must be charged with enforcing CRA,” said John Taylor, President and Chief Executive Officer, National Community Reinvestment Coalition.

“Regardless of where jurisdiction over the CRA is ultimately placed, LCCR believes that strengthening the law is absolutely vital to ensuring that our communities have access to fair, responsible sources of credit,” said Nancy Zirkin, Executive Vice President, Leadership Conference on Civil Rights.

Credit Rating Agencies
“One disappointing area of the administration’s proposal is its failure to propose robust reforms of the Credit Rating Agencies,” said Edmund Mierzwinski, Consumer Program Director, Public Interest Research Groups.

“The plan’s provisions on credit rating agencies, in particular, are weak considering the central roles these agencies played in causing the current crisis,” said Travis B. Plunkett, Legislative Director, Consumer Federation of America.

Corporate Governance Reforms
“The President’s plan, which includes only two proposals on corporate governance...We believe it would be a grave error to miss yet another opportunity to adopt more far-reaching reforms. Among the top priorities should be legislation giving the SEC clear authority to reform the proxy access rules to make it easier for shareowners to nominate directors,” said Mr. Plunkett.

Opposing CFPA
On the other hand, there is still opposition of the creation of the CFPA. “I believe that creating a separate stand-alone agency for this purpose ignores the increasingly vertically integrated nature of the market for retail financial services and the role that retail financial transactions play in the overall economy of the United States,” said Oliver I. Ireland, Partner, Morrison & Foerster LLP. He worried that “bifurcating regulation of the market as is contemplated by the creation of a dedicated agency that focuses only on the consumer protection aspects of the mortgage lending process, at a minimum, is likely to create conflicts with prudential supervisors.”

Wednesday, July 15, 2009

Hearing on the Banking Industry Perspectives on the Obama Administration’s Financial Regulatory Reform Proposals(Jui-Kai Li)

On July 15th , the Full committee of the House Financial Services Committee held a hearing on the banking industry perspectives on the Obama administration’s financial regulatory reform proposals. Testifying were Steve Bartlett-Financial Services Roundtable, John A. Courson- Mortgage Bankers Association, Chris Stinebert- American Financial Services Association, Steven I. Zeisel- Consumer Bankers Association, Professor Todd J. Zywicki- George Mason University, Denise M. Leonard- National Association of Mortgage Brokers, Edward L. Yingling- American Bankers Association, R. Michael S. Menzies- Independent Community Bankers of America.

In his opening statement, Chairman Barney Frank explained that there are lots of opinions and complaints with regard to the Obama administration’s financial regulatory reform proposals. He believes that these opinions and complaints are important during the establishment of this new regulation. He anticipated today’s discussion from the banking industry perspectives could contribute to the better regulation. The testimony is summarized below and copies of the written statements are available on the committee’s web site at

The witnesses are the recognized voices on banking, securities, insurance companies and mortgage broker industry. Most of the witnesses support “the bold, comprehensive financial regulatory reform to strengthen the ability of our financial markets to serve consumers and support the economy.” said Steve Bartlett, President and Chief Executive Officer, The Financial Services Roundtable.

However, the witnesses also offered their opposing points on Obama administration’s proposal:

Consumer Financial Protection Agency

Most of the witnesses strongly oppose the establishment of the new agency. “We strongly oppose the creation of a separate, free-standing Consumer Financial Protection Agency” because in part he believes that “consumer protection and safety and soundness should not be separated.” said Mr. Bartlett.

“Establishment of a regulator along the lines proposed would worsen the patchwork of federal and state laws resulting in uneven protection and increased costs for consumers.” said John A. Courson, President and Chief Executive Officer, Mortgage Bankers Association. Also, he worried that the CFPA could not give enough attention to mortgage products. “Because the new regulator would not be solely focused on mortgage regulation and products, there is a very real danger that mortgage products may not receive sufficient priority.” said Mr. Courson.

“There is no evidence that consumer ignorance was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred.” said Professor Todd J. Zywicki, George Mason University Foundation Professor of Law and Senior Scholar, Mercatus Center at George Mason University. “I have no affiliation with the “banking industry” except as a customer.” said Mr. Zywicki.

Sophisticated, Customized Derivatives
“The Roundtable recommends that standardized derivatives are cleared through a regulated clearinghouse to provide more transparency and to reduce systemic risk within the industry. However, clearing sophisticated, customized derivatives should not be required because they allow flexibility for institutions to meet their customers’ needs.” said Mr. Bartlett.

The Authority of Federal Reserve Board
“We must emphasize, however, that the Board should not be an additional super-regulator. Rather, it should work with the prudential regulator in non-emergencies to address potential systemic risks. Moreover, the Board also should not publicly identify systemically significant institutions (“Tier 1 Financial Holding Company”), as proposed by the Administration; it should focus its priorities and focus on activities and practices across the entire financial system, not individual institutions.” said Mr. Bartlett.

“Further, requiring each Tier 1 FHC to comply with the nonfinancial activity restrictions of the Bank Holding Company Act does not address a cause of the current credit crisis or threat to the safety and soundness of the financial system.” said Mr. Bartlett.

Resolution Regime for Insolvent Nonbank Financial Institutions
“The Administration’s legislative draft, relies too heavily upon the FDIC to act as a receiver or conservator for such institutions…We also oppose funding such an authority with assessments of all systemically significant institutions.Furthermore, the FDIC's Deposit Insurance Fund, the Securities Investor Protection Corporation, and the state insurance guarantee funds should be retained and protected for their original intended uses.” said Mr. Bartlett.Clearly,there are concerns that under the requirement of the proposal the deposit insurance fund of FDIC will be jeopardized.

Restriction of the Activities of Financial Institutions

“The Roundtable supports increased regulatory oversight of the financial affiliates of commercial companies to assure that such finance companies continue to provide this much needed credit in a safe and sound manner, but cautions against proposals that eliminate or severely restrict the activities of such institutions.” said Mr. Bartlett.

Plain Vanilla Mortgage
“The proposed regulator has the potential to roll back the clock 30 years, when consumers only had plain vanilla borrowing options.” said Chris Stinebert, President and Chief Executive Officer, American Financial Services Association.

“However, mandating the offering of some type of “plain vanilla” mortgage product would have the impact of reducing consumer choice and increasing costs for consumers. A better approach would be to continue to improve and clarify the current effort to ensure strong underwriting by ensuring the ability to repay a loan by prospective consumers. Strengthening underwriting is a more effective approach than attempting to proscribe specific products for consumers.” said Mr. Bartlett.

“NAMB is worried about the unnecessary additional costs of developing new products, questionnaires, and opt-in disclosures that would likely be passed-on to consumers if institutions’ product offerings are overregulated.” said Denise M. Leonard, Vice President, Government Affairs, National Association of Mortgage Brokers.

Industrial Bank Charter
“We do not believe that the elimination of the industrial bank charter is warranted to benefit customers. To the contrary, it would be the worst time to eliminate the charter, as this would lead to further job loss.” said Mr. Stinebert.

The financial reform proposes that companies that own an FDIC-insured thrift, industrial loan company (ILC), credit card bank, trust company, or grandfathered depository institution are required to become BHCs. However, lots of conflicts of interest involved in the industrial bank charters. Bankers can use bank charters primarily to access payment systems and avoid state usury laws.

“The CFPA grants broad authority to impose fees and assessments on “covered persons.” NAMB is concerned that those regulated on the state level, such as mortgage brokers, may be forced to pay more to do business, which will place such entities at a competitive disadvantage and will ultimately increase costs for consumers.” says Ms. Leonard.

Thrift Holding Companies
“Thrift institutions have taken the lead in re-establishing economic growth – whether it is the thrifts that are lending to help rebuild New Orleans, or those that are leading community development plans from coast to coast to put Americans back to work.” said Edward L. Yingling, President and Chief Executive Officer, American Bankers Association.

On the other hand, the elimination of thrift holding companies may hurt the bankers's profits.Financial reform proposes to eliminate thrift holding companies because “significant differences between thrift holding company and BHC supervision and regulation have created material arbitrage opportunities. “

Friday, July 10, 2009

Hearing on the Administration’s Proposal to Regulate the Over-the-Counter Derivatives Market (William Cunningham, Jui-Kai Li, Hsiu-Jui Chang)

At 10:00 a.m. on Friday, July 10, 2009, in 1100 Longworth House Office Building, the Full Committee of the House Agriculture Committee and the House Financial Services Committee conducted a hearing titled "A Review of the Administration’s Proposal to Regulate the Over-the-Counter Derivatives Market." Timothy F. Geithner, Secretary, U.S. Department of the Treasury, was the only witness.

The hearing began with a consideration of the risk to taxpayers from the over the counter derivatives market. According to Wikipedia,

"Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. According to the Bank for International Settlements, the total outstanding notional amount is $684 trillion (as of June 2008)."

Upon opening of the hearing, the Chair of the Ag Committee stated that: "Government should not be the one to judge risk." Among other topics, members of the Committee and the Secretary discussed the fact that new regulation is being driven by the a recognition that the OTC market provides a broader set of investment options, but capital requirements and other protections need to be strengthened to better reflect the true riskiness of these options. The Secretary reiterated that this was the purpose of the proposal.

The need for international cooperation among regulators was discussed at several points. A recurring worry was regulatory arbitrage. Influencing this concern was the ability of new technologies, like the Internet, to act as a powerful disintermediation engine, thereby making it easier for OTC derivative market customers to move trading activity to the exchange that is the least regulated.

Another topic of discussion concerned standardized versus customized OTC derivative products or contracts. Note that the Financial Reform Plan released by the Obama Administration calls for the use of more "plain-vanilla" derivatives.

One Committee member suggest banning Credit Default Swaps (CDS) outright, but the Secretary rejected this suggestion, calling instead for higher CDS capital requirements.

The Obama Administration Stimulus Plan was discussed, with one Committee member saying that recent increases in the unemployment rate showed the Plan to be a failure. The Secretary countered by saying that decreases in unemployment lag increases in economic growth at this point in a recovery.

Several Committee members discussed the need for a central OTC derivatives clearinghouse. One member suggested the creation of an electronic clearinghouse. The Secretary suggested that this would increase transparency and make price discovery more efficient. The Secretary also noted that this increased transparency will require closer cooperation and coordination by the SEC and the CFTC, but no decision appears to have been made yet about merging the two regulatory bodies.

The only fireworks came when one committee members asked the Secretary to guarantee that today's derivative buyer will not be tomorrow's bailout recipient. The Secretary declined to offer any such assurance.

Wednesday, July 1, 2009

Central Pacific versus OneUnited

According to the Washington Post, "Sen. Daniel K. Inouye's staff contacted federal regulators last fall to ask about the bailout application of an ailing Hawaii bank that he had helped to establish and where he has invested the bulk of his personal wealth."

While we have seen this before, I think the Senator's case differs significantly from the OneUnited case. Black-owned OneUnited "sought aid as community 'beacon'", had few inner city loans, and still "got $12 million from the US bank bailout fund."

The cases are different because:

"Regulators in October (2008) concluded in a cease-and-desist order that OneUnited.. had poor standards for qualifying and documenting loans, and gave top executives excessive pay and perks. Two of the perks regulators targeted were a $6.4 million beachfront Santa Monica mansion (1% of OneUnited's assets) that management used while in California and a Porsche SUV driven on company business in Boston."

The bank the Senator helped, "Central Pacific, was founded in 1954 by a group of World War II veterans including Inouye who were emerging leaders in Hawaii's Japanese American community. Inouye, who became the bank's first secretary, said that he initially invested $3,000, the minimum amount possible. Central Pacific is Hawaii's fourth-largest bank, holding about 15 percent of the state's deposits."

The Senator asked about the application. He did not facilitate a meeting between bank management and the Secretary of the Treasury (as was the case with OneUnited). Central Pacific had no cease-and-desist orders pending and was too significant (and too responsible) to fail.