Most noteworthy paragraph in Hank Paulson's op-ed , in today’s Washington Post, on what to do about the GSEs:

The GSEs are providing an enormous stimulus to the economy. Placing Fannie and Freddie in conservatorship was, in my view, the most effective of the stimulus efforts undertaken in the past two years. This stimulus was aimed squarely at the driver of our financial and economic crisis: the decline of home prices. Without public support, ensuring that mortgage financing was available during the worst moments of the financial crisis and the ensuing 22 months, the housing market would have ground to a halt, home prices would have spiraled downward, foreclosures would have skyrocketed, and financial institution balance sheets would have suffered greater losses, leading to a prolonged downturn and the loss of millions of additional jobs.

I don’t think I’ve ever seen anyone actually make this point, even though it is blatantly, absolutely true. If Fannie and Freddie hadn’t been around at the depths of the crisis to buy mortgages, everything would have ground to a halt. They’re still playing a vital role in keeping the economy propped up. That’s something the ban-the-GSEs-and-let-the-market-work-its-magic crowd fails to address whenever they get their lather up on the issue. Paulson’s answer is to create utility-like entities, whose rates of return would be fixed so managements don’t go crazy, to buy and insure conforming residential mortgages. I suppose. Free-market types will resist the idea. Then again, if the government is so invested in promoting and subsidizing home ownership (and you don’t even want to try and count the ways how), it can logically play a role in preventing the system from seizing up. . .  . No, I'm not crazy about the idea, either. . . .

In Phoenix, Freddie Mac moves to clear some inventory:

FREDDIE MAC TO AUCTION OFF FORECLOSED PHOENIX HOUSES

Prospective buyers trying to purchase Phoenix foreclosed homes to live in will have first dibs on 135 houses that mortgage giant Freddie Mac is auctioning off next month. 

Buyers, particularly first-timers using government incentives and mortgage financing, have had a tough time competing with investors for inexpensive foreclosed homes in metropolitan Phoenix over the past 18 months. This auction, Aug. 7 at the Phoenix Convention Center, is geared toward buyers who plan to live in the houses.

HomeSteps, the real-estate-sales unit of Freddie Mac, is offering to pay qualifying buyers up to 3 percent of their closing costs. Almost a third of the foreclosed homes going on the auction block are set aside for first-time buyers using federal funds from the Neighborhood Stabilization Program.  [Emph. added]

So Freddie is giving would-be-occupants preference over investors even though, as seems to be the case, investors are willing to pay more for the properties.

By what logic does this make sense? In Phoenix and many other depressed markets, home prices have fallen by so much that investors can purchase properties and turn around and rent them out at a positive carry. That’s why they’re willing to outbid first-time buyers! Given the financial state that Freddie lately finds itself in, I’d think it would have an interest in getting the top possible dollar as it liquidates its OREO, rather than accept (and help subsidize!) a lower offer from a buyer who’s more likely to default in any event. Crazy. I thought we’d all decided that bending over backwards to let people buy houses doesn’t always produce good outcomes.  . . . Despite all that’s happened, the cult of homeownership seems as strong as ever. . . .  

Corporate executives don’t trust President Obama. Fareed Zakaria counts the ways why:  

Most of the business leaders I spoke to had voted for Barack Obama. They still admire him. Those who had met him thought he was unusually smart. But all think he is, at his core, anti-business. When I asked for specifics, they pointed to the fact that Obama has no business executives in his Cabinet, that he rarely consults with CEOs (except for photo ops), that he has almost no private-sector experience, that he's made clear he thinks government and nonprofit work are superior to the private sector. It all added up to a profound sense of distrust.

Okay, okay, we get it!  . . . . While we're on the topic, the White House’s abuse of Chrysler’s secured-debt holders was no confidence-builder, either. Neither was this. And don't forget that “fat cat bankers” crack. That stung!  . . . .Come to think of it, is there a profit-making activity the President actually approves of? There must be. . . . . Wait, who makes TelePrompters? . . .

Who knew? It turns out Citi timed its Phibro sale pretty darn well:

[D]id Citi sell Phibro, its famed, profit-making commodity’s trading unit, in the nick of time?

Consider today’s release of second- quarter results from Phibro’s new owner Occidental Petroleum. Phibro “appears to be the bulk” of Occidental’s failure to meet Wall Street expectations, Chief Financial Officer Steve Chazen said in a conference call with investors and analysts this morning.  

“You can’t say trading results were anything but lousy,” Chazen said.

Citigroup sold Phibro late last year. While the purchase price wasn’t disclosed, a Citigroup executive told the Journal the bank expected to receive $450 million from Occidental.

In Gallup’s survey of Americans’ confidence in the country’s major institutions, out last week, which institution fell by the most? The presidency. In 2009, 51% of Americans said they had a great deal or quite a lot of confidence in it. Now just 36% do—down 15 points.  That is by far the biggest decline of any of the 16 institutions included in the survey. (Next biggest decline: minus-6, for both Congress and the military.) And which institutions rose by the most? The medical system (up 4 points, to 40%) and big business (up 3 points, to 19%).

Yes, you are reading that right. After a year of listening to President Obama trash the country’s medical system and insist it be replaced, Americans like the system more now than they did then. And after watching the White House systematically turn the energy industry, the health care industry, and the financial services industry into scapegoats over the past year, people think better of big business now than they did before. It’s only Obama who’s doing the sinking. The guy might need to readjust the settings on his teleprompter. . . .

One more reason to expect that, should she be appointed head of the CFPB, Elizabeth Warren would be less a disinterested regulator than she would be a nakedly partisan hack: she obfuscates the data in studies she conducts, in order to arrive at a pre-determined, politically correct conclusion. That’s what happened last year, at any rate, when, in the midst of the healthcare debate, Warren and colleagues miraculously produced a paper that found that soaring medical expenses accounted for fully 70% of bankruptcy filings, up from 50% in 2001. The Atlantic’s Megan McArdle ain’t buying it:

What Warren et. al. neglect to mention is that bankruptcies fell between 2001 and 2007 [because of the more creditor-friendly bankruptcy law passed in 2005].  In fact, they were cut in half.  Going by the numbers Warren et. al. provide, medical bankruptcies actually fell by almost 220,000 between 2001 and 2007, a fact that they not only fail to mention, but deliberately obscure.

Are Warren, et. al. unaware that bankruptcies fell by half?  No bankruptcy analyst could possibly be unaware of this fact; it has been the most talked-about phenomenon in the bankruptcy area since the 2005 law was passed.  

Oh, that classy White House. An unnamed Wall Street executive tells CNBC how the Obama administration must have decided to dole out the invites to today’s bill signing:

"Basically, the White House made the decision to invite only the banks that were most sycophantic in the run-up to the passage of Dodd-Frank.”

Some things you can just depend on. . . The logic of the decision eludes me, however. The White House comes off as petty, Jamie and Blankfein come off as stalwart defenders of shareholders and employees, and Vik Pandit comes off as a putz. I doubt this is the effect the Obama people were looking to create. . . .

Edward Glaeser makes the perfectly obvious, and often forgotten point that regulators are mere mortals, too, and so can be just as non-rational as the consumers they are supposed to protect.  

A consumer protection agency, however, is based on the view that a regulator can help offset the errors made by private individuals. In some cases, regulatory agencies really do make things better . . . . But history has seen plenty of bad regulation, whether in railroads or financial markets, that privileges insiders and restricts innovation. The best way to avoid these missteps is for the Bureau of Consumer Financial Protection to have modest, well-defined goals, like providing clear information to borrowers. Clear, limited objectives will reduce administrative overreach and respect the fact that politicians and regulators are people, too, and make the same kinds of mistakes as lenders and home buyers. [Emph. added]

I somehow doubt that “clear, limited objectives” are what the Obama people have in mind for the CFPA. This is not going to end well. . . .

Duh! Sell-side analysts are chronically over-optimistic:

Research published by McKinsey & Company this morning lays out in black and white what many have long suspected – that equity analysts consistently overestimate the future earnings growth of the companies they cover.

The consultant found that over the past 25 years, average earnings-growth estimates of 10-12% for companies in the S&P 500 were almost 100% too high. Average actual growth over the period was closer to 6%.

Authors of the report, titled ‘Equity analysts: Still too bullish,’ said: “Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.”

This tendency for optimism is reflected by the fact that analysts forecast growth of more than 10% for 70% of companies in the US index. [Emph. added]

The chart tells the tale:

In the comments section, Jim Quinn responds to my assertion that, contrary to Quinn's charge, Jamie Dimon did not shake and bake JPMorgan’s second-quarter earnings results:

Matt old boy You actually believe the crap you are writing? I'm a CPA and worked in the corporate world for 16 years you tool. I understand GAAP. I also understand how corporate management operates. Dumb ass auditors will sign off on anything Dimon shoves in front of their face. He pays the fees and they bend over. You clearly don't understand how the real world operates. If you recall, Enron's books looked spectacular until the company went bankrupt. You sound like a common bank analyst shill to me.

And here I thought Tom was the shill. . . . . Quinn’s argument, such as it is, seems to be that since Enron’s auditors allowed the company to get away with murder ten years ago, GAAP must be meaningless and all company managements everywhere must routinely make up their numbers as they go along. But Enron was an anomaly! That’s why it was in all the papers! Note that Quinn offers zero evidence of accounting malfeasance on JPMorgan’s part, other than his own mistaken understanding of reserve accounting. Since the Enron blowup, meanwhile, accountants have been sent to jail, Arthur Andersen has imploded, and laws like Sarbanes-Oxley have been enacted. If outside auditors ever routinely acted as management lapdogs (which they did not) they sure don't anymore. (And auditors aren't the only ones looking over a bank's management's shoulder; regulators are, as well.) Quinn is simply wrong in both his understanding of accounting and his understanding of how it is applied. . . . P.S. Whatever you do, do not trust the content of audits conducted by Jim Quinn, CPA. . . .

Alan Blinder says that one way to goose fiscal stimulus without adding to the deficit would be to let the Bush tax cuts expire, and then use the incremental revenues to extend unemployment benefits. People on unemployment almost surely will tend to spend a higher portion of the incremental dollars they’ll receive, he argues, than would the big earners who would have effectively gotten a tax cut. Fine. I buy that. But do critics have a point when they worry that extending unemployment benefits will simply incent the unemployed to put off a serious job search?

Economic research suggests they are right, though one shouldn't exaggerate the magnitudes. Furthermore, the work disincentives are only part of the story. Remember, we provide unemployment insurance for humanitarian reasons (to aid the afflicted) and to support the economy (by maintaining spending).

I’ll take that as a “yes.” I agree one shouldn't exaggerate the extent of the perverse incentive created by extending jobless benefits, but one might at least try to quantify it.  Also—and not to sound callous—what does “aiding the afflicted” have to do with deficit-neutral stimulus enhancement? For myself, I have a hard time seeing how paying people more money to not work will help meaningfully spur job growth. Alternative I'd like to see Blinder discuss at some point: temporarily cutting the payroll tax. The tax is regressive, so the new stimulus dollars will skew toward those with a higher propensity to spend rather than save them, and you don’t get the backwards incentives that extending jobless benefits creates. . . . .

James Quinn, a “senior director of strategic planning for a major university,” says that JPMorgan’s 76% second quarter earnings gain was “a gigantic fraud,” since it included a $6.3 billion reserve release that was set “at the complete discretion of Jamie Dimon.”

That’s not right. Actually, let me put that another way: that’s delusional. FASB rules see to it that bank managements have very little discretion setting reserves. There is simply no way that Jamie Dimon can conjure up a $6.3 billion reserve release on his own without running seriously afoul of GAAP. ( For that matter, if Dimon is fraudulently releasing reserves now, why did he bother larding them up at the depths of the crisis in the first place?) 

No one expects senior directors of strategic planning at major universities to understand the nuances of bank accounting, but they might have the basics right--especially if they’re going to publicly accuse bank CEOs of fraudulently cooking the books.

P.S. The tone of Quinn’s responses to skeptical commenters leaves one with the distinct impression that he needs to get his prescription rebalanced ASAP. . . .

The financial reform bill ended up being 2,400 or so pages long, so naturally it will take time for people to fully come to grips with the implications of everything that’s in it. Andy Kessler highlights one non-trivial detail that I’m surprised hasn’t gotten more attention already.

What is even more troubling is the prospect of government seizures built into the Dodd-Frank financial bill. This is much like the seizure of property from auto industry bond holders (denounced as speculators) in the bankruptcy of GM and Chrysler.  

Dodd-Frank also provides government leeway to seize firms it considers a systemic risk, without really defining what that systemic risk is. Why anyone would provide debt to large financial institutions (or auto makers) is beyond me, certainly not without demanding a huge premium for the seizure risk. . . . . [Emph. added]

He’s totally right. I’m still at a loss to understand the supposed virtues of the government’s new resolution authority. (To over-summarize the dilemma: either the feds will repay unsecured creditors of seized firms at 100 cents on the dollar or they’ll pay them less than that. There’s no third choice! Yet in either case, really bad things will happen that other parts of the bill won’t prevent.) As it is, private lenders have seen how unpleasant it can be to deal with the Obama administration in a corporate workout. I don’t know why lenders to “systemically important” institutions should expect any better treatment. . . .

Fun statistic of the day:  

Credit-card issuers mailed 84.8 million offers of plastic to U.S. subprime borrowers in the first six months of this year, up from 43.7 million a year earlier, estimates research firm Synovate. Nearly 8% of loans for new cars in the latest quarter went to borrowers with the lowest range of credit scores, up from 6.2% in 2009's fourth quarter, according to J.D. Power & Associates and Fair Isaac Corp.

I say, good! A resurgence in subprime lending good for the economy and good for subprime consumers. And assuming those consumers are being underwritten in a non-insane manner—which, considering where we are in the cycle, I bet is a very good assumption—good for the card lenders doing the mailing. . . .

One of the more urgent questions of the moment is whether the expiration of the $8,000 federal tax credit for home purchases, which occured April 30, will suck the life out of the housing market and perhaps cause a second leg down in prices. The Los Angeles Times hints at an answer: maybe not!

The expiring of the federal credit drove down the number of sales contracts signed nationwide a record 33% in May, according to government estimates, while the number of contracts on existing homes in the U.S. plunged a record 30% that same month, according to real estate industry estimates. . . .  

[D]ata on home purchase contracts from the California Assn. of Realtors, which are more forward-looking but less reliable indicators of sales, showed the regional market holding its own in June.

The data showed that contracts for single-family houses in seven cities — Los Angeles, Burbank, San Diego, Riverside, San Bernardino, Santa Ana and Anaheim — rebounded last month after dipping in May.  

Meanwhile, the more expensive cities of Irvine, Pasadena and Santa Monica appeared unaffected by the tax credit's expiration, with Irvine and Pasadena sales climbing steadily in April, May and June and Santa Monica registering a drop in June sales after a May surge. [Emph. added]

Meanwhile, home prices in Southern California are up 13% from a year ago. . . .

Andrew Ross Sorkin talks to Hank Paulson about the Dodd-Frank bill:  

Mr. Paulson, who was speaking by phone from his longtime home in Barrington, Ill. — he recently put his home in Washington up for sale — was initially reluctant to weigh in. He said he had not read all 2,000 pages of the legislation. But as he began talking, despite his insistence that he didn’t want to answer my question, he did exactly that.

“We would have loved to have something like this for Lehman Brothers. There’s no doubt about it,” Mr. Paulson declared about midway into our conversation.  

He was referring to a provision of the bill known as resolution authority, which would enable the government to unwind a failing investment bank or insurance company in an orderly way without forcing it into bankruptcy, thus avoiding the unintended consequences that a bankruptcy might create. . . [Emph. added]

Am confused. If the government had seized Lehman, the way Paulson now says he wishes he’d had the power to do,  the feds would have repaid Lehman’s unsecured creditors at either a) 100 cents on the dollar or b) something less than 100 cents on the dollar. If b had happened, the whole near-collapse of the financial system would have proceeded just as it did anyway. If a had occurred, the too-big-to-fail policy would have been made more explicit than ever, and lenders to large institutions would have added confidence the government would backstop their loans, no matter what kind of crazy antics the institution was up to. So I don’t see why resolution authority is supposed to be such an improvement on the status quo. All it is is a huge expansion of government’s right to unilaterally seize private property. Which, to my mind, is not a good thing. . .

Holman Jenkins hits nail on head:

Let us be realistic about one thing, since most of us aren't running for office: "Bailout" has become a curse word in populist diction, but "too big to fail" isn't going away just because regulators pretend next time they would fold their arms and let the system blow up.

The government will and should continue to come to the rescue in a panic. We need better incentives to avoid creating such situations in the first place. But that discipline won't come from shareholders, who will happily create the next 100-to-1 leveraged financial institution if the potential rewards are great enough. Bank depositors and other leverage suppliers are the ones who must be mobilized to make the system safer. [Emph. added]

Enactment of this new, misbegotten financial reform bill, it goes without saying, doesn’t change this dilemma at all. . . .

From the Orlando Business Journal:

The Federal Reserve has concluded that applying the same consumer protections to small business credit cards that Congress imposed on personal cards could make these cards more expensive and harder to get.

These protections, such as restricting the ability of banks to raise interest rates on existing balances, were applied to personal credit cards in the Credit Card Act of 2009. Credit cards issued to small businesses, instead of individuals, were not covered by this law. [Emph. added]

So increased regulation makes credit more expensive and difficult to obtain! Who knew? And that’s not Rand Paul talking, it’s the Federal Reserve! President Obama says he wants banks to lend more. Odd. He has a funny way of showing it. . . .  

From today’s Miami Herald:

 

Same paper, same page, same day:


And you don't even want to know about condos. . . .