Now We Have HAFA within HAMP to Stem the Housing Crisis

In plainer language, we have the Home Affordable Foreclosure Alternatives Program, a new program announced on November 30, 2009, which is part of the Home Affordable Modification Program courtesy of the U.S. Treasury Department under Obama Administration.

Home Affordable Foreclosure Alternatives Program (HAFA)
(National Association of Realtors)

"On November 30, 2009, the Treasury Department released guidelines and forms for its new Home Affordable Foreclosure Alternatives Program (HAFA). HAFA is part of the Home Affordable Modification Program (HAMP). HAFA provides incentives in connection with a short sale or a deed-in-lieu of foreclosure (DIL) used to avoid foreclosure on a loan eligible for modification under the HAMP program. Servicers participating in HAMP are also required to comply with HAFA. A list of servicers participating in HAMP is available at MakingHomeAffordable.gov.

"HAFA applies to loans not owned or guaranteed by Fannie Mae or Freddie Mac, which will issue their own versions of HAFA in coming weeks."

HAFA seems to be in response to the criticism that the administration's loan modification program (HAMP) is not working. The article lists the program features of HAFA in bullet points. They include:

• Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
• Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
• Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
• Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-three matching basis).

The 2nd bullet point looks like the result of lobbying effort by the realtors. But that aside, my question is: What's in it for investors?

Other than up to $1,000 for giving some scraps for the 2nd lien holders?

I think I know the answer.

Many investors who bought distressed mortgages may be already backstopped by FDIC. If a house is foreclosed or sold on a short-sale, and if the realized amount from foreclosure/short-sale is less than the amount the borrower owes on the house, the investors of the loan will receive 80 to 95% of the difference from FDIC under loss share agreement like the one FDIC has with the investors who purchased IndyMac. (FDIC is, by the way as you know, broke).

The kicker here is that these investors probably paid for a fraction on a dollar for these mortgages. If FDIC's asset liquidation is any indication, they are sold at anything from 3 cents on a dollar (non-performing) to 70 cents (performing) on a dollar.

Let's say here's a house in danger of foreclosure. The mortgage outstanding on the house is $500,000. The market value is determined to be $350,000. Now the investors agree to a short sale at that price. To compensate for the loss, FDIC will give $120,000 (80% of $150,000 loss) to the investors. But wait! These investors purchased this mortgage at $250,000 (50 cents on a dollar). So by agreeing to sell the house at $350,000, they will already have made $100,000. On top of that, FDIC will give another $120,000. Total of $220,000 profit on $250,000 investment. 88% return. The return would be much higher if they used leverage (PPIP anyone?).

With such a perverse incentive in place, investors don't have much interest in loan modification; they would rather foreclose and pocket the quick money than going through a slow process of loan modification. So now the government has stepped in again and is telling the servicers/investors to be a little less greedy; instead of foreclosing, how about short-sale? "You will still get compensated for your "loss", but it may just take a bit longer. It will make you look good in the eyes of distressed homeowners, you know, if you give the appearance of taking some hit ..."

Now, the next question is: Who are these investors?

Or put it another way: Do you know who owns your mortgage?

At this point, it is very safe to assume the bank who gave you the mortgage no longer owns it. It's been sold long time ago. Occasionally, you may get to know who owns your mortgage when there's a change of a loan servicer. Then you may get to know that your loan is actually owned by a bank other than the originating bank, Fannie Mae or Freddie Mac (the wards of the state who have just been given an unlimited ATM card by Uncle Sam), a hedge fund that manages billions of dollars, or that your loan has probably been turned into some kind of securities (MBS, CDO, squared, cubed, who knows) as you may see a combination of alphabets and numbers as the investor.

A hedge fund manager has this to say in a New York Times article ("U.S. Loan Effort Is Seen as Adding to Housing Woes" 1/1/2010) about "clearing the housing market" by allowing foreclosure and short sale:

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

Yes, that may be all true. But it is probably a good bet that his firm is invested in residential mortgages outright or in a securitized form, which they probably purchased on the cheap. He'd rather see his fat profit sooner than later, wouldn't you think?

So, again and again, the government is there for the big boys, making sure that they profit handsomely.

What will the distressed homeowners get after the short sale under this HAFA? No house, battered credit record, and $1500 for relocation. Oh and the peace of mind that the first lien holder cannot come after you for deficiency. No guarantee though of the 2nd lien holder...

Here's the link to the November 30, 2009 Supplemental Directive announcing HAFA within HAMP (27 pages of the total 43 pages are sample forms and exhibits).

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Holiday Gifts for Americans: Lumps of Coal

It looks like Americans got the proverbial lump of coal for the holiday gift from their government.

It started in the week before the Christmas week, but the news quietly spread on the Internet during the Christmas week.

Did Obama exempt Interpol from same legal constraints as American law-enforcement? (12/23/09 Hot Air)

The president of the United States did that on December 16 by amending Executive Order 12425 signed by President Reagan and removing the exceptions in the original Order. Mainstream media didn't report. It was bloggers who caught it.

"In Executive Order 12425, Reagan made two exceptions to that status. The first had to do with taxation, but the second was to make sure that Interpol had the same accountability for its actions as American law enforcement — namely, they had to produce records when demanded by courts and could not have immunity for their actions."

Now that's gone, thanks to the presidential signature. Interpol can do whatever it wants in the U.S., and they don't have to tell anyone why they are doing what they are doing.

Then, on Christmas Eve, we were greeted with two pieces of joyful news. First, in the very early morning,

Senate Passes Health Bill (12/24/09 Politico Live Pulse)

So now we have a new "right" - a right to health care insurance. And we don't have a right not to have health care insurance. And the right will be forced upon us with penalties and taxes and jail-time. (Much like spreading "democracy" at gunpoint.)

Then, after the holiday-shortened stock market was closed, Treasury Secretary Timmy Geithner announced that the government was going to remove the $400 billion cap on aid to Fannie Mae and Freddie Mac, two of the three wards of the state (the third one being AIG):

A Lump of Coal from Treasury (Mark A. Calabria, 12/29/09 Cato Institute)

The existing limit was $200 billion each, total $400 billion. Now the federal government will backstop the entire balance sheets of Fannie and Freddie, and that's over $5.5 trillion dollars. Cato Institute's article speculates that it is not for the support of the U.S. mortgage market but to support large holders (foreign and domestic) of Fannie and Freddie debt instruments.

On Christmas Day, a hilarity and ensuing dismay: a panty bomber struck and failed, and airline passengers get the punishment.

A son of a rich Nigerian banker was assisted by a sharply-dressed man at Schiphol airport in Amsterdam and boarded the plane without passport. Then, just before landing on Detroit, he tried to ignite explosives hidden in his underpants and failed.

As the result, all around the world, people are being subjected to lengthy and probably totally unnecessary pre-boarding checks and other potential intrusions into privacy like whole-body scan and behavioral profiling (whatever that means by this towering intellectual), and a bracelet that can zap you immobile if you are bad ("bad" defined by the panicky flight attendants?).

Then on December 30, a Bloomberg article revealed that Barney Frank's bill for financial overhaul (H.R. 4173) which passed the House include a generous help package for the too-big-to-fail banks: $4 trillion. U.S. taxpayers will have the privilege to pay for it one way (tax) or the other (inflation):

Bankers Get $4 Trillion Gift From Barney Frank (David Reilly, 12/29/09 Bloomberg)


Happy New Year.

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Debt Limit Is Fast Approaching

as the U.S. dollar continues to decline and the 30-year bond auction meets tepid result today.

The debt limit is currently set at $12,104 billion.

The tiny widget on the left top corner of this blog is ticking away, and it is now at $11,949 billion.

Mere $155 billion, and the limit will be reached. That's less than one-month issue of Treasury notes and bonds these days, which averages around $180 billion for the last 3 months.

The stock market gave up a chunk of gains for the day (still positive) on the announcement of the 30-year bond auction result.

But what caught my eyes was the sale of $10 billion 16-day Cash Management Bill (CMB). It matures on October 29, and pays the same interest as 4-week bill. That's where the Primary Dealers put their money today, not 30-year bond. (For details of today's auction, please go to my site on Treasury auctions, here.)

CMB is usually used to fill temporary shortfalls in the government budget so that the government can continue to operate (=to spend more). 16 days to tide them over until Congress approves yet another debt limit increase, as Treasury Secretary Timmy Geithner requested back in August.

The U.S. government has temporary short falls in the budget permanently.

The debt limit was raised twice in the 2009 fiscal year. The second one was when the so-called stimulus bill was passed in February. Now that the Senate passed the defense bill that will cost $636 billion, the debt limit increase is a foregone conclusion.

Sea of debt, as far as eyes can see. Lovely.

The U.S. dollar index went down to 75.76 intraday, lowest in 14 months. Long-term (20-year) support at 80 has been long gone. There is a slight support around 75, a better support at 72. Below that, it's an uncharted territory. Literally.

Take a look at my post from May. Back then, the dollar index was still at the support, at 80. And that seemed dangerously low back then.

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If You Were Watching Treasury Auction Last September

...you might have been able to get the @#$% out of the stock market in time.

As I was looking for next week's treasury auction information at TreasuryDirect.gov for my other blog, it occurred to me, for some unknown reason, to take a look at CMB (Cash Management Bill) auctions, if any, in September 2008. Since I started tracking the Treasury auctions and Fed's open market operations in May, I know there are CMB auctions done for the Federal Reserve use, and not for the government use.

I wish I had checked these auctions when they were taking place in September 2008.

Here are the CMB auctions under the SFP (Supplementary Financing Program), which was initiated by the Treasury Department at the request from the Federal Reserve on September 17, 2008, the day A.I.G. was bailed out by the Federal Reserve:

September 17, 2008: 35-day CMB, $40 billion (Primary Dealer: $18.68 billion)
September 18, 2008: 76-day CMB, $30 billion (Primary Dealer: $20.58 billion)
September 18, 2008: 20-day CMB, $30 billion (Primary Dealer: $15.43 billion)
September 19, 2008: 45-day CMB, $30 billion (Primary Dealer: $20.47 billion)
September 19, 2008: 59-day CMB, $30 billion (Primary Dealer: $19.60 billion)
September 24, 2008: 7-day CMB, $40 billion (Primary Delaer: $18.34 billion)
September 25, 2008: 34-day CMB, $40 billion (Primary Dealer: $23.98 billion)
September 26, 2008: 101-day CMB, $60 billion (Primary Dealer: $33.60 billion)
September 30, 2008: 15-day CMB, $45 billion (Primary Dealer: $34.05 billion)

September Total: $345 billion

Of that, Primary Dealers absorbed $204.73 billion, 59.3% of the total issue.

On September 4, 2008, the Federal Reserve's balance sheet was $935 billion.

On October 2, 2008, it swelled to $1,274 billion.

(Currently, it stands at $2,179 billion, the level attained since early November 2008.)

At that time, the news focus was on the gyrating stock market and the political front (Fannie and Freddie effectively nationalized, Lehman Brothers bankrupted, AIG effectively nationalized, short sale ban on financial stocks, bank bailout bill pushed by then-Treasury Secretary Paulson and the Fed chairman Bernanke - for more on those hectic days, see my "What the @#$% Happened" series of posts in the "In case you missed" box of the blog). The focus was more on the bank bailout bill as the month progressed, and many analysts, economists, pundits were busy hyping the bill as the savior and cure-all.

"What would happen if we DIDN'T pass this bill?? It would be a DISASTER!!"

was a scream I often heard in certain cable network (that starts with C and ends with C).

We all know what exactly happened the moment the bill was passed: the stock market took a nosedive and kept on diving for 8 trading days.

That caught many investors, big and small, off-guard, myself included. For many people, their portfolios took a huge dent in a very short time.

But if I had paid attention instead to the almost frantic auctions of CMB in September, I could have sensed that things were not well at all, and it was not just the matter of AIG if they needed to raise over $300 billion in such a hurry. I would have probably get out of my long positions, and even bought short ETFs.

This year, the stock market swooned on October 1 on a larger volume, and continued to go down the next day. Many analysts and pundits as well as traders are calling an imminent sizeable correction, if not outright crash (though some do); perhaps they are doing it so that they wouldn't be accused of being caught off-guard yet again, after one year.

This time, however, at least one thing is different: the Treasury Department wasn't frantically raising money via CMB in September.

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FDIC Wants to Be Bailed Out

by banks, not by Treasury.

FDIC, whose DIF (deposit insurance fund) was meager $10 billion (see my post) at the end of June to cover close to $5 trillion deposits (and remember that was before the record bank closures in July and very costly closures in August. The fund must be very close to zero, if not negative already), wants to borrow money from the banks from which it collects deposit insurance fees.

FDIC could seek bailout from banks (9/22/09 AP via Yahoo Finance)

"WASHINGTON (AP) -- Regulators have approached big banks about borrowing billions to shore up the dwindling fund that insures regular deposit accounts.

"The loans would go to the fund maintained by the Federal Deposit Insurance Corp. that insure depositors when banks fail, said two industry officials familiar with the conversations, who requested anonymity because the plans are still evolving.

"Regulators also are considering levying a special emergency fee on all banks, charging regular fees early or tapping a $100 billion credit line with the U.S. Treasury, the officials said."

Let's say I am an insurance company. I insure your home, but times have been good and we are all prosperous so I will not collect insurance premiums from you for a decade. Don't worry nothing will happen. Then, Santa Ana wind blows and lightening strikes, and voila there's a massive fire in your area. Your home burns down. But I'll say, sorry, no money to give to you. In fact, I am broke. So I am going to borrow from you so that I can pay you and others. I'll pay you good interest on it, how about 25 basis points above the Fed funds rate? While I'm at it, I'll assess one-time emergency fee to replenish my insurance fund quickly. What do you say?

You would take me to court.

But wait, there is a possibility that this may be another disguised "rescue", actually, of big, national banks. There is also a possibility that this is a coordinated move with the Federal Reserve. Without the details known at this point, it is my pure conjecture. But here's what I see may be happening:

1st possibility: disguised "rescue" plan

FDIC would accept "loan" in the form of any type of asset from the big banks. Instead of cash or cash equivalent, the banks would give loans (of dubious quality) on their books as "loans" to FDIC, and FDIC would accept at face value and pay interest on the "loans" on top of it. (Where would that interest payment money come from?)

2nd possibility: coordination with the Fed to control excess reserves

The banks will create new loans to FDIC out of the excess reserves at the Federal Reserve. The Fed would be happy that the excess reserves are not escaping into the real economy to cause inflation. Banks would be happy that it would earn (probably) better interest than at the Fed, and their balance sheet get stronger with very safe loan to FDIC (ultimately backed by taxpayers). FDIC would be happy to have freshly minted money knowing it actually didn't cause much distress to the big banks anyway.

Just last month when FDIC issued the quarterly banking profile for the 2nd quarter (it is linked in my post), FDIC chairman Sheila Bair didn't sound much worried about the dwindling DIF, and kept repeating the mantra of "Our resources are strong. Your insured deposits are safe."

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Geithner Asks Congress for Higher Debt Limit

Of course. We have to buy those Gulfstream jets for Congress.

Geithner asks Congress for higher US debt limit (8/7/09 Reuters)

"WASHINGTON (Reuters) - U.S. Treasury Secretary Timothy Geithner formally requested that Congress raise the $12.1 trillion statutory debt limit on Friday, saying that it could be breached as early as mid-October.

""It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Geithner said in a letter to Senate Majority Leader Harry Reid that was obtained by Reuters."

Hmmm... So, raising the debt limit to borrow more is supposed to somehow impart confidence in the investors around the world that the U.S. will always meet its obligations. By issuing more debt. That must be comforting. It's called "Borrowing from Peter to Pay Paul", or "ponzi scheme". Japanese call it 自転車操業 - a bicycle operation (if you stop pedaling, you and the bicycle will fall down). It could also be called "musical chairs" - you don't want to be the last one standing, holding the bag.

The debt limit has already been twice raised this fiscal year. The first was October 3, 2008, and the debt limit was raised to $11,315 billion. The second was February this year, after the stimulus bill passed Congress and was signed into law; the debt limit was raised to the current $12,104 billion.

Here're the recent debt limit numbers from Congressional Research Service "The Debt Limit: History and Recent Increases" (April 7, 2009):


The debt limit increased 78% in 10 years from 1998 to 2008. The U.S. GDP grew 29% (from $10,508 billion in Oct 1998 to $13,142 billion in Oct 2008, in 2005 dollars; data: St. Louis Fed) during the period, and the U.S. population grew 10% (data: St. Louis Fed).

We are not going to pay this back, are we?

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Treasury Auction of 13-Week Bill

The U.S. Treasury Department auctions 13-week bill every single week to fund the government operations (I hope). It auctioned this week's batch today, but one number caught my attention: Indirect Bidders.

This week, 13-week bill attracted only $4.62 billion of Indirect Bidders' money (which represents foreign buyers of Treasuries), or only 14.4% of total sales of $32 billion.

In June and July, the Indirect Bidder percentages of 13-week bill were:

• July 20: 44.3%
• July 13: 51.5%
• July 6: 32%
• June 29: 53%
• June 22: 29%
• June 15: 35.8%
• June 8: 34.9%
• June 1: 51.2%

If foreigners including foreign central banks stop rolling over the U.S. short-term debt, it would be some problem here... One week doesn't make a trend, but it is worth keeping an eye on it.

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Treasury Auction for Supplementary Financing Program

As I was updating the result of today's Treasury auction for my other blog, I noticed an interesting announcement from the Treasury Department.

The Treasury Department, in addition to today's two auctions, will hold three more auctions this week. One is 4-week bill tomorrow. The other two are what's interesting.

The Treasury is auctioning two batches of 70-day Cash Management Bills (CMB), one for $35 billion (July 22) and the other for $30 billion (July 24), as part of Supplementary Financing Program. I haven't paid much attention to Cash Management Bill auctions, as I thought they are temporary borrowings by the Treasury to fill the monthly government budget shortfalls.

So what is "Supplementary Financing Program (SFP)"? It is a temporary program announced by the Treasury Department on September 17, 2008 (one day after AIG was bailed out by the Federal Reserve) basically to help out the Federal Reserve. The Treasury Department issues debt, and the money goes to the Federal Reserve for whatever the Federal Reserve is doing (no one knows for sure) to stabilize the financial markets.

So I took a look at the auction results for CMBs this year, and almost all of them have been for this SFP (i.e. for the benefit of the Federal Reserve). CMB auctions for the SFP have been held for the following dates, amounts either $30 billion or $35 billion:

• January 7, 14, 21, 28
• February 4
• March 4, 6, 18, 20
• April 1, 3, 30
• May 13, 15, 21
• June 3, 5
• July 15, 22 (to be held), 24 (to be held)

So the Federal Reserve continues to need cash injection to the tune of $60 to 120 billion a month, even though the financial markets are supposed to have stabilized. What are they spending the money for?

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No Bailout For CIT

Just as I thought, only 2 days ago on Monday.

CIT talks fall apart, bankruptcy may loom
(7/15/09 Reuters via Yahoo Finance)

"WASHINGTON/NEW YORK (Reuters) - CIT Group Inc (NYSE:CIT - News), a major lender to small- and mid-sized U.S. businesses, said on Wednesday that talks with the government to bail out the company had ended, a development that could make bankruptcy likely.

""Discussions with government agencies have ceased," the New York-based company said in a statement. "There is no appreciable likelihood of additional government support being provided over the near term."

"The announcement came after last-ditch talks in which Treasury Department had been concerned about a worsening liquidity crunch at CIT over the last few days, and that government aid would not put the lender on a path to recovery.

"CIT said its management, directors and advisers were evaluating alternatives. It did not elaborate.

"A bankruptcy filing would mark one of the largest for a U.S. company since the global credit crisis accelerated last September."

CIT had received $2.3 billion of TARP money. No more, says the Treasury. I suspect CIT lacked a strong connection to the present administration.

I also find FDIC's attitude very amusing:

"The FDIC has been reluctant to do so [granting CIT access to its government debt guarantee program], however, because the program is designed for healthy institutions, and it believes CIT's participation involves too much risk."

FDIC has granted access to numerous institutions that are not the best examples of health (Citigroup and Bank of America come to mind). FDIC itself is no such example either, with reserve ratio of paltry 0.27% as of March 2009. It would need a massive bailout from the taxpayers more than any private sector financial institution.

But no matter. The government has decided who will be the winner and who will be the loser. CIT is the latter, but won't be the last loser as the government continues to extend its grabby hand into every aspect of our lives.

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Treasury Department Has Plan C To Solve Financial Crisis

Did you know they now have Plan C to solve financial crisis? I didn't. I didn't even know they had Plan A and Plan B, or any Plan at all.

Treasury Works on 'Plan C' To Fend Off Lingering Threats
(by David Cho and Binyamin Appelbaum, 7/8/09 Washington Post)

"As the financial system tries to right itself after its near-collapse last fall, the Treasury Department has assembled a team to examine what could yet bring it down and has identified several trouble spots that could threaten the still-fragile lending industry.

"Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.

"Part of the mission is assessing which firms are the most vulnerable and trying to decipher what assets these companies hold and whether they pose a danger to the wider financial system. Plan C is a small-scale, relatively informal approach to a problem the administration hopes to address in the long term by empowering the Federal Reserve to oversee systemic risk."

"The creation of Plan C is a sign that the government has moved into a new phase of its response, acting preemptively rather than reacting to emerging crises, officials said.

"We are continually examining different scenarios going forward; that's just prudent planning," Treasury spokesman Andrew Williams said."

Huh? Now, can you tell what the hell they are talking about? Does this look like a newpaper article written by a reporter who actually digs in to find out more about this Plan, or does this look like a cut and paste job from the Treasury Department's public relations office handout?

"The officials in charge of Plan C -- named to allude to a last line of defense -- face a particular challenge in addressing the breakdown of commercial real estate lending."

OK, so it is about commercial real estate. And what is Plan C, exactly? The article doesn't say, and doesn't even speculate.

Remember this from March? The Treasury Secretary Tim Geithner said the plan (whatever plan he was talking about at that time - I suspect it was PPIP which has shrunk from $1 trillion to mere $40 billion) would work (and therefore he didn't need Plan B), all that was required was "will", not "ability":

(Doesn't his forehead look like a Klingon?)

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Pimco Is Missing From Treasury's PPIP

The U.S. Treasury Department, the Federal Reserve and FDIC announced the start of the Public-Private Investment Program, commonly known as PPIP, yesterday.

Other than the drastic shrinkage of the whole scheme from $1 trillion when it was announced in March to mere $40 billion (the government putting in $30 billion, private investors $10 billion), curiously missing was the world-largest bond manager, Pacific Investment Management Co., commonly known as Pimco.

Here's from Bloomberg:

U.S. Treasury Opens Distressed-Debt Program Without Pimco (7/9/09 Bloomberg)

"The U.S. plan to help buy as much as $40 billion in assets from banks got started almost four months after it was proposed and without Pacific Investment Management Co., the world’s biggest bond manager and an early supporter."

"... Pimco, which in March announced plans to apply, said it withdrew its application in June because of “uncertainties” about the initiative’s design."

Other than that, Bloomberg or Pimco doesn't elaborate on the reason why Bill Gross' s firm decided to withdraw.

Pimco manages $756 billion in assets. It is possible that the scaled-back PPIP program is too small for them to participate. But it is also possible that Mr. Gross doesn't quite trust the government. I remember reading this at Pimco's site back in early April [emphasis is mine]:

"Shake hands with the government is and has been our motto although the contractual certainty of a government handshake may now be questioned in an increasingly number of marginal areas."

This is a change of tone coming from Mr. Gross. This is the guy who said back in January;

"Still, future policymakers must confront the reality that is, not the one that should have been. And investors must do likewise, casting aside personal philosophies for a clear-headed view of the future horizon. PIMCO’s view is simple: shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first: agency-backed mortgages, bank preferred stocks, and senior bank debt; Aaa asset-backed securities such as credit card, student loan, and auto receivables. These have been well-advertised PIMCO strategies over the past 6 months but there are others in clear sight. An Obama administration will quickly be confronted by the need to provide those hundreds of billions of dollars to states and large municipalities. Their requests total nearly a trillion dollars and to think California or NYC would be allowed to fail is, well – unthinkable. Municipal bonds then, selling at historically high ratios relative to U.S. Treasuries, offer attractive price appreciation potential, or at the very least a defensiveness with high carry that a 2½% 10-year Treasury cannot."

And I believe his firm was extremely successful in doing it - buying these securities before the government did, and sell them essentially to the government at higher prices.

Now, after seeing what this new government under the new president has done so far, Pimco would rather stay away, at least for now.

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Mandatory IRA With Treasury-Issued R-Bonds?

Remember earlier this year when the stock market was still very volatile and the horrendous memory of September-November 2008 market crash was still fresh, there was a chatter about confiscating the IRA accounts and about creating a national IRA system where you are only allowed to invest in Treasury securities (at that time, 30-year bond was yielding 3%, currently 4.3%) ?

Well, that talk apparently isn't dead. I found this link in Lewrockwell.com blog section.

Administration explores 'R bond' as option for retirement accounts (6/7/09, Investmentnews.com) [emphasis is mine]

"Officials in the Obama administration are moving quickly to develop the investment infrastructure behind the president’s proposal for mandatory automatic enrollment in individual retirement accounts, which could be supported by the creation of Treasury-issued retirement bonds.

"J. Mark Iwry, deputy assistant secretary for retirement and health policy at the Department of the Treasury, said that administration officials are exploring some “conservative” options for investing the assets of 78 million Americans that he estimates could be automatically enrolled in this “universal” workplace retirement system."

"He said that officials have discussed the possibility of making a low-risk life-cycle or target date fund the default investment option for these auto-IRAs, which would be mandatory for employers if they don’t offer a retirement plan to their workers.

"... there is also a chance that they could rely on a new form of bond — an “R bond” — as the basic building block for the auto-IRA, Mr. Iwry said in addressing reporters at the Treasury Department in Washington last week.

"Administration officials are discussing the exact details of these R bonds, such as their interest rates, maturities and minimums, he noted. These bonds ideally would provide individuals with a source of secure, steady returns that would protect their initial investments."

"R" for "Retirement", I suppose. So, under this mandatory IRA program, workers get to have supposedly safe and non-volatile R-bonds issued by the Treasury Department until their investment grow to a certain size (whatever the size to be determined), then they will be allowed to "graduate" to the next level (whatever that will be).

What a scam. The U.S. workers get to have their IRA accounts stuffed with low-yielding Treasury debts so the government can spend more, and they have no other choice, at least initially (however long or short that's going to be). Coaxing foreign governments to continue to buy the US government debts (Treasury bills, notes, and bonds) is one thing; it's totally another to force its own citizens to buy the government debts.

78 million Americans with mandatory IRAs that have $10,000 in this R-bonds - that would be $780 billion U.S. debt taken care of right there.

"The administration, which included an auto-IRA provision in its 2010 budget, has gained some bipartisan support for the proposal, Mr. Iwry added. However, as more specific details of the program’s features come out — such as this initial investment infrastructure — opposition could well unfold. "

You must be kidding. Opposition? But Democrats have the majority in the House, and they can simply fast-track it, just like they may be planning to do with the health care reform bill.

By the way, Mr. J. Mark Iwry is from Brookings Institution who joined the Obama administration in April.

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Treasury Auctions for Week of June 22, 2009

Treasury Department will auction the following Treasury securities in the week of June 22, 2009. Hang on...

Monday June 22, 2009

• 13-week bill: $31 billion
• 26-week bill: $30 billion

Tuesday June 23, 2009

• 2-year note: $40 billion

Wednesday June 24, 2009

• 5-year note: $37 billion (up $2 billion from $35 billion last month)

Thursday June 25, 2009

• 7-year note: $27 billion (up $1 billion from $26 billion last month)

Total for the week: $166 billion

• Bills: $61 billion
• Notes: $104 billion

Total SO FAR for the month of June: $341 billion

• Bills: $276 billion (includes $26 billion 1-year bill)
• Notes and bonds: $65 billion

If you think that's too much debt, think this gets repeated every single month for the rest of the year, if not longer. On course to annual $2 trillion debt in notes and bonds (it will be about $300 billion more if I include 1-year bill).

FYI, watch out if New York Fed will do any open market operation, particularly days when they auction notes. (http://www.newyorkfed.org/markets/openmarket.html)

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How Much TARP Has Been Spent So Far?

Goldman Sachs is reported to return the TARP money it received on Wednesday, the first major bank TARP recipient to do so.

On this historic occasion, I thought it would be nice to find out how much TARP money has been spent already, and how the money is accounted for. Also, it would be nice to know what is the maximum amount of TARP money that can be spent.

I simply assumed there's a definite data table somewhere at the Treasury Department site, so I went and looked. There was a table, and here's the link.

According to this table (as of June 16, 2009, the most recent),

• Capital Purchase Program (for banks): $197,610,325,000
• Automotive Industry Financing Program: $79,966,778,971
• Automotive Supplier Program: $6 billion
• Targeted Investment Program (Citi and Bank of America): $40 billion ($20 bil each)
• Asset Guarantee Program (Citi): $5 billion
• Consumer and Business Lending Intiative Program (TALF LLC): $20 billion
• Systemically Important Failing Institutions (AIG): $69,835,000,000

Total of roughly $418 billion dollars, counted at par.

However, I got too curious and went to take a look at Monthly Treasury Statements at the Treasury Department. TARP is a line item in Treasury's outlays. According to the Statements since October last year, Treasury Department's outlays of TARP is as follows (cumulative):

• Oct 08: $115 billion
• Nov 08: $191 billion
• Dec 08: $242 billion
• Jan 09: $280 billion
• Feb 09: $290 billion
• Mar 09: $293 billion
• Apr 09: $117 billion (They changed the accounting from cash to net present value to make monthly outlays smaller thus less monthly deficit. The ostensible reason was to account for risk. If it were accounted the same way, it would have been $292 billion)
• May 09: $135 billion ($310 billion, in old way of accounting)

We have about $108 billion gap... There was $30 billion that went to GM on June 3, so this Statement, covering through May 31, doesn't cover that. So we now have $78 billion gap. So, the same department (Treasury) issuing two different numbers for the same event for two different publications. Talk about transparency.

Actually I have one more guess about the amount. Treasury Department has a special account at the Federal Reserve, and that's $199 billion. If I remember right, that's the residual money for TARP. If that's the case, TARP spent is $700 billion minus $199 billion = $501 billion.

And there is this nagging question of "How much of the $700 billion bailout was for TARP?"

The short answer seems to be, "Who knows?" I give up.

With the super regulatory "council" coming our way with the Federal Reserve at the core, probably we simply should not expect an answer. Any answer.

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Sweeping Financial Reform - Advance Notice of Wednesday's Announcement

I thought the previous administration had a leaky valve everywhere. I guess all administration have those. This is the latest leak from a senior administration official outlining what Obama will announce on Wednesday.

Obama To Call For Sweeping Financial Reforms Wednesday
(6/16/2009 7:54 PM ET RTT News) [emphasis is mine, my comments in square brackets]

"President Barack Obama will lay out a sweeping series of reforms for the financial sector Wednesday.A senior administration official familiar with the plans, speaking to reporters on condition he not be named, said Tuesday that the damage caused by the recent financial crisis showed the urgent need for action.'

[Don't waste a good crisis.]

"To address those gaps, the administration will first establish a Financial Services Oversight Council, headed by the treasury department to better coordinate the actions of various regulators.

""We will, in addition, place square responsibility and require clear accountability, on the Federal Reserve to serve as the consolidated supervisor at the holding company level of all large interconnected financial firms," he said. "They will be subject … to more exacting supervisory requirements and capital standards at the holding company level.""

[So it is still about "financial" firms, although I suspect the definition is very fluid. Remember last year when SEC banned shorting the "financial" stocks? It included IBM and GE.]

[But what do you mean accountability? The Fed is not accountable to Congress or White House. Are you going to change the Fed's charter? We don't even know what the Fed has on its balance sheet. Are you going to audit the Fed?]

"He added, "We will also require, as a measure of increased transparency, registration of hedge funds and other private pools of capital and we will require the improvement of regulation of money market mutual funds."

[Bye bye dark pools.]

""All credit default swap markets and all over the counter derivatives markets will be subject to appropriate regulation," he said. "We're going to prevent those activities from posing risks to the financial system, promote transparency, prevent market manipulation, fraud and other market abuses and also ensure that OTC derivatives are not marketed inappropriately to unsophisticated parties."

[Ummm, all OTC derivative markets' size is nearly $1,000 trillion. How are you going to regulate that?]

["Unsophisticated parties" like local and state governments? Who decides what's "inappropriate"? Would it be deemed inappropriate only when the local/state governments lose money?]

"The Treasury-led financial council will have the authority under the plan to require reports from any U.S. financial firm to assess whether its activities pose a risk to the system as a whole."The Federal Reserve … will have clear authority over payments, clearings and settlement systems to ensure that no risks arise outside the system of supervision," he said.

"The administration will also call for the creation of a consumer-focused financial regulator to ensure that financial products sold to consumers are appropriate both for households and the system as a whole.

"He added, "This new entity will have broad authority to write rules. … It will be the primary enforcer of consumer protection law across the financial sector so that we can level up the playing field and have standards that apply to every participant in the system."

[And this entity will craft a financial product and force the firms to offer it. See my post.]

"The final part of the plan will be to continue to work on the world stage to make sure regulations in other countries will be stronger in a more globally interconnected world."

[So that was what "supervisory colleges" were all about.]

"Although the plan is ambitious the official said the administration hopes to have the measures passed through Congress quickly, preferably this year, the official said.

""We're going to push forward with legislation," he said. "We're going to work very, very hard to get this done right away." "

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Treasury International Capital data for April 2009

Treasury Department released today the Treasury International Capital (TIC) data for April 2009. The flow is turning negative again.

"Monthly net TIC flows were negative $53.2 billion. Of this, net foreign private flows were negative $58.4 billion, and net foreign official flows were $5.2 billion."

Since January this year, the net TIC flows are as follows (in billion dollars):

• January 2009: -144.0
• February: -90.9
• March: 25.0
• April: -53.2

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Treasury Announces $25 Billion Recovery Zone Bonds

Latest from the U.S. Treasury Department. It almost feels like we're back in 1930s in the U.S., or in Europe after the World War II.

Treasury Announces $25 Billion in Direct Allocations of Recovery Zone Bonds
(6/12/09, U.S. Department of Treasury) [emphasis is by me]

"WASHINGTON--As part of the Obama Administration's efforts to stimulate economic growth and jumpstart the availability of financing critical for economic recovery, the U.S. Treasury Department announced $25 billion in bonds authority available under the Recovery Zone Bonds program. Created by the American Recovery and Reinvestment Act (Recovery Act), Recovery Zone Bonds are targeted to areas particularly affected by job loss and will help local governments obtain financing for much needed economic development projects, such as public infrastructure development."

That's about the size of the budget deficit in the state of California, by the way.

"Creating the conditions for economic recovery requires addressing the challenges facing state and local governments," said Treasury Secretary Tim Geithner. "State budgets have been scaled back and local services cut at a time when they are most needed. Turning things around requires innovative strategies, which is what the Recovery Act has provided in the form of the Recovery Zone Bonds. The new financing tools provided by Recovery Zone Bonds will help state and local governments obtain the funds needed to revitalize our communities."

The Recovery Act included $25 billion for two new types of Recovery Zone Bonds – $10 billion for Recovery Zone Economic Development Bonds and $15 billion for Recovery Zone Facility Bonds. Recovery Zone Economic Development Bonds are one type of taxable Build America Bond that allow state and local governments to obtain lower borrowing costs through a new direct federal payment subsidy, for 45 percent of the interest, to finance a broad range of qualified economic development projects, such as job training and educational programs. Recovery Zone Facility Bonds are a type of traditional tax-exempt private activity bond that may be used by private businesses in designated recovery zones to finance a broad range of depreciable capital projects."

In summary, money is for qualified projects in designated recovery zones:

• $10 billion for taxable Recovery Zone Economic Development Bonds for state and local governments to obtain lower borrowing cost via direct federal payment subsidy;
• $15 billion for tax-exempt Recovery Zone Facility bonds for private businesses in designated recovery zones.

"To make this program as easy as possible for state and local governments to administer and use, the Treasury Department has also detailed the bond volume cap allocations at the local level for counties and large cities. The total state allocations and the complete list of direct county and large city allocations can be found here. "

Attention to detail: down to county and city level. For those who don't want to click the link above, here are some samplings at the state level (the first number is Recovery Zone Economic Developement Bond, the second Recovery Zone Facility Bond). Not surprisingly, certain states get more than others, with almost all counties within the state get the allocation. But all 50 states get allocation; the standard amounts that every state gets seem to be $90 million for Economic Development Bond, and $135 million for Facility Bond:

• AL: 244,676,000, 367,014,000
• AK: 90,000,000, 135,000,000
• AZ: 90,000,000, 135,000,000
• CA: 806,225,000, 1,209,338,000 (City of Los Angeles, LA County get huge chunk)
• CT: 90,000,000, 135,000,000
• FL: 538,485,000, 807,727,000
• GA: 355,785,000, 533,677,000
• IL: 666,972,000, 1,000,457,000 (City of Chicago, Cook County get huge chunk)
• IN: 313,081,000, 469,621,000
• KS: 90,000,000, 135,000,000
• LA: 90,000,000, 135,000,000
• MD: 208,860,000, 313,291,000
• MA: 222,676,000, 334,013,000
• MI: 773,050,000, 1,159,575,000
• MS: 90,000,000, 135,000,000
• MO: 229,143,000, 343,715,000
• NV: 90,000,000, 135,000,000
• NY: 370,098,000, 555,147,000
• OH: 422,637,000, 633,955,000
• RI: 100,882,000, 151,322,000
• TN: 231,417,000, 347,126,000
• TX: 90,000,000, 135,000,000
• UT: 90,000,000, 135,000,000
• VT: 90,000,000, 135,000,000

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30-Year Treasury Bond Auction Result June 11, 2009

The stock market cheered, at least initially when the auction result was announced, and Dow Jones Industrial Average shot up to 8,877 before it came back down to end at 8,770, only 31 point above yesterday's close.

So the bond auction went better than what was already a very low expectation. But did it?

Today's auction was an "reopening" auction. According to Treasury Department,

"In a security reopening, the U.S. Treasury issues additional amounts of a previously issued security. The reopened security has the same maturity date and coupon interest rate as the original security, but with a different issue date and usually a different purchase price."

This year,

• 30-year bond new issues were auctioned on February 12 and May 7; and
• Reopening issues were auctioned on March 12 and today, June 11.

So, for reopening issues, what's important to look at seems to be the PRICE: How much the bidders are willing to bid down (or up, never say never). Of course that reflects in High yield number, Median yield number, Allotted at High, etc.

Here's a comparison table of the four issues of 30-year bond this year. I've noticed three things: 1) The reopening issues were more popular than the new issues; 2) the reopening issues are cheaper in price; 3) the price of the reopening issues this time was much cheaper than the price in March.

My conclusion: there's not much to celebrate. Foreign investors flocked to today's reopening because they can buy the Treasury bond at 4.25% coupon interest rate at 7% discount in price.

In March reopenings, they bid down the price by less than 2%. This time, they bid down by almost 7%. Two times don't make a trend, but they can be the start of the inflationary trend.

There are more reopenings to come, in 10-year note, 30-year bond, 5-year TIPS, 10-year TIPS, and 20-year TIPS. Just by writing this I get tired. I can't imagine how fatigued the bond market will have become by the year end. And this has to be repeated next year, probably year after next.

(Another interesting question to ask is this. Which foreign countries bought them today? Was it Chinese, or Japanese? Or Russians? Or was it Caribbean Banking Centers?)

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10-Year Treasury Note Auction Result Is In

And judging by the market reaction, it is not good. Both stock market and bond market are sinking deeper.

I frankly don't know what the traders were expecting, for them to get disappointed like this. The key numbers of the auction is posted in the right-hand column, next to this post. (Here's the original announcement.)

Foreign participation was slightly better than the last auction, and bid to cover ratio is also higher than the last. What spooked the traders may be the yield.

Over 46% of the auction was allotted at the high yield at 3.99%.

In the last auction, only 22% of the auction was allotted at the high yield. Right before the auction result announcement, 10-year note yield was 3.94%.

Higher foreign participation demanding the higher yield for the risk they are taking.... Hmmm, it looks like bond vigilantes are intensifying their attack.

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Russia Set to Reduce US Treasury Exposure

Today is the much dreaded day of 10-year Treasury note auction. In anticipation of not so steller result (particularly after Chinese students laughed at the US Treasury Secretary), the yield on 10-year note has popped above 3.9%, and the 30-year bond yield is 4.71%.

The stock market is also under pressure, probably from this impending auction. Dow Jones Industrial Average is down about 30 points to 8,732, S&P 500 down 4 to 937. Nasdaq is the worst performer, down 22 points (-1.21%) to 1,837.

The bond market doesn't need any more negative news right now, but it got one this morning. It came from Russia, the 5th largest foreign holder of US Treasury securities. (If you exclude Carribean Banking Centers and Oil Exporters, Russia is the third largest holder. Here's the link to the lateset TIC from the Treasury Department.

Russia to Sell US Treasurys, Buy IMF Bonds (6/10/09, CNBC):

"Russia will reduce the share of U.S. Treasurys in its foreign exchnage reserves, the world's third-largest, a senior central bank official said on Wednesday, driving the dollar broadly lower."

"Russia holds about 30 percent of the reserves, worth $404.2 billion, in Treasurys. Central bank First Deputy Chairman Alexei Ulyukayev said it would buy bonds issued by the International Monetary Fund and also up the share of reserves held in bank deposits."

"Ulyukayev said Russia had increased its investment in liquid treasuries during the peak months of the crisis and was now ready to cut it...."

Ouch.

The Russian holdings of US-dollar denominated assets including Treasuries and agency bonds fell to 41.5% as of Jan 1, 2009, from 47% a year earlier. Their Euro holdings increased from 42.4% to 47.5% during the same period, but as the net position, US dollar was still 47%, Euro 41%. (See this article for more detail.)

Russia also holds 523.7 tonnes of gold reserve, 4% of the total reserve. Russia and China already expressed interest (see my post) in yet-to-be-issued IMF bond/note.

One more hour to go before Treasury announces the auction result...

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