DailyFinance.comhttp://www.dailyfinance.comDailyFinance.comhttp://o.aolcdn.com/os/df/2013/img/2-dailyfinance_logo_m.pngDailyFinance.comhttp://www.dailyfinance.comen-usCopyright 2013 Weblogs, Inc. The contents of this feed are available for non-commercial use only.Blogsmith http://www.blogsmith.com/GOP Has a Good Chance at Winning the House in Novemberhttp://www.dailyfinance.com/2010/04/30/gop-has-a-good-chance-at-winning-the-house-in-midterm-elections/http://www.dailyfinance.com/2010/04/30/gop-has-a-good-chance-at-winning-the-house-in-midterm-elections/http://www.dailyfinance.com/2010/04/30/gop-has-a-good-chance-at-winning-the-house-in-midterm-elections/#commentsFiled under:

Republicans Have Good Chance of Winning House, Political Analyst Stuart Rothenberg Says Republicans could win control of the House of Representatives in November's midterm 2010 elections, a prominent independent political analyst said Friday.

"We're headed for a big Republican election," said Stuart Rothenberg, a Washington, D.C., political analyst who publishes the nonpartisan Rothenberg Political Report and is a columnist for Capitol Hill newspaper Roll Call. Rothenberg gave his assessment to the 2010 Government, Regulatory & Compliance Conference in Washington held by the Insured Retirement Institute, a trade association that represents the annuity industry.

"I think they have a good chance to win the House, but they're not there yet," he said. addig that GOP chances of taking over the Senate are slimmer.

Republicans, who need 40 seats to win control of the House, are "going to make major gains in the House; major gains in the Senate," Rothenberg said. "Democrats could lose the House," he said. While he stopped short of making a clear prediction that Republicans will win the House, he predicted that Democrats will lose at least "a couple of dozen" seats to the Republicans.

Rothenberg counts 68 Democratic House seats in play, compared to only 11 Republican seats, which contributes to the Republicans' advantage. As a result, "Democrats are going to be more desperate to get anything and everything through now," he said.

Polls Show Republicans, Democrats Approximately Even

The Senate math is harder for the GOP. There are 57 Democrats and two Democratic-leaning Independents in the Senate, and 41 Republicans, meaning the GOP would have to win 10 seats to take control of that body. He currently sees Republicans gaining between five to eight Senate seats, but the GOP could have a greater advantage if Dino Rossi runs in Washington State, where he twice ran for governor unsuccessfully, and if former New Hampshire Attorney General Kelly Ayotte is able to win the Republican Senate primary, he said. Further, polls show declining support for Sen. Barbara Boxer (D-Calif.), who could face a tough reelection fight from former Republican Rep. Tom Campbell.

Polls of which party people expect to vote for in November now show Republicans and Democrats approximately even, with 44% supporting each party. But those numbers represent a sharp decline for Democrats, who previously have enjoyed margins of 51% supporting them compared to 41% supporting Republicans.

"We constantly are seeing growth in fear and negativity and pessimism," Rothenberg said. "A lot of it is the lack of a job turnaround. That's what I think most of it is," he said. Despite indications of economic recovery, the unemployment number has been stuck at about 9.7%.



There is increasing skepticism about whether the $787 billion American Recovery and Reinvestment Act stimulus package Congress passed last year at the request of President Obama has been effective, "and until we get a turnaround in jobs, I'm not sure we're going to get a turnaround in mood."

That negativism favors Republicans. Not only have recent polls showed declining support for President Obama, with 46% of the public now saying they think he's doing a good job and 51% saying he's doing a poor job, the percentage of people who believe the country is headed in the wrong direction have climbed to the upper 50s or higher, Rothenberg said.

People's opinions about the federal government's effect on their daily lives have become sharply more negative as well. A poll released last week by the The Pew Research Center for The People & The Press found that 38% said the federal government has a positive effect on their lives and 43% felt it was negative, a sharp decline in positive attitudes in recent years, Rothenberg said. Further, 39% of the public supports a bigger government with more services, while 50% say they want a smaller government with fewer services, a big change from when Obama was elected and the mood was in support of more government.

Unpopular Legislators Unlikely to Change Many Minds

In the midterm elections, Democrats are likely to argue that they have acted on health care reform, and they'll face pressure to pass the financial service reform bill now being considered. Democratic plans to spend $50 million on turning out party voters and selling them on health care reform aren't likely to succeed, Rothenberg predicted. "We have just spent a year on health care reform. People now have opinions on health care reform. You have to change those opinions. It's very difficult to change once people who have decided on something," he said.

Moreover, relying on lawmakers to sell health care reform is tantamount to "child molesters trying to sell health care reform," considering the public's extremely low opinion of Congress. "You can't take unpopular people and put them out in the public and try to sell an issue that people already are skeptical about," he said.

Republicans, who have scored recent victories in the governors' races in Virginia and New Jersey, as well as the U.S. Senate race in heavily Democratic Massachusetts for the seat of late liberal icon Ted Kennedy, will try to stoke public anger about a government that they say is veering too far to the left, taking too much control and spending too much money.

Americans Don't Make Sharp Turns

But a Republican victory in Congress isn't likely to hurt President Obama, Rothenberg said. "As a matter of fact, I think if the Republicans have a good year, it's probably better for the president," he said. Obama has another two years for the economy to improve, and he would be able to "triangulate" by blaming Republicans if his policies go awry, similar to the way Bill Clinton was able to deal with a Republican congressional victory in 1994 and go on to win reelection in 1996.

Moreover, if Republicans win, "They're going to think that's because the country's made this dramatic turn to the right, just like Democrats thought the country had made a dramatic turn to the left," in the 2008 election, Rothenberg said. "The country doesn't turn very dramatically. People just want stuff to work out. It's not about ideology for most Americans."

Demographic trends still favor Democrats, he said. Midterm elections tend to get higher turnouts of whites and older voters, while presidential elections draw voters who support Democrats.

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]]>Sara HansardFri, 30 Apr 2010 13:23:00 ESTBlankfein and Levin Spar Over Goldman Sachs's Market Maker Rolehttp://www.dailyfinance.com/2010/04/27/blankfein-and-levin-spar-over-goldman-sachss-market-maker-role/http://www.dailyfinance.com/2010/04/27/blankfein-and-levin-spar-over-goldman-sachss-market-maker-role/http://www.dailyfinance.com/2010/04/27/blankfein-and-levin-spar-over-goldman-sachss-market-maker-role/#commentsFiled under: , , , ,

Goldman Sachs CEO Lloyd Blankfein, pictured above, and Senate subcommittee Chairman Carl Levin sparred Tuesday afternoon over whether market makers should have a duty to disclose to clients whether the company was taking short positions on securities it sold to its customers.Goldman Sachs Chairman and CEO Lloyd Blankfein and Senate subcommittee Chairman Carl Levin, D-Mich., sparred Tuesday afternoon over whether market makers should have a duty to disclose to clients whether the company was taking short positions on securities it sold to its customers.

Levin, chairman of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations, listed numerous examples of collateralized debt obligations sold by Goldman that emails showed Goldman employees thought were not good value.

"In a deal where you are selling securities and you are intending to keep the short side of that deal, which is what happened here in a lot of these deals, do you think you have an obligation to tell the person that you're selling that security to in that deal that you are keeping the short position in that deal?" Levin asked Blankfein.

On the Opposite Side of the Deal

"I don't think we would disclose that," Blankfein responded. The Goldman top executive argued that its position as a market maker puts it on the opposite side of clients. "If a client came to us and asked us to buy something from him and we intended to hold the long position, I don't think we have an obligation of telling him that our intention is to hold it."

As a market maker, Blankfein said, "We are buying from sellers and selling to buyers." In the context of market making, he said, "That is not a conflict." Buyers are looking for exposure, and they should mainly be concerned with whether the security they are being sold provides the exposure that they want, he said. "They wouldn't care what our views are" on the security they are buying, he said.

Levin insisted that the company has engaged in gambling.

"You're going out and getting a default swap," Levin said. "You are betting against the very security that you are selling to that person." The senator said he wants to ensure that the financial service reform legislation Congress is considering contains provisions to deal with such conflicts of interest by investment firms.

No Big Profits for Us, Senator

Goldman has been charged by the Securities and Exchange Commission with securities fraud for not disclosing to clients that it allowed hedge fund Paulson & Co. to choose securities in a CDO that Goldman sold. Paulson chose the securities so that it could short them.

Like the other six Goldman officials who testified before the subcommittee's hearing Tuesday -- which is to be the last of the panel's hearing on the causes of the financial crisis -- Blankfein insisted that Goldman Sachs didn't net large profits from shorting the housing market in 2006 and 2007, but was primarily trying to hedge its position to control its risk. He said it was impossible to predict with certainty what was going to happen in the housing market.

Members of the subcommittee also criticized Goldman officials for getting large bonuses. "The idea that Wall Street came out of this thing just fine, thank you, is just something that grates on people," said Sen. Ted Kaufman, D-Del.

Congressional Responsibility

But Sen. Tom Coburn, R-Okla., ranking minority member of the subcommittee, said that Congress also bears responsibility for not overseeing regulators who were supposed to be overseeing the securities markets. "Congress is 90% responsible," he said.

Blankfein didn't come before the subcommittee until late in the afternoon. The panel grilled four Goldman executives, including Executive Director Fabrice Tourre, for more than four hours about Goldman's collateralized debt obligation deals in which it took short positions for securities it sold to clients. Tourre was also charged in the SEC case.

When that panel finally disbanded after 3 p.m., some members of the audience, dressed in striped prison costumes, were escorted from the hearing room for being disruptive.

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]]>Goldman Sachs fraudhearingssenateSara HansardTue, 27 Apr 2010 19:30:00 ESTGoldman's Blankfein: 'We Certainly Did Not Bet Against Our Clients'http://www.dailyfinance.com/2010/04/27/goldman-sachs-ceo-we-didnt-bet-against-our-clients/http://www.dailyfinance.com/2010/04/27/goldman-sachs-ceo-we-didnt-bet-against-our-clients/http://www.dailyfinance.com/2010/04/27/goldman-sachs-ceo-we-didnt-bet-against-our-clients/#commentsFiled under: , , , ,

The day the Securities and Exchange Commission brought fraud charges against The Goldman Sachs Group (GS) "was one of the worst days in my professional life," Goldman Sachs Chairman and CEO Lloyd Blankfein said Tuesday in prepared testimony to a Senate subcommittee.

"We believe deeply in a culture that prizes teamwork, depends on honesty and rewards saying no as much as saying yes," according to the prepared remarks that will be delivered before the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations Tuesday. Blankfein and other Goldman executives are being grilled by lawmakers on the role Goldman Sachs played in the financial crisis.

"We have been a client-centered firm for 140 years and if our clients believe that we don't deserve their trust, we can not survive," Blankfein said.

Goldman Sachs "strongly" disagrees with the SEC complaint, he said, but added, "I also recognize how such a complicated transaction may look to many people. To them, it is a confirmation of how out of control they believe Wall Street has become, no matter how sophisticated the parties or what disclosures were made. We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."

Documents Shows Goldman Bet Against the Housing Market

On April 16, the SEC charged Goldman Sachs with securities fraud for its role in offering collateralized debt obligations based on mortgages -- securities the firm itself bet against. The deal cited in the SEC case was with a German bank.

In a press conference Monday, Sen. Carl Levin (D-Mich.) outlined more than 500 pages of evidence compiled by the subcommittee he chairs that show, contrary to the firm's public statements, starting in late 2006 and continuing through 2007, Goldman Sachs moved away from investing in the mortgage market to betting against that market by shorting securities backed by subprime mortgages.

But Blankfein said his company "didn't have a massive short against the housing market and we certainly did not bet against our clients." He said the company was not consistently or significantly net short in its residential mortgage-related products in 2007 and 2008.

During the two years of the financial crisis, while Goldman was profitable, it lost about $1.2 billion from its activities in the residential housing market, he said.

The chief mistake of investment banks, rating agencies and regulators in the financial crisis was that they failed to "sound the alarm that there was too much lending and too much leverage in the system," and that credit had become too cheap, Blankfein said. "One consequence of the growth of the housing market was that instruments that pooled mortgages and their risk became overly complex. That complexity and the fact that some instruments couldn't be easily bought or sold compounded the effects of the crisis," he said.

Goldman's Hedges Were Designed to Reduce Firm's Overall Risk

Blankfein claimed that "until recently, most Americans had never heard of Goldman Sachs or weren't sure what it did." He stressed that his company employs 35,000 people, most of whom work in the United States, that it helps "governments raise capital to fund schools and roads," and provides funds to companies "to invest in their growth." Goldman works with pension funds, labor unions and university endowments, and it contributes to liquidity in the financial system, he said.

"I recognize, however, that many Americans are skeptical about the contribution of investment banking to our economy and understandably angry about how Wall Street contributed to the financial crisis," he said. "As a firm, we are trying to deal with the implications of the crisis for ourselves and for the system."

He also insisted that "strong, conservative risk management is fundamental and helps define Goldman Sachs." But he said that the company's risk management processes "did not, and could not, provide absolute clarity. They highlighted uncertainty about evolving conditions in the housing market. That uncertainty dictated our decision to attempt to reduce the firm's overall risk."

The financial system today "is still fragile but it is largely stable," he said, and that stability "is a result of decisive and necessary government action during the fall of 2008," when the government began propping up troubled financial institutions with $700 billion in backing under the Troubled Asset Relief Program. Goldman Sachs had government money for about eight months, and it repaid it with a 23% annualized return, Blankfein said.

Derivatives, which played a major role in causing the financial crisis, are an important tool to help companies and financial institutions manage their risk, Blankfein said, "We need more transparency for the public and regulators as well as safeguards in the system for their use." He said Goldman Sachs supports proposals in financial service regulatory reform legislation to set up clearinghouses for standardized derivatives and higher capital requirements for nonstandard instruments.

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]]>Goldman Sachs fraudLloyd BlankfeinSenateSara HansardTue, 27 Apr 2010 11:12:00 ESTSenate Republicans Put the Brakes on Financial Reform Bill Debatehttp://www.dailyfinance.com/2010/04/26/senate-republicans-put-the-brakes-on-financial-reform-bill-debat/http://www.dailyfinance.com/2010/04/26/senate-republicans-put-the-brakes-on-financial-reform-bill-debat/http://www.dailyfinance.com/2010/04/26/senate-republicans-put-the-brakes-on-financial-reform-bill-debat/#commentsFiled under: ,

n their first demonstration of their new clout following the election of Scott Brown (R-Mass) to the U.S. Senate, Republicans on Monday were able to stop legislation designed to reform financial services regulation in the wake of the crippling financial crisis.In their first demonstration of their new clout following the election of Scott Brown (R-Mass) to the U.S. Senate, Republicans on Monday were able to stop legislation designed to reform financial services regulation in the wake of the crippling financial crisis. The GOP opposition was joined by one Democrat, Sen. Bill Nelson of Nebraska.

Sixty votes were needed to take up the reform bill under a procedural "cloture" vote held this afternoon but only 57 senators voted to take up the bill, while 41 voted against it. All Republicans voted against the bill. Not voting were Sens. Christopher Bond, R-Mo., and Robert Bennett, R-Utah, who were absent. They would likely have voted against taking up the bill.

Senate Majority Leader Harry Reid, D-Nev., voted against cloture as a procedural matter so that the bill could be reconsidered later under Senate rules. Proponents of a bill will have to go back to work to draft a bill that can garner 60 votes needed to move ahead.

Speaking immediately after the vote, Sen. Mark Begich, D-Alaska, expressed his disappointment at the results. "It's amazing... They're drafting some bill somewhere in some dark room. I don't know if it's in the Capitol or up on Wall Street."

White House Had Urged Action

Earlier Monday, the White House issued a statement calling on Congress to pass the Restoring American Financial Stability Act. The legislation would "create clear rules of the road and can be consistently and systemically enforced, thus creating a more stable financial system with better protection for consumers and investors," the statement said.

The administration urged the Senate "to resist pressure from those who would preserve the status quo and to stand up for long overdue reform that will protect American families and the long-term health of the nation's economy."

On Sunday, Senate Banking Committee member Bob Corker, R-Tenn., who negotiated to try to come up with a bipartisan compromise agreement on the bill, reiterated his opposition to the bill, which was approved last month by the Banking Committee on a party-line vote.

Addressing Systemic Risks

Corker expressed hope that a bipartisan agreement can be reached, but he said "fundamental omissions" in the legislation must be addressed. He spoke on ABC's "This Week" television program.

While the bill, authored by Senate Banking Committee Chairman Christopher Dodd, D-Conn., addresses systemic risk, liquidation of large firms, consumer protection and derivatives regulation, "There are still many changes that need to occur before we move to debate the bill on the floor," Corker said. He said he plans to introduce a series of amendments to address omissions in the legislation.

"At the core of the financial crisis were home loans that should never have been written because the borrowers could not repay them," he said. Minimum loan underwriting standards need to be established requiring appropriate down payments and verification of borrowers' ability to pay for the life of the loan. That is not in the bill currently.

More Disclosure Sought

In addition, investors who bought mortgage-backed securities had no way of enforcing the representations and warranties made by the sponsors because they lacked access to underlying data or a third-party opinion, Corker said. Instead they relied on the securitizer or credit rating agencies that had conflicts of interest in reporting that the securities were sound because they were paid by the issuer. Corker wants mandated disclosures and more transparent information about such securities.

If a financial firm fails and must go through a resolution process, compensation and bonuses received by upper-level executives and board members should be used to repay the firm's creditors, Corker said. He wants to require the Federal Deposit Insurance Corp. to execute a "clawback" provision as part of liquidation proceedings.

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]]>financial reform billWall Street bailoutSara HansardMon, 26 Apr 2010 18:45:00 ESTSenator Levin: Goldman Bet Against Its Own Securitieshttp://www.dailyfinance.com/2010/04/26/senator-levin-goldman-bet-against-its-own-securities/http://www.dailyfinance.com/2010/04/26/senator-levin-goldman-bet-against-its-own-securities/http://www.dailyfinance.com/2010/04/26/senator-levin-goldman-bet-against-its-own-securities/#commentsFiled under: , , ,

Carl Levin, Lloyd Blankfein Goldman SachsDespite claims by Goldman Sachs (GS) that it upholds its responsibility to clients, evidence gathered by a Senate subcommittee shows that the company was making short-sale bets against the mortgage-backed securities it sold to investors in 2006 and 2007.

"The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients," said Sen. Carl Levin, D-Mich., at a press briefing Monday afternoon. Levin is chairman of the Senate Homeland Security and Governmental Affairs Committee's Permanent Subcommittee on Investigations, which is holding a day-long hearing Tuesday focusing on Goldman Sachs's role in the financial crisis.

Seven Goldman officials, including Chairman and Chief Executive Officer Lloyd Blankfein and Executive Director Fabrice Tourre, are scheduled to testify. Goldman Sachs and Tourre were charged April 16 by the Securities and Exchange Commission with securities fraud for their role in marketing a collateralized debt obligation obligation in which New York hedge fund Paulson & Co. had influenced the selection of some of the underlying subprime mortgage securities.

Accusation and Denial

In his prepared testimony, Blankfein denied that the firm bet against its clients, and said the company can not survive without their trust. "If our clients believe that we don't deserve their trust, we cannot survive," Blankfein said, according to an AP report.

But Levin said the evidence uncovered by his subcommittee shows otherwise. "For large fees Goldman helped run a conveyor belt that dumped hundreds of billions of dollars of toxic mortgages into the financial system," Levin said. That provided the lenders with liquidity so that they could issue still more bad loans, he said. Goldman Sachs used financial engineering to turn the high-risk mortgages into investments that were granted AAA ratings, selling them to pension funds, universities, municipalities, insurance companies and banks throughout the world, according to Levin.

"The subcommittee has determined that, contrary to its public pronouncements, in 2007 Goldman Sachs shifted direction, and placed heavy bets against mortgage-backed securities that it had created and that it was selling to its clients," Levin said. The company established and then cashed in large short positions that held in residential mortgages and related instruments. While Goldman lost a lot of money in 2007 when it decided to sell its long positions in mortgage-backed securities, it more than recouped those losses with $3.7 billion in profits it made from shorting that market.

Levin particularly disputed claims by Goldman that it was simply moving to a more neutral, "balanced" position in mortgage investments in 2007. "By early 2007 the company blew right past a neutral position on the mortgage market and began betting heavily on its decline," he said. The short positions at one point represented about 56% of the firm's risk as measured by the most relied-upon risk measure, called Value At Risk (VAR), he said.

The subcommittee has compiled more than 500 pages of documents, including numerous emails, showing that Goldman officials was moving away from investing in long positions in mortgage-backed securities beginning in late 2006 and continuing through 2007.

"Of course we didn't dodge the mortgage mess," CEO Blankfein wrote in one email to Goldman Executive Vice President and Chief Financial Officer David Viniar, who is also scheduled to testify Tuesday before the subcommittee. "We lost money, then made more than we lost because of shorts."

Some of the emails were reports to the company's board of directors on how it was taking short positions in the market.

A 'Gambling House'?

The company's decision to issue "synthetic" collateralized debt obligations, which contained no assets other than references to mortgage-backed securities, made it a "gambling house," rather than an investment bank, Levin said.

Goldman Sachs' behavior was probably similar to that of other investment banks, Levin said. The subcommittee will decide whether to refer the Goldman case to the SEC and the Department of Justice for possible action. "They misled the country, and they were not fair to their customers," he said.

Levin also called on the Senate to take up the financial reform bill. The Senate is scheduled to take a procedural vote this afternoon to determine whether it has at least 60 votes to avoid a Republican filibuster. Republicans, who have 41 seats, have said they will block the bill until they can get agreement on some measures they want in the bill.

Levin is sponsoring an amendment to the financial service legislation with Sen. Patty Murray, D-Ore., that would prohibit bank holding companies such as Goldman Sachs from engaging in high-risk proprietary trades, and would only allow non-bank financial companies from engaging in proprietary trading if they meet stringent capital requirements. The amendment also would address conflicts of interest at brokerage firms.

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]]>BlankfeinGoldman Sachs fraudmortgage backed securitiesSara HansardMon, 26 Apr 2010 17:00:00 ESTIn Financial Reform Drama, Industry Displeasure With Obama's Speechhttp://www.dailyfinance.com/2010/04/23/in-financial-reform-drama-industry-displeasure-with-obamas-spe/http://www.dailyfinance.com/2010/04/23/in-financial-reform-drama-industry-displeasure-with-obamas-spe/http://www.dailyfinance.com/2010/04/23/in-financial-reform-drama-industry-displeasure-with-obamas-spe/#commentsFiled under: , , , ,

Obama financial reform speechIt's no surprise financial services companies aren't happy with President Barack Obama's tough speech at Cooper Union in New York yesterday calling on them to support his financial reform efforts.

Big Wall Street companies whose officials attended the President's speech largely declined to comment. Among them were Morgan Stanley (MS) Chief Operating Officer Tom Nides and Chief Financial Officer Ruth Porat, Credit Suisse (CS) Investment Bank Chief Executive Officer Paul Calello, and JPMorgan Chase (JPM) Chief Risk Officer Barry Zubrow.

Disagreement on Volcker Rule

Goldman Sachs (GS), which was represented at the speech by CEO Lloyd Blankfein, responded to Obama's criticism that Wall Street is fighting reform by saying, "We have consistently been in favor of sensible bipartisan financial services reform."

The Securities Industry and Financial Markets Association issued a polite statement from President and CEO Tim Ryan: "We share President Obama's urgency to get bipartisan regulatory reform passed." But, Ryan said in the statement, "while we disagree on some of the details -- specifically on the Volcker rule and aspects of the derivatives portion of the legislation -- it should not distract us from our overall shared goal of passing responsible reform."

But one industry lobbyist, who would not speak for attribution, was bluntly critical of Obama. "He completely demagogued the industry. I don't know a single company that opposes legislation, and he runs around saying Wall Street's opposing this. Just because you oppose his legislation doesn't mean you oppose legislation. I think it's unconscionable."

In his speech yesterday, the President urged the industry to "join us, instead of fighting us in this effort," and he lambasted the financial industry for "descending on Capitol Hill...spending millions to influence the outcome of this debate. We've seen misleading arguments and attacks that are designed not to improve the bill but to weaken or to kill it."

"Strong Banks Want Strong Regulation"

The financial industry is lobbying to change several provisions in reform legislation that the Senate is taking up. Among other things, the industry objects to a proposed new tax on it to recoup the cost of the financial bailout, limits on banks' ability to trade for their own accounts and a $50 billion fund that would be collected from institutions with at least $50 billion in assets to fund resolutions of failed firms.

The resolution fund is a major sticking point between the Senate's Republicans and Democrats. President Obama maintained in his speech yesterday that the fund would "protect the financial system and the broader economy and American taxpayers in the event that a large financial firm begins to fail." There's currently no process that would contain failures such as Lehman Brothers last year, the President said.

Speaking on Bloomberg TV yesterday, Barclays (BCS) President Bob Diamond, who attended the President's speech, was more favorable to Obama. "I thought [it] was a very solid speech," Diamond said. "We're very close on a number of key issues to agreement," he said, adding, "Strong banks want strong regulation."

Calling for Major Changes

The U.S. Chamber of Commerce, which has been very active in opposing a number of Obama's proposals in the legislation, was also conciliatory toward the President, but the organization continues to call for major changes in the bill. Tom Quaadman, executive director of the Chamber's Capital Markets Center, says it's "a good thing [that] he left a lot of the populist rhetoric in Washington," at least compared to other speeches the President has given.

There needs to be bipartisan agreement on the legislation, says Quaadman. "The important part here is that we need to have a good bill. A bill for its own sake isn't worth the effort."

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]]>banking sectorderivativesfinancial crisisfinancial reformFinancial Regulatory Reform BillVolcker RuleSara HansardFri, 23 Apr 2010 14:00:00 ESTBailout Has Been Good for Wall Street, Not Main Streethttp://www.dailyfinance.com/2010/04/20/bailout-has-been-good-for-wall-street-not-main-street/http://www.dailyfinance.com/2010/04/20/bailout-has-been-good-for-wall-street-not-main-street/http://www.dailyfinance.com/2010/04/20/bailout-has-been-good-for-wall-street-not-main-street/#commentsFiled under:

The federal government's $700 billion bailout program has helped big banks but hasn't done much for the little guy, a key official said Tuesday. While the Troubled Asset Relief Program, as the plan is called, is "getting Wall Street back on its feet, it is not meeting its goal of getting Main Street back on its feet," TARP Special Inspector General Neil Barofsky (pictured) told the Senate Finance Committee.

Barofsky was speaking at a hearing on President Obama's proposed "Financial Crisis Responsibility Fee," which seeks to recoup TARP money by levying a tax of $90 billion over 10 years on banks with more than $50 billion in assets. Barofsky said the tax would mostly hit companies that will have repaid their TARP money.

"Those that are most able to repay will have repaid and there wouldn't be a loss associated with it," Barofsky said. But for companies that are doing poorly including American International Group, General Motors and Chrysler, "It will be more difficult to impose a tax on them," he said.

The Tax Faces Criticism

The Senate is to take up financial service reform legislation this week and some are calling for including the President's tax proposal in the legislation. But not everyone is a fan of the tax. "Corporate entities don't actually bear the burden of taxes; people do," said Finance Committee Ranking Member Charles Grassley, R-Iowa.

But Sen. Charles Schumer, D-N.Y., favors the tax. "The administration's proposal is a common-sense way to make sure that taxpayer money is repaid, and I believe it should be included in the financial reform legislation soon to be debated on the Senate floor," he said.

Talk of holding financial services firms responsible comes as the U.S. Securities and Exchange Commission pursues Goldman Sachs in a high-profile case for allegedly failing to adequately disclose the risk of certain investments to investors. During the hearing, Senate Finance Committee Chairman Max Baucus, D-Mont., described the financial crisis as "a fire that spread through our entire economy" and he blamed the origin of the blaze on the financial industry. The industry was faulted for writing bad mortgages and then in turn selling the bad mortgages to investors as collateralized debt obligations.

More to Help Broad Economy

Barofsky made it clear that he believes the Treasury Department needs to do more to ensure the TARP program helps the broader economy beyond just the financial services industry. Long-term unemployment remains at the highest rates in memory and small community banks are failing at an alarming rate, with 50 failures so far this year, he said. The goal of preserving home ownership has "fallen horribly short," with 2.8 million foreclosures last year and estimates this year that will eclipse that, Barofsky testified.

The Home Affordable Modification Program, Treasury's TARP-funded mortgage modification program, was originally intended to keep 3 million to 4 million homeowners in their homes by modifying mortgages to sustainable levels, Barofsky noted. "But it appears that it may never come close to meeting that goal," he said. There have been fewer than 230,000 permanent modifications more than a year into the program.

Failings of the program include problems with transparency, Treasury's execution of the program and problems with the program's design, Barofsky said. In many cases, borrowers who receive modifications are still unable or unwilling to continue to make payments because they're too high or their homes are "hopelessly under water," meaning the properties are worth far less than what is owed, he told the committee.

TARP Losses Revised Downward

As the economy recovers, many of the larger banks that received TARP funding have been able to repay the funds in advance of what had been anticipated, Barofsky said. As a result expected losses in the TARP are going down. The Office of Management and Budget estimates losses will be $127 billion while the Congressional Budget Office estimates losses at $109 billion. Both agencies estimate that the concentration of losses are from support to AIG, the automobile industry and to struggling homeowners.

During the hearing, Barofsky says his office has investigated fraud related to the program, citing the Securities and Exchange Commission's $150 million settlement with Bank of America over charges connected to the TARP. Meantime, the inspector general's office is conducting three different audits that touch on the extensive role of BlackRock Financial Management throughout the financial crisis, Barofsky said. One audit is looking at potential conflicts of interest connected with a $40 billion public-private investment program.

Barofsky was highly critical of an administration plan to take $30 billion out of the TARP program to set up a separate program to support small business lending. The plan would be "tremendously dangerous and wasteful to the taxpayer, if this $30 billion program is taken out of the TARP without our oversight continuing," Barofsky said. The TARP program and the proposed small business lending programs are virtually identical, and the inspector general's office already has built up auditing and investigative expertise, which is crucial to prevent fraud, Barofsky said.

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]]>bailouttarpSara HansardTue, 20 Apr 2010 19:00:00 ESTHouse's Levin Predicts Bush Tax Cuts for Wealthy Will Expirehttp://www.dailyfinance.com/2010/04/19/houses-levin-predicts-bush-tax-cuts-for-wealthy-will-expire/http://www.dailyfinance.com/2010/04/19/houses-levin-predicts-bush-tax-cuts-for-wealthy-will-expire/http://www.dailyfinance.com/2010/04/19/houses-levin-predicts-bush-tax-cuts-for-wealthy-will-expire/#commentsFiled under:

The new chairman of the House committee responsible for writing U.S. tax legislation predicts the Bush era tax cuts will expire for the wealthiest Americans, but that tax cuts for middle income families will remain in place.The new chairman of the House committee responsible for writing U.S. tax legislation predicts the Bush era tax cuts will expire for the wealthiest Americans, but that tax cuts for middle income families will remain in place.

Speaking at a National Press Club lunch, Rep. Sander Levin (pictured), D-Mich., chairman of the powerful House Ways and Means Committee, said Wednesday that "The divergence of income we've seen in the last decade means we should keep the middle income tax cuts and let those for the wealthy expire, and I think that is going to eventually happen."

He did not outline specific action that he expects his committee to take. If Congress does nothing, however, most of the Bush tax cuts will expire at the end of this year.

Middle Class Incomes Have Stagnated

Levin took over the House tax-writing committee in March after the previous chairman, Charles Rangel, D-N.Y., was forced to step down due to ethics charges.

During the last economic expansion from 2001 to 2007, the 1% of Americans with the highest incomes received two-thirds of the increased national income, while middle-class incomes stagnated, he said.

President Obama has called for allowing the Bush tax cuts to expire for couples who earn more than $250,000 per year, while cutting taxes for middle-income people.

Creating Jobs Is a Top Priority

Creating more jobs will be the committee's top priority, Levin said. "Jobs is our Number One issue," he declared, pledging to take additional action to spur job growth.

The committee held hearings last week on creating "green jobs" that help the environment. Levin lauded the automobile industry for endorsing a public-private partnership to develop technologies to develop energy-efficient automobile batteries.

The public-private partnership is the underlying premise of a tax extenders bill that includes research and development tax credits that Congress is working on.

Levin Eyes Change to Estate Tax

Levin indicated he wants to change the current estate tax law. In 2010, the estate tax expired, but under current law in 2011 it will revert to 2000 levels, when estates worth more than $1 million were liable for the federal tax. In 2009, estates below $3.5 million were not liable for estate tax.

"I find this uncertainty unacceptable and unfair," Levin said. Many wills are written to leave as much to the children as possible below the threshold at which estate taxes must be paid, with the rest going to the surviving spouse. "Today that means that the children may well be left with nothing," he said.

Levin also called for changes to trade agreements with Panama and Korea, which ships about 700,000 cars to the United States annually. In contrast, he said the U.S. sells less than 10,000 cars to Korea. "It's a one-way street," he said.

He was critical of Latin American countries, singling out Columbia. Latin American countries, have "deep disparities in terms of income and opportunity," that prevents the rise of a middle class. "We have to expand trade, but do so in a way that spreads its benefits," he said.

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]]>sander levintaxesSara HansardMon, 19 Apr 2010 18:30:00 ESTDodd Calls on Republicans to Support Financial Reform Billhttp://www.dailyfinance.com/2010/04/19/dodd-calls-on-republicans-to-support-financial-reform-bill/http://www.dailyfinance.com/2010/04/19/dodd-calls-on-republicans-to-support-financial-reform-bill/http://www.dailyfinance.com/2010/04/19/dodd-calls-on-republicans-to-support-financial-reform-bill/#commentsFiled under: , , , , ,

Dodd Calls on Republicans to Support Financial Reform Bill With the Senate preparing to take up major financial reform legislation later this week, Senate Banking Committee Chairman Christopher Dodd (D-Conn., pictured), called on recalcitrant Republicans to join in supporting the major regulatory overhaul.

"This comes right down to this basic fact: Whose side are you on?" Sen. Dodd said at a Monday morning press conference in which he and fellow committee member Sen. Mark Warner (D-Va.) participated. The Senate is scheduled to begin consideration of the bill Wednesday.

All 41 Senate Republicans signed an April 16 letter to Senate Majority Leader Harry Reid (D-Nev.) saying they oppose the bill in its current form. The letter alleges that the Restoring American Financial Stability Act of 2010 "allows for endless taxpayer bailouts of Wall Street and establishes new and unlimited regulatory powers that will stifle small businesses and community banks."

Not so, said Dodd, in response: The bill ends the concept of allowing financial institutions that are "too big to fail."

Proposed Fund Would Have Banks Cover Cost of Failure

A key sticking point is a $50 billion resolution fund into which banks having more than $50 billion in assets would have to pay. Both Dodd and Warner said that the idea of a pre-funded resolution fund was originally suggested by Republicans, and they called for Republicans to come forward with new ideas if they now oppose it. "The door is wide open," Dodd said.

"If there are ideas to do this ... to insulate that taxpayer, that's fine," Dodd said. "This is not a question where I'm rigidly holding onto this," he said.

The proposed fund would cover the cost of unwinding large institutions that fail in an orderly manner so that the broader economy is not damaged. "You need to keep the lights on to do an orderly dissolution of firms," Warner said.

Under the legislation, management of firms that fail would be fired, shareholders and creditors would lose value and assets in the firms would be depleted. With the painful process laid out in advance, there would be adequate reason not to assume that failing firms would be implicitly backed up by the government, Warner said.

Reforms Would Prevent a Repeat of Goldman Sachs, AIG Fiascos

Dodd warned that Republicans should not want to be seen as the party blocking major reforms, especially after the blockbuster Securities and Exchange Commission case filed on Friday against Goldman Sachs (GS) for selling risky mortgage-backed securities without disclosing that the investments were partly selected by a hedge fund manager who made billions of dollars betting that the underlying securities would fail.

"Our bill would have prevented those kind of events from happening," Dodd claimed.

Emboldened by the SEC case, and the possibility that similar cases will follow, Reid has decided to move forward with the legislation, despite Republican opposition. On Thursday, President Obama will travel to New York City, where he is to deliver remarks at Cooper Union calling for passage of the bill. The president also is planning to stump for support for the legislation across the country.

In addition to setting up the resolution fund, Dodd and Warner highlighted provisions in the bill that would require more regulation of derivatives, complex instruments which derive their value from other financial assets. Huge investments by American International Group (AIG) in derivatives went sour as they recession began, which led to the government loaning $85 billion to the firm in 2008 to prevent it from collapsing and taking down the rest of the financial system.

Dodd said that more transparency in derivatives trading is needed to prevent another such occurrence. Republicans argue that the legislation would make it difficult for small businesses and nonfinancial institutions to hedge bets and get credit.

Democrats and Republicans also disagree about whether a powerful new regulator dedicated to protecting consumers is needed. Democrats say a new agency is necessary because no currently existing regulatory agency focuses on consumer needs in the areas of mortgages, credit cards and other types of consumer financing, while Republicans say a new agency would provide overlapping, confusing regulation over the financial industry.

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]]>American International Groupfinancial reformSenateSara HansardMon, 19 Apr 2010 13:05:00 ESTWhat Went Wrong at WaMu: Weak Regulators Ignored Bank's Bad Practiceshttp://www.dailyfinance.com/2010/04/16/what-went-wrong-at-wamu-weak-regulators-ignored-banks-bad-prac/http://www.dailyfinance.com/2010/04/16/what-went-wrong-at-wamu-weak-regulators-ignored-banks-bad-prac/http://www.dailyfinance.com/2010/04/16/what-went-wrong-at-wamu-weak-regulators-ignored-banks-bad-prac/#commentsFiled under: , , ,

What Went Wrong at WaMu: Weak Regulators Ignored Bank's Bad Practices Agency infighting and regulators' repeated disregard of shoddy lending practices allowed Washington Mutual Bank, a $300 billion thrift and the sixth largest U.S. depository institution before it failed in 2008, to continue to make high-risk mortgage loans and sell them as securities into the market, according to the findings of a Senate investigative subcommittee released Friday.

In the second of four hearings being held on causes of the economic crisis by the Permanent Subcommittee on Investigations, Chairman Carl Levin (D-Mich.) called Seattle-based WaMu, which was purchased by JPMorgan Chase (JPM) in 2008 after it collapsed, "a case history to illustrate how from 2004 to 2008, U.S. financial institutions loaded up on risk and churned out hundreds of billions of dollars in high-risk, poor-quality home loans to Wall Street in exchange for big fees. Together they initiated the economic assault."

The financial firms "couldn't have done what they did unless their regulators let them," Levin said, listing numerous examples of situations in which the Office of Thrift Supervision knew of serious problems in loan quality and risk management at WaMu, but did little to stop the practices until it was too late. The Federal Deposit Insurance Corp., the bank's back-up regulator, also did not take enough action to ensure the safety and soundness of the bank, Levin said.

The subcommittee released nearly 500 pages of documents from regulators and WaMu, and it took testimony from inspector generals at Treasury and FDIC, both of which released their own critical reports.

Bank Dumped Toxic Mortgages Into Market "Like Polluters Dumping Poison in a River"

WaMu was the largest financial institution overseen by the Office of Thrift Supervision, and WaMu's fees paid for 12% to 15% of the agency's budget, Levin said. "OTS was a feeble regulator," he said. "Instead of policing the economic assault, OTS was more of a spectator on the sidelines, a watchdog with no bite, noting problems and making recommendations but not acting to correct the flaws and the failures that it saw." At times, OTS officials even prevented the FDIC from fully examining the bank, he said.

Between 2003 and 2008, WaMu and its primary subprime lender, Long Beach Mortgage Company, dumped low-risk 30-year fixed-rate loans and loaded up on more profitable, but problem-plagued, high-risk subprime and adjustable-rate "option arm" mortgages, Levin said. From 2000 to 2007, WaMu and Long Beach securitized at least $77 billion in subprime loans, stopping only when the subprime secondary market collapsed in September 2007. WaMu sold another $115 billion in option arm loans. "Together, WaMu and Long Beach dumped hundreds of billions of dollars of toxic mortgages into the financial system like polluters dumping poison in a river," he said.

Meanwhile, regulators "had a front-row seat to Washington Mutual's high-risk lending strategy, its poor quality loans, its substandard securitization practices, but did little to stop it," he said. OTS was well aware of WaMu's high risk lending strategy, moving to require the bank to get board approval of that strategy in January, 2005.

"OTS knew about WaMu's shoddy lending practices, having repeatedly identified problems with the bank's operations in examination reports year after year," Levin said. OTS noted numerous problems at WaMu and told the bank to take corrective action, but when problems were not fixed OTS failed to take action. Levin listed deficiencies noted by OTS examiners in WaMu's lending policies, including concentrations in option arm loans to higher-risk borrowers, limited-documentation loans, and loans with subprime or higher-risk characteristics throughout a period from 2004 through 2008.

OTS raised concerns with WaMu's top executives and board of directors for five years, Levin said. "Each year, WaMu promised to do better, but it didn't, and OTS never took action to change that," he said. OTS officials viewed the bank as their "largest constituent" instead of an institution that they were supposed to regulate, he added. While some OTS examiners tried to object to policies that allowed borrowers to get loans without verifying income, an OTS official dismissed concerns, labeling one examiner who raised concerns as a "lone ranger."

The agency did not take any enforcement action until shortly before the bank failed in 2008, when it was too late, Levin said.

OTS Blocked FDIC's Access to WaMu Records

OTS examiners felt they could not take action against WaMu as long as the bank was not losing money and loans were being repaid, according to the subcommittee's findings. However, regulatory standards require agencies to take action against bad practices, whether or not the institution committing them is making money, Levin said. Moreover, OTS officials felt that as long as WaMu was selling the mortgages as securities, they did not need to interfere, regardless of their effect on the market or the broader economy.

OTS officials also blocked FDIC access to bank data, Levin said. But the FDIC expressed concerns about the bank from 2005 through 2008, and did not act aggressively to correct the bank's practices, he said. The FDIC finally downgraded the WaMu in September 2008, after several runs on the bank's deposits, and the OTS reluctantly followed suit the same day. "By then, the FDIC was contemplating whether the $300 billion thrift, had it failed, might exhaust the entire federal deposit insurance fund, which contained a total of about $45 billion," he said. The OTS closed WaMu and appointed the FDIC as receiver in September; the FDIC sold WaMu's assets to JPMorgan Chase for about $1.9 billion.

"This is a great example of regulatory failure," concluded Sen. Tom Coburn, (R-Okla.), the ranking GOP member of the subcommittee. But Congress was also remiss, he said. "Where was the Congress in looking at OTS?" Congress did little to oversee the effectiveness of OTS or the FDIC, he said, and he criticized plans for the Senate to consider financial reform legislation before getting a full report on what happened with bank failures.

Resolution of WaMu Collapse Had "Zero Cost" to Taxpayers, FDIC

In prepared testimony, FDIC Chairman Sheila Bair claimed that the FDIC "has taken a leading role in addressing some of the unsustainable trends that precipitated the mortgage crisis." The agency has advocated for regulatory reform to end abusive mortgage lending under the Home Ownership and Equity Protection Act, she said.

But she said an interagency agreement giving the FDIC back-up authority to examine high-risk thrifts limited direct FDIC access to bank employees and required it to rely on examinations conducted by the OTS. "The compromises that appeared reasonable in theory at the height of the banking industry profitability served to bind us when the FDIC needed to implement this agreement in practice," she said in her testimony. Bair called for removing limits on the FDIC's ability to take enforcement action.

Bair defended WaMu's resolution, saying it "went remarkably smoothly." All of WaMu's deposits were preserved, bank branches were left open, many jobs were saved, and there was "a seamless transition for WaMu's customers the day after the bank was closed." Further, the resolution came at "zero cost" to the deposit insurance fund, and the bank was not bailed out. "Had the FDIC been forced to liquidate WaMu, the FDIC estimates that it would have suffered approximately $41 billion in losses," she testified.

The FDIC has acted to implement findings of the FDIC and Treasury inspectors general in connection with the oversight of WaMu, Bair said. The two inspectors general identified problems with the interagency agreement that limits the FDIC's ability to examine potential risk at insured deposit institutions. They also expressed concerns about FDIC's reliance on the rating system it uses for setting insurance premiums for banks.

Former OTS Director John Reich tried to defend his agency's regulation of WaMu, saying that the FDIC had agreed on the bank's risk rating. Some exam results indicated that the WaMu deserved its relatively high rating until 2008, he said. Reich said he did not why it took so long to implement a Memorandum of Understanding that OTS entered into with the bank under which WaMu was supposed to correct problems.

"I regret that there was a six-month delay," Reich said. "I regret that it took so long." But he said he could not remember why it took so long. "I was not personally involved in the negotiations" of the memorandum, he said.

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]]>bank failuresbanksFDICfinancial crisisregulationwashington mutualSara HansardFri, 16 Apr 2010 15:16:00 ESTThis Financial Reform Isn't What State Securities Regulators Wanthttp://www.dailyfinance.com/2010/04/14/this-financial-reform-isnt-what-state-securities-regulators-wan/http://www.dailyfinance.com/2010/04/14/this-financial-reform-isnt-what-state-securities-regulators-wan/http://www.dailyfinance.com/2010/04/14/this-financial-reform-isnt-what-state-securities-regulators-wan/#commentsFiled under: , ,

At state securities regulators' annual public policy conference on Tuesday in Washington, they made no secret of their unhappiness with financial service reform legislation that Congress is considering. In fact, they're in open revolt.

After hearing the litany of complaints the state securities officials have with the proposed legislation, Pennsylvania Securities Commission member Tom Michlovic stood up during a question-and-answer session and asked: "What are we supporting this turkey for? Let's just call it where it is. We haven't got a single thing in this legislation."

"What Would the Tea Baggers Do"

The legislation aimed at reform the financial services industry was clearly top of mind at the North American Securities Administrators Association's meeting. Michlovic suggested that NASAA publicly oppose the bill and ask President Obama to veto it if Congress passes it. In December, the House approved its version of the bill, the Wall Street Reform and Consumer Protection Act, and the Senate is expected to take up the Restoring American Financial Stability Act the week of April 26.

"This isn't financial reform, and we're putting our name on it as financial reform," Michlovic said. Congress has "been eroding everything we've been working for" because the bills being considered won't provide strong enough regulation to fix the ills that plague the current system, he said.

"What would the tea baggers do?" Michlovic asked the approximately 200 regulators attending the conference. He referred to the Tea Party movement that's causing waves in American politics by opposing health care reform and other legislation that Congress and the administration are crafting. "The tea baggers would fight it tooth and nail, and they'd be running down the street trying to deal with those folks. And we do have some credibility right now."

Less Onerous Rules for Brokers

State securities regulators have lobbied in vain to win inclusion of stronger provisions that would require brokers who provide investment advice to come under the same fiduciary legal obligations that are imposed on investment advisers under the Investment Advisers Act of 1940.

Brokers are now regulated under different securities legislation, the Securities Exchange Act of 1934. They're required to make securities sales recommendations that are suitable for their customers, but they're not required to act in their customers' best interest. Nor are brokers required to provide the types of disclosures that investment advisers give customers, warning of possible conflicts of interest, such as earning higher commissions for selling particular securities.

In recent years, brokers have moved toward providing clients with investment advice. That has led investment advisers to challenge the legal exemption brokers currently retain from having to register and be regulated under the Investment Advisers Act. In 2007 the Financial Planning Association won a ruling from the U.S. Court of Appeals for the District of Columbia that overturned a Securities and Exchange Commission rule that would have allowed brokers to charge advisory fees on assets they manage without having to be regulated as investment advisers. The SEC has continued to grapple with the issue of broker-adviser regulatory harmonization since then.

Scuttled for a Study

The House bill contains provisions that would require brokers who provide personalized investment advice to retail investors to act as fiduciaries. But the provision doesn't include advice given to institutional investors, such as endowments and pension funds. The House bill contains a provision, which many state officials oppose, that would exempt brokers from fiduciary obligations after initially giving retail clients investment advice.

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) had initially issued draft legislation that the state regulators supported, but that provision was scuttled and replaced with a requirement that the SEC merely study the issue of how to harmonize regulations of brokers and advisers. Brokerage groups and insurance agents who act as financial advisers have opposed the fiduciary requirement, arguing that such an obligation could limit the choices they're able to offer investors. They also claim it would raise consumer costs by making it more difficult to sell on commission, or make it impossible to sell securities owned by their brokerage firms, both of which could create conflicts of interests.

Sens. Robert Menendez (D-N.J.) and Daniel Akaka (D-Hawaii) may offer an amendment when the bill is taken up by the full Senate that would be similar to the House provision, according to a press aide for Menendez, though it's not certain. The senators are likely to offer the amendment only if they believe the Senate would approve it, according to a lobbyist working on the legislation.

Private Offerings Get Ignored

The possibility that state securities regulators could actively oppose the legislation "should be an option that remains on the table," said Indiana Securities Commissioner Chris Naylor, who spoke on a panel about what the regulatory reform would mean to Main Street investors. "It's passion like that that we have to take to our members," Naylor said, referring to Michlovic's fervor.

In addition to the fiduciary issue, the state officials are unhappy that neither of the bills Congress is considering would provide them with more power to oversee private securities offering. Private offerings don't carry the regulatory filing and disclosure requirements that public securities offerings need to be sold. Since state securities regulators were barred from reviewing private offerings under the National Securities Markets Improvement Act of 1996, the number of such offerings have increased to nearly 30,000 from about 12,000, according to Pennsylvania Securities Commissioner Steve Irwin, who spoke on the panel.

Fraud complaints have increased dramatically as well, Irwin said. The SEC hasn't been able to review the private offerings adequately, he said. Such offerings have become "the preferred method for microcap fraudsters to raise or misappropriate funds from investors," Irwin said.

While states still have power to stop fraud, the limits on their powers make it difficult to shut down illegitimate operators before they cause damage to investors, Irwin said. "That's why we have a black hole of regulatory reform. The feds aren't doing anything, and left it to us when we were handcuffed."

"There Ought to Be a Choice"

State securities regulators also want to ban the use of mandatory arbitration provisions in securities contracts. Most brokerage contracts currently require customers to take disputes to arbitration, and many investor advocates argue that investors should be given the option of taking cases to court as well.

Both the House bill and the bill approved by the Senate Banking Committee in March would give the SEC the discretion to restrict or prohibit mandatory arbitration clauses, but the NASAA doesn't believe that goes far enough. It argues that the SEC has historically been unwilling to take up the issue of mandatory arbitration.

"Pre-dispute arbitration is a bad idea," said Marc Minor, bureau chief of New Jersey's Department of Law and Public Safety, who spoke on the panel. "There ought to be choice."

The number of securities arbitration cases, which are administered by the Financial Industry Regulatory Authority, rose to about 65,000 in 2009, the highest number since 2004, Minor said. Most claimants in arbitration cases don't, and the numbers of claims that prevail has been going down in recent years, he said. Securities arbitration panels usually include an industry participant.

The state securities regulators have spoken. Whether Congress listens is another matter.

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]]>financial reformfinancial servicesSara HansardWed, 14 Apr 2010 17:40:00 ESTStruggling Homeowners Need More Helphttp://www.dailyfinance.com/2010/04/14/struggling-homeowners-need-more-help/http://www.dailyfinance.com/2010/04/14/struggling-homeowners-need-more-help/http://www.dailyfinance.com/2010/04/14/struggling-homeowners-need-more-help/#commentsFiled under: , ,

mortgage modification programThe chairwoman of a congressional housing committee today called for increased measures to help homeowners whose mortgages are greater than the value of their homes.

In the past year, 1.4 million trial loan modifications have taken place but only 230,000 modifications have been made permanent, said Rep. Maxine Waters (D-Calif.), chairwoman of the Housing and Community Opportunity Subcommittee of the House Financial Services Committee. At the same time, performance on home mortgages serviced by the largest national banks and thrifts continued to decline through the end of 2009. While foreclosures decreased from January to February, the February figures are still 6% higher than February, 2009.

Waters called for stronger foreclosure intervention programs, including a $3 billion provision she authored in financial service reform legislation. Her plan passed the House in December and would provide assistance to unemployed homeowners facing foreclosure -- "a much more robust program than what the Treasury Department has proposed."

She also called for principal reduction programs, citing data that the average borrower in Southern California would not get out from being "underwater" until 2016.

What's Good for the Goose...

"Increasingly, I am unconvinced that these voluntary programs are going to provide the assistance that homeowners desperately need," Water said. She was critical of statements by bank officials that principal reduction programs are unfair and cause market distortions. "When these financial institutions find themselves underwater on their own real estate investments, they themselves often stop making payments," she said, citing Morgan Stanley's decision to stop making payments on five underwater office buildings in San Francisco.

When the Mortgage Bankers Association found itself underwater on its headquarters, it was able to rely on other lenders to get out from under the unsustainable mortgage, she added. "Unfortunately, it seems that many of their members oppose giving homeowners the right to do the same."

Servicers continue to construct barriers for people trying to get loan modifications, Waters said, pledging to work for mandatory loss mitigation legislation.

Falling Short

Rep. Shelley Moore Capito (R-W.Va.), ranking member of the subcommittee, said the administration's Home Affordable Modification Program "has fallen woefully short." As of March 12 only 170,000 homeowners had received permanent modifications, she said.

The administration has over-promised what can be done to help homeowners, and the programs that have been created provide the perverse incentives for people not to repay mortgages, Capito said. "The problems we are now seeing in the housing markets are less related to exotic mortgage products. Are we creating a moral hazard here for future homeowners that will give them less incentive to pay their mortgages on time and purchase a home that is well within their means? Is it fair to the vast majority of Americans who own their home outright or are current on their mortgage that some Americans who are not as responsible with their financial decisions are now receiving these benefits?"

The new revisions announced by the administration in March allow borrowers to refinance into the Federal Housing Administration program, which is already struggling with its capital reserve fund below the mandated 2% level, Capito said.

Signs of Stabilization

Mortgage servicers have been slow to implement the Home Affordable Modification Program, Federal Housing Administration Commissioner David Stevens told the housing subcommittee. But Stevens said that the programs announced March 26 "have accelerated the pace of modifications," and there are signs of stabilization in the housing market. The adjustments to Federal Housing Administration programs will offer between 3 million and 4 million underwater homeowners the chance to restructure their loans through the end of 2012.

Stevens told the housing subcommittee that the changes, in addition to other changes made to the Home Affordable Modification Program, the largest loan modification the nation has seen, "will help the administration meet its goal of stabilizing housing markets" by offering a second chance to struggling homeowners.

The changes, which are voluntary, permit lenders to provide additional refinancing options for borrowers who are current on their mortgage if the lender reduces the amount owed by at least 10%. The loan program, financed by the private sector and the federal government's Troubled Asset Relief Program, "will provide more opportunities for qualifying mortgage loans to be responsibly restructured and refinanced into FHA loans," Stevens said. In answer to questions about the impact of the programs on FHA's capital levels, he said the programs "should not expose FHA to further risk.

With record low mortgage rates and help from mortgage modification programs, more than 4 million homeowners have refinanced their mortgages, saving more than $7 billion in the past year, Stevens said. Home equity increased by more than $13,000 for the average homeowner in the last three quarters of 2009.

The Rules

Eligible homeowners for the new FHA refinance option must live in an owner-occupied principal residence and have a mortgage balance of less than $729,750. Lenders must agree to write down the balance of the underwater loan to a sustainable level, and the new monthly mortgage payments must not be greater than 31% of their income.

Stevens said that the government "cannot and should not help everyone." Investors and speculators should not be protected, nor should Americans living in million-dollar homes or defaulters on vacation homes. "Some people simply will not be able to afford to stay in their homes because they bought more than they could afford."

An estimated 11 million to 15 million mortgages, about a fourth of outstanding mortgages, exceed the value of the home, Stevens said. But he said it is difficult to know how many of these underwater mortgages are for owner-occupied homes. Moreover, most underwater homeowners are current on their mortgages.

"The administration is keenly aware of the potential for moral hazard in principal reduction and has carefully designed the guidelines of the principal write-down enhancements to FHA and HAMP to discourage borrowers from purposefully becoming delinquent on their loan," which is why they must be current on their loan payments, Stevens said. Total mortgage debt for the borrower after refinancing can not be greater than 115% of the current value of the home, which should give homeowners a way to regain equity in their homes and affordable monthly payments.

A second lien write-down program will be paired with the changes to encourage write-downs of second liens, Stevens said. About half of underwater homeowners have a second lien in addition to their primary mortgage, he said.

A Growing Willingness to Help

As housing prices have stabilized, servicers have been more willing to write down mortgages, he said, citing Bank of America (BAC), which announced a new initiative March 24, and Wells Fargo (WFC), which last year wrote down $2.6 billion in principal for borrowers of option ARM loans. "We are encouraged that lenders are increasingly offering mortgage relief through principal write-downs for struggling borrowers," Stevens said.

The administration has moved aggressively to change and expand programs to help at-risk homeowners, said Phyllis Caldwell, chief of the Treasury Department's Homeownership Preservation Office. Documentation requirements have been increased for trial modifications, and established concrete time frames for servicer responses.

To assist unemployed homeowners, services will be required to reduce their mortgage payments temporarily to affordable levels for at least a few months, and if the homeowner does not find a job, he or she will be evaluated for permanent assistance or could be eligible for a short-sale program.

Servicers will soon be required to consider an alternative modification approach that emphasizes principal relief in order to expand the use of principal write-downs, Caldwell said. Servicers will be asked to consider principal write-down balances above 115% of current loan-to-value, and eligible homeowners will earn the forgiveness on a pay-for-success basis.

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]]>housingSara HansardWed, 14 Apr 2010 16:25:00 ESTWashington Mutual's Reckless Lending Practices Highlighted at Hearinghttp://www.dailyfinance.com/2010/04/13/washington-mutuals-reckless-lending-practices-highlighted-at-he/http://www.dailyfinance.com/2010/04/13/washington-mutuals-reckless-lending-practices-highlighted-at-he/http://www.dailyfinance.com/2010/04/13/washington-mutuals-reckless-lending-practices-highlighted-at-he/#commentsFiled under: , ,

James Vanasek Washington MutualReckless credit practices at Washington Mutual Bank were detailed Tuesday at a hearing held by a Senate subcommittee investigating the role of high-risk home loans in the financial crisis. The collapse of WaMu, which specialized in risky "option ARM" loans that many of its mortgage holders were unable to pay, helped send the financial markets into a tailspin.

Washington Mutual "was a reflection of the mortgage industry, characterized by very fast growth, rapidly expanding product lines, and deteriorating credit underwriting," James Vanasek (pictured), chief risk officer of WaMu in 2004 and 2005, testified to the subcommittee.

"Mistakes Were Made"

"This was a hyper-competitive environment in which mistakes were made by loan originators, lending institutions, regulatory agencies, rating agencies, investment banks that packaged and sold mortgage-backed securities, and the institutions that purchased these excessively-complex instruments," Vanasek said.

The bank's failure was "both the result of individual failures and systemic failures fueled by self-interest, failure to adhere to lending policies, very low interest rates, untested product innovations, weak regulatory oversight, astonishing rating agency lapses, weak oversight by boards of directors, a cavalier environment on Wall Street, and very poorly structured incentive compensation systems that paid for growth rather than quality."

Vanasek also blamed the repeal of Glass Steagall Act, which had separated banking from securities brokerage and other financial institutions, and its impact on the securitization market, as well as Community Reinvestment Act requirements that put pressure on banks to make more low-income mortgage loans.

Vanasek testified that he was unable to change the bank's culture of issuing large volumes of poor loans that were then securitized and sold to investors. His efforts to tighten the rules, including verifying income information that many borrowers were providing, were ignored, sometimes at the urging of mortgage officers eager to earn high fees on the loans they made.

A Man-Made Disaster

"To rebuild our defenses it is critical to understand that the recent financial crisis was not a natural disaster," said Sen. Carl Levin, chairman of the Permanent Subcommittee on Investigations, a part of the Homeland Security and Governmental Affairs Committee. "It was a man-made economic assault. People did it. Extreme greed was the driving force, and it will happen again unless we change the rules."

In the last 18 months the subcommittee has conducted more than 100 interviews and depositions to investigate the cause of the economic crisis, developing case studies that are detailed in 86 exhibits on its website. The subcommittee's investigation focused on the period from 2003-2008 leading up to the financial crisis.

While the now-failed WaMu, which at one point was the sixth largest bank in the U.S. with $330 billion in assets, had once made conservative, traditional fixed-rate mortgages, in 2005 the bank moved to more profitable option-ARM and subprime mortgages, Levin said. In 1999 purchased Long Beach Mortgage Company, a subprime lender who made loans to people whose credit histories did not support getting traditional mortgages.

Long Beach made the loans through third-party mortgage brokers, and then the company packaged and sold the loans to Wall Street as mortgage-backed securities. Levin detailed ongoing problems with fraud and shoddy loan practices at Long Beach, which were not stopped by WaMu.

"Long Beach was not a responsible lender," Levin said. "Its loans in mortgage-backed securities were among the worst performing in the subprime industry." Emphasis at both Long Beach and WaMu was put on churning out large volumes of the highly profitable subprime loans, which were sold as to Wall Street as mortgage-backed securities.

Levin cited an internal email of WaMu's primary federal regulator, the Office of Thrift Supervision, stating that Long Beach mortgage-backed securities prior to 2003 "have horrible performance. LBMC finished in the top 12 worst annualized net credit losses in 1997 and 1999 through 2003," and the company had poor performance other years as well. The Federal Deposit Insurance Corp. also noted numerous deficiencies in the company's loans.

Nevertheless, the company was allowed to securitize its loans, selling them to investors, and neither WaMu nor regulators took decisive action to stop the company from continuing to issue the highly profitable subprime loans.

Confidence Game

"Confidence was king" at WaMu when it dived head-first into high-risk lending, said Sen. Tom Coburn, R-Okla., ranking member of the subcommittee. "The bank drastically altered its business model from long-term fixed-rate mortgages to higher-risk loans made to higher-risk borrowers," he said. Easy money from the Federal Reserve and climbing home values gave company executives a misplaced sense of confidence, he said.

Sales associates were put under immense pressure to "just get the loans done," Coburn said. Coupled with a voracious appetite for subprime-based mortgage backed securities from Wall Street and government sponsored enterprises Fannie Mae and Freddie Mac, "all the pieces were in place for an epic fall of this once venerable financial institution." WaMu "made sure anyone and everyone got a loan," he said.

Congress also failed to oversee Fannie Mae and Freddie Mac, the Federal Reserve, the FDIC, the Securities and Exchange Commission, and other areas as well, Coburn said. "Because of reckless federal policies too many families found themselves locked into mortgages they did not understand and absolutely could not afford."

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]]>financial crisisSara HansardTue, 13 Apr 2010 12:30:00 ESTWhy Fannie Mae Failed: Ex-CEO Blames Conflicting Mandateshttp://www.dailyfinance.com/2010/04/09/why-fannie-mae-failed-ex-ceo-blames-conflicting-mandates/http://www.dailyfinance.com/2010/04/09/why-fannie-mae-failed-ex-ceo-blames-conflicting-mandates/http://www.dailyfinance.com/2010/04/09/why-fannie-mae-failed-ex-ceo-blames-conflicting-mandates/#commentsFiled under: , , ,

Fannie Mae Faiure: Ex-CEO Daniel Mudd Blames Conflicting Mandates The root cause of the troubles that mortgage giants Fannie Mae, Freddie Mac and Ginnie Mae experienced during the financial crisis can be found in the conflicting mandates of their business models, the former head of Fannie Mae told a congressional commission on Friday.

"I accept responsibility for everything that happened on my watch," said Daniel Mudd (pictured), former president and chief executive officer of Fannie Mae, who testified before the Financial Crisis Inquiry Commission. But he said the demands put on Fannie Mae to support affordable housing and home ownership ultimately made it impossible for the organization to succeed in its other mission: making a profit.

During the crisis of 2007 and 2008, "so many decisions were a choice between unsavory alternatives," Mudd said. "I could not do what a private firm could do: leave the market, close the window, or short mortgages." Under the mandate Congress gave them when they were created, the three government-sponsored enterprises (GSEs) that underpin the U.S. mortgage system must stay in the market and provide liquidity.

Without revenue, profits and growth, the company could not attract global capital to the U.S. housing market. On the other hand, the GSE also had to meet the mission goals for affordable housing and liquidity that were written into its congressional charter, Mudd said.

"A monoline GSE asked to perform multiple tasks [could] not withstand a multiyear 30% home price decline on a national scale, even had it been without the accompanying global financial turmoil," Mudd said. Unlike other financial institutions, the GSEs were unable to diversify, and the housing market collapse of 2007-2010 made it impossible for them to operate profitably.

Operating in Havoc

In 2008, the Federal Housing Finance Agency put Fannie Mae and Freddie Mac into conservatorship. At the time, the two owned or guaranteed nearly 57% of the $12 trillion U.S. mortgage market.

But even as late as as the end of 2008, the Office of Federal Housing Enterprise Oversight, Fannie Mae's regulator, declared that the GSEs were in full compliance with their capital requirements, Mudd said. As havoc developed in the housing markets, the GSEs were called on to refinance subprime borrowers and provide the lead in mortgage modifications. At the same, time Fannie Mae and Freddie Mac were pushed to raise capital, earn returns and cut costs.

"I sought to balance the fine points of mission and business, insofar as I could understand them, with the support of regulators and policymakers," Mudd said. "That was no longer possible by Sept. 6, 2008, and I am sorry for that." The demands of operating an enterprise sponsored by the government increasingly conflicted, he said.

There was overinvestment in housing, origination standards slipped and there were too many middlemen. "Home ownership rates probably rose too high," Mudd said.

"The fundamental and solid economics of home ownership will reassert themselves" once this crisis is behind the country, Mudd said. But without a consensus on national policy to support housing, he said, "It will be difficult to choose between competitive models for a new housing finance system. Government entities created to support home ownership as a social good will tend to socialize the risk to all taxpayers. Purely private companies will exercise their fiduciary responsibility to pass the costs and the risks to homeowners. Hybrid organizations, such as a GSE, will be left to balance conflicts between taxpayers and homeowners and shareholders. There are no simple answers."

To Stay Competitive, Fannie Bought Into Subprimes

Fannie Mae reported about $134 billion in net losses in 2008 and 2009, most of which came from loan losses and credit losses, Financial Crisis Inquiry Commission Chairman Phil Angelides said, citing the company's financial report. A significant amount of the approximately $104 billion in loan losses came from higher-risk products, such as "Alt A," subprime and interest-only loans, and loans to people with poor credit, originated in 2006 and 2007.

Angelides asked why Fannie Mae decided to invest in the higher-risk products in that period. Loans with high-risk features made in 2007 made up 29% of Fannie Mae's loans but accounted for 58% of the losses, 28% of the loans in 2008 but 75% of the losses, and 24% of 2009 loans but 69% of losses, he said.

Those higher-risk loans put on the books shortly before the housing market collapsed were, unsurprisingly, the worst-performing and were the first to go, Mudd said.

Fannie Mae had come out of a period during the 1990s when it was a dominant force in the marketplace. But that position had slipped as Wall Street and the private market developed competing products.

There was a "broad concern that under the continuation of these trends, Fannie Mae and by derivation Freddie Mac's role in the market would be less relevant." In response, Fannie Mae developed a plan to buy some of the new securities, he said.

Losing Influence to Private Companies

Robert Levin, former executive vice president and chief business officer of Fannie Mae, also testified that the growth of the private-label mortgage securities market, which primarily financed subprime mortgages, Alt A mortgages and jumbo loans, had a significant impact on both the mortgage markets as a whole and Fannie Mae in particular. "When Fannie Mae was one of the principal sources of capital in the mortgage market, Fannie Mae's influence was greater. When other sources of capital were more plentiful, as in the period prior to the crisis, Fannie Mae's influence was diminished," he said.

In 2003, the amount of private-label securities issued was about half that of Fannie Mae's, but in 2004, dollar volumes of private-label securities increased dramatically, exceeding the levels of Fannie Mae's mortgage-backed securities, and almost reaching the levels of Fannie Mae and Freddie Mac combined. The trend continued in 2005 and 2006, when the dollar volume of private-label securities issued exceeded the combined dollar volume of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

Fannie Mae's business activity relative to the overall market declined significantly during that time. Many of the products funded by private-label issuers had features that attracted low-income borrowers, which threatened Fannie Mae's ability to meet its mandated housing goals, Levin said. "Fannie Mae had never previously experienced market changes of the magnitude that we were seeing during this period," he said.

In response, Fannie Mae expanded its Alt A business "incrementally over time," he said. But he added that Fannie Mae applied underwriting standards that were more conservative than those prevalent in the market at the time. Fannie Mae's Alt A mortgage business, while responsible for a disproportionate amount of the company's losses, did perform better than the market, and it sustained smaller losses than otherwise might have occurred, he said.

Fannie Mae's involvement in the subprime market was "minimal," he said, consisting primarily of purchasing AAA-rated private-label securities backed by subprime loans, which contributed to its housing goal objectives. "With the benefit of hindsight, had we anticipated the extraordinary market meltdown, we would have been far less likely to expand our involvement in these non-traditional products," he said.

Fannie Mae began to reduce its participation in the Alt A market in 2007, when the market took a turn for the worse, Levin said. But at that point, it was too late. "An unprecedented decline in home prices, a high unemployment rate, a global liquidity and credit crisis, engulfed Fannie Mae and its only line of business, a secondary market for mortgages. These crises were centered on our market and our asset class, and we took the full brunt of the market crisis head on, which would have been difficult for the company to deal with under any circumstances."

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]]>fannie maefinancial crisisfreddie macmortgagessubprimeSara HansardFri, 09 Apr 2010 13:15:00 ESTBroker Morgan Keegan Charged with Fraudhttp://www.dailyfinance.com/2010/04/07/broker-morgan-keegan-charged-with-fraud/http://www.dailyfinance.com/2010/04/07/broker-morgan-keegan-charged-with-fraud/http://www.dailyfinance.com/2010/04/07/broker-morgan-keegan-charged-with-fraud/#commentsFiled under: ,

Regulators charged Memphis brokerage firm Morgan Keegan & Company and two of its employees with fraud on Wednesday, alleging they overstated the value of securities backed by subprime mortgages.

"Morgan Keegan recklessly published these inaccurate daily net asset values and sold shares to investors based on the inflated prices," U.S. Securities and Exchange Commission said in a statement.

The firm was also charged with misleading practices in selling bond funds in a separate case that the SEC filed along with the Financial Industry Regulatory Authority and 13 state securities regulators.

An attorney for Morgan Keegan did not return a call seeking comment.

The SEC charges were directed at Morgan Keegan & Company and Morgan Keegan Asset Management, which is the investment banking, securities brokerage trust and asset management division of Regions Financial Corp. The two employees charged with fraud were Morgan Keegan funds portfolio manager James Kelsoe Jr. and accountant Joseph Thompson Weller.

Price Adjustments Allegedly Ignored Lower Values

According to the commission's allegations, Kelsoe arbitrarily instructed the firm's fund accounting department to make 262 "price adjustments" in 2007 that increased the fair value of some portfolio securities. The price adjustments ignored lower values for the same securities quoted by various dealers, the SEC said.

Many of the funds' securities were backed by subprime mortgages and lacked readily available market quotations. Kelsoe's actions "fraudulently prevented a reduction in the NAVs of the funds that otherwise should have occurred as a result of the deterioration of the subprime securities market," the SEC said.

Weller, a certified public accountant who was head of the firm's fund accounting department and a member of its valuation committee, did nothing to correct the valuation procedures, the SEC further alleged.

Judge to Determine Any Sanctions or Penalties

A hearing is to be scheduled before an administrative law judge to determine whether the firm and the two employees committed the violations, and the hearing will also determine what sanctions and financial penalties, if any, are appropriate, the SEC said.

In a separate action by the SEC, FINRA and 13 states, Morgan Keegan, Kelsoe and three other employees were charged with marketing seven affiliated bond funds to investors using false and misleading sales materials, costing investors well over $1 billion. In addition to an unspecified fine, FINRA is seeking to force the firm to repay ill-gotten profits and pay full restitution to investors.

In 2006 and 2007, Morgan Keegan sold more than $2 billion of the bond funds to some 13 investors, FINRA and state regulators said. The funds were invested in risky structured products, particularly subordinated tranches of asset- and mortgage backed securities, including subprime products. The investments caused the funds to experience serious financial difficulties beginning in early 2007, and they collapsed later that year.

Charges Are Result of a Two-Year Probe

FINRA alleges that "the misleading sales materials, combined with the firm's misleading and deficient internal guidance and failure to train its brokers about the risks, led Morgan Keegan's brokers to make material misrepresentations to investors," the self-regulatory organization said. This allegedly was a problem with the Regions Morgan Keegan Select Intermediate Bond Fund, which was marketed as a relatively safe, conservative fixed income mutual fund, FINRA said.

The action resulted from a two-year multi-state probe of Morgan Keegan led by Mississippi and Alabama securities regulators, the North American Securities Administrators Association said in a release.

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]]>fraudMorgan KeeganSara HansardWed, 07 Apr 2010 18:45:00 ESTThe SEC Details Its New Asset-Backed Securities Regulatory Proposalhttp://www.dailyfinance.com/2010/04/07/the-sec-details-its-new-asset-back-securities-regulatory-proposa/http://www.dailyfinance.com/2010/04/07/the-sec-details-its-new-asset-back-securities-regulatory-proposa/http://www.dailyfinance.com/2010/04/07/the-sec-details-its-new-asset-back-securities-regulatory-proposa/#commentsFiled under: , , , , ,

SEC Chairman Mary SchapiroThe Securities and Exchange Commission voted 5-0 on Wednesday to issue new regulatory proposals covering the $2 trillion-plus asset-backed securities (ABS) market. Chairman Mary Schapiro calls the plan a "fundamental revision" in how the ABS market would be regulated.

"At one time, the securitization market provided trillions of dollars of liquidity to virtually every sector of the economy," Schapiro says. "But securitization has also fostered poor lending practices by encouraging lenders to shift their risk of loss to investors." Sound underwriting practices in the mortgage-backed securities part of the ABS market "took a back seat to immediate profits," she says, resulting in investors largely withdrawing from the market when those securities went so bad after the U.S. housing bust.

Shapiro adds that the proposals "are intended to better protect investors in the securitization market by giving them more detailed information about the assets that are pooled into ABS, more time to make their investment decision, and the benefits of better aligning the interests of issuers and investors." That alignment would be created through a requirement that issuers retain some of the risks, or keep some "skin in the game," Shapiro says, when they sell ABS.

"The Crisis's Immediate Trigger"

Highlighting the role that mortgage-backed securities (MBS) played in the current financial crisis, former Federal Reserve Board Chairman Alan Greenspan, testifying at a separate hearing on Wednesday before the Financial Crisis Inquiry Commission, said that "while the roots of the crisis were global, it was securitized U.S. subprime mortgages that served as the crisis's immediate trigger." He especially pointed to government-sponsored enterprises Fannie Mae and Freddie Mac as creating outsize demand for MBS at the urging of the Department of Housing and Urban Development and Congress to expand funding for affordable housing.

ABS values are based on the values of specific assets that back, or get pooled into, the securities. Those assets can include mortgage loans, student loans, credit card payments, auto loans and nearly any other kind of asset that provides a steady flow of payments. Securitization helps expand the availability and lowers the cost of credit for homeowners, consumers and businesses because as lenders pool the assets into securities and sell them to investors, the lenders then get more money to turn into loans. Major players in the asset-backed securities market include JPMorgan Chase (JPM) and Citigroup (C), which issued $62.8 billion and $41 billion in the securities, respectively, last year, according to Asset-Backed Alert.

A central feature of the SEC's approximately 600-page rule proposal, which the public will have 90 days to comment on, is to require new disclosures about the particular assets bundled into the securities.

The plan calls for ABS issuers to file standardized information with the SEC about specific loans in the pool at the time the asset is securitized and on an ongoing basis. Issuers would be required to file on the SEC website a computer program of the contractual cash flow provisions, called "waterfall payments," that govern how the borrowers' loan payments are distributed to different classes of investors, how losses are divided among those classes and when fees are paid to loan service providers (which collect loan payments and distribute them to investors according to the waterfall provisions).

How Much "Skin" Is Enough?

However, the two Republican commissioners, Troy Paredes and Kathleen Casey, are expressing some concerns that the disclosures could violate consumer privacy.

"One also has to take notice of certain personal privacy interests that could be comprised if more detailed [information] is to be publicly available," Paredes says. He adds he voted to approve the proposal to move the process forward.

Paredes also questions another feature of the rule that would require issuers of most ABS to retain at least a 5% interest in the securities in order to be able to issue them quickly under the SEC's "shelf" registration system. That system allows issuers to skip several time-consuming steps and allows them to take securities to market more rapidly than they could under the standard registration system.

"More rigorous analysis is required than has been offered before concluding that a particular percentage or form of risk retention is appropriate," Paredes says.

Another criticism: ABS originators that are able to securitize through the GSEs Fannie Mae and Freddie Mac, which are exempt by law from registering with the SEC, "will gain a further competitive advantage" over private originators, Casey says. She and Paredes are calling on Congress to remove the GSEs' legal exemption from the securities registration process.

A Diminished Role for Credit Ratings

However, SEC Commissioner Luis Aguilar commended the proposal for requiring for the first time that substantially the same information investors receive in public ABS offerings be provided to investors in unregistered private placements. "This is appropriate," Aguilar says, "because many have concluded that a contributing factor to the crisis was a lack of disclosure about, and understanding of, asset-backed securities," including collateralized debt obligations.

But Aguilar expressed concern that the proposed rules would not apply to all structured finance products sold as private placements. "While this aspect of the proposal is designed to improve the information available in unregistered offerings of structured finance products, its effectiveness could be limited," he says. The proposed rules would not apply to structured finance products sold under some exemptions for private sales, he says.

Among other things, the new proposal would give investors at least five days to consider the investments before an asset-backed security could be brought to market.

It would remove references to ABS credit ratings as an eligibility requirement for shelf registration. Credit ratings for many ABS deals were often too high, giving many investors a false sense of security and contributing to the financial crisis. Instead, new criteria would be established for shelf registrations of asset-backed securities, including the 5% equity retention, and a certification requirement by the chief executives of issuers attesting that investors have a reasonable basis to believe the securities will produce cash flows described in the prospectus.

To keep ABS transactions from fleeing to private markets, where some types of ABS, such as collateralized debt obligations, are sold, issuers of those securities would have to provide investors, upon request, the same information that would be required in the public markets.

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]]>asset backed securitiesfinancial crisisSECSecurities and Exchange CommissionSara HansardWed, 07 Apr 2010 16:50:00 ESTThe SEC Is Ready to Clamp Down on Asset-Backed Securitieshttp://www.dailyfinance.com/2010/04/06/the-sec-is-ready-to-clamp-down-on-asset-backed-securities/http://www.dailyfinance.com/2010/04/06/the-sec-is-ready-to-clamp-down-on-asset-backed-securities/http://www.dailyfinance.com/2010/04/06/the-sec-is-ready-to-clamp-down-on-asset-backed-securities/#commentsFiled under: , , , , ,

Securities and Exchange Commission SECThe Securities and Exchange Commission is set to release a major new regulatory proposal on Wednesday aimed at reining in the $2.1 trillion asset-backed securities (ABS) market that played such a prominent part in sparking the financial crisis.

According to a knowledgeable source, the SEC will propose new restrictions on companies that issue these securities, the vast majority of which are backed by mortgages.

The SEC's action follows on the heels of the Federal Reserve pulling out of the mortgage-backed securities (MBS) market on April 1. Since December, 2008, the Fed had bought $1.25 trillion in subprime MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae in an effort to keep the MBS market going and help keep home-loan interest rates low.

ABS values are based on the values of the specific assets -- including mortgage loans, credit card payments and auto loans -- that back specific securities.

According to Asset-Backed Alert, major issuers of ABS in 2009, included Barclays PLC, with $95.8 billion; Royal Bank of Scotland Group, with $74.1 billion; JPMorgan Chase, with $62.8 billion; and Citigroup, with $41 billion.

Less Guessing About "What's in There"

The new rule proposal, expected to be some 600 pages long, will require ABS issuers to provide an an inventory for all of the underlying assets in the securities. That hasn't been previously required, and many of the mortgages held in the securities have proved to be poor investments because the mortgage holders were unable to keep up with payments on their loans.

Currently, companies only have to provide general information about the assets pooled in the securities. The new information "would be at the asset level, so you don't have to guess at what's in there," the source says.

The information would have to be provided in a standardized, "tagged" format so that analysts, credit raters and others researching the security could find the information easily. The new requirement likely won't be extended to credit-card-backed securities, which are held by some 40 million people.

Speed Bumps on the Path to Issuance

Tom Deutsch, executive director of the American Securitization Forum (ASF), says there "could be some strong positives to some of that additional disclosure." But the devil is in the details, he adds. Would the additional disclosure show such key information as whether loans were modified, the location of the real estate, the amount of equity in the home, or if there's a second lien? "The question is: What is most relevant to investors, and what is cost-effective?" Deutsch says.

As part of the overhaul, the SEC may propose some "speed bumps" in the "shelf registration" system for ABS. Currently, that system allows companies that are well known in the markets or that carry investment-grade ratings to take their securities to the market quickly when conditions are favorable, without having to get approval from the SEC for the prospectus and other required filings. Those filings are made periodically and can be pulled off the "shelf" when the company wants to market securities.

Many issuers of securities use shelf registrations because the SEC's traditional registration system takes much longer to get approval of prospectuses and other required disclosures.

Issuers Would Have to Retain Some Risk

In addition, to be allowed to use the SEC's shelf registration system, companies would have to keep some "skin in the game." Currently, they're allowed to sell the entire security to investors without holding any of it themselves. Financial regulation reform legislation approved by the Senate Banking Committee would require that companies that issue the securities hold 5% of the assets. The SEC is likely to propose something similar.

"We've been very opposed to an arbitrary percentage of risk retention, like 5%," Deutsch says. "It doesn't necessarily change the incentives of the issuer." The ASF supports prohibiting loan originators whose loans don't meet set standards from selling the loans, or requiring them to repurchase the loans for full price in the event of default. That would provide full coverage to investors, Deutsch says.

Also, for a security to be eligible for shelf registration, chief executive officers may be required to certify that the assets held in the security have demonstrated the capacity to produce enough in earnings to make the security's required payments to investors.

And instead of allowing immediate sales of ABS, the SEC may propose that issuers announce their intentions of going to market with a security a set time in advance of the security's sale.

Problems with credit ratings that led to poor investments in many of the securities are prompting the SEC to make these changes, many of which are similar to requirements that Europe has instituted. "Now we know AAA is not always AAA," says the source, referring to credit ratings that were extended to many ABS transactions.

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]]>abscredit ratingsSECSecurities and Exchange CommissionSara HansardTue, 06 Apr 2010 16:00:00 ESTObama Announces Offshore Oil Drilling Expansionhttp://www.dailyfinance.com/2010/03/31/obama-announces-offshore-oil-drilling-expansion/http://www.dailyfinance.com/2010/03/31/obama-announces-offshore-oil-drilling-expansion/http://www.dailyfinance.com/2010/03/31/obama-announces-offshore-oil-drilling-expansion/#commentsFiled under: , ,

Obama Announces Offshore Oil Drilling Expansion Announcing the first expansion of U.S. offshore oil and gas development in more than two decades, President Obama said on Wednesday that the administration will allow offshore drilling in regions of Alaska, the eastern Gulf of Mexico and 50 miles off Virginia's coast.

"I want to emphasize that this announcement is part of a broader strategy that will move us from an economy that runs on fossil fuels and foreign oil to one that relies on homegrown fuels and clean energy," said the president in his remarks, made with Interior Secretary Ken Salazar at Andrews Air Force Base in Maryland.

The administration's strategy calls for developing oil and gas resources in new areas, such as the eastern Gulf of Mexico, and for increasing oil and gas exploration in frontier areas, such as parts of the Arctic and Atlantic Oceans. The administration will continue to support development of leased areas off Alaska's North Slope, while protecting Bristol Bay. The strategy will be implemented in the current 2007-2012 offshore oil and gas leasing program, as well as in the new 2012-2017 program that the administration will propose.

"There will be those who strongly disagree with this decision," including people who oppose any new areas to drilling, as well as people who want to open all areas to drilling, Obama said. "The answer is not drilling everywhere all the time, but the answer is not also for us to ignore the fact that we are going to need vital energy sources to maintain our economic growth and our security. Ultimately we need to move beyond the tired debates of the left and the right."

New Drilling on One Hand, Greenhouse Gas Limits on the Other

As part of the administration's effort to balance development of traditional energy sources with conservation, the Environmental Protection Agency and the Department of Transportation on Thursday will sign a joint final rule, agreed to with the state of California and automakers, establishing greenhouse gas emission standards and corporate average fuel economy standards for light-duty vehicles for model years 2012-2016. The new standards are expected to save 1.8 billion barrels of oil over the life of the program, the president said.

In addition, Obama said the Department of Energy and the General Services Administration are doubling the federal hybrid vehicle fleet by purchasing 100 electric vehicles by the end of the year, and the president highlighted a Navy F/A-18 fighter and light-armored vehicle that the Army and the Marine Corps have been testing on a 50/50 biofuel blend. The Navy jet, the "Green Hornet," will be flown for the first time on Earth Day, April 22, and is likely to be the first plane to fly faster than the speed of sound on a biofuel blend.

The president's announcement is aimed at shoring up support from Republicans for legislation that would limit emissions of greenhouse gases. A "cap and trade" bill was passed by the House last year, and the Senate is now working on similar legislation. A spokeswoman for Sen. John Kerry (D-Mass.), who is working on negotiating a bill with Sens. Lindsey Graham (R-S.C.) and Joseph Lieberman (I-Conn.), said in an email, "In the difficult work of putting together a 60-vote coalition to price carbon, Sen. Kerry has put aside his own long-time policy objections and been willing to explore potential energy sources off our coasts as part of a suite of alternative solutions."

Sen. Graham said in a release that Obama's proposal "is a good first step. But there is more that must be done to make this proposal meaningful." Graham called for encouraging states to allow exploration by sharing a portion of the revenue from oil and gas drilling, and opening more areas of the Eastern Gulf to exploration, as well as viable drilling sites in the Atlantic and the Pacific.

American Petroleum Institute President and CEO Jack Gerard called the president's announcement "a positive development," in a release. But he called for consideration of other oil-rich areas, such as the Destin Dome area of the Eastern Gulf and areas off the Pacific Coast and Alaska. He also suggested that the permitting processes needed to be handled "in an expeditious way."

"The oil and natural gas industry has a proven track record of safe oil and natural gas development," said Gerard. "And the majority of the American people recognize this by supporting greater offshore development for the benefit of their communities, their states and their nation."

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]]>oilSara HansardWed, 31 Mar 2010 14:34:00 ESTWhy Broker Regulation Matters to Investorshttp://www.dailyfinance.com/2010/03/31/why-broker-regulation-matters-for-investors/http://www.dailyfinance.com/2010/03/31/why-broker-regulation-matters-for-investors/http://www.dailyfinance.com/2010/03/31/why-broker-regulation-matters-for-investors/#commentsFiled under: , ,

The way financial advisers are regulated will likely have a bigger impact on investors than any other financial services reform that Congress is considering.The biggest sleeper in the debate over financial service regulatory reform is how brokers and investment advisers will be regulated.

The lion's share of attention has been given to hot-button issues like the Obama administration's proposed new financial consumer protection agency and ending government bailouts of large financial companies.

That's because most investors end up investing their money the way their adviser recommends. If they go to an investment adviser, chances are good they will end up investing in mutual funds. If they go to a broker, they could be put in stocks, mutual funds or wrap accounts. And if they go to an insurance agent, they are more likely to end up invested in annuities.

Investors Spend Little Time Researching Investments

Moreover, the fees and commissions they end up paying -- and what their adviser tells them about potential conflicts of interest before they invest -- matter. Most investors probably are not inclined to spend time researching their investments. That's what they pay a financial adviser to do, after all.

And the fees that are charged on their investments, whether they are up-front commissions or ongoing fees, add up over the long-term. They also have a significant impact on the retirement nest egg people end up with after saving and investing during their working years.

But a little-noticed debate that has been taking place within the financial advisory community for years is not one that is easy for most retail investors to follow. The chief issue is whether financial advisers should come under fiduciary standards, which means they are supposed to act in the best interest of their clients.

Investment advisers, regulated under the Investment Advisers Act of 1940, are held to that standard. And most experts in the financial services industry agree that the fiduciary standard is higher than the regulatory standards brokers come under.

Investment Advisers Face More Regulation Than Brokers

Brokers are regulated under a different standard. Investment advisers are overseen directly by the Securities and Exchange Commission and state securities regulators, which of course are government regulatory bodies. Brokers, meantime, are directly supervised by the Financial Industry Regulatory Authority, a self-regulatory organization of the brokerage industry.

Brokers are required to make recommendations that are suitable for their clients. But that gives brokers leeway to recommend proprietary products that their firm pushes them to sell. It also gives them the ability to suggest products that may pay them the best commission or other fees, even though the investment may not end up being the most economical or best-performing for the client.

Investment advisers are required to make advance disclosures of fees and potential conflicts of interest, while disclosures brokers are required to make may not be as comprehensive. And, in the event of a legal dispute, brokerage firms disavow fiduciary liability, which makes it more difficult for plaintiffs to make claims and win damages.

When securities laws were first enacted, brokers primarily executed trades. But in recent years, brokers have moved more toward providing advice as more middle-income people who are investing for retirement seek advice. In the end, this has made them function more like investment advisers.

Regulators Frowned on Brokers 'Churning' Accounts

To move brokers away from incentives to "churn" customers' accounts by trading investments primarily to make commissions, the SEC at one point ruled that they would be exempt from having to register and be regulated as investment advisers. Favored by the brokerage industry, the exemption would have spared them the extra liability that investment advisers carry. It would also have allowed them to charge fees based on assets. What's more, the rule would have let brokers to continue selling investments owned by their brokerage firms.

It is more difficult under investment adviser regulations to make such "proprietary trades" to investors. That's because it can be a conflict of interest if firms push their own investments on customers when the investments are not in the customer's best interest.

The U.S. Court of Appeals for the District of Columbia Circuit overturned the SEC rule after the Financial Planning Association filed a lawsuit against it. Since then, a 2008 study conducted by the RAND Corp. for the SEC found that investors are confused by the different regulatory schemes for brokers and investment advisers. That was not a surprise.

What was more of a surprise was the finding that, even when researchers explained the legal differences, most investors did not believe that the legal and regulatory differences had a significant impact on them.

An Early Regulation Proposal Was Scuttled

Early on in the financial reform debate, members of the SEC, including Chairman Mary Schapiro, FINRA Chief Executive Officer Richard Ketchum, as well as the Securities Industry and Financial Markets Association, which represents the brokerage industry, embraced the idea of having all advisers held to fiduciary standards. The Wall Street Reform and Consumer Protection Act approved by the House of Representatives last December includes provisions that would bring all financial advisers who provide personal advice to retail investors under fiduciary standards.

But insurance agents and some brokerage groups were able to scuttle an early proposal by Senate Banking Committee Chairman Christopher Dodd (D-Conn.) that would have fully required all brokers giving advice to register and be regulated under traditional fiduciary standards. Instead, a bill approved March 22 by the committee would just require the SEC to study the issue and issue new regulations governing financial advisers.

While insurance agent groups say a new study is needed to come up with recommendations to harmonize regulation of financial advisers, many others in the industry say no more study is needed. But, to the extent that the SEC does end up examining the issue again, the cost that customers end up paying to invest through either brokers or investment advisory firms is likely to come up.

Brokers argue that their traditional method of selling on commission allows more middle-income people to get investment advice. How's that? They argue that these investors are less able to pay high fees for financial plans or meet relatively high investment minimums required by investment advisers.

Account Minimums Less Likely With Brokers

"One of the first things I ask investment advisers I am in contact with is do they have an account minimum," says David Bellaire, general counsel and director of government affairs for the Financial Services Institute in Atlanta, which represents dually-registered broker-dealers and investment advisory firms. "Invariably I'm told, yes they do," he says. "It's clear to me that advisers determine they need to hit that minimum before it makes sense for them to work with that client."

Brokers are less likely to require account minimums, or, if they do, the minimums are likely to be less, says Bellaire, whose group supports the Senate language requiring the study. "We know that smaller investors would not be able to get the advice and support they need if we flip the switch and everyone has to be an adviser under the Advisers Act."

But cost is an issue that the SEC may well consider studying, albeit it will be difficult to do. "There's no way to quantify precisely the net costs and benefits of fiduciary duty," says Mercer Bullard, an associate law professor at the University of Mississippi School of Law who founded Fund Democracy, a mutual fund shareholder advocacy organization.

But, Bullard, who favors fiduciary standards, also disputes claims by brokers that costs would rise if all advisers were required to be fiduciaries. "For them to say that it will raise cost is to completely ignore any benefit to investors from a fiduciary duty," he said.

Will the SEC Weaken Standards to Accommodate Brokers?

Such costs can include the costs investors may bear if they are sold higher-cost, lower-performing investments, he said.

Moreover, to further complicate the debate, investment advisory groups and state regulators fear the SEC itself may weaken fiduciary standards to accommodate brokers. Indeed, Luis Aguilar, who serves on the five-member commission and is a proponent of the traditional fiduciary standard for all advisers, expresses that worry. "I am concerned that either Congress or [the SEC] will do something to weaken the standard," he says. "As a commissioner I have only one vote."

Ms. Schapiro formerly served as CEO of FINRA, and SEC member Elisse Walter headed regulation at FINRA before joining the SEC, which causes investment adviser groups to worry they could favor broker regulations in coming up with new rules for advisers.

Brokers also make the argument that the SEC is only able to audit 9% of SEC-regulated investment advisory firms, while FINRA is able to examine a majority of the brokerage firms it oversees. Yet both FINRA and the SEC missed the massive Ponzi scheme taking place at Bernard L. Madoff Investment Securities LLC for years. That failure occurred both during the time that Madoff operated as a broker-dealer, as well as after he was forced to register as an investment adviser with the SEC in 2006.

SEC Should Look at Results Brokers and Advisers Provide

Investment adviser groups strongly oppose being brought under FINRA, which they argue has a culture more geared toward the brokerage industry than the investment advisory industry. But even if FINRA were to become the regulator of investment advisers at some point, it would likely move toward more of a fiduciary standard than brokers would want.

No matter which version of legislation is enacted, the SEC is almost certainly going to have to revisit this issue. In addition to looking at costs for investors, the agency should consider looking at what results investors with both types of advisers are actually getting. Do investment advisory clients come out ahead over both the short- and long-term compared to brokerage customers?

Further, the SEC should consider requiring both advisers and brokers to make disclosures -- before securities are purchased -- of whether a customer would pay more buying a security on commission or paying fees based on assets. In addition to getting better cost pre-sale disclosures, customers would have to give some consideration to whether they plan to hold investments for the short term or the long haul.

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]]>financial regulationstock brokersSara HansardWed, 31 Mar 2010 07:00:00 ESTNo Mail on Saturdays? The Postal Service Will Have to Fight for Thathttp://www.dailyfinance.com/2010/03/30/no-mail-on-saturdays-the-postal-service-will-have-to-fight-for/http://www.dailyfinance.com/2010/03/30/no-mail-on-saturdays-the-postal-service-will-have-to-fight-for/http://www.dailyfinance.com/2010/03/30/no-mail-on-saturdays-the-postal-service-will-have-to-fight-for/#commentsFiled under: ,

U.S. Postal Service mail deliveryThe U.S. Postal Service isn't going to get its no-Saturday-delivery put into effect without a struggle. "This proposal has a lot of doubters," says Ruth Goldway, chairman of the Postal Regulatory Commission (PRC), which must issue an advisory opinion on the USPS's plan. "I'm skeptical," she says.

The five-member PRC plays only an advisory role in the USPS's plans, but "Congress is probably going to look at our record and our recommendation before they act," Goldway says. "Our advisory opinion has a good deal of weight in this case."

The USPS is filing a request for the commission's advisory opinion on the service's five-day delivery proposal, which drops Saturday mail, to save $3.1 billion annually. However, Goldway says, "I don't believe they're going to save as much money as they think they are. It will lower total volumes in the mail more than they think [and] make the mail less viable." Saturday service is one of the "strategic advantages" the Postal Service has now, she says.

In addition, "It's not a good idea at this time of high unemployment to eliminate tens of thousands of jobs without carefully looking at alternatives. I'm going to look at this proposal and all the evidence very carefully before I make my decision."

Opposition in Congress

As approved by the USPS board of governors on March 24, the plan calls for five-day delivery to start in fiscal 2011. According to a new USPS website created to provide information about the proposal, the abbreviated schedule is needed because the USPS "is facing unprecedented volume declines" and a $238 billion projected shortfall during the next decade. The service is a self-supporting government entity that receives no direct support from taxpayers.

Some members of Congress aren't likely to be keen on the plan. Rep. Sam Graves (R-Mo.) last year proposed legislation with 49 co-sponsors that urged the Postal Service to keep its six-day delivery schedule, but the House Committee on Oversight and Government Reform has yet to act on the bill. Earlier this month, Sen. Susan Collins (R-Maine), the ranking member of the Senate Homeland Security and Government Affairs Committee, also said she's skeptical about the proposal to cut Saturday mail.

Further, Goldway held out the possibility that the PRC could go further than provide merely an advisory opinion, which it expects to do in six to nine months after field hearings are held across the country. When the PRC makes its annual compliance determination, it has the power -- so far unused and untested -- to require the USPS to reinstate activities it reduced in the previous year, she says.

Goldway, however, was more supportive of proposals to give the USPS relief from a requirement (imposed under the Postal Accountability and Enhancement Act of 2006) that retiree health care benefits be prepaid. That mandate costs the USPS $5.5 billion a year. "No other government agency, and almost no other private company, has to set up a fund to prepay its health care retiree benefits," she says. "The mailing community, including the commission, feels strongly that the Postal Service needs relief" from the requirement.

40,000 Fewer Jobs?

The delivery cuts are part of a comprehensive plan by Postmaster General John Potter to reduce costs, increase productivity and make other changes for a "leaner, more flexible Postal Service." The USPS has annual revenue of more than $68 billion and delivers nearly half the world's mail. If it were a private sector company, it would rank 28th in the 2009 Fortune 500.

At a briefing in New York on Monday, Deputy Postmaster Patrick Donahoe said the service cut would result in the loss of about 40,000 full-time jobs. About 600,000 workers currently work for the USPS.

Like the media, the USPS has felt the profound changes in the ways Americans communicate as electronic modes have replaced letters and other types of "snail mail." Revenue from first-class mail, the service's primary product, continues to decline. In fiscal 2009, mail volume plummeted by 25.6 billion pieces, nearly 13% of total volume, resulting in a revenue drop of nearly $7 billion, the USPS reports.

That trend is likely to continue. In addition, current economic conditions have forced the largest users, who in the past spent millions of dollars on mailings, to drastically cut back.

Part of a Larger Plan

Pledging to provide "five days of delivery, six days of service," the USPS says weekday-only delivery is one of its best options to significantly slash costs. Saturdays have the lowest daily volumes, and more than a third of U.S. businesses are closed. Polls cited by the service found support for five-day delivery to help the system maintain financial stability.

Goldway, of course, isn't the only skeptical participant. The Postal Service also faces opposition to the Saturday cuts from the four unions that represent its employees.

Curtailed delivery is a critical part of a larger plan announced March 2 for the next decade. Called "Delivering the Future," it's aimed at making the USPS viable for the long term. The plan anticipates getting approval for legislative and regulatory changes to give the service more flexibility to make business decisions quickly, including pricing decisions.

Two of the plan's key proposals require action by Congress: restructuring the retiree health benefit prepayment schedule and eliminating statutory language mandating mail delivery six days a week.

Goldway notes that Congress included language in 1983 specifically requiring that the USPS keep its current delivery schedule after it had pushed hard in 1977 and 1980 to cut back to five days. "The Congress knew what it was doing when it put that language in in 1983," she says. "It was specifically responding to concerns that the Postal Service might cut service."

Ties That Connect a Nation

Other elements of the proposal will be detailed in the filing with the PRC. Street delivery and blue-box collections would be eliminated on Saturdays. Express Mail Service would continue seven days a week. And post offices that currently are open on Saturdays will remain open. Post office box accessibility would continue, and bulk mail and drop shipments would continue to be accepted at facilities that are currently open.

The USPS is the only delivery service the reaches all 150 million residences, businesses and PO boxes in the country. It operates 36,000 retail locations, and it relies on sales of postage and other products to pay operating expenses. Whether its mail carriers keep stopping by at your home or business on Saturdays next year remains to be seen.

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]]>mailpostal serviceSara HansardTue, 30 Mar 2010 12:10:00 EST