Citi Approaches Feds

Source: Politico
The federal government is in talks with Citigroup Inc. to increase its ownership stake in the troubled bank, the Wall Street Journal reported Sunday, citing sources the newspaper did not identify.

The government could take as much as a 40 percent share of Citigroup’s common stock, stoking fresh speculation about the nationalization of several large U.S. banks amid steep losses in the financial sector and potentially triggering a new round of stock selling when the markets open on Monday.

Source: Wall Street Journal Online
U.S. Eyes Large Stake in Citi
Taxpayers Could Own Up to 40% of Bank's Common Stock, Diluting Value of Shares

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.

Any such move would give federal officials far greater influence over one of the world's largest financial institutions. Citigroup has proposed the plan to its regulators. The Obama administration hasn't indicated if it supports the plan, according to people with knowledge of the talks.

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their stock diluted. A larger ownership stake by the government could fuel speculation that other troubled banks will line up for similar agreements.

Karl Denninger Takes On White House Press Secretary Robert Gibbs

Karl Denninger addresses White House Press Secretary Robert Gibbs' attack on Rick Santelli, point by point. Accurate and scathing.

Santelli and Liesman Debate Housing Plan

Visit msnbc.com for Breaking News, World News, and News about the Economy

Rick Santelli On Obama Bailout

All I can say is - Thank you Rick Santelli.

PBS Frontline: Inside The Mortgage Meltdown

On Thursday, Sept. 18, 2008, the astonished leadership of the U.S. Congress was told in a private session by the chairman of the Federal Reserve that the American economy was in grave danger of a complete meltdown within a matter of days. "There was literally a pause in that room where the oxygen left," says Sen. Christopher Dodd (D-Conn.).

Homeowner Affordability and Stability Plan

http://www.financialstability.gov/

Watch Treasury Announcement Here

Executive Summary: Here

Fact Sheet: Here

Questions and Answers: Here

From The Executive Summary:

3. Supporting Low Mortgage Rates By Strengthening Confidence in
Fannie Mae and Freddie Mac:

Ensuring Strength and
Security of the Mortgage Market: Today, using funds already authorized in 2008 by Congress for this purpose, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability.

Provide Forward-Looking Confidence: The increased funding will enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners, and provide forward-looking confidence in the mortgage market. Treasury is increasing its Preferred Stock Purchase Agreements to $200 billion each from their original level of $100 billion each.

Promoting Stability and Liquidity: In addition, the Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.

Increasing The Size of Mortgage Portfolios: To ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing problems in the housing market, Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.

Support State Housing Finance Agencies: The Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving homebuyers.

No EESA or Financial Stability Plan Money: The $200 billion in funding
commitments are being made under the Housing and Economic Recovery Act and do not use any money from the Financial Stability Plan or Emergency Economic Stabilization Act/TARP.

Update: Elliott Wave Update

Elliott Wave Summary

February 18, 2009:
Wave 4 is unfolding, as we've suspected, as a 4th wave triangle formation. This is an A-B-C-D-E sideways formation that occurs, by Elliott Wave definition, in the 4th wave position. So, anytime you've got a 4th wave, you tend to be on the lookout for a triangle. And, in this case, this is wht we've got, and it's very well defined.

We are now in Wave E, which should last anywhere from 3-5 trading days, 5 days max as Wave E can not last longer than Wave D, and then the Nasdaq Composite will begin a very large leg down. This will be a move to significantly lower lows, however, it will come with less downside momentum (intensity) than we saw at the peak in downside momentum that the nasdaq composite displayed in October 2008. We will experience a price/momentum divergence. This will be a new low that be bought with much more confidence than we've seen to date.

Wave 4 Subdivisions:
Wave A:
11/21/08 to 01/06/09
1295.49 to 1665.63
370.14 pts or 22.22%
29 Trading Days

Wave B:
01/06/09 to 01/23/09
1665.63 to 1434.08
231.55 pts or 13.9%
12 Trading Days

Wave C:
01/23/09 to 02/10/09
1434.08 to 1598.50
164.42 Pts or 10.28%
12 Trading Days

Wave D:
02/10/09 to 02/18/09
1598.50 to 1454.46
144.05 pts or 9.01%
5 Trading Days

Current Wave 4 Count

Longer Term Wave Count (not updated since Febraury 8, 2009)

President Obama Signs Historic Stimulus Package

Bailout Proposal

Normally, I just use this blog as a place to store videos and ideas that I might find interesting at a later date. Outside of Elliott Wave updates, and some Fannie Mae spread updates, I don't include much commentary/opinion or original thought on this blog. I just don't have a lot of time right now to do that.

But today, I'd like to present an idea that I think would be a rather obvious policy choice for the mortgage markets, a choice that I know will not be presented.

I would suggest that with the remaining subprime loans that are in the marketplace, that the government offer an "FHA Streamline" refinance to current subprime mortgage holders as well as Fannie and Freddie mortgage holders.

This gets around two of the primary problems in the current refinance market: 1) Loan To Values, 2) Debt to income.

LTVs are pretty much a universal issue with most properties looking to refinance currently. For example, let's say you purchased a home in 2006, and were extremely responsible and put 20% down on the purchase. At this point, you've probably got roughly a 100% LTV. In short, pretty much none of the homes that were purchased with even 20% down between the years of say mid-2005 through 2007 can refinance without more principal buydown from the borrower. That's a big problem.

Secondly, basically you have to assume that on any sub-prime or alt-A stated income loan, the borrower would not make the same income on a full-doc basis than they stated on their original stated income loan application. This is not to say that all state-income loans were "Liar loans", because frankly, the current underwriting guidelines are overly harsh against many categories of borrowers" self-employed, commission income, retired, mixed income (a combinaton of W2 and 1099). Underwriters are currently not allowing quite a bit of legitimate income, this is a major problem currently in our industry.

Anyway, allowing for FHA Streamline loans, basically a non-FHA to FHA streamline loan would eliminate both appraisals and income from the application. As long as you've got a clean mortgage payment history for the past 12 months, you get to refinance.

Rather than make this program mandatory for the servicing companies, make the program completely voluntary. The government could set up a reasonable amount that they would pay on each traunch of loans. Maybe $0.55 on the dollar for subprime, stated income, 100% LTV originated in June 2006, for example; $0.85 for alt-A, 100% LTV originated in January 2007. You could set up the amount of payout pricing by loan type, origination date, loan charachteristics etc. At the same time, on the borrower's side, have the amount of the new loan be less than the originaly principal amount but more than the payout to the loan servicers.

For example:

Original Mortgage underwritten in December 2006 for $350,000, 100% LTV, stated income, subprime.

Home is currently worth $250,000.

Pay the debt service provider $192,500 for the loan, if the borrower agrees to refinance. Allow the borrower to refinance say a $285,000 loan amount at an FHA 30 years fixed rate.

1) You provide the borrower with an opportunity to refinance at a reasonable rate and a reduce principal amount, although still more pricipal than the home is worth.

2) You allow the service provider, who probably bought this for roughly $0.35 when the investment bankers went under or when the investment bank had to make a distressed sale. So you're offering to provide a reasonably generous profit to the service provider, as provide a source of liquidity.

3) You create a profit margin for the taxpayer, if the loan is paid back over time.

There are clearly problems with this solution, but there are problems with every solution that is currently being discussed. This soultion would:
- be the cheapest and easiest to implement;
- would put the loans in government control, so that the government would then control the foreclosure process through HUD, which already has a system of dispensing foreclosed properties already in place;
-

Elliott Wave Update - Slight Change To Wave Count

I've made a slight change to the Elliott Wave count since last week. The Nasdaq is still in Primary Wave 4, but rather than be in Wave B of 4, I have moved up the timetable a bit. Whereas last week I had Wave B above labeled as smaller degree wave (a) of Wave B, now I have Wave B and Wave C as completed, and Wave D needing only one last leg down to complete Wave D. I was wavering last week about which way to go...Once Wave E back up is completed, and this should be at the end of the month (Feb '09), watch out below as Primary Wave 5 down should be ready to go.

Fannie Mae 10 Yr Treasury Spread update

02/12/2009 Items of note:

1. Spread between the Fannie 30 NRY and 10 Yr Treasury bond has narrowed to 1.68498%, with the average spread from 12/03/2007 to 02/12/2009 at 2.07888% and a -2 standard deviation at 1.62334%. Not much room remaining for the spread to fall. If the Treasury wants to get mortgage rates lower in the immediate future, we're going to need to see the rates on the 10 Yr Treasury fall.
2. One factor complicating the reduction in mortgage rates is the continued price adjustment increases being imposed by Fannie Mae and Freddie Mac. Why Fannie and Freddie are jacking up their fees right now, while the Federal Reserve and the Treasury are fighting tooth and nail to reduce rates, seems to be working at cross purposes, and not helping with the Treasury's and Federal Reserves goal of mortgage rate reduction. The upcoming price adjustment increases take effect on Monday (02/16/2009).

Government Bonds May Be Last Bubble: Jim Rogers

CNBC Interview with Jim Rogers

Investors will have to short government bonds at some point despite their current attraction, as the amount of debt issued is "staggering" and inflation risks are down the road, Jim Rogers, CEO of Jim Rogers Holdings, told CNBC Tuesday.

The low rates policy promoted by central banks is likely to pop a fresh bubble in government bonds sometime in the future, Rogers said.

"I was short long-term government bonds in the US, I had to cover a little loss because the head of the central bank said he was going to buy US long-term bonds, and he's got more money than I do," he told "Squawk Box Europe."

"I plan to sell short US government long bonds sometime in the foreseeable future… I don't know when, whether it's this quarter or this year," Rogers said.

If long-term interest rates continue to go down, then "you've got to sell short government bonds, because the numbers are just staggering" when it comes to the amount of debt issued by the US and the UK, he explained.

"Government bonds may be the last bubble that is developing. I'm not short government bonds right now," Rogers said.

Link to story

Meredith Whitney On "Bad Bank"

Obama Press Conference Transcripts

From CNN. Transcript Link Here

President Obama's Opening Remarks:

President Obama: Good evening, everybody. Please be
seated.

Before I take your questions tonight, I'd like to speak briefly about
the state of our economy and why I believe we need to put this recovery plan in motion as soon as possible.

I took a trip to Elkhart, Indiana, today. Elkhart is a place that has lost jobs faster than anywhere else in America. In one year, the unemployment rate went from 4.7 percent to 15.3 percent. Companies that have sustained this community for years are shedding jobs at an alarming speed, and the people who've lost them have no idea what to do or who to turn to.

They can't pay their bills. They've stopped spending money. And because they've stopped spending money, more businesses have been forced to lay off more workers. In fact, local TV stations have started running public service announcements to tell people where to find food banks, even as the food banks don't have enough to meet the demand.

As we speak, similar scenes are playing out in cities and towns across America. Last Monday, more than 1,000 men and women stood in line for 35 firefighter jobs in Miami [Florida]. Last month, our economy lost 598,000 jobs, which is nearly the equivalent of losing every single job in the state of Maine.

And if there's anyone out there who still doesn't believe this constitutes a full-blown crisis, I suggest speaking to one of the millions of Americans whose lives have been turned upside-down because they don't know where their next paycheck is coming from.

And that is why the single most important part of this economic recovery and reinvestment plan is the fact that it will save or create up to 4 million jobs, because that's what America needs most right now.

It is absolutely true that we can't depend on government alone to create jobs or economic growth. That is and must be the role of the private sector. But at this particular moment, with the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back into life.

It is only government that can break the vicious cycle, where lost jobs lead to people spending less money, which leads to even more layoffs. And breaking that cycle is exactly what the plan that's moving through Congress is designed to do.

When passed, this plan will ensure that Americans who've lost their jobs through no fault of their own can receive greater unemployment benefits and continue their health care coverage.
We'll also provide a $2,500 tax credit to folks who are struggling to pay the costs of their college tuition and $1,000 worth of badly needed tax relief to working- and middle-class families. These steps will put more money in the pockets of those Americans who are most likely to spend it, and that will help break the cycle and get our economy moving.

But as we've learned very clearly and conclusively over the last eight years, tax cuts alone can't solve all of our economic problems, especially tax cuts that are targeted to the wealthiest few Americans. We have tried that strategy time and time again, and it's only helped lead us to the
crisis we face right now.

And that's why we have come together around a plan that combines hundreds of billions in tax cuts for the middle class with direct investment in areas like health care, energy, education, and infrastructure, investments that will save jobs, create new jobs and new businesses, and help
our economy grow again, now and in the future.

More than 90 percent of the jobs created by this plan will be in the private sector. They're not going to be make-work jobs, but jobs doing the work that America desperately needs done: jobs rebuilding our crumbling roads and bridges, repairing our dangerously deficient dams and levees so that we don't face another Katrina.

They'll be jobs building the wind turbines and solar panels and fuel-efficient cars that will lower our dependence on foreign oil and modernizing our costly health care system that will save us billions of dollars and countless lives.

They'll be jobs creating the 21st-century classrooms, libraries, and labs for millions of children across America. And they'll be the jobs of firefighters and teachers and police officers that would otherwise be eliminated if we do not provide states with some relief.

Now, after many weeks of debate and discussion, the plan that ultimately emerges from Congress must be big enough and bold enough to meet the size of the economic challenges that we face right now.

It's a plan that is already supported by businesses representing almost every industry in America, by both the Chamber of Commerce and the AFL-CIO. It contains input, ideas and compromises from both Democrats and Republicans.

It also contains an unprecedented level of transparency and accountability so that every American will be able to go online and see where and how we're spending every dime. What it does not contain, however, is a single pet project, not a single earmark, and it has been stripped of the projects members of both parties found most objectionable.

Now, despite all of this, the plan's not perfect. No plan is. I can't tell you for sure that everything in this plan will work exactly as we hoped, but I can tell you with complete confidence that a failure to act will only deepen this crisis, as well as the pain felt by millions of
Americans.

Now, my administration inherited a deficit of over $1 trillion, but because we also inherited the most profound economic emergency since the Great Depression, doing little or nothing at all will result in even greater deficits, even greater job loss, even greater loss of income, and even greater loss of confidence.

Those are deficits that could turn a crisis into a catastrophe, and I refuse to let that happen. As long as I hold this office, I will do whatever it takes to put this economy back on track and put this country back to work.

I want to thank the members of Congress who've worked so hard to move this plan forward, but I also want to urge all members of Congress to act without delay in the coming week to resolve their differences and pass this plan.

We find ourselves in a rare moment where the citizens of our country and all countries are watching and waiting for us to lead. It's a responsibility that this generation did not ask for, but one that we must accept for the future of our children and our grandchildren.

The strongest democracies flourish from frequent and lively debate, but they endure when people of every background and belief find a way to set aside smaller differences in service of a greater purpose. That's the test facing the United States of America in this winter of our hardship, and it is our duty as leaders and citizens to stay true to that purpose in the weeks and
months ahead.

After a day of speaking with and listening to the fundamentally decent men and women who call this nation home, I have full faith and confidence that we can do it, but we're going to have to work together. That's what I intend to promote in the weeks and days ahead.

And with that, I'll take some of your questions.

And let me go to Jennifer Loven at [The Associated Press].
There you go

.

Fannie Mae - 10 Yr Treasury Spreads

Interesting note that mortgage spreads are tightening.

Stock Market Update - Technical Picture

Here is the updated Elliot Wave analysis. Funny thing, for all the stock market gyrations, the market progresses at a pretty slow pace. I believe it was Benjamin Graham who said: "In the short term the stock market is a voting device, in the long term it is a weighing mechanism."

Elliott Wave Long Term:

Elliott Wave Intermediate Term:

Elliott Wave Short Term - Wave 4

So, short term, we are in a counter-trend move, meaning that the primary trend, Long Term (Beginning 03/10/2000) and Intermediate Term (Beginning 10/31/2007), is down.

The Intermediate Leg down is not yet completed. This leg should subdivide into a 5 wave pattern down. The Nasdaq Comp appears to have completed legs 1, 2, and 3 of this 5 wave pattern down, and is in the midst of wave 4, which is counter-trend in nature. Counter-trend, in this circumstance, means that the direction of the wave can be either up, or sideways overall. Wave 4s often (not always) move sideways, and these sideways formations are labeled triangles.

If Wave 4 is a triangle, it will subdivide into an A-B-C-D-E formation, with each leg taking on an a-b-c subdivision.

My short term interpretation is that we should begin to see a sharp decline this coming week in the Nasdaq, as the c-leg of an a-b-c subdivision of Wave B within Wave 4. This decline should move below the January 23, 2009 low at 1,434.08, but should definitely hold above the 11/21/2009 low at 1295.48. Looking at the charts from a non-Elliott perspective, my guess is that the Dec 01, 2008 low at 1398.07 should provide support to complete wave B.

There is a great deal of information that I have included on the charts, detailing each wave in terms of points, percentages, number of trading days. I may not explicitly mention this detail in my comments, but I will refer to it on a regular basis, and it will be a foundation for future analysis.

Stimulus: Because all economies have performance issues

From the folks over at Reason:

Budget Policy Challenges - Alice Rivlin

Alice Rivlin Testimony In Front Of House Budget Committee

Jan. 27, 2009

Mr. Chairman and members of the Committee: It is a pleasure for me to be back at the House Budget Committee. I am especially gratified to follow my former colleague, Douglas Elmendorf, as he makes the first of many appearances before this Committee as Director of the Congressional Budget Office.

I will say a few words about the uncertainties of the economic outlook and then turn to the question of how to deal with the immediate and longer-run challenges of fiscal policy. The challenge of budget-making has never been greater. Indeed, I believe that the future viability of the United States economy depends very heavily on budget policy-makers’ ability to focus on two seemingly contradictory imperatives at the same time:

The immediate need to take actions which will mitigate the impact of the recession and help the economy recover—actions that necessarily require big increases in the budget deficit.

The equally urgent need to take actions that will restore fiscal responsibility and reassure our creditors that we are getting our fiscal house in order—actions to bring future deficits down.

I stress two sets of actions because I do not believe it will be sufficient to pay lip service to the long run challenge, while acting only on deficit-increasing responses to the current financial and economic crisis. Congress and the Administration must work together on actual solutions to both problems at the same time.

The Economic Outlook

We meet at a time of extraordinary uncertainty about how deep the recession will be and how long it will last. Forecasters all admit that they have little confidence in their ability to predict how consumers, producers, and investors at home and abroad will react to the cataclysmic economic events that have occurred. But people in the forecasting business still have to produce forecasts, so they do the best they can. The Congressional Budget Office (CBO) forecasts that the recession will “last well into 2009” and that the economy will begin to recover, albeit slowly, in 2010. CBO expects unemployment to peak at about 9 percent. The CBO is a bit more pessimistic than the Blue Chip average of commercial forecasters, because the rules of CBO forecasting do not allow them to take account of likely congressional actions to stimulate the economy and enhance recovery.

Right now I think we should be skeptical of all forecasts and especially conscious of the risk that things may continue to go worse than expected. The current CBO forecast is much more pessimistic than the one released just last September, and the Blue Chip consensus has been going steadily south for many months. Additional revelations of weakness in the financial services sector could further impede credit flows and produce a continued slide in all forecasters’ expectations.

Indeed, uncertainty about the health of the financial sector compromises all current forecasting efforts. The economic models used by forecasters are based on the experience of the post World War II period, especially the last several decades. Not since the 1930’s, however, have we experienced a downturn caused by crisis in the financial sector. Despite aggressive efforts of the Treasury and the Federal Reserve to stabilize the financial sector, credit is not flowing normally, even to credit- worthy borrowers. Continued instability in the financial sector and credit tightness could deepen the recession and delay recovery.

Also adding to the uncertainty and increasing the chance that recovery will be unusually slow is the fact that is that returning to the pre-crisis economy is not desirable. Before the current crisis Americans were consuming and borrowing too much, while saving too little. We had become an over-mortgaged, over-leveraged society dependent on the inflow of foreign credit. If recovery from this recession is to be solid and sustainable, we must stop living beyond our means. We must transform ourselves into a society that consumes less, saves more and finances a larger fraction of its investment with domestic saving, rather than foreign borrowing. This transformation is necessary, but it will put recovery on a slower track.

Indeed, not since we were a developing country have we been so dependent on foreign creditors. We are lucky that, even though this world-wide financial crisis started in the United States, the response of world investors has been to flock to the safety of U.S. Treasuries, which makes it possible for our government to borrow short-term at astonishingly low rates. But we cannot count on these favorable borrowing conditions continuing forever. Especially if we fail to take serious steps to bring down future budget deficits, the United States Government could lose the confidence of its foreign creditors and be forced to pay much higher interest rates on to finance both public debt and private debt. Rapid increases in interest rates and a plummeting dollar could deepen the recession and slow recovery.

An “Anti-Recession Package” and Investment in Future Growth

Despite the uncertainty of forecasts it is already clear that this recession is bad and that worse is yet to come. Recessions always increase budget deficits as revenues drop and recession-related spending increases. These automatic deficits help stabilize the economy. In addition, since an unusually severe downturn in the economy is threatening, the government should act quickly to mitigate the downslide with spending increases and revenue cuts that will stimulate consumer and investor spending, create jobs and protect the most vulnerable from the ravages of recession.

What we used to call “stimulus” (temporary spending or tax relief designed to jump-start the economy) has been merged into a broader concept of “recovery” and investment in future growth. However, I believe an important distinction should be made between a short-term “anti-recession package” (aka “stimulus”) and a more permanent shift of resources into public investment in future growth. We need both. The first priority is an “anti-recession package” that can be both enacted and spent quickly, will create and preserve jobs in the near-term, and not add significantly to long run deficits. It should include temporary aid to states in the form of an increased Medicaid match and block grants for education and other purposes. Aiding states will prevent them from taking actions to balance their budgets--cutting spending and raising taxes--that will make the recession worse. The package should also include temporary funding for state and local governments to enable them to move ahead quickly with genuinely “shovel ready” infrastructure projects (including repairs) that will employ workers soon and improve public facilities. Another important element of the anti-recession package should be substantial transfers to lower and middle income people, because they need the money and will spend it quickly. This objective would be served by increasing the Supplemental Nutrition Assistance Program (SNAP), unemployment compensation, and the Earned Income Tax Credit. Helping people who lose their jobs to keep their health insurance and aiding distressed homeowners also belong in this “anti-recession” package. On the tax side, my favorite vehicle would be a payroll tax holiday, because payroll tax is paid by all workers and is far more significant than the income tax for people in the lower half of the income distribution. Moreover, a payroll tax holiday would be relatively easy to reverse when tax relief was no longer appropriate. This anti-recession package should move forward quickly. Because its components would be temporary, there would be little reason for concern about its impact on the deficit three or four years down the road.

The anti recession package should be distinguished from longer-run investments needed to enhance the future growth and productivity of the economy. The distinction is not that these longer-run investments are less needed or less urgent. We have neglected our public infrastructure for far too long and invested too little in the skills of the future workforce. If our economy is to grow sustainably in the future we need to modernize our transportation system to make it more efficient and less reliant on fossil fuels. We need to assure access to modern communications across the country and invest in the information technology and data analysis needed to make medical care delivery more efficient and effective. We need a well thought-out program of investment in workforce skills, early childhood education, post-secondary education, science and technology. Such a long-term investment program should not be put together hastily and lumped in with the anti-recession package. The elements of the investment program must be carefully planned and will not create many jobs right away.

Since a sustained program of public investment in productivity-enhancing skills and infrastructure will add to federal spending for many years, it must be paid for and not simply added to already huge projected long-term deficits. That means either shifting spending from less productive uses or finding more revenue. Overtime, Congress could reduce commitments to defense programs and weapons systems that reflect outmoded thinking about threats to U.S. security, reduce agricultural subsidies, and eliminate many small programs that have outlived their original priorities. Reform of the tax system--including making the income tax simpler and fairer or increasing reliance on consumer taxation—could produce more revenue with less drag on economic growth. None of these policies would be easy, but the resources to pay for large permanent increases in federal spending must be shifted from somewhere else as the economy returns to full employment. Congress will only be able to accomplish this reallocation of resources if it reinstates some form of long run (say, ten year) PAYGO and caps on discretionary spending.

I understand the reasons for lumping together the anti-recession and investment packages into one big bill that can pass quickly in this emergency. A large combined package will get attention and help restore confidence that the federal government is taking action—even if part the money spends out slowly. But there are two kinds of risks in combining the two objectives. One is that money will be wasted because the investment elements were not carefully crafted. The other is that it will be harder to return to fiscal discipline as the economy recovers if the longer run spending is not offset by reductions or new revenues.

Immediate Action to Bring Down Future Deficits

As this Committee knows well, projections of the federal budget show rapidly rising spending over the next several decades attributable to three major entitlement programs; namely, Medicare, Medicaid and Social Security. Under current rules, Social Security spending will rise rapidly over the next two decades, but level off after the Baby Boom generation passes through the system. The health care entitlements are expected to rise even faster. Moreover, they are expected to keep on rising because they are dominated by continued increases in the spending for health care in both the public and private sectors. If policies are not changed Medicare and Medicaid—and to a lesser extent Social Security—will drive federal spending up considerably faster than the rate at which the economy is likely to grow. Unless Americans consent to tax burdens that rise as fast as spending, a widening gap will open up. We will not be able to finance these continuously growing deficits.

Because rapidly rising debt threaten our credibility as sound fiscal managers, we do not have the luxury of waiting until the economy recovers before taking actions to bring down projected future deficits. Congress and the Administration should take actual steps this year to reduce those deficits in order to demonstrate clearly that we are capable of putting our fiscal house in order. This can be done without endangering economic recovery.

The crisis may have made Social Security less of a political “third rail” and provided an opportunity to put the system on a sound fiscal basis for the foreseeable future. Fixing Social Security is a relatively easy technical problem. It will take some combination of several much-discussed marginal changes: raising the retirement age gradually in the future (and then indexing it to longevity), raising the cap on the payroll tax, fixing the COLA, and modifying the indexing of initial benefits so they grow more slowly for more affluent people. In view of the collapse of market values, no one is likely to argue seriously for diverting existing revenues to private accounts, so the opportunity to craft a compromise is much greater than it was a few years ago. Fixing Social Security would be a confidence building achievement for bi-partisan cooperation and would enhance our reputation for fiscal prudence.

Vigorous action should also be taken to make Medicare more cost effective and slow the rate of growth of Medicare spending, which contributes so much to projected deficits. While restraining health spending growth should be a major feature of comprehensive health reform, Medicare is an ideal place to start the effort. Medicare is the largest payer for health services and should play a leadership role in collecting information on the cost and effectiveness of alternative treatments and ways of delivering services, and designing reimbursement incentives to reward effectiveness and discourage waste. Congress has a history of allowing pressure from providers and suppliers (for example, suppliers of durable medical equipment or pharmaceutical companies) to thwart efforts to contain Medicare costs. The government has also not been adequately attentive to punishing and preventing Medicare fraud. The United States will not stand a chance of restoring fiscal responsibility at the federal level unless Congress develops the political will to hold health providers accountable—whether in the context of existing federal programs or comprehensive health reform--for delivering more cost effective care. A good place to start is Medicare.

Process Reform

This Committee does not need to be convinced that deficits matter and that the deficits looming in the federal budget--exacerbated by the rapid increases in debt associated with recession and financial bailout—must be dealt with sooner rather than later. You know that procrastination will make the hard choices harder and make us increasingly dependent on our foreign creditors and exposed to their policy priorities. The question is: should you take actual steps now to reduce future deficits or design process reforms that will force you to confront viable options and make choices in the future? My answer is: do both.

Fixing Social Security and taking aggressive steps to control the growth of Medicare costs would be visible evidence that Congress and the new Administration have the courage to rein in future deficits. But the Congress also needs to restore discipline to the budget process—not use recession or the financial meltdown as excuses for throwing fiscal responsibility to the winds just when we are going to need it more than ever. A large temporary anti-recession package is the right fiscal policy in the face of severe recession and should not be subject to offsets—that would defeat the purpose. But more permanent investments in future growth—also good policy—should be paid for and not allowed to add to future deficits. Caps on discretionary spending and PAYGO for revenues and mandatory spending should be reinstated and seriously enforced.

Moreover, PAYGO is not enough, because it only guarantees that congressional actions with respect to entitlements and revenues will not make projected deficits worse than they would be under current policies. But, we all know that deficits projected under current policy will rise at unsustainable rates. Spending required by Medicare, Medicaid and Social Security will rise substantially faster than revenues at any feasible set of tax rates. We will not be able to borrow that much money—even if we thought it desirable to do so.

The current budget process subjects a declining—discretionary spending—to annual scrutiny by leaves entitlement programs and revenues on automatic pilot outside the budget process. Fiscal responsibility requires that all long-term spending commitments be subject to periodic review along with taxes and tax expenditures. There is no compelling logic for applying caps and intense annual scrutiny to discretionary spending, while leaving huge spending commitments, such as Medicare or the home mortgage deduction entirely outside the budget process and not subject to review on a regular basis. I am a member of a bipartisan group called the Fiscal Seminar (sponsored by The Brookings Institution and the Heritage Foundation) that addressed this problem in a paper entitled, Taking back our Fiscal Future, in 2008. We may not have come up with the right solution, but we certainly identified a serious problem that stands in the way of getting the federal budget on a sustainable long run track.

Not a Partisan Matter

The challenges that face this Committee—mitigating the recession, enhancing future growth, restoring sustainable fiscal responsibility—cannot be solved by one political party, but require non partisan analysis and bipartisan cooperation. Many budget analysts with quite disparate views on particular policies share the conviction that Congress and the Administration must meet the double challenge of reviving the economy and restoring fiscal responsibility at the same time. I attach a memo to President Obama signed by twelve experienced budget analysts (including myself) that emphasizes these points.

Thank you, Mr. Chairman and members of the Committee.

Link To Original Article

McCain On The Stimulus Package

Moody's says U.S. financial position deteriorating

NEW YORK (MarketWatch) -- The Aaa-rating coveted by the U.S. is still stable, though it's unclear how much the government's interventions in financial markets and economic stimulus will affect its deteriorating financial position, Moody's Investors Service said Thursday. U.S. Treasurys issued to the public are "most certain" to be paid, wrote Steven Hess, Moody's senior credit officer, in a research report. The government had $5.8 trillion in debt held by the public at the end of 2008, the rating agency said. The government's ratio of debt to gross domestic product, and debt and interest payments to federal revenue, will rise to levels that are high for a country rated Aaa-rated. "Whether in 2010 or after, interest rates are almost certain to rise from their current low levels and the affordability of the federal government debt will deteriorate," analysts said. It's difficult to determine the impact of purchases of preferred stock of housing agencies Freddie Mac and Fannie Mae any purchases under the Troubled Asset Relief Program or other capital provided to banks. As "these figures represent the purchase of assets, their ultimate effect on government debt is not clear," analysts said. "Government could realize a net gain or a net loss." Nonetheless, "structural fundamentals, political stability, and still favorable post-crisis economic prospects support the stable outlook for the Aaa ratings of the United States."

Go To Moody's Story Here

Moody's reviews $302 bln CMBS, sees many downgrades

NEW YORK, Feb 5 (Reuters) - Moody's Investors Service said on Thursday the erosion in the U.S. economy would likely lead it to downgrade a raft of commercial mortgage-backed securities, including some rated Aaa, by March.

Moody's said it is conducting the review of ratings on $302.6 billion in CMBS to include deteriorating factors, such as property cash flows, that support debt payments. It also more than doubled the expected losses on CMBS made during the 2006-2008 lending heyday, to about 5 percent from 2 percent.

Ratings on the safest Aaa classes, about 72 percent of securities under review, should not be affected by adjustments made for stressed cash flows and capitalization rates, or the ratio of net income from the property to its value, it said.

But junior Aaa classes could be cut four or five notches, on average, Moody's said. Lower-rated bonds face downgrades of up to six levels below current designations, it added.

"The pace of decline in the economy has really altered our fundamental view of how commercial real estate will perform on a going-forward basis, so we thought a ratings sweep would be appropriate," said Michael Gerdes, a senior vice president at Moody's, said in an interview.

Moody's review shook the $700 billion market, and investors ramped up bearish positions on CMBS derivative indexes. Risk premiums on the CMBX-5 "AJ" index shot up about 160 basis points to a 1,730/1,760 basis point spread over its interest-rate benchmark, according to an investor.

Issuance of CMBS came to a standstill in 2008 as the credit crunch led investors to reduce risk on investments, especially real estate. Commercial real estate delinquencies are about 1 percent, compared with double-digits rates on many types of residential loans, but sharp job losses and drops in consumer spending in the United States are expected to reverberate through the sector through 2010.

http://in.reuters.com/article/marketsNewsUS/idINN0538668220090205

President Obama On The Economy

At the 4:02 point of the video: quoting President Obama

...then you get the argument this is not a stimulus bill, this is a spending bill. What do you think a stimulus is? That's the whole point. No, seriously. That's the point.

At the 4:02 point of the video: quoting President Obama


He got a great laugh out of the crowd for that line, as he was speaking to the choir, rallying the troops. But it's a line that could haunt him a great deal going forward.

Geithner promises U.S. bank plan revamp next week

Geithner promises U.S. bank plan revamp next week

U.S. Treasury Secretary Timothy Geithner promised on Wednesday to lift the wraps next week on intensely awaited proposals for stabilizing the banking system and spurring the sluggish U.S. economy.

HOME LOAN ASSIST
TARP COVERS MORTGAGE

A cornerstone of the economic recovery plan that President Barack Obama is expected to unveil Monday will be modifying problem mortgages, The Post has learned.

In a nod to Main Street over Wall Street, sources familiar with the plan say Treasury Secretary Tim Geithner plans to allocate almost half of the remaining $350 billion in funds from the Trouble Asset Relief Program to the so-called "Mo Mod," or mortgage modification, platform.

"Mo Mod" is an algorithmic mortgage processing program that can rewrite up to 500,000 loans a month, and will be a major part of Treasury's plan to help repair tattered bank balance sheets.
The 21-day "Mo Mod" program works by structuring a new mortgage that more accurately reflects a home's worth so that a troubled borrower no longer owes more on their home than the property is worth.

OK smarty pants - how low will rates go?

I got the above email from a client yesterday. I got a chuckle out of it, but also, it gets right to the point. For people trying to refinance their mortgage, how low will the rates go? The 30 year fixed rate mortgage...

The truth is, the refinance game is much more complicated than ever before, and there is a great deal more uncertainty. More complicated in that there are more pricing adjustments than ever coming from Fannie Mae and Freddie Mac, adjustments that make the final rate higher than what many are expecting.

More uncertainty in that many deals are coming down to appraisals, and LTVs. And these appraisals are a bit of a crapshoot. Most appraisers are very sympathetic to the situation, and are generously providing neighborhood comps, and their opinions, before they book the appraisal. But that mainly weeds out the obvious value problems; you just can't weed out the close calls until an appraiser steps onto the property. Unfortunately, it's a financial risk that the borrower usually takes upfront, and there's really no getting around it.

So, Ok smarty pants - again I ask, how low will rates go?

My guess is that we're going to see very agressive action coordinated between the Federal Reserve, Treasury, and FDIC within the next two weeks. And by the end of February, we will see 30 year fixed rates, for the best borrowers, at 4.25%. That's my best guess. Keep an eye on the charts, the Wilder Rsi. Lock when the Wilder Rsi goes back into a bottoming formation. I'll be posting the updates on this blog. I'm making an effort to make at least one post per day.

btw, if you want to email me, my email is admin@waterfrontmtgdirect.com

10 Year Treasury Update - February 02, 2009

02/02/2009: 10 Year Treasury

Current Yield 2.84% Current Wilder Rsi: 63.83

Comments: Friday's Rsi close of 65.43 was the highest Rsi close since 06/13/08 at 67.33
While we continue to feel that the 10 Yr Treasury market is close to a trading high in yield, we also recognize that short term, the trend is still up. So far today, the 10 year treasury is trading in an "inside day" pattern, which is a trend continuation pattern, and that trend is for higher yields. The market appears to be close to a reversal point towards lower yields, but is not quite there, yet. Be patient.

What seems to make the most sense is a closing of the gap that occurred between the close of 11/28/08 and the open of 12/01/08, which would imply a yield up to 2.93%.

Obama Promises Lower Mortgage Costs, New Loans

Obama Promises Lower Mortgage Costs, New Loans
Link To
Article

WASHINGTON -- President Barack Obama on Saturday promised to
lower mortgage costs, offer job-creating loans for small businesses, get
credit flowing and rein in free-spending executives as he readies a new road map for spending billions from the second installment of the financial rescue plan.

The White House is deciding how to structure the remaining half of the
$700 billion that Congress approved last year to save financial institutions and lenders. An announcement was possible as early as this coming week on an approach that would use a range of tools to unfreeze credit, helping families and businesses.

At the end of a week that saw hundreds of thousands of people lose their jobs, Mr. Obama also used his Saturday radio and Internet address to tell that nation that "no one bill, no matter how comprehensive, can
cure what ails our economy."

During the final three months of 2008, the economy recorded its worst
downhill slide in a quarter-century, stumbling backward at a 3.8% pace, the government reported Friday. It could get worse.

Treasury Secretary Timothy Geithner is trying to finish a plan to overhaul the bailout program begun in the Bush administration. Mr. Geithner has said the administration is considering using a government-run "bad bank" to buy up financial institutions' bad assets. But some officials now say that option is gone because of potential costs.
Many ideas under consideration could end up costing hundreds of billions beyond the original price tag. Aides would not rule out the possibility that the administration would seek more than the $350 billion already set aside.

I've got a few ideas to immediately lower mortgage costs, and it wouldn't cost the government a dime. Ideas that could be implemented within days:

Roll back the excessive hidden fees (also known as pricing adjustments) that Fannie Mae and Freddie Mac have dramatically increased over the past 18 months.

Examples of hidden fees:

• FICO (Credit Score) Adjustments (Fannie Mae). For a 30 year Fixed mortgage with an LTV between 75.01% and 80% the pricing adjustment is as follows:

Roll back the FICO adjustments to the 700 level, and cut the adjustments below 700 in half.

• Adverse Market Delivery Charge - 0.250% To Price, 0.125% to Rate. This charge is exceptionally counter-productive given that the Federal Reserve is pulling out all the stops to reduce mortgage rates, not raise them.

I could go on, but the list of new and/or increased charges from Fannie Mae/Freddie Mac is simply astonishing. Cut these fees immediately, and you've got much lower interest rates for the consumer. This is something that could be enacted within days.

Obama Administration Summary - January 2009

Inauguration Day - January 20. 2009

Cabinet Confirmations:

Steven Chu (Energy), Arne Duncan (Education), Janet Napolitano (Homeland security), Ken Salazar (Interior), Eric Shinseki (Veterans Affairs), Tom Vilsack (Agriculture), Tim Geithner (Treasury Secretary), Hillary Clinton (Secretary of State), Susan Rice (US Ambassador to the United Nations)

Pending Confirmation

Eric Holder (Attorney General) expected confirmation February 02, 2009

Tom Daschle - Undergoing review. In question due to non-payment of taxes.

http://firstread.msnbc.msn.com/archive/2009/01/20/1752515.aspx

http://www.nydailynews.com/news/politics/2009/01/26/2009-01-26_senate_votes_6034_to_confirm_timothy_gei.html

http://www.cnn.com/2009/POLITICS/01/21/clinton.confirmation/

http://www.afro.com/tabid/456/itemid/2774/Senate-Set-to-Confirm-Holder-as-Attorney-General-o.aspx

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/31/AR2009013101891.html?hpid=topnews

It should be noted that Bill Richardson (Commerce Secretary) pulled out of his nomination due to an ongoing grand jury probe.

Noted - Timothy Geither. Failure to pay taxes. China currency manipulation (1) and China currency manipulation Financial Times Article (2).

Other nominations of note:

Leon Panetta - Director of the Central Intelligence Agency. Story here

Major Legislation

Domestic: H.R. 1 - The American Recovery and Investment Act. Click here for entire bill.

Highlights: January 30, 2009: President Obama's First Week in Office

In Focus: Stats

The Gallup Organization survey: 68 percent of Americans approve of Obama's
performance as the nation's chief executive. - AP,

1-25-09

What History Foretells for Obama’s First Job Approval Rating: Barack Obama can expect to receive a rating above 50% when Gallup reports his first job approval rating this weekend. All elected presidents since Dwight Eisenhower began their terms in office with approval ratings above 50%, generally low disapproval ratings, and high "no opinion" levels. - Gallop.com,

1-22-09

The Headlines...
After Jabs at Cheney, Biden Pursues an Activist Role: Vice President Follows Initial Gaffes by Diving Into Wide Range of Issues; Drawing Contrasts With Predecessor Vice President Joe Biden, in a bid to become an influential second-in-command, is striving to carve out meaty roles for himself quickly. - WSJ, 1-30-09

Obama Signs Equal-Pay Legislation: President Obama signed his first bill into law on Thursday, approving equal-pay legislation that he said would "send a clear message that making our economy work means making sure it works for everybody." - NYT, 1-29-09

Obama's busy, bold first 10 days in office could rival Roosevelt's pace: Ever since Franklin D. Roosevelt passed 15 major bills in three months during his first term as president in the early 1930s, American presidents have been judged by their first 100 days in the Oval Office. - Canadian Press, 1-29-09

Republicans take a back seat: Lacking strong leadership and the political capital to oppose a popular president, the fractured GOP can only agree on one thing: This really isn't their moment. As Republicans fight President Obama's gargantuan economic plan, they have plenty of ideas. What they don't have is a party-wide consensus: They can't agree among themselves on the best alternative, or on whether government action is even needed to pull the economy from its nose dive. - LAT, 1-29-09

House OKs $819B stimulus bill with GOP opposition: In a swift victory for President Barack Obama, the Democratic-controlled House approved a historically huge $819 billion stimulus bill Wednesday night with spending increases and tax cuts at the heart of the young administration's plan to revive a badly ailing economy. The vote was 244-188, with Republicans unanimous in opposition despite Obama's frequent pleas for bipartisan support. - AP, 1-28-09

Stock Markets on January 20, 2009:

Dow Jones Industrial Average: 7,949.08 S&P 500: 805.22 Nasdaq Comp: $1,440.86

Interest Rates: 10 Year Treasury Note Yield: 2.40%