Category Archives: Current Events

Commercial Mortgage Loan Turmoil

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I mentioned in a June 29, 2011 posting titled Financial Crisis–Part III that one component of the Dodd-Frank law was to create a new regulatory structure for credit rating agencies.  Erroneous credit ratings that were given to mortgage-backed securities resulted in billions of dollars of losses, and were one cause of the financial crisis.  The SEC has not fully staffed the new office mandated by the Dodd-Frank law that is supposed to address this issue, and the provision that would hold credit rating agencies legally liable for their ratings was reported to have been tabled. Of course the government is now angry at Standard & Poors (S & P) for downgrading U.S. debt from AAA. There was a recent event involving S & P that was given very little media attention, but shocked the commercial mortgage-backed security (CMBS) world into disarray. Goldman Sachs and Citigroup pulled a $1.48 billion dollar CMBS offering hours away from settling the issue after S&P announced they would not be able to deliver final ratings on the security. A Wall Street Journal article by Al Yoon quoted a man who has worked in real estate finance since 1995 as saying “I’ve never seen this happen, to the extent where a deal was so far along, ever.”

The process of issuing a CMBS involves issuers working with the rating agencies to determine final pricing based on a preliminary rating, which has been developed after months of diligence. As was the custom, Goldman Sachs and Citigroup priced the recent issue based on the preliminary rating. No rating agency has previously failed to issue the rating when the deal is about to close, but that string has now been broken. S&P muddied the issue even more by saying “…it won’t assign new ratings to transactions based on its current criteria” (whatever that might mean). Other deals had to be recently “sweetened” to reassure investors.

What does this mean, and why should we care? The drama of watching the President and Congress thrash around with how to come up with a way of keeping the government funded followed by a stock market swoon has consumed nearly all of the news reporting. The possibility that the commercial real estate mortgage market is in limbo has been hidden behind the screen of bureaucratic ineptness of our elected officials trying to figure out how to fund overspending by the government. I fear this mostly unnoticed event instigated by what must be a nervous S&P could further cripple an already fragile economy. For those who haven’t been watching, the real estate market hasn’t been doing very well, and killing the commercial market by causing funding to dry up will be harmful. I write that believing that I have mastered the art of understatement. One analyst was quoted as saying, “This is a debacle of epic proportions.”

Financial Crisis–Part III

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Parts one and two gave a historical perspective about government actions that paved the way for the crises that brought the economic system to the brink of collapse in 2008. In the spirit of “never let a crisis go to waste,” Congress reacted by passing the Dodd-Frank law after accusations such as, “See what happens when businesses aren’t adequately regulated.” The Dodd-Frank law requires 387 rules to be developed by 20 different regulatory agencies. The regulators have finalized 24 rules and have missed deadlines on 28. An article in ProPublica by Jesse Eisinger and Jake Bernstein details what the law was intended to accomplish and the problems that are being faced in developing the regulations. A few things the law was intended to accomplish have been at least partially put in place. A Consumer Financial Protection Bureau has been created, although the Obama administration hasn’t appoint a person to head the agency.  Outrage over executives being rewarded for taking risks that pushed their companies near or to failure resulted in rules that give shareholders a say on executive pay. The larger problem is in the 363 rules that remain to be developed and imposed.

Baring “proprietary trading” was central to the passage of the Dodd-Frank law. Banks leveraged heavily to speculate in bundled packages of subprime mortgage-backed securities and derivatives. The collapse of the value of those securities was central to the crisis. However, the rulemaking process for regulating derivatives has generated wide opposition. The Treasury Department has proposed some to be exempted from the regulations and the Securities and Exchange Commission (SEC) has issued an initial rule that will allow derivative trades under certain conditions. The rulemaking process has been so flawed that it “…has sparked a barrage of opposition, even from previously supportive legislators.”

Some believe that erroneous credit ratings given to mortgage-backed securities by the rating agencies was the root cause of the crisis, and losses from investments that had been given high ratings resulted in billions of dollars in losses. The Dodd-Frank law created a new regulatory structure for credit rating agencies, but the SEC has not fully staffed the new office. They also have indefinitely tabled a provision that holds the credit rating agencies legally liable for their ratings.

Regulators are dealing with complex issues while facing severe budget constraints, and many are saying they may not be able to carry out some key provisions. Wall Street is lobbying to blunt provisions it failed to defeat in the legislature. “Some wonder if Congress ordered regulators to do more than they could feasibly and legally accomplish.”

It is tempting to hope that the budget problems of the regulators and the intensity of lobbying will succeed at blunting the effects of the law, since there is a growing chorus of warnings that the law could damage American competitiveness. I would argue with the phrase “could damage.” I would replace it with “has damaged.” To fully appreciate how effective the government is, I only need to quote Milton Friedman, “If you put the federal government in charge of the Sahara Desert, in five years there will be a shortage of sand.”

The Financial Crisis–Part I

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There are those who advocate there weren’t enough regulations (read Barney Frank) to prevent the financial meltdown in 2008.   My contention is that the crisis began with numerous government regulations that encouraged home ownership for people who couldn’t afford homes. The regulators decided encouraging wasn’t a strong enough approach and began demanding that lenders make loans to people who couldn’t afford to repay them.  Greedy speculators noticed opportunities for profits by creating packages of  “subprime” (read “risky”) loans and selling them to other speculators.  The real estate bubble grew because of the artificial increase in demand. The collapse probably began when the first home couldn’t sell for the original purchase price.

The march to the crisis began when the Community Reinvestment Act (CRA) was signed by President Carter in 1977.  That Act was the beginning of numerous actions by the government to encourage, or force, home loan agencies to make loans to borrowers in low income neighborhoods.  The intent was to open up the American Dream of home ownership to people who couldn’t previously convince their bankers they could repay the loans.  The Act was reinforced during the Clinton era by imposing penalties on loan agencies that didn’t meet requirements for loans in inner cities.  The CATO Institute warned in 1993 that the changes would be costly to the economy, and the warning was studiously ignored.

The push to make home ownership available to everyone continued into 2000.  The Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac were directed to devote a significant percentage of their lending to support “affordable housing.” Fannie Mae announced in 2001 it had a goal to finance $500 billion in CRA loans by 2010.  The Federal Reserve joined the party by lowering interest rates, which encouraged new borrowers to initiate loans and others to refinance their loans and use the proceeds to buy new luxury items.

There have been charges that racism is involved in deciding who is given home loans.  A Princeton study confirms the validity of that charge.  African-Americans were more likely to be offered subprime loans compared to whites who had similar financial backgrounds.

Records of Past Climate Change

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The Supreme Court in 2007 declared that carbon dioxide and other “heat-trapping gases to be pollutants that endanger public health and welfare.” That ruling set the Environmental Protection Agency (EPA) in motion to establish regulations to control the gases. A New York Times article quoted the EPA as saying the science supporting the endangerment finding “compelling and overwhelming.” They proposed a law under the Clean Air Act to regulate “heat-trapping gases” (which includes methane, nitrous oxide, and hydroflurocarbons in addition to carbon dioxide). It is odd that the EPA has a paper that presents a solid argument that much of the carbon dioxide in the atmosphere is the result of natural conditions separate from the activities of man. The paper first observes that the climate of the earth has changed throughout history preceding and following the arrival of man. Various scientific studies show that temperatures and carbon dioxide levels have been higher than present levels for about two-thirds of the last 400 million years. The causes of climate change are listed as:

  • Changes in the Earth’s orbit and tilt affect the amount of sunlight received on the surface of the planet
  • Changes in the intensity of the sun is an obvious cause of changes in temperature, and the NASA believes reduced solar activity was the cause of the “Little Ice Age” from the 1400s to 1700s
  • Volcanic aerosols block sunlight; the Tambora Volcano in Indonesia in 1815 lowered global temperatures by as much as five degrees Fahrenheit and caused 1816 to be “the year without a summer in New England 1816
  • Volcanic eruptions release carbon dioxide

I find the most interesting part of the paper to be a discussion under the bullet titled “Changes in greenhouse gas concentrations.” “The heating or cooling of the Earth’s surface can cause changes in greenhouse gas concentrations. For example, when global temperatures become warmer, carbon dioxide is released from the oceans. When changes in the Earth’s orbit trigger a warm (or interglacial) period, increasing concentrations may amplify the warming by enhancing the greenhouse effect. When temperatures become cooler, CO2 enters the ocean and contributes to additional cooling. During at least the last 650,000 years…during warm interglacial periods CO2 levels have been high and during cool glacial periods, CO2 levels have been low.” (Emphasis added) It is thus quite clear that those who blame changes in temperature on changes in carbon dioxide concentrations have ignored that the reverse is true.

I often read that Arctic sea ice coverage is continuing to shrink. I frequently look at the National Snow and Ice Data Center graphs of Arctic sea ice extent, and it is true that current coverage is less than the 1979-2000 average. However, the 2011 data is virtually tracking the 2007 levels (The amounts in April 2011 were higher than April 2007, but June 2011 levels are slightly lower than June 2007). How is it possible for no ice loss since 2007 translate to “continuing to shrink?” Current news reports are once again talking about severe and hot weather are being caused by global warming. The EPA paper describing the causes of past climate change would say that man has little influence on what may or may not happen.

Persecution of Mideast Religious Minorities

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I closed the blog posted on May 11th about the Mideast unrest with a comment that those who support a dictator will suffer when the dictator loses. That may be true, but recent news events show that others are taking advantage of the turmoil to attack people practicing a religion they won’t tolerate. I can’t begin to catalog all of the different ethnic and religious factions that have suffered for centuries because of religious intolerance by others, but the Coptic Christians in Egypt are facing organized attacks from Salafi, ultraconservative Muslims, and Muslim Brotherhood extremists since the overthrow of Hosni Mubarak. One recent incident involved 12 Coptics killed, over 200 wounded, and a church set on fire. Crowds of Muslims were marching and shouting Islamic chants and Osama bin Laden’s name. There is concern that the attacks are intensifying, that moderate Muslims may be increasingly involved, and there are warnings that the overall situation may degrade into a civil war.

Christianity was the dominant religion in Egypt in the fourth to sixth centuries. The language was Coptic, which was based on the Greek alphabet with an additional six to seven characters. The Muslims conquered Egypt in 639 AD, but the population remained mostly Christian. There were gradual conversions to Islam over the next several centuries until Egypt became a mostly Muslin country by the end of the 12th century. It is estimated that 5-10 percent of Egyptians are currently Christians, and the extremists seem to be unwilling to rest until that percentage reaches zero.

It is difficult to sort through and gain much of an understanding about what is happening in the Mideast, or where things are going from here. The Muslim Brotherhood was illegal but tolerated under Mubarak in Egypt, but is now legal and is gaining support. The protests and government crackdown in Bahrain has inflamed tensions between Sunnis and Shiites. The Wall Street Journal reported that the kingdom has blamed Iran for much of the unrest and invited troops from Sunni-dominated Saudi Arabia.  The Libyan civil war remains in the news, although it certainly doesn’t seem certain what will happen in that country should Moammar Gadhafi be ousted. Yemen has a well-organized branch of al Qaeda. President Saleh has supported counter-terrorism forces, and the Obama administration has supported negotiations guided by Saudi Arabia. The protest movements in Syria and Iran seem to have been quieted by violent suppression and mass arrests.  It remains difficult for me to cheer on the protestors, although Tunisia does have a chance to become a democracy. The transitional government is preparing for elections in July to install and assembly to draft a constitution and election laws. I remain skeptical that either democratic governments or freedom of religion will be the outcome in other countries. Let’s hope I write a posting someday celebrating that I was wrong.

Dream Act Revisions

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I searched the Immigration Policy Center web site after the Dream Act failed to pass to consider the opinions of supporters. That helped me understand why there is a wish to provide a path to citizenship for young people brought to this country illegally who have grown up as Americans. There are several revisions that could be made to the Act that would make it something I could support. The primary flaw with the Act as proposed was, in my opinion, including mere attendance of college as a path to citizenship. I would support citizenship for those who serve honorably in the military.

One criticism of the Act is that it would encourage others to come into the country illegally. Probably the best way to gather support for the Act is to include it in immigration reform legislation that proves we are serious about addressing the total problem, including border security. Of course there would have to be solid proof that the applicants did grow up in this country. There also must be a sunset clause to eliminate incentives for more illegal immigration. However, I have no objection to a young person earning citizenship by honorably serving in the military. To those who might say having only one path to citizenship through military service is too limiting, there is a GI Bill which provides substantial college benefits. The link also provides information on Federal and State grants available to veterans.

President Obama would undoubtedly disagree with my suggestion about the need to consider the Dream Act as part of immigration reform. He said in a recent press conference that border security has been improved under his administration, and that issue shouldn’t deter a vote for the Act. The same day I read a New York Times article by James C. Mckinley Jr. in the Denver Post (December 22, 2010, page 7A) titled “Audit: Millions entering U.S. minus proper ID.” The article included the observation that “A year and a half after the federal government strengthened rules on the documents needed to enter the country, millions of people are still being allowed through without passports or…other identification cards…The Inspector General for the Department of Homeland Security estimated…about 3.6 million people a year were still passing through customs without the required documentation, and that half of those were coming through the border crossing in Texas.”