UF Weekend Reads
The heat is on all across the U.S. as we gear up for the 4th of July. And in Europe, the heat over the euro zone financial crisis seems to have abated for a day at least, judging by Friday’s big stock market reaction.
So is the euro zone financial crisis over? No, and a lot more work needs to be done. It’s also likely that Friday’s rally will give way to more selling pressure by next week. It’s the Madness of Wall Street and it’s simply how things go.
But here’s the thing: this week’s ability of European leaders to move toward getting something done–even if it is just a bigger band-aid–is one more indication that at the end of the day this crisis will be solved in someway. Oh sure, some nations will get hurt–and more importantly a lot of ordinary people that had nothing to do with the financial crisis will get hurt the most. However, maybe it’s time for everyone–especially those in the media, at hedge funds, bloggers and on Twitter–to back away from some of the worst doom-and-gloom hysteria. Yes, things are bad and could get worse, but is the world really coming undone over the euro zone crisis?
Earlier this week, my UF co-leader Jenn Ablan had an exclusive interview with Michael Steinhardt, one of the people who helped make hedge funds famous, and he basically said there was too much hysteria over Europe. And I think he’s onto something.
So on a real hot weekend, maybe it’s time for everyone to chillax–about the euro zone, health care, etc. Sound advice for all of us–even me.
And without further ado, here are Sam Forgione’s weekend reads:
The eminent domain brush fire
By Matthew Goldstein
It didn’t take long for the powerful voices on Wall Street to rise up in protest over an intriguing and controversial idea to condemn distressed mortgages through local government’s power of eminent domain.
Two weeks after Jenn Ablan and I first reported that officials in San Bernardino County, Calif. were giving serious consideration to the novel idea being pushed by financier-backed Mortgage Resolution Partners, 18 financial trade groups are voicing strong objections. The groups, led by the Securities Industry and Financial Markets Association, are concerned that if local governments can seize underwater mortgages it might discourage bank lending. Why? The argument is that if it can happen now, who knows when local governments might move to condemn mortgages again–crisis or not.
The unified opposition may make it difficult for Mortgage Resolution Partners, which says it is talking to public officials in Nevada, Florida and on Capitol Hill, to get much traction for its plan outside of San Bernardino. And if San Bernardino County goes forward with using private money to buy-up underwater mortgages held by banks and in mortgage-backed securities, a U.S. Supreme Court lawsuit challenging the legality of the measure seems more than likely.
And litigation, of course, takes time and it means it could be two years before any legal challenge to using eminent domain for mortgages get resolved. In other words, the goal of using eminent domain to keep struggling homeowners in their residences by reworking their mortgages in the eminent domain process could be years off.
The trouble is we don’t have two, or three years to wait for a resolution of the worst by-product of the financial crisis, which is that average Americans still sit saddled with too much debt — most of it housing debt. Last October, Jenn and I wrote how some economists were beginning to say “a great haircut” was needed to address all the debt hanging over the heads of ordinary Americans in order to jump-start the economy. And the calls for debt relief have only grown–it’s one reason Yale economist and housing guru Robert Shiller came out in favor of the eminent domain concept in a recent op-ed in The New York Times.
Is eminent domain the answer? It’s too soon to say and it’s not clear if it is constitutional, even though some legal scholars say it is. But if this idea sparks debate that’s not a bad thing.
UF Weekend Reads
Yes, Germany and Greece have been in a war of words in the unfolding crisis over the latter’s membership in the euro zone, but this afternoon the two nations face off in a different (and far more entertaining) way: they go head-to-head in the European Championship quarterfinal.
As Reuters’ Alexander Hudson reports from Poland, the setting of tonight’s more-than-just-a-game battle, “When Greece take the football field in the Polish coastal city of Gdansk… the honor of the nation is at stake.” Greece, by the way, has never beaten Germany on the soccer pitch.
Closer to home, with the NBA season now officially over – congrats to our Miami Heat fans – there’s a little more time for some weekend reading…
From New York Magazine:
Cleary Gottlieb attorney Lee Buchheit has the cure for debt-laden Greece, Spain and Italy, writes Jessica Pressler.
From Dealbook:
Eminent domain for underwater mortgages could have biggest impact on banks
By Matthew Goldstein
A controversial idea of using the power of eminent domain to seize underwater mortgages may hurt some of the nation’s biggest banks more than investors in mortgage-backed securities.
The reason is the process of condemning a mortgage in which a borrower owes more money than their homes are worth will likely result in a seizure of any home equity loan–or second lien–on that property as well. And that could spell trouble for many U.S. banks, which at the end of the first quarter had $700 billion in second liens on their books, according to SNL Financial.
The trouble is that analysts say many banks have not adequately reserved against losses on those second liens or taken write-downs to reflect the impairment in value on the underlying mortgages. So an outright seizure of those second liens by a local governments could result in unexpected losses for the banks.
Who says? Some of the biggest proponents of the eminent domain plan being promoted by Mortgage Resolution Partners, a San Francisco firm with backing from a group of West Coast financiers.
Robert Hockett, a Cornell University law professor, who is advising MRP, says, ” what we are planning to do, is the second liens would be extinguished once the first loans are taken.” But Hockett, who has been researching the use of eminent domain to fix the nation’s housing woes for some time, said MRP is sensitive to the potential pain this can cause the nation’s banks and is willing to work with them.
The law professor went on to say that some pain is necessary because millions of average Americans are suffering under crushing debts and something needs to be down to jump start the economy. He wrote about the plan in an op-ed for Reuters.
David –
Eminent domain does not necessarily mean the original owner loses some value. It simply means that the owner is compelled into the conveyance. The compensation may or may not reflect “full value.” In fact, there are countless stories wherein an owner of property becomes subject to a taking that ultimately proves to be a financial windfall.
That being said, like you, I think this approach, while laudable for its innovation, will ultimately prove unworkable. Allowing private capital to piggyback the public purpose franchise of municipal governments is proving to be politically difficult – ask a Chicago resident how they feel in retrospect about the new parking regime!
Spain, not Greece, on the minds of many money managers
By Katya Wachtel
On Sunday, voters in Greece’s parliamentary election gave market-watchers the result they wanted.
But in the minds of many money managers, those election results are little more than a band-aid for the euro zone’s deep and complex debt problems, and their attention is focused further West. Many hedge fund managers say it is Spain – the euro zone’s fourth largest economy and the recent recipient of a 100 billion euro bank bailout – that is the real concern for the stability global financial markets.
“Greece has been off the radar screen since March as far as I am concerned,” said Robert Koenigsberger, founder and chief investment officer at $3.2 billion investment manager Gramercy. “When everyone went to bed on Sunday night, I doubt they were expecting to wake up and find that Spain would be 25 basis points wider. People probably thought there would be a risk-on trade that could give Spain some relief.”
Other U.S-based hedge funds noted that the spike in Spanish yields on Monday reflect where market participants’ real concern lies, as well as skepticism over bank bailout of that country earlier this month.
“With Spanish Yields jumping over 7% [on Monday], no-one was feeling all that positive post-Greek elections,” wrote Jack Flaherty, a fixed income manager at $47.9 billion investment firm GAM.
Exchange traded derivatives could mean low Treasury yields for years
By Matthew Goldstein and Jennifer Ablan
Fears of rising interest rates may be overstated, especially if federal regulators push ahead with plans to have a good chunk of derivatives traded through organized clearing houses.
Todd Petzel, chief investment officer for Offit Capital, which manages $6 billion for wealthy investors, argues that the need for traders to post collateral for derivatives contracts traded with clearing houses could provide a new buyer for all the Treasuries the Fed will print to fund the U.S. government deficit and help spur the economy.
In other words, a new source of buyer for Treasuries will emerge.
In a recent letter to Offit’s clients, Petzel says moving derivatives onto clearing house platforms “should reduce systemic risk.” But the move could have the “unintended” effect of creating a new buyer for Treasuries because right now collateral postings in most derivatives trades is irregular and n0t always required at the outset of a transaction.
Petzel says that could all change with clearing of derivatives and that should be good news for the Fed and its inflation hawks.
It is unlikely that this demand will suddenly appear, solving all of the Treasury’s problems at once. But it seems to be a massive wave of buying that will come to market over the next several years and build steadily as the derivatives market grows and more business moves to the clearing model.
UF Weekend Reads
So there’s this election this Sunday in Greece and everyone–who follows the markets–is all excited. But at the end of the day, the main reason people in the markets are all up in arms is because they want to know who will get paid, in what order and most important–how much. Sadly, there’s too little focus on whether the right people/institutions are getting paid; let alone issues of social dignity and the quality of human existence. Guess that’s what the markets are all about, right?
But don’t let any of that stop you from saying thanks to your dad tomorrow. And for all of you dads out there—A Happy Father’s Day. Here then is Sam Forgione’s weekend reads:
From The New Republic:
Dierdre N. McCloskey spans the efforts of economists to gauge happiness.
From Foreign Affairs:
Layna Mosley offers a level analysis of euro zone government debt and how markets view it.
good EU PLAN B:
Let South be obrero / migrant workers for Euro’s again.
This is how Eu once started.
Form the EU of willing of the North.
North is 80% anyway. what’s the point splitting between workers and spanish educated obrero’s …
Stop the debt AND flow free labour laws and south can pay.
A good economy needs dual labour laws. US/maxicans. Chineese rual workers ect.
Mr. Geithner and the politics of condemnation
Matthew Goldstein and Jennifer Ablan
The idea of using eminent domain to help out homeowners who are underwater on their mortgages isn’t necessarily a new one.
Two years ago, a group of congressional leaders led by Rep. Brad Miller of North Carolina wrote to Treasury Secretary Tim Geithner recommending that the federal government consider buying underwater mortgages to stem the flood of home foreclosures. The Democratic congressman got two dozen of his colleagues to sign onto the proposal, which Geithner gave a pretty cool response to.
In a May 7, 2010 letter to the U.S. lawmakers, Geithner said the proposal had too many hurdles to be seriously considered. The Treasury secretary said eminent domain is a “complex and lengthy” proceeding. And he worried about the difficulty of buying “mortgages out of the trusts and other securitization vehicles that own and control a substantial share of mortgage debt.”
But the biggest obstacle raised by Geithner was determining what would be fair value for taxpayers to pay for an underwater mortgage.
“If Treasury were to pay a a price higher than fair market value, taxpayers would be exposed to a high risk of loss and banks and investors would receive a windfall.”
Rep. Miller recently recalled the letter from Geithner when he read in Reuters about a plan by Mortgage Resolution Partners to use private dollars to work with local governments to condemn underwater mortgages through eminent domain. Miller said he is intrigued by the idea but would prefer it to be the government in charge rather than a group of financiers.
UF Weekend Reads
Here’s to getting out exclusive stories fast when need be. This week, pay close attention to Jamie Dimon, who will be on the congressional hot seat as he deals with questions over JPM’s $2 billion plus trading loss. And without further ado, here’s Sam Forgione’s weekend reads:
From Fortune:
Peter Elkind and Doris Burke add more arc to the “human drama” of MF Global’s collapse.
From The New York Times:
Ron Lieber has some tips to resolve the fear of falling behind on finances.
From Institutional Investor:
Pension wallflowers at the Chesapeake dance
By Matthew Goldstein and Jennifer Ablan
You gotta give credit to O. Mason Hawkins and Carl Icahn, the unlikely partnership that managed to get some important concessions from Chesapeake Energy Corp., the embattled natural gas company. But when it comes to public pensions that also own stock in Chesapeake, it’s a far different story.
The head of Southeastern Asset Management and the billionaire activist trader came together to get Chesapeake to agree to shake-up its board and allow the pair to name four new independent directors on the company’s nine-member board. And for the most part, Hawkins and Icahn managed to wrest that change from Chesapeake without much help from public pensions that own shares in the Oklahoma-based company.
The move is an attempt by Chesapeake to deal with criticism shareholder anger that company long has been to forgiving to the wheeling-and-dealing of its chief executive Aubrey McClendon.
It’s not clear yet whether the board shake-up will be enough to right the ship at Chesapeake, which has been reeling ever since the Reuters’ reporting duo Brian Grow and Anna Driver broke the news that McClendon had secured more than $1 billion in loans from a company doing business with Chesapeake. McClendon got the loans to continue to participate in a well drilling program the company offered as a perk to its co-founder.
Still, it’s a start and to be fair there were plenty of skeptics about Hawkins and Icahn–see Sam Forgione’s excellent profile on Hawkins and our take on Icahn’s early public flirtation with Chesapeake.
What’s disturbing, however, is just how quiet most public pensions that own shares in Chesapeake have been ever since the controversy over McClendon erupted in mid-April. Many public pensions we have reached out to over the past few weeks either haven’t commented or simply didn’t return requests for comment.
On June 1, General Motors announced a plan to reduce its pension liability by an expected 26 Billion dollars. The GM plan provides select U.S. salaried retirees a lump-
sum payment offer and other retirees with a continued monthly pension payment. This will be a complex decision-making process and the advice of a qualified financial advisor is suggested. For a free white paper and information on the General Motors (NYSE:GM)Pension Buyout visit http://www.gm-pension-buyout.com The decision deadline has been set for July 20, 2012.
