The SEC and Fed were once more in front of a Congressional committee discussing regulation. Today’s hearing centered on investment banks and both entities insisted that they should regulate them. Reuters has a full report, but here are some excerpts.

“But Cox said his agency should oversee investment banks, while Geithner said the Fed must have a direct supervisory role over any firms that borrow from the U.S. central bank.”

“”It’s very important that we have a role in consolidated supervision of these institutions because you will not have good judgments made by this central bank, this Federal Reserve, in the future unless we have the direct knowledge that comes with supervision,” Geithner told the U.S. House of Representatives Financial Services Committee.”

The rise of broad financial services companies, some of which are involved with both commercial and investment banking, has blurred the regulatory lines and reform must establish clear responsibility and authority for overseeing the various types of financial firms, he said.

You can see where this is going, can’t you.The two are going to compete with each other to show how tough they will be. Meanwhile, the investment bankers, who are not going into their first rodeo here, will play one off against the other.

Count on a government solution. Rules and procedures to the extent that an IB will probably need a hall pass to go take a pee, and enough holes to allow them to pretty much continue business as usual.

Tom Lindmark

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Arizona’s Maricopa County medical examiner said that Scott Coles, CEO of Mortgages Ltd., died as a result of a suicide according to the Wall Street Journal. Mr. Coles was found to have overdosed on alcohol, oxycodone and zolpidem.

Scott Coles, who was 48 years old, had built Mortgages Ltd., a company his father founded, into Arizona’s largest hard money lender. A number of high profile commercial real estate developments are having financial problems due to the inability or unwillingness of Mortgages Ltd. to continue funding them. Here is a link to a previous article.

This is an unfortunate high profile example of the human toll that this entire mess is undoubtedly taking on many.

Tom Lindmark

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There have been reports floating around the internet that Washington Mutual has been experiencing an outflow of uninsured deposits. I have seen enough to make me believe that there is data to support the rumors and, therefore, let me pass on objectively what seems to be going on.

First, it is important to understand that Washington Mutual maintains that it is able to fund itself through its banking operations.  Here is what the company says:

“A WaMu spokesman said the company does not need to rely on funding from outside sources.“

“At end of June, WaMu had more than $40 billion in liquidity, or access to cash and other assets that can be easily converted to cash. The thrift stopped using commercial paper, one common source of short-term borrowing for some companies, roughly a year ago.” 

Here are the facts as they are being reported:

1. Total deposits declined by $6.13 billion in Q2.
2. Federal funds purchased fell to $75 million at the end of June versus $3.39 billion a year ago.
3. Repos were at $214 million at June 30, 2008 versus $9.36 billion last June 30.
4. Institutional brokered deposits were $100 million at the end of June. They were at $2.5 billion at the end of December and $11 billion at the end of June 2008.
5. Credit default swaps on WAMU’s debt widened dramatically today. 

Clearly, unsecured creditors are reducing their exposure to the company. At the same time WAMU has a very strong retail operation which provides a steady funding base. Even though they may have lost some funding flexibility, it does not mean that they are in danger of collapsing.  

Tom Lindmark

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From Market Watch.

Existing home sales fell 2.6% in June to a seasonally adjusted annual rate of 4.86 million.  This is the lowest level in 10 years. The Census Bureau reported that there are 6.1 million vacant housing units for sale or rent.

Bank shares tumbled on the news.  Fannie, Freddie and WAMU were all off about 15%. The Financial Sector SPDR was off 6.3%. Data from Morgan Stanley indicated that the recent run-up in financial stocks may have been due to short covering. No surprise there.

Tom Lindmark

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Reuters is reporting that U.S. banks’ direct primary credit borrowing from the Fed rose to $17.68 billion on July 23^rd. This is the highest borrowing ever save for September 12, 2001 when they borrowed $45.5 billion. 

“Who else is going to lend to them?” said Howard Simons, strategist with Bianco Research in Chicago.”

“The financial sector, everyone whose business is essentially lending money is now a ward of the state. They could lend to each other but they don’t trust each other. They can’t raise money in the equity market. There is nowhere else to turn,” Simons said.”

The broker dealers borrowed nothing under the Primary Dealer Credit Facility versus $9 million average per day last week. However, the bid-to-cover ratio for the Term Securities Lending Facility was 2.07 which is the highest ever. 

Despite all the cheerleading on Capitol Hill, there are still things badly amiss with the credit markets.  

Tom Lindmark

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Los Angeles is taking the lead in fighting obesity. A planning committee of the city council has agreed to recommend to the entire city council that they consider a ban on the opening of new fast food restaurants in a 32 square-mile area of the city. 

Apparently, people in the South LA, Baldwin Hills, West Adams and Leimert Park areas of LA weigh more than people do elsewhere in the city. So the planners decided to put them on a forced diet. 

I wish them good luck. I suspect the residents will find a Big Mac when their craving gets overpowering but this way they may have to walk a few extra blocks for it. So the exercise will help cancel out the calories. Those are pretty clever bureaucrats in Los Angeles.  

Tom Lindmark

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As if we all didn’t have enough to worry about with banks crashing, homeowners losing their houses to foreclosure and GSE’s requiring government bailouts, along comes the news that our kitchen countertops may be killing us. 

It seems that some granite countertops are emitting radon gas.  The New York Times was right on top of the story in its report today.

“ SHORTLY before Lynn Sugarman of Teaneck, N.J., bought her summer home in Lake George, N.Y., two years ago, a routine inspection revealed it had elevated levels of radon, a radioactive gas that can cause lung cancer. So she called a radon measurement and mitigation technician to find the source.

“He went from room to room,” said Dr. Sugarman, a pediatrician. But he stopped in his tracks in the kitchen, which had richly grained cream, brown and burgundy granite countertops. His Geiger counter indicated that the granite was emitting radiation at levels 10 times higher than those he had measured elsewhere in the house.” 

“My first thought was, my pregnant daughter was coming for the weekend,” Dr. Sugarman said. When the technician told her to keep her daughter several feet from the countertops just to be safe, she said, “I had them ripped out that very day,” and sent to the state Department of Health for analysis. The granite, it turned out, contained high levels of uranium, which is not only radioactive but releases radon gas as it decays. “The health risk to me and my family was probably small,” Dr. Sugarman said, “but I felt it was an unnecessary risk.” 

The article goes on to point out in much detail what you probably suspect. This is really not that big of a deal. Yes some granite does emit radon but you would probably have to sleep on it to even begin to get to a danger threshold. 

Nevertheless, I’ll bet you can guess who is showing a keen interest in this issue. If you said the trial lawyers go to the head of the line. They are already advertising on the Web for clients who think they may have been injured. Need I say more? 

Tom Lindmark

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This blog has been at it since March, so I guess that makes me a new blogger.  It has been one great learning experience and a lot of fun. It took me a while to catch on to the game and I’m still learning. One thing I did was to spend a great deal of time reading other blogs and I still do read them.

That brings me to the subject of Sheila Bair, the head of the FDIC, a criticism she leveled at blogs this week and a few things I have noticed.

First, Ms. Barr, as reported by the San Francisco Business Times, noted that over the weekend after the agency seized control of Indymac  that, “The blogs were a little out of control.” That is putting it mildly.

The sense of impending collapse of the banking system as described by some of the blogs that I read was palpable. As usual, much of the commentary lacked any fundamental analysis and relied instead on innuendo and rumor. Those that avoided outright incendiary commentary nevertheless exercised little or no control over their readers’ comments.

The essence of blogs and the new interactive nature of the Web revolves around the free exchange of ideas. While I don’t condone censure of comments, I do think that if you are going to feature them on your blog, a responsibility exists to respond to and put in perspective those comments. They can have an impact equal to or greater than the blog article itself. Anything less is simply using ones readers to sensationalize the subject and drive numbers that enhance advertising revenues.

Blogs represent an important development in the flow of information and have been, to my mind, critically important in giving air to dissenting voices in the particular period of crisis we are currently experiencing. Nevertheless, they need to grow up and do so quickly or risk either being marginalized or restricted for lack of self-control and intelligent, defensible commentary.

Ms. Bair has a point and everyone that expresses an opinion needs to take note and act responsibly.

Paul Gigot, the editor of the Wall Street Journal’s editorial page, has a poignant column today titled “The Fannie Mae Gang”. Mr. Gigot spent many years in Washington as the Journal’s Washington Bureau chief. He knows how the town works and how the town works with business.

In his column he provides a behind the scenes look at how Fannie, Freddie, Wall Street and the government all worked together to further their own interests often at the expense of the taxpayer. The article is particularly timely in light of the impending bailout legislation and it may make you cross your fingers as we continue down the road with this mess.

I highly recommend it.

Tom Lindmark

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A few days ago I wrote an article questioning why the financial stocks were faring so well in an environment of nothing but pretty bad news. Since then there have been some OK earnings reports from the likes of Bank of America and some pretty awful ones from the likes of WAMU and Wachovia. Nevertheless, the stock market performance of the financials continues to be eye popping.

I came to the conclusion that there was a pretty concerted effort on the part of the government and the industry to talk up their book. Not only talk it up, but in the case of the SEC engage in some fairly obvious market manipulation by creating a “short squeeze”. Holman Jenkins in his weekly Wall Street Journal column seems to be saying somewhat the same thing.

“That devil theory, popular among a few conspiratorialists, was not endorsed by Chris Cox, the SEC chief who enacted this week’s new rules saying that naked short selling, which was already a violation, is now . . . a violation. Instead, what we have here is an exercise in symbolic confidence-building. The message from Washington to shareholders in a handful of giant banks, investment banks, and Fannie Mae and Freddie Mac: “We’re with you. We want the best for you. We’re very sorry about Bear Stearns, and we won’t do it again.”

“The markets have gotten the message, judging by the phenomenal rally in bank stocks. Washington will do all it can to support share prices in hopes that the equity markets will freshen up and become receptive to big new issues of bank stock, getting Washington off the hook for bailouts to resolve the mortgage crisis.”

If you buy into the concept that Washington and the industry are engaging in a public relations campaign designed to grease the skids then you have to assume that, despite their protestations to the contrary, the banks are still in bad shape and in need of some serious capital. Why else would so much hot air be blown around?

As Jenkins points out, the government is bending over backwards to make nice to Fannie and Freddie. You will note in the article that he goes on to suggest that it may be necessary for the government to resort to some sort of regulatory forbearance or modification of accounting principles in order to attract capital. This would be of a piece with the experience from the S&L crisis. A final accounting won’t occur until there truly is a crisis, and until that occurs, the government will do all in its power to avoid assuming the cost.

Tom Lindmark

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