Fed now required to release TARP and other borrower names (Bloomberg)

Well, mayor of NYC Mike Bloomberg has proven what control of the media will give you.  He's finally succeeded in getting the Freedom of Information Act to apply to the Federal Reserve, as mentioned in the article here.

There are always two sides of things, but the anonymity of borrowers at the discount window (which all of these programs are, essentially) has never been questioned before.  The real trouble with this ruling is that banks will be reluctant, going forward, to go to the Fed for temporary liquidity because it may appear to make them look weak to the market.

Of course it's ridiculous to assume that discount borrowing implies weakness, but that's likely how it will be taken.

In the short term, we'll see prices of these banks TANK after the announcement.  Maybe that's what Bloomberg is really after -- a good capital crisis which will be much more widespread than last year's hit to the top ten.

The Latest:  The Fed is appealing this ruling.  We'll wait and see if they have to release names tomorrow (probably not).

Zombie Banks versus Possessed Lenders: Romero's "Night of the Living Dead" versus Raimi's "The Evil Dead"

Just some thoughts we were discussing in class last semester, given the rhetoric about "Zombie Banks" from Nouriel Rhoubini and others.

In the 80s, we discussed the thrift problem in terms of "zombies" -- some institutions were technically dead, but their existence threatened the other, well-run banks. Just like Romero's zombies from "Night of the Living Dead," these things were artificially kept alive by regulators and their incentive structures were all screwed up. They took on more risk and paid higher deposit rates and hurt their across-the-street competitors and raised everyone's costs.

Romero zombies are the walking dead that eat the living (as distinguished from Haitian zombies, which don't really exist). They will continue to seek and eat the living until their diseased brain is disabled. Max Brooks' "Zombie Survival Guide" or "World War Z" stand as good references here. Michael Lewis' "Liar's Poker" is a good reference for the zombies of the S&L era.

WaMu (or Wachovia home lending) are good examples of that kind of thing today, but I'd argue that most institutions that are in trouble today (starting with Fannie and Freddie) are technically The Possessed and not zombies. They may still harm the living, but they are the manifestations of pure evil in a living host and not the dead brought alive to walk again. Big distinction!

In Sam Raimi's classic film "The Evil Dead," several youngsters (meddling kids) visit the omnipresent cabin in the woods and replay an audio tape of a scholar's reading from The Necronomicon, or the Book of the Dead. This awakens a disembodied evil in the forest that begins to possess them one by one, leading each possessed partier to attack the others in turn. Finally, our hero Ash (portrayed by the terminally underrated Bruce W. Campbell) manages to replay another incantation and send the evil spirits back to their own dimension.

"How does this relate to our current situation?" you ask.

Freddie and Fannie worked fine for years and years before Congress decided that their role could be expanded to backing subprime stuff. Big banks were encouraged, if not outright required, to purchase subprime and "liar" (AKA stated income) loans to meet their Community Reinvestment Act obligations. Most of this activity accelerated in the early 1990s, but it was continued and encouraged by every Congress and administration since Carter. Washington, again, forgot the unintended consequences of messing with the markets.

To be sure, there was enough greed to go around. Congress was hungry to get the credit for "helping" people get home loans. Same with a few presidents in there. Mortgage bankers were hungry to make all those loans and pass them off to investors who had hedged their risk in the credit default swap market. Moody's and S&P gave up trying to rate mortgage-backed securities properly and ignored the risk of credit default swaps in large part. Mortgage originators didn't care whether or not their customers could ever hope to repay loans on homes in CA and elsewhere that were terribly overpriced. Sure they were overpriced -- FHA and others were pumping money into the markets. Congress argued that FHA limits were too low (which, by the way, Frank in the House and Dodd in the Senate have argued again this summer. It continues).

We have a few zombies this time. With WaMu charging no fees and offering services galore, it's hard for the little bank on the corner to compete. It drives down margins and profitability, and therefore capital (via retained earnings or surplus). Pretty simple to understand. Also, if folks worry about WaMu (as they should) they might worry about MyLittleBank and cause it some funding anxiety in the short-term.

With Wachovia creating "Pick-a-Payment" mortgage loans, everyone has to cut their fees to compete. GoldenWest (which was bought by Wachovia and started the trouble there) was making loans based on appraised home value, not based on the borrowers' abilities to repay. And they were getting press and bragging about it! Wow!

But the big distinction this time around is the "possession" of the housing aftermarket by Congress and political types in general. In their effort to "do good" they really threw a bubble into the market, and corrupted the legitimate mortgage-backed security market and the for-fee ratings agencies. There's no trust left in any of it.

Raimi's Evil Dead promised to "swallow your soul." And it looks as though the soul of the mortgage markets will be swallowed for a while to come.

What is Miller's Grist?

We've got to come to grips with online education in this country. Recruiters are telling me, now, that online programs, both undergrad and graduate, are being shunned. Yet the academic-types, especially those who are concerned with enrollment growth and cost management, are telling me that online is "where it's at" -- the "next big thing" coming to a computer near you.

I start online development, formally, for my banking class in a few weeks, after having spent months researching it and working with Dr. Williams' classes. We'll see how 4xxx-level finance classes turn out online. I've already promised my Spring and Summer students that it will be as close to the face-to-face thing as possible. Otherwise, it's not fair to them.

Neat Site

I get a lot of "targeted marketing" on this blog address, but I got one today that I thought I should share.

Beware of spam, but there might be some interesting things here. It's sponsored by ads from "online colleges" AKA diploma mills, so you never know what they'll put on there, really.

If you find anything there useful, you might want to drop me a note so I can let everyone know.

Lots going on this summer.

Greetings everyone:

Sorry about the lack of posts, but there's been a good bit going on this summer. As you may know, Dr. Williams and I are putting our courses on line next year (3333 Intermediate Finance in the fall, for her; 4331 Banking in the spring, for me). It's a lot of work, and tough to maintain the same quality from one modality to the other.

I hope everyone's summer has been fun. We're getting things ready for the fall. It should be exciting.

Thoughts on online teaching

We've been going back and forth here about our online development. Dr. Williams is right now devp for the fall (Intermediate) and I'm going to do Banking in the Spring of '10. A recent decision of the Deans' Council requires that all online courses have online testing and no proctoring of any kind, so we're working around that stuff right now. Some of my colleagues in other areas (not finance) are struggling with that one -- they're concerned that it is impossible to maintain the same standards in online and F2F classes, and it's impossible to verify student identities. I'm not sure how we're going to fix it, but some fix has to be found.

It's an ongoing struggle to make our classes as complete as we can, and do all this other stuff too. Meanwhile, for those students who think online is going to be somehow easier than face-to-face, look out!

Comprehensive Financial Regulation Reform

Here's the latest from 1600 Penn. Ave. regarding reform of the evil and seditious financial system in this country.

http://online.wsj.com/article/SB124524649229423271.html

The actual proposal is here:

http://online.wsj.com/public/resources/documents/finregfinal06172009.pdf

(or online at the White House I guess).

I just cruised through it quickly, and I could only find the word "subprime" used to connect to the weathered accusations that "predatory lenders" caused the recent housing problem. No mention of Freddie or Fannie activities promoting securitization of subprime to the detriment of portfolio risk, or the expansion of the housing market in response to political initiatives.

In fact, the proposal includes a couple of paragraphs (no sources cited) that tell us how CRA can't be blamed for subprime, etc. I guess if a lie is repeated often enough, it becomes truth. (And yes, I've looked into who REALLY said that, and I'm not sure I believe the IntraWeb, so I won't cite anyone here.)

Unfortunately, the thrust of this effort is to reign in 25 years of helpful broadening of the banking system by folks who don't really understand how things work. Diversification, geographic and otherwise, is necessary for financial stability. What ISN'T necessary is a Congress and/or administration trying to hand out money based on demographics and not repayment ability.

That's just one person's opinion, of course.