Gundlach Sees ‘Blockhead’ Fed Repeating European Errors on Rates

(Bloomberg) -- Jeffrey Gundlach said if the Federal Reserve raises interest rates in the middle of 2015 the central bank will have to reverse course.

The billionaire co-founder of DoubleLine Capital made the comments in an investor presentation Tuesday that covered bond markets, U.S. housing, global demographics and currencies. He criticized the Fed for not learning from errors made by global counterparts, which raised interest rates and then had to cut them, and Chair Janet Yellen for spending too much time with foreign officials.

Read more...  http://www.bloomberg.com/news/articles/2015-03-10/gundlach-sees-blockhead-fed-repeating-european-errors-on-rates

GOLDMAN: We Disagree With The Fed

On Wednesday, the Federal Reserve finally ended quantitative easing, one of its extraordinary monetary policy measures aimed at stimulating the economy. It was confirmation that the days of the financial crisis are behind us and that the US economy is returning to normal. "Labor market conditions...

http://www.businessinsider.com/goldman-disagrees-with-the-fed-on-labor-market-slack-2014-11

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Fed Policy: From Tapering to Tightening | ETF Trends

Over the past nine months, the Federal Reserve (Fed) has gradually reduced the pace of its asset purchases in conjunction with an improvement in the strength of the U.S. economy. With "tapering" expected to end October 29, we believe that investors should now look beyond 2014 and start to focus on when, not if, the Federal Reserve will raise the Federal Funds Rate.

Read more. ..http://www.etftrends.com/2014/09/wisdomtree-fed-policy-from-tapering-to-tightening/

Fed Weighs Change to Rate Guidance for Added Flexibility

Federal Reserve officials are considering whether to alter their guidance on the likely path of interest rates to give them more flexibility to react to changes in the economy.

The Fed has said since March that its benchmark rate would stay low for a "considerable time" after it completes monthly bond buying intended to boost growth. With purchases set to end late this year and the Fed nearing its full-employment goal, that assurance will soon become obsolete.

Read more...http://bloom.bg/1wfLL99

Fed Misread Crisis in 2008, Records Show - NYTimes.com

WASHINGTON — On the morning after Lehman Brothers filed for bankruptcy in 2008, most Federal Reserve officials still believed that the American economy would keep growing despite the metastasizing financial crisis.

The Fed’s policy-making committee voted unanimously against bolstering the economy by cutting interest rates, and several officials praised what they described as the decision to let Lehman fail, saying it would help to restore a sense of accountability on Wall Street.

Read more...Fed Misread Crisis in 2008, Records Show - NYTimes.com

Here's Your New and Improved Hundred Dollar Bill

The Federal Reserve is making it rain new hundred dollar bills on October 8, 2013. They're more colorful, more secure, and easier to authenticate, but harder to replicate. Here's everything that's changed.

Read more: Here's Your New and Improved Hundred Dollar Bill

Surprise! The big bad bailout is paying off

FORTUNE -- The bailout of the financial system is roughly as popular as Wall Street bonuses, the federal budget deficit, or LeBron James in a Cleveland sports bar. You hear over and over that the bailout was a disaster, it cost taxpayers a fortune, we didn't really need it, it didn't work, it was a failure. It has become politically toxic, which inhibits reasoned public discussion about it.

But you know what? The bailout, by the numbers, clearly did work. Not only did it forestall a worldwide financial meltdown, but a Fortune analysis shows that U.S. taxpayers are coming out ahead on it -- by at least $40 billion, and possibly by as much as $100 billion eventually. This is our count for the entire bailout, not just the 3% represented by the massively unpopular Troubled Asset Relief Program. Yes, that's right -- TARP is only about 3% of the bailout, even though it gets about 97% of the attention.

A key reason for the rescue's profitability is that the Federal Reserve System has already turned over more than $100 billion of bailout-related income to the Treasury, and is on track to turn over $85 billion more this year and next. That's not something most people include in their math. On the negative side, we're including what may be the first overall cost calculation of a special tax break that's worth tens of billions of dollars to four big bailout recipients. And, of course, we've analyzed reports from the Congressional Budget Office, the Treasury, the Federal Deposit Insurance Corp., and other sources.

We'll get to the detailed numbers in a bit. But for now, we'd like to remind you why the bailout exists. The revisionist idea that the bailout is the problem -- rather than excesses in the financial system -- is simply stunning to those of us who watched the financial crisis surface in 2007, when two Bear Stearns hedge funds speculating in mortgage securities collapsed, and reach a crescendo in September 2008, when Lehman Brothers went bankrupt. Many in the financial world applauded Washington's decision to let Lehman go under -- but that applause was quickly replaced by fear as unanticipated consequences of the bankruptcy surfaced.

Lehman's collapse touched off a terrifying run on money market mutual funds when the Reserve Primary Fund announced it could pay holders only 97¢ on the dollar because of Lehman-related losses. Savers who'd considered money funds as safe as federally insured bank deposits stampeded for the exits, pulling out hundreds of billions of dollars. It took federal guarantees of more than $3 trillion of money market fund balances -- bailout! -- to stop this modern-day bank run.

Some hedge funds that used Lehman's London office as their "prime broker" had their assets frozen, setting off a run on prime brokers Goldman Sachs (GS) and Morgan Stanley (MS) as U.S. hedge funds pulled out their assets to avoid getting frozen if either firm failed. Goldman and Morgan were close to running out of cash when the government saved them by making them bank companies with access to the Fed's lending facilities. Bailout! Bailout! GE Capital (GE) was having trouble rolling over its borrowings, and was rescued by a government guarantee program. Bailout! Then there was American International Group, the now infamous AIG (AIG), which required a 12-figure rescue.

Had Goldman, Morgan Stanley, GE Capital, AIG, and several giant European banks not gotten bailouts and instead failed, even capital-rich J.P. Morgan Chase (JPM) would have gone under, because it wouldn't have been able to collect what these and other players owed it. There would have been trillions in losses, worldwide panic, missed payrolls, and quite likely the onset of Great Depression II. That's why we needed a bailout. And why we got it.

Now that we've relived the history, let's take a stroll through the numbers. Things have turned out far better than expected because the massive government intervention calmed the markets, and Uncle Sam had to make good on only a tiny fraction of the obligations that taxpayers guaranteed. Uncle Sam bought assets at what turned out to be near-bottom prices amid the market panic; the value of Sam's holdings has since soared. The more than $14 trillion of government investments, securities purchases, and loan guarantees -- of which TARP never amounted to more than $411 billion (although it was authorized to spend up to $700 billion) -- stabilized the whole financial system.

So how has this worked out for U.S. taxpayers?

Let's take the costs first.

· The biggest expense by far comes from the rescue of mortgage finance giants Fannie Mae and Freddie Mac. Or, actually, the rescue of their debtholders -- stockholders have been essentially wiped out.

The $130 billion cost is the money the government has put into Fannie and Freddie ($154 billion) to cover their losses, less the dividends ($24 billion) Fannie and Freddie have paid on the government's preferred stock. The Treasury and the nonpartisan Congressional Budget Office both expect that $130 billion figure to shrink; Fannie and Freddie have been adding profitable business since 2008, and it should begin to outweigh their losses from the housing bubble. But we're being conservative and counting the full $130 billion.

· Then there's a $35 billion tax expense, which no one else has included in bailout calculations. It's our analysis (with assistance from tax guru Bob Willens) of the taxpayer cost of special IRS rulings that allowed TARP recipients AIG, Citigroup, (C) General Motors, (GM) and Ally Financial (formerly GMAC) to use their tax losses in full, rather than being subject to "change in control" rules designed to stop companies from being taken over for their tax losses. GM got both an IRS ruling and a provision in the 2008 economic stimulus legislation to preserve its losses despite having gone bankrupt.

We estimate that without special treatment, the companies could have used only about $4 billion of their $43 billion of "deferred tax assets" to offset federal income taxes. Now they can use them all. We're estimating the taxpayer cost at $35 billion rather than the full $39 billion because it's not clear when -- or whether -- the companies will earn enough to use all the losses. (The tax breaks have presumably increased the prices of the shares in those companies that the government owns or has sold, because they have made the companies more valuable to investors. That means the higher share prices have decreased the cost of the bailout, though it's impossible to quantify by how much.)

· We're counting the cost of TARP as $19 billion, based on the most recent update by the Congressional Budget Office. That includes $13 billion spent to help homeowners restructure their mortgages, plus projected losses on AIG, GM, and Chrysler, offset by gains in some of TARP's other holdings, primarily in banks. The $19 billion estimate is a big improvement from the CBO's first estimate, $189 billion, in January 2009. That's because TARP's investments have fared better than expected, and its total outlays have been shrinking rapidly. They're down to $104 billion, according to the Treasury, from their aforementioned high of $411 billion.

The plus side

· The biggest and most surprising numbers are the bailout-related profits that the Federal Reserve has turned over to the Treasury, and that we expect it to turn over this year and next.

We're counting these payments as an offset to the bailout's cost because they stem from the Fed's bailout activities. The Fed's increased profits come primarily from income on the $1.25 trillion of mortgage-backed securities it bought in 2008–09 to stabilize credit markets (Quantitative Easing 1), and the $600 billion of Treasury securities it bought in 2010–11 (QE2) to hold down interest rates and raise asset values. Even though QE2 is usually considered "economic stimulus," we're treating it as part of the bailout because rising asset values have helped stabilize the financial system.

The Fed now owns almost $2 trillion more of securities than it did before financial problems surfaced in 2007. A normal financial institution would have had to borrow heavily to add $2 trillion of assets, and interest on that borrowed money would have offset most or all of the income from the added assets. The Fed, though, doesn't have to borrow: It effectively creates money (which has its own problems) to buy the securities. So the Fed's income on its added securities is pure profit.

Each year the Fed turns over most of its annual profit to the Treasury. It's money that the Treasury can spend, and it reduces the federal budget deficit. From 2007 (when the Fed began expanding its balance sheet to combat financial instability) through 2010, the Fed sent a total of $193 billion to the Treasury. In the previous four years it sent the Treasury only $91 billion. We're counting that $102 billion difference as bailout-related profit.

· Most Fed analysts expect the size of the Fed's securities portfolio (and hence its profits) to fall slowly, if at all, this year and next. So we're estimating that the Fed will send $55 billion of bailout-related profits to the Treasury this year, about what it sent in 2010. To be conservative, we're estimating the 2012 bailout profit at only $30 billion.

· The Treasury owns 563 million shares of AIG that it got from the Fed, which extracted them from the insurance giant in 2008 in return for making $85 billion of credit available. Even though AIG was a big TARP recipient, this holding, currently worth about $16 billion, isn't included in TARP's profit-and-loss statement. That's why we're including it here.

· The Treasury says it has made a total of $15 billion from fees for insuring money fund balances, and from the $150 billion of mortgage-backed securities that it owns.

· We estimate that the FDIC has made $8 billion from the difference between the fees it has charged to guarantee borrowings and the losses it has incurred on those guarantees. The FDIC declined to give us a number because some of the guarantees are still outstanding.

Bottom line

Our accounting is unconventional because in some places we count what has happened, in some places we project what's likely to happen, and in some places we've done our own numbers because no others exist. If things break right, taxpayers could come out $100 billion ahead: our $42 billion profit estimate, plus a $25 billion reduction in the Fannie/Freddie cost, $25 billion more in Fed profits, and a reduction in the $19 billion expense we're showing for TARP.

We don't expect any of what we've told you to make the bailout popular -- we're not wild about it ourselves for the same reasons many people dislike it. The government was picking winners and losers. Big Government bailed out Big Finance while letting average taxpayers lose their homes. Creditors of bank companies and AIG got far too good a deal at taxpayer expense. Wall Street is back to paying enormous bonuses (and whining about being demonized), while average Americans, whose tax dollars saved the Street, are still suffering. And, of course, the economy is down 7 million jobs from its peak in 2007.

But something needed to be done when the financial world was on the brink of the abyss, and the government did something. No matter what your views are, you should be happy that taxpayers, almost miraculously, are coming out ahead rather than hundreds of billions of dollars behind.

When our boss assigned us to find out how much the financial rescue cost, we expected to find a monumental loss, because Fannie Mae and Freddie Mac seemed like a bottomless pit. Instead, we discovered that bailout profit payments from the Fed -- which we hadn't previously thought of as a profit center -- are virtually certain to exceed taxpayer losses on Fannie and Freddie. We were surprised -- and pleased -- to discover taxpayers showing a profit on the bailout. We hope that you are too.

by Allan Sloan Fortune Magazine Jul 8, 2011


Surprise! The big bad bailout is paying off

Fed limits debit fees retailers pay

WASHINGTON - The Federal Reserve said Wednesday that banks can only charge retailers 21 cents each time they swipe a debit card.

The board raised the cap from its initial proposal of 12 cents. Banks and big payment processors like Visa and MasterCard convinced the Fed that was too low to cover the cost of handling transactions, maintaining networks and preventing fraud.

Banks currently have no limit and charge an average of 44 cents per swipe.

The Fed voted 4-1 to adopt the rule, which was required under the financial regulatory law enacted last year. Gov. Elizabeth Duke opposed the rule. It takes effect Oct. 1.

It was "one of our most challenging rulemakings" under the financial regulatory law, Fed Chairman Ben Bernanke said Wednesday. He said the Fed will monitor developments in the debit-card market "on an ongoing basis" to gauge whether it's accomplishing the intended goals.

Fed staff said the higher cap reflects a broader range of costs incurred by banks that issue debt cards. The rule will also allow banks to charge a fraction more to cover the costs of fraud prevention. It does not apply to government-issued debit cards, prepaid cards or cards issued by banks and credit unions with assets under $10 billion.

The move to limit swipe fees pitted the nation's largest banks and payment processors like MasterCard Inc. and Visa Inc. against Walmart and retailers of all sizes.

Banks said roughly $16 billion was at stake if the 12-cent cap took effect. That would be more than 80 percent of the $19.7 billion in debit-transaction fees paid by merchants in 2009, according to the Nilson Report, which tracks the industry.

Associated Press Jun. 30, 2011 12:00 AM


Fed limits debit fees retailers pay

Fed chief shines - by saying nothing new

WASHINGTON - The script was repetitive. The lines were delivered without emotion. There wasn't even a twist.

The reviews for Federal Reserve chief Ben Bernanke's unusual news conference Wednesday would have sunk a Hollywood blockbuster. As the head of the famously vague central bank, though, he nailed it.

"I would give the chairman high grades for his performance today," said Dana Saporta, an economist at Credit Suisse. "I was a little relieved."

In an hourlong give-and-take with reporters - the first news conference by a Fed chief in almost 20 years - a relaxed Bernanke delivered little new information and said nothing to spook investors who were hanging on every word.

"We paid attention," said David Ader, head of government bond strategy at CRT Capital. "But he didn't say anything we hadn't heard already."

Financial news channels pasted second-by-second charts of financial markets on the screen next to Bernanke's face as he spoke. Not much drama there, either: The Dow Jones industrial average rose gently as the Fed chief spoke. It ended the day up 96 points, at 12,691.

For Fed-watchers, there were a couple of morsels. Bernanke decoded his frequent pledge to keep interest rates near zero for "an extended period." He indicated rates would stay at the record lows for at least the next two Fed meetings, or about three months.

He also seemed to rule out further major efforts to help the economy. Shortly before Bernanke started talking, the central bank announced that its $600 billion plan to hold down interest rates by buying government bonds would end as scheduled in June.

He suggested the Fed would be reluctant to start a new program.

"The trade-offs are getting less attractive at this point," he said. "Inflation has gotten higher."

In the run-up to the first of what the Fed says will be quarterly news conferences, Wall Street held its breath, and the financial media speculated endlessly about how the Fed chairman might respond to unfiltered questions from the media.

Cameras whirred as Bernanke, wearing a conservative gray suit and a red tie, walked to a dark-brown wooden desk, where he sat fielding questions like the college professor he used to be.

Bernanke said the news conference was a step toward his goal of making the Fed more open and accountable to the American public. He has given television interviews, spoken to reporters about his South Carolina upbringing and allowed cameras inside the Fed.

In 2008, some Americans directed anger toward the central bank after the financial crisis. The Fed bailed out crippled insurer American International Group and opened itself for emergency lending to investment houses, not just commercial banks.

Critics, including some lawmakers, ripped the Fed for being secretive. The institution is often misunderstood: It isn't bankrolled by the taxpayers but by what it earns from its huge portfolio of Treasury and mortgage securities.

Bernanke stuck close to the statement the Fed issued earlier in the day, saying it would keep short-term rates near zero and end the bond-buying program.

"The Fed likely judges this first press conference a success," said Michael Feroli, an economist at JPMorgan Chase. "Nobody was able to trip up Bernanke, who generally came across as poised and balanced. Market participants may not have learned a lot about where Fed policy is heading, but today's event was more about the Fed communicating to a broader audience than the market."

Fed chairmen had held news conferences only twice before. Paul Volcker had one in 1979, shortly after he was appointed by President Jimmy Carter, and Alan Greenspan held an impromptu session with reporters in 1992.

The Fed has long acted in secrecy. For decades, the central bank didn't bother to explain what it was doing or why. It chose instead to let investors pore over scraps of information like Kremlinologists trying to discern the inner workings of the Soviet Politburo.

But the Fed has slowly opened up. In 1975, Fed chairmen began testifying before Congress twice a year. In 1994, the Fed's policymaking committee started issuing statements after its meetings, disclosing the target for its benchmark federal-funds rate.

Eight years later, Fed statements began to include a roll-call tally of how committee members voted on interest-rate policy. That allowed investors and the public to gauge the extent of dissent at Fed meetings.

Bernanke has taken openness to levels unthinkable under his predecessor, Greenspan, who tended to make opaque comments that Wall Street parsed word for word, as though he were an oracle.

The Fed chief sketched a picture of an economy growing steadily but still weighed down by prolonged unemployment, now at 8.8 percent. He noted that about 45 percent of the unemployed have been without a job for six months or longer.

The news conference allows Bernanke to pre-empt critics at some of the regional Federal Reserve banks who say the Fed isn't being vigilant enough against inflation, said Sarah Binder, a political scientist at George Washington University who studies the Fed.

"This really puts Bernanke's stamp on the policy of the Fed," she said. "It has the potential to neuter the dissenting view."

by Paul Wiseman and Jeannine Aversa Associated Press Apr. 28, 2011 12:00 AM




Fed chief shines - by saying nothing new

Fed curbs could have cut small banks' ills

WASHINGTON - The Federal Reserve Board, chastised for regulatory inaction that contributed to the subprime-mortgage meltdown, also missed a chance to prevent much of the financial chaos ravaging hundreds of small- and midsize banks.

In early 2005, at a time when the housing market was overheated and economic danger signs were in the air, the Fed had an opportunity to put a damper on risk taking among banks, especially those that had long been bedrocks of smaller cities and towns across the nation.

But the Fed rejected calls from one of the nation's top banking regulators, a professional accounting board and the Fed's own staff for curbs on the banks' use of special debt securities to raise capital that was allowing them to mushroom in size.

Then-Chairman Alan Greenspan and the other six Fed governors voted unanimously to reaffirm a nine-year-old rule allowing liberal use of what are called trust-preferred securities.

The Fed allowed the banks to count the securities as debt, even while counting the proceeds as reserves.

Banks were then free to borrow and lend in amounts 10 times or more than the value of the securities being issued.

The Fed supervised about 1,400 bank-holding companies, the bulk of them parent companies of community banks.

A four-month McClatchy inquiry finds that the Fed rule enabled Wall Street to encourage many community banks to take on huge debt and to plunge the borrowings into risky real-estate loans.

In a winter 2010 Supervisory Insights report published Wednesday, the Federal Deposit Insurance Corp. confirmed McClatchy's findings.

Sandra Thompson, the FDIC's director of supervision, said that "institutions relying on these instruments took more risks and failed more often than those that did not include the use of" trust-preferred securities.

In its supervisory report, however, the FDIC didn't criticize the Fed directly.

The Securities and Exchange Commission is now investigating how securities businesses hawked some of the complex bonds in a poorly understood, $55 billion offshore market for debt issued by banks, insurers and real-estate trusts - a market that's only now becoming clear.

William Black, a former senior federal thrift regulator, blames the Fed for an overzealous free-market focus.

"The Fed desperately wanted to believe that it didn't need to regulate and could rely instead on private market discipline," meaning banks would avoid taking excessive risks, said Black, now a professor at the University of Missouri, Kansas City.

Instead, he said, the banks were "lending into the bubble" with money generated by the bonds, while other banks lacked the sophistication to assess the perils of buying the complex securities.

Fed officials declined to comment about this regulatory misfire. Greenspan didn't respond to a request for comment.

by Greg Gordon and Kevin G. Hall McClatchy Newspapers Dec. 24, 2010 12:00 AM




Fed curbs could have cut small banks' ills

Fed reveals aid deals for U.S., foreign banks

WASHINGTON - The Federal Reserve revealed details Wednesday of trillions of dollars in emergency aid it provided to U.S. and foreign banks during the financial crisis.

Newly released documents show that the most loan money over time went to Citigroup ($2.2 trillion), followed by Merrill Lynch ($2.1 trillion), Morgan Stanley ($2 trillion), Bank of America ($1.1 trillion), Bear Stearns ($960 billion), Goldman Sachs ($620 billion), JPMorgan Chase ($260 billion) and Wells Fargo ($150 billion). Many of the loans they took were worth billions and had short durations but were paid back and renewed many times.

Among the largest foreign bank recipients were Bank of England, Swiss National Bank, Barclays and Bank of Japan.

The documents are a reminder of how crippled the financial system had become and how much it's recovered since. Banks earned $14 billion from July through September this year.

The Fed released the data in the form of more than 21,000 transactions. The disclosures are required under the financial-overhaul law.

The documents detail more than $2 trillion the Fed lent through eight programs from December 2007 to July this year. The lending programs had never been used before and are now defunct. Most of the loans have been repaid, and none are overdue, Fed officials say.

In addition, the Fed disclosed details of "swap" arrangements with foreign central banks. The Fed traded much-in-demand dollars for foreign currencies to try to ease credit. The foreign central banks, in turn, lent the dollars to banks in their countries that needed dollar funding. The Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan were involved in the exchanges.

One of the emergency lending programs the Fed created provided low-cost, short-term loans to banks. Another sought to ease credit problems in the "commercial paper" market, which many U.S. companies use to finance everything from salaries to supplies.

The documents help illustrate the global scope of the crisis. The Federal Reserve provided credit lines to some of the largest central banks overseas: The European Central Bank took $8 trillion in temporary credit lines, while the Bank of England took $918 billion. That credit ensured that overseas markets wouldn't freeze for a lack of U.S. dollars, the global reserve currency.

by Jeannine Aversa Associated Press Dec. 2, 2010 12:00 AM





Fed reveals aid deals for U.S., foreign banks

Fed officials clash over new strategies to bolster economy

WASHINGTON - Divisions within the Federal Reserve over how to pump up the economy and lower unemployment came into sharper view Wednesday.

Three Fed officials squared off in competing speeches over how much help would come from one likely next step - buying more government debt.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, argued that such an effort may not help the economy much. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, made a similar point.

But, Eric Rosengren, president of the Federal Reserve Bank of Boston, said Fed policy makers must do what they can to bring more relief.

The Fed delivered a strong signal last week at its meeting that it was prepared to act if the economy weakened. High on the list of unconventional tools is buying more government debt, known as quantitative easing.

The goal is to force down rates on consumer and businesses loans even more to get Americans to boost their spending. Doing so would help the economy.

In their speeches, Kocherlakota and Plosser expressed skepticism that quantitative easing would drive down rates nearly as much as such efforts did during the recession and financial crisis.

Because financial markets are in better shape now than during the crisis, the difference between the rates on super-safe Treasury securities and rates on other consumer and business loans has narrowed.

"I suspect that it will be somewhat more challenging for the Fed to impact them," Kocherlakota said. A new debt-buying program "would have a more muted effect."

But Rosengren said buying more government debt could benefit the economy.

"It is important that policy makers be open to implementing policies" that are aimed at lowering unemployment and preventing inflation from getting too low, which could put the country at risk of deflation, he said in a speech in New York.

Many economists believe the Fed is likely to announce action when it wraps up a two-day meeting on Nov. 3, the day after the congressional midterm elections.

by Jeannine Aversa Associated Press Sept. 30, 2010 12:00 AM



Fed officials clash over new strategies to bolster economy

Fed concerned with weak recovery

WASHINGTON - The Federal Reserve signaled Tuesday that it's worried about the weakness of the recovery and is ready to take further steps to boost the economy if needed.

Fed officials said they also are concerned that sluggish economic growth could prevent prices from rising at a healthy rate.

But at the end of its meeting, the Fed announced no new steps to rejuvenate the economy and drive down unemployment. Instead, it hinted that it's prepared to see if the economy can heal on its own.

The meeting is the last for the Fed's chief policymaking group before the Nov. 2 midterm elections. It comes as voters are focused on the economy and the jobs crisis. Polls show they are likely to punish Democrats in Washington for the sluggish economy.

In its statement, the Fed used the same language it did in August to sketch a downbeat view of the economy. It concluded that economic activity has slowed in recent months. And it warned that the pace of growth is likely to be "modest in the near term" - almost identical to the assessment it made a month ago.

But the Fed delivered a stronger signal that it would take new steps to lift the economy. The Fed said it is "prepared to provide additional accommodation." In its previous policy statements, the Fed didn't go that far. Instead, it had said it would "employ its policy tools as necessary."

The Fed made clear that given the economy's weakness, it's more concerned about prices falling than rising. It didn't use the word deflation. But some economists have raised fears about the country sliding into a deflationary spiral. That's a widespread drop in wages, prices of goods and services and the value of stocks and homes.

"They are more worried about the economy and deflation than I thought they would be," said Sung Won Sohn, an economist at the Martin Smith School of Business at California State University.

For the sixth consecutive meeting, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, was the sole dissenter.

At Tuesday's meeting, the Fed once again left a key short-term rate near zero, where it has been since December 2008. It also repeated a pledge to hold rates at those ultralow levels for an "extended period."

If the economy keeps losing momentum, the Fed will be likelier to provide relief at its meeting on Nov. 2-3 or at its last scheduled session of the year on Dec. 14.

Chairman Ben Bernanke last month indicated a preference to launch a new program to buy large amounts of government debt. Such a move would be intended to lower already low rates on mortgages, corporate loans and other debt. The goal is to entice people and businesses to spend more, and thereby strengthen the economy and lower unemployment.

In economic circles, it's known as "quantitative easing." That's when the Fed takes unconventional steps, as it did during the financial crisis, to inject money into the economy.

by Jeannine Aversa Associated Press Sept. 22, 2010 12:00 AM




Fed concerned with weak recovery

Bernanke: Shut banks imperiling system

WASHINGTON - Federal Reserve Chairman Ben Bernanke told a panel investigating the financial crisis that regulators must be ready to shutter the largest institutions if they threaten to bring down the financial system.

"If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved," Bernanke said Thursday while testifying before the Financial Crisis Inquiry Commission.

Bernanke also said it was impossible for the Fed to rescue Lehman Brothers from bankruptcy in 2008 because the Wall Street firm lacked sufficient collateral to secure a loan. Lehman's former chief executive told the panel a day earlier that the firm could have been saved but that regulators refused to provide help.

The Fed chief presented his analysis of the crisis and views on potential systemwide risks as the panel approaches the end of its yearlong investigation into the Wall Street meltdown.

The financial-overhaul law enacted this summer gives regulators the authority to shut down firms when their collapse poses a broader threat to the system. The process resembles the one used by the Federal Deposit Insurance Corp. to close failing banks.

FDIC Chairman Sheila Bair told the panel "the stakes are high" for regulators to effectively exercise their new powers.

Panel Chairman Phil Angelides said the new law will be an enormous test of will of the regulators.

Bair and Bernanke said tougher rules and market pressures will lead huge firms to voluntarily shrink themselves. Executives can no longer count on the government to bail them out if they veer toward failure, they said. Bernanke said that bailing out these institutions is not a healthy solution and that great improvement will come from the new law.

Bernanke led the economy through the financial crisis and the worst recession since the 1930s. The Federal Reserve took extraordinary measures to inject hundreds of billions into the battered financial system.

Former Lehman CEO Richard S. Fuld Jr. testified Wednesday that the firm could have been rescued. But the regulators refused to help - even though they later bailed out other big banks.

Bernanke disagreed. He said bailing out Lehman would have cost taxpayers billions.

by Marcy Gordon Associated Press Sept. 3, 2010 12:00 AM




Bernanke: Shut banks imperiling system

AIG is repaying $4 billion in federal loans

In its single biggest repayment of bailout loans so far, American International Group Inc. said Monday that it is paying back nearly $4 billion in taxpayer aid with proceeds from a recent debt sale.

The insurer's aircraft-leasing company, International Lease Finance Corp., completed the sale of $4.4 billion in debt. AIG will use more than $3.9 billion of the proceeds to repay the Federal Reserve Bank of New York, trimming the balance on its credit line with the Fed to about $15 billion. Adding interest, the total is about $21 billion.

The emergency credit line was part of a $182 billion federal bailout package that New York-based AIG received during the financial crisis to avoid collapse. AIG has been selling off assets to pay back the aid.

"This is continuing tangible evidence of AIG's progress in repaying the American taxpayers," said Robert Benmosche, AIG president and CEO. "AIG is getting stronger every day. We still have more work to do, but we will finish the job and make sure we repay the American taxpayers."

As of June 30, excluding the new payment, AIG said its outstanding balance owed to the government stood at about $101 billion. The total includes debt as well as preferred shares of stock in AIG held by the Treasury Department.

Los Angeles-based International Lease leases one of the world's biggest commercial-jet fleets. It struggled earlier this year to pay off its loans and had to draw the $3.9 billion from AIG to pay back some of its debt. AIG had tried to find a buyer for the unit, but any sale seems off the table for now as the aircraft unit has found healthy demand for recent bond offerings, which will help it meet some deadlines for paying back loans.

The repayment will release about $10 billion of collateral that International Lease had pledged to the Fed under the credit agreement.

With the recent debt sales and other note issues, the aircraft unit has boosted its total liquidity, assets that can quickly be converted to cash, to more than $12.5 billion over the previous five months.

"(The offerings) are a direct reflection of our company's viability and future prospects as a leader in leasing aircraft to the world's airlines," said Henri Courpron, International Lease's CEO. He noted that the company has more than $13 billion in aircraft orders.

Separately, AIG said it will book a pretax charge of about $650 million against its earnings because of the repayment.

AIG shares dipped 13 cents, to $35.04. The stock has traded in a 52-week range of $21.54 to $55.90.

by Mark Jewell Associated Press August 24, 2010 12:00 AM


AIG is repaying $4 billion in federal loans

Fed Publishes Wave of Rules for Mortgage Origination Transparency « HousingWire

The Federal Reserve Board today announced a batch of final and interim rules designed to increase the transparency of the mortgage origination and disclosure processes. The Fed is also proposing a number of rules to improve the clarity and accountability around reverse and jumbo mortgage origination.

The Fed released final rules restricting an originator from receiving compensation based on the interest rate or other loan terms of the mortgage. The new rules apply to mortgage brokers and the companies that employ them, as well as loan officers employed by depository institutions and other lenders.

Some originators — like brokers — have been the object of public criticism for allegedly steering borrowers into loans with interest rates higher than the rate required by lenders, in order to receive higher yield-spread premiums.

"This will prevent loan originators from increasing their own compensation by raising the consumers' loan costs, such as by increasing the interest rate or points," the Fed said. "Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice."

The final rule also prohibits originators from receiving compensation directly from consumers while also receiving compensation from the lender or another third party.

"In consumer testing, the board found that consumers generally are not aware of the payments lenders make to loan originators and how those payments can affect the consumer's total loan cost," the Fed said. "The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate, thereby paying more in total compensation than they realize."

The Fed also announced final rules to implement an amendment to the Truth in Lending Act that requires consumers be given notice within 30 days of the sale or transfer of their mortgage loan.

Additionally, the Fed issued an interim rule that revises disclosure requirements for closed-end mortgage loans under Regulation Z — or Truth in Lending regulations. Under the interim rule, lenders must include a payment summary table outlining the initial interest rate together with the corresponding monthly payment.

Lenders must also include the maximum interest rate and payment that can occur during the first five years of an adjustable-rate mortgage, as well as a "worst case" example showing the minimum rate and payment possible over the life of the loan. Lenders complying with the interim rule must also disclose the fact that consumers may not be able to avoid payment increases through refinancing.

Along with the final and interim rules, the Fed proposed consumer protections and disclosures on mortgage transactions. As the second phase of the Fed's review and update of mortgage rules, the proposal would affect Reg Z.

The proposal would improve disclosures that consumers receive for reverse mortgages and impose rules for accurate product representation in reverse mortgage advertising. It would also prohibit certain unfair practices in the sale of financial products related to reverse mortgages.

The Fed's proposal would improve disclosures of borrowers' rights to rescind certain mortgage transactions and clarify the responsibilities of the creditor if a consumer exercises the right. Additionally, it would ensure consumers receive new disclosures when the parties agree to modify the key terms of an existing closed-end mortgage loan.

The Fed also proposed a rule to revise the escrow account requirements for higher-priced first-lien jumbo mortgage loans. The rule would implement a provision of the Dodd-Frank Act and increase the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien jumbos.

The rule would implement the Dodd-Frank provision to increase the APR threshold to 2.5 percentage points — from the current 1.5 percentage points.

by Diana Golobay HousingWire August 16, 2010

Fed Publishes Wave of Rules for Mortgage Origination Transparency « HousingWire

Feds won't go after exec pay

by Daniel Wagner Associated Press July 24, 2010 12:00 AM

WASHINGTON - For all his tough talk about excessive pay for bankers, the Obama administration's pay czar let the executives go without a fight.

Kenneth Feinberg announced Friday that he will not try to recoup $1.6 billion in compensation given to top executives at bailed-out banks because he thinks shaming them is punishment enough.

His decision to go easy on 17 banks that made "ill-advised" payments to their executives is likely to fuel concerns about how he will oversee the $20 billion oil-spill compensation fund created by BP.

"I'm not suggesting we should blink or turn the other cheek," Feinberg said later in an interview. "These 17 companies were singled out for obviously bad behavior. The question is: At what point are you piling on and going beyond what is warranted?"

He could not force the banks to repay the money, but the law instructed him to negotiate with banks to return money if he determined that the pay packages were "contrary to the public interest" - language that he opted not to use.

Still, his leniency is a far cry from the bravado he displayed in the months leading up to his final act as pay czar. In February, he spoke with confidence about his ability to get companies that received taxpayer help to accept less.

In an interview with the Hill newspaper, Feinberg said he had been "fairly successful in convincing the companies that it is in their best interests to seek an accommodation on compensation."

Among the companies Feinberg did not pursue were two whose bailouts are expected to cost taxpayers more than $38 billion: American International Group Inc. and CIT Group Inc. He also ignored excessive pay at Wall Street powerhouses such as Goldman Sachs Group Inc. and JPMorgan Chase & Co., which reaped massive profits from government efforts to stabilize the financial system. They had no trouble repaying their bailouts.

He said a fight with those banks could have exposed them to lawsuits from shareholders trying to recapture the executives' money, and he did not think that would be fair.

Sen. Bernie Sanders, a Vermont independent, said he was disappointed that Feinberg decided there was no way to force the banks to return the bonus payments. "These people's jobs were saved by the taxpayers of this country, and their response was to give themselves these huge bonuses," Sanders said. "Many Americans lost their jobs because of this Wall Street greed. It is one of the reasons the American people are as angry as they are."

Many Gulf Coast fishermen are angry, too, at the way BP and the government have handled the legal claims of those whose earnings have been hurt by the oil spill.

Paul Nelson, a fisherman in Coden, Ala., who leads the South Bay Communities Alliance on the Alabama coast, said the fishermen he represents feel they have no voice in the claims process. "Where is the citizen input?" he asked.

It's not the first time Feinberg has talked tough but taken a light touch with bankers.

He clashed publicly with AIG Chief Executive Robert Benmosche - while quietly approving a pay package worth more than $10 million.

He announced in October 2009 that he had cut cash pay by 90 percent at the handful of companies that got the biggest bailouts. Yet the changes were not retroactive - they only applied to the final six weeks of that year.

That track record concerns some Gulf state officials.

Alabama Attorney General Troy King announced Thursday that he will file suit against BP to recover tax revenue lost because of the oil spill and to recoup cleanup costs. At the news conference, he said Feinberg seems to be working more for BP than for the people harmed.

Feinberg strongly defended his independence from BP, saying his actions "speak for themselves."

"I think both the administration and BP will acknowledge my absolute independence," Feinberg said. He added that anyone who believes he "went easy on the banks hasn't carefully read what I did over the past 16 months and what I did today regarding these 17."

Rather than demanding they return the money, Feinberg invited the 17 banks that overpaid workers to give their boards of directors more power to withhold pay during future crises. The request was voluntary.

Feinberg reviewed 419 companies that received bailout money before pay curbs were enacted by Congress in February 2009. The review covered the period from October 2008 to February 2009. The starting point was when banks began receiving bailout money under the Troubled Asset Relief Program. The ending point was when Congress enacted pay curbs on institutions receiving government support.

Feinberg determined that a total of $1.7 billion in payments were made during that period that would have violated the guidelines adopted later. And $1.6 billion of that amount was paid out by 17 of the country's largest financial institutions.


Feds won't go after exec pay

Fed to banks: Lend more to smaller firms

by Jeannine Aversa Associated Press July 13, 2010 12:00 AM


WASHINGTON - Big companies are building up cash and are expected to report strong earnings starting this week. Not so for small businesses that can't get loans - or hire freely until they do.

The gap helps explain why the economic rebound isn't stronger and could even stall. Federal Reserve Chairman Ben Bernanke stepped up pressure Monday on banks to break the logjam and lend more to smaller firms, which employ at least half of American workers.

Small-business owners are relying on personal credit cards or raiding retirement accounts to stay afloat, the Fed chairman said.

Bernanke and other regulators have urged banks for months to lend more to smaller companies. Lawmakers have complained that small businesses that want loans are having trouble getting them. Banks have countered by saying demand remains weak.

The Fed does have authority to create programs to increase lending, such as providing low-cost loans to banks. But economic conditions would probably have to weaken considerably before the Fed would propose such a move. One such program set up during the 2008 financial crisis was recently closed.

The Fed chief's latest comments came as legislative efforts to spur small-business lending have languished and as the recovery has lost momentum. Bernanke spoke at a Fed conference held to explore ways to loosen lending to small companies.

"Making credit accessible to sound small businesses is crucial to our economic recovery," Bernanke said. "More must be done."

Some small-business leaders say they would hire more if only they had easier access to loans. One of them is Marilyn Landis of Basic Business Concepts Inc. of Pittsburgh, which compiles financial documents for other small businesses.

Landis says she would like to hire one or two more people for her 10-person firm and wants to expand into New England. Yet even though she says she's never missed a payment, Landis says her line of credit was cut about 18 months ago.

She relies on credit cards to pay for everything from supplies to payrolls. Without additional credit, she says, "It is impossible to expand, and I can't hire."

Nearly one-third of small-business borrowers report difficulty arranging credit, the National Federation of Independent Business said.

By contrast, big businesses, which start reporting their second-quarter earnings this week, have enjoyed easier access to loans and low interest rates.

Analysts expect companies in the Standard & Poor's 500 to report a 42 percent jump in profit by one measure, S&P says. For the current quarter, which ends Sept. 30, they expect a 31 percent rise.

The big companies also benefit from something available to fairly few small businesses: plenty of cash.

In March, cash at S&P 500 companies hit a record $837 billion - about a year and a half's worth of profits. And S&P senior analyst Howard Silverblatt says he expects cash to rise to a new record for the April-to-June quarter when figures are released later this summer.

Yet even as the economy has improved, lending to small businesses has declined. It's dropped from around $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of this year.

The Fed and other regulators have urged banks to step up lending to creditworthy small businesses. Despite the push, such lending is still tight.

The impact on the economy is severe because small businesses tend to drive job growth during recoveries. They employ roughly half of all Americans and account for about 60 percent of job creation, Bernanke said.

And newer small businesses - those less than 2 years old - are especially vital. Over the past 20 years, these startups accounted for roughly a quarter of all job creation, even though they employed less than 10 percent of the work force, he added.

The Obama administration in early May sent Congress a proposal to create a $30 billion program to unfreeze credit for small businesses. The fund would provide money to small- and medium-sized banks to encourage them to lend to small businesses. The legislation has yet to pass the Senate.

Bernanke said it's hard to tell whether the problem is banks refusing to lend to small businesses or a lack of demand from those companies.

Some lenders say they have restored more traditional standards after a period of lax lending that contributed to the financial crisis.

Several big banks say they're already lending more to small businesses. Bank of America lent $19.4 billion to small- and medium-sized businesses in the first three months of 2010, an increase of nearly $3 billion from last year. JPMorgan Chase and Citigroup have pledged to lend more, too.

Combined, though, the dollar amounts are relatively tiny compared with how much banks would lend in a healthy economy, said Robert DeYoung, a finance professor at the University of Kansas.

"These numbers would be dwarfed by the increase in lending after the economy starts recovering, and the economy hasn't really started to recover," DeYoung said.


Fed to banks: Lend more to smaller firms

Fed to provide details on ’swap’ program to stem European debt crisis

By Jeannine Aversa Associated Press May 12th, 2010

Fed to give update on plan to ease Europe’s woes

WASHINGTON — The Federal Reserve said Tuesday that it will provide more details about its role in trying to help ease the financial crisis in Europe.

The information involves the Fed’s so-called currency “swap” arrangements with other central banks. The program — used during the 2008 global financial crisis — was revived Sunday.

Under the program, dollars are sent overseas in return for foreign currencies. In turn, participating central banks can lend the dollars out to banks in their home countries that are in need of dollar funding to prevent the European crisis from spreading further.

Starting Thursday, the Fed said it will provide weekly updates broken out by participating countries about the use of the program — such as the amount of dollars requested by individual central banks. The information will be posted on the Federal Reserve Bank of New York’s Web site.

As was the case during the 2008 financial crisis, the Fed will provide a total amount of dollars shipped under the program in a weekly snapshot of its balance sheet, released each Thursday.

The Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan are involved in the dollar swap effort.

The Fed’s decision to provide more information on the transactions comes as Congress has passed legislation that seeks to make the Fed more open and subject it to audits. The Fed’s role in bailing out Wall Street companies in 2008 has angered lawmakers and the American public.

Meanwhile, the Fed said it was posting on its Web site the contracts made with Bank of England, the European Central Bank and the Swiss National Bank. The agreements with the Bank of Canada and the Bank of Japan will be posted after they are finalized, the Fed said.

The debt crisis first erupted in Greece and there are fears that it could spread to Spain, Portugal and other eurozone countries. The crisis has pushed up demand for the U.S. dollar and has sharply weakened the value of the euro, the currency used by 16 European countries.

European banks need dollars to lend to companies across the Continent. European companies that have operations in the U.S. pay their employees in dollars and buy raw materials with the U.S. currency. Also, oil and other commodities are priced in dollars around the world.

The swap program, opened in 2007, was shut down in February as financial conditions in the United States and abroad had shown signs of improving.

Fed to provide details on ’swap’ program to stem European debt crisis

Fed tightens gift-card rules

Fed tightens gift-card rules

by Jeannine Aversa Associated Press Mar. 24, 2010 12:00 AM

WASHINGTON - The Federal Reserve issued new rules on Tuesday to protect Americans from getting stung by unexpected fees or restrictions on gift cards.

Gift cards have grown in popularity - with more than 95 percent of Americans having received or purchased them, the Fed said.

And as usage has gone up, so too have complaints from people taken by surprise by fees that eat into the value of the cards as well as restrictions on how long they'll be good for.

Under the rules, consumers must have at least five years to use the gift cards before they expire. The Fed also says service or inactivity fees can be imposed only under certain conditions.

Such fees can be charged if the consumer hasn't used the card for at least a year, if the consumer is given clear disclosures about them and no more than one fee is charged a month.

The rules take effect Aug. 22.

Congress ordered the Fed to issue the new protections under a law enacted last year.

Sen. Charles Schumer, D-N.Y., who championed the gift-card crackdown in Congress, wants faster implementation of the rules.

"Now that the new rules are finalized, we will work with the Fed to speed up
the effective date rather than keep consumers at risk of being ripped off until next summer," Schumer said. "These new rules will curb the abusive fees and early-expiration dates that can drain gift cards of their value before they are ever even used."

The Fed received more than 230 letters weighing in on its proposal first unveiled in November.

Many consumers urged the Fed to ban all fees and to eliminate expiration dates so that people didn't lose any value.