Bubble Driver: This New Libor ‘Scandal’ Will Cause A Terrifying Financial Crisis(?)

Forbes Magazine has an interesting piece entitled “This New Libor ‘Scandal’ Will Cause A Terrifying Financial Crisis.”

The vastly worse Libor “scandal” that I am referring to is the fact that the Libor has stayed at record low levels for the past half-decade, which is helping to fuel a massive economic bubble around the entire world that will end in a devastating financial crisis that will be even worse than the Global Financial Crisis. Instead of causing a few tens of billions of dollars worth of losses like the Libor rate-fixing scandal, the “Libor Bubble” will gut the global economy by trillions of dollars.

Here the the 1 month LIBOR rate compared to The Fed Fund target rate.

libor1mthfedOther than brief episode in September 2008, The Fed seems to be driving 1 month LIBOR.


To quote Robert DeNiro from Taxi Driver, “Are you looking at me?”

U.S. Federal Reserve Chair Yellen testifies before a House Financial Services Committee hearing on Capitol Hill in Washington



Fredo Mac? Freddie Mac Profit Slides on Derivative Losses (Book Of Business Declined)

Freddie Mac, one of the government mortgage giants, posted a Q4 profit (which goes to the US Treasury), but that profits is lower than a year earlier.


Freddie Mac had an earnings surprise of -89 percent. Surprise!


According to the Wall Street Journal, “Freddie Mac Profit Slides on Derivative Losses.”

Mortgage-finance company Freddie Mac will send the U.S. Treasury $90 million in March, after posting a fourth-quarter profit that declined steeply from a year earlier.

The company said that its fourth-quarter net income was $227 million, down from $8.6 billion in the same quarter of 2013. The profit was driven by interest income of $3.6 billion and derivatives losses of $3.4 billion.

Still, the three-month period ended Dec. 31 was the 13th consecutive quarter in which the firm showed a profit.

The derivatives losses were also not as serious an issue as they appeared. Freddie uses derivatives to hedge its portfolio’s exposure to rising interest rates. For accounting purposes, the company marks the derivatives to the market price, even as it carries many of its hedged investments at cost.

Because of that mismatch, when rates fall, as they did late last year, the derivatives can show a loss, even though the effect should even out over time.

Freddie, along with mortgage-finance firm Fannie Mae , was put into a conservatorship by the U.S. government in September 2008 after crisis-era losses.

Freddie received about $71.3 billion in support from the Treasury. After the expected March payment, Freddie will have paid back $91.8 billion.

Freddie doesn’t make loans, but buys them from lenders, wraps them into securities and guarantees to make investors whole if the loans default.

As policymakers continue to debate the future of the companies, Freddie and Fannie are slowly reaching what could be described as a normal operating environment. Although the companies’ profits had been partly driven by large post-crisis settlements with lenders on crisis-era mistakes, much of that is behind them.

“The ’Great Recession’ is passing through. We’ll have fewer giant swings in credit losses…There are a declining amount of special items,” said Freddie CEO Donald Layton . “We expect less and less of that kind of stuff to deal with.”

Likewise, as home prices have risen and borrowers’ credit quality has improved, Freddie has seen fewer defaults. Freddie said its single-family serious delinquency rate at the end of the year was 1.88%, its lowest since January 2009.

Lenders for the past few years have been loath to make loans to borrowers with anything less than pristine credit, in part because of the steep penalties that they faced from Fannie and Freddie after the financial crisis.

Late last year, the companies reached an agreement with lenders clarifying their liability for making loan mistakes in an effort to entice lenders to make loans to creditworthy borrowers with worse credit scores and lower down payments.

Mr. Layton said that on average, lenders have been moving to offer more loans to such borrowers, though some have been quicker or slower to lessen the requirements.

Richard “Dick” Bove is still recommending purchasing Freddie Mac stock, despite the downturn in earnings.

boverecAnd from Bloomberg, Freddie Mac’s total book of business decreased for the first time since August, declining 0.8% in January after rising at its fastest pace since December 2009 in the final month of 2014. Freddie’s retained portfolio diverged from December’s 19% gain, falling at a 3% rate in January as it bought fewer mortgage securities. Its guarantee business slowed 210 bps from December to a 1.2% growth rate. Single-family delinquency rates continued to be a strong point for Freddie, falling to 1.86% from 2.34% a year earlier.

Freddie Mac’s mortgage-related investment portfolio must fall to $399 billion by year-end, based on its agreement with the U.S. Treasury, though Freddie is reducing its portfolio faster than required. The decline may hurt earnings through lower net interest income and operating leverage. Freddie accelerated the sale of less liquid assets, such as mortgage loans, since 4Q12. If it continues to do so, the net interest yield may shrink because most loans have a higher yield than comparable securities.

Freddie Mac could post higher GAAP earnings if interest rates rise, raising the amount paid to the U.S. Treasury. Freddie uses derivatives to hedge against movements in interest rates. In general, changes in their fair value have been positive during periods of rising rates, and negative when rates have fallen. While such changes do not reflect economic returns because the fair value of the hedged assets and liabilities may not be adjusted, any gain in net income would boost payments to the Treasury.

So, there you have it. Freddie Mac remains profitable despite the tanking of mortgage purchase applications since 2007.

mbapsa022515As Fredo (the spiritual father of Freddie Mac) said in The Godfather,






Pikey Nation? Personal Spending Declined -0.2 Percent In January, Second Worst Decline Since 2009 As Gasoline Prices Rise

According to the US Government (which now regulates the internet for “the greater good”), personal spending declined more than expected in January by -0.2 percent. This read is tied for the second worst personal spending read since 2009.


Let’s see what happens in for February’s personal spending report since regular gasoline prices have been rising again.


The PCE Deflator rose by only 0.2 percent YoY, after rising 0.8 percent in December.

pcedef I though the 50 percent decline in oil and gasoline prices were supposed to have a stimulative effect on personal spending?

On top of declining personal spending, we have an UNaffordability crisis in housing at wage growth is still slow and home price growth is 2 times wage growth.


At this rate, middle class America will be living in Caravans like Brad Pitt and the Pikeys in the Guy Ritchie film “Snatch.”.


On a side note, several years ago I drove from Glasgow to play golf at Southerness Golf Club near Dumfries on the British border. While playing, I noticed a community of caravans next to the golf course. Not knowing what that implied, I asked my Scottish golfing partner. He said “Bloody Pikeys.”


Dream Lover: Stock Market Continues To Rise As Expected Global GDP Growth Continues To Tank

The S&P 500 stock market index keeps climbing regardless of whether economic information is good or bad. Why? Because Wall Street’s “Dream Lover” is the Chair of the Federal Reserve Board of Governors.

For example, the world GDP forecast keeps falling … and the S&P 500 stock market index keeps rising. Much like a psychotic Energizer Bunny.

gdpfprefedBut Janet is not the Dream Lover of middle class America where real median household income and mortgage purchase applications remain depressed after 2007.

househfed4The M1 Money Multiplier  reamains stalled and below 1 indicating the low interest rate loans are not circulating among the middle class.


Somewhere beyond the sea, Yellen’s comrades in Central Banks are pushing their rates into negative territory. And it is not helping their middle classes either!


And if Janet Yellen and the Central Banks remove the monetary stimulus, splish-splash, we’ll be taking a bath!


Once again, a tip of the hat to the brilliant Jesse’s Cafe Americain!

Bove: Mortgage Meltdown Brewing (Dick, You’re A Little Late To The Party!)

Dick  Bove appeared on CNBC and warned that a mortgage meltdown is brewing. He has a related interview as well.


The Treasury Department is looking to wind down Fannie Mae and Freddie Mac, but without these organizations, there would be few buyers for 30-year fixed rate mortgages, bank analyst Dick Bove told CNBC on Tuesday.

Banks would be happy to step in and offer variable rate five- and 10-year mortgages, but those shorter maturities would increase monthly payments for borrowers and lower the overall cost of housing—a situation that would send shock waves through the U.S. housing market, said Bove, vice president of equity research at Rafferty Capital.

“Is the United States ready to take a shock to housing prices because we’re getting rid of 30-year fixed rate mortgages?” he said during a “Squawk Box” interview.

Bove said banks have admitted to him privately that they cannot make money on 30-year fixed-rate home loans anymore due to new rules on capital reserves and securitizing mortgages.

Consequently, the industry wants to make loans that it can sell to Fannie Mae and Freddie Mac, he said. The two government-sponsored enterprises help increase the number of loans that can be made by buying mortgages from banks so they can reinvest in new loans.

However, the Treasury Department is aiming to phase out Fannie Mae and Freddie Mac by 2018.

“So the question becomes, ‘Who’s going to buy these mortgages?’ And if we’re talking about 30-year fixed rate mortgages, which are yielding less than 4 percent, who’s going to be crazy enough to buy [them] or put [them] on their balance sheet?” Bove asked.

Who is crazy enough to buy 30 year fixed-rate mortgages and/or put them on their balance sheets? The Federal government and their proxies Fannie Mae and Freddie Mac, of course!

But first of all, Dick, 2018 is a long way off and I wouldn’t announce the obituary for Fannie Mae and Freddie Mac quite yet.

Second, Michael Lea and I have been saying for a long time now that banks do not want to put 30 year mortgages on their books. Why? 30 year fixed-rate mortgages pose a number of risks to the lender/investor (interest rate risk, prepayment risk, default risk, underwriting risk, etc).  Banks would prefer to hold short-term adjustable rate (aka, variable-rate) mortgages that have shorter duration (less risk exposure).  Here is our Mercatus paper entitled “Do We Need The 30 Year Fixed-rate Mortgage?” In short, the US is the only country with an obsession with the 30 year fixed-rate mortgage. France, hardly the model of a healthy economy or banking system, is second with 67 percent of long-term fixed-rate mortgages.



Third, Dick, the mortgage purchase application market has already melted down.

mbapsa022515Fourth, big banks are not originating a heck of lot of mortgages even when they sell them to Fannie Mae and Freddie Mac.


Fifth, households continue to deleverage in terms of their mortgage debt. The US is back to 1981 levels when 30 year mortgage rates exceeded 18 percent. But today 30 year mortgage rates are south of 4 percent.

gr10morg The mortgage rates for jumbos (loan amount higher than the conforming loan limits at Fannie Mae and Freddie Mac) used to have a wider spread over conventional (non-jumbo) mortgages until 2013. Now the spread is smaller.

jumbotefaaaaIf we go back to 1998, the jumb0-conforming spread was low BEFORE the financial crisis and the government takeover of Fannie Mae and Freddie Mac. The spread has finally declined to pre-crisis levels of 31 basis points.

jumboconfltspeadEven at near historic low mortgage rates, the mortgage market for single-family residential housing is still in meltdown.

If I compare the 30 year fixed-rate with the 3/1 ARM rate (fixed for 3 years and adjusts every year after the initial 3 year period), the 3/1 ARM rate is HIGHER than that of the 30 year fixed. Typically, ARM rates are lower than fixed.


If I compare the rates on 5/1, 7/1 and 10/1 ARMs, we can see that the mortgage market is functionally dead for home purchases even at 3.48 percent on the 5/1 ARM.

armratesHow about the 15 year mortgage versus the 30 year mortgage? Even a 93 basis point rate differential, a 3 percent 15-year mortgage can’t jumpstart the residential mortgage market for the middle class.

fr3014So, Mr Bove, the residential mortgage market for the middle class has ALREADY melted down. As Billy Preston sang, “Nothing From Nothing Beats Nothing.”

Speaking of nothing from nothing, I wonder if Fed Chair Janet Yellen showed THIS chart to Congress?


Here is a tape of Fed Chair Janet Yellen lecturing Congress on how The Fed’s zero interest rate policies and QE have helped the middle class and the residential mortgage market.

Below is Senator Rand Paul with Fed Chair Janet Yellen.




The 10 most Useless Graduate Degrees (Management The MOST Worthless Followed By Marketing And Computer And Information Systems)

Business Insider has an interesting article, “The 10 most useless graduate degrees.”

Unfortunately, for business schools, three of the most useless graduate degrees are in the top ten. In fact, they ARE the top three most worthless degrees.

3. Computer and Information Systems

2. Marketing and Market Research

1. Human Resources and Personnel Development

This helps explain why the University of Chicago Booth School of Business has no management faculty (but has a few adjuncts teaching strategy, entrepreneurship, etc). The Ohio State University Fisher College of Business has 34 full-time faculty members in their Management and Human Resources department.  And 27 lecturers! That is a total of 61 management faculty and lecturers … for what Business Insider considers to be THE MOST WORTHLESS GRADUDATE DEGREE!!

Here is an example of a typical Management lecture.

Advice to students taking graduate degrees in business: Take finance and accounting courses. And take courses where up-to-date topics are studied.

But if you major in Management, Marketing or Computer and Information Systems, prepare to be be able to ask “Would you like steamed or fried rice with your General Tso’s Chicken?”




Chicago Business Barometer Collapses To Lowest Level Since 2009 But Germany’s Bundstag Backs Greek Bailout Extention

The Chicago Business Barometer has collapsed below 50 to its lowest point since 2009.


And I thought that the German Bundestag backing the Greek bailout extension would be cause for celebration!

Or are we just watching the net installment of the horror series “Saw”?

sawtriciclodeformado (1)

Another tip of the hat to Jesse’s Cafe Americain!

Speaking of SAW and Jigsaw, here is a clip of Merkel talking to Greek leaders.