KeNo's Housing and Economic Portal: Sunday April 17 Housing and Economic stories

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Fed's Rules Let Brokers Turn Junk Into Cash at Height of Financial Crisis - (www.bloomberg.com) At the height of the financial crisis, the Federal Reserve allowed the world’s largest banks to turn more than $118 billion in junk bonds, defaulted debt, securities of unknown ratings and stocks into cash. Collateral of those asset types made up 72 percent of the total $164.3 billion in market-rate securities pledged to the Fed on Sept. 29, 2008, two weeks after the bankruptcy of Lehman Brothers Holdings Inc., according to documents released yesterday. The collateral backed $155.7 billion in loans on the largest day of borrowing from the Primary Dealer Credit Facility, which was created in March 2008 to provide loans to brokers as Bear Stearns Cos. collapsed. “The fact that the Fed was willing to accept that collateral was indicative that collateral was very hard to come by at the time,” said Craig Pirrong, a finance professor at the University of Houston. It also highlights “the seriousness with which the Fed viewed the situation,” he said.

Documents shed light on Fed lending practices - (www.washingtonpost.com) The Federal Reserve lent vast sums of money to a long list of banks during the financial crisis, according to newly released documents, supporting institutions gigantic and minuscule, and those based throughout United States and from many corners of the globe. The New York office of Bahrain-based Arab Banking Corp. borrowed $1.1 billion from the Fed’s emergency lending program for banks during October 2008, according to the documents. That bank is currently 59 percent owned by the Libyan Investment Authority, which invests money for the government of the Middle Eastern state now enmeshed in conflict. (At the time, Libya was making slow progress at mending its relationship with the United States and other Western governments.) “It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans,” said Sen. Bernard Sanders (I-Vt.) in a statement Thursday, the Fed was extending credit “to a bank that is substantially owned by the Central Bank of Libya.” The Treasury Department excluded Arab Banking from recent sanctions against Libya, as it is headquartered in Bahrain and governed by that nation’s laws, and was complying with sanctions against the Libyan government.

Report Criticizes High Pay at Fannie and Freddie - (www.nytimes.com) Regulators have approved generous executive compensation atFannie Mae and Freddie Mac, the taxpayer-backed mortgage finance giants, with little scrutiny or analysis, according to a report published Thursday by the inspector general of the Federal Housing Finance Agency. The companies, whose fates are to be decided by Congress this year, paid a combined $17 million to their chief executives in 2009 and 2010, the two full years when Fannie Mae and Freddie Mac were wards of the state, the report found. The top six executives at the companies received $35.4 million over the two years. Since Fannie Mae and Freddie Mac were taken over in September 2008, the companies’ mounting mortgage losses have required a $153 billion infusion from taxpayers. Total losses may reach $363 billion through 2013, according to government estimates. Charles E. Haldeman Jr., a former head of Putnam Investments, the giant fund management concern, joined Freddie Mac as its chief executive in 2009. He made $7.8 million for 2009 and 2010. Fannie Mae’s chief is Michael J. Williams, who has worked at the company since 1991. He received $9.3 million for the two years. Company officials declined to comment.

New York markets cancel ETF trades - (www.ft.com) Nasdaq OMX and NYSE cancelled trades in 10 exchange-traded funds after their prices plummeted in early trading on Thursday, raising questions about measures implemented to safeguard investors against sharp market swings after last year’s “flash crash”. The exchanges cancelled certain trades that occurred in 10 of 15 Focus Morningstar ETFs that launched on Wednesday, said a spokesperson for Scottrade Financial Services, the ETFs’ sponsor. The trades occurred early in the session when prices dropped by as much as 98 per cent after a human processing error at Knight Capital Americas, a market maker for the ETFs. The net asset values of the ETFs and the value of the underlying securities and shareholders were not affected, Scottrade said. On its website, Nasdaq said it cancelled trades in FocusShares ETFs that were executed between 9:54am and 9:56am that were more than 10 per cent away from the day’s trade before the erroneous order or the previous close if no trades occurred prior.

Warning raises heat on Portugal - (www.ft.com) The eurozone’s peripheral economies face further downgrades because of growing risks of defaults and rising funding costs, Moody’s warned on Thursday. It highlights increasing dangers for the peripheral economies of Portugal, Greece and Ireland after last week’s EU agreement intensified fears one or more of these countries will default. Portuguese bond yields came under most pressure on Thursday, hitting fresh euro-era highs, after Standard & Poor’s, another rating agency, downgraded four of Lisbon’s leading banks. That followed its cut of the country’s credit rating to triple B minus, one notch above junk, earlier in the week. The banks, Banco Espirito Santo, Caixa Geral de Depositos, Banco BPI and Banco Santander Totta were also cut to triple B minus. Portuguese five-year bond yields spiked nearly half a percentage point to 9.53 per cent, Irish five-year yields jumped a quarter of a percentage point to 10.98 per cent and Greek yields rose to 14.37 per cent.