One of the US's top fraud investigators is warning that America's policing of money laundering is wide open to abuse.
Eric Lewis will tell a Congressional hearing on terrorist financing that billions of dollars are slipping through the US banking system.
In a testimony ahead of the hearing on Tuesday he says that only international action can stop the laundering.
The US Committee on Financial Services is taking evidence on "trends in terrorism financing".
Mr Lewis will tell the hearing the "powerful tools" to stop the laundering of drug and terrorist money "are not being used as vigorously and consistently as they could be".
Mr Lewis was legal counsel to the liquidators of the collapsed Bank of Credit and Commerce and is an adviser to liquidators running down the companies of fraudster Bernard Madoff.
Continue reading the main story
“Start Quote
Only the US possesses the resources and tools to protect the global financial system”
End Quote Eric Lewis US lawyer
He also represents the al-Gosaibi family of Saudi Arabia, which has been involved in a long-running dispute with the billionaire head of another Saudi family, Maan al-Sanea.
The Gosaibi family have alleged that Mr Sanea siphoned off billions of pounds through the US banking system in a complex fraud. Mr Sanea categorically disputes the claim.
As an example, Mr Lewis says in his testimony that the Gosaibi case raises "fundamental concerns about the safeguards that have been put in place to prevent our banking institutions from becoming instruments of terrorist financing or fraud or other financial crimes".
Mr Lewis said the alleged fraud appeared to involve the transfer of funds "on a dizzying scale", "yet there appear to have been no questions asked", he claimed in his testimony.
Inadequate fines
He criticised Wall Street' s due diligence, saying that this "first line of defence" often failed because banks are "heavily incentivised to look the other way" when a large slice of business comes their way.
Fines imposed on banks are often too small to make an impact.
Mr Lewis said: "The bottom line is that fines are still viewed by banks as unlikely to occur, and if they do occur, they are a cost of doing business, and, until that changes, banks will not be good policemen."
He said that the global nature of fraud, in which transactions pass through many jurisdictions, meant that closer international cooperation was needed to help combat it.
However, Mr Lewis believes that only the US "possesses the resources and tools to protect the global financial system".
"If the US does not take on this responsibility, it will both undermine its own security and fail to do its part for global security interests," he said.
'Vulnerable'
Another expert witness at the hearing, Victor Comras, also felt that the US must give greater focus to banks and financial institutions abroad.
Mr Comras, special counsel at the Eren Law firm and former diplomat, said that the US had made great strides in cracking down on money laundering in America.
But he said in his pre-hearing testimony: "US banks are intricately networked into an international banking system and… remain awkwardly vulnerable to getting caught up in handling terrorist group-related transactions that originate overseas."
The problem was, US banks rely heavily on the accuracy of transactional information given to them by foreign banks. But very often US banks have to take that information on trust, he said.
"It is essential that we broaden the focus of our attention, when it comes to inhibiting the financing of terrorism, to include financial institutions beyond out shores," Mr Comras said.
BBC
Wednesday, September 29, 2010
Thursday, September 23, 2010
Superior Gold Group - US is still in recession, says Warren Buffett
Billionaire investor Warren Buffett said US economy remains in recession , disputing this week's assessment by a leading arbiter of economic activity that downturn ended more than a year ago. "We're still in recession," Buffett said on Thursday. "We're not going to be out of it for a while, but we will get out."
On Monday, the National Bureau of Economic Research said the world's largest economy ended an 18-month recession in June 2009, but cautioned that its assessment did not mean normal activity had resumed . Buffett said he defines a recession differently from the NBER, saying it ends when real per capita GDP returns to its pre-downturn level.
President Barack Obama said that economic weakness is "still very real" for the millions of Americans who are out of work, have seen the value of their homes fall, or are mired in debt. Buffett, 80, runs Berkshire Hathaway Inc which has roughly 80 operating businesses . "A great majority" of these businesses are "coming back slowly," he said.
Berkshire's operations cover a broad swath of the economy, including the Burlington Northern Santa Fe railroad, Dairy Queen ice cream, Geico auto insurance , and luxury jewelers such as Borsheim's . Shipments at Burlington Northern are "61% of the way back," Buffett said. "Our carpet business, our brick business, our insulation business, they're not back 61%, they are moving back."
On Tuesday, the US Federal Reserve, which has already driven short-term lending rates to near zero, said it is prepared to provide additional stimulus to avert possible deflation. "We've used up a lot of bullets," Buffett said. "And we talk about stimulus. But the truth is, we're running a federal deficit that's 9% of GDP. That is stimulative as all get out." Buffett's $45 billion net worth makes him the second-richest American, trailing only Microsoft Corp cofounder Bill Gates.
Reuters
On Monday, the National Bureau of Economic Research said the world's largest economy ended an 18-month recession in June 2009, but cautioned that its assessment did not mean normal activity had resumed . Buffett said he defines a recession differently from the NBER, saying it ends when real per capita GDP returns to its pre-downturn level.
President Barack Obama said that economic weakness is "still very real" for the millions of Americans who are out of work, have seen the value of their homes fall, or are mired in debt. Buffett, 80, runs Berkshire Hathaway Inc which has roughly 80 operating businesses . "A great majority" of these businesses are "coming back slowly," he said.
Berkshire's operations cover a broad swath of the economy, including the Burlington Northern Santa Fe railroad, Dairy Queen ice cream, Geico auto insurance , and luxury jewelers such as Borsheim's . Shipments at Burlington Northern are "61% of the way back," Buffett said. "Our carpet business, our brick business, our insulation business, they're not back 61%, they are moving back."
On Tuesday, the US Federal Reserve, which has already driven short-term lending rates to near zero, said it is prepared to provide additional stimulus to avert possible deflation. "We've used up a lot of bullets," Buffett said. "And we talk about stimulus. But the truth is, we're running a federal deficit that's 9% of GDP. That is stimulative as all get out." Buffett's $45 billion net worth makes him the second-richest American, trailing only Microsoft Corp cofounder Bill Gates.
Reuters
Monday, September 6, 2010
Gold101.com - US investors seek pay for pre-WWII German bonds
More than 80 years ago, Germany sold tens of thousands of bonds to American investors in an effort to recover financially from World War I. Later, Adolf Hitler used some of the money raised by those bonds to build the powerful Nazi war machine that would ravage Europe during World War II.
Now, half a dozen US bondholders are turning to federal courts in an effort to force Germany to make good on its promise to repay the debts, which today could be worth hundreds of millions, if not billions, of dollars. Action has been heating up in lawsuits filed in Miami, New York and Chicago, including a victory for investors last month when an appeals court rejected Germany's attempt to dismiss their case.
If the bondholders ultimately win, their lawyers could ask judges to seize German assets in the U.S. to repay them, a tactic that has worked in other legal disputes over money owed by foreign governments.
But if Germany prevails, the bondholders argue, it could undermine the global system through which governments raise money by issuing bonds.
``Our position is not only correct under the law, it would avoid such a potentially far-reaching precedent,'' said investor attorney Sam Dubbin of Coral Gables, Florida, who has frequently represented Holocaust survivors in Nazi-related claims.
Enrico Brandt, a spokesman for the German Embassy in Washington, said the lawsuits are baseless. Brandt said the only way bondholders can redeem the securities is to go through a validation process mandated by a 1953 international treaty and later enshrined in German law.
`` Consequently, the efforts of the plaintiffs to outmaneuver the validation procedure by suing in the United States will fail,'' Brandt said in an e-mail. ``Any bond passing the validation procedure successfully will be honored.''
Even with the questions of the bonds' validity, a robust market has developed with people around the globe buying and selling them in hopes they one day can be redeemed.
Bondholders claim in their lawsuits Germany has erected a nightmarish maze of bureaucratic red tape around the validation process. One key issue for many bonds is a purported Soviet Red Army plunder of thousands of bonds in 1945 from a Nazi vault as the war ended. Germany said those bonds had already been redeemed to the government, but were still improperly resold around the world. Any from that batch would therefore be invalid, the government argues.
Court documents indicate that Germany has repeatedly cited a ``list of stolen bonds'' in denying payment, but attorneys for bondholders say Germany won't share its list or allow it to face public and legal scrutiny. The validation law also requires the difficult task of proving the bond wasn't physically present in Germany on Jan. 1, 1945, not long before Germany surrendered.
``There are so many problems with the validation process that there is no real validation process,'' said Tampa attorney James Lowy, who represents a group of investors separate from those Dubbin works for.
Dubbin said documents from a German archive show most of the looted bonds were returned by the Soviets, a conclusion echoed by historians hired by lawyers in the New York case.
Germany also has claimed it is not subject to U.S. court rulings regarding its bonds, a stance rejected by federal appeals courts in Atlanta and New York. The New York court, however, dismissed one bondholder lawsuit on grounds that they did not first seek repayment through the German validation process. The bonds in that case are valued at more than $400 million.
If Germany ultimately loses in American courts and still refuses to pay the bondholders, their U.S. attorneys could ask judges to seize German assets in this country or ask German courts to enforce the judgment. Lawyers in a separate case previously seized millions of dollars in Cuban assets frozen in the U.S. to pay lawsuit damages.
Richard Buxbaum, an international law professor at the University of California at Berkeley, said the U.S. government set up a fund for investors by seizing Chinese assets in a case involving unpaid bonds from pre-communist China. In the German bonds case, he said, the key for a U.S. judge will be to decide if Germany's system of authenticating the securities passes U.S. constitutional muster.
``You have to show some proof of ownership,'' Buxbaum said. ``My guess is that the American courts would apply the German law.''
Germany tried to win dismissal of the lawsuit filed by Dubbin's clients, World Holdings LLC, on grounds that the matter didn't belong in U.S. courts. But a federal judge in Miami rejected that and her decision was upheld Aug. 9 by the 11th U.S. Circuit Court of Appeals, which took pains to point out the issue remains unsettled. Germany could still appeal the decision.
None of the bondholders suing in U.S. courts would agree to comment for this story.
The U.S. court battles are only the latest intrigue to surround the bonds, first issued by Weimar Republic in the 1920s as Germany struggled to recover from World War I, which had ended in 1918.
The bonds were sold in the U.S. from 1924 to 1930 to help Germany invest in new projects and industries and pay war reparations. One series, known as the Dawes Bonds, raised $110 million in 1920s dollars _ the equivalent of about $1.2 billion today; another series called the Young Bonds generated more than $98 million _ about a billion today.
Investors were told the German bonds were guaranteed safe. Even President Calvin Coolidge urged Americans to snap them up.
But things changed after 1933, when Hitler and the Nazis rose to power. Hitler defaulted on the bonds and ordered that none be repaid, causing them to plummet in value worldwide. Then, Germany began quietly buying them up for pennies on the dollar before World War II began in 1939, stashing thousands in bank vaults and reselling others.
The upshot was that Germany got to keep all the money raised through the bond sales, leaving investors in the cold. And Hitler was able to use a chunk of the money ``to rebuild Germany's war machine,'' according to Dubbin's lawsuit.
Dubbin and Lowy argue the issue remains relevant today. ``It's a question of accountability,'' Lowy said. ``They are saying, 'We will build things with your money but we're not going to pay you.' You think these bonds are safe. They're not.''
Now, half a dozen US bondholders are turning to federal courts in an effort to force Germany to make good on its promise to repay the debts, which today could be worth hundreds of millions, if not billions, of dollars. Action has been heating up in lawsuits filed in Miami, New York and Chicago, including a victory for investors last month when an appeals court rejected Germany's attempt to dismiss their case.
If the bondholders ultimately win, their lawyers could ask judges to seize German assets in the U.S. to repay them, a tactic that has worked in other legal disputes over money owed by foreign governments.
But if Germany prevails, the bondholders argue, it could undermine the global system through which governments raise money by issuing bonds.
``Our position is not only correct under the law, it would avoid such a potentially far-reaching precedent,'' said investor attorney Sam Dubbin of Coral Gables, Florida, who has frequently represented Holocaust survivors in Nazi-related claims.
Enrico Brandt, a spokesman for the German Embassy in Washington, said the lawsuits are baseless. Brandt said the only way bondholders can redeem the securities is to go through a validation process mandated by a 1953 international treaty and later enshrined in German law.
`` Consequently, the efforts of the plaintiffs to outmaneuver the validation procedure by suing in the United States will fail,'' Brandt said in an e-mail. ``Any bond passing the validation procedure successfully will be honored.''
Even with the questions of the bonds' validity, a robust market has developed with people around the globe buying and selling them in hopes they one day can be redeemed.
Bondholders claim in their lawsuits Germany has erected a nightmarish maze of bureaucratic red tape around the validation process. One key issue for many bonds is a purported Soviet Red Army plunder of thousands of bonds in 1945 from a Nazi vault as the war ended. Germany said those bonds had already been redeemed to the government, but were still improperly resold around the world. Any from that batch would therefore be invalid, the government argues.
Court documents indicate that Germany has repeatedly cited a ``list of stolen bonds'' in denying payment, but attorneys for bondholders say Germany won't share its list or allow it to face public and legal scrutiny. The validation law also requires the difficult task of proving the bond wasn't physically present in Germany on Jan. 1, 1945, not long before Germany surrendered.
``There are so many problems with the validation process that there is no real validation process,'' said Tampa attorney James Lowy, who represents a group of investors separate from those Dubbin works for.
Dubbin said documents from a German archive show most of the looted bonds were returned by the Soviets, a conclusion echoed by historians hired by lawyers in the New York case.
Germany also has claimed it is not subject to U.S. court rulings regarding its bonds, a stance rejected by federal appeals courts in Atlanta and New York. The New York court, however, dismissed one bondholder lawsuit on grounds that they did not first seek repayment through the German validation process. The bonds in that case are valued at more than $400 million.
If Germany ultimately loses in American courts and still refuses to pay the bondholders, their U.S. attorneys could ask judges to seize German assets in this country or ask German courts to enforce the judgment. Lawyers in a separate case previously seized millions of dollars in Cuban assets frozen in the U.S. to pay lawsuit damages.
Richard Buxbaum, an international law professor at the University of California at Berkeley, said the U.S. government set up a fund for investors by seizing Chinese assets in a case involving unpaid bonds from pre-communist China. In the German bonds case, he said, the key for a U.S. judge will be to decide if Germany's system of authenticating the securities passes U.S. constitutional muster.
``You have to show some proof of ownership,'' Buxbaum said. ``My guess is that the American courts would apply the German law.''
Germany tried to win dismissal of the lawsuit filed by Dubbin's clients, World Holdings LLC, on grounds that the matter didn't belong in U.S. courts. But a federal judge in Miami rejected that and her decision was upheld Aug. 9 by the 11th U.S. Circuit Court of Appeals, which took pains to point out the issue remains unsettled. Germany could still appeal the decision.
None of the bondholders suing in U.S. courts would agree to comment for this story.
The U.S. court battles are only the latest intrigue to surround the bonds, first issued by Weimar Republic in the 1920s as Germany struggled to recover from World War I, which had ended in 1918.
The bonds were sold in the U.S. from 1924 to 1930 to help Germany invest in new projects and industries and pay war reparations. One series, known as the Dawes Bonds, raised $110 million in 1920s dollars _ the equivalent of about $1.2 billion today; another series called the Young Bonds generated more than $98 million _ about a billion today.
Investors were told the German bonds were guaranteed safe. Even President Calvin Coolidge urged Americans to snap them up.
But things changed after 1933, when Hitler and the Nazis rose to power. Hitler defaulted on the bonds and ordered that none be repaid, causing them to plummet in value worldwide. Then, Germany began quietly buying them up for pennies on the dollar before World War II began in 1939, stashing thousands in bank vaults and reselling others.
The upshot was that Germany got to keep all the money raised through the bond sales, leaving investors in the cold. And Hitler was able to use a chunk of the money ``to rebuild Germany's war machine,'' according to Dubbin's lawsuit.
Dubbin and Lowy argue the issue remains relevant today. ``It's a question of accountability,'' Lowy said. ``They are saying, 'We will build things with your money but we're not going to pay you.' You think these bonds are safe. They're not.''
Wednesday, September 1, 2010
Superior Gold Group - Wall Street closes with strong gains
Wall Street stocks soared on Wednesday after strong manufacturing data in the United States and China eased deep-running concerns over the state of the global economic recovery.
The Dow Jones Industrial Average jumped 254.75 points (2.54 percent) to 10,269.47 in closing trades, while the broader S&P 500 index gained 30.96 points (2.95 percent) to 1,080.29 points.
The tech-rich Nasdaq composite index rose 62.81 points (2.97 percent) to 2,176.84.
The Dow Jones Industrial Average jumped 254.75 points (2.54 percent) to 10,269.47 in closing trades, while the broader S&P 500 index gained 30.96 points (2.95 percent) to 1,080.29 points.
The tech-rich Nasdaq composite index rose 62.81 points (2.97 percent) to 2,176.84.
Monday, August 30, 2010
Superior Gold Group - Japan tries to boost growth
Japan's central bank eased monetary policy at an emergency meeting on Monday, seeking to contain a strong yen and mollify growing political pressure to revive a faltering economy.
The move, which disappointed investors and analysts hoping for bolder action, comes as Prime Minister Naoto Kan prepares a new set of economic stimulus measures.
To boost liquidity, the central bank unveiled a new six-month low-interest loan programme to financial institutions.
Combined with an existing three-month funds-supplying operation worth 20 trillion yen ($236.4 billion), banks will now have access to a total of 30 trillion yen ($355 billion).
AP
The move, which disappointed investors and analysts hoping for bolder action, comes as Prime Minister Naoto Kan prepares a new set of economic stimulus measures.
To boost liquidity, the central bank unveiled a new six-month low-interest loan programme to financial institutions.
Combined with an existing three-month funds-supplying operation worth 20 trillion yen ($236.4 billion), banks will now have access to a total of 30 trillion yen ($355 billion).
AP
Friday, August 27, 2010
Superior Gold Group - Boeing further delays delivery of first Dreamliner
Aerospace giant Boeing said on Friday it would further delay the delivery of its first 787 Dreamliner aircraft until early next year, in another set-back for the troubled jet programme.
Boeing said it now expects to deliver the first Dreamliner in the middle of the first quarter of 2011 as it continues to carry out tests on the beleaguered plane, which is already more than two years behind schedule.
Confirmation that Boeing will not be able to hand over the first aircraft to Japan's All Nippon Airways (ANA) this year came in a statement released in the US and Japan, after it warned in July it may have to delay.
The Chicago-based plane maker said the latest setback follows problems with the Rolls-Royce engines that will power the plane as it continues to test the aircraft.
"While Boeing works closely with Rolls-Royce to expedite engine availability, flight testing across the test fleet continues as planned," it said.
Boeing added that the scheduled revision will not affect the company's financial guidance.
Rolls-Royce said on Friday it was working closely with Boeing to rush through delivery of the engines.
The aviation giant is hanging its future on the mid-sized plane -- its first new model in more than a decade -- which draws on huge advances in aviation technology and can fly long-haul routes using up to 20 percent less fuel.
Boeing launched the Dreamliner programme in April 2004 and initially had planned to deliver the first plane to ANA in the first half of 2008.
But the aircraft, which can seat up to 330 passengers, only made its maiden flight in December last year.
The series of delays in the 787 programme has cost Boeing billions of dollars as airlines such as Russia's S7 and Australia's Qantas last year cancelled their orders.
Earlier this month flagship carrier Air India said it wanted compensation from Boeing for delays in the delivery of Dreamliner planes, with media reports saying the airline is demanding one billion dollars.
In July, Boeing warned that a series of issues, including problems with the "horizontal stabiliser" and instrumentation delays, could push the first delivery back into next year.
Boeing said it had detected a "workmanship issue" with the horizontal stabiliser, a component in the rear of the aircraft that is designed to stabilise it in flight. It is made by Italy's Alenia.
The Dreamliner's fuel efficiency is largely down to the fact that up to half the twin-aisle aircraft is made of lightweight composite materials, such as carbon fibre-reinforced resin, according to the company.
Japan's ANA has ordered a total of 55 Dreamliners as it looks to gradually replace its fleet of kerosene-hungry vehicles with more economically and environmentally friendly models.
"It is unfortunate since it is a very good aircraft and testing was going smoothly," an ANA statement said in reaction to the latest delay.
"We hope that (Boeing) will further improve the airframe and make the delivery as soon as possible," it said.
Meanwhile Boeing's fierce European rival Airbus is working on a new long-haul plane of its own -- the A350 XWB (Extra Wide Body). Another big project for Airbus is its long-delayed A400M military transport plane.
<!--9488d06bcb844dfdaae0efd03bde6f11-->
Boeing said it now expects to deliver the first Dreamliner in the middle of the first quarter of 2011 as it continues to carry out tests on the beleaguered plane, which is already more than two years behind schedule.
Confirmation that Boeing will not be able to hand over the first aircraft to Japan's All Nippon Airways (ANA) this year came in a statement released in the US and Japan, after it warned in July it may have to delay.
The Chicago-based plane maker said the latest setback follows problems with the Rolls-Royce engines that will power the plane as it continues to test the aircraft.
"While Boeing works closely with Rolls-Royce to expedite engine availability, flight testing across the test fleet continues as planned," it said.
Boeing added that the scheduled revision will not affect the company's financial guidance.
Rolls-Royce said on Friday it was working closely with Boeing to rush through delivery of the engines.
The aviation giant is hanging its future on the mid-sized plane -- its first new model in more than a decade -- which draws on huge advances in aviation technology and can fly long-haul routes using up to 20 percent less fuel.
Boeing launched the Dreamliner programme in April 2004 and initially had planned to deliver the first plane to ANA in the first half of 2008.
But the aircraft, which can seat up to 330 passengers, only made its maiden flight in December last year.
The series of delays in the 787 programme has cost Boeing billions of dollars as airlines such as Russia's S7 and Australia's Qantas last year cancelled their orders.
Earlier this month flagship carrier Air India said it wanted compensation from Boeing for delays in the delivery of Dreamliner planes, with media reports saying the airline is demanding one billion dollars.
In July, Boeing warned that a series of issues, including problems with the "horizontal stabiliser" and instrumentation delays, could push the first delivery back into next year.
Boeing said it had detected a "workmanship issue" with the horizontal stabiliser, a component in the rear of the aircraft that is designed to stabilise it in flight. It is made by Italy's Alenia.
The Dreamliner's fuel efficiency is largely down to the fact that up to half the twin-aisle aircraft is made of lightweight composite materials, such as carbon fibre-reinforced resin, according to the company.
Japan's ANA has ordered a total of 55 Dreamliners as it looks to gradually replace its fleet of kerosene-hungry vehicles with more economically and environmentally friendly models.
"It is unfortunate since it is a very good aircraft and testing was going smoothly," an ANA statement said in reaction to the latest delay.
"We hope that (Boeing) will further improve the airframe and make the delivery as soon as possible," it said.
Meanwhile Boeing's fierce European rival Airbus is working on a new long-haul plane of its own -- the A350 XWB (Extra Wide Body). Another big project for Airbus is its long-delayed A400M military transport plane.
<!--9488d06bcb844dfdaae0efd03bde6f11-->
Tuesday, August 24, 2010
Superior Gold Group - New Fees Weighed for Mortgage Industry
The Obama administration may propose that any federal backing of mortgages be paid for through fees on the lending industry, according to people familiar with the internal discussions.
While the administration hasn't settled on a plan to revamp failed mortgage giants Fannie Mae and Freddie Mac, which are now under federal supervision, a consensus appears to be emerging that some type of government guarantee will be needed to keep the ailing mortgage market functioning.
Some conservatives don't believe the government should offer any type of guarantee, while others advocate limited, but explicit, backing. About nine in 10 new loans are currently backed by Fannie, Freddie or government agencies.
Policy makers face challenges determining what types of loans or mortgage-backed securities should be guaranteed and how the industry should be charged for government backing. Government officials want the cost of any explicit guarantee fully offset by the mortgage industry to avoid adding to the federal budget deficit.
But Washington must walk a fine line between pricing a guarantee high enough so it accurately reflects risk, while not charging so much that borrowing costs soar.
At a housing-finance conference last week, Treasury Secretary Timothy Geithner cited a "strong case" for a continued federal guarantee but said "the challenge is to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimize taxpayer exposure."
Officials want to avoid a repeat of what happened to Fannie and Freddie, which had to be bailed out and taken over by the government in 2008 after losses destabilized the firms. Mr. Geithner and others have said the firms wrongly guaranteed increasingly risky mortgages without charging enough to cover the risk.
Others warn the government has a poor track record when deciding how to price guarantees. While guarantees provided by the Federal Housing Administration, which insures mortgages, have traditionally turned a profit for the U.S., in recent months that agency has depleted its reserves and risks running out of money.
"It's very hard to know what the right fee is," said Alex Pollock, resident fellow at the conservative American Enterprise Institute think-tank, who supports moving to a fully private mortgage market. "The argument will always be from homebuilders, realtors, affordable housing groups, consumer groups and members of Congress that you're charging too much and making it too expensive for borrowers."
The National Association of Realtors, for example, is asking the Treasury to reduce interest payments Fannie and Freddie must currently make to the government, arguing that easing the firms' expenses could produce more flexible lending standards. In a letter to Mr. Geithner this month, the organization said the Treasury should retroactively lower the 10% dividend the firms must pay on the $148 billion in taxpayer aid they have used.
The industry appears prepared to pay some type of premium to get the government's backing. Under proposals floated by two trade groups, the Financial Services Roundtable and the Mortgage Bankers Association, new private-sector entities created to securitize and insure mortgages would pay a fee into a government-insurance fund.
Researchers at the New York Federal Reserve Bank, writing on their own behalf, have proposed creating lender-owned cooperatives that would replace Fannie and Freddie. Private lenders would pay into a "mutualized loss pool" to provide guarantees for mortgage-backed securities, and members would also pay a reinsurance fee to the government for a separate fund to backstop additional losses.
Some investors and academics say a government backstop is needed if the U.S. wants to facilitate securitization markets, where investors buy bonds backed by pools of mortgages. While mortgages were once funded primarily through the banking system, securitization fueled the growth of the nation's $10 trillion mortgage market over the past 30 years, dwarfing the capacity of the nation's banking system to fund loans.
"To suggest the private market can come back in and take the place [of the government] is simply impractical. It won't work," said Pacific Investment Management's Bill Gross at last week's summit.
source: WSJ
While the administration hasn't settled on a plan to revamp failed mortgage giants Fannie Mae and Freddie Mac, which are now under federal supervision, a consensus appears to be emerging that some type of government guarantee will be needed to keep the ailing mortgage market functioning.
Some conservatives don't believe the government should offer any type of guarantee, while others advocate limited, but explicit, backing. About nine in 10 new loans are currently backed by Fannie, Freddie or government agencies.
Policy makers face challenges determining what types of loans or mortgage-backed securities should be guaranteed and how the industry should be charged for government backing. Government officials want the cost of any explicit guarantee fully offset by the mortgage industry to avoid adding to the federal budget deficit.
But Washington must walk a fine line between pricing a guarantee high enough so it accurately reflects risk, while not charging so much that borrowing costs soar.
At a housing-finance conference last week, Treasury Secretary Timothy Geithner cited a "strong case" for a continued federal guarantee but said "the challenge is to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimize taxpayer exposure."
Officials want to avoid a repeat of what happened to Fannie and Freddie, which had to be bailed out and taken over by the government in 2008 after losses destabilized the firms. Mr. Geithner and others have said the firms wrongly guaranteed increasingly risky mortgages without charging enough to cover the risk.
Others warn the government has a poor track record when deciding how to price guarantees. While guarantees provided by the Federal Housing Administration, which insures mortgages, have traditionally turned a profit for the U.S., in recent months that agency has depleted its reserves and risks running out of money.
"It's very hard to know what the right fee is," said Alex Pollock, resident fellow at the conservative American Enterprise Institute think-tank, who supports moving to a fully private mortgage market. "The argument will always be from homebuilders, realtors, affordable housing groups, consumer groups and members of Congress that you're charging too much and making it too expensive for borrowers."
The National Association of Realtors, for example, is asking the Treasury to reduce interest payments Fannie and Freddie must currently make to the government, arguing that easing the firms' expenses could produce more flexible lending standards. In a letter to Mr. Geithner this month, the organization said the Treasury should retroactively lower the 10% dividend the firms must pay on the $148 billion in taxpayer aid they have used.
The industry appears prepared to pay some type of premium to get the government's backing. Under proposals floated by two trade groups, the Financial Services Roundtable and the Mortgage Bankers Association, new private-sector entities created to securitize and insure mortgages would pay a fee into a government-insurance fund.
Researchers at the New York Federal Reserve Bank, writing on their own behalf, have proposed creating lender-owned cooperatives that would replace Fannie and Freddie. Private lenders would pay into a "mutualized loss pool" to provide guarantees for mortgage-backed securities, and members would also pay a reinsurance fee to the government for a separate fund to backstop additional losses.
Some investors and academics say a government backstop is needed if the U.S. wants to facilitate securitization markets, where investors buy bonds backed by pools of mortgages. While mortgages were once funded primarily through the banking system, securitization fueled the growth of the nation's $10 trillion mortgage market over the past 30 years, dwarfing the capacity of the nation's banking system to fund loans.
"To suggest the private market can come back in and take the place [of the government] is simply impractical. It won't work," said Pacific Investment Management's Bill Gross at last week's summit.
source: WSJ
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