NYU Stern: February 2011 Archives

The Administration is counting on the private sector to fill the gap in home lending if it trims the roles of Fannie Mae and Freddie Mac

by Lorraine Woellert and Jody Shenn

Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan on Feb. 11 offered three options for shrinking Fannie Mae (FNMA) and Freddie Mac (FMCC), the bailed-out housing finance companies that own or guarantee more than half the nation's mortgage debt. By gradually reducing the dominant positions of Fannie and Freddie, the officials hope to coax private financial firms and bond traders to take on more of the U.S. mortgage market's risk and revive the secondary market for home loans. One government misstep, and a shortage of home loan money could send loan costs soaring and home prices tumbling. "We want to be careful that the process happens in a way that doesn't interfere with or impede the process of repair in the housing market," Geithner said.

Read the full article on Businessweek.com

How Close is America to Fiscal Crisis?

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Gradual steps should be taken to avert an abrupt crisis

by Viral Acharya

IT IS clear that America cannot just "count on" growth going forward. While growth-enhancing strategies may work, and corporations may invest more as jobs and demand pick up, creating a virtual cycle, the scale of efforts and mixed results over the past two years suggest that any counting on growth must also prudentially count on associated risks. The risk of a fiscal stimulus that does not deliver on growth is an added government debt burden. While there is perhaps no immediate fiscal crisis and the woes of European countries only strengthen the role of the dollar as international reserve currency, there are three issue to worry about:

Read the full article on Economist.com

Fannie and Freddie Face Eviction in America

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by Alexandra Frean, The Times

The Obama Administration took a wrecking ball to its dilapidated housing finance system yesterday by announcing plans to wind down Fannie Mae and Freddie Mac, the companies that own or guarantee more than 85 per cent of American mortgages.

The US Government seized control of Fannie and Freddie in 2008 as the two financing giants started stacking up heavy losses amid the collapse of the housing market. It has since poured in more than $130 billion (£80 billion) of taxpayer funds.

There has been widespread, bipartisan agreement that something must be done to extricate the State from ownership of the pair, known as government-sponsored enterprises (GSEs), and to gradually reduce its footprint in the mortgage market.

Should Banks Be Allowed to Pay Dividends?

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by Viral Acharya

In "Banks should be allowed to pay out dividends", published as Comment in FT on February 10, 2011, William Isaac, former chairman of FDIC and chairman of LECG Global Financial Services, makes the point that paying out dividends will enable banks to raise more capital in future, and easily so, which in turn would help promote growth. The author also agrees with the need to have greater capital in the system. Hence, it is somewhat difficult to understand the author's blanket assertion that banks should be allowed to pay out dividends. There are at least two difficulties with the author's position.

Risky Businesses

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by Craig Torres

Congress last year ordered U.S. bank regulators to figure out which financial companies are the riskiest and then turn the list over to the Federal Reserve so they can be supervised more closely. The Fed, the Treasury Dept., and nine other regulators on the Financial Stability Oversight Council this spring will reveal the criteria they plan to use to decide which financial companies to tag as systemically risky; the companies will be named later this year. Economists at New York University's Stern School of Business have derived their own list, based on a model that one of them, Nobel Prize winner Robert Engle, helped develop. The model starts with a financial firm's stock price as a proxy for its capital--the money it has to make loans, buy bonds, or absorb losses. They then subject each company to a stress test, in which the stock market declines 40 percent, to find how much capital a company would need to continue holding the same amount of loans and bonds. One downside to the model: It only works for publicly traded companies, so it won't help regulators decide whether most hedge funds should make the list.

Read the full article on BloombergBusinessweek.com

Fixing Europe's banks comes first

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by Roy C. Smith

The welcome oversubscribed debut of the eurozone bond helped to narrow spreads in the peripheral countries for a while, but the success of the issue cannot hide the fact that Europe has not yet devised a credible plan for restructuring its ailing sovereign borrowers.

And this it cannot do until it first addresses the huge contingent liability from the banking sector that continues to threaten these borrowers.

The undercapitalisation of banks represents a major overhanging claim on the eurozone countries. It is an unknown that must be clarified before the problems of excessive sovereign indebtedness can be dealt with convincingly. The banks have to be fixed first, then the sovereigns.

Read the full opinion editorial on eFinancialNews.com.

About RegulatingWallStreet.com

The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

About Restoring Financial Stability

Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

About the Authors