Geithner To Bailout FHA?
Submitted by Bruce Krasting on 11/15/2012 21:39 -0500
So two days ago the WSJ runs the story that the FHA is soon to be in default due to a shortfall in its reserve fund. Sure enough, it's now official:
The government's finances are creating a three-ring-circus of events. I'm thinking to myself, "Where's the tent?"
Just a quick thought on the timing of FHA's bad news. This was "known" two months ago (or more). The leak, and the announcement, came a comfortable two weeks past election day. If you believe that's just a coincidence, well, I guess I have nothing to say.
The FHA says the shortfall in the books comes to a modest $16.3Bn. As bailouts go, that's chump change. It's small beer today, but next quarter there will be another shortfall as the "book" of nutty mortgage's works its way through (and steam rolls) the FHA. The losses being booked today (and next month) result from mortgage guarantees made back in the dark days of 2008 -09. These loans were programed to make losses. The chickens are coming home to
die roost. I think FHA will need a line of credit for at least $50Bn.
Given that we are already on the brink of warfare in Washington over a bunch of money issues, the timing for FHA to go into the red is terrible. The Republicans must be peeing in their pants with glee over this affair. After all, FHA, is a child of the Democratic Senate. In the end, elder statesmen and learned stewards like Chuck Schumer (D-NY) were supposed to be keeping an eye out for FHA. Oh, well.
If you have an worries about FHA, and its ability to keep grinding out those ultra cheap 97.5% LTV mortgages, let me assure you that this will not be a problem at all. You can keep buying those high flying builder stocks, and maybe even buy a home of your own. The bottom of the RE market was a year ago already, right?
The problems at FHA are going to be swept under the carpet with no problems at all. In an ironic twist of history, Tim Geithner will put a pen to the FHA bailout before the end of the year. It will be his last act as Treasury Secretary. Our boy Tim came in bailing, he is going out bailing. He is, and always will be, the Bailout King.
Here's how it will work:
- Geithner will use his own bank, The Federal Financing Bank (FFB). This bank is owned by the US Treasury, and Geithner is the the Chairman of the Board.
- No Congressional legislation is required for Geithner/FFB to make loans to, or guaranteed by, government agencies. Geithner doesn't even have to take a call from a Senate Republican. Tim has the only signature required.
- FHA will get a $50Bn line of credit from FFB. It will immediately draw $20Bn in order to replenish the reserve accounts. FFB will book the advance as a loan. FHA will book it as a subordinated capital note, and therefore treat it as tier one equity. Of course this is all accounting rubbish. Just what's necessary to maintain the charade.
- Speaking of charades and accounting rubbish, the loan from FFB will not be reflected in America's debt profile. The FHA loans are not part of the Debt Subject to Limit. That's just the rules of this game. Loans to Solyndra were guaranteed by DOE, so the money Treasury borrowed to make the bad loans to Soly never showed up on the books. Talk about a neat trick!
- Treasury will issue a few more notes to the public to come up with the cash that FHA needs to honor its guarantees. That's not a problem at all. Maybe Bernanke will buy some of the paper, just to keep a necessary balance.
- With Ben B Zirping, the Vig for the FHA will come in at a very low rate. The FHA will borrow $30-40Bn and not pay a dime over 3/4 percent. Can you say "magic?
The foregoing is well more than a guess on my part. There is a road map for this type of problem. The FDIC was down to nickels back in 1991. It got a line of credit from the FFB for $30Bn. Later the FDIC line was increased to $100Bn. When the SHTF in 2009 the line went to a cool half trillion. When it comes to providing credit to government agencies that have outstanding guarantees to the public, the FFB is the way to go when in need of some cheap/fast cash.
There is a lot of talk going around that reads, "The debt doesn't matter". Maybe that's true. That, or the whole thing is smoke and mirrors. The FFB bailout of FHA will be of the smoke and mirrors variety.
The U.S. Postal Service reported a record annual loss on Thursday and warned that, without congressional action, it could face a cash shortfall next fall.
The mail service said it lost $15.9 billion in the fiscal year that ended on September 30. That is more than triple its $5.1 billion loss last year.
The USPS, which relies on the sale of stamps and other products rather than taxpayer dollars, has been grappling for years with high costs and tumbling mail volumes as consumers communicate more online.
In September, the Postal Service hit its $15 billion borrowing limit for the first time in its history. That leaves it with few options if it suffers an unexpected shock, such as a slowdown if lawmakers are unable to prevent the year-end tax increases and spending cuts known as the "fiscal cliff."
"When you've got a $65 billion revenue business and you are looking at the potential of this fiscal cliff, of course that may have an impact on advertising and whatnot, which could hurt us," Postmaster General Patrick Donahoe said on Thursday.
"That's why we're saying let's get this thing done now ... and get us off of our own personal, postal fiscal cliff."
Much of the Postal Service's loss in 2012 came from two defaults on a total of more than $11 billion in payments that Congress had directed USPS to pay into a fund for future retiree health benefits.
The agency was unable to make the payments, but still must account for them in financial statements.
Postal officials want Congress to pass legislation that would allow the agency to end Saturday mail delivery and run their own health plan rather than enrolling USPS employees in federal health programs, among other things.
Lawmakers have been working for more than a year on legislation to overhaul the Postal Service, but have been unable to agree on how to do it.
The U.S. Senate passed a bill in April that would eventually let the agency move to five-day delivery. Leaders in the House of Representatives have said that bill would not solve USPS's problems, but they have been unable to pass their own bill.
"The Postal Service is facing a fiscal cliff of its own and any unanticipated drop in mail volumes could send the agency over the edge," said Art Sackler of the Coalition for a 21st Century Postal Service, which represents business mailers.
"If Congress fails to act, there could be postal slowdowns or shutdowns that would have catastrophic consequences for the 8 million private sector workers whose jobs depend on the mail."
Lawmakers have said they are working to finish up postal legislation during the current "lame duck" session.
The Postal Service said total mail volume tumbled to 159.9 billion pieces in 2012, a 5 percent dip from 168.3 billion pieces a year ago.
While email has eaten away at mail volumes, online shopping has proved a boon for the package business as the Postal Service delivers items ordered from e-Bay Inc, Amazon.com Inc and others. The agency said package revenue rose by $926 million, or 8.7 percent, during the year.
Postal officials expect this trend to continue. Last week, Donahoe announced that the agency expects package deliveries during the 2012 holiday season to jump 20 percent compared with the same period in the previous year.
Still, the agency faces extremely tight cash. Chief Financial Officer Joseph Corbett said USPS could have a cash shortfall in October 2013.
"It's a ridiculous situation quite frankly to be put in," Corbett said. "There is no other well-run commercial organization with commercial freedoms that would allow themselves to operate on a couple days' cash flow. We need a buffer against any potential downturn."
Fiscal Cliff Can About To Be Kicked Into 2013?
Submitted by Tyler Durden on 11/16/2012 08:00 -0500
With precisely 13 working sessions left for Congress in 2012, it is time to ratchet up the can kicking rhetoric a bit. Sure enough, here comes the White House, via the Wall Street Journal, doing just that.
- WHITE HOUSE IN ADVANCED INTERNAL DISCUSSIONS ON PLAN TO REPLACE SEQUESTER - SOURCES - DJ
- CONCEPT WOULD KICK MAJOR DEFICIT-REDUCTION TALKS INTO 2013 - DJ
- CONCEPT WOULD BE PART OF BROADER NEGOTIATIONS ON TACKLING 'FISCAL CLIFF' - DJ
- Because when unable to reach a compromise over anything, what is the best option? Just stick head in sand, and demand that the Mr. Chairman gets to work. As for the news above, this is largely irrelevant for the actual fiscal cliff negotiations and the futures buying algos are once again in for a rude awakening.