Regulatory Arbitrage Infinity! Law Limiting CEO Pay To $600,000 At Fannie and Freddie Easily Skirted Since Presidents Are Not Subject To Law

US Senator Elizabeth Warren probably thinks that the T-Rexs and Raptors in Jurassic Park can be regulated or contained. Just like she thinks that G-SIBS can be regulated without causing harm to the economy. But life finds a way.

Quicken Loans (and Rocket Mortgage) are examples of financial institutions that escape  regulation by remaining a privatley-held corporations. But there are zads of ways to avoid regulations imposed on  financial institutions.

Massachusetts Sen. Elizabeth Warren wants to make sure top executives at mortgage giants Fannie Mae and Freddie Mac are not being paid more than a congressionally-mandated salary cap allows.

An example of bypassing the regulatory swamp? Regulations prohibit Fannie Mae and Freddie Mac CEOs from making more than $600,000 per year. 

In a recently unveiled proposal – called the Respect the Caps Act – Warren is looking to close a loophole both agencies are said to be taking advantage of in order to pay their top executives millions.

Warren’s legislation was developed in response to a watchdog report from the Federal Housing Finance Agency’s (FHFA) Inspector General. According to the report, the FHFA – which oversees Fannie and Freddie – approved plans that circumvented the congressionally-mandated salary cap at the two agencies, which is set at $600,000. This was said to be done by separating the CEO and president roles, transferring tasks from the CEO to the president, and raising the president’s pay. Presidents are not subject to the pay cap.

As a result, two executives at Fannie were said to be paid $4.2 million to perform the same tasks a CEO has performed for $600,000. At Freddie, the figure was $3.85 million.

“Following the financial crisis, Congress passed my bipartisan bill to cap pay raises for executives at Fannie Mae and Freddie Mac. Instead of enforcing the law, the FHFA has allowed executive compensation at Fannie to increase by $3.6 million and at Freddie, by $3.25 million,” Warren said in a press release.

If the director of the Federal Housing Finance Agency – a post that Mark Calabria was just confirmed to – were to approve salaries that exceeded the $600,000 cap, he could be removed according to the terms of the bill.

The cap was put in place in 2015 after the former FHFA director sought to allow executives to receive a hefty, multimillion dollar pay package.

The former FHFA diector was … Mel Watt/



Death Star? Fed Seems Resigned to Bubble Risk in Effort to Extend Expansion (Declining R-Star)

Asset bubbles abound thanks to Central Bank low rate policies. And these aren’t tiny bubbles, but gargantuan asset bubbles.


(Bloomberg) — Some Federal Reserve policy makers seem resigned to running a heightened risk of asset bubbles and other financial excesses as they seek to keep the economic expansion going.

That’s one of the messages tucked inside the minutes of the Federal Open Market Committee’s March 19-20 policy making meeting.

“A few participants observed that the appropriate path for policy, insofar as it implied lower interest rates for longer periods of time, could lead to greater financial stability risks,’’ according to the minutes, published April 10.

Chairman Jerome Powell could be one of those officials. He’s publicly pointed out that the last two expansions ended not in a burst of inflation, but in financial froth, first a dot-com stock market boom, then a housing bubble.

A willingness by the Fed to court such perils by holding rates down should be good for the economy for a while. After all, the aim of such a policy would be to sustain growth at a healthy enough clip to meet the Fed’s twin goals of maximum employment and 2 percent inflation.

But that monetary stance could store up trouble down the road should the financial threats materialize.

“Easy financial conditions today are good news for downside risks in the short-term but they’re bad news in the medium term,” senior International Monetary Fund official Tobias Adriantold a Boston Fed conference last year.

In economists’ parlance, here’s the Fed’s dilemma: R-star — the neutral interest rate that stabilizes the economy when it’s meeting the Fed’s goals — may be so low that it also prompts super-risky behavior by investors.

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Behind the fall in R-star: an aging population and slower productivity growth that has boosted savings and depressed investment.

Catch a falling star? Or is it a Death Star?


Bring Out Your Fed! Existing Home Sales Fall -5.44% YoY In March (EHS Inventory Lowest Since 1999)

Bring out your Fed!

According to the National Association of Realtors (NAR), existing home sales tanked -5.44% YoY in March.


At the same time, the INVENTORY of existing home sales rose in March, but still remains near its lowest level since 1999.

Existing home sales Median Price YoY has slowed to 3.8% with The Fed’s quantitative tightening (QT). As opposed to 13.4% YoY during The Fed’s QE3.


Time to bring out your Fed!


CRE Bubble? Commercial Real Estate Prices Since The Financial Crisis (Apartments Have Largest Run-up, Retail Has Poorest)

Given the advent of on-line shopping, commercial real estate prices are not quite back to where they were at the height of the asset bubble prior to the financial crisis of 2008-2009. Suburban office space is barely above the pre-crisis peak.


On the other hand, apartment prices are substantially above where they were in 2008-2009, as are CBD (Central Business District) offices.

All with the help of The Federal Reserve’s low interest rate policies. But notice that the growth rate of CRE has slowed (except for apartments).

The good news for CRE investors? The Fed isn’t likely to keep raising their target rate or continue to shrink their balance sheet.


A Tale Of Two Central Banks (Fed Vs ECB And Their Bank Stocks)

This is a tale of two Central Banks: The US Fed and the European Central Banks. And their respective commercial banks.

First, The Federal Reserve. US commercial banks recovered from the global financial crisis, although not completely.


But for the ECB, such is not the case for European banks.


Indeed, this a tale of two Central Banks.


US Housing Starts Fell In March, Slowest Pace Since May 2017 Despite Interest Rate Declines (5+ Unit Starts Decline 3.44%, 1 Unit Starts Decline 0.38%)

The hopium about interest rate declines didn’t pay off in March. Housing starts fell despite declining interest rates.

(Bloomberg) —  U.S. new-home construction unexpectedly fell in March, decelerating to the slowest pace since May 2017 and suggesting builders remain wary even as lower mortgage rates and steady wage gains offer support to consumers.

Residential starts fell 0.3 percent to a 1.139 million annualized rate after a downwardly revised 1.142 million pace in the prior month, according to government figures released Friday. Permits, a proxy for future construction, slumped 1.7 percent to a 1.27 million rate. Both figures missed estimates.

1-unit starts fell -0.38% in March while 5+ unit (apartment) starts fell -3.44%. The Midwest was the biggest loser at -17.61%. The biggest winner was … the West at 31.40%.


The decline in 10 year Treasury rates (yellow line) provided a nice pop in 1-unit start in January, but nada in February and Match (white line). Apartment starts (blue line) have slowed.


So pushing interest rates down has not paid off as hoped.



Fire! Templeton Deepens Short Duration Bet To -2.21 in $34 Billion Bond Fund

Negative duration bets? Financial markets are coming undone.

(Bloomberg) — Average duration in Templeton Global Bond Fund shortened to -2.21 years by end of first quarter, from – 1.6 years at end of 2018, according to latest filing.

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Builds up Mexico position to 13% from 12.6% at end of 2018, making the country the biggest portfolio holding

Brazil and U.S. remain in top three country holdings with at least 11%

Other top 10 exposures include India, Indonesia, South Korea, Argentina, Ghana
Retains short position on euro, yen, Australian dollar

Increases cash to 32.2% from 24.9% at end of 2018

Total net assets increase to $33.8b from $33.5b

NOTE: fund, run by Michael Hasenstab and Calvin Ho, has returned 3.5% in past year, outperforming 58% of peers, according to data compiled by Bloomberg.


Templeton’s negative duration bet comes as The Federal Reserve announced that they may need to buy more government bonds than it did before the 2008 financial crisis and conduct other money-market operations to implement its current approach to managing U.S. interest rates.

Or as Arthur Brown sang, “We are the Gods of hellfire,  and we bring you … FIRE!”


Financialization And New York City Rents (Rent Bubble????)

Financialization refers to the increase in size and importance of a country’s financial sector relative to its overall economy.  And the center of US financialization is … New York City with its investment banks like Goldman Sachs.

While west coast housing prices are cooling (but still uber-expensive on the coast). NYC rents are still hot.

Rents climbed to a first-quarter record in Manhattan, and to all-time highs in Brooklyn and Queens, data from StreetEasy show. At the same time, purchases declined and almost a fifth of home-sellers in the three boroughs were forced to cut their prices.

Many New Yorkers, weary of bargaining with owners whose list prices are still out of touch with a slowing market, are choosing to remain renters until they find the perfect deal. That’s given landlords power to raise rates and offer fewer lease sweeteners, said Grant Long, senior economist at StreetEasy.

Central Park South was Manhattan’s costliest neighborhood in the first quarter, with a median asking rent of $7,200. Landlords sought $3,785 in Greenwich Village, $3,995 in Chelsea and $2,900 on the Upper East Side. Borough-wide, rents rose 2.6 percent from a year earlier, the biggest annual increase since 2016, according to a StreetEasy index.

Owners listed apartments for a median of $3,035 in the Long Island City neighborhood of Queens, and $2,995 in Brooklyn’s Williamsburg.

The Flatiron district is no slouch at $4,615 median rent. This trendy area has numerous millionaires and billionaires (as Bernie Sanders loves to say).

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But since the advent of financialization in the 1980s, the wealth distribution in the US has become the most skewed since the 1930s.


And much of the skew is about the consolidation of financial power in New York City (and regulation of the 0.1% resides in Washington DC.

Yes, The Federal Reserve, the hell hound for Wall Street, has helped inflate asset bubbles and keep them frothy, benefitting the 0.1%.

At the national level, home price growth YoY, while slowing, still exceeds average hourly earnings for the majority of US workers as well as core inflation.


So, are we in a housing bubble? Previously, “economists” have said that a housing bubble is when home price growth exceeds wage growth. But when I speak to the Five Star Government forum on housing on Tuesday, I will be the only one that says the word “bubble.”

Mentioning a bubble in the 5 Star gathering is like including Carolina Reaper 2,200,000 SHU peppers in the spice mix.


Another 48 Hours: Investors Question Possible Credit Trading Fix (Optimal Level Of Transparency)

The Dodd-Frank Wall Street legislation was signed into law back in 2010 by then President Obama. The legislation to limit banks from trading for their own accounts has generated its own conflict: what is the optimal level of transparency?

(Bloomberg) — U.S. market regulators are proposing to test whether keeping large corporate bond trades secret for two days will spur more buying and selling. A better tack might be to make it easier for dealers to hang onto more securities, some money managers believe.

In the decade since the 2008 financial crisis, dealers’ holdings of corporate bonds have plunged thanks to new rules that make it more expensive for banks to keep the securities and limit banks from trading for their own accounts. Brokers used to buy big blocks of bonds from investors and sell them over time, but are now more inclined to just link up buyers and sellers directly. Tweaking standards for reporting trades won’t make dealers more willing to hold onto securities, said Josh Lohmeier, head of U.S. investment-grade credit at Aviva Investors, which manages more than $420 billion.

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“The potential changes are a nice excuse to reduce transparency, but internal capital controls post-crisis and charges for carrying inventory are probably a bigger impact to market liquidity,” Lohmeier said. “This is purely a benefit to the absolute largest asset managers and dealers, but is questionable how the rest of the market benefits.”

The end result may be that brokerages and the biggest investors boost their earnings without improving market liquidity, said Bill Zox, chief investment officer of fixed income at Diamond Hill Capital Management, which manages around $21 billion.

Financial Industry Regulatory Authority last week proposed a pilot program that would give traders 48 hours before having to reveal their so-called block trades to other investors. The proposal comes as trading volume in the corporate bond market hasn’t kept pace with issuance. There were about $37 billion of trades per day in the market in March, according to the Securities Industry and Financial Markets Association, a trade group. That’s about double the level of 2003. But outstanding corporate debt levels have about tripled, according to Bloomberg Barclays indexes.

Money managers and dealers have proposed a wide array of fixes. BlackRock Inc., for example, has suggested standardizing corporate bonds and increasing trading venues. The Financial Industry Regulatory Authority (FNRA) proposed a pilot program last week that would give dealers 48 hours before having to reveal their so-called block trades to the market.

Big investment firms including BlackRock and Pacific Investment Management Co. have lobbied for the delay, arguing that the current rules, which require large transactions be reported within 15 minutes, can make it harder to clear trades because market participants know exactly what was bought and at what price.

Shock Absorbers

Limits on banks’ trading were designed to make them safer institutions than they were a decade ago. But traders have argued that it can be difficult to execute large block trades in less-liquid portions of the market. By one measure from the New York Federal Reserve, primary dealers’ holdings of corporate bonds have plunged to around $10 billion today from more than $200 billion in 2007.

Part of those declines may be overstated, consulting firm Tabb Group said in a report last year, because of a change in the way the Fed defined the debt in 2013 to exclude mortgage-backed securities without government backing. Still, the firm estimated that dealer inventories dropped somewhere between 35 and 50 percent between 2007 and 2014.

Why Corporate Bond Liquidity Might Not Be as Bad as You Fear

Dealers historically served as shock absorbers in markets, buying securities from money managers and then patiently waiting until they could offload the bonds. That’s harder now, said Jason Brady, president and CEO of Thornburg Investment Management, which manages $44 billion.

“It’s always been the case in bonds that nobody wants to buy exactly what the other person wants to sell at the exact same time,” Brady said. “That’s been the role of the broker dealer, and they can’t really play that role anymore.”

Finra introduced the Trade Reporting and Compliance Engine, better known as Trace, in 2002 in an effort to increase transparency in the corporate bond market, where the bulk to transactions still take place over the phone between buyers and sellers. Many junk bond dealers believe the reporting requirements have hurt market liquidity, said Ken Monaghan, co-director of high yield at Amundi Pioneer.

“How do you improve liquidity? Almost uniformly Trace has been pointed to as one of the major obstacles,” Monaghan said.

The idea for the pilot was suggested by a group of industry executives that advises the SEC. The Securities Industry and Financial Markets Association, Wall Street’s biggest trade group, supports for the proposed test as do JPMorgan Chase & Co. and Eaton Vance, according to Finra.

One the other hand, two market makers for exchange-traded funds have expressed concern that the changes would reduce price transparency, Finra said. Even one of the biggest money managers is opposed to the idea.

“Our belief is that the reporting rules today work for the market,” said Chris Alwine, head of global credit at Vanguard Group, which manages more than $5 trillion of assets. “We’re not in favor of the proposal. It works against electronic trading, the evolution of the markets because you’re withholding information from market participants.”

I agree with Chris Alwine. The 48 hour rule goes against market evolution and tries to return to a gilded age of securities.





US And China Credit Impulses Are Negative (Annual Change As % Of GDP), Along With The Eurozone

The bad news? The credit impulses (annual change as a percentage of GDP) for both the USA and China are negative.


The good news? The decline in China’s credit impulse is lessening.

If we throw the Eurozone into the Papusa, we see that the Eurozone has negative credit impuse growth, but is better than China or the USA.


Since 2005, China’s sovereign yield curve has actually increased will Japan’s has dropped into negative territory.