Lenders modified more troubled loans during the first quarter, according to a government report released today, but a growing number of borrowers are falling behind on their payments.

The Federal Reserve ’s June policy meeting is now a week in the past, and Fed officials are starting to emerge to explain the central bank’s decision-making in more detail. James Bullard , president of the St. Louis Fed, was up today with a talk to Philadelphia’s Global Interdependence Center . Departing from the standard practice of Fed officials who like to read from prepared texts, Mr. Bullard gave a college-style lecture with a power point presentation. He also followed up with discussions with reporters. We’ll follow his lead and offer our take — in power point form — of three important messages: The Fed’s benchmark interest rate — the federal funds rate — is going to stay near zero for the “foreseeable future,” given the weak economy and low inflation. That ought to reinforce to investors who were expecting rate hikes by year end that it isn’t likely. Still, Mr. Bullard is wary of counting too much on the “slack” argument. This argument holds that high unemployment and excess manufacturing capacity push inflation rates down. While there is lots of slack in the economy, he says, inflation might not fall as much as some models suggest. Indeed, inflation expectations, what he considers a better inflation indicator, have bounced back from depressed levels earlier this year to modest levels around the Fed’s rough goal of 2%. The Fed’s ‘liquidity programs,” such as efforts to support the commercial paper market or money market mutual funds, are on track to end next year “if financial conditions continue to improve.” The Fed signaled this on Thursday when it said the liquidity programs would run out on Feb. 1, 2010. The central bank effectively punted on the third prong of its efforts to revive the economy — its purchases of mortgage backed securities, Fannie Mae and Freddie Mac debt and U.S. Treasury bonds. Some investors expected the Fed to make changes in the program to buy $1.75 trillion worth of this debt when it met last week. The Fed took no action. But that doesn...

Posted By: A lot of folks are parsing the latest S&P Case Shiller home price report out today, and debating whether some month-to-month increases are proof of home price stabilization nationwide. I frankly think it’s impossible to say anything nationwide, because a lot of different markets are reacting very differently. That may seem an incredibly prosaic thing to say, but I think an awful lot of smart folks often lose sight of that. Topics: | | Sectors: | MEDIA:

There comes a time when, however alluring is the limelight, and however strong your thrust for action, you’d better opt for a graceful exit. The exit of former Fed Chairman Alan Greenspan has been anything but graceful, made all the more frustrating by his stern refusal to leave. Greenspan’s latest foray into the stage comes in the form of an in the Financial Times last week, which is so full of blunders that I’m embarrassed on behalf of the FT for publishing it without first doing even a Wikipedia check. Worse… Greenspan’s thesis reveals either a mind that (for all its former greatness) can no longer think; or an ex-Fed Chairman who so misunderstood how the financial system works that it’s no wonder at all that we got into this mess! So the first blunder comes early on when Greenspan talks about what he sees as a virtuous circle of rising stock markets, leading to improved credit conditions, higher lending and the resumption of economic activity… which in turn supports higher stock prices and so on. While the idea that improved confidence can generate a virtuous circle has merits, what is questionable is Greenspan’s road to get there: The “newly created equity” in banks’ balance sheets as the prices of banks’ stocks go up. Well that’s plain wrong. Regulatory capital, which is what matters for a bank’s ability to increase its lending, is not marked to market but at the price paid up originally to purchase equity in a bank. (Regulatory capital also includes other stuff, like retained earnings, which again are not marked to market but at the price when they were booked). In other words, the increase in stock prices does NOT provide a “ capital buffer that supports the debt issued by financial and non-financial companies ” and does NOT “ supply banks with the new capital that would allow them to step up lending .” If there is one way higher stock prices help is if banks actually see it as an opportunity to raise new capital and expand their operations. Indeed, some banks...

There is a fascinating about how the world of derivatives has shaped up through the crisis. I often encounter misconceptions about hedging. The one line that summarises the issue is this: The job of a hedging strategy is to combat extraneous economic exposure. Let me focus on currency exposure as an example, though the basic idea works in all aspects of hedging. A good currency hedge is one which neutralises the effect of currency fluctuations on the NPV of profit. I have seen four major mistakes in the way people think about hedging: Hedging seen as a way of eliminating currency risk in the translation of direct import/export proceeds. This is wrong because it's an incomplete picture of what happens to the profits of a company when the currency moves. A lot of finance practitioners are confused on this subject, particularly in India where RBI rules have had mistakes on these things for decades. (While RBI staff made mistakes, that was no reason for currency hedging consultants and such like to also make the same mistakes). Hedging seen as a profit centre. This is wrong because the job of hedging is to eliminate exposure of the NPV of profit, not to make money. Suppose a company embarks on a currency hedging program. Half the time (ex-post) the hedge will appear to have made money and half the time (ex-post) the hedge will appear to have lost money. For a company which has very big currency exposure, ex-post, half the time there will be massive cash losses on the currency hedge. If top managers, directors or regulators do not understand this correctly, it's easy to jump into complaints about `massive losses on derivatives trading'. This emphasises the importance of seeing a hedging strategy and the economic exposure in an encompassing way. A person who closes out one element of an overall hedging strategy because that's generated a lot of cash outflow in recent days is, well, wrong. Hedging away the core sources of profit. A refinery is a bet on the ...

The Mortgage Bankers Association (MBA) today released its Commercial Real Estate/Multifamily Finance Quarterly Data Book for the first quarter of 2009. The analysis focuses on how the continued economic downturn in the United States placed further pressure on the commercial and multifamily real estate markets during the first quarter. While the pace of the economic slowdown appears to be easing, different aspects of commercial real estate and commercial real estate finance are feeling different levels and types of pressure.

Bloomberg is reporting . The benchmark index for U.S. stock options fell below its closing level from the day before Lehman Brothers Holdings Inc.’s September collapse as stocks rallied and investors paid less to hedge against equity losses. The VIX, as the Chicago Board Options Exchange Volatility Index is known, lost 1.1 percent to 25.65 at 11:54 a.m. in New York. The index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which added 0.9 percent. “Fear of the doomsday scenario has definitely subsided,” Jeremy Wien, a VIX options trader at Societe Generale SA in New York, said before the index slipped below its Sept. 12 close of 25.66. Before today, the VIX averaged 20.18 in its history stretching back to the start of 1990. The index peaked at 80.86 in November and dipped below 30 in May for the first time in eight months. It reached an intraday record of 89.53 on Oct. 24. The volatility benchmark, known as Wall Street’s “fear gauge” because it almost always increases as stocks fall, reflects expectations for price swings for the next 30 days and is calculated from S&P 500 options that are one or two months from expiration. Federal Reserve Chairman Ben S. Bernanke has made unprecedented use of the central bank’s powers as the lender of last resort. He kept banks liquid by accepting bonds they can’t trade as collateral for Treasuries and bailed out the nation’s biggest insurer, American International Group Inc. The S&P 500’s swings were the biggest in the benchmark’s 80-year history last year as it plunged 38 percent, the most since 1937. There were 18 moves of more than 5 percent after Sept. 29. That was more than half of the 35 swings of that size that have occurred from 1955 through 2008, according Howard Silverblatt, the senior index analyst at S&P in New York. Giving Bernanke or the Fed any credit for this is preposterous. The Fed helped create this mess. For a complete trashing of Bernanke please...

Summary of Fannie Mae's book of business for May 2009

submits: It seems the Bank of International Settlements ((BIS)) is not buying into the green shoots meme of recovery. More specifically, they call into question the health of banks that still carry large amounts of toxic assets on their balance sheets. From the Guardian:

submits: As , the tide in credit is turning. The average loan was 5 bps wider, while toxic bonds, just like that scene in Indiana Jones and the Temple of Doom, are starting their descent back into hell, wider by 78 bps on average, and just 23 bps away from the critical 1,000 bps threshold (after being at 895 bps last week). Also, to see what a schizophrenic yoyo game even credits have become, compare the Neiman Marcus and TRW bond spreads (wider by about 500 and 850 bps, respectively). Compare the TRW action from the current week with that from . Lunacy.

submits: The total number of banks in the U.S. declined further last year. At the end of 2008, about 7,100 banks were in operation compared to 7,300 in 2007 as per the Federal Reserve Bulletin, June 2009. click to enlarge