First Impressions

The Future of U.S. Housing Finance
Doug Ashburn – John Lothian News

After the collapse of the housing market in 2008 and the passage of the Dodd-Frank Act in 2010, a number of items were placed on a ‘to-do’ list to be addressed at some point in the future. One of the biggest items on that list was deciding what to do about Fannie Mae and Freddie Mac, the twin housing finance/securitization firms that have been operating under government control since the crisis.

Now, six years later, it is time to take a fresh look at these two firms, and what is to be done with them. They are currently running on the fumes of the crisis, as most of their recent profitability is coming from lawsuits awarded them from the lax lending and rating standards of the pre-crisis era. This is about to run its course. So, what now?

The easy answer, and one that seems to have bipartisan support, is to wind them down. It is important to remember that Fannie and Freddie were brought to their knees well before the actual crisis, hobbled by accounting scandals and the resulting lawsuits.

But what will housing finance look like in this nation without such intermediaries? Is the commercial banking sector ready to assume the role? Not likely, considering the hordes of new regulations and capital requirements, and current aversion to risk prevalent in the sector. Absent a new infrastructure, which seems to require some sort of government incentives and/or a backstop, home ownership becomes less likely for many, including those striving toward the middle class. The last thing we need now is a deepening of the divide between the haves and have-nots.

The goal, however, it the building of equity, not just debt. And, there must be standards in place. The next iteration must not become a slush fund, nor should it be a way to funnel money for political gain.

Let’s get to work. The American Dream is at stake.

Quote of the Day

“But if the private sector is not ready to step into the space, and you shrink what Fannie and Freddie are doing, you do damage to housing finance in this country and that does damage to the economy and that does damage to the possibility of affordable housing and home ownership.”

Federal Housing Finance Agency Director Mel Watt in the story, “U.S. private lenders not ready to replace Fannie, Freddie: regulator”.

Lead Stories

‘Dash for trash’ lifts unrated debt sales
Andrew Bolger and Robin Wigglesworth – FT.com
Now it is the turn of the tiddlers. Even companies too small to be graded by the leading rating agencies – or that choose not to – are benefiting from voracious investor appetite for European corporate bonds.
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U.S. private lenders not ready to replace Fannie, Freddie: regulator
Reuters
The regulator of government-controlled mortgage finance firms Fannie Mae and Freddie Mac said on Sunday he would not oppose them having a smaller presence in the market but private capital had to be ready to take over first.
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Does the Euro Zone Need Deflation?
Alen Mattich – MoneyBeat – WSJ
As most observers decry Europe’s falling inflation rate, could it be that the euro zone in fact needs deflation? That, at least, is what one leading London-based economist thinks.
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***DA: Gets back to the fundamental question – is it appropriate to punish savers to reward over-borrowers?

U.S. Fed may need to update its interest rate guide
Reuters
Interpreting Federal Reserve policy is hard enough, but the central bank may need to dust off its ‘How to’ guide to explain the nuts and bolts of new tools it will use when it finally starts to raise interest rates.
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***DA: I think the Fed has plenty of time to figure that out. Interest rates are not going anywhere any time soon.

Heard on the Street: Europe’s Bonds Are No One-Way Bet
WSJ.com
Markets can only move in one direction for so long. Thursday’s violent reversal in southern European government bonds is testament to that. Having declined almost in a straight line since the start of the year, yields spiked higher, with the gap between 10-year German yields and those of Italy, Spain and Portugal widening 0.2 percentage point, and those of Greece 0.5 percentage point.
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Belgium’s KBC scraps ‘risk-free’ practice on sovereign bonds
Sam Fleming – FT.com
Belgium’s biggest bank has ended its practice of ascribing no risk to government bond holdings in a move that some analysts say could foreshadow similar changes elsewhere in the euro area.
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Piketty’s Wealth Concentration Doesn’t Show Up In The British Figures Either
Forbes
As we all know by now Thomas Piketty’s arresting thesis is that capitalism leads, absent bloody wars and depressions, to ever greater inequality in the distribution of wealth. Further, he says this is already happening and that we are returning to pre-WWI levels of wealth concentrations and that this is a Very Bad Thing indeed. The slight problem with this part of the thesis is that we cannot actually see such wealth concentration occurring.
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***JB: It is amazing how much Piketty’s book has scared conservatives and caused them to use brain bending attempts to massage the numbers. Interestingly over the weekend it was reported that Britain’s wealthiest 1,000 people are worth £519 billion which amounts to one-third of the nation’s GDP and an increase of 15% over last year alone. Conversely the working class is £1,600 a year worse off since 2010. In the end if it walks like a duck and quacks like a duck…

No sign of major central banks tightening the reins
Reuters
Government bond yields have tumbled on the basis that the world’s major central banks will continue to keep monetary policy easy and in some cases loosen further.
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Reasons for the Bond Rally
Joshua M Brown | The Reformed Broker
I know, I know – Who cares about the reasons? Only Price Pays! But still, as professional investors, understanding the reasons behind a trend is every bit as important as respecting the market action itself.
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At big-ticket dinners, a blunt Bernanke sounds theme of low rates
Reuters
In a series of quarter-million-dollar dinners with wealthy private investors, Ben Bernanke has been clearer than he ever was as chairman of the Federal Reserve on his expectations that easy-money policies and below-normal interest rates are here for a long time to come, according to some of those in attendance.
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The sun also rises. Bond yields, not so much
Dan McCrum | FT Alphaville
Some broad thoughts on the economic and market cycle arrive from Nikolaos Panigirtzoglou and team at JPMorgan, to help active investors (most of them, it seems) who are scratching their heads and looking perplexed.
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DBW: ECB negative deposit rate edition
Izabella Kaminska | FT Alphaville
Citi’s Hans Lorenzen contemplates the implications of a possible negative deposit rate at the ECB. The relevant DBW (death of banks watch) quote is this:
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The debt that’s only for those on the A-list
Ayesha Javed – Financial News
Nobody likes gate-crashers. Least of all private equity firms keen to keep a firm grip on portfolio companies that are at risk from aggressive debt holders.
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Central Banks

Fischer, Brainard to push for more activist Fed
Reuters
The two new nominees to the Federal Reserve’s Board of Governors are expected to push for an expanded Fed role in managing the U.S. economy, working to replace the current raft of programs that resulted from the financial crisis with more permanent tools.
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Fed may need to update its interest rate guide
Reuters
Interpreting Federal Reserve policy is hard enough, but the central bank may need to dust off its ‘How to’ guide to explain the nuts and bolts of new tools it will use when it finally starts to raise interest rates.
jlne.ws/1o6hUwx

Fed’s Bullard says inflation, job goals ‘within sight’
Reuters
The U.S. economy is within sight of the Federal Reserve’s inflation and employment goals, and is expected to grow at a “robust” pace for the rest of the year, St. Louis Federal Reserve Bank President James Bullard said on Friday.
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Draghi as Committed as a Central Banker Gets, as Economists Await ECB Stimulus
Alessandro Speciale and Andre Tartar – Bloomberg
Mario Draghi has left little room for doubt.
Ninety percent of economists in the Bloomberg Monthly Survey predict the European Central Bank president will ease monetary policy in June after saying on May 8 that officials are “comfortable” with acting then. While that allows investors to prepare for added stimulus and a weaker euro, it also sets them up for a bigger disappointment should he fail to deliver.
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UK housing market has deep problems, says BoE’s Carney
Reuters
The British housing market has “deep, deep” structural problems which pose the biggest current risk to the economy, Bank of England Governor Mark Carney has said in an interview.
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ECB’s Weidmann: ‘Shortsighted’ to Focus on Euro Strength
WSJ.com
Monetary-policy efforts targeted solely toward the euro exchange rate would be “shortsighted,” a top European Central Bank official said Monday.
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Currencies

BitBeat: Bitcoin Conference Sure Doesn’t Lack for News
MoneyBeat – WSJ
The Bitcoin Foundation’s annual conference kicked off Friday in Amsterdam and already it’s stirring a quite bit of buzz.
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Member Departures Bring New Focus on Bitcoin Foundation
MoneyBeat – WSJ
The exit of around 10 members from the Bitcoin Foundation as the foundation launches its annual conference in Amsterdam has focused new scrutiny onto the most high-profile advocacy body for bitcoin after a tumultuous four months for the digital currency.
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U.S. states take lead in writing bitcoin rules
Reuters
A task force of U.S. state regulators is working on the first bitcoin rule-book, the head of the group said, hoping to protect users of virtual currency from fraud without smothering the fledgling technology.
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Indexes & Index Products

Egypt to launch first domestic ETF
Chris Flood – FT.com
Egypt is planning to launch its first domestically listed exchange traded fund. It is part of efforts to attract capital into a country that has been battered by political and economic instability after the toppling of Hosni Mubarak as president in February 2011.
jlne.ws/1o6qVFC

New Constructs Revises Mutual Fund, ETF Rankings
Max Bowie – WatersTechnology
New Constructs, a Nashville, Tenn.-based provider of independent research and stock recommendations based on analysis of footnotes in financial statements, has revamped the way it rates mutual funds and exchange-traded funds to deliver more value to traders, investors and investment advisors.
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SG offers hedge fund strategies in new LSE-listed ETN
Risk.net
SG is offering professional and sophisticated retail investors in the UK an ETN that goes long stocks in the FTSE 100 and 250, and short the two indexes. Hinde Capital is the strategy manager for a product that is collateralised in a similar way to an ETF
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Gold

Death of silver fix heralds overhaul for precious metal benchmarks
Reuters
London’s precious-metal price benchmarks, including silver, the century-old gold “fix” and platinum group metals are on the verge of major transformation, industry sources say, as regulatory scrutiny and lawsuits hasten action.
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Gold Climbs on Speculation of India Relaxing Import Restrictions
Claudia Carpenter – Bloomberg
Gold climbed for the first time in three days in New York on speculation the new Indian government will relax import restrictions on the metal.
Incoming Indian leader Narendra Modi told thousands of supporters over the weekend that he represented a break from past governments after winning the nation’s biggest electoral mandate in 30 years. The new India finance minister will decide on easing gold import curbs, Reserve Bank of India Governor Raghuram Rajan said last week. China overtook India last year as the world’s biggest gold buyer.
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Hedge Funds Cut Gold Bull Bets Most in Month: Commodities
Bloomberg
Hedge funds cut bullish bets on gold futures by the most in a month as holdings of physical bullion in exchange-traded funds dropped to the lowest since 2009.
Money managers’ net-long position contracted for the second time in three weeks in the five trading sessions ended May 13. The drop in bullion held through global ETPs extended into a ninth week, with about $6.9 billion of value erased.
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Gold Is Not Stable After All
Bill Conerly – Forbes
I like gold. My wedding ring is simple but classy. My crowns in my mouth are so good that I forget they are there. The electronic contacts in my computer work just fine. Gold is great. But not as a steady measure of purchasing power, nor as a guaranteed investment.
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Central banks in Europe to coordinate on gold: ECB
Brian Blackstone – MarketWatch
Central banks in the euro zone, Switzerland and Sweden have agreed to coordinate their gold transactions and have no current plans to sell “significant” amounts, the European Central Bank said Monday.
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