Author: Annie Lowrey

Mike Konczal of the Roosevelt Institute and the blog Rortybomb has a useful chart and paper outlining what to demand from Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill — the provisions that will ensure financial security — along with the chances of each provision making it into the final legislation.

The effort that seems most secure? Derivatives reform. The effort that seems least secure? A provision ensuring banks put all relevant liabilities clearly onto their balance sheets, as well as too big to fail and hard leverage cap requirements.

Bloomberg News’ Caroline Baum has a tart piece on strategic defaults and consumer spending — invoking the theory, first put forward by HousingWire’s Paul Jackson, that underwater homeowners are purposefully defaulting on their mortgages and using the funds to buy regular goods. That would explain why consumer spending is increasing despite high unemployment, declining real incomes and rising foreclosure rates. Historically, at least, cash-strapped consumers cut their discretionary spending and then stopped paying their auto loans and credit cards before quitting their mortgages. But the latest recession has upended that calculus. And homeowners left owing more on their homes than their homes are worth are more and more often walking away.

Baum writes, “Those deadbeat homeowners, facing possible eviction and in some cases unemployed, are throwing caution to the wind — and money at retailers.”  I quibble with that depiction. Strategic defaulters are not “deadbeat,” nor are they lacking “caution.” They are making an economically rational calculation, generally one that is in their best interests. They walk away, and the bank takes their house — that is how real-estate contracts work, and banks themselves do it all the time.

As Roger Lowenstein wrote in the New York Times Magazine: “Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. [When a homeowner strategically defaults, he] isn’t escaping the consequences; he is suffering them.”

Moreover, strategic defaulters tend to be economically distressed. These “deadbeats” decide that they and their families would be better off finding a new place to live, rather than continuing to let their mortgage winnow away at their income. My guess is that they aren’t heading out to buy new Hummers, but rather thinking more along the lines of toothpaste and new shoes and infant formula.

Baum also questions whether the math works. She writes:

A mortgage lender or bank experiences reduced cash flow, which means less money flowing to shareholders who, the last time I checked, were consumers in their own right. Sure, one can argue that the borrower has a greater propensity to consume than the lender, but this is a case of what Lawler calls “single-entry analysis for double-entry bookkeeping” and what I view as an example of Bastiat’s broken window.

This makes no sense. When a consumer strategically defaults, she reaps the benefits of the boost in income immediately. The relationship between banks’ cash flows and shareholder payouts is, on the other hand, obviously non-immediate and highly complex. The bank waits to classify payments as late, then the house as in default, then as a foreclosure. It takes a while for the foreclosure to happen. Then the bank often waits to put the property back on the market. Then it takes some time for the bank to sell it, sometimes for profit, sometimes for a loss. Banks do this on the scale of hundreds of thousands. And every once in a while they determine how much to give their shareholders in dividends. There is no magical transaction by which a single default nicks a penny from every shareholder at the end of the quarter. But the theory that homeowners are strategically defaulting in high enough numbers to free up consumer spending seems rational to me.

The Senate Permanent Subcommittee on Investigations, headed by Sen. Carl Levin (D-Mich.), held its third hearing on the financial crisis today, and up to bat were the credit ratings agencies. These companies — just three players, Moody’s, Fitch and Standard & Poor’s, dominate the market — take financial products issued by banks and other financial firms, perform thorough investigations and assign a rating to them based on the chance that the product will default. Or, at least, that’s how it’s supposed to work.

In practice, “[the] agencies allowed Wall Street to impact their analysis, their independence and their reputation for reliability,” Levin said this morning. “They did it for the money.” In short: The banks gamed the ratings agencies, and did it well. Here’s from the summary of the Levin report:

“Investors trusted credit rating agencies to issue accurate and impartial credit ratings, but that trust was broken in the recent financial crisis,” said Levin. “A conveyor belt of high risk securities, backed by toxic mortgages, got AAA ratings that turned out not to be worth the paper they were printed on.  The agencies issued those AAA ratings using inadequate data and outmoded models.  When they finally fixed their models, they failed for a year — while delinquencies were climbing — to re-evaluate the existing securities.  Then, in July 2007, the credit rating agencies instituted a mass downgrade of hundreds of mortgage backed securities, sent shockwaves through the economy, and the financial crisis was on.  By first instilling unwarranted confidence in high risk securities and then failing to downgrade them in a responsible manner, the credit rating agencies share blame for the massive economic damage that followed.”

From 2002 to 2007, the credit rating agencies earned record profits, reporting $6 billion in gross revenues in 2007.  They also allowed the drive for profits and market share to affect ratings.  Knowing that Wall Street firms might take their business elsewhere if they didn’t get investment-grade ratings for their products, the agencies were vulnerable to pressure from issuers and investment bankers.  As one Moody’s executive wrote in October 2007: “It turns out that ratings quality has surprisingly few friends: issuers want high ratings; investors don’t want rating downgrades; short-sighted bankers labor … to game the rating agencies.”

The credit rating agencies still, three years into the crisis, have a conflict of interest at the heart of their business. The financial firms that produce the financial products, not the financial firms that buy them, pay for the supposedly independent ratings. In a released email, one S&P employee describes colleagues in the company’s mortgage unit: “They’ve become so beholden to their top issuers for revenue they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation.” The Dodd bill creates an office of credit ratings within the Security and Exchange Commission, and increases oversight. But it does little to change the underlying problem.

Sen. Blanche Lincoln (D-Ark.) has written an aggressive proposal to regulate the derivatives market. (WDCpix)

This week, Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill moved to the floor of the Senate. And with that bill close to passage, Wall Street and lobbyists turned their attention to Sen. Blanche Lincoln (D-Ark.) and the Senate Agriculture Committee’s proposal to regulate derivatives, a $450 trillion market and a major source of investment-banking profits.

Image by: Matt Mahurin

Derivatives are essentially a type of financial insurance. They let two parties trade a contract derived from the price of some underlying security, currency or commodity. For instance, say you were a major airline. You might go to your bank to purchase a derivative locking in the price of gas, just in case a summertime oil shortage pushed up prices at the pump. In this case, you would be an “end user,” meaning you actually take delivery of the good. About 90 percent of the derivatives market involves financial firms trading derivatives like credit-default swaps back and forth for profit — and just 10 percent involves end users, non-financial firms using derivatives to mitigate risk.

Still, end users have become the unlikely center of the fight on derivatives legislation. With the reputation and credibility of big financial firms weak, companies in industries from agriculture to aviation came forward to say that this legislation might not only dampen big business’ profits but also hurt them. On Tuesday, the U.S. Chamber of Commerce and other business lobbies — via a group called the Coalition for Derivatives End-Users — took to the Hill for a flurry of meetings between corporate representatives of those worried end users and members of Congress.

“The legislation has the potential to take hundreds of billions of dollars out of the economy through margin and capital requirements,” says Cady North, a lobbyist at Financial Executives International and a member of the Coalition for Derivatives End-Users’ steering committee. “We estimate that the bill could require up to $900 billion in capital expenditures.” Moreover, the Coalition argues, the bill will increase the cost of derivatives for end users. (The Coalition declined to provide a list of participating executives or their companies, or a list of the legislators or assistants with whom they met, and the Chamber of Commerce did not respond to repeated requests for comment.)

But there’s just one problem. The Lincoln bill forces financial firms to put up collateral and use clearinghouses when they trade derivatives, but specifically exempts end users from those requirements. Banks are using their end-using clients as proxies to help kill off the legislation, lawyers and lobbyists contend. And for most end users, the opposition to the bill makes little sense.

Other lobbying organizations representing end-using white-collar companies said they had no issues with the legislation. For instance, Michael Griffith, a legislative analyst at the Association for Financial Professionals, which represents 16,000 of “the folks that manage your average companies’ money,” says he has no issues with it. “We’re pretty happy with what the Agriculture Committee approved,” he says. “It has a broad end user exemption on it, and we haven’t had many complaints from our members.”

“I know the banks are screaming about it,” says Brian Kalish, the director of AFP’s finance practice. “[My members are] getting panicky emails from their bankers. But [of] my members, no one’s panicking.”

But this week, some end users got more than panicky emails from their banks. Lawyers and lobbyists say that banks clearly misled companies about how the legislation might impact their business costs. In one case, a derivatives broker told a company that the legislation would force it to pay the same fees and put up the same collateral as financial firms, even where it explicitly would not.

“I’ve heard of a few folks who use derivatives [as end users who] called up their banks to talk about the legislation,” another lobbyist said. “Of course, their bankers told them to expect the whole market getting disrupted, price increases, collateral calls. Now, for most of them, they’re buying swaps to hedge. The legislation specifically exempts them.”

Legislators this week repeated the concern. Senate Banking Committee Chairman Dodd said he sees evidence of the bankers’ influence when end users lobby him. “The end users have been basically used by the major investment banks,” he told the Huffington Post’s Ryan Grim on Tuesday.

Indeed, Lincoln took pains to ensure most end users are not impacted by the legislation. Some firms with “captive finance entities” — financial-products divisions within big, diversified companies, like Cargill — might not qualify as end users on some transactions, and might have to post collateral when they use derivatives to speculate rather than hedge. But they represent a small proportion of end users, who represent a small portion of derivatives users.

Furthermore, the legislation might eventually drive end-users’ costs down. Many derivatives experts — off of Wall Street, at least — believe that Lincoln’s reforms will increase competition and transparency, reducing prices. Robert Litan, a derivatives expert at the Brookings Institution, explains, “In a world of nontransparency, the world the derivatives market is in right now, the way I understand it, if you try to call four or five dealers, to shop around, none give you a real price. They might quote you an indicative price. If you commit, then they give you pricing information.”
The White House concurs. Jen Psaki, the deputy communications director, recently argued, “The unregulated OTC derivatives markets were at the center of the recent financial crisis. The Wall Street banks that dominate this market want to keep it unregulated so they can make money off regular firms.”

Citigroup is selling new mortgage-backed securities for the first time in two years.

The company expects the mortgages to be rated AAA. But, BusinessWeek notes, “$67.3 million of the loans were to self-employed borrowers and $66.3 million didn’t require borrowers to document two years of their incomes and assets.”

With Sen. Chris Dodd (D-Conn.) on the cusp of pushing his financial regulatory reform bill through Congress, the head of the Senate Banking Committee is looking forward to the next legislative fight, over housing and mortgage finance. This morning, Dodd said that the government-sponsored enterprises — Fannie Mae, Freddie Mac and the federal home-loan banks, which lost hundreds of billions of dollars in the housing bust and own or guarantee more than half of U.S. mortgages — need a major reform bill as well.

In response to a question about the GSEs, Dodd said they are in “desperate need of reform” this morning. “But candidly there’s only so much I could only take on with this bill and so that comes up. But not in this round. It’s in the next wave here we have to deal with GSEs.”

To this end, last week the Treasury Department released a list of seven questions Washington will try to address with housing and mortgage finance reform. It is seeking the advice of housing market professionals and others, and asked the public to write in answers and attend town hall meetings on the subject this summer as well. The questions are:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?
2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?
3. Should the government approach differ across different segments of the market, and if so, how?
4. How should the current organization of the housing finance system be improved?
5. How should the housing finance system support sound market practices?
6. What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?
7. Do housing finance systems in other countries offer insights that can help inform U.S. reform choices?

Just minutes ago, Sen. Harry Reid (D-Nev.) moved for the Senate to start debate on the financial regulatory reform bill on Monday, saying, “We’re going to move forward on this legislation because the American people demand it.” Sen. Mitch McConnell (R-Ky.) said no, as bipartisan negotiations were ongoing. Reid has now filed for cloture to start debate.

Thus begins what promises to be a heated debate and long parliamentary process on passing the final legislation. Democrats need one crossover to close debate, and a simple majority to pass.

The Congressional Budget Office has released its review of Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill. It says the bill reduces the deficit by $21 billion over 10 years, with the money raised coming mostly from charging banks to pay into a fund available to the government to liquidate failing firms.

Additional items of note:

• The bill increases revenues $32.4 billion from now until 2015 and $75.4 billion between now and 2020. It increases spending over those period by $25.8 billion and $54.4 billion, respectively.
• The bill would start reducing the deficit by slight amounts as soon as it is implemented.
• The creation of the Consumer Financial Protection Agency would cost $3.2 billion between 2011-2020. The CBO estimates it will require 515 staffers.
• The bill would increase fees the SEC collects from financial firms by $650 million over five years, and fees firms pay to other regulators by $500 million.

Of course, the gains here are minuscule when viewed through the lens of the federal budget. But the value of preventing another widespread financial crisis, costing millions in jobs and trillions in household wealth? Priceless.

Watch live here. And here is the full text:

It’s good to be back in the Great Hall at Cooper Union, where generations of leaders and citizens have come to defend their ideas and contest their differences. It’s also good being back in Lower Manhattan, a few blocks from Wall Street, the heart of our nation’s financial sector.

Since I last spoke here two years ago, our country has been through a terrible trial. More than 8 million people have lost their jobs. Countless small businesses have had to shut their doors. Trillions of dollars in savings has been lost, forcing seniors to put off retirement, young people to postpone college, and entrepreneurs to give up on the dream of starting a company. And as a nation we were forced to take unprecedented steps to rescue the financial system and the broader economy.

As a result of the decisions we made — some which were unpopular — we are seeing hopeful signs. Little more than one year ago, we were losing an average of 750,000 jobs each month. Today, America is adding jobs again. One year ago, the economy was shrinking rapidly. Today, the economy is growing. In fact, we’ve seen the fastest turnaround in growth in nearly three decades.

But we have more work to do. Until this progress is felt not just on Wall Street but Main Street we cannot be satisfied. Until the millions of our neighbors who are looking for work can find jobs, and wages are growing at a meaningful pace, we may be able to claim a recovery — but we will not have recovered. And even as we seek to revive this economy, it is incumbent on us to rebuild it stronger than before. That means addressing some of the underlying problems that led to this turmoil and devastation in the first place.

One of the most significant contributors to this recession was a financial crisis as dire as any we’ve known in generations. And that crisis was born of a failure of responsibility — from Wall Street to Washington — that brought down many of the world’s largest financial firms and nearly dragged our economy into a second Great Depression.

It was that failure of responsibility that I spoke about when I came to New York more than two years ago — before the worst of the crisis had unfolded. I take no satisfaction in noting that my comments have largely been borne out by the events that followed. But I repeat what I said then because it is essential that we learn the lessons of this crisis, so we don’t doom ourselves to repeat it. And make no mistake, that is exactly what will happen if we allow this moment to pass — an outcome that is unacceptable to me and to the American people.

As I said two years ago on this stage, I believe in the power of the free market. I believe in a strong financial sector that helps people to raise capital and get loans and invest their savings. But a free market was never meant to be a free license to take whatever you can get, however you can get it. That is what happened too often in the years leading up to the crisis. Some on Wall Street forgot that behind every dollar traded or leveraged, there is family looking to buy a house, pay for an education, open a business, or save for retirement. What happens here has real consequences across our country.

I have also spoken before about the need to build a new foundation for economic growth in the 21st century. And, given the importance of the financial sector, Wall Street reform is an absolutely essential part of that foundation. Without it, our house will continue to sit on shifting sands, leaving our families, businesses and the global economy vulnerable to future crises. That is why I feel so strongly that we need to enact a set of updated, commonsense rules to ensure accountability on Wall Street and to protect consumers in our financial system.

A comprehensive plan to achieve these reforms has passed the House of Representatives. A Senate version is currently being debated, drawing on the ideas of Democrats and Republicans. Both bills represent significant improvement on the flawed rules we have in place today, despite the furious efforts of industry lobbyists to shape them to their special interests. I am sure that many of those lobbyists work for some of you. But I am here today because I want to urge you to join us, instead of fighting us in this effort. I am here because I believe that these reforms are, in the end, not only in the best interest of our country, but in the best interest of our financial sector. And I am here to explain what reform will look like, and why it matters.

First, the bill being considered in the Senate would create what we did not have before: a way to protect the financial system, the broader economy, and American taxpayers in the event that a large financial firm begins to fail. If an ordinary local bank approaches insolvency, we have a process through the FDIC that insures depositors and maintains confidence in the banking system. And it works. Customers and taxpayers are protected and the owners and management lose their equity. But we don’t have any kind of process designed to contain the failure of a Lehman Brothers or any of the largest and most interconnected financial firms in our country.

That’s why, when this crisis began, crucial decisions about what would happen to some of the world’s biggest companies — companies employing tens of thousands of people and holding hundreds of billions of dollars in assets — had to take place in hurried discussions in the middle of the night. That’s why, to save the entire economy from an even worse catastrophe, we had to deploy taxpayer dollars. And although much of that money has now been paid back — and my administration has proposed a fee to be paid by large financial firms to recover the rest — the American people should never have been put in that position in the first place.

It is for this reason that we need a system to shut these firms down with the least amount of collateral damage to innocent people and businesses. And from the start, I’ve insisted that the financial industry — and not taxpayers — shoulder the costs in the event that a large financial company should falter. The goal is to make certain that taxpayers are never again on the hook because a firm is deemed “too big to fail.”

Now, there is a legitimate debate taking place about how best to ensure taxpayers are held harmless in this process. But what is not legitimate is to suggest that we’re enabling or encouraging future taxpayer bailouts, as some have claimed. That may make for a good sound bite, but it’s not factually accurate. In fact, the system as it stands is what led to a series of massive, costly taxpayer bailouts. Only with reform can we avoid a similar outcome in the future. A vote for reform is a vote to put a stop to taxpayer-funded bailouts. That’s the truth.

And these changes have the added benefit of creating incentives within the industry to ensure that no one company can ever threaten to bring down the whole economy. To that end, the bill would also enact what’s known as the Volcker Rule: which places some limits on the size of banks and the kinds of risks that banking institutions can take. This will not only safeguard our system against crises; this will also make our system stronger and more competitive by instilling confidence here at home and across the globe. Markets depend on that confidence. Part of what led to the turmoil of the past two years was that, in the absence of clear rules and sound practices, people did not trust that our system was one in which it was safe to invest or lend. As we’ve seen, that harms all of us. By enacting these reforms, we’ll help ensure that our financial system and our economy continues to be the envy of the world.

Second, reform would bring new transparency to many financial markets. As you know, part of what led to this crisis was firms like AIG and others making huge and risky bets — using derivatives and other complicated financial instruments — in ways that defied accountability, or even common sense. In fact, many practices were so opaque and complex that few within these companies — let alone those charged with oversight — were fully aware of the massive wagers being made. That’s what led Warren Buffett to describe derivatives that were bought and sold with little oversight as “financial weapons of mass destruction.” And that’s why reform will rein in excess and help ensure that these kinds of transactions take place in the light of day.

There has been a great deal of concern about these changes. So I want to reiterate: there is a legitimate role for these financial instruments in our economy. They help allay risk and spur investment. And there are a great many companies that use these instruments to that end — managing exposure to fluctuating prices, currencies, and markets. A business might hedge against rising oil prices, for example, by buying a financial product to secure stable fuel costs. That’s how markets are supposed to work. The problem is, these markets operated in the shadows of our economy, invisible to regulators and to the public. Reckless practices were rampant. Risks accrued until they threatened our entire financial system.

That’s why these reforms are designed to respect legitimate activities but prevent reckless risk taking. And that’s why we want to ensure that financial products like standardized derivatives are traded in the open, in full view of businesses, investors, and those charged with oversight. I was encouraged to see a Republican Senator join with Democrats this week in moving forward on this issue. For without action, we’ll continue to see what amounts to highly-leveraged, loosely-monitored gambling in our financial system, putting taxpayers and the economy in jeopardy. And the only people who ought to fear this kind of oversight and transparency are those whose conduct will fail its scrutiny.

Third, this plan would enact the strongest consumer financial protections ever. This is absolutely necessary. Because this financial crisis wasn’t just the result of decisions made in the executive suites on Wall Street; it was also the result of decisions made around kitchen tables across America, by folks taking on mortgages and credit cards and auto loans. And while it’s true that many Americans took on financial obligations they knew — or should have known — they could not afford, millions of others were, frankly, duped. They were misled by deceptive terms and conditions, buried deep in the fine print.

And while a few companies made out like bandits by exploiting their customers, our entire economy suffered. Millions of people have lost homes — and tens of millions more have lost value in their homes. Just about every sector of our economy has felt the pain, whether you’re paving driveways in Arizona or selling houses in Ohio, doing home repairs in California or using your home equity to start a small business in Florida.

That’s why we need to give consumers more protection and power in our financial system. This is not about stifling competition or innovation. Just the opposite: with a dedicated agency setting ground rules and looking out for ordinary people in our financial system, we’ll empower consumers with clear and concise information when making financial decisions. Instead of competing to offer confusing products, companies will compete the old-fashioned way: by offering better products. That will mean more choices for consumers, more opportunities for businesses, and more stability in our financial system. And unless your business model depends on bilking people, there is little to fear from these new rules.

Finally, these Wall Street reforms will give shareholders new power in the financial system. They’ll get a say on pay: a voice with respect to the salaries and bonuses awarded to top executives. And the SEC will have the authority to give shareholders more say in corporate elections, so that investors and pension holders have a stronger role in determining who manages the companies in which they’ve placed their savings.

Now, Americans don’t begrudge anybody for success when that success is earned. But when we read in the past about enormous executive bonuses at firms even as they were relying on assistance from taxpayers, it offended our fundamental values.

Not only that, some of the salaries and bonuses we’ve seen created perverse incentives to take reckless risks that contributed to the crisis. It’s what helped lead to a relentless focus on a company’s next quarter, to the detriment of its next year or decade. And it led to a situation in which folks with the most to lose — stock and pension holders — had the least to say in the process. That has to change.

I’ll close by saying this. I have laid out a set of Wall Street reforms. These are reforms that would put an end to taxpayer bailouts; that would bring complex financial dealings out of the shadows; that would protect consumers; and that would give shareholders more power in the financial system. But we also need reform in Washington. And the debate over these changes is a perfect example.

We’ve seen battalions of financial industry lobbyists descending on Capitol Hill, as firms spend millions to influence the outcome of this debate. We’ve seen misleading arguments and attacks designed not to improve the bill but to weaken or kill it. And we’ve seen a bipartisan process buckle under the weight of these withering forces, even as we have produced a proposal that is by all accounts a common-sense, reasonable, non-ideological approach to target the root problems that led to the turmoil in our financial sector.

But I believe we can and must put this kind of cynical politics aside. That’s why I am here today. We will not always see eye to eye. We will not always agree. But that does not mean we have to choose between two extremes. We do not have to choose between markets unfettered by even modest protections against crisis, and markets stymied by onerous rules that suppress enterprise and innovation. That’s a false choice. And we need no more proof than the crisis we’ve just been through.

There has always been a tension between the desire to allow markets to function without interference — and the absolute necessity of rules to prevent markets from falling out of balance. But managing that tension, one we’ve debated since our founding, is what has allowed our country to keep up with a changing world. For in taking up this debate, in figuring out how to apply our well-worn principles with each new age, we ensure that we do not tip too far one way or the other — that our democracy remains as dynamic as the economy itself. Yes, the debate can be contentious. It can be heated. But in the end it serves to make our country stronger. It has allowed us to adapt and thrive.

I read a report recently that I think fairly illustrates this point. It’s from Time Magazine. And I quote: “Through the great banking houses of Manhattan last week ran wild-eyed alarm. Big bankers stared at one another in anger and astonishment. A bill just passed … would rivet upon their institutions what they considered a monstrous system… Such a system, they felt, would not only rob them of their pride of profession but would reduce all U.S. banking to its lowest level.” That appeared in Time Magazine — in June of 1933. The system that caused so much concern and consternation? The Federal Deposit Insurance Corporation — the FDIC — an institution that has successfully secured the deposits of generations of Americans.

In the end, our system only works  — our markets are only free — when there are basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system. And that is what these reforms are designed to achieve: no more, no less. Because that is how we will ensure that our economy works for consumers, that it works for investors, that it works for financial institutions — that it works for all of us.

This is the central lesson not only of this crisis but of our history. It’s what I said when I spoke here two years ago. Ultimately, there is no dividing line between Main Street and Wall Street. We rise or we fall together as one nation. So I urge you to join me — to join those who are seeking to pass these commonsense reforms. And I urge you to do so not only because it is in the interests of your industry, but because it is in the interests of our country.

Thank you. God bless you. And may God bless the United States of America.

Housing sales should rise a strong 5 percent in March, housing economists say, with the rush fueled by the end-of-the-month expiry of the first time homebuyer’s tax credit. All in all, 5.3 million Americans will purchase a new home. But The Associated Press story injects a note of caution:

Still, some housing market experts predict the market will take a dramatic “double-dip” once the government’s supports are gone. But others argue that there is enough pent-up demand to keep the market chugging. And prices have fallen dramatically since the boom years — as much as 50 percent in some places. So buyers can pick up bargain-priced foreclosures.

The most prominent housing expert anticipating a double-dip is Robert Shiller, the Yale professor and co-creator of the Case-Shiller housing index. In a recent New York Times piece, he argued that the optimism might be premature, particularly given the end of the Federal Reserve program to buy billions’ worth of mortgage-backed securities and Obama’s homebuyer tax credit programs. “Momentum may be on the forecasts’ side,” Shiller wrote. “But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.”

But momentum where? Bargain-priced foreclosures where? A double-dip where? These articles describe the national housing market, but increasingly it is more useful to think regionally. A national recovery — underpinned by rising consumer and investor confidence and returning employment, if slowed by the end of Obama’s housing-market programs — seems a decent bet. But in certain areas, severe difficulties look likely to continue and even worsen.

I wrote about this in part yesterday, in response to David Leonhardt’s excellent New York Times column on how in many parts of the country the rent ratio implies it is an advantageous time to buy a house. It is in most places. But in a few regions — namely, central southern California, Florida, Michigan and Nevada, plus to a lesser extent Georgia — all signs are that the housing market will not be recovering any time soon. Why? The answer lies in their housing markets as well as in their broader economies.

For one, their residential real estate markets are still in a state of decline. Places like the Inland Empire and Las Vegas and Ft. Myers have the highest concentration of shadow inventory, foreclosed homes that banks have not put back on the market. Moreover, they have increasing rates of foreclosures and delinquencies, implying falling home values to come.

Compounding the problem is that those regions also do not have the fundamentals for broader economic recovery either. They suffer from high, high rates of unemployment. In some cases, their population bases are actually shrinking. And households remain highly indebted. With no construction boom on the horizon — indeed, they tend to have excess housing and commercial real estate stock — these places seem stuck in a vicious downward cycle.

That means, while a broad-based and slow recovery helps turn the housing market around in the majority of states, things look parlous for an already hard-hit minority.

Lloyd Blankfein — head of Wall Street giant Goldman Sachs, against which the SEC filed civil charges last week for defrauding clients in some mortgage-backed securities trades — famously stopped speaking to the press after he mentioned he thought Goldman was doing “God’s work” in the midst of the biggest financial crisis since the Great Depression.

My guess is that the public still won’t be hearing from Blankfein too often. The Financial Times reports that in his numerous calls to major clients, assuring them of the firm’s stability despite the SEC charge, he has argued the suit will “hurt America.”

Unlike Goldman’s participation in over-financializing the U.S. economy, stoking the mortgage crisis and shorting the housing market, leading to an $8 trillion loss in household wealth, the suit will hurt America. Right.

President Barack Obama will give a speech on financial regulatory reform this morning at New York’s Cooper Union college, located one mile from Wall Street. He plans to demand that five elements make it into the final bill:

• Protect taxpayers from too-big-to-fail firms
• Impose the Volcker rule, named for former Fed Chair Paul Volcker, which stops firms from making large bets with their own money, or “proprietary trading”
• Make derivatives trades transparent
• Create a consumer protection agency
• Institute pay reforms to give investors a say over executive pay

Here are three excerpts from the speech, released to the press this morning:

One of the most significant contributors to this recession was a financial crisis as dire as any we’ve known in generations. And that crisis was born of a failure of responsibility — from Wall Street to Washington — that brought down many of the world’s largest financial firms and nearly dragged our economy into a second Great Depression. It was that failure of responsibility that I spoke about when I came to New York more than two years ago — before the worst of the crisis had unfolded. I take no satisfaction in noting that my comments have largely been borne out by the events that followed. But I repeat what I said then because it is essential that we learn the lessons of this crisis, so we don’t doom ourselves to repeat it. And make no mistake, that is exactly what will happen if we allow this moment to pass — an outcome that is unacceptable to me and to the American people.

As I said two years ago on this stage, I believe in the power of the free market. I believe in a strong financial sector that helps people to raise capital and get loans and invest their savings. But a free market was never meant to be a free license to take whatever you can get, however you can get it. That is what happened too often in the years leading up to the crisis. Some on Wall Street forgot that behind every dollar traded or leveraged, there is family looking to buy a house, pay for an education, open a business, or save for retirement. What happens here has real consequences across our country.

A comprehensive plan to achieve these reforms has passed the House of Representatives. A Senate version is currently being debated, drawing on the ideas of Democrats and Republicans. Both bills represent significant improvement on the flawed rules we have in place today, despite the furious efforts of industry lobbyists to shape them to their special interests. I am sure that many of those lobbyists work for some of you. But I am here today because I want to urge you to join us, instead of fighting us in this effort. I am here because I believe that these reforms are, in the end, not only in the best interest of our country, but in the best interest of our financial sector. And I am here to explain what reform will look like, and why it matters.

It’s earnings week — and the Federal Reserve system is offering up details on its 2009 balance sheet.

The bank notes that though the total value of its assets “did not change significantly,” the composition of those assets changed dramatically. The bank shed $1.3 trillion in central bank liquidity swaps, loans and commercial paper. But it increased its holdings of mortgage-backed securities by $919 billion, “to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.” (For reference, U.S. housing assets are worth $16.7 trillion, according to the Federal Reserve. Their value peaked at $22.9 trillion in 2006.)

The Fed’s overall earnings increased to $53.4 billion — including a surprising $20.4 billion in earnings on its mortgage-backed securities, many of which the Fed gained through its bailouts of AIG and Bear Sterns. Those assets were took a loss in 2008.

Senators agree that the banks are too big. But multiple bills and possible amendments circulating on the Hill offer different solutions to that problem. Here is a primer on the main proposals.

The American Financial Stability Act: Sen. Chris Dodd’s (D-Conn.) financial regulatory reform proposal is due to be taken up next week. It imposes “tough” new capital and leverage requirements that “make it undesirable to get too big.” (Dodd has not specified any numbers, leaving that up to regulators.)

It also creates a Financial Stability Oversight Council, to keep an eye on big banks. The Federal Reserve and FSOC can force a bank (or a non-bank financial institution, like an investment bank) to slim down if the regulators determine it poses a danger to the financial stability of the country. But this is only a “last resort.” Additionally, the Dodd bill looks to implement a version of the Volcker Rule — stopping banks from speculating with their own funds, or “prop trading.” But this rule will not be finalized or implemented until FSOC completes a study of it.

The Wall Street Transparency and Accountability Act: Sen. Blanche Lincoln’s (D-Ark.) derivatives reform bill passed out of committee today and will be merged into Dodd’s bill. It makes derivatives trading a less lucrative enterprise by forcing many over-the-counter derivatives trades into clearinghouses, improving price and volume transparency and encouraging competition. The bill helps to limit bank size by forcing financial firms that have access to the Fed discount window to stop trading in swaps, a currently unregulated form of derivative.

The Safe Banking Act: Sen. Sherrod Brown (D-Ohio) and Sen. Ted Kaufman (D-Del.) introduced a new bill to break up the banks today. They say they hope to offer it as an amendment to the Dodd proposal. It mandates hard leverage and size caps on banks and non-banking financial institutions. It limits commercial banks’ assets to 2 percent of GDP, and non-banks’ assets to 3 percent. It also prevents banks from holding more than 10 percent of insured deposits. Finally, it imposes a 16-to-1 leverage cap.

The Return of Glass-Steagall: Sen. Maria Cantwell (D-Wash.) has said she will reintroduce Glass-Steagall-type provisions as an amendment to financial reform. (Glass-Steagall is a Depression-era rule, rescinded in 1999, that banned banks from combining commercial and investment banking functions.) She has the backing of Sen. John McCain (R-Ariz.). Republican Senators Richard Shelby (Ala.), Johnny Isakson (Ga.) and John Cornyn (Texas) have also said they support repealing the repeal of Glass-Steagall.

Talking Points Memo reports that Sen. Richard Shelby (R-Ala.), the ranking member of the Senate Banking Committee, says Republicans are close to supporting Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill. “We’re very close to a deal and there will be a substantial number of Republicans that go along with it,” Shelby says. Senate Minority Leader Mitch McConnell (R-Ky.) had last week convinced all 41 Republican Senators to sign on to a letter opposing the bill on the grounds that it would create “perpetual bailouts” for Wall Street firms. It now seems Republicans will not filibuster the popular bill.

Additionally, the Senate Agriculture Committee passed Sen. Blanche Lincoln’s (D-Ark.) derivatives reform bill out of committee. All of the committee Democrats, plus Sen. Charles Grassley (R-Iowa), agreed to the plan, which Wall Street stringently opposes.

Today, New York Times economics writer David Leonhardt has a good column on why it might be a good time to buy a home in some unlikely parts of the United States.

Leonhardt shows that the rent ratio — the price of the home divided by the estimated annual cost to rent one like it — in many metro districts has fallen enough to signal that it is a good time to consider purchasing a home rather than renting one. Housing market experts believe that if the rent ratio is lower than 20, a home is of good enough value to consider buying. If the number is higher than 20, a purchaser is counting on real estate prices to rise to make up the higher aggregate cost of paying a mortgage. (During the worst of the housing bubble, homebuyers in places like Ft. Myers, Fla., were bidding on homes with sky-high rent ratios in the 40s.)

Leonhardt’s analysis shows that homes seem to be a decent deal in markets like California’s Inland Empire and Las Vegas — the very markets that stoked the worst of the housing crisis. But those parts of the country are suffering from high, high unemployment and a long real-estate hangover. And Leonhardt’s analysis does not take into account the fact that many mortgage experts believe those markets still have a ways to fall. I took the markets the Times column indicates might be a good deal — with rent ratios below 20 — and overlayed the data with information from RealtyTrac indicating the proportion of houses that received a foreclosure notice last month. In places like Washington, D.C., and Seattle, just one in 1,800 homes received a foreclosure notice. But in Las Vegas, one in 69 did, meaning a whole lot of houses might be coming on the market soon.

Indeed, the foreclosure crisis looks like it might worsen in many already hard-hit markets this summer and fall. The blue line on the graph below shows the rent ratio. The purple line shows the proportion of homes in the midst of foreclosure last month — and indicates markets that look likely to gain some capacity in the next few months.

So people looking to buy new homes might want to think twice before sinking their savings into one of the markets with a long purple line here, like Las Vegas or Riverside or Miami. On the other hand, the real estate markets in cities like Indianapolis, Dallas and Washington look considerably safer.

Senate Minority Leader Mitch McConnell (Ky.) is softening his criticism of Sen. Chris Dodd’s (D-Conn.) financial regulatory reform proposal, which Democrats plan to move to the floor on Monday. At the same time, Sen. Blanche Lincoln’s (D-Ark.) derivatives reform proposal goes into markup this morning at the Senate Agriculture Committee. (Lincoln says she expects it to pass on a party-line vote.) But aren’t these supposed to be the same bill?

To clarify the process: Yes. The Dodd bill and the regulatory reform bill that passed the House both contained derivatives language weaker than in Lincoln’s proposal. Dodd’s bill is going forward first, and the Senate bills need to be merged.

When the bills are merged, the language will change, ending up somewhere between the two. The White House reportedly believes that Lincoln’s language is too strong. But Lincoln’s proposal has received strong praise from reformers, and Lincoln says Dodd has assured her that the derivatives proposal won’t be too watered-down. Still, the provision requiring banks to move out their swaps desk looks the most likely to be axed.

In a startling new Pew survey, more than half of households say that within the past year a member of the household has been out of work — up 15 percentage points since last year. The survey in general paints a bleak picture of the jobless recovery:

And 70 percent of respondents report having a major financial difficulty, including unemployment, in the past year.

Financial regulatory reform uses multiple complex provisions to force banks to raise capital and lower risk. Today, Sen. Charles Schumer (D-N.Y.) offered his support for a blunter instrument: a bank tax.

“I think the administration’s proposal is a common-sense way to make sure that money should be repaid, and I believe it should be included in financial reform legislation to be considered on the Senate floor,” Schumer said today at a Senate Finance Committee hearing.

In January, President Obama proposed taxing big banks’ profits at 0.15 percent, both to pay for the multi-billion dollar cost of bailouts and to deter risk-taking. Today, Sen. Max Baucus (D-Mont.), the head of the Senate Finance Committee, said he would hold hearings on the proposal. But Sen. Chris Dodd (D-Conn.) has thrown water on the idea of attaching the bank tax to the broader financial regulatory reform bill due to be taken up next week.

Speaking today at a news conference on derivatives, Sen. Maria Cantwell (D-Wash.) raised the possibility of proposing an amendment to Sen. Blanche Lincoln’s (D-Ark.) derivatives reform proposal that might force banks to separate their commercial and investment banking functions.

“I’m a purist,” Cantwell said, in response to a question regarding whether she supported the Volcker Rule (a proposal by former Federal Reserve Chairman Paul Volcker to ban “proprietary trading,” effectively banning any bank with federal backing from speculating with its own money). “If you want to take fuel out of the fire, I would also personally say that you should break up the big banks and not have investing and commercial banking in the same bucket. I will offer that amendment on the floor.”

The portions on derivatives trading offer a more specific iteration of that same idea. Section 106 of Lincoln’s derivatives reform proposal bans banks from receiving “federal assistance (including federal deposit insurance, and access to the Federal Reserve discount window)” if they contain desks that trade swaps, one currently unregulated type of derivative.

Cantwell, who did not clarify when asked a follow-up, seemed to indicate that her amendment hopes to go further — preventing banks from forgoing federal backing if they deal not only in swaps, but in any sort of speculative trading. This winter, Cantwell and Sen. John McCain (R-Ariz.) were due to propose a return to the Glass-Steagall rules, rescinded in 1999, that prevented combined commercial and investment banks. But that provision has not made it into the final bill.