Author: Annie Lowrey

Derivatives — traded contracts whose price is derived from something else, like a stock, commodity, or interest rate — are the biggest remaining battleground in the financial regulations bill due for a Senate vote by the end of the month. Off the Hill, the loudest objections to a plan crafted by Sen. Blanche Lincoln (D-Ark.) to trade them on exchanges comes from two sides. Here’s a distillation of who doesn’t like it.

Dealers: The five biggest derivatives dealers — all big financial firms, like Goldman Sachs — made a whopping $28 billion in fees off of derivatives trading last year. These firms weren’t making bets, but were processing over-the-counter (that is, not exchange-traded) derivatives for their clients. Under regulations proposed by Lincoln and due to be unveiled later today, not only would dealers see those fees go down — they would be forced to wall off derivatives operations from the rest of their businesses.

End Users: End users are non-financial firms that buy derivatives contracts. (For instance, if you were a shipping company, you might want to purchase an option to buy gasoline at a set price in the future, if you thought petroleum prices were on the rise.) Under the Senate bill, companies using derivatives to speculate need to put up collateral. But end users using certain kinds of derivatives to hedge do not. Non-financial firms are concerned that the regulations will be too restrictive — possibly out of concern that financial companies will squeeze through the end user loophole – and they will end up posting collateral, increasing the cost of derivatives.

It is understandable that financial firms do not want to see their derivatives-trading profits disappear — but there is no way legislators will leave this multitrillion-dollar market unregulated just because lucrative companies do not want to see the end of one easy profit stream. (Besides, big Wall Street banks invest in derivatives exchanges and stand to profit from them.) And Lincoln, Sen. Chris Dodd (D-Conn.) and other negotiators do not seem likely to change the end user language.

Initial unemployment applications unexpectedly increased from 460,000 last week to 484,000 this week.

An unnamed Labor Department official quoted in the wire stories says:  “Volatility is always associated with the Easter holiday” and “This is more attributable to administrative factors than to possible layoffs. I did not see anything in the states’ numbers that would reflect economic concerns.”

That said — even if the number does not imply increased layoffs, it certainly does not indicate a willingness to hire on the part of businesses. Thus, the jobless recovery continues.

Blogging at Naked Capitalism, Edward Harrison provides a persuasive argument for why retail sales and consumption are increasing, despite persistent joblessness and a lack of income growth. He posits that homeowners in foreclosure or struggling with mortgage payments are deciding to stop sending checks to the bank, letting their banks reclaim their homes as collateral at some point but living rent-free until then and therefore having more money to spend on goods and services — an act known as “strategic default.”

If this is happening, it is a worrisome trend for big financial institutions, like Bank of America. Those banks often have hundreds of thousands, if not millions, of mortgage and home-equity loan customers — and therefore a lot of losses to stomach if homeowners decide to stop sending in checks and instead to grant the bank a house to try to sell on a very sluggish market.

Harrison explains, though, why strategic default might be a good idea for a homeowner:

Why might someone do this? Basically, someone strategically defaults because one finds oneself in a situation in which repayment no longer makes financial sense. For example, you buy a house for $400,000, $40,000 in cash and $360,000 as a mortgage. The value drops to $300,000, so you are now 20% underwater and rentals are half the price of your mortgage payment.  Meanwhile your repayments are 60% of income and you and your spouse have two children to take care of.

A person in this scenario who could continue paying the mortgage might opt to default, knowing that the bank might even delay in foreclosing on them, giving them rent free accommodation on top of defaulting. Remember banks are playing the pretend and extend game in order to avoid credit writedowns. The growing divide between delinquencies and foreclosures tells you that this is what is happening.

Harrison argues that the data imply that homeowners are taking money that would have gone to their mortgages or other loans — sometimes eating up as much as 60 or 70 or 80 percent of take-home income — and using it for personal expenditures. (I mention the mall in the headline, but I’ll note here that distressed homeowners are generally pretty hard up. Food and gas is more likely.) And he finds a number of anecdotal accounts of just this happening. HousingWire offers a similar argument as well.

Ultimately, if this phenomenon is as widespread as one might imagine — given that as many as 3 million households will receive a foreclosure notice this year — I’d expect to see that reflected in decreased expenditure on housing and increased expenditure on goods, on aggregate. I hoped to find information on how Americans spend their post-tax income, proportionally, but I could not find more recent data than from 2007. (If anyone has it, put it in comments!)

But the Bureau of Economic Analysis does provide often-updated, detailed data on spending on housing, goods, services and other necessities. It turns out that as of last quarter Americans were still spending a bit more on housing last quarter than in the one before it. But given the dire state of the housing market in the first quarter of 2010 and increasing numbers of defaults, I would not be surprised to see that red line bend down soon.

Wondering what’s behind those recent jobless recovery numbers?

1. Fortune 500 companies tripled their profits to $391 billion in 2009.

2. They also slashed their payrolls by more than 800,000 jobs.

RealtyTrac reports that foreclosures reached their highest-ever level in March: “[F]ilings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.”

The troubles continued to be felt most acutely in the so-called “sand states”: California, Nevada, Arizona, and Florida. In California alone 216,263 properties received a foreclosure notice. Ten states accounted for more than 70 percent of foreclosure activity, RealtyTrac said.

Why the sudden spike, so many months since the start of the burst of the housing bubble? The underpinning reason, of course, is persistent joblessness, declining incomes, and declining real estate prices. President Obama’s emergency foreclosure plans –  including the Home Affordable Modification Program, or HAMP, under scrutiny this week — have delayed much foreclosure activity, but not changed the underlying fundamentals.

The more immediate reason is that banks have decided to take action against homeowners late on their payments, both for mortgages and home-equity loans (secondary loans taken against the value of a house). The subprime mess remains a multibillion-dollar liability on the banks’ books. Reporting earnings yesterday, J.P. Morgan, the massive investment bank, for instance, wrote down $1.1 billion in home-equity losses. Lenders with more immediate exposure to mortgages — such as Bank of America — have much more to lose. And a recent report from CreditSights, a research firm, said that Bank of America, Wells Fargo, and J.P. Morgan might need an additional $30 billion to cover home-equity losses alone.

The Internal Revenue Service building in Washington (Flickr: functoruser)

Today is the deadline to file federal income taxes, and individuals and businesses are scrambling to get their books in order. The recession continued to batter individuals and families in 2009, with income falling and unemployment rising. But corporate profits started to rebound — nowhere more spectacularly than in the financial sector. Given those fundamentals, one might imagine that the Internal Revenue Service would focus more on corporations than individuals or small businesses.

Image by: Matt Mahurin

But a new report from the Transactional Records Access Clearinghouse, a nonpartisan research group affiliated with Syracuse University, shows that throughout the downturn, the agency has gone after fewer and fewer big businesses and more and more mom-and-pop outfits — the traditional engine of job growth.

Five years ago, the IRS instituted a “perverse quota system,” according to TRAC, pressuring auditors to complete more audits, rather than to recover more tax losses or to go further in depth. As a result, auditors turned away from more complicated and larger companies, despite clear evidence that they can defraud the federal government for much more vast amounts than their smaller counterparts. In 2009, the IRS performed audits on only around 25 percent of the biggest corporations — representing the lowest audit-rate in 20 years. Since 2005, the IRS has audited 22 percent fewer big businesses and allocated 33 percent fewer hours to looking at big-company books. Time spent on small businesses and the number of small businesses examined, on the other hand, have increased.

“The system is perverse and counterproductive,” argues Susan Long, the co-director of TRAC and a professor of managerial statistics at Syracuse. “The number of revenue agents actually peaked in 1988, and Congress has whittled back [the IRS’s] appropriations and thus the amount of hours that they had for agents to look into corporate profits. But we actually looked at a period where Congress was providing more resources to the IRS [between 2005 and 2009], and they still continued to cut back on these kinds of audits.”

The IRS disputes some of TRAC’s findings, telling reporters that it audits every company with assets over $20 billion and has changed the rules this year to help agents flag troublesome business filings. (The IRS did not respond to TWI’s repeated requests for comment.) But TRAC contends that the agency’s refutation of its data in several cases does not make sense. For instance, the IRS claims to audit 118 percent of one income-bracket of companies, but has not yet explained why the number is above the logical limit of 100 percent.

And in another sign that individuals, rather than big corporations, will be subject to IRS scrutiny, the agency recently promised to expand audits for new homeowners using the Obama administration’s tax credits – an $8000 credit for first-time buyers and $6500 credit for repeat buyers, available for purchases between January 1, 2009, and April 30, 2010. More than 1.5 million people have claimed the credit, and the IRS has promised to audit those claimants heavily.

With the Home Affordable Modification Program faltering in its effort to stem the foreclosure crisis, Dean Baker, the co-chair of the Center for Economic and Policy Research, argues for a simple and free way for Congress to aid banks and underwater homeowners.

Testifying before the House Subcommittee on Housing and Community Opportunity, headed by Rep. Maxine Waters (D-Ca.), he says that home values still need to deflate 10 to 20 percent. To ensure that underwater homeowners do not simply walk away from their mortgages, Congress should create a right-to-rent program letting people undergoing foreclosure rent their homes for five or ten years:

[M]ost homeowners who purchased their homes near the peak of the market are unlikely to ever see any equity in their home. In addition, even they are likely to be paying more in ownership costs than they would to rent a comparable home, even if they were to benefit from a modification and receive a lower cost mortgage….[An] efficient approach would be Right to Rent legislation that would temporarily change the rules on foreclosure to allow homeowners to stay in their homes, paying the market rent for a substantial period of time following foreclosure. By incentivizing lenders to negotiate, Right to Rent would immediately benefit all homeowners facing foreclosure. Finally, Right to Rent could be implemented at no cost to taxpayers and would require no new bureaucracy.

Today, a report from the Congressional Oversight Panel faults the Treasury Department’s efforts to stem the tide of foreclosures:

Treasury’s response continues to lag well behind the pace of the crisis. As of February 2010, only 168,708 homeowners have received final, five-year loan modifications — a small fraction of the 6 million borrowers who are presently 60-plus days delinquent on their loans. For every borrower who avoided foreclosure through HAMP last year, another 10 families lost their homes.

The Home Affordable Modification Program, the Obama administration’s flagship effort to help borrowers reduce their monthly mortgage payments and stop the foreclosure crisis, is not going well, the report concludes. Among the more distressing findings, flagged by the Huffington Post’s Shahien Nasiripour, is that homeowners who go through modifications often end up deeper underwater — owing more than their house is worth — than before modification. (The more underwater the homeowner, the more likely he or she is to walk away.) All in all, three-quarters of the program’s participants owe more than their house is worth.

In a separate report, the Treasury Department said that the number of homeowners who modified via HAMP but then still later defaulted doubled in March to 2,879. It also said that HAMP initiated just 57,000 new trial modifications in March, 15,000 fewer than in February, due to “servicers increasingly requiring upfront documentation from homeowners to comply with pending HAMP policy requirements.”

Phyllis Schlafly, the attorney and conservative political activist, has published a piece arguing against the United States’ progressive tax structure, in which around half of Americans will pay no federal income tax this year. In the piece, she writes:

The outright cash handouts include the earned income tax credit (EITC), which can amount to $5,657 a year to low-income families. Financial benefits can include child tax credits, welfare, food stamps, WIC (women, infants, children), housing subsidies, unemployment benefits, Medicaid, S-CHIP and other programs. This is a massive transfer of wealth and a soak-the-rich racket.

I’ll repeat: She argues that programs such as WIC — which provides food to “low-income pregnant, breastfeeding, and non-breastfeeding postpartum women, and to infants and children up to age five who are found to be at nutritional risk” — is a “soak-the-rich” racket. Schlafly’s is the most radical iteration of a common conservative talking point, that America’s low-income wage-earners are pulling a fast one on wealthier wage-earners by shirking income taxes. David Leonhardt at the New York Times offers an excellent, levelheaded refutation today:

The 47 percent number is not wrong. The stimulus programs of the last two years — the first one signed by President George W. Bush, the second and larger one by President Obama — have increased the number of households that receive enough of a tax credit to wipe out their federal income tax liability.

But the modifiers here — federal and income — are important. Income taxes aren’t the only kind of federal taxes that people pay. There are also payroll taxes and capital gains taxes, among others. And, of course, people pay state and local taxes, too. Even if the discussion is restricted to federal taxes (for which the statistics are better), a vast majority of households end up paying federal taxes. Congressional Budget Office data suggests that, at most, about 10 percent of all households pay no net federal taxes. The number 10 is obviously a lot smaller than 47.

Furthermore, the rich have their tax breaks too — none more egregious than the carried interest rule, which allows people like hedge fund managers to pay a 15 percent capital gains tax, rather than the standard 35 percent income tax, on certain earnings. That rule is currently undergoing Congressional scrutiny.

This morning, Federal Reserve Chairman Ben Bernanke testified before Congress on the condition of the economy. His comments were generally positive, but he cited serious concerns with the labor market and said it will take a “significant amount of time” before the 8.5 million jobs lost in the recession return.

I am particularly concerned about the fact that, in March, 44 percent of the unemployed had been without a job for six months or more. Long periods without work erode individuals’ skills and hurt future employment prospects. Younger workers may be particularly adversely affected if a weak labor market prevents them from finding a first job or from gaining important work experience.

After that statement, Bernanke turned to other matters. The Fed, despite the protestations of economists such as Joe Gagnon, has signaled that it will not do more to combat unemployment. That leaves the action to Congress, where thankfully there are a number of proposals to combat high rates and long spells of joblessness, and their side-effects.

A good plan is Rep. George Miller’s (D-Calif.); his Local Jobs for America Act would provide $75 billion over two years to states to boost hiring. (Several members of the House pushed for the bill today.) Another is the continued extension of unemployment benefits as a stopgap measure. Speaking against a temporary one-month bill on the Senate floor this morning, Sen. George LeMieux (R-Fla.) argued that the benefits are non-emergency and therefore should be pay-go:  “Has it been unforeseen that we were going to have to extend unemployment compensation?…Of course it is not. We knew that we were going to have to do this, but there is an unwillingness in this Congress to pay for things.” Economist Mark Zandi countered by saying that not passing benefits would be “counterproductive” and that benefits should be paid for later in the economic upswing.

Today, the White House Council of Economic Advisers released their latest quarterly report on the stimulus and estimated that the American Reinvestment and Recovery Act has increased total employment by between 2.2 and 2.8 million jobs — with tax cuts and income support saving or creating approximately half of those jobs.

The CEA estimates the number of jobs saved through a GDP model, but the report also provides direct statistics on how the Recovery Act helped families and workers. The report notes that 22 million people, 14 percent of the labor force, have directly benefited from unemployment benefits provided in the  Recovery Act, for instance; 50 million retirees and others received $250 one-off assistance payments; and millions more benefited from a temporary boost to the earned income tax credit.

Holding the size of the labor force steady, without those 2.2. million jobs, the current unemployment rate would stand at 11.8 percent. Of course, higher unemployment would discourage workers from looking for jobs, etc., and it is impossible to project what the unemployment rate would have been if the government had not passed the Recovery Act. Regardless, the size of its benefit remains considerable.

In the past few weeks, Blanche Lincoln (D-Ark.), the chair of the Senate Agriculture Committee, has become the unlikely point person on a debate on Wall Street arcana. Her committee is charged with producing the language regarding derivatives regulation for the broader financial regulation reform bill. Banks make billions in transactions fees on derivatives every year, and therefore have pushed back hard on a White House plan to put them on exchanges, improving pricing and volume transparency. It seemed that Lincoln might have waffled, but she released a letter to Politico today indicating the regulations will be strong:

A new proposal … would require sweeping changes to the $450 trillion derivatives market, including forcing big banks to spin off “swaps desks” that handle the complex financial instruments — a more aggressive approach than either the White House or other congressional committees have advocated so far, according to the Arkansas Democrat and her aides.

Lincoln’s plan is likely to burnish her standing with progressive groups inside the Democratic Party ahead of her May 18 Senate primary, where she is facing a challenger from the left. Lincoln drew fire from liberals in her party for opposing the public health insurance option in the recent health care reform bill.

Her plan is due to be unveiled as soon as the end of the week. The Senate hopes to take up financial regulation reform by the end of the month.

Kerry Killinger was the chairman and chief executive officer of Washington Mutual, the $300 billion savings-and-loan organization, from 1990 until 2008. During his tenure, he made more than $100 million in compensation, including more than $14 million in 2007 and $21 million in 2008 — granted for his oversight of WaMu’s tremendous expansion and rise in profitability, fueled by making loans to less-than-creditworthy borrowers.

In 2007, when the housing bubble started to burst, Killinger continued to stand by WaMu’s home loans business. With billions in losses racking up, in March, 2008, he rejected an $8-a-share merger offer from J.P. Morgan. Just months later, in September, 2008, WaMu went entirely belly up, with all of its shareholders effectively wiped out.

It is hard to pity Kerry Killinger — and less so after reading his prepared testimony for the Senate Permanent Subcommittee on Investigations, headed by Sen. Carl Levin (D-Mich.). Killinger insists that the government seizure of WaMu, in the largest bankruptcy in banking history, was an “unfair” mistake. Moreover, he whines that WaMu was shut out from meetings between the Wall Street banks and Treasury and Fed officials:

The unfair treatment of Washington Mutual did not begin with its unnecessary seizure. In July 2008, Washington Mutual was excluded from the “do not short” list, which protected large Wall Street banks from abusive short selling. The Company was similarly excluded from hundreds of meetings and telephone calls between Wall Street executives and policy leaders that ultimately determined the winners and losers in this financial crisis. For those that were part of the inner circle and were “too clubby to fail,” the benefits were obvious. For those outside of the club, the penalty was severe.

As for Killinger’s contention that the government shut WaMu down rather than rescuing it because it was not running with the in-crowd: September and October 2008 marked the absolute height of the credit crisis. In the weeks after the collapse of Lehman Brothers, Fed and Treasury officials were concerned with averting utter economic catastrophe, not with punishing banks that weren’t part of the “club.” The statement is as absurd as it is tone-deaf. I will note that unlike most other executives testifying to Congress, Killinger does not use the words “sorry” or “apologize” even once in his 7,600-word testimony. (He does say he is “saddened” by what has happened.) He does not apologize to his shareholders, employees or the homeowners and average citizens who patronized WaMu.

And my sense is that in the coming week Killinger’s testimony will seem even more ridiculous. Levin’s committee’s report, due to be released in full on Friday, reportedly shows gross negligence and fraud at WaMu, which made hundreds of millions off of mortgage-backed deals before collapsing and spurring the “man-made economic assault” of the Great Recession, as Levin describes it in his blistering opening remarks.

This morning, Senate Minority Leader Mitch McConnell (Ky.) spoke out against the financial regulatory reform bill expected to come up for a Senate vote sometime at the end of the month. The central gist of the argument is that the bill puts the taxpayers on the hook for future bailouts and does not restore moral hazard:

The bill gives the Federal Reserve enhanced emergency lending authority that is far too open to abuse. It also gives the Federal Deposit Insurance Corp and the Treasury Department broad authority over troubled financial institutions without requiring them to assume real responsibility for their mistakes. In other words, it gives the government a new backdoor mechanism for propping up failing or failed institutions.

A new $50 billion fund would also be set up as a backstop for financial emergencies. But no one honestly thinks $50 billion would be enough to cover the kind of crises we’re talking about. During the last crisis, AIG alone received more than three times that from the taxpayers. Moreover, the mere existence of this fund will ensure that it gets used. And once it’s used up, taxpayers will be asked to cover the balance. This is precisely the wrong approach.

Far from protecting consumers from Wall Street excess, this bill would provide endless protection for the biggest banks on Wall Street. It also directs the Fed to oversee 35 to 50 of the biggest firms, replicating on an even larger scale the same distortions that plagued the housing market and helped trigger a massive bubble we’ll be suffering from for years. If you thought Fannie and Freddie were dangerous, how about 35 to 50 of them?

The speech encapsulates Republican opposition to the bill: That it does too much to stymie free markets and to prop up Wall Street at the expense of consumers.

This morning, Treasury Secretary Timothy Geithner published an opinion piece in The Washington Post. In it, he argues:

Ending “too big to fail” also requires building stronger shock absorbers throughout the system so it can better withstand the next financial storm. To do that, the Senate bill closes loopholes and opportunities for arbitrage, and it brings key markets, such as those for derivatives, out of the shadows. Transparency will lower costs for users of derivatives, such as industrial or agriculture companies, allowing them to more effectively manage their risk. It will enable regulators to more effectively monitor risks of all significant derivatives players and financial institutions, and prevent fraud, manipulation and abuse. And by bringing standardized derivatives into central clearing houses and trading facilities, the Senate bill would reduce the risk that the derivatives market will again threaten the entire financial system.

Sen. Judd Gregg (R-N.H.) had a detailed opinion piece in Bloomberg on the same topic:

Congress’s aim for OTC regulation is to reduce systemic risk to the financial system by, at the very least, providing an efficient regulatory structure that reduces the frequency and severity of market liquidity problems.

By and large, the swaps market is a wholesale, institutional market where most trades are large, block-sized transactions. Mandatory exchange trading would reduce market liquidity and increase execution costs for the ultimate end-user of these swaps. Advocates for mandated exchange trading want to decrease bid-ask spreads, which would theoretically lower the cost of these products, but they fail to understand the market sensitivities.

Mandating real-time dissemination of swap transaction price and quote data will require market participants to announce their trading interests to the entire market and allow others to step in front of their trades, moving the market against their hedges. In such an environment, market liquidity for swap transactions will decrease dramatically, if not disappear altogether.

To unpack: Geithner and Gregg sound like they might be at (incomprehensible) loggerheads, but they are not actually saying very different things. Geithner wants to exchange-trade derivatives, making pricing and volume information open to the market. Gregg argues that if pricing and volume information are public, the market will react to that information, making certain trades more expensive or even impossible. Both agree that exchange-trading derivatives will reduce fees for Wall Street banks and provide transparency into the true cost of swaps and other financial instruments.

There is a backdrop to the two wonky op-eds: Derivatives are the newest battleground between Democrats and Republicans, reformers and Wall Street. The Obama administration is currently pressuring the Senate Agricultural Committee (which is writing the derivatives part of the legislation) to ensure that the rules aren’t so loose as to exempt many financial firms and non-banks from using the exchanges.

The National Federation of Independent Business — the small-business lobbying organization — reports that small-business optimism declined in February. Small businesses reported smaller workforces and continued price cutting, among other sluggish stats. This chart encapsulates the continued bad times:

The yawning gap on the right side of the chart shows that while small businesses continue to expect improved sales, actual sales remain at historical lows.

The report comes just months after another, more comprehensive dismal report, “Small Business Credit in a Deep Recession.” It shows that, despite the lifting of the recession, as of February, small businesses have less access to credit than they did a year ago. The percentage of small businesses holding a loan has fallen 20 percent year-on-year. More than half of small businesses cite “slow or declining” sales as a major issue, up eight percent from one year ago. And only 40 percent of small businesses attempting to borrow had all of their needs met.

Small businesses — which over the past 15 years have generated nearly two-thirds of new jobs — continue to show low optimism and sustained difficulty accessing credit, despite the Obama administration’s efforts: more than $15 billion in loan guarantees through the Small Business Administration, $33 billion in tax breaks for new hiring and increased loans to small businesses through the multi-billion-dollar Term Asset-Backed Securities Loan Facility, or TALF. The administration has made a concerted effort to ensure the flow of credit to small businesses for more than a year now — but many programs remain in plenary stages, and thus far, they have evidently had little effect. For months, the NFIB has advocated a payroll tax holiday to gin up hiring. But that measure remains controversial and unmentioned by the White House and Congress.

Unnamed administration officials quoted by David Cho of The Washington Post say the federal deficit is lower than the White House’s initial projections. The budget gap for the first six months of the year is eight percent lower than estimated; were the trend to continue, the annual deficit would be $300 billion lower than initial estimates. The officials cited higher tax revenue and lower spending on the financial-system bailout as the reason for the improved numbers.

But other White House officials — namely Kenneth Baer, spokesperson for the Office of Management and Budget — expressed dismay at the tentative data, calling it “premature and irresponsible.” The annual deficit figure is not due to come out until late summer. The new estimate sets a higher bar for the White House to clear, and is based on higher tax-withholding by employers in March and April (a positive sign, but a preliminary one) and lower spending on helping the financial sector (premature, particularly given the possibility of housing market troubles later in the year).

Still, using Office of Management and Budget data, I created a graph to show just how much lower the annualized projection might be, and presumed similar savings in the coming years. The blue line is official White House data, either confirmed or projected; the red shows the estimated savings.

Peter Orszag, director of the Office of Management and Budget, reports on his blog that earmarks have declined sharply, down 17 percent in volume and 27 percent in dollar value between 2009 and 2010:

For too many years, the practice of congressional earmarking continued virtually unabated. During the 10-year period that ended in 2005, according to the Congressional Research Service, the number of earmarks skyrocketed, increasing by more than 400 percent and reaching a level of more than 16,000. This increase was particularly troubling because all too often, earmarks are an easy vehicle for special interest deal-making – inserted into congressional spending bills without filter for merit, need, priority, or any scrutiny by the public, the media, or other members of Congress.

The Administration has just completed its count of the earmarks contained in the Fiscal Year 2010 appropriations bills, the last of which the President signed into law in mid-December. Although more needs to be done, the news is encouraging: earmarks are down by double-digit percentages….These reductions build on the progress that has been made on earmarks since 2006, reductions prompted by a series of reforms that then-Senator Obama helped to write – including bringing more transparency and disclosure to the process.

In a later post, he accounts for discrepancies between his numbers and those produced by Taxpayers for Common Sense, the federal budget watchdog.

For the Senate Permanent Subcommittee on Investigations, it is WaMu week.

Tomorrow, the subcommittee will release more than 500 documents on Washington Mutual, the $300 billion bank that helped fuel the subprime bubble and then collapsed in the biggest bank failure in U.S. history. It will also hold a hearing with WaMu executives, including Kerry Killinger, the former chairman and chief executive officer. Then, on Friday, the subcommittee — headed by Sen. Carl Levin (D-Mich.) — will release an investigative report, the fruit of 18 months of labor, into how the Main Street bank took on and eventually died due to Wall Street practices.

Details about the report started to emerge today. The company decided in 2003 to move aggressively into subprime lending to bolster earnings, ultimately producing $77 billion in mortgage-backed securities. The company changed pay practices to prize quantity over quality. And it “built a conveyor belt to dump toxic mortgage assets into the financial system like a polluter dumping toxic substances into the river,” Levin told reporters. Expect ugly revelations all week.

Tomorrow, the House Financial Services Committee, headed by Rep. Barney Frank (D-Mass.), starts a series of hearings on mortgage modification and the housing market. The schedule is as follows:

• On Tuesday morning, the committee holds a hearing with home loan executives from Bank of America, Citigroup, J.P. Morgan and Wells Fargo on “Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program.”
• On Wednesday morning, the committee holds a hearing entitled “Housing Finance: What Should the New System Be Able to Do?” The witness list is not yet set.
• On Wednesday afternoon, the Subcommittee on Housing and Community Opportunity holds a hearing on “The Recently Announced Revisions to the Home Affordable Modification Program (HAMP).” The witness list is not yet set.

Some troubling data on the inadequacies of HAMP and the still-weak housing market form a backdrop to the hearings. Today, Bank of America reports that it has completed 33,000 mortgage-modifications, up 12,000 since March — it says it has now modified around a quarter of eligible mortgages. (Citigroup does better: It has modified more than half.)

But those positive statistics are overshadowed by a report from Lender Processing Services — a major mortgage processing company — showing that the inventory of foreclosed homes hit a “record high” in February. The number of delinquencies jumped 21 percent year-on-year. The report notes: “More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end.” This graph shows the percentage of mortgages that are non-current or in foreclosure, month by month: