BNA Banking Report, Wednesday, November 30, 2005
OFHEO Announces 16 Percent Increase in Fannie, Freddie Conforming Loan Limits
By Richard Cowden
In an article about OFHEO announcing that it would raise the single-family conforming loan limit for Fannie and Freddie by 16 percent next year, Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc., said the size of the loan limit adjustment “will arm those who are opposed to the loan price increase. The higher the limit, the harder it is to argue that ordinary borrowers are excluded from the conventional mortgage market” by the existing conforming loan rules. Petrou went on to say that the big adjustment for 2006 could prompt potential Senate negotiators to dig in their heels on the question of allowing larger loan limit adjustments for pricier markets. “This could become a hot-button issue.” Petrou also said the GSEs appear to be sensitive about the size of the upcoming adjustment.

American Banker, Tuesday, November 8, 2005
After Years As Nonissue, A Premium Vote Toss-Up
By Luke Mullins
A Federal Deposit Insurance Corp. vote today to determine whether to charge banks premiums for the first half of next year is shaping up to be a cliffhanger. Observers said it was uncertain how the agency would rule because it depends on several factors, including the strength of insured deposit growth, the impact of the Gulf Coast hurricanes, and whether a premium increase could have political ramifications. “The Bank Insurance Fund is stressed from two sides,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics. “On one side there is deposit growth and the other is the potential difficulty of banks in the Gulf region.”Though no bank has failed yet due to the hurricanes, such a possibility represents an “important psychological factor,” Ms. Petrou said. “The fund would be considerably stressed by even a couple of small bank failures in the region,” Ms. Petrou said.

CFO Magazine, October 2005
Basel Faulty?
By Randy Myers
In an article on how the new international banking rules could improve loan pricing, but have raised concerns at the Fed, Karen Shaw Petrou, managing partner of Washington, D.C.-based Federal Financial Analytics Inc., says lenders also may find it more advantageous under a Basel II regime to use other credit-risk mitigation techniques, such as guarantees, portfolio insurance, and credit derivatives. Finally, she says, banks operating under Basel II may become less interested in offering one-year revolving lines of credit, against which they didn’t have to hold regulatory capital under the original Basel accord but now will. When lines of credit are available, they may be more expensive.

BNA Banking Report, Monday, October 3, 2005
Regulators Delay Basel II Implementation, Promising New Roadmap, Extra Safeguards
By R. Christian Bruce
In an article about the U.S. delay in implementing the Basel II capital accord by at least one year, Federal bank and thrift regulators hope to charting a new roadmap for the effort and promising extra safeguards to address problems highlighted in a controversial impact study released last spring. Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc., a Washington, D.C., financial services consulting firm, Sept. 30 predicted that large U.S. banks covered by Basel II will not welcome the delay. Although the extra time will allow regulators to address concerns about Basel II’s impact on smaller U.S. banks, she said, it also will give banks in Europe, Canada, and elsewhere a clear advantage against their large U.S. bank competitors at least through 2011, which is the soonest that a U.S. Basel II bank can take full advantage of the new accord. “This addresses the most immediate political challenge they faced, but they are about to walk into a buzzsaw, because the big U.S. banks will read this and be most upset,” Petrou told BNA. “There’s a U.S. investment bank problem and a foreign bank problem,” Petrou said, referring to competitiveness concerns on the part of U.S. banks adopting Basel II. She added that the extra flexibility regulators have allowed themselves under the new timetable could make planning more complicated. “Every bet is hedged,” she said.

Petrou’s Testimony Strikes Nerve

Bachus, Frank, and several other members of the subcommittee centered many of their concerns about Basel II by referencing testimony Petrou. She warned that delayed implementation could damage U.S. banks that need the accord to keep pace with foreign financial institutions. If the United States delays implementation, she warned, banks in Canada and the European Union and elsewhere will have lower capital costs, making them hungry to acquire U.S. banks. “With barriers to entry remaining high within the EU and in most other nations, EU and Canadian banks–possibly soon joined by newly strengthened Japanese ones–will look to the U.S. for new targets,” Petrou said.

Compromise Approach Suggested

Petrou argued for an approach that would move ahead with Basel II for large banks, while giving smaller U.S. banks some of the same kinds of options. Instead of merely making adjustments to the Basel I accord as regulators have promised, she said U.S. regulators should allow Basel II’s “standardized option” to be used in the United States.

That approach, though not as aggressive as the internal ratings-based model in terms of risk assessment, nevertheless moves away from the Basel I standards and offers more flexibility. Among other points, she said, the standardized option would assign a 35 percent risk weight to low-risk mortgage loans, and a 75 percent risk-weight to consumer and small business loans. “Small banks and savings associations with simple portfolios can quickly look through the standardized requirements and implement them without complications the requirements dictate for more complex banks,” she said. She said that middle ground would allow the United States to move ahead with the benefits of Basel II for very large banks, while making substantive changes that smaller institutions need. “The U.S. can and should move quickly to the advanced Basel II options, but quickly means only at the pace at which all institutions that wish to pursue Basel II–not just the biggest banks and savings associations–demonstrate readiness for rules regulators should continue to test and adapt,” Petrou said.

American Banker, Thursday, September 29, 2005
Lawmakers: No Basel II Until IA Done
By Damian Paletta
In an article on House lawmakers telling federal banking regulators to hold off on the Basel II capital accord until parallel work on standards for small banks is finished, much of the tirade against the Fed at the hearing began after Karen Shaw Petrou, a managing partner at Federal Financial Analytics, said U.S. regulators were in a “damned if you do, damned if you don’t dilemma.” If Basel II is not adopted domestically, large U.S. banks would be at a competitive disadvantage with foreign ones that could hold less capital and lower their prices on loans and other products, she said, but if U.S. regulators implement the accord, small banks could find themselves at a pricing disadvantage.

American Banker, Tuesday, August 16, 2005
Fed: Banks Bulking Up With Exotic Mortgages
By Damian Paletta
In an article on new evidence recently emerging that lenders are piling into untested mortgage products, and that regulators are increasingly worried about it, Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. said “These statistics would push a doubting regulator in the direction of a tougher rule.” The new study showed that more than half of the respondents to the Federal Reserve Board’s quarterly survey of senior loan officers said their share of interest-only and other nontraditional mortgage products is substantially or moderately higher than a year before. Nearly a third said that such products make up 16% to 50% of their dollar volume of residential mortgages – substantially more than previously estimated. The survey report also said mortgage demand was up despite recent interest rate hikes, and it noted looser underwriting standards for commercial and industrial loans.

Fortune, Monday, August 15, 2005
By Bethany McLean
Fannie, Freddie, and China. Really. According to a report by Federal Financial Analytics, China’s holdings of Fannie and Freddie debt are double what they were three years ago. In fact, China now holds $144.5 billion of such debt, almost equal to the $150 billion in Treasuries that it owns. The worry cuts both ways: What if China’s economy stumbles, and it begins dumping Fannie and Freddie bonds? Or what if Fannie and Freddie stumble? What sort of pressure would that put on China’s fragile banking system? Gotta love the global economy. In today’s trade, Fannie fell 83 cents to $51.17.

BNA’s Daily Report for Executives, Monday, August 15, 2005
Report Says Concerns About GSE Bonds Held by Chinese May Be Driving Reform Bill
By Richard Cowden
In a August 12 report on Chinese investors now holding about a quarter of all U.S. housing government-sponsored enterprise foreign debt, Federal Financial Analytics Inc., a Washington, D.C.-based financial consulting firm noted that a level that high could pose risks for financial systems in both countries. Concerns about the rapidly increasing share of agency bonds issued by Fannie Mae, Freddie Mae, and the 12 Federal Home Loan Banks in the hands of “fragile” Chinese banks may be one of the motivating factors behind the Federal Reserve Board’s and the administration’s insistence on tough legislation to trim Fannie’s and Freddie’s mortgage portfolios, the report said.

National Mortgage News Online, August 12, 2005
China Holds Large GSE Debt
Fannie Mae, Freddie Mac and the Federal Home Loan Banks have been marketing their debt to China and other Asian countries for years, but it appears that China is holding nearly as much GSE debt as U.S. Treasury securities. As part of its quarterly funding report, the Treasury Department included a chart that shows China holds $150.2 billion in U.S. Treasury bonds and $144.5 billion in government agency bonds — which is predominately debt issued by the three housing government sponsored enterprises. The chart highlights the fact that competition between Treasury and agency securities is “very real in foreign eyes,” according to Federal Financial Analytics, Inc., a Washington consulting firm that spotted the chart. “This reason alone would justify a tightening of the GSEs’ portfolio holdings.” The FFA report also points that concerns about U.S banks holding large concentrations of GSE debt holdings has a foreign element too. “China has, of course, a fragile, stressed banking system that could not withstand even a short-term liquidity crunch from any GSE market shock.”

Daily Report for Executives, Friday, July 15, 2005
OFHEO-Released Data on Mortgage Trends Show Falling Fannie, Freddie Market Shares
By Richard Cowden
In an article on newly released data on mortgage trends, OFHEO said that the date indicate a sharp drop over the past year in total market share for mortgages represented by government-sponsored enterprises Fannie Mae and Freddie Mac. The announcement came just before Senate Banking Committee Chairman Richard Shelby (R-Ala.) said that he expects his committee to take up legislation that would abolish OFHEO and establish a stronger independent regulator to supervise the two housing finance companies. Federal Financial Analytics, a Washington, D.C., financial consulting group issued a statement July 13 that said: “The release–in sharp contrast to the actual study–focuses on the GSEs’ declining market share from 2003 to 2004 and provides OFHEO’s explanation for the sometimes startling drops. Is this an effort to show that the GSEs no longer pose so large a threat and, therefore, that legislative reformers can relax and let OFHEO go about its business?”


Washington Post, Saturday, July 2, 2005
Cost Outlined For Oversight of Mortgage Finance Firms
By Annys Shin
In an article about a House bill to strengthen oversight of mortgage companies Fannie Mae and Freddie Mac, Congressional Budget Office said the bill will cost the federal government $300 million over 10 years. The finding may increase opposition to part of the bill that would force the two firms to set aside 5 percent of their profit into a low-income housing fund. Karen Shaw Petrou, managing partner of financial services consultancy Federal Financial Analytics Inc., wrote in a recent research note that the budget office’s findings would probably “swing additional members” to side with bill opponents.

American Banker, Thursday, June 16, 2005
OFHEO’s New Worry at Fannie: Report cites credit risk, liquidity soft spots
By Jody Shenn
In an article on OFHEO’s latest annual report to Congress, it has begun to criticize Fannie Mae’s management of credit and liquidity risks. The regulator said Fannie’s management of credit and liquidity risks was generally “satisfactory.” But it pointed out several soft spots, including a few “of greater significance” on the credit risk side. Karen Shaw Petrou, a managing partner of Federal Financial Analytics Inc., said the regulator has not really said much about potential breakdowns in these areas of risk management. “If they are doing it now, that is significant,” she said.

Daily Report for Executives, May 2, 2005
Regulators Delay Basel II Rulemaking, Citing Risk Implications From Impact Study
By R. Christian Bruce
In an article about federal bank regulators delaying the Basel II rulemaking, Karen Petrou, managing partner at Federal Financial Analytics, Inc. said “Our guess is that the U.S. regulators’ problems with the QIS aren’t its data or questions on how well the bank filled out the form.” Petrou went on to say that the results simply highlight what she called the inherent contradiction of the Basel II effort in the United States. From the start, she told BNA in a telephone interview, regulators expected that even if capital varied by risk, in the aggregate it would close in on the 8 percent standard set out in the 1988 Accord. “But that just can’t happen, and it hasn’t happened,” she said. “To discover that risk-based capital means that risk varies is not all that surprising.”

Seattle Post-Intelligencer Reporter, Friday, April 12, 2005
Federal Home Loan Bank’s Situation Raises Concern
By Bill Virgin
In an article about The Federal Home Loan Bank of Seattle coming in for closer scrutiny from analysts, regulators and bankers as it tries to reverse a slump in earnings, Federal Financial Analytics Inc., a Washington, D.C.-based firm that studies political and regulatory risk for financial services industry executives, issued two reports in the last week that warned that a “major interest rate mismatch” between assets and liabilities “will take a sizable bite out of earnings and equity whether interest rates rise or fall this year.”

Dow Jones Newswires, April 12, 2005
Worrisome Financial Disclosure Shows Seattle FHLBank Worsens
By Dawn Kopecki
In an article about cash flow problems at the Seattle Federal Home Loan Bank depleting its 2004 earnings and likely handicapping the bank’s operations for years to come, Federal Financial Analytics managing partner, Basil Petrou, wrote “The bank’s efforts to stabilize its finances may lead to a further revenue collapse as a few large members with membership in other banks take their advances business elsewhere because of the reduced – or non-existent – future dividends association with bank stock now needed to facilitate the advances program. All in all, a real mess for Seattle and the (Finance Board).”

American Banker, Thursday, March 31, 2005
A Pivotal Week for GSEs; Testimony could dictate fate of reform bill
by Rob Blackwell
In an article about the three upcoming Congressional hearings in the fight over giving the housing government-sponsored enterprises a new regulator, Fed Chairman Greenspan is expected to reemphasize the systemic risk posed by Fannie and Freddie and reiterate that curbing their portfolio growth would be an essential way to strengthen economic stability. “The Fed Chairman is no longer discounting the prospect of GSE systemic risk,” Federal Financial Analytics Inc. wrote in a report released Monday. “If he expands on this point – which we expect he will do in his usual, elliptical way – members on both sides of the Hill will be put into the more fearful mode that the Fed hopes will push tough legislation to enactment.”

Wall Street Journal, Wednesday, March 9, 2005
Fannie Mae Is Cited for ‘Deficiencies’
In an article about OFHEO tightening its grip on Fannie Mae in light of its accounting problems, many in the industry have questioned Fannie’s financial oversight. At a minimum, Fannie seems to have allowed “extreme sloppiness” in its internal controls, said Karen Petrou, a managing partner at Federal Financial Analytics Inc., a research firm in Washington.

Daily Report for Executives, Wednesday, March 9, 2005
Fannie Mae Signs Second Agreement To Boost Accounting, Internal Controls
By Richard Cowden
In an article about OFHEO tightening its grip on Fannie Mae in light of its accounting problems, Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc., a Washington, D.C., bank consulting firm, said the most surprising aspect of the agreement was the level of detail of procedures that it orders Fannie to take to improve its operations. “Developing policies to protect against falsified signatures and to keep from overwriting databases, that’s the basics of internal controls,” Petrou said. Having said that, however, Petrou added that it is no longer news that Fannie was experiencing lapses in managing its internal controls. “It seems to us that what was really going on here was that Freddie Mac’s, Fannie Mae’s, and the Federal Home Loan Banks’ portfolios were growing so fast that their internal controls were unable to keep pace,” she said.

American Banker, Wednesday, March 09, 2005
Fannie Hit with Second Set of Regulatory Controls,
By Rob Blackwell
In an article on additional steps taken by OFHEO to govern Fannie, OFHEO noted the need for more internal controls and better corporate governance. OFHEO also required that Fannie’s general counsel report to Fannie’s board or OFHEO “actual or possible misconduct of a not inconsequential nature by employees.” Fannie’s board has a year to audit and review the company’s compliance program and provide the results to OFHEO. “What strikes me about this is all of the functions that report to OFHEO,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting firm whose clients include competitors to Fannie. “In essence, OFHEO has put in a series of in-house examiners that Fannie is paying for.”

Dow Jones Newswire, Tuesday, March 8, 2005
Fannie Agrees To Prevent Execs From Altering Data
By Dawn Kopecki
In an article on escalating accounting and corporate governance problems at the GSE, Fannie Mae’s (FNM) board agreed Monday to prevent executives from altering the company’s internal financial records and to prohibit employees from falsifying bookkeeping entries in an unusual deal struck with Fannie’s regulator to more broadly improve internal controls and accounting practices. “This is basic stuff,” said a report in industry newsletter GSE Activity Report. “If Fannie lacked it – as OFHEO clearly found – then it again proves that (Fannie’s) portfolio grew far faster than internal controls could support despite all the senior management assertions up to the end that Fannie’s
risk-management was a standard to which everyone else should aspire.”

American Banker, Thursday, February 24, 2005
New Vows By Fannie: Penance or Just PR?
By Rob Blackwell
In an article about Fannie Mae appearing to be in full-scale retreat after disclosing a slew of new accounting problems and pledging to reduce its mortgage portfolio, cut advertising and lobbying, and play nice with its regulator, many critics remained suspect. The GSEs made many promises in its announcement that OFHEO had new problems with its accounting for securities, loans, consolidations, and commitments as well as “practices to smooth certain income and expense amounts.” “It’s going to be a different company, with much less emphasis on its portfolio,” said Karen Shaw Petrou, the managing partner of Federal Financial Analytics, a consulting firm whose clients include competitors of Fannie’s. “It is back to the securitization business.”

American Banker, Tuesday, February 15, 2005
Plan Raises Questions About FHLB Loan Buying
Chicago Bank Will Reduce Reliance on “Voluntary” Stock
By Rob Blackwell
In an article about the Federal Home Loan Bank System and its mortgage purchase programs where experts predicted they would eventually break Fannie Mae and Freddie Mac’s lock on the secondary mortgage market, issues have arisen. For years, Home Loan bank officials have known that the programs cannot continue to grow unless the banks find a way to securitize them or otherwise move them off the balance sheet. But the one approved program akin to securitization – Chicago’s shared funding – has not been successful, and the Seattle Bank’s MortgageChoice has not been approved. “It strongly suggests securitization, albeit in the complex fashion required by the current MPF structure,” Federal Financial Analytics wrote last week in its GSE Activity Review. “The ‘other FHLBs’ reference also strongly implies that Chicago can assist other Home Loan banks that want to find a secondary market for their MPF holdings, doubtless helping more than a few of them out of the holes the MPF has dug in recent months,” the review said.

THE WALL STREET JOURNAL, February 14, 2005
Citigroup and Capital Research Report Big Fannie Mae Stakes
In an article about Citigroup Inc. and Capital Research & Management Co. both reporting large stakes in the shares of Fannie Mae, Karen Petrou, managing partner of Federal Financial Analytics Inc., speculated that Citigroup could be positioning itself to gain influence over any eventual change in Fannie’s status. Congress is considering legislation that would clamp tougher regulation on Fannie and Freddie, while Citigroup has disclosed that it holds about 61 million shares, or 6.3%, of Fannie’s common stock. At the current share price, the stake is valued at about $3.8 billion.

Dow Jones Newswires, January 7, 2005
Sovereign’s Write-Down of Agency Preferred Could Be First Of Many
By Allison Bisbey Colter
In an article on Sovereign Bancorp.’s decision to write down the value of certain holdings of Fannie Mae and Freddie Mac preferred stock, some see it as a sign that the thrift’s auditor, Ernst & Young is gearing up to implement the controversial new rules. “If that’s so, some small and mid-sized banks and thrifts could experience some unhappy news in coming days,” said analysts at Federal Financial Analytics, a Washington consulting group that caters to many of Fannie’s competitors.

BNA’s Banking Report, Monday, January 3, 2005
Fannie Mae Plans Major Stock Move To Beat Back Questions About Capital
In a story about Fannie Mae’s plan to offer $5 billion in stock to large investors, Karen Shaw Petrou, managing partner at Federal Financial Analytics said, “I think the debate will focus more on executive compensation than it otherwise would have. That’s where I see the major impact beyond the immediate players.”