American Banker, Tuesday, December 11, 2007
Treasury Just Can’t Seem to Buy a Break
By Cheyenne Hopkins

Recent attempts, and apparent misses, by the Treasury Department to resolve pressing financial problems could be chalked up to the fact that there are no easy answers. But that is little consolation to a department whose reputation has suffered under the Bush administration. With few exceptions, the Treasury’s much-previewed loan modification plan was met with widespread disdain last week. Critics on the left said it was too little, too late, while those on the right said it was an unnecessary, potentially dangerous intrusion into the housing market. No one said the plan was just right. Senate Democrats and consumer groups said the plan had become too targeted, but some analysts said the Bush administration was limited in what it could do. “Absent all the policy issues related to bailout and moral hazard, there were the simple constitutional and statutory realities involved in structuring any agreement of this sort,” said Karen Shaw Petrou, managing director for Federal Financial Analytics Inc.

American Banker, Thursday, December 6, 2007
Study Finds Capital Levels Could Rise Under Basel II
By Steven Sloan

After years of concerns that the Basel II accord would lead to drastic capital drops, a study has found that the largest domestic banks may find themselves hoarding more capital instead, as a result of the liquidity crunch. The study, released last week and conducted by Federal Financial Analytics Inc., indicated that in a matter of months problems in the credit markets have silenced nearly a decade of worries that Basel II would let banks hold significantly less capital against risks. The end result, according to one of the study’s authors, could be a further tightening of credit. Bank assets have “become a good deal riskier than the initial quantitative impact surveys, or, for that matter, internal models, had anticipated, so the risk-based capital requirements will spike sharply upward, and that will have an overall impact on credit availability, although lower-risk credit would be favored and might not be as adversely affected as higher-risk obligations,” said Karen Shaw Petrou, the managing director of Federal Financial Analytics.

American Banker, Wednesday, November 28, 2007
Cuomo GSE Play Could Find a Gap in Preemption
By Cheyenne Hopkins

WASHINGTON — New York Attorney General Andrew Cuomo’s decision to take an indirect path in his investigation into Washington Mutual Inc., most notably by targeting its relationships with Fannie Mae and Freddie Mac, may reflect a calculated attempt to exploit a possible gap in regulatory preemption, analysts and industry lawyers said. At issue is how much power Mr. Cuomo can wield against Fannie and Freddie. In the case of financial institutions, federal courts have backed up the preemption authority of the OTS and the Office of the Comptroller of the Currency when state regulators — including former New York Attorney General Eliot Spitzer — attempted to investigate national banks and thrifts. “There’s no comparable framework for Fannie and Freddie, because this hasn’t arisen in the past. … There’s no slam dunk here,” said Karen Shaw Petrou, managing director for Federal Financial Analytics Inc.

American Banker, Monday, November 12, 2007
Industry Left Guessing About FDIC’s Thinking on Premiums
By Joe Adler

WASHINGTON — The Federal Deposit Insurance Corp.’s decision to delay setting 2008 assessment rates left observers wondering whether it meant the agency was more likely to lower rates next year or was biding its time before taking premiums up a notch. Some industry representatives viewed the agency’s move to wait until it gets a better read on deposit growth as a sure sign a rate cut was on its way. “It is impossible to predict that the assessments would be lower because of the additional factors that are in play,” said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc.

Washington Post, Thursday, November 8, 2007
Cuomo’s Loan Probe Turns to Fannie, Freddie
By Carrie Johnson

The New York attorney general subpoenaed mortgage finance giants Fannie Mae and Freddie Mac yesterday as he sought to expand his housing industry investigation by focusing on companies that package house loans and sell them to investors. It was the second public step in Andrew M. Cuomo’s probe of fraudulent house appraisals, which he says rippled across the market as overvalued mortgage loans were bundled together and sold as debt. Analysts said Cuomo’s ultimate goal is to boost standards for the housing industry. Already the investigation is intensifying pressure on companies to find paperwork that would justify years-old appraisals, analyst Karen Shaw Petrou of Federal Financial Analytics said in a note yesterday.

Washington Post, October 27, 2007
Fannie, Freddie Portfolios Shrink
Firms Have Argued for Higher Investment Caps
By David S. Hilzenrath

Though Fannie Mae and Freddie Mac have been arguing that they should be granted authority to buy more mortgages to help ease a credit crunch, data released by the companies this week show that they haven’t been using the authority they already possess. Both companies reduced their mortgage-related investments in September, widening the gap between their holdings and the limits on those holdings. In response to accounting scandals at the two companies, the government capped the amount of mortgages and mortgage-backed securities they can hold in their portfolios. “A lot of it is reflective of the value of the assets in the portfolio,” said Michael Cosgrove, a Freddie Mac spokesman. Noting that other investment firms have been reporting big losses on mortgage-backed securities, Karen Shaw Petrou, an analyst with Federal Financial Analytics, said it appeared that Freddie Mac was selling assets to prepare for write-downs in the value of mortgage investments. Petrou, whose clients include adversaries of Fannie Mae and Freddie Mac, said Freddie Mac was more vulnerable to problems with subprime loans than Fannie Mae.

American Banker, September 10, 2007
Credit Woes Tilt Perspective on a Basel Pillar
By Steven Sloan

In an American Banker article on the problems in the subprime mortgage market and the already complicated process of implementing the proposed Basel II capital Karen Shaw Petrou, managing partner of Federal Financial Analytics is quoted as saying “With each individual bank, especially those with subprime mortgages, you’ll see a more conservative approach,” Before the crisis, examinations of Basel banks “would have been more of a process of negotiation,” Ms. Petrou said. “I think the discussions will now be one-way.”

Financial Times, August 31, 2007
Pressure builds in US for rules to curb predatory lending
By Jeremy Grant

In a Financial Times article on the organisers of the upcoming Five Star Default Servicing conference in Texas that trumpeted their event with a promise to ‘quiet the swarm of negative headlines’ about their industry, Karen Shaw Petrou, managing partner at consultancy Federal Financial Analytics, says: “The big problem is determining which borrowers facing foreclosure were the victims, and who were the speculators with speculative [mortgage] structures who were just caught in a downturn. “If every borrower facing foreclosure is rescued, then no borrowers in future will take care to get a prudent mortgage,” she argues.

Financial Times
, August 15, 2007

Fannie Mae fights for lending rights
By Jeremy Grant

In an article on Fannie Mae’s chief executive Daniel Mudd’s appearance on television in the US, he cast the huge mortgage lender in the role of “a saviour” in the troubled US housing and mortgage markets. Fannie is one of two huge “government-sponsored enterprises” – the other is Freddie Mac – set up in the Roosevelt administration to help finance affordable housing for millions of less well-off Americans. Karen Shaw Petrou, Federal Financial Analytics’ managing partner is quoted as saying that “While neither is statutorily allowed to participate much in the subprime end of the mortgage market, their financial positions – including high leverage and low reserves – mean “neither can absorb much pain.” She also noted that investors are still “totally in the dark” on the extent of both GSEs’ exposure to riskier products such as interest-only loans. Fannie’s last known reserves position dates from the end of 2005. “To me it’s not a political argument,” says Ms Petrou. “These are highly leveraged, minimally reserved institutions with all of their eggs in one basket, which is now widely acknowledged to be a risky one. “Things are moving so fast that one can only make a political judgment about this once the politicians are back in town. And right now in the current market that seems years away.”

Bureau of National Affairs, August 13, 2007
OFHEO, Bush Reject Proposed Easing Of Portfolio Caps for Fannie, Freddie
By Richard Cowden

In an article from BNA, on the rejection of proposed easing of portfolio caps for Fannie and Freddie by the OFHEO and the President, Federal Financial Analytics’ managing partner, Karen Shaw Petrou noted that “Mr. Dodd chose his words very carefully.” She also noted that by advocating greater flexibility for the GSEs within the bounds of safety and soundness, Dodd was also being consistent with their regulator’s position. James Lockhart, director of OFHEO, has been adamant that neither of the GSEs will be allowed to increase their mortgage acquisitions until they have cleared up persistent weaknesses in their accounting and internal controls systems. Neither is current in their quarterly financial reporting.

Bloomberg, Monday, July 30, 2007
Fannie Mae and Freddie Mac hold billions in subprime-backed securities
By Judy Shenn

In a Bloomberg article, Karen Shaw Petrou, managing partner of Federal Financial Analytics is quoted as saying that the disclosures do not “make us overall feel any better because beyond subprime” there are other risks. She also cited rising delinquency rates on all U.S. mortgages and her firm’s estimate that the companies hold a sizable amount of home-equity bonds.

American Banker, Friday, July 13, 2007
Regulatory Divisions May Postpone Basel II Launch
By Steven Sloan

In an American Banker article on the six month remaining before the proposed Basel II capital rule is slated for implementation in the United States, Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc., agreed that banks would simply not have enough time to comply with a final rule. “I think it would be very difficult to implement if anything is published with a Jan. 1 effective date,” she said. “That would be such a short time frame for such a profound rule.”

The Economist, Thursday, July 5, 2007
Fannie and Freddie Ride Again

In an article in The Economist, Federal Financial Analytics is quoted as saying “In a recent report, Federal Financial Analytics, a consultancy, noted that a 15-30% writedown of this non-AAA slice—hardly inconceivable given the continuing rise in subprime delinquencies—would result in losses of up to $3 billion for Freddie and $3.6 billion for Fannie. That would knock back their return to financial normalcy.”

American Banker, Thursday, July 5, 2007
FDIC Board Reaffirms Direct Role in Major Policy Decisions
By Joe Adler

In a story about FDIC’s memo to its staff members to rein in their authority to make decisions without consulting the agency’s board first, Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc., said concerns about subprime mortgages and other faltering business models have led to a sudden rise in enforcement orders. “The FDIC, like all of the banking agencies, is looking at a very different climate coming up.”

Bloomberg, Monday, July 2, 2007
Fannie, Freddie May Lose $6.6 Billion in Subprime
By James Tyson

In a Bloomberg article, Managing Partner, Karen Petrou is quoted as saying “Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, may lose as much as $6.6 billion should defaults in subprime mortgages force write downs on securities rated below AAA.” Investments in such mortgage bonds totaled $12 billion at Washington-based Fannie Mae and $10 billion at McLean, Virginia- based Freddie Mac in May, according to Petrou. Subprime mortgage defaults may require a write down of these assets of 15 percent to 30 percent, she said. Mortgage investors have been reeling this year as the worst housing decline since the 1930s threatens the $6 trillion U.S. mortgage bond market. Petrou’s estimate challenges the view of investors who predict Fannie Mae and Freddie Mac will weather a rise in mortgage delinquencies because the firms primarily limit themselves to investments in only the highest rated securities. The government-chartered companies “have significant risk and the AAA alone don’t protect them from it,” said Petrou, whose clients include FM Policy Focus, a lobbying group seeking tougher federal oversight for the firms. Subprime-related losses of $3.6 billion at Fannie Mae and $3 billion at Freddie Mac would erode most of their reserves mandated by the Office of Federal Housing Enterprise Oversight, she said.

Reuters, Friday, June 29, 2007
Fannie, Freddie Could Have Big Subprime Exposure-Analyst

Mortgage finance companies Fannie Mae and Freddie Mac could face a multibillion dollar loss if subprime assets continue to mount, according to an analyst report issued on Friday. The continued writedown of subprime assets could hurt the two government-sponsored enterprises even though they hold highly rated mortgages, according to a report from Federal Financial Analytics in Washington. “Looking only at their non-AAA positions, a writedown of 15 percent to 30 percent would mean a $1.8 billion to $3.6 billion hit for Fannie and a $1.5 billion to $3 billion hit for Freddie,” the report said.
Neither government-sponsored enterprise has much of a cash reserve against losses of that size, and covering those costs could push the companies’ capital below the levels agreed to with their regulator.

American Banker, Thursday, June 7, 2007
Basel Issues Spur S&P to Form Its Own Standards,
By Steven Sloan

As international regulators struggle to implement the Basel II capital rule, Standard & Poor’s is developing its own framework that will serve as a separate tool to measure bank performance starting next January. The framework will not include the leverage ratio – which has sparked opposition in the United States – and will apply to all banks, regardless of whether they adopt Basel II. The goal, according to the S&P analyst who helped develop the “Risk-Adjusted Capital Framework,” is to design a comparable measure. U.S. banks are expected to use a different version of Basel II than banks abroad, and smaller domestic banks may use the less complex Basel I or Basel IA. Concerns over the competitive inequities that Basel II could create have plagued the rulemaking process. Industry observers argued that S&P would not have been compelled to create a separate framework if implementation in the United States had gone more smoothly. “Had Basel II done what it was supposed to do, then S&P would not need to do what it did,” said Karen Shaw Petrou, the managing partner of Federal Financial Analytics.

BNA Daily Report for Executives, Monday, May 21, 2007
Bear Stearns Bid for Doral Financial May Show Path to Gaining Regulators’ OK
By Christian Bruce

A bid by private investors for Puerto Rico’s troubled Doral Financial Corporation shows that an ongoing wave of acquisitions by private equity firms has now reached into the world of federally insured financial institutions, a financial services expert told BNA May 18. In most cases, private equity bids for regulated institutions face significant obstacles, according to Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc., a Washington, D.C., financial services consulting firm. But buying an ailing institution–especially a smaller one–may make the deal more palatable to regulators, and allow investors to avoid problems that might arise in other situations, she said. “This is a troubled company, and an example of one way to do these transactions,” she said, referring to the bid for Doral Financial. And, if the Federal Reserve Board approves the acquisition, more such transactions could be on the way, Petrou said in a May 18 update. “[W]ith one deal pending, the odds for more are growing,” she said. According to Petrou, whose firm recently released an extensive memo on such transactions, the bid for Doral is significant because it shows how investors can structure a transaction that is less likely to spook U.S. bank regulators. “The smaller the deal, the more willingly it will be approved, but significant activity and capital constraints will be imposed unless the takeover is part of a bank rescue–increasingly likely as some of the subprime mortgage and commercial real estate chickens come home to roost on bank balance sheets,” Petrou said in the May 15 memo. And in a May 18 update, Petrou noted that an acquisition could eliminate the potential for a bank failure that would bring the Federal Deposit Insurance Corporation into the picture. “If the acquisition is not quickly consummated, the parent bank holding company will declare bankruptcy, doing little that’s good for the insured-depository subsidiary. The prospect of a claim on the FDIC concentrates the Fed’s mind wonderfully, perhaps accounting for the acquirers’ optimism about regulatory approval,” she said. However, acquisitions of federally insured banks and thrifts, or portions of their businesses, can be accomplished in other ways, according to Petrou. For example, a savings association can be a better bet for investors, even though the charter is more limited, because holding company regulations are less stringent, she said. Or, she said, investors can simply buy a particular business division of the bank, though that carries some downside as well. “The business line can then be transformed into a publicly traded company, although these firms typically have to be more highly capitalized than they were when housed within a bank holding company, thus reducing their appeal from a [private equity] point of view,” Petrou said.

Daily Report for Executives, Wednesday May 2, 2007
FDIC Official Lends Support to Worries About More Capital Declines Under Basel II
By Christian Bruce

A senior Federal Deposit Insurance Corporation official May 1 lent support to concerns that capital reductions under the Basel II capital accord may be more significant than previously thought. Progress toward U.S. implementation of the global capital accord was delayed for a year in part because of concerns about capital reductions in an important impact study that the FDIC released in 2003. That study, Quantitative Impact Study No. 4 (QIS-4), showed that under Basel II, banks’ risk-based capital levels would suffer significant declines. In September 2005, federal bank regulators delayed the U.S. implementation of Basel II, citing the need for safeguards in response to concerns raised by QIS-4. Basel II is now back on track, and scheduled for preliminary U.S. implementation beginning in 2008. But the accord still has its critics, including those who say the QIS-4 results might have been too optimistic. Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc., a Washington, D.C., financial services consulting firm acknowledged the weaknesses of Basel II, but said the accord still should go forward because of even bigger problems with Basel I, the 1988 accord that still governs U.S. banks. “I know Basel II is very problematic but Basel I is worse,” she said. Petrou said she favors an approach that resembles the so-called Basel IA approach–which regulators have proposed as a more risk-sensitive version of the 1988 standards–or the standardized approach. But Petrou favors dropping the leverage ratio, which uses a ratio of capital to assets to set a minimum level beyond which the bank cannot go. Currently, the leverage ratio is part of the U.S. version of Basel II, but Petrou said she favors instead a set of prompt corrective action standards that would be built into the risk-based capital rules.

American Banker, Monday, April 2, 2007
In Focus: The ‘F’ Word (Forbearance) Is Back, if Not Quite the Same
By Joe Adler

WASHINGTON — Forbearance, a dirty word from the savings and loan crisis, is once again being bandied about as millions of subprime borrowers face possible foreclosure. The two leading Democratic contenders for president — Sens. Hillary Rodham Clinton of New York and Barack Obama of Illinois — have hinted at it, and a third, Senate Banking Committee Chairman Chris Dodd, turned heads March 13 when he told reporters he wanted to see “some sort of forbearance” for strapped borrowers. The Connecticut Democrat rushed the next day to make clear he was not envisioning an S&L-type cleanup, telling a television interviewer, “No one’s talking about a bailout at this point at all.” But the mere mentions of forbearance and bailout brought to mind the $350 billion Uncle Sam spent on the S&L crisis of the late 1980s. That was forbearance then, but what does the word mean today? So far, policymakers have been vague at best. “It’s unclear exactly what they’re speaking of,” said James Ballentine, the director of housing and economic development for the American Bankers Association. “I’ve seen so many scenarios thrown out over the past three or four weeks in an attempt to address this issue that I’m almost losing track.” Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc., agreed, and noted that the next step is figuring out how best to protect consumers. “Who and how is really tricky, and that’s what people are really wrestling with right now.”

Day to Day (NPR), March 28, 2007
By Wade Goodwyn

Citigroup may cut 15,000 jobs as part of a restructuring plan involving the out-sourcing to India of mid- and upper-level jobs in research, investment banking and credit analysis.
Listen to this story…

BNA, March 13, 2007
Subprime Mortgage Worries Dominate Talks on GSE Regulatory Reform Legislation
By Richard Cowden

Lawmakers discussing proposed legislation on government-sponsored housing finance enterprises March 12 interspersed their comments with concerns over the potential impacts the reforms might have on the subprime mortgage market.

American Banker, Friday, March 9, 2007
Viewpoint: Multiple Regulators Fuel Competitiveness
By Karen Shaw Petrou

In their January report on New York’s competitiveness as a financial center, Mayor Bloomberg and Sen. Schumer drew attention to a wide array of market-reform proposals. Some have come up a lot in similar efforts — Section 404 of the Sarbanes-Oxley Act at the top of that list. Others were more novel. Among them was a suggestion that the number of federal financial regulators be reduced to one from the seven or so that now hold sway. This sounds efficient — one-stop shopping, as it were. It would, though, have serious and unintended consequences for U.S. financial market innovativeness, an area where we still unquestionably lead the world. Ms. Petrou is the managing partner of Federal Financial Analytics Inc. in Washington.

American Banker, Wednesday, February 14, 2007
Pressing Bernanke on Regs: Will monetary expert air views on bank policy?
By Steven Sloan
In his first year as Federal Reserve Board chairman, Ben Bernanke has established himself as steward of the nation’s economy but done little to define his standing as a banking regulator. In testimony today and Thursday, Mr. Bernanke’s positions on a number of banking policy questions may be teased out by members of the House and Senate banking committees. With control of Congress flipping to the Democrats, the Fed chief can expect questions on regulations designed to protect consumers from predatory lenders, identity theft, and abusive credit card practices. He also may be asked about the messy Basel II capital rules, the systemic risks posed by Fannie Mae and Freddie Mac, and whether commercial firms should be allowed to own banks. Others expect Mr. Bernanke to become more publicly engaged in the Basel II debate after comment letters on the proposal come in. “Then it will be at the point at which the final decision will be made and the chairman in particular becomes quite active,” said Karen Shaw Petrou, the managing partner at Federal Financial Analytics Inc.

American Banker, Wednesday, February 7, 2007
FDIC Seen Having Little Leeway in ILC Controversy
By Joe Adler
WASHINGTON – Despite questions about whether the Federal Deposit Insurance Corp. compromised its independence last week by deferring to Congress on who should own industrial loan companies, former regulators and other observers agree the agency had little choice. Though the FDIC had the authority to approve applications by Wal-Mart Stores Inc. and Home Depot Inc. to own ILCs in Utah, congressional interest in enacting legislation to ban commercial ownership of such companies made moving forward dangerous, observers said. Lawmakers have warned they would undo any such decision by the FDIC, and most observers said the agency’s board recognized that resolving the policy debate was best left to Capitol Hill. Analysts also drew contrasts between independence on policy matters and regulation. “Where independence becomes critical is not on these policy issues, but rather on supervisory determinations,” said Karen Shaw Petrou, managing partner with Federal Financial Analytics Inc.