Washington Post, November 23, 2008
Banking Regulator Played Advocate Over Enforcer
By Binyamin Appelbaum and Ellen Nakashima

When Countrywide Financial felt pressured by federal agencies charged with overseeing it, executives at the giant mortgage lender simply switched regulators in the spring of 2007. The benefits were clear: Countrywide’s new regulator, the Office of Thrift Supervision, promised more flexible oversight of issues related to the bank’s mortgage lending. For OTS, which depends on fees paid by banks it regulates and competes with other regulators to land the largest financial firms, Countrywide was a lucrative catch. But OTS was not an effective regulator. This year, the government has seized three of the largest institutions regulated by OTS, including IndyMac Bancorp, Washington Mutual — the largest bank in U.S. history to go bust — and on Friday evening, Downey Savings and Loan Association. The total assets of the OTS thrifts to fail this year: $355.7 billion. Three others were forced to sell to avoid failure, including Countrywide. In the parade of regulators that missed signals or made decisions they came to regret on the road to the current financial crisis, the Office of Thrift Supervision stands out. But critics in government and industry said Countrywide’s shift from OCC oversight to that of OTS was evidence of a “competition in laxity” among regulators eager to attract business. “Institutions should not be able to find a safe haven in one regulator from the reasonable concerns of another regulator,” said Karen Shaw Petrou of Federal Financial Analytics, referring to the Countrywide episode.

Banker, Thursday, November 20, 2008
Paulson Content to Let Bailout Play Out
By Cheyenne Hopkins

Phase 1 of the bailout is apparently over. Treasury Secretary Henry Paulson made it clear this week he has no intention of asking Congress for the remaining $350 billion authorized for the Troubled Asset Relief Program. Barring a fresh disaster, he may not even deploy the $60 billion remaining from the first installment. With two months left in the Bush administration’s term, Mr. Paulson appears content to watch what he has put in place play out. He felt comfortable enough to tell Congress Tuesday that the worst is over. Mr. Paulson got a bipartisan tongue-lashing from members of the House Financial Services Committee Tuesday, with many openly questioning his credibility. Though Mr. Paulson expressed optimism that the worst was over, observers are not so sure. “Nobody has a clue,” said Karen Shaw Petrou, the managing partner of Federal Financial Analytics. “Markets remain so volatile, credit market conditions so fragile, that any directional conclusions are premature.”

Washington Post, November 14, 2008
Freddie Mac Seeks Government Aid After $25.3B Loss
Aid to Fannie, Freddie May Top Expectations
By Zachary A. Goldfarb

Freddie Mac has asked the federal government for the first $14 billion due under a federal bailout program after reporting massive losses today, as concern mounted that government efforts to stabilize the mortgage giant and its sister company Fannie Mae are likely to grow far more expensive than originally suggested. The government itself has taken steps that make it more likely Fannie Mae and Freddie Mac will need its cash. The government has introduced several programs to protect debt issued by other institutions, such as banks. Fannie Mae and Freddie Mac lack this explicit federal guarantee and that has made their debt comparatively less attractive to investors, increasing what the companies have to pay to raise capital in private markets. As a result, some analysts are concerned that Fannie Mae and Freddie Mac may run out of funding. “There is a huge and serious liquidity squeeze, and the only way Fannie and Freddie get out of that is by going to the Treasury,” said Karen Shaw Petrou, an analyst with Federal Financial Analytics.

American Banker, Thursday, November 13, 2008
Paulson Outlines a Tarp Plan Without Buying of Bad Assets
By Cheyenne Hopkins

Treasury Secretary Henry Paulson confirmed Wednesday what many industry observers had begun to suspect — the government is abandoning its plan to buy troubled assets from banks. The news brought criticism from several quarters, including lawmakers who saw it as a missed opportunity, bankers who said they have whiplash from the Treasury’s about-face, and industry observers who praised the move but openly doubted the professed rationale for it. A change in market conditions necessitated the focus on capital injections, he said. “The facts changed, and the situation worsened, and given the situation we confronted we said the right way to use taxpayers’ money … would be through an investment program.” But Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc., said there had been no change in market conditions — the Treasury just realized that an asset purchase program was too difficult. “If the plan wasn’t going to work, that was as foreseeable on Sept. 19 as it was on Oct. 10,” she said. “They rushed out the asset-purchase program without considering how complicated it was.”

Marketplace Radio, November 12, 2008
What’s happened to the bailout plan?

Why hasn’t the government’s plan to buy up toxic assets worked? Will recapitalizing the banks and providing mortgage relief ease the crisis? Kai Ryssdal puts those questions and more to financial analyst Karen Shaw Petrou.

Listen to the show…

FT, November 11 2008
Confusion as Tarp fails to ease clogged markets
By Aline van Duyn

The clue is in the name. The US government’s $700bn troubled asset relief programme (Tarp) was proposed in September as part of a plan to unclog the billions of dollars of tainted mortgage-backed securities that banks are stuck with. But the Tarp has not evolved as expected. So far, the US Treasury has not bought any troubled assets directly or said whether it still plans to do so, or what shape any purchases might take ‘The lack of clarity and the lack of decision-making has been a problem’. Clarification on whether insurance and guarantees will be used is the third big question. As well as mortgage-backed assets, this is important for the many municipal users of the bond markets, which are now also facing difficulty raising funds. Karen Shaw Petrou, managing partner at Federal Financial Analytics, said the use of insurance could also be a large help in unclogging the markets. By providing government guarantees a much bigger group of assets could be covered by a set amount of money, but decisions had to be made as to which asset categories to include. “The government needs to make policy decisions about sectors and institutions,” she said, adding that the Treasury had to “identify more precisely which asset categories to target and which investors they want to help”.

Washington Post: October 30, 2008
Fannie Asset Write-Down Raises Concerns: Mortgage Giant’s Action Increases Chances It Will Tap Government Funding
By Zachary A. Goldfarb

Mortgage finance giant Fannie Mae said yesterday that a class of assets that had made up a big part of its financial cushion in the months before the government took it over now effectively has no value. The announcement raises the probability that the government will need to put money into the firm and, experts said, signals that the company does not expect to make a profit in the foreseeable future. Fannie Mae said yesterday that it effectively is writing down “substantially all of the value of the deferred tax asset.” At the end of the second quarter, its deferred tax asset was worth $20.6 billion, comprising nearly half its $47 billion in capital. Some analysts say the decision on tax assets is just the start of a reassessment of the companies’ true financial position. Some have questioned whether the companies have accurately put a value on other assets. “For now, Fannie and Freddie are wards of the state and the decision to address net deferred tax assets is part of the long-delayed reckoning with the downside impact of 65-to-1 leverage,” Washington research firm Federal Financial Analytics said in a statement yesterday.

American Banker, October 23, 2008
Moving Goals Undermining Capital Effort
By Cheyenne Hopkins and Stacy Kaper

The Treasury Department’s changing goals and shifting rationales for new programs is undermining the market confidence it is trying to restore, observers said Wednesday. The asset-purchase-turned-capital-injection plan was a case in point. In the last week alone it has had at least three stated goals: shoring up balance sheets, enabling fresh lending, and encouraging deals between healthy and weak institutions. These goals are not mutually exclusive, but the shifting has produced confusion over whom the government is really trying to help and how. Karen Shaw Petrou, managing director of Federal Financial Analytics Inc., said the Treasury’s confusion about the reason for the capital injection makes it difficult to figure out who should get the money. If there were clear criteria, “then you would have to have a clear policy on what you want the capital to do.”

Marketplace Radio, October 21, 2008
Should rescue money fund takeovers?

Is the Fed encouraging a shakeout in the regional bank sector? Word is the government might allow mid-sized banks to buy weaker rivals with bailout money, instead of issuing loans. Jeremy Hobson checks it out. Karen Petrou is managing partner at Federal Financial Analytics. She says government-financed M&A’s would be a big mistake.

Listen to the show…

NewsHour, October 21, 2008
Attempts to Ease Credit Crunch Reveal Mixed Results

Several plans have been enacted in recent weeks to loosen the flow of credit and ease the financial crisis. An expert panel evaluates the efforts and the state of the credit sector. Karen Shaw Petrou, managing partner of Federal Financial Analytics “We don’t need bigger banks; we need stronger banks.”

Transcript or Streaming Video

Washington Post, October 19, 2008
Financial Rescues Can Set Off New Problems
By Peter Whoriskey and Zachary A. Goldfarb

If there was one thing policymakers could agree on during the recent economic turbulence, it was that interest rates on U.S. home mortgages ought to come down, and fast. But as the government stepped in recently to shore up the nation’s banks, those rates went up. Chalk up another case of unintended consequences. Since the beginning of the crisis that has upended financial markets and stunned the world economy, the well-intentioned actions of governments and officials have often created new problems that require nearly equally urgent solutions. The complexity and linkages in the world financial system are to blame. Much of the uncertainty about government intervention comes because it reorders in sometimes unforeseen ways how investors value their investments. “With the whipsawing failures of Fannie and Freddie, the private-sector capital option to support the financial industry was ripped off the table,” said Karen Petrou, an analyst at Federal Financial Analytics. Similarly, by propping up banks with capital infusions and guaranteeing more of their deposits as part of the Treasury Department’s massive rescue package for financial markets, the government may be elevating banks over other institutions, accelerating the longstanding rush of money out of hedge funds.

Forbes.com, Wednesday, October 15, 2008
Commentary: A CDS Holiday
By Karen Shaw Petrou

Click here to read the commentary…

Dow Jones, October 14, 2008
Many Banks Likely To Participate In US Recapitalization Plan
By Jessica Holzer

The Bush administration is likely to get many takers on its offer to buy equity stakes in banks, despite the strings attached to the program. Just weeks ago, the stigma of accepting such government cash would have been unthinkable to a good many banks, even though the capital markets are virtually frozen to them, industry analysts and experts said. But now, a large number of banks will seriously consider signing up for the program, which the Bush administration rolled out with the declaration that nine of the largest firms have already volunteered. “Everyone’s going to give it a hard look, particularly because of the cover provided by the announcement from the leading banks,” Karen Petrou of Federal Financial Analytics said. Fifteen banks have failed this year after years of no bank failures. Still, those numbers and the number on the FDIC’s list of “problem” banks – 117 – are tiny compared with the failed and problem banks during the thrift crisis. Banks that don’t sign up by the Nov. 14 deadline will be shutting off the option at a dicey economic time. Banks’ current capital levels do not reflect losses that are coming down the pike, analysts said. “There’s an ugly problem there that ultimately needs to work through people’s balance sheets,” Petrou said. Also, it’s possible that firms could, ironically, become stigmatized for not accepting the government cash injection, she argued. The government stake could function like “an implicit guarantee” to new investors that the government won’t swoop in to prop up the firm, wiping out shareholders in the process. Such harsh treatment of shareholders in the case of the government’s takeover of Fannie Mae (FNM), Freddie Mac (FRE) and its loan to AIG (AIG) has contributed to the pall over capital markets, Petrou said.

Wall Street Journal, October 9, 2008
McCain Reshuffles Rescue Deal
Proposal Could Help Homeowners but Also Reward Predatory Mortgage Lenders
By John D. McKinnon

Sen. John McCain’s $300 billion plan to help homeowners struggling with mortgage debt carries big potential benefits for the troubled real-estate sector, but could reduce the funds available for rescuing banks. The proposal, which Sen. McCain announced during Tuesday night’s presidential debate with Sen. Barack Obama, also could make winners out of investors — including predatory mortgage lenders — that the Bush administration and Congress have tried to exclude from the government’s largesse. And it raises knotty administrative questions about how the government would handle potentially huge numbers of mortgage refinancings. Among the challenges: screening out undeserving homeowners who might seek to qualify for help By relying on existing rescue resources, the McCain plan could reduce the amount of money available for buying financial assets from institutions, said Karen Petrou, managing partner of Federal Financial Analytics.

NPR Morning Edition, September 29, 2008
Another Shoe Drops: Citigroup Acquires Wachovia

Wachovia is the latest bank to fall victim to the global financial crisis. The Federal Deposit Insurance Corp. announced Monday that Citigroup will acquire the banking operations of Wachovia. The FDIC says Wachovia says all depositors are protected and there will be no cost to the Deposit Insurance Fund.

Click here to listen…

NPR – All Things Considered, September 26, 2008
Washington Mutual Collapses
by Jim Zarroli

The battered savings and loan company Washington Mutual has become the latest casualty of the subprime mortgage disaster. Regulators say the bank fell over the edge because in the past week or so more and more customers began pulling their deposits out.

Listen to the interview…

American Banker, Sunday, September 21, 2008
Paulson Plan Hits Speed Bumps
Lawmakers, industry raise questions about accounting, competitive and other issues with $700B buyout facility
By Cheyenne Hopkins and Stacy Kaper

It took only a few hours after its release for industry representatives and lawmakers to begin raising significant questions about the Treasury Department’s legislative proposal to create a facility that would buy and hold up to $700 billion in troubled assets. Among the potential issues were that it lacked a clear definition of who could sell to the facility; what assets it would buy; how Treasury would determine the price of such assets; and accounting implications for banks that use the facility. Treasury Secretary Henry Paulson worked on Sunday to ease these and other concerns — including those of Democratic lawmakers who said the plan did not do enough to assist troubled borrowers — but industry representatives were unconvinced. A Treasury spokeswoman said Sunday that the agency is aware of the problem, and was working to address bankers’ concern. “We’re working to implement the guarantee with as little change as possible in the preexisting playing field,” she said. But some analysts said it was more than just banks that were raising fears of competitive imbalance caused by Treasury’s plan. Karen Shaw Petrou, managing director of Federal Financial Analytics, said the multitude of unanswered questions surrounding Treasury’s plan is feeding concerns across industries. “Every body is feeling very ill used,” she said. “They feel everyone else was the perpetrator and they are the victim. In my opinion it’s a circular firing squad.”

Dow Jones Newswires, September 20, 2008
Treasury’s Financial Market Rescue Plan Will Help Some Banks, Hurt Others
By Jessica Holzer

The U.S. Treasury’s plan to buy $700 billion of distressed assets will likely prevent more large financial firms from toppling, but it could also harm some banks that don’t participate in the program, according to analysts and industry lobbyists. By buying such hard-to-value assets, the government will place a market price on them, clearing up uncertainty about their value and helping to unclog the balance sheets of many banks. The plan, however, could trigger capital charges at many banks that have been reluctant to write down their toxic mortgage-related assets to very low values, analysts and industry lobbyists said. That’s because auditors will force them to value the assets at the government-set price. “If it sells at a very low price, everyone else will have to carry the asset at that price,” said Peter J. Wallison, a former general counsel to the Treasury. Other analysts agreed, saying that creating a market for billions worth of illiquid assets would offset the hits to capital some banks may be forced to swallow. “I think anything that improves the underlying value of the obligations benefits the industry as a whole, regardless of any short-term accounting difficulty,” said Karen Petrou of Federal Financial Analytics.

New York Times, Thursday, September 18, 2008
Regulators Try to Change Rules to Match the Need

Federal officials issued a raft of proposed and final rules this week aimed at shoring up the weakened financial markets and strengthening the eroding balance sheets of banks. With little notice, regulators at four agencies that oversee the nation’s banks and savings associations on Monday and Tuesday proposed a significant change in accounting rules to bolster banks and encourage widespread industry consolidation by making them more attractive to prospective purchasers. The regulators and the Bush administration have decided to resort to further loosening of the accounting rules to try to get the industry through problems that some experts have attributed in large part to years of deregulation. Separately, the Securities and Exchange Commission imposed new limits on short-selling and issued guidelines to help financial institutions prop up money market accounts in light of losses reported Tuesday by a large fund. Some experts said bank regulators had few good options.
“It’s a desperate thing,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “If we’ve learned anything,” she added, “it’s that capital at risk is the way to protect the financial system. Giving any institution a capital incentive to double down the federal backstop would be dangerous.”

American Banker, Thursday, September 18, 2008
AIG Bailout: Catalyst for Consolidated Authority?
Holding company oversight system back in spotlight
By Joe Adler and Steven Sloan

Lehman Brothers, Merrill Lynch & Co. Inc., and American International Group Inc. have at least one thing in common: They owned depositories but were not overseen by the Federal Reserve Board.Each own a thrift but opted not to use the holding company structure laid out in the Gramm-Leach-Bliley Act of 1999. That left oversight to either the Office of Thrift Supervision or the Securities and Exchange Commission, neither of which has as much power as the Fed’s authority over financial holding companies. That’s a legacy of the Gramm-Leach-Bliley Act of 1999, which created the financial holding company structure and put the Fed in charge of policing these companies. But most nonbanking companies did not want to subject themselves to Fed oversight, so those that wanted to own a depository institution did so through the thrift charter. At a congressional hearing today on the housing crisis, lawmakers are expected to investigate the issue, including whether a stronger holding company regime could have prevented the companies from unraveling. The OTS has power only over entities that directly affect the thrift, said L. Richard Fischer, a partner at Morrison & Foerster LLP. Karen Shaw Petrou, managing director of Federal Financial Analytics Inc., agreed with that assessment. “There’s the Bank Holding Company Act, which defines any number of expressed Federal Reserve authorities, requirements, restrictions, authorities, with regard to the bank holding company,” she said. In contrast, there are only “limited references” to the thrift holding company powers “and expressed provision in law that bars the OTS from reaching into the holding company.”

PBS Nightly Business Report, September 16, 2008
AIG Struggles To Survive
Stephanie Dhue

PAUL KANGAS: A wild ride for shareholders of AIG, the stock seesawed all day on rumors running rampant on Wall Street that it was, or was not being bailed out by private funding or the federal government. None of those things happened today, and after the closing bell, the insurance giant said it has enough money to stay in business and pay claims to policyholders. Stephanie Dhue has more on the troubles at AIG. DHUE: The $62 trillion CDS market is what is called a bilateral market, where trades are done between two parties. Unlike the NYSE or the NASDAQ, there’s no exchange, no settlement or clearing system. Analyst Karen Petrou says that makes it difficult for the parties to settle their obligations. KAREN PETROU, MANAGING PARTNER, FEDERAL FINANCIAL ANALYTICS: The CDS market is like a lot of people on two ends of the telephone call, but none of them can find each other, because there’s no exchange. We’re all picking up our phones in the CDS market, but we have no idea who is on the other end.

Wall Street Journal, September 15, 2008
Credit-Swap Players Puzzle Over Fan-Fred Fallout
Lehman Situation Adds to Urgency to Settle Questions

The government’s takeover of Fannie Mae and Freddie Mac is causing headaches and confusion among players in the credit-default swap market where as much as $1 trillion of contracts need to be settled and there are differing opinions as to how. These bumps add to worries that a bankruptcy by a big financial firm such as Lehman Brothers Holdings Inc. could trigger bigger problems in this relatively new and largely unregulated market. Fannie and Freddie didn’t go bust, but the government’s plan to put them into conservatorship triggered a default among credit-default swaps tied to hundreds of billions of dollars in Fannie and Freddie debt. The swaps are private contracts that act like insurance against bond and loan defaults. Because the government’s explicit backing pushed up the values of most Fannie and Freddie bonds, analysts earlier predicted that CDS sellers would have to make small payouts. However, debate and uncertainty over how the contracts should be settled is creating a bigger logistical problem than many expected. (More on the CDS market in Heard on the Street.) “This is going to be a very tricky workout with a lot of ambiguities and potential systemic market impact,” said Karen Petrou, managing partner of Federal Financial Analytics Inc., a consultancy in Washington.

American Banker, Monday, September 15, 2008
As Thrifts Stagger, OTS Faces Tough Questions
By Cheyenne Hopkins and Joe Adler

This week will be a crucial week for the Office of Thrift Supervision. It faces what will probably be a grueling hearing Thursday on the takeover of IndyMac Bancorp, the biggest thrift failure in history; its largest institution — Washington Mutual Inc. — could be acquired soon; and more savings and loan collapses could be around the corner. The confluence of events could not come at a worse time for the agency, whose extinction has been recommended by the Treasury Department, which oversees the OTS. The loss of Wamu — which holds 20% of the assets under the agency’s purview and generates a significant chunk of its income — could force the OTS to restructure and feed the momentum for its demise. The drubbing it is expected to take on Capitol Hill for the supervision of IndyMac, meanwhile, could also help persuade lawmakers that it is time for the agency to go. The OTS is “first on the firing line,” said Karen Shaw Petrou, managing director of Federal Financial Analytics Inc. “By virtue of the concentration of large thrifts into higher-risk mortgages, thrifts are higher-risk institutions facing a much more problematic future. How they got that way is a critical question. It’s not that these assets were opaque. The higher-risk mortgage structures were problematic from both a prudential and consumer point of view.”

The Capital Times & Wisconsin State Journal, September 11, 2008
Downsize failed mortgage giants; the bailout of Fannie Mae and Freddie Mac shows why both businesses should be scaled down in size

Federal officials decided this week to bail out Fannie Mae and Freddie Mac because the two public-private corporations are too big to allow them to fail. Let that be a lesson to Congress and the next president when they consider how to reform Fannie and Freddie. Don’t expose taxpayers or the economy to that much concentrated risk again. Downsize these two mortgage giants. Fannie Mae – the Federal National Mortgage Association – and Freddie Mac – the Federal Home Loan Mortgage Association – are government sponsored, stockholder-owned corporations that serve as middlemen between banks and investors in the home loan market. The bailout will take several months. What then? Reform is required. Banking industry consultant Karen Petrou put it this way; “I think it is fair to say that (Fannie and Freddie) operate under divided and in many respects faulty regulation with inadequate capital and lack of appropriate market discipline.” Petrou made her comment in 2003 in front of a congressional hearing. She wasn’t the only expert to warn of trouble. But Fannie and Freddie were so big and so influential – in the economy and in politics – that Washington failed to respond.

American Banker, Tuesday, September 9, 2008
Dramatic Step Left Some Wanting Even More
By Rob Blackwell

Though policymakers across Capitol Hill rushed Sunday to praise the Treasury Department for seizing Fannie Mae and Freddie Mac, there was growing criticism in some quarters that the move did not go far enough. Federal regulators opted to place the companies into conservatorship, effectively protecting the interests of owners — rather than putting them in receivership and wiping them out. Some critics, including a former top regulator of Fannie and Freddie, said that was a mistake. The companies, which eventually acceded to giving receivership powers to the new regulator, may have been right all along. Karen Shaw Petrou, the managing director of Federal Financial Analytics, said if the Federal Housing Finance Agency — the new GSE regulator created just two months ago — had put the companies into receivership, it might have sparked a market panic. “Even though the new law is designed to prevent market panic, it could well have ensued. A conservatorship doesn’t do that — you are keeping everything as is.”

Marketplace Radio, September 8, 2008
Lots of Questions Still Surround Bailout

KAI RYSSDAL: It’s not a stretch to say there’s more we don’t know now about what’s going to happen in the mortgage finance market than we do know. Starting with the eventual pricetag Janet mentioned. To get another perspective we’ve called Karen Shaw Petrou at Federal Financial Analytics in Washington.
KAI RYSSDAL: What do you think the odds are of this not working out the way Secretary Paulson wants it to and of taxpayers getting stuck holding the bag?
Petrou: Well, the odds are not small. Nothing has worked so far. So I think we need to be cautious about this. Treasury is doing the best it can with a set of really crummy options. It didn’t want to do this, now it has and I think we all need to hope that this works because it’s hard to even contemplate what else would have to happen if this doesn’t take hold in the market.

Listen to the interview…

Financial Times, Tuesday, August 19, 2008
Freddie and Fannie fix under market pressure
By Krishna Guha and James Politi in Washington and Saskia Scholtes in New York

In an article on the interim rescue plan for Fannie Mae and Freddie Mac unveiled by the US Treasury, Karen Shaw Petrou, managing partner at Federal Financial Analytics, said their counter-parties could demand higher collateral in response to perceived credit risk. This would be very destabilizing. For now, the Treasury appears to hope that market strains will abate. But if the pressures mount, it could be forced to consider injecting capital, or nationalization.

Washington Post, Sunday, August 17, 2008
Insurers Avoid Getting Soaked In Subprime Storm
By Jane Bryant Quinn

In a story on the one financial industry that seems to be dodging the subprime bullet is insurance, Karen Shaw Petrou, managing partner of consulting firm Federal Financial Analytics thinks solvency is an outdated yardstick for measuring the health of large, diversified insurance companies, operating internationally and trading in the global derivatives markets. Liquidity has become a risk, too, she said. Like investment banks, insurers could suffer a crisis of confidence that cuts off their short-term funds and interrupts their ability to pay. At present, failing insurers are managed by the states where they’re licensed to do business. But the states aren’t equipped to handle too-big-to-fail insurers that present a global investment risk. Petrou thinks companies such as these should come under the purview of federal regulators, who ought to be developing contingency plans. “We keep learning hard lessons,” Petrou said. “Fannie Mae and Freddie Mac were supposed to be bulletproof, too.” If your life insurance company fails, your state’s guaranty fund will step in and transfer the policy to a new insurer. In most states, you’re protected for as much as $300,000 in death benefits and more if the failed insurer has enough assets. If you have, say, a $1 million policy, however, you may be at risk. The policy might be transferred with a reduced cash value, which could lower the benefit if you died. (A few states protect as much as $500,000 in death benefits. Cash values are usually protected up to $100,000.)

American Banker, Friday, August 15, 2008
Why Many See FHFA Treading Carefully
By Steven Sloan

Early this summer fear that James Lockhart would use new powers to strangle Fannie Mae and Freddie Mac was so rampant that it helped stall landmark housing legislation on Capitol Hill. Now, with Mr. Lockhart two weeks into his new role as the director of the Federal Housing Finance Agency, some observers are convinced he plans to use his authority — from capital levels to executive pay — cautiously. The Home Loan banks face their own set of challenges. The Home Loan Bank of Chicago continues to reinvent itself as an advance-driven, independent bank, even though it is likely to post losses for the rest of the year. Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc., warned of another potential problem, writing in a note to clients this week that the “most immediate hit” from downgrades of Fannie and Freddie subordinated debt will be felt at the Home Loan banks. “Banks must adjust their sub-debt holdings if a downgrade leads to excess concentration of investments in a ratings category,” she wrote. “Depending on which FHLBank holds what, the downgrade of sub-debt could thus not only force a capital hit, but possibly a writedown if GSE or similarly rated positions need to be liquidated.” A source within the Home Loan Bank System said such holdings are negligible, if they exist at all.

Wall Street Journal, Sunday, August 10, 2008
U.S. mortgage giants still at risk
By Charles Duhigg

Gaping losses at Fannie Mae and Freddie Mac are causing the two U.S. mortgage giants to slow their purchases of home loans at a time when the government is counting on them to help prop up the housing market. The reductions and associated measures that the companies are taking are likely to drive up U.S. home mortgage rates, which are near their highest levels in a year. And as the companies continue revealing losses, some observers are beginning to speculate which one is at greater risk. Much of the concern focuses on Freddie Mac, which has posted smaller losses than Fannie Mae, but which might be more exposed to the risk of becoming undercapitalized. Some analysts say that the types of loans Freddie Mac has bought, and the smaller amount of capital the company has on hand, put it at greater risk. “Freddie is at much greater risk than Fannie,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting firm. Petrou said that some loans owned by Freddie Mac put the company at risk of needing to raise significant amounts of capital very quickly if those mortgages were downgraded by rating agencies.

MarketPlace Radio, August 7, 2008
Another down quarter for Freddie

Kai Ryssdal: For the fourth consecutive quarter — that’s more than a year, just to make the point — Freddie Mac is deep in the red ink: $842 million dollars worth, three times as bad as even the pessimists had been guessing. Karen Shaw Petrou is with Federal Financial Analytics. She says Freddie Mac will be around when it’s all over. The question is how. Karen Shaw Petrou: Whether it maintains its GSE status as a publicly-backed, privately-owned company is the question or instead, would it be turned into a receivership, in essence, will it be restructured? She says Freddie Mac can’t disappear altogether. The company was created nearly 40 years ago to help ordinary Americans buy homes. The law that spawned the company also guarantees it’ll always exist in some form.

Click here to listen…

American Banker, Wednesday, August 6, 2008
Legislation Inspires a New GSE Debate
By Steven Sloan

The housing bill has been law for just a week, but the next big fight over the government-sponsored enterprises is already brewing. The Housing and Economic Recovery Act of 2008 tightened oversight of the GSEs but also gave the Treasury Department the power to buy Fannie or Freddie stock and to lend an unlimited amount to either company. These changes are prompting people on both sides of the debate to ask whether the GSEs’ public-private business model — which pits profit-seeking shareholders against an affordable housing mission — needs adjusting. Just how bad things are at both companies should become clearer this week as each reports second-quarter results: Freddie today and Fannie on Friday. Both are expected to post a fourth consecutive quarterly loss. Just how bad the June 30 numbers look could influence the debate over an appropriate business model. “If earnings stay in the sustainable but limping along category, it certainly avoids the imminent action that far more serious problems would” suggest, said Karen Shaw Petrou, the managing director of Federal Financial Analytics.

BNA, July 25, 2008
Consulting Firm Eyes New Language
By Mike Ferullo

In a July 24 memo on the legislation, Federal Financial Analytics Inc. said two sections–those on government-sponsored enterprises and new tools for the Federal Deposit Insurance Corporation–stand out. “We have completed our first–if quick–read of the GSE sections of the legislation. The Senate bill is generally the final package. Last-minute attempts to soften some of the provisions went nowhere. The bill does, though, give the Fed an even greater role in the new regulator should a receivership be contemplated–perhaps giving the Fed a chance to intervene if it thinks a takeover could spark a systemic-risk event,” the Washington financial services consulting firm said. The memo also pointed to “brand new” language for the FDIC “stuck in the middle of the bill’s otherwise boring miscellaneous provisions.” “This gives the FDIC authority to declare a bridge institution not just for banks–current law–but also for savings associations. This could have prevented some of the panic related to closing Indy Mac and is clearly sought by the FDIC in light of problems at other large thrifts,” Federal Financial Analytics said.

Dow Jones Newswires, July 18, 2008
Mortgage Giant Freddie Mac Considers Major Stock Sale
Issue of Up to $10 Billion Would Aim to Stave Off Rescue Plan
By James R. Hagerty, Monica Langley and Susan Pulliam

Mortgage giant Freddie Mac — emboldened by emergency regulatory actions that have triggered a two-day rebound in its battered stock — is considering raising capital by selling as much as $10 billion in new shares to investors, according to people familiar with the matter. In the latest development, Freddie filed a form with the Securities and Exchange Commission Friday morning that marks a final step toward registering its common stock with the agency. The filing of a Form 10 registration statement indicates that the shares could be registered as early as today. As of March 31, Freddie had “core capital” — a measure of financial strength consisting of retained earnings and other items — totaling $38.3 billion. That works out to 1.8% of the $2.15 trillion of mortgages Freddie owned or guaranteed as of that date. That’s low compared with the requirements placed on other financial institutions, such as banks. Indeed, if Freddie were a bank, it would need about $91 billion to be considered well-capitalized, says Karen Petrou, managing partner at research firm Federal Financial Analytics in Washington. Her firm does consulting work for trade associations that are sometimes publicly critical of Fannie and Freddie.

MarketPlace Radio, July 14, 2008
After Fannie and Freddie, what next?

For years the big question about Fannie Mae and Freddie Mac was this: Does government-sponsored really mean government-backed? Fannie and Freddie are what’re known as government-sponsored entities. They get a special line of credit from the Treasury Department and some other perks. And the assumption has always been that the government would be there for them if times got tough. Yesterday’s announcement from Mr. Paulson is the exception that proves the rule about what happens when you assume. Secretary Paulson made it clear that, yes, the government will be there now that things are tough. Fannie and Freddie will get another line of credit from the Treasury, access to special loans from the Federal Reserve, and the possibility that Uncle Sam will buy company stock to shore it up if need be. Karen Shaw Petrou‘s with the consulting firm Federal Financial Analytics in Washington, D.C. Ms. Petrou welcome to the program.

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NewsHour, July 11, 2008
Worries of a Bailout of Mortgage Giants Hit Markets Hard

The market value of mortgage giants Freddie Mac and Fannie Mae slumped again Friday, but rebounded after officials downplayed the likelihood of government action. A reporter and analysts discuss the developments. Karen Shaw Petrou, managing partner of Federal Financial Analytics ‘This is a very, very scared market. It heard a noise in the closet, and it’s pulled the covers up over its head, and it’s not going to look out until, Mom, like the federal government, comes in and says it’s OK.”

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New York Times, July 11, 2008
Loan-Agency Woes Swell From a Trickle to a Torrent
By Charles Duhigg

The word began spreading across Wall Street trading desks on Monday morning: Fannie Mae and Freddie Mac, the giant companies at the heart of the nation’s housing market, might be in trouble. The tumult, which continued on Thursday, started with a cautionary analyst’s report, one that might have caused few ripples in normal times. But these are not normal times. Within minutes, the price of the companies’ shares was plunging, sending shock waves through the financial markets, the economy and Washington. Fannie Mae and Freddie Mac are so big – they own or guarantee roughly half of the nation’s $12 trillion mortgage market – that the thought that they might falter once seemed unimaginable. But now a trickle of worries about the companies, which has been slowly building for years, has suddenly become a torrent. “As it gets harder for Fannie and Freddie to borrow money, it’s going to push up mortgage interest rates,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “And this general gloom will prolong the credit crisis, which means it’s harder to get student loans, auto loans and basically any type of borrowing.”

Washington Post, Wednesday, July 9, 2008
Fannie, Freddie News Led to ‘Confusion’
By David S. Hilzenrath

The sell-off Monday in shares of Fannie Mae and Freddie Mac was based on “a lot of confusion” about a perceived threat to the mortgage funding giants, a federal regulator said yesterday. Investors dumped shares of the companies Monday after a Wall Street analyst reported that a proposed accounting change could force them to raise tens of billions of dollars and undermine their ability to support the troubled housing market. James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight, said the accounting change would not necessarily force the companies to increase the amount of capital they must set aside as a cushion against losses. In an interview, Lockhart said his agency and federal law, rather than accounting rulemakers, control the capital requirements for the government-sponsored firms. “I don’t think there is a prospect that the companies could require a bailout,” Lockhart said. Congress is working on legislation to give regulators more power over Fannie Mae and Freddie Mac, including greater authority to regulate their capital, and Lockhart has long argued that OFHEO needs such expanded authority. But Karen Shaw Petrou of the research firm Federal Financial Analytics said that under current law, OFHEO could determine that the proposed change in the accounting rules has no effect on the capital requirements for Fannie Mae and Freddie Mac. Regardless of the accounting rules, Petrou has contended that Fannie Mae and Freddie Mac are allowed to operate with inadequate financial cushions. Her firm asserts they should increase their capital by $10 billion to $20 billion each to put them on a par with banks.


LA Times, July 9, 2008
Why the troubles at Fannie and Freddie are yours?
By Peter Viles

The big mortgage news locally yesterday was IndyMac’s dramatic exit from the mortgage business, at a cost of 3,800 jobs. But investors knew IndyMac was toast, and something like this was coming — that’s why IndyMac has been a penny stock lately. The bigger news — at least financially — was the sharp sell-off in shares of Fannie Mae and Freddie Mac, which is Wall Street’s way of saying the following: the housing and mortgage markets are deteriorating, and Fannie and Freddie are going to need to raise money to survive. If you don’t believe Wall Street’s analysis, take it from the Fed chairman this morning: “The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning,” Ben Bernanke said in a speech in Virginia. More: ” ‘If Fannie or Freddie ever became critically undercapitalized, their regulator would have no choice but to put in place a taxpayer rescue,’ said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company.”

New York Times, July 8, 2008
Mortgage Fears Depress Shares at Two Agencies
By Charles Duhigg

As home prices decline and Washington struggles to end the economic malaise, Wall Street is starting to send a sobering message: The worst is yet to come. One of the strongest warning signs came Monday, when shares of the nation’s most important mortgage companies, Fannie Mae and Freddie Mac, plummeted. After falling almost continuously over the past month, in just one day Freddie Mac tumbled another 18 percent, and Fannie Mae lost 16 percent amid concerns that the companies would need to raise billions of dollars in fresh capital. The gloomy news also threatens to further shrink Washington’s influence has over the economy. Legislators are widely expected to approve a housing rescue bill by the end of the month. That legislation will overhaul the regulatory structure for Freddie Mac and Fannie Mae, which are government chartered enterprises, and will force the two companies to hand over hundreds of millions of dollars each year to refinance troubled home loans. But the reform legislation will also likely bolster the odds that taxpayers will foot the bill if either company falters. “If Fannie or Freddie ever became critically undercapitalized, their regulator would have no choice but to put in place a taxpayer rescue,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company.

NPR- All Things Considered, July 8, 2008
Bernanke Wants to Expand Fed’s Market Oversight
By Jim Zarroli

Federal Reserve Chairman Ben Bernanke called on Congress Tuesday to write new laws that would expand the Fed’s role in preventing financial crises, such as the collapse of Bear Stearns last March. Bernanke also announced that the Fed may keep its so-called discount lending window open to big investment banks and brokerage houses through at least the end of the year. The window essentially extends credit to big financial institutions, as a way of keeping them operating during crises and restoring confidence in the nation’s financial system. Congress needs to expand the Fed’s role and “task the Fed with promoting the overall stability of the financial markets,” Bernanke said. These changes represent a huge potential transformation in the Fed’s role. “I think he was outlining both some immediate changes that would be very dramatic and, down the road, an even more profound restructuring of the U.S. financial system,” said Karen Shaw Petrou, managing director of the research firm Federal Financial Analytics. The financial markets are so anxious right now that almost anything can shake investor confidence, Petrou said. A single analyst report suggesting that Fannie Mae and Freddie Mac may face capital problems sent shares of the two companies plummeting on Monday. They rebounded somewhat on Tuesday after government regulators said the fears were overblown, but Petrou says there’s a lesson in what happened. “The financial markets remain extremely troubled, and none of the immediate regulatory fixes is sufficient to reduce the systemic risk posed right now,” she said.

MarketPlace Radio Show, July 2, 2008

Karen Shaw Petrou: And we all have learned the hard lesson about how flawed S&P and other decisions are. Karen Shaw Petrou is managing partner at Federal Financial Analytics. She studies the impact of regulations on financial institutions and their customers. Petrou says the kinks can be worked out later, but we need Basel II now. Petrou: Even with the flaws in the Basel II rules, they need to be put in place quickly and then refined, because the longer we have Basel I, the more risk we have, the less we will have solved the problems that got us here. In spite of the complaints, Basel II appears to be moving forward. By October, the very largest U.S. banks like Citigroup and Bank of America have to show regulators how they plan to put Basel II in place.

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American Banker, Friday, June 27, 2008
Simplified Basel II Is Out, and So Are Its Critics

By Joe Adler

The long-sought simplified version of Basel II regulators unveiled Thursday is designed for the vast majority of financial institutions, but it is already dogged by questions over whether it is simple enough. Regulators, including Federal Reserve Board Chairman Ben Bernanke, are hoping many small banks will adopt the standardized approach, which would make banks’ capital requirements more commensurate with their risk. But community bank advocates are raising concerns that the voluntary plan offers too few benefits, would keep small banks at a competitive disadvantage against the largest ones, and remains overly complex. Small banks “can argue” against the new capital regime, “but this is going to happen,” said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. “They’re already being forced bank by bank to raise lots of capital, both by the regulators and by the market… Basel I may provide a little safe harbor, but I think it’s small, rocky, and temporary.”

Regulators said they are watching the issue closely. But observers said that at this point regulators do not have a better option than using the rating agencies. “What we’re going to see is a two-part process in which the regulators will move and finalize the standardized option as quickly as they can, with the rating agency treatment more or less as it is — because they’re not sure what else to do, and they need to finalize this as quickly as possible,” Ms. Shaw Petrou said. “But at the same time, and in the context of the SEC rulemaking, this is a broadscale banking agency thing. They’ll be looking at this and making changes.”


American Banker, Friday, June 27, 2008
Viewpoint: Anticipating the New Environment for Boards
By Karen Shaw Petrou

When a bank falters, unsparing attention now centers squarely on the board table and the directors around it. As was the case in the S&L and banking crisis almost 20 years ago, individual directors — inside and outside — are facing tough challenges from the press, shareholders, lawsuits, and now regulation. In the face of this onslaught, troubled banks are looking with longing at governance and risk management improvements they wish they had made. Bankers hoping to avoid the wringer should anticipate the new standards for their board, implementing them now to head off legal and reputational risk, not to mention some hefty personal embarrassment for key directors. Having buckled under the weight of more than a few board binders, I have seen what directors face (or duck). I also have seen the worst of the rules governing bank boards and the resulting distractions from the real contribution outside directors must make.

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Washington Post, June 26, 2008
Delinquencies Rise at Fannie Mae, Freddie Mac
By David S. Hilzenrath

In a sign of continuing trouble in the housing market, mortgage delinquency rates doubled over a 12-month period at Fannie Mae and Freddie Mac, the two industry giants reported yesterday. Neither company’s figures fully captured the problems borrowers have had making payments, because they excluded loans for which payment terms had been relaxed.Both companies expanded their holdings largely by buying their own securities. Such purchases represented $20.2 billion of the $32.8 billion growth in Freddie Mac’s investment portfolio in May and $8 billion of the $8.5 billion increase in Fannie Mae’s portfolio. In Freddie Mac’s case, those purchases have produced a high concentration of risk, raising questions about the company’s financial safety and soundness, analysts at the research firm Federal Financial Analytics said. Freddie Mac securities made up more than half of its mortgage portfolio in May; Fannie Mae securities made up just over a third of its portfolio. “[W]e’re pretty sure that any bank holding as much of its own obligations as Freddie would need to have a great deal more [reserves] in place to handle the resulting liquidity risk,” the research firm said in a report yesterday titled “Doubling Down.”


Wall Street Journal, May 20, 2008
Senate Strikes Housing Rescue Deal
Plan Would Insure Up to $300 Billion in Home Loans; Encouraging Note From Bush
By Damian Paletta and James R. Hagerty

A Senate agreement pushed Congress significantly closer toward a bill that would expand the federal government’s role in propping up the housing market. After weeks of negotiations, Sen. Chris Dodd, a Democrat, and Republican Sen. Richard Shelby completed a plan Monday that would allow the government to insure up to $300 billion in refinanced loans for struggling homeowners. In a nod to a longstanding Republican concern, the agreement would also overhaul supervision of Fannie Mae and Freddie Mac, the enterprises that provide the lion’s share of funding for U.S. mortgages. The legislation agreed upon Monday would also create a new, more powerful agency to regulate Fannie and Freddie, the government-sponsored mortgage investors. Congress has struggled with that issue for years. The legislation would allow the new regulator to set higher capital requirements for Fannie and Freddie, which have long been allowed to operate with minimal levels of capital relative to their assets. If Fannie were a bank, regulators would require it to hold $135 billion of capital to be considered “well-capitalized,” estimated Karen Petrou, managing partner at research firm Federal Financial Analytics in Washington.

BNA, Friday, May 9, 2008
National Banks Gain New Advantages Under Recent OCC Rule, Consultant Says
By R. Christian Bruce

A new rule issued by the Office of the Comptroller of the Currency to ease regulatory burdens on national banks could give them better profit potential and a stronger competitive position against investment banks and state-chartered institutions, a financial services consulting firm is telling clients. The OCC April 24 finalized a package of changes that update and streamline OCC regulations to bring them into line with an in-house agency review as well as recent congressional mandates. Although the rule covers a broad range of matters, Karen Shaw Petrou, cofounder and managing partner of Federal Financial Analytics, Inc., said some of the changes could give national banks important advantages. In memos to clients, she said broader investment powers under the rules will, in some ways, allow national banks to emulate hedge funds. And broad authority to issue financial guarantees may help bankers compete for business against weakened bond insurers, according to Petrou. In an environment where financial institutions as a whole are struggling, the new rule could give national banks an edge, she said.” This will, we think, allow the stronger national banks to pick up some pretty big pieces in the financial-market debris,” Petrou said in the May 5 memo. Although the rule takes effect July 1, national banks and some foreign banks can begin applying portions of the new regulation right away.

The full text of the OCC rule may be found on the Web at: http://www.occ.treas.gov/ftp/release/2008-47a.pdf.

Washington Post Monday, April 28, 2008
Estimates Are Key at Financial Firms: Mistakes Could Hurt Broader Economy
By David S. Hilzenrath

The troubled housing market has already weakened major financial institutions, and additional vulnerabilities can be found in the fine print and between the lines of their financial reports. Crucial figures, such as the size of reserves that Fannie Mae, Freddie Mac and major lenders are holding to cover expected losses, are often based on subjective estimates and choices of accounting methods. The current environment has made those predictions even more difficult. For investors, “the decision fundamentally becomes, do I trust this management team to get these numbers right?” said Zach Gast, an analyst at RiskMetrics Group who studies corporate finances for institutional investors.If Fannie or Freddie weakened further, mortgages could become harder to get, making it tougher for people to buy and sell homes and adding to the downward pressure on home prices. “Fannie and Freddie are, in our view, massively under-reserved,” said Karen Shaw Petrou of Federal Financial Analytics, a consultant to financial institutions.

Washington Post Monday, April 28, 2008
Estimates Are Key at Financial Firms: Mistakes Could Hurt Broader Economy
By David S. Hilzenrath

The troubled housing market has already weakened major financial institutions, and additional vulnerabilities can be found in the fine print and between the lines of their financial reports. Crucial figures, such as the size of reserves that Fannie Mae, Freddie Mac and major lenders are holding to cover expected losses, are often based on subjective estimates and choices of accounting methods. The current environment has made those predictions even more difficult. For investors, “the decision fundamentally becomes, do I trust this management team to get these numbers right?” said Zach Gast, an analyst at RiskMetrics Group who studies corporate finances for institutional investors.If Fannie or Freddie weakened further, mortgages could become harder to get, making it tougher for people to buy and sell homes and adding to the downward pressure on home prices. “Fannie and Freddie are, in our view, massively under-reserved,” said Karen Shaw Petrou of Federal Financial Analytics, a consultant to financial institutions.

American Banker, Wednesday, April 16, 2008
Bair Sounds Open to Basel II Rewrite on Capital
By Steven Sloan

In the wake of the credit crisis, Federal Deposit Insurance Corp. Chairman Sheila Bair signaled Tuesday that she might push for the Basel II capital rule to be rewritten to let the largest banks use the standardized approach. Regulators and the industry haggled for years over whether large banks should have the option to choose between Basel II’s less cumbersome standardized approach and the more complicated advanced approach. The issue was seemingly settled last July when regulators agreed to issue a final rule that required the 12 largest domestic banks to use only the advanced approach, which relies on institutions to judge their risks internally and determine capital requirements accordingly. Credit rating agencies have come under heavy fire in recent months as highly rated assets have produced losses. Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc., said she expects tougher requirements on assets that get easier capital treatment because of a credit rating. The stricter standards may ultimately narrow the differences between the standardized and advanced approaches, she said. Once rules are adopted, “depending on how those are done, the incentive for using the standardized approach over the advanced approach will diminish,” she said. “It’s going to depend on how the standardized approach moves away from the credit rating agencies.”

American Banker, Tuesday, March 18, 2008
I-Banks at the Window, Congress at the Door
By Barbara A. Rehm and Rob Blackwell

The privilege of borrowing cash from the discount window is likely to carry the burden of stricter supervision for investment banks. At a minimum, the Securities and Exchange Commission’s relatively cursory oversight is likely to be replaced with the Federal Reserve Board’s fine-tooth-comb approach. “Now that large investment banks are allowed to step up to the window, some greater degree of regulation should be examined,” Sen. Charles Schumer, the chairman of the Joint Economic Committee and a member of the Senate Banking Committee, said on a conference call with reporters Monday. The New York Democrat raised doubts about the entire structure of the financial services system. Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc., agreed that “the regulators themselves are going to be significantly hammered” over how this happened. “There will be a rewrite of the regulator and the regulated.”

American Banker, Thursday, March 27, 2008
Support broadens for idea of linking Fed oversight to access
By Cheyenne Hopkins

A consensus is building around the need for more regulation of investment banks in the wake of the Federal Reserve Board’s move to grant them access to the discount window. Treasury Secretary Henry Paulson, himself a former investment bank executive, on Wednesday became the latest to call for more oversight. “Access to the Federal Reserve’s liquidity facilities traditionally has been accompanied by strong prudential oversight of depository institutions, which also has included consolidated supervision where appropriate,” Mr. Paulson said. “Certainly any regular access to the discount window should involve the same type of regulation and supervision.” The Treasury Department is working on a regulatory blueprint for the financial sector, and some saw the secretary’s remarks on investment banks as clues to the direction of the blueprint, which is expected out soon. “The whole model of investment bank regulation is based on an old broker-dealer rule,” said Karen Shaw Petrou, managing director of Federal Financial Analytics. “It’s based on the fact that, once, broker-dealers acted only as agents. Now they act as principals, and that is not reflected on any of the SEC’s rules.”

New York Times, March 20, 2008
A Break for Freddie and Fannie

With the blessing of the Bush administration, the regulator of Fannie Mae and Freddie Mac, the nation’s two largest mortgage finance companies, eased a major restriction on the companies on Wednesday in an effort to unfreeze credit markets and stabilize housing prices. By reducing the extra cushion of capital the two companies have been required to hold since 2004, the regulator, the Office of Federal Housing Enterprise Oversight, is enabling the companies to invest $200 billion more in home loans. In essence, the companies are being allowed to take billions of dollars that had been used as a reserve against possible further losses and invest that money now in the housing market. But some analysts disagreed, saying they were concerned that in the name of short-term fixes the government could be creating longer-term problems. “If the markets continue to decline, Fannie and Freddie will be two of the bodies on the beach,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “The argument is settled that the less capital the companies hold, the more risk they take.”

Washington Post, Thursday, March 20, 2008
Fannie, Freddie Cleared To Buy More Mortgages
By David S. Hilzenrath

The federal government yesterday gave Fannie Mae and Freddie Mac permission to operate with a reduced safety net in order to increase their aid to the troubled mortgage market. The step could allow the two federally chartered finance companies to immediately increase their investment in mortgages by a combined $200 billion, potentially compensating for weak demand from other investors. Yesterday’s decision by the Office of Federal Housing Enterprise Oversight reduces the amount of capital that Fannie Mae and Freddie Mac are required to hold as a cushion against losses. The capital requirement is meant to ensure that each company has sufficient resources to meet its obligations. Fannie Mae’s capital requirement was reduced to $38.3 billion from $41.5 billion, and Freddie Mac’s was reduced to $31.8 billion from $34.4 billion. The combined reduction of about $5.9 billion would allow Fannie Mae and Freddie Mac to increase their mortgage investments by about $200 billion because they are allowed to operate with what some policymakers describe as relatively thin cushions. Even with the extra 30 percent, the two companies were highly leveraged and inadequately capitalized, said Karen Shaw Petrou, managing partner of the consulting firm Federal Financial Analytics. “I think these are desperate times that drive policymakers to do things they don’t want to do because of the fragile nature of the financial system as a whole,” Petrou said.

Financial Times, Saturday, March 15, 2008
System braced for ripple effect
By Michael Mackenzie and Aline van Duyn in New York
and Peter Thal Larsen in London

Bear Stearns is hardly Wall Street’s biggest investment bank, but its travails have far-reaching consequences for the global financial system because of its crucial behind-the-scenes role in some of the world’s most troubled markets. Bear is a significant underwriter of mortgage securities, an active trader of derivatives and leading financier of hedge funds, meaning it has manifold relationships with other leading banks and investors. Analysts said it was almost impossible to know what impact Bear’s problems would have on its clients, its counterparties and on other investors holding securities or derivatives that Bear is trying to liquidate. “Bear Stearns is counterparty to a huge number of OTC derivatives, and it is not just the unwinding of contracts with Bear that are a concern, but the ability of this market with relatively weak and untested infrastructure to handle such a shock,” said Karen Petrou, managing partner at Federal Financial Analytics.

American Banker, Wednesday, March 12, 2008
In Fed’s Market Plan, a Backstop for GSEs?
Some see $200B securities injection as “stealth bailout”
By Steven Sloan

A move by the Federal Reserve Board to pump $200 billion into the markets by lending Treasury securities in return for collateral including agency mortgage-backed securities is seen as strengthening the implicit government guarantee of Fannie Mae and Freddie Mac. Though senior Fed staffers insisted the plan was aimed at stabilizing the market — not specific firms — it gives the government-sponsored enterprises critical support at a time when market turmoil has left debt and equity investors questioning the companies’ underlying health, observers said Tuesday. Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc., said the companies run the risk of uncertainty spiraling in panic. But she said the Fed’s action Tuesday could protect Fannie and Freddie. “If this finally works, then it may help to ease the margin calls, ease some of the pressures on the hedge funds, which will ease the strains on Fannie Mae and Freddie Mac,” she said.

All Things Considered (NPR), February 22, 2008
Credit Woes Squeeze Bond Insurance Business
by Jim Zarroli

Wall Street has a problem and over the past few weeks, some of the street’s most important bankers and regulators have been trying to come up with a solution. They’re looking for a way to rescue a little-known sector of the financial world called the bond insurance business. It’s a business that plays a vital role in the finances of cities and towns across the country, which use bonds to raise money for schools and bridges and sidewalks. And it’s being squeezed by the ongoing turmoil in the credit markets. Bond insurance firms do business by guaranteeing payment on a bond. If you buy an insured bond, and the issuer defaults, you’re guaranteed to get all the money that’s coming to you.

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American Banker, Monday, February 4, 2008
Will Capital Rules Open to Empty House?
How the market’s turmoil may alter Basel II rollout
By Steven Sloan

After years of pushing regulators to complete the Basel II capital accord, the banking industry may need some extra time to comply with it. Though the complicated accord will take effect April 1, the 12 largest banks can take six months to win approval of an implementation plan and up to three years to begin the first phase of that implementation. Some observers said bankers may need that window as they redeploy resources to deal with the daily challenges of the current market turmoil. Banks with significant holdings in lower-rated mortgages or securities could find themselves especially vulnerable to sudden capital hikes once they adopt Basel II. Though bankers may not like that, there seems to be little alternative. The industry almost unanimously agrees that the current Basel framework is too outdated to handle contemporary risks. But some said that even if banks took some extra time, they would be unable to stall the transition to Basel II for very long. “You’ve got the international pressure. You’ve got rating agency pressure. You have investor pressure,” said Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc. “That doesn’t afford more than a quarter or two of discretion.”

Financial Times, January 25, 2008
Analysts predict wave of home refinancing
By Krishna Guha and Jeremy Grant

The economic stimulus plan agreed on Thursday could unleash a wave of mortgage refinancing that would amplify the effect of the Federal Reserve’s 75 basis-point interest rate cut this week, according to analysts. While the Fed has cut rates aggressively, until now a large number of homeowners and would-be buyers have not been able to take advantage of the lower interest rates, because of high spreads in the dysfunctional secondary market for jumbo (large denomination) loans. Treasury secretary Henry Paulson said he had been run over by a “bipartisan steamroller” in agreeing this element of the package. For his part, Mr Frank said he had pledged that the relaxation of the loan limit would expire in 12 months. Still, some analysts question whether the GSEs were in any state to take on further credit risk. Karen Shaw Petrou, at federal financial analytics, said a big problem now was the sharp drop in house prices “which means many borrowers have current mortgages well above the actual value of their home”. This meant they could not refinance “because no lender can make a loan and GSEs thus cannot purchase one that comes in well above the current value”.