In a market where volatility is this high,even with the Fed removing trillions of dollars in duration from the markets via QE, just how are private obligors going to price trillions of dollars in first loss RMBS exposure in this imaginary private market that pro-reform elements in Congress have in mind? Fact is, when the Fed ends QE. market dependence upon the GSEs for liquidity support will grow. Like we said, raise the G fees and the conforming loan limit in the name of market forces, Congress needs to find some ways to increase the volume of mortgage loan refinancing and modifications.

"Toryism, Socialism and Housing Reform" a topic inspired by the good works of the members of both major parties in Congress. Rep. Scott Garrett, is a conservative Republican, but has become the latest agent of statism and zombie banks. Why this harsh appraisal? Because he comes from NJ, a state that is at least nominally pro-business but has always carried the water for Wall Street. NJ, has always produced protectors for the political interests of the big banks. And the covered bond proposal being so constantly advanced by Garrett and others is the latest triumph for financial innovation.

This commentary is background for the presentation entitled "GSEs: The Future Role of Government Sponsored Enterprises in the US," at the Global Association of Risk Professionals event on Tuesday, March 8, 2011, in New York. The Obama Administration recently advanced some proposals to reform several government agencies that control the market for housing. Treasury/HUD plan is really a menu of possible options, eliminating what would not work and making it clear that change will happen slowly, if at all.

The Q4 2010 results from the latest IRA bank stress index ("BSI") survey are in and the US banking industry saw slightly higher stress than in the previous quarter. At the start of 2010, we wrote in The IRA Advisory Service that Q1 was likely to be the best quarter of the full year 2010. As it turns out, Q1 2010 was the lowest BSI score for the full year and since the start of 2009. Operational stress as measured by the BSI has been rising in the US banking industry steadily since Q1 2010.

As we've noted in recent missives for The IRA Advisory Service, the visible volume of business flowing through the bank consumer channel seems to be receding or maintaining low levels. The commercial channel at most banks we hear from is still running at 1/3 to 1/2 of pre-2008 levels in terms of new originations and demand for credit. This is why when clients ask us about whether we worry more about inflation or deflation, our answer is "both." The chief worry bead remains revenue flowing through banks, housing and the US economy.

In this issue Richard Alford, Christopher Whalen and members of the Herbert Gold Society opine on the Fed's attitude toward veracity and transparency in an age when confidence is the paramount policy concern. In the process of seeking to restore and maintain confidence, in the financial system and in the Fed as an institution, the Board of Governors in Washington led by Chairman Ben Bernanke seem to follow the last of the three slogans of the Ministry of Truth in George Orwell's book, 1984: "Ignorance is Strength."

With last week?s release of Q4 Housing Vacancy Survey by the Census Bureau and prior week?s release of the November S&P Case Shiller Index data, two things are clear: (i) the housing market is in the midst of what will be at least a several quarters? long, double-dip in home prices as the final act in the five-year tragedy of residential real estate price re-rationalization and (ii) it is time to look beyond this final stage, to the future of housing demand as excess inventories are slowly absorbed.

Until the US government summons the courage to impose the same discipline on Bank of America, JPM and the other zombie money center banks as was applied to Western United and First Community banks, there will be no recovery in the US economy or in the housing sector -- nor in the political currency of Washington politicians. Credibility is ultimately the biggest valuation gap of all. Barack Obama's shortfall when it comes to public policy regarding the economy and financial institutions is a mile wide.

In this issue of The Institutional Risk Analyst, we return to the zombie dance party to check in on the queen of the prom, American International Group ("AIG"). First a question: Vampires are all the rage now in popular culture, so allow us to offer a macabre metaphor for AIG. Do you know what a "blood doll" is? A girl who craves to be the regular victim of or willing donor to a vampire. But hold that thought.

With more than half of Tunisia's population under 30, increasing unemployed youth want more. It remains to be seen who will come out on top in Tunis. But across North Africa - from Egypt to Morocco - underground religious Muslim opposition festers. Alas! in Tunisia, as elsewhere, the Iranian mullahs' total corruption and Saudi Arabian hypocritical lifestyle notwithstanding, the Islamicists' appeal is growing.

In this issue of The Institutional Risk Analyst, we propose a Brady Plan for the mortgage sector and feature a comment by Robert Feinberg on the state of too big to fail in Washington. Given that the equity market value of the zombies has been climbing since the end of Q3 2010, the Street clearly believes that the proverbial fix is in and that the Treasury will subsidize the losses of BAC et al. Bob confirms that view and that "too big to fail" is alive and well in Washington.

In a free society, when a problem grows to a certain size, the political force behind the good of the many becomes irresistible and the good of the few or the one can often overlooked. As new political tendencies join governments in Ireland and the U.S. in January 2011, we look for macro economic and financial factors to start driving events in some ways that will be very unpleasant for creditors and consumers like. Just remember that sovereign states like Ireland, California and New York don't file bankruptcy, they merely default a la Iceland and Argentina.

In this issue of The Institutional Risk Analyst, we speak to Michael Whalen, award winning composer and new media observer about the outlook for the business of creating and delivering content. Since graduating from Berklee College of Music, Michael has taught a business for music class than has saved thousands of young atists from making terrible mistakes with content and other contractual rights. Think Frank Zappa and Warner Brothers. And yes, Michael is IRA co-founder Chris Whalen's younger brother.

The key thing to take away from the Q3 2010 FDIC results is the continued volatility in bank financial statements as evidenced by the movement among the different ratings strata. This type of volatility in performance is normal among banks and non-banks alike, but the current period of credit and operational stress is making these distinctions even more pronounced. When you see this type of instability in bank financial disclosure, it suggests very strongly that these depositories are under severe operational stress.

Implementing Dodd-Frank levels the playing field for all of the producers of ratings. Banks and funds should start to create, aggregate and share two metrics - probability of default and loss given default - for all of the exposures which they touch. In creating these metrics, these institutions must both do their own work and will be able to reference any one of hundreds of external ratings and valuation sources.

This week The Institutional Risk Analyst returns to the financial travails of Ambac Financial Group, which recently filed bankruptcy after several years of twisting in the wind due to questions about solvency related to RMBS exposures. AFG, as it turns out, is the latest project of the Treasury Secretary, who wants to again protect the largest bank dealers and the market in over-the-counter derivatives from legal discipline.

This week The Institutional Risk Analyst is on the road. We were in Merriville, IN last night to give a talk entitled "A New Deal for the American Economy." The well-attended event was sponsored by the School of Business at Indiana State University and City Securities in Indianapolis.

This week the Institutional Risk Analyst features a comment by the FRBNY's Richard Alford. Alford provides a very revealing look into the brave new world of macroeconomics and how the members of the priesthood of imprecision see the 'multiplier' associated with fiscal spending. When you realize just how poor the methodology is behind these economic debates, both in terms of the mathematical assumptions and the understanding of human action, the fact that these distinctions underpin fiscal policy is truly frightening.

What we need from the Federal Reserve is some leadership on the issue of making the White House take responsibility for restructuring the economy. The Fed should be telling the healthy banks to start taking a bit of risk, making some loans instead of buying Treasury bonds and agency mortgage-backed securities. A bit of increased competition in the origination channel so that performing borrowers can get a refinancing closed will unblock the economy and also do wonders for the efficacy of Fed policy.

This week the Institutional Risk Analyst talks to Louisiana State University finance professor Joseph Mason. While the media is printing stories about foreclosures, Mason says, the more fundamental problem facing the U.S. economy is the approaching currency crisis.

If the Federal Open Market Committee does not soon allow interest rates to rise and thereby rebalance the policy equation between American savers and borrowers, then gold prices will climb further. Federal Reserve Chairman Ben Bernanke and the FOMC will hand the detractors of the central bank led by U.S. Representative Ron Paul the political issue they need to eliminate the Fed once and for all. And President Barack Obama will be wearing the concrete booties that once belonged to President Herbert Hoover. Unlike your worthless greenbacks, you can take that to the bank.

The failure on the part of the largest banks to perfect guidelines for security interest agreements on the homes, office buildings or other real properties that underlie securitizations is turning out to be not merely a legal headache, but also the operational catalyst for the next crisis in financials. This commentary also features a piece by contributor Dick Alford on the recent speech by New York Federal Reserve President William Dudley regarding the resumption of quantitative easing. According to Dudley, the speech suggests that the Fed has not yet learned from past mistakes.

The erosion of the profitability of the U.S. banking industry over the past two years under the Summers-Geithner-Bernanke rescue scheme is the proverbial fly in the ointment for both major political parties. Democrats and Republicans alike are going to be fed into the meat grinder over the next several years as the banking sector deals with literally hundreds of billions of dollars in direct and indirect expenses from the deflation of the mortgage bubble. The slow process championed by Summers and Geithner will ensure that Barack Obama becomes the Herbert Hoover of the Democratic Party.

This issue features a comment by Richard Field of TYI LLC about a new European Union rule for the asset-backed and structured securities markets in the European Union called Article 122a. This rule is a direct challenge to the U.S. regulatory community. Implementation will very quickly divide those financial institutions which are compliant and those which are not. Banks which are not in compliance with the EU rule will be obliged to offer investors significantly higher yields on debt than those banks which are compliant.

While the financial markets await the latest pronouncement from Fed Chairman Ben Bernanke, the Institutional Risk Analyst features a comment from friend and former colleague at the FRBNY Richard Alford. He asks whether any of the policy options being considered by the U.S. central bank are meaningful to the American economy. As Paul Krugman wrote in the New York Times on Friday, 'policy makers are in denial.'

This commentary features a piece from Achim Duebel at Finpol Consult in Berlin criticizing U.S. fiscal intervention in the housing market. Duebel's comment was first written in 2003, when its publication in a housing finance journal was blocked by government-sponsored enterprise lobbyists. The striking thing about it is that almost nothing about the structure of the housing market has changed since it was first written. Christopher Whalen also comments on the current status of the housing sector, and double-dips both real and imagined.

Given its second lease on regulatory life, one might expect that the Fed's bank supervision function would be gearing-up to take a fresh, smart, and tough line with respect to financial company oversight. However, the appointment of Sarah Dahlgren as head of supervision by the Federal Reserve Bank of New York indicates this may not be the case. Ms. Dahlgren has been at the center of many of the Federal Reserve's most embarrassing failures in the area of bank supervision, including the fiasco surrounding American International Group.

This piece features a comment by Richard Alford on the evolving rules for the new Basel capital framework. Investors and bankers alike need to pay more attention to the machinations in the Swiss city of Basel to develop new bank capital guidelines, standards which could greatly constrict the supply of credit in industrial nations in the coming years. Christopher Whalen also comments on Q2 2010 bank stress test ratings, Japan, technology and the housing market.

Some of the big American zombie banks - Citigroup, JPMorgan Chase and Bank of America in particular - are seeing positive results from the Fed's net interest margin drip. Many, however, are reverting back to the global mean for performance due to the zero-interest rate policy maintained by the central bank. In the end, the carry trade enhancement allowed by low interest rates amounts to a subsidy for credit losses by banks that comes out of the pockets of savers.

This piece features a commentary from Hugo Salinas-Price, founder of Mexican retailer Grupo Elektra, on his proposal for the introduction of a silver-backed peso. Legislation to that effect now is under serious consideration before the Mexican Congress. Salinas describes the Mexican peso as a 'derivative' of the dollar, a troubling prospect since the dollar itself is a derivative of nothing, at best a mere representation of a unit of work. Christopher Whalen also discusses the U.S. financial reform bill, and the latest Federal Open Market Committee meeting.

In a column in yesterday's New York Times, economist Paul Krugman took Fed Chairman Ben Bernanke to task for not doing more to combat deflation. And what should the Fed do according to Krugman? Print more money. More quantitative easing via purchases of private debt is the urgent recommendation of this leading American economist. While Krugman criticizes Ben Bernanke for being a Republican, however, it is worth noting that Krugman himself is not quite the socialist that he pretends to be. In fact, Krugman was once considered to be in the same political party as President Ronald Reagan.

This commentary features an interview with James Rickards, senior managing director for market intelligence at Omnis, Inc., about the dollar and the outlook for the U.S. currency in the global economy. Mr. Rickards' career spans the period since 1976. He was a first-hand participant in the formation and growth of globalized capital markets and complex derivative trading strategies.

Christopher Whalen writes about the role of Robert Rubin in Citigroup, Goldman Sachs, the Mexico bailout, and the threads he weaves throughout the White House administration?s fiscal policy.

This commentary features snippets from interviews by IRA co-founder Chris Whalen for his upcoming book, Inflated: How Money and Debt Built the American Dream, which is scheduled for release in November. Alex Pollock of the American Enterprise Institute, Bruce Bartlett, a domestic policy adviser to President Ronald Reagan and Treasury official under President George H.W. Bush, and Josh Rosner, principal of Graham-Fisher, all discuss the economic outlook.

This commentary features a profile of a profile of Capital One Financial, a multibank holding company that specializes in subprime credit cards and consumer banking. COF has a stress score for loan defaults that is more than two times the industry average. The bottom line for COF is that while it has a large and sophisticated treasury operation that includes hedges of its own assets and liabilities and has no Wall Street trading operation. In that sense, COF is more like a regional bank than a money center.

This commentary features a piece by Barnard economics professor Rajiv Sethi on high-frequency trading and its implications for the use of equity-market data, both for profit and risk management. Sethi notes that trading must be based on fundamental information rather than pure market data for prices to remain stable. Banning specific classes of algorithms is unlikely to provide a lasting solution to the problem, however, unless the advantage is shifted decisively and persistently in favor of strategies that feed information to the market instead of extracting it from technical data.

In this issue of The Institutional Risk Analyst, we opine on the latest fair value accounting proposal from the FASB and why market structure is the causation of our collective woe. We then feature a comment by Peter Wallison of AEI talking about the ?original sin? of rescuing Bear Stearns and how it made the financial crisis far worse because of the importance of ?narrative? ? the very same issue that is the focus of Nassim Taleb?s book The Black Swan.

This commentary features a contribution by Clifford Rossi, managing director of the Center for Financial Policy at the Robert H. Smith School of Business, University of Maryland. Rossi writes in support of a proposal by Senator Chris Dodd to establish the Office of Financial Research, which would aggregate enterprise-wide views of risk at large financial firms. Critics say the OFR would represent an unwarranted breach of privacy. The new division was included in the Senate financial reform bill, but is in danger of being dropped during the final reconciliation process.

Fannie Mae and Freddie Mac, and the Federal Housing Administration have sucked out most of the credit problems from the banks. Now they are mutating into hideous, cash-eating monsters as loans go bad and federal guarantees are honored. The losses at Fannie, Freddie and the FHA come in large part because of the underwriting decisions made by the banks. Literally millions of homeowners are in various stages of delinquency or default on their mortgages - and for many, the federal government is now the guarantor.

Stress indices indicate that the U.S. banking industry is officially on the mend in terms of building reserves, but the credit cleanup continues even as new events climb over the horizon. The volatility last Thursday was a reminder of the huge uncertainty that remains in markets today, uncertainty that produced a liquidity-driven downdraft in prices for some very large cap names. One of the big drivers of the equity volatility is the Fed's zero rate policy, which is forcing investors to search for yield in some very strange places.

This commentary features an interview with former senator Ernest Hollings, a Democrat from South Carolina. Hollings was elected to the Senate in 1966. He is a social liberal and a fiscal hawk who regularly puts his Senate colleagues to shame on issues such as Social Security and the budget, according to Institutional Risk Analyst. Hollings supports new limits on campaign donations in exchange for lower corporate taxes. He also supports a new Value Added Tax, as well as tariffs to protect domestic industries and prevent the offshore outsourcing of jobs.

Last week during the media feeding frenzy surrounding Goldman Sachs disclosures we saw once again how the efforts in the 1980s and 1990s to deregulate Wall Street created extraordinary risks for all concerned: bankers, traders and investors. We all seem to suffer from a common, self-inflicted wound that can be summed up simply as a lack of trust. To solve this crisis, we need to restore basic rules of behavior and compensation in financial markets so that it is once again in the best interest of firms like Goldman Sachs to exercise a duty of care to all clients.

This piece features a comment from Alan Boyce, chief executive officer of Absalon, on the impending end of the Fed Purchasing Program. Boyce says that as FPP ends, there is the real potential for unintended consequences in domestic and foreign markets. If markets were to become unglued, the Fed may purchase more mortgages and Treasury debt. Foreign central bankers will likely snap and become sellers, however, if the Fed decides to monetize more debt. Markets would likely take it as a sign that the Fed is politically unable to exit the mortgage market, or quantitative easing.

This commentary features a piece by Richard Field of TYI, LLC, a consulting and technology firm focused on filling information gaps created by financial innovation, on the need to level the disclosure playing field in the asset-backed security markets. Field says that giving investors anything less than daily data on loan portfolio performance is unfair. Meanwhile, the basic tools of machine-to-machine data transfer make daily reporting possible today, as evidenced by the XML-enabled Report of Condition and Income submission system at the Federal Deposit Insurance Corporation.

Without the implicit backing of the U.S. Treasury and Federal Reserve System, the remaining large dealers of over-the-counter assets and derivatives could not function in the post-crisis marketplace. This reality is most visible in the tripartite market for repurchase agreements or REPOs, the basic tools Wall Street uses to finance its working capital book. Now that it's April and the Fed's quantitative easing purchase program is ending, it seems fair to ask: What trick is Fed Chairman Ben Bernanke going to perform next to maintain the stability of market prices?

This post features a comment from international mortgage finance consultant Achim Dubel of German financial think tank Finpolconsult. Dubel says that legislation proposed by Representative Scott Garrett of New Jersey to create a covered bond market in the U.S. needs to be changed if it is to restore investor trust and provide needed new liquidity to real estate markets. Legacy problems with shaky assets of all colors on bank balance sheets should be solved via bad banks and/or bank insolvency and restructuring, not through a new secondary market for bank mortgages.

This article features a comment by Richard Alford, a former economist at the Federal Reserve Bank of New York's foreign department. Alford notes that AIG is back in the news again for successfully negotiating the sale of two significant operating units. The Fed will receive partial payment for the sales in stock of the acquirer. This shows that both the Fed and U.S. taxpayers are still providing capital and taking risk to support the business activities of insurance subsidiaries of financially sound parenting companies operating abroad, a year and a half after the crisis hit.

The Institutional Risk Analyst interviews Bill King, founder of Chicago-based derivatives firm M. Ramsey King Securities. Their conversation centers on a new report by the bankruptcy court examiner in the Lehman Brothers liquidation that provides another piece of evidence linking over-the-counter derivative structures and accounting fraud in the style of Enron and WorldCom. The IRA also examines the FDIC's recent bank securitization reform efforts, as well as the recent rally of CitiGroup, Barclay's and other large-cap financials.

One year ago, OneWest Bank Group purchased the banking operation of the IndyMac Federal Bank, which was being operated in conservatorship by the FDIC. As with the purchase of Washington Mutual by JPMorgan Chase, the subsidy in these deals came from the write-down of the assets of the failed bank. All of the potential claims against the parent companies of WaMu and IndyMac for rescission of securitized loans are sitting in bankruptcy court, where they will likely remain and die.