Saturday, September 19, 2009

The hypocrisy of the Fed

As we speak the typical debt to income ratio acceptable to major big bank loan underwriters is 45/100. In the realistic world 33/100 is a tried and true ratio. Anything above 33/100 is considered "risky". I wonder if Fitch, S&P and Moody's are taking this into their calculations? I doubt it!!! For every credibility gap there is always a gullibility fill!

The Fed is reportedly looking to monitor banker pay in order to discourage excessive risk-taking. But aren't the Fed's easy money policies encouraging risk?
NEW YORK ( -- Are there any mirrors in the headquarters of the Federal Reserve? If so, I think it's time for Ben Bernanke and his colleagues to look into one.

The Fed, according to a Wall Street Journal report Friday, is said to be considering a plan that would allow regulators to closely monitor and even change the pay practices at financial firms in order to make sure that these companies aren't encouraging excessive risk-taking.

Considering that the mess that we find ourselves in is partly due to big banks and insurance firms failing to recognize the many subprime warning signs in order to satisfy Wall Street's myopic focus on quarterly profits, reining in bonuses and other compensation tied to stock performance may not sound like a bad idea.

But riddle me this Bat-readers: Isn't it more than a tad hypocritical for the Fed to be trying to tell banks that too much risk is a bad thing?

After all, the Fed has kept its key overnight bank lending rate near 0% since December and has shown no indication that it will raise this rate anytime soon.

And the Fed has pumped trillions of dollars into the financial system through a variety of programs in order to try and get banks to loan more again. The business of lending is inherently risky. So what kind of message is the Fed trying to send here?

"It makes absolutely no sense at all. It is completely counterintuitive," said Haag Sherman, managing director with Salient Partners, an investment firm in Houston. "The government wants to impose more regulations and put shackles on compensation but in the next breath everybody is screaming about banks not lending."

It's hypocritical plain and simple. Isn't all this cheap money designed to push banks to take on more risks? The Fed wants to slap banks on the wrist for paying its employees too much because that might encourage them to get reckless. But at the same time, the Fed is tempting banks to lapse into bad habits with what may be an overly accommodative monetary policy.

This is the equivalent of your doctor telling you that he wants to approve every meal you eat for the next few months so you don't gain a lot of weight -- while handing you coupons for McDonald's and Krispy Kreme on your way out of the office.

Now of course, many big financial firms are guilty of helping to bring about the financial crisis as the promise of fantabulous bonuses undoubtedly caused them to put on blinders and ignore risk.

"There was no acknowledgment that the derivatives they were writing had a risk. The biggest issue with compensation at financial firms is that it was like paying people before the roulette wheel stopped spinning," said Barry Ritholtz, CEO and director of equity research at research firm Fusion IQ in New York.

But there is a lot of blame to go around.

Consumers got suckered into thinking that the American dream wasn't just owning a home but owning a home with as little money down as possible so they could quickly flip it and buy another one. Greedy mortgage brokers and appraisers helped indulge this.

But many believe the the root cause of the housing bubble is that interest rates were extremely low for an extended period of time. And that's mainly the Fed's fault. During the 2001 recession, the Fed slashed interest rates, bringing them down to 1% by June 2003. And it held them at 1% for a year.