Throughout the ongoing credit crisis, pundits and skeptics alike have alluded to "too big to fail" — the idea that some financial institutions, however irresponsible, had become too fat, too large, and too systemically important to the global financial machine to be allowed by regulators to fail. U.S. Federal Reserve chief Ben Bernanke admitted in a speech Friday morning that the notion of "too big to fail" was correct, and suggested that Federal regulators were moving to ensure that some of the nation's largest banks would not be allowed to fail.

In remarks delivered to the Council on Foreign Relations in Washington D.C., Bernanke said that "reforms to the financial architecture" were needed to prevent this sort of crisis in the future — but said that some firms were too large to be allowed to fail. Read the full speech.

"We must address the problem of financial institutions that are deemed too big–or perhaps too interconnected–to fail," Bernanke said. "Given the highly fragile state of financial markets and the global economy, government assistance to avoid the failures of major financial institutions has been necessary to avoid a further serious destabilization of the financial system, and our commitment to avoiding such a failure remains firm."

In other words: I don't like it, but, yes, some firms really are too big to fail. Bernanke suggested the U.S. needed to prop up ailing financial giants like Citigroup, Inc. (C: 30.87 +1.61%) and American International Group Inc (AIG: 25.25 +0.44%), while also suggesting that a new regulatory framework be put into place to prevent "too big to fail" from being an issue in the next financial crisis.

"It is imperative that policymakers address this issue by better supervising systemically critical firms to prevent excessive risk-taking and by strengthening the resilience of the financial system to minimize the consequences when a large firm must be unwound," Bernanke said.

AIG was clearly on Bernanke's mind here, as well: "The United States also needs improved tools to allow the orderly resolution of a systemically important nonbank financial firm, including a mechanism to cover the costs of the resolution."

The ailing insurer has received more than $160 billion in direct Federal assistance to keep it afloat as bets of credit default swaps and other derivative contracts — including mortgage-related bets — have soured.

The Fed chief also suggested that the recession could be over by the end of 2009, if policymakers and regulators are able to right the ship of the U.S. and global financial machine. Doing so quickly, however, might be a tall order; as Bernanke noted in his speech, addressing this crisis will require a coordinated global response.

Pundits have suggested for months now that Wells Fargo & Co.'s (WFC: 29.60 +1.89%) acquisition of troubled Wachovia Corp. last year was the result of the bank's desire to remain "too big to fail" in the eyes of regulators; a similar strategy was cited behind Bank of America's (BAC: 7.29 -0.14%) purchase spree, which included troubled mortgage originator Countrywide Financial Corp. and Merrill Lynch. Whether he intended to or not, Bernanke's speech Friday clearly gives some strong credence to such thoughts.

Write to Paul Jackson at paul.jackson@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Troubled financial institutions at times ought to be allowed to fail and their operations sold off, said Thomas Hoenig, president and CEO of the Federal Reserve Bank of Kansas City, in a speech Friday in Omaha, Neb. "We understandably would prefer not to 'nationalize' these businesses, but in reacting as we are, we nevertheless are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis," he said.

And Treasury Department actions to invest billions of Troubled Asset Relief Program dollars into these institutions have "added to market uncertainty." As a result, "investors are understandably watching to see which institutions will receive public money and survive as wards of the state," Hoenig said.

"If institutions — no matter what their size — have lost market confidence and can't survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses and begin the process of restoring them to private ownership," he said.

He encouraged the sell-off of "manageable pieces" of failed institutions that became to large or complex to manage. He also drew on the example of Swedish "bad banks" that absorbed problem assets, promoted transparent banking operations, restored confidence and limited taxpayer loss.

Read his speech.

Senate Republicans have been especially vocal critics of the bank rescues in recent months. "Close them down, get them out of business. If they're dead, they ought to be buried," Sen. Richard Shelby, R-Ala., said in an ABC interview, according to a MarketWatch bulletin. "We bury the small banks. We've got to bury some big ones and send a strong message to the market,"

Instead, the Treasury propped up both large and small banks and has come under criticism for its massive bailouts of American International Group Inc. (AIG: 25.25 +0.44%) and Citigroup Inc. (C: 30.87 +1.61%) which together have received on the order of $95 billion through the TARP. Both institutions, despite capital purchases, targeted investments, asset guarantees and systemic significant failing institution infusions, have still required restructuring plans and possible future Treasury investments.

"I don't think they made the hard decision and that is to let these banks fail," Sen. John McCain, R-Ariz., said in a Fox News Sunday interview of such institutions, according to MarketWatch.

Eating cake, at the FDIC's expense
It's unclear now what sort of effect a massive wave of failed institutions would have on the Federal Deposit Insurance Corp., which has already seen its deposit insurance fund strained by 17 bank failures this year. Ten bank closings in February were estimated to be a drain of some $944.3 million on the FDIC’s deposit insurance fund, while another six closings in January cost the fund at least $789.1, according to FDIC estimates. All told, the fund is out some $1.77 billion so far this year.

Critics have said for months that the FDIC’s deposit insurance fund just wasn’t large enough to manage all the expected bank failures expected over the coming months and years — and it seems they were right on the money. Senate Banking Committee Chairman Christopher Dodd, as of Friday, is moving to allow the FDIC to temporarily borrow up to $500 billion from the Treasury, after key officials, including Bair, made subtle cries for help. The FDIC’s current line of credit with the Treasury is $30 billion.

Write to Diana Golobay at diana.golobay@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

The Obama administration's housing rescue plan is a step in the right direction, but the plan certainly isn't without its downfalls, said a congressional oversight panel in a report released Friday.

The $275 billion plan, announced on February 18, aims to prevent unnecessary foreclosures through obtaining affordable payments for struggling homeowners. It's a plan that the administration estimates could help between four and five million homeowners who would otherwise find themselves in foreclosure. While these projections are encouraging, there are "additional areas of concern that are not addressed in the original announcement of the plan," wrote the oversight panel in its report.

"In particular, the Plan does not include a safe harbor for servicers operating under pooling and servicing agreements to address the potential litigation risk that may be an impediment to voluntary modifications," the report said.

However, the U.S. House of Representatives approved Thursday a bill that contains a provision that would legally give mortgage service firms "safe harbor" if they try to revise distressed loans. The Senate is expected to consider its own version of the bill soon, but the chance of passage is uncertain, according to a Reuters report.

The plan also falls short in fully addressing the contributory role of second mortgages in the foreclosure process — both as it affects affordability and as it increases the amount of negative equity, the report said. And while the modification aspects of the Plan will be mandatory for banks receiving TARP funds going forward, the panel is concerned with how federal regulators will enforce these new standards industry-wide in order to reach the needed level of participation.

The Plan also supports permitting bankruptcy judges to rework underwater mortgages in certain situations. "Such statutory changes would expand the impact of the Plan," said the report. "Without the bankruptcy piece, however, the Plan does not deal with mortgages that substantially exceed the value of the home," which the panel warns could limit the relief it provides in parts of the country that have experienced the greatest price declines.

"The foreclosure crisis has reached critical proportions," the oversight panel said. But it hopes by identifying the current impediments to sensible modifications that the nation can move toward "effective mechanisms to halt wealth-destroying foreclosures and put the American family — and the American economy — back on a sound footing."

Write to Kelly Curran at kelly.curran@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

The United States is facing an economic Pearl Harbor and has seen its economy "fall off a cliff," said Berkshire Hathaway's Warren Buffett in a CNBC interview Monday. Now, according to the well-known investor, the country faces a choice of remaining confused and divided, or uniting under what must be done. "Fear is very contagious," Buffet said. "I've never seen the consumer — or Americans — more fearful than this."

In fear, consumers have changed their spending and saving behaviors, which has in turn affected all other interacting layers of the economy, he said. "When poeple get scared, they don't buy as much, and when they don't buy as much, people get laid off," he said. "We are in a very viscious feedback cycle. It will end…but how fast we get there depends not only on the wisdom of government policy, but the degree to whcih it's communicated properly."

According to Buffett, the economy first went wrong because of the false believe everyone had — "I did, mortgage lenders did, borrowers did…." — that house prices had nowhere to go but up. The result was $11 trillion in mortgage debt based not on borrower qualification but the assumption home prices would rise. In reality, homes that might have been worth considerably more if the housing bubble had continued "are worth maybe 4 or 5 trillion less," he said. Seeing as how a home is often the largest asset most people have, "a huge amount of people's net worth" was lost.

Although consumers are facing substantial losses — which communicate to losses on the part of businesses and the broader economy itself — the next step, Buffett said, is to unite as we did after the attacks on Pearl Harbor. Back then, no one blamed anyone for how many ships there had been in the harbor. Rather than hold Congressional meetings and try to pass pet projects as part of the war declaration, the U.S. people largely united to build new ships and aircraft and prepare for war. "We got united, and we really need that now," Buffett said.

But he acknowledged the economy can't turn around on a dime. "We've had this great economic machine unlike anything anyone's ever seen. And it started spluttering, and people said maybe we'd better slow it down," Buffett said. Now with the economy so severely slowed — to 8.1 percent unemployment — it's unclear how much further we have to go. Buffett would not estimate how much higher unemployment has to rise, as it "depends on the wisdom of our policies" to turn the jobless situation around, but he said it would get better. "In five years from now, I can assure you the machine will be running fine," he said.

Watch the interview.

Write to Diana Golobay at diana.golobay@housingwire.com.

Regulators on Friday shut down Commerce, Ga.-based Freedom Bank of Georgia. The Georgia Department of Banking and Finance, which closed the bank, named as receiver the Federal Deposit Insurance Corp., which entered a purchase an assumption agreement with Lavonia, Ga.-based Northeast Georgia Bank to assume all $161 million in deposits.

The four branches of Freedom Bank reopened Monday as branches of Northeast Georgia Bank, which agreed to purchase $167 million of the bank's assets at a $13.65 million discount. The FDIC said it retained the remainder of the bank's $173 million in assets for later disposition. Northeast Georgia Bank also entered a loss-sharing agreement with the FDIC, through which the bank would share in losses on approximately $96.5 million in assets. The FDIC said the estimated cost to the deposit insurance fund would be $36.2 million.

Ten bank closings in February were estimated to be a drain of some $944.3 million on the FDIC's deposit insurance fund, while another six closings in January cost the fund at least $789.1, according to FDIC estimates. All told, the fund is out some $1.77 billion so far this year. As of March 7, 2008, only two Missouri-based banks had failed all year — Douglass National Bank and Hume Bank — at an estimated cost to the fund of at least $5.6 million. Friday's closure brings the running total for 2009 to 17.

The U.S. government has warned in recent weeks of a severely troubled deposit insurance fund that risks tanking this year amid rapidly mounting bank failures. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative,” wrote FDIC chairman Sheila Bair in a letter to chief executives last week.

Critics have said for months that the FDIC’s deposit insurance fund just wasn’t large enough to manage all the expected bank failures expected over the coming months and years — and it seems they were right on the money. Senate Banking Committee Chairman Christopher Dodd, as of Friday, is moving to allow the FDIC to temporarily borrow up to $500 billion from the Treasury Department, after key officials, including Bair, made subtle cries for help. The FDIC’s current line of credit with the Treasury is $30 billion.

Write to Diana Golobay at diana.golobay@housingwire.com.

President Barack Obama on Sunday announced his intent to nominate three advisers to key posts at the U.S. Treasury Department, which has lately been criticized for being understaffed. "Out of crisis arises opportunity," Obama said in a statement. "With the leadership of these accomplished individuals and our whole economic team, I am absolutely confident that we will turn around this economy and seize this opportunity to secure a more prosperous future."

Alan Krueger, counselor to the Treasury secretary before his nomination, will head economic policy as assistant secretary. The Bendheim professor of economics and public affairs at Princeton University, Krueger has served as chief economist at the U.S. Departmet of Labor and has been widely published on education, unemployment, income distribution, social insurance, regulation, terrorism and the environment.

David Cohen, previously counselor to the Treasury secretary, will now head terrorist financing as assistant secretary. Prior to his work at the Treasury, Cohen was a partner at the WilmerHale law firm, where he focused on civil litigation.

Kim Wallace, previously counselor to the Treasury secretary, will now head legislative affairs as assistant secretary. Before joining the Treasury, Wallace served as managing director and head of the Washington research group at Barclays Capital, which he joined after serving 14 years in the same position at Lehman Bros. Inc.

Write to Diana Golobay at diana.golobay@housingwire.com.

Despite a surge in actions taken by bank regulators, overall mortgage litigation eased, according to the Fourth Quarter 2008 Mortgage Litigation Report released Monday by MortgageDaily.com.

A total of 202 active cases were tracked in the latest report. Many fell into more than one of the 22 categories covered during the latest period. Excluding regulatory-only actions, 46 cases were tracked — tumbling from 74 cases in the third quarter but about the same as the quarterly average for 2007.

The biggest volume of activity was with regulatory actions, which jumped to 161 from the third quarter's 126 — reflecting deteriorating capital at the weakest U.S. banks. Investor class actions eased, though 11 cases were still tracked. And after no third-quarter activity, four mortgage-backed securities lawsuits, three mortgage employment lawsuits and three suitability cases were tracked in the fourth quarter. Most categories, however, saw a decline during the fourth quarter.

Cases tied to mortgage compliance tumbled from 18 in the third quarter to six during the latest period. Mortgage fraud litigation was down similarly, falling to five cases in the fourth quarter from 18 in the third quarter.

Likely reflecting private and public efforts to stem foreclosures, fourth-quarter foreclosure lawsuits were off by more than half. Secondary marketing lawsuits fell from 12 cases to just three. Mortgage fee lawsuits were down by half in the fourth quarter, while predatory lending actions declined 43 percent.

Write to Kelly Curran at kelly.curran@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

The global economy may shrink to within five percentage points below its potential — the first shrink since World War II, according to estimates released Sunday by World Bank. For some 129 of the poorer, developing countries, the downturn will be felt keenly, with the World Bank estimating these countries are short from $270 to $700 billion. This significant gap, the group said, is too large for the international financial institutions to cover on their own.

“This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis," said Wold Bank Group president Robert Zoellick. "We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest.”

The world's poorest countries have seen exports and revenue decline as an overall effect of the downturn in developed countries. As a result, these countries have come to depend on "development assistance" like that pledged at the Gleneagles Summit in 2005, but according to World Bank, many of these aid commitments have fallen behind. World Bank chief economist and senior vice president Justin Yifu Lin urged more developed countries to consider investing some of their fiscal stimulus in developing countries.

“Clearly, fiscal resources do have to be injected in rich countries that are at the epicenter of the crisis, but channeling infrastructure investment to the developing world where it can release bottlenecks to growth and quickly restore demand can have an even bigger bang for the buck and should be a key element to recovery,” Lin said.

With world trade on track to post its largest yearly decline in 80 years — the sharpest losses likely to be focused in Asia — the World Bank pleaded the case that  aiding poorer countries now may help offset the devastation of existing poverty magnified by a global recession.

The issue, of course, is that wealthier countries have likely already contracted enough as to make investing in poorer countries all but impossible. In the United States alone, unemployment has risen to 8.1 percent and initial unemployment claims have risen to a 27-year high. Real gross domestic product dove 6.2 percent in the fourth quarter 2008 over the third quarter, according to data released in late February by the U.S. Bureau of Economic Analysis (BEA). Real GDP had contracted 0.5 percent in the third quarter from the second, indicating a rapid decline in productivity. "Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third," BEA analysts said in a statement. "The largest contributors were a downturn in exports and a much larger decrease in equipment and software."

Write to Diana Golobay at diana.golobay@housingwire.com.