After news that Insurance giant American International Group Inc. (AIG: 25.25 +0.44%) will be ordered to return to the Treasury Department $165 million — the amount it just payed out in executive bonuses — AIG CEO asked Wednesday afternoon for some of the recipients of those bonuses to return half the money. The company is under intense fire for awarding the bonuses while being kept afloat by more than $170 billion in bailout funds.

A tranche of the $165 million in retention bonuses were contractually committed to employees within the financial products division — "the very division most culpable for the rapid deterioration of AIG," wrote Treasury Secretary Timothy Geithner in a letter to Speaker of the House Nancy Pelosi.

Although considerably outraged, Geithner said the government couldn't legally block the payments, which were awarded under contracts signed before the government stepped in with billions of dollars to prevent AIG from going belly up last year.

But as of Wednesday, those who have received bonuses of $100,000 or more have been asked to return at least half those payments, AIG CEO Edward Libby told a House sub-committee during a special hearing Wednesday. "Some have already offered to return 100 percent," he said.

The hearing was a long, grueling one for CEO Liddy who took the reins of the troubled firm after the bonuses in question were negotiated in April 2008. He was drilled by a number of congressional leaders and even asked by Chairman of the House Financial Services Committee Barney Frank to submit the names of those executives who did not comply with the request to return their bonuses.

The bottome line is the Treasury wants to insure that taxpayers are compensated. In Geithner's letter to Pelosi, the plan was to  impose on AIG a contractual commitment to pay the Treasury from the operations of the company the amount of the retention awards just paid. "In addition, we will deduct from the $30 billion in assistance an amount equal to the amount of those payments," Geithner wrote.

"We should look at AIG as owner of the company," said Rep. Barney Frank (D-Mass.) at a recent press conference — the U.S. government currently owns about 80 percent of AIG. "The time has come to exercise our rights as owner rather than interfering with contracts between two parties. You didn't perform, you don't get bonuses;" a theory which he reiterated at the hearing Wednesday.

Going forward, future AIG bonuses will be subject to the strict executive compensation provisions enacted by Congress in the American Recovery and Reinvestment Act, Geithner said. "We will continue our aggressive efforts to resolve the future status of AIG in a manner that will reduce the systematic risk to our financial system…"

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 U.S. Treasury Department purchased $1.45 billion in preferred stock from 19 banks and financial institutions in states across the country Friday. According to data released Monday by the Treasury, the weekly injections through the Capital Purchase Program (CPP) increased five-fold over the previous week's $284.7 million. The substantial increase in capital funds distributed was driven by a $1.22 billion stock purchase from Discover Financial Services (DFS: 27.14 -2.93%).

Ohio-based First Place Financial Corp. (FPFC: 0.00 N/A) came in second behind Discover as the largest capital injection Friday, taking $72.9 million. Illinois-based firms received the most capital, with Caitlin-based Butler Point, Inc.'s $607,000 joining Riverwoods-based Discover's capital injections. The first Washington, D.C.-based firm to receive TARP funds, IBW Financial Corp., received $6 million. The smallest capital injection of the day — $425,000 — went to Haviland, Kan.-based Haviland Bancshares Inc.

Friday's capital injections consequentially showed a lopsided distribution of daily funds. According to the Treasury's data, 92 percent of daily funds went to five public institutions and only 8 percent of daily funds went to 14 private institutions on Friday. Even taking into account Discover's substantial capital infusion, the distribution seems grossly uneven after CPP funds that on March 6 were split relatively evenly between publicly traded firms — 45 percent — and privately held firms — 55 percent. All told, the Treasury has distributed — and promised — $328.28 billion through its various TARP programs, including the CPP, the Targeted Investment Program, the Systemically Significant Failing Institutions program, the Asset Guarantee Program and the TALF.

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 Homeownership Preservation Foundation (HPF), which operates the Homeowner’s HOPE Hotline, announced Tuesday that more than 124,000 homeowners have called the hotline since President Obama announced his “Making Home Affordable” plan on March 4, 2009.  On average, 13,500 homeowners have reached out to the Hotline each day since the announcement, about three times the average number of daily calls the Hotline received prior to the release of the president’s program.

The Making Home Affordable program is made up of two levels of aid — a refinance program effective for an estimated 4 to 5 million homeowners and a modification program estimated to reach between 3 and 4 million homeowners. The plan offers servicer and borrower incentives, designed in such a way as to allow for immediate modifications, in hopes of preventing unnecessary foreclosures. The plan has "clearly been a catalyst for homeowners to reach out for help,” said Colleen Hernandez, HPF’s president and executive director.

Hernandez said the increase in volume was not a surprise.  “The Homeowner’s HOPE Hotline is still the only place to which homeowners may turn 24 hours a day, 7 days a week for free housing counseling assistance from counseling agencies certified by the U.S. Department of Housing and Urban Development,” she said. Not to mention, counseling is provided in English, Spanish, and 19 other languages.

The Homeowner’s HOPE Hotline has received more than 390,000 calls thus far in 2009, compared to the approximately 20,000 calls received in the same period in 2007.  In 2008, the Hotline received a total of 1.2 million calls. If the current pace of calls continues through 2009, the Hotline will receive more than 1.5 million calls, according to the agency's press release.

The increase in calls showcases the growing demand for housing counseling services — especially free services. The Homeownership Preservation Foundation said the recent surge in calls to the hotline may require homeowners to be more patient than they have in the past. But “the Homeowner’s Hope Hotline is committed to helping as many homeowners as possible get the help they need and we’ll work as quickly as possible to make that happen.”

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

At last week’s House hearing on mark-to-market accounting, representatives from both sides of the aisle blamed accounting standards for skewering bank balance sheets and demanded, as Congressman Paul Kanjorski (D-PA) put it, that “the Financial Accounting Standards Board and the Securities and Exchange Commission to do the jobs they are required to do. Emergency situations require expeditious action, not academic treatises. They must act quickly.”

The most irate committee members asserted that, if FASB didn’t act, Congress would. That was Thursday, March 12, and FASB did not call their bluff. By end of day Friday the 13th, FASB had sent notice it would be discussing fair value measurement and other-than-temporary-impairment first thing March 16 (yesterday morning).

The definition of fair value in FAS 157 has always allowed for the use of analysis and judgment when no orderly market exists or the only market-based inputs available are derived from distressed transactions. However, practice — and the considerable legal liability imposed on auditors by Sarbanes-Oxley — have resulted in a continued emphasis on the use of stale and/or distressed transaction pricing. In addition, reporting entities have difficulty generating evidence that transactions from which their pricing inputs were derived were distressed. In brief, banks have protested they are valuing their assets at fire sale prices, far below their economic value or the price they would fetch if the markets would “unclog.”

The proposed guidance attempts yet again to clarify these issues. In order to evaluate if a significant adjustment to quoted prices, security holders would use a two-step process.

First, determine if factors exist that indicate the market for the asset is inactive. These are the usual suspects – infrequent trades, low trading volume, stale prices, considerable variability among quotes, abnormal spread and bid-ask widening, and so forth.

If the market is demonstrably inactive, determine if a given price quote reflects a distressed transaction: was a normal marketing period allowed and were their multiple bidders? If yes to both, then the quoted price should be “considered” in estimating fair value, although adjustments might still be warranted.

If both cannot be demonstrated, then the security holder should estimate fair value using a Level 3 technique such as a present value technique. The necessary market inputs (spread, for example) cannot be solely derived from the distressed price.

Instead — and here is the tricky part — “the inputs should be reflective of an orderly (that is, not distressed or forced) transaction between market participants.”

How do you do that? The wittiest accountant I know (actually, he would still rank witty alongside a witty non-accountant) asks does that mean you go back to 2006 spreads to get a rate commensurate with the risk inherent in the asset as perceived by willing buyers and selling in non-distressed markets?

Think of it — was 2006 a world of make believe and denial, or a world a valid assessments of risk?

The fact is, under the proposed changes determinations of “distressed” and “orderly” will be very much in the eye of the holder. Those holders may be able to win more arguments with their auditors, but investors will have to work that much harder to figure out if Omega National Bank’s private label CMOs really are worth what they are reported to be worth.

And speaking of investors, will the market like Citigroup (C: 30.87 +1.61%) or Bank of America (BAC: 7.29 -0.14%) (I own securities issued by both) any better because fire sale prices have not been applied without adjustment to their “troubled” assets?

Next, OTTI guidance

The press has focused on the additional guidance for measuring fair value in inactive markets, but the changes to the guidance for other-than-temporary impairment (OTTI) may well be the “beef” of FASB’s response.

Charges for OTTI are what banks and their codependents in Congress, the media and the blogosphere are complaining about when they talk about millions of dollars of permanent writedowns when expected credit losses are only in the thousands. That’s the issue Kajorsky was referring to last Thursday when he spoke of the case of the Federal Home Loan Bank of Atlanta:

… Last September, the bank estimated that it would lose $44,000 in cash flows on three private label mortgage-backed securities starting in about 15 years. The magic of mark-to-market accounting required this relatively minor shortfall to be treated as an other-than-temporary-impairment loss of $87.3 million. I find that accounting result to be absurd. It fails to reflect economic reality. We must correct the rules to prevent such gross distortions.

Current accounting guidance requires holders of debt securities (not held for trading purposes) to (1) determine if all amounts will be received according to the contractual terms of the security, (2) determine if they have “the intention and ability” to hold the security until all contractual amounts are received.

If the answer to either step is no, then the security must be written down to its current market value. The amount of the write down — the difference between amortized cost and current fair value — is taken against earnings and reduces capital.

After deliberating several alternatives yesterday, FASB voted to propose a new treatment. Instead of determining whether it has “the intent and ability to hold a security to recovery” to find OTTI, the entity need only consider if it intends to sell the security or would be required to sell the security before recovering its cost basis.

If they intend to or anticipate they must sell, the entire impairment loss would be recognized in earnings (and sayonara capital, same as today). If NOT, then only the portion of impairment “representing credit losses” would be recognized in earnings and the balance of the “impairment loss” or difference between amortized cost and current fair value would be reflected in other comprehensive income (OCI).

At first blush, this looks like a big concession to critics of “the magic of mark-to-market accounting.” It provides regulatory relief — recall that losses accumulated in OCI are not included in calculations of regulatory capital. And they could be measured, using easier to achieve and more flexible Level 3 pricing.

But it does not resolve the biggest problem created by OTTI — as my witty accounting guru points out, it’s a DETERRENT to selling. If a bank sells a “toxic” or “troubled asset” it realizes a loss and destroys capital. As one of the irate Congressmen put it, they were calling on the standard setters to act now “to make these clogged assets marketable again.”

Which really begs the question, to whom would they be marketable? The fact is, the ranks of willing investors have been decimated. And the underlying risk has ballooned. An unknowable chunk of the underlying mortgages and consumer loans are backed by falling property values and owed by borrowers who have heard all about the bailouts for the undeserving, the overreaching borrowers who drove away, leaving the pets to starve in the empty house, the hope of bankruptcy relief, the buying of cars and TVs and whatever on home price appreciation.

Potential buyers of these clogged assets must weigh the non-zero risk that risk premia suggested by “distressed” transactions may not be wrong. The prudent will be asking, “is 2009 to 2012 as 2006 was to today?”

And while I have your attention, can I ask, how can the same Congress that is furious with banks for taking the bailout dough and not lending to reinvigorate spending and paying outsized compensation to undersized risk managers talk about suspending mark to market accounting?

Editor’s note: Linda Lowell is a 20-year-plus veteran of MBS and ABS research at a handful of Wall Street firms. She is currently principal of OffStreet Research LLC.

Disclosure: The author held investment positions in C and BAC when this story was published. Additional indirect holdings may exist via mutual fund investments.

Sen. Ted Kaufman, D-Del., in his first bill proposal since being sworn in to Congress in mid-January, submitted to the Securities and Exchange Commission on Monday a bipartisan legislation that aims to reinstate the so-called "uptick rule" that prohibited short sales from the Depression era until its repeal in mid-2007. “Abusive short selling is tantamount to fraud and market manipulation and must be stopped – now,” Kaufman said on the Senate floor late Monday. “The uptick rule should have never been repealed. To permit people to sell shares they don’t have and won’t be able to deliver turns investment into pure speculation. The time has come for this practice to stop.”

He was joined in the effort by  Sen. Johnny Isakson, R-Ga., who announced Tuesday his co-sponsorship of the bill and who said he has since last fall been calling for reinstatement of the rule.

“Senator Kaufman has introduced a piece of legislation that is right for America, it is right for America's investors, and it is right for our stock market as it still languishes today somewhere down near what we hope is the bottom,” Isakson said during a speech on the Senate floor. “One way to ensure that bottom exists is to stop rewarding those who would feed off of it and instead reinstate good discipline that ensures good practices and allows the market to restore itself back to a good equilibrium.”

The legislation would "end abusive short selling" by restoring the rule that prohibited short sales of the securities of any financial institution unless the trade occurs at a price at least 5 cents higher than that of the last transaction. The legislation would prevent anyone from selling securities short without proof of a "legally enforceable right" to do so at that time. The restrictions would force short sellers to wait for stock prices to increase before selling and — the Senators hope — encourage a bit of market recovery.

“This is bigger than just one rule, however influential that rule is,” Kaufman said. “Markets all over the world continue to tumble because average investors have lost confidence that the markets work for them. Piece by piece, we must restore that faith.  One important step is instituting sensible regulations. In this case – enacting a proven, time-tested rule – it’s an easy call.”

The SEC is slated to meet April 8 to vote on proposing a return of the rule.

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