Financial Services Update

October 25, 2010

Authored by: Matt Jessee

G20 Finance Ministers Meet in South Korea

On Friday and Saturday, global finance ministers from the G20 countries were to meet in South Korea to discuss international currency tensions, exchange rates, and broader concerns about the global economy.  The meeting comes just two weeks after the G20 met in Washington but were unable to resolve currency differences.  At the outset of the meeting, U.S. Treasury Secretary Timothy Geithner called for limits on trade imbalances, in an effort to broker an international compromise on exchange-rate tensions.  Britain, Canada and Australia expressed immediate support, as well as France and Japan, but Germany and China have yet to formally weigh in.  Geithner’s plan called for the biggest industrialized economies to keep their current-account balance — whether a surplus or a deficit — below 4 percent of gross domestic product.

Federal Probe into Mortgage Servicers

On Wednesday, Housing and Urban Development Secretary Shaun Donovan announced that a federal probe investigating five large mortgage servicers has found improper foreclosures, but officials have yet to find systemic, “structural” problems with processing.  HUD’s 5-month probe of the Federal Housing Administration-insured loans acknowledged that the agency has been aware of problems at some servicers for months and that HUD will “take actions” against those firms to ensure that homeowners are made “whole and protected.”  While Donovan declined to give specifics on which specific servicers were identified, Donovan said the lack of evidence of widespread structural problems reinforces the Administration’s decision to oppose a nationwide moratorium on foreclosures.  Pressure has been mounting to figure out whether banks, processors and courts have improperly foreclosed on thousands of homeowners.  All 50 state attorneys general have already announced investigations, and the FHA probe is expected to be completed in nine weeks.

FHA Predicts Greater Losses at Fannie and Freddie

On Thursday, the Federal Housing Finance Agency (FHFA) released new projections showing possible future financial performances of Fannie Mae and Freddie Mac and the potential draws from the U.S. Treasurer under terms of the Preferred Stock Purchase Agreements (PSPAs).  To date, Fannie Mae and Freddie Mac have drawn down a total of $148 billion in Treasury funds since the two government sponsored enterprises (GSEs) were placed in federal conservatorship in August 2008.  The projections, which are based on three different scenarios, result in cumulative draws by the two GSEs that range from $221 billion to $363 billion through 2013.  However, dividends paid by the GSEs to the Treasury continue to make up increasingly larger portions of those draws and if those dividends are excluded, the cumulative draws range from $142 to $259 billion.

Cameron Unveils Deficit Reduction Plan

On Wednesday, British Prime Minister David Cameron and Chancellor of the Exchequer George Osborne unveiled a 106-page spending review that included at 26% decrease in contributions to local councils by 2015, a 24% cut to the Foreign and Commonwealth office, a 24% cut to the Department for Culture, and a 7.5% cut to the Ministry of Defense.  Taken together, the cuts could bring the budget deficit to 1.1% of GDP by 2016 depending on economic growth.  Osborne also announced that he would soon introduce the “maximum sustainable” tax on banks.  Cameron had already announced a 2.5% rise in the VAT to 20%, an increase in capital gains tax to 28% from 18%, and that he has no plans to bring the top marginal income tax rate down from its current 50%.

More Information

If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
1 314 259 2463