The ever-incisive FT columnist Martin Wolf offers prudent and timely advice concerning the reforms needed to ease credit market doldrums and right the global financial state of things.

One key practice Wolf would like to see addressed is bank / mortgage lender selling of mortgages they originate.

Designers of the practice had good intentions: It was designed to free-up capital so banks / mortgage lenders could have more money available for future homebuyers. A noble intention.

Unfortunately, as tradition reminds us, the road to perdition (and record housing sector slumps) is paved with good intentions. The problem, Wolf notes, is that the originate-and-distribute model encouraged banks / mortgage lenders to originate (in many cases for handsome fees) high-risk, very-poor-credit-quality mortgages with reckless abandon, because originators knew that the loan would be sold, and its status as a performing asset would be entirely someone else's problem. Save the best (mortgages), get rid of the rest.

It's not surprising, Wolf notes, that the originate-and-distribute model became laden with sloppy, irresponsible and even fraudulent loans. Wolf's reform: originators must be required to retain a portion of the equity of securitized loans. Hence, if / when they go bad, the originator loses money too.

Economic Analysis: Wolf's proposed financial / bond market reform is on the mark. If every party, including the originator, has a stake in a mortgage's repayment status, that will lead to higher-quality loans, while at the same time retaining the secondary market's benefit of freeing-up capital for new mortgages.

Financial eras, like social periods, are often defined by moments or epiphanies when decision makers and/or citizens realized that a serious flaw/mistake/problem was occurring through time, and across space, and needed to be corrected.

The ever-incisive FT columnist and economist Martin Wolf describes one contemporary concern that's likely to be addressed: the failure to align the interests of managers with those of investors.

My BloggingStocks colleagues Peter Cohan and Zac Bissonnette have also written on the subject on several occasions in this space, and now the FT's Wolf has assembled additional data that may very well lead to public policy changes, both in Wolf's United Kingdom and in the United States.

The U.S. Federal Reserve will conduct two auctions of 28-day credit through its Term Auction Facility in March, the Fed announced Friday, in a statement.

The Fed said it will offer $30 billion in an auction on March 10, 2008 and $30 billion in an auction two weeks later, on March 24, 2008.

The Fed also reiterated its support for the term auction facility policy. The Fed said: "The Federal Reserve intends to conduct biweekly TAF auctions for as long as necessary to address elevated pressures in short-term funding markets. Decisions regarding auctions in April will be announced by Friday, March 28."

Readers of this space know that the investment thesis offered here favors large-cap companies with demonstrated business models and that have a competitive advantage in established markets, preferably with a favorable global trend as a support.

Still, every once in awhile an exception is made, in this case to get-ahead-of the-curve regarding a sector's recovery, and with the aforementioned in mind, Bear Stearns is worth an evaluation.

Bear Stearns (NYSE: BSC) is a leading investment banking, securities, and derivatives trading, clearance, and brokerage firm serving corporations governments, institutional, and individual investors worldwide.

Analysts expect Bear's prime brokerage and asset management businesses to continue to grow, along with adequate-to-good results from its trading division.

Further, there's a sense now among analysts that BSC's mortgage securities and leveraged loan commitments on its balance sheet have been sufficiently written down. That's not to say that there won't be more write-downs or an additional financial bump or two, but the worst appears to be over, at least for Bear.

A bank stock? In this market? Sure, if it's a community-oriented bank, such as People's Bank.

People's United Financial, Inc. (Nasdaq: PBCT) is a community-based bank that operates more than 300 branches in Connecticut, Massachusetts, Vermont and New Hampshire.

In addition to traditional banking activities, People's provides specialized services tailored to specific markets, including personal, institutional, and employee benefits as well as cash management, and municipal banking and finance.

Analysts see a 10-12% increase in loan growth in 2007, and 9-11% revenue growth overall: a similar performance is expected in 2008. Meanwhile, most importantly, asset quality remains good -- no small consideration in today's beleaguered mortgage market.

Analysts also like the fact that People's will likely use new capital to expand its operations outside its Connecticut base. The Reuters FY 2008/FY 2009 EPS consensus estimates for PBCT are $0.82 to $1.02.

The First Call mean rating for PBCT is: Buy [9 firms]. Mean 2008 target: $20 [high: $23, low: $17].

Stock Analysis: People's Bank is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 2 years should be rewarded from PBCT's shares. Sell/Stop Loss if you were to purchase shares in this company: $8.

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.

Bank of America, Citigroup and other major U.S. banks and lenders announced Tuesday a revised plan to help some borrowers in danger of default remain in their homes.

Encouraged by U.S. Treasury Secretary Henry Paulson, the banks will offer a 30-day freeze on foreclosures while loan modifications are considered for borrowers who are at least three months late on payments. The program will include borrowers with prime mortgages, as well as those with poorer credit histories.

Second wave of defaults

The program is being initiated as the United States prepares for the second wave of mortgage defaults as variable mortgages rates reset in 2008. The U.S. Federal Reserve estimates that about two million mortgages will reset to higher rates, with foreclosures expected to soar to one million, absent an intervention. In a typical year, the U.S. has about 500,000-550,000 foreclosures.

The compelling question, following the U.S. Federal Reserve's 125-basis-point cut in short-term interest rates in 8 days, is whether the Fed has done enough.

"Probably not," economist David H. Wang told BloggingStocks Thursday. "But they've done all they can do, politically and practically, until the next meeting in five or so weeks."

By practically, Wang means that barring another market plunge or a capitulation day, the Fed is not prepared to lower rates before its next meeting. The Fed is already facing criticism that it responded earlier not to economic conditions, but to Wall Street's demands -- perpetual demands in the view of some -- for interest rate cuts. In this climate it would take an extraordinary event to secure another Fed emergency cut, he said.

By politically, Wang means the Fed is, similarly, facing criticism that its current easing policy will increase inflation pressure. "Some in Washington believe in inflation will accelerate so much that by year's end the Fed may be forced to raise rates. And I grant you, it's not a baseless concern," Wang said.

The banking and financial sectors have certainly taken their lumps amid the housing sector's correction, but that doesn't mean there aren't bank stock opportunities out there, and one bank worth a review is Hudson City Bancorp.

Hudson City Bancorp (Nasdaq: HCBK) is a community bank with about 110 branches in the Metropolitan New York area.

Analysts like HCBK's loan growth, ramping fee income, and strong cost control history. Best of all, analysts say Hudson should not be adversely affected by the secondary mortgage market and its incorrect pricing of loans because Hudson holds most of the loans it originates.

Further, margin spreads should increase in 2008, and charge-offs should be minimal. The Reuters FY 2007/FY 2008 EPS consensus estimates for HCBK are $0.59 to $0.82.

The risks? An inversion of the yield curve would hurt HCBK's results; competition is modest.

The First Call mean rating for HCBK is: Buy [13 firms]. Mean 2008 target: $15.50 [high: $18, low: $12].

Stock Analysis: Hudson City Bancorp is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 2 years should be rewarded from HCBK's shares. Sell/Stop Loss if you were to purchase shares in this company: $8.

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.

On American exchanges, the banking and financial sectors are not preferred sectors right now, to say the least, but one bank worth a review is Banco Santander SA.

That's because Banco Santander, S.A. (ADR) (NYSE: STD) is one of Europe's leading banks, offering retail banking and consumer finance services in Spain, Portugal, the United Kingdom, Germany, Italy and other parts of Europe. The company also operates subsidiaries in Argentina and Mexico, and in 15 other Latin American countries.

Hence, it goes without saying that analysts like Banco's geographic footprint, lending base, and customer breadth. Most important, Banco appears to have been unaffected by the August 2007 subprime-driven financial turmoil.

The U.S. Federal Reserve said it will conduct biweekly emergency auctions of loans "for as long as necessary" as part of a coordinated effort among the world's major central banks to provide liquidity to head off a potential, future credit crunch, the Fed announced Friday in a statement.

The Fed said: "The Federal Reserve intends to conduct biweekly Term Auction Facility (TAF) auctions for as long as necessary to address elevated pressures in short-term funding markets. The Board of Governors will announce the sizes of the January 14 and January 28 TAF auctions at noon on January 4."

To date, the Fed, in conjunction with the European Central Bank, has loaned more than $40 billion in 35-day loans in two auctions at interest rates of 4.65% and 4.67% per auction, respectively, Bloomberg News reported Friday.

Shares of Goldman Sachs fell $5.52 to $203.11 Tuesday morning, despite the fact the company posted Q4 EPS of $7.01, 33 cents better than the Reuters consensus estimate of $6.68.

During the quarter, Goldman Sachs (NYSE: GS) reported higher revenue from investment banking and stock trading and also recorded a gain from a power-plant sale, recording a $900 million before-tax gain for the sale of a wind farm.

Goldman also posted Q4 revenue of $10.74 billion versus the Reuters consensus estimate of $10.12 billion.

Not enough for Street

"It's a case where Goldman Sachs did not beat the earnings estimate by enough," analyst C. Leonard Bauer, formerly of Prudential, told BloggingStocks Tuesday. "In typical Goldman fashion, they've managed to do better in the investment banking space than their peers, but I don't think it will be enough to propel the stock higher, given the current macroeconomic environment."

Once again, the ever-incisive Financial Times columnist Martin Wolf, an economist, identifies with laser-accuracy what ills the current market. The problem, Wolf argues, is not a lack of solvency but a lack of liquidity (i.e. 'panic').

Wolf does not deny that there have been bad loans (there have been) or that no companies will go out of business (some will). But the circumstance that froze credit markets, that caused quality corporate bonds to fail to price, and that leads to 100-point spreads between the LIBOR rate (what banks charge each other) and the ECB's benchmark interest rate, is rooted more in a lack of confidence, than a lack of sound economic fundamentals or a lack of resources.

A lack of liquidity

And a lack of liquidity or 'panic' is something that central bankers can address. With the above in mind, the U.S. Federal Reserve's plan, in consultation with the European Central Bank, the Bank of England, the Swiss National Bank, and the Bank of Canada, to inject $40 billion via auctions into the financial system is appropriate and prudent. (Further, in addition to reciprocal currency arrangements, the companion central banks will take related actions, including the Bank of England's decision to accept a wider range of collateral on 3-month loans).

Bank of America Corporation (NYSE: BAC) announced Monday it closed a $12 billion, enhanced money fund after major clients pulled-out amid losses on complex asset-back securities, including structured investment vehicles, Bloomberg News reported.

The Columbia Strategic Cash Portfolio was closed last week and is being "wound down," Bank of America spokesman Robert Stickler told Bloomberg News. Sticker said the fund's net asset value, which had been $33 billion two weeks ago, was 99.4 cents on the dollar as of Monday.

November's 94,000 added jobs statistic is likely to tip the scales in favor of a quarter-point cut in short-term interest rates instead of a half-point cut, economists and analysts say.

"The November job creation number, while not outstanding, is more than enough to quell the half-point hawks," economist Steve Affinito told BloggingStocks Friday. "The Fed will cut interest rates by one-quarter point next week."

Affinito said the November 2007 jobs report was "the sole bright spot" after a string of negative economic data recently reported for the U.S. economy. That data points to a slow-growing U.S. economy (or possibly worse) through Q1 2008, many economists agree.

"If we can register 2% GDP growth in the first quarter of next year, that would be acceptable at this point, and I would take it," Affinito said, adding that Q1 could conceivably show a contraction. For Q4 2007 Affinito estimates that the economy will have slowed to 2.3-2.6% growth.

True, no one on the trading floor of the New York Stock Exchange Friday yelled, "It's a return to the 'Roaring 90s,' " but given the way the U.S. economy and the stock market have gone in 2007, it's a start.

The Dow Jones Industrial Average closed Friday up 59.98 points to 13,371.71 - - hardly the stuff of a headline, but it was a technically-significant day.

The Dow's accomplishment? On Friday the Dow closed above the critical 200-day moving average at 13,250.10 - - the toughest moving average to break - - for the third consecutive day. Technical analysts argue that three consecutive closes above the 200-day moving average is a bullish sign. [For background on the Dow and the 200-day moving average, click on this bloggingstocks link: "Fed be nimble, Fed be quick."]

Hence, the Dow has cleared a major technical hurdle. The 'three closes above 200' does not guarantee that the rally will continue, but it is a step in the right direction.