How can so many Americans believe that we’re in a depression, when the stock market and commodity prices have been booming?
Read the Rest…
Jun 192010
New Bank Fees: How to Fight Back Wall Street Journal
Bank on it: Higher fees, and more of them, are coming soon to a financial institution near you.
Regulators in the past year have pushed through a raft of changes designed to rein in banks’ most abusive practices, from excessive overdraft fees to the way lenders raise interest rates when a credit-card payment is late. The new rules are expected to slice billions from firms’ profits—and more if lawmakers move forward with a bill to limit how much financial institutions can charge merchants for debit-card transactions.
Banks, of course, aren’t giving up those revenues without a fight. Instead, industry leaders like Bank of America Corp., Wells Fargo & Co., HSBC Holdings PLC’s HSBC North America, Fifth Third Bancorp and others are experimenting with new ways to nick their customers, from imposing maintenance fees on checking accounts to rolling out new charges for services like fraud alerts, debit cards and credit reports.
Making matters trickier, while the banks must disclose the new fees fully, they likely will do so only in the ordinary-looking correspondence that most consumers toss in the trash without reading. The result: Many people will learn of the new charges only after opening their monthly statements.
Does It Make Sense to Resurrect the Glass-Steagall Act?
A Growing List Of One Term Presidents, A Moral Question - Not A Political One, A Shareholder-Not Just a "Stakeholder", A State of Distress, A Time To Repent, AIG and all that....., Audit the auditors?, “the Greenspan doctrine”, Back to the basics, Bank Failures, Banks - Crisis Discussion, Collateral Damage, Consumption Ran the Old Economy, Coup d'etat in America, Figures don't lie but Liars can figure, Negative Cash Flow, No Bank Is Indispensable, Our phony middle class, PANDEMIC, Regulation - the Discussion, Regulatory Failures, The Consequences of Greed, The Democrats Blew It Again, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Importance of Strategic Planning, The Joy of Being A Bank
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Feb 202010
In the present system, the more unrestricted the banks are, the more money they can generate “out of thin air,” and the more damage they can inflict upon the wealth-generation process. FULL ARTICLE by Frank Shostak
Feb 202010
I.O.U.: Why Everyone Owes Everyone and No One Can Pay
by John Lanchester
Simon & Schuster, 272 pp., $25
Among the more trenchant touches in John Lanchester’s study of the financial bust is his framing of the new finance as Wall Street’s answer to post-modernism. Wall Street, too, in Lanchester’s account, engineered “a break with common sense, a turn toward self-referentiality and abstraction, and notions that couldn’t be explained in workaday English.” If post-modern art has often seemed like an arcane conversation among the cognoscenti that was meant more to confuse the onlooker than to satisfy or inform, one could barely say less of collateralized debt obligations (CDOs) and the welter of alphabet securities that underlay the new finance. The parallel should not be pushed too far, but Lanchester is right that the financial crisis sprang from the esoteric principles and practices of an insulated elite.
Wall Street has been so smitten with itself that it lost sight of the purpose—to provide credit and capital to the rest of us, remember?—that society entrusted to it. Lanchester, a British novelist and a banker’s son, excels at recalling, in comprehensible terms, this original—and betrayed—purpose. If his penchant for metaphor occasionally leads him off the rails, more often he spots latent truths that conventional banking reporters miss. Thus he nicely observes that ATMs, with their creation of “frictionless” and seemingly ownerless money, can induce a frightening vertigo; and that Alan Greenspan was so robotic in his defense of new financial instruments that he sounded like “a computer program written to impersonate [what] Alan Greenspan would have said: Free market good. Trust free market.”
Though he is essentially a tourist to his subject, Lanchester understands perfectly that the man behind the curtain was no wizard—that markets, far from being God-given instruments of perfection, were human constructs. He understands, too, that the precision embedded in financial models was a false precision, and that the idea that risk could be “boiled down to a [single] number” fatally endowed practitioners with an undeserved confidence. And the central error of the era, Lanchester suggests, was cultural. Quoting Senator Byron Dorgan, whose prescient warning went unheeded, “The culture is that Wall Street knows best.” The corollary was that the market was “magically self-regulating,” and thus not in need of government regulation or adult supervision.
Lanchester sees the flaws of bankers in cultural terms as well. They and the other troubadours for the new finance errantly believed that ordinary people thought like experts did—or as they imagined experts did: arithmetically and flawlessly. But since most people are neither experts nor computers, millions of them mortgaged their homes for more than they could afford. He frames the greed of bankers by correctly pointing out that no sooner is a regulation crafted than bankers set to figuring ways around it. This observation is hardly new, but Lanchester delivers it with added force by contrasting financiers with health care workers: “Doctors don’t, for the most part, pride themselves on saying ‘What the hell, nobody’s looking, so I’m just going to reuse this dirty needle.’”
With so much complexity, and uncertainty about future performance, it is not surprising that the securities are difficult to price and that trading dried up. Without market prices, valuation on the books of banks is suspect and counterparties are reluctant to deal with each other.
The policy response to this problem has been circuitous. The Federal Reserve originally saw the problem as a lack of liquidity in the banking system, and beginning in late 2007 flooded the market with liquidity through new lending facilities. It had very limited success, as banks were still disinclined to buy or trade such securities or take them as collateral. Credit spreads remained higher than normal. In September 2008 credit spreads skyrocketed and credit markets froze. By then it was clear that the problem was not liquidity, but rather the insolvency risks of counterparties with large holdings of toxic assets on their books.
The federal government then decided to buy the toxic assets. The Troubled Asset Relief Program (TARP) was enacted in October 2008 with $700 billion in funding. But that was not how the TARP funds were used. The Treasury concluded that the valuation problem seemed insurmountable, so it attacked the risk issue by bolstering bank capital, buying preferred stock.
But those toxic assets are still there. The latest disposal scheme is the Public-Private Investment Program (PPIP). The concept is that private asset managers would create investment funds of half private and half Treasury (TARP) capital, which would bid on packages of toxic assets that banks offered for sale. The responsibility for valuation is thus shifted to the private sector. But the pricing difficulty remains and this program too may amount to little.
The fundamental problem has remained untouched: insufficient information to permit estimated prices that both buyers and sellers find credible. Why is the information so hard to obtain? While the original MBS pools were often Securities and Exchange Commission (SEC) registered public offerings with considerable detail, CDOs were sold in private placements with confidentiality agreements. Moreover, the nature of the securitization process has made it extremely difficult to determine and follow losses and increasing risk from one tranche and pool to another, and to reach the information about the original borrowers that is needed to estimate future cash flows and price.
This account makes it clear why transparency is so important. To deal with the problem, issuers of asset-backed securities should provide extensive detail in a uniform format about the composition of the original pools and their subsequent structure and performance, whether they were sold as SEC-registered offerings or private placements. By creating a centralized database with this information, the pricing process for the toxic assets becomes possible. Making such a database a reality will restart private securitization markets and will do more for the recovery of the economy than yet another redesign of administrative agency structures. If issuers are not forthcoming, then they should be required to file the information publicly with the SEC.
Mr. Scott is a professor of securities and corporate law at Stanford University and a research fellow at the Hoover Institution. Mr. Taylor, an economics professor at Stanford and senior fellow at the Hoover Institution, is the author of “Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis” (Hoover Press, 2009).
Why Toxic Assets Are So Hard to Scrub – Kenneth Scott & John Taylor, WSJ
May 092009
The Banks Are No Longer The Problem
From THE INSTITUTIONAL RISK ANALYST
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=358
“You think that’s air you’re breathing?” Morpheus to Neo
The Matrix
The Matrix
We are gratified to see that Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke take our suggestion of several weeks ago on CNBC not to allow the TARP banks to repay the government debt until they prove the ability to function in the debt markets without reliance upon a government guarantee. Washington has indeed fixed the solvency problems of the large zombie banks — not with additional capital or stress tests, as many of us seem to think. Rather, the banks have been stabilized by turning them into GSEs via FDIC guarantees on their debt. Those banks which can end their dependence on federal guarantees will be the visible winners in the post stress test market, and valuations and spreads will reflect this divergence between zombies and viable private banks. Seen from this perspective, Chrysler, General Motors (NYSE:GM) and the large banks are GSEs rather than private companies, parestatales as they know them in Mexico. To talk about a rally in the equity of large US financials seems truly ridiculous, at least to us, especially true when you look at how the public sector subsidies being applied to the banks have distorted their financial statements. Maybe by the end of next year, when we know which banks can or cannot shed the need for government subsidies, then we can talk about investible equity in these GSEs. To that point, turning Bank of America (NYES:BAC), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) into GSEs was just the first battle, Vol. II of the Lord of the Rings, to use another cinematic metaphor. Next comes dealing with the dysfunction in the non-bank market for securitization and financing, the real battle to save the US economy from a truly dreadful year-end 2009 and beyond. By the way, is it not remarkable that the FDIC has run dozens of resolutions and bank sales processes over the past 18 months without a single leak or breach of confidentiality of these sensitive transactions, including both the WaMu and Wachovia transactions? Yet the Fed and Treasury run a confidential stress test process via overt leaks the press! One thing we learned years ago working at the Fed of New York, the senior man never talks to the media and never goes to the meeting. Maybe our friend Nouriel Roubini could whisper this into Secretary Geithner’s ear next time they spend quality time. We hear from the Big Media, BTW, that Tim Geithner’s growing corps of handlers directs media inquiries to Roubini for “an objective view” of the Secretary’s handling of the financial crisis. One Democrat asks: Could it be Larry Summers to the Fed, Roubini to the White House? And speaking of the fall of the elites, FRBNY Chairman Steve Friedman finally resigned yesterday, ending a scandalous period when the greater community of present and past employees of Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM) and other dealers was arguably in control of the most important arm of the US central bank. The fact that the Board of Governors appointed former GS ibanker Freidman as a “C” class director, who are meant to represent the public interest and not be past officers of regulated banks, was scandal enough. But then, when GS formally became a bank holding company last year, the Board failed to remove Friedman when his conflict became acute. The Board also failed too to appoint another “C” class director, making it almost seem that the Board wanted to assist in the GS operation to influence the operations of a Federal Reserve Bank. Remember that the board of directors of the FRBNY selected Tim Geithner as President, who then bailed out AIG to the benefit of GS and the other OTC derivatives dealers that were facing AIG. That is why a congressional inquiry is needed to understand just why the Fed Board and, in particular, Fed Vice Chairman Don Kohn, tolerated the Freidman conflict and arguably neglected their statutory duty to ensure the proper governance and operation of a Federal Reserve Bank. But hold that thought. Earlier this week, IRA released to subscribers to our Advisory Service preliminary Q1 ratings for the 7,000 or so banks that have submitted their call reports to the FDIC. Users of the IRA Bank Monitor professional edition may view the preliminary ratings for the units of their BHCs as the reports are released by the FDIC. Once we are finished testing this preliminary dataset, we will also enable these displays in the consumer version of the IRA Bank Monitor. Click here to go to our Picking Nits blog where IRA CEO Dennis Santiago provides his take on the preliminary data from the FDIC and some observations about what the data suggests for 2009. While the idea of public stress testing is a new concept in Washington, we’ve been conducting a census of all US banks for years, first via our public Basel II benchmarks and Economic Capital model, and more recently with the bank ratings from our Bank Stress Index. Each quarter, we ask two basic questions about all US banks: Stressed View: First, how did you do this past quarter? Looking at factors such as capital, lending, realized losses, income and efficiency, we grade all US banks on a six notch scale, which forms the basis for our “A+” through “F” ratings. Risk Adjusted View: Second, we calculate Economic Capital or “EC” factors for all US banks, and compare the “stressed,” maximum probable loss from trading, investing and lending to their current capital, from tangible common equity up through the various regulatory measures. By looking at EC, we provide users of the IRA Bank Monitor with a second, risk-adjusted perspective on the safety and soundness of the institution. Based on the institutions for which data has been released by the FDIC, it is pretty clear in our latest stress test that the condition of the US banking industry is continuing to deteriorate and that we are still several quarters away from the peak in realized losses for most banks. The key telltale in the Q1 FDIC data is that ROE degradation, not charge-offs, still leads the rising stress evidenced by the IRA Banking Stress Index. Remember that provisions are a leading indicator, while charge-offs lag the credit cycle. Once you see ROE performance improving, meaning a decline in the need to build loss reserves to buffer future losses, and charge-offs are the leading factor in our index, then you’ll be able to test the thesis that the worst is over for US banks and valuations are beginning to stabilize. So based on what we see now, is it time to be being financials? One IRA reader in SF named Jonathan asks: “This market for financial stocks must have some of your clients scratching their heads. What do you make of things? Is this irrational exuberance or have we turned?” We’ll be addressing the Q1, post stress test valuations for the largest banks as the rest of the units in the bank universe fill in their FDIC CALL reports. No, in our opinion we have not turned the corner in financials. The current FDIC data suggests that bank loss rates may not peak until next year. We are not yet even on the right block to make the turn, in our view. Suffice to say that the composition of the Q1 loss data we see from the FDIC makes us believe that the peak in terms of losses for the US banking industry will be closer to Q4 2009 than our original target of Q2 2009. Given where large bank loss rates were in Q1 2009, just imagine where we’ll be by Q4. Or put another way, now you know why regulators are pushing BAC and WFC to raise additional capital. The bank stress tests conducted by regulators are not so much about capital adequacy through the current economic cycle as identifying enough capital to get the large zombie banks through the end of the year. While Larry Summers and the other economic seers who populate the Obama Administration actually believe that we’ll see an economic bounce in Q3 2009 – a key assumption that also underlies the regulators’ approach to designing the bank stress tests – we see nothing in the credit channel that suggests improvement in the real economy. Both residential real estate or “RES” and commercial real estate or “CRE” markets in the NY area, for example, are starting to see an acceleration in price declines, this as the swelling population of frustrated sellers is starting to capitulate in the face of few or no buyers. But the chief reason for this sad tale above is that there is no financing for jumbo loans in the RES market. Indeed, as one of the bankers who participated in the “Market & Liquidity Risk Management for Financial Institutions” conference sponsored by PRMIA at the FDIC University on Monday noted, banks are not originating any RES paper that cannot be sold to Fannie Mae or Freddie Mac, soon to be merged into “Frannie Mae,” as we noted earlier. During a luncheon keynote address at that event, Josh Rosner of Graham Fisher & Co. noted much of the “growth” in non-conforming real estate markets during the final years of the boom was fueled by speculative buying and that the lack of financing in the jumbo, non-conforming RES markets is forcing price compression in markets like the urban RES and CRE markets of NY, CA, MA, etc. “The lack of attention paid to the creation of industry wide standards and a more solid legal basis for securitzation has only hindered the recovery of a financial intermediation in a market that once funded about 50 percent of all consumer revolving and non-revolving credit,” Rosner told The IRA. While regulators think that stabilizing the banks was the real battle, is it in fact the dysfunction of the non-bank securitization markets and the effect of this dysfunction on valuations in the RES and CRE real estate markets that is now driving the US economic meltdown? While the Fed as a good bit to the toxic securitizations in cold storage on its balance sheet, the central bank’s best efforts at adding liquidity facilities cannot replace this multi-trillion dollar market if banks won’t originate paper. If you want to learn more about the problems in the non-bank sector and how products like ARMs are about to push the US economy into a meltdown, take a look at the presentation from the PRMIA event on Monday by Alan Boyce, the former CFC executive and now chief executive officer of Absalon, a joint venture between George Soros and the Danish financial system that is assisting in the organization of a standardized mortgage-backed securities market for Mexico. Go to the last slide. This is an illustration of the Option Adjusted Duration (“OAD”) of the US mortgage markets. Notice that the OAD calculated by Boyce has grown from a low of $23 trillion in Sep 05, which just happens to be the nadir of loan defaults for the US mortgage market, to $45 trillion in Mar 09. The OAD is set to grow significantly as US interest rates rise or as the slope of the interest rate curve steepens. OAD is essentially a way to measure the economic weight of debt, basically time x money or the price response for a given move in interest rates. Using existing data and some clever suppositions, Boyce constructed an alternate explanation of “the conundrum” of 2003 to 2006. This was driven by the Fed’s very predictable interest rate policy, which flattened the interest rate curve and compressed interest rate volatility. Homeowners were encouraged to refinance into ARMs and there was significant cash out refinancing into premium fixed rate mortgages. Interest rate risk was transferred to US consumers and created a ticking time bomb for US markets in terms of the future duration of the total corpus of outstanding mortgage debt. During the PRMIA conference, Boyce echoed the view of other participants that the failure to act on securitization ensures further RES and CRE price compression. In a rising rate environment the OAD of this RES exposure in particular will grow exponentially and dwarf the “weight” or OAD of the UST debt issuance. The US homeowner will be trapped in their homes, unable to sell as nominal mortgage debt exceeds house values. Of note, in the Danish system, rising interest rates do not create negative equity for home owners, performing borrowers may redeem their mortgage by purchasing the associated bond at the prevailing market rate. Credit risk is kept out of the bond market, making the mortgage bonds a pure reflection of the associated interest rate risks. By efficiently splitting credit and interest rate risk, there are no surprises as each risk resides where it is best analyzed and hedged. Bottom line is that securitization machine operated by Wall Street doubled the outstanding stock of mortgages during the last five years of the boom, but the falling OAD driven by Fed rate policy hid the growth. Unfortunately, in their wisdom, federal regulators actually encouraged US mortgage originators to use ARMs and other products to push interest rate risk onto the backs of homeowners and bond market investors ill-equipped to understand let along manage such risks. Boyce and many others believe that without a complete refinancing for all performing mortgage borrowers, the US real estate markets – and thus the financial industry – will in trapped in a deflationary environment for years to come. The only way to fix this mess, Boyce suggested at the conference, is to refinance the entire performing mortgage market into standardized, transparent, callable, fixed rate loans, which allow the homeowner to value his liability at the market price. The interest of the mortgage originator needs to closely aligned to that of the borrower via a minimum 10% first loss risk sharing. Rosner told The IRA he doubts that America’s political and business sectors are ready or willing to embrace the transparency and consumer-friendliness of Denmark’s mortgage sector, but the fact that Boyce and George Soros are advancing this example as a solution may be significant – especially as the year-end deadline for resolving the conservatorships of Fannie Mae and Freddie Mac approaches. Rosner and Boyce believe that the restructuring of the housing GSEs presents an opportunity to set a new, consistent standard for securitization in the US. More on this issue of “reformation” of the non-bank financial sector in a future issue of The IRA.
H/T TO JESSE”S CAFE AMERICAIN
Richardson and Roubini Call for Bank Resolution, Diss Stress Tests
at Naked Capitalism
Silverton Bank, N.A., of Atlanta was closed Friday by the Office of the Comptroller of the Currency, according to the Federal Deposit Insurance Corporation, making it the 30th bank failure of the year and the 55th since the beginning of the recession. FDIC said it created a bridge bank, Silverton Bridge Bank, N.A., to take over operations. The bank did not take deposits from the public or make retail loans, but was a commercial bank that had 1,400 client banks in 44 states. At the time of the closure, Silverton Bank had about $4.1 billion in assets and $3.3 billion in deposits.
Meet the new leaders of banking
JPMorgan Chase, Wells Fargo and other bank behemoths have bulked up over the past year. But they’re not the only ones getting bigger these days.
Dozens of small banks that were otherwise anonymous in the years leading up to the financial crisis have also enjoyed robust growth in recent months.
Some of them have expanded so rapidly, in fact, that they have transformed themselves into what some argue is the next generation of regional banking leaders.
Chicago’s MB Financial (MBFI), for example, drastically widened its deposit base by buying local rivals that failed. In September, the company made its boldest purchase yet when it scooped up 11 branches and $7 billion worth of deposits controlled by Corus Bankshares after Corus was seized by the FDIC.
And with the fragmented Chicago banking landscape continuing to shift, MB Financial’s buying spree may be far from over.
“We think there is quite a bit of opportunity in the area for similar transactions in the future,” said Mitchell Feiger, chief executive officer of MB Financial.
Other fast-growing regional banks, such as Prosperity Bancshares (PRSP), have been buoyed by a resilient economy in their home market and diligent underwriting practices.
The Houston, Texas-based lender has not only reported consistently higher profits so far this year, but it also recently hiked its dividend and was reportedly a key contender for Guaranty Bank, a significantly larger peer that failed in late August. Guaranty was eventually acquired by Spain’s BBVA.
And some banks have simply managed to harness the broader market forces at work, including consumers’ flight from stocks to cash earlier this year and widespread discontent with larger banks in the wake of taxpayer bailouts.
Signature Bank (SBNY), which operates solely within the New York metropolitan area, is one of those banks. Between July and September alone, the company reported almost double-digit growth in both loans and deposits, a feat that is not lost on many industry analysts.
“That is pretty phenomenal,” said Andy Stapp, a senior equity research analyst at brokerage B. Riley & Company, who tracks Signature.
Of course, much of the spoils of the recent shakeup in the banking industry have gone to the biggest players in the business.
Both JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500) dramatically expanded their retail banking operations after they bought Washington Mutual and Wachovia respectively.
Today, the nation’s 10 largest banks control approximately $3.4 trillion in deposits, according to recent FDIC data, $700 billion more than they did just a year ago.
Some would even argue that the banking field is much more crowded these days with the entry of Goldman Sachs (GS, Fortune 500), American Express and GMAC, all of whom got into the deposit-taking business last fall when they were unable to access traditional sources of liquidity.
Still, that has hardly deterred many ambitious bankers looking to expand.
Los Angeles-based City National (CYN), which caters largely to businesses as well as affluent customers, recently indicated it was looking to expand its presence in Northern California after it acquired a branch in the Silicon Valley region in late August.
“Going to San Jose was always part of our plan,” said City National CEO Russell Goldsmith. “It was an attractive way to get into the third-largest city in California and complete the circle around the [San Francisco] Bay area.”
Tepid loan demand has complicated growth plans for many ambitious banks, however.
With unemployment now above 10%, Americans are broadly reining in their spending. Consumers and businesses remain hesitant to seek out credit, according to the most recent survey of senior bank loan officers by the Federal Reserve.
And if forthcoming federal legislation requires banks to hold more capital, that could heighten the competition for customers.
“It will be harder for banks to grow deposits, which is one of the reasons why we are so interested to get them now,” said MB Financial’s Feiger.
If banks like MB Financial can navigate all those hurdles and aren’t constrained by issues like commercial real estate loan losses, the opportunities to grow could be huge, notes Aaron Deer, an equity bank analyst for Sandler O’Neill.
With potentially hundreds of additional banks likely to fail in the months and years ahead, competition will continue to ease. And should credit remain tough to come by, banks will likely be able to fetch a premium even on new loans made to those borrowers with sterling credit.
“My guess is the opportunities for organic growth is probably going to accelerate over the coming year,” said Deer. “Right now banks are finding very attractive lending opportunities.”
Meet the New Leaders of Banking – David Ellis, CNNMoney