Banks – Crisis Discussion

Missteps to Mayhem

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Oct 102011

Inside the Doomsday Machine with the outsider who predicted and profited from America’s financial Armageddon.

by Michael Burry, MD’97

I worry about the future of a nation that would refuse to acknowledge the true causes of the crisis. A historic opportunity was lost. America instead chose its poison as its cure, and the second “Greatest Generation” would never be born.

Today I expect the U.S. government to attempt continuing an easy money policy into the next presidential term—past the meat of the foreclosure crisis, and past the corporate and public financing humps that are upcoming. Junk bonds, incredibly, again are at all-time highs. Quantitative easing seems to be working for now. But this is an invalid validation of what America is doing, a Pyrrhic gamble. As we continue to debase our currency, Bernanke says he is not printing money. Yet I receive an email every day from the Fed saying we just bought another $7 billion or $8 billion in treasuries, monetizing the debt. The scope and breadth of quantitative easing raise severe questions about the Treasury’s needs.

Government borrowing of money for the purpose of injecting cash into society, bailing out banks, brokers and consumers, is an easy decision for a population that has not yet learned that short-sighted easy strategies are the route to long-term ruin. We never quite achieved the catharsis necessary to stoke a deep reevaluation of our wants, needs and fears.

Importantly, the toxic twins—fiat currency and an activist Fed—remain even more firmly entrenched with the financial reforms of last year. The Federal Reserve, having acquired new powers of regulation, has insisted that nothing in the field of economics or finance was of any help in predicting the crisis—period, no more comments. It’s a worthless conclusion that guarantees we’ll make the same mistake again and again.

We need better leaders, but frankly this isn’t going to happen. A problem cannot be solved if it is never acknowledged.

Taxes need to be raised, spending needs to be cut, and loopholes need to be shut if we are to have any hope of returning to a stable base. Home ownership should not be a policy of the U.S. government. The banking system needs substantial reform and bank breakups. Glass–Steagall needs a second run in a strong form. And 22.5 million public workers have no business unionizing against the taxpayer. The list of things that won’t happen—but should happen—goes on and on.

By 2020, interest expense on our national debt could very well exceed $1 trillion. All personal income taxes collected in the U.S. in one year do not total $1 trillion. Our country’s math is scary big, but even scarier is that it simply doesn’t work…

Read the rest here.

Obama’s Problem Was Simply the Banks

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Nov 072010

Obama’s Problem Was Simply the Banks – James Galbraith, New Deal 2.0

Obama must break his devil’s pact with the banks in order to succeed.

Bruce Bartlett says it was a failure to focus. Paul Krugman says it was a failure of nerve. Nancy Pelosi says it was the economy’s failure. Barack Obama says it was his own failure — to explain that he was, in fact, focused on the economy.

As Krugman rightly stipulates, Monday-morning quarterbacks should say exactly what different play they would have called. Paul’s answer is that the stimulus package should have been bigger. No disagreement: I was one voice calling for a much larger program back when. Yet this answer is not sufficient.

The original sin of Obama’s presidency was to assign economic policy to a closed circle of bank-friendly economists and Bush carryovers. Larry Summers. Timothy Geithner. Ben Bernanke. These men had no personal commitment to the goal of an early recovery, no stake in the Democratic Party, no interest in the larger success of Barack Obama. Their primary goal, instead, was and remains to protect their own past decisions and their own professional futures.

One nation, under fraud

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Oct 172010

Tomorrow, a bank—not your bank, but any bank—could evict you from your home. Even if you didn’t know the bank was foreclosing. Even if your mortgage is paid off. Even if you never had a mortgage to begin with. Even if the bank doesn’t hold a single piece of paper that you signed. And major banks not only know this fact, but have spent millions of dollars to defend it in court. Why? The answer starts with a Jacksonville homeowner named Patrick Jeffs.

In 2007, Deutsche Bank sued Jeffs for his home, which is a necessary step in the process of foreclosing on a homeowner in the state of Florida. Curiously, despite the fact that he immediately hired a law firm to defend his property when he found out about the foreclosure, neither Jeffs nor his attorneys were at the trial. That’s because it had already happened. Deutsche won by default because Jeffs wasn’t able to travel backwards in time to attend, even though the trial featured a signed affidavit indicating that he had been served his court summons.

The only problem with the summons Jeffs supposedly received was that it had been conjured out of thin air.

One nation, under fraud Joseph Tauke, The Daily Caller

We screwed up…now you pay for it

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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.

Banks are gearing up for a wave of new fees in an attempt to make up for lost revenue from new regulatory rules on credit cards and overdraft fees. Robin Sidel has details.

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.

Things could get nasty

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Jun 122010

PR Push Against Strategic Defaulters Underway (Is There a Debtors’ Prison in Your Future?) – 06/12/2010 – Yves Smith

A Credit Union That Played With Fire

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May 162010

Purveyors of C.D.O.’s maintain that buyers who lost billions in these mortgage-related instruments were, of course, sophisticated.

But as a recent report from the inspector general of the National Credit Union Administration shows, it is neither credible nor factual that only savvy investors bought C.D.O.’s.

The report analyzes the April 2009 collapse of the Eastern Financial Florida Credit Union. Based in Miramar, Fla., this state-chartered institution was created in 1937 to serve the Miami employees of what later became Eastern Airlines. The institution added other Florida employee groups and was serving 208,000 members when it failed last year.

Eastern Financial had $1.6 billion in assets at the end of 2008. The company was placed in conservatorship on April 24, 2009. It was taken over by the Space Coast Credit Union of Melbourne, Fla. The failure will cost the National Credit Union Share Insurance Fund, the federal agency that guarantees credit union deposits, an estimated $40 million.

Because it was based in Florida, the doomed credit union had its share of bad real estate loans on its books. But the inspector general’s autopsy report said that the major cause of the Eastern Financial collapse was its decision to dive head-first into toxic C.D.O.’s just as the mortgage mania was faltering.

Between March 2007 and June 22, 2007, the credit union committed nearly $100 million to buy 16 of these instruments; most contained dicey home equity loans.

The timing of these purchases is intriguing. The spring of 2007 was when Wall Street’s mortgage machinery was sputtering; New Century Financial, a big subprime lender, filed for bankruptcy that April. Brokerage firms that had provided funding to lenders like New Century and Countrywide began pulling in their credit lines. At the same time, it became a matter of some urgency for these firms to jettison mortgage-related securities in their pipelines.

Who sold Eastern Financial its toxic securities? Alas, the inspector general identifies neither the C.D.O.’s the credit union bought nor the firms that peddled them.

But the report did note that the instruments Eastern Financial bought were private placements, “which provided less readily available market data to perform analysis and provide better understanding of underlying assets and grading system, tranches, etc.” In other words, the most obscure C.D.O.’s imaginable.

“This situation illustrates yet again why over-the-counter securities and derivatives are not suitable for federally insured banks and other ‘soft’ institutional clients,” said Christopher Whalen, editor of The Institutional Risk Analyst. “Wall Street securities dealers who knowingly cause losses to federally insured depositories should go to jail.”

Credit unions are nonprofit entities and typically do not engage in the risky investing that bank executives did during the credit bubble. Federal credit unions are also limited in the types of securities they can buy. While they can purchase mortgage-backed securities, they are barred from buying C.D.O.’s.

State-chartered credit unions have more leeway to invest in exotic instruments if their home states allow it. Florida, California and Michigan are three such states. But according to the National Credit Union Administration, less than 1 percent of all credit union investments fall into the exotic category.

THOSE state-chartered institutions that can buy C.D.O.’s and other riskier investments must set aside reserves of 100 percent of mark-to-market losses in such securities when they decline in value. This is intended to deter credit union executives from venturing down the risk spectrum.

The Florida credit union met that requirement, but clearly the deterrence didn’t work. Eastern Financial’s failure may be an outlier, but it makes for a terrific case study.

Indeed, the inspector general’s analysis is depressingly familiar. Eastern Financial’s management and board “relied too heavily on rating agencies’ grading of C.D.O. investments,” it concluded, and failed to evaluate and understand their complexity.

Almost immediately after the credit union bought the C.D.O.’s, they fell in value. By September 2007, the credit union had recorded $63.4 million in losses on the products, almost two-thirds of the original investment. By the time of its failure, the credit union had charged off all 18 C.D.O. investments, resulting in total losses of nearly $150 million.

Richard Field, managing director of TYI, which develops transparency, trading and risk management information systems, says the Eastern Financial collapse is yet another example of why investors in complex mortgage securities need to be able to consult complete loan-level data on what is in these pools.

“A sizable percentage of the problems in the credit markets and bank solvency are directly related to this lack of information,” Mr. Field said.

But the Eastern Financial insolvency also illustrates why regulators should make Wall Street adhere to concepts of suitability for institutions as well as individuals, Mr. Whalen said.

“The dealers who sold the C.D.O.’s to this credit union should be sanctioned,” he said. “It might even be possible to pursue the dealer who sold the C.D.O.’s under current law. At a minimum, the Securities and Exchange Commission should impose retail investor suitability standards onto banks and public sector agencies to end the predation by large Wall Street derivatives dealers.”

Will the National Credit Union Administration pursue any of the credit union’s executives or the firms that sold it the toxic securities? “We always consider potential claims of third-party liability in cases of this magnitude,” said John J. McKechnie III, director of public and congressional affairs at the administration.

A Credit Union That Played With Fire Gretchen Morgenson, New York Times

Does It Make Sense to Resurrect the Glass-Steagall Act?

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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

Debt of No Honor

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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.’”

ROGER LOWENSTEIN on WALL STREET’S BREAK WITH COMMON SENSE

Meet the new leaders of banking

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Nov 142009

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.

Life at the top

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.”

Risks versus rewards

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

The Banking System Is Still Broken

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Oct 172009

From the Wall Street Journal:

Borrow from the Federal Reserve at zero and lend to Treasury for a profit. That’s some racket.

Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke have announced that the recession is over. Now that the Dow Jones Industrial Average has broken the 10,000 mark, we’ll surely be hearing assurances that economic growth is here to stay. But the credit markets are in much worse shape than some indicators suggest.