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Home2010 Outlook for Banking
Posted by Larry Doyle on November 19th, 2009 9:31 AM |
What does the future hold for our banking industry? Will it be ‘business as usual,’ as some on Wall Street might like? Will the populist rage sweeping the country compel those in Washington to enact meaningful reform? Will credit loosen? Will housing stabilize and support increased lending by banks? How many banks will close? So many questions and so much uncertainty. While we can make projections on all these fronts, let’s tap into the minds of those who monitor developments in banking on a daily basis.
The American Banker is the banker’s bible when looking for cutting edge analysis and perspectives. Today, this fabulous journal brings us over the wall and into the minds of top rated banking analysts on Wall Street. Let’s navigate, 2010 Outlook : Red Tape, Housing Could Impede Banks’ Recovery:
The banking industry may be on the mend, but its recovery could be hindered by heavy-handed regulation and more pain in the housing market, among other things.
That was the consensus of three banking analysts who participated in an American Banker roundtable late last month in New York.
The veteran market watchers — Anthony Polini of Raymond James, David Hendler of CreditSights Inc. and David Ritter of Argus Research Co. — said the worst of the financial meltdown may be over, but banks are still facing heavy losses and depressed profits, particularly if the government gets carried away with financial and other reform efforts.
In my opinion, these analysts provide a mix of thoughtful insights combined with industry bias. That said, the overall review is compelling. Let’s touch on a few major themes. (more…)
Sleepless in Seattle . . . FHLB-Seattle, That Is
Posted by Larry Doyle on November 10th, 2009 4:28 PM |
Having broached expectant difficulties in the Federal Home Loan Bank system last spring, I try to keep a close eye out for news of note on this largely unknown – but critically important – system of banks. To a large extent, the FHLBs have been flying under the radar despite some serious problems within their investment portfolios and loan books.
High five to KD for pointing out that the folks at FHLB-Seattle probably are not getting much sleep these days. Why is that? Insufficient capital will do it to you every time. As the American Banker offers, FHLB Seattle Still “Undercapitalized,” Regulator Says:
The Federal Housing Finance Agency said late Friday that the Federal Home Loan Bank of Seattle remains “undercapitalized” and will not be allowed to redeem or repurchase stock or pay dividends.
At the end of 2004, as the bank struggled with the size of its mortgage purchase program, it said members who wish to redeem their stock must wait five years before receiving their money.
But with that time period almost up, the Finance Agency said it would not allow the bank to begin redeeming stock, fearing it could lower its capital base. (more…)
Mortgage Fraud Deserves Jail Time
Posted by Larry Doyle on November 3rd, 2009 10:34 AM |
Fraudulent actions must have consequences.
How is it that with trillions in financial losses and a variety of financial frauds readily apparent, very few individuals have been held accountable? FL, a loyal reader of Sense on Cents, has banged this drum repeatedly.
Why hasn’t this fraud been more aggressively combated? The influence of the banking lobby, primarily over the federal regulatory oversight of the financial industry.
What a shame. Are there some new sheriffs, those being state attorneys general, getting ready to ride into this mess? It would appear they are. I immediately thought of our friend FL upon reading The New York Times report, States Are Pondering Fraud Suits Against Banks.
The banking industry at large has worked in concert with its lobbyists and trade associations to keep regulators and law enforcement at bay. At the federal level, the banks have largely been successful. That success begs the question as to how deeply embedded the lobbyists are in the regulatory community. (more…)
Sheila Bair Trumps Tim Geithner
Posted by Larry Doyle on October 29th, 2009 9:52 AM |
FDIC Head Sheila Bair
“Too big to fail.”
Do you think the American public is sufficiently sickened by that phrase? No doubt.
How will our ‘wizards in Washington’ handle this monstrous issue going forward? Is there any doubt that the industry itself should be held accountable to provide the necessary capital to unwind firms deemed ‘too big to fail?’ Of course not. However, the execution of that policy is where the rubber meets the road and where we learn who in Washington is truly working for the American public and who is working for the financial industry. How so? Let’s navigate. (more…)
UPDATE: Analyst Exposes Wells Fargo Balance Sheet Charade
Posted by Larry Doyle on October 22nd, 2009 6:01 AM |
UPDATE: Wells Fargo released their earnings yesterday, October 21st. The Wall Street Journal commented on Wells’ earnings by writing, Wells Fargo Leads Stocks Into The Red:
Wells Fargo led stocks lower after a bearish analyst note triggered a selloff that took down J.P. Morgan Chase and other financial shares.
The Dow Jones Industrial Average closed down 92.12 points, or 0.9%, to 9949.36, marking its second decline in a row. J.P. Morgan and Bank of America were two of its weaker components, losing $1.38, or 3%, to $44.65, and 50 cents, or 2.9%, to 16.51, respectively.
Stocks had spent much of Wednesday’s session in the green as Morgan Stanley and Yahoo posted third-quarter profits above Wall Street expectations. But the market turned deep into the red late as Rochdale Securities’ banking analyst Richard Bove cut his investment rating on Wells Fargo to “sell” from “neutral,” saying the quality of its earnings was “pretty poor.”
What did Bove see? Perhaps he was focused on much of what I had referenced and Michael Shulman had written about in September.
LD
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My Original Post from September 30, 2009 (more…)
Uncle Sam’s New Mousetrap to Stem Foreclosures
Posted by Larry Doyle on October 13th, 2009 2:40 PM |
Despite hundreds of billions of dollars in support of Freddie Mac, Fannie Mae, the Federal Housing Association, and mortgage modifications, our housing market continues to be swamped with an ever increasing wave of foreclosures. The shadow supply of homes overhanging the market is estimated to be in the realm of 15 month’s worth. Last week, I wrote that Washington needed to address this issue in my post “Washington Needs a New Housing Model.”
Thanks to our friends at 12th Street Capital, we learn today that Treasury will release a new plan next week to stem the wave of foreclosures. How might this work? Let’s navigate a release which came from the Mortgage Banker’s Association convention currently ongoing in San Diego. Housing Wire reports, Treasury to Announce New Program to Avoid Foreclosure:
The United States Department of the Treasury is launching, with an official announcement expected next week, a new program to help ailing borrowers escape foreclosure.
The Chief of the Homeowner Preservation Office at the Treasury, Laurie Maggiano, released information on the Home Affordable Foreclosure Alternatives (HAFA) while speaking at the MBA’s 96th Annual Convention going on in San Diego. The official launch is expected in the next week or so.
HAFA already holds the support of Fannie, according to a VP at the agency, Eric Schuppenhauer, who believes the new program allows borrowers in imminent default to “make a graceful exit” from their home. HAFA will keep the stigma associated with foreclosure away from the borrowers, he added, and help keep communities intact.
Maggiano adds that HAFA will offer financial incentives to both servicers and borrowers, and associated secondary investors, in order to facilitate a short sale or deed in lieu of the property.
Borrowers will need to be Home Affordable Modification Program (HAMP)-eligible and Maggiano released some stats for the crowd’s consumption. 2,484,783 homeowners have requested information on HAMP. 757,955 HAMP plans were offered. 487,081 trials are underway.
Other additional [1] incentives to the short sale industry are nearly developed. The IRS will soon offer a 4506EZ form that will enable servicers to pre-fill out the information so that it only requires a borrower’s signature. It also will include softer language so as not put potential participants off.
For those unaware, a “short sale” entails a home being sold for less than the balance of the mortgage. The homeowner is not held responsible or liable for making up the difference between the proceeds generated by the sale and the mortgage balance. That difference is eaten by whomever ‘owns’ or is holding the mortgage. The owner or holder could be the originator if that entity never sold the mortgage. The owner or holder could be a trust on behalf of investors if the loan had been securitized.
What is the motivation to promote short sales rather than allowing the foreclosure process to run its course? Short sales may be short in terms of proceeds although they are not necessarily short in terms of time. That said, short sales typically do expedite the sale of a home. Short sales have typically occurred at a 10-20% discount to the market. Why? The homes have not been prepared for sale, meaning ‘dressed up.’
The monetary incentive provided to mortgage servicers to promote short sales will likely have a similar impact as the monetary incentive provided to modify mortgages. What has that impact been? Not much.
While many of Uncle Sam’s programs have been designed to buy time and allow the market and economy to recover, that approach has proven not to work so far in housing. Will this short sale program work to support housing? I doubt it.
I think what this program will look to achieve is to actually lessen the negative stigma associated with the term foreclosure. If Uncle Sam can say foreclosures are declining, he can then wave the flag as making progress on housing. What he will be doing, however, is merely ‘redefining’ foreclosure or in other words, ‘putting perfume on a pig.’
This program theoretically will negatively impact bank capital as banks will be forced to take a loss sooner rather than later on those mortgages they hold which are involved in short sales.
Aside from that development, real integrity in this process would include:
>> Add short sales to foreclosures as a more robust measure of housing supply stemming from delinquent mortgages.
>> Assess home prices along with rental rates to measure overall cost of housing.
LD
What Did Bank of America Know and When Did They Know It?
Posted by Larry Doyle on October 13th, 2009 8:19 AM |
Are the powers that be at Bank of America wilting under political pressure to release the details of its merger with Merrill Lynch? In fact they are and in the process, the executives at Bank of America are agreeing to waive attorney-client privilege. What are the critical points which New York Attorney General Andrew Cuomo, the SEC, those in Congress, and especially Bank of America shareholders want to learn?
1. What did Bank of America know about the ongoing deteriorating financial position at Merrill Lynch?
2. What did Bank of America executives share with their board members about the billions in bonuses to be paid at Merrill?
3. Did Ken Lewis overplay his hand? Please reference my commentary from a few weeks ago, “Documents Indicate Ken Lewis Utilized the MAC To Shake Down Bernanke and Paulson.”
The Wall Street Journal summarizes these topics this morning in writing, BofA to Hand Over Documents Related To Its Merrill Deal:
Mr. Cuomo’s investigators, as well as Judge Rakoff, have said a fuller accounting of the events surrounding the deal is a prerequisite to any resolution of the probes. BofA is hoping releasing the privileged documents will satisfy those demands, according to people familiar with the matter.
BofA’s move will likely reveal exactly what advice was provided by outside firms, according to people familiar with the matter. Those firms include Wachtell, Lipton Rosen & Katz, which represented BofA during the Merrill transaction and is a long and trusted adviser to the bank, as well as Merrill’s counsel, Shearman & Sterling LLP.
It may also show conversations with ex-general counsels Timothy Mayopoulos and Brian Moynihan. Bank of America recently hired law firm Paul Weiss Rifkind Wharton & Garrison LLP to join Cleary Gottlieb Steen & Hamilton LLP in representing the bank in the various federal and state investigations surrounding the Merrill acquisition.
“This is going to get to the down-and-dirty question of what counsel did say and did not say, what counsel meant and did not mean,” said James Cox, a law professor at Duke University.
(Associated Press) In a photo from Sept. 2008, Merrill Lynch Chairman and CEO John Thain, left, and Bank of America Chairman and CEO Ken Lewis shake hands following a news conference.
Down and dirty? I love it. Get the extra large popcorn. This should be good.
LD
Housing’s Catch-22
Posted by Larry Doyle on October 12th, 2009 9:28 AM |
What is the optimal policy to deal with our ongoing housing crisis? Should Uncle Sam continue to throw more money at mortgage modifications? Should banks be compelled to implement a principal reduction program? Should Uncle Sam step in and subsidize the principal writedown involved in a principal reduction program? Would that be the mother of all socialized housing programs? Let’s navigate and address these topics knowing full well that none of these questions have any easy answers.
I witness further evidence again this morning of a continued increase in home foreclosures amidst the prime mortgage space. The Wall Street Journal highlights this ongoing development in writing, Foreclosures Grow in Housing Market’s Top Tiers:
The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. “The slope of that curve in recent months is much sharper than it was recently,” said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.
Foreclosures are rising in more expensive markets as home values in those areas fall, leaving more homeowners with mortgages that exceed the value of their properties. Prime loans accounted for 58% of foreclosure starts in the second quarter, up from 44% last year, according to the Mortgage Bankers Association. Subprime mortgages accounted for one-third of foreclosure starts, down from one-half last year.
The prime category includes so-called exotic mortgages that were increasingly used to buy more expensive homes, including interest-only mortgages that allowed borrowers to defer principal payments during an initial period. Borrowers often aren’t able to refinance out of these products because the drop in home values has left them with little equity in their homes.
Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments.
Zillow estimated that nearly one in four homes with mortgages was worth less than the value of the property at the end of June. Mr. Humphries said he didn’t expect to see foreclosure volumes level off until later in 2010. (LD’s emphasis)
![[Moving Up chart]](http://s.wsj.net/public/resources/images/NA-BB100_TOPTIE_NS_20091011211658.gif)
With the waves of foreclosures not abating, Uncle Sam’s plans to merely modify mortgages is proving largely insignificant in supporting the overall housing market. Homeowners are clearly showing a strong inclination to default on their mortgages when they are ‘underwater.’ Thus, how does Uncle Sam help people get ‘above water?’ Compel banks to reduce the principal balance of the mortgage. Will they do it? Not quickly, as a principal reduction would imply an immediate hit to the banks’ capital. (more…)
Documents Indicate Ken Lewis Utilized the MAC to Shake Down Bernanke and Paulson
Posted by Larry Doyle on September 29th, 2009 2:33 PM |
10.01.09 UPDATE FROM LD: I wrote this commentary this past Tuesday afternoon. Mr. Lewis tendered his resignation last evening. In regard to my concluding remarks in this post, I only wish all my calls on the market were equally as prescient.
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The intrigue embedded in the Bank of America takeover of Merrill Lynch is never ending. While the book and movie of this high stakes Wall Street thriller will be voluminous, the story most certainly has many chapters yet to be written. To this point, the following questions remain outstanding:
1. Why, at the time, did Bank of America pay such a premium for Merrill Lynch?
2. Did Bank of America know all the details surrounding the $3.5 billion in accelerated bonus payments made to Merrill employees in December 2008?
3. What did Merrill CEO John Thain share with Bank of America CEO Ken Lewis in regard to the growing losses at Merrill?
4. Did Ben Bernanke and Hank Paulson pressure Lewis to complete the merger against his will?
5. Did Ken Lewis consider invoking the MAC (material adverse condition) clause and negate the deal? Did Lewis consider invoking the MAC to negotiate a cheaper price?
6. Did Ken Lewis use the leverage embedded in the potential implementation of the MAC clause to generate significant government support?
Recall that a recent SEC fine of $33 million imposed by the SEC on Bank of America was thrown out by Judge Jed Rakoff as nothing more than a contrivance in which taxpayer funds were used to effectively repay other taxpayers, those being Bank of America shareholders.
Judge Rakoff will hear this case between the SEC and Bank of America in early February. Perhaps at that time answers to the questions asked above will be fully uncovered and released. Perhaps stories will leak beforehand to shed light on this drama. To that end, welcome to Sense on Cents.
I read a story to which I will link, but can not promise the link will not be broken at some future point. As such, I will provide a brief synopsis which provides riveting insights into Question 6.
Law.com reports today How Bank of America Used Merrill’s Losses to Bully the Government. In this report, the reporter offers that Corporate Counsel magazine has pored over hundreds of documents, e-mails, and transcripts pertaining to the Bank of America merger with Merrill Lynch.
In regard to the use of the MAC clause or renegotiating the deal, Law.com very clearly lays out how events unfolded last December:
The record shows that Bank of America decided not to disclose to shareholders its consideration of a MAC before the Dec. 5 vote. It also apparently decided not to use the MAC as leverage against Merrill to lower its price before the vote, even though the bank had agreed to pay a premium — $29 per share for Merrill stock that was selling at $17. It might have, but didn’t, use the MAC to force Merrill to drop its multibillion-dollar bonus pool.
Instead, the bank waited until after the shareholders approved the merger — but before the deal closed on Jan. 1 — and used the MAC to muscle the federal government and U.S. taxpayers into ponying up more bailout funds. At the time, the bank did not disclose the role of federal regulators in not invoking the MAC, and in promising the bank another $20 billion of taxpayer money in 2009 to complete the deal. (The bank had already received $25 billion in bailout funds in 2008.)
Some observers and politicians have accused federal banking officials of forcing Bank of America CEO Kenneth Lewis into completing the merger. But the documents suggest it was Lewis doing the bullying, relying on a highly vulnerable marketplace to win his way.
Wow. Did Ken Lewis overplay his hand? In light of this information, is there any doubt that Lewis is a short timer?
We will learn more in the days and weeks ahead as this drama plays out. You can’t make this stuff up . . .
Thoughts, comments, questions always appreciated.
LD
Related Sense on Cents Commentary:
Did Big Ben Bernanke and Heavy Hank Paulson Break the Law in Buying Ken Lewis’ Silence (April 28, 2009)
Rep Edolphus Towns on Bernanke’s Testimony: ‘Something Rotten in the Cotton’ (June 26, 2009)
How Will Bank Failures Impact Economy?
Posted by Larry Doyle on August 28th, 2009 1:04 PM |
Analysts discount the impact that the expected massive number of bank failures will have on the U.S. economy.
Additionally, analysts also discount the fact that the FDIC fund to cover depositors of failed institutions is close to zero. This fund can be replenished by the FDIC imposing an assessment on remaining banks or, if need be, tapping an emergency line of credit at the U.S. Treasury.
What will be the real impact of bank failures? In my opinion, American consumer confidence and small business owners will bear the brunt of the pain from the bank failures. Why?
>> The reality of further job losses at these banks and those they support within local economies.
>> The psychological impact of seeing small and community banks fail.
>> The lack of credit availability to consumers and small business owners in communities across America.
What are the plans to stem the tide and plug the holes created by bank failures?
1. Have larger banks take over these institutions. What are the risks in this transition? Many of these banks are already filled with underperforming and delinquent loans. The acquiring banks typically want the cheap deposit base of the failed banks and little more.
2. Private equity buyers will have the opportunity to purchase failed banks. What are the risks in this process? The private equity buyers will have to maintain higher capital ratios. Another risk is that the private equity buyers may utilize the cheap deposit base as a pool of liquidity and capital for higher return undertakings than traditional lending in the local communities.
In my opinion, the gap dividing Wall Street and Main Street is only going to grow wider in the midst of these bank failures. The party on Wall Street has little appreciation for this reality on Main Street.
John Kanas, the former chairman and CEO of North Fork Bank, and his private equity firm purchased BankUnited in Florida this past May. Kanas addresses these topics in an interview on CNBC.
LD
Related Commentary:
Halting Recovery Divides America in Two
by Cari Tuna, Liz Rappaport, and Julie Jargon
The Wall Street Journal (August 29, 2009)
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