Occupy the mortgage lenders
By Simon Johnson The opinions expressed are his own.
Participants in the Occupy Wall Street movement are right to argue that the big banks have never properly been investigated for the mortgage origination, aggregation, and securitization behavior that was central to the financial crisis – and to the loss of more than eight million jobs. But, thanks to the efforts of New York’s attorney general, Eric Schneiderman, and others, serious discussion has started in the United States about an out-of court mortgage settlement between state attorney generals and prominent financial-sector firms.
Talks among state officials, the Obama administration, and the banks are currently focused on reported abuses in servicing mortgages, foreclosing on homes, and evicting their residents. But leading banks are also accused of illegal behavior – inducing people to borrow, for example, by deceiving them about the interest rate that would actually be paid, while misrepresenting the resulting mortgage-backed securities to investors.
If these charges are true, the bank executives involved may fear that civil lawsuits would uncover evidence that could be used in criminal prosecutions. In that case, their interest would naturally lie in seeking – as they now are – to keep that evidence from ever seeing the inside of a courtroom.
The scale and structure of any out-of-court mortgage settlement should address the damage inflicted by the alleged pattern of behavior. Many Americans now have too much debt. About 10 million mortgages are estimated to be “underwater” (the house is worth less than the loan). And, in key markets around the US, four years into the housing slump, home prices continue to fall.
If these were commercial loans, creditors would consider restructuring them – extending the payment schedule and typically writing down principal. But, in America’s home mortgage market, this is much less common. Banks want neither millions of negotiations nor, most importantly, the need to face the losses implied on their loan portfolio.
As a result, households want to spend less and pay down their debts. To some extent, this is the natural aftermath of any credit boom. And household deleveraging in the US will take a long time.
How big banks can fix their leadership blindspots
By Katrina Pugh The opinions expressed are her own.
In the jitteriness over the stock market’s worst quarter in two years, a racing volatility index, and protests spreading across the nation’s major cities, all bank leadership (and perhaps all corporate leadership) needs to ask a fundamentally new question: “What blindspots are dogging us?” This hardly seems like a radical question. After all, most arbitrators make their money off of other people’s blindspots by seeing around corners where others can’t.
But often, leaders are unaware of blindspots in their own organizations. And they are unaware that they are unaware.
At UBS, blindspots led to $2.3 billion in undetected rogue trading losses, and the ouster of CEO Oswald Gruebel. Analysts have widely criticized UBS’s lax accountability, and oblique, easily-gamed bank systems. Corporate insider Sergio Ermotti brings a strong track record to UBS’s post of interim CEO. Entering this maelstrom, however, will put his leadership to the test.
UBS is far from alone. Many other banks have disclosed the unhappy results of ignoring blindspots, such as Bank of America’s Countrywide loan portfolio, Citibank-Japan’s clumsy disclosure process, and the French banks’ Greek loan portfolios.
We, the investors and consumers need a new cry: “These banks are too big to go stale!” They all need a good air flow. Knowledge flow, that is.
We can learn from UBS’s example. Regardless of whether Ermotti’s destiny is from interim to permanent CEO, he must start on the pathway toward greater transparency at the bank. He needs to act like an outsider in an insider’s clothing. Acting like an insider, he needs to quickly map out how knowledge has failed to reach across the vast network of traders, investment groups, and risk managers. Acting like an outsider, Ermotti needs to stride across the room and open a window. He needs to seize this moment to launch a knowledge overhaul.
I agree with the last comment that “transparency culture is obviously not what banks want to create.” Banks are kicking and screaming (privately), but publicly they are showing some readiness. Do you think these two postures will come into alignment, if they can see transparency as a sign of leadership?
Housing double-dip threatens banks
Another dip in U.S. housing looks likely, bringing with it difficulties for banks and for their government guarantors.
What is perhaps worse: having chucked money at supporting asset markets in order to support banks the past two years, the policy options for handling another housing downturn and banking crisis would be greatly circumscribed.
If you think the debate about more fiscal stimulus is heated, wait until you see the venom which the prospect of another housing and banking bailout brings.
Despite absolutely massive official support, via the FHA, Fannie Mae, Freddie Mac, a now expired housing credit and other initiatives, air now appears to be leaking out of the housing market faster than it is being pumped in.
The recent run of data in the aftermath of the expiration of the housing credit has been terrible. Existing home sales fell 27 percent in July to an annual rate of 3.83 million, the lowest figure in the 11-year history of the data, leaving inventories above a year’s worth of sales even before you account for the shadow inventory of foreclosures and would-be short sales. Nearly 15 percent of all loans are past-due or in foreclosure and 23 percent of properties encumbered by a loan are in negative equity, meaning they have very good reason to default if they haven’t already. Another 5 percent of mortgaged homes have 5 percent equity or less.
Combine all this with a clearly weakening U.S. employment scene and you have the potential for further substantial falls in the value of housing, which, last time I checked, is bad news for the loans that are the backbone of the financial system.
Meanwhile household formation, a key determinant of house prices over the medium term, is going in the wrong direction. When jobs are tough to find and house prices aren’t rising many people decide it is better to move back home with mom and dad.
It’s actually worse…those that were enticed into the housing market by gov’t programs will feel just the latest ponz of the banking industry.
They’ll say you made rates low, you subsidized downpayments, you said “buy” I bought. Now foreclosures on my street are up and my downpayment is gone. I’m underwater and you say you can no longer help.
What’s the equivalent of the 1930′s farmer’s pitchfork? Anyone?
A painful holiday’s end for Europe
Europe’s long summer holiday still has a week to run but this year’s reentry will bring with it evidence that very little progress has been made on the issues that threaten to rend the currency union and upend the global economy.
Despite waving the stress-test magic wand over its banks in late July the same problems continue to grow unchecked: a euro zone periphery that can’t compete, may not be able to pay its debts and so may bring down with them the very banks that have been pronounced healthy.
While the German economy is growing at a rate not seen since the Berlin Wall came down, things are a good bit worse in Ireland, Portugal, Spain, Italy and especially Greece, all of which face some combination of an austerity-induced recession and debts public and private which which threaten their banking systems, local governments and Treasuries.
Investors have looked at this on the one hand and on the other a $1 trillion bailout, a pliant International Monetary Fund and the results of the stress tests and have voted with their feet: average spreads between German and peripheral country bonds are back in territory last seen in June and heading north. Ten-year Greek bonds now yield 861 basis points more than German issues, or about where they were in May when we were all debating the chances of the euro surviving in its current form.
Irish bonds too have underperformed alarmingly as austerity without debt rescheduling does what austerity without debt rescheduling does: kills growth and kills the prices of assets the debts are secured upon, leaving the country less able to service its debts and more likely to default even harder. Yes, defaults are like sneezes; some are polite and soft and some splatter everyone in the room.
A number of interlocking stories show that, while European central bankers are talking a firm game about upgrading growth forecasts on the back of German exports, their actions show continued very strong concern.
First comes news on Monday that Anglo Irish Bank has transferred a new batch of impaired loans to the state-run bad bank National Asset Management Agency at just 38.1 percent of their face value, a price lower than the last transfer and one that, while it may prove optimistic, even at this level implies a weakening asset market and a growing and perhaps ultimately un-meetable bill for the government. Remember, the more money Ireland needs from the center, the less there is available to meet the growing needs of Greece and Spain.
from The Great Debate UK:
Not much stress, not much test
-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own.-
Back in the 1950’s, when most women stayed at home while their menfolk went out to work, a favourite trick of life insurance salesmen was to walk into the prospect’s home at dinner time and ask the wife:
“Mrs Smith, have you ever thought what would happen if your husband keeled over and had a heart attack right now?”
Imagine the effect of this question on the poor guy sitting there eating his meat and two veg. It must often have been enough to make him choke on his roast potato there and then – maybe even die on the spot.
Not being in the business of selling life insurance, the European bank regulators were unwilling to take any chances with the client’s cardio-vascular system, so they have restricted themselves to asking the question:
“What would happen if the client had the flu and needed a couple of weeks off work?”
Stress tests and cargo cults
How are European officials orchestrating the bank stress tests like Pacific islanders speaking into coconuts and waiting for cargo to drop from the skies?
They both make the elemental error at the heart of all cargo cults; they mistake necessity for sufficiency and hope that imitation and affect will make up for a lack of substance.
Most often associated with the south Pacific after World War II, cargo cults are religions whose practitioners try to use magic to produce the results of more powerful technologically sophisticated cultures.
In the Pacific that meant making clearings in the jungle to serve as runways and donning coconut earphones and microphones with vines for wires, all in hopes that the cargo that came with American or Japanese occupation would somehow return.
In Europe it means running a bank stress test that officials hope will, like the one in the U.S. in 2009, restore confidence in its banks.
The European Union has not disclosed the methodology of the stress tests, the results of which are expected to be released on July 23 and which will cover banks with assets equaling about half of banking assets in each country. The purpose of a stress test is to restore confidence in the banking system and, thereby, resume the flow of credit between banks, and between banks and the investors who supply banks with debt and equity capital.
The U.S. stress tests probably worked not simply because they were rigorous enough; they worked because they helped to create the belief that behind the banks stood a mighty backstop — the U.S. government.
Excellent observations.
Christine Lagarde said last week, “The test results will be out July 23rd, and they will show eurobanks are strong.”
That was it. End of. Unbelievable – and totally unwarranted – arrogance.
http://nbyslog.blogspot.com/2010/07/you- cant-play-secret-squirrel-with.html
The $5 trillion rollover
Banks around the world must refinance more than $5 trillion of debts in the coming three years, a massive rollover that poses threats to financial stability and growth.
The need to replace these debts, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth.
For banks in the UK, according to the Bank of England Financial Stability Report, the refinancings amount to about $1.2 trillion by the end of 2012.
If banks in Britain raise funds at the same pace they have been this year, they will only collect half of their needs in time. This is even before the fact that the banks need desperately to turn some of their riskier short-term funding into more reliable funding with a longer maturity.
“If funding costs increase dramatically, which is perfectly possible in what could be pretty febrile market conditions, that will hit profitability (and the banks ability to raise capital organically) until they are able to re-price loans and facilities,” according to Richard Barwell, an economist at the Royal Bank of Scotland in London.
“And to the extent that banks are unwilling or unable to roll over funds that would trigger forced deleveraging. Both outcomes imply a sharp contraction in credit conditions for those within and outside financial markets, putting considerable downward pressure on activity and asset prices.”
Banks outside of Britain are perhaps doing marginally better in meeting their needs, but still face an uphill struggle.
Yes indeed the massive rollover poses threats to financial stability and growth.
Banks will de-leverage, that is sell assets where they can but the market for the assets may be limited; therefore the assets may have to be written off, eventually causing the banks to go out of business; that is why credit default swaps on banks have been rising in value. Definitely there will be a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth. The borrowers most at risk are the small companies which are reliant upon a well-functioning lending system with low rates. This group of companies includes the Russell 2000, IWM, whose value swings widely with the value of regional banks, KBE, and the too-big-too-fail-banks, RWW.
The problem with longer out funding is that as the yield curve rises, $TYX:$TNX as the economy slows then the funding becomes prohibitively expensive, limiting the amount of lending and raising the risk of failure on the loan.
First with the subprime crash and more recently with the sell off of currencies on the rise of the European Sovereign Debt Crisis on April 26, 2010, we entered into the age of the end of entitlements: the track record of the past three years of the banks getting their money, courtesy of government support, has ended in the US with the termination of the Federal Reserve QE and is ending in Europe as the ECB terminated the one year repo facility and put a three-month repo facility in its place.
Day by day, the European sovereign debt crisis is getting larger as investors have sought the so-called safe haven in US Treasuries, TLT and IEF and as the lending system has frozen as Spanish banks must be financialized by the ECB to continue in operations and as European financial organizations, EUFN, have stopped lending to each other and put their overnight money on hold at the ECB at low-interest.
The banking system problem has gone from one of liquidity to one of solvency: many banks are simply insolvent; they are zombie financial institutions waiting to be shut down.
The market demanding a different capital structure from banks will result in ever decreasing credit and an ever decreasing GDP; this is a vicious cycle that commenced April 26, 2010 as the currency traders sold the world currencies against the US Dollar; this is known as Debt Deflation.
Debt deflation is consequence of credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is that “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”
Bible prophecy foretells that when currencies collapse, a new worldwide credit system will be installed. The Sovereign, that is the world leader, Revelation 13:5-10, will be complemented by the Seignior, meaning top dog banker who takes a cut, Revelation 13:11-18, will direct the 666 credit system, Revelation 13:17-18, which is the seigniorage system whereby one will be given the charagma, or mark, necessary to conduct commercial activity.
from The Great Debate UK:
Banks, borrowing, bonds and Britain’s budget
-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-
George Osborne must be thankful to Don Fabio and his boys for ensuring that Wednesday’s tabloids will have other things to think about than the Budget, because it is going to be one of the toughest ever.
There is every indication the advance billing is more than just news management. The pain is going to be frontloaded for two reasons.
First, if anyone thought the electoral cycle was dead, the run-up to the last election should have disabused them.
The old wisdom is still valid: get the pain in early, keep the goodies for later, when the next election is in sight. In the present case, it is reinforced by the more Macchiavellian consideration that the more blood is spilt on Tuesday, the less attractive will be the prospect of an early election and hence the stronger the bonds holding the coalition government together.
The more important reason for cutting the deficit drastically at the outset is the message it sends to the markets that we are not going to exploit our position outside the Eurozone to inflate away the debt.
Euro zone medicine not working on banks
Fear of lending to banks is rising again in Europe, as even a 750 billion euro zone rescue package proves not enough to stem fears that the banking system will prove the weak link when southern European nations can’t meet their obligations.
Strikingly many European and British banks are now being forced to pay more to borrow money in the interbank markets than before the joint European Union, International Monetary Fund and European Central Bank package was announced two weekends ago.
That deal, which should insulate highly indebted countries such as Greece, Spain and Portugal from funding pressure for the next two years or so, was effective in driving down the extra interest those countries had to pay to borrow as compared to Germany. Tellingly, it was less effective, even counter-productive, in restoring calm to the markets in which banks fund their short-term borrowing needs.
While the mutual distrust is still far less than the utter panic during the crisis following the collapse of Lehman Brothers in 2008, it is very significant that the bailout of the weak links in the euro zone is having far less of a multiplying effect than earlier infusions of cash and liquidity into solvency shortfalls.
It may be simply a passing tremor. It may be a result of structural weakness in the euro zone, as investors bet that when push comes to shove a politically fractured Europe will find it impossible to agree on how to underwrite and fund the rescue of banks facing losses if Greece and its peers default.
It might, even more interestingly, be a sign that the medicine of government rescue packages works less well the higher and higher you go up the world’s capital structure. After all, the banks two years ago were rescued by governments, which were bigger. Small governments are now being rescued by bigger governments. Will Mars or Saturn have cash to contribute when it is Britain, or, whisper it, the United States, which needs help?
WILL BANKS BE LEFT HOLDING THE BAG? The three-month dollar London interbank offered rate (LIBOR), a compilation of the costs banks report they must pay to borrow, rose to 0.46 percent on Monday, having risen steadily since concern over Greece became acute, its highest level since last summer. Also rising markedly is the spread between LIBOR and an overnight indexed swap (OIS), a measure of unwillingness to lend that, because it strips out interest rate fluctuations, is considered a more pure indicator of bank solvency fear. It now stands at about 24 basis points, about double the rate in February but far below its crisis peaks.
It is not “quite likely” that Greece will be forced to restructure its debts in the medium term…
The assets of the Greek state are higher in value than its total debt of 300bn. Current cash deposits in Greek commercial banks are also almost equal to the same amount.Finally,total private external and internal debt is much smaller that in any other Eurozone country and the actual size of the Greek economy is at least 40% larger than official data.
It is amazing how shallow are almost all analyses and how unfounded are most predictions about the future of the Greek economy!
Taxing spoils of the financial sector
If you want less of something, tax it.
That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here’s hoping it proves more of a promise than a threat.
The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional “Financial Stability Contribution,” with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.
More interestingly, the IMF is also proposing a “Financial Activities Tax,” (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents — the unwarranted spoils — of the financial sector.
In economics the concept of “rents”, essentially the extra money a given individual or industry is able to extract from its clients above what it would if there were perfect competition, is central. If there is only one cable television provider in your neighborhood you will know what I am talking about.
In financial services, the evidence is that rents are huge, in part because of impaired competition and in part because increasingly complex financial services allow banks to sell clients products that they don’t understand, may not need and will almost always be over-charged for. Bank employees in turn charge hefty rents to their bosses, boards and shareholders, each of whom, as you journey up the organizational chart, understand less about the complex services, and like clients, are then less able to defend their own interests.
Some of the best evidence forming the intellectual underpinning of this is provided by economists Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, whose work found that about 30 to 50 percent of the extra pay bankers get as compared to similar professionals is attributable to rents. <http://people.virginia.edu/~ar7kf/paper s/pr_rev15_submitted.pdf>
As a long in the tooth former consultant to Central Banks & Commercial Banks, here is my “old fashioned” view.
Banks are the primary engine driving the world’s economy.
Tax the Banks and they will pass it on their customers.
More expensive money means Less economic dynamism & incidentally more unproductive public service costs to regulate.
Obama must have fools for advisers.
But what do I know, it is 20 years since I was advising governments of the world.
“But $350 billion is roughly what the financial sector as a whole earned in an average quarter during the credit boom – and profit levels in recent quarters have reached or exceeded those levels.”
You don’t really believe that the “profits” recently reported by the big banks were real, do you? It was all accounting gimmicks, manipulated to make it look to investors like they weren’t in such bad shape.
These guys have managed their businesses into the ground. It might be worth it to help neither the housing market nor the financial industry…just to see the big banks implode under the weight of their own greed and stupidity. Especially if the Justice dept would actually do their job and prosecute these white collar criminals. At least then folks might perceive that there’s some amount of fairness in our political/economic/justice system.