In Haiti crisis, a lesson for investors, givers

Jan 17, 2010 23:21 UTC

Well-known to businessmen everywhere, but totally under-appreciated by investors, is the concept of working capital, the day-to-day operating cash flow that makes a business run. Turns out the Red Cross has a big working capital problem when it comes to text message donations. From Carrick Mollenkamp (WSJ), Americans pledge millions, but cash flow takes weeks:

Secretary of State Hillary Clinton, CNN, and users of Twitter Inc. have urged people to punch 90999 and then type in the word “HAITI” on their phones to send $10 to the American Red Cross. But the money won’t be routed from most U.S. wireless carriers to relief efforts until cellphone users pay their phone bills.

That could take 30 to 90 days, telecommunications officials estimate, well after the critical initial days in which humanitarian aid organizations are trying to deliver medical supplies, food and water to save injured earthquake victims and help others with their most immediate needs.

To run its operations, the Red Cross needs cash today. But text message donations don’t actually come through until users pay their cell phone bills and carriers pass through the funds. (To be clear, I’m not saying text message donations are a bad thing. They’re an ingenious way for relief organizations to leverage the billing relationships that carriers have with consumers. I gave $10 myself. Still, it provides a good opportunity to discuss cash flow issues that few understand.)

Businesses confront cash flow issues like this every day, yet investors typically ignore them.

Does a business require lots of investment up front to provide its good or service? If so, this can be a big and ongoing operational risk. Every Christmas season, retailers invest in inventory they hope is going to sell. If it doesn’t, they can end up in bankruptcy.

On the other hand, there are businesses that get paid before delivering their good or service. Many subscription businesses get paid up front only to deliver content later.

(The analogy isn’t perfect since the Red Cross doesn’t aim for profits. But it is in the business of disaster relief, which requires a cash investment up front.)

All else equal, it’s better to run a business that gets paid first. Risks that your product doesn’t sell, or that your customers don’t come through with a cash payment, are removed.

Warren Buffett has made his fortune in large part due to astute working capital management. His main business is insurance. He gets paid premiums up front but only pays out if his customers have a claim. In the meantime, he has control of the “float,” which he can invest to generate profits for Berkshire. Writing insurance policies that result in few if any claims has made billions for Berkshire shareholders.

Understanding working capital is also crucial to Buffett’s brand of value investing. If a business must invest capital up front, what is the average return on that capital investment? If the return on capital employed* is high — and the business is simultaneously selling for a cheap valuation — then odds are you’ve identified a stock that will outperform the market. (Joel Greenblatt wrote a best-selling book based on this two-part magic formula.)

And the lesson for charitable givers? Don’t wait for disasters to strike to give money. While the devastation in Haiti is certainly heart-breaking, we shouldn’t think it out of the ordinary. After all, Mother Nature regularly delivers an epic disaster — the Asian Tsunami in 2004, Katrina in 2005, the Sichuan Province earthquake 2008, Haiti 2010.

So consider giving at regular intervals, especially before disasters strike. And not just to the Red Cross. Presumably aid organizations can mobilize more quickly if they have working capital available in advance.

—————

*There are different ways to calculate return on capital employed. Here’s one way:

Return = annual after-tax operating income = last twelve months operating income * (1 – tax rate)

Capital employed = Accounts receivable + inventories + prepaid expenses + net property, plant and equipment – accounts payable – accrued expenses – deferred revenue

ROCE = Return / Capital Employed. If a company has $100 million of after-tax operating income and $200 million of capital employed, then ROCE is 50%.

Even better than a high ROCE is a business that has negative working capital. For instance, if deferred revenue is really high because a business takes in cash before delivering its good or service, then capital employed is likely negative.

COMMENT

Why not donate it to the Blue Cross as people behave like animals when it comes to money. Just paying taxes is crippling, let alone 10% to the ‘church’ AND VAT.

This disaster is classic, Amampour of CNN (spelling ?) attacking the poor Head of the UN, exploitative propaganda (‘I was there first’) and finger-pointing.

It should be simple:

1. Re-establish/concoct communications;
2. Re-establish/concoct transport passages;
3. Move the living out of the disaster areas to rural areas;
4. Supply shelter, water and food to THEM, even if it is dropped by air;
5. Let the big boys start cleaning up the mess.

Most important, Natural Selection, let it flow, we need to knock even larger chuncks out of the 7 000 000 000 headcount.

Rolfe, you are becoming a man of the world by mixing in du Pont formulas into such sensitive humanitarian matters, socratic irony by a ‘hypocrite’. What more do you want ?

Posted by Gandhiolfini | Report as abusive

Bank failure Friday

Jan 16, 2010 06:02 UTC

The year has started off slowly: Only 4 closings the first half of January. Expect FDIC to pick up the pace…

#2

  • Failed bank: Town Community Bank & Trust, Antioch IL
  • Acquiring bank: First American Bank, Elk Grove Village IL
  • Vitals: as of 9/30, assets of $69.6m, deposits of $67.4m
  • Estimated DIF damage: $17.8m

#3

  • Failed bank: St. Stephen State Bank, St. Stephen MN
  • Acquiring bank: First State Bank of St. Joseph, St. Joseph MN
  • Vitals: as of 9/30, assets of $24.7m, deposits of $23.4m
  • Estimated DIF damage: $7.4m

#4

  • Failed bank: Barnes Banking Co, Kaysville UT
  • Acquiring bank: None.
  • Vitals: as of 9/30, assets of $827.8m, deposits of $786.5m
  • Estimated DIF damage: $271.3m

Lunchtime Links 1-15

Jan 15, 2010 16:00 UTC

Consumer protection agency in doubt (Paletta, WSJ) Chris Dodd appears willing to trade the CFPA in exchange for Republican support of his financial reform bill.

Manhattan apt rents drop 9.4% in Q4 (Gittelsohn, Bloomberg) Great stimulus for the NY economy.

Volcker calls for support in fighting bank lobby on reforms (Harper, Bloomberg) Looking to get a copy of this speech to post later today.

Can online comments affect your credit? Yup. (Sandberg, SF Chronicle) More an oddity than a trend, but interesting nonetheless.

CBO: Fannie/Freddie cost government $291 billion in ’09 (Golobay, HW) The full report from CBO is here. CBO estimates the total cost of subsidizing Fan/Fred will only be $99 billion more through the end of 2019. Meanwhile most of the housing stock in the U.S. will end up on the government’s balance sheet.

JP Morgan loan losses overshadow higher profit (Comlay, Reuters) The bank reported earnings that beat analyst estimates, but the reasons for the beat — lower taxes and lower bonus accruals in JPM’s investment bank — are considered “low quality” because they aren’t sustainable sources of profit. And lower bonus accruals may sound good from a populist point of view, but they don’t really help anyone other than bank shareholders who get to retain the earnings.

Monologue wars (Gawker) Late night hasn’t been this interesting in years. The 10@10 segment with Jimmy Kimmel on Leno is gold. In related news, Conan’s show is for sale on Craigslist.

Roger Ebert vs. Rush Limbaugh (SunTimes)

The Exorcist (imgur)

Windpipe transplant renews Belgian’s life (AP) A Belgian woman has a working windpipe after surgeons implanted the trachea from a dead man into her arm, where it grew new blood vessels before being transplanted into her throat.

For the next time you’re playing H-O-R-S-E. And the handshake at 0:18 is possibly more impressive than the shot….

Lunchtime Links 1-14

Jan 14, 2010 17:06 UTC

Obama to unveil plan on bank taxes (WSJ) Surprisingly this doesn’t look dead on arrival in Congress, maybe because banks know that the tax — spread over 10 years — isn’t likely to hurt very much. It’s a missed opportunity to shrink big bank balance sheets.

The advanced technology trade deficit (Mandel, ht NG)

Sheila Bair testimony before FCIC (FDIC.gov) Bair was the highlight of the morning’s hearing and the headline from her testimony is that it’s the Fed’s fault. Had Alan Greenspan taken Edward Gramlich’s advice to regulate subprime, perhaps many of the excesses of the bubble could have been avoided. In other news, the commission is unhappy with Attorney General Eric Holder b/c the Dept of Justice isn’t sharing as much information as the commission would like.

The rise of the permanent temporary workforce (Coy/Conlin/Herbst, BW) More evidence we’re becoming Japan.

T Boone Pickens cuts order for wind turbines by over 50% (Souder, Dallas News) He’s still a big fan of natural gas…

Male chromosome may evolve fastest (Wade, NYT) Wives everywhere beg to differ.

Thirsty Koala (ht Danny W)

Koala

Can crisis inquiry live up to 1930s trailblazer?

Jan 14, 2010 14:32 UTC

Ferdinand Pecora turned a tame United States investigation of the 1929 Crash into an exposé that spawned far-reaching banking reform. Despite flashes of incisiveness from Chairman Phil Angelides, the Financial Crisis Inquiry Commission’s debut with Wall Street bosses Wednesday lacked that kind of promise. It’s early days, but the panel needs to sharpen up.

Mr. Angelides began on a high note, quizzing Goldman Sachs honcho Lloyd Blankfein about the firm’s dual role marketing financial products to customers and, elsewhere in the organization, at times selling the same products short. But Mr. Angelides didn’t have time to press his point, and the other commissioners mostly offered softer questions.

Jamie Dimon, John Mack and Brian Moynihan, respectively the bosses of JPMorgan, Morgan Stanley and Bank of America, took less flak – but that may be because they escaped questioning from Mr. Angelides, who concentrated on Mr. Blankfein.

Even Brooksley Born, famous for battling former Federal Reserve Chairman Alan Greenspan and other bigwigs over derivatives regulation, didn’t press the bank chief executives very hard.

Of course, this is just the beginning. Aside from looking at Goldman’s apparent conflicts, the American International Group rescue, derivatives trading, bank leverage, credit ratings and other potential financial sector causes of the crisis, the government’s role demands scrutiny, too. That includes not just regulatory failures but also policies that promote and subsidize home ownership – raised by Mr. Blankfein in his testimony – and the extremes of leverage allowed at government-linked mortgage giants Fannie Mae and Freddie Mac, an issue brought up by Mr. Dimon.

With all this ground to cover, there is time for Mr. Angelides’ panel to hit its stride. Back in the 1930s, it took the arrival of Mr. Pecora in 1933 – only as counsel to the Senate investigation, and its fourth one at that – to galvanize proceedings and earn his name’s association with the commission, which led to the Securities Act of 1933 and the Securities Exchange Act of 1934.

If Mr. Angelides wants his own name linked with similarly meaningful results this time around, he needs to knock his team into leaner, meaner shape.

COMMENT

Nothing much will be accomplished while things are relatively calm in the markets and economy. But once we start another big leg down, which is coming this year, the social mood will shift and the political backing of the people will be there to really effect some change. By the Spring of 2011 things will look quite different and some real reform will get done.

Posted by Onlooker from Troy | Report as abusive

Can crisis inquiry live up to 1930s?

Jan 14, 2010 01:20 UTC

- By Rolfe Winkler and Richard Beales -

Ferdinand Pecora turned a tame United States investigation of the 1929 Crash into an exposé that spawned far-reaching banking reform. Despite flashes of incisiveness from Chairman Phil Angelides, the Financial Crisis Inquiry Commission’s debut with Wall Street bosses Wednesday lacked that kind of promise. It’s early days, but the panel needs to sharpen up.

Mr. Angelides began on a high note, quizzing Goldman Sachs honcho Lloyd Blankfein about the firm’s dual role marketing financial products to customers and, elsewhere in the organization, at times selling the same products short. But Mr. Angelides didn’t have time to press his point, and the other commissioners mostly offered softer questions.

Jamie Dimon, John Mack and Brian Moynihan, respectively the bosses of JPMorgan, Morgan Stanley and Bank of America, took less flak – but that may be because they escaped questioning from Mr. Angelides, who concentrated on Mr. Blankfein.

Even Brooksley Born, famous for battling former Federal Reserve Chairman Alan Greenspan and other bigwigs over derivatives regulation, didn’t press the bank chief executives very hard.

Of course, this is just the beginning. Aside from looking at Goldman’s apparent conflicts, the American International Group rescue, derivatives trading, bank leverage, credit ratings and other potential financial sector causes of the crisis, the government’s role demands scrutiny, too. That includes not just regulatory failures but also policies that promote and subsidize home ownership – raised by Mr. Blankfein in his testimony – and the extremes of leverage allowed at government-linked mortgage giants Fannie Mae and Freddie Mac, an issue brought up by Mr. Dimon.

With all this ground to cover, there is time for Mr. Angelides’ panel to hit its stride. Back in the 1930s, it took the arrival of Mr. Pecora in 1933 – only as counsel to the Senate investigation, and its fourth one at that – to galvanize proceedings and earn his name’s association with the commission, which led to the Securities Act of 1933 and the Securities Exchange Act of 1934.

If Mr. Angelides wants his own name linked with similarly meaningful results this time around, he needs to knock his team into leaner, meaner shape.

Afternoon links 1-13

Jan 13, 2010 20:51 UTC

Must ReadKyle Bass: Testimony before the FCIC (fcic.gov) Bass is a hedgefunder that made big profits betting against subprime. His testimony has many fascinating facts and figures. [The pie charts on page 9 look familiar.]

Obama to push tax on too-big-to-fail banks (Nasiripour) Not a lot of details: “the planned tax would be imposed in a way that targets firms’ riskiest activities, such as proprietary trading. It would be crafted in a way that doesn’t affect a financial company’s retail banking, so that the cost theoretically would not be passed on to retail customers — but it wasn’t clear exactly how that would work.” And will it tax other TBTF firms besides banks? What about insurers? What about GE? Update: WSJ says the tax will target bank liabilities.

Earthquake in Haiti may have killed over 100,000 (Farie/Varner, Bloomberg) The epicenter of the 7.0 magnitude quake was 10 miles from Haiti’s capital city.

Google China spat shines spotlight on cyberspying (Prodhan/Lee, Reuters) Google has consistently tried to thread the needle between the revenue opportunities provided by the Chinese market, and the censorship restrictions imposed by the Communist Party. This attack was so egregious that Google said it’s had enough.

Prime jumbo RMBS delinquencies jump to 9.2%: Fitch (Golobay, HousingWire) ht Implode-o-Meter.

SEC proposes effective ban on naked access (Younglai/Spicer, Reuters)

FDIC’s Bair blasts other regulators for reluctance on banker pay plan (Paletta, WSJ) I’d hoped to share the video archive with all of you but a day later it’s still not available. There are good arguments that additional curbs on pay will be both tough to design and ineffective at curbing risk. A better regulator is failure. But that’s not Dugan’s point. He just wants to protect banks.

VIDEOLennart Green does close up card magic (TED talks)

Clever 2010 calendar (imgur)

Another dose of Martian awesome (Plait, Discover)

A Chinese thanks Google for standing up to the communists (more)…

google thanks

COMMENT

Just read an amazing global tactical allocation report on zerohedge (2 in facts with yesterday macro section) http://www.zerohedge.com/article/global- tactical-asset-allocation-equities

Might be of interest.

Kind regards,
Petter

Posted by Petter Knight | Report as abusive

Crisis inquiry commission hearings today

Jan 13, 2010 14:48 UTC

UPDATE: Wow, if the questioning by Phil Angelides of Lloyd Blankfein is any indication of how these hearings are going to play out, they will be much fun to watch. He really pressed Blankfein and the two got combative. Too bad he didn’t have more time…

UPDATE 2: False start, the other commissioners are mostly asking softball general questions. Angelides is the only one hitting hard.

The Financial Crisis Inquiry Commission begins its hearings today. They’re already under way and can be viewed live on CSPAN 2. A web feed is available here.

A couple interesting links:

Top 10 Questions for the Commission from Eliot Spitzer, Bill Black and Frank Partnoy

Ask Holder to be bolder Tom Ferguson on why AG Eric Holder should be more aggressive as the nation’s top prosecutor.

Starting the day off are John Mack, Lloyd Blankfein, Jamie Dimon and Brian Moynihan. Other CEOs I hope are questioned under oath include Chuck Prince (Citi), Stan O’Neal (Merrill Lynch), Ken Lewis (BofA), Angleo Mozilo (Countrywide), Herb Greenberg (AIG), Jack Welch (GE) and Herb Sandler (World Savings).

Joe Cassano — the guy who ran AIG’s Financial Products division — should also be called. To my knowledge he hasn’t said anything publicly since AIG’s failure. He’s hiding in London, but would he ignore a commission subpoena?

SEC shifts focus, but new complaint again fails Rakoff test

Jan 13, 2010 00:31 UTC

After Judge Jed Rakoff threw out its original $33 million settlement with Bank of America, the SEC shifted the focus of its case. In its new complaint filed today, the SEC still accuses BofA of misleading shareholders for failing to disclose material information. But the issue this time isn’t bonuses, it’s Merrill’s fourth quarter losses.

Yet the complaint still names no names and again asks BofA shareholders to pay for themselves being misled. In other words, Judge Rakoff’s beef with the original complaint would seem to apply to this one as well.

Here’s the allegation:

Bank of America’s failure to make any disclosure concerning Merrill’s October and November losses violated Bank of America’s express undertaking to apprise investors of fundamental changes and rendered its prior disclosures materially false and misleading in violation of the federal securities laws.

Pages 7 to 11 of the complaint recount how Merrill’s loss projections for Q4 kept ballooning while lawyers generated different excuses not to disclose them.

BofA’s last financial communication with the public was Q3 results, which showed a $5.2 billion loss. At that time analysts thought the worst was over, that Merrill would break even in Q4.

But by November Merrill admitted to BofA that they’d lost $4.6 billion in October. On December 3rd — two days before shareholders voted to approve the merger — Merrill gave BofA execs an updated Q4 projection: over $7 billion of losses. Days after the shareholder meeting the loss forecast jumped again to $12 billion.  When Merrill finally reported, its net loss came in at $15.3 billion.

It’s hard to see what tortured legal arguments BofA’s lawyers can muster to justify this disclosure failure…

But like the first complaint, this one names no names. It only refers to “a senior Bank of America executive” who told “senior executives at Merrill” that disclosure may be required. It also mentions that various BofA “lawyers” deliberated on the matter.

Assuming this results in another quick settlement where no one admits wrongdoing, one wonders if it will pass muster with Rakoff.

In last August’s hearing, he complained that SEC had failed to address the “who/what/where” of its case. “Was it some sort of ghost?  Who made the decision not to disclose [the bonuses]?” he asked. Replace “bonuses” with “losses” and you’ve still got the same issue.

Justice isn’t served if shareholders, who were misled, end up paying a fine to the government. And what of deterrence? If executives are never held responsible for their behavior, they’ll never change it.

Of penny stocks and buried treasure

Jan 12, 2010 19:33 UTC

Last Friday bulletin-board traded Marine Exploration announced that it had discovered a shipwreck from 1690 off the coast of the Dominican Republic (ht Ari Weinberg). The company issued a press release trumpeting a “great discovery” and its stock popped 50%. But the release smells fishy…

“The most important find in Dominican waters since the discovery of Captain Kidd’s ship Quedagh Merchant in 2007,” states Wilfredo Feliz, Director of the Dominican Republic Ministry of Culture Sub-aquatic Patrimony Office…

Have there been many “finds” in Dominican waters since 2007?

“Treasure pieces were of incalculable historical value,” according to a news story in Underwater Times.

Incalculable “historical” value, eh? What about monetary value?

Clicking through to the Underwater Times article — no doubt the paper of record on such matters — we find an inventory of what was found: a bell made in 1693; navigation compasses and plumb lines for measuring depth; silver coins, silverware; a pistol, sword sheaths, sword handles and other military items; ornaments and several jewels, notably a ring set with eight diamonds; plates with makers’ marks (castles, lions and fleurs-de-lis); bronze candlesticks; a device for measuring the ship’s speed in knots

Some silver coins and a ring set with 8 diamonds doesn’t sound like much of a haul.

A deeper dive suggests this company isn’t in good shape. They’ve generated $0 dollars of revenue since inception in 2007. They owe $3.4 million. And accounts payable are 3x cash-on-hand. Naturally their auditor — a Mr. Ronald Chadwick based in Aurora, CO — has issued a going concern warning.

The two insiders, Paul Enright and the almost-perfectly-named Robert L. Stevens, have been selling stock non-stop since investing $1 million each in May according to ThomsonOne.

Lots of other fishiness about the company. Their name is plagiarized borrowed from their larger, more successful competitor Odyssey Marine Exploration. Also, as they must be short of treasure maps, they ran a “treasure hunter challenge” on their site. To “win” the competition, entrants would provide map coordinates, which become MEXP’s property upon submission. Winners are entitled to 5% of the recovery value of whatever is found.

One wonders how they maintain a market cap of $20.5 million and whether Stevens and Enright sold a bunch of stock after it popped on the news of this “find.” Not that I’d want SEC to waste their time on this.

The company didn’t return phone calls.

Lunchtime Links 1-12

Jan 12, 2010 17:53 UTC

China surprises with bank reserve hike (Xin/Rabinovith, Reuters) The Fed could learn something from the PBOC. This sudden move to tighten bank lending maintains the PBOC’s reputation for acting without warning. If the Fed had a similar rep, U.S. lenders wouldn’t be so cavalier taking interest rate risk.

Special bankruptcy court for banks mulled in Senate (Younglai, Reuters) Interesting proposal for Dodd’s Senate financial reform bill. Can’t really comment until details are made available.

Citi unit grows — with Fed’s help (Enrich, WSJ) The fact that Citi subsidiary GTS is so important to the global financial system — and that its failure would be disastrous — is a good argument that regulators should find a way to wind it down…

Obama weighs tax on banks to cut deficit (Calmes, NYT) No details here either, but I expect whatever is proposed to pass, as the proposal will come not long after banks announce bonuses. Plan would raise as much as $120 billion. Taking money away from the financial sector, including its customers, is a necessary step towards de-leveraging the economy.

Devaluation sparks chaos in Caracas (Lyons/Crowe, WSJ)

Single stock dividend futures launched (Hedgeweek, ht Nick Gogerty) Not sure what the value of these is, but Nick points out that the leverage available to those trading futures means someone in need of a trading fix will get it…

Mark McGwire admits using steroids (ESPN) He cries a lot, complains of the pressure he was under and the difficulty of a 162 game schedule.

At a mighty 104, gone while still going strong (Fernandez/Schmidt, NYT)

Expense reports (Dilbert)

You played the joker too, right?

jack

COMMENT

Jack is NOT amused. LOL!

Posted by EF | Report as abusive

Yield curve can’t drive profits if banks won’t lend

Jan 11, 2010 20:41 UTC

A steep yield curve should mean fat profits for banks. It hasn’t.

Unable to find qualified borrowers and worried that interest rates have nowhere to go but up, banks are stockpiling cash and securities while letting loans dwindle. It turns out banks won’t lend till rates rise. The trouble is, if rates rise their capital will take another hit, leaving them little to support new lending.

The yield curve is a proxy for the difference between short-term rates at which banks borrow and long-term rates at which they lend. In theory, a “steeper” curve means a wider profit margin.

As the following chart shows, bank profit margins aren’t keeping pace with the steepness of the curve.

(Click here to enlarge chart in new window)

NIMs

Why not? One issue is that banks aren’t lending. You can’t make money borrowing short if you’re not willing to lend long. Indeed, banks are shrinking their loan books while socking away cash:

(Click here to enlarge chart in new window)

loans-cash

Why do this?

Cash is more liquid than loans, of course, so higher balances protect banks from the volatility of credit markets. Also, it prepares them for stricter liquidity requirements coming from regulators.

The fall in lending is more controversial, but banks are absolutely right to be curtailing loans. One reason, 10% unemployment means a dearth of credit-worthy borrowers. Another important one: Rates have nowhere to go but up.

A bank originating a new 30-year mortgage at 5.3% is taking significant interest rate risk. Remember, the bank has to borrow short to fund the mortgage, by selling CDs for instance. One year CDs average 1.6% according to Bankrate. Because rates can’t go lower, deposits are likely to get more expensive over the 30-year life of the mortgage. What looks like a healthy interest rate spread today (5.3% – 1.6% = 3.7%) is going to tighten.

The risk involved in originating new mortgages is a big reason the vast majority are now purchased or backed by Fannie, Freddie or FHA.

Instead of loans, banks have been plowing assets into more liquid securities according to Paul Miller of FBR Research. But as credit markets have healed, the interest rate spread on these assets have also come down, limiting profit potential.*

When will banks lend again? Miller argues that “for any meaningful margin expansion…the Fed needs to raise rates.”

The yield curve may be steep, but it’s steep at low rates. Banks can’t capture the whole spread because they have to pay significantly more for deposits than the Fed funds rate of 0-0.25%. To make money, banks need to lend at higher rates.

Also many carry floating assets – credit card and corporate loans, ARMs – that key off indices like LIBOR. A Fed hike would instantly improve their yield.

Trouble is higher rates mean lower real estate prices and higher default rates, which will continue to bleed bank capital. It’s a troubling paradox: Banks can’t make money on new lending without higher rates, but higher rates will increase credit losses on old legacy loans. It’s another reason the Fed is stuck.

———–

*Last week regulators issued a warning to banks about interest rate risk, their first since 1996. It’s likely the warning stems from regulator concerns over banks’ holdings of securities.
COMMENT

I actually think it is 180 degrees opposite. The steep yield curve IS the reason banks aren’t lending.

The quote listed “Instead of loans, banks have been plowing assets into more liquid securities according to Paul Miller of FBR Research” is accurate.

Why would a bank lend to a “risky” borrower when they can throw their cash in a 2 year Treasury note with a 100 bps higher yield then their cost of capital (i.e. 0%)? Add in a spread on high quality credit and they are printing money without taking on hardly any risk.

Lunchtime Links 1-11

Jan 11, 2010 15:41 UTC

Shoddy tayloring (George Cooper) The author of my favorite book on the financial crisis now has a blog. His first post tears down Bernanke’s recent speech absolving his/Greenspan’s easy money policies for inflating housing bubble. It’s a bit technical, but very good.

Venezuelan devaluation helps Chavez, for others it’s unclear (Molinski/Crowe, DJN) Speaking to economist Steve Hanke last month about North Korea’s devaluation, he predicted that Venezuela would be next. His thoughts today: “Venezuela is in a death spiral. There will be more bad news.”

Hank Greenberg’s self-serving, off-base salvo at Goldman (NakedCapitalism) Smith writes a great take-down of the Greenberg’s “interview” in Saturday’s WSJ.

Banks prepare for big bonuses, and public wrath (Story/Dash, NYT) The writers estimate that Goldman’s pay will average $595k, and JP Morgan Chase investment bankers will average $463k.

Saint Elizabeth and the Ego Monster (Heilemann/Halperin, New York Mag) We already knew that John Edwards is among the phoniest candidates in recent memory, but this has interesting detail. Turns out Elizabeth’s virtuous image was a “mirage.”

All choices lousy for stadium fix (Brown, Cinci Enquirer) When will taxpayers learn that it’s a losing bet to subsidize stadiums? A former professor of mine, Allen Sanderson at UofC, has argued cogently that subsidizing stadium construction is a bad investment.

Dubai’s first foreclosure may open floodgates in world’s worst market (Fattah, Bloomberg)

America slides deeper into depression as Wall St. revels (Evans Pritchard, Telegraph)

Toxic corn (biolsci.org) If I’m reading this right, it says three varieties of Monstanto genetically-modified corn are harmful to your health…

Childproof drawer…

COMMENT

Moin from Germany,

excellent find The Cynical Economist.

I have seen this just last week on Arte and have asked myself if this kind of BLOCKBUSTER DOCUMENTARY will it ever make into the news ( MSM ) in the US…..

I think i know the answer….. ;-)

CFPA can’t arrive fast enough for the elderly

Jan 9, 2010 19:20 UTC

Odd that AARP is only just now throwing its support behind the proposed Consumer Financial Protection Agency, after the House watered down many key provisions in its reform bill. WSJ’s Michael Crittenden reports that the lobby group for retirees wrote a letter to Senators Dodd and Shelby of the Senate Banking Committee which said:

When seniors are defrauded or otherwise taken advantage of, the results are particularly devastating since they gernerally are beyond or near the end of their earning years. (no link)

Too true.

The elderly are great targets for financial scam artists. The creeping fog of dementia is the obvious reason.

Less obvious is how many elderly fall victim simply because they’re lonely. In 2007, the NYT reported the poignant case of 92-year-old Richard Guthrie, whose name was sold to scam artists by a telemarketing firm:

”I loved getting those calls. Since my wife passed away, I don’t have many people to talk with. I didn’t even know they were stealing from me until everything was gone.”

Another reminder comes from a must-read article in yesterday’s Times about an elderly woman in California who was sold progressively filthier mortgage products by Herb and Marion Sandler’s World Savings, now a unit of Wells Fargo. “Elder abuse” and “predatory lending” are the key descriptive phrases and they are absolutely correct.

The same article quotes an AARP study saying 70% of the nation’s elderly have been solicited to take out a new mortgage in recent years. These are the kinds of folks who probably paid off their mortgage years ago and now own their house free and clear. Letting them take cash out can seem a good way to help make ends meet, but it can also be a fast-track to foreclosure and homelessness.

The problem is that many elderly aren’t capable of making a rational decision because they don’t understand the financial products they’re being sold. Hell, folks with all their faculties don’t understand option ARMs. The salesmen/mortgage brokers didn’t understand the products either, but they didn’t care, since they get paid by the volume of loans originated.

It seems obvious that AARP would throw its considerable weight behind a strong CFPA that can act as an FDA for financial products. But why now?

The House Financial Services Committee already gutted many of the key features of the CFPA in its reform bill. Among other things, the requirement for “plain vanilla” products was dropped. And dealer-based auto lenders won a big loophole. Rep Ed Perlmutter did his darndest to water-down the bill, and was bought for only a few thousand bucks by the financial lobby. Could AARP have bought his support?

Bankers celebrated, since some were worried they wouldn’t be able to sell balloon-note loan terms to high risk or low income customers, for instance.

Well, thank goodness for that. Wouldn’t want to take a meal ticket away from folks selling confusing, dangerous financial products.

Update: Previously this post was titled “…for the baby boom” instead of “…for the elderly,” but reader Dorothy H. makes a very good point that senility is still a long way off for the boomers!

COMMENT

You are 100% correct in calling the ARM loans sold to many by World Savings as FILTHY Mortgage products. Not to sure that I agree with you that the brokers selling these loans for/with the bank didn’t understand them, although I will agree that most probably didn’t care. They were making money hand over fist,from the front end to the back. Why would the majority of them concern themselves with quality or integrity when they could line their pockets so easily?

Posted by Carolina Bagnarol | Report as abusive

Bank failure Friday

Jan 9, 2010 16:25 UTC

Only one failure last night (the first of the new year and the first since the week before Christmas).

#1

  • Failed bank: Horizon Bank, Bellingham WA
  • Acquiring bank: Washington Federal S&L, Seattle WA
  • Vitals: assets of $1.3 billion, deposits of $1.1 billion
  • Estimated DIF damage: $539m (loss rate 41% of assets)
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