Skip to comments.Don't Bank on It
Posted on 01/23/2011 10:53:49 AM PST by FromLori
Disappointing earnings, shrinking revenues and optimism that somehow the economy is improving despite an ongoing housing hangover -- this is what America's biggest banks offered as they released year-end financial results last week.
"Last year was a necessary repair and rebuilding year," Bank of America CEO Brian Moynihan said Friday.
Yes, we know. The shards of our broken economy remain scattered on the ground and we're gluing them back together. What else could Mr. Moynihan say as he announced a 2010 loss of $2.2 billion?
"We enter 2011...against a backdrop of an improving economy," he said. But then he qualified: "Full economic recovery depends on housing-market stability."
And until we can return to housing-market stability, banks can borrow for next to nothing and lend at rates once charged only by Mafia loan sharks.
Banks enjoy guarantees not to fail unless the U.S. government goes down with them. They remain more or less free from regulations that might significantly curb their reckless risk-taking. And they continue to pay their executives better than rock stars or baseball players.
Yet given all these advantages, a spotty financial performance is the best they can do?
We jacked the national debt to almost $14 trillion to avert a Great Depression that the banks nearly caused.
(Excerpt) Read more at online.wsj.com ...
The banks did their part because they were pressured under the Community Reinvestment Act (by Congress and community organizers) to lend to borrowers who could not repay. Even a child knows such a system is doomed.
The free market system was injected with a huge infusion of socialism...and all we are left with is another example as to why socialism doesn't work.
But not to worry, after the foxes raided the hen house and killed all the hens...our country was stupid enough to elect the most "audacious" fox president.
If drastic action is not forthcoming shortly, our "goose" is cooked too.
Actually the CRA was a very small part of the problem. The Banks invented and sold these defective loans world wide out of nothing but sheer greed.
Those same too big to fail Bankers also donated to obama and acorn and our Fed knew six months before we were let in on the secret that they crashed the world’s economy. Those same big banks got a two fer they got to wipe out a lot of their competition our small American conservative banks.
They should have been allowed to fail that’s what capitalism is all about. Instead we bailed out obama’s backers I have no sympathy for those big banks what so ever.
For instance Ireland’s whole problem is the banks.
Irelands Fate Tied to Doomed Banks
Up to 50 billionnearly $50,000 for every household in the Emerald Isle.
But unlike Greece, Ireland is a relatively wealthy country, with per capita GDP of nearly $38,000. Thats 21 percent higher than per capita GDP in Greece, and in the top third for European countries. Low corporate tax rates and a skilled workforce have made Ireland a haven for some of the worlds biggest companies. And its public debt, about 65 percent of GDP, is far below Greeces crushing load, which is 126 percent of GDP. Irelands debt levels are even lower than those in France, Germany and the United Kingdom.
A failed banking sector that Irelands government can no longer rescue on its own. Ireland is in the midst of a real estate bust that could trump even the ruinous downturns that turned parts of southern California and Nevada into suburban ghost towns, with home-grown banks stoking it all. Now, those banks are trying to manage catastrophic losses. The Irish government has effectively nationalized the nations biggest banks by guaranteeing their debt, which would be akin to the U.S. government taking over Citigroup, Bank of America, J.P. Morgan Chase and Wells Fargo.
That means the Irish government is also on the hook for the losses those banks endurewhich have risen far beyond initial estimates, and may have a lot farther to go. So far, the Irish government is obligated to cover losses amounting to 175 percent of Irish GDP
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Greed is inherent in all human activity.
The problem as I see it was that when the banks packaged their loans, the institutions which bought them did not properly evaluate the pools to uncover the bad loans and the bad lending practices which produced them.
And as part of this entire process, fold in Freddie and Fannie.
I disagree that the problem is greed...because what is greed but self-interest where individual conscience has been confused or obscured.
It may all be a mess and complex derivatives may have played a large part in permitting the sale of bad loans, but ultimately it all goes back to the CRA and Freddie and Fannie and the muddying of the lending business by government interference.
BTW, Europe is another matter...and their problems are not unrelated to the influence of socialism and the unions.
That said, the growing complexities of the industry and the ignorant acceptance by buyers of shoddy lending products (including credit default swaps) did their part to contribute.
As a retired investment banker, I would tend to agree that there is a lack of exercise of conscience, but I have never known conscience to be the glue that held together business of any kind...it is the customers who must demand quality, not government or the manufacturers or sellers. It is up to a buyer to make sure that he is getting a good product. It the buyer is negligent, there will always be some con man to provide a pig-in-a-poke.
Absolutely...all we did was encourage incompetence and failure.
And how about investors being sold MBS’s that were rated as AAA by the banks? Tough luck then they should have checked the thousands of loans individually instead of believing the con men at the banks is that what you mean?
Then the banks get bailed out but not the investors sweet deal for those connected and that’s what banana republics do. If it was just Caveat emptor why are the NY Fed, Pimco, Blackrock, Allstate, MBIA, Fannie/Freddie all suing the banks? Surely they should have known better.
Fannie/Freddie were not nationalized until after the melt down and now they are just being used as another way to bail out the banks with our tax dollars.
Statistics prove BTW that the CRA had little to do with the housing meltdown it was the sub prime loans the liar loans that caused the crisis. Those were invented by the banks who gave up good safe lending practices that had served our nation well for years. As such they should have eaten the losses just like they ate the profits.
As I said they did this globally. Look at Ireland they were doing fine until their politicians tried to force them to pay for all the bankers greed. The CRA had no influence there.
Unlimited credit for GSEs seen as backdoor bailout
“The very best its million-dollar executives can do is claw back a penny on each bubbly subprime dollar?”
The banks don't rate their own mortgage pools or their own credits, do they?
And rather than check the thousands of mortgages or believe the con men...don't investors have the option of just walking away.
Surely you aren't suggesting that they MUST invest in these MBS's.
And an idiot institution that would invest in subprime loans deserves what it gets...but it is their responsibility to perform due diligence. The buyers, not the seller, are negligent and have violated their fiduciary responsibilities to their investors.
I don't actually let the sellers off the hook, but their liability ends when they obey the securities laws and accurately disclose what they know about what they are selling.
The rating agencies don’t rate products for free. They get paid for their evaluation by the banks. So the ratings agency’s were working for the banks.
“Historically, investors had paid them for their ratings, which helped ensure accuracy. If an agency was wrong too often then customers would buy ratings from one of its competitors instead. But in the early 1970s, all the agencies switched to a model in which the bond issuer paid for the rating. This created an enormous conflict of interest because the issuer always wants the best rating possible and can take its business elsewhere if it doesnt get the rating it wants.”
Banks Pressured Credit Agencies, Then Blamed Them
“Executives from S&P and Moody’s (MCO) acknowledged during the hearing that investment banks shop around for the best rating. Some agreed that ultimately, it’s the investment banks that are their clients, not the investors who end up with the securities.”
There is an implicit incentive for rating agencies to pass out high ratings in order to get repeat business from the banks.
No I’m not saying they MUST invest in MBS’s what I am saying is they were CONNED into believing they were buying AAA by the banks.
There was a time when they were perhaps less sensitive to pressure, but they have always been a systemic problem in my mind.
A larger problem in my mind is the increasing pressure for short term results by lenders and investment banks. As financial institutions reward their managers and professionals more and more on immediate results, there is an ever increasing pressure on the part of all to make the big deal ASAP. If the financial institutions lose big next year, that is a problem for their shareholders not their managers and bankers. The managers and bankers will already have pocketed millions and may have fled the scene of the crime.
All this leads the bankers and managers to ramp up the risk/reward continuum as far as they can, then take the rewards and leave the risks with their employers. If the sh!t hits the fan, they simply find a new job.
This immediate payout scenario seems to have caught on around the world.
They don’t even have to leave the scene of the crime the Fed will see to it that the TBTF’s are kept in business (another sore spot for me since so many of the smaller conservative banks were wiped out).
Now they don’t even have to ask the Treasury for money in the future since the Fed invented a new accounting gimmick they can simply dump the debt off the Feds own balance sheet and onto that of the Treasury.
Like that ~ $2.2 Trillion in mortgage backed securities that the Fed took as collateral for “loans” to Wall Street.
Fed Balance Sheet Hits Record $2.2 Trillion In Assets On $71 Billion Weekly Increase In MBS
They’re worth what now, maybe 50% of their face value, tops?
In addition unemployment and foreclosures are going one way - up.
Which means the value of the mortgages go down.
But that’s not a problem now, because Bernanke will just sneak up to the Treasury and stuff the bill for the losses unto the taxpayers directly rather then continuing to use Fannie/Freddie to bail out the banks.
So you and I our children/grandchildren can labor as slaves for the leisure of the banking and government class, until we die.
Have you ever read a CDO product offering? I mean, really read it?
Even if you have the sort of advanced math that I’ve had from doing signal processing classes as part of an EE degree, the math in some of these securities is deliberately obscuring the details. Huge statistical hand-waving went on inside some of these securities. After I finally ground my way through one of these beastly things, I had to come up for air (it took me like a week of evenings...) and ask “Who in the hell is actually READING these things? There cannot be anyone who is buying these things who is actually performing for-real due diligence!”
They’re just too complicated. Most straight bond offerings aren’t particularly thrilling readings like some bodice-ripping romance novel, but one can nut out the real risk factors therein if a person applies themselves to grinding through it. The CDO circular I got into was a masterful job of “if you can’t dazzle them with brilliance, baffle them with BS!” that used to be the province of academics. Huge statistical assumptions were made... without any foundation in actual facts of real estate markets.
That was in early 2007. From that, and some of the personal information I gathered walking around real estate developments in Reno, NV later that year, I concluded we were going to be in a world of hurt. I was estimating a 25% fall in housing prices. Obviously, I was wrong and misunderestimated the ultimate depth of the decline.
What I found was people who knew nothing about real estate cycles were buying one house to live in, and a second next to them (or two houses on either side of them) with IO loans for pure spec on housing prices. I asked if they were supposed to occupy the houses, but the people got real dodgy on answering that question most of the time. Wanted to know who _I_ was, why was I asking these questions, etc. From that, I can conclude that there was mortgage fraud going on all over some of these developments. Not the “organized crime” type of mortgage fraud the FBI seems to be going after, but the “Mr. Jones telling a little white lie” kind of fraud, where someone buying a house next door lied to the mortgage broker about living in the house. The broker, who wanted his/her fees and paycheck, goes along with the fraud. By the time the note is sold the first time, hey, no one is verifying any of the loan origination data. The securitization of this crap then completely obscures the facts on the ground as to loan quality.
The result was that the market buyers fell back upon the ratings of the government recognized credit rating agencies (S&P, Moodys & Fitch’s), who put gold-plated ratings on paper built on top of crap. Why did they do this? In part because the bankers were paying for the ratings, in part because the ratings agencies didn’t have the math background to really pull apart the security overlay from the bogus paper underneath. And none of the ratings agencies verified any of the collateral issues that are now appearing in courts across the US WRT MERS and assignments. I suppose that’s probably not the job of the ratings agencies, but still - someone should be verifying that the collateral is, you know, actual and factual.
Then there’s the issue of complete laziness on the part of many investors to get dirty and look into what they’re buying. We owned only about a quarter-mil+ of RMBS and banking stock, but that was enough for me to want to drive through new developments when I had spare time and poke my nose around.
Banks that owned billions or tens of billions? Feh. They could not be bothered to actually send someone out on the ground and ask “Hey, who is actually buying all these houses in Vegas and Reno? Because we’re not seeing enough new registrations of cars to track with the sales of houses... we’re not seeing enough retail sales taxes in these counties to jibe with an actual increase in population to fill all these houses.” Nevada realtors kept claiming that they were the “fastest growing state” umpteen years in a row... but if you were there in person and started looking around, you saw a LOT of things that simply did not add up.
Cost of an investment bank to send out a couple of young turks with per diems and a rental car to poke their noses around? Chump change. Hell, even if the banks allowed the youngsters to stay every night at a whorehouse, they would have come away far better off than they did with their hands-off approach.
If I have to stab down my finger upon the whole financial landscape of the last 20 years and say “They should take the majority of the blame” I’ll be pointing at the three large ratings agencies. Why? Because they’re the fall-back for most bad credit investing decisions: “Well, I can’t be held to account, because after all, S&P rated it AAA!” S&P then hides behind the FIrst Amendment, in effect saying “Well, we can say anything, and you can’t hold us liable because that might stifle our freedom of speech!”
This has to stop. If we take the three ratings agencies out of the picture, then investors must either do their own homework, or the market will accord ratings to debt via alternatives like a CDS market on the paper vs. underlying debt classes. The CDS market will have to define what a “credit event” is for the state muni bond (because right now, there is no “bk” event, as there is for corporate paper), and these will probably include things like late payments and restructuring. Still, if we have a fair and open market in credit insurance on muni paper, that provides the buyer of that paper with some indication of what the market thinks of the risk on that paper going forward.
The brutal truth is that the ratings being stamped on all manner of debt by these ratings agencies are just nonsense in the extreme. I don’t care if we’re talking muni, corporate or government paper now. Caveat emptor should be the rule of the day, and either we get rid of these poor excuses for partners in fraud, or we make them liable for their ratings. The latter course of action might make them respond to things like CDO’s by saying “We can’t actually determine what the credit quality is here, it is simply too complicated to model...” which would say a lot to the market as well...
Freddie/Fannie: I completely agree they’re a part of the problem. But from the defaults in the higher credit quality conforming loan market, I have to say that CRA just doesn’t ring true as a primary cause of the size and scope of this melt-down. If we want to talk about only the sub-prime markets and in only some of the markets previously red-lined, OK, I’m on board with that small segment. When I look around Reno and Vegas now, tho, those weren’t houses being sold on CRA-induced loans.
The Fed didn't take $2.2 trillion in MBS as collateral.
Fed Balance Sheet Hits Record $2.2 Trillion In Assets On $71 Billion Weekly Increase In MBS
Theyre worth what now, maybe 50% of their face value, tops?
Maybe more than par. Like I showed you already.