Tag Archives: Bank

The Great Bailout Debate.

The great bailout debate.

Tim Geithner, claims that bank bailouts were a critical part of getting the economy running again, while Neil Barofsky, says the Obama administration should have spent more time bailing out underwater homeowners who were crushed by the housing bust. Who’s right?

Well, like it or not, the banks had to be bailed out, the same way you’d bail out electrical utilities rather than let everyone go without electricity. They’re just too important to the rest of the economy. They clearly should have been more punitive but frankly, given the speed at which the tide rose back in the closing chapter of the Bush administration, there wasn’t time to structure anything. Morally right or wrong, we needed to spend a ton of money to rescue the banks, and stop the bleeding. Did they do what anyone would do if someone handed over a bag of money? Of course they did.

On the other hand, Mr. Barofsky makes a good point: consumer debt overhang has been hobbling the recovery ever since 2008, and it’s outrageous that so little money was spent rescuing consumers right along with the bankers. Obama should have pushed a lot harder for “cram down” legislation; Fannie and Freddie should have been enlisted to rewrite mortgages; money should have been airlifted into consumer pockets, either to spend or to pay down debt; and schemes should have been set up for homeowners who were too far gone, that allowed them to rent their homes back from the banks that foreclosed on them. In fact, my earlier proposal was and still is, force the banks to re-finance all mortgages at current assessed market values without owner qualification.

So, they are both right, but neither of them can get us out of this mess. The only way we are going to start this thing up again is for the US Government to force banks to open their credit spigots, ignore strategic mortgage defaults, start loaning money to sub-700’s again, and re-write all of the existing mortgages, essentially marking them to market (lovely irony here).

And we need to do this before Europe crashes and burns next year. How? We have leverage. What do the banks want more than anything? Where is their greatest source of potential profit? Investment banking. We make a devil’s bargain. The banks come to the credit and mortgage table, and the Government lets them continue to operate as a single entity, with commercial and investment combined.

We stop talking about Glass-Steagall, and we stop threatening to regulate derivatives. The banks open their checkbooks to small business, and they re-write all of the underwater mortgages. That stops the bleeding in housing, jump-starts the small-ball economy, and boosts consumer confidence.

Short of such a drastic measure, we head into 2013, sailing a doomed ship following a doomed course on a fatal journey into the abyss. 


New Peer-to-peer Lender Enters Space.

RainFin: latest entry into peer-to-peer lending – but, in South Africa.

RainFin intends to disrupt South Africa’s financial services sector by allowing credit-worthy South Africans to engage in peer-to-peer lending, cutting out banks in the process and offering higher returns to lenders and better interest rates to borrowers.

Sean Emery, cofounder and CEO of RainFin, says the company’s online platform links people who need to borrow money with people who have money to lend. He says borrowers can access funds at lower interest rates and with better terms and conditions than they could through a bank.

Emery says borrowers may be able to get interest rates as low as half of those offered by traditional banks. Lenders, meanwhile, can achieve “superior returns” on money they loan to others. He calls it “social lending”, and it fits well with American models that are rolling out this year, in advance of the JOBS act and attendant CrowdFunding bill, though Emery contends social-lending is different.

Lending is making the wrong people rich and the wrong people poor,” says Emery. There’s an important distinction between “CrowdFunding” and “social lending”, he says. The latter is a subset of the former and sees a group of people engaging in transactions while sidestepping traditional intermediaries rather than pooling resources to create a product or fund an event.

In order to use RainFin, consumers must be older than 18 and resident in South Africa. The site employs a thorough credit vetting process, after which borrowers can apply for loans of between R1 000 ($123 US) and R75000 ($9,191 US) using the RainFin marketplace.

These are small, short-term loans. Borrowers can specify the loan amount, the maximum interest they are willing to pay and the loan duration they prefer. The maximum repayment period is one year.

Individual lenders, meanwhile, can invest between R100 ($12 US) and R500000 ($61.275 US) in the service and spread it across numerous loans. Investors are not obliged to lend to groups or individuals, and have access to anonymous credit risk information based on factors such as age, gender, location and credit score.

RainFin earns a percentage-based transactional fee on every loan that takes place. Emery says this makes the costs of the platform “completely transparent” to its users. There is a 2% origination fee charged to the borrower and a 1% fee to lender for managing the transaction. Thus, the service takes 3% of a transaction’s value, added to it.

“We believe that consumers have an opportunity to take back some of the power they have given to banks, benefitting each other rather than large institutions in the process.”

Emery says RainFin intends to add other products to its offering, including financing for small and medium-sized businesses and mortgages in coming months.

The service is aimed at two types of borrowers. The first are highly creditworthy borrowers who want a better return on investment than they get currently.

The second is the first-time borrower or a borrower that is shunned by the formal banking sector because of their age — whether too young or too old — or because they are freelancers, students or entrepreneurs.

At launch, the service is designed to handle up to 100,000 users. Emery says there are no plans to launch the service outside South Africa on account of the banking regulation complexities that it would entail. The service doesn’t require a banking license because it doesn’t take deposits.

“In the same way a real estate agent isn’t a bank, we aren’t either. We don’t take deposits and reinvest them for profit; we merely facilitate the moving of money between people,” says Emery.

Co-founder Hannes van der Merwe says RainFin is not a micro-lender. “We are not trying to extract as much money out of you as we can.” He says one of the challenges the service faced was designing a process that would allow users to engage in a legally binding contract online.

Lenders stipulate the interest rate they are prepared to accept and, in the case of two or more lenders offering the same rate, the first to bid on a loan request wins it. The service warns lenders if it appears a lender is taking on too much of a loan and inadequately spreading their risk on the service.

Van der Merwe says lenders can be kept up to date on new loans coming into the marketplace via Web feeds. Alternatively, the service includes an automatic “bid agent” that will bid on loans that meet specific criteria or notify the lender via e-mail.

Emery says the bulk of the service’s marketing will be done online, as that is where its audience is. “We are focused on using the mediums in which we operate so online, mobile and social networks to start with,” he says.

RainFin is funded by SA capital and went live on Tuesday.

Obama Goes All Firefighter.

As much as I would like to write about all of the other crazy things that are going on, the European banking thing is the gift that keeps on giving.

Now of course, the Obama administration is stepping up efforts to push Europe to deal with this debt crisis, so that he won’t have to just 5 months prior to the election. Actually, what he is trying to avoid is dealing with the pressures on the US banking system as they build to a crescendo more like 3 months prior to the election.

If the clowns in the Romney camp had any brains, they would be building a huge media plan focused on “How Obama got us into this mess.”

So, hoping to avoid a similar disaster to 2008, the administration is holding private meetings, urging officials in the 17-nation euro zone to take swifter action to calm markets, reassure depositors about their banks’ health, and prevent some of Europe’s largest countries from suffocating under high borrowing costs and weak economic growth.

They think that the lessons learned from the 2008 financial crisis includes acting quickly and decisively to stabilize the financial system and prevent investor panic.

As an example, the administration wants Europe to use the continent’s rescue fund— now around €700 billion ($866 billion)—to provide assistance to governments struggling with soaring borrowing costs. Allowing the rescue fund to directly recapitalize banks, instead of forcing the struggling governments to borrow first from the rescue fund, would help prevent bank failures and enable the banks to continue lending, which would help support economic growth, the officials believe. Under this approach, the governments wouldn’t have to boost their own debt loads by borrowing from the fund.

How this works, by the way, is that the U.S. yells directly at the International Monetary Fund, in which it is the largest shareholder. The IMF has been urging Europe to use the rescue fund for that purpose, but the idea is opposed by Germany because they rightfully fear they will be left holding a huge bag of defaults.

The administration has also pushed Europe to build a larger rescue fund, or so-called firewall, believing a bigger war chest would ease investors’ concerns about governments beyond long-troubled Greece. But, that won’t work this time as investors are now much more cynical than they were in 2007, and they no longer trust governments to get their bailouts right.

And, to further complicate the situation, (as we have faithfully reported here) risks are rising that the financial turbulence in Spain—Europe’s fourth-largest economy—could deepen even before Greek voters go to the polls in two weeks to decide their fate in the currency union.

On Wednesday, Mr. Obama and leaders from Germany, France and Italy held an hour-long videoconference to discuss the euro-zone crisis, following up on a meeting of the Group of Eight major advanced economies hosted by the White House just one week ago.

These meetings were planned before Spain’s borrowing costs shot up this week. But they underscored the administration’s rising worry about how the euro-zone crisis could drag down the weak U.S. recovery for the third straight spring.

In a Gallup poll released Thursday, 71% of Americans said they are at least somewhat concerned about the effect of the European financial crisis, but only 16% said they understood the danger to the US markets . The data suggested worries could rise as the troubles weighed on U.S. markets and gained more attention in the U.S. Among the 16% of people who said they are paying very close attention to the news about Europe’s financial situation, 95% said they are concerned. Unfortunately, that still means only 15% of the US population is concerned about this very serious and impossibly huge disaster waiting just off-shore.

What those 15% fear is that a cascading crisis across the European banking system, triggered by Spain, or Greece, or another unseen banking revelation, could cross the Atlantic and hit the U.S. financial system. As we said in a prior post, we have a $39 billion KNOWN exposure to the European banks. Almost any result imaginable will translate into less business investment and hiring and less bank lending, triggering yet another, and deeper recession.

I love him, but this one will belong exclusively to Obama. Better act NOW.

This Might Freak You Out.

Happy Easter or Passover or whichever holiday you choose to celebrate today.

For those of you who have been following my blog for the past 4 months, you have probably gotten the impression that I am pessimistic about our future, and that I am cynical about the persistence of the human condition. I have harped on the coming financial crisis in Europe and how it will impact the US, and I have bitched about the free ride that banks have gotten from this administration. I constantly remind you all that Greece is headed for a massive loan default, a huge and ugly political uprising and an unstructured and messy departure from the European Union, most probably followed soon thereafter by Spain, Ireland, Portugal and Italy.

You all know how I feel about the disappearance of the middle class in this country and the dangers of such a dramatic consolidation of wealth among a very few and a collateral consolidation of poverty among a growing third, soon to be half of the country. I carp about the Republican platform moving to exacerbate the problem by lowering taxes on the wealthy while rolling back education, health care and social programs. All of this is true, yet I am NOT a pessimist, nor am I cynical about the inevitability of the human response to crisis. I am actually an optimist, and I always have been, preferring to see the glass as half full as opposed to half empty, and instead of simply pointing out the problems, I have always tried to point out the solutions.

One of you asked me, if I am always wringing my hands over the future of America amid an almost complete vacuum of leadership, what practical, workable things I would do differently to change the direction this country is headed, and to prepare for and guard against some of the speed bumps and outright disasters that await us should we stay the current course. OK, since you asked, here it is:

1. Congress. Work a full year. Either vote to make your health care and pension plan law for everyone else, or vote yourselves into private health care plans and a non-matching 401(k). Pay for your own transportation to and from work. Reduce your staff to twenty people, and pay them market wages. Make all Congressional and employee perks competitive to private industry.

Pass the following laws effective immediately: a) Crowdfunding, without SEC restrictions. This will create jobs. b) Banks must within 30 days, re-structure all home  mortgages to real-estate appraised market values, no exceptions. This will be grandfathered as a condition of the earlier bailout. The effect of this law will stabilize the housing market. c) Pass an emergency Banking law that gives homeowners who have been un-employed for 6 months or longer a free ride on their mortgage payments for an additional 12 months, and do not accrue those carry costs onto their existing mortgages; in short, the Banks eat the difference, further stabilizing the housing market. d) All banks who have foreclosed and now own REO properties must keep those properties on their books for a period of 5 years, and will not be allowed to bring those homes to market during that period but must maintain them in sell-able condition, but without sales signs in the yards, and without MLS listings. This shift in mortgage risk will result in the proper distribution among the two parties who have taken the risk of an ever rising housing market, and will completely stabilize the housing market.

e) Pass another emergency Banking law which restricts investment in European banks and Sovereign bonds and requires US banks to withdraw their positions in European banks and Sovereign bonds to 10% of all foreign holdings. This will mitigate the impact of Eurozone failures and defaults on US banks. f) Re-enact a version of the Glass-Steagall Act, restricting US commercial banks from investment banking, and break up the current US banks within a 90 day period, restricting derivative trading to it’s purest form and disallowing exotic contracts to be traded under the guise of derivatives. This is a lot easier to do than it appears and it will greatly reduce volatility in the markets. g) Raise taxes 6% on those earning over $250,000 per year, and 10% on those earning over $1,000,000 per year. h) Reduce the capital gains tax to 10%.

h) Eliminate all subsidies for Oil companies and Industrial farms. i) Repeal the Citizens United ruling. j) Freeze existing lobbyists and restrict lobbying spending to $1,000,000 per firm. k) Pass an emergency job-funding bill that invests $200 Billion in infrastructure construction projects administered by the Federal, not the State government. l) Repeal No Child Left Behind and re-direct that money into teaching, arts, music, science and sports. m) Sponsor a National Program equivalent in funding to putting a man on the moon in today’s dollars, that has a goal of getting America to the number one position in Reading, math and Science across all grade levels within 5 years, and create ridiculous rewards for students and teachers who achieve those goals. n) Reduce the number of Federal cabinets and Agencies to 500, and fully pension all of those people whose jobs will be eliminated.

o) Eliminate the Federal Energy Management Program and create a single Agency whose only goal is to achieve fossil-fuel independence by 2020, and staff it with proven entrepreneurs who are vested in a ridiculous amount of Federal stock options, so that when they achieve that goal, they will be rewarded just like in real life. p) Nationalize all Police and Fire and create a single intelligence agency while eliminating the CIA and the FBI. q) Cease the prosecution of all wars and withdraw combat troops from current theaters of war, while re-building the VA and re-distributing those funds to veterans hospital care and housing, education and job benefits. r) Pass a law that eliminates filibustering, and requires that every bill that is introduced into Congress be written in plain, 8th grade English and posted on the Web for a period of 60 days with automatic response mechanisms that requires the authors and proponents to respond to every citizen query in person, and the attendant dialogue be required to be appended to the bill prior to allowing a vote by Congress. This may eliminate any bill from being enacted by Congress, other than those emergency bills.

s) Shut down unemployment, and instead write a tax-free check  for $100,000 to everyone who was drawing those benefits and give them one year to prove that they could start a successful business and employ at least one other person. If they succeed, they could draw down additional funding to expand their business. Half may fail, but the other half that succeeds would eliminate unemployment, and it would cost only slightly more than the banking bailout of 2008. Think about it: Eliminate Unemployment!

While I am tempted to suggest that we should create a single cabinet post called Really Smart Guys in a Room and require 2 years of national service from people like Warren Buffet, Bill Gates, Paul Allen, Sharon Stone, James Woods, Robert Reich, Bill Clinton, Marc Andreesen, Vinod Khosla, Joichi Ito, Jonathan Ive, Diego Rodriguez, Michael Arrington, Charlene Li, Marc Benioff, Jack Dorsey, Jim Breyer, Reid Hoffman, Andy Rubin, Sebastien Thrun, Sheryl Sandberg and Rich Rubin, I guess that might be going over the top. I left a bunch of really bright people out, but you get the idea. Let them create the kind of wealth, innovation and prosperity they created in Silicon Valley, but instead of a measly $800 million Venture Fund, they would have access to an $800 Billion Venture Fund. Darn. How cool would it be to get these guys together and tell them they can do anything they want, but just make the world a better place, and don’t forget make us money while your doing it.


Housing Remains Bleak. Cash Buyers Not Helping.

A Merrill-Lynch housing report came out today that said  in November, they forecasted that home prices would fall another 8% from 2Q11 through 1Q13. Since then, the 3Q and 4Q data releases showed actual home prices dropped 3.2% in the second half of 2011, implying another 4-5% decline remained based on the earlier forecast.

More information has come their way since the initial forecast, including favorable developments on the policy front, better economic data and a decline in the supply of homes on the market. They have therefore updated their home price model and believe that prices are bottoming now. However, they continue to believe the recovery will not begin in earnest until 2014.

I have trouble believing that, since there is no mention of the inventory overhang from the 4,000,000 foreclosures going through the process right now, which will essentially more than double the 3,000,000 foreclosures that have been finalized, written off, or are up for sale as REO or short-sale properties. 38% of the National RE transactions in January and February were all cash deals. Indicating that opportunists are buying 4 in 10 homes that are on the market. And, it is not helping the recovery.

And, those all cash buyers are expecting and getting 15-25% discounts in price, further exacerbating  the falling housing prices. If sellers have a choice between selling to an investor for cash or to a buyer who plans to seek a mortgage, the investor is a safer choice, even if that means a lower sale price.  Also, cash buyers can close more quickly, usually in less than 30 days, which is attractive to lenders selling off real-estate-owned properties. Buyers seeking a mortgage usually need 45 to 60 days to close, even when everything goes well. Finally, buyers don’t have to deal with bank-ordered appraisals that come in lower than asking price. In a cash deal, the price is what the buyer and seller agree upon, regardless of appraisal.

In Miami-Dade County, for example, cash sales accounted for 63% of closings in December of 2011.

NAR said a survey of its members showed that 31 percent of Realtors experienced contract failures in February, often because buyers saw their mortgage applications turned down, or because appraisals came in below the negotiated price. That compares with 33 percent reporting contract failures in January, and 9 percent in February 2011. Average sales price fell from $166K to $157K and actual sales rose from 3,787,000 to 4,060,000 comparing February 2001 to February of 2012. If you subtract the all cash deals, you will see an increase of only 2.7%. Hardly robust.

Here’s an example from South Florida reported just yesterday, and you can get a sense of what’s coming: 

Foreclosure activity in the area surged in February as lenders sought to clear a backlog of properties from their books.

Foreclosure petitions — the first step in the process — more than doubled in Bristol County, rising from 68 in February 2011 to 158 last month. Plymouth County petitions jumped 57 percent year over year, increasing from 97 to 152, according to a report released Wednesday by The Warren Group, publisher of Banker & Tradesman.

Banks were reluctant to launch new foreclosure proceedings a year ago in the aftermath of the “robo-signing” controversy, when lenders were accused of improperly handling paperwork, experts said.

“Now they have got their act together and they’re not waiting any longer,” said Peter S. Barney, administrative assistant to New Bedford‘s Board of Assessors. “Now they are going to take care of it. They want to clear their books.”

The problem of delinquent homeowners never went away and bankers want to get control of those properties and sell them, he said.

Statewide, foreclosure petitions also doubled, rising from 694 a year ago to 1,394 last month. The activity was still tame compared with recent years. More than 2,000 foreclosure petitions were filed in February 2010, according to The Warren Group.

My guess is more like a bottom in 2014 and the beginnings of a recovery in 2015. Barring any European contagion. Hold on to your hats!

America’s ‘Unbanked’ Masses.

Millions have lost access to credit or essential banking services due to regulatory reforms.

Fewer Americans have access to traditional banking services such as checking accounts, consumer loans and credit cards than they did five years ago. Part of this has to do with the housing bust severely damaging the finances of U.S. households. But millions more have lost access to credit or essential banking services due to regulatory reforms imposed over the past four years.

If you looked back in 2005, the number of “unbanked” Americans was closer to one in four. At the current rate, that number will reach one in three in 2013.

Excluding millions of Americans from traditional banking services is not an efficient means of commerce and will result in long-term negative consequences for our economy. The negatives include higher transaction costs, lower household savings, and the concentration of credit in the hands of the few—conditions more commonly associated with Third World countries.

Banks are partly to blame for the post credit-crisis shrinkage in banking services. They have not figured out a way to reprice consumer loans effectively in a post-securitization world. For decades, banks could underprice consumer loans (mortgage, home-equity and other personal loans) because they were subsidized with the high fees from securitizations. That all ended with the collapse of the subprime mortgage market.

Still, four years after the death of securitization, many banks are still pricing second mortgages cheaper than first mortgages (one is priced off the London Interbank Offer Rate and the other off of the 10-year Treasury bond yield). Instead of changing this archaic pricing structure, the banks have simply pulled back from this once heavily relied upon financing product. Note, more than 75% of American mortgages are not underwater and could be eligible for this product. This is just one example of a host of consumer-lending products.

But importantly, banks are not to blame for the unintended consequences of ill-planned and ill-timed regulatory reform. The Credit Card Accountability, Responsibility, and Disclosure Act (CARD) essentially restricted a bank’s ability to quickly reprice credit-card interest rates. It was passed in 2009 after the peak of the credit crisis, with most of the provisions going into effect in February 2010.

Since mid-2008, over $1.6 trillion in credit lines have been expunged from the system. Under the new law, banks could no longer use other credit bureau information to reprice, as decisions had to be based upon the credit experience of the issuer alone. These restrictions made it far more difficult to effectively price for the evolving risk of a consumer.

Overdraft protection (“Reg E”) reform has had a similar impact on retail bank customers. By limiting the fees banks can charge customers, regulators have in effect made the expense of servicing some customers greater than the revenue they generate. In many cases, regulations have made the overall economics of branch banking uneconomic. Consequently, many bank branches have shuttered, nearly 1,500 since 2009.

Pre-paid debit cards have grown exponentially over the past few years. (Pre-paid cards are vehicles that essentially allow a consumer to borrow from themselves.) Many of these come with high fees. They are not the solution, but merely the only viable option in the current regulatory environment. Will they be the next target for well-intentioned regulatory reform?

There are examples of individual banks getting this right. One example is PNC, which recognized early into the crisis the need to create a “halfway house” of sorts to rehabilitate customers under newfound distress. Programs like PNC’s Foundation Checking account allow customers with tarnished credit histories to maintain an account with no minimum balance after completing a workshop on managing it. Unfortunately, this example is more the exception than the rule.

As an industry, banks need to get in front of this debacle and establish a sensible pricing matrix for the new post-securitization world of financial products and consumer banking. Meanwhile, regulators should seriously reconsider the restrictive provisions in the CARD Act and Reg E, and lawmakers should subject to heightened scrutiny anything forthcoming from the newly established Consumer Finance Protection Bureau.