Tag Archives: Jamie Dimon

A Crisis of Massive Proportion.

Well, we had the obligatory G-8 meeting at Camp David last weekend,

and appropriate lip service was paid to keeping Greece in the euro zone, but the economists who are watching the continuing financial crisis in Europe are rapidly coming to two conclusions: 1) Greece is likely to abandon the common euro currency now used by 17 European countries. And 2) there will be a damaging domino effect throughout most of Europe.

One of the effects of this abandonment results from the impending Greek revival of its traditional currency, the Drachma. Salaries and prices within Greece would be converted from euros to drachmas, and the drachma would be allowed to depreciate to make the Greek economy more competitive.

The problem comes with debts that are denominated in euros, especially if the lenders are outside of Greece. These lenders would naturally resist being repaid with less valuable drachmas. However, if Greek borrowers have to repay the loans with euros, the debt would become more expensive for them to pay off after the drachma is devalued.

The most likely result therefore, is that debts to non-Greek creditors would become useless after Greece switches to the drachma.

(Shocked face here – I believe we predicted this back in January).

After all of the inevitable lawsuits, defaults, forced reductions in repayment, the lenders end up holding an empty bag and losing big money. Just as in the U.S. banking crisis of 2007-2008, once some banks lose enough money to become troubled, the contagion spreads to other banks, because they are all tethered to one another as co-parties.

The Central Bank and the IMF would step in and try to stabilize the situation, and Germany would take its lumps (and perhaps a few islands) and after a couple of years on the Drachma, Greece stabilizes itself and life goes on. Sounds ugly, but generally benign, right? Unless you happen to be a Greek, that is. But what else might happen?

Well, there is always our friend, the derivative, and it could easily set off a global chain reaction. You know derivatives, right? They are the complex, “synthetic” financial securities, which Warren Buffett famously referred to as “financial weapons of mass destruction.” And which recently caused Jamie Dimon some embarrassment and a $2B loss.

In the case of government bonds, these instruments are known as credit derivatives. They include all sorts of loans secured by bonds as well as incredibly complicated vehicles that amount to insurance policies if the bonds default, like CDS. No one really knows how much of this stuff is sloshing around the international financial system, but the total value for all types of bonds was estimated at more than $50 trillion in 2008 and has continued to grow rapidly since then.

Trouble is, if the bonds underlying these derivatives become questionable, all the derivatives become uncertain too, even if they add up to far more than the value of the bonds themselves. Moreover, some of the synthetic investments based on Greek bonds could be governed by Greek law, some by British law (if anything originated in London) and some by U.S. law (if Wall Street was involved).

What if one legal system accepts the conversion of euro loans into drachmas and another doesn’t? Everything could be thrown into the courts for months. Even worse, if synthetic investments secured by Greek bonds become untrustworthy, why would anyone trust similarly complex investments involving Spanish bonds or Italian bonds?

The result of a meltdown in the world of derivative investments could cause far more chaos than simple bond defaults, because at the very least, it would be almost impossible to figure out who owed how much to whom.

So, let’s say Greece recovers quickly, and Italy, Spain, Ireland and Portugal want out of the euro zone too. There is the very real possibility that Greece abandons the euro and bounces back surprisingly fast. In fact, that is exactly what we urged them to do back in January.

But, our recommendation while good for Greece, would cause another sort of disaster, potentially much, much larger than the one facing the Greeks. Both Argentina and Iceland suffered currency collapses, but after a horrible year or two, they each rebounded and were better off than if they had fought to save a failing currency. Analysts point out that both countries were big exporters of grain, meat or fish and those sales boomed after currencies were devalued.

Greece, in its own way, could profit from a similar recovery — a rebound in tourism. A 30% drop in the exchange rate might make a vacation in Greece the best deal in years. Even for Germans.

Good for Greece, but not so good for Europe and really bad for the U.S.  How could the Italian government convince its people of the need for higher taxes or the Spanish government explain soaring unemployment if Greece were obviously better off outside the euro zone? They couldn’t and wouldn’t even try. In order to remain in office, any politician worth his salt would say, “Hey. Let’s follow Greece’s lead.” Then the entire European Union would likely unravel, with Germany leading the way and with Global financial consequences many times greater than those resulting from Greece alone.

U.S banks are deeply invested in the European outcome and are in the impossible position of needing to hold their positions otherwise risk a banking panic of global proportions. The best they can do now is hope and pray, neither of which has ever been a really good strategy. However, the best you can do now is to sell all your bank stocks and watch the show safely from the sidelines.

And, what a show it is bound to be.


$2 Billion? Chump Change. Jamie Dimon Has Real Problems Now.

The US Federal Reserve has just released data that shows mind-boggling trade positions that JP Morgan has taken in synthetic credit indices, an extremely haphazard class of derivative, also known as Credit Default Swaps (CDS).

Um, try $100 Billion worth; an increase from a net long notional of $10 Billion at the end of 4Q11, to $84 Billion by the end of 1Q12.

All banks are required to report quarterly on these things and JP Morgan’s position in CDS has jumped eight-fold in under 6 months. This may raise additional concerns about JP Morgan’s investment strategy in synthetic products.

In investment-grade CDS with a maturity of one-year or less, JPMorgan‘s net short position exploded  from $3.6 billion notional at the end of September 2011 to $54 billion at the end of the first quarter.

Over the same period, JPMorgan’s long position in investment grade CDS with a maturity of more than five years leapt five times from $24 billion to $102 billion (see chart). They are either really, really smart, or really, really, stupid. If it’s the latter, guess who bails them out?

“I don’t care how big a bank you are, that’s still a big move,” said one seasoned credit analyst.

JPMorgan’s chief executive Jamie Dimon said his firm began closely examining the CIO’s (Chief Investment Officer) controversial trading strategy in closer detail when large mark-to-market losses – put at $2 billion by Dimon during an analyst call on May 10 – started appearing in the second quarter.

Dimon has since tried to balance his exposures by flipping positions in long, high-yield CDS and short positions in investment-grade CDS, but the crazed selling of these CDS positions is eerily reminiscent of the final hours of Lehman Brothers.

People will question senior JP Morgan management signing off on a trading strategy that vastly increased the banks’ exposure to a worsening credit environment at a time when other banks were battening down the hatches. In dramatic contrast to JPMorgan, the Fed data show ALL other major US banks (GSax, Citi, B of A, Morgan Stanley) maintaining large short positions in investment-grade credit in expectation of a continuation of the rocky credit environment persisting throughout the second half of 2011.

The figures underscore JPMorgan’s failure to act at an earlier stage, given the large concentrations of risk it was accumulating, as well as the inability of regulators to discern abnormal trading patterns among the piles of data banks already reported to them. Shame on the SEC … again.

On the day (May 10th) that the $2 Billion loss story broke, that morning’s The Gartman Letter, market commentator Dennis Gartman wrote:

“The press conference… caught everyone a bit off guard and does raise all sorts of flags and does indeed cause us to remind ourselves that “there is never just one cockroach;”          however, if the losses sustained are held to what was reported yesterday afternoon, then we must remember that this is isolated; that it shall be a loss of only 30 cents/share; that Jamie Dimon’s pristine reputation has been irreparably sullied; that the Left shall use this as an excuse for even more onerous over-sight of the banking/broking businesses of the nation, but the nation is not in jeopardy and we shall all go on.”

IF … “the losses sustained are held to what was reported … .”.

Should be an interesting couple of weeks on Wall Street.

Thanks, Mr. Dimon.

Jamie Dimon has allowed us to witness an object demonstration of why Wall Street does, in fact, need to be regulated. Thank you, Jamie.

I hate to beat up on Jamie Dimon so badly, especially since I don’t know him personally and I’m sure he is a fine fellow, but as Bill Maher would say, hey, they give you the comedy lines and you just have to take it, right?

Any honest evaluation of the facts would conclude that JPMorgan, to its — and Jamie Dimon’s  — credit, did manage to avoid many of the bad investments that brought other banks to their knees in the 2007-2008 contagion.

His demonstration of sound judgment and careful planning gave Jamie the role of class valedictorian in Wall Street’s war to delay, and/or repeal the righteous pile of financial reform crawling its way through Congress and occasionally spewing watered-down effluence like the Dodd-Frank bill.

Mr. Dimon has been particularly open in his opposition to the so-called Volcker Rule, which would prevent banks with government-guaranteed deposits from engaging in “proprietary trading,” (basically speculating with depositors’ money). Why? Because everything at JP Morgan Chase is under control and we don’t need no stinking badges, thank you very much.

Until last week maybe. A minor screw-up. $2 Billion in trading losses. Well, there are really no excuses as Jamie said, but hey, they’re human. They make mistakes too. Still, no reason to lose our minds and start regulating like crazy; after all, it WAS their money, right? Well, not exactly. It turns out that the bank’s “money” is in fact money backed by taxpayer’s guarantees.

We know from history that banking has always been subject to  destructive panics, that occasionally threaten to bring down the entire financial system. In spite of arm-chair economists like Mitt Romney and Newt Gingrich and perhaps especially our buddy, Paul Ryan, bad banking is not always the result of government intervention or the meddling liberal fools in Congress.

In the golden ages of American Capitalism, between 1700 and 1840, or between 1890 and 1929, we had minimal government and no Fed (to speak of) and yet, we still managed a financial panic roughly once every six years. Some of them real beauts.

After the greatest depression in our history, our Congressional leaders arrived at a reasonable solution that seemed to work really well for the next 60 years or so. We implemented systems of guarantees and oversight that protected both the citizen depositors and the government who guaranteed those deposits. Deposits were insured, so that panic resulting from the perception of a failing bank was limited, and banks were prevented from gambling and abusing the privilege they enjoyed from those insured deposits, guaranteed by taxpayers.

The significance of those regulations prevented banks, holding government-guaranteed deposits, from engaging in high-risk market speculation. Speculation in investment products like CMOs and CDO tranches and Knock Out Straddles.

What? You didn’t have any Knock Out Straddles? Lehman Bothers did.

But, I guess we really didn’t like financial stability. Or, we all saw a movie in 1987 called Wall Street and decided that being Master of the Universe would be pretty cool. Jamie Dimon certainly thought so. He was 31 when that movie came out. Not surprisingly, all of these new forms of banking without government guarantees became the rage, while 50 years of banking regulation was over-turned (by a Democrat by the way) and banks were allowed to take on increasing risks. We, the people, got exactly what we deserved.

It is mind-blowing to me that we have to debate and argue about whether we should restore the safeguards that brought us 50 years without a major banking panic. We, the people who got shafted by the bankers, their lobbyists and the politicians they bankroll, have to cajole our Congressmen to re-instate the Glass-Steagall act of 1933? After we allowed those very same bankers to be bailed out by our own tax dollars? Why?

We are the same people, at least 48-50% of us, who want to cast a vote for a guy who has promised to repeal Dodd-Frank and any other banking regulations that come down the pipe? Really?

We can thank Jamie and JP Morgan for shining a spotlight on the reasons we need to tighten regulations on banks, but it really won’t do any good as long as we continue to pretend that none of this matters. Or, that we can’t make a difference. Or, that it’s all too weird and hard to understand and the banks won’t really do anything that stupid again, would they?

You may not be able to fix it, but with one vote, you could make it worse.

Congressman McHenry Promotes His Crowdfunding Bill And Trashes Competing Senate Legislation.

Congressman McHenry promotes his crowdfunding bill, trashes competing Senate legislation

© Image: Eric Blattberg / Crowdsourcing.org

Representative Patrick McHenry (R-NC), the driving force behind the H.R. 2930 crowdfund investing bill currently under consideration in the U.S. Senate, discovered crowdfunding the same way many of America’s college frat houses sate their thirst: through Pabst Blue Ribbon.

Scrolling through his twitter feed, McHenry stumbled upon a tweet by advertising executive Michael Migliozzi II asking people to invest in Pabst Brewing Company for as little as $5 dollars. By the end of February 2010, roughly five million Americans had pledged over $200 million dollars to own a stake the ailing brewing company. Of course, the five million funders ever-so-slightly surpassed the U.S. Securities and Exchange Commission’s 35 unaccredited investor limit, so the SEC put a stop to the purchase — but for McHenry, the PBR experiment demonstrated the massive potential of crowdfund investing.

In an economic environment where the dollar faces increasing pressure, where bank lending is scarce and expensive, where 25 million Americans are out of work, we cannot afford to “operate under the same rules and regulations … we used in the era of the rotary telephone,” said Representative McHenry Monday at the SoHo Loft Capital Creation and Crowdfunding Conference in Manhattan.

Representative Patrick McHenry, left, chats with event attendees (Photo: Eric Blattberg)

Onerous regulation is holding back businesses seeking to raise capital, argued McHenry, and nowhere is that more apparent than in state regulation. Under current state regulations on securities registrations, for example, “If you raise [capital] from 30 individuals in the state of Connecticut, you’re limited to only five in the state of Colorado,” scoffed McHenry.

After listening to testimony from the folks at Startup Exemption, McHenry drafted H.R. 2930, “The Entrepreneur Access to Capital Act.” Based largely on Startup Exemption’s proposed  crowdfund investing framework, the bill creates crowdfunding exemptions for firms and businesses seeking to raise up to $2 million dollars through online platforms — or “portals,” as McHenry calls them. It also includes a threshold of $10,000 or 10% of income as the individual investment cap, removes the ban on general solicitation by preempting the Blue Sky Laws, and overrides state regulatory authority. McHenry feels that “light-touch regulation” from the SEC is sufficient, though he failed to specify precisely what actual mandates the organization plans to enact.

McHenry’s original H.R. 2930 proposal changed as it continued its journey to become law — he originally proposed a $5 million investment cap, compared to the modified $1 million limit (or $2 million if a company audits its financials) — but such is the nature of lawmaking. House Republicans and Democrats worked together to amend the bill, originally one and a half pages, to its the current dozen-page format. A result of rare bipartisan cooperation and compromise, the bill sailed through the House with an overwhelming 407–17 majority vote. It even garnered a statement of support from the Obama administration. “To get a bipartisan bill through the House of Representatives — and to get President Obama to sign on — is kind of the equivalent of getting [JPMorgan Chase CEO] Jamie Dimon down to Zuccotti Park to play in the drum circle,” joked McHenry.

Some senators weren’t satisfied with H.R. 2930, however, opting to introduce their own competing legislation. Jeff Merkley (D-OR) proposed S. 1970, and Scott Brown (R-MA) put forward S. 1971 (more details here). Even if H.R. 2930 flounders and dies in the senate — as McHenry worries it might — he would not support either of the senators’ proposals in their current forms. “They don’t open the space up enough,” said McHenry of the senators’ crowdfunding legislation. “They don’t preempt Blue Skies, they don’t allow enough dollar raising … and the Merkley bill still demands state regulation.”

As previously mentioned, H.R. 2930 is currently awaiting review in the Senate. “Most good things go to the Senate to die,” declared McHenry. “We have to make sure this legislation does not die so we can free this space up and actually get capital flowing. That’s what it’s all about.”

Analysis: Banks Expect to Spend Less on Bad Mortgages. But I Don’t.

Even as President Barack Obama is calling for more assistance for struggling mortgage borrowers, major banks are looking forward to spending less to handle problem home loans.

The chief executives of JPMorgan Chase & Co and Bank of America Corp, the two biggest U.S. banks, said this month their rate of spending to handle troubled mortgages had topped out and should begin to decline soon with falling delinquency rates. Wells Fargo & Co, the fourth-biggest bank, also is counting on lower mortgage expenses this year.

With fewer problem loans to process, the banks could reduce the army of back-office staffers who handle the paperwork and phone calls required by foreclosures.

Bank executives are under pressure from investors to reduce expenses to improve profits amid weak demand for loans in the slow economy. If the three big banks are right in anticipating that the wave of mortgage defaults will subside, their bottom lines will get a lift — and property values will firm up, to the benefit of neighborhoods across the country.

Others are not so optimistic. Executives of Citigroup Inc, the third-biggest bank, continue to caution that mortgage issues, including legal liability for alleged abuses, remain the biggest single threat to the U.S. banking industry. And some consumer advocates worry that the banks could scale back too quickly on their mortgage workout staff.

Obama, who said in his State of the Union address on Tuesday that he intends to ease the mortgage burdens of “millions of innocent Americans,” is sending Congress a plan to allow homeowners to refinance at lower rates even when they owe more than their homes are worth. Also under discussion: a multistate settlement in which banks could pay up to $25 billion in exchange for protection from future lawsuits about improper foreclosures and lending and servicing abuses.

After the bust in house prices, the banks built up armies of staff to handle problem loans, said Guy Cecala, publisher of industry trade journal Inside Mortgage Finance.

“I’m not passing judgment on how well it works or how efficient it is,” he said. “But they have adequate staffing.”

JPMorgan nearly tripled its staff over three years to 20,000 people. “That number has probably peaked, and I think you will see it coming down over the next couple years,” JPMorgan Chief Executive Jamie Dimon told analysts who questioned him about expenses after the company reported lower fourth-quarter profits. Meaning:  higher unemployment. (add a colon after meaning)

Dimon forecasts that two-thirds of the $925 million of expenses JPMorgan incurred to service mortgages in the quarter will go away. (forecast should be plural)

JPMorgan’s mortgage delinquencies are down sharply from 18 months ago, and the bank charged off less than half as much money for problem home loans in the fourth quarter as it did a year earlier.

Bank of America is working off a mountain of mortgage problems left from its 2008 purchase of subprime lender Countrywide Financial. It now has about 32,000 workers handling delinquent or other at-risk mortgage loans, more than six times the staff it had in 2008. The bank spent $2 billion in the fourth quarter, excluding litigation costs, on the issue.

Chief Executive Brian Moynihan said that over time that spending will be reduced to $300 million per quarter, even taking into account stricter servicing regulations faced by banks. (delete second ‘that’)

Moynihan noted that total loans more than 60 days past due declined more than 20 percent from a year earlier to about 1.1 million in the fourth quarter. He said the bank expects costs to decline in 2012 but that it could take up to two years for expenses to return to normal levels.

The resolution of problem loans will depend on how fast the economy improves and the unemployment rate declines, Bank of America spokesman Dan Frahm said. The bank will continue to make “investments necessary to meet the needs of our customers,” he added.

San Francisco-based Wells Fargo told analysts it expects to reduce its quarterly expenses for troubled mortgages and foreclosures to as low as $600 million, compared with $718 million in the fourth quarter.

“We do believe that there are some cyclically high mortgage costs that are going to roll off,” CEO John Stumpf told analysts.

Dan Alpert, managing partner with investment bank Westwood Capital LLC, said, “If the expectation is that the economy is strengthening and new defaults will start to slack off, then yes, expenses should go down.”

But Alpert cautioned that if the economy is doing “a head fake, like in the first and second quarters of last year, then defaults will start going up again.”

Diane Thompson, an attorney with the not-for-profit National Consumer Law Center, said it is premature for banks to say their operations are ready to be scaled back.

Banks continue to lose documents, give bad information to customers and take too long to resolve loan modification applications, said Thompson, whose organization assists struggling borrowers.

Banks could also have additional costs if they agree to new servicing standards to reach a settlement with federal officials and state attorneys general investigating alleged foreclosure abuses.

Some statistics suggest the foreclosure crisis is far from over. A study last fall by the Center for Responsible Lending estimated that while more than 2.7 million homeowners who received loans between 2004 and 2008 had already lost their homes to foreclosure, another 3.6 million were still at serious risk of ending up in the same boat.

Citigroup executives cautioned last week, for the second time in three months, that overall delinquency rates had stopped falling recently because some borrowers, who previously defaulted and had their mortgages modified, had defaulted again. Citigroup also said its servicing costs increased in the fourth quarter because it spent more to comply with a settlement banks reached last year with some regulators over the handling of mortgages.

“We continue to believe mortgage-related issues are the single largest source of risk facing the U.S. banking industry,” Citigroup Chief Financial Officer John Gerspach told analysts.

Alongside servicing costs for existing mortgages and potential losses on the loans, banks also still face allegations that they broke laws during the housing boom by giving loans to unqualified borrowers and then fraudulently packaged and sold mortgage-backed bonds. Obama pledged Tuesday to ramp up government investigations of those allegations, which could lead to billions of dollars of litigation expenses and penalties for banks.

But Citigroup executives also noted that repeat defaults are not as frequent as it had expected and that early-stage delinquencies were less common in the fourth quarter than in the third quarter.

Paul Miller, a bank analyst at FBR Capital Markets, said big banks’ servicing expenses are likely to fall from current levels. But he cautioned that significant relief will not come as quickly as the banks would like.

“I would think 2012 is probably the year it peaks,” Miller said, “but it’s not like it’s going down by 50 percent.” No, it isn’t.

You Want New Lending? Not from Banks, and Not Anytime Soon.


Big Banks “Killed” in 4Q Mortgage Results

If you expect the banks to start opening the credit spigot anytime in the next two years, forget it!

The big banks’ mortgage expenses keep piling up, in a backlog that is likely to drag down their profits — and a broader housing recovery — for the foreseeable future.

As the largest banks reported quarterly results this month, they took charges for repurchasing soured loans, complying with federal mortgage servicing standards, paying for an upcoming settlement with state attorneys general and resolving significant foreclosure and litigation costs.

The mortgage woes at big banks have been so dire for so long that Jamie Dimon‘s comment this month that JPMorgan Chase & Co. was “getting killed in mortgages” became a footnote rather than the main story.

Even Wells Fargo & Co., which posted the strongest fourth-quarter mortgage results and now controls a third of the U.S. mortgage market, had significant costs for loan repurchases and mortgage servicing failures. It posted about $300 million in costs related to mortgage servicing and foreclosures.

The worst problem, analysts say, is that the banks’ fourth-quarter charges do not necessarily signal any sort of resolution to the litigation and regulatory risk for banks with significant mortgage exposure.

“The optimistic view is these are one-time charges and they will be over and done with,” says Brian Foran, an analyst at Nomura Securities. “But some of the charges are not big enough to cover everything.”

Foran singled out U.S. Bancorp and PNC Financial Services Group Inc., which both took charges in the quarter related to the pending settlement agreementwith state attorneys general and to the cost of complying with federal consent orders for past mortgage servicing failures.

US Bank took a $130 million charge for the settlement and $34 million for servicing compliance; PNC disclosed a total of $240 million in expenses for both, including foreclosure costs.

But those expenses might not be enough to cover the banks’ exposure from the settlement, which has been negotiated for months. Foran cites some concern that banks will have to “dig deeper” by giving borrowers principal reductions beyond the upfront costs of a settlement. Because banks cannot talk in detail about the settlement before it is finalized and announced, they have not been able to explain what the payouts would actually cover, he says.

Though mortgage banking profits are up and origination volume increased for some banks in the fourth quarter, mortgage loan growth has fallen from a year ago. Bank of America Corp.‘s pullback in correspondent lending continues to remake the overall mortgage landscape as banks try to bolster their capital levels.

At B of A, mortgage origination volume dropped 77% from a year ago to just $18 billion at Dec. 31, a dramatic retreat. Though Wells Fargo appears to be the main beneficiary of B of A’s withdrawal from mortgages, the San Francisco bank had a 6.2% decline from a year earlier in fourth-quarter mortgage originations, to $120 billion.

JPMorgan Chase’s mortgage origination volume dropped 24% from a year earlier to $38.6 billion, while Citigroup Inc.‘s fell 3% to $21 billion from a year ago.

Banks saw some signs of life in consumer and especially corporate lending, but analysts were still largely unimpressed.

“Loan growth was tepid,” says Frederick Cannon, a co-director of research and chief equity strategist at Keefe, Bruyette & Woods, Inc. “Solid organic loan growth is very difficult to achieve when consumers and corporations are deleveraging and economic growth is moderate.”

Banks are having a tough time growing revenues or earnings “meaningfully,” Cannon says, particularly when balance sheets are shrinking.

Each bank is facing unique hurdles in its mortgage operations. Wells Fargo, for example, is trying to liquidate a $112.3 billion loan portfolio, which Cannon says “may present a challenge to loan growth in the coming quarters.”

But the challenges for Bank of America are far more acute, he says, because the bank’s pullback in mortgages is likely to overshadow any potential gains for the foreseeable future.

“Mortgage accounting is not friendly when you’re shrinking your mortgage operations,” Cannon says. “They’re more and more just going to be servicing bad loans for a long time, which means the cost of servicing is going up.”

High servicing expenses are expected to be a drag on the top banks for some time to come. JPMorgan Chase’s mortgage servicing expenses totaled $925 million in the fourth quarter, down 4% from a year earlier, but chief financial officer Doug Braunstein told analysts during a conference call that servicing costs will continue to be high in the first half of 2012. He attributed 75% of those expenses to costs for defaulted loans and foreclosures. (JPMorgan Chase posted a $258 million loss in its mortgage unit, compared with a profit of $330 million a year earlier.)

A drop in mortgage volume and high servicing costs are not the only reasons behind industry members’ pessimism. Some of the biggest hits in the quarter came from mortgage repurchase requests, which remain elevated and show no signs of abating.


The high level of repurchase requests in the fourth quarter “indicate that repurchases are not going to go away any time soon,” Pfeifer says. “There is still a substantial amount of repurchases requests out there. The tail of the litigation risk is very long.”


Wells took a $404 million provision for mortgage loan repurchase losses; JPMorgan Chase took a $390 million provision; B of A set aside $263 million for repurchases and Citigroup took a $200 million hit.

Meanwhile, SunTrust Banks Inc. said Friday it had to increase reserves for mortgage repurchases to $320 million.

Fannie Mae and Freddie Mac are being “hyper-aggressive” in pursuing repurchase claims, because they have a statute of limitations of between four to six years to do so, says Michael Pfeifer, a managing partner at the law firm Pfeifer & DeLaMora LLP in Orange, Calif., which defends mortgage lenders and banks against repurchase requests.

He adds that some banks are quietly settling repurchase claims with the Federal Deposit Insurance Corp., which has a longer statute of limitations.

B of A, which has perhaps the most exposure to mortgages from its ill-fated acquisition of Countrywide Financial Corp., said it ended 2011 with $15.9 billion reserved to address potential representation and warranties mortgage repurchase claims, up from just $5.4 billion at the end of 2010

Where Is the Volcker Rule?

Three years ago, a financial crisis threatened to bring down the United States economy and to spread economic disaster around the world. How far have we come in preventing any kind of recurrence? And will the much-discussed Volcker Rule – attempting to limit the risks that big banks can take – play a positive role as we move forward?

Bad loans were the primary cause of the 2007-8 financial debacle. When the full extent of the problems with those loans became apparent, there was a sharp fall in the values of all securities that had been constructed based on the underlying mortgages – and a collapse in the value of related bets that had been made using derivatives.

The damage to the economy became huge because these losses were not dispersed throughout the economy or around the world. Rather, many of the so-called toxic assets were held by the country’s largest banks. Financial institutions that used to lend to consumers and businesses had instead become drawn into various forms of gambling on the booming mortgage market (as well as on commodities, equities and all kinds of derivatives). “Wall Street gets the upside and society gets the downside” was the operating principle.

And what a downside that proved to be.

Henry M. Paulson Jr., Treasury Secretary at the time, said the Troubled Asset Relief Program, or TARP, was needed to buy those troubled assets from the banks. But this quickly proved unwieldy, so TARP pumped roughly half a trillion dollars into bank equity. The Federal Reserve backed this up with an enormous amount of liquidity through more than 21,000 transactions.

The additional government debt as a direct result of this finance-induced deep recession is estimated by the Congressional Budget Office at around 50 percent of gross domestic product, roughly $7 trillion.

These are staggering numbers. And this system of big banks taking outsize risks, failing and imposing huge damage on the rest of us has to stop. This ball is now firmly in the regulators’ court.

Whatever your broader issues with the Dodd-Frank Act of 2010, one point about legislative intent in this law is clear: The regulators have the authority to cut banks down to size and return them to their historical role of intermediary between savers and borrowers.

As for size, the regulators have long ignored the existing guidelines and allowed the biggest banks to get bigger. We need to go in the opposite direction, and that includes cutting down to size the private megabanks, as well as Fannie Mae and Freddie Mac. It also means taking advantage of the resolution authority and all associated provisions that Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation, worked so hard to put into the Dodd-Frank Act.

As Jon Huntsman is arguing on the Republican campaign trail, too-big-to-fail banks simply need to be forced to break themselves up.

But we also need to make the megabanks less likely to fail. The easiest way to do that would be to require banks to have enough common equity to absorb losses.

But the bankers have pushed back hard, with Jamie Dimon, head of JPMorgan Chase, leading the way with statements like this on capital requirements, which are known loosely as the Basel Accords: “I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American.”

Dan Tarullo, responsible for this issue on the Federal Reserve Boardseems to support the idea of requiring significantly more equity in big banks, perhaps moving in the direction recommended by Anat Admati and her colleagues. But Mr. Tarullo appears to have lost that battle for now.

If we are not breaking up banks and if we are not requiring them to have reasonable levels of capital (thus limiting how much they can borrow relative to their equity), we must use all other available tools to stop the too-big-to-fail banks from taking excessive and ill-conceived risks.

This is where the Volcker Rule becomes so important. Named for Paul A. Volcker, former chairman of the Federal Reserve, and adopted as part of Dodd-Frank at the insistence of Senators Jeff Merkley, Democrat of Oregon, and Carl Levin, Democrat of Michigan, the Volcker Rule directs the regulators to get banks out of the business of betting on the markets.

The regulators are now determining how they plan to carry it out. Draft proposals are currently open for comment.

But the latest news on this front is not encouraging, as crucial regulators seem stuck in a “bigger is better, and anything goes for the biggest” mind set.

The Volcker Rule has some good points, including a requirement that trader compensation not be tied to speculative risk-taking, and that firms collect and report some essential data to regulators. But the current draft does too little to actually stop the banks’ risky practices.

The main problem is that the rule as drawn does not set out the clear, bright lines that banks and regulators need, nor does it provide for meaningful enforcement. Instead of drawing the lines, the proposed rule mandates that firms write many of the rules themselves.

There is some good news. At this point, it is only a proposed rule, and the public is able to comment. Organizations like Better Markets that promote the public interest within the regulatory process will be in there fighting to strengthen the proposed rule and make the final rule better.

Everyone who cares about real financial reform should do the same, but the regulators’ draft rule has made it harder to uphold the public interest than should have been the case. For example, the regulators ignored the breadth of the Volcker statute and focused instead on only a narrow slice of the bank’s balance sheet – just what the bank says is for “trading” purposes. Much else of what big banks do seems likely to escape scrutiny.

The regulators also have given very little guidance on conflicts of interest, on what should be considered high-risk assets or on what high-risk trading strategies should be permitted.

During a Senate hearing last week, Senator Bob Corker, Republican of Tennessee, focused on another important problem – the lack of any restrictions on trading in the enormous Treasury securities market. The regulators will create a lot more paperwork for the banks, but if the current draft is adopted, the too-big-to-fail banks are not likely to be forced to stop doing much.

Last year Senator Levin said:

We hope that our regulators have learned with Congress that tearing down regulatory walls without erecting new ones undermines our financial stability and threatens our economic growth. We have legislated to the best of our ability. It is now up to our regulators to fully and faithfully implement these strong provisions.

From what we’ve seen so far, our regulators have not yet understood this message. They seem instead more in tune with Mr. Dimon, who insisted this year that regulators should back away from any effective implementation of the Volcker Rule:

The United States has the best, deepest, widest, most transparent capital markets in the world, which give you, the investor, the ability to buy and sell large amounts at very cheap prices. I wish Paul Volcker understood that.

Mr. Dimon — who is on the board of the Federal Reserve Bank of New York — seems to have forgotten the financial crisis, its impact on ordinary Americans and the utter fiscal disaster that ensued. Or perhaps he never noticed.