Friday, December 7, 2012

Bank's Good News and Bad News

Gee, the banks are now making lots more money; all’s right with the world, and aren’t we happy?

A variety of reports out this week announced growing commercial bank profits, including making big margins on their mortgage originations, which---while not representing huge increases over previous new mortgages—did generate great profits.

The banks are not doing volumes of new business, just making more on the marginal amount of lending they do; along with the hefty profits they make arbitraging their funds in overnight Federal Reserve funds and buying short term Treasury securities.

Along with the earnings reports, a Wall Street Journal a blog article, by Nick Timaros, caught my attention because of both the bank earnings news and their reported “rich”--meaning high profit--mortgage origination business.

Timaros’ story reported on research papers delivered New York Fed conference this week. One of papers noted that despite all of the reasons cited by banks justifying relatively speaking higher mortgage rates, i.e. higher Fannie and Freddie guarantee fees, Fannie and Freddie demands on loan buy backs (damn those GSEs, still a problem even though they don’t control of their own businesses!), hedging costs related to delays in mortgage processing, and finally banks inability to process and approve a loan applications, none of them singly or together justify the banks hefty spread over their cost of funds.

Banks also argue that the large gap between what they pay for money and what they charge borrowers is because they don’t have the staff capacity to handle all the applications they receive.

Bull pucky!

If they want, banks can hire more people, but they chose not to because the business they are writing—which again isn’t huge—is so rich, why should they waste it on overhead?

Plus, they face no other major competition, since the large banks control the origination process via their in house lenders and their subsidiaries.

Timaros’ article notes that for most of the past decade, the banks’ spread between cost of funds and lending rate was 0.5 percentage points. Since the 2008 financial meltdown, the spread first grew to 1 percent and now it has leaped as high as 1.5%.

Even with the Fed insuring low rates across the board, shouldn’t some/all of the federal bank regulators ask why consumers are being charged so much relative tot he banks cost of money?

As Mr. Timaros wrote, “The upshot, the thinking goes, is that mortgage rates would be even lower if the banks were passing along their lower funding costs to borrowers.”

It can’t be news to the regulators when these developments were presented at a Federal Reserve conference with plenty of banking industry, regulatory observers, plus media, present.

The last time the federal financial regulators ignored a trend, financial institutions—including Fannie and Freddie—went on a subprime mortgage buying binge which threatened financial institutions and nations worldwide.

This pattern of high relative costs to consumers may not rise to that level, but somebody should say something about these unnecessarily high financing costs.
Here's a link to the Timaros article.

Oh, Oh, Elizabeth, Sherrod, and Maxine
(They Ain't a New Girl Singing Group)

The banks might want to reconsider their mortgage profit making (who am I kidding?) and maybe make less net cash with all of their government provided deposits, i.e. federal TARP funds and insured deposits, since a few political personnel moves announced this week suggest some dicey times on Capitol Hill for the big financial services companies.

New Sen. Elizabeth Warren (D-Mass)—whose fight for the creation of the Consumer Finance Board, as part of the Dodd-Frank legislation was heavily opposed by the big banks—has been named to the Senate Financial Services Committee, where she joins long time bank critic bank critic Sen. Sherrod Brown (D-Ohio), On the other side of the Hill, Rep. Maxine Waters (D-Cal) was named senior Democrat on the House Financial Services Committee. (She alone, is a major “Oh, merde!”)

If I was a banking industry exec, those could be the last three congressional Democrats I would want to testify before and explain my institution’s profit structure, especially when the industry publicly put so much money into trying to elect Mitt Romney. I wouldn’t be surprised to see similar financial service industry contributions to Warren’s and Brown’s opponents.

Bankers beware.

I am reminded of warnings, “What goes around…” and “Payback is…!”

Dick Armey and Freedom Works

Former House Majority Leader Dick Armey, and his $8 million golden parachute, was thrust into the news this week when his messy departure from Freedom Works, the right wing Tea Party-sympathetic organization which Armey helped create, earned heavy media coverage.

The exact story still isn’t perfectly clear, but it looks like a nest of scoundrels had a falling out and Armey landed comfortably on an $8 million departure cushion.

Reportedly, leading up to last month’s election, inside Freedom Works Armey for the organization to work more closely with the GOP congressional leaders, a position that Dale Kibbe, the FW president, and other FW officials didn’t support.
Armey then resigned from Freedom Works and took his guaranteed compensation, waiting until this week because his contract called for that payment only if he resigned after the November presidential and congressional elections.
Dick Armey now has cited his “ethical and moral concerns” over the behavior of some FW leaders as a major reason for leaving.
Freedom Works lost several of the high profile races in last month’s elections, when voters rejected their and Tea Party’s incumbents and candidates also were dumped by the electorate.

Dick Armey and Fannie

Armey always was a tough guy for Fannie, but never more than when he traveled the country in the late 90’s (in what some considered his thinly disguised testing of the presidential waters) touting his “flat tax” proposal.

Fannie Mae joined other "housers" to oppose--without mentioning Mr. Armey's name-- the negative homeownership impact that tax proposal would have on those taxpayers who itemized and deducted their mortgage interest costs.

The fact that the ads challenging the “flat tax” appeared in Iowa and New Hampshire really seemed to off the then GOP House Majority Leader Armey.

Armey retaliated by asking the General Accounting Office (GAO) to investigate whether Fannie Mae had First Amendment rights—my phrase not his—and legally could advertise and take positions on issues of the day?

GAO’s answer was “Yes, they do,” which did not mollify the Leader and seemed to put in concrete his opposition to Fannie and Freddie.

Support John Boehner as He Tries to Be Responsible

I’ve predicted a resolution on the “Cliff negotiations” before December 31--press statement wars aside—and I continue to believe Speaker John Boehner (R-Ohio) is attempting to act responsibly, given his constraints.

The GOP's wing nuts are gunning for him because he is talking constructively to the White House. Republicans and Democrats should support Boehner’s efforts.

People who know something about politics realize that any “Cliff deal” is a preliminary to far more significant bipartisan agreements next year or in 2014 regarding additional major spending cuts and substantive tax reforms. The problem isn’t going away.

The Right is wasting a lot of ammunition over a near term fight they will lose, if President Obama lets all of the tax increase become law on Dec. 31, because the right wing zealots in their party won’t let the GOP congressional leadership reach a settlement.

Read about Boehner’s attacks from the Right, link below.

Rick Santorum Does What and the Senate Listened?

I had to throw in this chestnut.

Those Senators who voted “no” on this action are cowards as well as craven. All because the Santorum family has a disabled child and choose to home-school her, while the soon to be ex-Senator believes the UN can deny them that opportunity???

Maloni, 12-7-2012

(“Remember Pearl Harbor,” 71 years ago.)


Bill Maloni said...

It's not a "Maloni blog," without a "Maloni typo!"

My apologies To Wall Street Journal reporter Nick "Timiraos" for misspelling his name.

Damn and I liked his article!

Anonymous said...

Do not worry about typo's.
Let's start building a housing finance coalition to rebuild the secondary market.
Do not see any leader in the congress or administration willing to take on this responsibility.
Time for citizen action; "1000 pointsof light" actions to restore the housing market.

Bill Maloni said...


I always believed that Chuck Schumer (D-NY) could be that guy because of his seniority, smarts, experience, and dogged personality.

Of course, he--like others--would need to truly understand what happen in past years to see the systemic advantages to resurrecting the market and removing Uncle Sam's explicit financial backing.

I hope it would the last element which would appeal to him politically/intellectually.

Anonymous said...

Schumer is the ideal choice for this task.
Appeal to his ego. He could renew, restore America's housing market. And he could push the WH into supporting a major housing proposal.
I remeber when we used to have giant housing bills, 1961, 1964 etc. John Sparkman and Albert Raines gained national recognition for their housing efforts.I remember when Larry Blackman of the home builders sat in Rayburn's office and advised him on how Dems should vote on the many floor housing bill amendmants. Where are the housing leaders in congress now? Time to reinvent them!!

Bill Maloni said...

"Those were the days my friend, we thought they'd never end.....!"

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