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Thursday, August 26, 2010

Large US Banks - Unmitigated Asses Or So Amoral They Ought To Be Behind Bars?

I mentioned before that larger banks appeared to be clearing their loan loss reserves too quickly.

But seriously dude, take a look at Q2 Bank Charge Offs and Delinquencies. Delinquencies hit a new high at 7.32% SA. Charge offs dropped to 2.86%, but how much can that mean if delinquencies are still rising overall?

When you look at the details, your heart quails. After all, charge offs dropped 21 basis points on residential mortgages. That's pretty significant, and much better than the overall drop in charge offs of a measly six basis points. Now look at delinquencies for residential mortgages, and they rose 45 basis points to a shocking 11.40%. (1,140 basis points). Delinquencies on credit cards dropped 69 basis points, but charge offs rose to 10.66% from 10.07%.

It will take a while. Two graphs from the indispensable St Louis Fed Fred:

This is the ratio of loan loss reserve to total loans. The higher the expected charge off curve, the higher this ratio should be. The annualized charge off rate for Q2 was 2.86%. The height in this cycle was 2.93% in 09 Q4.

An annualized rate is equivalent to the rate if the current seasonally adjusted losses held for four quarters.

But the current charge off rate is less important than the delinquency rate plus experience. In the last really bad banking cycle (1991) the charge off rate peaked in 1991 Q2 at 1.70%, and the delinquency rate peaked at 1991 Q2 at 6.16%. Note that the charge off/delinquency ratio was about 28% then, but in Q2 2010 it was 39%. This is because far more homes are worth significantly less than the outstanding loans they are securing.

The real reason some banks think they can get away with this is because they dumped the risk for some of their worst mortgage loans onto the government. But I think they haven't entirely. I think that a lot of politicians are going to hit the streets and that there will be something of a day of reckoning when the GSEs come back to certain entities and hand them back their lovelies, the entities tromp off to their Congressional feeding trough, and get rebuffed.

Mortgages are huge chunk of the problem - when you look at interest rates earned versus accrued losses, it becomes clear why the charge off/delinquency ratio is so high this time. And the ability of banks to cover this from their current earnings has peaked - now we are in the era of declining net interest margins:

When your earnings come slow and hard, and your losses come hard and fast, you are operating in a high risk environment.

Note that banks were rolling along much better in 1991 and after, so they were far more able to recoup their losses.

Now, I am fascinated to note a sudden spate of articles suggesting that Fannie, Freddie and FHA (rarely named explicitly) should be shut down and the losses then covered by the government. This tends to exclude the "unmitigated asses" theory of US bankers, because doing so would protect these banks from the inevitable handbacks which must ensue after the last 18 months of handoffs to the GSEs.

It's important to reiterate this. Large US banks were deliberately taking their bad loans and rewriting them as GSE loans or FHA insured. Thus, they believe their only remaining problem is to make sure that these entities will not be able to come back to them and make rude noises such as "your appraisal value was wildly inflated - take it back!" And the means that they have chosen to accomplish this are the shutdown of these entities.

Full Disclosure: I currently have significant holdings of BofA and Citi stock, because I am hedging my theory that Congressional corruption is now nearly infinite based on the last year's performance. And I also note with sorrow that Barney Frank is on the "shut the GSEs down and stick the taxpayers with the bill" bandwagon. My investment in the criminality/stupidity/cupidity of Congress Critters plus the absolute inattention of the populace may pay off.

But it shouldn't! This is a huge fraud. My conclusion is that the executives of these organizations are so amoral that they should be behind bars.

Please, prove me wrong and make me poorer.

Full Disclosure: I currently have significant holdings of BofA and Citi stock, because I am hedging my theory that Congressional corruption is now nearly infinite based on the last year's performance. And I also note with sorrow that Barney Frank is on the "shut the GSEs down and stick the taxpayers with the bill" bandwagon. My investment in the criminality/stupidity/cupidity of Congress Critters plus the absolute inattention of the populace may pay off.

All I Ever Really Needed to Know I Learned at Despair.com
Finally, you're seeing the FRAUD!

Ignore all the idiots talking about printing money, inflation and recovery. What's really happening is a giant debt swap - cash for trash. The banking system is legitimizing its ill-gotten gains by having the Government go into debt to assume the liabilities. Free markets - bah!

Wealthy bankers won't be paying for this mess through higher taxes either. Social security and other public benefits are in the cross hairs. The majority will get less than they "banked" on.

I'm sure people will be chiming in on how it's unfair and counter-productive to raise taxes on the money bankers have "earned". Ain't no freakin way that money was "earned". It was swindled via the largest financial fraud in history. Bernanke is a criminal.

What a sham(e). Deflationary depression looms.
Just want to say a big THANKS. Stumbled across you blog and love the style and educated comment. Fantastic!
"Amoral"? Most assuredly. "Ought to be behind bars?" Bah. That's like jailing a gun for shooting somebody. The whole point of "amoral" is that morality doesn't apply, like it doesn't with a machine.

Ric's First Rule of Finance: When money falls from the sky, the smart guys get big hats. They don't have to find big hats; the 10-gallon Stetson is already in the closet, cleaned, blocked, and the sweatband adjusted to fit.

Never, never, never forget or ignore that this whole mess started when Our Government (the Benevolent, the Merciful) tried to implement one of their sophomoric Utopianisms and make the bankers pay for it. Bankers have institutional memory going back to the di Medicis about that sort of thing -- and in the modern era they also have communications and coordination tools necessary to come out on top without being directly confrontational. Direct confrontation brings out the guns, and although you can make money on the gun business it's disruptive, noisy, and annoying to the neighbors. Fortunately there are other means.

Never forget, either, that their first attempt at combatting the new parasite was honest. The derivatives-and-tranches system didn't hide anything from anyone who pays attention, and anyone who doesn't pay attention gets burned eventually (that's a Law of the Universe). It worked up until the point where Government (the Compassionate, the Generous) decided that the paper profits belonged to them, instead of inside the system propping it up.

What you are looking at is the latest stage in the contest between Bankers and Princes that began when ol' Lorenzo started loaning money to warring goons. Bankers have to have quick wits and a deep fund of learned techniques; in a contest with the d*weeds, dumba*es, and sophomoric Utopians that make up our beloved Ruling Class, the outcome is inevitable. You are also looking at the reason we aren't seeing an orgy of inflation. Having dealt with Peron, Zimbabwe, and a host of others, the bankers have methods on tap to make sure that if it's tried the bankers will end up rose-scented and the inflators will wind up deeper in s*t than when they started. There are a few people (Friedman, Bernanke) who have an inkling of that and are restraining the Mugabe-wannabes the best they can -- and the guys at Chase are licking their chops anticipating their failure.

MoM,your investment in the banks is as safe as houses. And yes they are criminals,our society looks more and more like an overt kleptocracy.
MoM, please consider this question: had the banks in question behaved "better" (by the standard of your choice) how would Congress and the Executive have rewarded them? How have Congress and the Executive rewarded the banks when they have Done The Right Thing in the past?
I guess I should say it's not surprising. That's why they hire these guys; their aim is to maximize profits and keep the stock price up, not practice public morality. Sometimes you'll still see that from companies with a substantial private ownership, but not a publicly-traded and owned company like Citi or BOA.

Speaking of morality, why is it that Barney Frank appears in public without a bag over his head? He wasn't alone, by a long shot, but his role in this entire disaster was very large from the beginning, and it continues.

What's the difference (to the taxpayer) between 1) closing the bad banks down and creating an RTC to manage all the bad assets, and 2) leaving the banks open and letting them dump their bad assets onto the GSE's with FHA backing?

The lesson of history is that technology changes, human action remains exactly the same. (That's why your holdings are sensible.)
Well, that does explain Rep. Frank's sudden 180 on Fannie and Freddie. Thanks for deciphering that one, M_O_M.

Question for you, though--what do you make of the noises I've been hearing about the mortgage clearinghouses not actually having clear liens on the homes that the holders of MBS's need to foreclose on?

I can't figure out if that's just a screw-up, or this is a gun to somebody's head.
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Neil - mostly MERS does have it if the recordings are done before they try to foreclose. In some cases, it does appear that some of the paperwork was never done and if the originators are gone, that could be a problem. It's one thing if it just needs to be executed and recorded, but it's another thing if it never was completed.

Coming from a small bank environment, it is shocking that some of these recordings weren't done. Perfecting your security is the one banking fundamental.

There isn't a problem with running through MERS if the paperwork is legal and completed and the initial recordings were done properly, but yes, you could potentially lose primacy if they aren't done and/or if later the paperwork can't be located.

But so far, almost all of what I have read about appears to stem from sloppiness and not even preparing for the foreclosure. It's not surprising that judges got mad. Trying to foreclose without doing the recordings or without having the notes is asking for a slap in the face and I am glad the judges are administering a lot of them.
MOM, visit this link and tell me if it validates your amorality thesis:

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