Wednesday, September 30, 2009
The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending September 25, 2009. The Market Composite Index, a measure of mortgage loan application volume, decreased 2.8 percent on a seasonally adjusted basis from one week earlier.
The twin peaks in the graph above are your "green shoots." Since early summer we have been mired in a lending brownfield, which may turn to quicksand with the expiration of the Federal First-Time Buyer's Tax Credit at the end of November. Recovery, anyone?
Friday, September 25, 2009
Tuesday, September 22, 2009
Legislators won't do it. Neither will regulators. So how do we proceed with pest control on Wall Street? I'm talking about the investment bankers who have spent the past two decades padding their compensation by peddling risky derivatives to zombie investors. Their financial "engineering" (too good a word, as it implies that they actually made something useful) resulted in a dangerous shortening of time horizons, a dysfunctional allocation of resources, massive job destruction, a generational delay in economic innovation, and a crushing tax burden amortized in perpetuity. Other than that, good job, guys.
Throughout 2008 I held up Merrill Lynch as the arch symbol of this over-the-counter culture. When 2008 expired, so did Merrill Lynch, at least as a stand-alone company. But the culture lives on. By all rights Merrill would have--and should have--failed, just as Lehman Brothers did a year ago. But Bank of America, prodded by an oligarchy anxious to keep the game going, decided to take Merrill over.
The merger almost fell apart when, upon more careful examination, Merrill's assets proved too toxic even for an acquirer the size of BofA. Then came a comical sequence wherein the Three Stooges--Treasury Secretary Henry Paulson, Fed Chair Ben Bernanke, and BofA CEO Ken Lewis--slapped each other silly with threats and counter-threats. Ken-Doll thought about pulling out of the deal before the shareholder vote in December. Take this, said Hammerin' Hank, handing him an envelope stuffed with $25 billion in TARP dough. Not enough, said Lewis. Then we'll up the ante, said Paulson, throwing in another $20 billion in taxpayers' money and a guarantee to cover as much as $118 billion in Merrill assets. Still not enough, repeated Lewis. Look, you good-for-nuttin' empty suit, said Helicopter Ben, just take the money and keep your trap shut, or we'll fire you AND your entire board.
O.K., O.K., that's enough, concluded Lewis. BofA shareholders approved the deal, blissfully unaware that Merrill was ringing up billions in losses and paying billions in executive bonuses. Since then the Securities and Exchange Commission, embarrassed into action by New York's Attorney General, has accused BofA executives of withholding material information from shareholders. Convinced that its work was complete, the SEC then agreed to a settlement whereby BofA would pay the government a fine of $33 million while admitting no wrongdoing.
Here come de judge! (Remember that refrain popularized by comedian Flip Wilson forty years ago?) Last week U.S. District Judge Jed Rakoff threw out the settlement, finding it ridiculous that the victims of the alleged wrongdoing--the shareholders who own the company--would ultimately pay the fine (the judge's dissatisfaction is documented here). Instead, he ordered the case to trial. The SEC, having already blown the Bernie Madoff affair, has no choice but to proceed. It must prove the misconduct and identify the perpetrators, who presumably would then be subject to punishment. Yesterday the SEC pledged to "vigorously pursue" the case against Bank of America.
Pending the trial, Lewis continues to make out like a bandit, thanks to the largesse of the federal government. The various bailout programs enacted by Congress (TARP, TALF, TLGP, etc.) have boosted the stock prices of all the major banks. Lewis has seen his 4.7 million shares of BofA stock more than quintuple in value since March. So confident is he of his firm's recovery that he has arranged to cancel the $118 billion asset guarantee provided by the feds for the Merrill mess. Generous to a fault, Uncle Sam is accepting an exit fee of $425 million, or less than a tenth of the real value of the insurance as originally negotiated.
It will be interesting to see if the discovery process which Judge Rakoff demands finally assigns accountability for the ongoing financial calamity that threatens any meaningful economic recovery.
Lewis announced today that he will retire from Bank of America at the end of the year. He will leave with $135 million in pension benefits, stock, and other compensation. So what if Social Security goes bust!
Monday, September 21, 2009
Friday, September 18, 2009
[click for a larger view]
The S&P 500 stock index oscillates around its 200-day moving average, regularly reverting to the mean. The S&P is now trading at 20 percent above the 200-day MA, typically a level which triggers a turn back down. Fasten your seat belts.
Friday, September 11, 2009
Up, Up, and Away? That's what the stock market seems to be saying, but the line above is pointing in the other direction. ALLL stands for "Allowances for Loan and Lease Losses," and the graph indicates that only 20% of all bank assets reside in banks with sufficient allowances set aside to cover their nonperforming loans. In other words, as more and more loans become delinquent, banks are under-reserving for possible defaults. Instead, they are puffing up their current earnings in hopes of appeasing regulators and attracting investors (and, of course, paying their top executives).
A new wave of defaults will arrive in 2010 as option ARMs (adjustable-rate mortgages) do what they were designed to do: explode. These are teaser loans that start borrowers off at absurdly low monthly payments for the first few years. The payments might be interest-only (leaving the principal untouched) or even less (allowing the balance owed to increase). Then, once the introductory period expires, the payments on principal begin. That's when the rubber finally meets the road.
These products were perfect for speculators flipping properties in an overheated market. Borrowers could sell for a profit before the loans re-set. But option ARMs will prove deadly to homeowners who have suddenly lost their jobs and, thus, the income to cover the higher payments due after the re-set. The U.S. economy has shed jobs for twenty months in a row (a total of 6.9 million) and is expected to continue doing so at least until the middle of 2010. The mortgages, alas, allow no grace periods for unemployed borrowers. [Hours after I posted this, FDIC Chair Sheila Bair revealed in a statement that "the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months." The initiative applies to banks that have acquired failed FDIC-insured banks and would offer relief to "unemployed and underemployed" borrowers.]
Almost $100 billion in option ARMs will reset between now and the end of 2010. Mounting foreclosures are inevitable, and hundreds of banks will be forced to close. Surviving banks will be hit by the feds with a double whammy: "special assessments" to help indemnify insured deposits as well as stricter capital-reserve requirements to backstop defaults. Turning a profit will be a tall order (as described here). Lending to entrepreneurial start-ups--and creating jobs--will be out of the question.
But bank CEOs don't mind. They already have theirs.