Regulatory

The latest piece of stupid to come out of Ms. Bair's mouth was this morning on CNBS and summarized on Bloomberg:

Dec. 14 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said she’s “concerned” that U.S. banks are making only the safest loans, and encouraged the companies to step up their pace of lending.

“There needs to be well-managed risk-raking to get the economy going again,” Bair said today in a Bloomberg Television interview at the White House, prior to a meeting of bank chief executive officers with President Barack Obama.

Right.  But here's the problem, in a nutshell - the banks are still hiding losses - big losses.

Where?  Well, among other places, as I noted in The Ticker on the 8th:

However, as Laurie has said, the choice is between forced cramdowns and workouts within the current loan structures or continued foreclosures.   Both end in the same place for home values, but the latter results in larger losses, as a loss delayed is a loss that grows larger for multiple reasons.  Some of those include "homeowners" who trash their foreclosures on the way out the door, vandalism and simple rehab-and-resale expenses.

Today, a week later, she suddenly "gets some press" - for what I've been writing about for over two years, and what others have been opining on as well: The second mortgages are sitting on bank balance sheets and they are, for loans that are underwater on the first, worth exactly zero!

“It’s important to realize the largest second-lien holders are the largest banks, and there’s going to have to be some very substantial writedowns if you go to a principal-reduction program,” Goodman said. “And this is going to have to be addressed head-on.”

How do you intend to "address" this Sheila?

Let's count the ways:

1. You can stop allowing banks to lie!  That would be a great idea.  Force them to go through their second line portfolio line by line, and reserve against all loans that have a subordinate position and for which the collateral value is less than the total of the first and all seconds combined.  For those who are not paying today, that means writing those loans off entirely, as the capital structure says they are worth zero.  For loans that are currently performing a provision for doubtful collection should be established.
   
   
2. You can find a way to "bail out" the second line holders.  How much is involved here?  Good question - but it's not small!  Several of the large banks have tens of billions of dollars of this trash on their balance sheets and it infests basically all of them.  This is a roughly $1 trillion dollar mess.  Since these were the "ATM Machines" of housing and were both most popular in bubble areas and were drawn down in those areas heavily, the losses are likely to be enormous - hundreds of billions worth.  (Estimates are that 70% of all outstanding HELOC balances are in bubble states - specifically, California, Arizona, Nevada and Florida.)

So which is it going to be Ms. Bair?  You say you want banks to take "prudent risks" but those were the same "prudent risks" that caused all the trouble in the first place.  These so-called "prudent risks" include writing second lines (including HELOCs) that were immediately tapped and spent - not on household improvements that increase the value of the home, but on boats, cars, exotic vacations and credit-card balances.

Now you want "small business" to be able to get loans.  There's a major problem here: Small businesspeople have no collateral to pledge!

I know - I have been a small businessperson most of my adult life.  I have interacted with banks most of my adult life too.  And in each and every instance for a small business loan I have been asked to pledge my personal assets as collateral for that loan.  As I was either unwilling to do so or unable (I had no material personal assets as I lived in an apartment at the time) I did not "avail" myself of the moneychangers financial abuse (fortunately.)

With most homes underwater, most small businesspeople have no assets to pledge as collateral.  Therefore, you are asking for the impossible - prudent lending does not take place unsecured, and yet small businesspeople are, largely, without collateral as a direct and proximate cause of the outrageous housing bubble that your agency, along with the rest of the Federal Government and Federal Reserve, willingly and knowingly allowed to be blown (and which is now collapsing.)

The fraud machine on Wall Street and in DC continues to roll on, with pointless bleating from administration officials on a regular basis about how we "must increase lending" - when in truth it was too much lending to people who simply couldn't pay that caused the trouble in the first place, destroying the collateral value that would, in normal economic times, be used as security for such lending.

We will eventually stop trying to drink ourselves sober, but I fear that it will only happen when we start puking up blood - or worse, suffer liver cancer.

I can't believe this is coming from five Democrats:

Five House Democrats will call this week for a return to a Depression-era law that separated Wall Street investment banking from Main Street commercial banking.

If adopted, the measure would give banks one year to choose between being commercial banks or investment banks. The nation's biggest -- those now commonly referred to as "too big to fail" -- would be broken up. The Obama administration opposes the measure.

The amendment's five co-sponsors -- Maurice Hinchey of New York, John Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington, and John Tierney of Massachusetts - want to restore the Glass-Steagall Act of 1933, which prohibited commercial banks from underwriting stocks and bonds. The act was repealed in 1999 at the urging of, among others, Larry Summers, now President Barack Obama's chief economic adviser.

Gentlemen, you're on the right side of this.

You can start reading here, then page back.  There's a lot of reading for you to do..... (this is the search results for all of my Tickers that have mentioned Glass-Steagall, of course.)

http://market-ticker.org/search/glass-steagall/P12.html

A FULL re-instatement of Glass-Steagall - not some watered-down piece of legislative trash, but the real deal - will prevent the economic meltdown we are in the middle of from ever happening again.

The key to such a fundamental re-balancing of our economy would be the restoration of the balance of credit, by making it impossible for those banks with access to the sovereign's fractional reserve privilege to speculate with it. 

Instead, lending would shift primarily to productive investment.

Glass-Steagall, in point of fact, was one of the primary reasons post-WWII that we came roaring forward with our economy.  Lending went to finance productive assets (e.g. factories, machines, tractors, combines, etc) instead of financial speculation as it had in the 1920s. 

It was that financial speculation that led to the asset bubbles in the 1920s - and that, in turn, resulted in the malinvestment that was responsible for The Great Depression.

It was that very same financial speculation in the 1990s and 2000s that led to the current bust, and contrary to the claims made by Bernanke, Geithner and others, the pain is not over, nor can it be until and unless the banks' abuse of sovereign credit for financial speculation is prohibited.

If this amendment passes it will eviscerate Wall Street's "profit gravy train", but it will also usher in a productive explosion in America that we have not seen in the last 50 years.

You want to see jobs created by the millions and Americans return to work?

Pass this amendment.

If Bair won't do the right thing with the FDIC (and OTS/OCC), seizing banks when she should, it appears they will stop the BS games that they DO play when they come in:

When AmTrust Financial Corp. filed for bankruptcy protection this week, it may have been trying to avoid what happened to Washington Mutual last year.

Federal regulators seized WaMu in September 2008 and sold it to JPMorgan Chase, leaving WaMu shareholders without a dime. Never mind that WaMu's parent company had $4 billion in the bank. Regulators took it all and gave it to JPMorgan.

Exactly.  These deposits, of course, are well beyond the FDIC insurance limits, and simply "disappear" when the FDIC comes-a-knocking.

But not if you file bankruptcy first!  Then you get to throw a padlock on the safe - before Sheila can come in there and rob your bank (almost literally.)

In all fairness if you're over the FDIC maximum there's really not a lot you can do about it.  Which is why you should never be, and why the Transaction Account guarantee program (now ending) has been such a big deal for businesses.

Try running a payroll for a business of any size without being over $250,000 in your account - ever.  Good luck. 

Sheila, I'm sure, will be pissed off about this - that's a few million (and maybe tens of millions) she's been "foreclosed" on being able to use to help cover what will, I'm sure, be huge FDIC losses if and when this bank is seized.

Of course if The FDIC had ever bothered with this silly law called "Prompt Corrective Action" - USC Title 12, Ch16, Sec 1831o - there would have never been a problem in the first place.  This bank, and the more than a hundred others thus far (and likely more than 2,000 to come) would have been seized before there was a risk of actual loss of materiality to the deposit insurance fund.

But Sheila has played "extend and pretend", just like Treasury.  Unfortunately extending and pretending is really all about the pretending, and when the cash flow will no longer support the light bill, you're done and the lies are exposed.

Any angst that Sheila has is the result of her own actions, and as a consequence I applaud boards that are willing to take this bull by the horns and shove it where Sheila won't appreciate it.

Maybe - just maybe - it will wake up our regulators if done often enough to hurt, and cause them to start enforcing the law instead of willfully turning a blind eye to it.