by Calculated Risk on 9/26/2009 04:06:00 PM

From the WaPo: Barney Frank Talks Back A couple of excerpts:

Klein: What's the most important part of financial regulation?

Frank: Limiting securitization. I believe the single biggest issue here is that people invented ways to lend money without worrying if they got paid back or not by securitizing the loan. When I was younger, the theory was if you had a high risk tolerance, you went into stocks. If you were safe and stodgy, you bought debt. But debt became the volatile aspect here.
...
Klein: One theory of the crisis is that the problem wasn't traders and their high tolerance for risk. It was people fooling themselves into thinking this stuff was safe by slapping a triple-A rating on everything.

Frank: I agree; the theory has always been that people bought debt because it was safer. The basic problem was that 30 years ago when people lent other people money, they expected to be paid back by the people they lent money to. So they were very careful. Two years ago, most loans were being made by people who were going to sell those loans to other people and didn't expect to be paid back.

This is an interesting answer. About two years ago, I was asked to sum up the causes of the crisis in a few words, and I responded "Securitization and the lack of regulatory oversight". I then explained how rapid innovation in lending resulted in a disconnect between the borrower and the eventual debt holder.

The mortgage lenders and Wall Street firms were disconnected from the performance of the actual loan (the "Originate-to-sell" model). At the same time, the rating agencies were evaluating the debt based on the historical performance of the old style lender-borrower relationship. The eventual debt holders relied on the rating agencies, without realizing the entire model had changed.

Meanwhile the regulators were not following this advice:

“Instruct regulators to look for the newest fad in the industry and examine it with great care. The next mistake will be a new way to make a loan that will not be repaid.”
William Seidman, "Full Faith and Credit", 1993.

There is nothing inherently wrong with securitization or financial innovation. But the regulators should always be on the lookout for "a new way to make a loan that will not be repaid".

by Calculated Risk on 9/26/2009 01:28:00 PM

A quote from Bloomberg: Strauss-Kahn Says Crisis Consequences Will Last Long Time

“We will still have rising unemployment at least for a year,” [International Monetary Fund Managing Director Dominique] Strauss-Kahn said via videolink in an address to the Yalta European Strategy Conference from Washington. “From this point of view, the crisis isn’t over. It is too early to claim victory, even that we have avoided the worst situation. The consequences will be there for a long time.”

Strauss-Kahn makes several key points:

Unemployment will continue to rise for some time.

The consequences of the crisis will "be there for a long time".

It is too early for a victory lap.

Earlier this week, Strauss-Kahn expressed concern about the social consquences of the crisis (via Reuters):

"In many areas of the world, what is at stake is not only higher unemployment or lower purchasing power, but life and death itself," Strauss-Kahn said.

"We don't just care about growth for growth's sake, we also want to safeguard peace and prevent war," he said, adding: "Indeed, when low-income countries were doing well over the past decade or so, the incidence of war declined significantly. The great fear is that this trend could be reversed."

by Calculated Risk on 9/26/2009 08:33:00 AM

From Peter Hong at the LA Times: Don't bank on your home as an ATM (ht Ann). A few excerpts:

For generations of Americans, a home was seen not simply as a dwelling, but as an engine of personal wealth. That view was promoted by the home-building and real estate sales industries as well as the U.S. government, which subsidized home loans and provided tax deductions for mortgage interest.
...
Now, however, the worst housing crash since the Great Depression may mean that a home purchase ought to be considered with the same warning issued to investors in securities: Past performance is not indicative of future results.
...
Leslie Appleton-Young, chief economist for the California Assn. of Realtors, said that the state's median home price used to rise and fall roughly in line with the national median. ... "It didn't really get out of whack until about four or five years ago," she said. "It was tied into financing."

With lax mortgage standards a thing of the past, at least for now, Appleton-Young said, home price increases will be more moderate in the future, which should lead people to "a much more realistic assessment of why they're buying a home. They'll do so more for the consumption value; it's a place to raise your family, not your nest egg."
...
"In the period post-World War II, you bought a home, gave your family a great place to live relative to the alternatives, and if all went well, in 20 years you didn't have a mortgage," said [Thomas Lawler, influential housing consultant and a former Fannie Mae official]. "That's what people ought to go back to."

It makes sense for people to buy houses as a place to live, not as an investment.

Perhaps Leslie Appleton-Young has lost track of time, but four years ago was 2005 - the peak of the housing insanity. She probably meant four or five years before 2006 (when prices peaked) as to when house prices in California started to detach from fundamentals.

by Calculated Risk on 9/26/2009 01:47:00 AM

From the NY Times: Group of 20 Agrees on Far-Reaching Economic Plan

The leaders pledged to rethink their economic policies in a coordinated effort to reduce the immense imbalances between export-dominated countries like China and Japan and debt-laden countries like the United States, which has long been the world’s most willing consumer.

The United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit. Countries like China, Japan and Germany will be expected to reduce their dependence on exports by promoting more consumer spending and investment at home.

... for the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the International Monetary Fund.

Imagine an export led recovery in the U.S. (as opposed to the typical recovery with consumer spending and housing leading the way). I'll believe it when I see it.

by Calculated Risk on 9/25/2009 07:36:00 PM

This is an unofficial list of Problem Banks.

Changes and comments from surferdude808:

Another week with significant changes to the Unofficial Problem Bank List as the FDIC released its enforcement actions for August. We will not get another release from the FDIC until the end of October.

The Unofficial Problem Bank List grew by 23 institutions to 459 and aggregate assets total $297.2 billion, up from $294 billion last week. During the week, we added 25 institutions to the list while we removed 2 because of failure. The failures were Irwin Union Bank and Trust Company ($2.8 billion) and Irwin Union Bank, F.S.B. ($518 million).

The largest asset additions include First Mariner Bank ($1.3 billion), Baltimore, MD; Anchor Mutual Savings Bank ($657 million), Aberdeen, WA; and NexBank ($560 million), Dallas, TX.

For the other 23 additions, the average asset size is $178 million. The additions are concentrated in handful of states including Minnesota (5), California (4), Washington (4), and Georgia (3), which all continue to see banks with large CRE or C&D lending concentrations come under enforcement action.

The list includes 2 new Prompt Corrective Action orders the FDIC issued against American United Bank ($112 million), Lawrenceville, GA; and Bank 1st ($109 million), Albuquerque, NM. It is long overdue for the agencies to start issuing more PCA orders.

One other interesting item this week is that the FDIC issued a Cease & Desist order on August 31st against Georgian Bank ($2.2 billion), Atlanta, GA, which was closed today. We typically remove failures from the subsequent week’s list but, in this case, we did not add Georgian Bank otherwise aggregate assets would have been $299.4 billion.

The list is compiled from regulator press releases or from public news sources (see Enforcement Action Type link for source). The FDIC data is released monthly with a delay, and the Fed and OTC data is more timely. The OCC data is a little lagged. Credit: surferdude808.

See description below table for Class and Cert (and a link to FDIC ID system).

For a full screen version of the table click here.

The table is wide - use scroll bars to see all information!

NOTE: Columns are sortable - click on column header (Assets, State, Bank Name, Date, etc.)





Class: from FDIC

The FDIC assigns classification codes indicating an institution's charter type (commercial bank, savings bank, or savings association), its chartering agent (state or federal government), its Federal Reserve membership status (member or nonmember), and its primary federal regulator (state-chartered institutions are subject to both federal and state supervision). These codes are:

N National chartered commercial bank supervised by the Office of the Comptroller of the Currency

SM State charter Fed member commercial bank supervised by the Federal Reserve

NM State charter Fed nonmember commercial bank supervised by the FDIC

SA State or federal charter savings association supervised by the Office of Thrift Supervision

SB State charter savings bank supervised by the FDIC

Cert: This is the certificate number assigned by the FDIC used to identify institutions and for the issuance of insurance certificates. Click on the number and the Institution Directory (ID) system "will provide the last demographic and financial data filed by the selected institution".