by Calculated Risk on 12/14/2009 09:56:00 PM

There seems to be a sense that the banks are rushing to repay the TARP funds so they can pay bonuses. I think it is more likely that are just taking advantage of the opportunity to raise capital.

From Eric Dash and Andrew Martin at the NY Times: Wells Fargo to Repay U.S., a Coda to the Bailout Era

Wells joins Citigroup, Bank of America and JPMorgan Chase, its largest rivals, in shedding the stigma of taxpayer support and the restrictions on compensation that came with it.
...
[David H. Ellison, a portfolio manager at FBR Funds] said banks appeared to be “rushing in” to pay back the government, so they can offer bigger bonuses to their executives and get lawmakers off their backs.

But the prospect of huge losses on mortgages and commercial real estate loans early next year might also be causing the repayment stampede, he said.

“It may be as much about raising capital as it is paying off TARP,” he said.

Exactly.

What has made this doable now is the massive support for asset prices by the Government (and taxpayers). This includes the Fed's MBS purchase program, the loose lending by the FHA, the FTHB tax credit, the HAMP, and more. These programs have limited the losses at the financial firms. Maybe this will work - as I noted last year, house prices in low end bubble areas might have bottomed - although prices are clearly still too high in many mid-to-high end bubble areas and eventually will decline (at least in real terms) to more supportable levels. And that probably means more losses for the banks.

Also in the article, Dash and Martin write that some financial experts think "If the economy takes a turn for the worse ... these same large banks will return to the government for a new round of aid." I don't think so.

I doubt there will be a TARP II. If any of these banks get in trouble again, they will probably be dissolved, management fired, and the shareholders wiped out. Isn't that implicit in paying back the TARP? Isn't that a key component of financial reform?

by Calculated Risk on 12/14/2009 06:19:00 PM

From the WSJ: Wells Fargo to repay entire $25 billion in bailout aid, use proceeds from $10.4 billion stock sale.

The last of the big banks ...

Press Release from Wells Fargo: Wells Fargo to Repay Entire $25 Billion TARP Investment; Announces $10.4 Billion Common Stock Offering

Wells Fargo & Company announced today that, pursuant to terms approved by U.S. banking regulators and the U.S. Treasury, it will redeem the $25 billion of series D preferred stock issued to the U.S. Treasury in October 2008 under the government’s Troubled Asset Relief Program (TARP), upon successful completion of a $10.4 billion common stock offering.

“TARP stabilized our country’s financial system when confidence in financial markets around the world was being tested unlike any other period in our history. Its success also generated financial returns for taxpayers, including $1.4 billion in dividends paid to the U.S. Treasury by Wells Fargo,” said Wells Fargo President and CEO John Stumpf. “Now we’re ready to fully repay TARP in a way that serves the interests of the U.S. taxpayer, as well as our customers, team members and investors.”

by Calculated Risk on 12/14/2009 02:23:00 PM

Just an update on the status of the Fed's MBS purchase program.

From the Atlanta Fed weekly Financial Highlights:

From the Atlanta Fed:

The Fed purchased a net total of $16 billion of agency-backed MBS in each of the last three weeks, with the last one through December 2. This purchase brings its total purchases up to $1.058 trillion, and by the end of the first quarter 2010 the Fed will have purchased $1.25 trillion (thus, it is 85% complete).

In the last two months, the average weekly amount of MBS purchased has been smaller, averaging $17 billion over the last 10 weeks versus the average of $23.4 billion before that period.

The Fed purchased an additional $16 billion net in MBS over the last week.

And on the Fed balance sheet:

The balance sheet shrank slightly between November 26 and December 2 to $2.24 trillion.

Note that the Fed balance sheet is mostly Agency & MBS and Tresuries now.

by Calculated Risk on 12/14/2009 12:03:00 PM

On Saturday I wrote that I'd take the "over" - more bank failures in 2010 than 2009. This is primarily because many FDIC insured banks are overly exposed to Construction & Development (C&D) and Commercial Real Estate (CRE) loans.

FDIC Chairwoman Sheila Bair is also taking the "over".

From CNBC: Worst of Bank Failures Isn't Over Yet: FDIC's Bair

Bank failures will continue to accelerate into next year despite "some encouraging signs" that things are turning around for the battered industry, FDIC Chair Sheila Bair told CNBC.

... Bair did not quantify how bad the failures would get but said the worst isn't over yet for institutions that will suffer even as the economy improves.

"There's a lag generally with bank recovery from the overall economy," she said. "We do think bank failures will continue to go up next year but will peak. Even at higher levels than we have this year, it's still far below where we were during the S&L days."
...
"Even though the insured depository institutions are having their share of problems, it's really much lower than it was during the S&L days simply because most of this occurred outside the insured banks," Bair said.

Amid the problems for the industry, Bair said the Federal Deposit Insurance Corp's financial standing remains solid. She said the FDIC will head into 2010 with about $60 billion in cash reserves.

A industry contact told me this weekend that they expect 400 bank failures in 2010.

by Calculated Risk on 12/14/2009 10:35:00 AM

The Mortgage Bankers Association's (MBA) current forecast for refinance activity in 2010 is $693 billion, and falling further in 2011 to $591 billion. The MBA is currently estimating 2009 refinance originations will be $1,246 billion - so they expect activity to fall almost in half.

This gives me an excuse for a graph or two (as if I need one).

Click on graph for larger image in new window.

Refinance activity picks up when mortgage rates fall (for obvious reasons), and this graph shows the monthly refinance activity (MBA refinance index) and the Freddie Mac 30 year fixed mortgage rate and one year adjustable mortgage rate - and the Fed Funds target rate since Jan 1990.

Mortgage rates would have to fall further in 2010 to get another increase in refinance activity, and with the Fed MBS purchase program scheduled to end by the end of Q1, it seems unlike that rates will fall - unless the program is extended or the economy weakens significantly.

Notice that following the '90/'91 and '01 recessions, the Fed kept lowering the Fed Funds rate because of high unemployment rates. This spurred refinance activity.

The second graph shows the weekly MBA refinance activity, and the Ten Year Treasury yield.

Every time the 10 year yield drops sharply, refinance activity picks up. But notice what happened at the end of 1995. The Ten Year yield dropped, but the increase in refinance activity was muted. This was because mortgage rates didn't fall below the rates of a couple years earlier - and many people had already refinanced at those lower rates. The same thing will happen in 2010 and 2011 - there will only be a surge in refinance activity if rates fall below the rates of 2009.