Just when I thought I was caught up, Morgan and Goldman are approved by the Federal Reserve to become bank holding companies. What I suspect this means is that they will now look to acquire banks that can provide stable depositor based funding. The Federal Reserve just relaxed the regulations prohibiting bank holding companies from using federally insured deposits to fund investment banking assets so we end up with FDIC (taxpayer) guaranteed deposits funding investment banking operations. I hope I am wrong, but if this is the case it is a shameless manipulation of the rules to use unsuspecting taxpayers in a bail out for equity and bond investors in these banks and it should not be allowed to proceed without full and honest disclosure and approval from Congress. If these banks are insolvent the fix should be that equity and then, as necessary, debt gets wiped out, not that a roundabout free taxpayer guarantee provides the means for funding.
Sphere: Related ContentSunday, September 21, 2008
Wednesday, June 25, 2008
California v. Countrywide
Let the fun begin! I found this link to the draft complaint filed by California against Countrywide and its executives for deceptive practices in the mortgage market. California charges that Countrywide AND some of its executives knowingly used deceptive practices to lure customers into taking on riskier mortgages than they needed or could afford in order to increase the profit Countrywide made selling these mortgages into the securitization market. The complaint makes for interesting reading (to nerds like me). I like the fact that it provides examples of some of the loan payments and how the negative amortization features work.
By the way, flying through Congress is a plan to authorize FHA to guarantee refinancing of $300 billion of mostly subprime loans. Of course, the taxpayers stand behind FHA guarantees, so get ready to dig into your pocket to pay off the banks and investors who own the kind of bad loans described in the complaint. According to this Washington Post Report portions of this plan were submitted by Bank of America. Bank of America is set to purchase Countrywide and reportedly has the largest portfolio of mortgage securities of any of the major banks (call me a conspiracy theorist). I don’t always agree with WSJ Editorials, but if you take the political finger pointing out of this one it pretty much hits the mark. Here’s more from tomorrow’s WSJ. I reviewed this legislation last month and wrote a more detailed analysis here.
So far the Federal Reserve has advanced some $400-450 billion to banks and investment banks secured by mortgage securities (we believe but can't verify), FHA is already well into refinancing many bad loans and looks to be getting authorization for an additional $300 billion, and the Federal Home Loan Banks (funded through taxpayer guaranteed bonds) have advanced over $250 billion to banks for mortgages, all since this broke out last year. That’s $1 trillion, and that’s without counting any possible exposure to the largest mortgage companies we have, the government sponsored entities Fannie Mae and Freddie Mac, or the impact of negative real interest rates from the Federal Reserve (again). To put the $1 trillion into perspective, it is about 7% of our GDP and about 11% of our entire national debt. It’s a lot of money.
I hope the summer is treating you well!
