Tag Archives: banks

Begging the Banks

Treasury Secretary Henry Paulson today called on the banks that the federal government has just given $250 billion dollars to make that money available to others in the economy.

“We must restore confidence in our financial system,” Paulson said. “The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”

The “needs of our economy” might require that the banks not hoard the money that the government has given them, but the Bush administration isn’t requiring much of anything.

I agree with Paulson that the economy will not begin to recover until there is liquidity in the credit markets.  That, indeed, was the rationale behind the government’s massive and unprecedented bailout of the financial industry.

Why, then, is Paulson asking the banks to do the only thing that justified giving them those billions of taxpayer dollars?

If, as is apparent to just about everyone, the economy will not recover until liquidity is restored to financial markets, why doesn’t the federal government require that the banks not hoard the billions that the government is giving them?

The answer is that, despite the acuteness of the financial crisis, and despite the government’s belated decision to take large scale action, the basic approach of the Bush administration has not changed.

In fact, for the past year, the Bush administration has taken a consistent, and faulty, two pronged approach to dealing with the expanding economic crisis, and this approach has not changed with the latest bailout.

This two pronged approach is

  • (1) make capital available at extremely low rates to banks and financial institutions with the goal of restoring liquidity, and then
  • (2) beg and plead with these same banks and financial institutions to move this capital into the economy.

As the housing and mortgage crisis worsened, Federal Reserve Chairman Ben Bernanke announced a series of cuts in interest rates.  Each time, Bernanke repeated his call for lenders to voluntarily reduce the principal on delinquent loans to adjust them for the drop in home prices, rejecting the far more more forceful action proposed by Democrats favoring legislation that would require the refinancing of hundreds of thousands of mortgages.

Of course, the banks did not voluntarily do what Bernanke requested.

Now Treasury Secretary Paulson is following the same dead end path in asking the banks to voluntarily take the actions that are needed for the restoration of the market.

The Bush adminstration’s beg and plead approach did not work in the past, and it will not work now.

Of course, no one, except the apocalypticals of the far Left and Right, and Libertarians driven crazy by ideology or alcoholism, want to see the global economy collapse.  Sane people don’t want to see bread lines or live with their guns at the ready in a bunker in the woods.

But we can now longer expect that capitalists, driven by personal gain, will voluntarily act to save the system that sustains them.

What is needed is a comprehensive and mandatory overhaul of the entire banking and financial system and the credit markets on the order of the Securities and Exchange Act of 1934.

And for that, we’ll have to wait at least until a new Congress, a new administration, and a new political and economic philosophy take over in January 2009.

I hope we last that long.

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Morals, Money and the Bailout

We’ve heard lots of moralism about the economy recently from both ends of the political spectrum.  Wall Street is guilty of greed and homeowners in trouble are guilty of irresponsibility. Instead of offering a cogent systemic analysis of how we got into this financial mess, and the best way to change our economic and financial system in order to fix it, both parties seem to prefer preaching about the wages of sin. 

But while wagging a self-righteous finger while invoking the Seven Deadly Sins (in particular Greed, Envy, Sloth, and Pride, but we could also make a case for Gluttony and Lust) makes for good politics, it is a terrible way to approach the current crisis. 

We should not expect capitalists not to be greedy.  And we should not expect consumers to want fewer or less expensive goods, including fewer and less expensive homes and cars.

The desire for more, for bigger, and for better is not the enemy of capitalism. 

Unregulated capitalism is the enemy of capitalism.

What we should expect, and what we need, is for the economic and financial system to be structured by law and regulation to channel the desires of both capitalists and consumers for more, for bigger, and for better into productive, sustainable economic growth.

Moralism won’t get us there, and will distract us from seeing the problem for what it is: a matter of systemic, not moral or individual, failure.

McCain’s Economic Plan: Blame Minorities

Fox News’ Neil Cavuto made news of his own this week by suggesting that the credit crisis was caused by loans made to minorities

On Fox’s “Your World” on September 18, Cavuto asked Rep. Xavier Becerra (D-CA), “[W]hen you and many of your colleagues were pushing for more minority lending and more expanded lending to folks who heretofore couldn’t get mortgages, when you were pushing homeownership … Are you totally without culpability here? Are you totally blameless? Are you totally irresponsible of anything that happened?” Cavuto also said, “I’m just saying, I don’t remember a clarion call that said, ‘Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.’” 
 
This wasn’t the first time that Cavuto blamed loans to minorities for the credit crisis.  In an exchange with House Majority Leader Steny Hoyer (D-MD) on September 16, Cavuto said “[Y]ou wanted to encourage minority lending — obviously, a lot of Republicans did as well. There was a lot of — expand lending to those to get a home,” Cavuto then rhetorically asked, “Do you think, intrinsically, it was a mistake, on both parties’ part, to push — to push for homeownership for everybody?”  Unlike Becerra, Hoyer either didn’t understand what Cavuto was saying or simply rolled over. “I think clearly what happened,” Hoyer replied, “ is Fannie and Freddie got caught up in trying to do what the Congress wanted done.”

This is not just a generic attack on minorities.

What is going on here is an attempt by Republicans to deflect public outrage from the credit industry, the investment banks and their Republican deregulators and to place the blame for the crisis credit on the government and the Democrats. 

That’s why John McCain and his Republican apologists have focused their ire on the quasi-governmental institutions Fannie Mae and Freddie Mac rather than on the wholly private companies and individuals behind the credit meltdown.

Every time McCain or one of the Republican talking-pointers blasts Fannie Mae and Freddie Mac, the message is: “These are government institutions, run by Democrats. They caused the credit crisis by pushing the Democratic Party agenda, including homeownership for minorities who could not afford to buy homes and should have been content to be renters. Blame them, not us.”

But are they right?  How big a problem are loans to minorities?  And should any future regulation of the credit and mortgage industry eliminate the mortgages that allowed so many minorities to become homeowners?

The answer is No.

The facts show that there has been tremendous racial disparity in lending is growing, and that the subprime mortgage crisis has disproportionately affected minority borrowers. Banks such as JP Morgan Chase, Citigroup, Bank of America, and Countrywide issued high-cost subprime loans to minorities more than twice as often as to whites and, at some institutions, the number of high-cost subprime loans issued increased even amid a growing credit liquidity crisis.

Citigroup in 2007 made higher-cost subprime loans 2.33 times more frequently to blacks than to whites. During the same period, JP Morgan Chase made higher-cost subprime loans 2.44 times more frequently to blacks and 1.6 times more frequently to Hispanics than to whites. Bank of America extended to blacks higher-cost loans 1.88 times more frequently, and Country Financial extended to blacks higher-cost loans 1.95 times more frequently than to whites. A study released in 2006 found that blacks and Hispanics were often two or three times more likely to receive high-cost subprime mortgages than were white borrowers.

So, yes, minorities were very much more likely to receive high-cost subprime loans than whites. Yet as Robert J. Shiller of Yale University and Austan D. Goolsbee of the University of Chicago have pointed out, although minorities have been hit hard by the subprime bust, the overall affect of the subprime mortgage boom for minorities was mostly positive.

Both Shiller and Goolsbee think that minorities benefited tremendously by financial innovations created by the mortgage and banking industries, and they have cautioned against reacting to the subprime crisis by restricting innovative mortgage practices that allowed minorities greater access to the American Dream of home ownership than ever before.

In testimony before Congress in September 2007, Robert J. Shiller, professor of economics at Yale, author of the bestseller Irrational Exuberance and co-developer of the Case-Shiller National Home Price Index, put the issue in context.  As the news of the study findings hits the media, Shiller’s nuanced Congressional testimony is worth recalling:

“The promotion of homeownership in this country among the poor and disadvantaged, as well as our veterans, has been a worthy cause. The Federal Housing Administration, the Veterans Administration, and Rural Housing Services have helped many people buy homes who otherwise could not afford them. Minorities have particularly benefited.”

“Home ownership promotes a sense of belonging and participation in our country. I strongly believe that these past efforts, which have raised homeownership, have contributed to the feeling of harmony and good will that we treasure in America.”

“But most of the gains in homeownership that we have seen in the last decade are not attributable primarily due to these government institutions. On the plus side, they have been due to financial innovations driven by the private sector. These innovations delivered benefits, including lower mortgage interest rates for U.S. homebuyers, and new institutions to distribute the related credit and collateral risks around the globe.”

The same point was made by University of Chicago economics professor and Barack Obama economic advisor Austan D. Goolsbee in his essay in the New York Times entitled “‘Irresponsible Mortgages’ Have Opened Doors to Many of the Excluded.”

Goolsbee cautioned against the “very old vein of suspicion against innovations in the mortgage market.”  He cited a study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, “Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market,” showing that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans.” “These innovations,” Goolsbee observed, “mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.”

Goolsbee wrote that these economists “followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.”

In regard to racism in mortgage lending, Goolsbee noted that “Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.”

He concluded that “When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.”

In the search for villains in the credit crisis, Congress should be careful not to  eliminate the mortgages that have opened doors for many who have historically been excluded from homeownership and the American Dream.

It is also important to recognize that it was the Bush adminstration that pushed for greater access to homeownership for minorities, and specifically tasked Freddie Mac and Fannie Mae with expanding home loans to minorities.

As CNN reported on June 17, 2002:

“President Bush touted his goal Monday of boosting minority home ownership by 5.5 million before the end of the decade through grants to low-income families and credits to developers. ‘Too many American families, too many minorities, do not own a home. There is a home ownership gap in America. The difference between African-American and Hispanic home ownership is too big,” Bush told a crowd at St. Paul AME Church in Atlanta. Citing data he used Saturday in his weekly radio address, Bush said that while nearly three-quarters of white Americans own their homes, less than half of African-Americans and Hispanic-Americans are homeowners. He urged Congress to expand the American Dream Down-Payment Fund, which would provide $200 million in grants over five years to low-income families who are first-time home buyers. The money would be used for down payments, one of the major obstacles to home ownership, Bush said. … Fannie Mae, Freddie Mac and the federal Home Loan Banks — the government-sponsored corporations that handle home mortgages — will increase their commitment to minority markets by more than $440 billion, Bush said. Under one of the initiatives launched by Freddie Mac, consumers with poor credit will be able to obtain mortgages with interest rates that automatically decline after a period of consistent payments, he added.”

In the political battle over blame for the credit crisis, Democrats need to be careful both to counter claims that the crisis was caused by loans to minorities and also not to allow conservatives and Republicans to use the crisis as a pretext to scuttle these programs.

Bankers Reject Free Market Ideology and Call for More Regulations and Protections for Investors

Free-market ideologues tend to blame most economic problems on government interference in the market.  And their response to economic crisis is invariably to call for the reduction or elimination of government regulations.

But free-market ideologues are usually pundits, professors, and politicians, and not capitalists themselves.

Real capitalists care less about ideology, and more about what is actually important — that is, capitalism.

That’s why it should come as no surprise that in the face of the potentially catastrophic crisis that is now gripping the banking industry, it is the bankers themselves who are calling for more, rather than less, government regulation.

As the Financial Times reports, “Many of the world’s biggest banks are proposing reforms that would limit the size and scope of their businesses in one of the most dramatic responses to the credit crisis. The proposals would hold down the number of investors who can buy complex financial products, bring large swathes of the derivatives markets into regulators’ sights and call on banks to spend more on technology and risk management.”

“Backed by banks including JPMorgan Chase, Merrill Lynch, Citigroup, HSBC, Lehman Brothers and Morgan Stanley, the proposals are being delivered to global regulators in the hope of producing rules for credit markets that would cut risk of contagion and restore confidence.”

Here is the story:  Last week, a panel of high-power bankers calling themselves “Counterparty Risk Management Policy Group III,” lead by Goldman Sachs managing director E. Gerald Corrigan, issued a report to Treasury Secretary Henry M. Paulson Jr. and Mario Draghi, chairman of the international Financial Stability Forum, calling for more regulation and governmental oversight of the banking industry and new standards for monitoring and managing risk.

The Washington Post reports that the bankers’ panel “suggested that big investment houses regularly perform ‘liquidity stress tests’ to measure their expected flexibility in the face of a crisis. It also urged firms to make sure they have accurate snapshots of their exposures to institutional trading partners, with the ability to compile detailed reports within hours.”

“In the current crisis, ‘some of the worst failures were in risk monitoring, which was before you even got to risk management,’ Corrigan, a former chief executive of the Federal Reserve Bank of New York, said in an interview.”

Included in the panel’s recommendations is a prohibition on selling high-risk and complex financial products to anyone except “sophisticated investors.” 

According to the Financial Times, under the panel’s recommendations “even pension funds and other institutional investors would no longer be automatically allowed to buy bonds backed by assets such as subprime mortgages. All but the wealthiest retail investors would be barred from buying structured products, such as auction rate securities, a $330bn market used by municipalities and student loan providers to raise funds.”

Corrigan said “the ‘markets had been sandbagged by complexity’ and suggested the new rules would help ensure sophisticated financial products were only sold to investors with the resources and skills to understand and monitor them.”

We agree with the panel’s report and recommendations. 

It is long overdue that investors in financial products have at least the kind of “qualified investor” protections that exist under the Securities and Exchange Act — both for the sake of the investors and the stabiliity of the financial markets.

And it is good to see that real capitalists care more about preserving the world’s financial markets than about preserving some ideologically pure notion of free-market capitalism.

On other hand, in the short term, it would not be good for the economy if the banks used these recommendations as a rationale to further restrict the availability of credit to qualified borrowers.

Credit Markets are Frozen as Economy Stalls — The Fed’s Efforts to Increase Lending Fail Despite Billions to Banks

Federal Reserve Chair Ben Bernanke and his fellow monetary watchdogs have taken unprecedented steps in the past year to increase liquidity in the credit market.  They’ve cut the short-term interest rate seven times since September 2007.  They’ve committeded billions of public dollars to prevent the bankruptcy of Bear Stearns and other major financial institutions, and billions more to prop-up mortgage giants Fannie Mae and Freddie Mac.  The goal has been to stabilize the financial markets and increase liquidity — that is, to make more money available to more people and businesses.

What has been the result of the Fed’s efforts?

The answer is: Not much.

Despite the Fed’s efforts — and the billions of public dollars invested over the past year in the financial industry — the banking business has just about shut down.

In fact, it is harder now for most business to borrow money than it was before the Fed started its rating-cutting.

As the New York Times reports, “Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.  Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.”

The effect of the banks’ tight money policy could be devastating to the economy. 

Mortgage rates will continue to climb, further increasing foreclosures and heightening the housing crisis.  Those industries closely allied with real estate, such as construction, will continue to collapse.  Even successful businesses will be unable to expand, further increasing the jobless rate.  Smaller businesses, which provide a large percentage of American jobs, will be particularly hard hit, since they will be entirely frozen out of the credit market.  Bankruptcies, both large and small, will continue to spiral upward. 

What is the answer?

The Fed’s rate-cutting hasn’t worked, and the piece-meal approach being taken by Congress and the administration (including the new mortgage relief legislation) won’t work either.

What is needed is a comprehensive overhaul of the entire banking and financial system and the credit markets, including the securities laws.

And for that, we’ll have to wait at least until a new Congress and a new administration take over in January 2008.  Even then, comprehensive and systemic change is unlikely.

We need a 21st Century Franklin Roosevelt. 

Unfortunately, that’s probably impossible until we’re in the midst of a 21st Century Great Depression.

Foreclosure Activity Up 53% Over June 2007

Default notices, auction sale notices and bank repossessions were reported on 252,363 U.S. properties during June 2008, a 3 percent decrease from the previous month but still a 53 percent increase from June 2007, according to the latest RealtyTrac Foreclosure Market Report.

The report also shows that one in every 501 U.S. households received a foreclosure filing during the month.

“June was the second straight month with more than a quarter million properties nationwide receiving foreclosure filings,” said James J. Saccacio, chief executive officer of RealtyTrac. “Foreclosure activity slipped 3 percent lower from the previous month, but the year-over-year increase of more than 50 percent indicates we have not yet reached the top of this foreclosure cycle. Bank repossessions, or REOs, continue to increase at a much faster pace than default notices or auction notices. REOs in June were up 171 percent from a year ago, while default notices were up 38 percent and auction notices were up 22 percent over the same time period.”

Nevada, California and Arizona continued to document the three highest state foreclosure rates in June.  Florida, Michigan, Ohio, Colorado, Georgia, Indiana and Utah were other states that made the top ten.

For the third month in a row, California and Florida cities accounted for nine out of the top 10 metropolitan foreclosure rates among the 230 metropolitan areas tracked in the report.

RealtyTrac noted that “Foreclosure filings were reported on 8,713 Nevada properties during the month, up nearly 85 percent from June 2007, and one in every 122 Nevada households received a foreclosure filing — more than four times the national average.”

“One in every 192 California properties received a foreclosure filing in June, the nation’s second highest state foreclosure rate and 2.6 times the national average.”

“One in every 201 Arizona properties received a foreclosure filing during the month, the nation’s third highest state foreclosure rate and nearly 2.5 times the national average. Foreclosure filings were reported on 12,950 Arizona properties, down less than 1 percent from the previous month but still up nearly 127 percent from June 2007.”

“Foreclosure filings were reported on 68,666 California properties in June, down nearly 5 percent from the previous month but still up nearly 77 percent from June 2007. California’s total was highest among the states for the 18th consecutive month.”

“Florida continued to register the nation’s second highest foreclosure total, with foreclosure filings reported on 40,351 properties in June — an increase of nearly 8 percent from the previous month and an increase of nearly 92 percent from June 2007. One in every 211 Florida properties received a foreclosure filing during the month, the nation’s fourth highest state foreclosure rate and 2.4 times the national average.”

“Foreclosure filings were reported on 13,194 Ohio properties in June, the nation’s third highest state foreclosure total. Ohio’s foreclosure activity increased 7 percent from the previous month and 11 percent from June 2007. The state’s foreclosure rate ranked No. 6 among the 50 states. Other states in the top 10 for total properties with filings were Arizona, Michigan, Texas, Georgia, Nevada, Illinois and New York.”

“Seven California metro areas were in the top 10, and the top three rates were in California: Stockton, with one in every 72 households receiving a foreclosure filing; Merced, withone in every 77 households receiving a foreclosure filing; and Modesto, with one in every 86 households receiving a foreclosure filing. Other California metro areas in the top 10 were Riverside-San Bernardino at No. 5; Vallejo-Fairfield at No. 7; Bakersfield at No. 8; and Salinas-Monterey at No. 10.”

“The top metro foreclosure rate in Florida was once again posted by Cape Coral-Fort Myers, where one in every 91 households received a foreclosure filing — fourth highest among the nation’s metro foreclosure rates. The foreclosure rate in Fort Lauderdale, Fla., ranked No. 9. LasVegas continued to be the only city outside of California and Florida with a foreclosure rate ranking among the top 10. One in every 99 Las Vegas households received a foreclosure filing in June, more than five times the national average and No. 6 among the metro areas.”

“Metro areas with foreclosure rates among the top 20 included Phoenix at No. 12, Detroit at No. 13, Miami at No. 15 and San Diego at No. 17”

RealtyTrac does not expect foreclosure activity to ease up until 2009.

Real Estate Values Per Square Foot Down More than 20% in Six Major Markets

Real estate prices continue to fall in most markets, according to Radar Logic Incorporated, a real estate data and analytics company that calculates per-square-foot valuations.

Among the key findings of the latest report from Radar Logic:

  • The broad housing slump continued as consumers showed persistent lack of confidence and difficulty in financing home purchases.
  • April 2008 continued to exhibit price per square foot (PPSF) weakness compared to last year in almost all markets. One MSA showed net year-over-year PPSF appreciation, one was neutral, and 23 declined.
  • The Manhattan Condo market showed a 3.6% increase in PPSF year-over-year coupled with an increase in recent transactions despite a modest decline of 0.7% in month-over-month prices.
  • Charlotte’s increase of 1.5% in year-over-year PPSF moved its rank among the 25 MSAs to number 1. This represents an increase over the 0.1% year-over-year PPSF appreciation last month.
  • Columbus showed year-over-year PPSF appreciation of 0.2% for April 2008, which is an increase from last month’s year-over-year decline of 4.3%.
  • New York declined 3.0% year-over-year in April 2008, its second decline in Radar Logic’s published history (beginning in 2000).
  • Sacramento, the lowest-ranking MSA, showed a 31.7% decline from April 2007, which is consistent with last month’s decline of 30.6%.

 The ten biggest declines in per-square-foot values from last year were in these markets:

Sacramento (-31.7%)

Las Vegas (-29.9%),

San Diego (-28.1%)

Phoenix (-25.6%).

Los Angeles/Orange County (-23.4%).

Miami (-22.4%).

St. Louis (-19.8%).

San Francisco (-19.7%).

Tampa (-16.6%).

Detroit (-16.1%).

You can read the full Radar Logic report here.