Can taxpayers begin to get off the hook?
This week’s attempt by the FDIC (Federal Deposit Insurance Corp.) to sell securities backed by residential mortgages and construction loans marks a huge milestone in the road back to normalcy for the financial markets this week. Let’s hope the markets pass the test.
The FDIC has bundled together some of the mortgages and loans it owns after taking over failed banks into a mortgage-backed security of the kind that was the mainstay of the mortgage market before the financial crisis.
That market has been essentially closed for new business since the crisis with only Fannie Mae (FNM) and Freddie Mac (FRE) willing to buy these securities with funds provided by taxpayers. Banks use this market to sell mortgages that they have originated so they can put the proceeds back into new mortgages. When this market is frozen, banks have to hold onto the mortgages they’ve originated and that reduces the money they have available for new mortgages. If banks know they can’t securitize and sell their mortgages, they become more reluctant to lend. And that reduces the availability of mortgages.
Because private investors haven’t been willing to buy these securities post-crisis, taxpayers through Fannie Mae and Freddie have been left as the only buyers. That’s been necessary to keep the market functioning at all, but Fannie and Freddie can’t keep expanding their books forever. At some point private investors need to step back into this market.
The mortgage-backed securities that the FDIC will offer for sale this week are designed to entice private investors back into the market.
Bank failures set to peak in 2010, FDIC says.
Yesterday, February 24, the FDIC (Federal Deposit Insurance Corp.) announced that its list of problem banks hit 702, at the end of December. That’s the highest level since 1993.
But, if we’re lucky and the economy doesn’t take a step backward this year, the number of bank failures will peak in 2010, the FDIC said. About 140 banks failed in 2009.
Not all those banks will go under but if they fail at recent rates and the average 23% loss rate on assets (since 2007) holds up, the FDIC is looking at having to absorb about $92 billion in losses on the $403 billion in assets at the 703 banks on its problem list between now and 2013, the FDIC projects. The FDIC currently has $66 billion in cash and liquid securities on hand. The agency has recently used special assessments on banks to build up its balances and that’s a likely source of cash if the FDIC needs a top up.
Another special assessment—the FDIC raised $5.6 billion from banks last fall—would take another bite out of banking industry profits. According to Keefe, Bruyette & Woods, the banking industry as a whole showed a profit of just $914 million for the fourth quarter of 2009.
Which highlights something very interesting about the FDIC list.
Update HDFC Bank (HDB)
At the end of January the Reserve Bank of India, the country’s central bank, held a conference call for analysts and investors.
The message: The bank is worried about continued growth in government borrowing and strong demand for loans from the commercial sector. And that the bank will move to reduce excess liquidity in the banking sector before it leads to rising expectations for higher inflation.
Look out Indian banks, higher interest rates ahead.
I’d be surprised if Indian bank stocks didn’t retreat as the Reserve Bank of India moves from rhetoric to action.
Shares of Indian banks such as Jubak Picks 50 member HDFC Bank (HDB) are already down 20% since January 19 as part of the global correction in emerging markets. Any further decline would give long-term investors who are impressed, as I am, by the results out of Indian retail banks a chance to get into (or add to positions in) the sector at a reasonable price. (For more on building a global portfolio see my post http://jubakpicks.com/2010/02/05/how-to-build-a-global-portfolio-what-countries-do-you-want-to-own/ )
Even JPMorgan Chase is still putting new money away to cover bad loans
Can’t anybody run a bank anymore?
I don’t mean an investment bank that makes its money from trading, managing stock and bond offerings, and inventing new financial instruments. That’s a good business these days for everybody from Bank of America (BAC) to JPMorgan Chase (JPM). (At Goldman Sachs (GS) it’s a great business.)
I mean a bank that takes deposits and makes loans through such bread and butter products as mortgages and credit cards.
JPMorgan Chase is one of the best in the business at that business. But even that bank, it admitted in its fourth quarter 2009 earnings report issued this morning (January 15) , just keeps generating losses in its traditional banking businesses.
Investors who were hoping to see signs that the end of trouble in retail and commercial banking was near have sent shares down 2.3% this morning (as of 11 a.m. in New York).
China’s bank regulators are losing the battle to rein in speculation–for now
So far it doesn’t look like the Chinese government is committed to ending financial speculation.
Look at the mis-match between the amount of cash Beijing has pumped into its economy and the tiny steps it has taken recently to take money out of the financial system.
