Ed’s Daily Notes for September 10th   Leave a comment

Bloomberg: Banks Seen at Risk Five Years After Lehman Collapse

While the amount of capital at the six largest U.S. lenders has almost doubled since 2008, policy makers and some Wall Street veterans say that’s not enough. They see a system still too leveraged, complicated and interconnected to withstand a panic, and regulators ill-equipped to head one off — the same conditions that led to the last crisis.

“We’re safer, but we’re not safe enough,” said Stefan Walter, who led global efforts to revise capital rules as general secretary of the Basel Committee on Banking Supervision.

More than 50 bankers, regulators, economists and lawmakers interviewed by Bloomberg News disagreed about what needs to be done. Some said the six biggest U.S. banks have only gotten bigger since 2007 — a 28 percent increase in combined assets, according to data compiled by Bloomberg — making it harder to let them fail. Others said they weren’t troubled by bigness or a system that requires government intervention every now and then, calling it an inevitable cost of financing global business.

The problem with that last bit of thinking is the assumption that TBTF banks are government-sponsored enterprises, and not private businesses. If they are GSE’s, they should be treated quite differently than any private business.

Regardless, all we have done so far is shuffle the deck chairs on our financial Titanic. Another iceberg, and we will re-live 2008 all over again.

Here is why this is a concern:

Bloomberg: BofA Cuts Jobs as Mortgage Slump Ensnares JPMorgan, Wells Fargo

Mortgage lenders including Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) that feasted on refinancings as interest rates reached all-time lows are now warning that the drop in demand may be steeper than expected.

Even Bank of America Corp., which fell to fourth in U.S. mortgages last year as it scaled back after buying Countrywide Financial Corp., is reducing capacity further as surging interest rates crimp demand. The Charlotte, North Carolina-based firm is eliminating 2,100 jobs and closing 16 offices by Oct. 31, said two people with direct knowledge of the plan.

Home lenders are tempering forecasts after interest rates rose amid signs the Federal Reserve may scale back stimulus efforts. Wells Fargo, the top U.S. home lender, said yesterday that third-quarter originations may fall 29 percent to $80 billion. JPMorgan, ranked No. 2, said it expects to lose money on home lending in the second half as volumes drop as much 40 percent from the year’s first six months.

“There was speculation, I’m sure by Wells but a lot of other people, that there would be second-quarter momentum that would carry through to the third quarter,” said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland. Yesterday’s comments and Bank of America’s job cuts show “that some of that stuff appeared very quickly in terms of people dropping out of the market. That clearly doesn’t bode well.”

Interest rates climbed after Fed Chairman Ben S. Bernanke told Congress on May 22 that the central bank may scale back the pace of its $85 billion of monthly purchases of mortgage bonds and Treasuries if the U.S. economy shows sustained improvement. The cost of a 30-year fixed home loan rose to 4.57 percent last week from 3.35 percent in May.

If you recall, in 2007, mortgage company layoffs were the first sign of the impending disaster. I won’t say it is happening again, but caution is certainly warranted here.

Another sign of the disaster in 2007 was foreclosures:

CNNMoney: Surprising foreclosure hot spots

While housing markets across the country are recovering from the deepest throes of the foreclosure crisis, others are just stumbling into it — and they aren’t exactly the places you’d expect.

States like Maryland, Oregon and New Jersey, which maintained relatively stable markets after the housing bubble popped, saw new foreclosure filings climb by double- and triple-digit percentages in July, according to RealtyTrac.

In Maryland, for example, new foreclosure filings skyrocketed 275% compared with a year earlier. When it came to overall foreclosure activity, including default notices, scheduled auctions and bank repossessions, the state had the second highest foreclosure rate in the nation, after default-riddled Florida.

Oregon saw new foreclosure filings surge 137% and New Jersey’s foreclosure starts spiked 89% year-over-year.

So what gives? In many of these cases, early government intervention aimed at helping these markets is now coming back to haunt them, says Daren Blomquist, RealtyTrac’s spokesman.

“Foreclosures are continuing to boil over in a select group of markets where state legislation and court rulings kept a lid on foreclosure activity during the worst of the housing crisis,” he said.

Take the D.C. metro area, where the District of Columbia converges with the suburban counties of Virginia and Maryland. Foreclosure filings in both D.C. and the Virginia suburbs of Fairfax and Arlington are down significantly year-over-year, while in Maryland’s nearby Frederick and Montgomery counties, the rate of new foreclosures is skyrocketing.

“That tells me that the difference has not much to do with the underlying fundamentals of the housing market but by the way the crisis was handled,” said Blomquist.

After the housing bubble popped, Virginia’s government didn’t try to stop many of the defaulting loans from working their way through foreclosure process. While the hit was painful at first — by the end of 2008, the state had the 10th highest foreclosure rate in the nation — the market has gotten back on its feet more quickly.

Meanwhile in Maryland, an aggressive effort by the state to make sure all foreclosures were handled properly during the housing crisis saved a lot of people’s homes but it also postponed a lot of inevitable foreclosures, according to Blomquist. Now the banks are catching up.

Admittedly, this isn’t the nationwide problem it was in 2007. If may turn out to be nothing, due to the localized nature of the problem.

But as long as the TBTF banks are still TBTF, I would remain cautious, especially knowing they are laying off people.

CNS News: Treasury: Debt Up $0 in August; CBO: But Deficit Was $146B

Explain this one:

The federal deficit increased by $146 billion in August, according to a report released today by the Congressional Budget Office. But, at the same time, according to the U.S. Treasury, the federal debt did not increase at all during the month.

Total federal receipts were $185 billion during August, according to the CBO, while total federal outlays were $331 billion. Thus, the Treasury was forced to engage in $146 billion in deficit spending.

Despite this deficit spending, the Treasury reported that at the close of every single business day in August, the federal debt subject to a legal limit by Congress remained exactly $16,699,396,000,000.

How is this?

Back on May 17–when the Treasury said the debt first hit $16,699,396,000,000–Treasury Secretary Jack Lew sent House Speaker John Boehner a letter indicating that the Treasury would begin using “extraordinary measures” to allow the government to continue borrowing money without exceeding the legal limit of $16,699,421,095,673.60.

“In total, the extraordinary measures currently available free up approximately $260 billion in headroom under the limit, as described below,” said an appendix to Lew’s letter.

Among the “extraordinary measures” Lew said he could take to create this “headroom” under the debt limit were: 1) not investing new money from the Civil Service Retirement and Disability Fund (CSRDF) in U.S. Treasury securities, which he said would create $6.4 billion in “headroom” per month, 2) not reinvesting $58 billion ion Treasury Securities held by the CSRDF that would be maturing and not reinvesting $16 billion in interest owed to the fund, which would create $74 billion in headroom, 3) suspending the routine daily reinvestment of $160 billion in special Treasury securities held by the Federal Employees’ Retirement System Thrift Savings Plan, which would create another $160 billion in headroom, and 4) suspending the routine daily reinvestment of Treasury securities held by the government’s own Exchange Stabilization Fund, which would create another $23 billion in headroom.

On Aug. 26, Lew sent Boehner another letter stating: “Based on our latest estimates, extraordinary measures are projected to be exhausted in the middle of October.”

Between now and then, Congress will need to approve legislation to fund the government past the end of the fiscal year on Sept. 30, decide whether to permit Obamacare funding in that legislation, and decide whether to authorize President Obama to use military force in Syria.

The clock is ticking…


Posted September 10, 2013 by edmcgon in Economy, Federal Reserve, Market Analysis, News, Politics, Real Estate

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