Posts filed under “Finance”
“In hindsight, it was spot on.”
-Jeffrey Brown, former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.
A brutally damning article about the warnings the Bush administration received and ignored was published this morning by the Associated Press. The AP summed up the philosophy of the Bush White House, writing: “The administration’s blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.”
The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
“Expect fallout, expect foreclosures, expect horror stories,” California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
“These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages,” David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.
Bank regulators had proposed new guidelines for writing risky loans in 2005, but were rebuffed by the White House. The proposed regulations might have avoided the worst fo the housing and credit crisis, had they been enacted.
What was so especially damning was these proposals were all stripped from the final Administrative rules by the Bush White House. None required congressional approval or even the president’s signature:
• Before banks could purchase mortgages from brokers, they should verify the process to ensure buyers could afford their homes.
• Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
• Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
• Regulators proposed a cap on risky mortgages so a string of defaults wouldn’t be crippling.
• Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
• Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.
The banks that lobbied most aggressively against the rules reads like a who’s who of bankruptcy and FDIC conservatorship: IndyMac, Countrywide Financial, Washington Mutual, Lehman Brothers, and Downey Savings.
US diluted loan rules before crash
AP, December 1, 2008
Government warned of mortgage meltdown
Regulators ignored warnings about risky mortgages, delayed regulations on the industry.
December 1, 2008: 6:38 AM ET
click for interactive graphic > Sources: Citi Faces Pressure to Slim Down U.S. Seeks Change as Part of Rescue Deal; Talks Began on Fears of Client Exodus DAVID ENRICH and DEBORAH SOLOMON WSJ, NOVEMBER 25, 2008 http://online.wsj.com/article/SB122753629931853007.html Citigroup Should Be Held Accountable, Obama Aide Podesta Says Edwin Chen Bloomberg, Nov. 28 2008 http://www.bloomberg.com/apps/news?pid=20601087&sid=akf_DTv.v8ic&
The Bailout of Citigroup moves forward (Is this book ever going to be finished?): “Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which…Read More
You MUST check out the BP Café ! Today, we had excellent posts from Jim Welsh, Marion Maneker, Jack McHugh, and author Vitaliy N. Katsenelson. Yesterday, it was Michael Panzner and Chris Whalen. The highlight of Wednesday morning was the monthly newsletter of Paul Brodsky & Lee Quaintance, which was mentioned in Alan Abelson’s column…Read More
There is a long-but-worth it article (The End) in Portfolio by Michael Lewis, who traces the arc from Liar’s Poker to the End of Wall Street. Before you turn in fear of yet another Magazine Cover Indicator, be aware of one thing: The prostrate bull on the cover of the magazine does not represent,a s…Read More
Chris Whalen runs Institutional Risk Analytics.
The past several months have been a blur of activity. On the
eve of Veteran’s Day, when Americans remember those who have served and have
died to protect our freedom and our way of life, let’s take stock of where we
Following the takeover of Pasadena, CA-based IndyMac Bank in July, IRA launched our IRA Bank Cart (“How’s My Bank?”) product to help provide consumers with descriptive analytics on bank safety and soundness. We actually credit CBS’s Bill Whitaker for planting the seed. He interviewed us about four months ago and asked IRA CEO Dennis Santiago what to tell Mr. and Mrs. America about what’s actually happening inside their banks. We had to admit that around the time of that interview, the Do-It-Yourself solution was for individuals to learn to become better analysts at interpreting raw FDIC Call Reports, a skill even professionals on Wall Street were struggling with. With the failure of IndyMac, we got the message loud and clear that the non-analyst
world needed better.
So our team in Torrance set to work assembling an affordable online report, via The IRA Bank Cart, that provides all customers of banks as much if not better information on the fundamental stresses affecting U.S. banking institutions than most financial professionals possess. Because most people can and do deposit money in all types of banks, we chose not to limit our coverage to just the largest publicly traded banks that the media and Wall Street follow. Instead we created a comprehensive analytical product covering the entire federally-insured bank population.
As part of the IRA Bank Cart tool, IRA also introduced our Bank Stress Index that measures five life critical aspects of the business of banking-earnings, capital, efficiency, losses and lending commitments. To build this index, we created an explicit census of US banks by calculating actual measures for every FDIC-insured unit for every quarter going back every year to December 31, 1995. Americans deserve no lesser diligence.
We combine these individual measures into an overall measure of stress – a ratings system in effect — for the entire US banking industry. The Bank Stress Index represents yet another distillation of the FDIC data by IRA and let’s all bank customers compare the relative safety and soundness of every active FDIC Unit Certificate Holder
and the bank-only portions of all the Bank Holding Companies submitting periodic
reports to U.S. banking regulators.
Corporations Get into the Act
In the two months since the Bank Stress Index product was introduced, a new need emerged, namely serving the cash management activities of corporate CFO’s and Treasurers. It actually first began when the IRA Bank Cart product was launched. Worried representatives of church groups and 501(c3) non-profit organizations actually came to call our offices in CA. These risk-averse investors were looking to reduce the deposit risk exposures for their treasury funds in the $1MM to $2MM range and were of a mind to spread deposits from 100% in a single institution to typically 20% to 34% per institution.
Remember, we did not have any retail customers prior to May of this year. Now we have thousands.