Busted: Bankers and The Global Economy

February 25, 2008

FDIC and Careless Banking Risk

Filed under: banking, credit, government, investment, money, security — Tags: , , , , , , , , , , , — digitaleconomy @ 12:00 pm

A year ago, the global financial system was still highly liquid. Bank profits were at all-time highs. Downgrades of triple-A-rated CDOs were virtually unheard of. SIVs, mono-line insurers, municipal bond auctions, and mortgage-backed securities weren’t making the daily headlines that they are now. Everyone thought the world was “peachy keen”.

bair_sheila.jpgThe FDIC holds that the systematic breakdown in lending standards in a large segment of the U.S. mortgage market came from the bankers themselves. The FDIC considers the importance of new legislation and regulation to put a stop to abusive and irresponsible mortgage lending practices.” This statement today indicates that abusive and irresponsible mortgage practices are still in vogue. FDIC Chairman Sheila Bair stated, “We’ll need significant reforms to restore confidence in the integrity of financial markets.” First, she cited a “lack of transparency” in reference to structured finance. Bankers created new investment vehicles with unknown consequences that could not be easily resolved. In fact, the consequences of these back room deals could take years to unravel. Ms. Bair also cites “a pervasive, over-reliance on ratings and quantitative methods, as a substitute for good judgment and traditional credit discipline.”

Essentially, when bankers received a rating, they looked no further and were only concerned with the perceived profit from the transaction. Ms. Bair intimated that collateral in most of these transactions was a real issue.

If you want to analyze a rated corporate bond, for example, you can go to the SEC website and get financial statements and a wealth of reports about the borrowing corporation. If the bond is actively traded, you can check out the latest secondary market prices and volumes in the Wall Street Journal or on your Bloomberg. On the other hand, suppose you want to analyze a CDO. You might ask for a standard spreadsheet of loan-level data. But you would probably find this unavailable, even for a potential investor. And even a basic summary about the underlying collateral may not have been given due diligence or independent validation, and is unavailable to the general public.

This is the dark ages, foolish thinking that bankers bought into according to the FDIC. Information was not available on banking instruments and investors did not seek that information. They simply snapped up the investment based on the perceived ratings value and the perception of profit. Banks even assumed that they had no risk exposure because of the bond rating that the instrument had received.

The FDIC doesn’t have any hard solutions for the mess that bankers have created, suggesting that incentives are needed to make bankers follow the rules and supply collateral information rather than relying on ratings. U.S. banking regulatory agencies have agreed not to release any bank from responsibility until a complete study and review is done to provide a clean bill of health.

Sheila Bair says that this is progress. What do you think?

February 21, 2008

Wild West Banking

Filed under: banking, government, investment, money — Tags: , , , , , , , , , , — digitaleconomy @ 11:20 am

The “sub-prime” and “Alt-A” mortgage crisis has its roots in an escalating real estate market along with wild speculation and the intense desire for profits at any cost. If you are not clear on the speculative bonanza that brought about the mortgage and banking crisis, I invite you to review this short video which covers Countrywide, the Northern Rock Banking Debacle and some of the speculations in banking. The failures rank from the bankers to the bond rating agencies to the money-lust of the investors. The bonds were seen as a “low risk” deal. Nobody scrutinized the bond rating agencies or how the banking packages were assembled. As seen over and over lately, the conflict of interest has been huge. In general, bank regulators have been clueless regarding the reality of the new internal banking instruments designed by the bankers to make a fast buck.

Observations and Commentary by Elvis Manning

The Credit Crunch and World Banking

Make Bankers Pay?

The Fed and the Subprime Mortgage Debacle

The Great American Mortgage Scam

 

February 14, 2008

Bernanke Admits Banking Stress to U.S. Senate

elvis1.gifBen Bernanke admitted details of the state of U.S. banking and finance today. Bernanke admitted the considerable strain of financial markets since last summer. He cited “heightened investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates” which triggered the financial turmoil. The reality is that record default on these subprime variable-rate mortgages is what began the turmoil. Once the money strain showed on their bond investments, the investors affected became concerned. Bernanke also pointed out the relunctance of investors to bear risk and difficulties in valuing complex or illiquid financial products. Bernanke is referring to the lack of willingness (more…)

January 10, 2008

Credit Crunch: Is World Banking in Trouble?

creditcrunch.jpgIn the eyes of many financial experts, the recent weakness in the world banking system is a regional symptom in that market and not a systemic problem. Right now financial firms that have exposed themselves to “subprime” mortgages face much larger losses on the surface than other banking and finance firms. On a regional basis, the value of homes in the U.S. market as well as other assets like stocks and bonds, have been adversely affected. As a result, bank losses have multiplied and lending has been sharply curbed as a result of defaults on loans and the devaluation of bonds. These loans and bonds are the profitable mainstay of banking. These banking declines continue to be revealed in the United States and worldwide. The news is now reporting job losses and continuing expected job losses as a result of the economic slump in the United States.

Economic analysts have been quick to lay blame on policymakers. The trend of “deregulation” has created a climate with little oversight by bankers and regulators. It is natural that “the industry” would want to spread the risk and increase profits by seeking bond investors throughout the world. When the crisis hit from relentless profiteering and the crumbling base of the “subprime” mortgage bonds, the investment world was sent into a tail spin. Naturally, the goal of the industry is to detract attention from the crisis along with any responsibility, while shifting as much of any catastrophic loss as possible. The history of the banking and finance industry shows that the Federal Reserve and other central banks will ultimately take care of everything, acting much like a large safety net to bolster the system. Any financial instability dramatically risks increasing the national debt for the region along with devaluation of regional monetary value. The Federal Reserve and other central banks will play a reassuring role by trimming short-term interest rates and creating new channels of commercial credit.

Jean-Claude Trichet, president of the European Central Bank disclosed the need to watch continued uncertainty in the money markets to ensure smooth functioning. The theory of the Federal Reserve is to reduce interest rates more aggressively to prevent the current credit crisis from evolving into a recession that would deepen the credit crisis currently underway. The weakness in the banking industry lies in the size of the U.S. market as well as the fact that hundreds of billions in U.S. mortgage debt have been invested in by overseas investors.

The banking system does have systemic problems. Banks have bet heavily on the continued boon of their market through the use of creative internal loan schemes. They are being forced to absorb losses and lower the value of their banking assets. As credit ratings on bonds are lowered, asset values continue to deflate. Contracts called credit default swaps were designed to insure against loan losses, but are in reality untested theory. As a result, banks are now very fearful to lend to one another. The reality is that interbank lending is a routine part of the world economy and is required for status quo operations to continue. The irony is that what bankers fear most is exactly what they must face on a daily basis.

On the surface, most bankers and their mouthpieces are optimistic. They say that the global economy will escape major damage. Behind the scenes, they are shaking in their boots from enacting new profit-generating policies that threaten to swallow banking reputations and liquidity whole.

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