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Large Bank Mortgage Cartels and Fed Economists
Jesse Eisinger has a great artice in the NYT, “After Bailout, Giants Allowed to Dominate the Mortgage Business,” which says a great deal about how the Fed looks at the economic world. Allow me to expand on Jesse’s work.
The problem with the Fed starts with a basic, very favorable disposition to large banks. This love affair stems from monetary policy, which is the main focus of all Fed officials. The neo-Keynesian socialism that passes for mainstream thinking at the US central bank assumes that large financial institutions are more stable than smaller players, especially since the functioning of the government debt markets is paramount.
The Fed is not really concerned about monetary policy any longer so much as maintaining market access for the spendthrift US Treasury. During the darkest days of the subprime collapse, the Fed forced mergers of securities firms with larger depositories not so much to avoid systemic risk as to preserve primary dealers. And the effort was a complete and total failure.
Not only is a cartel of big banks in control of the US mortgage market, but we have lost scores of smaller primary dealers and the sales and underwriting capacity they once brought to the markets. Not only are banks such as Well Fargo (WFC) and USBancorp (USB) now responsible for more than half of the mortgage market, but that market has shrunk because of the greatly reduced loan origination capacity in the US. This is the joint responsibility of the Fed and Congress.
Not only did the folks who pretend to be responsible for financial supervision at the Fed preside over the wholesale destruction of several large securities dealers – Washington Mutual, Bear Stearns and Countrywide – but Congress legislated the non-bank loan originators out of existence with Dodd-Frank. Since none of the large banks are buying third party residential mortgage production today, the capacity of the system to originate new credits has also plummeted – leaving the banks in complete control of a far smaller, less efficient market that is almost totally focused on government guaranteed products.
Today the markets are less liquid and comprised of fewer participants, many of which are just barely putting capital at risk in the housing sector. Banks such as Bank America (BAC) and Citigroup (C) have mostly withdrawn from the home loan market (C was never really there even during the boom). JPMorgan Chase (JPM) is focused largely on refinancing existing customers and subsidized loans such as HARP. If the central bank and Congress had set out to destroy the private market for mortgage finance, they could have scarcely done a better job.
The implementation of Basel III is an additional disaster for the housing industry, although in this case the impact on the large banks will be severe. Just imagine how Warren Buffet and the lesser souls who pretend to follow financials are going to react when they see WFC and even USB shrinking balance sheets and volumes in future quarters. That is precisely what is going to occur if the Basel III proposal is implemented. Over the past five years, large banks used the fact of the emergency 100% FDIC insurance coverage for transaction balances to grow their market share in deposits and mortgages. But the FDIC program, known as “TAG” for transaction account guarantee, apparently is finally going to lapse at the end of 2012 and with it the funding advantage enjoyed by WFC, USB and other large banks will recede.
Under Basel III, large banks are no longer going to be able to use their swollen balance sheets to warehouse mortgage servicing rights or MSR. What really needs to happen to clip the wings of the large banks is to end the definition of transaction balances as deposits at all, a move that would shrink the balance sheets of WFC, JPM, et al by 10-20%. Combined with Basel III, such a change would greatly reduce the effective leverage of the large banks and decrease their contribution to systemic risk.
Jesse errs in one case by calling the Fed a “victim” when it comes to the large bank monopoly in mortgages. True, the large banks and the overall reduction in mortgage underwriting capacity thwarts monetary policy. But the Fed is just getting the result they have always wanted, albeit unwittingly. This is why I have always believed we must get the Fed out of the business of supervising banks.
The Fed's Washington staff has never met a large bank merger that it did not like and has never been willing to deny such an application by a bank holding company, especialy a BHC that houses a primary dealer. Today what we need to see is the Fed breaking up large banking firms into smaller, more competitive pieces, a move that would help the consumer and the US economy considerably. But don’t hold your breath waiting for the folks at the Fed to start deconstructing the TBTF banks. That would be to risky, they will say, but the question is to whom?
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One bi problem wiith this narrative is that the Fed and Congress did not blow up Countrywide and Washinton Mutual. They blew themselves up.
The largest banks/primary dealers seem to effectively be policy arms of the US government. They facilitate implementation of monetary policy, facilitate cash transactions by foreign govts/corporations, and receive investment from foreign allies(see Saudi investment in Citicorp).
If you believe that Ron Paul was the man then your final best choice is Gary Johnson
the gse’s have been the serial dumping ground for garbage mortgage paper for literally decades. I first became aware of it in 1994…the ‘tequila currency crisis’ when gs was on the hook for billions in Mexican paper……from that point on, every time there was a liquidity crisis, 1997-1998-2000-2002, part of the solution was always to use the gse’s as a backdoor, stealth source of funding to make the pd’s whole again……….that whole charade was a big part of their inability to produce audited financials....... before they finally collapsed……..and the Chinese forced bernankenstein to make good on the gse paper held by the commies in Beijing
Doug Noland wrote about this for years………………
http://www.prudentbear.com/index.php/commentary/creditbubblebulletin
There's really nothing that can be done to save the banks (in reality). Now, if we're talking about sticking one's head in the sand, OK then. Yes, the Fed is stuffing all of its proverbial eggs into one proverbial basket. When the Ice Age dawned, it was the smaller, more agile mammals that thrived, while the large dinosaurs became extinct.
When is the next Ice Age scheduled?
I don't even know where to begin with this load of crap. Citi wasn't exposed to the mortagage industry? Bahahhahahaha! They WERE the industry...through a "debt monetization scheme" that the phucking you know who passed on to the US taxpayer! Sure...they didn't ORIGiNATE mortgages...but only the Federal Government does that now so who cares. Simply put "all these Big Names" Chris you kowtow to are in fact VERY EXPeNSIVE tiny little banks now. So move along with your Bullshit Rhetoric. What does matter is Hartford, Connecticut. That would appear to be the True Financial Capital of the World right now...and not the fanciful one being/not being created by New York City and it's media. "At least they have electricity and public transportation into The City" yes?
I was kinda surprised about the Citibank comment also. They did not originate my mortgage, but they are sure "servicing" it now for an "unknown" investor. They purchased a crap load of mortgages when they bought the ABN AMRO mortgage arm.
Business as usual while our elected officials look the other way. It's very interesting to me to understand that the housing crisis was a result of many factors, but one of the major ingredients was the corrupt behavior of the TBTF banks, whether through predatry lending, securities fraud, robosigning and more. It astounds me that in the face of this we gave them tax payer bailouts wthout asking for major change in the form of new management. What is clear is even if you are not a fan of the TBTF banks, that if you clean up the crooks and the cowboys and make an example of them, perhaps the culture of corruption could be reigned in. But here we are, four years later, no investigations, no arrests, no prosecutions and no convictions. SOX is openly laughed at by senior management of TBTF banks as is any other new regulation that comes thier way. After 4 years the TBTF are bigger and fatter than they ever were and they are making more money ripping off the very people who bailed them out in the first place. Unfucking believable.
To me, the real problem is that, there is no such thing as TBTF. It doesn't exist. It's a myth, conjured up from TPTB media propaganda pool.
The only thing that allows for TBTF is Government. My understanding is, the majority of the American people did not want the Bailouts/TARP. But Government did it anyway. Because it's their money and their "TBTF" Banks, not American's.
When they took us off the Gold Standard they took away our money, in order to make it theirs. Now they can just print their money out of thin air for themselves and their elite cronies, and then wrap it in a red, white, and blue flag.
I will give the politicos the benefit of the doubt on the bank bailouts.
Think they were panicked into a dumb decision by the prophets of catastrophe.
What they cannot be forgiven for is the inaction over the frauds,frauds to hide
frauds(robosigning)that have finally been revealed.Welcome to the Chiquita republic.
The only law left, is the law of the Jungle.Size truly does matter.
Bailing out banks is a fraudulent activity!
End. The. Fed.
The only representative we had, the one that would have ended the FED, will be moving on. It will give me great pleasure writing his name, on my ballot, as it doesn't matter which one of the candidates wins. Still amazing how obvious "They" were in making sure the little bit of a chance Dr. Paul had got burried. He's the only guy they had to worry about and couldn't even let his voice be heard.
There isn't a single bank holding loans right now. Even my community credit unions are selling the loans to the Fed.
After all, why would they when there is a buyer for every loan they can write.
The problem is the appraisers are making sure nobody can refinance their loan. Which is a conspiracy to try and reflate the home sales market. If you can;t refinance just go out and buy a new home and short sell the one you are in now.