- Occupy Wall Street – while not a cohesive movement, at least part of its birth can be traced to outsized Wall Street salaries and bonuses, especially since the taxpayer saved most of the TBTF banks. Bank Transfer Day (11/5), the day on which Americans are supposed to transfer their deposits to community banks, is more symbolic than real, as the “Too Big To Fail” (TBTF) banks core consumer deposits are only a small portion of their liabilities and can easily be replaced with no or low cost funding from the Fed or elsewhere. Nevertheless, Bank Transfer Day is a PR issue for the large banks;
- Margin squeeze – TBTF have used the arbitrage spread between borrowing costs (near 0%) and Treasury yields (2%+) to profit. And, the purchase of Treasury securities requires no capital under the capital regulations, as Treasuries are “risk free.” The Fed’s new policy of “Operation Twist” targets longer term interest rates and squeezes this arbitrage spread;
- Volcker Rule – this has recently been put out for comment by the FDIC. It severely limits trading profits made for the bank’s own account and is likely to have a big impact on TBTF trading profits going forward;
- Debit card monthly fees – although such fees are a direct consequence of the limitation on debit swipe fees by the Fed under Dodd-Frank, and it was common knowledge that the TBTF banks would find a way to increase fees elsewhere to make up for their losses on the swipe fees, the timing has turned out to be lousy and the TBTF banks are taking a PR hit from the press, and even from the sponsors of Dodd-Frank who clearly knew that there would be unintended consequences;
- Exposure to Europe – According to Michelle Bachmann, the U.S. TBTF Banks have a $700 billion exposure to European Banks. So, a freezing up of liquidity flows to those institutions may have an impact on the value of such holdings. It is clear that the Fed and the European Central Bank will intervene with massive liquidity injections if such events unfold. Nevertheless, the risk of such a freeze up exists. Furthermore, if contagion spreads because of a Greek default, there is no doubt that the TBTF equities will be negatively impacted. So far, we have seen the equity prices of these behemoths ebb and flow with the news (or hope) out of Europe regarding their evolving “rescue” plan;
- Mortgages & Foreclosures
- Foreclosures at the TBTF institutions are rising because moratoriums have expired and “robo” issues have been addressed. In addition, so called “Prime” loans in portfolios (usually “Jumbo” loans – those that are larger than the FNMA limits) are becoming a big issue as there is a clear trend toward rising “strategic” foreclosures. In fact, Fitch recently downgraded many of these “prime” mortgage pools. This calls into question the quality of what may be on the TBTF balance sheets in the form of such jumbo loans. Furthermore, the fact that FNMA and FHLMC reduced their loan maximums on October 1st is destined to have a huge negative impact in states like CA and FL, where the prices of higher end properties will fall due to the unavailability of financing. So, expect “strategic” defaults to rise rapidly in these states;
- Half of America’s mortgages are on MERS (Mortgage Electronic Registration System), but, in many states, MERS has no standing in foreclosure. Theoretically every owner of a securitized pool should sign off on each foreclosure in the pool. There could be hundreds, if not thousands, of owners in these pools. In addition, many jurisdictions require that title transfers be recorded in county recorder offices. Since that did not occur, lawsuits are now being developed against the major TBTF players for lost recording/title transfer fees. The Dallas DA recently sued MERS and BAC for $100 million of such fees. According to Mark Hanson, since MERS has been operating since 1995, there could be billions of dollars of such thwarted fees. Because nearly every local governmental entity is hungry for funds, this could catch on like wildfire;
- Bank of America’s (BAC) $8.6 billion global servicer settlement is in trouble, as NY’s AG Schneiderman says it should be closer to $25 billion, and he is getting support from other states, like CA. The rumor mill has circulated the theory that if lawsuit settlements become outsized, BAC appears to have the option of bankrupting the old Countrywide unit, which it has kept as a separate legal entity since its purchase in 2008. Imagine, though, the market reaction to such a move!
- Lawsuits on mortgage trustees are just starting. According to Bloomberg, US Bank, Bank of NY Mellon, Deutsche Bank, Wells Fargo, HSBC, BAC and Citibank (C) are the major mortgage trustees. Bloomberg speculates that since these institutions didn’t underwrite, sell, securitize, service, or ship loans according to regulations, the odds are low that the trust departments got it right. So far, NY’s Schnedierman has requested documents from Deutsche Bank and Bank of NY Mellon.
- In early September the Federal Housing Finance Agency (FHFA), the receiver for FNMA and FHLMC, sued BAC, C, JPMorgan Chase (JPM), Barclays, HSBC, Credit Suisse, and Noruma Holdings demanding refunds from these institutions for loans sold to FNMA and FHLMC that were based on false or missing information about the borrowers or the properties. The FHFA said that the two mortgage giants purchased $6 billion from BAC, $24.8 billion from Merrill Lynch which is now owned by BAC, and $3.5 billion from C.
- Lawsuits and foreclosure issues are making the TBTF banks sorry they are in the mortgage business. JPM’s Dimon announced that they are going to be leaving the mortgage business, and BAC announced last week that by year’s end they will stop buying mortgages from correspondents.
Not all of this appears to be priced in the market, so there may be continued downward pressure on the prices of financial stocks, especially TBTF, as events unfold, especially the potentially disruptive forces that Europe may unleash, or the conclusion that the foreclosure and mortgage lawsuits are larger and more significant than currently believed.
Robert Barone, Ph.D.
October 12, 2011
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