FORTUNE -- America is downsizing. Whether it's the food we eat, the cars we drive, or the houses we live in, Americans are concluding that smaller is better. Even U.S. corporations are starting to see the benefit of more Lilliputian institutions; the impending -- and widely hailed -- breakups of McGraw-Hill (MHP) and Kraft (KFT) are two examples.
So what about banks? It would surely be in the government's interest to downsize megabanks. Sen. Sherrod Brown (D-Ohio) continues to push his bill to split apart the largest institutions. Regulators have new authority to order divestitures under the Dodd-Frank financial reform law. From a shareholder standpoint, government breakups have a pretty good outcome. It worked out well for John D. Rockefeller, whose shares in Standard Oil doubled after it was ordered to break up. Ditto for those who owned stock in AT&T (T).
Yet with gridlock in Washington, don't count on politicians for a solution.
Shareholders, however, have an interest in demanding that big banks split apart.
Comparing the valuation for the supersize banks (Citigroup (C), Bank of America (BAC), and J.P. Morgan Chase (JPM)) with their simpler, leaner competitors isn't pretty. Price/earnings per share for the supersizers averages 5.8, compared with 8.1 for smaller, more focused Wells Fargo (WFC) and 8.1 for the bigger regional banks like U.S. Bancorp (USB) and PNC (PNC). More telling is the ratio of share price to tangible book value. For the supersizers, the average is 72% of book, compared with 165% for Wells and 142% for the big regionals. Chase's strong performance holds up the average for the supersizers, but even its price to book is only 110%. Wells' superior performance suggests that complexity is a bigger drag on returns than size is. Even though Wells' assets exceed $1 trillion, it has pretty much stuck to its basic business of taking deposits and making loans, and in the process has consistently delivered solid returns.
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Before the financial crisis, the supersizers benefited from high levels of leverage and cheap debt funding costs from their "too big to fail" status. All that has changed. Capital requirements are going up significantly for mega-institutions. The cost of borrowing will rise, too, as bondholders come to realize that Dodd-Frank means what it says: no more bailouts. New rules on liquidity, proprietary trading, and derivatives will also eat into earnings. So it is hard to see how the megabanks' numbers can improve.
Supersizers argue that their scale is necessary to meet the financial needs of multinational corporations. But it's not clear that multinationals find it advantageous to do business with a handful of financial titans. Dealing with smaller, more focused institutions provides specialized expertise and less risk of conflicts. If there were really that much value in supersizer services, presumably it would show up in shareholder returns. But it doesn't.
Supersizers also argue that their economies of scale can lower costs for customers. Studies show that some economies of scale do exist, but they are limited by management difficulties in overseeing many different business lines. So while average overhead costs go down, average revenues go down even more. This effect can be mitigated by strong management, as Chase's exceptional performance demonstrates. But how many Jamie Dimons are out there?
At the beginning of the year, Citi's share price was trading at 58% of tangible book value, while BofA was trading at 48%. If Citi and BofA were broken up into smaller institutions that traded at price to tangible book ratios on par with the average of the big regionals, their shareholders would see $270 billion in appreciation. JPM shareholders would see $52 billion in appreciation.
So, shareholders, get ye to the boards that represent you and ask them loudly about whether your company would be worth more in easier-to-understand pieces. The public-policy benefits of smaller, simpler banks are clear. It may be in the enlightened self-interest of shareholders as well.
by Sheila Bair CNNMoney.com Jan 18, 2012
Why it's time to break up the 'too big to fail' banks - The Term Sheet: Fortune's deals blog Term Sheet
Showing posts with label dodd frank wall street reform. Show all posts
Showing posts with label dodd frank wall street reform. Show all posts
Sunday, July 8, 2012
Sunday, May 13, 2012
FDIC to spare healthy units of failing banks
WASHINGTON - Regulators plan to employ a strategy for handling big failing banks that would help stabilize the financial system by preserving the banks' healthy operations, the head of the Federal Deposit Insurance Corp. says.
FDIC acting Chairman Martin Gruenberg outlined the agency's strategy in a speech Thursday. Under the 2010 financial-overhaul law, the agency has the authority to seize and dismantle big financial firms that could collapse and threaten the broader system. The aim is to avoid another taxpayer bailout of Wall Street banks in another financial crisis.
Gruenberg said that under the strategy, the FDIC would take over a failing bank's parent company but allow its healthy subsidiaries to continue operating. He said that would reduce disruption and permit normal financial transactions.
Because the subsidiaries would keep operating, their trading and other relationships with other big financial institutions also would continue normally and "mitigate systemic consequences," Gruenberg said in the speech at a Federal Reserve conference in Chicago. That would reduce the chance that closely connected big financial firms would fall like dominoes.
In shutting down a bank's parent company, the FDIC would transfer its assets, especially holdings in its subsidiaries, to a new "bridge" company. Shareholders would lose their investment. Its creditors would receive equity stakes in the "bridge" company.
Eventually, the bridge company would become a healthy company in private hands, Gruenberg said.
FDIC officials cite Lehman Brothers' collapse in 2008 that precipitated the financial meltdown and Great Recession. Despite Lehman's extensive losses, there were valuable assets in some subsidiaries, especially its European operation, based in London, they say. When Lehman failed, that operation had to be dissolved under British law. The FDIC strategy would permit such an operation to continue.
by Marcy Gordon - May. 10, 2012 06:21 PM Associated Press
FDIC to spare healthy units of failing banks
FDIC acting Chairman Martin Gruenberg outlined the agency's strategy in a speech Thursday. Under the 2010 financial-overhaul law, the agency has the authority to seize and dismantle big financial firms that could collapse and threaten the broader system. The aim is to avoid another taxpayer bailout of Wall Street banks in another financial crisis.
Gruenberg said that under the strategy, the FDIC would take over a failing bank's parent company but allow its healthy subsidiaries to continue operating. He said that would reduce disruption and permit normal financial transactions.
Because the subsidiaries would keep operating, their trading and other relationships with other big financial institutions also would continue normally and "mitigate systemic consequences," Gruenberg said in the speech at a Federal Reserve conference in Chicago. That would reduce the chance that closely connected big financial firms would fall like dominoes.
In shutting down a bank's parent company, the FDIC would transfer its assets, especially holdings in its subsidiaries, to a new "bridge" company. Shareholders would lose their investment. Its creditors would receive equity stakes in the "bridge" company.
Eventually, the bridge company would become a healthy company in private hands, Gruenberg said.
FDIC officials cite Lehman Brothers' collapse in 2008 that precipitated the financial meltdown and Great Recession. Despite Lehman's extensive losses, there were valuable assets in some subsidiaries, especially its European operation, based in London, they say. When Lehman failed, that operation had to be dissolved under British law. The FDIC strategy would permit such an operation to continue.
by Marcy Gordon - May. 10, 2012 06:21 PM Associated Press
FDIC to spare healthy units of failing banks
$2 Trillion JP Morgan Trading Loss Renews Push To Curb Bank Risk; Dodd-Frank Found Wanting - Investors.com
JPMorgan Chase's (JPM) $2 billion trading loss has renewed concerns about how the nation's largest banks manage risk and raised doubt as to whether the 2010 financial overhaul adequately protects taxpayers.
Overnight, CEO Jamie Dimon seems to have gone from exhibit A in the case that too-big-to-fail banks can be safely run without tighter regulatory handcuffs to exhibit A that they can't.
In one respect, the shift may be unwarranted: The trading loss looks like a superficial wound — not even big enough to wipe out half ofJPMorgan's Q1 profit. At least when it comes to absorbing this particular loss, "too big" may not be so bad.
JPMorgan Chase CEO Jamie Dimon reassured the bank's employees on Friday that the company is "very strong." He is pictured in San Francisco on Jan. 13.
But banking experts understand that financial crises are a fact of life. As long as banks are playing with federally insured deposits — and an implicit broader bailout backstop — taxpayers have an interest in making sure they don't take on excessive risk.
That's where the Volcker Rule, passed as part of the Dodd-Frank reforms, is supposed to come in. But the rule remains unfinished as regulators struggle to translate Congress' mandate to keep banks from taking risky bets into clear, workable guidelines.
Rep. Barney Frank, D-Mass., sounded a note of vindication: "The argument that financial institutions do not need new rules .. . is at least $2 billion harder to make today."
Yet it's unclear if the Volcker Rule would even restrict the activity that burned JPMorgan. Dimon suggested on Thursday's conference call that the trade in question was done to hedge risk and, therefore, would be permissible under the Volcker Rule.
The rule targets proprietary trading — making trades not to provide customers with liquidity or hedge risk, but for pure profit.
"The Volcker Rule judges very much by the intent" behind a trade, said Brookings Institution scholar Douglas Elliott. "If a bank does its hedging incompetently," that's beyond the ability of regulators to police, he said.
And for good reason: "If we didn't have these exceptions, (the Volcker Rule) would effectively forbid a large majority of the things that banks do."
Elliott, for one, is no fan of the Volcker Rule, which aims to ban unnecessary risk, rather than preventing excessive risk-taking. In that sense, it seems designed to rid bank culture of a "trading mentality," he said.
Other analysts also see it as somewhat besides the point in heading off financial crises.
"Banks usually go broke from making bad loans," not proprietary trading, said American Enterprise Institute banking expert Alex Pollock.
by Jed Graham Investor's Business Daily May 11, 2012
$2 Trillion JP Morgan Trading Loss Renews Push To Curb Bank Risk; Dodd-Frank Found Wanting - Investors.com
Overnight, CEO Jamie Dimon seems to have gone from exhibit A in the case that too-big-to-fail banks can be safely run without tighter regulatory handcuffs to exhibit A that they can't.
In one respect, the shift may be unwarranted: The trading loss looks like a superficial wound — not even big enough to wipe out half ofJPMorgan's Q1 profit. At least when it comes to absorbing this particular loss, "too big" may not be so bad.
JPMorgan Chase CEO Jamie Dimon reassured the bank's employees on Friday that the company is "very strong." He is pictured in San Francisco on Jan. 13.
But banking experts understand that financial crises are a fact of life. As long as banks are playing with federally insured deposits — and an implicit broader bailout backstop — taxpayers have an interest in making sure they don't take on excessive risk.
That's where the Volcker Rule, passed as part of the Dodd-Frank reforms, is supposed to come in. But the rule remains unfinished as regulators struggle to translate Congress' mandate to keep banks from taking risky bets into clear, workable guidelines.
Rep. Barney Frank, D-Mass., sounded a note of vindication: "The argument that financial institutions do not need new rules .. . is at least $2 billion harder to make today."
Yet it's unclear if the Volcker Rule would even restrict the activity that burned JPMorgan. Dimon suggested on Thursday's conference call that the trade in question was done to hedge risk and, therefore, would be permissible under the Volcker Rule.
The rule targets proprietary trading — making trades not to provide customers with liquidity or hedge risk, but for pure profit.
"The Volcker Rule judges very much by the intent" behind a trade, said Brookings Institution scholar Douglas Elliott. "If a bank does its hedging incompetently," that's beyond the ability of regulators to police, he said.
And for good reason: "If we didn't have these exceptions, (the Volcker Rule) would effectively forbid a large majority of the things that banks do."
Elliott, for one, is no fan of the Volcker Rule, which aims to ban unnecessary risk, rather than preventing excessive risk-taking. In that sense, it seems designed to rid bank culture of a "trading mentality," he said.
Other analysts also see it as somewhat besides the point in heading off financial crises.
"Banks usually go broke from making bad loans," not proprietary trading, said American Enterprise Institute banking expert Alex Pollock.
by Jed Graham Investor's Business Daily May 11, 2012
$2 Trillion JP Morgan Trading Loss Renews Push To Curb Bank Risk; Dodd-Frank Found Wanting - Investors.com
Sunday, June 12, 2011
Mortgage-rule changes worry some organizations
Proposed regulatory changes designed to reduce the threat of another mortgage meltdown would make buying a home cost-prohibitive for many financially responsible minority and low-income residents, representatives of the country's largest civil-rights organizations said Wednesday.
In a telephone news conference, leaders of the groups National Council of La Raza, the National Urban League, NAACP and National Coalition for Asian Pacific American Community Development took issue with one particular component of the nearly 400-page proposal by federal regulators to create what they call "qualified residential mortgages."
Under the proposed rules, authorized by last year's Dodd-Frank Wall Street Reform and Consumer Protection Act, banks issuing mortgages for subsequent bundling and sale to the securities market must either require a 20 percent down payment or retain 5 percent of each loan's value on their books.
The proposed rules would not apply to loans backed by Fannie Mae, Freddie Mac or the Federal Housing Administration, which comprise 90 percent of all mortgages issued today.
Speakers at Wednesday's news conference said a required down payment of 20 percent would be particularly harmful to members of ethnic minorities, because they tend to earn less and typically would have the greatest difficulty coming up with 20 percent of the home's purchase price in cash.
The proposed rule also would have a chilling effect on the housing-market recovery by severely limiting the purchase power of minority groups, currently the fastest-growing segment of the housing market.
Regulators and other supporters of the 20 percent requirement say it would greatly reduce the risk of a second foreclosure crisis by requiring both lender and borrower to have a sizable stake in the loan's full repayment.
But members of the civil-rights groups said they were concerned about predictions that lenders would charge considerably higher interest rates to those mortgage borrowers unable to put 20 percent down.
Some analysts predict lenders could tack as much as 3 percent onto the interest rate for borrowers with pristine credit who lack the 20 percent down payment.
"We're concerned about any proposal that would make mortgages more expensive and difficult to obtain," said Cy Richardson, vice president of housing and community development for the National Urban League.
Graciela Aponte, senior legislative analyst for La Raza's Wealth-Building Policy Project, said mortgage lenders have a history of exploiting minority homebuyers, even those with ample proof of creditworthiness.
She offered a number of statistics supporting that claim, all based on studies by the nonpartisan Center for Responsible Lending, based in Durham, N.C.
- Latino and African-American homebuyers were more than twice as likely as White homebuyers to receive the kinds of mortgage most at risk of default.
- Even after controlling for income, credit score, loan-to-value ratio and presence of a co-signer on the loan, members of ethnic minorities made up a disproportionately large percentage of the subprime market.
- An estimated 8 percent of African-American and Latino homeowners have lost their homes to foreclosure, compared with 4.5 percent of White homeowners.
Aponte noted that all Arizonans face a higher risk of home foreclosure than residents of most other states, and that Arizona's housing market had been slow to recover even without the added restrictions on buyers.
by J. Craig Anderson The Arizona Republic Jun. 9, 2011 12:00 AM
Mortgage-rule changes worry some organizations
In a telephone news conference, leaders of the groups National Council of La Raza, the National Urban League, NAACP and National Coalition for Asian Pacific American Community Development took issue with one particular component of the nearly 400-page proposal by federal regulators to create what they call "qualified residential mortgages."
Under the proposed rules, authorized by last year's Dodd-Frank Wall Street Reform and Consumer Protection Act, banks issuing mortgages for subsequent bundling and sale to the securities market must either require a 20 percent down payment or retain 5 percent of each loan's value on their books.
The proposed rules would not apply to loans backed by Fannie Mae, Freddie Mac or the Federal Housing Administration, which comprise 90 percent of all mortgages issued today.
Speakers at Wednesday's news conference said a required down payment of 20 percent would be particularly harmful to members of ethnic minorities, because they tend to earn less and typically would have the greatest difficulty coming up with 20 percent of the home's purchase price in cash.
The proposed rule also would have a chilling effect on the housing-market recovery by severely limiting the purchase power of minority groups, currently the fastest-growing segment of the housing market.
Regulators and other supporters of the 20 percent requirement say it would greatly reduce the risk of a second foreclosure crisis by requiring both lender and borrower to have a sizable stake in the loan's full repayment.
But members of the civil-rights groups said they were concerned about predictions that lenders would charge considerably higher interest rates to those mortgage borrowers unable to put 20 percent down.
Some analysts predict lenders could tack as much as 3 percent onto the interest rate for borrowers with pristine credit who lack the 20 percent down payment.
"We're concerned about any proposal that would make mortgages more expensive and difficult to obtain," said Cy Richardson, vice president of housing and community development for the National Urban League.
Graciela Aponte, senior legislative analyst for La Raza's Wealth-Building Policy Project, said mortgage lenders have a history of exploiting minority homebuyers, even those with ample proof of creditworthiness.
She offered a number of statistics supporting that claim, all based on studies by the nonpartisan Center for Responsible Lending, based in Durham, N.C.
- Latino and African-American homebuyers were more than twice as likely as White homebuyers to receive the kinds of mortgage most at risk of default.
- Even after controlling for income, credit score, loan-to-value ratio and presence of a co-signer on the loan, members of ethnic minorities made up a disproportionately large percentage of the subprime market.
- An estimated 8 percent of African-American and Latino homeowners have lost their homes to foreclosure, compared with 4.5 percent of White homeowners.
Aponte noted that all Arizonans face a higher risk of home foreclosure than residents of most other states, and that Arizona's housing market had been slow to recover even without the added restrictions on buyers.
by J. Craig Anderson The Arizona Republic Jun. 9, 2011 12:00 AM
Mortgage-rule changes worry some organizations
Saturday, April 16, 2011
Workers: Low pay imperils industry
Recently implemented federal reforms to boost pay for home appraisers have not fixed the problem, according to a group of Phoenix-area appraisers who said low pay was destroying their profession.
The Dodd-Frank Wall Street Reform and Consumer Protection Act approved by Congress and signed into law in July contains several provisions intended to ensure that home appraisals are impartial, thorough and accurate.
Appraisers were hoping the new measure would correct problems they began to experience in May 2009, when a set of rules known as the Home Valuation Code of Conduct was adopted by the profession.
In a recent survey by the Arizona Association of Real Estate Appraisers, an overwhelming majority of members said they used to earn $350 to $375 per job. Lately they've been earning about half that amount, they said.
Aris Abakuks, an independent, board-certified appraiser based in Gilbert, said it had been difficult for local appraisers to earn a living since the 2009 code of conduct took effect, because the group of intermediary companies put in place to assign appraisers to specific jobs has not been paying them enough.
The largest intermediaries, known as appraisal-management companies, are owned by the major mortgage lenders such as Bank of America and Wells Fargo.
Appraisers who demand more pay risk being dropped from the management company's eligibility list, which one local appraiser described as the equivalent of being blacklisted.
"It's basically controlled by the larger lenders," Abakuks said. "They can just pay whatever they want."
Abakuks said he was dropped from one of the major management companies' list because he refused to perform extra work for no pay on an appraisal he had completed and received payment for already.
Abakuks would not specify which company had barred him from working, but he and others said the practice was common.
The new measure to prohibit unfair pay, which took effect April 1, states that "lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised."
It goes on to explain that a "fee appraiser" is any licensed, board-certified appraiser who charges a fee for his or her services.
Some appraisers, but not all, say the 2009 code of conduct has devastated their profession and reduced the quality of home appraisals.
Others say it was necessary, because bribery and collusion had been rampant in the appraisal business and contributed to the hyperinflation of home prices in the middle of the previous decade.
It essentially put a wall between appraisers and mortgage brokers by inserting a middle man into the process. In most cases, appraisers are no longer allowed to speak directly with brokers.
The problem, opponents of the code say, is that some management companies keep too big a chunk of the appraisal fee to run their own operations.
Joanna Conde, a board-certified residential appraiser who heads the statewide Arizona Association of Real Estate Appraisers, and other trade group members said overworked appraisers who need to maintain a high volume of business are more likely to cut corners, miss deadlines and make mistakes.
Nearly every major bank owns an appraisal-management company, which is set up to assign an appraiser from a pool of available candidates each time a home needs to be appraised for a mortgage-loan purchase or refinancing.
Some of the major mortgage lenders, including Bank of America and Wells Fargo, also own appraisal-management companies.
An appraisal is required only if the buyer is taking out a loan. It gives the lender a basis for deciding how much to lend.
Arizona lawmakers recently approved a new law that will force management companies to meet higher standards of conduct and disclose their fees to consumers.
It also will require the state's nearly 200 management firms to register and pay a license fee of $2,500 every two years, Conde said.
Most appraisers and even some management firms supported Senate Bill 1351, which also requires background checks on appraisal-management company owners, forces companies to reveal hidden fees to consumers, and makes them comply with rules for lenders and appraisers.
It also would allow appraisers to file complaints.
However, the new state law is still being implemented and might not take effect until this summer, Conde said.
Meanwhile, several local appraisers said management firms still underpay them and make unreasonable demands, such as expecting them to do follow-up work or drive long distances for no additional compensation.
Even appraisers with steady work are having a difficult time paying the bills, Abakuks said. As a result, many veterans are leaving the profession, and virtually no young people are entering it.
"The problem is going to come five to 10 years from now when there aren't enough appraisers," he said.
by J. Craig Anderson The Arizona Republic Apr. 16, 2011 12:00 AM
Workers: Low pay imperils industry
The Dodd-Frank Wall Street Reform and Consumer Protection Act approved by Congress and signed into law in July contains several provisions intended to ensure that home appraisals are impartial, thorough and accurate.
Appraisers were hoping the new measure would correct problems they began to experience in May 2009, when a set of rules known as the Home Valuation Code of Conduct was adopted by the profession.
In a recent survey by the Arizona Association of Real Estate Appraisers, an overwhelming majority of members said they used to earn $350 to $375 per job. Lately they've been earning about half that amount, they said.
Aris Abakuks, an independent, board-certified appraiser based in Gilbert, said it had been difficult for local appraisers to earn a living since the 2009 code of conduct took effect, because the group of intermediary companies put in place to assign appraisers to specific jobs has not been paying them enough.
The largest intermediaries, known as appraisal-management companies, are owned by the major mortgage lenders such as Bank of America and Wells Fargo.
Appraisers who demand more pay risk being dropped from the management company's eligibility list, which one local appraiser described as the equivalent of being blacklisted.
"It's basically controlled by the larger lenders," Abakuks said. "They can just pay whatever they want."
Abakuks said he was dropped from one of the major management companies' list because he refused to perform extra work for no pay on an appraisal he had completed and received payment for already.
Abakuks would not specify which company had barred him from working, but he and others said the practice was common.
The new measure to prohibit unfair pay, which took effect April 1, states that "lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised."
It goes on to explain that a "fee appraiser" is any licensed, board-certified appraiser who charges a fee for his or her services.
Some appraisers, but not all, say the 2009 code of conduct has devastated their profession and reduced the quality of home appraisals.
Others say it was necessary, because bribery and collusion had been rampant in the appraisal business and contributed to the hyperinflation of home prices in the middle of the previous decade.
It essentially put a wall between appraisers and mortgage brokers by inserting a middle man into the process. In most cases, appraisers are no longer allowed to speak directly with brokers.
The problem, opponents of the code say, is that some management companies keep too big a chunk of the appraisal fee to run their own operations.
Joanna Conde, a board-certified residential appraiser who heads the statewide Arizona Association of Real Estate Appraisers, and other trade group members said overworked appraisers who need to maintain a high volume of business are more likely to cut corners, miss deadlines and make mistakes.
Nearly every major bank owns an appraisal-management company, which is set up to assign an appraiser from a pool of available candidates each time a home needs to be appraised for a mortgage-loan purchase or refinancing.
Some of the major mortgage lenders, including Bank of America and Wells Fargo, also own appraisal-management companies.
An appraisal is required only if the buyer is taking out a loan. It gives the lender a basis for deciding how much to lend.
Arizona lawmakers recently approved a new law that will force management companies to meet higher standards of conduct and disclose their fees to consumers.
It also will require the state's nearly 200 management firms to register and pay a license fee of $2,500 every two years, Conde said.
Most appraisers and even some management firms supported Senate Bill 1351, which also requires background checks on appraisal-management company owners, forces companies to reveal hidden fees to consumers, and makes them comply with rules for lenders and appraisers.
It also would allow appraisers to file complaints.
However, the new state law is still being implemented and might not take effect until this summer, Conde said.
Meanwhile, several local appraisers said management firms still underpay them and make unreasonable demands, such as expecting them to do follow-up work or drive long distances for no additional compensation.
Even appraisers with steady work are having a difficult time paying the bills, Abakuks said. As a result, many veterans are leaving the profession, and virtually no young people are entering it.
"The problem is going to come five to 10 years from now when there aren't enough appraisers," he said.
by J. Craig Anderson The Arizona Republic Apr. 16, 2011 12:00 AM
Workers: Low pay imperils industry
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