Recently in Banking And Finance Category

Much as cities in California have made mistakes when it comes to their finances, it appears here on the East Coast the city of New York is about to shoot itself in the foot, but in a different fashion.

While New York also has problems with its public employee unions, it's nowhere near the level seen elsewhere. Instead, the City Council is proposing rules that will help drive the last surviving industry out of the city - the financial industry.

For the life of me I can't figure out how making it too difficult and too expensive to remain in New York City is going to help the city's finances. Is it possible the City Council has been infected with the "California disease"? After all, California's state and local level governments have been doing their best to drive businesses out of business or out of state. They have succeeded. That's why California is in the fiscal mess it's in. And now New York City wants to do the same thing?

Yet in the wake of JP Morgan's massive losses last week and the continuing controversy surrounding the Wall Street bailouts, the New York City Council is debating a measure that would require city banks to publicly disclose their efforts at "socially responsible" banking.

--snip--

Many bankers, as well as Mayor Michael Bloomberg, have voiced their opposition to the new plans. The regulations, they say, would add another burdensome layer to the web of regulations that already exist at the federal and state levels. The Council, however, appears unmoved, and support of key council leaders...give it a fighting chance at making it into law.

If it does, its supporters on the Council will hail it as a major victory, but it will be a loss for the city as a whole. The financial industry is the one industry keeping the city alive, yet New York's blue politicians seem unconcerned about the risks of antagonizing their major cash cow.

This is the same attitude held by many politicians in California and we've seen how well that's worked out for them. The City Council doesn't seem to understand that the banks and other financial institutions will have no problem departing the city for greener pastures. As the post linked above states, Fortune 500 companies have been leaving New York for decades. Wall Street firms will have no problems following them to places with better business climates. And with today's telecommunications infrastructure, those greener pastures can be anywhere, even here in New Hampshire.

As I mentioned in yesterday's post, Morgan Kelly, an economics professor in Dublin, Ireland, warned the Irish government about the impending economic meltdown because of laws enacted to protect Irish banks from failure. He was derided as a crank and alarmist. Now that the meltdown has occurred just as he predicted, he's warned the government not to take a bailout from the EU and the IMF because in the long run it will hurt the Irish economy worse than if they did nothing and leave the economy under the control of Brussels. Did the Irish leaders listen?

Of course not.

After months of trying to go it alone, Irish officials have relented and are officially asking Europe for a bailout that could top the $110 billion dished out to stave off bankruptcy for Greece.

--snip--

The request for help was a humbling turnabout for Ireland, which just last week was insisting it could manage its own finances. It does not view itself as being as profligate or irresponsible as Greece was in running up deficits, and has been preparing a four-year budget plan filled with sharp cutbacks that is intended reduce its deficit from 32 percent of gross domestic product to 3 percent.

But the government has been sinking further and further into debt since its 2008 decision to protect its banks from all losses. The banking system had become so weakened that it could not afford to wait any longer for help.

Ireland is suffering from the Law of Unintended Consequences, where legislation designed to prevent bank failures and help prop up the economy had just the opposite effect. That's what happens when stopgap measures brought forward by those with too little understanding of economics and monetary policy try to fix a problem they don't understand.

Ireland's calamity should be seen as a cautionary tale, showing us how government intervention in markets as a means of protecting the economy quite often creates more problems than it solves.

As I reported in this post, banks are selling more homes than developers. That's not good news. What makes it worse news is that for every home presently for sale, there are two more waiting to go on the market. If all those homes were put on the market now, the already shaky (and declining) housing market would collapse entirely and real estate values would head for the cellar. Those homeowners trying to sell their homes would be crowded out of the market and would be forced to sell them for far less than the homeowner might owe, meaning it would be cheaper for the homeowner to either walk away or declare bankruptcy and let the bank take it. In each scenario both the homeowner and the bank would lose and yet another home would have it's value reduced to almost nothing.

This is not a new situation.

Back in the early 90's a similar housing bubble burst and millions of homes were foreclosed upon. It wasn't uncommon to see 20 pages of foreclosure auctions in the newspaper (or at least in the statewide paper here in New Hampshire). The Resolution Trust Company, an entity created by the federal government to dispose of these bank-owned properties, had over $1.3 billion (~$2.1 billion in 2010 dollars) worth of real estate to sell in New Hampshire alone. As now, they couldn't dump all of those properties on the market at the same time without destroying what little was left of the real estate market at the time. It took the RTC years to dispose of all those properties, putting them up for sale as the demand rose.

Is it possible the same thing will be required again to prevent the worst from happening?

As if the stock market downturn and declining home sales aren't enough, the so-called Frank-Dodd Financial Reform bill will make sure to kill off one thing that many of us depend upon - our local community banks.

The comprehensive financial reform agreed upon by the House and Senate on Friday, along with all the new regulations of the past year, could signal the end of community banking. The new reforms will give more power to the Federal Reserve to regulate how [small banks] do business.

What does all this mean for our customers? Less credit will be available, costs will increase, and we will be less able to make loans to regular people who were creditworthy in the past. This is the perfect storm for the small retail banking customer. We will start to see more small community bank failures and mergers because of voluminous regulation.

I thought financial reform was supposed to help both consumers and banks to survive. Instead it looks like it's designed to destroy small banks and make it very difficult to get loans of any type. How is this helping anyone except the banks that are too large to fail?

It has become increasingly apparent the Democrats in Congress are not friends of the American people. The only ones they're interested in helping are themselves...to our money.

If only this had actually happened.

The testimony of Charles Prince, former CEO of Citigroup, a too-big-to-fail bank that received $45 billion in bailouts and $300 billion in taxpayer guarantees, was riveting. You've seen it on the news, but if you were watching it live on C-Span, the stark power of his brutal candor was breathtaking. This, as you know, is what he said:

"Let's be real. This is what happened the past 10 years. You, for political reasons, both Republicans and Democrats, finagled the mortgage system so that people who make, like, zero dollars a year were given mortgages for $600,000 houses. You got to run around and crow about how under your watch everyone became a homeowner. You shook down the taxpayer and hoped for the best."

"Democrats did it because they thought it would make everyone Democrats: 'Look what I give you!' Republicans did it because they thought it would make everyone Republicans: 'I'm a homeowner, I've got a stake, don't raise my property taxes, get off my lawn!' And Wall Street? We went to town, baby. We bundled the mortgages and sold them to fools, or we held them, called them assets, and made believe everyone would pay their mortgage. As if we cared. We invented financial instruments so complicated no one, even the people who sold them, understood what they were."

"You're finaglers and we're finaglers. I play for dollars, you play for votes. In our own ways we're all thieves. We would be called desperadoes if we weren't so boring, so utterly banal in our soft-jawed, full-jowled selfishness. If there were any justice, we'd be forced to duel, with the peasants of America holding our cloaks. Only we'd both make sure we missed, wouldn't we?"

Sadly, this was nothing more than wishful thinking on Peggy Noonan's part.

Still, it would be refreshing, wouldn't it?

I have to say the opening statements of the President's State of the Union address were on target, talking about the problems that we, as a nation and as individuals, are facing. But once he started addressing the main issue we face - the economy - he lost me.

He talked about tax cuts, but only the temporary tax cuts. The somewhat more long term cuts, the Bush tax cuts, expire next year, meaning everyone will see a tax increase once they're gone.

On the stimulus bill - blah blah blah blah blah blah. (At least that's what I heard.)

As much as I agree that jobs are an issue, I have to disagree with the president that somehow it's up to the government to stimulate them with our money. Better that government get the heck out of the way. We don't need it to take $30 billion of the repaid TARP funds and spend it again.

I agree with Obama that we need to upgrade our infrastructure to help American businesses compete in the global marketplace. But what do high-speed trains have to do with that? Better that electrical systems and broadband communications networks be built, which will do far more to support American businesses than trains.

And while the president says he "won't accept second place for America", he's been doing what he can to make sure that's where we'll end up, if not third or fourth place.

After that I started nodding off as he started mouthing the same old platitudes but in different wrappers. (Make energy less expensive by taxing the hell out of it. Punish all the banks for the actions of a few. Spend billions more on education even though study after study after study shows more money doesn't equate to better education. Destroy our health care system in order to save it. And so on and so on.)

I. GOT. BORED.

ZZZZZZZzzzzzzzzzzz........

UPDATE 1/28/10: Going back and watching the address again, I saw that as time passed he shifted more and more blame for all our troubles on to others. He laid all the blame for the failure of health care reform and cap-and-tax squarely on the Republicans, saying they now owned the blame. Senator John Kyl rebutted that allegation today on NPR, stating the Senate Republicans were following the will of their constituents, blocking bad legislation that would do little more than cost the American people untold hundreds of billions of dollars with nothing to show for it.

There's something terribly wrong with this whole concept.

How is it the President can impose a tax (a fine fee) on responsible financial institutions that wisely and carefully shepherded their depositor's/client's money through the financial meltdown, required no TARP funds, didn't have to declare bankruptcy, nor required any other government 'help' because they were solvent and didn't get involved with the financial shenanigans? Yet the irresponsible institutions and corporations that squandered hundreds of billions of dollars get a walk and won't have to pay the fine fee?

Doesn't this send the wrong message? The President is saying, in effect, "If you do well and make money for your clients/depositors/shareholders while also providing sensible and responsible financial services we will punish you!. But if you are spendthrift and get involved with high risk financial strategies and investments and lose all of your money, will give you all the taxpayer money you need to stay afloat."

Like that will help stimulate the economy in any kind of sustainable fashion. But then, the looters never look at such things from an economic point of view. It's always about being "fair and just". But who decides what is fair and just? The looters, or course.

It's bad enough Congress was complicit in part for making the housing meltdown a reality. Now they want to do it again.

(Remember the definition of insanity: Doing the same thing over and over again but expecting the results to be different this time.)

...[F]ew people noticed a hearing with an exceedingly boring title -- "Proposals to Enhance the Community Reinvestment Act" -- held last week in the House Financial Services Committee. But the session marked a key moment in the ongoing battle between Republicans and Democrats over what caused our current financial woes -- and how we might best avoid getting into the same trouble again.

At the hearing, and in others across Capitol Hill, Democratic majorities are pressing hard to expand some of the very policies that led to the reckless home lending that in turn helped lead to the great financial meltdown. If Chairman Barney Frank and his fellow Democrats have their way, we'll do it all again -- and more.

At issue last week was H.R. 1479, the Community Reinvestment Modernization Act of 2009, sponsored by Democratic Rep. Eddie Bernice Johnson. It would expand and strengthen the 1977 Community Reinvestment Act, which required banks to make loans in low-income areas that many lenders had traditionally shunned.

The same legislation that forced banks to lend to borrowers incapable of repaying the loans is now being 'enhanced' to force banks to do even more of this kind of lending? If that isn't an example of fiscal insanity, I don't know what is.

Back in 2003 and again in 2007, President Bush tried to rein in Fannie Mae and Freddie Mac, two government-created financial organizations, because he believed they were getting in over their heads. Barney Frank, the same Chairman of the House Financial Services Committee, blocked any attempts to do that, stating on more than one occasion that they were fiscally sound and required no such efforts.

He was wrong.

Both Fannie Mae and Freddie Mac backed the irresponsible loans the banks were forced to make by taking them off the bank's hands and repackaging them, in effect collecting most of the risky home loans and holding on to them or repackaging them as mortgage backed securities. When these home loans stopped performing, as they were destined to do, both financial organizations failed and billions of dollars were lost in the financial markets and billions of dollars worth of real estate was foreclosed upon, leaving the taxpayers holding the bag.

Now these congressional idiots want to the same thing...again.

Do they really believe that this time there won't be a housing market collapse when banks are forced to give even more home loans to people incapable of paying them back?