Bank Lending Shrinking As Wage Growth Remains Stagnant

I appeared on Fox News Radio today on the Tom Sullivan Show. He asked me about the non-existant inflation report today, the poor retail sales numbers and the zero percent wage growth report. (One listener sent me an angry email saying all lending trends were positive — he must be a golfer that is confusing declining scores with success).

We also got around to discussing positive bank profits. But I pointed out that bank lending is declining in the face of stagnant wage growth.

Bank Loans and Leases YoY are declining.

As are Commercial and Industrial Loans YoY, the lowest level since July 2011.

1-4 unit mortgages outstanding? We are still below the YoY growth rate at anytime between 1992 and 2008.

Multifamily mortgage debt outstanding is growing and is back at 2007 levels.

Wage growth?

Tough market conditons!

Battle Royale: JPMC’s Dimon and Minneapolis Fed’s Kashkari Battle Over Bank Capital

Bloomberg has nice piece on the battle between JPMorganChase’s Jamie Dimon and the Minneapolis Fed’s Neel Kashkari.

(Bloomberg) Jamie Dimon is America’s most famous banker, and Neel Kashkari is its most outspoken bank regulator, so it’s not a shock that they would eventually come to blows. What’s interesting is that their contretemps is over an acronym that most Americans have never heard of, but one that may be central to preventing another recession.

TLAC, which is pronounced TEE-lack, is something you need to know about if you want to judge the sparring between Dimon, the well-coiffed chief executive of JPMorgan Chase & Co., and Kashkari, the very bald man who ran for governor of California on the Republican ticket and is now president of the Federal Reserve Bank of Minneapolis.

On April 6, Kashkari went after Dimon in a way that circumspect central bankers ordinarily don’t. In an essay published on Medium and republished on the Minneapolis Fed website, he challenged Dimon’s assertion in his annual letter to shareholders that 1) there’s no longer a risk that taxpayers will be stuck with the bill if a big bank fails, and 2) banks have too much capital (meaning an unnecessarily thick safety cushion). Wrote Kashkari: “Both of these assertions are demonstrably false.”

This is where TLAC comes in, so bear down for a bit of bank accounting. TLAC stands for total loss-absorbing capacity. The more capacity that a bank has to absorb losses, the smaller the risk that it will require a taxpayer-funded government bailout. So lots of TLAC is good. But not all TLAC is created equal. Kashkari argues that a lot of what Dimon calls TLAC on paper wouldn’t be available to absorb losses in a real-world crisis.

Imagine that a whale swims up the Thames River and beaches itself in the City of London, causing billions of dollars in losses to Bank X. If the loss is really big or Bank X is weak (unlike JPMorganChase, which most emphatically is not weak), then one such hit could push it into insolvency. The first thing that happens is that the price of the stock falls to zero. Shareholders, in other words, are the first to absorb losses. That’s fair: Shareholders get all the profit that a bank makes after paying its expenses, so they should have to take the hit when the bank’s profit is wiped out unexpectedly.

The fight between Dimon and Kashkari is over who absorbs the rest of the loss. According to Dimon, it’s the unsecured bondholders. (Unsecured meaning they don’t have a legal claim to any specific asset on the bank’s balance sheet.) Unsecured bondholders are informed that, sorry, there’s been a loss. They’re not going to get their interest payments anymore, and their bonds are being converted into common shares. Now they’re at the back of the line with the rest of the bank’s shareholders; they’ll get paid only if the bank starts making a profit again.

The beauty of the system outlined by Dimon is that taxpayers aren’t exposed to risk because if a bank gets in trouble it has a great, big escape hatch: It simply wipes out its bondholders, thus conserving its money.

“It sounds like an ideal solution,” Kashkari writes. “The problem is that it almost never actually works in real life.” In a financial crisis, regulators worry about contagion. If bondholders of one bank are defaulted on, those of other banks will worry they’re next and yank their support, causing a downward spiral of confidence that crashes the economy. So the regulators make sure bondholders keep getting paid.

“Indeed,” Kashkari writes, “the most recent crisis showed that even some debt holders who had been explicitly told that they would take losses during a crisis got bailed out.”

Kashkari argues that regulators and bankers should stop acting as if bonds are part of TLAC (which, remember, stand for total loss-absorbing capacity), because when push comes to shove, bondholders will absorb few if any losses. Taxpayers will be forced to step up and make sure they keep getting paid.

Kashkari also disses Dimon’s argument that banks’ safety cushions are needlessly thick. Dimon wrote to shareholders that if the Federal Reserve standards weren’t so tough, “banks probably would have been more aggressive in making some small business loans, lower-rated middle market loans, and near-prime mortgages.” Kashkari’s response? “Mr. Dimon argues that the current capital standards are restraining lending and impairing economic growth, yet he also points out that JPMorgan bought back $26 billion in stock over the past five years. If JPMorgan really had demand for additional loans from creditworthy borrowers, why did it turn those customers away and instead choose to buy back its stock?”

Mr. Kashkari has a valid point. Check out the bank capital to total assets during the housing bubble of the last decade. From 2004-2007, bank capital to total assets exceeded 10%, but fell under 10% for 2008. And we all remember TARP (the Troubled Asset Relief Program signed into law on October 3, 2008). Starting in 2o08, bank capital was strengthed to 12.74% of total bank assets by 2010, but has slipped to under 12% by 2013.

Of course, not all capital (and capital ratios) are equal. Take a look at Chase Bank’s Basel III standardized regulatory capital and advanced transitional regulatory capital. Chase Bank’s Tier 1 capital under Basel III Advanced Transition is now under 10% at 9%. JPMorgan_Chase_Co_4Q16_Basel_Pillar_3_Report

JPMorganChase has credit risk exposure to residential and commercial real estate, C&I loans, consumer auto loans and student loans.

Can any large bank survive if home prices and/or commercial real estate prices burst and fall 20%?

So while it seems that Dimon is correct (stiff the unsecured bondholders), Kashkari is also correct in that regulators may panic (again) and try to preserve the unsecured bondholders. That is, bail out the unsecured bond holders.

Maybe Dimon and  Kashkari can settle their “battle royale” by doing it “the Swanson Way.” 

Wells Fargo Mortgage Applications Fall To Lowest Since 2005* (The Wells Fargo Mortgage Wagon ISN’T Coming!)

It is reporting season for American banks and Wells Fargo’s came out today. first-quarter-earnings-supplement

Of particular interest is the decline in residential mortgage applications for Wells Fargo, the lowest since 2005. Because that is the last year for which there is data on Bloomberg for Wells Fargo.*

Mortgage originations? About the same as Q1 2016, but substantially below levels seen in 2012. Q1 2017 is the second lowest level of originations sine 2005.

It just isn’t Wells Fargo. Take Bank of America. But Wells claimed their niche was the residential mortgage market while other banks retreated from the market.

Low wage growth coupled with regulatory overreach by Dodd-Frank and the Consumer Financial Protection Bureau has diminished residential mortgage lending by the banks.

So, the Wells Fargo (mortgage lending) wagon isn’t coming. And it isn’t for other big banks either. But PROFITS increased for mortgage bankers  in 2016.

While Wells Fargo was still the leading mortgage originator in Q3 2016, shadow bank Quicken is challenging Chase for 2nd place with PennyMac challenging US Bank for 4th place in the mortgage origination derby.

Maybe Dan Gilbert, the CEO of Quicken Loans and the owner of the Cleveland Cavaliers basketball team, should adopt the Wells Fargo wagon song for Quicken! Because it seems that Wells Fargo’s wagon isn’t bring the home loans as expected.

MBA Residential Mortgage Application Index Hits Highest Level Since May 2010 .. And It Is Only April!!

As mortgage interest rates hit a new 2017 low, we now see mortgage purchase applications rising to its highest level since May 2010.

This new level is in spite of mortgage originations for borrowers with credit scores under 620 playing a lesser than during the financial crisis. Although mortgage originations for borrowers with credit scores under 620 are at their highest level since March 2010. So both mortgage purchase applications (SA) and under 620 credit score mortgage borrowers are at their highest levels since 2010.

With the worst wage recovery after a recession in modern history, expanding the “credit envelope” is about the only way to expand mortgage lending.

In other words, mortgage credit for borrowers under 620 FICO score is expanding at the fastest pace since Dodd-Frank and The Consumer Financial Protection Bureau were created in 2010.

Elizabeth Warren, architect of the Consumer Financial Protection Bureau.

 

Cohn Said to Back Wall Street Split of Lending, Investment Banks

Former Goldman Sachs executive Gary Cohn said he supports breaking up the too-big-to-fail (TBTF) banks that have grown to be behemoths through acquisitions.

In a private meeting with lawmakers, White House economic adviser Gary Cohn said he supports a policy that could radically reshape Wall Street’s biggest firms by separating their consumer-lending businesses from their investment banks, said people with direct knowledge of the matter.

Cohn, the ex-Goldman Sachs Group Inc. executive who is now advising President Donald Trump, said he generally favors banking going back to how it was when firms like Goldman focused on trading and underwriting securities, and companies such as Citigroup Inc. primarily issued loans, according to the people, who heard his comments.

The remarks surprised some senators and congressional aides who attended the Wednesday meeting, as they didn’t expect a former top Wall Street executive to speak favorably of proposals that would force banks to dramatically rethink how they do business.

Yet Cohn’s comments echo what Trump and Republican lawmakers have previously said about wanting to bring back the Glass-Steagall Act, the Depression-era law that kept bricks-and-mortar lending separate from investment banking for more than six decades.

In the years after the law’s 1999 repeal, banks such as Citigroup, Bank of America Corp. and JPMorgan Chase & Co. gobbled up rivals and pushed into all sorts of new businesses, becoming one-stop-shopping financial behemoths.

How true. Here is a chart of bank aggregation which resembles an economic version of the Bruce Willis film “Last Man Standing.” Call it Last Bank Standing.

It will not be easy to break up the TBTF banks, of course. Other nations have similar banks that are broad- based in terms of merging lending banks with investment banks (and insurance companies). And they have been unsuccessful, for the most part, in breaking up big banks.

And remember, The Federal Reserve approved of the massive bank aggregation. Depository concentration be damned. 

In 1994, Congress prohibited any bank holding company from making an interstate acquisition of a bank if it would result in the acquirer controlling 10 percent or more of the total insured deposits in the United States. The 10 percent deposit cap was not binding on any firm when it was imposed in 1994, but acquisitions by large commercial banks brought three firms up to the cap, and acquisitions of institutions not covered by the deposit cap put Bank of America above the cap. Growth of deposits generally, as well as each firm’s internal growth, could affect these calculations over time.

Dodd-Frank is merely one impediment to shrinking the TBTF banks. The Consumer Financial Protection Bureau (CFPB) is helping to grow the shadow banks (e.g., non-depository financial institutions) such as Quicken through regulation.

Ratings Shopping Haunts Commercial Mortgage Bonds as Risks Rise

The retail slaughter caused by on-line shopping (Amazon effect) and sluggish wage growth since The Great Recession are taking a toll on large shopping mall stores and, as a consequence, commercial mortgage-backed securities (CMBS).

(Bloomberg) – Matt Scully and Adam Tempkin – Only a decade ago, global investors got a hard lesson about the dangers of relying on rosy bond ratings. Now they’re getting a reminder — this time in frothy corners of the $528 billion U.S. commercial-mortgage bondmarket.

As delinquencies on loans rise, some ratings firms are walking back their grades on bonds tied to properties like shopping malls and office towers, just a few years after assigning them. DBRS Inc. last month lowered the AAA ratings it had given 294 interest-only bonds after realizing it had been too lenient. Also in March, Kroll Bond Rating Agency Inc. cut some of its grades on a $1 billion bond issued in 2014, citing weakness in Texas loans exposed to energy prices.

The reversals underscore how forces that brought trouble to financial markets before are still percolating through Wall Street today. No one sees the dangers as being nearly as grave as they were during the home mortgage bust. But the same ratings business model used during that period still prevails — meaning that the banks that put together debt securities still pay for the credit grades, and they can shop around for the firm that will give them the highest ratings under the loosest criteria.

According to Trepp, retail delinquencies have risen to 6.12% as of March 17, 2016 (following only industrial loans).

And a foreclosure appeared in the WBCMT 2007-C32 CMBS deal (Rockvale Square in Lancaster, PA). Not to mention a non-performing property in teh BSCMS 2007-PW15 deal.

The WBCMT 2007-C32, a Wachovia deal, is now rated at CCC+ or lower for tranches B through D. Tranches E and F are rated as D by S&P. The H tranche, rated as C by Moody’s, has eaten $15.5 million in losses thus far. Tranches J and K are gone after sustaining losses of $56.6 million and $33,46 million, respectively. At least tranches A1, A2 and APB paid off with no losses.

And with delinquencies rising over the last year, the retail forecast is gloomy.

Parks and Recreation’s Tom Haverford may have to change his tune on “things are forever.” Particularly if shopping at Macy’s , Sears, JC Penney’s, The Limited, Abercrombie and Fitch, etc. 

Yes, Tom, you can buy things on-line. Unless your wages are slow to grow and you have accumulated significant debt. Particularly during the worst wage recovery after recession in modern history.

 

Jurassic Banking: Shadow Banking Is Getting Bigger Without Getting Better

There is an interesting article on Bloomberg entitled “Shadow Banking Is Getting Bigger Without Getting Better” 

Taxi companies that compete with Uber and media companies that are up against Facebook know it: In a rivalry between regulated and unregulated firms, the latter have an unfair advantage. It also applies to banks, which spent the past ten years losing market share to companies that regulators ignored.

In a fresh working paper, Greg Buchak and Gregor Matvos of the University of Chicago, Tomasz Piskorski of Columbia Business School and Stanford’s Amit Seru calculated that between 2007 and 2015, so-called shadow banks have increased their share of the U.S. Federal Housing Administration mortgage market sevenfold to 75 percent. That’s the market where the less creditworthy borrowers get their loans. In the U.S. mortgage market as a whole, shadow banks held a 38 percent share in 2015, compared with 14 percent in 2007.

This is not really surprising since non-depository financial institutions have risen in force thanks in part to Washington DC’s penchant for trying to regulate anything that moves (Dodd-Frank, Consumer Financial Protection Bureau, etc.) But the growth of “shadow banks” is also linked to a growth in more risky FHA-insured loans.

And with FHA-insured loans having 4 times the serious delinquency rate than loans purchased by GSEs Fannie Mae and Freddie Mac, this is represents a dramatic shift in banking and risk taking.

As Gerald Hanweck and I showed in a recent paper, bank failures following the housing bubble and financial crisis boomed in  2009 and 2010. Most of these bank failures were small banks. This resulted in bank aggregation into progressively larger banks. These were failures of depository institutions and shadow banks (non-depository institutions like Quicken Loans) have stepped in with riskier loan profiles.

The result? The rise of the mega-banks.

As Professor Ian Malcolm said in the movie Jurassic Park, life will find a way. Including subprime lending. Welcome to Jurassic Park, where Senator Elizabeth Warren and CFPB Director Richard Cordray still believe that they can control the banking system.