As we wind our way down from our Great Recession and over-extended housing market, the fiasco in laying responsibility continues as the banks and the now newly government-controlled Government Sponsored Enterprises argue over who should pay for one bad loan after another.
Although deciding who should pay the bill seems to be the big question in Washington these days, regardless of the outcome, the result will remain the same. It is the people of the United States who will end up paying the bill. And as the banking and GSE professionals responsible for all the bad loans continue receiving bonuses and fighting amongst themselves over fault, little is being done for the lowly American homeowner—the real person who deserves credit for remaining solvent, continuing to pay the bill, and saving our economy.
Regarding the above argument, for most of the last two years I have taken the side of the free-enterprise banks and placed most of the blame for our current crisis on the GSEs, Fannie Mae and Freddie Mac. I still do; however, no longer can I be an apologist for the banks either.
Since 2006 total assets for the nearly 7,800 banks are up approximately $1.4 Trillion–$0.5 Trillion of it is in increased Cash, another $0.5 Trillion of the increase is in Securities, and most of the rest of the increase is accounted for in a category called All Other Assets. Stockholder Equity is up by more than $2.5 Trillion, and even after adjusting for estimated losses associated with poor loans still on the books, the equity to asset ratio of the banking industry is above its end of year 2006 level.
Yet despite all this good news as reported to the FDIC for the period ending 06/30/2010, the amount of loans (also an asset) on the bank industry’s books has actually decreased slightly since the end of 2006.
In other words, the banks are back in the black and flush with cash without having had to lend more to their customers. Remember TARP, anyone? In the first six months of this year, the Big Four Banks (JP Morgan, Bank of America, Citigroup, and Wells Fargo) each reported near or more than $5 billion in net income. Citigroup, being the one exception, reported only $4.6 billion (sic) in net income for the first six months of this year.
Overall, the “entire” banking industry has reported a net income over $40 billion for the first six months of 2010. Over the past 2-3 years the banks have paid or accounted for the majority of their $400-$500 billion in misjudgments and are now moving forward seemingly with new vigor.
But how did the banks pay for their miscalculations and misjudgments? And how are the banks treating their still worthy customers? Let’s look at some detail.
Net income for the banks has returned to the positive side in 2010 as a result of three primary reasons: (1) a larger spread between the interest rate they borrow at and the interest rate they loan to their customers; (2) less dividends to their stockholders; and (3) less taxes to the government.
And while the banks manage this “slight of hand” pass off to their customers, stockholders, and the taxpayer, they have continued to increase their salary base and other non-interest expenses (e.g., building, equipment, and doughnuts). I forget. Did I mention that while the banks have managed this Houdini-like act that they are making it harder to borrow new loans or refinance existing loans at the new economically depressed rates that are appropriate?
JP Morgan, probably the most Wall Street-favoured of the Big Four banks, provides us with a good example of how things have been working in the banking industry. Since 2006, JP Morgan has increased the amount of income earned from its interest rate spread by $30.5 billion (or by 141%), increased its income from business fees charged to the customer by $4 billion (an 11% increase), while at the same time increasing its salary base by $7.2 billion (up 44%) and its other non-interest expenses by $10.4 billion (or 48%). Dividends, which are down about one-third industry wide since 2010, have actually gone up at JP Morgan (explaining much of its favoured status) by $5.1 billion (or 177%).
Think this is an anomaly? Then let us take a look at Bank of America’s financials as reported recently to the FDIC. Since 2006, Bank of America has increased the amount of income earned from its interest rate spread by $20 billion (or 53%), maintained its non-interest fee income essentially the same, while at the same time increasing salaries by $3.5 billion (or 22%) and other non-interest expenses by $5.1 billion (or 28%). Dividends to Bank of America stockholders so far in 2010 is at one-third the rate of dividends paid in 2006.
So if the above is true, then why, one might ask, is the pre-tax net income in 2010 for JP Morgan essentially the same as it was in 2006 and about one-third of what it was for Bank of America? The answer: the toxic assets or bad loans that those banks issued during the earlier part of this decade.
The amount of non-performing or delinquent loans that JP Morgan is reporting on their books as of June 30, 2010 is up $49.7 billion (or 526%) compared to the end of 2006. For Bank of America the amount of non-performing or delinquent loans is up $72.9 billion (or 576%).
Over the last three years the above two banks have already written off more approximately $153 billion in bad debt and increased their Loan Allowance to cover future loans on the books by another $61 billion, taking pre-tax net income down, resulting in less taxes having to be paid.
But bank salaries and bonuses? Should I repeat myself again? Think these are anomalies? You will find the same results are reflected when you look at the entire banking industry as a whole.
Yet now we are being told that new global and national financial reform is going to save us from future banking financial crises. Excuse me for being sceptical; however, Big Finance does not pay big salaries and big bonuses for people who cannot figure out ways to get around poorly written regulations and inept regulators. If they cannot figure out how to bend the rules themselves, Big Finance can buy big Accountants to help them in their effort.
So for the above and the many other anecdotal stories that friends and family have shared with me regarding their recent banking experiences, I can no longer be a bank apologist. If the banks will not refinance the primary home of someone who is (1) current and (2) been paying his or her mortgage throughout this crisis, at a 4.0% mortgage rate , then I say, let the Congressionally-run GSEs refinance that mortgage. A 4.0% rate is defendable from a long term inflationary standpoint, it makes economical sense, and it is line with financial theory.
It is time to stimulate our economy without Government spending and the 4.0% refinancing rate is the way to do it. It puts new money into the hands of millions of deserving families and there is no reason for further delay. We have already waited longer than we should have.
It should take less than 5 minutes to approve a “good” loan for refinancing. Compare that against the time it takes to modify a loan with a history of nonperformance. More than 90% of the mortgage loans in the United States are good loans, while less than 10% require modification because they are in arrears. Let’s get our priorities straight for once and reward those financially responsible people who deserve it.
Now that the big banks are “flush”, it is time to start narrowing the gap in their interest rate spread again.
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