US Bank Regulators 'playing with fire'
from an investor board ...
(snip)" This ain't moral suasion, it's arm twisting of magnanimous proportion. Fed & US treasury probably attempting workout on all ends. Meanwhile USD languishes in death throe.
from Financial Times reporters -
"US regulators on Friday told banks to be more lenient with subprime mortgage borrowers in difficulties, potentially compounding uncertainties in the troubled mortgage securities market. The bank regulators issued guidance urging lenders to work with borrowers, for example by modifying loan terms."
- Such changes could affect the value of securities backed by subprime loans, which have already fallen sharply following a recent surge in defaults.
�Banks will have to work out how to reconcile the requirements of the regulators and the interests of holders of mortgage securities,� said one official.
- American International Group has said implementing the guidelines will cost it at least $178m, while Washington Mutual has committed to cut rates on up to $2bn of subprime loans, some of which have been securitised.
Regulators have also expressed concern about rising levels of risk.
A senior Bank of England official warned the vulnerability of the global financial system had increased as financial institutions have taken on greater risks in search of higher returns.
- Meanwhile, investors are still struggling to evaluate the potential scale of subprime exposure in financial markets after the losses at Bear's two funds and at others, including a listed fund run by London-based Cheyne Capital.
- Much of the exposure to the subprime sector is through opaque and complex instruments known as collateralised debt obligations, which repackage tranches of debt of varying risk.
Morgan Stanley estimates the total volume of CDOs issued since the start of 2005 with some subprime mortgage exposure is about $550bn."(snip)
On the surface this sounds 'compassionate'. However, in terms of cold hard financial reality, this new guidance from US bank regulators is essentially instructing banks and credit unions to increase their percentage of non-performing debt, and in turn further devalue the CDO 'risk insurance' that banks and credit unions thought they had purchased. At the same time, the further devaluation of CDO's is going to create yet more huge losses in the investment bank / hedge fund world.
You will recall that last week Bear Stearns ponied up 3 BILLION dollars = 25% or so of the firm's capital in order to 'rescue' an affiliated hedge fund that had taken huge losses on mortgage backed CDO investments. Arguably, the REAL purpose of this 'rescue' was to avoid the forced sale of more the affiliated hedge fund's CDO's after the first few forced sales only netted 10-20 cents per dollar of 'notional value'. The basis for this action is speculated to be that, like houses, if CDO's are sold at auction at a much lower price than their 'assessed value', this establishes a new 'market price' which must then be applied to all of the surrounding houses. But unlike houses, the holders of similar CDO's must then almost immediately 'revalue' those CDO's i.e. must book huge financial losses - with the next date for 'revaluation' being end of next quarter i.e. NOW.
Thus US bank regulators, having been faced with a choice of allowing delinquent subprime mortgage holders to take their losses and bankruptcies stemming from buying overpriced houses with insufficient income/credit, have instead essentially instructed the banking and financial sector to 'hide' those losses instead by renegotiating interest rates, by extending mortgage durations etc. and transferring the losses to the CDO market instead i.e. investment banks / hedge funds / foreign investors.
With trillions of dollars worth of CDO's floating around, the potential magnitude of these financial losses is arguably large enough to force many financial institutions into bankruptcy - which could very well lead to a major banking crisis a la 1933.
Ultimately, I suspect that it will be the US taxpayer that winds up holding the bag in one form or another.
Re: US Bank Regulators 'playing with fire'
Yup. Ala "Savings And Loans" bail out. Strangely enough - for very close the same reasons. History! Thee doth repeat thine self!
The question will be: Which hurts less - bail out or consequences. Given this country's penchant for generating "productivity" but "financial engineering" instead of actual goods and service, it should be an interesting question.
Re: US Bank Regulators 'playing with fire'
^^^ well I don't know about the entire country, but I DO know that the vast majority of 'discretionary spending' money in the New York area originates with bankers / brokers / hedgies / attorneys / advisors / analysts etc. whose livelihoods essentially depend on slicing off X percent of investor money for their company and themselves. Thus it is totally logical to conclude that if those investors decide to cut their losses and shift their hot money elsewhere that the profitability of the American 'financial services' industry will suffer.
This would be particularly true for the big 5 financial houses whose incomes depended in large measure on fees and commissions related to selling repackaged mortgage bonds, CDO's, private equity buyouts, mergers & acquisitions etc.
Re: US Bank Regulators 'playing with fire'
Quote:
Originally Posted by
Deogol
Yup. Ala "Savings And Loans" bail out. Strangely enough - for very close the same reasons. History! Thee doth repeat thine self!
"History does not repeat itself, but sometimes it does rhyme." - Mark Twain