Tuesday, June 28, 2011

Who’s crazy?

Like the song says: But maybe I’m crazy; Maybe you’re crazy; Maybe we’re crazy; Probably.

The last posting, On Investing: Part 14 (contd.), Some old fashion beliefs had a sophisticated basis, commented: “… it would appear that despite its limitations, the “old fashion” guidance looks pretty reasonable when compared to the nonsense inventive minds can come up with when it is ignored.” But when it comes to inventive minds, nothing beats the lines, “Ha, ha, ha; bless you’re soul; you really think you’re in control… Well,I think you’re crazy….” as in the song by Gnarls Barkey.

It seems that rather than freed from an anchor of old fashion thinking, we collectively became a little unhinged. Now it seems everyone knows what banks should do, and we’ve all arrived at this collective conclusion without having any consensus. Yet, even with everyone knowing what banks should do, there is no stampede by the public to start banks.

Consider some examples of our collective wisdom: A recent direct mail solicitation advised, “By now you’ve heard about President Obama’s Stimulus Plan and the benefits for homeowners. [Name of bank’s subsidiary] is pleased to play a key role in supporting homeownership by offering refinancing opportunities under the federal Making Home Affordable Program. Your current mortgage loan may be eligible for a refinance under this program.”
“This new plan will make refinancing easier for many homeowners. Some benefits to refinancing under this program now include:
Refinancing up to 125% loan-to-value…[explanation of a 125% LTV]
No appraisal required on some single-family homes
With the relaxed qualifying requirements available through the Making Home Affordable Program, it makes sense to review your current situation now….”

It would seem one approach is to encourage banks to lend to people who are underwater. So, if people borrowed too much, the solution is just to refinance it into the next administration. Gee, 125% LTV. Sounds familiar. Hum? If a bank lends 125% LTV it’s predatory, but if it’s a part of a government program, it’s stimulus. Sounds like the Community Reinvestment Act all over again. Subprime anyone?

There is, however, a little wrinkle here. Like the WALL STREET JOURNAL advertisement discussed in “Your Government at Waste, or Worse” the direct mail is a bad joke. There is no mortgage to refinance at this address, there probably aren’t many underwater mortgages in this zip code (no bubble, no bust), and even an inefficient direct mail screen would definitely screen me out for this direct mail solicitation. Is it waste, or an intentional effort to make people who paid off their mortgage feel like suckers? If it’s the later, it failed. The suckers are people who try to borrow their way out of debt, and taxpayers who willingly lend people money they can’t repay.

The WALL STREET JOURNAL article entitled “Tighter Lending Crimps Housing,” June 25, 2011, would make one think the direct mail was a hoax: “The percentage of mortgage applications rejected by the nation's largest lenders increased last year, spotlighting how banks' cautious lending practices are hampering the nascent housing market recovery…..Although lenders were expected to pull back from the freewheeling conditions that helped inflate the housing bubble, some economists argue they are now too conservative, and say that with the U.S. economy still wobbly, mortgages need to be easier to obtain for qualified borrowers, not harder.”

The article continues with two conflicting opinions as to the appropriateness of tighter standards, thus illustrating that the above statement that “some economists argue they [bank lending standards] are now too conservative” is half a fact. It also illustrates that it’s hard to keep journalists from writing opinion pieces as real and calling them reporting. Interestingly, one opinion ends with this: “You had decades where credit standards were tougher than they are even now." That should sound familiar to anyone who read the posting: On Investing: Part 14 (contd.). Some old fashion beliefs had a sophisticated basis.

Today’s news from the same source included an article entitled: “Debt Hamstrings Recovery: Inability of Nations, Consumers to Get Out of Hock Weighs on Global Economy.” It started with: “The Federal Reserve is just days away from ending one of the major steps to aid the U.S. economy—but the effort has done little to solve the original problem: The government and individuals alike are still heavily in debt….Around the globe, the inability of governments and households to reduce their debt continues to cast a shadow over Western economies and the financial health of individuals. Today, U.S. consumers have more mortgage and credit-card debt than they did five years ago, and the U.S. budget deficit is worsening.”

Interestingly at one point it says “Banks, for their part, are hoarding cash, being stingy with new loans.” That’s so absurd as to be laughable. Banks hate having money just sitting there. In fact, the article contradicts itself by going on to discuss consumers increasing their total debt. Seems to me consumers couldn’t increase their debt unless someone lent them money. It wasn’t me. How about you? Egads,could it have been banks?

The madness doesn’t end there. Another story entitled “Capital Rules Tighten for Big Banks” is about “The agreement, hammered out over the weekend in the Swiss city of Basel.” It “will force global banks that are considered ‘too big to fail’ to maintain capital cushions that are significantly thicker than those of other institutions, and several times greater than what they have needed to maintain in the past.” Force them? I thought they were already “…hoarding cash, being stingy with new loans” according to the other story. What gives? See? Unhinged at least.

It gets interesting later on with this quote: “In order to satisfy the new requirements, which won't fully take effect until 2019, some banks might need to curtail dividend payments or stock buybacks to preserve scarce capital, according to a report last week by Morgan Stanley analysts.” Where did the hoarded cash go?

In reality, “Giant banks for months have been lobbying against the planned capital surcharge. They argue it is unnecessary and could tip fragile economies back into recession by tying up resources that could be used for lending to consumers and companies.” Lending is what banks do if left to their own devices. In fact, regulators are well aware that the regulator’s challenge is to keep banks from lending too much and too aggressively. But one must ask: Is that a case of banks being predatory, or is it banks providing too much stimulus?

Well, maybe if all those who are convinced they know what banks should do went out and started a bank, they’d know the answer first hand. I can’t because as Gnarls says: “Maybe I’m crazy; How about you?”

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