Eliminating Fannie Mae and Freddie Mac; Overaggressive Bank Examiners; Rewriting California's Constitution
From a client who’s a very senior officer at a community bank:
“Examiners are hammering everyone about loans with ridiculous standards, i.e. if it is weak it is bad, if it is OK it is bad, if it is good we must be missing something because it has to be bad. If you don't have an appraisal that was done one week ago, it is too old and they discount it. If you have a current appraisal, it must be based on unrealistic comps.”
The banker who wrote this is very smart, very experienced, and very much on target.
We’ve been critical of Boards of Directors for approving management plans to go into subprime lending, but we’d like to make one thing clear. We don’t really fault these Directors for deciding to allow management to move into subprime lending. Directors are human, and people often make decisions that look foolish only in hindsight. So we don’t fault them for the decision per se. What we’re concerned about is whether they did proper due diligence and analysis before making the decision. We’re less concerned with bad decisions and more concerned with how they made that decision. Bad decisions can be excused, but not bad decision-making practices. Does that make sense?
With all the discussion about doing away with or merging regulatory bodies, how about this: Instead of one regulator for national banks, one for state banks and one for thrifts, how about three regulatory bodies based on the size of the bank? It doesn’t make sense for the OCC to regulate $2 trillion Bank of America as well as a $200 million community bank, just because the smaller one happens to have a national bank charter. How about one regulator for all banks under $500 million in size, a second regulator for all banks between $500 million and $5 billion, and a third regulator for all banks over $5 billion?
Do you like Neil Young’s music? One scientist liked him so much that when he discovered a new species of spider recently, he named it Myrmekiaphila neilyoungi.
There’s a proposal in California to re-write the state’s unwieldy constitution, and one of the many components of the plan is to require drug testing for all members of the state legislature. Isn’t that hilarious? Don’t you love it when hypocrites can be uncovered.
Speaking of California, prison guards here can retire at 50 with a pension equal to 90% of their final years pay. There are hundreds of prison guards who make well over $100,000 a year, many who make over $150,000 with overtime. We wrote Arnold and asked how many made six figures, but we never heard back.
We just read that Mary Travers of Peter, Paul and Mary died sometime last year. If you’re seeing this for the first time, doesn’t it kind of make you feel like a part of an era has passed?
Remember we quoted Fred Jackson that “If you get your deposit pricing right, you’ll find lots of good loans to make”?” meaning you won’t have to chase higher risk loans for their yield. At the old Chino Valley Bank in Southern California, now CVB Financial, the cost of their deposits was 53 basis points last quarter. When your deposits only cost you 53 bps, you can make lots of money making only the safest loans.
Plans for our East Coast Client Appreciation Dinner are coming along. We’re looking at locations in Washington D.C. and Baltimore. We’ll keep you posted.
Exactly two years ago, January 2008, California had 16.6 months inventory of unsold homes. Today, it’s down to only 3.8 months of unsold homes. This is the sort of thing that is an absolute sign that housing prices have bottomed out. With such low inventory, people have already started over-bidding, and if you believe California is a bell-weather for the rest of the nation, better times are around the corner.
We were pretty disgusted when Goldman Sachs became a bank holding company just to get their hands on TARP money. They somehow nabbed $36 billion in deposits, we suspect almost all are non-core deposits. Their lack of loyalty to the banking industry was never in doubt, and with the new banking regs on the horizon, it wouldn’t surprise us to see them dump their bank charter pretty quickly.
We have an idea. Eliminate or sell Fannie Mac and Freddie Mac. They performed the job they were meant to do, which was to provide the liquidity needed to make home ownership more available. They did the job well for decades, and recently they did it too well, buying or insuring loans of people desperately unqualified. Instead, how about a GSE of some sort to do for infrastructure what FNMA did for housing? It could buy or insure bonds or loans to finance the rebuilding of bridges, freeways, power grids, windmill farms, and whatever other infrastructure our country needs. It’s just an idea.
We’ve talked to many, many clients recently about tracking secondary market leakage. Some can track it loan by loan, and others look at it on a 2-3 month rolling basis it. Unfortunately, too many have never really thought about it. But however you look at it, you need to be aware of it, watch it, and think about it. It’s one of the 3-4 most important things you can focus on.