Bank Ratings and Secondary Market Revenue Leakage

By: •

From an article in the Rocky Mountain News:

 “For customers, Wells Fargo would be able to attend to their business to the ends of the earth if required.” 

That’s from an 1866 issue of the paper.  If you think about it, the Wells Fargo brand and reputation have been in the making for almost 150 years. 

Here’s a very interesting research article titled “Troubled Banks: Why Don't They All Fail?"

Skip all the statistical mumbo jumbo (“Predictions of Unordered Multistate and Bivariate Models”, whatever the heck that means) and go right to the graphs at the end. It’s easy to assume that most 4 & 5 CAMEL rated banks will fail, but there are some interesting events that can occur among these troubled banks that correlate with non-failure.

By the way, isn’t there an argument to be made that Wells Fargo no longer exists? Legally, Norwest bought Wells but then kept the name.  Does it even matter?

The Temporary Liquidity Guarantee Program (TLGP) turned out to be pretty huge. Under TLGP, the FDIC insures non-interest-bearing accounts above the $250,000 limit.  We just read in the FDIC Quarterly that this program has brought in $834 billion in non-interest-bearing transaction accounts. Banks can make a lot of money when given deposits for which they pay zero interest.

We must have been bored, but we actually read the annual report on the Schwab Cash Reserves money market fund.  Lots of their holdings were recognizable (Federal Home Loan Bank, Deutsche Bank, Chase, etc.) but there was a lot of stuff with names like Falcon Asset Securitization Corp., Starbird Funding Corp., and Tulip Funding.  We’re sure they’re fine, but remember how mortgage securities would get generic, meaningless names like these?  Maybe we’ll call them and ask.  By the way, this $31 billion fund is yielding 0.07% (as in seven bps), after Schwab pays itself 47 bps.

One of the items that resonated during the final weeks of the fight over Health Reform was when Anthem Blue Cross raised their premiums by 39%.  Great timing there, Blue Cross.  In the history of corporate public relations, has there ever been worse timing?

San Francisco mayor Gavin Newsom pushed through a law a few years back to encourage taxi cabs into using hybrid engines or other less-polluting fuel.  We just read that 57% of all cabs in the City by the Bay are now green.  Very cool.

A year or two ago, 90% of our FOCIS-plus Reviews were for mortgage companies or their Warehouse Lenders. Interestingly, it’s about 50-50 now between those two v. banks and thrifts that have mortgage banking operations.

We hate to sound like a nag, but what are you doing to track your leakage?  If you’re building in a profit of, say, 150 bps on FHA loans, are you realizing those 150 bps when the loan is purchased?  We see companies that will build in 150 bps, and on average only realize 70-80. The reasons are varied, but not getting the margins you build into your pricing is almost always one of the biggest reasons for a company that’s doing poorly. We do a lot of detective work on this issue, trying to figure out what causes this leakage, and lately we’re seeing credit overlays as a big source.