Bank Directors Approving Loans; Fixing Consumer Credit; Debt Ceiling Debate; Poor Jobs Data

Remember when loan processors were as fast as the workers in clip #2? (The fish are fun to watch as well.) HowDoesHeDoThat?

As I write this, we still don't have a nomination from President Obama for the director of the Consumer Finance Protection Bureau. We have had, however, some high level job news lately. President Barack Obama did appoint Thomas Curry as comptroller of the currency, the regulator who oversees federally chartered banks, and Mary Miller as Treasury undersecretary for domestic finance. Mark Bialek was appointed inspector general of both the Board of Governors of the Federal Reserve System and the CFPB. (More, by the way, on the current state of the CFPB at www.stratmorgroup.com.) Lastly, Sheila Bair is now no longer FDIC Chairman, a post she has occupied since mid-2006. Vice Chairman Martin Gruenberg is now Acting Chairman; he served as Vice Chairman of the FDIC Board of Directors since August 22, 2005.

Ms. Bair is now with Pew Charitable Trust so will not enter her name into the ranks of the unemployed when she receives that call around dinner time from the government. But plenty of people still do, as the employment numbers from Friday for June sure showed an economy that is not filled with them. For things to pick back up, just as always, it is jobs and housing, jobs and housing. It was a decidedly negative payroll report. Nonfarm payrolls increased by only 18k, well below market expectations of a 105k increase. There were also significant downward revisions to the past two months for a total downward revision of 44k. And once again we were reminded of the weak correlation between ADP and the government numbers.

A few optimists pointed to some numbers that showed hiring increased, and it was mostly from the stock of unemployed workers given the sharp decline in the labor force. In addition, firing declined. They wisely point out that when hiring exceeds firing, the future may be a little brighter. That aside, for now, and the foreseeable future, the economy continues to "muddle through" with bumps along the way. Needless to say, if you're out of a job, you're less likely to go out and buy a fancy watch or take the family to Disney Land. A rule of thumb is that consumer spending makes up 70% of the economy, so don't look for much change in the GDP, or interest rates, in the near future. FULL RECAP

How are we supposed to teach our kids about budgeting when the US government continues to waffle? The U.S. government currently borrows about $125 billion each month, and the Obama administration wants Congress to raise the limit by more than $2 trillion to meet the country's borrowing needs through the 2012 presidential election (funny how that works).  According to some reports, a small team of Treasury officials is discussing options to stave off default if Congress fails to raise the country's borrowing limit by an August 2 deadline. That is comforting, as senior officials, including Treasury Secretary Timothy Geithner, have repeatedly said there are no official contingency plans if lawmakers do not give the U.S. government the authority to borrow more money. Can the administration delay payments to try to manage cash flows after August 2? Does the U.S. Constitution allow President Barack Obama to ignore Congress and the government to continue to issue debt? How can the central bank (in this case, the NY Federal Reserve Bank) operate as Treasury's broker in the markets if a deal to raise the United States' $14.3 trillion borrowing cap is not reached on time?

Depositors at First Chicago Bank & Trust in Chicago learned that the institution was closed and taken over (with the FDIC's help) by Northbrook Bank & Trust Company, also of Illinois. Out in Colorado (where folks put their $3,000 mountain bike on top of their $500 Subaru) Colorado Capital Bank's depositors are now dealing with First-Citizens Bank & Trust Company of Raleigh, North Carolina. (It is somewhat rare, but not unheard of, for an out-of-state bank to step in.) And Signature Bank (CO) was closed Friday and the FDIC tapped Points West Community Bank (CO) to assume all of the deposits. As a quick side note, I saw a report that showed of all the banks that have failed this year, 4% had no buyer, 73% were done via loss share, and 23% had no loss share and were purchased at a discount without government support.

Continuing on with the FDIC, the latest efforts of the American Association of Bank Directors (AABD) are worth mention. They are in response to the recent FDIC lawsuits against directors of failed banks, which assert that they are personally liable for voting to approve individual loans that went bad if the loans had deficiencies at the time of approval.  According to David Baris, a partner with BuckleySandler and president of AABD, this places bank directors in the shoes of loan and credit officers, a role for which they are both unsuited and unqualified.  Mr. Baris believes, "It may be time for bank directors to stop approving loans and instead to delegate all non-insider loan approvals to bank officers and officer loan committees." AABD has advised its members "not to approve loans until the FDIC formally clarifies its expectations and requirements for bank directors who want to be involved in the loan approval process" so that they may approve loans without taking undue risk of personal liability.

All real estate is local, right? Housing economists point out that there is too much supply and not enough demand. It seems that the market is in disequilibrium at over 9 months of supply at the current sales pace, and 17 months including the backlog of foreclosures and seriously delinquent mortgages. (In a "normal" environment, it only takes 5 months to clear the inventory of homes.) Thus the reason that some believe this imbalance will remain wide for the next two years before gradually shrinking - and it is hard to argue with a potential buyer citing this apparent status as a reason to delay a purchase. As long as there is excess supply, construction gains will be limited and home prices will be held down. On the plus side, new delinquencies are declining, and if the economy heals somewhat, housing demand will improve.

Those dealing with credit reports know that a noticeable percentage of potential home owners are leaving the market, unable to return for X number of years, and see a shift from homeownership to renting. This should support the multifamily construction market, but delay normalization in the single-family market. Mortgage purchase applications have been trending below pending home sales due to the increasing share of all-cash buyers. One also has a drop in home prices reducing household wealth, weighing on consumer spending, and constraining the economic recovery. Calgon, take me away.

Here is one comment (not a paid ad) from a reader a while back about financial literacy. "The bottom line is that while the goal of financial literacy is laudable, when it comes to credit and borrowing issues, the reality is that the issues are too complicated for most people. What people are in desperate need of is financial help from competent and trustworthy professionals.  The professionals and regulators on the asset side of the consumer balance sheet (stocks, bonds and mutual funds, etc.) already seem to understand that; education and disclosures alone will not protect people (or lenders) from making mistakes. Mortgage lenders, in particular, need to recognize that regardless of the disclosures people sign, that we will be politically and perhaps legally held responsible for the outcomes. A company named iQual Corporation, www.iqual.com offers a credit advisory service called ApprovalGUARD to people in 42 states and the District of Columbia.  It's not credit repair, debt counseling or debt collection.  It is simply a for-profit business that, on a subscription basis, walks the consumer through their credit report and explains what is going on there and how they can make better decisions in light of information. The lenders and servicers using the program have been thrilled with the results for their borrowers and the consumers are raving fans because of the empowerment it creates."

The bond market on Friday helped those waiting to lock. MBS volumes have been "less than normal," which bears watching since "normal" keeps coming down. By the end of the day on Friday Tradeweb marked MBS higher 9/32nds to 7/8th of one point. As mentioned above, Friday's payroll report was weak all around, with virtually no redeeming qualities, and wiped out the "feel-good" environment generated by the partial stabilization of the Greek sovereign situation. Meanwhile, with less than a month to go before the debt ceiling deadline of August 2, the political situation remains in flux. With so much political and economic ambiguity, the one certainty is that the US will see fiscal tightening at the federal level over the next few years. At the margin, policy makers will probably try to offset that with easy monetary policy for a longer period. Per dealers, originators went into Friday well covered, and with the 10-yr back below 3.00% their next concern is fall-out.

But this is a new 5-day work week with lots of scheduled news (although there is none today). Tomorrow we have the release of the FOMC minutes from the 6/22 meeting along with some Trade Balance figures. The inflation twins, PPI and CPI, come out on Thursday and Friday - but inflation is pretty low down on the totem pole of concerns right now. Retail Sales will be released on Thursday, and that packs a little more wallop, along with Jobless Claims. Industrial Production & Capacity Utilization are on Friday. We will also see some Import/Export Prices on Wednesday, and Consumer Sentiment numbers, along with Treasury auctions Tuesday, Wednesday, and Thursday. We find the 10-yr's yield sitting around 2.95%.

A minister was completing a temperance sermon. With great emphasis he said, "If I had all the beer in the world, I'd take it and pour it into the river."

With even greater emphasis he said, "And if I had all the wine in the world, I'd take it and pour it into the river."

And then finally, shaking his fist in the air, he said, "And if I had all the whiskey in the world, I'd take it and pour it into the river."

Sermon complete, he sat down.

The song leader stood very cautiously and announced with a smile, nearly laughing, "For our closing song, let us sing Hymn #365, 'Shall We Gather at the River.'"   

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com . The current blog takes a look at early actions taken by the new CFPB and the political situation affecting it. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.