Time for Greater Oversight of Mortgage Lenders? Duh!

One thing you can count on from government is that they will eventually notice a problem and arrive at cogent mix of regulation and scapegoat once it's too late. Great that Treasury Secretary Paulson today wants stronger oversight of mortgage lenders to avoid future debacles and credit crisis. Bad that he and the others responsible for the financial solvency of the United States didn't notice that when things were obviously awry, when regulatory oversight was missing, or when housing inflation that could bankrupt the government ws rampant and being government guaranteed--think GNMA.

Good, likewise, that all these savants are busily working to stave-off a collapse of the financial system, but bad that at the same time they fail to see that banks, so desperate to make profits to offset losses, are gouging the consumer, hoarding the rate cuts, and foreclosing at such record-breaking rates that they are setting off a consumer led recession. One would expect more. One would expect them to notice that since two-thirds of the US economy is driven by consumer spending, sending out (loan) checks and offering counseling to consumers is hardly what it will take to avert a deep recession.

The tale-tale sign that these giants of finance still don't get it is contained in Paulson's recent admonishment that banks "revisit their dividend policies." True, banks might need to cut dividends to accelerate profitability and to replenish their capital reserves, but again, what about the consumer, whom they need? What about the those living on fixed income who have been advised to invest with a "total return" strategy, who have accepted some market risk while buying depressed bank stocks for their above-average dividends? These government savants are still not thinking about the extra burden they are getting ready to inflict on them. Nor are they thinking about the stampede out of bank stocks that will surely occur if banks confronting insolvency have nothing to offer investors.

The message here is two-fold. First SELL, SELL, SELL your Citibank (C), Bank of America (BAC), Wachovia (WB), etc. These stocks will definitely fall if dividends are slashed or eliminated. And secondly, we're headed for crisis. Not just because of the mind-freeze in Washington that notices but acts too late, but also because of the failure to address inflation at the consumer level, the failure to understand that people with high debt, or those without jobs, or those living on less income, aren't good consumers. No doubt crisis is on the way because of their failure to head off the mounting losses compounding at GNMA that mean huge consumer tax ramifications later, and perhaps just at the time of dire need to stimulate the economy.

Yes, crisis is around the corner because, incredulously, Washington is beginning to bailout mortgage-lenders by buying up (ok, swapping) their failed and de-valued mortgage-backs in exchange for treasuries supposedly on a 28 day loan. (Interested in a bridge across...?).

Moreover, crisis is looming because Congress acts politically, but not intelligently. They have failed to recognize that the people responsible for this credit crisis are the same people now attempting to fix the problem for themselves. The Congress refuses to work together or with the Executive branch out of political deference, and undoubtedly won't work together until crisis engulfs us. So the second message in Paulson's speech, just after SELL, was, 'Hold on, Crisis is coming!' God help us. What kind of message is that for the markets?

Comments

[DSX Lover:]

Why would BAC, WB, and C cut the dividends? It seems totally ridiculous. Best time to buy ever, Banks are fully capitalized, and can absorb huge loses that will not materialize. WB has 73 Billion of Capital a wooping 10% of Total Assets with consumer loans totalling just 223 Billion. Banks will make 2.25% on Deposits, because CD rates have gone down, and with 75 points dropping on Tuesday it will be more. No need for any of these banks to cut the dividend, specially when at year end the payout ratio will be less than 50%, and there won't be a need to keep capital, because the growth in assets will be slowing down. Banks on average keep 5-6% Capital/Total Assets depending on their risk weighted assets, and right now they have much more than that. You will never have an opportunity to buy these banks so cheap in your lifetime. If you're not confident in U.S. Banks buy ING, BCS, RBS, or LYG all of them yielding close to 7.5% without the SUBPRIME debacle, trading at 6 times earning and being hit harder than the U.S. for stupid Reasons.
Can you imagine a 7.5% dividend or a 9% dividend for life with WB. Plus once the charges are finished and earnings are restored, the dividends will be increased year over year. Buy now put it on SafeBox, enjoy the rest of your life without having to worry about social Security.

2008 Mar 14 09:18 AM

[33Nick:]

Well, aren't you hard on our poor overworked politician friends out there in their stratospheres trying to contain problems they were unaware of that we fully knew of years ago.

The real problem is maintaining a certain level of relevance. So what better ways to do this then by creating the problems, let them mature without acting in time (that is consumer higher benefit time), and right before the fall, fly in to the rescue and be hailed at the saviors... Only one of these days, those types of plans won't work and the financial system collapses.

Great post.

2008 Mar 14 11:44 AM

[poet1:]

VIP investors receive a higher rate of return than the average guy, one way to fund that is by cutting dividends

2008 Mar 14 12:23 PM

[jack kreg:]

The author rants about recent history and speculates about the near future.

2008 Mar 14 12:29 PM

[jack kreg:]

Mortgage oversite, how do I spot a dead beat borrower, without profiling or some other illegal method?

2008 Mar 14 12:30 PM

[Ames Tiedeman:]

When is this truth going to come out:

All the Congress had to do to avoid this entire mess was to pass legislation years ago whereby the borrower had to qualify not at the "teaser rate" but at the rate in which the loan would move to on the first adjustment up. Do all of you realize this would have prevented this entire debacle? Do you ever ask what the good people from Yale, Harvard, Stanford, and Cornell, who run our country could not figure this out? Do you want to know the answer? It is because the banks did not want that. And guess what? The banks give the vile politicians funds to runt heir campaigns. So when Hillary proclaims that lobbyists are a good thing ask yourself why and think about what has happend the the U.S. housing market. Bush wanted the highest home ownership on record. Do you think his administration was about to call for legislation to do the right thing? Of course not...Now we have the mess we have.

2008 Mar 14 03:03 PM

[Rep07:]

Yeah, the government has been inexcusably negligent on regulation, and the bank managements have been criminally negligent on obviously unsound lending policies, and the bankers should be fired, charged, and jailed en masse. These g-d people have done more damage to the USA than any terrorist.

Really, a smart junior-high-school kid could see that the teaser rates were going to blow up the world eventually. All these execs knew very well what would happen and they let it happen anyway because THEY KNEW THE FED WOULD BAIL THEM OUT. What we need now is for the government to ALLOW the next ten major bank failures, without a bailout, so that it puts the fear of God into all the other cos. Then slam down the most oppressive industry regulation the country has ever seen, just totally constrain what the lenders are allowed to do.

Bottom line: laissez-faire just doesn't work. Criminal management teams keep destroying everything over and over again--S&L's, dotcoms, hedge funds, subprime, option-ARMS. It's time to ditch laissez-faire in favor of brutal draconian regulation.

2008 Mar 14 04:02 PM

[Chemist29:]

Wall Street is motivated by greed. Anyways, When we have our genius of a treasury secretary saying things like "Banks should cut their dividends to recapitalize themselves" , which is the dumbest thing I've ever heard, I think we should cut his salary to help the deficit and likewise the dollar.

2008 Mar 23 12:52 PM