Wall Street should be frustrated and so, too, should Main Street. Politicians not only stoked fears during the height of the meltdown with TARP, stress tests, and stimulus but then they had to divert attention from their own short-sightedness and launch into a series of punitive measures on behalf of the people. It's all backfiring. Of course banks aren't lending but they didn't have to because it's been too easy to make money by borrowing at zero. Moreover, who's going to make a subprime home loan or an Alt A loan and be called "reckless" when they default? Banks are in business to make loans and take risk.
So, yes Dimon was spot on with respect to his questions to Bernanke on whether anyone thought out future implications from so-called reform that includes 300 new rules on top of lots of regulations.
By the way, the same special interest groups with bloodlust in their eyes to get a pound of flesh and then some from Wall Street are now demanding certain parts of Dodd-Frank be dumped. This is a part that will be overseen by the Fed, which felt enough political pressure to shift the comment phase on credit risk retention requirements to August 1 from June 10. But, will changes be made, and if so does it open up the act for other changes? Just as word that more businesses will dump employee healthcare insurance once the new healthcare law goes into effect was a no-brainer, so is the fact that Dodd-Frank hurts more than it helps. Yes, it hurts people supposedly represented by those aforementioned special interest groups the most.
Another way to describe credit risk retention requirements is qualified residential mortgages (NYSEMKT:QRM) or gold-plated mortgages that get favored status and allow banks more leeway on the amounts of capital they must retain. Obviously banks would want to make as many gold-plated loans as possible but they also want to make other loans too. Moreover, the more money someone puts down on a mortgage the better the terms should be, but I sense this is going to be argued much like those old New York Rockefeller drug laws. If you recall, sentences for crack were significantly more than for powdered cocaine, so special interest groups lobbied hard to get the crack sentences lowered. Of course they could have fought to make powder cocaine laws stiffer.
Do these groups want people that put 5% down to get the same rates and terms as the family that put down 20%? Now, if the beef is that it's going to be too hard for moderate income households to refinance, or for first time homebuyers to get a mortgage, then that's a legitimate point. Barney Frank, one of the architects of the bill, says if the new rule is implemented as originally drafted it will cause "a new credit crunch." Here's the deal to get best rates and terms:
* 20% down payment with purchase of home
* 28% or less of gross income applied to monthly mortgage payment (debt-to-loan ratio)
* 36% or less total monthly household debt to income ratio
* 25% equity stake to refinance at best rates
* 30% equity stake for cash outs
* 60 days late on any credit account during the past two years prohibits best rates
I found it strange during the last presidential election cycle how the narrative was banks being evil for making loans to people on the fringe. When I was growing up, it was a Godsend to get any kind of loan from a bank and despite personal circumstances everyone considered it unfair and racist when banks turned them down. The dream of homeownership was powerful (if you've never seen A Raisin in the Sun it's a must) and when people got a home they fought tooth and nail to keep it. Now, folks are being told to settle for renting and if a bank does offer you a loan they are evil and racist. Go figure.
Swipe at Free Market
Master Card (NYSE:MA) and Visa (NYSE:V) took it on the chin yesterday after the Senate voted not to delay implementation of caps on so-called swipe fees. As part of financial regulatory reform, otherwise known as punishment, the Federal Reserve had to come up with a reasonable fee for the use of debit and credit cards. That number turns out to be $0.12, down from industry-wide average of $0.44. I'm sure for many this sounds fair but would it be fair if profits at the company you work for were cut by 73%? Of course not, it would mean jobs, right? Before anyone goes around saying this was about making life easier for the people, this was a good old fashion battle of lobbying.
On the winning side:
> Association for Convenience & Petroleum Retailers
> National Retail Foundation
> Food Marketing Institute
> Merchants Payments Coalition
I get that these fees seem high but we are opening a Pandora's Box when we allow lawmakers to cap profits for any industry. Banks say the fees help to pay for security and protection for customers. I'm sure some of the $1.0 billion a month the industry was taking in went to stuff like that but a lot went straight to the bottom line. Master Card and Visa should have been able to just say swipe fees are a source of profits. If the Fed can determine that a 73% haircut is reasonable then all businesses should be nervous. At least 55 senators voted to delay the cut but the measure needed 60 yes votes.
Banks are going to go back to the drawing board to find ways to get back that lost revenue which means some higher fees or lesser service could be in the offing. This isn't about defending banks; I have never had a banking relationship I enjoyed and have closed accounts with some of the biggest names out there because of shoddy service. It's about precedent and the idea government can or should control profits even for a niche of industry. This is how it begins and you can bet the biggest villain out there according to many on the left, corporate America, will be asked to give up even more profits.
This is better than a windfall profits tax - as it permanently digs into the pockets of businesses and distributes to government coffers.
Glimmer of Hope
I'm not sure why it gets the short stick, but I think monthly consumer credit data is an important data point. As it turns out, revolving credit continues to decrease, falling to $790.1 billion in April from $791.1 billion in March. Non-revolving credit did continue to increase, however, by $7.2 billion month to month.
Beige Black & Blue Book
I'm not sure how we could characterize the latest collection of anecdotal information from the Fed as optimistic unless you are only looking at Big D. Wow, no wonder there is talk of Governor Perry jumping into the presidential race, Texas is all hat, all cattle, along with accounting, legal, financial, construction and energy. Most regions appear to be marking time but four actually saw deceleration.
Rumors surfaced after the close that the White House could be working on a giant stimulus package that would include a lot of GOP-friendly goodies like payroll tax cuts. I'm not sure but one thing is for sure, just about the only thing the White House could (quasi)legitimately brag about is the stock market. Of course, when the Dow hit 14,000 during the Bush era it represented the spoils of the rich and was something to disdain. Now, the spin is it's a reflection of Keynesian success although it's really not. The stock market reflects growth in parts of the world that were once colonies and now want to be conquerors.
The domestic story has not only mitigated the rally in stocks but has sparked the current sell-off. If Wall Street sulks long enough it might be able to manipulate the White House and Federal Reserve into action. With talk of double dip recession ringing louder and louder each day, certain aspects of the economy are already there. Housing has hit and is lurching below the double dip and yesterday marked the sixth straight down day for stocks, a streak not endured since February 2009. With their only metric of success is in freefall, we could see the Fed and White House step up to the plate.
The Street wins again.
We've seen this script before...equity futures higher preopening, then market trades slightly higher for a couple of hours, then slightly lower then it tumbles into the final moments only to be saved by the bell. Stocks are oversold but are also sending a message things could get worse for the economy if the right people don't pay attention. Game time has passed, so let's forgets about spin and lies and let's move in the right direction.