Posts Tagged ‘Bankers’

Happy 212th Birthday, Nykredit Realkredit!

Tuesday, March 31st, 2009

The CMBS market is anything but rotten in the state of Denmark. While the American mortgage securitization system crumbles, the Danes are successfully securitizing commercial and residential loans exactly as they have since 1797.  That’s when Nykredit Realkredit – Denmark’s largest mortgage bank – was established.  And, there hasn’t been a single Danish mortgage bond default since 1795.

American mortgage bankers could learn a valuable lesson from their Danish counterparts.  Even though Copenhagen’s home prices have fallen 14 percent over the last two years, Standard & Poor’s recently reissued its AAA rating on Nykredit’

$154 billion in mortgage bonds.  The Danish system is tightly regulated and extremely transparent; their bonds also earn minimal profit.  To illustrate, Nykredit earned a meager 2.1 percent on its new mortgages during 2008.  In hindsight, small risk and small reward have their appeal.

Denmark’s mortgage model is extremely simple.  Each mortgage bank handles the entire securitization process, from origination to servicing.  The difference with the American system is that the Danes sell the bond upfront, and then fund the loan.  The American process is the reverse of Denmark’s.

This way, the bank never gets caught short by a change in interest rates between the time the loan is issued and when it is sold.  Danish loan-to-value requirements are strictly enforced at 80 percent for residential and 60 percent for commercial properties.  Additionally, most Danish mortgages are long-term and fixed-rate.  The relatively few subprime borrowers receive governmental mortgage insurance support to maintain the quality of credit.

A Brief History of the Fed

Monday, February 23rd, 2009

The origins of the public/private Federal Reserve Bank is the subject of a new book “Innumeracy”, by John Allen Paulos. Established in 1913 when Congress passed the Federal Reserve Act in an attempt to prevent financial panics, the Fed still had an aura of mystery. Even more curiously, the Fed’s founders knowingly created the perception that they were forming a secret society – much to the exasperation of a public that widely distrusted bankers.

One of the interesting tidbits is that the organizers traveled via private train, used assumed names, and held a hush-hush meeting on an isolated island off the Georgia coast to discuss their vision of how the Fed should be structured.

These “Lords of Finance” created the Fedfederal-reserve-building as a means to keep all money in circulation pegged to the now-abandoned gold standard, which remained in effect in the United States until 1971. In practice, this meant that someone could go to the bank and exchange (for the sake of discussion) $100 for a specified amount of gold. The standard was 23.22 grains of gold to the United States dollar. The grain is based on the weight of a grain of wheat, which translates to 1/7,000 of a pound.

The world’s first central bank is the venerable Bank of England, established in 1694 to finance Britain’s foreign wars. To this day, the so-called “Old Lady of Threadneedle Street” maintains a monopoly on issuing banknotes, and manages the nation’s monetary policy.