Posts Tagged ‘Citigroup’

Fannie Mae Asks Uncle Sam For More Money

Wednesday, March 21st, 2012

In an attempt to dig itself out of a deepening hole, Fannie Mae has requested $4.6 billion in additional federal aid. “We think that we have reserved for and recognized substantially all of the credit losses associated with the legacy book,” Chief Financial Officer Susan McFarland said.  “We’re very focused on returning to profitability so we don’t have to draw (from Treasury) to cover operating losses.”

Although the nation’s banks seem to be recovering nicely, the same cannot be said for mortgage giants Fannie Mae and Freddie Mac.  Writing in Forbes, Steve Schaefer notes that “The mortgage finance giants have taken on a greater share of supporting the U.S. housing market as private players pared back their exposure in recent years, and the result has been billions of losses on the taxpayer dime.  Fannie Mae reported booking a $16.9 billion 2011 loss capped off by the loss of $2.4 billion in the 4th quarter.  Fannie Mae’s losses are still coming largely from its legacy book of business (from before 2009), which led to $5.5 billion in credit-related expenses tied to declining home prices.

“The black holes of Fannie and Freddie – Fannie’s Q4 report shows it has requested to draw $116.2 billion since being placed under conservatorship Sept. 6, 2008 while paying back $19.9 billion in preferred stock dividends – are the biggest black eyes of the 2008 bailouts.  Plenty of critics of the Troubled Asset Relief Program (TARP) have made their voices heard over the years, but at least most of the banks that received TARP injections – the biggest of which went to Bank of America and Citigroup – have paid back the government’s loans and are back to making profits, if modest ones. Even American Intl Group and the automakers  that received bailouts – General Motors and Chrysler – have moved beyond needing additional government dollars.  Fannie and Freddie, on the other hand, show few signs of becoming anything resembling productive companies until the housing market turns around or the pre-2009 assets are completely wiped off the books or new policies are necessary to encourage new refinancing beyond those currently in place that have had limited impact.”

“While economic factors such as falling home prices and high unemployment produced strong headwinds for our business again in 2011, we continued to grow a very strong new book of business as we have since 2009, “said CEO Michael Williams, who handed in his resignation in January but is still on board while the government-sponsored enterprise (GSE) looks for his replacement.

Bank of America last week announced that it had stopped selling some mortgages to Fannie Mae because of a dispute over requests from the government-run company to buy back defective loans.  “If Fannie Mae collects less than the amount it expects from Bank of America, Fannie Mae may be required to seek additional funds from Treasury,” the company said.

Fannie Mae blamed its loss primarily on pre-2009 loans and falling home prices, which pushed up the company’s credit-related expenses.  In the 4th quarter of 2010, Fannie Mae posted a slight profit to end a streak of 13 consecutive quarterly losses, though the company was back in the red in the following quarter and each since.  The net cost to taxpayers for bailing out Fannie and Freddie stands at more than $152 billion.

During the 4th quarter, Fannie Mae acquired 47,256 single family homes through foreclosure compared with 45,194 in the 3rd quarter.  The company disposed of 51,344 REO properties in the quarter, down from 58,297 in the 3rd quarter.  As of the end of 2011, Fannie Mae was holding 118,528 REO properties, a reduction from the 122,616 at the end of September and 162,489 on December 31, 2010.  The value of the single-family REO was $9.7 billion compared with $11.0 billion at the end of the 3rd quarter and $15.0 billion at the end of 2010.  The single family foreclosure rate in the 3rd quarter was 1.13 percent annualized compared with 1.15 for the first three quarters of the year and 1.46 percent for 2010.

Meanwhile, the federal government wants to sell approximately 2,500 distressed properties in eight locations to investors who buy them in bulk and rent them out for a predetermined period.  The properties, located in Atlanta, Phoenix, Las Vegas, Los Angeles/Riverside, and three Florida regions, include single-family homes and co-op apartment buildings.  “This is another important milestone in our initiative designed to reduce taxpayer losses, stabilize neighborhoods and home values, shift to more private management of properties, and reduce the supply of REO properties in the marketplace,” said Edward J. DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae.

Federal Reserve Asks for Comments Before Implementing the Volcker Rule

Monday, October 24th, 2011

Federal regulators have requested public comment on the Volcker Rule — the Dodd-Frank Act restrictions that would ban American banks from making short-term trades of financial instruments for their own accounts and prevent them from owning or sponsoring hedge funds and private-equity funds.  The Volcker rule, released by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency, is intended to head off the risk-taking that caused the 2008 financial crisis.  The rule, which is little changed from drafts that have been leaked recently, would ban banks from taking positions held for 60 days or less, exempt certain market-making activities, change the way traders involved in market-making are compensated and assure that senior bank executives are responsible for compliance.

Analysts say the proposed rule could slash revenue and cut market liquidity in the name of limiting risk.  Banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc., have already been winding down their proprietary trading desks in anticipation of the Volcker Rule kicking in.  Banks’ fixed-income desks could see their revenues decline as much as 25 percent under provisions included in a draft, brokerage analyst Brad Hintz said.  Moody’s Investors Service said the rule would be “credit negative” for bondholders of Bank of America Corporation, Citigroup, Inc., Goldman Sachs, JPMorgan and Morgan Stanley, “all of which have substantial market-making operations.”  The rule, named for former Federal Reserve Chairman Paul Volcker, was included in the 2010 Dodd-Frank Act with the intention of reining in risky trading by firms whose customer deposits are insured by the federal government.

John Walsh, a FDIC board member and head of the Office of the Comptroller of the Currency, said that he was “delighted” that regulators had reached an agreement on the proposed rule, “given the controversy that has surrounded this provision — how it addressed root causes of the financial crisis.”  “I expect the agencies will move in a careful and deliberative manner in the development of this important rule, and I look forward to the extensive public comments that I’m sure will follow,” Martin J. Gruenberg, the FDIC’s acting chairman, said.  The rule will be open for public comment until January.

Not surprisingly, Wall Street opposes the rule, saying it will cut profits and limit liquidity at a difficult time for the banking industry.  Moody’s echoed those concerns, saying the current version of the Volcker rule would “diminish the flexibility and profitability of banks’ valuable market-making operations and place them at a competitive disadvantage to firms not constrained by the rule.”  Some Democratic lawmakers and consumer advocates are pushing to close loopholes in the rules, especially the broad exemption for hedging.  Supporters of the Volcker rule take issue with a plan to excuse hedging tied to “anticipatory” risk, rather than clear-and-present problems.  “Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute,” said Marcus Stanley, policy director of Americans for Financial Reform, an advocacy group.  Additionally, the Securities Industry and Financial Markets Association raised concerns about whether the exemption for trades intended to make markets for customers is too narrow.

According to Moody’s, the large financial firms all have “substantial market-making operations,” which the Volcker Rule will target.  The regulations also will recreate compensation guidelines so pay doesn’t encourage big risk-taking.  Derivatives lawyer Sherri Venokur said restrictions on compensation are “intended to create a sea change in the mindsets of those who create the culture of our banking institutions — to value ‘safety and soundness’ as well as profitability.”

Equity analysts at Bernstein say that the Volcker Rule — if implemented in its current form – will slash Wall Street brokers’ revenues by 25 percent, and cut pre-tax margin of their fixed income trading businesses by 33 percent.  According to Bernstein, the Volcker Rule’s potential limitations are a surprise because it appears to prohibit flow trading in “nonexempt portions” of the bond-trading business.  Bernstein says inventory levels – and, in all probability, risk taking – must be based on client demands and not on “expectation of future price appreciation.”

A Bloomberg.com editorial offers support to the Volcker Rule, while admitting it won’t be perfect.  According to the editorial, “This week, the first of several regulatory agencies will consider a measure aimed at ending the practice.  Known as the Volcker rule, after Paul Volcker, the former Federal Reserve chairman, the measure would curb federally insured banks’ ability to make speculative bets on securities, derivatives or other financial instruments for their own profit — the kind of ‘proprietary’ trading that can lead to catastrophic losses.  Whatever form it takes will be far from perfect.  It will also be better than the status quo.  The bank bailouts of 2008, and the public outrage over traders’ and executives’ bonuses, laid bare a fundamental problem in big institutions such as Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co.

“They attempt to combine two very different kinds of financial professionals: those who process payments, collect peoples’ deposits and make loans, and those who specialize in making big, risky bets with other peoples’ money.  When these big banks run into trouble, government officials face a dilemma. They want — and in some ways are obligated — to save the part of the bank that does the processing and lending, because those elements are crucial to the normal functioning of the economy.  But in doing so, they also end up bailing out the gamblers, a necessity that erodes public support for bailouts and stirs enmity for banks.  Separating the bankers from the gamblers is no easy task. Commercial banks’ explicit federal backing — including deposit insurance and access to emergency funds from the Federal Reserve — is attractive to proprietary traders, who can use a commercial bank’s access to cheap money to boost profits.  Bank executives like to employ traders because they generate juicy returns in good times that drive up the share price and justify large bonuses. In effect, both traders and managers are reaping the benefits of a government subsidy on financial speculation.  The Volcker rule will not — and probably cannot — fully dissolve the union of bankers and gamblers.”

SEC Wants Banks to Divulge Potential Foreclosure Losses

Tuesday, December 7th, 2010

SEC Wants Banks to Divulge Potential Foreclosure LossesThe Securities & Exchange Commission (SEC) is advising banks to divulge their anticipated losses from bad foreclosure documents. Lenders are required to divulge conditions where they “reasonably expect” to have an “unfavorable impact” on financial results, according to a letter posted by the SEC on their website.  SEC posted the letter as a response to “concerns about the potential risks and costs associated with mortgage and foreclosure-related activities.”

Government regulators and the attorneys general from all 50 states are looking into whether loan-servicing firms used irregular practices during foreclosure proceedings.  Those under investigation include robo-signers who did not completely read the documentation before rubber-stamping foreclosures.  According to the SEC, banks should set aside money for possible lawsuits and “other contingencies when it is probable” that they will lose money.  Companies that are unable to estimate potential losses should inform the SEC.

Some of the biggest banks – JP Morgan Chase, Bank of America, Wells Fargo & Company and Citigroup, Inc. – already have invested in a combined $10 billion to cover buybacks, according to SEC spokesman John Nester. Mary L. Schapiro, the chairwoman of the SEC, recently indicated that “whenever there are suggestions that there may have been any kinds of issues with respect to disclosure, misrepresentations or omissions, we are always looking at that kind of conduct.”In other words, disclosures that companies make to their own shareholders will be looked at, as well as what was said about the value of the loans packaged into mortgage-backed securities that were subsequently sold to various investors.

Treasury: TARP Repayments Now Surpass Debt

Tuesday, June 29th, 2010

TARP repayments total $194 billion; $190 billion is still outstanding.  The $700 billion Troubled Asset Relief Program (TARP) is turning out to be a better bet than many thought at first. According to the Treasury Department, the amount of money repaid by banks and other recipients now exceeds TARP’s outstanding balance.  In a monthly report to Congress on the program, TARP repayments total $194 billion; $190 billion is still outstanding.  A large chunk of that came when Treasury sold 1.5 billion Citigroup shares it had acquired when bailing out the bank, netting $6.18 billion.

“TARP repayments have continued to exceed expectations, substantially reducing the projected cost of this program to taxpayers,” said Herbert M. Allison, the Department of the Treasury’s assistant secretary for financial stability.  “This milestone is further evidence that TARP is achieving its intended objectives:  stabilizing our financial system and laying the groundwork for economic recovery.”

Created during the darkest months of the financial meltdown in the fall of 2008, TARP originally was intended to purchase toxic subprime mortgage securities from banks.  Henry M. Paulson, who was Treasury Secretary at the time, later altered TARP to channel money into banks to stabilize them and provide capital to encourage them to make loans at a time when the capital markets were frozen.  TARP funds bailed out 707 American banks – including Citicorp and Bank of America — to the tune of $205 billion.  Another $331 billion was used to bail out companies such as General Motors and Chrysler.

Banks are making a concerted effort to repay the money to avoid strict executive compensation limits.  By May 31, 71 banks had repaid 100 percent – or $137 billion — of their TARP money.  President Barack Obama hopes to recoup some TARP losses with his proposal to tax the 50 largest financial institutions.  This would net approximately $9 billion annually over 10 years.  Congress is considering the legislation, which faces stiff opposition from the big banks.

Kenneth Feinberg Widens Review of Rescued Bank Compensation

Thursday, April 1st, 2010

The nation’s pay czar is widening his review of how much money hundreds of banks paid their top executives during Pay czar is asking for details on compensation at U.S. banks that took TARP money.  the 2008 financial crisis. Kenneth R. Feinberg, officially the Special Master for Executive Compensation, is asking for details on compensation at 419 banks that were bailed out by the Treasury Department’s Troubled Asset Relief Program (TARP).  Because Feinberg’s authority over compensation only started on February 17, 2009 – when President Barack Obama signed the $787 billion stimulus bill into law and gave Treasury the ability to shape compensation at bailed-out companies – he can do nothing about bonuses paid at the end of 2008.

The standards for deciding that compensation is excessive must be “contrary to the public interest.”  Feinberg’s “look back letter” gives the firms 30 days to provide the information requested.  The compensation review applies only to managers who earned upwards of $500,000 during the four-month period that is under assessment.  Scott Talbott, senior vice president of the Financial Services Roundtable, said the big banks “will work with Mr. Feinberg to demonstrate that the industry has eliminated pay practices that encouraged excessive risk-taking.”

Last fall, Feinberg cut executive paychecks by approximately 50 percent for the seven biggest bailout recipients.  Of those, Citigroup and Bank of America have since repaid the government.  Feinberg was able to pressure AIG employees to return a percentage of their compensation.  James Angel, a finance professor at Georgetown University’s McDonough School of Business, said, “On one hand, some of these banks were effectively forced to take TARP money.  But you could also argue that the executives of surviving banks should not be compensated highly because it wasn’t really their particular skill, it was their luck that they were in an institution that survived when the government bailed out the financial system.”

TARP Banks Lending on the Rise

Tuesday, March 2nd, 2010

Lending by banks that received TARP assistance rose 13 percent in December.  Eleven American banks that received money from the Troubled Asset Relief Program (TARP) originated 13 percent more loans in December than they had the previous month. The Department of the Treasury released this information in its monthly survey of loans made by recipients of the $700 billion government bailout money.

According to the Treasury Department, total loan balances fell one percent during the same timeframe.  This report does not include statistics from banks that repaid their TARP funds in June of 2009; future reports will not include data from banks that are exiting the TARP program.

A total of $178.1 billion in new loans was made during December, according to the Treasury.  Bank of America led the pack in originating loans, with $64.6 billion, an 11 percent increase over November.  Wells Fargo & Company occupied second place with a six percent increase, reporting $58.3 billion in new loans.  Citigroup lent $16.3 billion, an 11 percent increase.

Hedge Fund Honcho’s Bet Pays Off Big

Monday, February 1st, 2010

David Tepper’s shopping trip for cheap Bank of America and Citigroup stocks a $7 billion windfall.  David Tepper’s shrewd bet that the nation would avoid a second Great Depression inspired him to buy bank shares at rock-bottom rates, a move that has earned his Appaloosa Management hedge fund an estimated $7 billion worth of profit during 2009.  Last winter, Tepper invested heavily in Bank of America stocks selling for $3 a share, as well as Citigroup, Inc. preferred stock, then priced at a bargain-basement $1 per share.

Tepper, a philanthropist who funded the Tepper School of Business at Carnegie Mellon University, made a gamble that is paying off in a big way – surprising skeptics who insisted that he was making a costly error.  “I felt like I was alone,” Tepper said.  There were days when “no one was even bidding.”  An improving market has seen Appaloosa Management earn a 120 percent return.  As a result of those gains, Tepper now manages approximately $12 billion, making his company one of the world’s largest hedge funds.

In general, hedge funds had a bad year in 2008, when they experienced a 19 percent decline.  Approximately 1,500 funds – 16 percent of the total – went out of business in 2008.  The funds had a far better year in 2009.  According to Hedge Fund Research, Inc., they are seeing a 19 percent return, the best annual gains in 10 years.

Alan Shealy, a long-time Tepper client, says “Investing with David is like flying, with hours of boredom followed by bouts of sheer terror.  He’s the quintessential opportunist, investing in any asset class, but you have to have a cast-iron stomach.”

Czar Kenneth Feinberg Wants Across-the-Board Executive Pay Cuts

Thursday, January 14th, 2010

Pay czar Ken Feinberg thinks Wall Street executives make too much money.  Compensation czar Kenneth Feinberg – officially, the Obama administration’s special master for executive compensation – believes that the pay reductions he mandated at seven taxpayer-rescued firms should become the model  for Wall Street and corporate America.

“There is entirely too much reliance on cash and there’s got to be a better way to tie corporate performance to long-term growth,” Feinberg said.  “I’m hoping that the methodology we developed to determine compensation for these individuals might be voluntarily adopted elsewhere.”  The Obama administration is holding unregulated risk-taking fueled by excessive pay partially responsible for the financial crisis, which has caused $1.6 trillion in losses and write-downs globally, as well as 7,200,000 jobs in the United States.  Between Feinberg’s ruling and Federal Reserve guidelines for banker compensation, the government has inserted itself directly into decisions normally made by corporate boards.

Feinberg has restructured cash “guarantees” into stock that the recipients must hold over the “long term”, according to a statement from the Treasury Department.  “Guaranteed minimum amounts give employees little downside risk in the event of poor performance – but upside when times are good.”

Meanwhile, the Federal Reserve has proposed new guidelines on pay practices at that nation’s banks and plans to review the 28 biggest firms to assure that compensation packages don’t create incentives that lead to the risky investments that caused the worst financial crisis in 70 years.

Central Banks Tighten the Purse Strings A Little

Thursday, December 17th, 2009

The world’s central banks are easing up slightly on the generosity they have shown over the past year when the financial crisis threatened to destroy the global economy. After European Central Bank president Jean-Claude Trichet said his bank would withdraw some liquidity operations, the euro rose.  Similarly the pound went up after the Bank of England started purchasing bonds at a slower rate.  The Federal Reserve detailed the conditions in which it would raise interest rates – though it hasn’t acted on that yet.Central banks take initial steps to see if global economies can thrive without being propped up.

Juergen Michels, chief European economist at Citigroup, Inc., in London, says that “As soon as the first exit measures are put in place, there’s the risk that the market overreacts.  We’ll probably see a tightening of financing conditions, and hard-fought-for improvements will be in jeopardy.”

These actions mean that investors will have to operate without the liquidity that has been propping up the world’s economies, even as new concerns about additional asset bubbles grow.  Mistiming the withdrawal of support could spoil the fragile recovery.  Central banks are changing course at a time when factories are restocking inventories, and the price of commodities like gold and sugar are climbing.  The MSCI All-Countries World Index has soared 66 percent since March and sugar has increased 90 percent this year.

“There are all kinds of risks,” said Jim O’Neill, chief global economist at Goldman Sachs Group, Inc., in London.  “We don’t know how much of the improvement in markets is due to the central banks’ largesse, and neither do they.  They’re pretty nervous, but they’ve got to get out of it at some stage.”

A Rebound in Offshore Activity Signals India’s Recovery

Monday, November 16th, 2009

call-centers-india_26A report by India’s Economic Times indicates that up to 11 multinational firms including Wells Fargo, Standard Chartered and Ingersoll Rand set up back office facilities in India during the 3rd quarter of 2009.

A research firm, Everest Group, says this bodes well for the overall business momentum in India picking up in 2010.  Two of the reasons cited for India’s resurgence are the depreciation of the Indian currency and the reduction in operating costs which have enticed outsourcing operations back.

Although there was movement of outsourcing projects to facilities in Latin America and Southeast Asia, India continues to dominate the scene in the third quarter.

The new numbers signal a shift away from the doldrums of the first part of 2009.  Many U.S. firms like GE and CitiGroup put expansion plans and capital projects on hold due to the deteriorating financial ratios.

Jacob Cherian is AlterNow’s India Contributor. He is a business writer for Offshore Advisor.