Posts Tagged ‘Wall Street Journal’

The Fed’s 2010 Profit? A Cool $81.7 Billion

Tuesday, April 5th, 2011

The Federal Reserve made some serious money in 2010. The central bank’s profit soared to $81.7 billion, a record high, primarily from growing interest earnings on federal agency and government-sponsored enterprise mortgage-backed securities.  The Fed’s balance sheet — which also can be monitored monthly — ballooned to $2.43 trillion, up $193 billion from 2009, as holdings of the Treasury Department and mortgage-backed securities increased. The Fed gave back $79 billion to Treasury in last year, an 68 percent increase over $47 billion the Fed returned in 2009.  The Fed’s previous record high earnings was $53.4 billion.

In reaction to the financial crisis, the Fed acquired securities whose value had collapsed due to fear and uncertainty in markets.  Additionally, the Fed created emergency lending programs for banks and firms, which further boosted its balance sheet.  The central bank came under attack for taking too many risks with taxpayer money and putting itself in a position to endure losses.  So far the Fed’s crisis-lending programs have earned handsome profits.  The 2010 income rise primarily resulted from $24 billion in interest earnings from the $1.0 trillion mortgage-backed securities and agency bonds it bought to stabilize the housing market.  As of last week, the Fed held a virtually identical quantity of such securities.

The Treasury Department plans to slowly sell its $142 billion portfolio of mortgage-backed securities.  Although there’s no direct implication for Fed policy, the market reaction to the Treasury sale provides valuable input into how the central bank may go about selling its own significantly larger holdings, which analyst expect to take place early in 2012. That’s a significant increase over the $907 billion it held in August 2008, just before the financial crisis.  To help the nation’s economy recover, the Fed has created massive amounts of credit to support the banking system and buy bonds.

Writing in the Christian Science Monitor, Doug French notes that “Amongst the assets Mr. Bernanke and Co. are shepherding include sub-prime mortgage bonds that once belonged to American International Group (AIG).  The Wall Street Journal reports that AIG would like to repurchase these bonds as a part of its attempt to break free from government control through a public stock offering.  ‘Ahead of that, AIG wants to be able to show investors it is putting its cash to work and boosting investment income in its insurance units,’ reports the WSJ’s Serena Ng.  The rub is that AIG is offering 53 cents on the dollar for the mortgage bonds.  Maybe the Fed can do better in the marketplace.”

Trouble Ahead for Community Banks

Monday, May 10th, 2010

Banks with less than $10 billions in assets are facing commercial real estate losses.The nation’s small and medium-sized banks – those with under $10 billion in assets – could see a spate of commercial loan failures in coming years, according to a report issued by the Congressional Oversight Panel as part of its supervision of the Troubled Asset Relief Program (TARP).  The panel’s chair, Harvard law professor Elizabeth Warren, is “deeply concerned” that commercial loan losses could destabilize many smaller banks – which account for nearly 50 percent of all small business loans.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, is especially troubled about the interaction among bank lending, small business employment and commercial real estate values.  According to Lockhart, a significant amount of CRE exposure is concentrated at smaller institutions, which carry almost half of total CRE loans.  Small firms’ reliance on banks with heavy commercial real estate exposure is considerable.

The Wall Street Journal counters the pessimism by pointing out that a decrease in unemployment and easier credit for developers could mitigate the losses, thus easing the pressure on real estate developers and other businesses trying to make their payments.  On the other hand, Dr. Gary Shilling, president of A. Gary Shilling & Company, an investment advisory services company, is urging his clients to avoid regional and community banks.  He expects that many more banks will fail, but notes that the Obama administration “is extending the Troubled Asset Relief Program to them and is using other techniques to keep them, as a group, intact.”

Banks Charging Off Bad Commercial Loans at Fast Pace

Tuesday, July 28th, 2009

buy-sell-panicA new Wall Street Journal analysis shows that U.S. banks are charging off bad commercial mortgages at the fastest pace in almost two decades.  At the current clip, losses on loans that financed apartments, retail centers, offices, and other commercial real estate could total nearly $30 billion by the end of the year.

Thousands of U.S. banks loaded up on commercial-property debt; as a result, losses on such loans will be on the radar as banks post quarterly results in coming weeks.  Regulators, meanwhile, continue to push some bankers to take losses on commercial real-estate exposure now as a way to lessen the blow of a catastrophic hit later.  Some analysts remain concerned that some banks are not sufficiently recognizing losses on their commercial real-estate loans, thereby exposing themselves to larger losses later.

According to Deutsche Bank AG, since the beginning of 2008, the amount of charged-off commercial mortgages as a percentage of such debt outstanding has ranged from a high of 3.2 percent to as low as 0.3 percent.  Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank, comments, “Net charge-offs to date have been highly inadequate. This is clearly a problem that is being pushed out into the future.”

Banks are balancing the ability to take charge offs (or loan loss reserves) with the capacity on their balance sheet to absorb such loses without jeopardizing their capital condition with the regulators.