November 22, 2024

Banks Revive Risky Loans and Mortgages

The banks that created risky amalgams of mortgages and loans during the boom — the kind that went so wrong during the bust — are busily reviving the same types of investments that many thought were gone for good. Once more, arcane-sounding financial products like collateralized debt obligations are being minted on Wall Street.

The revival partly reflects the same investor optimism that has lifted the stock market to new heights. With the real estate market and the economy improving, another financial crisis seems a distant prospect. What’s more, at a time when the Federal Reserve has pushed interest rates close to zero, the safest of these new investments offer interest rates almost double that paid by ultrasafe United States Treasury securities, according to RBS Securities, which was involved in such instruments in the past.

But the revival also underscores how these investments, known as structured financial products, have largely escaped new regulations that were supposed to prevent a repeat of the last financial crisis.

“All of this seems like a fairly quick round trip,” said Manus Clancy, a managing director at Trepp, a research firm that focuses on commercial real estate. “You are seeing a fair number of sins being forgiven.”

Banks are turning out some types of structured products as fast or faster than they did before the bottom fell out. So far this year, for instance, banks have issued $33.5 billion in bonds backed by commercial mortgages, slightly more than they did in early 2005, when the real estate market was flying high, according to data from Thomson Reuters.

Banks have won over investors by taking steps to make this generation of structured products safer than the last one. But with demand for these products on the rise, credit ratings agencies and regulators are warning that the additional protections are already dwindling, allowing some of the old excesses to creep back into the market.

“The players in the business are generally the same as they were before,” said Tad Phillips, a commercial real estate analyst at Moody’s rating agency. “Because it’s the old players, they know how to push the boundaries.”

Whatever the risks, the basic principle behind the products remains the same. A pool of loans — whether home mortgages or corporate loans — are mixed together into bonds, ranked by varying levels of risk. If the underlying loans go bad, the bonds at the bottom of the pecking order suffer losses first, followed by the next lowest, and so on up the chain. It is only after enormous losses that the top-ranked AAA bonds lose money.

Bundling many loans into one investment, a process known as securitization, provides an efficient way to channel money to borrowers who might not otherwise get funds. But securitization proved dangerous during the last real estate boom because it encouraged banks to give loans to people with weak credit and then pass on those risky loans to the buyers of the structured products. When the real estate market dropped in value, it inflicted unexpected losses on those investors and led to chaos in the financial system. Many investors complained that the complexity of the instruments obscured their risks.

The Dodd-Frank regulatory overhaul is forcing banks to take extra steps in the process of bundling loans, but it does not change the basic approach.

For a glimpse into this process, both before and after the crisis, consider the mortgage taken out by the Hard Rock Hotel in downtown Chicago. In mid-2007, just as the real estate market was coming unhinged, the hotel — like many ordinary home buyers — took out a risky mortgage on which it paid only interest. JPMorgan Chase mixed this loan and others into a commercial mortgage-backed security. Credit ratings agencies gave a large portion of the resulting bonds a AAA rating.

After the recession, the hotel struggled to keep up with its payments, edging it toward foreclosure. It was one of several bad loans that caused losses for holders of the old bonds. But late last year, with the market for structured finance coming back to life, the hotel’s owners were able to refinance the old mortgage. In February, that refinanced loan turned up in a new bond, which again received a AAA rating.

Article source: http://www.nytimes.com/2013/04/19/business/banks-revive-risky-loans-and-mortgages.html?partner=rss&emc=rss

Economix Blog: Casey B. Mulligan: Hidden Costs of the Minimum Wage

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

The current federal minimum wage of $7.55 an hour is increasingly creating economic damage that needs to be considered with the benefits it might offer the poor.

Today’s Economist

Perspectives from expert contributors.

Democrats are now proposing to increase the federal minimum wage to $9 an hour. News organizations have repeatedly noted that economists do not agree on the employment effects of historical minimum-wage changes (the more recent federal changes in 2007, 2008 and 2009 have not yet been studied enough for us to agree or disagree on results specific to those episodes) and do not agree on whether minimum wage increases confer benefits on the poor.

That doesn’t mean that we economists disagree on every aspect of the minimum wage. We agree that minimum wages do some economic damage, although reasonable economists sometimes believe that the damage can be offset and even outweighed by benefits.

More important, we agree that the extent of that damage increases with the gap between the minimum wage and the market wage that would prevail without the minimum. A $10 minimum wage does less damage in an economy in which market wages would have been $9 than it would in an economy in which market wages would have been $2.

Moreover, elevating the wage $2 above the market does more than twice the damage of elevating the wage $1 above the market. (Employers can more easily adjust to the first dollar by asking employees to take more responsibility or taking steps to reduce turnover, steps that get progressively harder.) That’s why economists who favor small minimum wage increases do not call for, say, a $100 minimum wage, because at that point the damage would far outweigh the benefits.

Market wages normally tend to increase over time with inflation and as workers become more productive. As long as the minimum wage is a fixed dollar amount, the tendency for market wages to increase over time means that economic damage from the minimum wage is shrinking. That’s one reason that economists who see benefits of minimum wages would like to see minimum wages indexed to inflation, allowing the minimum wage to increase automatically as the economic damages fell.

But these are not normal times. The least-skilled workers are seeing their wages fall over time, largely because they are out of work and failing to acquire the skills that come with working. Moreover, the new health care regulations going into effect in January are expected to reduce cash wages, as many employers of low-skill workers are hit with per-employee fines of about $3,000 per employee per year, as the law mandates new fringe benefits for other employers and low-skill workers have to compete with others for the part-time jobs that are a popular loophole in the new legislation. (The minimum wage law restricts flexibility on cash wages, by establishing a floor, but makes no rule on fringe benefits.)

To keep constant the damage from the federal minimum wage, the federal minimum wage needs not an increase but an automatic reduction over the next couple of years in order for it to stay in parallel with market wages.

Article source: http://economix.blogs.nytimes.com/2013/03/13/hidden-costs-of-the-minimum-wage/?partner=rss&emc=rss

You’re the Boss Blog: This Is Not Your Father’s Company

She Owns It

Portraits of women entrepreneurs.

Susan ParkerSara Krulwich/The New York TimesSusan Parker

Most family businesses don’t survive beyond the founder’s generation. Bari Jay, in its second generation, and Johnson Security Bureau, in its third, are two exceptions. Both companies are thriving largely because of the efforts of two of our business group members, Susan Parker and Jessica Johnson, respectively. Each woman stepped in after her father’s death, and remade aspects of the business, often taking steps that their fathers never would have  considered — or endorsed. During our latest meeting of the group, Ms. Johnson and Ms. Parker talked about what their fathers might think if they were to see how things run today.

“My dad and I butted heads on how the business should run in the last months that he was alive,” said Ms. Johnson, who took over in 2009. Areas of disagreement included estimating and bidding on projects, using technology, leveraging relationships with existing clients and forging relationships with new ones. Typically, Ms. Johnson’s father would hear of a security contract becoming available through a connection. Knowing someone who was familiar with his work was enough for her father to get a foot in the door, said Ms. Johnson. After that, he just sold the client on price and then performed.

“He got very comfortable,” said Ms. Johnson, who has far fewer security industry contacts but an extensive sales background. She urged her father to take a more proactive approach. “Sometimes you’ve got to go out there and hustle,” she said. But Mr. Johnson had never really had to market the business. For that reason, and also because of a general reluctance to embrace technology, he was hesitant to set up a Web site, or even to get voice mail, Ms. Johnson said.

She also said she and her father had different expectations regarding employees. “My dad never really worked for anyone else,” said Ms. Johnson, who says she believes her years of having a boss helped her better understand employee needs. She noted that the employment relationship must serve both employer and employee. “I don’t think he was as focused on it being a good fit both ways,” she said.

“He had no point of reference,” said a group member, Alexandra Mayzler, who said she understood his position because she, too, had never had a boss. Ms. Mayzler said she often struggled to determine the best way to communicate with employees at Thinking Caps Tutoring. While she wants to be approachable, she can’t always stop what she’s doing to address concerns that might be as minor as a request to write a recommendation letter. To understand what it’s like to be an employee, Ms. Mayzler said she constantly turned to a friend who worked in “corporate America.”

Ms. Parker said that, because she and her sister had worked for other companies before they took over Bari Jay in 2008, they had expectations about how to handle the human relations aspect of the business. The sisters established an official H.R. policy and handbook, which Ms. Parker said was unusual for a small garment center business. She said that because they had both held other jobs, neither could imagine going without a handbook. “You can get sued,” she said. Additionally, the sisters set up a 401(k) plan that contributed matching funds. “These are things I had at my old job, so I knew about them and wanted them,” she said.

She added that, if her father were working with them today, he would “want nothing to do with this whole H.R. thing.” While he would be happy to let his daughters run with it, it’s unlikely he would have seen a need to establish anything formal.

Additionally, she said, he would have continued to delegate the tasks required to execute business with Bari Jay’s Chinese factories. Because he was resistant to change, the company was among the last of its competitors to go overseas, in 2004. Until then, Bari Jay’s factories were located in New York City, in Queens and in Chinatown. Ms. Parker said her father did visit the Chinese factories that Bari Jay used, serving as the personable face of the company.

“He was old-school garment center, and didn’t want to learn the new way of doing things,” she said. For example, he always paid by check. Dealing with payments to Chinese factories would have required him to learn how to go online to send a wire transfer.

Despite Bari Jay’s growth and success, Ms. Parker said, business would probably be even better today if her father, who had 40 years of garment center experience, were working with his daughters today. Ms. Parker has a wide network of informal advisers, including a competitor, some of her father’s old industry friends and his mentor, who is 83 and still working. “We have a lot of people to call, but I wouldn’t need all of them if my dad were here,” Ms. Parker said.

“Could you hire someone with that experience?” asked Ms. Mayzler.

“When we first took over, we looked into it, but a lot of the people we talked to walked in with huge egos and wanted huge salaries,” Ms. Parker said. Nothing seemed to warrant either, she said, so she and her sister decided to figure things out for themselves.

You can follow Adriana Gardella on Twitter.

Article source: http://feeds.nytimes.com/click.phdo?i=6881f278833f27d26769ced4bcf97c71

Bucks Blog: Banks Test Monthly Fees for Debit Cards

Bloomberg

Using a debit card for purchases has become second nature to many of us. But now some banks are taking steps that make the cards less attractive, by charging monthly fees for their use with some checking accounts.

The moves follow the heated debate over limiting the “swipe” fees that banks charge retailers for processing debt transactions. Banks say they have to make up that lost interchange-fee income from somewhere — for example, by eliminating debit card rewards programs, and by adding fees on customers for shopping with debit cards.

Wells Fargo, for instance, is notifying customers this month that beginning in October, the bank will test a debit card “activity fee” of $3 a month when a customer makes a purchase or payment with a debit card linked to a personal or business checking account. (ATM transactions won’t trigger the fee.)

The test will affect accounts opened in five states: Oregon, New Mexico, Nevada, Georgia and Washington. The bank said the accounts will continue to carry perks including “card personalization,” which lets you put a photo of, say, your dog on your card. (Gee, thanks.)

“This is one of those ways we are looking at recouping lost revenue,” said a Wells Fargo spokeswoman, Lisa Westermann, in an e-mail.

SunTrust Bank recently implemented a $5-a-month fee for debit card purchases for holders of its basic Everyday Checking account and will add the fee to its student checking account next spring. In any given month, if the customer uses the debit card to make a purchase — either using a signature or a PIN — the bank will charge a single $5 fee. The fee doesn’t apply to use of the card for ATM transactions.

“As I’m sure you’re aware, a debit card usage fee is a growing trend due to changes in the environment in which our industry operates,” Hugh Suhr, a SunTrust spokesman, said in an e-mail.

Regions Bank, meanwhile, now charges a $4 monthly fee for debit card purchases for holders of its basic LifeGreen Checking account and its student checking account, according to the bank’s Web site. (The fee doesn’t apply to ATM transactions and is waived if you don’t make any purchases with the card.)

JPMorgan Chase is testing a $3 monthly fee for a debit card with a basic checking account in northern Wisconsin. (Customers there have three other accounts to choose from that provide a debit card with no fee, according to a bank spokesman.)

Would you cut back on use of your debit card, if your bank charges you a fee for shopping with it?

Article source: http://feeds.nytimes.com/click.phdo?i=a912be158633c3647a83a21e0adfd892