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DealBook: An Enigma in the Mortgage Market That Elevates Rates

September 18, 2012 by Leave a Comment

A Wells Fargo booth at a mortgage-refinancing workshop in January in Seattle.Ted S. Warren/Associated PressA Wells Fargo booth at a mortgage-refinancing workshop in January in Seattle.

Imagine a 30-year mortgage on which you only pay 2.8 percent in interest a year.

Such a mortgage could already exist, but something in the banking system is holding it back. And right now, few agree on what that “something” is.

Getting to the bottom of this enigma could help determine whether mortgage lenders are dysfunctional, greedy or simply trying to do their job in a sensible way.

Right now, borrowers are paying around 3.55 percent for a 30-year fixed rate mortgage that qualifies for a government guarantee of repayment. That’s down from 4.1 percent a year ago, and 5.06 percent three years ago.

Mortgage rates have declined as the Federal Reserve has bought trillions of dollars of bonds, a policy that aims to stimulate the economy. Last week, the Fed said it would make new purchases, focusing on bonds backed by mortgages.

The big question is whether those purchases lead to even lower mortgage rates, as the Fed chairman, Ben S. Bernanke, hopes.

But mortgage rates may not decline substantially from here. Something weird has happened. Pricing in the mortgage market appears to have gotten stuck. This can be seen in a crucial mortgage metric.

Banks make mortgages, but since the 2008 crisis, they have sold most of them into the bond market, attaching a government guarantee of repayment in the process.

The metric effectively encapsulates the size of the gain that banks make on those sales. In September 2011, banks were making mortgages with an interest rate of 4.1 percent. They were then selling those mortgages into the market in bonds that were trading with an interest rate, or yield, of 3.36 percent, according to a Bloomberg index.

The metric captures the difference between the bond and mortgage rates; in this case it was 0.74 percentage points. The bigger the “spread,” the bigger the financial gain for the banks selling the mortgages. That 0.74 percentage point “spread” was close to the 0.77 percentage point average since the end of 2007. Banks were taking roughly the same cut on the sales as they were in previous years.

But something strange has happened over the last 12 months. That spread has widened significantly, and is now more than 1.4 percentage points. The cause: bond yields have fallen a lot more than the mortgage rates banks are charging borrowers.

Put another way, the banks aren’t fully passing on the low rates in the bond market to borrowers. Instead, they are taking bigger gains, and increasing the size of their cut.

So where might mortgage rates be if the old spread were maintained? At 2.83 percent – that’s the current bond yield plus the 0.75 percentage point spread that existed a year ago.

It’s important to examine why the tight relationship between bond yields and mortgage rates becomes unglued.

One explanation, mentioned in a Financial Times story on Sunday, is that the banks are overwhelmed by the demand for new mortgages and their pipeline has become backlogged. When demand outstrips supply for a product, it’s less likely that its price — in this case, the mortgage’s interest rate — will fall. There are in fact different versions of this theory.

One holds that bank mortgage operations are still poorly run, and therefore it’s no surprise they can’t handle an inundation of new applications. Another says banks deliberately keep rates from falling further as a way of controlling the flow of mortgage applications into their pipeline. If mortgages were offered at 2.8 percent, they wouldn’t be able to handle the business, so they ration through price, according to this theory.

Another backlog camp likes to point the finger at Fannie Mae and Freddie Mac, the government-controlled entities that actually guarantee the mortgages. The theory is that these two are demanding that borrowers fulfill overly strict conditions to get mortgages. Banks fear that if they don’t ensure compliance with these requirements, they’ll have to take mortgages back once they’ve sold them, a move that can saddle them with losses.

As a result, the banks have every incentive to slow things down to make sure mortgages are in full compliance, which can add to the backlog. Once this so-called put-back threat is decreased, or the banks get better at meeting requirements, supply should ease.

But there is a weakness to the backlog theories.

The banks have handled two huge waves of mortgage refinancing since the 2008 financial crisis. During those, the spread between mortgage and bond rates did increase. But not anywhere near as much as it has recently. And the spread has stayed wide for much longer this time around.

For instance, $1.84 trillion of mortgages were originated in 2009, a big year for refinancing, according to data from Inside Mortgage Finance, a trade publication. In that year, the average spread between bonds and loans was 0.89 percentage points. And the banking sector was in a far worse state, which would in theory make the backlog problem worse.

Today, the sector is in better shape, with more mortgage lenders back on their feet. But the spread between loans and bonds is considerably wider. In the last 12 months, when mortgage origination has been close to 2009 levels, it has averaged 1.1 percentage points. This suggests that it’s more than just a backlog problem

Some mortgage banks seem to be having little trouble adapting to the higher demand. U.S. Bancorp originated $21.7 billion of mortgages in the second quarter of this year, 168 percent more than in the second quarter of last year.

Wells Fargo is currently the nation’s biggest mortgage lender, originating 31 percent of all mortgages in the 12 months through the end of June. In a conference call with analysts in July, the bank’s executives seemed unfazed about the challenge of meeting mounting customer demand.

“We’ve ramped up our team members in mortgage to be able to move the pipeline through as quickly as possible,” said Timothy J. Sloan, Wells Fargo’s chief financial officer. He also said that the bank had increased its full time employees in consumer real estate by 19 percent in the prior 12 months. Not exactly the picture of a bank struggling to expand capacity.

But if banks are readily adding capacity, why aren’t mortgage rates falling further, closing the spread between bond yields? Perhaps a new equilibrium has descended on the market that favors the banks’ bottom lines.

The drop in rates draws in many more borrowers. The banks add more origination capacity, but not quite enough to bring the spread between bonds and loans back to its recent average.

The banks don’t care because mortgage revenue is ballooning. But it all means that the 2.8 percent mortgage may never materialize.

Article source: http://dealbook.nytimes.com/2012/09/18/an-enigma-in-the-mortgage-market-that-elevates-rates/?partner=rss&emc=rss

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S.E.C. to Change Policy on Companies’ Admission of Guilt

January 6, 2012 by Leave a Comment

The change will also apply to cases where a company enters an agreement with criminal authorities to defer prosecution or to not prosecute as part of a settlement.

Robert Khuzami, the director of enforcement at the S.E.C., said the agency would continue to use the “neither admit nor deny” settlement process when it alone reaches a deal with a company in a case of civil securities law violations. Those types of cases make up a large majority of its settlements.

The S.E.C. has been sharply criticized, in federal court and on Capitol Hill, for allowing companies to repeatedly settle fraud cases without admitting or denying the charges. Until last week, that policy has been applied even when a company acknowledges the same conduct to another government agency, often the Justice Department.

For example, the S.E.C. and the Justice Department announced on the same day last month that Wachovia bank would pay $148 million to settle charges that the bank reaped millions of dollars in profits by rigging bids in the municipal securities market, one of several such settlements announced last year by the two agencies.

In the Justice Department settlement, Wachovia said it “admits, acknowledges and accepts responsibility for” manipulating the bidding process in the sale of derivatives on tax-exempt bonds to institutional investors like cities, hospitals and pension plans over a six-year period ending in 2004.

But in fashioning a settlement with the S.E.C. based on the same facts, Wachovia agreed to settle the charges “without admitting or denying the allegations.” Wachovia is now part of Wells Fargo.

Under the new policy, a civil settlement will cite the admission of conduct or conviction in the corresponding criminal case, Mr. Khuzami said. But the S.E.C.’s enforcement staff will have discretion whether to use relevant facts from the criminal case in its own court documents for the civil case.

The S.E.C. encountered the conflict between simultaneous admission and nonadmission of facts in three other cases involving bid-rigging by large Wall Street firms last year. S.E.C. officials declined to comment on whether additional cases could result from the Wall Street bid-rigging.

Mr. Khuzami said the policy change had been under consideration since last spring and had been discussed with commissioners “over the last several months.”

The “neither admit nor deny” practice has been in use for years by many government agencies in addition to the S.E.C. But it has been the S.E.C.’s application of it, particularly in cases related to the 2008 financial crisis, that has attracted renewed criticism recently.

In November, a federal judge in New York rejected an S.E.C. settlement with Citigroup over securities fraud charges, saying that the “neither admit nor deny” language deprived the court of the facts necessary to determine if the punishment was adequate because it meant that there were no established facts on which to base a decision.

The Citigroup case would not have been affected by the change, because there was no concurrent criminal charge. The S.E.C. has appealed the judge’s rejection of its settlement with Citigroup.

The S.E.C. has defended the practice of allowing companies to neither admit nor deny charges, saying that by settling with companies, it saves the commission the far greater expense — and potential risk — of fighting them in court. The agency says it is usually able to get as much money from a settlement as it could win in a protracted legal case, with money being returned to investors more quickly.

In drafting a settlement of securities fraud charges, companies frequently seek the “neither admit nor deny” language for fear that their acknowledgment of the conduct could be used against them in shareholder lawsuits seeking damages. But legal experts say that safe harbor does not apply when a company has admitted facts in a criminal case.

Article source: http://www.nytimes.com/2012/01/07/business/sec-to-change-policy-on-companies-admission-of-guilt.html?partner=rss&emc=rss

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Economy Shows Some Positive Signs

December 17, 2011 by Leave a Comment

While other data on Thursday showed that industrial output shrank for the first time in seven months in November, much of the decline came from auto production, which analysts said had been held back by temporary supply disruptions.

“It looks like we have just hit a clear patch on the road to recovery, where things are going to speed up a little bit,” said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, N.C.

Although growth is quickening from the third quarter’s 2 percent annual rate, analysts cautioned that troubles in debt-stricken Europe pose a major risk to the economy in the United States. The fourth quarter growth rate is expected to top 3 percent.

Much of the rest of the global economy is already weakening, with the euro zone — the 17 nations in the European Union that use the euro — expected to slip into recession.

In the United States, initial claims for state unemployment benefits dropped 19,000 to 366,000, the lowest since May 2008, the Labor Department said. That follows a report earlier this month that showed the jobless rate hit a 2 1/2-year low of 8.6 percent in November.

The economy’s firming tone was also emphasized by data showing an acceleration in factory activity in New York state and the mid-Atlantic region this month.

The Philadelphia Federal Reserve Bank said its index of business conditions rose to its highest level since March as new orders surged. A separate report showed business activity in New York state at its highest since May, with a strong rebound in new orders and an improvement in hiring.

But the Fed’s industrial production report took some of the shine off the two regional factory surveys. Output at the nation’s mines, factories and refineries dropped 0.2 percent in November after rising 0.7 percent in October.

The decline was led by a 0.4 percent drop in factory output, which reflected a 3.4 percent slump in motor vehicle production.

Economists, however, blamed a scarcity of auto parts from flood-ravaged Thailand for the weakness. They said it also most likely weighed on production of high-technology goods, which were down sharply for a third consecutive month.

“We are not worried about the health of the manufacturing sector,” said Michelle Girard, a senior economist at RBS in Stamford, Conn.

“Inventories are lean and firms will likely need to restock after a decent holiday season. Automakers also plan healthy production increases in the first quarter,” she said.

FedEx on Thursday provided a further signal the economy was gaining momentum, saying demand for residential delivery services was rising with “healthy growth” in online shopping.

Honeywell International, the maker of products ranging from cockpit electronics to control systems for large buildings, also struck an upbeat note on the economy and predicted strong sales growth next year.

Another report from the Labor Department showed wholesale prices rose 0.3 percent last month, reversing October’s 0.3 percent fall, as food prices climbed 1 percent. Excluding food and energy, producer prices were up a mild 0.1 percent.

Article source: http://feeds.nytimes.com/click.phdo?i=3266aa532a0b272691c41e1fc13a91b9

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Wells Fargo Settles Bid-Rigging Cases

December 8, 2011 by Leave a Comment

Wells Fargo will pay $148.2 million to settle federal and state charges that it rigged dozens of bidding competitions to win business from cities and counties.

The U.S. Department of Justice, along with the federal and state regulators, had been investigating the actions of employees at Charlotte, N.C.-based Wachovia Bank, which Wells Fargo Co. acquired in 2008.

The Securities and Exchange Commission said Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond transactions in 25 states and Puerto Rico.

“Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Banks help states and municipalities raise money for projects like building roads and schools by selling bonds to investors. Portions of those proceeds may not be spent immediately, and banks will help the municipalities invest those funds until they’re needed. The SEC said the banks rigged the bidding process for some of those investments, forcing the municipalities to pay prices for securities that were above fair market value.

The SEC said Wachovia won some bids through a practice known as “last looks,” in which it obtained information from agents about competing bids. It also won bids through “set-ups,” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor.

As part of the settlement, Wells Fargo will pay the Securities and Exchange $46.1 million; the Office of the Comptroller of the Currency will be paid $34.5 million; the Internal Revenue Service gets $8.9 million; and a group of state Attorneys General will be paid $58.75 million.

Wells Fargo settled a separate civil case in federal court in New York last month over similar allegations. The bank paid $37 million to settle that case, which had been brought by several states.

The San Francisco bank said in a statement that it was pleased to have resolved the matter. It noted that the transactions in the case had been done by employees who are no longer with the company. Wells Fargo said the payments wouldn’t have an adverse effect on its financial results. Wells Fargo has $1.3 trillion in assets.

Wells is not the only bank to settle similar fraud charges brought by federal and state authorities over rigging municipal bond bidding.

In July, a unit of JPMorgan Chase agreed to pay $228 million to settle civil fraud charges that it rigged dozens of bidding competitions to win business from cities and counties. Bank of America agreed in December to pay $137 million. UBS agreed in May to pay $160 million.

___

Business Writer David Pitt contributed to this story.

Article source: http://feeds.nytimes.com/click.phdo?i=d4780bc47e66836151dd27dddf0bb09e

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Citigroup to Lay Off 4,500 Workers

December 7, 2011 by Leave a Comment

Citi will also take a $400 million charge in the fourth quarter to cover the severance and other costs related to the downsizing effort, which will reduce the bank’s work force by about 2 percent, to 262,500 employees. Citi now has roughly 100,000 fewer employees than it did at the end of 2007, before the worst of the financial crisis.

Most of the job losses will come from Citi’s back-office and investment banking operations. Its Wall Street-related business has been hard hit by a slowdown in trading volume amid the turmoil in Europe. But nearly every part of Citi’s sprawling businesses will face cuts.

Citigroup is the latest big bank to announce extensive layoffs, following similar actions by many of its rivals that have coursed through the industry since last fall. While Citi quietly began pruning its work force this summer, Bank of America, Goldman Sachs, Wells Fargo, Bank of New York Mellon — and almost every large European bank — have announced big job cuts.

Wall Street companies have come under intense pressure as the world economy has slowed in recent months, and their once-lucrative trading businesses have sputtered as investors have parked their cash on the sidelines. More traditional banking has also been hit hard by anemic demand for loans, as well as new regulations and consumer outcry against fees on checking accounts, debit cards and credit cards.

Speaking at the Goldman Sachs financial services conference on Tuesday, Mr. Pandit framed the layoffs as part of his plan to brace the company for an even more difficult road ahead.

“Financial services faces an extremely challenging operating environment,” he said. “These trends will likely significantly affect the competitive landscape in the coming years.”

Ever since taking over the bank almost four years ago, Mr. Pandit has been making steady progress on a plan to transform Citi from a global banking behemoth into a more nimble, corporate lender. He has shed hundreds of billions of dollars in assets to lighten its balance sheet, strengthened the bank’s risk controls and repaid the $45 billion bailout the bank received to prevent its collapse in the fall of 2008.

For his efforts, Mr. Pandit accepted a $1-a-year salary — although Citigroup’s board handed him a retention package worth at least $23.2 million earlier this year.

But as the market turmoil in Europe has rippled around the world, Mr. Pandit’s recovery strategy has lost some steam. While Citigroup has cranked out seven consecutive quarters of profits after it set aside less money to cover bad loans, the bank has struggled to increase its income. Revenue fell 10 percent to about $60 billion in the first nine months of this year, compared with the period a year ago.

In his remarks on Tuesday, Mr. Pandit said Citi’s investment banking and trading performance in the current quarter had thus far been in line with its third-quarter results. Those numbers were solid, but nowhere near the blockbuster performance its traders had turned in earlier in the year.

And he warned that the bank was unlikely to see a repeat of the $2.6 billion paper gain it realized in the third quarter, when it benefited from accounting quirks tied to the valuation of its own debt. Based on Monday’s credit spreads, Mr. Pandit said, Citi is on track to take a $600 million paper loss in the fourth quarter.

Article source: http://feeds.nytimes.com/click.phdo?i=a586b05b0ed61d93faf07073138d94ca

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Massachusetts Sues 5 Major Banks Over Foreclosure Practices

December 2, 2011 by Leave a Comment

Citing extensive abuses of troubled borrowers across Massachusetts, the state’s attorney general sued the nation’s five largest mortgage lenders on Thursday, seeking relief for consumers hurt by what she called unfair and deceptive business practices.

In addition to creating a new and significant legal headache for the banks named in the suit — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and GMAC Mortgage — the Massachusetts action diminishes the likelihood of a comprehensive settlement between the banks and federal and state officials to resolve foreclosure improprieties.

Also named as a defendant in the Massachusetts suit was the electronic mortgage registry known as MERS, an entity set up by lenders to speed property transfers by circumventing local land recording officials.

The attorney general, Martha Coakley, and her investigators contend that the banks improperly foreclosed on troubled borrowers by relying on fraudulent legal documentation or by failing to modify loans for homeowners after promising to do so. The suit also contends that the banks’ use of MERS “corrupted” the state’s public land recording system by not registering legal transfers properly.

“There is no question that the deceptive and unlawful conduct by Wall Street and the large banks played a central role in this crisis through predatory lending and securitization of those loans,” Ms. Coakley said at a news conference announcing the lawsuit. “The banks may think they are too big to fail or too big to care about the impact of their actions, but we believe they are not too big to have to obey the law.”

Ms. Coakley has been among the most aggressive state regulators in her pursuit of financial institutions involved in the credit crisis. In addition to her inquiry into foreclosure improprieties in Massachusetts, she has also conducted far-reaching investigations into predatory lending and securitization abuses.

Since 2009, Ms. Coakley has extracted more than $600 million in restitution and penalties from lawsuits against mortgage originators like Option One and Fremont Investment and Loan and Wall Street firms like Goldman Sachs and Morgan Stanley, which bundled loans into mortgage securities.

Officials at all of the banks issued statements saying they would fight the suit. Most of them also indicated dismay that Massachusetts had taken action during negotiations to reach a settlement over the types of practices highlighted in the case.

“We are disappointed that Massachusetts would take this action now,” said Tom Kelly, a Chase spokesman, “when negotiations are ongoing with the attorneys general and the federal government on a broader settlement that could bring immediate relief to Massachusetts borrowers rather than years of contested legal proceedings.”

Lawrence Grayson, a Bank of America spokesman, said: “We continue to believe that collaborative resolution rather than continued litigation will most quickly heal the housing market and help drive economic recovery.”

And Vickee Adams of Wells Fargo said, “Regrettably, the action announced in Massachusetts today will do little to help Massachusetts homeowners or the recovery of the housing economy in the Commonwealth.”

But as Ms. Coakley made clear during the news conference, her office had come to view as unacceptable the negotiating stance taken by the banks in the protracted settlement talks.

“When those negotiations began over a year ago, I was hopeful that we would be able to reach a strong and effective solution,” she said. “It is over a year later and I believe the banks have failed to offer meaningful relief to homeowners.”

Delaware, Nevada and New York have also objected to the direction the settlement negotiations were taking.

Kurt Eggert, a professor at Chapman University School of Law in California who is an expert in mortgages and securitization, said the Massachusetts lawsuit was a significant step because it opened the banks’ practices to far greater scrutiny than they had been subject to.

“So far the servicers have escaped any real review or punishment for their bad practices because federal regulators have by and large given them a pass on whether they followed the law in foreclosures,” Mr. Eggert said. “This lawsuit argues that they haven’t followed the law and that they can’t just fix all their problems after the fact.”

Among the misconduct cited in the Massachusetts complaint were 14 cases of foreclosures by institutions that had not shown proof that they had the legal right to seize the underlying properties when they did so. All the banks also deceived troubled borrowers, the complaint said, about the loan modification process. For example, some banks incorrectly advised borrowers that they would receive priority treatment if they were more than 90 days delinquent on their loans. Other borrowers were misled when told that they must be more than two months’ delinquent to receive a loan modification, it said.

Although Mr. Eggert said that the banks were likely to argue that a state like Massachusetts had no right to bring such a case against federally regulated institutions, he said that the Dodd-Frank legislation restricted the ability of federal authorities to bar states from acting in such cases.

“If the state can go forward and do real discovery, it will be the first time that anyone has really dug into the servicers’ files to see what they have done,” he added. “The feds conducted an investigation where they looked at very few files, and here the state could demand to see a lot.”

 

Article source: http://feeds.nytimes.com/click.phdo?i=1830dae53a466f0bb2a8cb843f5a1df5

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Online Banking Keeps Customers on Hook for Fees

October 15, 2011 by Leave a Comment

The Internet banking services that have been sold to customers as conveniences, like online bill paying, also serve as powerful tethers that keep customers from jumping to another institution.

Tedd Speck, a 49-year-old market researcher in Kent, Conn., was furious about Bank of America’s planned $5 monthly fee for debit card use.

But he is staying put after being overwhelmed by the inconvenience of moving dozens of online bill paying arrangements to another bank.

“I’m really annoyed,” he said, “but someone at Bank of America made that calculation and they made it right.”

Former bankers and market researchers say that it’s no accident.

The steady expansion of online bill paying, they say, has emboldened Bank of America, as well as rivals like Wells Fargo, JPMorgan Chase and SunTrust, to turn to new fees on customer accounts as other sources of revenue dry up. The fees have caused an uproar among consumers and drawn sharp criticism from politicians, including President Obama.

“The technology locks you in and they’re keenly aware of it,” said Robert Smith, who was chief executive of Security Pacific when it was bought by Bank of America in 1992. “It’s very hard for consumers to just ditch that.”

For years, banks have openly sought to attach as many loans and services as they can to a customer, like credit cards, mortgages and mobile phone banking.

What they haven’t mentioned are marketing studies like the one commissioned by Fiserv, which develops online bill paying systems, showing that using the Internet to pay bills, do automatic deductions and send electronic checks reduced customer turnover for banks by up to 95 percent in some cases.

With 44 million households having used the Internet to pay a bill in the past 30 days — up from 32 million five years ago and projected to reach 55 million by 2016 — it’s a shift that has major ramifications for competition.

There’s even evidence that fewer consumers are switching banks, with 7 percent of them estimated to be moving their primary account to a different institution in 2011, down from 12 percent last year, according to surveys by Javelin Strategy and Research.

Emmett Higdon, a consultant who managed Citibank’s online bill payment product from 2004 to 2007, said that “for the consumer, it’s a double-edged sword.” While customers value the convenience, inside the industry “it was known that it would be a powerful retention tool. That’s why online bill paying went free in the first place. Inertia is powerful in the banking industry.”

Bank of America today has 29 million account holders banking online and 15 million using the service to pay bills, but company officials say there is no connection between the stickiness of Internet bill paying and the decision to impose the $5 monthly debit card fee.

“People like online bill pay, it’s convenient and safe,” said Anne Pace, a spokeswoman for the company. “The lower attrition rate that came along with it was simply a result of offering a valuable service.”

The fee, she said, “allows us to continue offering the benefits that customers have come to expect from our debit card,” like fraud protection, overdraft prevention and a wide-reaching A.T.M. network.

Asked if the bank calculated how many online-bill-pay customers a new fee could drive away, Ms. Pace said, “We did extensive research on how they would react to a new fee and whether it was fair.”

The new fee will not apply to customers with a Bank of America mortgage or those who have an account balance of $20,000 or more.

Members of Congress have taken notice of the fee uproar — and the ties that bind customers to their banks.

“The difficulty of moving accounts is deliberate and unnecessary,” said Representative Brad Miller, who introduced a bill this month that would make it easier for customers to switch.

Article source: http://www.nytimes.com/2011/10/16/business/online-banking-keeps-customers-on-hook-for-fees.html?partner=rss&emc=rss

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Another Decline in New-Home Sales

September 26, 2011 by Leave a Comment

A stagnant job market and a big overhang of unsold existing homes have combined to keep new-home sales low even as mortgage rates returned to lows not seen since at least the early 1970s.

New-home sales slipped 2.3 percent last month to a 295,000 annual rate, a six-month low, the Commerce Department said on Monday. That was in line with analysts’ forecasts and did little to allay fears that the United States could slip back into recession.

The median sales price also moved lower from the previous month and was 7.7 percent below year-ago levels.

“There’s no sign yet that low mortgage rates are helping the housing sector,” said Gary Thayer, a strategist at Wells Fargo Advisors in St. Louis.

The Federal Reserve last week announced new measures to ease credit further for home buyers, but analysts cautioned that the level of mortgage rates was not the main hurdle to buying.

Heavy debts taken on during the housing boom in the previous decade are also making consumers cautious to spend.

In its monthly report on single-family home sales, the government raised its estimate for July’s sales pace slightly to 302,000 units. Also, the supply of homes available on the market in August dropped to a record low.

Data last week showed new construction of homes fell in August, dragging on economic growth.

“The housing sector can’t get any worse,” said Michael Englund, an economist at Action Economics in Boulder, Colo.

Article source: http://feeds.nytimes.com/click.phdo?i=99940ef2acff4659c3bc52ab62742f0a

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DealBook: Once Unthinkable, Breakup of Big Banks Now Seems Feasible

July 27, 2011 by Leave a Comment

John A. Thain, chief of Merrill Lynch, left, and Kenneth D. Lewis, chief of Bank of America, in 2008.Bebeto Matthews/Associated PressJohn A. Thain, chief of Merrill Lynch, left, and Kenneth D. Lewis, chief of Bank of America, in 2008.

What was made can be unmade.

JPMorgan Chase and Wells Fargo may have venerable names, but they and the pseudo-venerable Citigroup and Bank of America are all products of countless mergers and agglomerations.

There is no rule of markets that requires a financial system dominated by four cobbled-together, lumbering behemoths.

Lawmakers and regulators have failed to remake our system with smaller, safer institutions. What about investors?

Big bank stocks have been persistently weak, making breakups that seemed politically impossible no longer unthinkable.

Bank of America’s recent quarterly earnings were so weak that investors and commentators wondered whether the bank should sell off Merrill Lynch, the investment bank for which it foolishly overpaid at the height of the crisis. Bank of America trades at half of its book value (the stated value of its assets minus its liabilities), an indication that investors view its asset quality and prospects just a notch below abominable, as Jonathan Weil of Bloomberg News pointed out last week.

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For Bank of America, the question is whether it will have to raise capital. Selling shares at such depressed prices would be costly. Regulators won’t push for it. They just gave stress tests to the biggest banks, and merely restricted the bank from paying out a dividend. The logical solution is that Bank of America shed business lines in a bid to improve its prospects in the eyes of Wall Street.

Citigroup’s stock, revenue and earnings have lagged for a decade.

“Look, if you can’t compete in the major leagues for over a decade, it’s time to go back to the minors,” said the always outspoken Mike Mayo, an analyst with CLSA. His chronicle of ruffling bank management feathers, “Exile on Wall Street” (Wiley), will be published in the fall.

JPMorgan Chase is as well managed as any gargantuan bank can be. But if you look at its businesses, it’s hard to see any area where it is clearly the best, something even its own executives concede. Not in credit cards, where the premier name is American Express. Not in money management, where you might offer up T. Rowe Price. Investment banking — Goldman Sachs (the last quarter notwithstanding). Back-office transactions, State Street.

Yet even JPMorgan is merely trading at book value. Put another way, the market regards the value that JPMorgan provides as a financial services conglomerate as zilch. How well do all of JPMorgan’s divisions work together? In presentations to investors, JPMorgan executives show how much revenue they gain from existing clients. But these measures are hardly unbiased. Executives have an incentive to defend their empires. Who is to say that a certain division of JPMorgan wouldn’t have won that business anyway? And nobody measures how much a bank loses through conflicts of interest.

Even in the face of investor pressure, there are forces that would hold bank breakups back. Mainly pay.

“The biggest motivation for not breaking up is that top managers would earn less,” Mr. Mayo said. “That is part of the breakdown in the owner/manager relationship. That’s a breakdown in capitalism.”

Institutional investors — the major owners of the banks — are passive and conflicted. They don’t like to go public with complaints. They have extensive business ties with the banks. The few hedge fund activist investors who aren’t cowed would most likely balk at taking on such an enormous target.

Also, there are reasons to think that smaller banks wouldn’t necessarily make the system safer. A wave of small bank failures can have systemic effects, as was the case in the Great Depression. Focused companies like Washington Mutual and Bear Stearns failed in the recent crisis, worsening it.

Making a nuanced argument, John Hempton, a blogger, investor and former regulator in Australia, says that it’s better for shareholders — and societies — to have large banks with lots of market power. That makes them more profitable and leads them to take less risk, making them safer and more enticing for investors.

Another oft-trotted-out argument against breakups: The United States needs global banks to service its giant, multinational corporations and to preserve our position in world markets.

Color me unconvinced. When a giant corporation wants to do a major bond offering or a big company goes public, the banks, despite their size, don’t want to shoulder all the risk themselves, preferring to share the responsibility.

If the stocks continue to lag for quarters upon years, these arguments will seem less convincing, while institutional reluctance will begin to erode.

Investors don’t care about size, they care about performance. It’s undeniable that smaller banks are easier to manage. And they are easier for regulators to unwind — and therefore less terrifying to trading partners — when they fail.

One of the most remarkable aspects of the debate about overhauling the financial system after the great crisis was the absence of serious contemplation of breaking up the largest banks.

It’s not a perfect solution. Banks responding to investor pressure would react haphazardly. But it’s a good start.

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Follow him on Twitter (@Eisingerj).

Article source: http://feeds.nytimes.com/click.phdo?i=6fb0c8626d4ef1d83745f8636d57b607

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