Why 'Too Big to Fail' Scares Me - And What We Can Do About ItFirst, the good news: thanks to the mortgage/credit crisis and the ensuing financial panic, we have created a new cadre of 'mega-banks' that are large, well capitalized and have come to the rescue of their ailing brethren in the financial services industry. All has been saved because of 'charitable' takeovers of such ailing has-beens as Countrywide, Merrill Lynch, Wachovia and Washington Mutual.
We can all sleep again, knowing that the big boys are stable, and together control 67% of the mortgage market in terms of receivables on first and second liens. Here's how the servicing numbers shake out in terms of market share: Bank of America (21.68%), Wells Fargo (17.65%), Chase Home Finance (15.09%), CitiMortgage (8.49%) and Residential Capital LLC (4.14%).
Now for the bad news: the top five control 67% of the residential servicing market, which means in my book most of these firms are "too big too fail" just like Fannie and Freddie were. Think about it for a second: what if something goes wrong with Bank of America, which now services $2 trillion in home mortgages for American consumers? I'm not saying BoA is in danger financially but we've created a financial system - for better or worse - where too much risk is in the hands of too few. There's something wrong with that.
Let's take Fannie Mae and Freddie Mac, for example. They own or guarantee $5.2 trillion of the nation's $9.6 trillion in U.S. housing debt or 54%. That type of market share concentration should never have been allowed to happen. It creates a situation where the government cannot - for fear of a huge market disruption - allow something so big to fail.
Some of you remember the giant hedge fund Long Term Capital Management, the brainchild of John Meriwether, a former star bond trader at Salomon Brothers. LTCM went down during the Russian debt crisis in 1998 when it bet the wrong way on that nation's prospects. The Federal Reserve stepped in. Do you know why? Answer: LTCM had borrowed $125 billion from commercial banks. If LTCM went down so would its lenders, at least some of them.
The big question is how do you fix "too big to fail"(TBTF)? Do you put caps on how large an institution can grow or will lobbyists from the banking and financial service industries shoot that one down in the name of free market capitalism? Are we better off with a system where we have thousands upon thousands of smaller institutions where the risk can be spread around the nation?
I'm not sure the answer to these questions is yes. But I do sometimes wonder if we've made a huge mistake by even allowing such things as interstate banking. When I was a young cub reporter in the 1980s interstate banking was a hot issue. There were regional interstate banking "compacts" where a thrift in Massachusetts would be allowed to open up branches in Rhode Island and vice versa. In the old days a California bank or S&L could not open de-novo branches in New York.
Then the S&L crisis happened and lobbyists became involved and all of a sudden you had West Coast banks buying out East Coast ones, and North and South intermingling. Non-depository mortgage bankers, on the other hand, had the ability to open offices and lend anywhere in the U.S. - as long as they went through the proper licensing procedures. But this was also a time when non-banks were hemmed into making mostly FHA loans.
Times like this I wonder if we've made a huge mistake by allowing interstate banking and not putting caps on how much market share a company can have in terms of mortgage servicing and deposit gathering. We are dealing with the public's money - their mortgages and savings.
I'm not an expert on banking but I believe there's a 10% cap on one bank amassing more than 10% of all deposit accounts. I'm sure it's just a matter of time before the government grants an exception to this rule just so another bank can be saved. We've deregulated and we've change old laws in the name of capitalism but look at what we created in 17 years time: a savings and loan crisis that cost the nation's taxpayers $120 billion and a mortgage/credit crisis that cost $700 billion. The last number, as you may've guessed, is just a downpayment.
Karl Marx and Leonid Ilyich Brezhnev are looking up from their graves, whispering "victory." What I am talking about? Take note: the Federal Reserve today said it would buy up to $600 billion of MBS and debt from Fannie Mae, Freddie Mac and the FHLB System. Treasury and the New York Federal Reserve launched a $200 billion program to kick-start the ABS market and should I mention that Uncle Sam owns (more or less) Fannie, Freddie, American International Group and plenty of preferred stock in our largest banks, Wall Street firms and thrifts. Still to come: GM, Chrysler and Ford. Folks, I'm not saying all these efforts will fail. On the contrary the whole crazy plan could work. But please, let's not call it capitalism, shall we. But just in case, over the holidays I will be reading books by Marx and Mao and renting the movie "The Motorcycle Diaries." Have a Happy Thanksgiving. Better red than dead. Oh, and one final irony: it was all done under our nation's first "MBA" president, George W. Bush, who's greatest accomplishment was buying and then selling the Texas Rangers. It seems fitting that Ameriquest once owned the naming rights to the Rangers stadium. That would be Roland Arnall's Ameriquest. (See the book "Chain of Blame"...
Jumbo mortgage investor Thornburg Mortgage says it has just 300 delinquent loans in its $21 billion portfolio but its stock price is $0.20 a share compared to a 52-week high of $140. (It recently had a reverse stock split.) In an interview last week company CEO Larry Goldstone said the publicly traded mortgage REIT, though, is bracing for an increase in delinquencies. Mr. Goldstone said the industry is in the "fourth inning" of its recovery but noted that he's unsure if "we're in the top of the fourth or the bottom." Thornburg is no longer funding new loans but hopes to one day return to the origination market - and even use loan brokers...
WASHINGTON NEWS: The Federal Deposit Insurance Corp. estimates that 638,000 mortgages entered foreclosure in the second quarter while servicers had to deal with a larger crop of newly delinquent loans. Single-family mortgages becoming 60 to 90 days past due in the second quarter totaled 736,000, up from 670,000 in the first quarter and 618,000 in the fourth quarter of 2007. (For the full story see Brian Collins' story on MortgageWire.
DATA NOTICE: In a week or so the 3Q edition of National Mortgage News' Quarterly Data Report will be ready, including a complete ranking of the nation's top 100 lenders and servicers - and subprime subservicers playing in the "scratch and dent" arena. During the quarter just $333 billion of home mortgages were funded, the lowest reading since 2000. To order the QDR send an e-mail to:
DATA NOTICE #2: With the mortgage industry in the throes of a historical correction you need up-to-date data on which firms are left standing. You need hard numbers on their servicing and production volumes, including executive names and telephone numbers. All of this is contained in the brand-new Mortgage Industry Directory and the Web version of the production, the eMID. The book and e-book provide 2Q 2008 information plus full-year 2007 stats. For more information e-mail
