BankThink

The best way to stave off regulatory excess in the wake of a financial crisis is to stop causing crises in the first place. More restraint on financial institutions' part could help.

To ensure covenants are satisfied, loan syndicates obtain private information that would give an equity market maker an advantage. Reinstating Glass-Steagall may be the only way to prevent reuse of such information.

Receiving Wide Coverage ...Big Fat Fannie Swings to Black: Mortgage-finance giant Fannie Mae reported a $2.7 billion first-quarter profit, its strongest performance since Uncle Sam rescued it nearly four years ago. The financial turn-around will enable Fannie to repay $2.8 billion to the U.S. government. That will shave Fannie's bailout bill to a mere $93 billion out of the $116 billion originally received from taxpayers. All told, bailouts of Fannie and its sibling, Freddie Mac, will cost taxpayers $53 billion between 2011 and 2020, according to the New York Times, citing a Congressional Budget Office estimate. Fannie said it had benefited in the first quarter from the slowing pace of home-price declines and that it lost less than in recent quarters on sales of foreclosed properties. "We expect our financial results for 2012 to be significantly better than 2011," Susan R. McFarland, Fannie Mae's chief financial officer, said in a statement. "Fannie has a lot more bailing to do," the Journal warned in its Heard on the Street column. "The first quarter shows continued profitability isn't assured. Part of the profit is due to gains that resulted from an upswing in interest rates earlier in the year." That's according to Jim Vogel of FTN Financial, who pegs the contribution to profit at around $1 billion. "With rates having retreated recently, this could reverse in the current quarter," he warned. Sustainable or not, the upswing extended to Freddie Mac as well, which last week posted a $577 million first-quarter profit. The black ink at the duo could complicate what is already a politically charged debate in Washington over whether they should put up with greater short-term losses to help stabilize the housing market, the Journal reports. The Obama administration has offered to subsidize the cost of those write-downs, and Fannie's federal regulator, Federal Housing Finance Agency, has weathered heavy criticism from Democrats for resisting modifications that forgive debt. On Wednesday Fannie Chief Executive Michael Williams came down on the side of the FHFA when he told the Journal it isn't necessary for his firm to participate in programs to write down principal for homeowners who owe more than their homes are worth. Other forms of relief are available, he said, including reducing homeowners' payments by dropping the interest rate or waiving payments on part of the loan without forgiving any debt. "Candidly, I think we've got the right tools now. Principal reduction is not part of it," Williams said. As his FHFA overseer, Edward DeMarco, can tell him, such views could turn Williams into a lightning rod. Wall Street Journal, New York Times

In their path-breaking 2009 book "This Time Is Different: Eight Centuries of Financial Folly" economists Carmen Reinhart and Kenneth Rogoff conclude it never is.

Receiving Wide Coverage ...Mortgage Morass: Low interest rates and the revamped Home Affordable Refinancing Program have turbocharged demand for mortgage refis. But given tighter underwriting standards and leaner capacity than in previous refi waves, delivery of the product takes a while: 70 days to close on average, up from 45 days a year ago, according to an Accenture study cited in a front-page story in today's Journal. The article is chock-full of anecdotes about borrowers frustrated by the wait, and it points out that lenders are using the tried-and-true refi boom strategy of lowering their rates less than they otherwise might, mainly to keep from getting swamped with applicants. (This has the added benefit of juicing profit margins, as our American Banker colleague Kate Berry reports here.) A sidebar to the Journal story notes that closing costs are on the rise, limiting the savings for borrowers who refinance. Meanwhile, bad loans and bad blood from the bubble years continue to haunt the banking sector. An FT story concisely describes recent examples: the Treasury Department has okayed a plan for Ally Financial to place its stepchild mortgage unit ResCap into bankruptcy; if that goes well enough, Bank of America could theoretically do the same with Countrywide; Wells Fargo has increased its reserve for repurchases of soured mortgages and has been examined by the Justice Department for potential fair lending violations. Finally, Beazer Homes is one of the most recent companies to try to seize an opportunity created by the mortgage mess — the Journal reports that the homebuilder has formed a REIT that will buy and rent out single-family homes that went into foreclosure or short sales, including houses that Beazer built and sold in the first place.

The announcement by Bank of America (BAC) of their plan to offer up to 200,000 struggling homeowners a new lease on life for their underwater mortgage through principal reduction at first glance seems like a major step forward in addressing a nearly 5-year old problem.

Louisiana has filed a RICO complaint against MERS and a host of megabanks, Bank of America included. Down the line, consumer advocates hope hard-nosed prosecutors can provide what Occupy may not be able to: justice for homeowners.

The banking industry suffered credit crises in the 1970s, 1980s, 1990s, and 2000s. An unavoidable conclusion is that its loan loss reserves were in all cases too small.

Bankers received an earful about pay from the public this year. But among the audience that matters most—their own shareholders—the feedback was overwhelmingly positive.

Breaking News This Morning ...HSBC Earnings: The British global bank’s profits, excluding that nettlesome debt valuation adjustment, rose 26% year-over-year in the first quarter, aided by the investment banking and emerging markets divisions. None of the early news takes we’ve seen go into much detail on HSBC’s U.S. operations, but you can find the quarterly SEC filing from the empire’s main outpost in the colonies right here. The FT story has some interesting comments from HSBC chief executive Stuart Gulliver about the recent political developments in Greece and France — he says he’s “quite sanguine.” Wall Street Journal, Financial Times, New York Times.