BankThink

One key to the well being of the banking industry is of course the economy. Even the best management and board cannot immunize a banking company from the effects of local and national economic malaise.

Sometime in June, the long-awaited final qualified mortgage rule will be released. Considerable speculation and debate over variations of the rule have taken place since it appeared in the Dodd-Frank Act. Its ultimate form has implications for access to mortgage credit, its cost, and contingent legal liability, among others.

The mortgage insurance industry has paid about $30 billion in claims, mostly to Fannie and Freddie, through the current cycle. That $30 billion is money that didn't have to come from the taxpayer.

The National Fair Housing Alliance's past discrimination initiatives against the property insurance industry and others suggest that servicers should expect a series of press releases and HUD complaints followed by federal court actions.

Why has there been continuing explosive growth in prepaid cards, primarily marketed by nonbanks and most profitably to people who are already bank customers?

Receiving Wide Coverage ...Who Knows What Dangers Lurk in the Heart of the Financial System? The FT knows. The paper has a package of stories today on the global shadow banking system, which it says "has recovered more rapidly" than the regulated banks "and is poised to usurp banks in a variety of ways." (If you don't have time to read all the stories, there's also a handy cheat sheet.) Banks have been selling assets to shadow institutions to meet new heightened regulatory capital requirements, for example. In Europe nonfinancial companies, including manufacturers like Siemens and retailers, have begun funding their suppliers and other smaller firms. A poster child for the resurgence in shadow banking is GSO, a unit of the private equity firm Blackstone, which "has emerged as one of the biggest providers of capital to companies with sub-investment grade ratings in Europe and the US as well as a significant financier of high-profile acquisitions." However, the FT says old-school broker-dealers are unlikely to stage a comeback and that hedge funds, while recruiting star proprietary traders from banks soon to be subject to the Volcker rule, are keeping a lid on leverage. Yet another story recaps the SEC's proposed new regulations of money market funds, though we ought to duly note that former bank regulator and current money fund advocate Jerry Hawke disputes any characterization of his client's industry as "shadow banks." Most interesting to us is a very brief story in the FT package about how financial institutions like Goldman Sachs and Deutsche Bank are acquiring insurance businesses in Europe for a stable source of funding — even more reliable, perhaps, than deposits. "Life insurers and pension schemes make very long-term promises to pay out money to people, but only when certain things happen — for example, retirement or death. So they are extremely unlikely to suffer a run." And to think that a few years ago insurance companies here were applying for banking charters. The grass is always greener … Finally, the FT’s banking editor, Patrick Jenkins, cautions in an op-ed that bankers who complain about the growth of shadow banking ought to keep an eye on their own houses. He warns that the seemingly low-risk business of M&A advisory, where banks like UBS have been placing more of their chips, has its share of hazards, not least of which is that the more firms are trying to win business, the less profitable it will be.

Look ma, no hands (or mag stripe): Sporting eyewear with a built-in camera, a cashier or flea market vendor could accept a payment card simply by looking at it.

Goldman Sachs Group [GS] is raising money for a new fund that will buy home-loan bonds and, it hopes, benefit from an improving real-estate market, according to Bloomberg. My initial reaction is: this is insane.

Receiving Wide Coverage ...Thar She Blows! JPMorgan Chase's chief investment office has taken a large bullish position in credit default swaps — large enough to move the market and thus earning the trader who placed most of the trades the nickname "the London Whale." There's a good chance these trades will be exempt from the pending Volcker rule's ban on proprietary trading by banks, the papers report. The CIO's mission is to hedge companywide risk, not to generate short-term profits, JPMorgan says. But critics of the Volcker rule have said the line between prop trading and permitted activities like hedging can be blurry. Meanwhile, hedge funds that have made bearish bets on the same corporate credits are fuming, since a rally (which they say the Whale's bullish position sparked) has forced them to meet margin calls. Wall Street Journal, Financial Times, New York Times, Bloomberg.

Editor's Note, July 25, 2012: This and other BankThink opinion columns written by Joel Sucher bearing this note, published between October 2011 and June 2012, mentioned the law firm of Stephen J. Baum, Litton Loan Servicing, or both. The columns should have disclosed that Baum's firm, working on behalf of Litton, had attempted to foreclose on the writer's property in 2009. American Banker's editors were unaware of this history at the time the columns were published.