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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

The Chinese Are Coming: "A landmark" is how the Wall Street Journal described the Federal Reserve's Wednesday announcement that it has approved plans by three state-backed Chinese banks to expand in the U.S. The approval sets the stage for the Chinese to carry out the first acquisition of a U.S. retail-banking network by a state-owned Chinese lender. That deal will involve Industrial & Commercial Bank of China Ltd., one of the world's largest banking companies, buying 80% of the U.S. subsidiary of Bank of East Asia, a Hong Kong company with 13 branches in New York and California. The decision could open the door to more Chinese takeovers. Yet the Journal terms as "unlikely" significant Chinese inroads into the U.S. banking industry anytime soon. (Remember what happened to the Japanese?) The Fed also gave the nod to two Beijing-based banks, Agricultural Bank of China Ltd. and Bank of China Ltd., to build branches in New York City and Chicago, respectively. The approvals mark a change of direction for the Fed, which during the financial crisis rejected a bid by China Minsheng Banking Corp., to buy San Francisco lender UCBH Holdings Inc., the holding company for United Commercial Bank. "The Federal Reserve effectively is giving its seal of approval to China's bank-regulatory system, a big step for U.S. regulators given their past concerns about the adequacy of Chinese supervision of banks," the Journal reports. The approval follows the U.S.-China Economic Dialogue last week during which U.S. officials said they were "encouraged" by a positive review of Chinese banking supervision by the International Monetary Fund and World Bank, according to the Financial Times. A "slam dunk" is how Ernie Patrikis, a partner at White & Case who represented ICBC, characterized a U.S. government communique that described Chinese regulation of banks as meeting a standard of "comprehensive, consolidated supervision." It's a phrase that's come back to haunt in the past. Wall Street Journal, Financial Times

The Debt in Spain Falls Mainly on the Banks: Told ya so. That's what many observers of the slow-motion train wreck that is Spain's financial crisis are thinking this morning. After tuning out a growing international chorus calling for bailouts, the Spanish government on Wednesday caved in and announced it has taken a major stake in Bankia, the country's third-largest bank by assets. The Bank of Spain said Bankia and BFA, its parent company, had informed it that they will convert €4.47 billion of state aid in the bank into 45% of outstanding ordinary shares. "The value destruction by Bankia, the country's third-biggest bank by assets, is immense," according to the FT. The paper describes Bankia's troubles in a manner that's worthy of the best Wall Street scandals. They involve a public listing only last summer that raised €3.3 billion while disguising what is believed to have been a mountain of bad property loans behind bogus analyst research and a bank holding company that "kept up a pretence of normality" until recently when Deloitte refused to sign off on its accounts. Spain's ministry of economy said the bailout was "a necessary first step to ensure its [Bankia's] solvency, the tranquility of depositors and dispel doubts about the entity's capital needs," the FT reports. The third leg of the tottering stool that is the Spanish economy, along with the troubled banks and a government-in-denial: the non-financial sector. Its debt is 134% of gross domestic product, ranking second in the industrialized world behind only troubled Ireland, according to a McKinsey study cited by the New York Times. New York Times, Financial Times

Wall Street Journal

When the next crisis brings a major financial firm to its knees, U.S. regulators will seize the parent company but allow its units around the globe to keep operating while the mess is cleaned up. That's according to a plan that Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., intends to unveil during a Chicago speech on Thursday, reports the Journal. The policy is part of regulators' bid to "chip away at the tacit understanding that the government will step in to save top financial institutions seen as vital to the economy or banking system," it adds. Gruenberg will outline a plan under which equity investors in large banks or other financial firms would be wiped out and bondholders face losses as their holdings are swapped for equity in a new entity—a "bail-in" of sorts. The company eventually would emerge from the process as a new, recapitalized private entity. That's the plan, anyway.

Wonders never cease. Democrats and Republicans appear to be on the verge of agreeing on something that doesn't involve toppling a foreign despot. It's President Obama's two nominees to the Federal Reserve Board—with backing, no less, from big financial institutions like JPMorgan Chase (JPM) and Goldman Sachs (GS). Wall Street firms have been pressing Sen. David Vitter, R-La., to end his effective blockade of Senate confirmation for Harvard University economics professor Jeremy Stein and former private-equity executive Jerome Powell, says the Journal.

New York Times

The Consumer Financial Protection Bureau is planning to propose limiting the ability of banks and mortgage brokers to charge certain transaction fees during the mortgage application process. The move could end a decades-old practice of stuffing home loans with legions of convoluted fees in what critics charge is one of the most abusive practices consumers face when they buy a house.

 

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