Wednesday, January 11

Receiving Wide Coverage ...

Force-Placed Insurance Probe: Citing anonymous sources, the papers report that New York State is investigating the force-placed insurance practices of the big banks, including JPMorgan Chase, Bank of America, Wells Fargo and Citi. According to the Times, the state’s Department of Financial Services “has already turned up instances where mortgage servicing units at large banks steered distressed homeowners into insurance policies up to 10 times as costly as the homeowners’ original plans. In some cases, those policies were offered by affiliates of the banks themselves, raising questions about conflicts of interest; in other cases, there may have been kickbacks between unrelated companies.” No one disputes that force-placed coverage is necessary to protect collateral when a borrower fails to obtain regular homeowners insurance. But the arrangements being probed pose potential conflicts “because companies may have an incentive to place homeowners in policies offered by their affiliates rather than looking for the best rates on the open market,” the Times writes. Fittingly, the probe is being conducted by an interdisciplinary regulator, which was created last year by combining the state’s separate banking and insurance agencies. A spokesman for Governor Andrew Cuomo tells the Times the merger was meant to address the “sometimes problematic overlap between banking and insurance.” The new agency, led by Benjamin Lawsky, issued subpoenas in October (nearly a year after American Banker ran an award-winning investigative article about the very same issues with force-placed insurance, we note modestly). New York Times, Wall Street Journal.

CEO Leaving Fannie Mae: Michael Williams, who has run the government-controlled mortgage guarantor and loan buyer since 2009, will step down as soon as the board finds a successor. Which means the Federal Housing Finance Agency, the conservator for Fannie and Freddie Mac, now has two key spots to fill, as Freddie CEO Charles Haldeman has previously announced plans to leave this year. Also potentially complicating the recruitment task, both departing CEOs were grilled by lawmakers on Capitol Hill over their pay packages last year. Who’d want to face such scrutiny (or do the job for less than they could make at a private company, one that isn’t tied by umbilical cord to the taxpayer)? It might take a true patriot. The Journal quotes Williams as saying he’s leaving because “this is a good time to move on,” while he tells the FT that “I decided the time is right to turn over the reins to a new leader.” Both “answers” are textbook examples of the often criminally misused phrase begging the question. But a former Fannie executive speculates for the Journal that running Fannie is probably a “draining if not exhausting” job these days. Wall Street Journal, Financial Times.

Bernanke’s Billions: Sometimes “unintended consequences” can be positive. The Federal Reserve’s growing securities portfolio, amassed to stimulate the economy and the housing market, also produced nearly $77 billion of profits that were returned to the Treasury last year. This was close to the record amount in 2010. The Times’ Binyamin Applebaum notes that the Fed is now the biggest investor in Treasury bonds and Fannie and Freddie debt, which means that “most of the money flowing into the Fed’s coffers comes from taxpayers. But Fed officials note that this cycle — payments flowing from Treasury to the Fed and then back to the Treasury — still saves money for taxpayers because those interest payments otherwise would be made to other investors. ‘It’s interest that the Treasury didn’t have to pay to the Chinese,’ the Fed’s chairman, Ben S. Bernanke, half-jokingly told Congress last year.” And the Journal points out that the Fed could still lose money on its holdings, but adds that “Fed officials generally aren’t worried about this risk.” Phew! We were concerned there for a sec. New York Times, Wall Street Journal.

The Pandit Proposal: In an op-ed in the FT, Citigroup CEO Vikram Pandit proposes that regulators create an imaginary “benchmark portfolio,” whose contents would be 100% public, and then require all banks to produce risk metrics, such as loan-loss reserves, for that hypothetical collection of assets. What would be the point of this abstract intellectual exercise? “How a given company’s risk measurements perform against the benchmark portfolio tells the world how its management thinks about risk, and so just how conservative or risky its own portfolio probably is,” Pandit writes. For instance, “an institution that cheerfully reports minimal expected losses from the benchmark portfolio in the event of a one-in-a-thousand market decline is probably understating the risk in its own portfolio,” while “one that predicts significant losses from the benchmark portfolio even from a routine decline is … very conservative.” Right now, he argues, it’s hard for investors to tell if an institution is holding sufficient capital; while the ratios are disclosed, the underlying assets are known only to insiders and some regulators. Making all banks (and, Pandit implies, nonbanks as well) show how’d they tackle the benchmark portfolio would give the market an apples-to-apples comparison. An interesting idea, but we wonder, what’s to stop a bank from applying a more rigorous, conservative analysis to the theoretical assets than it does to the actual ones? Presumably, regulators would have to make sure their charges are applying the same models to the benchmark portfolio as to the internal (real) ones. And, as more than one FT reader asks in the comment threads, why not just make institutions disclose their actual assets? In a separate news article, the FT reports that Pandit’s idea is garnering mixed but generally favorable reactions. Mark Carney, chairman of the international Financial Stability Board and Canada’s central banker, tells the paper: “It couldn’t hurt. It would be better if you had four portfolios rather than one.” Four what-if exercises? Oboy.

Wall Street Journal

You’ve heard of zombie banks. This is the first article we’ve seen that mentions “zombie landlords.” Five-year office leases that were signed at the height of the real estate bubble are starting to expire, leaving the buildings’ owners unable to re-let the space at the same high rents and thus heightening risk of default on commercial mortgages.