Subprime

On Wednesday, Sumitomo Mitsui Banking Corporation pledged to invest $945 million in a plan by Barclay's to raise almost $9 billion in fresh capital. This follows a $1.2 billion investment Mizuho Financial Group made in Merrill Lynch in January.

In contrast to most developed world banks, which have been relegated to life-support by immense subprime losses, Japanese banks emerged almost unscathed by subprime debt. Along with various sovereign wealth funds, Japanese banks appear poised to become major investors in distressed Western financial institutions.

Snapshot asks, will Japanese investment be seen as less threatening than investment from the Gulf and China?

Sky News - Barclays Outlines £4.5bn Cash Injection
The Economist - Japanese banks: On the prowl again
AFP - Moody's upgrades Japan's debt rating
Mondo Visione - Japan's FSA Publishes English Translations of the Banking Act

A curious piece ran today on the Washington Post's opinion page.  

President of the Southern Christian Leadership Conference Charles Steele Jr. wrote an article called the "The Color of Credit" which noted the racial disaprity of wealth in America. Good, that's a fact that needs some more attention. It highlights the history of housing discrimination, policy efforts to address it, and the rise in minority homeownership rates since the mid-90s. Fine, that's a story worth knowing. It then discusses how recent declines in the housing and mortgages market will erode these gains. Great, that's an essential perspective to have right now, especially as we think about crafting future policy interventions. It takes issue with proposed restrictions on credit providers that would cap their fees. Wait a minute, what's going on here?

Three of the largest U.S. investment banks, Morgan Stanley, Merrill Lynch, and Goldman Sachs, had their credit ratings lowered by S&P on the concern that further writedowns lay ahead. Since the beginning of 2007, banks worldwide have written down some $387 billion and raised over $270 billion in new capital. Commercial banks also had a turbulent day with Wachovia's Chief Executive Ken Thompson ousted and Washington Mutual's Kerry Killinger stepping down from his position as chairman (he will retain his position as the CEO).

Snapshot asks, do you agree with the ratings agencies that financial institutions will face further trouble in 2008? Will it be less, more, or equal to trouble they faced in the past few months?

Housing prices continued their downward slide in April with a monthly decrease of 2.2%, a decline of 14.4% from last year's levels. In an unexpected twist, monthly home sales actually rose by 3.3%. Some optimists see this as an indication that the market is nearing its bottom and beginning to work its way through a massive glut of unsold homes as sellers cut their overvalued asking prices and buyers open their wallets to bargains. Others point to worsening consumer confidence and tighter lending requirements as evidence that April's sales figures were a statistical blip in a market that has much further to fall.

Snapshot asks, to what degree will further credit turmoil stop buyers from clearing the housing market?

Wall Street Journal - Home Sales Rise in Hard-Hit Areas
Bloomberg.com - U.S. Home-Price Index Fell 14.4% in March
Washington Post - Existing Home Sales Rise as Prices Plummet
New York Times - Home sales post unexpected April increase
Yahoo News - Home sales unexpectedly rise in April

FDIC Chairman Sheila Bair has struck again-with yet another creative response to the ongoing mortgage crisis. Chairman Bair has a history of being ahead of just about everyone else in Washington with proposals to respond to the crisis in a manner that is doable and fair. This time it's the Home Ownership Preservation or HOP loan, and the FDIC estimates about one million loans-make that one million homeowners in trouble-might be eligible.

A proposal by Gordon Brown's government to up the taxes paid by resident foreigners and demand greater transparency in their offshore dealings has many fearing an exodus of London's international financiers. This comes at a time when increasing numbers of businesses in London are also moving their headquarters to countries with lower taxes. Layoffs by banks in the wake of the subprime crisis are further damaging the City's reputation as a vibrant financial center. A loss of foreign residents and international business would be devastating for a city that has emerged as New York's greatest rival for global preeminence.

Snapshot asks, could New York reclaim the top spot if London falls?

With a sense of irony and amazement that Congress actually might be getting the housing mess right, Sebastian Mallaby's column in today's Washington Post hits the nail on the head. It's interesting that it took a writer whose major beat is international economics to see the point about negative externalities and the collective public good. As several of us, through many forums--I've been working with the Center for American Progress on the Save America's Family Equity or SAFE proposal--have been saying for months, this is not a matter of bailing out either borrowers or lenders or of preventing house prices from falling. This is a matter of cushioning the blow for all the rest of us--the communities that will pay dearly from declining tax revenues and increased demand for services; the homeowners whose mortgages are long-since paid off or who have been paying faithfully and can and will continue to do so; the renters who have lost their homes because their landlord can't afford to pay the mortgage any more.

Mallaby points to the positive steps Congress is taking to enable loan servicers to sell or refinance their loans after taking a substantial haircut and to enable borrowers to get new loans that they can support--with upside to the government to compensate for taking the risk. I wish he'd included the proposal outlined in Congressman Frank's bill for bulk transfers of loans, because I believe that ultimately that will be necessary. But the essential points are there. As is the point that the tax giveaways in the Senate's "housing" bill are outrageous.

It's all we hear about these days: The U.S. subprime mortgage bubble -- created by poor and at times predatory lending practices and lax banking regulation and creative investment products -- has burst. Of the approximately 7.7 million subprime loans outstanding, over 2 million are at risk of foreclosure and 600,000 borrowers are expected to lose their homes this year. The majority of us are left in shock as we watch the devastation unfold, the bubbles aftermath wreaking havoc on the U.S. (and increasingly global) economy, ensuing fears of recession and economic pain to come, and leaving politicians, economists, and regulators all scrambling to pick up the pieces.
However, in the meantime, the 2006 Nobel Peace Prize winner on Tuesday proudly hailed microfinance -- the innovation of providing small loans to poor, traditionally financial excluded individuals, mainly women -- as "sub sub sub subprime" lending. That means that globally, more than 3300 microfinance institutions provide such "super-subprime" loans to over 100 million clients and growing. Just to be clear: I'm a huge fan of microfinance. However, I'm left perplexed by this dichotomy: How can a lending practice that is almost singlehandedly dragging the whole of the U.S. economy in to a hole simultaneously and sustainably end third world poverty?

It has lately become fashionable for conservative pundits (Larry Kudlow, George Will) and disgruntled ex-bankers (Vernon Hill, for example, in his March 7 American Banker editorial) to blame the current credit crisis on the Community Reinvestment Act. This is patent nonsense. The sub-prime debacle has many causes, including greed, lack of and ineffective regulation, failures of risk assessment and management, and misplaced optimism. But CRA is not to blame.

First, the timing is all wrong. CRA was enacted in 1977, its companion disclosure statute, the Home Mortgage Disclosure Act (HMDA) in 1975. While many of us warned against bad subprime lending before the turn of the millennium, the massive breakdown of underwriting and extension of risky products far down the income scale-without bothering to even check on income-was primarily a post-2003 phenomenon. To blame a statute enacted in 1977 for something that happened 25 years later takes a fair amount of chutzpah.

Alan Greenspan wrote in Monday's Financial Times that he was blameless for the development of the real estate bubble, echoing his dismissal of blame during the popping of the tech bubble. Greenspan is right to point out that the ability of regulators to foresee crises are exaggerated and housing bubbles in other countries have risen despite tight monetary policy. However, he is wrong that tighter monetary policy, further regulation over both mortgage lending and complex financial instruments would not have helped slow soaring housing prices. As Martin Wolf points out in his column linked below, a rise in interest rates of 1% would not lead to market collapse if people expected their houses to rise in value by 10%.

Alan Greenspan - The Fed is blameless on the property bubble
Martin Wolf - Why Greenspan does not bear most of the blame
Desmond Lachman - The Economic Consequences of Mr. Greenspan