Opinion & Analysis

Archive for November, 2009

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Tribute to Mark Pittman, Reporter Who Foresaw Subprime Crisis

In Risk on November 28, 2009 at 7:25 pm

“Who sues the Fed? One reporter on the planet,” said Emma Moody, a Wall Street Journal editor who worked with Pittman at Bloomberg.

“The more complex the issue, the more Mark Pittman wanted to dig into it. Years ago, he forced us to learn what a credit- default swap was. He dragged us kicking and screaming.”

A former police-beat reporter who joined Bloomberg News in 1997, Pittman wrote stories in 2007 predicting the collapse of the banking system.

Pittman’s fight to make the Fed more accountable resulted in an Aug. 24 victory in Manhattan Federal Court affirming the public’s right to know about the central bank’s more than $2 trillion in loans to financial firms.

Source: http://www.bloomberg.com/apps/news?pid=20601109&sid=af7QohP8YdRo&pos=12

Private Banking Trends 2010

In 1 on November 22, 2009 at 9:36 pm

2009 is a year to remember for many private banking professionals. Hedge funds failed, Bernard Madoff convicted, clients withdrew assets from private banks. The global financial crisis has fundamentally changed how the HNWI clients invest and the wealth management business itself.

Trend 1: Growing Chinese market
Many “new money” acquire their wealth through IPO. According to Ernst & Young’s recently published Global IPO Update, Brazil and China accounted for two-thirds of global capital raised in Q2 2009. This not only means that the economy is growing rapidly in these countries, more importantly it shows that there is a growing demand for private banking and wealth management services in the region.

Private bankers should also note that the growth of the Chinese market is not uniform across all Chinese cities. While Beijing, Shanghai and Shenzhen will spearhead growth, Hong Kong, on the other hand, will likely to have a tough 2010. Hong Kong actually suffered a huge reduction in HNWIs of 61% in 2009, because of the near 50% drop in market capitalization.

Trend 2: Rising compliance cost and lower profit margin
The Bernard Madoff $65 billion Ponzi scheme, among other scams exposed in 2009, alerted regulators in many countries. In order to crack down on false trading activities and tax evasions, governments worldwide demand more oversight of banking operations. As a direct result, banks have to spend more money on compliance and risk management. With a stagnant market in most countries it is almost impossible to increase fees and banks are likely to have to absorb the rising cost. This means lower margin for private banks and flat compensation for bankers.

Trend 3: Diversifying clientele
As the society progresses and becomes more diversified, so is the wealth management market. Customers today are more fragmented than ever before, and banks which are quick to respond benefit from the changing demographic. Islamic private banking, for example, is gaining momentum. HSBC Amanah is promoting Shariah compliant portfolios. In June 09, Morgan Stanley Wealth Management hosted a wealth planning seminar for same sex couples in Beverly Hills. It is likely that other private banks will become more aggressive in targeting demographic segments that have previously been ignored.

Trend 4: Rebuilding client trust will remain a top priority for bankers
The 2009 Capgemini Wealth Report found that more than a quarter of HNWI clients withdrew assets from their firms due to a loss of trust and confidence. There are several high profile client-advisor fallouts in the past 6 months, such as Singaporean tycoon Oei Hong Leong suing Citigroup private bank for a $684 million loss, and US investor Andrea Barron suing UBP for negligence. In Hong Kong, entrepreneur Joyce Tsang (founder of listed beauty salon group Modern Beauty) sued Goldman Sachs advisor for her $2 million loss.

Trend 5: E-trading and online customer service will become key differentiators
While some of HNWIs prefer to deal with their advisors face to face and seldom use email, it is easy to see why the “new money” group, often in their mid thirties and forties, are increasingly turning to online self service.

Trend 6: Singapore will remain a key player in the private banking industry
Singapore is known as “Switzerland of the East”. There are many reasons why it will stay this way for at least another three years. On top of the excellent international reputation and the $300 billion private banking assets the region currently manages, the Singaporean government is aggressive in making the country more attractive to private banks and HNWIs worldwide.

Source: http://blogs.law.harvard.edu/sammy/2009/07/26/private-banking-trends-2010/


Property Values to Fall a *Ceiling of* 43% from Current Values

In 1 on November 4, 2009 at 4:17 pm

That’s according to Michael White who notes that if you use a 20 year time horizon, with the 10 city and 20 city composite, and assume that the prices will return to the trend line, then our residential property bubble will bottom after the values fall another 40% from current levels.

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He notes that the US (namely Fannie Mae, Freddie Mac, and Ginnie Mae) is funding about 90% of all new mortgages and that at some point, if the government stops their support, then home prices should crash. Prices for real estate are ultimately determined by our income, and if the trend represents a match of income and price, then the picture of the trend line is the picture of our future.

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That said, others will note that applying technical analysis to the Case Shiller index only tells part of the story. If anything, readers noted that there was a limited sample size used to extrapolate future prices. The trend line is only over four years and therefore not useful in projecting a decade into the future. Consumers, investors and others who do not want to see a loss in their homes would rather sit on it for 10 years rather than see a 40% slide in the residential market.

Useful factors would have been based on rising unemployment, rising interest rates, tighter credit, expiration of government stimulus, deflationary pressures on wages and materials.

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A History Lesson On Fannie Mae *Federal National Mortgage Association

In 1 on November 4, 2009 at 3:29 pm

A long time ago in a far away land, there was a depression so bad that they capitalized the “D.” To help, the government created agencies such as the Public Works Project and the Fair Housing Act. Later, it also created the “Federal National Mortgage Association.” (Because having a place to call home makes stronger families, communities, and nations!)

FNMA (Fannie Mae) was created in 1938 to help low to middle income families realize the American Dream–owning their own homes. In 1968, it went public where the government owned the preferred stock and the public owned the common stock.  It hit a high of around $82 in June ‘01 (and is currently trading at $1.18). The company buys mortgages from lenders and provides money to continue allowing lenders to make home ownership possible for many people who wouldn’t necessarily be able to qualify for a loan.

In 1968, when Fannie Mae became a  public owned company, traded on NYSE, a government owned association was spun off and called Ginnie Mae. Ginnie Mae (Government National Mortgage Association), provided a link between capital markets (the lenders) and the Federal Housing markets. They did/do the same exact thing except how money is raised–either publicly or privately.

This makes Mortgage backed securities more attractive to investors such investors. The difference between Fannie Mae and Ginnie Mae is the government backing. While the backing is only perceived in Fannie, is it real in a Ginnie Mae backed security or mortgage.  Note, GNMA is a private company and has always been as such–it is owned entirely by HUD and is not a government-sponsored enterprises (GSE).

Unlike the FNMA and FRE, the debts and guaranties of GNMA are direct obligations of the Treasury and therefore has no ambiguities on their status. They can issue MBS with a guarantee at a lower cost than the old agenies. They did not fall into a trap of bad credit in 04-07 that killed FNMA and FRE. Net net, GNMA did what a government mortgage agency should have done–supported the mortgage market and protect the taxpayers. Many expect their responsibilities to increase in the coming years. 95% of all home loans through the FHA and VA are backed by GNMA. This means that the lender will get paid even if the borrower defaults on payments.

Then there’s Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac (NYSE: FRE) whic is another GSE with 5 out of 18 board members appointed by the President. A buyer of mortgages on the the secondary market, it provides money to lenders to continue selling mortgages. This keeps the market liquid and allows banks to do what they do. They were $73 in December 04 and are currently trading at $1.26.