Banker - KEN McNERNEY

Bank Dealmaking Finally Returns to California

US Banker | August, 2011

By Rachel Witkowski

California got a small taste of bank dealmaking last week that didn't involve a failed or ailing institution.

In Southern California, California United Bank announced it would acquire California Oaks State Bank in a cash-and-stock transaction. The deal is valued at about $17.3 million, or nearly 1.3 times tangible book value, potentially setting a basis of pricing for traditional bank-acquisition deals in the area.

Analysts say the purchase represents a breathe of fresh air for a state where deals in recent years have been for failed banks or have been unions with at least one distressed partner with very little premium, if any. Four more banks failed in California last Friday, raising the state's tally of failed banks to 10 this year.

"It's a compelling event," said Tim O'Brien, managing director at Sandler O'Neill & Partners LP. "It's a sign of things to come."

Though a small deal, if completed it will increase California United's assets by about 22 percent, to more than $650 million, and its deposits by 26 percent, to $530 million.

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By DAVID REILLY

A subsidized market is a subsidized market, no matter how you dress it up.

That's worth remembering as the latest proposal to revamp housing finance emerges in Congress. Late last week, a House Democrat and Republican proposed legislation some are hoping will prove a workable compromise for the two parties.

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Under the plan, Fannie Mae and Freddie Mac would be replaced by several smaller companies that would create and sell mortgage bonds explicitly backed by the U.S. government. The new firms would seek private capital, although they wouldn't trade on a stock exchange. They also wouldn't hold portfolios of mortgages, as Fannie and Freddie do today.

Trouble is, the government would still likely end up guaranteeing a portion of the mortgage market, with taxpayers ultimately taking on the credit risk of home loans. And although the plan calls for the government to be paid for its guarantee, too often such backing is underpriced. For Full Story:

Will the Banks Finally Have to Answer

May 17, 2011

At long last, there may be a serious investigation into the mortgage mess — the kind that results in clarity as well as big fines and maybe even accountability.

Gretchen Morgenson reported in The Times on Tuesday that Eric Schneiderman, the New York attorney general, wants to discuss mortgage operations during the housing bubble with executives of Bank of America, Goldman Sachs and Morgan Stanley. He has also requested documents and information from the banks, examined material given to his predecessor, Andrew Cuomo, and studied issues raised in lawsuits against the banks.

Mr. Schneiderman would not comment on the investigation. What is needed is a broad inquiry into how banks inflated the housing bubble, profiting as it expanded and getting bailed out when it burst — leaving investors and homeowners devastated.

Any serious investigation must take a close look at “securitization” — the pooling of thousands of home loans into securities that were sold to investors the world over. Three years after it all imploded — and even after Congress vowed to get answers and names — Americans still don’t have answers to vitally important questions. For Full Story:

By ALEX J. POLLOCK

It is nearly five years since the peak of the housing bubble, and that highly leveraged sector, with its $11 trillion in residential mortgage debt, continues to struggle. Home values just posted their biggest quarterly decline since late 2008, largely due to a steady stream of foreclosures.

But if we consider that the housing bubble inflated from roughly 1999 to 2006, that made seven fat years. An ancient authority would suggest that seven lean years should follow. That would mean two more lean years to go—not a bad prediction.

Actually, what we experienced was a double bubble: one in housing and a parallel one in commercial real estate, which has mortgage debt of $2.4 trillion. Both of these sectors used the opening years of the new century to run up leverage and asset prices to an unsustainable 90% increase, with housing peaking in the second quarter of 2006, and commercial real estate in the fourth quarter of 2007.

The causes of the housing bubble—subprime mortgages, adjustable-rate mortgages, government-mandated loans, etc.—are well known. The role of traditional lending by the heavily regulated banking system in the commercial real-estate bubble has received less attention, yet its toll in subsequent bank failures is apparent.

The inevitable bust brought a national price drop of 32% from the peak for housing, and an even steeper 42% drop from the peak for commercial real estate. These erased trillions of dollars of illusory bubble "wealth." The combined drop in market values was greater than $8 trillion—that's more than the GDP of China last year.

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Associated Press

Why did house prices fall proportionally less than commercial real-estate prices after they both inflated to the same extent? In part, at least, this reflects large government programs and subsidies to support house prices. But even with this support, the asset prices on which huge amounts of debt had been built shriveled, leaving the debt under water. As an old banker told me long ago, "Just remember this, young man: Assets shrink—liabilities never shrink!" The credit markets for housing and commercial real estate obviously did not remember this classic principle. For Full Story:

When the Financial Crisis Inquiry Commission (FCIC) reported in January that the 2008 crisis was caused by lax regulation, greed on Wall Street and faulty risk management at banks and other financial firms, few were surprised.

That, after all, was the narrative propagated by government sources since 2008 and widely accepted in the media, in numerous books, and by many commentators. Writing in the New York Times on June 30, for example, Pro-Publica reporter Jesse Eisinger complained that bankers' concerns about excessive regulation under the Dodd-Frank Act did not take account of "the staggering costs of the crisis that the ...

Citadel’s Griffin Debates Dodd-Frank

4:37 p.m. | Updated

LAS VEGAS — Many hedge fund managers are not happy with the regulatory tone in Washington.

Among their biggest concerns: the Dodd-Frank law, which was passed in the wake of the financial crisis.

The debate smoldered on Friday morning on a panel at the SkyBridge Alternative Conference in Las Vegas between former Senator Christopher J. Dodd (of Dodd-Frank fame), David Axelrod, a top presidential adviser, and Kenneth C. Griffin, the founder of the Citadel hedge fund. Only Mr. Dodd asked that his comments be off the record.

Mr. Griffin, whose Chicago hedge fund manages about $10 billion, lauded aspects of the Dodd-Frank Act, including limits on leverage and the creation of a derivatives clearinghouse.

But he took aim at a central part of the law — the designation of institutions as systemically important, or “too big to fail.” He argued that once a firm was labeled as such, the assumption was the government would provide a backstop if something went wrong.