Friday, April 1, 2011

This Week in Bank Failures

Ireland bank stress test results were released yesterday, throwing that country’s fiscal plans into disarray. The banks need an additional €24 billion in guarantees from the government, and there may shortly be no choice but to wind down some of the banks to protect the country from insolvency. As an initial step, the Finance Minister has announced a plan to merge two of the four largest banks. The plan also calls for the troubled banks to shrink their operations by about a third over the next two years, which will include closing some offices and selling some assets. Further action may be needed when the banks are looked at again in May. In its new approach to its banks, Ireland may be trying to follow the more successful pattern of Iceland.

The Dodd-Frank Act requires U.S. mortgage lenders to retain an ownership share in loans they originate, a requirement known as risk retention. Technically, it is the issuers of the mortgage-backed derivatives that are subject to the rule, but either way, risk retention affects the originating bank. The law may not have any effect on the market, though. In drafting regulations, federal banking regulators seem surprisingly eager to find ways to work around the law. Proposed regulations released this week would exempt most ordinary home mortgages from the risk retention rules. The proposed rules require, for example, a 20 percent down payment, a term between 1 and 30 years, and a written application from the borrower. Rules also cover areas such as ability to pay, insurance, and underwriting, but they exempt loans that are perfectly ordinary in these respects.

Regulators, along with real estate lobbyists, seem to be worried that the securitization market (assuming it ever makes a comeback) will completely bypass mortgages that are subject to risk retention. No one has explained why they imagine the market working that way — perhaps it is nothing more than a question of stigma — but that’s why regulators want to do away with the risk retention rules for most mortgages.

AIG is reorganizing its flagship property and casualty insurance business unit. Details of the moves suggest that AIG expects to need some kind of Treasury support for a stock offering when that business unit, Chartis, is spun off.

The Fed is not waiting for AIG to get back on its feet, and is going ahead (over AIG’s objections) with an auction of $15 billion in mortgage bonds it purchased from the insurance company when it was on the verge of bankruptcy.

Treasury-owned GMAC has filed for a public stock offering under its new name Ally Financial. The IPO could bring in $5 billion and set the stage for the U.S. Treasury and General Motors to sell off their shares in the lender. Regardless of the details of the stock offering, which have yet to be worked out, Ally is not expected to be worth as much as the $17 billion the Treasury put into it during the Wall Street bailout.