Banks are highly regulated institutions, in spite of what Amar Bhide implies in today's NYT editorial. He argues the Fed should insure all bank deposits, no matter how large, but in response regulate more. The regulators are already regulating a lot, choking off credit. When no specifics are offered, it highlights how clueless such solutions are, as with the current CFPB, which doesn't do anything I'm aware of, but create a new permanent bureaucracy. After all, more regulatory pressure pre-2007 would have just meant more ninja loans, not less, given the conventional wisdom back then.
A friend shares with me the following anecdote. He thinks real estate is cheap, and wants to buy houses, and make money renting them. Ultimately, he would sell out of the homes when they recover in value. He has been doing it for a couple years with good results. He went to a bank, to see if he could leverage this idea, say by getting loans for 50% of the purchase price. They said, only if you hold this in a 'compensating balance.' These are cash balances held by the borrower at the bank, and add fees and some safety to the bank. In this case, the bank wants the borrower to keep the entire balance as a cushion, borrow money for a potential liquidity event, that would be rather futile because once the borrower used said compensating balances to rectify a funding problem, it would then have a liquidity problem with the bank. So, in practice, the compensating balance would not be a cushion for tough times, nor would it earn interest for the borrower. My friend decided not to get the loan.
The regulators aren't letting bankers return to business as usual, as previously they got 100% loan-to-value, now can't even get 50%! Many still think the bankers basically are parasitic thieves. I maintain that without a healthy bank sector free from the fear of extinction, our recovery will remain weak.
9 comments:
is your friend local... as in the TC metro?
i am a local commercial banker and indeed, the lending for investment properties is limited to only a small number of local community banks due to concentrations and the overall fear of the real estate values. Certainly the big boys (WFC, USB, TCF) and the bigger community players (kline, anchor) are out of it.
with that being said, at 50% loan to value i will lend him money all day long without compensating balances.
I will even provide references. If he is looking for secondary market type rates.... then he is asking too much.
PS.. found your blog a few months ago. I got interested in this low vol investing after hearing about it in a portfolio managing class at the MBA program at the U of MN. I remember the professor calling it the flavor of the moth... LOL
keep up the good work!
I think in this environment my dog could run a bank. Cost of funds 0.00%, but treasuries at 3.00% and live off the spread...... Truth be told if banks have to carry it on their balance sheet they don;t want to do it. Commercial Finance Companies, Hedge Funds, Credit Unions, Factor, and even Pawnshops the new financiers of the 2012 and beyond.
Finances after politics is best place to game the system. Politics is too obvious and it is often dangerous - gaming the system in finances is relatively risk free. Compare the gaming possibilities in finances and producing something physical.
Merely speculation with one piece of anecdotal evidence. Pathetic and a waste of time.
Congratulations on getting a spot on Abnormal Returns, too bad you botched it with nonsense.
moroco: he wants to do this with $100MM, mainly in SW US...
"He went to a bank" What bank? Good for that bank that they aren't stupid enough to make the same mistake twice. If your friend wants to speculate on real estate then maybe he needs to find an alternative source of funding, or maybe take the risk himself by building his own capital. Yeah, that is the way it is supposed to (and in a healthier time used to) be done, through hard work and re-investment of profit.
If your friend wants to take the easy way then send him to a school for an exclusive business degree from an exclusive school. Oh, never mind, that would take money. Obviously your friend has none and is looking for an easy way.
That's how we got here. Money doesn't make itself, even if you believe it does.
Relieving the regulatory burden without increasing accountability is not the answer. We've seen the results of removing regulation when bankers are rewarded with annual bonuses and walk-away when it crashes and burns. There's no claw-back and no one goes to jail. There's no downside.
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