Also Noted: Spotlight On... Mary Jo White aims at all crime
Today's Top News1. More banks sell MSRs, a natural hedge
The Financial Times makes an interesting point about mortgage servicing rights (MSRs): they can serve as a hedge to rough times in the origination and refi market. It's fair to say that industry has now stumbled upon hard times in both. Big mortgage banks like Wells Fargo, Citigroup and Bank of America are actively managing their capacity by downsizing as the market continues to deflate. But higher rates aren't all bad if you own lots of mortgage servicing rights. It is hard to predict how much padding MSRs will provide. They represent the value of future fees that banks receive for servicing mortgages: handling payments, monitoring delinquencies, and so on. "Their value rises as rates do, because the servicing fees have a longer life when borrowers refinance less." MSRs can swing actively in value, and banks often hedge them actively. "For example, in the second quarter, the change in the value of Wells Fargo's MSRs (driven primarily by mortgage rates) was $1.9bn, but net of hedges it was only $68m. Banks can, however, dial back their hedges when rates are rising." As of now, one has to wonder if the market has changed dramatically enough to make banks reconsider their recent moves to sell of more MSRs. Wells Fargo among others have been open about their desire to sell MSRs as the regulatory capital situation makes them less desirable. Selling MSRs has emerged a risk-management best practice, it would appear. The issue is how much would rates have to rise, all other things equal (a big assumption), to make hanging onto MSRs the better choice. For more: Read more about: earnings, Mortgage Services 2. Time to hedge against a U.S. default?
Will the U.S. debt default near-crisis -- it could unfortunately explode into a full-on crisis -- spawn an epic trade? One that will generate billions in profits for some lucky hedge fund manager? We've such trades before. Remember when George Soros got the best of the BOE? Remember the lucky few who not only predicted the housing collapse but also devised clever ways to bet on such a collapse? One of the big winners in the real estate crisis was recently asked if he was hedged against the possibility of default, and his answer was somewhat surprising. Kyle Bass of Hayman Capital Management says "he's not hedged for the event of a U.S. default, because there's nothing much you can do about it," reports CNBC. He was quoted: "All the money you're gonna have is under your pillow, and it probably won't be worth as much as it is today… But I don't think we're going to get to that apoplectic point in the United States." He thinks that the political brinksmanship will eventually lead to a deal to prevent the country from defaulting on its debt. We can only hope that pans out. Over the next week or so, the volatility may spike in some markets, and one would think that some credit hedge funds have positioned themselves to fare well, perhaps making big leveraged bets on rising rates in near-term fixed-income securities. At a minimum, hedge funds are pondering a wide range of defensive moves. For more: Read more about: Default Event 3. Janet Yellen, a safe Fed chair choice for banks
How will the top banks fare under proposed new Federal Reserve Chairman Janet Yellen? They probably would have fared better from a regulatory point of view under Lawrence Summers, who was the first choice and bit more dovish on regulatory oversight. That said, the conventional wisdom holds that Yellen will represent only minor change only compared with current chairman Ben Bernanke. Given that Wall Street prizes certainty, her nomination is not likely to be hugely controversial. "Yellen, who previously led President Bill Clinton's Council of Economic Advisers and the Federal Reserve Bank of San Francisco, has won praise from reform advocates for spotting problems in the subprime mortgage market early on. Publicly, she has supported efforts to force banks to rely less on debt for funding and called for other actions to prevent them from becoming too big to fail," notes Reuters. "Beyond that, her views on how regulators should crack down on banks are less well known. In a speech in July, she showed herself to be inside the Fed mainstream on regulation issues, largely approving of its current course of action." She's a safe candidate from all vantage points. For now anyway. During her confirmation hearings, she'll be pressed on specifics. For more: Read more about: Federal Reserve Board 4. Star analyst shifting to hedge funds
What's up with Meredith Whitney? She was among the brightest stars in the universe of Wall Street analysts, rocketing to fame with her correct prediction that Citigroup would be forced to cut its dividend in 2007. She quickly became a go-to expert on all things related to the financial crisis and bank industry. When it came to the credit crunch and its aftermath, she was seen as a go-to expert. No one was surprised when she graced the cover of Fortune. But then things turned rocky. Her penchant for publicity and audacious predictions seemed to work against her when she predicted a wave of municipal defaults, which was widely criticized and has yet to be borne out. And now, she seemed to be moving on. DealBook notes that she has de-registered her brokerage unit from Finra. She hasn't published research for several months now. So what will she do next? She's "poised to move onto her next venture. According to Finra records, Ms. Whitney is the managing principal of Kenbelle Capital, a 'long/short' fund. And according to a legal notice published in The Royal Gazette, Bermuda's main newspaper, Kenbelle Capital has applied for a permit…" Will she fare better as a hedge fund manager? It's really hard to say. It's not unheard of for a research star to find success on the buy-side. But the field is crowded, and for small funds especially, the competition is really intense. The success rate is not high. But it helps to have a big reputation at the outset. For more: Read more about: Meredith Whitney, Stock Analysts 5. Banks to go easy on shutdown workers?
The government shutdown looms large as an economic sinkhole in areas that are heavily dependent on the federal workers. The best example might be the Washington, D.C. metropolitan area. If the shutdown endures, more families will start to encounter difficulties in making mortgage payments, and therein lies an opportunity for banks. It's fair to say that they are still suffering a bit from the reputational problems that arose in the financial crisis. While they are not the top public enemy at this point, they still have a lot of work to do toward burnishing their brands. They would be wise to do more than heed the advice of regulators, who have urged banks to be lenient with struggling customers. "Prudent workout arrangements that are consistent with safe-and-sound lending practices are generally in the long-term best interest of the financial institution, the borrower, and the economy," the bank regulators advised in a statement. It noted borrowers may face hardship in making payments on mortgages, student loans, car loans, credit cards, and other debts. Banks typically work out temporary hardships with victims of natural disasters. So this really shouldn't be all that controversial. Banks would be wise to make a big marketing deal out their leniency, making sure the world knows that they are willing to come to work out deals with borrowers, which puts them in a favorable light. Doing the right thing can be very effective marketing. For more: Read more about: mortgages, Government Shutdown Also NotedSPOTLIGHT ON... Mary Jo White aims at all crime It's fair to say that Mary Jo White has fared extremely well as the new chairman of the SEC. She came aboard at a very tough time, and has managed, against the odds, to create a favorable impression. She seems to be revitalizing the oft-criticized agency and pushing it in welcome new directions. She certainly does not intend to go soft on crime. The top securities regulator has "placed everyone from auditors to fund board members on notice, saying her agency plans to look for violations in all corners of the market, from major Wall Street investment firms to boiler room operations," notes Reuters. Article Company News:
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Friday, October 11, 2013
| 10.11.13 | More banks sell MSRs, a natural hedge
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