When I grow up, I want to be a bank.
Lately, banks have gotten more attention than a bikini-clad blonde at a frat party.
[img]427|left|||no_popup[/img] One minute they’re everybody’s pariah. Almost in an instant, they look like the best bet in town.
It’s the perfect business model.
First, you precipitate a massive financial crisis by making trillions in ill-advised loans to millions of borrowers at rates that are ridiculously low for property that’s valued way too high. After that, you loan billions to homebuilders and other speculators at stupidly low rates that let them flood the market with so much new inventory that the supply of available units far outstrips the possible demand.
Are you with me so far?
Here Is the Next Step
Then you bundle up this soon-to-be worthless paper, get it rated investment grade by your buddies, and sell it on Wall Street as if it were diamonds wrapped in gold.
To make your paper really attractive, you call it mortgage-backed securities, a fancy name that makes potential investors think it’s bullet-proof. For good measure, and to make sure you don’t lose, you get an insurance policy from your pals at AIG — called a credit default swap — just in case real estate values fall back to earth, causing your investors and portfolio to go sideways.
Here’s where it gets good.
Real estate prices begin to fall, as you knew they would. You start to teeter, causing a financial panic. At this point, you’ve made yourself so big and so seemingly indispensible to the economy, that the federal government thinks it has no choice but to throw you a lifeline. Like a charm, you get billions in taxpayer money.
But wait. There is more.
Just Keeps Getting Better
Because the feds feel really sorry for you, and genuinely want you to succeed, they let you borrow money for next to nothing. This means you still can make borrowing attractive while gaining a nifty profit on your loans. Just to sweeten the deal, and because when you’re a bank every day is like your birthday, the feds tell you that they’ll take all your bad debt off your hands with no risk to you.
Life is good when you’re bank.
It must be working. Home refinancing and loan origination are projected to hit a two-year high. Today, the Mortgage Bankers Assn. boosted its forecast for 2009 home-loan originations by $800 billion, to $2.78 trillion, as a wave of refinancing and low interest rates spur homeowners to seek out new loans.
As borrowers clamber to take advantage of historically low interest rates, banks are reaping huge profits since mortgage origination fees are the costliest in eight years.
Suddenly, the banking business is booming again. Total originations may rise to the fourth-highest on record, driven by a drop in fixed mortgage rates and last week’s Federal Reserve announcement that it will triple its planned purchases of mortgage-backed securities. The effect of having the Fed bid in the market for a sustained period has created an enormous refinancing incentive for hundreds of thousands of homeowners who just a few months ago thought they’d never see a better rate than the one they had.
Moreover, because the cost of borrowing money is so low for the banks, the profit they’re making on the spread – the difference between their cost and the interest rates they charge the borrower — is higher than ever. When I grow up, I want to be a bank.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
