“Overall, both the quantity and quality of capital at many large bank holding companies have improved since the financial crisis,” the Fed said. “The return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks’ long-term access to capital.”
Really? Is there actual coverage of bank “assets” by actual capital? How about second lines on homes, for instance?
There are a few people who I converse with on the forum and elsewhere who have been looking through some offerings of these loans, and also tracking their performance. I’ve long argued that one of the big scams with bank balance sheets is that these loans are, as second lines, worthless if there is a mortgage default and the home is worth less than the first. We’re now seeing this with losses on these loans in he 70-100% range. Yet nearly all of these second lines are being carried at ridiculously rich “valuations” compared to reality by the banks – and most of these loans are not securitized.
There is a “quiet” proposal in the alleged 50-state Foreclosure settlement that speaks of second lines being written down on modifications ratably with the first, if principal reductions are required. This is simply another device to allow banks to change – on a retroactive basis – the contractual terms that were originally contemplated by both the lender and borrower. Should this stand the first-line investors, who had every reason to believe their note had priority, will (once again) get screwed.
I have no problem with banks being “able” to pay dividends and buy back shares – as soon as all the actual losses are out in the open and recognized and nobody is or will attempt to change contractual terms retroactively to screw someone else (and maintain their own solvency.)
Until that happens there is no defensible position in allowing the “return of (non-existent) capital to shareholders.” The Fed seems hellbent and determined to destroy what little credibility it has left; if we get another one of those “nobody could see it coming” incidents in the coming months it will look mighty foolish as the latent bad debts are forced into the open once again the pigs cry at the trough for more public money (and this time, likely, obtain a “No!” in response.)