Posted: 11/13/2009 6:31:54 PM EDT
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Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail. As Treasury Secretary Timothy Geithner recently put it, "No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure." The term "too big to fail" must be excised from our vocabulary. But ending the era of "too big to fail" does not mean that we must somehow cap the size of financial-services firms. Scale can create value for shareholders; for consumers, who are beneficiaries of better products, delivered more quickly and at less cost; for the businesses that are our customers; and for the economy as a whole. Artificially limiting the size of an institution, regardless of the business implications, does not make sense. The goal should be a regulatory system that allows financial institutions to meet the needs of individual and institutional customers while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk. The solution is very simple, but you will notice that Jamie doesn't bring it up. That's because he finds it unacceptable. What's that solution? Prohibit as a matter of Federal Law, and enforce it vigorously under pain of immediately dissolution, THE LENDING OF MONEY UNSECURED THAT EXCEEDS THE FIRM'S CAPITAL. This is in fact the only way you can both end "too big to fail" and not constrain size or influence. It is also the definition of sound lending. It is also how lending was done prior to the banksters corrupting the government and literally usurping the sovereign credit of The United States. Link ONE DOLLAR OF CAPITAL FOR EACH DOLLAR OF UNSECURED LENDING, MARKED TO MARKET NIGHTLY. A one-sentence Bill that, were it to become law, would instantly end "too big to fail" and yet let you grow as large as you'd like - provided you are gambling with your own money and not the sovereign credit of The United States. |
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So, let's say Joe Customer bought a $200k house 7 years ago, that is now "worth" around $150k thanks to our lovely housing market. Joe has never missed a payment, never asked for a loan modification, and won't be selling his home anytime soon. That means that the bank backing that loan should take a $50k hit, just because some zit-faced bank intern saw a comp across town on realtor.com for $150k? Mark to market is not the answer. Some would argue that it's a big part of what got us into this mess in the first place. |
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Quoted: So, let's say Joe Customer bought a $200k house 7 years ago, that is now "worth" around $150k thanks to our lovely housing market. Joe has never missed a payment, never asked for a loan modification, and won't be selling his home anytime soon. That means that the bank backing that loan should take a $50k hit, just because some zit-faced bank intern saw a comp across town on realtor.com for $150k? Mark to market is not the answer. Wouldn't that be $200k minus 7 years of equity? |
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Quoted: Quoted: So, let's say Joe Customer bought a $200k house 7 years ago, that is now "worth" around $150k thanks to our lovely housing market. Joe has never missed a payment, never asked for a loan modification, and won't be selling his home anytime soon. That means that the bank backing that loan should take a $50k hit, just because some zit-faced bank intern saw a comp across town on realtor.com for $150k? Mark to market is not the answer. Wouldn't that be $200k minus 7 years of equity? Pardon my faulty math, it's late and my brain doesn't work. The premise still stands... Why should a bank be forced to take a loss that doesn't exist? |
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Quoted:
So, let's say Joe Customer bought a $200k house 7 years ago, that is now "worth" around $150k thanks to our lovely housing market. Joe has never missed a payment, never asked for a loan modification, and won't be selling his home anytime soon. That means that the bank backing that loan should take a $50k hit, just because some zit-faced bank intern saw a comp across town on realtor.com for $150k? Mark to market is not the answer. Some would argue that it's a big part of what got us into this mess in the first place. Yes, the bank should take it. They made a bad business decision on that loan. Do you prefer that we as tax payers take it ? Foreclosure is part of the legal process. The dumbass who took out the loan should have his credit ruined by this and the bank should eat the loss. Not you and I. |
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Let's say you wish to buy a car. The car has a value once you drive it off the lot of $25,000. The sticker price is $30,000. If you borrow less than $25,000, the bank need hold no capital. If you wish to borrow more than the car is worth at the time of origination, the bank must hold dollar-for-dollar against the unsecured portion. This of course makes "low or zero" down loans expensive, as the bank must cover it's capital costs in full on any unsecured lending. Once the loan is made the bank marks to market nightly. If the collateral value declines faster than the loan balance, again, the bank has to start boosting capital (or sell the loan off.) This forces banks to price risk properly - specifically, the risk that it will have to seize the collateral and sell it. It makes unsecured lending quite expensive (e.g. credit cards) but secured, sound lending with good down payments reasonably cheap. It also makes longer-duration loans more dangerous and thus more expensive. The bank chooses how close to the 6% Tier Capital line it wishes to run. If it goes under 6% it is subject to a demand to increase capital (or sell assets.) If it ever breaches zero on a mark-to-market basis the bank is instantly closed as a matter of federal law. |
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Quoted: Quoted: So, let's say Joe Customer bought a $200k house 7 years ago, that is now "worth" around $150k thanks to our lovely housing market. Joe has never missed a payment, never asked for a loan modification, and won't be selling his home anytime soon. That means that the bank backing that loan should take a $50k hit, just because some zit-faced bank intern saw a comp across town on realtor.com for $150k? Mark to market is not the answer. Some would argue that it's a big part of what got us into this mess in the first place. Yes, the bank should take it. They made a bad business decision on that loan. Do you prefer that we as tax payers take it ? Foreclosure is part of the legal process. The dumbass who took out the loan should have his credit ruined by this and the bank should eat the loss. Not you and I. That's the point I'm trying to make. If the homeowner isn't trying to do a short sale, isn't being foreclosed on, and the payments are always on time, there is no "hit"... only faulty accounting rules. I would guess that a large chunk of those hundreds of kajillions of dollars in "toxic assets" you keep hearing about are exactly that... houses that are technically underwater right now, but it doesn't really matter because the mortgage checks are still coming. |
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Quoted: Quoted: Quoted: So, let's say Joe Customer bought a $200k house 7 years ago, that is now "worth" around $150k thanks to our lovely housing market. Joe has never missed a payment, never asked for a loan modification, and won't be selling his home anytime soon. That means that the bank backing that loan should take a $50k hit, just because some zit-faced bank intern saw a comp across town on realtor.com for $150k? Mark to market is not the answer. Some would argue that it's a big part of what got us into this mess in the first place. Yes, the bank should take it. They made a bad business decision on that loan. Do you prefer that we as tax payers take it ? Foreclosure is part of the legal process. The dumbass who took out the loan should have his credit ruined by this and the bank should eat the loss. Not you and I. That's the point I'm trying to make. If the homeowner isn't trying to do a short sale, isn't being foreclosed on, and the payments are always on time, there is no "hit"... only faulty accounting rules. I would guess that a large chunk of those hundreds of kajillions of dollars in "toxic assets" you keep hearing about are exactly that... houses that are technically underwater right now, but it doesn't really matter because the mortgage checks are still coming. According to the MT guy, unsecured lending is the cause of those upside down mortgages. I don't claim to understand it. Example: Bank makes loan of $160,000 on property (allegedly) worth $200,000. Property drops in value (sound familiar). Who would specifically ensure that the banks are marking to market situations like these? Right now, many are insolvent. Even though UNSECURED LENDING above and beyond CAPITAL is a cause, it is not the only one. It is the only cause. No bank can ever cost the deposit fund one penny nor can it impose systemic risk (although itself can fail) if it NEVER has more than one dollar of unsecured credit out for each dollar in excess capital. It really IS that simple. |
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Quoted: This mark to market would not work well on car loans unless the down payments were larger and the payment terms shorter. Some cars, depending on how they're maintained, would be worthless halfway through a typical auto loan (60 or 72 mos.) Yes, he explains that in the forum discussion. Let's say you wish to buy a car. The car has a value once you drive it off the lot of $25,000. The sticker price is $30,000. If you borrow less than $25,000, the bank need hold no capital. If you wish to borrow more than the car is worth at the time of origination, the bank must hold dollar-for-dollar against the unsecured portion. This of course makes "low or zero" down loans expensive, as the bank must cover it's capital costs in full on any unsecured lending. Once the loan is made the bank marks to market nightly. If the collateral value declines faster than the loan balance, again, the bank has to start boosting capital (or sell the loan off.) This forces banks to price risk properly - specifically, the risk that it will have to seize the collateral and sell it. It makes unsecured lending quite expensive (e.g. credit cards) but secured, sound lending with good down payments reasonably cheap. It also makes longer-duration loans more dangerous and thus more expensive. The bank chooses how close to the 6% Tier Capital line it wishes to run. If it goes under 6% it is subject to a demand to increase capital (or sell assets.) If it ever breaches zero on a mark-to-market basis the bank is instantly closed as a matter of federal law. |
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It was wrong when the lenders sold 125% mortgages on homes to begin with. This action
helped drive the bubble higher. It was a gamble that should not have been taken. Also lenders around here were selling 80/20 loans. They did not require any down payment at all on houses priced at $300k plus. It was a very reckless action and just wrong. |
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Quoted: Quoted: Quoted: So, let's say Joe Customer bought a $200k house 7 years ago, that is now "worth" around $150k thanks to our lovely housing market. Joe has never missed a payment, never asked for a loan modification, and won't be selling his home anytime soon. That means that the bank backing that loan should take a $50k hit, just because some zit-faced bank intern saw a comp across town on realtor.com for $150k? Mark to market is not the answer. Some would argue that it's a big part of what got us into this mess in the first place. Yes, the bank should take it. They made a bad business decision on that loan. Do you prefer that we as tax payers take it ? Foreclosure is part of the legal process. The dumbass who took out the loan should have his credit ruined by this and the bank should eat the loss. Not you and I. That's the point I'm trying to make. If the homeowner isn't trying to do a short sale, isn't being foreclosed on, and the payments are always on time, there is no "hit"... only faulty accounting rules. I would guess that a large chunk of those hundreds of kajillions of dollars in "toxic assets" you keep hearing about are exactly that... houses that are technically underwater right now, but it doesn't really matter because the mortgage checks are still coming. It does matter. 1. Suppose the house was originally mortgaged with a market value of $200K. (Not loan amount, just mkt value) 2. Not the home has a market value of $150K. 3. In that time the home owner has paid their actual mortgage down to $140K. The bank now holds a $10K asset they can make additional loans against instead of $60K. Drop in market value dramatically tightens up the lending pool. It gets harder to get a mortgage, harder to get a business loan, harder to get credit period. The reverse is also true. If the same house now had a market value of $250 and an outstanding martgage of $140, the bank would now have a $90 asset. That's part of what created this mess. Skyroceting values freed up the lending pool to the point that banks were flooded with assets. |
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Quoted: It was wrong when the lenders sold 125% mortgages on homes to begin with. This action helped drive the bubble higher. It was a gamble that should not have been taken. Also lenders around here were selling 80/20 loans. They did not require any down payment at all on houses priced at $300k plus. It was a very reckless action and just wrong. From what I understand, they are still making those type loans. |
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Take a look at this. Can someone explain why Wells Fargo approved a loan that would result in a monthly housing expense that would appear to exceed 100% of the borrowers monthly take home pay? Anyone? |