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IT’S a $2.6 trillion mystery.
That’s the amount that foreign banks and other financial companies have lent to public and private institutions in Greece, Spain and Portugal, three countries so mired in economic troubles that analysts and investors assume that a significant portion of that mountain of debt may never be repaid.
The problem is, alas, that no one — not investors, not regulators, not even bankers themselves — knows exactly which banks are sitting on the biggest stockpiles of rotting loans within that pile. And doubt, as it always does during economic crises, has made Europe’s already vulnerable financial system occasionally appear to seize up. Early last month, in an indication of just how dangerous the situation had become, European banks — which appear to hold more than half of that $2.6 trillion in debt — nearly stopped lending money to one another.
Now, with government resources strained and confidence in European economies eroding, some analysts say the Continent’s banks have to come clean with a transparent and rigorous accounting of their woes. Until then, they say, nobody will be able to wrestle effectively with Europe’s mounting problems.
“The marketplace knows very little about where the real risks are parked,” says Nicolas Véron, an economist at Bruegel, a research organization in Brussels. “That is exactly the problem. As long as there is no semblance of clarity, trust will not return to the banking system.”
Limited disclosure and possibly spotty accounting have been long-voiced concerns of analysts who follow European banks. Though most large publicly listed banks have offered information about their exposure — Deutsche Bank in Frankfurt says it holds 500 million euros in Greek government bonds and no Spanish or Portuguese sovereign debt — there has been little disclosure from the hundreds of smaller mortgage lenders, state-owned banks and thrift institutions that dominate banking in countries like Germany and Spain.
Depfa, a German bank that is now based in Dublin, is one of the few second-tier European banking institutions that have offered detailed disclosures about their financial wherewithal, and its stark troubles may be emblematic of those still hidden on other banks’ books.
Despite boasting as recently as two years ago of its “very conservative lending practices,” Depfa, which caters primarily to governments, has flirted with disaster. It narrowly avoided collapsing in late 2008 until the German government bailed it out, and today its books are still laden with risk.
http://www.nytimes.com/2010/06/06/bu...toxic.html?hpw
As profits rebound at many of these institutions, however, artful dodging becomes more disturbing. And when disguising problems winds up harming the taxpayer — the same folks who rode to the rescue of banks with billions of dollars — the denial is downright exasperating.
Among the more glaring bookkeeping fictions on big banks’ balance sheets today are the values they assign to all of the bounteous second mortgage loans. doled out during the mortgage bonanza. As any realist will attest, many of these loans are worth little, and yet there they sit, at fantasy levels, on banks’ ledgers.
Refusing to face reality on second liens ultimately hurts shareholders. But taxpayers are the ones holding the bag when institutions try to avoid losses by refusing to buy back problem loans they have sold to Fannie Mae and Freddie Mac, the mortgage finance giants that are wards of the state.
Fannie and Freddie helped grease the nation’s housing machinery before and during the boom years, scooping up loans from all corners of the country. The more of these that Fannie and Freddie bought, the easier it was for banks to write new mortgages.
To protect themselves from getting piles of garbage loans shoveled their way when they buy mortgages, Fannie and Freddie require lenders or loan servicers to sign contracts requiring those firms to repurchase loans that don’t meet certain standards relating to borrower incomes, job status or assets. Loans that were extended fraudulently, or deemed to have been predatory, are also candidates for buybacks.
Surprise, surprise: banks don’t want to repurchase these loans. So when Fannie or Freddie identify problem mortgages and request repayment, a battle royal begins. Banks may argue, for example, that the repayment requests have flaws of their own.
But for us as taxpayers, watching this battle from the sidelines, one growing concern is how aggressively Fannie and Freddie will pursue their requests. If banks refuse to buy back flawed loans, taxpayers will have to cover more of the losses.
A lot of money is at stake here, and the figure is growing all the time. According to March 31 figures from Freddie, for instance, the amount of problem loans that it has asked other firms to buy back stood at $4.8 billion — up 26 percent from $3.8 billion just three months earlier.
Freddie also said that as of the end of March, 34 percent of its buyback requests had been outstanding for 90 days or more. Three months earlier, that figure was 30 percent. That increase suggests a greater reluctance among banks to respond to Freddie’s demands.
Fannie, for its part, doesn’t disclose how much it’s asking banks to buy back. Instead, it simply reports how much banks have agreed to buy back but have yet to pay during a specific period.
During the first quarter of 2010, for example, Fannie said the unpaid principal balance of loans repurchased by its servicers came in at $1.8 billion, up from $1.1 billion during the first quarter of 2009. “We expect the amount of our outstanding repurchase and reimbursement requests to remain high throughout 2010,” Fannie said in a filing.
It’s surely good news that Fannie and Freddie are trying to hold these other firms responsible for shoddy lending standards. But if those firms continue to resist paying up, that would be bad news indeed for taxpayers who would have to absorb Fannie and Freddie’s losses on the loans.
“Banks have been unwilling to mark all of the bad loans they have and mortgage securities they hold to their true values because that would require a loss,” said Kurt Eggert, a professor at the Chapman University School of Law. “But this is about banks trying to avoid losses and having the taxpayers absorb them.”
Freddie does not identify the lenders or loan servicers it is asking for buybacks. Some of the difficulties it encounters with loan buybacks are, it said, the result of “potential insolvency” — that is, financial woes at companies that made or service the loans.
The top three lenders or loan servicers doing business with Freddie are JPMorgan Chase, Bank of America and Wells Fargo.
http://www.nytimes.com/2010/06/06/bu...l?ref=business