Investors, hear my warning, you will lose in the end. Last warning.
BlackRock with ETF push to smaller banks
- The roughly 7K regional and community banks in the U.S. have securities portfolios totaling $1.5T, the majority of which is in MBS, putting them at a particularly high interest rate risk, and on the screens of regulators who would like to see banks diversify their holdings.
- "This is going to be a multiple-year trend and dialogue," says BlackRock's (BLK) Jared Murphy who is overseeing the iSharesBonds ETFs campaign.
- The funds come with an expense ratio of 0.1% and the holdings are designed to limit interest rate risk. BlackRock scored its first big sale in Q3 when a west coast regional invested $100M in one of the funds.
- At issue are years of bank habits - when they want to reduce mortgage exposure, they typically turn to Treasurys. For more credit exposure, they habitually turn to municipal bonds. "Community bankers feel like they're going to be the last in the food chain to know if there are any problems with a corporate issuer," says a community bank consultant.
ALERT: COMMUNITY BANKS AND CREDIT UNIONS AT GRAVE RISK HOLDING $1.5 TRILLION IN MBS
by Neil Garfield
I've
talked about this before. It is why we offer a Risk Analysis Report to
Community Banks and Credit Unions. The report analyzes the potential
risk of holding MBS instruments in lieu of Treasury Bonds. And it
provides guidance to the bank on making new loans on property where
there is a history of assignments, transfers and other indicia of claims
of securitization.
The risks include but are not limited to
- MBS Instrument issued by New York common law trust that was never funded, and has no assets or expectation of same.
- MBS Instrument was issued by NY common law trust on a tranche that appeared safe but was tied by CDS to the most toxic tranche.
- Insurance paid to investment bank instead of investors
- Credit default swap proceeds paid to investment banks instead of investors
- Guarantees paid to investment banks after they have drained all value through excessive fees charged against the investor and the borrowers on loans.
- Tier 2 Yield Spread Premiums of as much as 50% of the investment amount.
- Intentional low underwriting standards to produce high nominal interest to justify the Tier 2 yield spread premium.
- Funding direct from investor funds while creating notes and mortgages that named other parties than the investors or the "trust."
- Forcing foreclosure as the only option on people who could pay far more than the proceeds of foreclosure.
- Turning down modifications or settlements on the basis that the investor rejected it when in fact the investor knew nothing about it. This could result in actions against an investor that is charged with violations of federal law.
- Making loans on property with a history of "securitization" and realizing later that the intended mortgage lien was junior to other off record transactions in which previous satisfactions of mortgage or even foreclosure sales could be invalidated.
The
problem, as these small financial institutions are just beginning to
realize, is that the MBS instruments that were supposedly so safe, are
not safe and may not be worth anything at all --- especially if the
trust that issued them was never funded by the investment bank who did
the underwriting and sales of the MBS to relatively unsophisticated
community banks and credit unions. In a word, these small institutions
were sitting ducks and probably, knowing Wall Street the way I do, were
lured into the most toxic of the "bonds."
Unless
these small banks get ahead of the curve they face intervention by the
FDIC or other regulatory agencies because some part of their assets and
required reserves might vanish. These small institutions, unlike the big
ones that caused the problem, don't have agreements with the Federal
government to prop them up regardless of whether the bonds were real or
worthless.
Most
of the small banks and credit unions are carrying these assets at cost,
which is to say 100 cents on the dollar when in fact it is doubtful
they are worth even half that amount. The question is whether the bank
or credit union is at risk and what they can do about it. There are
several claims mechanisms that can employed for the the bank that funds
itself facing a write-off of catastrophic or damaging proportions.
The
plain fact is that nearly everyone in government and law enforcement
considers what happens to small banks to be "collateral damage,"
unworthy of any effort to assist these institutions even though the
government was complicit in the fraud that has resulted in jury
verdicts, settlements, fines and sanctions totaling into the hundreds of
billions of dollars.
This
is a ticking time bomb for many institutions that put their money into
higher yielding MBS instruments believing they were about as safe as US
Treasury bonds. They were wrong but because of any fault of anyone at
the bank. They were lied to by experts who covered their lies with false
promises of insurance, hedges and guarantees.
Those
small institutions who have opted to take the bank public, may face
even worse problems with the SEC and shareholders if they don't report
properly on the balance sheet as it is effected by the downgrade of MBS
securities. The problem is that most auditing firms are not familiar
with the actual facts behind these securities and are likely a this
point to disclaim any responsibility for the accounting that produces
the financial statements of the bank.
I
have seen this play out before. The big investment banks are going to
throw the small institutions under the bus and call it unavoidable
damage that isn't their problem. despite the hard-headed insistence on
autonomy and devotion to customer service at each bank, considerable
thought should be given to banding together into associations that are
not controlled by regional banks are are part of the problem and will
most likely block any solution. Traditional community bank associations
and traditional credit unions might not be the best place to go if you
are looking to a real solution.
Community
Banks and Credit Unions MUST protect themselves and make claims as fast
as possible to stay ahead of the curve. They must be proactive in
getting a credible report that will stand up in court, if necessary, and
make claims for the balance. Current suits by investors are producing
large returns for the lawyers and poor returns to the investors. Our
entire team stands ready to assist small institutions achieve parity and
restitution.
FOR
MORE INFORMATION OR TO SCHEDULE CONSULTATIONS BETWEEN NEIL GARFIELD AND
THE BANK OFFICERS (WITH THE BANK'S LAWYER) ON THE LINE, EXECUTIVES FOR
SMALL COMMUNITY BANKS AND CREDIT UNIONS SHOULD CALL OUR TALLAHASSEE
NUMBER 850-765-1236 or OUR WEST COAST NUMBER AT 520-405-1688.
BLK | Thu, Nov 14
BlackRock with ETF push to smaller banks • The roughly 7K regional and
community banks in the U.S. have securities portfolios totaling $1.5T,
the majority of which is in MBS, putting them at a particularly high
interest rate risk, and on the screens of regulators who would like to
see banks diversify their holdings. • "This is going to be a
multiple-year trend and dialogue," says BlackRock's (BLK) Jared Murphy
who is overseeing the iSharesBonds ETFs campaign. • The funds come with
an expense ratio of 0.1% and the holdings are designed to limit interest
rate risk. BlackRock scored its first big sale in Q3 when a west coast
regional invested $100M in one of the funds. • At issue are years of
bank habits - when they want to reduce mortgage exposure, they typically
turn to Treasurys. For more credit exposure, they habitually turn to
municipal bonds. "Community bankers feel like they're going to be the
last in the food chain to know if there are any problems with a
corporate issuer," says a community bank consultant.
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