Fannie Mae & Freddie Mac – Bailout Lawsuit: Will Banks Ever Get a Fair Hearing Anywhere?

Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, discusses Bloomberg’s article on lawsuits filed against the government for the expropriation of property rights without just compensation in the diversion of the profits of Fannie Mae and Freddie Mac to the government.

Fannie Mae & Freddie Mac – Bailout Lawsuit: The Bloomberg Effect

Bloomberg News published a comment recentlyentitled “Bailout Lawsuit.” The article had nothing to do with any bailout. It dealt with lawsuits filed against the government for the expropriation of property rights without just compensation in the diversion of the profits of Fannie Mae and Freddie Mac to the government.

Yesterday the “news” organization misquoted a prominent analyst’s remarks concerning the impact of low interest rates on bank profits. The analyst said that continued low interest rates would cause banks to lose $5 billion in future profits – i.e., there would be an opportunity lost. Bloomberg headlined that the analyst said that banks would lose $5 billion in profits due to low rates – i.e., an actual loss. Plus, the “prestigious guest” being interviewed said that the analyst was right, bank earnings were in trouble.

Bloomberg is one of many publications that constantly twists the news to sell the argument that banks are bad. It has been doing this for years. Michael Bloomberg, the owner of Bloomberg, lost more jobs in banking when he was mayor of New York City than perhaps any other mayor in the history of the entity.

Negative Psychology

My point is that there seems to be a felt need on the part of observers of the American banking industry to find reasons as to why the United States banking industry is as Senator Bernie Sanders (D; VT) describes it. Investors have bought into the process. Consider the following:

  • The decline in oil prices is perceived to be good for America; but it is viewed as a terrible problem for banks due to potential loan losses. Forgotten is the fact that banks have a much larger consumer deposit and lending business than oil and gas position.
  • The record sales of automobiles in the United States is thought to be very good for America — not so for banks. Banks are thought to be about to absorb large loan losses on sub-prime auto lending. Forgotten is the fact that the auto loan portfolios at banks will be providing years of recurring revenue streams that are very profitable.
  • Rising home prices are believed to be good for America – not so for banks. Banks are believed to be dealing with another residential real estate bubble that will generate loan losses. The fact that the rise in home prices will resurrect home equity lending, a very large consumer loan business, for the banks is ignored.
  • The maintenance of low interest rates is believed to be good for America. It is believed to be very bad for banks. Not considered is the fact that interest rates peaked in 2006 and have hit record lows since then. This has not impeded banks from producing record earnings.
  • The recent stock market rally is perceived to be good for America but not enough to help banks.
  • The expectation that bank regulation is to tighten further is believed to be good for America. It is not believed that this tighter regulation has positively impacted banks in any way. It is perceived that
    • Banks are just as vulnerable to failure today as they were in 2008; and that
    • The only impact that regulation has on banks is to lower their return on investment.
  • The proliferation of private lawsuits against banks is perceived as being good for America. It is not considered that these lawsuits are impeding banks from providing their historic services to Americans.

Not Considered

The attacks on the industry have not considered these points:

  • In 2015
    • Bank revenues reached new all-time records
    • Bank loan losses were well below average for the industry
    • Bank net interest margins squeaked out a rise
    • Bank profits were an all-time record
  • In 2016
    • Revenues are likely to be flat
    • Loan losses will rise but not to the averages of the past
    • Net interest margins are expected to rise
    • Net interest income is expected to go up
    • Capital market revenues will decline
    • Bank profits could be the second highest ever recorded.

Also not considered is that the excessive regulation of the industry has severely negatively impacted capitalism in America:

  • A government agency sets or tries to set interest rates
  • A government agency sets money flows
  • A government agency directs the use of funds through the banking system
  • A government agency has meaningfully impeded fund flows in the relatively free capital markets.

Bank Stocks

The impact on bank stocks from the constant flow of negative news has been meaningful. Banks have plunged in value since July of last year. The S&P bank index was down just under 20% at the beginning of this week.

This leads to another set of issues that are not considered:

  • Banking is primarily a domestic industry that has withstood foreign competition
  • More than 99% of the bank stock in the country is owned directly or indirectly through funds by the American people.
  • The banking industry employs over 2 million Americans.
  • The banking industry lends $8 trillion to Americans.

Thus the continuous attacks by the politicians, press and others on this industry is a clear attack on the American people who own, work at, or borrow from the American banking industry – which is just about everyone.

It has also caused the mis-pricing of bank stocks. They are very, very cheap.

Fannie Mae - Bailout Lawsuit: Will Banks Ever Get a Fair Hearing Anywhere?
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