Thursday, February 28, 2013

We Bail JPMorgan Out, They Accrue Risk

What's JPMorgan and those Too Big To Fail/Jail banks doing with all of that money the government and FED has shoved at them? Finding entrepreneurs and new business ventures? Nah. They are just acquiring assets and getting bigger and bigger. Forget the CDS 'whale' trading. JPMorgan recently agreed to purchase MetLife's $70 billion mortgage and servicing portfolio. This will not spur the economy. This is just a preferred, super-sized bank using its top capital standing to acquire another asset block. The behemoth banks get to help the consumer by refinancing those mortgages on Met's block (in a weird twist, Met didn't refinance loans), but we know that with ZIRP in action, JPMorgan refinances that block at a sticky mortgage number and still collect their vig. The big get bigger, and this only makes JPMorgan a riskier ward of the state and more sensitive to interest rate changes. A treasury rate dislocation is going to hit them even harder now. Wait, they can just write CDS on themselves and count the rise in that as revenue/profits like Citigroup, stupid me to think JPMorgan is not special.

Lesson from JPMorgan: We need to break up the big banks.

Why did Met sell the block? Official word is they wanted to sell it and remove some features that made them a bank holding company, subject to different rules. It is more the case of a firm stepping away from its core competencies and failing. Met was not happy just purchasing mortgage backed securities for their asset portfolio and collecting the 5-8% that they offered. Met wanted to cut out the middleman and make the loans themselves, playing the arbitrage game that Met could spend less on making the loans than the commission fees they paid the MBS salesmen and have greater underwriting control over the loans. Met's not alone. The Hartford did this as well with commercial loans, and has taken a bath. Now that times are tough, Met does not have the decades of expertise to handle the downturn. How bad did Met screw up? They also sold their reverse mortgage portfolio. With how rigged those were against the elderly consumers, I can't believe a company could screw those up. Met knew nothing about mortgage lending and servicing and really only got going in originating after the housing slump began. This move cost over 4000 good paying jobs. Last to the party doesn't sniff champagne, only vomit.

Lesson from Met: do not move away from core competencies. If you're the biggest life insurer in America, stick to that. Snoopy abides.

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