WORLD> America
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WORLD> America
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Risk-taking is back for banks 1 year after crisis
(Agencies)
Updated: 2009-09-14 15:50 Meanwhile, Bank of America and Wells Fargo today originate 41 percent of all home loans that are backed by Fannie Mae and Freddie Mac, according to Inside Mortgage Finance. The banks made $284 billion in such loans in the first half of this year, up from $124 billion during the same period last year. "The big banks now are more powerful than before," said Johnson, now a professor at the Massachusetts Institute of Technology's Sloan School of Management. "Their market share has grown and they have a lot of clout in Washington." Wall Street's recovery is also being aided by a stock-market rally that has driven the S&P 500 index up nearly 54 percent since March 9, when it hit a 12-year low. Despite the return to profitability, these aren't the high-octane days from before the crisis. To qualify for government backing, the biggest Wall Street firms are no longer allowed to supercharge their returns by borrowing up to 30 times the value of their assets to place bets on stocks, bonds and other investments. Businesses supported by Wall Street bankers and traders say they've also noticed changes. Namely, their customers aren't spending as much on food, drinks and entertainment as they did during the boom years. At Fraunces Tavern, a high-end bar just around the corner from the New York Stock Exchange, the Wall Street workers who used to drink $25 glasses of port are scarce these days. "Now we're doing happy hours," says Damon Testaverde, one of the owners of Fraunces Tavern. "We never did that. There's just less bodies around." But one thing fundamental to Wall Street hasn't changed: Big banks and their traders are still finding creative -- some say speculative -- ways to profit. They're still packaging risky mortgages into securities and selling them to investors, who can earn higher returns by purchasing the securities tied to the riskiest mortgages. That was the practice that helped inflate the real estate bubble and eventually spread financial pain around the globe. In a way, the government has emboldened banks to keep selling risky securities: Since the crisis erupted, federal emergency programs have helped keep the banks from failing. But now, as the financial system recovers, the government plans to phase out these backstops -- leaving banks more vulnerable to big bets that go bad. One investment gaining popularity is a direct descendant of the mortgage-backed securities that devastated many banks last year. To get some lesser performing assets off their books, banks are taking slices of bonds made up of high-risk mortgage securities and pooling them with slices of bonds comprised of low-risk mortgage securities. With the blessing of debt ratings agencies, banks are then selling this class of bonds as a low-risk investment. The market for these products has hit $30 billion, according to Morgan Stanley. "It may be unpleasant to hear that the traders are riding high," said Walter Bailey, chief executive of boutique merchant banking firm EpiGroup. "But, hey, it's a pay-for-performance thing, and they're performing like mad." And that means the return of another Wall Street mainstay: Lavish compensation. After 10 of the largest banks received a $250 billion lifeline from the government last fall, some lawmakers were outraged that employees were being paid seven-figure salaries even though their companies nearly collapsed. A handful of top executives, including Citigroup CEO Vikram Pandit, have agreed to accept pay of just $1 this year. But the compensation of most high-performing traders hasn't changed. Goldman spent $6.6 billion in the second quarter on pay and benefits, 34 percent more than two years ago. And Citigroup, now one-third owned by the government after taking $45 billion in federal money, owes a star energy trader $100 million. The CEO of Goldman, Lloyd Blankfein, said at a banking conference in Germany last week that excessive banker pay works "against the public interest." He said bonuses are important to attract and retain top talent, but "misapplied, they can also encourage excess." The Obama administration has proposed measures to diminish the risk posed by large banks. They include forcing banks to hold more capital to cover losses and trying to increase the transparency of markets in which banks trade the most complex -- and potentially risky -- financial products. One major component of the Obama plan -- creating an agency to oversee the marketing of financial products to consumers -- will be difficult to pass in Congress. Industry lobbying against it and other proposed financial rules has been fierce. Lobbyists for hedge funds, the large investment pools that cater to the rich, have been able to fend off proposals that would require them to register with the SEC and regularly disclose their holdings. And they, too, are profitable again after a dismal 2008. The 1,000 largest hedge funds in Morningstar's database posted average returns of 11.9 percent through July. In 2008, those same funds lost 22 percent on average. "Have there been changes around the edges?" says Timothy Brog, portfolio manager of New York-based hedge fund Locksmith Capital. "Absolutely. Have their been systematic changes? Absolutely not."
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