Banks brace for more troubles

[dkf]

Exacerbating the European problem are the lower financial cushions held by many banks. Most notably, regulators there did not require banks to raise large amounts of capital as U.S. regulators required after conducting tough bank stress tests in 2009.

"In the U.S., even though the housing market remains a problem, there's a general feeling the core of the banking system was restored to health by mid-2009," Veron said. "The Europeans never found the nerve to address their banking situation."

U.S. officials have been worried about the potentially toxic combination of soaring sovereign debt from some key European nations and exposure to it by banks there that have not been required to buttress their finances enough.

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Bank of America might have to raise more capital, but it doesn't have the problems of some European banks, Ely said. He noted reports that an unnamed European bank had to borrow $500 million from the European Central Bank to handle its short-term cash flow, the largest amount any bank there had sought in two years.

"It spooked a lot of people," Ely said. "Some of these European banks are having some serious funding problems."

Officials from the Treasury, the Federal Reserve and other regulatory agencies are concerned that U.S. branches of European banks will try to borrow money here and ship it back to Europe, Ely said. And there is the broader worry of the impact of European banking problems on the interconnected global financial system.

http://www.latimes.com/business/la-fi-banking-turmoil-20110820,0,7383763.story

[NightWatcher]

1. Semi-unrelated tidbit: when the banks shit the bed here soon, they won't get bailed out again

[dkf]

2. Bank of America's back-door TARP

Taxpayer-owned Fannie Mae just bought the servicing rights to a bunch of bad loans from the struggling Bank of America. Where does it end?
By Abigail Field, contributor

FORTUNE -- Taxpayers may not realize it, but they just bailed out Bank of America again, this time to the tune of more than a half billion dollars.
The Charlotte, NC-based bank was one of the biggest recipients of bailout funds during the financial crisis. But Bank of America (BAC) continues to face deep problems related to its troubled mortgage portfolio and investors have battered the stock, which has plunged over 40% so far this year. That's escalated concerns that the bank may need to raise more capital. Yves Smith at Naked Capitalism has even started a BofA death watch.

But apparently the federal government is determined to resurrect BofA: the Wall Street Journal reports the feds have just used Fannie Mae, which is controlled by the U.S. government, to infuse BofA with $500 million and ease one of the bank's biggest headaches.

According to the WSJ, Fannie Mae spent $500 million to buy the servicing rights to a big chunk of the "seven million loans still causing the most problems." Although the $500 million is a paper loss to BofA, in that the rights were "originally worth more," it looks like BofA is still getting a good deal because the portfolio's "value is expected to deteriorate further."

In fact, the deal is worth much more than $500 million to BofA, because getting rid of those servicing rights lifts a huge cost burden off BofA's shoulders. And if securitized loans are involved, which they most likely are, the sale also limits the BofA's potential liability to investors for its current servicing violations. Finally, the $500 million is surely more than the servicing rights are worth in an arms-length transaction. How do we know? Beyond the comment that the loans are expected to "deteriorate further," the goal of the intervention can only be to fix Bank of America's capital structure, which is easier for the government to do if it overpays for the rights.

http://finance.fortune.cnn.com/2011/08/10/bank-of-americas-back-door-tarp/