YouSaid · the spoken record

James Gorman

lines on the record: 82
first: 2022-04-18
most recent: 2022-04-18
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“But imagine some kid who's trying to manage the interest rate risk of a mortgage lender today the way markets are moving around every day. What do you do? And the answer is they're no longer providing 30-day rate locks for consumers. They'll tell you what the rate is when you close a loan. So that's a big change from two years ago, where everybody was saying, Oh, you're fine, here's the rate lock for the next 45 days. Okay, because there was no upside risk. Rates were going down, right? That's changed.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“And even if they don't sell it, they're going to show the loss. But as time goes by, the loss is going to get bigger. So I think banks are going to have a tough time. Let's imagine the Fed gets Fed funds up to 3%. Guess what? Those mortgage-backed securities are going to be underwater. It's going to be like the 1980s with S&Ls when interest rates went up really quick and they couldn't reprice their loans. It's the same problem. So I would be really watching for this over the next couple quarters. There are banks, insurance companies, credit unions. The smaller guys don't have the sophistication and the resources to hedge interest rate risk. And a lot of people kind of went to sleep over the last couple of years. They said, wow, rates are going to be low forever. We don't have to hedge. Well, yeah, you did have to hedge.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Well, almost everybody made money in mortgages over the past couple of years, except for Brian Moynihan at Bank America, of course, who managed to have a down year in 2020 when everybody else was experiencing record volumes. I don't know how you do that. There are some embedded losses on the books of banks because they kept some of those loans that were made during 2020, 2021. So those loans are underwater. And the mortgage-backed securities that banks buy for liquidity for their treasury. Again, those securities are deep underwater. They're trading at 90 or below. So I think what you're going to see is smaller banks are going to have some pain. They're going to have what we call other comprehensive income where they're going to take a loss on their assets available for sale because they have to mark them every quarter. They have to do a mark-to-market.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“So, when it comes to mortgage back securities, the Fed is kind of screwed. What about commercial banks? I noticed today that Wells Fargo, they had a 33% year-of-a-year decrease in their mortgage lending. Has that been a profitable business since the great financial crisis? Has it been profitable over the two years when there have been no defaults? And what is your outlook on it going forward?”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Well, it's called extension risk. It's traditionally been one of the biggest risks that financial institutions face in terms of selecting assets for their balance sheet. In this case, the Fed has taken the risk, and they didn't understand that at the time. They understand it now. Because I think from a policy perspective, their hands are tied. I cannot imagine that they're going to try and stuff those low coupon securities down the throat of the dealer community just to hit their targets.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“It's a bad optics to have the Fed trading and solvent. And that's where we're headed. Because if they decide to try and sell any of this stuff, they have a big problem. What I suggested, by the way, Jack, is that they should just pick up the phone and call the Bank of Japan and see if the Bank of Japan will exchange some of these gnarly mortgage-backed securities they own for Treasury paper. Because the super national buyers like Bank of China, Bank of Japan, they like mortgage-backed securities. They don't like prepayments. Think about it. If you pay 104 for a Ginnie May 2 a year ago and you start getting prepayments at par, that hurts. You're losing four points every time you get a prepayment.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“They have a little contra account off to the side. It's much like the way banks set aside reserves for future losses, so the Fed will have to earn their way out of those losses before they're allowed to remit any profits to Congress and to the Treasury. That is going to be a big political problem for the central bank.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Well, number one, because our beloved public servants in Congress confiscated all their capital. And they set a cap on the Fed's capital at $40 billion. It's nothing. So it is true that central banks can be indifferent to loss in an economic sense, but they cannot be indifferent to the optics of being insolvent. People can read a balance sheet, an income statement. So even though yes, they can monetize the cost and basically get rid of it over time. They have that capacity. It doesn't look good. So the arrangement they came up with is when the Fed takes a loss, they don't subtract the number directly from capital.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“You would want to hit. If the Fed goes ahead and tries to sell this paper into liquid market, they're going to take enormous losses. $10, maybe 12-point loss on the security. When that happens, guess what? The Fed can't make remittances to the Treasury anymore. They have to wait until they earn their way out of that hole before they can start sending money to the Treasury again. The politicians will notice that. So Jay Powell has a big political problem. But more importantly, I don't think they can sell the bonds to your question. I don't think there's a bid out there for the kind of size we're talking about. So since that paper is not going to prepay, in other words, people at a Gini May 2 are not going to refinance their mortgage. They're 200 basis points out of the money now. They're going to keep that bond forever. The Fed could end up having to keep these securities for 12, 15 years.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Well, today, if I were to do that mortgage, it would be a four and a half, maybe a four and three quarter, and it would go into a Fannie Mae five and a half security. Okay, that's a big change in a year. So now that Fannie Mae $2.5, and there are twos, and there's even a few one and a half percent mortgage-backed securities out there, are trading in the low 90s and the high 80s. The on-the-run paper, what people are selling mortgages into today are so far away from those securities in terms of the coupon that nobody's making a market in the old paper. So when the Fed says, well, we may have to sell some bonds next year and you see an enormous commentary among the analyst community about this. My question is, who are you going to sell it to? There is no bid out there for Ginnie May Toos. Not a bid.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“No, no, they don't. The quick tutorial on mortgage-backed securities. If you go back 30, 40 years on Wall Street, many of the financial crises going back to Kidder Peabody, long-term capital management, all of the rest of these events came about because investors bought a piece of paper in one interest rate environment and a piece of paper was supposed to have an average life of three or four years. This is very similar to what you saw with the Fed when the Fed pushed interest rates down a year and a half, two years ago. Almost everybody in the mortgage market was selling those new mortgages they were giving people like me. I did a 3% jumbo a year ago into”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Set up for quick rapid changes in rates. I mean, look at the past month. We have had volatility in all of these markets. We have the 10-year treasury bond moving 10, 15 percent in terms of yield in a day. How do you hedge a business? How do you hedge a mortgage company if you have to deal with this kind of change every day? So unfortunately quantitative easing may have bought us some time with COVID and credit problems related to COVID, but it also gave us enormous volatility in the markets. And that's what people are dealing with today.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“In terms of demand for credit, trying to pull that interest rate up. So they got to be careful because if you get fed funds up to 2, 2.5% by the end of this year, early next year, that may be as far as you can go without causing a liquidity crisis in the system. And again, I think the Fed has to be very careful telling people in Washington that they can manage this process when I don't think they can. I work in the world for secured finance. The firm I work with in New York runs to be announced transactions for mortgage lenders. This is how people hedge interest rates, by the way. It's the second largest market in the world after treasuries. And we do a lot of other investment banking and financing activities. So this is where I live every day. And if the Fed gets this wrong again, Jack, we're going to have a problem. You know, we really do. This system is very fragile and it is not.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“I'm with Jim Bullard, who's been very critical of the Federal Open Market Committee. I think they should have tapered purchases of securities earlier. This policy was largely speculative. The Fed didn't know what to do. The traditional mechanism of dropping the target on Fed funds and then getting more bank lending didn't work. So going back to 2009, 2010, they went back to buying securities because they thought this was stimulus and the media accepts this explanation without any questions. It is striking to me how little critical comment and analysis we get out of the media except for you, of course, Jack. But I would have slowed things down. And even today, I would have focus on reducing the size of the balance sheet. I wouldn't be terribly concerned about the target for Fed funds. You know, you don't have a lot of pull right now.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Reserve board ought to resign based on their performance on inflation. You know, we have to have accountability again in the system if we're going to get things like inflation and economic growth under some kind of control”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Had a lot of pent up demand for housing, first off. And then when you drive interest rates down, so people were getting two and a half percent mortgages. Obviously, they went out and bought a house, but you had a lot of speculative activity too. You had institutional investors buying homes as investments. You had a big bid for a lot of commercial properties that are outside of urban areas. But the trouble is multifamily housing in big cities is in trouble. Banks hold those loans and the landlords are in a lot of trouble because the politicians never thought about taking care of the landlord. They were too busy taking care of the consumers. You know, they never even thought about it. I doubt most members of Congress could even discuss this with you, Jack. So, you know, that's kind of where we are. We are in the age of the dilettante and the people who are supposed to be taking us in Washington don't have a clue. I think that most of the members of the federal...”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“The house across the street from me just went for 30% more than I paid for the house I'm sitting in today that I bought a year ago. Okay, that shows you that there's demand for housing out there that has nothing to do with interest rates. A lot of these are cash transactions. People are just buying the house. So there's an awful lot of cash in the hands of consumers and business. And I would love to be able to tell you that the banks had a part in it, but they didn't. Because commercial lending was actually pretty weak during 2020-21. It started to turn up a bit at the end of last year like credit cards. Credit cards started to go back up again third quarter last year. But before that, they were falling. People were paying off debt. So, you know, your question is, how did we get this inflation if bank balances, loan balances were going down? And the answer is that this society, I think.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“No, that was not part of the process this time, and that's a very important question you asked, Jack, because traditionally, the banks were transmission belts for monetary policy. So if the Fed dropped interest rates, the banks were supposed to make lots of loans, you got consumption, demand pull inflation, and all of a sudden prices were galloping. That's the way things were 30, 40 years ago when we were a lot younger. You were probably still in the womb. you have a situation where the inflation is coming because of the surfit of liquidity out there, not necessarily from banks, though. You have inflation in terms of people having the cash to just go out and buy a home.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“But it's going to happen. And then the Treasury market too has to look for buyers because the Fed is not standing there basically monetizing half of the federal deficit every year. That's a big issue for policymakers in Washington. And you know what? They don't want to talk about it. The last thing Joe Biden wants to talk about right now is inflation or the Fed or housing prices because none of it is good.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Reserve that was created disappear. So as the Fed stops reinvesting the flow of prepayments on the mortgage bonds, the redemptions on the treasury bonds, the balance sheet of the banks is going to fall. But interestingly, it's not dollar for dollar, it's $2 for every dollar. So a dollar is the banks lose a deposit. It disappears because the investor bought the Treasury bond. Instead of having the Fed buy the bond, the customer bought the bond. But the other part of this Jack that's very significant is that the Fed is no longer a buyer of these securities. So the street, the big primary dealers have to come up and put capital to work to buy bonds and sell those bonds to investors. And this is going to have a big impact on the housing market. I think you're going to see 6% mortgages in this country by the end of June, which may sound extraordinary.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Yes, the mechanics of this are fascinating and also I think indicate just how reckless and speculative monetary policy has been in the US when the Fed bought a bond what they did was they called up Goldman Sachs or J.P. Morgan and I said hey I want to buy a bond so Morgan sells them the bond the Fed pays them and that creates a reserve account at the Fed The Guys at JP Morgan like reserves at the Fed because there's no market risk It doesn't go up and down. It's the same dollar every day. When the Fed reverses this process and they're no longer buying securities, what happens is the Treasury pays the Fed when the security redeems, but the Fed doesn't buy a new bond. Now, Treasury is running a deficit. They have to go out and refinance that bond. So they sell that bond to an investor, the bank deposit that was created.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Chris, over the past two years, deposits in JPMorgan, Wells Fargo, the U.S. banking system exploded higher. How much of that has to do with quantitative easing? What were the effects of it? And now that quantitative tightening is forthcoming, are we going to see that in reverse?”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Assets as banks get smaller, they have more pricing power. If you look at the bottom of Peer Group 1, which is the biggest 130 banks in the country, basically everybody above 10 billion in total assets, the bottom half of that distribution have a gross yield that's a 0.5 or 2 points higher than JP Borgen. That's what the little banks, they have to fight for deposits, but they have much more pricing power under loans.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Correct. So, you know, City doesn't have a wealth management business. They don't have the mortgage business. They got out a couple years ago. They sold the whole book. So there's not much left. It's a two-legged stool. And if you compare them with, say, Morgan Stanley, which has now got a decent sized bank, it's about a half trillion dollars in deposits. And then they have a nice investment in wealth management business, so three legs of a stool. Gorman has done a very good job steering Morgan Stanley, but you'll notice that this quarter the numbers are off compared with a year ago. And that's because we're coming out of a period of extraordinary Fed activity. And now we've got to go into a more normal and frankly more boring environment where banks are still going to have to compete. You asked a question that's very important, which is why can't they get their yield on their loan book up? Well, for the top banks, it's hard because they're looking for big loans. And there's intense competition for those.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“So You just made an interesting point about cities. City is different from the other top four banks. Think about the top five. You include U.S. Bank Corp. So U.S. Bank, Bank of America are pretty domestic lenders. They have some capital markets activity. Bank America has Merrill Lynch, right? Big wealth manager. City and JP Morgan have much more of a capital markets business. And in City, interestingly enough, has a credit card business that's kind of subprime. It's not like the other banks. They take a lot more risk. They're a lot closer to Capital One if you wanted to compare the businesses. That's really the good comp for city when you talk about consumer finance. So City is able to make more money than the other banks because the rate they charge on credit cards is high teens, low 20s, sometimes higher. So that has always helped city. The rest of the business at city.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“And why are low yields still pretty low? I'm just looking at, so we're recording on Thursday, April 14th, a lot of banks just reported their earnings. I'm looking at citibanks' quarterly report. And the gross loan yield of, let's see 2021 first quarter 5.44%. Now is 5.46% a year later. So two basis points. How come with all these rate hikes and all this tightness priced into the market on a relative basis? How come Lenials are still so low?”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Obviously, not paying their rent or paying their mortgage payments. They paid off their credit cards. Credit cards for U.S. banks fell by almost 20%. The outstanding balances, right? That's bad. That's how banks make money. So when people weren't using credit during the past couple of years, it actually made it tougher for the banks. And they had to lien on the capital market side, investment banking. The ones who were lucky have a big wealth management business, which is pretty steady. But the banking side of the business has been tough because it's been very competitive to find good loans that actually make sense, make money.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Quantitative easing because they would have destroyed the banks. If you had pushed the earning assets down much further, you really would have noticed. And that would have disturbed the narrative on Wall Street, which says everything is fine. So now what I tell people is that we're reverting back to the mean. Banks are going to struggle to get better prices for their loans. The average gross yield before you subtract funding costs and administrative costs for a big bank is inside of 4% today. 4% is not much. So you pay 25 basis points for the cost of funds. You pay about a point and a half for selling costs and administrative expenses. That's what's left. And so for a lot of banks, I think, you know, it's great to have cheap money, but they have struggled to try and make loans that make sense. So, for example, during COVID, when people got a lot of help from the government and they”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“What the Fed did basically was they pushed the cost of funds for the banking industry almost down to nothing in the third quarter last year we hit a record low which was 11 basis points on $22 trillion worth of bank assets it's nothing it's a rounding error so by pushing the cost of money down to zero for the banks they were able to preserve what we call net interest margin in other words what the banks make on loans less what they pay for money, deposits bonds everything you put all those numbers together and it tells you what their cost of funds was the banks have tried to maintain profitability and earnings with a huge amount of volatility the Fed adds all this cash to the market they grow in size but at the same time the money they were making on their loans was falling too so by the time we got to last year the Fed almost had to stop”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“It's big volatility in corporate earnings reporting and the presentation of that earnings. And now I think we're going to normalize kind of around 2019 levels of revenue and earnings, which is not what people expect. You know, the street has a very happy narrative when it comes to stock prices. But when you saw U.S. bank get to a two-time book, that told you that we were kind of in a very special time. JP Morgan got the one and three-quarter times book, which is pretty good for them. They're a big mainstream bank. You know, the best performer in the country, by the way, I bet you can't guess who it is, is American Express. The little bank inside American Express had driven that business to six and a half times book value. But even that example doesn't touch some of the crypto banks last year, all of which have come off dramatically, by the way.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Up home prices, they pushed up the value of all types of real estate. In fact, the only asset class in the real estate world that didn't perform well was multifamily housing, rentals, and that's because you had a moratorium on people paying their rent for eighteen months. If you're a landlord, that hurts. You know, they don't just have cash laying around waiting for COVID. So the banks look great. Their revenues were boosted. You had a lot of capital markets activity, but you didn't have any credit expenses. In fact, credit was a negative in terms of the bank. They didn't have to put aside money for credit loss. So it made them look better. Now we're going back to normal. And as you see with JP Morgan, credit is now an expense again after basically a year and a half where they were taking money out of reserves to make their earnings look better. So you have two years of big adjustment.”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT
“Well, if you're an investor and you're trying to think about revenue and earnings going forward, you start with 2019 as your baseline. You really can't use 20 and 21 because there were so many extraordinary items in the mix and you got to separate all those out. So you start with that and you say, okay, how much growth are we going to have in the U.S. economy? Maybe if we're lucky, a couple of percentage points, probably no more than that. So I wouldn't look for a really torid growth in any of the banks. If anything, their balance sheets will get smaller, their returns will improve as they shrink, and they really do need to shrink about 10 to 15 percent on average. Most banks to kind of get it back to a size that makes sense economically and financially. The key driver for bank valuations is credit. So when the Fed came in in April 2020 to save the world and basically started buying both Treasury bonds and mortgage-backed securities to add liquidity to the system, they pushed”
2022-04-18 · Forward Guidance · Think Rising Rates Are Good For Banks? Think Again! · IDENTIFIED FROM THE TRANSCRIPT