The past few days have been marked by annual earnings reports from the major banks. Two important themes:
- The Dodd-Frank bill has changed the financial sector. Guest-blogging over at Felix Salmon's place, Barbara Kiviat notes that consumer banks are making products more transparent with up-front, fee-for-service pricing rather than relying on penalty fees. Goldman Sachs, meanwhile, reported less income than expected after cutting profits in trading lines and shuttering one proprietary-trading unit altogether. The firm also noted that it had bolstered its capital reserves in anticipation of the Basel III capital rules. It is still way too early to tell if the Dodd-Frank law will be a success or even meaningful, but early returns suggest that banks are migrating away from risky and pernicious business practices and toward safer ones. Ideally, this will continue apace with urgency provided by active regulators and stringent new rules.
- Losses from the Mortgage Mess Start to Add Up. Bank analysts at J.P. Morgan are suggesting that as much as $120 billion in failing mortgage loans may need to be brought back to big banks from their investors due to burgeoning problems with the documentation of mortgage loans and the securities they were packaged into. I wrote about this problem last week; the analysts say it could be "the biggest issue facing banks." Meanwhile, Barclay Capital came out with an estimate of $22 billion in total cost to banks. I'll be writing more about this tomorrow, but it's clear, if only from the disparity, that we still don't have an idea of how much this problem will cost the financial sector. Those numbers don't include the legal cost of fraud prosecutions and civil suits from borrowers and investors, either.
While it's nice to see that the Dodd-Frank bill is starting to achieve at least some of what was promised, newly identified problems in the financial sector remind us -- in case anyone had forgotten -- that serious challenges still remain.
-- Tim Fernholz
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