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Financial News: Should We Trust Bailed-Out Banks?


Plus, what's keeping mortgage rates so high?

This column highlights the most interesting and useful financial news from around the Web.

Link: Do Bailed-Out Banks Remain Bad, While Good Banks Behave Better?
"The trauma and cost of a public rescue must surely teach the bank management concerned to behave in a more prudent manner, right?
Wrong, according to a recent Bank of International Settlements paper.

"Authors Michael Brei and Blaise Gadanecz have asked a simple enough question: what happens to a bank's lending profile, in terms of risk, following a bailout? To try and answer this, the authors looked at 87 bank holding companies in 14 countries, covering a cool $54 trillion of assets, representing some 52% of the worldwide banking industry. They compared the syndicated loan book, as a proxy for willingness to take on risk, before and after a bailout.

"While multiple factors are obviously at play when a bank gets bailed out (such as political pressure to keep corporate customers afloat), the research here suggests that when it comes to risk, bad banks largely carry on regardless."

Link: An Enigma in the Mortgage Market That Elevates Rates
"Imagine a 30-year mortgage on which you only pay 2.8% in interest a year.

"Such a mortgage could already exist, but something in the banking system is holding it back. And right now, few agree on what that 'something' is.

"Getting to the bottom of this enigma could help determine whether mortgage lenders are dysfunctional, greedy or simply trying to do their job in a sensible way.

"Wells Fargo (WFC) is currently the nation's biggest mortgage lender, originating 31% of all mortgages in the 12 months through the end of June. In a conference call with analysts in July, the bank's executives seemed unfazed about the challenge of meeting mounting customer demand."

Link: 4 Housing Stocks Goldman Likes
"Goldman Sachs (GS) weighed in with a bullish note on the housing sector on Tuesday morning and pointed out its top four picks for clients given what the firm called the sector's 'long list of positives.'

"'Our favorite stocks to take advantage of the improving housing market are MDC (MDC), KB Home (KBH), PulteGroup (PHM), and Toll Brothers (TOL).'"

Link: The Fed Is Worried That You Might Be Worried About Uncertainty
"When you are in the business of buying and selling volatility you can get sort of cynical about whether volatility is a thing, and whether it is appropriate to buy and sell it. We talked earlier today about the fact that if you have a client who doesn't care about something valuable, then you should buy as much of it from him as you can; you can guess where I learned that. It is superficially persuasive to tell a customer "you don't get any benefit from the volatility of your stock so you should just sell it to us," but ultimately you can't eat volatility. You eat buying low and selling high, and so you rigorously translate the customer's sale of volatility into buying low (from the customer) and selling high (to the customer). Science!"

Link: Expectations and Asset Prices: Keynes Meets Hayek
"The financial crisis has vividly put into question the alignment of asset prices and fundamental values. For an example of this, look no further than at the current decision made by the ECB president, Mario Draghi, to launch a courageous programme (dubbed Outright Monetary Transactions) to prop up the prices of short-term bonds issued by EU member states that ask for the help of the European stability funds (EFSF and ESM). The thrust of the argument is fairly simple: in the current market conditions, peripheral EU states find it hard to fund themselves in the market, and are forced to pay dearly to convince investors to buy their bonds. This impairs the monetary policy transmission mechanism, which relies on the interest rate set by the ECB. Thus, allowing the ECB to act as a 'buyer of last resort' in the secondary market ensures that bond prices don't spike, hopefully taming interest rates and contributing to restoring the workings of EU monetary policy."
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