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Auto Loan Delinquency Increases

It shouldn’t come as a surprise but many are still concerned about the increase in auto loan delinquency during the third quarter of this year. More Americans were late in their loan repayment as job cuts and lay-offs continued. The auto delinquency rate is determined by the amount of people who fall behind 60 days or more on their repayments.

It edged up to 0.81 percent in the July-September quarter. This increase reflects both seasonal trends and the weak economy. It’s actually quite common for late payments to occur during this period because borrowers focus on other expenses. Many of them get back on track during the first and second quarters. But amid these worrying figures, there are some bright spots.

Washington DC, for example, experienced a significant rate decrease in delinquency. Other states such as North Dakota, South Dakota, Colorado, Louisiana, Maryland, and Vermont also saw a decrease as well. North and South Dakota typically have the lowest delinquency rates in the United States for all kinds of loans. It is the improvements see in states like Louisiana that can be seen as a sign of recovery. Year-on-year, the state’s auto delinquency rate plummeted by over 14 percent.

While it is too early to say for certain, some analysts believe that the some spots in the country are starting to recover faster than the others. The relatively small increase in delinquency compared to 2008 also reveals that these types of loans are quite difficult to get today because financial companies have raised their lending standards.

Meanwhile, consumers are also trying to cut spending and taking on fewer loans. The rate of auto delinquency followed the results of mortgage delinquency. On the other hand, credit card delinquency mellowed in the third quarter from the second.

Executive Compensation – Weekly Round Up

Due to the financial meltdown in Wall Street, the Obama administration has decided to bail-out troubled banks using taxpayer money. As can be expected, the public was outraged by this development. The common consensus during the time the TARP program was being developed was, “why should we pay for the banks’ mistakes?” Well, the bailout actually came with a long list of strings attached. One of the most notable ones was the limit imposed on executive compensation.

Over the course of these past few months, we’ve seen the fast recovery of some of the nation’s biggest banks. And how each of these banks has struggled to raise capital in an effort to pay back the TARP money they received. Behind all this is a very strong motive: bank executives want to be in control of their compensation and company strategy. This week’s round-up is composed of blogs that had talked about banking executives’ compensation, its importance, and what it will mean for the average person.

Mark @ CS Monitor talked about how the government plans to restructure how bank executives are paid. His post titled “Obama Looks of Overhaul Executive Pay” talked about the proposed “say on pay” legislation. It will essentially give shareholders a bigger voice in how much the board and other top management officials will be paid. The initiative is designed to minimize risky behavior by tying executive compensation to behavior.

Gary @ Uncommon Common Sense wrote an in-depth post titled “America’s Big Business: When you Commit a Crime” on his blog. The article essentially discussed how bank executives “knew better” than to take the risks they were taking prior to the financial crisis. But they were operating in an industry that encourages high risk to increase they pay.

Andrew @ Harvard Law School Blog provides a comprehensive look as to why bank executives behaved the way they do in the industry. Titled “Compensation Structure and Systematic Analysis” dealt with pay arrangement that encouraged extreme risk taking to product pay incentives. In addition, the article discussed how short term focus distorted long term planning on the part of the banks.

Banks Pay Back TARP

The Treasury has finally allowed 10 big backs to repay some part of the TARP money they received during the height of the financial turmoil. Though the Treasury did not specifically identify these banks, allowing them to make the announcement on their own, the banks have been identified as JPMorgan Chase, Goldman Sachs, US Bancorp, BB&T Corporation, Capital One Financial, American Express, State Street Corporation, and the Bank of New York and Mellon.

Two of these banks namely JPMorgan Chase and Goldman Sachs are deemed financially strong enough to leave the TARP program. It is expected that the 10 big banks will return an estimated $68.3 billion back to the government. The latest estimate is dramatically more than the original repayment estimate of $25 billion. Other financial institutions specifically Morgan Stanley and Northern Trust are expected to repay the government as well. Previously, Morgan Stanley was asked to raise $1.8 billion after “failing” the stress test.

The $68.3 billion to be repaid this year is around a quarter of the TARP bailout fund. 22 community banks have already paid back $1.9 billion to the Treasury. While these developments are certainly good news for the Obama administration, the public, and even the bank themselves, these institutions are not yet totally out of government oversight. As condition to receiving the bailout fund, the banks agreed to “warrants” or stock options that give the government a share in profits once stock values rise.

In addition, the public won’t benefit as much as initially believed. This is because five of the repaying banks have little to do with consumer lending. Goldman Sachs and Morgan Stanley are mainly investment institutions while State Street, Northern Trust, and Bank of New York Mellon are asset management firms. With the exception of JPMorgan, none of these banks are big-time consumer lenders. The biggest lenders – Bank of America, Citigroup Inc., and Wells Fargo – don’t look like they’ll be in the position of repaying the government anytime soon.

Whatever the case, the repayment plan is certainly a welcome development in today’s grim economic times. Within several days, majority of the financial institutions mentioned above will wire the repayment to the Treasury Department.

Banks to Undergo Management Review

Over the past few weeks, news has been buzzing that nine of the country’s largest banks that failed the stress test are undergoing capital-raising initiatives to meet the government’s criteria. Monday is scheduled to be deadline for federal bank regulators’ approval for these plans. This long-awaited moment can be outshined by a less known deadline though: management review of these banks.

Banks including Citigroup Inc. and Bank of America will assess their top executives to ensure that the banks have sufficient leadership capability that will take them through the tough times. According to regulators, this process is necessary to find out if the current management has the “ability to manage the risks presented by the current economic environment”.

For many, this management review seems confusing, if not unnecessary. This is because the rules of the management review remain unclear. And individual regulators are providing contradictory guidance which further confuses the process. Whatever way they call it, it is clear that federal regulators are simply pressuring banks to get more people with commercial banking expertise.

Bank of America has already bowed to the pressure by replacing one senior executive and several directors. For its part, Citigroup is beefing up its board by adding new directors. It remains unclear if federal regulators will approve the management review on its deadline, which is on Monday.

Even as “weaker” banks prepare to wait for government approval for their capital raising initiatives and management review approval; “stronger” banks like JPMorgan Chase & Co and Goldman Sachs Group are preparing to repay the government. If their repayment scheme is approved, this will spell a dramatic milestone in today’s chaotic financial market.

It is expected that the government will accept the repayment of these banks. The Fed previously announced that it will allow repayment if the banks can prove they can raise capital from outside investors and lend to borrowers without relying on federal support.

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