naked capitalism

While one data point does not constitute a trend, a first page article in today’s New York Times, “Creators of Credit Crisis Revel in Las Vegas,” may signal a shift in popular sentiment. Normally, “how the mighty are fallen” stories are exercises in shadenfreude. But this one, on the annual convention of the American Securitization Forum, the industry group that helped bring us subprimes and collateralized debt obligations, is openly outraged, at least compared to the usual anodyne tone of New York Times reporting.

At a plush industry convention in Las Vegas, AFS members are sighted licking their wounds and plotting to find ways to profit from the crisis they helped bring about. While the article also mentions some of the losses that participants have taken, no one seems to be in dire straits. And there seems to be little in the way of remorse or self-recrimination.

Criminal investigations into Wall Street’s securitization practices corroborates the public’s increasingly dim view of the industry. Deep down, many subscribe to Balzac’s view that great fortunes are built on great crimes.

Today’s Wall Street Journal gives an update on the probes:

The Justice Department’s U.S. attorney’s office in Manhattan, based near Wall Street, has notified the Securities and Exchange Commission that it wants to see information the agency is gathering in its investigation of Merrill Lynch & Co., according to people familiar with the matter. The SEC is examining, among other things, whether the securities firm booked inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped, the people say.

The move by the U.S. attorney’s office comes as the SEC has upgraded its Merrill probe to a formal investigation…

The interest by the federal prosecutors is preliminary; it is unclear whether the SEC has turned over information. But the U.S. attorney’s office request could be a precursor to a criminal investigation, these people say.

In the last month or so, I have noticed a marked increase in hostility towards the financial services industry, both in the number of cynical, critical comments on this blog and the intensity of their venom. These are a few from the last week:

The wealth creation over the past decade plus has been on the back of a system that has grown more corrupt by the year. It is a parasytic system that is rotten to the core and feeding off the real economy, empowered by the bankrupt foreign economic policy that has essentially given away our competitive advantages and gutted out industrial base. Who said American’s aren’t generous? ……

Global collusion and financial engineering gurus fused together packages of localized loan pools into globalized loan pools in hopes that the default rates would be insignificant and thus any impairment or dilution would be diluted to zero risk.

The result of what these gurus engineered is a global systemic financial failure resulting in denial on their part, no accountability on their part and defaults on a global scale never before seen. These gurus will return to Davos with new derivatives and be held in high regard, versus being placed into global prison cells! …..

Wall Street has become a conduit unto itself and a zero sum wealth “creator” for the financial economy at the expense of the real economy. We are heading for a complete disaster and the more you read this moronic commentary [from a Wall Street strategist] the more you realize that never has there been a better time to sell. Rotten to the core.

And my personal favorite, in response to a post “Martin Wolf: Can We Corral the Financiers?“

The model has already been put forward by the enragés:

On 2 June, Paris sections — encouraged by the enragés (”enraged ones”) Jacques Roux and Jacques Hébert — took over the Convention, calling for administrative and political purges, a low fixed price for bread, and a limitation of the electoral franchise to sans-culottes alone. With the backing of the National Guard, they convinced the Convention to arrest 31 Girondin leaders, including Jacques Pierre Brissot. Following these arrests, the Jacobins gained control of the Committee of Public Safety on 10 June, installing the revolutionary dictatorship. On 13 July the assassination of Jean-Paul Marat — a Jacobin leader and journalist known for his bloodthirsty rhetoric — by Charlotte Corday, a Girondin, resulted in further increase of Jacobin political influence.[9] Georges Danton, the leader of the August 1792 uprising against the King, was removed from the Committee. On 27 July Robespierre, self-styled as “the Incorruptible”, made his entrance, quickly becoming the most influential member of the Committee as it moved to take radical measures against the Revolution’s domestic and foreign enemies.[10]

For those who don’t know the history of the French Revolution, Danton was guillotined, as was Robespierre. In other words, let the mob exact bloody justice.

Americans, unlike the French, don’t have a tradition of taking to the barricades when they are unhappy with their government. We are therefore unlikely to see the specter of heads of former Masters of the Universe being carried around on pikes.

But we are in the early stages of a credit crisis. The American consumer is only beginning to retrench. Unemployment is on the rise and many households are already in perilous financial shape, in no position to take any shocks. As conditions worsen, the anger against the financial elite which profited so handsomely during the boom years and is relatively unaffected by the downturn can only become more acute.

If a full-blown financial crisis develops, say along the lines envisioned by Nouriel Roubini, do not underestimate the potential for something we haven’t seen in the US for 40 years: demonstrations and other forms of collective action. Anger is a corrosive, destabilizing force. If conditions get bad enough, it can and will reach a boiling point.

Mind you, this is a downside scenario, but it is important to understand its full ramifications.

From the New York Times:

It was Monday night on the Strip, and John Devaney was giving a party for himself and fellow connoisseurs of risk who have seen their hot hands go cold.

In a gilded ballroom at the Venetian, the revelers sipped cabernet, dined on surf and turf and crowed as the Blue Man Group put on a private show.

The partygoers had traveled to Sin City this week — Mr. Devaney by chartered jet — for an event that before the current credit squeeze might have been called the Predators’ Ball of this era.

This time, with mortgage securities replacing the junk bonds of the 1980s, the gathering felt more like group therapy.

The occasion was, officially, the 5th annual conference of the American Securitization Forum, a celebration of the financial wizardry that supposedly turns risky mortgages and other loans into gilt-edged securities but, as Mr. Devaney belatedly discovered, does not always make them safe. Mr. Devaney, a 37-year-old money manager, lost big on bond investments last year. This week, in Las Vegas fashion, he said he was doubling down.

The four-day event at the Venetian drew more than 6,500 financial professionals from across the country. Many came in search of ways to ride out — or better yet, to profit from — the mortgage mess their industry helped to create.

Wall Street banks played a crucial role in the mortgage crisis by buying home loans and bundling them into securities. Regulators are examining whether investment banks and mortgage lenders hid the risks of subprime debt from investors.

While the mood was more somber than in years past, when home prices were soaring and mortgage lending boomed, there was plenty of fun and games. Countrywide Financial, the troubled lender that has come to symbolize some of the excesses of the mortgage business, was the host of a party on Sunday night where people cheered while watching the Super Bowl on big-screen televisions. On Monday came the gala dinner sponsored by Mr. Devaney. On Tuesday the conference organized an outing on a golf course near the California border.

Between such revels, attendees spent their time in meeting rooms with golden trim, listening to panel discussions with titles like “Transparency, Valuation and Rebuilding Investor Confidence” and “Legislation, Regulation and Market Oversight — A Global Review.”

At the conference last year, Mr. Devaney grabbed headlines — and was proved prophetic — when he said he hated subprime mortgage securities and was “hoping the whole thing explodes.” In March, before he incurred his big losses, he told The New York Times he was hoping to expand and diversify his trading business.

This year, Mr. Devaney, a brash bond trader, said he had grown cocky during the mortgage boom and paid the price. A hedge fund run by his company, United Capital Markets, plummeted last year, and he lost $100 million. The rout prompted him to sell a mansion on Key Biscayne, near Miami, his private jet and his yacht, Positive Carry, named after a financial maneuver in which the cost of financing an investment is less than the return obtained from it.

Mr. Devaney has, however, profited from turbulent markets in the past, and made his name earlier this decade trading troubled bonds backed by trailer home loans and business-franchise loans.

“In a funny way I want to thank the market for dealing me a direct hit,” Mr. Devaney said during one panel discussion, drawing laughter from the crowd. “As a trader, if you make money for too many years you lose sight of risk unless you get sucker- punched.”

Mr. Devaney said he was now buying beaten-down bonds for pennies on the dollar, betting their prices would revive.

But his financial troubles are small compared with losses in the housing market and broader economy. Many people are struggling to pay their mortgages and hold on to their homes. Nearly a quarter of home loans made to people with blemished, or subprime, credit are delinquent or in foreclosure, and defaults now are rising even on loans made to people with good credit. Some of the people who attended the Las Vegas gathering had recently lost their jobs and came hoping to find new ones.

At times, the unease here was palpable. During one panel discussion, a money manager stood up and denounced credit ratings agencies, which many investors have criticized for underestimating the risks posed by securities backed by subprime loans. In the last 12 months, the ratings firms have downgraded many securities they had awarded high marks to only a year or two earlier.

“In my 38 years this has been the worst capital destruction and the worst rating decline in history,” Robert L. Rodriguez, the chief executive of First Pacific Advisors, a mutual fund company based in Los Angeles, said to a panel of four executives from ratings firms. “All of you should be ashamed of yourself.”

The lashing elicited scattered applause. The panelists listened, their lips pursed. Some then admitted making some mistakes but said most investors in top-rated triple-A securities would get their money back.

“We all have heard a lot of criticism over the last several months, and some of that criticism is certainly justified,” said Glenn Costello, co-head of the residential mortgage-backed securities group at Fitch Ratings. But he added that a frequent criticism of ratings firms — that they are beholden to the investment banks and mortgage companies whose securities they rate — reflected “a real lack of understanding of how we as ratings agencies go about doing what we do.”

During another discussion, managers of much-maligned collateralized debt obligations — packages of bonds that are packages of other debt — criticized the media for what they said was negative coverage of the securities. Most of the speakers on that panel asked that reporters be allowed in the session only if they did not directly quote their remarks or did so with their permission.

But other managers and bankers said investors and journalists were right to question why so much wealth was destroyed so quickly. As for the view that some securities are trading at far lower prices than they deserved to be, Len Blum, a managing director at Westwood Capital, a boutique investment bank based in New York, said investors always overreacted to bad news, just as they overreacted to good news.

“The market always paints with a broad brush,” he said.

Another banker, Joseph M. Donovan, said the hand-wringing was overdone. He said what ailed the market was clear, but added that solutions would take time.

In his estimation, defaults are highest in cases where lenders take too many risks because neither they nor borrowers have much to lose. Mortgage companies sold the loans to Wall Street banks, and homeowners did not put any money down. Mr. Donovan, a retired Credit Suisse executive, said the packagers of the securities and investors took false comfort from the diversity of loans backing their securities.

“We need to step back and take a breather,” he said. “I don’t think there is anything fundamentally wrong.” Mr. Devaney, the bond trader, generally agrees with Mr. Donovan, whom he regards as a mentor.

Standing near a conference booth for Standard & Poor’s, the ratings firm, Mr. Devaney said to a fellow trader that he should buy bonds backed by second mortgages trading at deep discounts.

“I am buying things at 10 to 15 cents” on the dollar, Mr. Devaney boasted. The other trader, who did not consent to being identified, said he was worried that the bond prices might fall more.

Later, Mr. Devaney himself seemed to have second thoughts.

“I’m worried I won’t be able to call the bottom,” he said. But he quickly regained his old confidence. “Most of the stuff I have has limited downside,” he said.