naked capitalism

Bloomberg reported a few weeks ago of a rift in the group that supposedly represents the mortgage securitization industry, the American Securitization Forum. We say “supposedly” because the interests of its two main types of members, the sell side, meaning the parties that put together deals, and the buy side, meaning investors, are now directly opposed.

That rift has now escalated to what looks like a fatal schism, as bond king Pimco has quit the ASF over the refusal of the ASF to send a letter voicing investors’ objection to concerns about the pending mortgage settlement. We are told by other investors that Pimco’s departure is likely to herald a wholesale exodus by investors who have long felt their views are not taken seriously by the ASF.

Although most readers probably have had no reason to take notice of the ASF, it is important to recognize its role in defending the worst practices of the mortgage originators and servicers. After the robosigning scandal broke in fall 2010, there was a series of Congressional hearing on the topic (my recollection is five, but it might have been six). Tom Deutsch appeared at several of them and is likely to have made more appearances over these hearings than any other individual.

This excerpt from a December 2010 post will give you a feel for the caliber of Deutsch’s performance:

Well, I suppose one can defend the lies testimony offered by American Securitization Forum executive director Tom Deutsch before the Senate Banking Committee yesterday if one subscribes to the Through the Looking Glass theory of usage:
`

When I use a word,’ Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean — neither more nor less.’

And we all know how well things turned out for Humpty Dumpty….

Seriously, though, as we will see shortly, Deutsch gave one of the most outrageously dishonest presentations I can recall ever seeing, and readers know I specialize in calling that sort of thing out…

Now mind you, the ASF is in a huge hole. Despite its claims otherwise, it’s a lobbying group for sell side firms; investors are also members, but their needs are not taken seriously (the ASF posture toward very sound reforms proposed by the FDIC proves where its true loyalties lie). It was already in a defensive position before this hearing. In November; as we discussed, it issued a long-awaited white paper to assail the critics’ arguments. But that paper was weak and unconvincing; indeed, the ASF effectively acknowledged its shortcomings by issuing it the same day as an unsympathetic Congressional Oversight Panel report was released and immediately prior to Senate and House hearings on mortgage documentation issues.

If the paper had been convincing, it would have made sense to publish it earlier, to force the COP and the hearings to incorporate its views. The late release was a tacit admission that the ASF regarded it as better off merely muddying the water than exposing its position to robust debate.

Investors, even the pro-bank sort, were not persuaded. Contacts of mine were getting calls from buy-side types, including those sympathetic to banks, who were dismissive of the ASF paper. And the fact that 13 law firms signed the article? As one investor sniffed, “This is meaningless. All those firms issued true sale opinions. They’ll say what they have to say to try to make this go away.”

There is a piece of the Pimco-ASF contretemps that Bloomberg appears to have missed. After the ASF refusal to send a letter on the mortgage settlement defending the views of its investor-members, Tom Deutsch and Bill Frey were both speakers on a panel at a close-door meeting hosted by Representative Scott Garrett on ways to go forward with a new private securitization model. Deutsch tried to defend the part of the settlement that we have criticized as a back door bailout: that banks are required to reduce second liens (which they own) only pari passu with first liens (owned mainly by others) when they should be required to wipe out any second lien before touching the first lien.

Deutsch suffered what one source called “repeated napalm strikes” at the hands of Frey, who declined to comment on this post. Deutsch tried saying that the servicers’ role was murky; Frey cited typical language from the pooling and servicing agreement that said they are to service loans in the best interest of the certificateholders (meaning the investors). Deutsch then tried arguing for “extenuating circumstances.” Frey asked whether he was referring to the insolvency of the biggest banks if their second liens were marked at realistic levels. I’m afraid I don’t have exact quotes, but I infer that exchanges in Washington are not normally this direct and Deutsch was visibly squirming (not surprising given the fact set). The fact that Deutsch took a clearly anti-investor position (even though he tried to have it both ways) before a group of important decision makers apparently settled whatever doubts Pimco might have about leaving the ASF. And as I said above, more investor departures are likely to follow.

The Bloomberg article discusses other fissures within the ASF:

In 2009, asset managers seeking more outlets for their opinions started the Association of Mortgage Investors, which has issued press releases critical of the foreclosure deal. Yesterday, in a statement, the group called for monthly reports on steps banks are taking to adhere to the settlement. The Association of Institutional Investors, which includes larger asset managers such as Loomis Sayles & Co., was formed in 2010.

This part is a doozy:

[Veron] Wright, an ASF founder [its first chairman] and advisory board member who was chief financial officer of credit-card issuer MBNA Corp., said in his letter [of resignation] that the group’s directors were frustrated in attempts to win governance changes…The ASF, as part of its divorce from Sifma, created a separate entity to house its operations, Wright said in the letter. As a result, directors haven’t been able to see financial information, including staff pay, and have no legal control over the group, he said. The “corporate-governance concerns lead me to the conclusion that the executive director [Deustch] is not being properly supervised,” Wright wrote.

Gregg Silver, CFO of South Dakota-based 1st Financial Bank USA and a member of ASF’s management committee, said in a phone interview that he resigned last month for reasons similar to those expressed by Wright.

If most investors leave the ASF, that will be a huge blow not only to its finances but more important to its legitimacy. It would no longer be able to pretend to speak for the securitization industry, and its value as a mouthpiece for sell-side interests will be considerably diminished, which might also lead them to reduce their support.

I’m pleased that this comment “And we all know how well things turned out for Humpty Dumpty….” is looking to be prescient. If anyone deserves not to be able to put himself back together after a fall, it is Tom Deutsch.