Author Archives: Yves Smith

Links 3/24/11

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Richard Alford: Fed Policy, Market Failures and Irony

By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side. “..there is always a well-known solution to every human problem — neat, plausible, and wrong.” H L Mencken One […]

Are Fannie and Freddie Giving Banks Yet Another Bailout by Not Pursuing PMI Claims?

The further you look at the banking mess, the more the same problems keeps staring back: too many losses, not anywhere enough equity or reserves, and a lot of tap dancing by the officialdom to pretend otherwise.

We wrote yesterday, thanks to some sleuthing by Chris Whalen, that Fannie and Freddie might be sitting on north of $100 billion of unreported losses. If they started realizing those losses, one of the first parties that would take a hit would be the private mortgage insurers, since on high loan to value loans (over 80% of appraised value), they were in the business of guaranteeing the loan balance in excess of 80%. So while the failure of the GSEs to act is no doubt part of the extend and pretend shell game, it serves to keep PMIs that would otherwise be as dead as certain notorious parrots alive.

Marshall Auerback: The Economic Policy Behind Intervention in Libya Chases Its Own Tail

By Marshall Auerback, a hedge fund manager and portfolio strategist. Cross posted from New Deal 2.0

Any intentions of boosting the economy will be obliterated by our spending on military actions.

As my friend Chuck Spinney has noted in an exchange of emails, President Obama’s actions in Libya show that he has caved in to the “humanitarian interventionists” in his administration, as well as British/French/American post-colonial and oil interests. The result: yet another war with a Muslim country that has done nothing to us. Additionally, the fact that we are doing nothing to staunch the Saudi/Bahraini/Yemeni crackdowns smacks of hypocrisy and will hurt us even more on the Arab streets.

Links 3/23/11

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Fannie and Freddie Hiding Over $100 Billion of Losses?

Bank expert Chris Whalen has a little bombshell in his current newsletter. It’s so obvious that it should not only have occurred to me but pretty much everyone on the real estate beat. And that begs the question why no one has even mentioned it.

Beware the Predatory Pro Se Borrower!

Somehow, “predatory pro se borrower” reminds me of “The Attack of the Killer Tomatoes.” Pro se defendants are generally lost souls in the court system. They typically get up, flail around before a frustrated judge, and lose (cinematic examples to the contrary, like “Find Me Guilty”, notwithstanding). So the idea that they could rise to the level of being threatening enough to be “predatory” seems like more than a bit of an oxymoron.

But this document depicts these usually hapless defendants as a danger (hat tip April Charney):

Links 3/22/11

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Sleaze Watch: NY Fed Official Responsible for AIG Loans Joins AIG As AIG Pushes Sweetheart Repurchase to NY Fed

The corruption in high places is getting more and more brazen with every passing day. The only thing that separates the US from conventional banana republic status is that no one leaves keys to new luxury cars on the desks of officials to secure their cooperation. It’s just not enough of an inducement to get anyone to take action.

More on the Lack of Criminal Prosecutions: Was the SEC Deterred by a Widely Overlooked Ruling?

Bloomberg’s Jonathan Weil, who is normally an effective critic of bank chichanery and weak regulatory oversight, may have missed the mark on a key issue in an article last week, “Moral for CEOs Is Choose Your Fraud Carefully“. In it, he criticizes the SEC for failing to attack accounting fraud:

It seems the Securities and Exchange Commission won’t be doing anything to challenge that pretense, either, and that this may be by design. The SEC for years has been bending over backward to avoid accusing major financial institutions of cooking their books, even when it’s obvious they did. So much for upholding financial integrity.

Weil cites a series of object lessons where the SEC has not gone after financial firms executives for accounting fraud: Fannie Mae’s Donald Mudd, Countrywide’s Angelo Mozilo, and three executives at Indy Mac. Weil charges them with “see no accounting evil”.

Let’s be clear: I’m no fan of the SEC’s actions in the wake of the crisis. The regulator has been kept resource starved. Under Arthur Levitt (hardly the most aggressive of SEC chiefs) any effort at enforcement led to threats from Congress of budget cuts (Joe Lieberman was particularly aggressive). Chris Cox was put in charge, as far as I can tell, to make sure the agency did at little as possible. So the SEC only knows how to do insider trading cases, and on any other type of action, it seeks to get a settlement, when a trial in some cases might have more value as a deterrent (plus you don’t get to be good at litigating if you never litigate).

Moreover, the SEC also seems to believe it needs to win pretty much all of its cases to be perceived as a threat. That isn’t true either. Look at the Green Bay Packers, who were correctly the favorites to win the Super Bowl despite having a lousy win/loss record prior to the playoffs. But all those losses had been close, in hard-fought, well-played games. In litigation, embarrassing revelations in discovery or on the stand can also have deterrent value, and can serve as building blocks for future cases.

Let’s deal with the misconstructions in Weil’s article. He argues:

Satyajit Das: Controlling Sovereign CDS Trading – The Dysfunctional Debate

By Satyajit Das, author of Extreme Money: The Masters of the Universe and the Cult of Risk (Forthcoming September 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

In an opinion piece entitled “Hedging bans risk pushing up debt costs” published on 9 March 2011 in the Financial Times, Conrad Voldstad, the chief executive of the International Swaps and Derivatives Association (“ISDA”) and formerly a senior derivatives banker with JP Morgan and Merrill Lynch, made the case against the EU ban on “naked” credit default swap (“CDS”) contracts on sovereigns.

Just as “patriotism is the last refuge of a scoundrel”, arguments citing market efficiency and the benefits of speculation seem to be the first resort of dealers.

Guest Post: The 1785 Struggle Over Concentrated Banking Power

By William Hogeland, the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History who blogs at http://www.williamhogeland.com. Cross posted from New Deal 2.0

How a farmer, a weaver, and a backwoods prophet took on the money interest in founding-era politics — and won.

One of the better-known episodes in American founding finance occurred in 1791, when Alexander Hamilton, the first Treasury Secretary, proposed forming the United States’ first central bank. James Madison of Virginia, serving in the House of Representatives, objected. Prefiguring the Republican lawmakers who recently pledged not to introduce legislation without first citing the constitutional provision enabling it, Madison asserted that because the Constitution doesn’t grant Congress a specific power to form banks, a national bank would be unconstitutional.

Hamilton famously responded by arguing that if a power to do something is constitutional, then powers necessary to doing it must be constitutional too, even when not enumerated. If Congress determines that exercising its power to do anything “necessary and proper” in the discharge of its duties calls for forming a bank, it can form a bank. Any unconstitutionality, for Hamilton, would require a specific prohibition against banks (”Congress shall make no law…,” etc.).

So that’s typically how history students and readers get introduced to a key founding moment in American public finance: ideologically, intellectually and legally, in the context of a constitutional dispute between the lions of ratification Hamilton and Madison, two thirds of the “Publius” who authored “The Federalist,” now coming at odds in the fledgling republic. Anyone hoping to find anything related to how money and credit might flow to ordinary Americans will be disappointed.

Why is a Powerful Faux Liberal UK Think Tank Using a Tarnished Pol and Recycled US Republican Talking Points to Fight Breaking Up Banks?

By Richard Smith

The publication of a pamphlet from Demos, a British fauxgressive think-tank (unconnected with the American think-tank of the same name), is the latest visible move in a not-always-public epic battle between banks and regulators about bank reform. While Americans may assume that the time for regulatory intervention has passed, the preliminary findings of the Independent Banking Commission, a UK body whose output will put an important stake in the ground in the UK, is to be released on April 11th. Whatever mix of legislation, regulation and inaction is deemed appropriate by the politicians will follow the publication of the final IBC report in September.

Given the importance of this report, it should come as no surprise that the banks, or rather the bank that has most at stake, Barclays, is using every available channel to convey dire warnings about how terrible reining in the banks would be, particularly since the banks are really hardly at fault at all.

A curious centerpiece of this effort is this 100 page abortion of a pamphlet, penned by a fallen Labour MP (the usual expense account improprieties), Kitty Ussher.

The Elizabeth Warren Rorschach Test

The spectacle of a bunch of Republican Congressmen spending over two hours pillorying Elizabeth Warren, following weeks of death of a thousand unkind and generally offbase cuts coverage in the Wall Street Journal has led a lot of folks from what passes for the left, and even not so left, to ride in to her defense. A partial list includes Paul Krugman, Simon Johnson, Joe Nocera, Mike Konczal, and Adam Levitin.

The last time I can recall the Journal becoming quite so unhinged about an individual was over Eliot Spitzer. And since Warren seems pretty unlikely to be found to have similar personal failings, the specter of the right throwing what look to be ineffective punches at her makes for a peculiar spectacle. What is the real aim behind this drama?