Category Archives: Banking industry

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):

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?

Clearing Up Some Misperceptions on the Mortgage Modification/Second Lien Debate

A fairly long discussion, by blogosphere standards, has broken out over second liens. For those comparatively new to the topic, a recap is in order.

Second liens are either second mortgages or home equity lines of credit on homes. The bone of contention is that mortgage servicers, which also happen to units within the biggest US banks, have not been playing nicely at all with stressed borrowers out of an interest in preserving the value of their parent banks’ second liens. And the reason for that is that writing down second liens to anything within hailing distance of reality, given how badly underwater a lot of borrowers in the US are, would blow a very big hole in the equity of major banks and force a revival of the TARP. That is one of the very last things Team Obama would like to see happen, hence its eagerness to promote various extend and pretend policies.

The mortgage settlement proposal includes a provision that would call for second liens to be reduced pro-rata with the firsts. That, as Gretchen Morgenson noted, and Jesse Eisinger amplified, is contrary to long-standing principles of priority of creditor payments. Felix Salmon then argued that the banks were within their rights to try to extract some value from the seconds, which led to further rebuttals…

Quelle Surprise! Geithner Gutting Dodd Frank via Intent to Exempt Foreign Exchange

I have mixed feelings about an article by Robert Kuttner, “Blowing a Hole in Dodd-Frank.” On the one hand, he’s found an important example of the Administration’s lack of interest in meaningful financial reforms, which is its intent to exempt foreign exchange derivatives from the implementation of Dodd-Frank. But his discussion of what this matters at critical junctures confuses foreign exchange cash market trading with derivatives and thus leaves the piece open to criticism.

Kuttner warns that Geithner has signaled strongly his preference to exempt foreign exchange from Dodd Frank implementation:

Treasury Secretary Timothy Geithner is close to a decision to exempt the $4 trillion-a-day foreign-currency market from key provisions of the Dodd-Frank Act requiring greater transparency in the trading of derivatives. In the horse-trading over the final conference version of that legislation last year, both Geithner and financial-industry executives lobbied extensively to give the Treasury secretary the right to create this loophole.

On the Clouded Title Mess and the Difficulties of Cleaning It Up

Abigail Field’s latest piece at Daily Finance is a great one-stop summary of the most thorny problem underlying the securitization mess: how can we clean up title given how badly it has been screwed up? As we and many others have noted, integrity of property ownership is an essential foundation of development; this is straight Hernando de Soto gospel. And as our Richard Smith has pointed out, the various fixes to get around this mess run roughshod over well established court procedures that date back to the 1677 Statute of Frauds. Why was it necessary to implement those rules? Because without them, wealthy people could use the court system to steal property. Sound familiar?

One thing that it is important to stress: that the abuses to established real estate transfer and recording processes were not inherent to the securitization model. I’m not a fan of securitization but the sad reality is that no one is prepared to go back to the more costly in terms of equity required, model of on-balance sheet banking (it would result in a shrinkage of credit that every respectable economist would recommend against and hence will never happen). But no one (except the FDIC, which keeps being ignored) is thinking seriously enough about what it would take to make securitization safer.

Class, Social and Traditional Media, and the Mortgage Mess

I’m going to tell one on myself, and since I suspect my reflexes are atypical, I suggest you watch this video by a realtor, Leigh Brown, before reading the balance of the post:

Do We Need Big Banks?

Yves here. I normally let VoxEU articles stand on their own, but this topic, of whether the bank PR that bigger banks are essential stands up to scrutiny, is near and dear to my heart.

Note that the authors point to a 1990s study that finds that a $25 billion in assets bank was the optimal size. There were a fair number of studies done then of bank size versus efficiency. I’m a bit surprised that this is the one that is most often cited, since it also came up with the biggest size threshold at which a negative cost curve kicked in (meaning the bank became more costly to run). One study found that the slightly negative cost curve started at $100 million in assets (!); more typical was somewhere between $1 and $5 billion. And remember, these studies were done in the days when banks returned checks, and check processing was believed to have strong scale economies (ie, if check processing was a bigger proportion of total costs then than now, it could arguably have increased scale economies).

Some academics were frustrated with these results. I recall reading a paper where the author argued that there were theoretical cost savings to being bigger (duh) and basically contended that the empirical data had to be wrong.

Mirabile Dictu! FDIC Suing Former WaMu CEO, Two Execs, for $900 Million

The FDIC is suing three former WaMu executives for their role in the bank’s failure. The directors of the board, according to the Wall Street Journal, already settled for $125 million. More details:

The Federal Deposit Insurance Corp. sued three former executives of the failed Washington Mutual Bank, along with two of their wives, in a lawsuit filed on Wednesday.

The FDIC is seeking $900 million in damages for alleged gross negligence and other failures by the former executives in the run up to WaMu’s collapse in September 2008…

Guest Post: Curbing the Credit Cycle

Credit booms sow the seeds of subsequent credit crunches. This column argues that these have their source in cross-bank externalities. To internalise these cross-sectional spillovers, policy should operate “across the system”. It adds that this is the essence of macro-prudential policy, which, for the first time is about to be undertaken internationally.