Category Archives: Credit markets

Bank of America $8.5 Billion Mortgage “Settlement” Under Fire

We took an immediate dislike to the so called Bank of America mortgage settlement, in which the trustee for 530 mortgage trusts, Bank of New York, has entered into deal in which the bank will pay $8.5 billion to settle not only putback liability (having to compensate investors by buying back loans that never should have been put in the trusts in the first place) but also chain of title liability to investors (otherwise known as “my dog ate your mortgage”; note this would NOT impair the ability of homeowners to raise that issue in foreclosure).

We criticized the deal as being bad for homeowners (as in likely to accelerate foreclosures, rather than alleviate them, as claimed), bad for investors (due to the amount being too low for putbacks and an outrageous sellout based on the waiver for chain of title problems) and rife with conflicts of interest. Indeed, almost immediately after the settlement was announced, a group of investors who had been pursuing their own claims on three of the trusts in the settlement filed a petition as a means of objecting to the deal and its failure to provide a means for investors like them to opt out.

Two public officials, Eric Schneiderman, the New York attorney general, and Representative Brad MIller, who is a member of the House Financial Services Committee, apparently also suspect the pact does not pass the smell test and are asking some tough questions.

Satyajit Das: “Progress” of the European Debt Crisis

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

In Oscar Wilde’s Importance of Being Earnest, Lady Bracknell memorably remarks that: “To lose one parent… may be regarded as a misfortune; to lose both looks like carelessness.” The Euro-zone’s need to rescue three of its members (Greece, Ireland and Portugal) with three others increasingly eyed with varying degrees of concern (Spain, Belgium and Italy) smacks of institutionalised incompetence.

Eurozone Leaders Fiddling as Rome Starts to Burn? (Updated)

Worries about the Eurozone have heretofore been depicted as afflicting the periphery. But even though Italy is geographically on the margin, if the crisis engulfs it, it irreparably damages the core. And that time seems to be upon us.

Quelle Surprise! DoJ Pushing State AGs to Whitewash Servicing Abuses; Failure to Investigate Confirmed

The latest report by Shahien Nasirpour at Huffington Post confirms two things you’ve heard here and on some other sites following this sorry affair: first, that Tom MIller, Iowa attorney general who is leading the 50 state attorneys general negotiations on mortgage abuses, is a liar, and second, that any settlement will be a whitewash.

Did Sheila Bair Save the US From Complete Financial Meltdown?

When a moderate (meaning anachronistic) Republican proves to be a more tough minded regulator than Democrats, it serves as yet another proof of how far the county has moved to the right. Bair, in a long “exit interview” with Joe Nocera, says a number of things that would have been regarded as commonsensical and obvious in the 1980s, yet have a whiff of radicalism about them in our era of finance uber alles. For instance: Bear should have been allowed to fail, TBTF banks are a menace (well, she doesn’t say that, but makes it clear she regards them as repugnant), bank bondholders should take their lumps.

Bair was alert to the dangers of subprime, having recognized how dangerous it could be in the early 2000s (when a smaller version of the market blew up, taking homeowners along with it), and was not a believer of the Paulson/Bernanke party line that subprime would be “contained”. She long championed mortgage mods as better for lenders, borrowers, and the economy, and has fought an uphill battle with the Administration on that front. With the IndyMac failure, which put the subprime lender/servicer in the FDIC’s lap, she pushed hard to develop a template for how to do them, which then was ignored by the Administration (they did HAMP instead, an embarrassment which she refused from the outset to endorse).

The piece serves as an indictment of the banking industry toadies in the officialdom, namely the Treasury, Fed, and OCC. One priceless quote:

Satyajit Das: Bailing In to Bail Out – The Greek Bank Debt Exchange Proposal

By Satyajit Das, the 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)

The proposal to extend the maturity of Greek bonds emanating from the Élysée Palace reflects French strengths first identified by Napoleon III: “We do not make reforms in France; we make revolution.” Structured to meet a German requirement that private creditors contribute to the Greek bailout, the proposal falls short of what is actually required.

Moody’s Hacked

Via Richard Smith and Tom Adams. FT Alphaville is also on the case and informs us that this is really not a hack but a URL script trick. Click to enlarge.

The Sorrow and the Pity of Economists (Like DeLong) Not Learning from Their Mistakes

I hate to seem to be beating up on Brad DeLong. Seriously.

As I’ve said before, he is one of the few economists willing to admit error and not try later to minimize or recant his admission (unlike, say, Greenspan). And he seems genuinely perplexed and remorseful. This puts his heads and shoulders above a lot of his colleagues, at least the sort whose opinion carries weight in policy circles.

Even with DeLong making an earnest effort to figure out why he went wrong, his latest musings, via a Bloomberg op-ed, “Sorrow and Pity of Another Liquidity Trap,” show how hard it is for economist to unlearn what they think they know. And as the great philosopher Will Rogers warned us, “It’s not what you know that gets you in trouble. It’s what you know that ain’t so.”

So it’s important to regard DeLong as an unusually candid mainstream economist, and treat his exposition as reasonably representative if you could somehow get his peers to take a hard, jaundiced look at how wrong they have been of late.

DeLong’s mea culpa is about how he and his colleagues refused to take the idea that the US could fall into a liquidity trap seriously. As an aside, this is already a troubling admission, since many observers, including yours truly, though the Fed was in danger of creating precisely that sort of problem if if dropped the Fed funds rate below 2%. It would leave itself no wriggle room if the crisis continued and it had to lower rates further into the territory where further reductions would not motivate changes in behavior. That’s assuming we were in a “normal” environment. But the big abnormality is that we are in what Richard Koo calls a balance sheet recession. And as we will discuss below, Keynes (and Minsky) had a very keen appreciation of the resulting behavior changes, but those ideas were abandoned by Keynesians (it is key to remember that Keynesianism contains significant distortions and omissions from Keynes’ thinking.

But notice how he starts his piece:

Fed Releases More Details on Its Effort to Bail Out Lehman and Other Dealers

Bloomberg has a new story on its continuing efforts to pry more information out of the Fed on who borrowed what when in the runup to the financial crisis. The central bank had refused to provide details of what various needy financial firms had gotten under its single tranche open markets operations program, which was launched in March 2008. Lehman received a peak amount of $18 billion out of a total program size of $80 billion.

Now why does all this matter?

More on $8.5 Billion BofA Settlement Conflicts: 2/3 of Trustee’s RMBS Business is From BofA

No wonder Bank of New York was so eager to roll the investors to whom it is nominally responsible and sign up for a settlement deal in which it effectively sold their interests out (and didn’t bother even going through the motions of advance notice, much the less consultation). Bank of America not only used the carrot of a very juicy indemnification, it had the stick of the amount of RMBS trustee business it has directed to Bank of New York and presumably could send elsewhere on future deals if it became displeased.

Randy Wray: A PROGRESSIVE APPROACH TO FEDERAL BUDGETING – Or, Can One Take Billionaire Pete Peterson’s Money and Remain Progressive?

By L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City. Cross posted from FireDogLake

Yves Smith set off a firestorm in her criticism of several progressive groups that have joined forces with Pete Peterson to whip up deficit hysteria. There are three issues that need to be addressed:

1. Can a progressive take tainted money and remain progressive?
2. Did the Roosevelt Institute (in particular) take tainted money and remain progressive?
3. What would a progressive approach to federal budgeting look like?

Are Self-Dealing Parties Settling $242 Billion of Bank of America Liabilities for Way Too Little?

A petition filed by some unhappy investors on Tuesday raises some serious challenges to the so-called Bank of America mortgage settlement. The embattled bank hopes to shed liability for alleged misrepresentations made by Countrywide on loans sold in 530 mortgage trusts with $424 billion in par value. We said it was a bad deal for investors because, among other things, it included a very broad waiver of a very valuable right, that of being able to sue over so-called chain of title issues (in very crude terms, whether the parties to the deal did all the things they promised to do to convey the loans properly to the mortgage trust).

This action raises three sets of different issues: the conflicts of interest among the parties trying to push this deal through, the process used to finalize the deal, which this pleading contends were devised to give the other investors short shrift; and the inadequate amount of the settlement, not only for parties that have tried to move their own putback litigation forward, but arguably for all parties.

Ron Paul Suggests Using Fed to End Run Debt Ceiling Impasse

The only reason to think Republicans are serious about their threat to have the Federal government default rather than raise the debt ceiling is that they have an undue fondness for apocalyptic outcomes. I suppose I should actually favor this sort of thing; I’ve long thought the only hope for getting the US freed from rule by financiers was another financial crisis, provided it came soon enough and it was big enough. This one might fit the bill on those scores.

However, with the immediate trigger being pigheaded Congressmen, the banks might look like innocent victims, when the ballooning of public debt around the world was the direct result of their recklessness and the resultant global economy near-death experience. So a debt-ceiling-row-induced great big financial dislocation would probably not produce the opportunity to break the power of banks that yours truly and many others are looking for.

As the hour of reckoning approaches, more and more creative ideas to disarm the Republican weapon are being put forward, and an intriguing one comes from, of all places, a Republican, Ron Paul.

Partying on the Edge of the Eurozone Volcano

The Financial Times has two heated articles (relative to the each writer’s normal emotional register) on the continuing Greece neverending bailout saga, one from Wolfgang Munchau, the other from John Dizard. Munchau and Dizard reach the same conclusion from different fact sets: the latest Greek patch-up exercise is only going to make matters worse, politically and economically.

Look What You Can Buy in the Greek Liquidation Sale!

Sorry if you were looking for listing of the various Greek assets on offer. You need to be a really heavyweight investor (and have been verified as such) to get a real viewing. And you are late if you are taking interest only now. The Guardian last week visited a road show of sorts in London (note that the properties were being hawked BEFORE the Greek parliament had approved the sale). The potential bidders were very cool: