Category Archives: Credit markets

Fed’s Use of $80 Billion Facility as Subsidy Vehicle Confirms Regulatory Deficiencies

Bob Ivry has done a solid job of reporting on some of the documents that Bloomberg forced the Fed to release through a Freedom of Information Act request. In short form, the Fed created a special facility called the single-tranche open- market operations. It was established in March 7, 2008, the week before the Bear meltdown, and continued through the end of December. The facility size was $80 billion and the program was limited to 20 primary dealers. Three groups, Credit Suisse, Goldman, and Royal Bank of Scotland each borrowed at least $30 billion at various points.

Why is this program now controversial?

Marshall Auerback: To Save the Euro, Germany Has to Quit the Eurozone

By Marshall Auerback, a portfolio strategist, hedge fund manager, and Roosevelt Institute fellow

When the euro was launched, leading German politicians used to argue, with evident relish (and much to the chagrin of the British in particular), that monetary union would eventually require political union. The Greek crisis was precisely the sort of event that was expected to force the pace. But, faced with a defining crisis, Ms Merkel’s government is avoiding airy talk of political union – preferring instead to force harsh economic medicine down the throats of the reluctant Greeks, Irish, Portuguese and Spanish electorates. This is becoming both economically and politically unsustainable. If the objective is to save the currency union, perhaps policy makers are looking at this the wrong way around. In the end, paradoxically, to save the European Monetary Union, the least disruptive way forward would be for the Germans, not the periphery countries, to leave.

Tough Swiss Regs Induce UBS to Consider Glass Steagall Lite Partition, So Risky Ops May Become US Problem

Switzerland has taken the sensible move of recognizing that it cannot credibly backstop banks whose assets are more than eight times the country’s GDP. It is in the process of imposing much tougher capital requirements, expected to be nearly 20% of risk-weighted assets, well above the Basel III level of 7%.

UBS apparently plans to partition the bank in a Glass-Steagall lite split, leaving the traditional banking operations in Switzerland and putting the investment bank in a separate legal entity outside Switzerland. This resembles the approach advocated in the preliminary draft of the UK’s Independent Banking Commission report, of having retail banking and commercial banking separately capitalized.

The problem is that the devil lies in the details.

Fed Investigating Goldman Over Possible HAMP Mortgage Mod Violations

The Financial Times discusses a curious development, namely, that the New York Fed is making an inquiry into allegations that Goldman’s mortgage servicing unit, Litton Loan Services, failed to comply with HAMP guidelines. Readers may recall that HAMP Is the half-baked Do Something About the Mortgage Crisis program designed to give homeowners “permanent” year payment reduction mods, which is a kick the can down the road strategy.

In HAMP, servicers routinely asked borrowers to send the same documentation multiple times and assured borrowers they were likely to get a mod, only to refuse them. The worst is that many homeowners wound up worse off since they were not told that when the reduced payment trial mod ended, they would be asked to fork over the foregone portion of the payments plus late fees, pronto. Servicers often encouraged borrowers to use the savings to pay down other debt, thus assuring the homeowner would be unable to catch up and would lose their home.

The reason the Fed inquiry is curious is not that there were abuses; they were rampan

Former Treasury Restructuring Official Supports View That Dodd Frank Resolution is Failure Prone

As readers may know, we’ve been engaged in a long-running argument with a persistent Administration defender on the subject of Dodd Frank resolution, which is the one of the big arguments used for not doing much to make the TBTF banks less TBTF (see here for the latest in the series). The argument goes that since they will be allowed to fail, and they can be resolved non-catastrophically, the problem is solved. We’ve gone through the FDIC’s example of how they say they could have used the new powers under Article II of Dodd Frank and pointed out numerous (ahem) unrealistic assumptions, as as well as made more general arguments against its viability with anything other than a purely domestic institution. It’s also worth noting that a number of domestic banking and bankruptcy experts, as well as the BIS Cross-border Bank Resolution Group and the Institute for International Finance have also expressed serious doubts about the viability of Article II resolutions.

The latest critique comes from former Treasury official Jim Millstein who was the chief restructuring officer and headed the AIG rescue

Row Over New IMF Chief Intensifies (Updated)

We wrote a couple of days ago about the young versus old economy struggle over who will be the next leader of the IMF in the wake of Dominique Strauss-Kahn’s resignation. Ever since its inception, the IMF had had a European in charge. Christine Lagarde, the finance minister of France, is the favorite, and the US and Europe have enough votes to determine the outcome.

Representatives of several emerging economies voiced their objections, pointing to a comment made by Jean-Claude Junker, president of the Euro group, in 2007: “The next managing director will certainly not be a European”.

The Financial Times reports that the unhappiness has gone beyond complaints in the media to an open rift.

Greece must restructure

Cross-posted from Credit Writedowns Yesterday, I had the pleasure of talking on CNBC along with Marc Chandler of Brown Brothers Harriman about the European sovereign debt crisis. I also wrote a piece in the New York Times about the same issue, concentrated on Greece. While Marc and I differ somewhat in tone, we are both […]

Federal Court in Texas Deals a Potentially Serious Blow to MERS

Texas is not exactly a consumer-friendly state, so the Federal court ruling in the Eastern District of Texas against MERS has the potential to have broad ramifications (note a Federal court in Texas will still have to look to Texas law and precedents on real estate matters). Oddly, even though this decision took place last month, it seems to have escaped the notice of most real-estate oriented sites until now. Hat tip to April Charney for highlighting it (literally and figuratively, she marked the filing that I’ve posted below):

More Worries About the Foreclosure Overhang

The New York Times provides a workmanlike update on the impact of current and probable foreclosures on the housing market. The odd bit is that even though the article is downbeat, it manages to be relatively optimistic compared to industry sources.

Quelle Surprise! SEC Worked Hard to Ignore Warnings of Subprime Fraud

Saying that regulators ignored danger signs in the run up to the financial crisis now verges on being a “dog bites man” account. But the New York Times excerpt from the new book Reckless Endangerment by Gretchen Morgenson and Josh Rosner show that the SEC was not merely asleep at the switch, but apparently peopled with higher ups who were looking hard for reasons not to pursue suspicious conduct.

The extract is about a particularly rancid case, that of subprime originator NovaStar, which was one of the twenty biggest. Not only did it issue the drecky mortgages in impressive volumes, but it engaged in obvious financial misreporting. While the frauds it foisted on borrowers fell largely between regulatory cracks, since NovaStar as a non-bank mortgage broker was regulated only at the state level, and those offices are chronically understaffed, misstatements in public reports reside squarely in the SEC’s beat.

Former LPS Employees Allege 30% to 78% Error Rate in Borrower Mortgage Records, Contradicting Banker/Regulator Cover-Up

One investor said that every time he looked at corporate misconduct, “No matter how bad you think it is, it’s always worse”. Lender Processing Services is proving to be a classic illustration.

The City of St. Clair Shores Employees’ Retirement System is the lead plaintiff in a class action lawsuit against Lender LPS that was amended and expanded yesterday. The suit is against the company and its three top officers, charing them with violations of Federal securities laws with the intent of inflating the company’s revenues and stock price.

Registrars of Deeds as Unexpected Foot Soldiers Fighting Mortgage Abuses?

As regular readers no doubt know, the reason for creating the electronic mortgage registry service MERS was to save on recording fees when notes (the borrower IOUs) were transferred through multiple parties when mortgage securitizations were set up. As MERS legal status has come under questions, a few local registrars of deeds (the officers in charge of local recording offices) have made estimates of the losses to their county and have come up with significant numbers.

As more and more information about mortgage abuses have gotten media coverage, some registrars of deeds have dug further into their records to document their extent.

Marshall Auerback: IMF’s Predatory Policies Likely to Continue with New Leadership

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

It doesn’t matter who leads the IMF when the institution is governed by ideology.

Greece and Ireland appear to have lost an important political ally with the sidelining of Dominique Strauss-Kahn as both plead for more financial assistance from European partners to avoid an early restructuring of debt. The key word is “appears,” as in truth, arsenic remains arsenic, even if it is coated in sugar by an ostensible champagne socialist like Mr. Strauss-Kahn.

On Short-Termism and the Institutionalization of Rentier Capitalism

Andrew Haldane and Richard Davies of the Bank of England have released a very useful new paper on short-termism in the investment arena. They contend that this problem real and getting worse. This may at first blush seem to be mere official confirmation of most people’s gut instinct. However, the authors take the critical step of developing some estimates of the severity of the phenomenon, since past efforts to do so are surprisingly scarce.

A short-term perspective is tantamount to applying an overly high discount rate to an investment project or similarly, requiring an excessively rapid payback. In corporate capital budgeting settings, the distortions are pronounced: