Category Archives: Credit markets

Satyajit Das: Deflating Inflation/ Inflating Deflation

By Satyajit Das, author of Extreme Money: The Masters of the Universe and the Cult of Risk (Forthcoming in Q3 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Quantitative easing (“QE”), the currently fashionable form of voodoo economics favoured by policymakers in the US, is primarily directed at boosting asset values and creating inflation. By essentially creating money artificially, central bankers are seeking to return the world to stability, growth and prosperity.

The underlying driver is to generate growth and inflation to enable the problems of excessive debt in the economy to be dealt with painlessly. It is far from clear whether it will work

Initial Award of Frederic Mishkin Iceland Prize for Intellectual Integrity: Calomiris, Higgins, and Mason Paper on Mortgage Settlement

It seems more than a bit peculiar that, per American Banker, financial services industry participants have paid for three academics to issue a lengthy paper attacking a leaked draft settlement between state attorneys general and mortgage servicers. We have pointed out in multiple posts that the state AGs bargaining position is weak due to the lack of investigations. If the banks don’t like the terms, they can tell the AGs to see them in court.

But far more interesting is how embarrassingly bad this paper, “The Economics of the Proposed Mortgage Servicer Settlement,” by Charles Calomiris, Eric Higgins, and Joe Mason, is, yet how the economics discipline continues to tolerate special-interest-group- favoring PR masquerading as research.

In real academic disciplines, investigators and professors who serve big corporate funders have their output viewed with appropriate skepticism, and if they do so often enough, their reputation takes a permanent hit. Scientists who went into the employ of tobacco companies could anticipate they’d never leave that backwater. Even the great unwashed public knows that drug company funded research isn’t what it is cracked up to be.

But in the never-never realm of reality denial within the Beltway, as long as you can get a PhD or better to grace the latest offering from the Ministry of Truth, it gives useful cover to Congresscritters or other message amplifiers who will spout whatever big donor nonsense they are being asked to endorse this week.

Louisiana Bankruptcy Court Ruling Confirms Claims Made Against Lender Processing Services in Class Action Filings

A ruling in a Louisiana bankruptcy court case, In re Wilson, provides compelling evidence that many of the assertions made by Lender Processing Services, which both acts as the servicing platform and provider of default services for mortgage services industry, about how limited its role and hence its legal liability is, simply do not comport with reality.

Satyajit Das: Economic Uppers & Downers

By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk (Forthcoming in Q3 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Quantitative easing (“QE”) is the currently fashionable form of voodoo economics favoured by policymakers in the US.

QE, loosely “printing money”, entails central banks buying government bonds, which are held on the central bank’s balance sheet to inject money into the banking system thatcan be exchanged by banks for higher return assets, such as loans to clients. The purchases also increase the price of governments bonds, reducing interest rates.

Advocates of QE believe that it will lower interest rates promoting expenditure, growth, reduce unemployment and increase the supply of credit to underpin a strong economic recovery. In reality, QE is primarily directed at boosting asset values, subsidising banks, weakening the currency, helping the government finance its deficits and creating inflation.

Satyajit Das: Voodoo Economics Redux

n the film Ferris Bueller’s Day Off, an economics teacher, played by Ben Stein, launches into an improvised soliloquy: “… Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve. Anyone know what this says? It says that at this point on the revenue curve, you will get exactly the same amount of revenue as at this point. This is very controversial. Does anyone know what Vice President Bush called this in 1980? Anyone? Something-d-o-o economics. “Voodoo” economics.”

In the late twentieth century, US President Ronald Reagan discovered voodoo economics. In framing policy responses to the global financial crisis, central bankers and governments have increasingly embraced more exotic forms of voodoo.

A suspicious sniff at CoCos

Contingent Convertible bonds (“CoCos”) are supposed to address this nonsensical phenomenon: During the financial crisis a number of distressed banks were rescued by the public sector injecting funds in the form of common equity and other forms of Tier 1 capital. While this had the effect of supporting depositors it also meant that Tier 2 capital […]

It’s Now Official: No More Joint Federal/State Attorney Mortgage Settlement Effort

Housing Wire has confirmed what American Banker and the New York Times had indicated was underway, namely, that the formerly joint state/federal effort to deal with foreclosure abuses (still undefined beyond robosigning and improper affidavits) are now separate initiatives. We think that’s a good thing, since the state and federal law issues were so different that it made the idea of a grand global settlement seem a tad deranged, particularly on the fast timetable the Obama crowd was pushing for. As a reader with securities law regulatory experience noted via e-mail:

Whoever was leading this charge for the Feds totally miscalculated.

Washington AG Investigates New Foreclosure Abuse Front: Trustee Non-Compliance

LoanSafe reports that the Washington state attorney general, Rob McKenna, has uncovered a likely widespread violation of state law, that foreclosure trustees lack a physical presence as required and a means for borrowers to contact or visit them to submit last minute payments or present documentation. McKenna’s interest appears to result from the fact as with servicers, the foreclosure trustees are not accessible to borrowers and not responsive when there may be legitimate reasons to halt or delay a foreclosure. Note that Washington is a deed of trust state, and the foreclosure trustee handles certain tasks relative to the actual foreclosure. This is a different role than that of the securitization trustee, who is the agent of the securitization trust, the legal entity that holds the loans in the securitization.

ACLU Taking Aim at Florida’s Kangaroo Foreclosure Courts (Updated With Court Filing)

Per Lisa Epstein and April Charney, the ACLU has announced it is contesting the procedures used in Florida’s recently created foreclosure courts:

Rationalization of Biggest Foreign Bank Bailout Misses Regulatory Failure

Some aggressive spinning on the Fed data releases about its lending during the financial crisis has surfaced at Bloomberg (admittedly with some less favorable facts also included). The Friends of the Fed and other Recipients of Largesse are defending the central banks’ panicked and indiscriminate responses to the crisis. These efforts to rationalize emergency responses fail to acknowledge underlying regulatory failings that remain unaddressed.

The PR push surrounds the foreign bank that got the most support during the post-Lehman phase, namely, Dexia.

Banks Win Again: Weak Mortgage Settlement Proposal Undermined by Phony Consent Decrees

hink I’ve ever seen anything so craven heretofore.

As readers may recall, we weren’t terribly impressed with the so-called mortgage settlement talks. It started out as a 50 state action in the wake of the robosigning scandal, and was problematic from the outset. Some state AGs who were philosophically opposed to the entire exercise joined at the last minute, presumably to undermine it. Not that they needed to expend much effort in that direction, since plenty of Quislings have signed up for the job.

Amar Bhidé on the Role of Human Judgment

Rob Johnson of INET interviews Amar Bhide, an old McKinsey colleague and author of the book A Call for Judgment. From the introduction to this video:

The Professor of International Business at the Fletcher School of Law and Diplomacy criticizes the tendency in many quarters to rely on mathematical models to inform investment decisions. It’s that overreliance on models that tend to generalize and simplify that helped drive the world into the global financial crash of 2008 and the ensuing Great Recession. Bhidé makes a strong case that human actors need to immerse in the details of individual cases and weigh many different factors to come up with tailored decisions that more closely apply to the complexities of the real world. Bhide also argues that regulators need to take a similarly human-centered approach.

More Journalists Dignifying “TARP Was a Success” Propaganda

I hope NC readers don’t mind my belaboring the issue of the TARP’s phony success, but every time I see the Administration’s propaganda parroted I feel compelled to weigh in.

The trigger was an effort at a balanced assessment by Annie Lowrey at Slate, to which I have some objections, followed by some shameless and misguided cheerleading by Andrew Sullivan:

But two years ago, I sure didn’t expect the government to make a profit from TARP. And I sure didn’t expect the auto bailouts to become such huge successes.

What’s surprising to me is how pallid is the Obama administration’s spin has been on this. I never hear them bragging about how they managed to pull us out of the economic nose-dive we were facing. I know why: the recession isn’t over, even if TARP was a success, no one wants to hear about it, etc. But it’s one of the strongest and least valued part of Obama’s record – along with the cost control innovations in health insurance reform.

At some point, you have to stand up and defend your record. No doubt Obama is biding his time on this. But count me as surprised as I am impressed.

Cease and Desist Orders as Regulatory Theater in Mortgage Settlement Negotiations

I must confess to being puzzled last week by an American Banker article that claimed that Federal banking regulators were looking to send out cease and desist letters to serviers as a way to light a fire under banks who were dragging their feet at the now somewhat infamous so called settlement negotiations among 50 state attorneys general, various Federal regulators, the Department of Justice, and the major banks/servicers.

Now on the surface, this sounds sensible. The banks are not cooperating, so pull out a big gun and if needed, use it on them. But American Banker provided a link to the form of the cease and desist order and it looks remarkably weak. Its requirements are far less demanding than those set forth in the famed 27 page settlement draft that was presented by the AGs and the Federal authorities to the banks.

It’s important to stress that a threat of action that is weaker than what you are demanding in a settlement makes no sense in a negotiating context. It’s like offering to settle a lawsuit for $500,000 when the case only asks for $250,000 in damages. No one would accept the settlement, they’d either fight in court or accept a default judgment.

Judges in Florida Start Inflicting Pain on Foreclosure Mills and Trusts

Several readers pointed to an article in the Palm Beach Post, “Foreclosure crisis: Fed-up judges crack down disorder in the courts,” about how judges are having to resort to increasingly forceful measures to get foreclosure mill lawyers to comply with court orders. I had refrained from discussing it here because one aspect of the news story struck me as potential misreporting, so I wanted to verify it (and Lisa Epstein pointed to the transcript which enabled me to do so).

There have already been a number of reports of a marked shift in attitudes among judges in the wake of the robosigning scandal. In many courtrooms, the presumption that the bank is right has vanished. For instance, Mark Stopa reported late in March: