Category Archives: Credit markets

David Miles: What is the optimal leverage for a bank?

Yves here. Please be sure to read to the end of the post, where Miles discusses what level of equity he thinks banks should carry.

By David Miles, Monetary Policy Committee Member, Bank of England. Cross posted from VoxEU.

The global crisis has called into question how banks are run and how they should be regulated. Highly leveraged banks went under, threatening to drag down the entire financial system with them. Here, David Miles of the Bank of England’s Monetary Policy Committee, shares his personal views on the optimal leverage for banks. He concludes that it is much lower than is currently the norm.

IRS Likely to Expand Mortgage Industry Coverup by Whitewashing REMIC Violations

As established readers know, we’ve been writing since mid 2010 about the widespread, possibly pervasive, failure of mortgage securitization originators to convey the notes (the borrower IOU) to securitization trusts as stipulated in the deal documents, well before the robo signing scandal broke. This abuse matters because the transaction procedures were designed carefully to satisfy certain legal requirements, among them rules contained in the 1986 Tax Reform Act regarding REMICs, or real estate mortgage investment conduits, which required that the securitization trust receive all its assets by 90 days after closing and that all assets conveyed to the trust have to be “performing”, as in not in default. Failure to comply with the rules is a prohibited act and subject to taxation at a rate of 100%, and additional penalties may apply.

Now, with the Federal government under enormous budget pressure, shouldn’t the authorities be keen to go after tax cheats? The headline of a Reuters article, “IRS weighs tax penalties on mortgage securities,” would suggest so. But don’t get your hopes up. The lesson is don’t jump to conclusions when big finance is involved.

Marshall Auerback: QE2 – The Slogan Masquarading as a Serious Policy

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

Bernanke’s QE2 program has hurt savers, done nothing for banks, and eviscerated middle class living standards.

The U.S. Federal Reserve signaled the end of its controversial $600 billion bond-buying program as planned. And not a moment too soon.

Why Does Reputation Count for So Little on Wall Street?

There is a very peculiar article by Steven Davidoff up at the New York Times: “As Wall St. Firms Grow, Their Reputations Are Dying.” It asks a good question: why does reputation now matter for so little in the big end of the banking game? As we noted on the blog yesterday, a documentary team was struggling to find anyone who would go on camera and say positive things about Goldman, yet widespread public ire does not seem to have hurt its business an iota.

Some of Davidoff’s observation are useful, but his article goes wide of the mark on much of its analysis of why Wall Street has become an open cesspool of looting and chicanery (as opposed to keeping the true nature of the predatory aspects of the business under wraps as much as possible).

On Economics of Contempt’s Reliance on His Own Brand Fumes

Economics of Contempt is aptly named. While his stand alone pieces on various aspects of regulation are informative, if too often skewed towards officialdom cheerleading (he too often comes off as an unpaid PR service for Geithner), his manner of engaging with third parties leaves a lot be desired. He often resorts to the blogosphere version of a withering look rather than dealing with an argument in a fair minded manner. This then puts the target in a funny position: do you deal with these drive-by shootings which have either not engaged or misrepresented your argument, by cherry picking and selective omission? If you do, you can look overly zealous or argumentative. But if you do nothing, particularly if it’s in an important area of regulatory debate, you’ve let disinformation, at the expense of your reputation, stand.

OCC Makes Patently False Claim That Slap-on-the-Wrist Servicing Penalties Could Hurt Banks

It’s time we come up with a new handle for the Office of the Controller of the Currency. It is difficult to convey how shameless this regulatory-agency-turned-slut for the banking industry has become. It’s the Stage 4 disease version of where our government is heading at a rapid clip: officials masquerading as serving the public interest when they are uber lobbyists for the pet whims of their supposed charges.

So what do we call the OCC? The Office of Capital Corruption? The Office of Criminal Capitulation? I have no doubt readers will have even better ideas (and don’t be constrained by the acronym).

So How Exactly Does Buffett Get Information Like This?

Reader Hubert soliders on in the lonely task of continued Lehman spadework. He highlighted this section of FCIC testimony from Warren Buffett:

I think that if Lehman had been less leveraged there would have been less problems in the way of problems. And part of that leverage arose from the use of derivatives. And part of the dislocation that took place afterwards arose from that. And there’s some interesting material if you look at, I don’t exactly what Lehman material I was looking at, but they had a netting arrangement with the Bank of America as I remember and, you know, the day before they went broke and these are very, very, very rough ﬁgures from memory, but as I remember the day before they went broke Bank of America was in a minus position of $600 million or something like that they had deposited which I think J.P. Morgan in relation to Lehman and I think that the day they went broke it reversed to a billion and a half in the other direction and those are big numbers.

Hubert muses:

Mirabile Dictu! Economists Agree All the Fed Has Done is Goose Financial Markets!

You heard it first in the blogopshere. From the New York Times:

The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small….

Another Class Action Suit Filed in Federal Bankruptcy Court Against Lender Processing Services

The noose is tightening around Lender Processing Services.

Last week, various news outlets revealed that Federal banking regulators had issued consent orders against major servicers, MERS, and LPS. Kate Berry of American Banker pointed out that LPS is exposed to making payments to servicers:

In addition to the 14 biggest mortgage servicers, two of the biggest vendors to the industry received cease-and-desist orders from regulators Wednesday. One was stronger than the other.

Lender Processing Services Inc. and Merscorp Inc.’s Mortgage Electronic Registration System were both cited for “significant compliance failures” and “unsafe and unsound business practices” related to foreclosures. Regulators are requiring both companies to hire independent consultants, take remedial steps to address past failures and hire additional staff.

But only LPS, a publicly traded company in Jacksonville, Fla., that provides foreclosure-related services to banks, faces the possibility of having to reimburse servicers and borrowers if an independent review finds anyone was financially harmed by its failure to properly execute mortgage documents….

S&P Negative Watch Smackdown Wrap

One of the few upsides of the patently silly negative watch announcement for US Treasury bonds was that it elicited colorful and instructive commentary (see our view, along with Mark Thoma’s and Barry Ritholtz’s at the New York Times’ Room for Debate). Some sightings:

The FDIC’s Rosy, Theoretical, Misleading Lehman Resolution Counterfactual (or Why TBTF is Still TBTF)

The FDIC has released a document that purports to show how it could have successfully resolved Lehman Brothers using its new Title II resolution authority granted under Dodd Frank.

All I can say is that this is an interesting piece of creative writing. The Lehman counterfactual rests on a series of assumptions, which as I will discuss shortly, look pretty questionable. The most charitable assessment one can make comes from a famous exchange between two technologists. Trygve Reenskaug says: “In theory, practice is simple.” Alexandre Boily asks: “But, is it simple to practice theory?”.

But some longstanding Administration cheerleaders have jumped on the bandwagon, arguing that “pundits” have asserted “without evidence or analysis” that the resolution authority can’t work. That’s pretty amusing, given that Shiela Bair herself concedes, per the Financial Times, that the resolution authority will not work on a major international bank with retail and investment banking operations:

More Shots Across MERS’s Bow

Admittedly, this act of rebellion against MERS, the electronic mortgage registry by a Pennsylvania county is comparatively minor, but nevertheless illustrates the efforts various local bodies are taking to assert their authority against a system imposed without regard to state and local real estate laws.

Montgomery County estimates that it has lost $15 million in recording fees due to MERS, which its Recorder of Deeds, Nancy Becker, says has also made a mess of title records. She is working to get the county to cease doing business with banks that make use of MERS, and has launched an effort to get other counties in the state to follow suit.

Bill Black: Fiat Justitia Ruat Caelum (Let Justice be Done, Though the Heavens Fall)

Yves here. This post by Bill Black is important because it presents and dissects an ugly example of failure of morality and common sense within what passes for the elite in the US.

Earlier this week, Matthew Yglesias defended the Administration’s distaste for pursuing fraud investigations against financial players:

….the Obama administration felt it was important to restabilize the global financial system. That meant, at the margin, shying away from anxiety-producing fraud prosecutions. And faced with a logistically difficult task, that kind of pressure at the margin seems to have made a huge difference. There simply was no appetite for the kind of intensive work that would have been necessary.

I’m not as persuaded as, say, Jamie Galbraith is that the failure to do this is a key causal element in our economic problems. Indeed, I’d say that if you look at the situation literally, Tim Geithner’s judgment was probably correct.

This line of thinking is a favorite of authoritarians. Democracy, justice, and capitalism are messy affairs. All sort of repressive measures can be justified in the name of stability and safety. And the irony here is that the firms directly responsible for the most disruptive economic event of the last eighty years are to be shielded from the long arm of the law….in the name of stability, the one output they have clearly failed to provide.