Category Archives: Credit markets

Satyajit Das: Potemkin Villages – The Truth about Emerging Markets

By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”

Martin Gilman (2010) No Precedent, No Plan: Inside Russia’ 1998 Default; MIT Press, Cambridge, Massachusetts

Victor C. Shih (2008) Factions and Finance in China; Cambridge University Press, Cambridge, Massachusetts

Carl E Walter and Fraser J. T. Howie (2010) Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise; John Wiley, Singapore

According to myth, Russian minister Grigory Potyomkin ordered the erection of fake settlements, consisting of hollow facades of villages along the Dnieper River, to impress Empress Catherine II, about the value of her new conquests during her visit to Crimea in 1787. More than two centuries later, emerging market nations have borrowed the strategy. These three books provide insights into the Potemkin-village-like structure of emerging economies.

Megan McArdle Uses Straw Men to Argue Against Principal Mods

Megan McArdle has a post up discussing why she thinks the benefits of principal mods would be “at best small and mixed”.

The problem with her lengthy discussion is that it is rife with straw men.

Before we get to the nitty gritty, I want address two bits of framing at the top which I found troubling. The first was the title, “Principal Write-Downs Still Popular With Wonks”. The “still” suggests that wonks like it even though some, presumably most, yet to be named others don’t. And singling out “wonks” further implies that (aside from homeowners) they may be its only fans.

That is very misleading. Who is in favor of mods? The only people who under normal circumstances ought to have a vote on this matter, namely, the borrowers and the lenders. First mortgage lenders overwhelmingly favor mods to borrowers with who still have a viable income. Why? Do the math:

Dylan Ratigan: Will Washington wake up to Wall Street greed?

It’s good to see more MSM outlets taking up the “why the lack of cases against the big Wall Street firms” theme. Perhaps my cynicism is showing, but Phil Angelides seems to be talking a tougher line than he did when the Financial Crisis Inquiry Commission report was released. Is this simply his response to […]

Michael Lewis: Will Defamation Charges by His “Big Short” Villain Stick?

One of the dangers of framing stories as Manichean tales is the purported bad guys can take offense and try to get even. And if you do it in a book, the threshold for liability is low enough that they might indeed be able to inflict some real pain.

Michael Lewis, author of the bestseller The Big Short, along with his publisher, W.W. Norton and his source Steve Eisman, were sued today in Federal court for defamation by one Wing Chau. In case you are one of the five people in America who is interested in finance but has managed not to read The Big Short, there is a scene in the book in which FrontPoint’s Eisman, who is Lewis’ main subprime short hero, has asked to meet someone who is on the other side of his trade. That “someone” is a CDO which in practical terms means a CDO manager. Eisman and two of his employees have dinner with Wing Chau, who is the head of the CDO manager Harding. Needless to say, Lewis’ account makes it clear that he regards Chau as very much part of the problem.

Now we’ve written a LOT about CDOs; in fact, our book ECONNED broke the story of Magnetar and demonstrated how its CDO program, which it used to establish a risk-free short position, drove the demand for a large portion of the subprime market in the toxic phase. And we have taken issue with Lewis’ characterization of the shorts as heros.; Knowingly or not, the strategy that reaped them billions also distorted normal market pricing signals on a massive scale, not only allowing the subprime mania to continue well beyond its sell-by date but also by actively promoting the creation of the “spreadiest” or very worst mortgages.

Our reading of Lewis’ plight is that Chau’s claims seem to be a stretch, given that the facts are less on his side than a reading of his suit might suggest. But as we will discuss later on, litigation on books is so plaintiff friendly that even a weak claim can succeed in court.

Big Drop in New Foreclosures?

There has been evidence here and there of a marked fall in new foreclosure filings. Lender Processing Services, which handles more than half of the loans serviced in the US, said its revenues in its Default Services Group were down in the final quarter of the year. Why? Its revenues are tied to initial foreclosure filings, and its were off 33%, no doubt in large measure due to the robo signing scandal. Recall that it led many banks to halt foreclosures (some all over the US, others in judicial foreclosure states only) while they inspected the state of play and scrambled to revamp procedures. Banks piously claimed that they found no problems in the correctness of foreclosure actions and that ex making the changes needed to assure affidavits were proper, they were going to be back to business as usual post haste.

Now we already know that that isn’t the case. Since the robosigning scandal broke, foreclosure activity has been down. RealtyTrac reported that foreclosures in January were up only 1% over December levels, which was down 17% from the year prior.

But RealtyTrac captures every foreclosure filing in that particular report, so it is a mix of new foreclosure filings plus additional filings for foreclosures already underway….

Speculators Not Wagering Much Against Periphery Country Eurobonds

Given how many commentators believe that Greece is destined to default on its bonds (particularly since they are subordinate to any new money from the IMF and EU), you’d think they’d be putting their money where their mouth is.

But the old saw in the US is “don’t fight the Fed”. And the same logic appears to apply with the ECB. John Dizard of the Financial Times reports that perilous little in the way of CDS contracts is being written on everyone’s favorite sovereign default candidate (although the leader of Fine Gael, which will be leading the new coalition in Ireland, fired a shot of sorts across the bow of the eurozone officialdom).

Guest Post: The 10 Most Systemically Risky Financial Firms in the US

Yves here. As we noted in January,

Treasury Secretary Timothy Geithner is trying to duck the assignment given the Financial Stability Oversight Council under the Dodd Frank legislation, namely, that of identifying “systemically important” financial institutions….The Treasury devised a list of banks it subjected to stress tests; conceptually, how is this process any different?

I’m pleased to see four professors from New York University’s Stern School take up this task. And they end their analysis with a rebuke:

This is the easy part for the Financial Security Oversight Council. The tough part is to then design efficient regulation that discourages the build up of excessive risk.

By Viral Acharya, Thomas F. Cooley, Robert Engle, and Matthew Richardson. Cross posted from VoxEU.

As part of the US policy response to the global crisis, the Dodd-Frank Financial Reform Act calls for regulators to identify systemically risky financial firms – the sort that took the US financial crisis global. But how to identify these firms remains unclear. Some claim the task is impossible. This column begs to differ and names the 10 most systemically risky financial firms in the US.

NYT’s Joe Nocera Defends Failure to Bring Wall Street Execs to Justice

Aargh, it is frustrating to see how quickly establishment-serving shallow arguments become conventional wisdom. We get a big dose of this line of thinking from the New York Times’ Joe Nocera in an article titled, “Biggest Fish Face Little Risk of Being Caught.”

Now you can’t disagree with the conclusion: no major banking industry figure is going to be brought to justice. But the explanation he offers is incomplete and misleading, and serves to misdirect the public from more fundamental and more troubling causes.

Banks Pushing Back Hard on Inadequate Mortgage “Settlement” Trial Balloon

No sooner have the preliminary outlines of an inadequate settlement of mortgage servicing abuses been leaked, but the banking industry is engaged in a full court press to stop it.

The astonishing part is that the banking industry continues to maintain that it really didn’t do anything wrong, all it did was make some technical errors. That so grossly understates the degree of its recklessness and malfeasance as to be beyond relief.

It’s no surprise that the so-called Foreclosure Task Force which spent a mere eight weeks reviewing servicer activities and didn’t find much. The timeframe of its exam assured that it would not verify servicer records and accounts against borrower experience and records. It is almost certain that they also did not look at how servicer software credited payments and charges, when there is widespread evidence of violations of agreements with borrowers and RESPA.

And to the extent they looked at “improprieties” in foreclosure documents, it’s a given that they did not go beyond robosigning, when that is arguably the least significant form of malfeasance. There is ample evidence of fraud to cover for the failure to convey notes to securitization trusts, ranging from the misuse of lost note affidavits to document fabrication (bogus allonges being the most common fix).

In addition, pooling and servicing agreements also have specific provisions as to level and procedures for charging certain fees. Yet studies have determined that a specific servicer will apply the same charges across all borrowers and investors, irrespective of the requirements of particular securitizations. So it’s blindingly obvious that this exam was cursory, looking at one or two points of failure in a slapdash fashion and completely ignoring other issues that are at least as important.

Gillian Tett on Losses at Central Banks

Is the old Gillian Tett back? The one-time Financial Times capital market editor has taken to writing less frequently (understandable now that she has head the US operation) and less intrepidly (much of her commentary was prescient, particularly on my pet topic, collateralized debt obligations).

But her latest piece sounds a wee warning, and it’s one we’ve commented on as well, namely, that central banks are vulnerable to losses, and just like the banks they mind, may need a rescue by taxpayers if the err badly enough.

Her object lesson is the Swiss National Bank. Unlike most central banks, the SNB is quite transparent, and publishes periodic statements of the value of its assets on a mark to market basis. The usually conservative SNB made a uncharacteristically aggressive move last year, intervening in currency markets in an effort to suppress the value of its levitating franc.

Even though the locals applauded the move, the central bank was outgunned by currency traders and threw in the towel mid year. As the swissie continued to rise, the bank showed losses at the end of 2010 of SFr 21 billion. The only saving grace was that the gains on the bank’s hefty gold positions exceeded the damage. But that does not reassure its shareholders, who have become accustomed to annual payments out of bank “profits”, and are concerned that the profits this year will be too meager for them to enjoy their customary level of income.

Mortgage Fraud Whitewash: $20 Billion “Get Out of Jail Free” Settlement Floated

American leadership is reliable in one respect: it consistently undershoots my already low expectations.

Or maybe I have it backwards because I keep forgetting who the authorities are really serving, and it clearly isn’t you and me. As we will discuss below, the latest scam is that the banking regulators are finalizing a mortgage “breakdown” settlement, and they’ve evidently decided to let the industry off the hook for a mere $20 billion.

In Saudi Arabia, the royal family has just offered $36 billion worth of concessions in an effort to placate an increasingly unruly public (this appears to be in addition to pledges to spend $400 billion on education, health care, and infrastructure by 2014). This is in a country with a population just under 26 million, including over 5 million non-nationals who presumably aren’t eligible.

Now you can easily pooh pooh this comparison, since Saudi Arabia is an autocratic country desperately throwing around money to buy off dissidents, right? But this is the kind of money a leadership group will shell out when pressed to defend an existing order. And the US was very quick to hand out funds right, left, and center during the financial crisis. It’s continuing to do so now in less obvious ways, by continued life support for the mortgage market through Fannie and Freddie, the Fed’s super low interest rates and QE2, and non-monetary measures, most important its refusal to make any sort of serious investigation into what happened in the crisis and prosecute key actors.

Daniel Pennell: MERS Counsel Calls Me

By Daniel Pennell, a systems expert who has testified before the Virginia House of Representatives on MERS

I wonder if solar flares or something in the ether is prompting officials under attack to have unusually open conversations with people in the opposition. We’ve just had Governor Walker speak to “David Koch”, and I had a mini version of the same experience with MERS’ general counsel, except in my case, I was the recipient of the phone call. But the underlying assumptions of MERS and the Wisconsin executive were similar, in that each is confident of support from powerful allies.

Given that I am a vocal MERS critic, though testimony I have given, opinion pieces I have written and the work on legislation I have done over the last year decrying the legal standing and operational sloppiness of MERS, I was more than a little taken aback to get a call from Richard Anderson of the MERS legal team yesterday.

Bill Fleckenstein and Dylan Ratigan Discuss Commodities and “Individually Smart, Collectively Stupid” Regulators

This is a particularly crisp and straightforward discussion between money manager Bill Fleckenstein and Dylan Ratigan about central bank actions and commodities inflation. Enjoy!

MERS Endgame Nearing? One County Seeks Over $22 Million for Unpaid Recording Fees

Plank after plank of the mortgage recording company MERS’ business model has come under attack. To date, the results do not look good for the embattled company.

MERS has repeatedly insisted that its operations are legal. It would be more accurate to say that insufficient attention was paid to legal issues when the firm was created and the permissibility of its operations were under the radar and hence in a legal grey area for many years. Now that they have been challenged in court, MERS has had to retreat from many positions it took in public. Despite its protestations that everything it did was kosher, the database firm has now retreated from one of its widespread practices, of allowing foreclosures to be made in the name of MERS, after a number of state supreme courts and Federal bankruptcy courts issued rulings to the contrary.

Not surprisingly, MERS has the look of a company in trouble.