Category Archives: Credit markets

Quelle Surprise! Cursory Foreclosure Exam Produces Expected Whitewash of Servicer Abuses

It is really annoying when people, particularly those in positions of power, can’t even be bothered to take the trouble to lie well.

As we noted back in November, in a post titled, “Foreclosure Task Force: Worse Than Stress Tests?“, the officialdom was embarking on yet another hollow exercise in oversight:

Felix Salmon reports on a conversation with departing assistant Treasury Secretary Michael Barr on newly-commenced reviews of the practices of bank servicers.

Barr’s patter might sound convincing to the uninformed. An “11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks”! Promises to hold miscreants accountable! Banks required to fix what’s broken!

Felix was skeptical, noting that the reviews were effectively a “physician, heal thyself” approach to a part of the banking business that has proven to be unable to change behavior…

In addition, as Felix pointed out, if the exams were to uncover issues that might pose systems risk, the Treasury is certain to reason to minimize them…

This “review” is clearly a Potemkin exercise, yet another stress test-type charade, in which the facade of a serious investigation is used to sell the message that all is well in the banking industry.

Why Liberals Are Lame

The chattering classes of the left are encouraged by the spectacle of 14 Wisconsin state senators having the intestinal fortitude to deny the governor a quorum for a budget vote that includes provisions to strip most state employees of virtually all of their collective bargaining rights. They were in turn emboldened by large scale demonstrations in the capitol, which seemed to get their momentum from the fact that students, rather than taking the day off when teachers called in sick so they could protest, turned out in large numbers to support them.

Don’t underestimate the ability of the Democrats to trade this opportunity away. All the defecting Senators are asking for is to slow down the process and negotiate the bill. Sounds reasonable, right?

As someone who been party to deal-making, the problem with being reasonable and measured is that that only works with fair-minded and/or experienced opponents. Being non-negotiable is not only terribly effective (you throw a tantrum and then make only token concessions to let the other side save a teeny bit of face), it also takes comparatively little in the way of bargaining skills.

The right wing, for the most part, has made being unreasonable and non-negotiable part of its branding. The left, peculiarly, has not adapted. And the result is that it too often winds up ceding way more ground than it needs to.

Many readers will point out that this ineffectiveness serves as useful protective cover, particularly with the Obama Administration. It has repeatedly sought to have its cake and eat it too, by appealing to as much as possible of the traditional Democratic base (which they figure they can abuse, since it has nowhere to go) while also playing up to corporate backers. The true state of play has reached the point that even purveyors of leading edge conventional wisdom like Jeffrey Sachs are now willing to say that we have two center-right parties in the US.

But this, while true, misses an underlying pathology.

“Project Merlin” keeps on giving

Well, it was obvious that this bullet point from the Merlin agreement: implementing and applying European and international rules to create a level playing field in both policy and practice whilst protecting and maintaining the particular strength of UK financial services, and without pre-judging the outcome of the Independent Commission on Banking (IBC). was a […]

The 7 Things Really Wrong with the Treasury’s GSE Reform Plan

As readers no doubt know, the Treasury Department released its overdue plan for reform of the Fannie and Freddie, otherwise known as GSEs (for “government sponsored enterprise”) last Friday. We were surprised that some normally astute commentators, such as Mike Konczal and Felix Salmon, were taken in by this thin and misleading document. As banking expert Chris Whalen said by e-mail, “The proposal is completely disingenuous. Read 180 degrees opposite what it says.”

What is particularly striking is it is not very difficult to difficult to see through the stage management. Throughout the document, the Treasury calls its proposal a “plan” when it is anything but. Putting some stakes in the ground and then offering three mutually exclusive alternatives and no timetable for resolution is not a plan.

The reason for this failure to put forward a real proposal is that Treasury is trying to present itself as a fair broker of a politically fraught process. But that’s bunk. The outcome, unless the public wakes up to this new effort at looting, is already clear.

The fix is just about in.

Our Response to the Center for American Progress Objection to Our Post on Its GSE Reform Proposal

Readers have hopefully had the opportunity to read “The Center for American Progress Objects to Our Critique of Its GSE Reform Plan”, which contained an e-mail by David Min of the Center for American Progress presenting its bones of contention.

While we appreciate that the CAP has gone to the trouble to communicate with us directly, we are not persuaded by its arguments.

We’ll recap the e-mail and then address the issues individually:

1. You need to have some form of government guarantee to have a mortgage product that is fair to middle class consumers (his writing is a bit confused, at one point he uses “no” when he means “yes”, but this is the drift of his gist).

2. We’ve mistated who would eat “catastrophic risk” under the CAP scheme, since the Catastrophic Risk Fund and the new mortgage insurer investors would take losses first

3. Not all “banks” are behind or support the CAP proposal

4. This plan is the best option for the public and less lucrative to the financial services industry than a “privatization” model

Let’s dispatch these arguments in order.

Irish Bond Haircuts: Too Little, Too Late

The justification for Lenihan’s ruinous guarantee of both bank deposits and senior bondholders was partly a legal one. Irish law, like UK law, makes it hard to favour depositors ahead of bondholders; so FDIC-style resolutions aren’t an option. One might object that laws can be changed by sovereign governments, but the other justification was political: […]

Why are Half of the FCIC Interviews Being Withheld?

The FCIC has made a great show of being transparent, but if you are going to make that your signature, you can’t engage in halfway measures. Lambert Strether, in an e-mail titled “A data conversion effort that shows FCIC’s “Resource Library” is farcically bad and obfuscatory” noted:

Obviously, any independent evaluation of the material is not at all a priority with these guys. Yes, they’ve made it easy enough to DISTRIBUTE, and no doubt there will be an iPhone app any day now. Yay. But as far as making it easy to EVALUATE, which takes data you can interchange and manipulate and search, everything they have done makes that harder. Every single thing.

More tooth gnashing from Lambert here and here.

Another mystery is why so many interviews are being withheld.

Paulson Denies Culpability in Crisis, Yet Even Bear Turned Down His Deals

The release of the first batch of FCIC interview reveals interesting finger-pointing among some of the major players. We’ve argued (and in ECONNED, provided a considerable amount of supporting analysis) that the subprime shorts drove the demand for bad mortgages. There is no other explanation for the explosion of demand for “spready,” meaning bad, mortgages that started in the third quarter of 2005. As Tom Adams and I describe in a recent post:

Signs of recklessness were more visible in 2004 and 2005, to the point were Sabeth Siddique of the Federal Reserve Board, who conducted a survey of mortgage loan quality in late 2005, found the results to be “very alarming”.

So why, with the trouble obvious in the 2005 time frame, did the market create even worse loans in late 2005 through the beginning of the meltdown, in mid 2007, even as demand for better mortgage loans was waning? It’s critical to recognize that this is an unheard of pattern. Normally, when interest rates rise (and the Fed had begun tightening), appetite for the weakest loans falls first; the highest quality credits continue to be sought by lenders, albeit on somewhat less favorable terms to the borrowers than before.

In other words: who wanted bad loans?…

James Galbraith: Deficit Hawks Down – The Misconstrued “Facts” Behind Their Hype

By James K. Galbraith, a Vice President of Americans for Democratic Action who teaches at the University of Texas at Austin. Cross posted from New Deal 2.0.

Economist James K. Galbraith goes behind the scenes at a Pete Peterson gathering of deficit hawks to see what they have to say.

The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

Mr. Bixby began by describing the public debt as “the defining issue of our time.” It is, he said, a question of “how big a debt we can have and what can we afford?” He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change. Oddly none of those issues were actually mentioned by anyone, all evening long.

So Why is the FCIC Protecting Bernanke & Co?

Yes, the question in the headline is rhetorical. We know that great efforts have been made and are continuing to be made not to reveal certain aspects of the financial crisis, and the only rationale that makes an iota of sense is the information would embarrass certain people in power.

The latest object lesson is the failure of the FCIC to post the full recording of its 2009 interview with Bernanke. The rationale is that the interviews contain “legal or proprietary information”, so it is being withheld for five years. Are these people unable to use a calendar? The critical phase of the crisis was pretty much over as of end of 2008. Any sensitive customer or transaction position information from that period is now stale.

Deep T: Australian Banking System on Unstoppable Path to Collapse or Government Bailout

Yves here. This long and informative post on the pending train wreck in the Australian financial system might seem to be too narrow a topic for most Naked Capitalism readers, but it makes for an important object lesson. Australia managed to come out of the global financial crisis largely unscathed because its banks did not swill down toxic assets from the US (chump quasi retail investors were another matter) and it benefitted from the commodities boom.

Nevertheless, one might think its bank regulators might see what happened abroad as a cautionary tale. Mortgage debt took center stage in the crisis, and Australia is in the throes of a serious housing bubble. Yet as this post describes, the regulators seem asleep at the switch as to one of its major drivers.

By Deep T., a senior banking insider who is fed up with his colleague’s reliance on public support. Cross posted from MacroBusiness.

Previously I have posted on how the major banks recycle capital in The Capital Rort. I want to extend that subject by showing how mortgage ‘rehypothecation’ in Australia has led to the massive expansion in liquidity available to Australian banks which is at the root of the mortgage affordability issues in Australia and has put Australia’s banking system on the unstoppable path to collapse or government bailout.

GSE Headfake: Yet More Looting Branded as “Reform”

As time goes on, the various Ministries of Truth just get better and better at their stock in trade. We’ve gone from artful obfuscation like “extraordinary rendition”, and “Public Private Investment Partnerships” to stress free “stress tests” (particularly the Eurozone version) designed to get bank stocks up and credit default swap spreads down, to even grosser debasement of language. What passes for the left has for the most part been dragged so far to the right that the use of once well understood terms like “liberal” and “progressive” virtually call for definition. And the word “reform” has virtually been turned on its head. Financial services reform was so weak as to be the equivalent of a jaywalking ticket; health care reform was a Trojan horse for even large subsidies to Big Pharma and the health care insurers. But GSE reform takes NewSpeak one step further by turning the “reform” concept on its head and using the label to describe an effort to institutionalize even bigger subsidies to the mortgage industrial complex.

While Team Obama appears to have backed down from the trial balloon floated by the Center for American Progress (note that press reports give another rationale) and is expected to offer a menu of choices for “reform” in its overdue white paper on Friday, don’t be fooled. The proposals coming from the lobbyists expected to have real influence on which ideas get the green light are virtually without exception serving up such a narrow menu of choices as to constitute unanimity. We offered our take as of the release of the CAP report; a subsequent proposal by Moody’s Mark Zandi (see details here) is more of the same.

It’s as if a population suffering from a toxic reaction to mustard was now offered options ranging from Dijon to pommery to spicy brown as meaningful improvements.

Questioning Goldman’s “Market Making” Defense

The notion underlying the Volcker rule is that too big to fail institutions have a government backstop and therefore their activities should be restricted to the types of intermediation that support the real economy. The taxpayer has no reason to fund “heads I win, tails you lose” wagers. Various firms, most notably “doing God’s work” Goldman, has tried to play up the social value of its role, whenever possible wrapping its conflict-of-interest ridden trading activities in the mantle of “market making”.

A big problem in taking about market making versus position trading is that, Goldman piety to the contrary, the two are closely linked. Even though all the major dealer banks created proprietary trading operations to allow top traders to speculate with the house’s capital, plenty of positioning also takes place on dealing desks. While dealers are obligated to make a price to customer (well, in theory, it’s amazing how many quit taking calls in turbulent markets), they are shading their prices in light of how they feel about holding more or less exposure at that time. And the dealing desks, just like the prop traders, are seeking to maximize the value of their inventories over time.

A Goldman discussion of risk management presented yesterday (hat tip reader Michael T) gives reason to question that much has changed on Wall Street regarding the role of position taking, now taxpayer supported, in firm profits.