The so called Bank of America settlement, in which the Charlotte bank is set to pay $8.5 billion to settle representation and warranty liability on 530 mortgage trusts representing $424 billion of par value, is being hailed as a possible template for other mortgage issuers and servicers.
I sure hope not, because some of the things I see in this deal look plenty troubling.
Read more...Andrew Sheng, Chief Adviser to the China Banking Regulatory Commission, is wonderfully straightforward and realistic for an economist. He is willing to say, as he does in this video, things that are obvious yet somehow unacceptable to ‘fess up to in policy circles, like the planet simply cannot support 3 billion people in Asia living European lifestyles. He warns of the danger of creating the mother of all crises if governments cannot stem the tide of leveraged capital flows, and also discusses the role of China on the global stage.
Read more...Jon Daniellsson of the LSE has spotted something odd about the Basel III debate on capital levels…
Read more...Several readers sent me links to a Brad DeLong post which they took to be a rebuttal to a takedown I did of a recent Ezra Klein piece.
Since DeLong did not link to or mention my post, I doubt his piece had anything to do with mine. But his post is noteworthy for a completely different reason: it illustrates how economists have refused to learn much, if anything, from the crisis.
Read more...By Tom Adams, an attorney and former monoline executive
Barron’s published a detailed take down of the mortgage insurance industry weekend that highlights how Treasury’s approach to the mortgage mess will ultimately make matters worse. As the article points out, in the fairly likely scenario that mortgage claims exceed the amount of capital the insurers have available to pay them, the parties taking the biggest hit will be Fannie Mae and Freddie Mac. That means taxpayers are probably on the hook for more bailouts.
Despite having questionable capital reserves for the future claims they face, mortgage insurers are still continuing to write significant insurance business. Why would anybody want to continue to buy insurance from such shaky companies?
The continuing business of the mortgage insurers help shed light on the fact that virtually the entire mortgage industry is run through zombie companies that ought to have expired years ago.
Read more...Yves here. Despite the technical focus of this post, the underlying issue, of whether Greek CDS will pay out as protection buyers expected, is very important. As Das discussed in an earlier post, in the first real test of the CDS market (the Delphi bankruptcy in 2005), credit defaults swaps had required delivery of bonds to get the insurance payout on the contract . Since the volume of CDS on Delphi was over five times the amount of bonds outstanding, that would have meant a lot of people bought dud insurance. That was recognized to have the potential to have very bad outcomes for the market. So, on the fly, the International Swaps and Derivatives Association implemented “protocols” by which any two counterparties, by mutual consent, substitute cash settlement for physical delivery. In other words, they came up with a big fix that was nowhere in the contracts. Ain’t it nice to be a big financial player?
Efforts to extend Greek debt may require similar efforts at fixes, and if they aren’t fully effective, it could have a chilling effect on the CDS market (not that we think that is a bad outcome, mind you). But even with all the powers that be out to preserve the product and avoid roiling the markets, the conflicting objectives of various players may render that outcome not so easy to achieve.
By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk (Forthcoming September 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)
The European Union’s linguistic gymnastics, redefining default as “restructuring” or “re-profiling” and the structure of any final deal on Greek debt has “real” implications for the arcane workings of the CDS market.
In the film Casablanca, Rick (Humphrey Bogart) tells Captain Renault (Claude Rains) that he came to the city because of his health, to take the waters. Informed that they are in the desert, Rick ironically replies that he was “misinformed”. Investors and banks that purchased Greek sovereign credit default swap (“CDS”) to protect themselves against the risk of default may find that they have been similarly “misinformed”.
Read more...A recent post by Ezra Klein, “What ‘Inside Job’ got wrong,” manages the impressive feat of being spectacularly off base, rhetorically dishonest, and embarrassingly revealing of the lack of a moral compass all at once.
Since being off base is a major part of Klein’s brand, I suppose one should not be surprised; those who’ve had the good fortune to have limited contact with his output can read Jon Walker’s “Ezra Klein: Insurance Exchanges Don’t Work and Must be Expanded Dramatically,” or Physicians for a National Health Care Program’s “Does Ezra Klein really think ‘managed care didn’t kill anyone’?” for two of many examples.
I’m going to shred this piece in some detail, first, because it will be entertaining, and second, I hope that it will encourage readers to take a cold, bloodyminded look at the excuses made for malfeasance in our elites.
Read more...By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College
The fight for Europe’s future is being waged in Athens and other Greek cities to resist financial demands that are the 21st century’s version of an outright military attack. The threat of bank overlordship is not the kind of economy-killing policy that affords opportunities for heroism in armed battle, to be sure. Destructive financial policies are more like an exercise in the banality of evil – in this case, the pro-creditor assumptions of the European Central Bank (ECB), EU and IMF (egged on by the U.S. Treasury).
As Vladimir Putin pointed out some years ago, the neoliberal reforms put in Boris Yeltsin’s hands by the Harvard Boys in the 1990s caused Russia to suffer lower birth rates, shortening life spans and emigration – the greatest loss in population growth since World War II. Capital flight is another consequence of financial austerity. The ECB’s proposed “solution” to Greece’s debt problem is thus self-defeating. It only buys time for the ECB to take on yet more Greek government debt, leaving all EU taxpayers to get the bill. It is to avoid this shift of bank losses onto taxpayers that Angela Merkel in Germany has insisted that private bondholders must absorb some of the loss resulting from their bad investments.
The bankers are trying to get a windfall by using the debt hammer to achieve what warfare did in times past.
Read more...Yves here. I’ve long been interested in the German approach to housing, since it has two noteworthy features: very high rates of rentals and reasonable costs. This post from MacroBusiness provides a short but very instructive overview. I’m intrigued to see this article highlight an issue that I have stressed as a New York City resident, where tenants have much stronger rights than almost anywhere in the US: that strong tenant protections actually help landlords. The result is that people rent not because they can’t afford to own (which means they are financially less stable) but because they prefer not to (for instance, they prefer the flexibility, or decided to put their money in a second home or in investments). And tenants who have property rights (as in the landlord cannot deny them a lease renewal if they are current on their rent) not only take better care of their unit, but I’ve seen them actually make meaningful investments in them (this happens a lot in my building).
From MacroBusiness:
A few months ago, after posting numerous articles advocating the Texan approach to land-use planning, I promised fellow MacroBusiness blogger, The Prince, that I would undertake an analysis of the German housing system, which is regarded as amongst the most affordable and liberal in Europe.
Read more...By Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One. Cross posted from New Economic Perspectives
Mitt Romney chose to unveil the economic plank of his campaign for the Republican nomination with a speech in Aurora, Colorado decrying banking regulation. He could not have picked a more symbolic location to make this argument, for Aurora is the home and name of one of the massive financial frauds that caused the Great Recession. Lehman Brothers’ collapse made the crisis acute and Lehman’s subsidiary, Aurora, doomed Lehman Brothers. Lehman acquired Aurora to be its liar’s loan specialist. The senior officers that Lehman put in charge of Aurora, which was inherently in the business of buying and selling fraudulent loans, set its ethical plane at subterranean levels.
Aurora sealed Lehman’s fate by serving as a “vector” that spread an epidemic of mortgage fraud throughout the financial system and caused catastrophic losses far greater than Lehman’s entire purported capital. Aurora epitomizes what happens when we demonize the regulators and create regulatory “black holes.” Romney literally demonized banking regulators as “gargoyles” and claimed that banking regulations and regulators were the cause of the economy’s weak recovery.
Read more...I’ve been keeping an eye on the Elizabeth Warren beat, although my expectation is that the skirmishes now will pale in significance compared to whatever does or does not happen on what the Republican hope will be her ritual execution at the full committee hearing of the House Oversight committee on July 14.
This situation has become an intriguing bit of political theater. The Republican have increasing become one-trick ponies. Their strategy has been to take an extreme position, scream like bloody murder, act like they have no intention of negotiating, and watch the Dems capitulate. But particularly with Obama, capitulation is tantamount to throwing Br’er Rabbit in the briar patch: it’s exactly where the Democrats like to go, but they need political cover for selling out their badly abused “base”.
The hyperventilating and bullying strategy backfired spectacularly last month in subcommittee hearings with Warren chaired by Patrick McHenry. But the Republicans have convinced themselves that if they double down, they’ll come out winners. I don’t know how much of this is reptile brain reflex on overdrive, in that they are capable only of fight or flight and even flight is no longer an option.
Read more...I though readers might welcome an antidote from the nonsense that bank industry touts like the Office of the Comptroller of the Currency’s John Walsh routinely puts forth.
I’ve known Amar Bhidé, who is now a professor at Tufts, for thirty years; we both worked on the Citibank account at McKinsey (although never on the same study). He’s long had a reputation for being incredibly smart and iconoclastic.
Amar enjoys annoying people by saying completely commonsensical things that are not acceptable and watching chaos ensue.
Read more...The acting head of the Office of the Comptroller of the Currency, John Walsh, has unwittingly revealed himself to be running a heretofore stealth operation: The Ministry of Truth According to Banks. In the past, his remarks have had just the right combination of occasional intersection with the truth plus lots of nebulous phrasemaking for him to be able to sound dimly plausible as a regulator, provided you were on reader craazyman’s preferred cocktail of Xanax and Jack Daniels.
Of course, what Walsh really has going for him is the optics: he is the straight-out-of-central-casting image of the head of a largish financial firm somewhere in the heartlands. Given that no one who has been awake in America in the last five years trust banks, and most people have already reasoned from that that a banking regulator who sounds a lot like a banker is probably not such a hot idea either, Walsh’s looking so much the part ought to set off alarm bells. But the conditioning of seeing well preserved middle aged white men with gravitas and decent tailoring as trustworthy has been so deeply programmed into most Americans that it is pretty hard to overcome.
Read more...The SEC announced that JP Morgan has agreed to pay $153.6 million to settle charges related to a $1.1 billion heavily synthetic CDO called Squared which JP Morgan placed in early 2007 and was managed by GSC Partners, a now defunct CDO manager. The SEC has a cute but not all that helpful visual on the site, save it reflects the role of Magnetar as the moving force behind the deal.
Per the SEC’s complaint against JP Morgan, Magnetar provided $8.9 million in equity and shorted $600 million notional, or more than half the face amount of the CDO (this is consistent with our analysis, which had suggested that Magnetar, unlike Paulson, did not take down the full short side of its deals, since it like staying cash flow positive on its investments. The size of its short position was limited by the cash to be thrown off by the equity tranche). And needless to say, this was a CDO squared, meaning a CDO made heavily of junior tranches of other CDOs, so it was a colossally bad deal.
The complaints (one against JP Morgan and the other against GSC employee Edward Steffelin) make clear that the SEC had gotten its hands on some pretty damning e-mails. The core of the allegation against JPM was that all the marketing materials represented that the assets in the CDO were selected by GSC when they were in fact to a significant degree chosen by Magnetar.
Magnetar made clear that it regarded its equity position as “basically nothing” and really wanted to “buy some protection”, meaning get short and that Magnetar was actively involved in choosing the exposures for the deal.
Read more...An article at the New York Times, “Backlog of Cases Gives a Reprieve on Foreclosures,” is more than a little frustrating in that it takes some high level factoids about the mortgage mess and fails to draw the right inferences from them.
The premise of the piece is that in some states, the average time to foreclosure has become so attenuated that it would take decades at current rates to clear the backlog. Consider these dramatic-sounding statistics:
In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure, according to calculations by LPS Applied Analytics, a prominent real estate data firm.
Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade.
In the 27 states where the courts play no role in foreclosures, the pace is much more brisk — three years in California, two years in Nevada and Colorado — but the dynamic is the same: the foreclosure system is bogged down by the volume of cases, borrowers are fighting to keep their houses and many lenders seem to be in no hurry to add repossessed houses to their books.
The convention in writing is to list the most important cause first. Thus by giving “the foreclosure system is bogged down by the volume of cases” pride of place implies that the “foreclosure system” being overloaded is the biggest cause.
But this level of abstraction is misleading. There is no “foreclosure system”; that turn of phase implies a single overarching set of procedures. As the mere mention of judicial versus non-judicial states indicates, each state has its own laws and case history as to what is proper practice. Referring to a “system” when there is none is also likely to lead many readers to think in term of the system that is involved in the foreclosure process, the judicial system, and to incorrectly infer that courts being overloaded is a major culprit. The vagueness of the expression, in other words, has the effect of directing attention away from the fact that it is the banks’ own machinery that is the most gunked up.
Read more...