Category Archives: Regulations and regulators

Guest Post: Overruled

Cross posted from MacroBusiness

Ok, we all know that anyone who says “this time it is different” is to be treated at best as misinformed, at worst as a fool. “They are the five most dangerous words in the English language” etc. etc. But, to repeat my question: “Are things always the same?” Mostly, yes. Modern housing bubbles are not unlike 17th century Holland’s Tulipmania, government debt crises have not changed all that much since Henry VIII reduced the gold in coinage, greed, profligacy, irresponsible plutocracies are always with us.

But in global finance there are some things happening that are genuinely different. Dangerously so.

GAO Report Confirms Our Criticism of “Foreclosure Task Force” Review

We’ve taken a dim view of the “worse than stress tests” review by Federal regulators of foreclosure practices late last fall. This was an obvious effort to alleviate concerns in the wake of the robosigning scandal. When the bank-friendly OCC released the results of the review, the guts of which was a look at 2800 seriously delinquent loans from all the major servicers, it confirmed our reservations:

Republicans to Consumer Financial Protection Bureau: Drop Dead

In a new effort to guarantee the continued right of banks to loot and pillage, 44 Republican senators have written to Obama saying that they won’t approve of any head of the Consumer Financial Protection Bureau ex what these Ministers of Truth choose to call a “restructuring” of the agency.

The arguments made against the agency strain credulity. As the New York Times reports:

Will “False Claims” Lawsuit Against AIG, Goldman, Deutsche, BofA, SocGen on Fed Funding Lead to New Round of Embarrassing Revelations?

Litigation may be slowly doing the job missed or only partially completed by various governmental investigations into the financial crisis. The Valukas report on the Lehman bankruptcy was revealing, and numerous foreclosure defense attorneys have opened cans of worms that the powers that be would rather pretend simply don’t exist.

The New York Times reports tonight that a case filed last year was unsealed last week. It plumbs a continuing sore point with the public, namely the generous terms of the AIG bailout, both to the company (which defied the government and insisted on remaining largely intact when the plan had been to sell its various units to repay the government funding) and to its credit default swap counterparties. The litigation has the potential to be revealing, particularly if it goes into discovery (various depositions are likely to become public in pre-trial jousting, um, motions). The Times gives an overview:

UBS’s Magnus Warns of Risk of Chinese Minsky Moment

UBS strategist George Magnus helped popularize economist Hyman Minsky’s thinking in the runup to the financial crisis by warning of the likelihood of a “Minsky moment.” For those not familiar with Minsky’s work, a short overview from ECONNED:

Hyman Minsky, an economist at Washington University, observed [that] periods of stability actually produce instability. Economic growth and low defaults lead to greater confidence and, with it, lax lending.

In early stages of the economic cycle, thanks to fresh memories of tough times and defaults, lenders are stringent. Most borrowers can pay interest and repay the loan balance (principal) when it comes due. But even in those times, some debtors are what Minsky calls “speculative units” who cannot repay principal. They need to borrow again when their current loan matures, which makes
them hostage to market conditions when they need to roll their obligation. Minsky created a third category, “Ponzi units,” which can’t even cover the interest, but keep things going by selling assets and/or borrowing more and using the proceeds to pay the initial lender. Minsky’s observation:
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Deutsche Bank Sued by Department of Justice for Over $1 Billion on FHA Loans: Sound and Fury Signifying Not Much

If you were to read the news headlines and the fierce-sounding lawsuit filed by the Department of Justice against DeutscheBank on it “egregious” violations of FHA lending standards, you might be persuaded that Team Obama was getting serious about mortgage abuses.

Think again.

Silver Down 12%, Big Default Rumored at Comex

We managed to miss out on the parabolic rise of silver, which has now been followed by a stomach-churning 12% fall in thin holiday trading. And commodity markets are less deep than securities markets. Recall that the famed peak of gold in 1980 to $850, was a violent spike up, vasty high than the level two days earlier or two days later.

Silver in particular has been closely watched due to the presence of very large short interests which were apparently partially closed out late last week leading to some very serious intraday volatility. Today we have this cheery development, courtesy Jesse:

Earth to Libertarians: Private Parties Have Coercive Power Too

I’m sick of the free pass given the libertarian blather, “The state is the only source of coercive power.” I doubt that many non-libertarians buy that assetion, but they too often remain silent because most libertarians are rabid on that issue and arguing with them is like talking to a wall. But since that bogus assertion has been showing up increasingly in comments here as right-wing plants are becoming more common, I might as well do a quick shred, since it does not take much effort to show this claim is nonsense.

Let’s look at some simple empirical examples of why this pet argument just ain’t so.

Join Us At FireDogLake’s Book Salon on Saturday to Discuss Treasure Islands by Nicholas Shaxson

eaders may know that Nicholas Shaxson’s Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens, has created a big stir in the UK by shedding light on the scale of offshore banking and the numerous types of harm it does. We’ll be hosting a FireDogLake Book Salon tomorrow at 5 PM Eastern 2 PM Pacific.

Not only did I enjoy this book (it manages the difficult feat of being a lively and accessible discussion of banking and taxation), but it is certain to be one of the most important books of the year.

From the FDL overview of the book:

The Booger Rule of Antitrust in the Debit Card Fight

Although we were big fans of the HuffPo piece yesterday on the DC war over debit card regulation, Adam Levitin was a bit less happy since the article focused on the politics and was on why the card fees were burdensome to merchants.

Although a few readers tried arguing the bank position and did not get a terribly enthusiastic reception, Levitin explains the real problem: the actions of the Visa/MasterCard duopoly are pretty clear antitrust violations, but as he pointed out via e-mail, the US pretty much does not do antitrust any more. The Chicago school of economics indoctrination of judges via an orchestrated “law and economics” movement (see ECONNED for an overview) has resulted in judges not seeing competitive problems anywhere. The Department of Justice has lost a slew of recent antitrust cases at the Supreme Court, so they’ve lost the appetite to pursue them.

But (to give an indication of how bad the behavior of the card networks is), the normally supine DoJ has been active in payment cards.

Thomas Palley on How to Fix the Fed

The Roosevelt Institute hosted a conference yesterday on the future of the Federal Reserve, with the speakers including Joe Stiglitz, Jeff Madrick, Matt Yglesias, Joe Gagnon, Dennis Kelleher, Mike Konczal and Matt Stoller. Yours truly broke her Linda Evangelista rule to attend.

The discussion included the contradictions in the central bank’s various roles, its neglect of its duty to promote full employment, and its overly accommodative stance as a regulator, which has been enlarged thanks to Dodd Frank.

You can visit the Roosevelt site to view each of the three panels in full (they include the Q&A, which were very useful), the introductory remarks by Joe Stiglitz, or the presentations by each speaker separately. I encourage you to watch some of the panels, and to entice you, I’ve included videos from two talks I particularly liked below.

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.

HuffPo Expose on the Biggest, Ugliest Fight in DC: Debit Card Fees

If you want to understand inside the Beltway politics, proceed immediately to a superb article by Zach Carter and Ryan Grim at Huffington Post, “The Swipe Fee War”. It is a meticulously reported piece over the number one fight in the nation’s capital, which contrary to headlines, is not the budget battle but proposed regulations over debit card fees, otherwise known as “interchange” fees. As Felix Salmon, Katie Porter, and Adam Levitin have written, the reason this battle is so hard fought is that it pits two big spending constituencies against each other: banks versus retailers, or as one Senator broke it down further:

The big greedy bastards against the big greedy bastards; the big greedy bastards against the little greedy bastards; and some cases even the other little greedy bastards against the other little greedy bastards

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.