Category Archives: Regulations and regulators

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:

ETFs as Source of Systemic Risk?

Surprisingly little note has been paid to the discussion of ETFs in three reports issued last week by international regulatory heavyweights, namely, the IMF, the BIS, and the G20 Financial Stability Board.

Make no mistake: the authorities are worried. The BIS report, for instance, has an unflattering comparison on its first page, noting that now ETFs seem to be serving the same function for institutional investors now as structured credit products did in 2002-2003, with dealers pushing the envelope as far as “innovation” is concerned. The Financial Stability Board was more straightforward, flagging its concerns that ETFs could pose a threat to stability in its report title.

The regulators discussed the fact that “ETF” no longer stands for a single product. Most investors probably assume that an ETF is more or less a mutual fund, when in fact Eurobank affiliated groups’ products are typically synthetic (that is, they use derivatives rather than securities. There are even more structural variants, but we’ll stick to these two for the purpose of this post). And too often, the relationship between the ETF and the sponsor is not arm’s length.

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.

Senator Levin Claims Goldman Execs Perjured Themselves Before Congress on Mortgage Testimony

As readers may know, the Senate Permanent Subcommittee on Investigations just issued another report, Wall Street and the Financial Crisis. This is a far more focused and damning document than the Financial Crisis Inquiry Commission report, which was produced at considerably more expense and was undermined by dissent among its commissioners (which in fairness appears to have been by design).

I confess to having only gotten partway through the document and plan to issue a more thorough discussion in the next few days. However, some things are clear at this juncture.

Might Elizabeth Warren Get the CFPB Nod After All?

A Wall Street Journal report suggests that Elizabeth Warren might wind up getting nominated to head the Consumer Financial Protection Bureau despite fierce Congressional opposition because other possible nominees have turned down the job, in many cases because they want Warren to have it:

White House officials seeking someone to run the Consumer Financial Protection Bureau have so far failed to find a nominee, with several candidates rebuffing the administration’s overtures, according to people familiar with the process.

Initial Award of Frederic Mishkin Iceland Prize for Intellectual Integrity: Calomiris, Higgins, and Mason Paper on Mortgage Settlement

It seems more than a bit peculiar that, per American Banker, financial services industry participants have paid for three academics to issue a lengthy paper attacking a leaked draft settlement between state attorneys general and mortgage servicers. We have pointed out in multiple posts that the state AGs bargaining position is weak due to the lack of investigations. If the banks don’t like the terms, they can tell the AGs to see them in court.

But far more interesting is how embarrassingly bad this paper, “The Economics of the Proposed Mortgage Servicer Settlement,” by Charles Calomiris, Eric Higgins, and Joe Mason, is, yet how the economics discipline continues to tolerate special-interest-group- favoring PR masquerading as research.

In real academic disciplines, investigators and professors who serve big corporate funders have their output viewed with appropriate skepticism, and if they do so often enough, their reputation takes a permanent hit. Scientists who went into the employ of tobacco companies could anticipate they’d never leave that backwater. Even the great unwashed public knows that drug company funded research isn’t what it is cracked up to be.

But in the never-never realm of reality denial within the Beltway, as long as you can get a PhD or better to grace the latest offering from the Ministry of Truth, it gives useful cover to Congresscritters or other message amplifiers who will spout whatever big donor nonsense they are being asked to endorse this week.

Conflicted JP Morgan Next up for a Reputation Hit

Louise Story at the NYT has this: In the summer of 2007, as the first tremors of the coming financial crisis were being felt on Wall Street, top executives of JPMorgan Chase were raising red flags about a troubled investment vehicle called Sigma, which was based in London. But the bank chose not to move […]

The Independent Commission on Banking Interim Report – Quick Take

Quick take on stability aspects: well trailed moderation (or pusillanimity) in that it preempts radical breakup; tougher capital requirements than Basel III, plus CoCos; leaves liquidity regulation to Basel, and shadow banking regulation to the Financial Stability Board.

INET: Can Sovereignty and Effective International Supervision be Reconciled? The Challenge of Large Complex Financial Institutions

Cross post of an INET conference session on Large Financial Institutions that Paul Volcker described as a “Revival Meeting”…

UK IBC report preview

The IBC, or ICB report is to be published at 7:00 on Monday morning, UK time.

A suspicious sniff at CoCos

Contingent Convertible bonds (“CoCos”) are supposed to address this nonsensical phenomenon: During the financial crisis a number of distressed banks were rescued by the public sector injecting funds in the form of common equity and other forms of Tier 1 capital. While this had the effect of supporting depositors it also meant that Tier 2 capital […]

“Summer” Rerun: Why You Should Hate the Treasury Bailout Proposal

This post first ran September 21, 2008 A mere two weeks ago, the Fannie/Freddie rescue was called “the mother of all bailouts” by some commentators. If the plans of the Administration come to fruition, it will shortly be surpassed by the $700 billion mortgage rescue plan proposed by Hank Paulson late last week. The increase […]

It’s Now Official: No More Joint Federal/State Attorney Mortgage Settlement Effort

Housing Wire has confirmed what American Banker and the New York Times had indicated was underway, namely, that the formerly joint state/federal effort to deal with foreclosure abuses (still undefined beyond robosigning and improper affidavits) are now separate initiatives. We think that’s a good thing, since the state and federal law issues were so different that it made the idea of a grand global settlement seem a tad deranged, particularly on the fast timetable the Obama crowd was pushing for. As a reader with securities law regulatory experience noted via e-mail:

Whoever was leading this charge for the Feds totally miscalculated.

Washington AG Investigates New Foreclosure Abuse Front: Trustee Non-Compliance

LoanSafe reports that the Washington state attorney general, Rob McKenna, has uncovered a likely widespread violation of state law, that foreclosure trustees lack a physical presence as required and a means for borrowers to contact or visit them to submit last minute payments or present documentation. McKenna’s interest appears to result from the fact as with servicers, the foreclosure trustees are not accessible to borrowers and not responsive when there may be legitimate reasons to halt or delay a foreclosure. Note that Washington is a deed of trust state, and the foreclosure trustee handles certain tasks relative to the actual foreclosure. This is a different role than that of the securitization trustee, who is the agent of the securitization trust, the legal entity that holds the loans in the securitization.