The story Brooksley Born, and how her efforts to regulate derivatives, on Frontline.
It’s worth watching, even though it’s 55 minutes long.
I think that the description of Alan Greenspan is a very good argument for shorter terms and/or more restrictive term limits on members of the Federal Reserve.
It turns out that the Federal Housing Administration is ill-equipped to handle the explosion in mortgage loans that it is handling as a result of the private banks pulling back:
The Federal Housing Administration may be under-equipped to manage its exploding market share, according to an internal audit released last week. The report gave the FHA poor marks for its steps to screen lenders that are allowed to sell loans backed by the federal agency.
The FHA’s market share has grown sharply as the private mortgage market collapsed over the past two years, and the FHA now insures around one-quarter of all U.S. mortgages, up from around 2% in 2006. The FHA doesn’t actually make loans, and instead insures lenders against losses. To make FHA-backed loans, lenders and brokers must apply to the FHA to become certified by the agency.
The audit, by the inspector general for the Department of Housing and Urban Development, found that the agency was under-equipped to manage a big inflow in applications by lenders to make FHA-backed loans. The number of FHA-approved lenders more than tripled in 2008 to around 3,300 from 1,000 in 2007.
Gee, you think?
The people what cheated honest folks during the housing boom are going where the money is.
It’s another example of why the entire 60+ year focus on supporting home ownership of our government should be abandoned.
It gives us suburban sprawl, global warming, housing bubbles, mortgage fraud, and various other mishugas, all of it bad….He said from his home, which he bought with a mortgage, in a suburb of Baltimore, MD.
Orrin Hatch is asking Barack Obama to investigate college football’s Bowl Championship Series to see if it violates antitrust law.
It appears that BYU and the University of Utah are at a disadvantage, and Hatch thinks something should be done.
Dude, how about a protest song on your next record.
Moron.
I will note that I think that the college sports system needs to be investigated. I think that the players are treated like plantation slaves, but I’m not a US Senator.
Gee, I guess that they aren’t done with trying to pretend that they care about the ordinary folks, because the Federal Reserve has now issued pay guidelines for banks, allegedly in an attempt to reduce risk.
I’ve had multipule posts about the Fed doing this so that they can keep or expand their regulatory purview, including that essay that I sent to the WaPo, and they just keep doing it.
Well, at least it makes my essay that much more timely.
So, it now appears that the Obama administration is promising to restrict pay for senior executives at the big banks that got TARP bucks:
Responding to the growing furor over the paychecks of executives at companies that received billions of dollars in federal bailouts, the Obama administration will order the companies that received the most aid to deeply slash the compensation to their highest paid executives, an official involved in the decision said on Wednesday.
Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year. For many of the executives, the cash they would have received will be replaced by stock that they will be restricted from selling immediately.
The devil is in the details, and I simply believe this to be political theater.
There will be loopholes large enough to drive a truck load of cash through. I do not know what they are, but I believe this to be the case.
Barack Obama and Geithner/Summers have been steadfast in their continued support of Wall Street fat cats, and I do not expect this to change.
Housing Start Graph Pr0n Courtesy of Calculated Risk
Foreclosure/Default Graph Pr0n Courtesy of The Big Picture
We are still not seeing any signs of inflation, with wholesale prices falling 0.6$ in September, largely on falling energy costs, so this is unlikely to repeat this month.
Also, the G20 country in the best fiscal position right now is Canada, and the Bank of Canada is keeping its benchmark rate at 0.25%, so it is declining to follow Australia’s lead.
In real estate, housing rose to 590,000, which was below expectations, and applications for housing permits fell.
In energy, the eight-day long rally has ended after briefly being about $80/bbl, though it’s likely just some profit taking.
8 Days is a long time in the commodities market.
Meanwhile, the dollar is up, largely on strong statements from various European central bankers and politicians about how they support a strong dollar.
So it looks like the SEC has more insider trading cases that it’s looking into in addition to the Galleon case, which has had Raj Rajaratnam being frog marched before cameras in handcuffs.
What can I say but, “Pass the popcorn.”
I know what I can say, “Don’t stop until every person who was in on these deals has been caught, thrown off of Wall Street, and left destitute.”
In just one headline:
Private Capital Looks To Cash In On Carbon Trading
Yep, letting the hedgies in on this is such a good idea.
A Rich Guy Being Frog Marched in HandcuffsIt appears that US Attorney for New York has come up with a new way to enforce the laws against stock fraud, by going after them as if they were members of organized crime, with things like court ordered wiretaps, which were used to bring an indictment against Raj Rajaratnam, the head of the Galleon Group hedge fund.
The thing is, it is organized crime, it requires an enormous amount of…well…organization to pull off insider trading schemes:
Mintz said the alleged $20 million scheme is the most elaborate insider-trading ring discovered since the 1980s when the government began using criminal laws to prosecute such allegations.
“This was an extensive web of insider trading built upon years of contacts and strategically placed people,” the former prosecutor said. “Typically, insider trading cases are much more narrowly focused on some significant deal that’s leaked from one or two sources. The more people who have knowledge, the more potential that the scheme will be uncovered.”
There are dozens of people involved who have to know what is going on, and who must either actively aid, or actively ignore the activity for it to go forward when it is much more than an individual who has foreknowledge of a single event and then buys or sells based on this, as was the case, for example, with Martha Stewart.
One thing to be noted here is that this is about what would be considered pennies, it amounts to about $20 million for a man worth well over a billion dollars, and so, on a deep level, it makes little sense: Why risk decades in jail for something that might net less than 2% of your total net worth.
Here is what going on, I think. Rajaratnam, and Galleon made their money through insider trading, and simply, he continued to do so once he was a made man.
One hopes that as prosecutors dig into this, they get more people to roll over, and they expand their investigation.
RICO, the Racketeer Influenced and Corrupt Organizations Act, as well as an aggressive use of aggressive asset forfeiture laws would spread the net further and wider.
The days of a Michael Millikan doing his 22 months and leaving prison fabulously wealthy should be a thing of the past.
As I have noted before, now that Congress is looking at having an agency dedicated to protecting consumers from the worst excesses of the banking industry, and the Federal Reserve Feels believes that this role belongs to it.
Of course, the history of the Fed over the past 40+ years is that they believe in dismantling consumer protections, so their record is less than stellar.
In response to numerous proposals which would make consumer protection more formal in financial markets, which they see as a reduction in their bailiwick, they have continued to make “a day lat and a dollar short” regulations in an an attempt to convince Congress that they do not need to assign this task to some other agency.
Case in point, is how, after decades of skyrocketing fees and increasingly punitive “overdraft protection” schemes, Bernanke and his merry band have decided to clamp down on overdraft fees:
The Federal Reserve is likely to soon pass new rules making it harder for banks to hit customers with fees for overdrawing their accounts, a top official told a Senate subcommittee Wednesday.
Note that it appears that these rules will require that banks have customers positively affirm their desire to opt in to overdraft protection.
It’s amazing what the prospect of some regulatory competition will do to a bureaucracy.
Earlier posts on the subject here.
So, the politically connected academic who has made millions selling access to Wall Street banks, Larry Summers, has decided that real systemic regulation is necessary in the American financial system:
“Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country — by accepting the necessary regulation to protect the American people,” Summers said in remarks prepared for delivery at the Economist’s Buttonwood Gathering in New York. “There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.”
What’s more, his comments appear to be a part of deliberate push-back from the White House against the financial sector, where unnamed officials are describing themselves as “frustrated“.
Given who is working this issue *cough* Geithner and Summers *cough*, I have to conclude that this is being driven by political considerations, Obama has finally realized the depth and breadth of the anger against the banks and their lavish pay packages, and understands that there is a real political cost, one that will be born by the Democratic Party generally, and Barack Obama in particular, if the Wall Street banks continue to be what they are.
It’s true. As a part of updating financial regulations, Senator Shelby is trying to change the way in which the presidents of the Federal Reserve district banks are selected, by removing the ability of the lending institutions subject to that Fed bank to nominate their new president, he correctly notes that, “Any institution that is going to be involved in any way picking their regulator is not good policy.”
As to the current governance structure:
Each of the 12 Fed district banks has a nine-member board that includes three bankers, three non-bankers chosen by banks and three non-banker directors picked by the Fed’s Senate- confirmed governors in Washington. The directors nominate a president who is approved by the Board of Governors. The presidents vote on interest-rate decisions on a rotating basis, with New York having a permanent vote.
The idea that banks can hand pick one of their primary regulators has always been a bad idea, so I would go further, and remove banks from selecting the directors of the regional banks too.
While we are at it, how about shortening the terms of members. It’s currently 14 years, and it’s too long, and makes the board far to unresponsive and insular.
Additionally, one of the controls on the behavior of the Fed is meaningful criticism of its actions in academic economic publications, but the central bank has control over most of the academic economic publications, because so many of the editors out there are also on the Federal Reserve payroll, so a legal injunction prohibiting anyone working for the fed from acting as an editor of an economics journal would be a good thing.
David Stevens, HUD’s Assistant Secretary of Housing and Federal Housing Commissioner, basically the head of the Federal Housing Administration, has drawn a line in the sand against legislation increasing the minimum downpayment for an FHA loan from 3.5% to 5%.
This is the same FHA, that has had its reserves sucked dry by increasing defaults on its mortgage (here and here), and now they are fighting against making their loans less likely to default.
The reason given? That, “limiting the pool of eligible home buyers could dampen a fragile housing recovery.”
This is an extension of two largely bipartisan policies:
Both policies have proven disastrous, but decisions are still being made on this basis.
It should be noted that this is the same FHA was spitting in the face of sanity for some time by allowing “seller funded downpayment assistance loans”, where the seller raised the price of the home in order to lend the buyer the money for the downpayment (!). It was called the Down-payment Assistance Program (DAP).
This procedure is one of the reasons that they are in a pickle now, because it made it too easy for people who could not afford house payments to buy a house.
Thankfully, Congress made this illegal, and they are now looking at a further tightening of lending standards, but just as in the case the DAP, they are fighting the change tooth and nail.
It turns out that most of Timothy “I am not a Banker” Geitner’s friends that he has brought into the Treasury department have made millions working for the banks that wrecked out economy:
Some of Treasury Secretary Timothy Geithner’s closest aides, none of whom faced Senate confirmation, earned millions of dollars a year working for Goldman Sachs Group Inc., Citigroup Inc. and other Wall Street firms, according to financial disclosure forms.
When you have people overseeing the current system who personally profit from it, fundamental change is not in the offing.
Dylan Ratigan on MSNBC gives a succinct description of what happens in 7 m 42s.
A note: He does not take it to the next step, which is that Federal Government programs are essentially pumping up stocks, which makes the rally an illusion.
And here they are, ordered, and numbered for the year so far.
So, one more, and we are in triple digits for the year.
In response to news that Wall Street will once again be awarding record pay to its people, Kevin Drum said, “Burn it Down and Salt the Earth.”
Your mouth to God’s ear, dude.
Alan “Bubbles” Greenspan is saying that regulators should consider breaking up the large banks:
Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system, Greenspan told the Council on Foreign Relations in New York.
“If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”
I would note that Greenspan’s mentor, Ayn Rand, saw the breakup of Standard Oil as evil, with the wealth of the “prime movers” being confiscated by the “parasites,” “looters,” and “moochers”, to use her terms (from the Wiki on Atlas Shrugged, I read Virtue of Selfishness, and that ‘s quite enough Rand for me…It was worse than reading Emanuel kant)
I guess that I am over a week late to this game, but there has been a very significant case in Kansas that could completely reshape the fact of mortgage securitization.
Basically, the Kansas Supreme Court has ruled that the Mortgage Electronic Registration System (MERS), which is basically an electronic yellow pages for securitized mortgages, has no standing in foreclosure cases.
Considering that MERS records about ½ of the mortgages in the US, this is a very big deal.
While the precedent only applies to Kansas, it’s a state court after all, it is likely that their decision might influence other courts in other state:
The development of “electronic” mortgages managed by MERS went hand in hand with the “securitization” of mortgage loans – chopping them into pieces and selling them off to investors. In the heyday of mortgage securitizations, before investors got wise to their risks, lenders would slice up loans, bundle them into “financial products” called “collateralized debt obligations” (CDOs), ostensibly insure them against default by wrapping them in derivatives called “credit default swaps,” and sell them to pension funds, municipal funds, foreign investment funds, and so forth. There were many secured parties, and the pieces kept changing hands; but MERS supposedly kept track of all these changes electronically. MERS would register and record mortgage loans in its name, and it would bring foreclosure actions in its name. MERS not only facilitated the rapid turnover of mortgages and mortgage-backed securities, but it has served as a sort of “corporate shield” that protects investors from claims by borrowers concerning predatory lending practices.
….
The real parties in interest concealed behind MERS have been made so faceless, however, that there is now no party with standing to foreclose. The Kansas Supreme Court stated that MERS’ relationship “is more akin to that of a straw man than to a party possessing all the rights given a buyer.”
What this means is that the original lender, who sold the loan and transferred the title, has no standing, and that MERS has no standing, since they are not the title holder, and that the owner cannot actually be determined, since it has been abstracted into a sort miasma of Mortgage backed securities.
So in many cases, no one has standing to foreclose on the house, at least not in Kansas. (insert Toto joke here).
Matt Tiabbi, in his always amusing style describes this as, “Waking up to discover the mortgage market was a giant criminal enterprise.”
Barry Ritholtz notes another feature of MERS, that, “MERS also acts as a shield, making it all but impossible for many borrowers to deal directly with whoever happens to be holding their mortgage at the moment, which is why, to a large degree that I think it exists, so that you can f%$# over the homeowner, and they have no one to sue, so this is not a bug, it’s a feature, only, with the prices of homes falling, it’s become a bug.
While MERS does technically save some transaction costs by ignoring about 500 years of property laws by not requiring the physical transfer of a title, the real advantage here is that it means that the investors have become completely insulated from, and completely passive to, the realities of the underlying mortgage.
As Karl Denninger summarizes it rather pithily:
They [MERS] may as well have said “we have decided that we can abrogate state law with impunity.” Oh wait – they did, didn’t they?
Sorry folks, life doesn’t work that way.
If state law requires an unbroken chain of recorded assignments in order to document ownership of a mortgage and thus standing to foreclose, MERS cannot override this state law by fiat.
Can this be fixed on a case by case basis? Absolutely.
If you were someone who recorded and researched titles to property, given enough time and effort, could track down the paperwork (which is all electronic and does not exist), and then get the original paperwork, or a certified copy (like they do with so-called “original” birth certificates), and then get each and every person to whom the title was assigned over the life of the loan, you should be able to do it, except, or course, this information is not there is a coherent way, because it was considered to be inconvenient to keep.
But remember, this is what you would need to do each and every time that someone defaulted on a mortgage.
You are probably looking at something in the low 5 figure dollar range, and probably something in excess of 90 days, just to find out who has standing, which makes the foreclosure even more ruinously expensive.
