WONKESS

Sicko...

It's disheartening to read this:

[B]anksters giving their right to loot their companies top priority, and the greater fool public be damned, with Goldman the most egregious sinner. That firm’s self serving protestations to the contrary, it was a ward of the state, and would not exist now were it not for the munificence of taxpayers. It continues to profit from a raft of subsidies, ranging from FDIC guaranteed debt, a whole alphabet soup of special Fed facilities, and super low interest rates. As Linda Beale points out:

A recent study suggests that big banks in the TBTF category now enjoy a significant cost-of-funds spread compared to other banks. That is, they can borrow money more cheaply, leading to greater ability to make profits, than can other banks, because of the implicit guarantee that the federal government will step in and save them because they are TBTF and pose a systemic risk. That advantage may amount to as much as 48% of the TBTF banks’ profits this year (or as ‘little’ as 9%, on very conservative assumptions). The government, by the way, gets nothing for this implicit guarantee–unlike a commercial guarantor, it is not being paid a regular premium for the service.

So a significant portion of Goldman and other big bank profits are effectively windfall profits due to government largesse. And they are paying themselves bonuses on it...

Goldman, per the Independent, is out, as usual, to have its cake and eat it too, to enjoy the benefits of all the rescue subsidies but not bear the related tool:

Goldman Sachs has threatened the UK Treasury with plans to move up to 20 per cent of its London-based staff [where there is a proposal to levy a supertax on financial institution bonuses] to Spain in a standoff over tax and bonuses.

And watch this

Watch CBS News Videos Online

In the same day and not feel violently ill. 

Go Default, Young Man...

I'm glad there are some young women in the econ/finance blogosphere, and although I don't always agree with her Ryndianlibertarigaltism, Megan McArdle at the Atlantic generally relies on at some reasonable semblence of logic when she makes her arguments.  But this week, her tirade on why people shouldn't default is just more finger wagging from the moral majority, who rail endlessly against Joe six-pack (finally) making financially astute decisions while at the same time applauding corporations for doing the same (and, incidently, arguing that government has no role in preventing corporations from applying such rational financial decision making).

From McArdle:

...when I read about people like this, my outrage rises so hot:

Ms. Richey, the teacher, arrived in Palmdale in 1999. In 2004, she and her husband, Timothy, bought a two-story home on Caspian Drive, near Avenue O-8, with a no-down-payment loan.

But the value of the house plunged to less than $200,000 in 2009. Their $430,000 mortgage, with its $3,700 monthly payment, began to look more like an unwanted burden. By May, amid troubles getting tenants for two rental properties she also owned, Ms. Richey decided the time had come to cut a deal with America's Servicing Co., a unit of Wells Fargo & Co. servicing the mortgage on the house.

After three months of wrangling, she says she finally received a modification approval. The new monthly payment: about $3,300, far more than she had hoped. A Wells Fargo spokesman confirmed the bank offered Ms. Richey a modification under the Obama administration's Making Home Affordable program, and said, "The Richeys turned down the lowest payment we could offer."

Ms. Richey and her husband had already been working on Plan B -- exploring the neighborhood's "For Rent" signs.

. . .
Ms. Richey and her family made the move to Club Rancho Drive in August, when she was already several months behind on the mortgage. With Mr. Robbins's help, she recently sold the house on Caspian Drive for $195,000, money that the bank will accept to settle the $430,000 mortgage debt. She's also considering walking away from the mortgages on her two rental properties.

Showing a visitor the personal touches in her new home, including a $1,800 dining set she bought with some of her newly available income, she notes the advantages of being a renter rather than an owner.

Maybe the reporter made them sound worse than they are . . . but it sure sounds like they just decided that once the price of their property fell, they shouldn't have to pay back the money they'd borrowed.

There is a sizable school of thought that says why shouldn't they?  They made a contract with the bank under known rules, and as long as they're willing to pay the penalties, why shouldn't they just walk away, the way a corporation would?  Well, for one thing, companies don't always behave like this, and those who get a reputation for stiffing their suppliers run into trouble.  But for another, because society doesn't really work on such clean logic.  The reason we can have easy bankruptcy and a pretty robust credit market (usually) is that most people act like debts are obligations which should always be paid off if possible.  I'm not saying you should live on Kraft dinner and water for twenty years to slave at an impossible mountain of debt.  But I think before you walk away from three different mortgages, you should explore life options that do not include $1,800 worth of new furniture.

I have to agree, that the family featured in the WSJ appears to be on the more morally questionally side of the spectrum.  I doubt that the majority of individuals who default on mortgages turn around and purchase a $1800 dining room set, a little detail included, without question, to touch off some righteous indignation.

And McArdle simply isn't correct that society cannot function with such clean logic.  Contract 101 - parties will make rational decisions.  Rational.  Not ones bound by convention, morals or whatever other voodoo you want to throw at it.  And thus it must be, if we are to have a society as diverse as ours function without everyone throwing everyone else under the train tracks. 

The whole point of contracts, and the reason there are so many (oh, so ridiculously many) over-paid lawyers toiling away at negotiating the multitude of contracts that exist, is to understand all the scenarios that may arise for the other side that might prevent them from fulfilling their side of the bargain, and then putting in the penalties for non-performance.  And yes, sometimes the penalties cannot make up for the cost to the performing party.  Usually, this happens when there is something more emotional at stake than money - for example, a performer or a caterer not showing up at a kid's birthday party or a wedding.  But in strictly financial transactions, the penalty is only insufficient because the harmed party either (1) didn't do adequate due diligence or (2) was a poor negotiator.

There are some measures in our law that try to protect agains uneven bargaining power: that's the situation that most of us are in daily.  When I, Josie six-pack, negotiate a loan with a big bank, I do not have the $1000/hour lawyer available to me to make sure that I am sufficiently protected should the bank choose to do something outside the limits of our contract.  But there are laws that prevent banks from doing so, because the law recognizes the uneven nature of the transaction.  And beyond the laws, there is competition, that allows a savvier Josie six-pack to shop her business aroun to a bank with better terms, or a better reputation.

Why isn't there anything that protects the banks then?  Because they theoretically have thousands of minions that have the training to protect against these forfeitures happening.  Why, why should a bank have given a $400,000+ mortgage to a teacher and a fireman who apparently had several other real estate liabilities on their balance sheet?  WTF was the bank thinking?  I barely have the facts and I can see that this was an extraordinarily risky "investment".

But keep these things in mind: pre-recession, banks were residing in wonderland.  They were being richly... RICHLY... rewarded, effectively for making absurd loans left and right.  They lent to high-risk borrowers, with little recourse and even less dilligence, not because they were banking on their borrowers doing the "right thing", not even necessarily because they thought they would get their money back in the long run (let's face it, if the bankers truly believed in the sanctity of the promise, the CDS market would hardly have been as bubbly as it was), but because making such loans was so extraordinarily profitable in the short term.  The McArdles of the world seem to forget just how much cold, hard cash these risky borrowers was worth to the bankers that lent to them.

So don't cry boo-hoo to me now that the borrowers are doing what makes financial sense for them.  They will be penalized to the extent they agreed to be penalized under the terms of the contract.  Had the contracts been recourse, they would have personal liability.  They will take a hit on their credit ratings, affecting their "reputation" and making it more difficult for them to get their next "wad" of money.

And that's as it should be.

Update: here is another (better) article in the WSJ about strategic default.

Worth Watching: Elizabeth Warren on MSNBC...

This clip has been out for a day, and I tweeted it yesterday.  But it is worht watching, so I'm posting it here for those who might have missed it.

Visit msnbc.com for Breaking News, World News, and News about the Economy

Her main points:

• The banks are insolvent.
• They don't appear to be in part due to the changes to mark-to-market rules approved by FASB a few months ago that allowed banks to value certain toxic assets to model (IOW, at questionable value).  (I read somewhere yesterday that this could be as high as $300 billion worth of assets, but don't have time now to search for the link.)
• As long as the banks can sit on these toxic assets at their newly elevated prices, there is no reason for the banks to have to deal with them.  This means that these assets can continue to fester on the books until they either come due or there is a double dip (which might make the prices dip even under the mark-to-model scenario).  In fact, it would actually hurt the banks to try to deal with them, as that would be a realization event, forcing the banks to actually book the gains (as if) or losses.
• So the on-going myth that the banks are adequately capitalized is just that... a myth. 

We might be able to keep this up.  Really.  Certainly, the fact that the Fed refuses to raise interest rates suggests that we have an administration that is willing to do just about anything to keep the charade going.  But unless we literally see a return of asset prices to what they were before the recession (and just how realistic is that?  ANd how long can we reasonably expect it to take?), it seems singularly implausible to argue that this is going to end well.

Much Ado About MERS-thing...

Really interesting article in @NYT today about a company nobody knew about until this recession:

Created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. From an office in the Washington suburbs, it played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership.

If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS. In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS — about 13,000 in the New York region alone since 2005 — confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership.

In an interview, the president of MERS, R. K. Arnold, said that his company had benefited not only banks, but also millions of borrowers who could not have obtained loans without the money-saving efficiencies it brought to the mortgage trade. He said that far from posing a hurdle for homeowners, MERS had helped reduce mortgage fraud and imposed order on a sprawling industry where, in the past, lenders might have gone out of business and left no contact information for borrowers seeking assistance.

Here is a chart from the article that explaints MERS role in mortgage packaging:

I kinda get the sense that the NYT is making a big stink based on the reporter's lack of understanding of how the securitization process works.  If my understanding is correct, MERS' role in loan origination is that whereas the promissory note (the actual document that says you owe money to the mortage lender) is in the name of the loan originator, the lien on the house is held by MERS.  This makes complete sense if the intent of the mortgage originator is to sell the mortgage on to be packaged into mortgage backed securities.

Everyone who has an interest in the house (and when you enter a mortage, you give a security interest to the mortgage holder in your house) has to register their interest through the local registry (and this is important, because proper registration ensures that your interest doesn't get kicked back, or subordinated, by some later interest).  So you, as the homeowner, has official title to the house, but subject to other interests. 

If a mortgage was always intended to enter into the MBS market and the registration was in the name of the mortgage originator, it would create an unbelievable amount of excess paper work.  Each time that the mortgage is passed from bank to bank (and I'm guessing this could happen a few times, first to a bank that would package a bunch of local mortgages to sell to a national bank, then by the national bank, who would package a bunch of local pools and chop them up to sell to other banks/investors/funds as MBS, and then maybe even further pooling and chopping to create CDOs), the new owners would have to re-register their interest.  And how would you register the interest that an MBS holder would have in the home?  Would you have to register each purchaser of the MBS (which could be thousands of investors) and their 1/2000th share in the home?

This is no different than the problem that has been talked about in the media over the last few months, about how slowly the foreclosure process has been because mortgages have been stuck in asset backed securities.  Looking at #6 in the chart, it is the "trustees" and more importantly, the "servicers" that have the obligation to manage the pools of assets that provide the income streams for the asset backed securities.  And these trustees and servicers get fairly nominal fees to do what they do.  They are loathed to have to take the role of being debt chasers, especially since no matter what path they choose (negotiation or pursue foreclosure), there will likely be some tranche of security holders displeased with their decision.

MERS makes the step after the decision to pursue foreclosure simpler.  It looks once the decision to foreclose is made, MERS files suit, but the deed is ultimately transferred to the bank that will ultimately pursue resolution and recovery (see chart #8 and #9).  Of course, that bank (or financial institution) is really just another fiduciary intermediary, acting on behalf of the hundreds/thousands of securities holders.

And there is the problem with transparency.  Yes, we can't see the ultimate security holders, but really, even if we could, what benefit does that offer?  How is it helpful to get a 30 page list of all the investors that own a partial interest in a mortgage?  How exactly do you even deal with hundreds of security holders?

I've been looking at securitization documents recently, and I've come to think that the vehicles aren't inherently evil.  The worst problem is that the boom-time securities were ridiculously optimistic in their projections and still got extraordinary ratings from the ratings agencies.  Yes, there are still securitization deals happening, but the amount of overcollaterailzation and equity cushion being provided is pretty significant.  I'm guestimating, but some of these new deals would probably require default rates at nearly 25% (in other words, 1/4 of all the underlying loans) before the overcollateralization/equity cushion is wiped out.

Babel Tower...

It's amazing we manage to get anything done around here.  For example, there is bad bank and there is bad bank, and now that everyone is saying that we need a bad bank, and Geithner even thinks a bad bank is a good thing, why don't we try to understand if they mean bad bank, or bad bank?

For me there is:

The GOOD Bad Bank.  Gotta LET THE BANKS FAIL FIRST.  A few people have pointed to the bad bank that existed during the S&L crisis (the Resolution Trust Corporation), which managed to recover some value for the taxpayer.  Another favorite is the Swedish model, which is said to have recoved between 50% - 90% of government expenditure on the cleanup.  But it bears reminding that both these involved removing the bank from private hands: the first, through bankruptcy, and the second, through full nationalization.

The BAD Bad Bank.  IOW, keep the bastards in so they can continue the elaborate ruse of finding new ways of paying themselves multi-millions in bonuses.  But have them sell the rotten assets to the government for far too much money, to be held in the bad bank, on the theory that "recovery" is just around the corner.  Um... no thanks?

Finally, today  yesterday Marginal Revolution points out how there is similar confusion of just what Nationalization entails.  For example, the idea of doing things the way they've always been done (letting insolvent companies go bankrupt) has somehow become taboo out of some fear of nationalization (emphasis mine, and with some editorializing):

I believe that bank nationalization is now very likely. It may even be desirable. The term nationalization, however, clouds judgment on both sides of the debate. It's better to think of what we want to do as bankruptcy. Many of the major banks are insolvent. When the liabilities of an ordinary firm exceed its assets the firm enters one of a variety of types of bankruptcy procedure during which management is often removed, the firm is sold or reorganized and liability holders take ownership or are paid off at a discount. Notice that we do not call a bankruptcy procedure, nationalization, even though it typically occurs under the auspices of a government employed judge.

When it comes to the banks the issue is more complicated than with an ordinary firm because the major liability holders are depositors whom the government has guaranteed. As a result, the ultimate liability holder is the government. [G]iven deposit insurance, the procedure most consistent with free market principles is bankruptcy (nb: actually, I believe it is technically conservatorship -ed.), preferably a speed bankruptcy procedure under the auspices of the FDIC which has significant expertise in this field. (NB: of course, the FDIC being a government entity, and therefore, the taint of there being some sort of nationalization -ed.)

A speed bankruptcy; 1) punishes current management reducing moral hazard, 2) will be less politicized if done under the auspices of the FDIC than if done piecemeal with congressional involvement and 3) will get the banks working again as soon as possible. (NB: And I believe the problem being that these actions, done by the FDIC, are for some reason being perceived as Nationalization -ed.)

Notice how the term nationalization confuses the issue. First, it suggests government ownership of the banks which would indeed be a disaster. People in favor of free markets will rightly want to avoid any such outcome but ironically it's the current situation of "wait and see," and "protect the banker," which is likely to lead to an anemic recovery and eventual government ownership. Second, it confuses people on the left who think that nationalization is a way to insure that taxpayers get something on the upside. That idea is a joke - there is no upside. Taxpayers are going to have to pay through the nose but the critical point is that the taxpayers must pay the depositors whom they have guaranteed not the banks.

Bankruptcy... is a normal free market procedure, it emphasizes that the firm has failed and current management should be removed. Framing the issue in this way makes it clear that only the depositors should be protected and under reorganization there should be no control over wages on future management (wages are going to have to be high to get anyone to take on the task). Finally the idea of bankruptcy makes it clear that the goal is to get banks solvent, under new management, and back under private control as quickly as possible.

And today, Naked Capitalism remarks on this nomenclature problem as well.  I guess pre-privatization it is!

(On a more personal note, work has been really steady, even busy, for the last few days.  I guess this means that my job won't be "right-sized" tomorrow?  *fingers crossed*  We're still waiting to hear about J's job.  February's almost over and they said by April at the latest.  My on-line class is kicking my ass, it's hard and it's not fun.  I am seriously dreading the final.  Pbbbt...  All this is a roundabout way of apologizing for the state of my posts.  They sucketh badly.  But y'know, I'm kinda swamped.)

I, Hypocracy...

I generally align myself with the liberals in the country.  See, e.g., my ties to the wondrous Momos.  However, the one place where I'm ardently centrist is in things financial.  I'm a bit more free market than the standard liberal, and I'm very VERY fiscally responsible.  The thing I hate most about Washington D.C./federal government is basically the national debt.  I find it beyond reprehensible that we've come out of 3ish decades of steady growth with over $10 trillion of debt.

Which is why I could not be the messenger against the most recent GOP strategy to block the Obama stimulus.  As much as I disliked their aggressive tactics and on the whole believed that there was a role for a stimulus, I just couldn't pick a fight against a message centering around the ideas of fiscal responsibility. Luckily, there are others who can.  From Andrew Sullivan (bold mine):

This Manzi post would be their argument going forward. Here's why they are not being intellectually honest, and Manzi's post includes the relevant facts. The GOP has passed what amounts to a spending and tax-cutting and borrowing stimulus package every year since George W. Bush came to office. They have added tens of trillions to future liabilities and they turned a surplus into a trillion dollar deficit - all in a time of growth. They then pick the one moment when demand is collapsing in an alarming spiral to argue that fiscal conservatism is non-negotiable. I mean:seriously. 

The bad faith and refusal to be accountable for their own conduct for the last eight years is simply inescapable. There is no reason for the GOP to have done what they have done for the last eight years and to say what they are saying now except pure, cynical partisanship, and a desire to wound and damage the new presidency. The rest is transparent cant.

There is a way to spend and borrow enough to mitigate the sudden downdraft - while working to mend long-term fiscal problems. Manzi sets it out here:

2. Make an at least off-setting change in future liabilities under entitlement programs. This would include things like means-testing benefits, increasing the retirement age and making this sustainable by linking it to a longevity measure and so forth.

3. Reduce the military budget by reducing military commitments. The United States is increasingly a nation among nations. This will likely become ever truer as the economic rise of the Asian heartland continues. We need to recognize this, and scale our expenditures accordingly.

The great tragedy of the Gregg withdrawal is that this was precisely what he had been selected to achieve. The chance of real entitlement reform - the one thing that can indeed put the US back on a path to fiscal sanity - is real in the first year of an Obama presidency. But it will require bipartisanship; and if a decent fiscal conservative like Gregg is simply forced by his own party to have no role in it, then it will not happen. My sense is that this is indeed why he felt it necessary to withdraw.

The GOP is not interested in the long term fiscal health of this country. Their reckless stewardship over the last eight years proves that. They are not interested in helping this new president, who has done everything he can to create a civil atmosphere, to use this moment to prevent the worst in the short term and move to improve matters in the long term. Instead,they spin.

Or, as I mentioned in a tweet last week: so much of US politics abt positioning for next election. Well, politics can #suckit #fucktheppl.

All Bailouts are Created Equal...

I'm starting a new category today called "beyond the rhetoric" b/c I'm so bored with the auto bailout that it's not even funny.  I know that it affects a lot of Americans, I know that real American manufacturing companies are on the verge of disappearing (and despite falling consumer demand over the past 3 months, the fact that our trade deficit continues to grow just makes this all the more apocalyptic), I know that this will have significant impact on a whole supply chain and the one car company (Ford) trying to get its act together.

But I'm so sick of the conversation.  There's so much BS being slung around at this point, I'm surprised that our esteemed politicians in DC haven't suffocated in it.  And no, this is not a Republican thing.  This is a Democrat and Republican thing.  So screw you guys, I'm going home.

From the Democrats: "I dread looking at Wall Street tomorrow," Senate Majority Leader Harry Reid, D-Nev., said late Thursday after a vote to consider the plan failed. "It's not going to be a pleasant sight."

Way to fear monger.  Yes, because the reason we should bail out the auto industry is to prevent a bunch of equity holders from getting hurt.  It's the fantasy of high equity prices that helped get us here in the first place, so why should I care that Wall Street suffers? 

Meanwhile, the Republicans are all: the fault lay with the U.A.W.’s president, Ron Gettelfinger, whose union declined to agree to allow wage concessions in 2009 as part of a deal, says Senator Bob Corker, a Republican of Tennessee.

Because Republicans, who tend to represent states like Tennessee, Kentucky and other non-unionized states where foreign factories have set up, don't want to throw taxpayer dollars to support Union workers who are making more than the non-union workers in their own states doing the same jobs.  Ok, fair enough.

But why don't we talk about the concessions that the dealers are also not making.  Oh, wait... could it be because dealers are hugely powerful in those same states?  And because they have friends in high places?

Just pass the damn thing or don't, but don't try to paint it as saintly, or fair, or helping Americans generally: it's fake and it's patronizing.  Because none of you know what the hell you're doing.