WONKESS

Banks... Lawsuit... Does not compute...

Interesting:

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others...

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.

Clearly, I haven't been busy little internet beaver enough this summer, because this is apparently nothing new.  All I know is that I'm pleased that there is at least a little (v. v. little) attempt at holding the banks accountable for something.  Not that this will really go anywhere.  *sigh*

Too Little Too Late (about Too Much Too Soon)...

Gretchen Morgenson wrote this weekend in the New York Times on the Federal Reserve efforts to save the financial sector during the Great Recession, at enormous cost to the taxpayers and little benefit to Main Street.

Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fed had provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.

The money has been repaid and the Fed has said its lending programs generated no losses. But with the United States economy weakening, European banks in trouble and some large American financial institutions once again on shaky ground, the Fed may feel compelled to open up its money spigots again. (emphasis added)

This is NOT the TARP money bailout that was publicly debated and ultimately Congressionally approved, but additional amounts of money that were lent by the Federal Reserve to large banks (including foreign banks) largely in secret and at minimal interest rates in order to make sure that these banks could meet their minimum liquidity requirements so as to avoid bankruptcy. 

The Fed overnight window is nothing new - the Federal Reserve has long provided short-term liquidity to help grease the wheels of finance.  But the two startling things about these lending programs are (1) the amounts ($1.2 trillion!!!  And we're so worried about our debt problem pshaw!), and (2) the collateral pledged in return for these loans.  Under standard operating procedures, the Fed would only accept bonds with the highest credit grades in return for their cash loans (iow, US treasuries).  So under normal circumstances, the Fed is arguably just swapping almost equivalent goods.  Yes, banks get cash from the Fed, but they are receiving collateral worth as much and almost as liquid. 

Under the 2008 emergency lending programs however, the Fed started accepting all sorts of dreck from the banks.  Stocks, junk bonds, and although not mentioned in the Bloomberg article, I remember they were even accepting asset backed securities, the basically worthless investment vehicles that started all of the big banks' problems in the first place.

Yes, it is true that the Federal Reserve has not (yet) lost money in these lending endeavors, which is what the backers of these programs would argue.  However, think about this practically.  You are the bank.  You are given (as in Morgan Stanley's case) well over $100 billion in cold hard cash.  In return, you give the Fed some paper that you own which, if you had to mark-to-market at that moment (which you didn't, thanks to new accounting rules that came into place at around the same time changing MTM rules), would be worth - for arguments sake - a quarter of that (and maybe less).  If you just invest that money in a basket of S&P 500 stock, you will see returns of 27% and 14% over the next two years.  And even though you can't see the future, your calculations has to run something like this: if I bet big and it pays off, I get to keep all the upside less the 1.1% interest that the Fed is asking for its money.  If the bet doesn't pay off, I lose a bunch of worthless paper (the collateral being held by the Fed) and go bankrupt.  Which I would be anyways, if I didn't take this money. 

Hmmmm.... hard choice.

As far as I'm concerned, the Fed gave the financial sector carte blanche to play fast and loose with a whole lotta taxpayer cash.  Yes, this time it "worked out", but given that the reason for this weekend's NYT article is the fact that there are hints that the spigots are about to be turned on again, just how lucky does the Fed feel?

Do you feel lucky?  Well, do you, Bernanke?

Read the excellent Bloomberg article here and its associated data here.

Cross-posted at Momocrats.

At least the Poor have an Excuse...

The IRS says 1,470 millionaires paid no federal income taxes in 2009:

Where did the money go? Tax "expenditures" (otherwise known as deductions, write-offs, subsidies or loopholes), charities, municipal bonds and tax payments to foreign governments, according to a recent IRS [report].

Lovely.

Asymmetrical Morality...

There is an escalating unfairness in our system.  It is the unfairness of asymmetrical morality.   We seem to have come to the point where every action taken by a corporation, regardless how risky, brazen, dangerous or deplorable, is given a pass on the grounds that they will magically be corrected by market forces.  And yet, we have shackled the individual with all the obligations of a higher morality, thus stifling the very corrective market forces that were meant to keep the voracious corporation in line.  (Privatize the gains and socialize the losses, indeed.)

 

The debate over strategic default (on the part of underwater homeowners) goes to the heart of this asymmetrical morality.  I understand why it is so seductive to want mortgage holders to absolutely fulfill their obligations.  For one, when seen on an individual level, we all recognize that these are determinable individuals who could be our neighbors, our co-workers, our friends.  If all of these intimates were suddenly to base every action and decision on pure economic efficiency, it would change the dynamic of every interaction, and the world would become, let’s face it, pretty damn miserable.  Second, as the cousin emotion to schadenfreude, it is painful to know that those who lived well but beyond their means may never face repercussions while the responsible and frugal not only missed out on the good life, but might be saddled with some share of the subsequent fallout.

 

But why, do we feel such an urge to correct this iniquity between individuals, yet have no compulsion to address the same iniquity in a man versus corporation tête-à-tête? 

 

In law, there is a very powerful concept of the fiduciary.  It is, in fact, a concept that allows us to have the corporate form at all.  At its un-nuanced simplest, it requires the officers and directors of a corporation, as the “fiduciaries” of the owner-shareholders of the corporation, to act to the benefit (generally economic) of the owner-shareholders while suppressing their own (potentially conflicting) interests.  It is the fiduciary duty that allows – requires, according to some - corporations, and most egregiously, the TBTF banks, to do things like: lobbying political powers to pass legislation or pursue courses of action that are favorable to the corporation; follow laws only to their literal meaning, ignoring even the most obvious of intentions; pursue any corporate strategy (like earmarking the lions-share of corporate profits for compensation) that offers the potential for maximizing profit.  Free market at its finest.

 

But think how much more level the playing field would be if every individual, when pitted against a corporation acting under these fiduciary directives, was himself/herself represented by a fiduciary.  This already happens, among the very rich, who never sign a line without consulting one or more very expensive lawyers who have fiduciary duties to their clients. 

 

It’s really very simple.  If every time Joe Six Pack entered into a loan agreement, a mortgage, a credit card agreement, etc… with a bank, he did it through a trust, managed by a trustee, that trustee, as a fiduciary of Joe Six Pack, would have an obligation to manage that agreement in a way that is economically most beneficial to Joe Six Pack, morality be damned.  If, for example, Joe Six Pack was underwater on his non-recourse mortgage (technically owed by the trust), the trustee would actually have to default on the mortgage if the costs to JSP (such as increased borrowing costs) are lower than the amount that JSP is underwater.  Most economically beneficial.

 

The free-marketeers (hmm… the adult version of the Mousketeers?) will never allow the corporation to be burdened by morality (even while they can apparently achieve personhood in the realm of free speech – irony, anyone?)  After a decade in corporate America, even the most enlightened of corporations, with their built out corporate responsibility groups, engage in such “moral” behavior because of some (real or imagined) economic benefit (reduced litigation, public relations, marketing strategy).  The field is not even.

 

It’s time we evened it.

Timmay's got to go...

Food Matters...

h/t Cage Free Family

The Faux-gument of Borrower Responsibility...

I'm getting pretty sick of the twin argument I hear from conservatives about "caveat emptor" on the one hand and "personal responsibility" on the other.  I believe the premise is: (1) anyone who even has a whiff of having entered into a sub-prime or alt-A mortgage who is now in near or potential default is personally reckless regardless of the marketing techniques used by the realtor/mortgage originator because they should have done the appropriate due diligence before entering into the contract, (2) that they shouldn't be rescued by anyone, and especially not by taxpayer dollars, because by entering into the mortgage contract, they now have an obligation to perform and besides, (3) anyone who is near default must have bought above their means, and they should never have bought beyond their means in the first place.

This is a non-sequitor as far as I'm concerned, because it mixes the legalistic, on the one hand, with the moralistic on the other. 

I think there is a fundamental misunderstanding out there of the concept of CONTRACTS.  The whole point of the contract was to take the moral out of the equation, understanding that different individuals have different moral standards, which can be attributable to different upbringings, different cultural backgrounds or simply because someone is evil.  A contract is an agreement that two parties enter into, and the inducement (for both sides) to enter into the contract are the specific terms of the contract.  Get that?  It's the fact that a party likes the TERMS of a contract that makes him enter the it, not because of some nebulous sense of duty, or obligation.

The most important thing to keep in mind, then, is that the TERMS of a contract should always include specific provisions regarding what happens if one side of the contract decides, in fact, to not fulfill his contract.  Now a contract that contains no such terms will not fail for such absence, but it is then understood that the parties to the contract are willing to accept that they will get nothing as compensation for the failure of the other party to perform.  Now there is a large and complicated body of law that has to do with how to deal equitably for the situation where there is a failure to compensate for service already rendered, but that is not the situation we face in a mortgage contract.

Mortgage contracts have all sorts of built in terms that are precisely meant to deal with the possibility of the mortgage-holder not meeting their payment obligations.  Traditionally, this has included requiring a down-payment and holding a security interest in the underlying house, backed by checks to determine the credit-worthiness (and likelihood of continued credit-worthiness) of the borrowing party.  These "safe-guards" are meant to give the mortgage-holder an economic incentive (and not just a moral one) to perform. 

It was beyond dumb for originators to give mortages with no-down payment, relying purely on the value of the underlying real estate as a buffer against mortgage default.  But, as wew have been told, this was entirely due to the fact that with the pooling and bundling of mortgages into securities and their derivatives, the risk was passed ever higher, with no one attending to the number one rule of lending money - do your due diligence. 

I don't know why Americans so enjoy righteous indignation against their fellow Americans, relative to the corporations.  Or maybe we are so frustrated at the impotence we feel when we learn that the largest benefactors of the government's largess to AIG is... Goldman Sachs, that we can't help but want to stick it to the little irresponsible guy (as a proxy for the big huge irresponsible asshats that brought this pox upon our house). 

It bears remembering that the banks stand to gain as much from a government supported mortgage bailout as the individual irresponsible homeowner.  Foreclosures are notoriously costly, and recovery percentages poor.  A renegotiated rate for near-foreclosure homeowners is also far more beneficial to the banks than to the mortgage holder, who, in the majority of cases, is still paying for a house that is worth somewhat to much less than the attached mortgage, even if it is at a better interest rate.  In other words, if you want to voice some anger regarding this mortgage bailout, direct it at the right party(s).

And it is certainly the preferred bank plan, when the alternate is a court-determined cram-down (which is a bankruptcy procedure whereby a court will effectively force the bank to accept a lower principal based on a "more appropriate" valuation of home prices).   I'm not a fan of the cramdown for administrative reasons: it irks my sensibilities to use the legal regime to change the terms of the contract in a way that is clearly beneficial to one party over the other, and it is just one of those slippery slope roads you might not want to go down.  On the other hand, given that the very recent 2005 bankruptcy rules effectively screwed over all consumers holding debt, yet the consumer had no say in it, you might argue what's good for the goose...

Kick Ass...

Yeah, I'm getting really bad at this updating my blog thing.  Don't blame me.  I'm taking a class online for a master's degree (don't ask, long story, and no, it's not econ (I wish)) and the class is kicking my ass.  I'm so tired, I'm even finding it hard to be hatin' Bernanke, Geithner et al...

Foreclosure Alley...

This is so incredibly sad:

Inland Empire is pretty much the poster child for the foreclosure crisis. SoCal Connected tracked down some surreal sights associated with the crisis...

Stiglitz on the Financial System...

Holy Cow... This is such a friggin' good article (h/t Jesse's Cafe) and it goes to my Credit discussion.

Financial markets have been likened to the brain of the economy. They are supposed to allocate capital and manage risk. When they do their job well, economies prosper. When they do their job badly, as we are once again learning, everyone suffers. Financial markets are amply rewarded for their work--in recent years, they have received over 30 percent of corporate profits--and the standard mantra in economics was that these rewards were commensurate with their social return...

The task of unraveling all that went wrong in our financial system is a difficult one, but in essence the financial system's latest innovation was to devise fee structures that were often far from transparent and that allowed it to generate enormous profits--private rewards that were not commensurate with social benefits. The imperfections of information (resulting from the non-transparency) led to imperfections in competition, helping to explain why the usual maxim that competition drives profits to zero seemed not to hold....  One should have suspected that something was wrong with the economic system when millions of Americans owed billions to credit card companies and banks in "late fees," "penalties," and a variety of other charges, transforming a high annual interest rate of 20 percent into a truly usurious effective interest rate of 100 percent or more for those who fell behind in their payments.

To put it another way, had those in the financial sector allocated capital and risk in a way that fueled the economy, they would have had handsome profits. But they wanted more, and so established incentive structures that encouraged gambling. If they gambled and won, they could walk away with a share of the profits. If they gambled and lost, the investors would bear the consequences.... The financial-system-as-casino... is a negative-sum game. Those on Wall Street may have walked off with billions, but those billions are dwarfed by the costs to be paid by the rest of us. Some have lost their homes and life savings. Others are innocent bystanders who resisted the false promises of the mortgage brokers and the credit card companies, but now find themselves out of jobs as the economy weakens.

In short, the problem with the U.S. economy is not that we have allocated too many resources to the "soft" areas and too few to the "hard." It is not necessarily that we have allocated too many resources to the financial sector and rewarded it too generously--though a strong argument could be put forward to that effect. It is that too little effort was devoted to managing real risks that are important--enabling ordinary Americans to stay in their homes in the face of economic vicissitudes--and that too much effort went into creating financial products that enhanced risk. Too much energy has been spent trying to make an easy buck; too much effort has been devoted to increasing profits and not enough to increasing real wealth, whether that wealth comes from manufacturing or new ideas. (emphasis mine)

It's nice to hear a Nobel Prize winner thinking along the same lines as myself.  But it also reinforces my fear that this is too little notice, too late.

A long time ago, when I worked for a HUGE CORPORATION, we did one of those corporate exercises where we learned about the feedback mechanisms, including negative feedback, which reduces output but may be necessary to stabilize the system.  IOW, on some level, rather than casting pejoratives on the current slew of doom-n-gloom economists (like Roubini and Stiglitz w/ this article), we should simply come to the realization that their prophetic economic downturns (the real ones, not like the blips of  92 and 01) are simply necessary negative feedbacks.  There needs to be a purging of the system in order to re-stabilize the system.  A global recession, or even a localized one, will wean Americans off the teat of credit (man, I'm crass today) and get our minds off the cultural issues that are so divisive but have SO FRIGGIN LITTLE REAL MEANING IN OUR EVERYDAY LIVES. 

Yeah, I hate Sarah Palin.  I hate her w/ a passion (and yes, this is a total non-sequiturious digression).  Because she stands there at the podium, rallying her troops to fight these cultural battles (that I have vowed to stop engaging in.  It's like trolls... you gotta learn to STOP FEEDING THE TROLLS) and ignores the much more real issues that need to be addressed to keep this country strong (economy, economy, economy, education, senior entitlements and health care - and only b/c these are damn vital to how the economy is going to turn out).

But at least I now understand what the big "C" conservatives are feeling.  Sarah Palin is the Republican's Barack Obama.  So they probably view Obama with the same visceral dread and loathing that I have for Governon Palin.  But I'm a logical being, I can get over this, I can argue myself down from my fur up, claws out, gut reaction... right?

Pbbfftttt...