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Archive for the ‘mortgage crisis’ Category

How the financial crisis happened: The contribution of regulatory failure

Posted by Charles II on September 27, 2014

Michael Lewis’ piece (via Truthout:

The reporter, Jake Bernstein, has obtained 46 hours of tape recordings, made secretly by a Federal Reserve employee, of conversations within the Fed, and between the Fed and Goldman Sachs. The Ray Rice video for the financial sector has arrived.

First, a bit of background — which you might get equally well from today’s broadcast as well as from this article by ProPublica. After the 2008 financial crisis, the New York Fed, now the chief U.S. bank regulator, commissioned a study of itself. This study, which the Fed also intended to keep to itself, set out to understand why the Fed hadn’t spotted the insane and destructive behavior inside the big banks, and stopped it before it got out of control. The “discussion draft” of the Fed’s internal study, led by a Columbia Business School professor and former banker named David Beim, was sent to the Fed on Aug. 18, 2009.

It’s an extraordinary document. There is not space here to do it justice, but the gist is this: The Fed failed to regulate the banks because it did not encourage its employees to ask questions, to speak their minds or to point out problems.

ProPublica’s article by Jake Bernstein.

As it appeared on WBEZ

536: The Secret Recordings of Carmen Segarra
SEP 26, 2014
An unprecedented look inside one of the most powerful, secretive institutions in the country. The NY Federal Reserve is supposed to monitor big banks. But when Carmen Segarra was hired, what she witnessed inside the Fed was so alarming that she got a tiny recorder and started secretly taping.

Posted in mortgage crisis, regulations | 2 Comments »

FHA to join Fannie and Freddie in conservatorship

Posted by Charles II on November 15, 2012

According to Bill McBride, the Federal Housing Authority is fundamentally insolvent, and will require a $16B bailout. This is based on a HUD report which has been taken down, perhaps due to early release, and reported in the Wall Street Journal.

This isn’t entirely unexpected. I mentioned the FHA as a possible casualty in January 2010. But this is going to substantially complicate the problem of reaching a fiscal deal, since it will have to be factored in in the middle of the craziness in Washington.

However, this is only notional insolvency, based on model projections and not a sum that has to be paid out, cash-on-the-barrel. Apparently the fact that house prices have stopped falling while foreclosures continue and interest rates continue to fall reduced the projected revenue stream enough to turn what looked like a surplus into a deficit. Expect Darrell Issa and John McCain to demand a Watergate-style commission. Back in Realityville, expect the taxpayers to have to pony up a couple of billion a year for the FHA to continue operations.
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In the course of looking up the history, I am reminded of Bill McBride’s co-blogger Tanta (Doris Dungey), who died very young almost four years ago. Wherever you are, Tanta,

Posted in mortgage crisis | 1 Comment »

More good news: Rolling Jubilee

Posted by Charles II on November 13, 2012

Good news! You can now assist an Occupy offshoot, Strike Debt in canceling debt. This is called the Rolling Jubilee. What is a Jubilee?

From the Jewish Encyclopedia:

The septennate or seventh year, during which the land is to lie fallow, and the celebration of the fiftieth year after seven Sabbatical cycles. As regards the latter, the Hebrew term “yobel” refers to the blast of the shofar on the Day of Atonement announcing the jubilee year ….

The fiftieth year, i.e., that following the last year of seven Sabbatical cycles, is the jubilee; during it the land regulations of the Sabbatical year are to be observed, as is also the commandment “ye shall return every man unto his possession” (ib. verse 10), indicating the compulsory restoration of hereditary properties (except houses of laymen located in walled cities) to the original owners or their legal heirs, and the emancipation of all Hebrew servants whose term of six years is unexpired or who refuse to leave their masters when such term of service has expired (Gen. xviii. 6; ‘Ar. 33b; see Josephus, “Ant.” vi. 8, § 28).

The regulations of the Sabbatical year include also the annulment of all monetary obligations between Israelites, the creditor being legally barred from making any attempt to collect his debt (Deut. xv. 1 et seq.). The law for the jubilee year has not this provision. (emphasis added)

The only bad news that I can see is that they’re using Paypal. However, they also offer WePay. Don’t know if that is better.

Posted in mortgage crisis, Occupy movement | 3 Comments »

Some good news

Posted by Charles II on November 12, 2012

From Thom Hartmann, t/o:

The Occupy Movement is tackling the nation’s debt problem. Though the physical occupations have disappeared, the movement is busy helping Americans avoid foreclosure and providing disaster relief post-Hurricane Sandy. Now they’ve unveiled a new initiative they’re calling the “Rolling Jubilee.” The movement is raising money to buy debt from financial firms at pennies on the dollar. Then, rather than hounding struggling homeowners and students whose debt they just acquired, Occupy is completely forgiving it. As one organizer explained it, “OWS is going to start buying distressed debt (medical bills, student loans, etc.) in order to forgive it. As a test run, we spent $500, which bought $14,000 of distressed debt. We then ERASED THAT DEBT.” Since Wall Street got bailed out and Main Street got sold out, average Americans are drowning in enormous debt. Good on Occupy for doing something about it.

This is what community based organizing can do and, for those who have read this blog over the years, it’s essentially [1] what I said the government should do long before the mortgage crisis turned into a financial meltdown. If they had done, there would not have been a financial crisis.

Thank God for Occupy. They seem to be the only people with any sense.
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1. My solution was actually to force the borrower to reduce the mortgage to the level that it was payable by having the pain shared equally between the bank, the borrower, and the government. What that amounts to is having the government buy the mortgage at a discount, then re-issue it at a lower rate, thereby canceling a portion of the debt. So what OWS did was even better, though I’m sure that the debt they purchased at 4 cents on the dollar was absolutely unpayable.

Posted in Good Things, mortgage crisis, Occupy movement | 13 Comments »

Give it a shot: localities could solve the housing mess

Posted by Charles II on July 24, 2012

Via Ritholtz, Rolling Stone’s Matt Taibbi:

Something very interesting is happening.

There’s been so much corruption on Wall Street in recent years, and the federal government has appeared to be so deeply complicit in many of the problems, that many people have experienced something very like despair over the question of what to do about it all.

But there’s something brewing that looks like it might eventually turn into a blueprint to take on the financial services industry: a plan to allow local governments to take on the problem of neighborhoods blighted by toxic home loans and foreclosures through the use of eminent domain. I can’t speak for how well this program will work, but it’s certaily been effective in scaring the hell out of Wall Street.

Under the proposal, towns would essentially be seizing and condemning the man-made mess resulting from the housing bubble. Cooked up by a small group of businessmen and ex-venture capitalists, the audacious idea falls under the category of “That’s so crazy, it just might work!”

Since the Supreme Court has radically expanded the power of eminent domain to permit the seizure of homes for the incredibly important public purpose of building a shopping mall, doubtless they will feel constrained by shame not to reverse such a precedent so quickly.

Oh, that’s right. The Supreme Court has no shame.

Anyway, we will not get out of the depression until the housing crisis is resolved. It’s either wait for it to grind to an end by natural means or force the banks to resolve it by something like this scheme. I say give it a shot.

Posted in financial crisis, mortgage crisis | 2 Comments »

Your sanity break

Posted by Charles II on December 7, 2011

Krugman, Reinhart, and Nocera

Posted in financial crisis, mortgage crisis, Paul Krugman | Comments Off

Clear title is not an eMERSgency?

Posted by Charles II on November 6, 2011

Albrt, posting at Calculated Risk, explains why he thinks that the automated mortgage registry, by which mortgage originators evaded recording fees and created a paperwork tangle over title is not going to end up with people allowed to get “free houses,” i.e., erase the mortgage obligation:

Judge [James] Teilborg [of Arizona] considered motions to dismiss 20 of the MDL [multi-district litigation] cases, and dismissed each of them. Judge Teilborg then dismissed the remaining 52 complaints, but ordered the plaintiffs to take their best collective shot at submitting a “consolidated amended complaint” that avoided the shortcomings identified in the previous 20 complaints. The October 3rd order dismissed the consolidated complaint, and dismissed each of the 72 MDL claims with prejudice. At least some of the cases are apparently still alive in other courts based on claims that were not covered by the MDL decision.

The fraud issues were essentially disposed of by earlier rulings…

Judge Teilborg decided that naming MERS as a beneficiary on a deed of trust does not permanently destroy the security interest and completely bar foreclosure.

Judge Teilborg also decided that the foreclosures could not be wrongful unless the plaintiffs had not defaulted. The plaintiffs argued that a foreclosure can be wrongful in other ways. The law is unclear on this point, and a decision from a state court while the MDL decision is up on appeal could change the outcome.

This sounds like a huge setback to getting any real justice against deceptive mortgage originators. But I have to say that I am not surprised. Any judge ruling on this issue has in the back of his mind that if he lets the little people win any but the most outrageous cases, what follows is a nightmare of clouded title over millions of mortgages. Albrt says that “Screwed up paperwork … rarely ends up completely and permanently invalidating the bank’s security interest.”

True, but since courts have to sort these things out, sorting through the paperwork on millions of mortgages could overwhelm the courts system. From the courts’ vantage point, it would be crazy to give people any hope that they might prevail. Maybe I am a cynic, but I do think that institutions act in this way, perhaps even unconsciously, to protect themselves. Certainly no person who believes in equity, which is the New Testament concept of justice, could fail to see that many mortgage originators committed fraud on an industrial scale and have so far not been punished.

Posted in mortgage crisis | Comments Off

The new crisis de jour: Fannie and Freddie/updated

Posted by Charles II on October 9, 2011

Merkel and Sarkozy have agreed to do something, details to follow, to keep the Euro banks from collapsing. Their new-found urgency arose from the imminent collapse of the Belgian financial services company Dexia, whose retail banking arm is holding bad debt. It will be carved up into a “good bank” and a “bad bank,” with the “bad bank” holding assets of nominal value ca. $130B.

Let me harp a little on the mechanism for the crisis. The banks are holding a combination of cash, mortgage derivatives, municipal bonds, corporate bonds, and national bonds, not to mention the odd dog or cat. These constitute their assets. They are required to hold a certain level of assets relative to liabilities to be considered solvent. Their profitability is based on the interest rate at which they can lend relative to the interest rate at which they can borrow.

If people are unemployed, as in the US, they can’t pay their mortgages, so those default at a higher rate. But the same risks apply to the other assets, even cash. If the dollar falls, and your obligations are denominated in Euros, you get squeezed. There’s been a big problem because many Eastern European mortgages are denominated in Swiss Francs. As the Swissy rises, those mortgages become more and more expensive to service.

The uncertainty in the value of assets means that it is much harder for banks to borrow cheaply. So, their profitability falls, which can threaten their solvency. In the US, we solved this problem by letting the banks borrow at essentially zero rates, so that any loans they made would be profitable–as long as the borrowers did not default. So, of course, the banks bought things like Treasuries and Agencies. Agencies are mostly Fannie and Freddie bonds, bundled US mortgages, which the US government offered to guarantee.

So, this brings us to the next shoe to drop. Asian and Middle Eastern investors are, according to the FT, “spooked” by the financial terrorism being practiced by Republicans in Congress. Which only goes to show that they are paying attention. Korea and Kuwait have pulled the ripcord on Agencies, and Japan is not going to buy any more. Brazil, Russia, India and China didn’t say anything: they just stopped buying. Yen-denominated debt issued by foreigners, so-called “samurai bonds” are also drying up.

Update: And another shoe has been identified: exposure of US banks to second mortgages, which John McDermott of FT Alphaville estimates at more than $70B over existing write-downs for just Citi, JPM, Wells Fargo, and Bank of America. If these are brought into default because of renewed recession/job loss, banks could be forced to re-capitalize.

The net upshot is that creditors want higher interest rates to compensate for increased risk on everything from Greek debt to Agencies to samurai bonds. If this happens, the value of assets held by banks declines, making them less well-capitalized, and therefore less able to lend. Interest rates go up. The economy slows down. Banks are in trouble.

But you see, there’s one more angle to all this. While conventional banks get burned by uncertainty, investment banks thrive on it. Like most retail investors, I have had a terrible investment year because productive assets like stocks have fallen. But in one area, I’ve done remarkably well. On a medium term volatility trade, called VIXM, I made an annualized profit of 64% (exclusive of taxes and commissions) by buying when the $VIX index was around 20 and selling when it hit 40. But on the short-term volatility trade, I made a 193% annualized profit by buying around 17 and selling around 48 (**). At the height of the 2008 crisis, VIX hit 80. Such supercharged profits are possible only when there is high volatility. Instead of owning a stock, take out insurance on it, and burn it to the ground.

The people who thrive on volatility need a crisis. If Merkel and Sarkozy are getting serious about solving Europe’s problems, a new crisis has to be ginned up. Republicans in Congress, whether knowingly or not, are contributing to volatility by making it seem as if they are willing to default on US debt. And in so doing, they are making a new crisis inevitable.
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**Please note: I do not recommend VIXY and VIXM. ProShares takes a huge bite, and you have to watch these things minute-by-minute. During September, VIXY swung by 37%, while VIXM was more or less as volatile as the S&P. Also, please note that an annualized profit is very high because this all took place over a few months. The actual profit was much smaller. One has to repeat the win again and again to actually book such profits.

Posted in banking, financial crisis, mortgage crisis | Comments Off

The need for Jubilation

Posted by Charles II on August 6, 2011

Here’s the very definition of political risk. The Chinese are threatening, in a hectoring tone that does not befit a nation that suffered from debt slavery for two centuries or so, to refuse buy any more debt unless we cut Social Security and Medicare. The current Chinese government is, by the way, about as popular (except among their ex-pats) in Asia, as we are in Iraq, which is to say, about as popular as drought and famine.

More to the point, the Eurozone is playing extend and pretend at a time when even the most basics of business transactions demands clarity. The Germans are acting like southern Europe is naughty children, rather than the very nations whose deficit spending helped fuel German manufacturing. And the US is run by incompetents, deadbeats and lunatics. As the Guardian editorializes, “Financial Markets and Governments: No one’s driving“. A Babel is arising, in which nations are unable to talk to one another and plan a sensible strategy forward.

And so we get this news from Toby Helm, Nils Pratley, and Tania Branigan of the Guardian:

World leaders are battling to prevent panic from spreading across financial markets as the sudden downgrading of the US credit rating triggered fears of global turmoil when stock exchanges open.

Finance ministers from the G7 leading industrial countries – many of them away on summer holiday – agreed to a series of urgent weekend telephone talks to try to prevent a loss of confidence in the world’s biggest economy.

[Chancellor George] Osborne was reported to be urging richer eurozone states such as Germany and France to back the radical step of issuing so-called “eurobonds”, meaning they would underwrite the debt of poorer eurozone nations in return for gaining a formal say in the future running of their economies.

China, the largest foreign holder of US debt, issued an extraordinary demand that Washington change its economic ways and address its “debt addiction”. It said the rating reduction would be followed by more “devastating credit rating cuts” and global financial turbulence if the US failed to learn to “live within its means”.

It also insisted the US should slash its “gigantic military expenditure and bloated social welfare costs”

Continue reading by administering a brisk CLICK

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Posted in (Rich) Taxpayers League, deficit, mortgage crisis, wrong way to go about it | 4 Comments »

The Fed Audit

Posted by Charles II on July 21, 2011

Thanks to Bernie Sanders, the GAO did an audit of the Fed’s actions during the financial crisis. What this audit shows is that, of the securities from the financial crisis remaining on the Fed’s books, the only major category are Agency Mortgage Backed Securities. These are mortgages purchased by Fannie Mae and Freddie Mac for bundling into bonds which could be sold on the open market. They were not officially guaranteed by the USG at the time of issue.

Since the Congress then guaranteed these with the full faith and credit of the Treasury (after the collapse), the Fed can claim no losses. But in fact it is holding a face value of $1.2T in mortgages (see Appendix 1). These appear to be worth $909B (see Table 1), meaning that the US taxpayer subsidized the mortgage crisis to the tune of $300B.

Then there’s Maiden Lane I, II, and III for Bear Stearns and AIG, which have balances totaling $43B, and another $13B for TALF, which provided loans to buy asset backed securities (Table 1).

From the report:

As of July 2011, most of the Federal Reserve Board’s emergency loan programs have closed and all of those that have closed have closed without losses. Moreover, currently, the Federal Reserve Board does not project any losses on FRBNY’s outstanding loans to TALF borrowers and the Maiden Lane SPVs.

It’s puzzling to me why they don’t close Maiden Lane and TALF if they don’t have any losses. But $56B is a relatively minor point in this fiasco.

The summary provided by Sanders suggests that nothing really serious was discovered (other than the massive socialism-for-the-rich that was inherent in the bailout). The main thing is the Fed is too casual in excluding conflicts of interest, and some of the private contractors it employed may have profited from sweetheart loans.

The Fed is a walking conflict of interest, run by the banks for the banks. Thanks to Senator Sanders for making them open their books. That alone will have a deterrent effect.

Posted in capitalism as cancer, financial crisis, mortgage crisis | Comments Off

 
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