Posts filed under “Legal”

Private Sector Loan Losses vs Fannie/Freddie

Joe Kernan on CNBC continues to get this not just a little bit wrong, but terribly, horribly, mind numbingly wrong.

His favorite NYT article comes form  1999 (he referenced it again this morning). This piece has become a right wing meme: Fannie Mae Eases Credit To Aid Mortgage Lending. The article discusses a 24 bank, 15 market pilot program — teeny tiny in the overall total mortgage market — as if its the Rosetta stone of Housing/Credit crisis.

The article states that “banks, thrift institutions and mortgage companies have
been pressing Fannie Mae to help them make more loans to so-called
subprime borrowers. These borrowers whose incomes, credit ratings and
savings are not good enough to qualify for conventional loans, can only
get loans from finance companies that charge much higher interest rates
– anywhere from three to four percentage points higher than
conventional loans.”
It was the lenders themselves who were pressing the GSEs to buy these loans. The private sector lenders were pursuing this market due to fatter potential profits — not Fannie and Freddie.

These facts don’t stop the pundits; nor does an apparent lack of understanding of the actual causes of the housing boom/bust and the credit crisis. Their cognitive dissonance has also prevented them from acknowledging the role deregulation had in these events.

Some people actually look at the data, while others foolishly parrot talking points. Consider this Federal Reserve Board data, compiled by McClathcy. It shows that:

  • More than 84% of the subprime mortgages in 2006 were issued by private lending institutions.
  • Private firms made nearly 83% of the subprime loans to low- and moderate-income borrowers that year.
  • Only one of the top 25 subprime lenders in 2006 was directly subject to the CRA;
  • Only commercial banks and thrifts must follow CRA rules. The investment banks don’t, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.
  • Mortgage brokers, who also weren’t subject to federal regulation or the CRA, originated most of the subprime loans.

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The “Blame Fannie/Freddie/CRA” crowd, do provide a service: I know anyone who repeats this meme is an empty headed parrot, a mindless drone without an ability to think. This is a huge timesaver, as it has allowed me to dismiss many of the ditto heads I might have otherwise wasted time on.

So whoever came up with this silly talking point, despite your lack of concern for facts and your attempts at muddying the waters — thanks! You’ve saved me an enormous amount of time in identifying people not to bother reading, and to ignore.

Hat tip Econbrowser

Source:
Private sector loans, not Fannie or Freddie, triggered crisis
David Goldstein and Kevin G. Hall |
McClatchy Newspapers  October 12, 2008

http://www.mcclatchydc.com/251/story/53802.html

Category: Credit, Derivatives, Legal, Real Estate

S&P: We Knew Nothing! Nothing!

Category: Credit, Derivatives, Legal, Really, really bad calls

Is Wells Fargo “Sugarcoating” Balance Sheet?

Category: Data Analysis, Finance, Financial Press, Legal

Bad Medicine

http://www.grantspub.com/cartoonbank/?crtnYr=2007

Category: Credit, Federal Reserve, Legal, Real Estate

Quote of the Day: Fair Value Accounting

Category: Legal, Valuation

Understanding the Significance of Mark-to-Market Accounting

“Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.”
analyst Dane Mott, JPMorgan Chase & Co., Bloomberg

“Suspending the mark-to-market prices is the most irresponsible thing to do. Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings.”
Diane Garnick, Invesco Ltd., Bloomberg

Category: Corporate Management, Credit, Derivatives, Earnings, Legal

Fair-Value Accounting & FASB 157

“Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming himfor telling you that you are sick.” -Dane Mott , JPMorgan Chase & Co. > The debate on fair value accounting, FASB157, and transparency continues apace. If you want to understand why this is…Read More

Category: Credit, Finance, Investing, Legal

SEC: Less Personnel Than the Smithsonian

Category: Legal, Taxes and Policy

SEC: Brokerage Collapse Was Our Fault

The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.

The S.E.C.’s oversight responsibilities will largely shift to the Federal Reserve, though the commission will continue to oversee the brokerage units of investment banks.

Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”

“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement on Friday, however, went beyond that by blaming a specific program for the financial crisis — and then ending it.

On one level, the commission’s decision to end the regulatory program was somewhat academic, because the five biggest independent Wall Street firms have all disappeared.

The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And in the last month, Lehman Brothers went into bankruptcy, Merrill Lynch was acquired by Bank of America, and Morgan Stanley and Goldman Sachs changed their corporate structures to become bank holding companies, which the Federal Reserve regulates.

But the retreat on investment bank supervision is a heavy blow to a once-proud agency whose influence over Wall Street has steadily eroded as the financial crisis has exploded over the last year.

Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations.

The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components.

The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan.

The investment banks favored the S.E.C. as their umbrella regulator because that let them avoid regulation of their fast-growing European operations by the European Union.

Facing the worst financial crisis since the Great Depression, Mr. Cox has begun in recent weeks to call for greater government involvement in the markets. He has imposed restraints on short-sellers, market speculators who borrow stock and then sell it in the hope that it will decline. On Tuesday, he asked Congress for the first time to regulate the market for credit-default swaps, financial instruments that insure the holder against losses from declines in bonds and other types of securities.

The commission will continue to be the primary regulator of the companies’ broker-dealer units, and it will work with the Fed to supervise holding companies even though the Fed is expected to take the lead role.

The Fed had already begun regulating Wall Street firms that borrowed money under a new Fed lending program, and the S.E.C. had entered into an agreement under which its examiners worked jointly with Fed examiners, an arrangement that is expected to continue.

The S.E.C. will still have primary responsibility for regulating securities brokers and dealers.

The announcement was the latest illustration of how the market turmoil was rapidly changing the regulatory landscape. In the coming months, Congress will consider overhauls to the regulatory structure, but the markets and the regulators are already transforming it in response to events.

Still, the inspector general’s report made a series of recommendations for the commission and the Federal Reserve that could ultimately reshape how the nation’s largest financial institutions are regulated. The report recommended, for instance, that the commission and the Fed consider tighter limits on borrowing by the companies to reduce their heavy debt loads and risky investing practices.

The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to file the required documents. And it found that the division had not adequately reviewed many of the filings made by other firms.

The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said.

The S.E.C. approved the consolidated supervised entities program in 2004 after several important developments in Congress and in Europe.

In 1999, the lawmakers adopted the Gramm-Leach-Bliley Act, which broke down the Depression-era restrictions between investment banks and commercial banks. As part of a political compromise, the law gave the commission the authority to regulate the securities and brokerage operations of the investment banks, but not their holding companies.

In 2002, the European Union threatened to impose its own rules on the foreign subsidiaries of the American investment banks. But there was a loophole: if the American companies were subject to the same kind of oversight as their European counterparts, then they would not be subject to the European rules. The loophole would require the commission to figure out a way to supervise the holding companies of the investment banks.

In 2004, at the urging of the investment banks, the commission adopted a voluntary program. In exchange for the relaxation of capital requirements by the commission, the banks agreed to submit to supervision of their holding companies by the agency.

Category: Bailouts, Legal, Politics, Taxes and Policy

Short Selling Ban Spreads Around the World

Category: Legal, Markets, Short Selling, Taxes and Policy