Posts filed under “Regulation”
Last week, UBS announced a 2nd Quarter loss “due to restructuring charges.” The banking giant is raising $3.45 billion in a stock sale.
Partly owned by the Swiss government (for years prior to the crisis, if memory serves), UBS was one of the biggest losers in the financial crisis. After a huge expansion into riskiest businesses at the peak of the market, they have had steep losses and enormous write-downs. Since then, they have laid off tens of thousands of workers. (Aside from UBS’ tax problems).
One such worker who has escaped such an ignominious firing is former Texas Senator Phil Gramm. He was hired in 2002 to “advise clients on corporate finance issues and strategy.” This was around the same time that UBS acquired Enron’s energy trading operations. Recall Gramm’s wife Wendy was on the board of Enron, which was up til then the US’s biggest bankruptcy. You can insert whatever revolving door complaint about polticos you want here, but by now its almost besides the point.
Gramm’s position at UBS is “vice chairman” — dubbed “the greatest job in business” for its combination of high status and low work rate. It is a do nothing patronage role that is reward for all the Wall Street friendly legislation Gramm has sponsored. At least, they used to be considered Wall Street friendly, prior to their leading to the Street imploding.
To me, the more significant issue is how respected Gramm’s radical deregulation philosophy was — at least at the time — by the biggest of global investment houses. His philosophy rationalized the irresponsible investing behavior of these big banks.
I almost feel bad for Gramm. His cognitive dissonance and now discredited philosophy must be of little comfort to him in his twilight years.
Meanwhile, plenty of folks at UBS have told me he is an embarrassment to the firm.
Which raises the question: What exactly does Gramm do for UBS these days? Other than hang around as a reminder of bad decision making and his scheme of radical deregulation, does he really add anything to their bottom line? Or are they simply too embarrassed to throw the bum out?
If anyone can advise me as to why he is still gainfully employed at a large investment house that is suffering from enormous losses, I am all ears.
Phil Gramm: A Deregulator Unswayed (November 17th, 2008)
Amity Shlaes Does Not Know What a Recession Is (July 12th, 2008)
UBS Expects Second Quarter Loss
WSJ, June 26, 2009,
Phil Gramm’s UBS Problem
Slate, July 7, 2008, at 5:58 PM ET
Senator Phil Gramm to join UBS Warburg
UBS, October 7, 2002
The CRA brouhaha last year led the Orange County Register to run an analysis of “more than 12 million subprime mortgages worth nearly $2 trillion” in late 2008. What did their data based analysis discover? “Most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the…Read More
Congratulations to the 5 lucky ducks who managed to capture the attention of the FDIC: “Five U.S. banks with total assets of about $1.04 billion were seized by regulators, pushing this year’s tally of failures to 45 as a recession drives up unemployment and home foreclosures. Community Bank of West Georgia, in Villa Rica, Georgia;…Read More
Yet another example of how the sub-prime market was a creature of the profit motive, and not government mandates. There is this fascinating little anecdote in Connie Bruck’s Angelo’s Ashes — about Angelo Mozilo’s experiences in Florida as a dark skinned NY Italian, and how that impacted his later venture into minority lending (early 90s)…Read More
I’ve already spilled too many pixels debunking Phil Gramm‘s attempt to shift blame from his radical deregulation to other parties (see partial list at bottom). Oh, and I dropped another 322 pages explaining the actual causes of the crisis.
And yet, these attempts at misplaced fault continue.
So this morning, I want to try a completely different approach — the opposite of our usual data driven, analytical framework. Rather than show more facts, data and specific details, instead, I want to do a little thought experiment.
Imagine, if you will, that the discredited far right meme is actually correct: Assume that the CRA was a prime cause of the mortgage, credit and housing related crises.
Yes, he typed, it was all the CRA’s fault. (Stay with me here).
Assume arguendo that CRA legislation forced banks into making high risk, ill advised loans. And, let’s further assume a huge percentage of these government mandated mortgages have gone bad. The buyers who could not legitimately afford these homes or otherwise qualify for other mortgages have defaulted, and these houses are either in default, foreclosure or REOs.
What would this alternative nation look like?
Given the giant US housing boom and bust, this thought experiment would have several obvious and inevitable outcomes from CRA forced lending:
1) Home sales in CRA communities would have led the national home market higher, with sales gains (as a percentage) increasing even more than the national median;
2) Prices of CRA funded properties should have risen even more than the rest of the nation as sales ramped up.
3) After the market peaked and reversed, Distressed Sales in CRA regions should lead the national market downwards. Foreclosures and REOS should be much higher in CRA neighborhoods than the national median.
4) We should have reams of evidence detailing how CRA mandated loans have defaulted in vastly disproportionate numbers versus the national default rates;
5) CRA Banks that were funding these mortgages should be failing in ever greater numbers, far more than the average bank;
6) Portfolios of large national TARP banks should be strewn with toxic CRA defaults; securitizers that purchased these mortgages should have compiled list of defaulted CRA properties;
7) Bank execs likely would have been complaining to the Bush White House from 2002-08 about these CRA mandates; The many finance executives who testified to Congress, would also have spelled out that CRA was a direct cause, with compelling evidence backing their claims.
So much for THAT thought experiment: None of these outcomes have occurred.
In reality, the precise opposite of what a CRA-induced collapse should have looked like is what occurred. The 345 mortgage brokers that imploded were non-banks, not covered by the CRA legislation. The vast majority of CRA covered banks are actually healthy.
The biggest foreclosure areas aren’t Harlem or Chicago’s South side or DC slums or inner city Philly; Rather, it hs been non-CRA regions — the Sand States — such as southern California, Las Vegas, Arizona, and South Florida. The closest thing to an inner city foreclosure story is Detroit – and maybe the bankruptcy of GM and Chrysler actually had something to do with that.
I spent a year of my life researching and writing in painstaking details what the actual causes of the crisis were. I put together all of the moving parts as to what the actual causes were — and wrote them up in Bailout Nation, to wit: Irresponsibly ultra-low rates that led to a huge housing boom; a failure by the Fed to supervise non-bank lenders; An abdication of lending standards by both banks and non-banks; Radical deregulation of financial markets; the now discredited belief that markets can self-regulate; a shadow derivative market allowed to operate unlike every other financial product; Compensation schemes that rewarded short term risk taking over long term profitibility; Increases in leverage to the major investment houses from 12-to-1 to 35-to-1; These were the causes of the collapse — not some 1977 legislation.
Its not simply that the overwhelming amount of evidence points to many factors outside of the CRA, the actual results of CRA were minor. Relative to these other ginormous factors, the CRA impact is all but irrelevant. And to date, nobody has produced any data based evidence that the CRA was relevant to the crisis. Not one shred.
Until that evidence is produced, the CRA remains a marker, one that separates proponents of intellectually honest debate versus the parrots of partisan talking points, not worthy of your time or effort.
“The biggest obstacle to Volcker’s reform agenda is Summers” > There is a long article at Bloomberg very much worth reading about Tall Paul: Volcker Gets Less Than He Wants in Curbing Wall Street Excesses. Consider the following: “If Volcker is at one end of the spectrum arguing for tougher financial rules, Summers and Geithner…Read More
Our critique yesterday of the lobbying efforts of the commission sales people’s organization (Realtors and Mortgage brokers) included letters from these groups to their members and public officials. Be sure to see these Lobbying Letters from the NAMB and the NAR here: NAR Urges 18 Month Moratorium on Appraisal Reform Mortgage Broker’s Anti-Appraisal Reform Lobbying…Read More
I am beginning to suspect that the Realtor’s association and the Mortgage Broker’s association are pro-fraud.
“Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales. In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”
I called that a thinly veiled hint for “friendly” i.e., “corruptible” appraisals.
I did some more digging, and I quickly discovered what this contemptible suggestion was all about: It is part of a broader lobbying effort by the The National Association of Mortgage Brokers (NAMB) and The National Association of Realtors (NAR) against honest appraisals.
For more proof of this lobbying effort, see the letters to mortgage brokers and real estate agents from their trade associations to mobilize against mandating honest appraisals ( Mortgage Broker’s Anti-Appraisal Reform Lobbying and Effort and this NAR Lobbying letter).
Why is this significant?
Appraisal fraud was an enormous contributor to the unsustainable run up in prices during the boom period. Many (but not all) mortgage brokers and realtors referred buyers to appraisers that ALWAYS hit the number of the home purchase price.
A Bernie Madoff-like 100% success rate is often cause for suspicion, but we have much harder evidence than a statistical fluke. For that, let’s go to the big book of real estate fraud, Bailout Nation:
Fraud in Real Estate, Mortgages, and Home Building
Minor amounts of real estate–related fraud have always existed. During the housing boom years of 2002 to 2007, it became a pandemic. These various fraudulent actions helped make the housing boom much bigger—and the bust that much more painful:
Appraisal fraud: Historically, there was no incentive to inﬂate appraisals. But with the rise of the mortgage brokers—many working closely with real estate agents—the business of steering appraisals to the most generous rose rapidly. By inﬂating appraisals, many appraisers found they could attract more referral business; some even managed to always hit the target prices given by real estate agents, which contributed signiﬁcantly to the huge run-up in home prices. In 2005, more than 8,000 appraisers—roughly 10 percent of the industry—petitioned the federal government to take action against such abuses. But both Congress and the White House did nothing, allowing this rampant fraud to continue unabated.
So the very people who were enormous contributors to the credit bubble (mortgage brokers), and their colleagues who helped feed the housing boom and bust via friendly (i.e., corrupt) appraisals (RE Brokers, appraisers), are now mobilizing to make sure that honest appraisal reform is thwarted.
The NAR and NAMB apparently have no ethics to speak of. Their shameless self-interest, regardless of the damage it may cause, disgusts me . . .
Fraud in Real Estate, Mortgages & Homebuilders (August 17th, 2008)
Nonfeasance in Financial Oversight (August 18th, 2008)
TO: State Association Executive Officers State Association Presidents FROM: NAR Government Affairs DATE: 19 June 2009 RE: Fly-In Head’s Up Please note this notice is going to all state executive officers and state presidents. We will be sending Fly-In details on Monday June 22, 2009 to the states who have Members of Congress and/or United…Read More
Letter from Charles McMillan, 2009 President, National Association of REALTORS urging an 18 month moratorium on the Home Valuation Code of Conduct (HVCC) to Andrew Cuomo, NY Attorney General and James B. Lockhart III, Federal Housing Finance Agency: HVCC Moratorium Lockheart