Henhouse Foxes‏

Reuters has an article on the difficulty in regulating anything. The concern over the chickens' safety always seems to attract thoughtful, ideological foxes who are eager to staff the ad hoc committees. Here is a segment:


This spring, traders and analysts working deep in the global swaps markets began picking up peculiar readings: Hundreds of billions of dollars of trades by U.S. banks had seemingly vanished.

The vanishing of the trades was little noted outside a circle of specialists. But the implications were big. The missing transactions reflected an effort by some of the largest U.S. banks — including Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and Morgan Stanley — to get around new regulations on derivatives enacted in the wake of the financial crisis, say current and former financial regulators.

The trades hadn’t really disappeared. Instead, the major banks had tweaked a few key words in swaps contracts and shifted some other  trades to affiliates in London, where regulations are far more lenient. Those affiliates remain largely outside the jurisdiction of U.S. regulators, thanks to a loophole in swaps rules that banks successfully won from the Commodity Futures Trading Commission (CFTC) in 2013.

Many of the CFTC employees who were lobbied in these meetings went on to work for banks. Between 2010 and 2013, there were 50 CFTC staffers who met with the top five U.S. banks 10 or more times. Of those 50 staffers, at least 25 now work for the big five or other top swaps-dealing banks, or for law firms and lobbyists representing these banks.

The lobbying blitz helped win a ruling from the CFTC that left U.S. banks’ overseas operations largely outside the jurisdiction of U.S. regulators. After that rule passed, U.S. banks simply shipped more trades overseas. By December of 2014, certain U.S. swaps markets had seen 95 percent of their trading volume disappear in less than two years.
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After the crisis, Congress and regulators sought to rein in this risk, and the banks fought back. From 2010 to 2013, when the CFTC was drafting new rules, representatives of the five largest U.S. banks met with the regulator more than 300 times, according to CFTC records. Goldman Sachs attended at least 160 of those meetings.

Many of the CFTC employees who were lobbied in these meetings went on to work for banks. Between 2010 and 2013, there were 50 CFTC staffers who met with the top five U.S. banks 10 or more times. Of those 50 staffers, at least 25 now work for the big five or other top swaps-dealing banks, or for law firms and lobbyists representing these banks.


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The U.S. derivatives market has shrunk but remains large, with outstanding contracts worth $220 trillion at face value. And the top five top banks account for 92 percent of that.

In 2009, President Barack Obama tapped Gary Gensler, then 51 years old, to chair the CFTC. Liberals grumbled about Gensler’s résumé. The son of a cigarette and pinball-machine salesman in working class Baltimore, Gensler, at 30, had become the youngest banker ever to make partner at Goldman Sachs.

Among other jobs, he oversaw the bank’s derivatives trading in Asia. Later, as an undersecretary of the Treasury, Gensler helped push through the 2000 law that had banned regulation of derivatives markets.

Kenneth Raisler, a former Enron lobbyist representing JP Morgan, Citigroup, and Bank of America, argued in a letter that the CFTC should allow U.S. banks to do things overseas “even if those activities were not permissible for a U.S. bank domestically.”


--From the Reuters article: "U.S. Banks Moved Billions of Dollars in Trades beyond Washington's Reach" 

Student Loans

In 2010, Obama signed a law federalizing the student loan program, claiming that the banks were needless middlemen and that the government could just lend the money directly and save truckloads of money. Critics said that the Education Department is ill-equipped to identify risks when making loans. Easy terms and high default rates forced the Congressional Budget Office recently to increase the program's cost by 7 billion — a 30% jump. The New York Fed reports that 11.5% of student loan debt was more than three months past due in Q2 of this year, which was up from Q1. By comparison, the 90-day delinquency rate on credit card debt is just 8.4%. The Department of Education that 6.9 million people haven't made a student loan payment in more than 360 days, which is up 6% from the year before.
Enrollment in income-based loan programs — which base monthly payments on current income and forgive any remaining debt after 20 years — exploded 56% in just the past year. The amount of direct federal student loan debt has climbed more than 600%. The Department of Education now manages a loan portfolio bigger than the entire loan business of JPMorgan Chase.

Bauelle and Folk Wisdom

From James Bauelle's newsletter: "Six years later, we are on our way to the next crisis. In my view, its seeds are being sown in the proliferation of Internet-based lending platforms that promise to match borrowers and lenders/investors without the inconvenience or expense of a bank's being involved in the transactions. I have previously written about Lending Club and Prosper, the two leading companies in this space. Lending Club has an IPO in registration at the SEC and is expected to debut with a multi-billion dollar market capitalization this quarter. Like the woman's convertible Mercedes, P2P intermediaries' pricing is unbeatable. Nearly all of the expense of operating a bank is taken away; so, however, are key aspects of a bank's functionality."
 

There are a number of ways to see this evolution and they are worrisome, all of them. The banks have been unscrupulous and virtually rogue over the last decade; it is not unreasonable that people would love to bypass them. The problem is they have been roguish in their dereliction of their main assignment: The preservation of stability. They cannot be rejected without some substitute for that stability, otherwise the baby is in the air with the bathwater. That would be symbolic only, hoping that Galton is really, really right and we can substitute every Tom, Dick and Harry for banks--and should.

If it is symbolism everyone wants, how about decimating all the bank Boards. And the Fed too.

Buying Pitchfork Futures

"Those to whom the system brings windfalls ....are the object of the hatred."

This is a quote from Keynes that appeared in a recent article by Dylan Grice in a rather unusual context. The object was to evaluate the beneficiaries of inflation using an old observation by Richard Cantillon (writing decades before Adam Smith) called the “Cantillon effect. He showed how those closest to the money source benefited at the expense of others. His original observation was of the mining of gold and silver. Those who benefited most were closest to the creating of the wealth and they, in turn, used that wealth to buy goods which raised the price of those goods down the line to the later consumer. In other words, the beneficiaries of newly created money spend that money and bid up the price of goods with their higher demand. Those who suffer are those who have to pay newly higher prices but did not benefit from the newly created money. Grice applies this concept to the printing of money and inflation. The banks take the infusion of money, use it and the resulting inflation hits those further down the food chain.

The net effect is social disruption. Those to whom the system brings windfalls ....are the object of the hatred.

The Government-Citizen Partnership

While there a many problems in this political/economic landscape, the bank risks are significant ones and the most obviously recent. Here is Lawrence Lessig on Saturday's "Up w/Chris Hayes" (via Jim's Slog) talking about Jamie Dimon and BoA. What is interesting is that there is an element in what he says that sounds urgent and specific, as if this political influence and distortion of our system is somehow unique. Instead it is less specific and more metaphorical. For example, is this "crisis" worse than the ideological sub-prime mortgage crisis? And is it more politically manipulated?:

"The real story here is the fact that these guys are gambling because there's a government that's going to back them up. There's a bail-out that's going to come. And the most striking thing...for me was: here's a guy who's already demonstrated they can blow up the economy. And now another explosion goes off.

The fundamental reason why we should be afraid of them is the regulatory structure that makes it so that when they blow up we all go down with them. And the Senate is filled with a bunch of people who only want to make this guy happy. Now why is that?

It's because they know that this guy has the power to blackmail both the Democratic and Republican Party parties because if you don't have some kind of support from Wall Street, you lose the election! So it is the power he has in the political system that makes this so terrifying. This is the first financial crisis in the history of United States where the people who caused the crisis have enough power to block any effective reform that led to that crisis. And that's what we should be terrified about."

Money Laundering

The $335 million lending-bias deal over presumed prejudicial mortgage decisions requires Bank of America to fork over part of the settlement to left leaning political groups not at all connected to the suit. This remarkable decision redistributes millions in settlement cash to third parties instead of alleged victims. The American Department of Justice wanted this as part of the decision. This is a fascinating way of moving money from one group of people to people completely uninvolved with the suit or its decision.

But in 2008 it was even worse; it was voluntary. In 2008, Bank of America donated $2 million to Acorn Housing Corp. of Chicago. It also gave $500,000 to the National Community Reinvestment Coalition of Washington and $300,000 to the National Urban League of New York. The Bank of America gave millions to their sworn enemies.

I'm a good citizen. No one called me with an offer.

Subprime Morality

John Mauldin is an investment advisor who has a weekly newsletter. It's an eclectic collection of financially oriented interviews, summaries, opinions and occasionally simple forwards of other letters. Recently he has sent out three letters on the subprime problem. It is available at: http://JohnMauldin@InvestorsInsight.com

It is not for the faint of heart. Starting with this incredible quote from Bernanke, "The subprime problem will be contained", it tracks several parallel problems in the development and potential endgame of the subprime problems for banks, underwriters, investors and homeowners. More important is the insight it gives into the thoughtless black heart of what is masquerading as American capitalism and finance. He starts with the relatively minor housing problem which promises to become major as the subprime problem expands. False appraisals rose 50% last year; over 19,000 claimed the first time house buyer's tax credit but did not buy a house and 74,000 who claimed $500 million in refunds already owned a house; one in twenty-one residential mortgages are in foreclosure.

But enough of the small stuff.

Homeowners can be foreclosed upon and evicted only by the entity that holds the loan paper. As the Savings and loan industry declined, mortgages were shunted away from local institutions and into mortgage backed securities which were pooled together into Real Estate Investment Conduits. There they were divided into groups or tranches based upon various qualities like risk of default, interest rate and the like. The designation of these various mortgages into tranches was presided over by the Mortgage Electronic Registration System, jointly owned by Freddie Mac and Fanny Mae. It was legally impossible for these various organizations to hold the mortgage paper of the various mortgage loans. Thus the transfer of the title of the different properties was never done, the "chain of the title" was broken and the borrower now does not know who to pay. In essence, with a broken chain of the title, the borrower does not have a lender.

Consequently the banks holding these "broken chain" loans hired experts ("Foreclosure Mills") to evaluate the chains. They found these poorly documented titles and began to fix the broken chains by forgery and fraud. The title insurance companies that insured these titles balked and refused to sign on to this obvious illegality so the banks, desperate for protection against this chaos, went to the government and the Interstate Recognition of Notarization Act was created which gave a blanket approval to the fraud the foreclosure mills had perpetrated. This was passed by both, BOTH, houses of Congress but Obama pocket vetoed it--no standup guy he. Now the entire mortgage industry is under question. People foreclosed upon might get their houses back; people who bought foreclosed properties might not own them. The entire industry is in peril.

And the banks knew all the time. Richard Bowen from CitiMortgage repeatedly wrote to his superiors (including the esteemed Robert Rubin) warning them of the problem. He estimated 60% of the mortgages were defective and, as time went by, it increased to 80%.

When any of the mortgages were found on sampling review to be defective, they were recycled back into the general pool. Sometime they used the defective paperwork to renegotiate with the borrower for better terms for themselves. The taxpayers are responsible for some of these through Freddie and Fannie--perhaps 400 billion-- but 1.7 trillion, TRILLION, dollars in securities are not guaranteed and may well go to court. Bank of America's exposure may be 400 Billion. International clients and federal agencies (with subpoena power) will be involved.

The final letter describes Ameriquest and its predator employees as they behave like highwaymen and pirates in the field of contract law. Fraud, forgery and malicious insincerity was the norm. A specific sad story, Carolyn Pittman's, shows the callous disregard of these people as they repeatedly return to loot what little this poor woman had left.

Won't someone please call a cop? One only wonders how this will be resolved. Will the mortgage system collapse as borrowers strike back with righteous vengeance and withhold loan payments? How will the Washington Bathoes respond, having already shown their colors with The Interstate Recognition of Notarization Act? Certainly someone will call for a transfusion into the system.

But can morality and character be transfused?