Nevada’s Moral Hazard: The One With No Connection To Brothels

Nevada, one of the nation’s poster children in home foreclosures, is now tangled in the process of unwinding the results of the financial sector’s vulpine avarice.  Which home mortgages may legitimately be foreclosed upon and which are so defective that no legal process will rationally resolve the issues?  Bankers are lobbying for changes in NRS 106.210 and NRS 107.070 as included in AB 284 (pdf) of the 2011 session.

“At issue is Assembly Bill 284, a measure passed by the Nevada Legislature in 2011 and signed by Gov. Brian Sandoval that forces banks to prove they have the legal right to foreclose on a particular home before they take action. Most important, the law requires bank workers to sign an affidavit that they have personal knowledge of a property’s document history, or they will face criminal or civil penalties.”  [LVSun]

That “document history” part is important. A person doesn’t know the “document history” if the mortgage was robo-signed.  The “document history” may be unfathomable if the property documentation wasn’t properly registered with local government officials.  If the mortgage was signed, handed over to a servicer, later packaged with other mortgages into securitized asset products, sliced up into bits, and then re-sold to investors — we’ve seen this movie before and it didn’t have a happy ending…

Just how badly the financial sector had mismanaged the handling of mortgages can be quickly discerned from the numbers included in the Las Vegas Sun article.  Of the 5,350 foreclosure notices filed in August 2011, and the 4,684 default notices sent later, only 80 were compliant with the statute requiring that the banker demonstrate knowledge of the “document history.”

The issue also demonstrates how long it can take to fix messes created by free wheeling enthusiasts of financial creativity.  The housing boom lasted until 2007-2008, it’s now the end of 2012, and the bankers are only now returning to focus on their foreclosure mess.  It also provides an object lesson on the transitory nature of Moral Hazards.

Members of the financial community are oft heard speaking of Moral Hazards.  The New York Times explains: “…in economic terms it refers to the undue risks that people are apt to take if they don’t have to bear the consequences.”  For decades the formerly obscure term was applied to the “little guy.”

The Theory of Moral Hazard was applied to sales representatives, who it was said would not work hard to sell the manufacturer’s products if not given incentives like commissions to augment their enthusiasm for sales.  Later, it was applied to those “losers” who purchased home mortgages they did not understand with terms which were designed to create income for the mortgage sellers at the expense of the homeowner — whether the homeowner was financial capable of the increased expense or not.   In short, it is often argued under the matrix of Moral Hazards that the more trouble one might be in, the less help should be provided.

Even the libertarian Cato Institute was willing to accept the possibility that corporate malfeasance, unaccountable management, and shoddy risk management played a role in the collapse of the U.S. financial system in 2007-2008.*  The question becomes how much Moral Hazard should apply to the corporate entities which engaged in the financial transactions that fueled and eventually blew up the financial markets?

State Senator Tick Segerblom (D-Las Vegas) places the Moral Hazard on the bankers: “If it comes down to a homeowner who had a mortgage, or a bank — who has the right to be there? I’ll go with the homeowner,” he said. “I’m not worried about the banks. They made their beds. They can sleep in it.” [LV Sun]

If the question is: Shall the unworthy who got themselves into a Big Mess by the dint of their own avarice be offered succor from the government, either state or federal? Then those who truly hew to the Moral Hazard argument are stuck with banks, mortgage institutions, and investment houses whose porcine appetites caused them to fall into the trough.  The only other way out of the mess is to attempt to claim that the bankers didn’t really do it (an obvious mirage) or that, as the libertarians would like to assert, the bankers were merely acting out the extrapolations of government policy (as if the bankers have no free will and cannot discern Moral Hazards when they see them.)

Unfortunately for the banking industry apologists, the first option flies in the face of economic reality; and, the second makes them look like first class fools.

*The Institute author, after having pointed out the core of the problems, promptly reverts to the anti-government “Devil Made Me Do It” argument holding that low interest rates, deposit insurance, and federal participation in the secondary market were the ‘real evils.’

Simple Economics Made Complex: Capitalism vs. Financialism

The 2012 election at almost every level will be determined by turn out, and predicated on economics — micro and macro.  The problem for most voters is that we’re talking about two economies.  The economy of the financialists and the economy of the capitalists.  So far, the capitalists are winning.  Barely.

A capitalist believes that our economy works best when consumers have a choice of products from a variety of manufacturers or providers.  The economy expands as the demand for goods and services increases and providers seek to accommodate consumer needs.  A capitalist believes that capital should move from areas of surplus to areas of shortage, for small business lines of credit, for home loans, for student loans, for consumer credit, for business expansion, for commerce and marketing needs.

A financialist believes that the economy serves to accumulate wealth such that we create financial products and services which can be securitized and manipulated to create more wealth.   The financialists have been doing very well, thank you very much.  Not sure, then consider this chart:

That’s right, 93% of the increases in American income (wealth) in 2010 went to the top 1% of income owners in the U.S.  And the stock market has been doing quite well since 2009:

Of course, it’s not just stocks in which we find increased trading.  Other financial products, derivatives included, have been doing a thriving trade.

The traffic in derivatives hasn’t slowed much either.

So, while those whose income comes from the financial sector have been doing quite well, those in the “real” economy — the capitalist economy have been in something of a bind.

Note, Governor Romney’s complaint that the current economy means “stagnating” wages for middle class Americans he’s omitting a crucial bit of information:  When economic policies favor the accumulation of wealth in the coffers of the o.01%, it shouldn’t be the least bit surprising that middle class Americans aren’t seeing the increases in their bank accounts.

In short, the Financialists (and their presidential candidate Governor Mitt Romney) having secured a deregulated financial sector which rewards them disproportionately, are loathe to adopt any policy which might require them to pay more in taxes or to comply with any regulations on the financial product manipulation which constitutes their wealth accumulation strategy.

It’s up to the Capitalists in the 2012 election to secure a level playing field, or at least a more level field, one in which INVESTMENT is rewarded before SPECULATION.   One in which the economic reality of supply and demand means the supply and demand in REAL markets — not in esoteric “markets” for artificially concocted risk management products.

Let’s hope the Capitalists win.

If You Aren’t Pulling The Wagon, Don’t Complain About The Load: Foreclosures in Nevada

Another day, another glossy flyer from Grover Norquist in my P.O. box reminding me that the President supposedly promised to staunch the foreclosure flood in Nevada.  Better information and analysis can be found in the Las Vegas Sun article on the faltering foreclosure reduction plans in the Silver State.  The article makes some important points, and falls nicely into the Must Read List.

One of the advantages of blogging is that there is no length limit to articles, and some areas can be explicated in greater specificity.  No surprise, here come’s additional information on the securitization issues related to the foreclosure processes.

Wonk Alert

Not only were banks administratively unprepared to deal with failing home loans, the system devised in the Securitization Boom wasn’t helpful either.  The New York Times produced some of the better graphics to illustrate what was going on during the Housing Bubble.

At this point we should recall that those mortgages being pooled were not being held by the banks that issued them.  First, some weren’t even properly registered.  The MERC mess was created by bankers who didn’t think county recorders were working fast enough to satisfy the financier’s demand for more mortgages to pack into the pools.  [DB]

“The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse,” Mr. Schneiderman said. By creating this “bizarre and complex end-around of the traditional public recording system,” Mr. Schneiderman’s lawsuit asserts, the banks saved $2 billion in recording fees.” [NYT]

It might have saved the banks some $2 billion in recording fees, but when it became obvious some of those hybrid adjustable rate monstrosities were going into default, one thorny question arose — Who owned the mortgage? When trying to determine how to re-negotiate an individual mortgage it is helpful to know who owns it.  On the other end of the scale, investors who purchased mortgage backed securities were told that all the loans were just fine and dandy — some, specifically Bear Stearns, told investors the firm would repurchase defective loans — that wasn’t what happened. [NYT]

Now let’s look at the next step in the diagram.  The mortgage backed securities shown in the first part of the diagram were used to create another layer of investment products called CDOs.   This isn’t as much of a problem for the homeowner facing the possibility of robo-signing and ‘who owns the mortgage’ MERC related issues, but it does illustrate how the faulty or defective  mortages contaminated the system when pumped into Wall Street Casino.

One Size Doesn’t Fit All

In addition to the problems associated with the Securitization Boom, homeowners faced a situation in which not all regional housing markets were created equally.  David McGrath Schwartz’s article mentions this crucial point.  One map from 2010 illustrates the point:

The “hottest” real estate markets in the Housing Bubble were those most likely to see the creation of the now infamous no-doc hybrid adjustable rate mortgages which were designed from the outset to encourage refinancing NOT repayment.   However, federal statutes must address national problems, so the initial programs were devised with the national — not the Nevada — issues in mind.

HAMP:  “The program was built as collaboration with lenders, investors, securities, mortgage servicers, the FHA, the VA, FHLMC, FNMA, and the Federal Housing Finance Agency, to create standard loan modification guidelines for lenders to take into consideration when evaluating a borrower for a potential loan modification.”  [source]   Problems for Nevada emerged immediately.  Many home loans in the state weren’t part of any of the eligible agencies.  Some didn’t meet the first lien qualification standard.  How to calculate the >31% of available income became problematic.   Worse still the American Bankers Association in conjunction with the Mortgage Twins (Fannie & Freddie) were adamant in their objections to any mention of reducing the principal of the loans to prevent homeowners from going any further underwater.  [ Examiner]

The notion of bankers being unwilling to accept any reduction in the principal in order to prevent foreclosures doesn’t seem to make sense, unless we remember that the banks didn’t have enough skin in the game.  Too many banks securitized too many mortgages while retaining too little ownership of them.

HARP:  The Home Affordable Refinance Program — “To be eligible, you must have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac, sold to those agencies on or before May 31, 2009. The current loan-to-value ratio on the mortgage must be greater than 80 percent. Having a mortgage that was previously refinanced under the program disqualifies you from the program. Borrowers cannot not have missed any mortgage payments in the past six months and cannot have had more than one missed payment in the past 12 months.” [WaPo]

Here we go again — if the loan was owned or guaranteed by one of the mortgage twins, then a homeowner would be eligible.   If not — good luck.

“This is a big deal because, although the Fannie Mae-Freddie Mac-FHA triumvirate controls more than 90% of today’s new mortgage originations, that wasn’t the case from 2001-2007. Last decade, non-GSE lending was a major part of the U.S. housing market.

For example, Alt-A mortgages accounted for 27.5% of mortgage originations in 2005. Today, each of these homeowners is locked out from HARP. HARP 3.0 would allow these Alt-A customers to (finally!) refinance their home loans.”  [TMR]

HARP 3.0 is still on the drawing boards.  The situation as of June, 2012?

Although at least one Senate Republican shows interest in a plan to expand the Home Affordable Refinance Program, the outlook for Congressional action remains doubtful and House Democrats are pushing the Federal Housing Finance Agency to make further HARP changes administratively. During a Senate Banking, Housing and Urban Affairs Committee hearing last week on legislation to expand HARP, Sen. Bob Corker, R-TN, said he was open to the proposal. “I hope that we’ll have a real mark-up on this bill,” he said.”  [IMF]

A HARP 3 bill was introduced by Senators Boxer (D-CA) and Menendez (D-NJ) in September 2012.  S.3522 “Responsible Homeowner Refinancing Act of 2012,”  was placed on the Senate’s legislative calendar on September 12, 2012 and no action has been taken since.

In short, the two major programs have been limited because (1) of the opposition of banks and the mortgage finance industry to any suggestion that the principal of the mortgages be reduced; and, (2) the fact that a full 27% of the mortgages issued during the Housing Bubble were not from government guarantors over whom the Federal government has any current jurisdiction.

Instead of bemoaning the slow pace and limited reach of home mortgage modification in Nevada, we should be demanding that the 112th Congress take action on bills like Menendez’s S. 3522 which would expand the reach of federal services to those holding non-GSE  or FHA loans.

Senator Rubio Comes To Nevada Bearing News From The Scarlett O’Hara School of Business Administration

Bill Clinton summarized the GOP theme for 2012: “We left him a total mess, he hasn’t cleaned it up fast enough, so fire him and put us back in.” [MST]  Now Sen. Marco Rubio (R-FL) is pushing the theme in Las Vegas:

Obama “doesn’t understand the free enterprise system,” Rubio said, arguing government is too big and is hurting small business and job growth with too many regulations and taxes.  [LVRJ]

Fact check time.  Actually in terms of the total number of regulations adopted, the Obama Administration is well behind the administration of President George W. Bush.  President Bush approved 931 regulations in his first three years, President Obama has approved 886.  [FC]  So, what would those “too many regulations” concern?

Investment Sector Regulations

The first, and most obvious source of Republican distress over regulations are those which seek to curtail the antics of the investment sector.  Implementation of the Dodd Frank Act means that financialists, eager to pick up where they left off before their pipe dreams of exploiting securitization in the housing market exploded like a pipe bomb, don’t care to have any restrictive oversight of their transactions in the derivatives market.   The MegaBanks would ever so much like to go back to the days before the Volcker Rule and be able to use insured deposits as a back stop for their proprietary trading.  And, the MegaBanks don’t want to write ‘living wills‘ in case their trading desks get out of hand (again) and bring the bank down into insolvency or illiquidity.

The banking sector is also feeling the heat from the Consumer Financial Protection Bureau — which is (to their horror) protecting consumers.   Most recently American Express felt the hammer come down on their illegal practices:

“The Consumer Financial Protection Bureau (CFPB) today announced an enforcement action with orders requiring three American Express subsidiaries to refund an estimated $85 million to approximately 250,000 customers for illegal card practices. This action is the result of a multi-part federal investigation which found that at every stage of the consumer experience, from marketing to enrollment to payment to debt collection, American Express violated consumer protection laws.” [CFPB]

Federal regulators also fined American Express $27.5 million for the illegal activities, and about 250,000 American Express customers will be getting refund checks.

Back in September 2012, the FDIC and CFPB ordered Discover to pay $200 million to 3.5 million card holders and fork over a $14 million civil penalty for deceptive practices. Discover also agreed to stop its deceptive marketing, to make restitution to customers who made purchases, provide refunds to customers without requiring more consumer actions, and to submit to an independent audit.  [CFPB]

Further, what may have the financial sector’s panties in a bunch are the proposed rules from the CFPB on home mortgages.  The CFPB explains:

Mortgage Terms: Under the proposed rule, creditors would have to make available to consumers a loan without discount points or origination points or fees, unless the consumers are unlikely to qualify for such a loan. These options would enable a consumer buying or refinancing a home to better compare competing offers from different creditors, better able to compare loan offers from a particular creditor, and decide whether they would receive an adequate reduction in monthly loan payments in exchange for the choice of making upfront payments.

Interest rates and points: Consumers can pay points, which are expressed as a percentage of the loan amount, and fees to covers costs associated with origination or prepaid interest charges. While these points and fees come in many different names and combinations, they all should function similarly to reduce the interest rate and thus a consumer’s monthly loan payments.

Qualifications for mortgage initiators: Under state law and the federal Secure and Fair Enforcement for Mortgage Licensing Act, loan originators currently have to meet different sets of standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. The CFPB is proposing rules to implement Dodd-Frank Act requirements that all loan originators be qualified. The proposal would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable.

Steering: In 2010, the Federal Reserve Board issued a rule that was designed to curtail the practice of loan originators directing consumers into higher priced loans based not on the consumer’s interest, but on the possibility that the loan originator could earn more money. The Dodd-Frank Act included a similar provision banning the practice of varying loan originator compensation based on interest rates or other loan terms. The CFPB’s rule would implement the Dodd-Frank Act provision and clarify certain issues in the existing rule that have created industry confusion.

Mandatory arbitration: The proposal implements Dodd-Frank Act provisions that, for both mortgage and home equity loans, prohibit including mandatory arbitration clauses in loan documents and increasing loan amounts to cover credit insurance premiums.

OK, now who wants to go back to a system in which mortgage terms were intentionally incomprehensible, when a homeowner could pay points and be essentially paying for nothing, when homeowners were steered into mortgage deals in the interest of the bankers, when there were no background checks of any kind on mortgage sellers and no required training, and when if serious problems arose there was no way for the “little guy”  homeowner to have his day in court?

Does anyone really want to go back to the “say anything” days of credit card marketing?  Money kept in the pockets of middle class working Americans by not allowing mortgage manipulation and credit card rip offs is money they could be saving or spending on their families — a far better way to grow this economy than by allowing the rip-off artists to game the system for their own benefit.

Health Care Regulations

Contrary to right wing radio talkers, there has been no government take over of health insurance in this country, and contrary to the hopes of the Single Payer advocates there is no government sponsored health care for anyone other than people over 65 who are enrolled in Medicare.

What we did get in the Affordable Care Act were requirements that health insurance corporations selling group or individual policies provide comprehensive health care insurance coverage.

Under the terms of the Affordable Care Act when the insurance corporation says it is selling you or your business a “comprehensive” or “basic” policy, the policy must include coverage of preventative health care services, inoculations, cancer screenings,  and between 80% and 85% of what they take in as premiums must be used to pay for HEALTH care — NOT executive compensation, advertising campaigns, or other non-medical administrative expenses.

So, would we like to go back to the bad old days of denial of coverage for pre-existing conditions (like being born with a food allergy, or having chicken pox), or for autism screening, for mental health care services, or when the insurance corporations could charge more for women’s policies just because they were women?

We could, for the sake of the MegaBanks and the large health insurance corporations, shave many of the Obama Administration’s new regulations, but the ultimate loser would be 99% of Americans who can’t afford to be ripped off, and shouldn’t be paying health insurance policy premiums for basic services they aren’t getting.

About Those Taxes

Let’s haul out this chart again, illustrating the point that the federal tax rates at their lowest rate at least since 1979.

The chart doesn’t conform to the received wisdom of some in the corporate media and many in the Republican Party — but that’s where we are.  There have also been some 18 tax breaks for American small businesses.  The President has also suggested a tax reform package which would cut taxes for those earning less than $200,000 per year.  [WH] The median income for a family in Nevada was $48,927 in 2011. [DoN]

So, where are all those regulations and taxes ‘hurting’ American small business owners?  The garage owners, the beauty shop operators, the small independent retailers, the lawn care services, the framing subcontractors, the dry cleaning companies, the small hardware store owners, the local lumber yard?

The Republicans need a cover story.  If a regulation impinges on the bottom line of Merger Mania Wealth Management LLC, then they decry all regulations as an impediment to economic growth.  If a regulation requires Bleedem Health Inc. to report a higher “medical loss ratio” then all regulations are detrimental to our economic growth rate.   It’s the old “de-regulation mythology” of the last three decades — and we saw where it got us in 2007-2008.

The Republicans need a narrative.  “Tax and spend” Democrats has served nicely.  No matter that the tax rates are the lowest since the Eisenhower Days, no matter that the rates can be graphed to illustrate the point.  The narrative remains because it serves the interests of large corporations and major banking operations.   Tax dollars appropriated to subsidize multi-national oil corporations are ‘beneficial,’ but tax dollars expended to train workers for 21st century jobs or veterans who seek college degrees ‘create a culture of dependency?’

We DO understand the free enterprise system, and we understand that it works best when there’s a level playing field, with rational controls to prevent exploitation, and consideration given to our entrepreneurs and our labor force of the future.   The short-term vision of the current GOP leadership mirrors the myopia of our current corporate titans — what works to increase the Quarterly Earnings Report is good.  Tomorrow we’ll leave for later.

This Scarlett O’Hara School of Business Administration combined with the  Mr. Magoo Department of Finance perspective is more destructive of American economic progress than the tepid regulations of the Dodd Frank Act and the implementation of the Affordable Care Act provisions combined.

Perhaps they just don’t understand the free enterprise system?

Berkley Better on Banking

Granted, it’s no surprise a progressive blog would endorse the candidacy of Rep. Shelley Berkley (D-NV1) for the Nevada Senate seat — but this isn’t a patellar reflex test.   Anyone who has been reading this blog for over a week knows that this is the place wherein a person should expect a heavy dose of “Please Can We Save Capitalism From The Wall Street Wizards Who Feel Entitled To Have Taxpayers Cover Their Losses While They Reap All The Profits.”  Or, can we please just save Capitalism?

Representative Berkley summed the regulatory situation up nicely,”As we rebuild our economy, we must put in place common-sense rules to ensure Big Banks and Wall Street can’t play Russian Roulette again with our futures. Wall Street may be bouncing back, but we know from experience they’re not going to police themselves.”

She’s located the problem creators precisely.  Big Banks and Wall Street investment firms played fast and loose with the U.S. housing market.  The aftermath is still visible on the Nevada landscape.  Foreclosures are still  moving forward in the Silver State.   And, yes, we do know that the Big Banks and the Wall Street investment firms have little inclination to rein in their trading activities if such action might cut into their revenues — and bonuses.

Personally, I didn’t get all I wanted from the Dodd Frank Act.   I’d have been a far happier camper if synthetic credit default obligations were flat illegal.  I’d have been happier if the betting with credit default swaps was more severely curtailed.  I’d have been gleeful if the act had made securitization more rational.  However, we did get (1) clearinghouse oversight of some derivatives, (2) a consumer protection bureau to supervise the more egregious practices of some mortgage marketers, (3) a rational system to determine systemic risk to our banking sector, and  (4) an orderly liquidation authority provision to replace the bankruptcy/bailout mentality on Wall Street and in Washington, D.C.

Representative Berkley supported the Dodd-Frank Act, on December 11, 2009 she voted in favor of the bill.  Representative Dean Heller (R-NV2) voted against it. [GovTrack]   There is more than a little irony in the protestations coming from Senator Heller about being “against bank bailouts,” when his vote was one to preserve the bailout/bankruptcy option status quo on Wall Street.  Far from being an affirmation of ‘bail outs,’ the Dodd Frank Act provides a resolution process to wind down banks which have the potential to cause chaos similar to the Lehman Bros. collapse.

To pound on this point a step further, the opposition to the orderly liquidation authority came from Wall Street and the Big Banks, and early in the game from Big Bank allies at Treasury and the FED.   The crucial question concerned who would get burned in the event of a meltdown.  Under the old system a Big Bank facing insolvency or illiquidity faced two options — (1) either collapse into bankruptcy; allowing the counter-parties to dodgy portfolios to grab their collateral and run, while battalions of bankruptcy attorneys fought endlessly over the remains; or (2) get “certified” as a Systemic Risk and have the Treasury Department organize a bail out.   The Big Banks calculated that the Treasury and Federal Reserve wouldn’t want a repetition of the Lehman Debacle and would ride to the rescue.

The arguments from the Big Banks were predictable — the new statutory requirements for the liquidation process weren’t  sufficiently transparent; this coming from Big Banks which had squealed the loudest about opening their books for inspection.  The new liquidation authority would cause increased bank consolidation — which was happening already because larger, better managed, banks were buying up the flotsam and jetsam in the wake of Washington Mutual, Wachovia etc.  And, finally new regulations were unnecessary because such commercial banks as Wells Fargo and Bank of America weren’t dependent on proprietary trading for their major income.  The latter is an interesting proposition because it’s perfectly possible to have a commercial bank with solid conservative management owned by a bank holding company which is a complete mess.

So, instead of a resolution authority which allows regulators to keep the bank stabilized while finding buyers for the good stuff, fencing off the bad junk, and preventing the counter-parties from running away with their stash before any other creditors can even get in line — the Big Banks wanted “better bankruptcy laws…” and the Good Old Days …with bailouts.  Then Representative  Heller was happy to oblige.   Not only did he oblige once, he obliged twice — voting against the conference report on the Dodd Frank Act H.R. 4173 on June 30, 2010. [GovTrack] Representative Berkley voted in favor of the conference report on H.R. 4173 (111th).

Want a Senator not quite so obliging and beholding to the interest of the Wall Street Wizards and the Big Banks?  The choice would be Berkley.

References and Additional Recommended Reading:  Hardee, North Carolina School of Law, “Orderly Liquidation Authority, 4/4/2011. (pdf) Guynn, St. Louis Federal Reserve, “The FDIC’s New Resolution Authority under the Dodd-Frank Act: Will it Work and Can It Prevent “Too Big to Fail”? Sept. 2010. (pdf) Erickson & Fucile, “Dodd Frank Reforms After 2 Years,” Center for American Progress, July 20, 2012.  Hal S. Scott, “The Reduction of Systemic Risk, Capital Markets Regulation, Nomura School of Business, Harvard University, (pdf).  American Academy of Actuaries, “Federal Insurance Regulations and Systemic Risk, links to articles.   Frank, “Wall Street Reform and Consumer Protection,” U.S. House, Summary.   H.R. 4173 (111th Congress) Bill Summary and History, GovTrack.  Congressional Research Service, “Financial Regulatory Reform and the 111th Congress,” June 1, 2010.  SIFMA, (Dugan, Ryan) “Bloomberg View Op-ed: Ryan and Dugan – Too Big to Fail? Then Get a Living Will,” June 27, 2012.

Greenboard Diagram: When could a bankruptcy become a bailout?

And this is the reason to oppose any repeal of the Dodd Frank Act orderly liquidation authority for banks and financial institutions.   Those best served by the bankruptcy option are the bank executives, bank shareholders, other banks, creditors, and the battalions of bankruptcy attorneys who will sort the mess.   Those least well served are the American taxpayers.

The resolution option lets capitalism be capitalism — the well managed and strong survive and it is assumed that all investments, even shares of bank stock constitute a risk for which the American taxpayer should not be on the hook.

The Mortgage Modification Morass

President Obama, currently in southern Nevada — one of the unfortunate centers of the foreclosure problems in the wake of the Housing Bubble Collapse — would like to promote more mortgage modification to assist homeowners who are having difficulty paying their mortgages.  [LVSun]

Unfortunately the same problem that got us into this mess (securitization) is precisely the source of the problem getting out of it (securitization).

Why, for example, would any financial firm ever opt to promote foreclosures if there were any possibility the homeowners could be assisted to fulfill their mortgage obligations with a little modifications?

Well, if the firm is a mortgage servicing company then there are at least four reasons (shown in the graphic above) which make it more profitable for the foreclosure process to continue, than for a mortgage modification to be negotiated.  [Credit Write Downs] [AllmandLaw]

“Obama focused his address on the need for Congress to approve his housing market plan to assist “responsible homeowners” that he presented in February. The plan would allow those homeowners a chance at a lower rate, saving them about $3,000 a year.” [LVSun] (link added)

Or, a bit more specifically:

“Under the proposal, borrowers with loans insured by Fannie Mae or Freddie Mac (i.e. GSE-insured loans) will have access to streamlined refinancing through the GSEs. Borrowers with standard non-GSE loans will have access to refinancing through a new program run through the FHA. For responsible borrowers, there will be no more barriers and no more excuses.” [WH]

There’s another fly in this ointment.   While the President’s proposal is certainly better than the present position of the Congress in which Doing Nothing seems always preferable to doing anything,  the plan really doesn’t go far enough.  Congressional Republicans have been enthusiastic about opposing what little has been done (HAMP) on the grounds that the underfunded and limited program hasn’t been effective — as underfunded and limited programs often are in the face of massive problems.  A short list of problem creators:

The Foot Draggers: Those who (a)  invested heavily in mortgaged based securities during the Housing Bubble, especially in the upper tranches, have little incentive to support mortgage modification if any hope remains that they’ll get their share IF they hold out.  The MBS market, recently viewed though it was some small fuzzy brown thing walking on a dinner plate, is now “coming back.” [ChiTrib] (b) There is also the MERC Mess.  Investment companies, finding the efforts of local county recorders entirely too slow to satisfy the bankers’ voracious appetite for more mortgages more swiftly, created their own electronic recording system only to see it collapse in a heap of unresolved paper work which leaves homeowners wondering who owns what.  (c) Mortgage service companies who want to protect their margins. “We find that loss mitigation is costly for servicers, in large part because servicers currently lack adequate staff and technology; unfortunately, servicers have few financial incentives to expand capacity.” [ClFed]

The Inch Worms:  The foreclosure problem is a national issue, as illustrated by Realty Trac’s map shown below:

Click on the map to go to Realty Trac for more information.  About 93% of those facing foreclosure are single family homeowners [FDIC pdf] — not the “flippers” so often blamed in some conservative blogs.  Secondly, most of the mortgages in really serious trouble are those notorious adjustable rate monsters with reset rates designed to make homeowners refinance (thus stuffing the mortgage finance industry with new revenue) rather than pay off the existing mortgage.

Any plan which allows the mortgage sector to renegotiate loan by loan day by day inch by inch is insufficient to solve the problems.  Banks or other mortgage holders need to be required to deal with categories of mortgages not individual mortgage holders.   No doubt the bankers assault on this idea on Capitol Hill would be roughly analogous to the D-Day landings in Normandy.

The Principals:  Bankers and the financial sector recoil in horror at any proposal calling for them to take any cuts in the principal of a mortgage.  This is a bit hard to stomach since these were the same little Wall Street Wizards who paid zilch attention to the types of mortgages being sold to unsuspecting, and quite often unsophisticated borrowers, all in the interest of creating fodder for their CDOs and Synthetic CDOs… There are some real estate markets, and Nevada may well be one of them, in which the foreclosure problem will not be significantly mitigated until some banks take a cram down.

Calendar Watchers:  Forbearance is a lovely word.  The White House proposal addresses this as follows:

 ”Move by Major Servicers to Use 12-Month Forbearance as Default Approach: Key servicers have also followed the Administration’s lead in extending forbearance for the unemployed to a year. Wells Fargo and Bank of America, two of the nation’s largest lenders, have begun to offer this longer period to customers whose loans they hold on their own books, recognizing that it is not just helpful for these struggling families, but it makes good economic sense for their lenders as well.”  [WH]

12 MONTHS?  And, notice that the Lady Bountiful Forbearance demonstrated by Wells Fargo and Bank of America is on loans which they hold on their own books.   First, why only 12 months? Why not just get rid of the resets on those nefarious ARM mortgages and turn them into good old fashioned fixed rate mortgages?  Or, why not allow 24 months or 36 months for ‘forbearance?’

And…not to bring up another sticky point… What about those mortgages which are on someone’s books somewhere that isn’t a bank?  Unless, of course, the argument is that if BoA and Wells-Fargo can do it, why then can’t some mortgage servicer?  At which point we revert to the dis-incentives for servicers to modify much of anything.

Perhaps the best that can be said of the President’s proposal is that it does try to do something, and it does answer the Grover Norquist mailer sent to Nevada households saying that the President “promised” to solve the foreclosure crisis — which no, he didn’t.  And, in the face of extraordinary opposition from bankers, mortgage servicers, bondholders, shareholders, investment houses, and the attendant army of lobbyists thereof, it might be the best option political practicable at the moment.  It’s certainly better than Governor Romney’s suggestion that we simply let things “bottom out.”

There’s one more trap coming from the financialists — any good news concerning the housing market becomes fodder for the argument that we really don’t need to do anything because “the market is coming back.”   Tell that to the underwater, out of luck, and nearly out of time, homeowners in one of those states shown in deep red on the RealtyTrac map.

Follow The Money: How To Play The Traveling Money Game

I think I get it. How to play the Traveling Money Game — Romney Style.  Political Carnival provides the explanation, and because I tend to think in charts and graphs, this is my rendition of that explication.

Advice from The Strip to Wall Street

Nevadans understand gambling.  We bend over backwards to be hospitable to those who want to push buttons on our machines and enjoy the games on our tables.  We advertise it, we oversee it, and we are pleased to be one of the entertainment centers of the world.  We have large fancy casino resorts, and we have small pub-like local bars with enticing machines.  We support many of our public services from the revenue gaming produces.  However, enjoy it as we do we also know it from living with gaming 24/7/365.   There are two general rules we should share with you.

What happens in Vegas doesn’t necessarily stay in Vegas. No, we won’t advertise what you did — but that doesn’t mean your friends and associates won’t.  If you aren’t certain about this concept please contact Prince Harry’s public relations staff.  So, Wall Street, when your presidential candidate of choice makes disparaging comments about 47% of the country’s population at a donors’ dinner please don’t be surprised when the pictures and sound show up on the Internet.

Don’t gamble what you can’t afford to lose.   Nevada has an entire chapter (458A) in its statutes concerning problem gambling,  additionally we define issues involving people with serious trouble following the simple maxim:  “Problem gambling” means persistent and recurrent maladaptive behavior relating to gambling that causes disruptions in any major area of life, including, without limitation, the psychological, social or vocational areas of life.

Most problem gambling finds it origins in the Gamblers’ Fallacy:  “The Gambler’s Fallacy is committed when a person assumes that a departure from what occurs on average or in the long term will be corrected in the short term.”  There is also an investment oriented version of this definition:

“When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future.”

Why are we reminding you of all this?  Because … the more you believe  you can lose without doing irreparable harm to your economic or vocational life  the less likely you are to play the games responsibly, and the more susceptible you are to the Gamblers’ Fallacy.   There isn’t all that much difference between playing at one of our roulette tables and playing with high stakes bets on derivatives.   Remember — Past events do not change the probability that other events will occur in the future — the next roll on the wheel or the next position taken on oil futures are not fundamentally all that different.

One may be emotional, ” X is my lucky number,” but there’s a reason for those two green slots on the roulette wheel — which create just enough margin for the house to make a profit.  No matter how elegant the algorithms created by the Quants in the investment bank office building, no bet is without risk, even those bets made in the interest of reducing risk.

Perhaps individuals like Nick Leeson, who brought down Barings Bank in 1995, or the collapse of Long Term Capital Management in 1998 [FRBC pdf], or the failure of Lehman Brothers in September 2008, or AIG facing a potential $60 billion loss in early 2009, or more recently the London Whale backwash for JP Morgan — should be a reminder that he or she who adopts the Gamblers’ Fallacy can easily become a “problem gambler” who disrupts major areas of life — like our economic system.

Goosing the Pot? One of the problems with current suggestions that the “Job Creators” be allowed to keep more of their earnings by lowering capital gains taxes and reducing taxes for the top 0.1% of American income earners is that we don’t know whether those funds will be allocated for venture capital and entrepreneurial support — OR — if they will be returned to the Wall Street Casino in the form of esoteric “bets” on the behavior of other investments.

If a bank believes it can bet its funds with impunity, without having a Financial Stability Oversight Council monitoring its behavior, then why not indulge in the kind of “gambling” that created the Credit Meltdown in 2008?  If the Federal government has no power to require the orderly liquidation of banks making too many bad bets, then all that remains is the status quo ante- Dodd Frank Act, and the chaos created as Lehman Brothers and other investment houses almost totally wrecked our financial sector. This is a timely topic because:

“The attorneys general of Michigan, Oklahoma and South Carolina argued that the government’s new power to liquidate large, non-bank financial companies that are on the brink of failure is unconstitutional.” [LATimes]

All three attorneys general are Republicans.  All three are arguing that the Federal government cannot monitor  financial sector behavior, and cannot order the rational liquidation of a troubled investment institution if something like those irresponsible bets in our immediate past go horribly wrong — again.   The only options left are a potentially catastrophic collapse or a — Heaven forefend — a bailout.

Frankly, this is tantamount to hugging the unrehabilitated problem gambler and politely admonishing him “not to do it again.”

At least the state of Nevada is willing to acknowledge that some people have serious gambling problems, that some need oversight and help to deal with their issues, and that some need a firm reminder that they have no business gambling money they cannot afford to lose.

The question remains: When will the Republican Party acknowledge the insufficiency of voluntary oversight of financial institutions entirely too prone to sail close to the winds of the Gamblers’ Fallacy, and admit that the Wall Street Casino requires the same level of diligence Nevada exercises over “problem gambling?”

Quick Hits and Updates

**  Welcome to the advent of Political Hunting Season in Nevada, the Las Vegas Sun reports Senator “By Appointment Only” Dean Heller (R-NV) and Rep. Shelley Berkley (D-NV1) have comparable war chests.  What Rep. Berkley does not have is the assistance of Karl Rove’s shadowy anonymous donors protected by Citizens United.

** Think the Patient Protection and Affordable Care Act won’t help women in the Silver State?   Look at the Map:

Nevada’s rate of uninsured women would still be higher than most of the nation, but the ACA provisions would be a welcome improvement.

**  The Bain of Romney’s Existence:  Best reads so far — Crooks & Liars, “Boston Globe Reporter Stands By Their Article.”   Talking Points Memo, “Cutting Through the Bain Bamboozlement.”  Glenn Kessler takes a narrow and focused look at the legality of Romney’s Bain associations. See also, “50 Shades of Bain,” Bloomberg.   Don’t miss: “Here’s One of the Clever Financial Tricks Mitt Romney Used to Become Dynastically Rich,” Business Insider. (Warning: Don’t try this at home.)

** Oh, those silly little bankers, they just keep doing mischievous things: “JPMorgan Fears Traders Obscured Losses,” New York Times. “JPMorgan trade loss now up to $5.8 billion”, Washington Post. For those counting such things the losses are now 3X the original estimates.   “Dimon saw $1 billion potential loss when he made Teapot Remark,” Bloomberg.  “JPMorgan traders may have hidden losses,” Reuters.

Peregrine: “CEO of collapsed futures brokerage — I embezzled millions of dollars from customers accounts,”  Business Insider. Wow, what you can do with Excel + an ink jet printer — “PFGBest Chief arrested, admits 20 year fraud,” Reuters. (Warning: don’t try this at home either.)

“Hedge fund investors are running for the exits,” Business Insider.

The week’s events have brought some trenchant responses:

“The big banks are worlds unto themselves, and you’re a temporary citizen. Their logos are your country flag, their motto your national anthem.”   Business Insider.

“One of the most revealing exchanges in the Barclays documents came when a bank official tried to describe why Barclays’s improper postings were not as problematic as those of other banks. “We’re clean but we’re dirty-clean, rather than clean-clean,” an executive said in a phone conversation. Talk about defining deviancy down.

“Dirty clean” versus “clean clean” pretty much sums up Wall Street’s view of cheating. If everybody does it, nobody should be held accountable if caught. Alas, many United States regulators and prosecutors seem to have bought into this argument.” [New York Times]

Something to think about.