Tag Archives: financialists

Shady Lender Protection Act heard in Nevada Legislature Committee

AB 282

Perhaps this was a good week to revisit “Margin Call?”  Why? Because Fiore and Friends are promoting AB 282 in the Nevada state Legislature.

“AB 282: AN ACT relating to real property; revising provisions governing mediation of a judicial foreclosure action; revising provisions requiring certain actions related to the foreclosure of owner-occupied property securing a residential mortgage loan to be rescinded after a certain period; revising provisions governing civil actions brought by a borrower for certain violations of law governing the foreclosure of owner-occupied property securing a residential mortgage loan…”

This bill is on today’s agenda in the Assembly Judiciary Committee.  Might it be suggested that the informal title of the bill be “The Shady Lender Protection Act of 2015?”  Here’s why:

“Existing law provides that in a judicial foreclosure action concerning owner- occupied property, the mortgagor may elect to participate in the program of foreclosure mediation. (NRS 40.437) Section 1 of this bill removes provisions governing the process of such mediation and the documents required to be brought to the mediation. Section 1 instead requires the Nevada Supreme Court to adopt rules governing the mediation.” (emphasis added)

Let’s start with the part wherein the Nevada foreclosure mediation process has been successful.  It’s been especially beneficial for borrowers in owner occupied homes who want to avoid foreclosure. [nolo] Perhaps this is why Fiore and Friends and so dead set against it?  So, what are those documents required in the process?

“Nevada’s mediation program requires that borrowers and the lender provide the mediator and each other with certain documents prior to the mediation. The borrower must provide appropriate documentation, such as financial information, so that the lender can make a determination about whether the borrower is eligible for a loan workout. The lender must provide documents such as the original note, deed of trust, and assignments (or certified copies).” [nolo]

Remember those bad old days, the ones in the wake of the housing bubble debacle?  Those were the days during which lenders were seeking to foreclose properties on which they didn’t have the paperwork necessary to prove who held the mortgage.  And at this point we return to the messy problem of MERS.

MERS was an ‘electronic’ recording of mortgages which was supposed to facilitate the assignment of mortgages etc. at high speed – speed high enough to sate the demand from Wall Street for more and more and more mortgages to slice, dice, tranche, and otherwise divide into financial products for marketing.  The idea was that county recorders weren’t fast enough to keep pace with the Wall Street demand for mortgages in the secondary market.  The fall out from the MERS mess is still being felt in parts of the country. [Harpers]

Thus, what AB 282 does is to (1) eliminate a mediation process which has been successful in Nevada, and (2) eliminates the documentation requirements now on the books according to which the borrowers must provide their financial information and the lenders must prove they own the paperwork on the property.  We can guess who’s having problems with the paperwork, but an article in the Reno Gazette Journal in 2012 provides some interesting details:

“Data from the same report (on program effectiveness) , however, have some questioning what the program’s definition of good faith is. Out of the 3,183 total cases from the same time period, banks did not bring all the required documents in 1,149 cases — a rate of 36 percent.

JPMorgan Chase topped the list, failing to bring all necessary documents in 52 percent of its cases. Ally/GMAC was second at 50 percent, followed by Bank of America at 41 percent, US Bank at 32 percent and Wells Fargo at 31 percent. Citigroup posted the lowest rate of the six banks mentioned at 12 percent.”

And, why did the banks have problems with the paperwork?  They didn’t have it. The Great Wall Street Mortgage Mill had shredded the mortgages into sliced and diced financial products in which nobody knew who really owned what – much less what the paper was really worth.

“They want the original paperwork and not a certified copy, which becomes an issue for mortgages that have been securitized (into investments),” Uffelman said. “Once a mortgage gets securitized, the paperwork ends up in a different place and can be tough for a servicer to track down and pull back together. The more you securitize stuff, the easier it is to screw things up.” [RGJ 2012]

And screw things up they did. Since Wall Street was in such a glorious rush to manufacture asset based securities on offer in the Casino, the recording and other record keeping practices were lost in the great paper shuffle.  Only in the imagination of Wall Street sycophants does this create a problem to be borne solely by the homeowner.

If we look at the latest report (pdf) from the program we see the nature of the continuing documentation problem:

“Of the 1,894 mediations held during FY 2014, 73 percent resulted in the homeowner and the lender not coming to an agreement to retain or relinquish the property. In 28 percent of these cases, no resolution was reached because the lender failed to prove it had the authority to foreclose, or the lender failed to prove ownership of the deed of trust or the mortgage note.”  

“For example, in 319 cases, the beneficiary failed to bring the required certifications for each endorsement of the mortgage note. By statute, the lender must provide a certified deed of trust, a certification of each assignment of the deed of trust, a certified mortgage note, and a certification of each endorsement and/or assignment of the mortgage note.”

And just so borrowers aren’t inclined to take on the banks in a questionable foreclosure, AB 282 limits the time line for the mediation process, drops awards from $50,000 to $5,000, and eliminates the recovery of attorney fees by a prevailing borrower.

The Legislature already has AB 360 The Annuities Saleman’s Friend Bill in the hopper, and now the financialists must be rubbing their palms at the prospect of the Ultra-Big-Bank-Friendly AB 282!

AB 282 is a bill for the Banks, for the Wall Street Casino Players, for the Speculators, for the Financialists – and it is NOT a bill which does anything for average Nevada families.   As the session progresses it’s becoming ever more clear who the Nevada Republicans are supporting – and it’s definitely not Nevada homeowners.

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Filed under Economy, financial regulation, Foreclosures, Nevada economy, Nevada legislature, Nevada politics

From CDO’s to BTO’s: Wall St. tees up the next financial disaster

Wall Street Greed CDO

Think Progress picked up on a piece from Bloomberg News which ought to be raising eyebrows on Main Street.  The banksters are at it again, only this time those pesky Credit Default Obligations which brought down our financial system in 2007-2008 have been repackaged and served up under a new label: Bespoke Tranche Opportunities.

As the Think Progress analysis reports, these derivatives were an extremely important part of the last mess:

“The Financial Crisis Inquiry Commission concluded that derivatives “were at the center of the storm” and “amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities.” In 2010, the total on-paper value of every derivative contract worldwide was $1.4 quadrillion, or 23 times the total economic output of the entire planet.”  [TP]

Let’s be careful here, not all of that $1.4 quadrillion is in BTO’s, but the newly labeled derivative has that same capacity to “amplify the losses” when the underlying value of the securities becomes volatile.  For those who would like this explained in really clear diagrams, click over to the Wall Street Law Blog and follow along with the  White Board Wine Glasses Explanation – one of the best I’ve discovered to date.

Now, we can move on to what makes these BTO’s a problem, beginning with their creation:

“The new “bespoke” version of the idea flips that (CDO) business dynamic around. An investor tells a bank what specific mixture of derivatives bets it wants to make, and the bank builds a customized product with just one tranche that meets the investor’s needs. Like a bespoke suit, the products are tailored to fit precisely, and only one copy is ever produced.” [TP]

Now, why would anyone want to buy one of these products, much less order a special one?  In the Bad Old Days  fund managers could choose to purchase some tranched up CDO, those blew up, so why go out and order one tailored to their specifications?  Let’s return to the Bloomberg article:

“Goldman Sachs Group Inc. is joining other banks in peddling something they’re referring to as a “bespoke tranche opportunity.” That’s essentially a CDO backed by single-name credit-default swaps, customized based on investors’ wishes. The pools of derivatives are cut into varying slices of risk that are sold to investors such as hedge funds.

The derivatives are similar to a product that became popular during the last credit boom and exacerbated losses when markets seized up. Demand for this sort of exotica is returning now and there’s no real surprise why. Everyone is searching for yield after more than six years of near-zero interest rates from the Federal Reserve, not to mention stimulus efforts by central banks in Japan and Europe.”  (emphasis added)

Translation: Because interest rates have been kept low by central banks hoping to keep struggling economies moving ahead, banks haven’t been able to make what they deem to be enough profit off corporate and Treasury bonds, and therefore have started playing in the “financial product” game again (not that they ever really stopped for long) and have started making ‘bets’ (derivatives) in the Wall Street Casino – with ‘products’ (BTO’s) which aren’t subject to the reforms put in place by the Dodd Frank Act.

So, what’s the problem? A hedge fund manager wants to buy a structured financial product from a bank which has a higher yield than what he can get by investing in corporate bonds or Treasuries… what could go wrong?  Let us count the ways.

#1.  These securities aren’t tied to the performance of the real economy as corporate bonds would be.  In the jargon du jour, the BTO portfolio is a table of reference securities.  Here come the Quants again, there are formulas for determining the ‘value’ of these securities which may or may not be valid, and they certainly weren’t during the Housing Bubble.

#2. The yields are related to the the ratings.  Here we go yet again. One of the major ratings services, Standard & Poor, is ever so sorry (to the tune of a $1.5 billion settlement with the Justice Department) they helped create the Derivatives Debacle of ‘07-‘08, but that hasn’t stopped them from continuing to get involved in evaluating derivatives. [See the FIGSCO mess]

#3. The BTO encourages the same Wall Street Casino behavior we saw in the last Housing Bubble/Derivatives Debacle.  It’s explained this way:

“The trouble with this game is that the value of most structured finance products is opaque and subject to sharp and violent change under conditions of financial stress. So when they are “funded” in carry-trade manner via repo or other prime broker hypothecation arrangements, the hedge-fund gamblers who have loaded up on these newly minted structures are subject to margin calls which can spiral rapidly in a financial crisis. And that, in turn, begets position liquidation, plummeting prices for the “asset” in question, and even more liquidation in a downward spiral.” [WolfStreet]

Sound familiar? Sound a bit like Lehman Brothers?  Remove the jargon and the message is all too familiar – no one really knows the value of the structured product, and if the product is purchased with borrowed funds it’s subject to margin calls (people wanting their money back) which in turn leads to sell offs and the price for the “thing” drops off the financial cliff, and…. down we go. Again.  We’ve seen this movie before, and the ending wasn’t pleasant.

#4. The BTO is a way around financial reform regulations. The offerings, be they FIGSCO or BTO’s are being peddled at the same time the Financialists are trying their dead level best to (a) get Congress to whittle down the regulations put in place under the Dodd Frank Act financial reforms; and (b) figure out ways to get around the Dodd Frank Act provisions – witness the BTO.

The profit motive is perfectly understandable. If I can invest in something that pays more than a Treasury bill or bond, or more than a corporate bond, then why not?  However, at this point, as an investor, I need to make a decision – Am I investing or speculating?  If I’m investing then it would make more sense to take a lower yield on something that has a more credible value. If I’m speculating (gambling) then why not borrow some money and purchase some exotic structured financial product the value of which is far less credible (or even comprehensible) and “make more money?”

It’s speculation that tends to get us into trouble. This new round of creative financial products shows all the elements that got us into financial trouble the last time in recent memory.  Formulaic determination of value which ran head first into the wall of reality. Valuations which were based on “what’s good for business,” rather than on what might be other plausible outcomes.  Emphasis on speculation rather than investment – or on financialism rather than capitalism.  Short term yields as opposed to long term investment.

It was a recipe for trouble in 2007-2008 and it’s still a recipe for trouble in 2015.

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Filed under banking, Economy, financial regulation

Wall Street Lilliputians Want To Tie Up the Regulators

H.R. 185

There was H.R. 37 – the Eleven Bill Wall Street Wish List, which passed the U.S. House of Representatives, a bill of, for, and by the Wall Street Wonders who brought us the Crash of ‘07-08.  On January 13, 2015 the House approved  H.R. 185, another De-regulation Bill from those same awesome people who burdened us with bailouts.   The bill has a lovely name, the “Regulatory Accountability Act of 2015,” and was introduced by Virginia’s own ultra-conservative Representative Bob Goodlatte (R-VA) The miserable measure passed on a 250-175 vote [rc 28] with Nevada Representatives Amodei (R-NV2), Heck (R-NV3) and Hardy (R-NV, Bundy Ranch) all voting in favor of it while Representative Titus (D-NV1) voted No.

What was it that the three Nevada Representatives found so appealing in the bill?  Gee Whiz folks, friends, and neighbors, don’t you know this bill will FREE us from those burdensome regulations on Clean Water, Clean Air, and Stable Financial Markets! In short, H.R. 185 is a bill of the polluters and exploiters, by the exploiters and polluters, and for the exploiters and polluters. And, it would be bad enough if we ended up drinking the dregs from phosphates and breathing smog – but this is also another example of the financial sector wanting to roll back regulations protecting consumers, investors, and ordinary working citizens.

The bottom line is summarized by the Center for Effective Government as follows:

“This legislation represents nothing more than a backdoor effort to undermine public protections without having to be on the record opposing implementation of laws the American people support, like the Clean Air Act and Clean Water Act. Instead of improving our system of public protections, the Regulatory Accountability Act would add numerous hurdles and delay to agency efforts to develop new safeguards and give big business even more opportunities to interfere in this process. This would waste government resources that agencies need to achieve their missions.”  (Emphasis added)

Most of the attention from opponents of the bill was focused on the environmental issues, and related worker safety regulations. However, this bill also “deregulates” the bankers as well. Before the SEC or the CFPB could issue rules for the protection of investors and citizens the agencies would be required to conduct a manipulated form of cost-benefit analysis concerning the “cost of the rule” for businesses.

The SEC, CFPB or other financial regulator would have to:

“…conduct a cost-benefit analysis for all proposed rules and guidance, as well as any potential alternatives to the proposals or guidance. The bill would also expand the scope of these analyses by requiring agencies to include highly speculative estimates of all “indirect” costs and benefits for each option. Yet the bill does not even define what would qualify as an indirect cost.” [CEG]

But, wait, there’s more:

“The bill would mandate that all federal agencies adopt the “least costly” rule out of all the alternatives considered. The only exception to this default rule is if the agency can demonstrate that the additional benefits to the rule justify the additional costs, although it is unclear what the agency would need to do to satisfy this requirement. Given that Congress has just recently cut agency budgets, agencies with already limited resources and rulemaking timelines may choose to adopt the least costly option when they lack resources to demonstrate that the additional benefits justify adopting a more costly rule.” [CEG]

Notice the two elements which are left vague, (1) the definition of an Indirect Cost; and, (2) the standard by which the Additional Benefit is to be evaluated. How convenient!  Are we to assume that if the financial industry can offer some form of sublime speculation and declare that to be an “indirect cost,” then what the Financialists say will be held as Gospel?  Are we to assume that no matter what “additional benefit” might accrue for the protection of consumers – if the industry (financial, industrial, manufacturing, etc.) can say it is “unjustified” then we’ll just have to take their word for it?

No, the supporters of the bill will say – We’re not for repealing the Clean Water or Clean Air Acts, or the Dodd Frank Act – we merely want to make it all but impossible for the agencies to implement those laws.

Let’s take a look at a real world example.  The Consumer Finance Protection Bureau is proposing a rule concerning pre-paid products.

“[The proposed rules] would close the loopholes in [the prepaid product] market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”

Sounds reasonable.  However, it ranks in the litany of complaints from the American Banker’s Association, an organization still screaming about the ‘unfettered tyranny’ of the Consumer Financial Protection Bureau:

“…prepaid companies would be required to wait 30 days after issuing cards to begin offering their customers credit. That’s making, not implementing law. And the CFPB’s prerogative to unconditionally exempt parties from its rules is absolutism.”

Oh, the horror! There is another side to this story. 

“The proposal would require prepaid companies to limit consumers’ losses when funds are stolen or cards are lost, investigate and resolve errors, provide easy and free access to account information, and adhere to credit card protections if a credit product is offered in connection with a prepaid account. The Bureau is also proposing new “Know Before You Owe” prepaid disclosures that would provide consumers with clear information about the costs and risks of prepaid products upfront.

“Consumers are increasingly relying on prepaid products to make purchases and access funds, but they are not guaranteed the same protections or disclosures as traditional bank accounts,” said CFPB Director Richard Cordray. “Our proposal would close the loopholes in this market and ensure prepaid consumers are protected whether they are swiping a card, scanning their smartphone, or sending a payment.”  [Consumer Finance] (Emphasis added)

Funny how the American Banker’s Association left out the part wherein consumer losses would be limited in case of loss or theft, and the bank would investigate and resolve errors, and the same credit card protections would apply to prepaid cards, and the card holder could get “clear information about the costs and risks” of holding that card? And, they left out the part in which the protections which apply to plastic would also apply to the pre-loaded Smartphone.

Let’s guess what that “cost benefit analysis” might be, since it’s the bankers  who would be running the show.   What might be an “indirect” cost to the banks if they had to (1) limit a customer’s losses if his or her pre-loaded Smartphone were lost or stolen? (2) Investigate and resolve errors? Plastic or Electronic? or (3) If they actually had to inform the prospective customer about the costs and risks associated with a pre-loaded card or device?

And our Banker Says: “It is simply too costly, it absolutely can’t be done, it will ruin our bottom line, and deplete our shareholder value! Whatever benefit might redound to the customer – it will never be enough to justify the expense to which we will be put.  And besides that “It’s Tyranny!”Really?

And, NO, this isn’t like the EU defining a banana – it’s like requiring the seller of the financial product in question to be upfront about the costs and risks, and to address the issues created by loss and theft, and to investigate and resolve errors.   The ABA would have us believe this is about picky details like the URL addresses, and not about basic credit protection services.

There’s one form of direct cost the banker would like to avoid – any infringement on their activities in the secondary market for credit card debt, which is done this way:

“The process of securitizing credit card receivables is very similar to that of securitizing mortgages and other loan obligations. A card issuer sells a group of accounts to a trust, which issues securities backed by those receivables. The card issuer still services the account, but the assets are removed from its balance sheet. This allows the card issuer to issue more accounts and to reduce its capital reserve requirements, the amount of money banks are required by law to hold to do business. This money doesn’t earn interest, so, naturally, the card issuer wants to reduce its required reserves as much as possible. As the cardholders pay on their accounts monthly, most of the money is sent to the trust, which pays the holders of the credit card ABSs interest and principal. The card issuer retains a servicing fee and part of the finance charge as profit, and also includes part of the principal—the seller’s interest.” [TM.com] (Emphasis in original)

Oh, precisely what we want to hear! Right? When the banks securitize their credit card receivables it’s JUST LIKE mortgages and other loan obligations? We’ve seen that movie before and the ending was most unpleasant.  Nor are we looking at pittances. When Credit Card Receivables where first securitized in 1987 the total was $2,295.20 million, this climbed to a hefty $52,159.57 million by 2014. [SIFMA download] Little wonder the Bankers of the ABA don’t want anyone treading on their territory and placing any restrictions on to whom they may sell pre-loaded financial products.

So, what would a “cost benefit analysis” yield?  If just one customer was reduced from the total of those whose pre-paid (pre-loaded) debt could be securitized – would that be enough to trigger the “NO.”  If the amount stemming from the securitization of that customer’s credit was removed would that trigger the “indirect cost” NO?  The beauty of leaving the language in H.R. 185 vague is that all costs – no matter how speculative – must be considered, and all “indirect costs” – no matter how small or creative — must drive the regulation of the banking industry.  Not, Heaven Forefend, the costs to the consumers when credit cards/pre-loaded phones are lost or stolen, or when disputes cannot be resolved by the consumer without recourse to expensive and protracted litigation?

So, we’d have to ask Representatives Heck, Amodei, and Hardy, is this what you intended – that pre-paid/loaded Smartphone credit line holders do NOT have the right to know, in clear plain old readable English, the costs and risks of holding Corporation X’s credit card?  That they do not have a right to know that they have free and easy access to their credit information? That they do not have a reasonable expectation that errors will be corrected and disputes resolved without litigation?  Because in voting in favor of H.R. 185 that is exactly what they are saying.  (Our thanks and praise  to Representative Titus for NOT joining that chorus.)

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Filed under Congress, ecology, Economy, financial regulation, public health, public safety

House Republicans Set Up Next Financial Bust?

CLO cards Financialists score on H.R. 37. When at first you don’t succeed – keep voting – and pass the Eleven Bill Wall Street Wish List on January 14, 2015. [rc37]  This amalgamation of pro-Financialist bills is guaranteed to warm the cockles of the Wall Street denizens, even if it has some very real potential dangers for Main Street and Elm Street.   There is at least one reason to sound the alarm.

Collateralized Loan Obligations

One of the items on the Wall Street Wish List was more time for the banks to deal with Collateralized Loan Obligations.  Let’s break this down into some easy-to-understand parts, beginning with the CLO.

“A security backed by a pool of debt, often low-rated corporate loans. Collateralized loan obligations (CLOs) are similar to collateralized mortgage obligations, except for the different type of underlying loan.”

And, what’s a security?

“A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer.”

So, what we have in the CLOs  are financial instruments (fungible, and negotiable) issued by a corporation (financial institution). These bits of paper are made up from pools of corporate debt, usually of the low rated variety, sliced diced tranched etc. for Wall Street’s trading pleasure.

If this is sounding familiar, it should because those sliced diced tranched mortgage based pools were precisely what got Wall Street in big trouble in 2007-2008.  The only thing that’s different now is that the pools in question are made up of questionable corporate debt instead of questionable mortgages.  Let’s drill down more closely to see what’s so attractive to Wall Street about putting off the deadline for bankers to comply with the Volcker Rule on CLOs.

Collateralized loan obligations are investment funds which are primarily made up of leveraged loans, associated with large corporate loans with low to very low credit ratings; these loans can be swapped in and out by the fund manager throughout the life of the fund. Watch closely now – because the next point is important.

CLOs are NOT backed by loans to small business or individuals, but rather are typically composed of the debt that companies incur after being taken over by a private equity firm. [BetterMarkets]   Right! We are not speaking of loans to small business firms on Main Street, no matter how much obfuscatory palaver is applied by the Republican allies of the Wall Street Casino Major Players – this is about allowing banks to play with debt incurred during when private equity firms take over a company.

This isn’t about your neighborhood bank either.  Only four banks (Wells Fargo CLO Holdings, Citigroup CLO Holdings, State Street CLO Holdings) have 69% of all CLOs.  Nor is this a minor item, because the total U.S. bank CLOs add up to about $85 billion. [BetterMarkets]  Many crocodile tears have hit the floor from the faces of the Financialist collaborators in Congress about those “poor little neighborhood banks, distressed by government regulations,” to which we might say, “Horse Pucky.”  Why don’t the CLO Holdings want to comply with the Volcker Rule?

“The Volcker Rule prohibits proprietary trading and limits bank ownership of hedge funds. Bank investments in CLOs have the potential to be both a proprietary position and an investment in hedge funds because investing in a CLO is functionally identical to owning part of a hedge fund that invests in leveraged loans. Importantly, the Volcker Rule already provides both ample time to divest these sought-after instruments, and a variety of ways to bring existing CLOs into compliance with the rule. Specifically, CLOs backed entirely by loans are excluded from the Volcker Rule and many CLO holdings are not considered “ownership interest” under the Volcker Rule.” [BetterMarkets] (emphasis added)

In short, when a bank is trading in CLOs for its own direct gain, and not on behalf of any customer, and when it’s trading in funds which are composed of some loans, and a basket-load of other Stuff – sovereign debt, junk bonds, structured derivatives, credit default swaps – it would have to sell off the CLOs if they involve “high risk activity.”  “High Risk Activity” is pretty-speak for junk.  Also, when we hear bankers lament that they’d have to sell off their not-so-pretty CLOs at “fire sale prices” if they had to comply with the Volcker Rule sooner rather than later, we should not waste a whole box of tissues immediately.

Wall Street CLO funds which are not in compliance will be almost gone by 2019 – having been either matured or redeemed – so why worry? [LeveragedLoan] First, there’s that “almost” part. The idea behind the Volcker Rule was that banks should not be allowed to play with depositors’ money in the Wall Street Casino. Period. So the notion that having just a few “non-compliant” CLOs (those made up with pounds of junk included) isn’t acceptable. Period.

Secondly, it’s not like the leveraged loan business is slacking.  U.S. CLO issues hit $124 billion in new issues from 234 deals in 2014, up from $83 billion in 2013, and “blowing through” the previous $97 billion high in 2006. [LeveragedLoan]  Could someone be counting on another four years to do some back-door proprietary trading while waiting for the front door (Volcker Rule) to close?  Might a few of the Wall Street Bankers be counting on the fading memories of Main Street and Elm Street, so that as the memory of the Banking Debacle of 2007-2008 wafts off to the horizon they can go back to their Casino Business As Usual? [BetterMarkets]

It’s important to remember at this point that the CLOs based solely on loans and therefore  excluded from the Volcker Rule aren’t the beneficiaries of the services of the House of Representatives in voting for H.R. 37.  That would be the Junque Boutique CLOs padded with credit default swaps, structured derivatives, sovereign debt, and good old fashioned junk bonds that are the primary beneficiaries of Congressional largess, or exactly the financial products that got Wall Street in trouble the last time.

So, who from our Silver State voted to coddle the non-compliant CLO Holdings, to protect the managers of highly questionable funds with highly questionable holdings? And, to put the taxpayers on the hook for any fall out when this latest house of cards collapses?   The Big Banker Roundtable of High Flying Traders – with other peoples’ money – will want to thank: Representative Joe Heck (R-NV3), Representative Mark Amodei (R-NV2), and Representative Cresent {Does He Really Even Understand This Stuff?} Hardy (R-NV-Bundy Ranch).  Representative Dina Titus (D-NV1) had the good sense to stand with Main Street and Elm Street on this one.

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Filed under Economy, financial regulation

GOP Second Bite at the Financial Reform Apple

 Bankers Deregulation The Republican majority in the House of Representatives is about to try another bite at the Roll Back Dodd Frank Financial Reforms apple.  [HuffPo]

“The vote will come within days, if not hours. Under conditions laid down by the House Rules Committee late Monday, the GOP will be able to easily pass the legislation as part of an 11-point deregulation plan without Democratic support, while ignoring any Democratic amendments. President Barack Obama has threatened to veto the bill.” [HuffPo]

A point we should emphasize at the moment is that this piecemeal roll back of Dodd Frank Act reforms is being down without any Congressional hearings, nor will any amendments be allowed to the 11-Bill Wall Street Wish List.  Representative Maxine Waters (D-CA), the ranking member of the House Financial Services Committee, had something to say about this matter:

“House Republicans continue to stop at nothing to push legislation that benefits Wall Street’s biggest banks at the expense of American consumers. Last year, GOP leadership snuck a sweetheart giveaway for banks like JP Morgan and Citigroup into a must-pass spending measure. On just the second day of the Congressional session, they continued that strategy by trying to push through a complicated package of 11 bills to deregulate Wall Street. Fortunately, House Democrats joined together to stop that effort from moving forward. But Republicans won’t be daunted in their efforts to gut important Wall Street reforms.

Next week, House Republicans will take another shot at deregulation – making it clear that nothing will stop their efforts to make rewarding the biggest banks the first order of business in this Congress.
At a time when the American people are still hurting, I am disappointed that House Republicans are continuing to waste our valuable time on bills that help Wall Street and hurt Main Street. Americans are still suffering from the impacts of the worst financial crisis in a generation. They need their elected leaders to work for them, not for the mega-banks.”

The statement from Representative Waters pretty well sums up the situation.  Investment banks collapsed under the deluge of their own greed in 2007-2008, they were bought up and out by the commercial bankers, and they sought the protection of the federal government – they were bailed out and then as commercial banks were protected by the statutes governing commercial (as opposed to investment) banking.  Heads they win, tails they win.  

The Financial Services Roundtable supported H.R. 37 (the first attempt to roll back Dodd Frank in the 114th Congress) calling the delay in the implementation of the Volcker Rule a “technical change.” [FSR pdf ]  The financial interests would have more time to “conform their holdings of collateralized loan obligations under new regulations.”

No to put too fine a point to it, BUT the bankers have had since the collapse of their financial sector to get their houses in order, that would be since, say, October 2008?  But, Financial Services Chair Hensarling was “disappointed the first time and Wall Street Wish List failed, and his comments are instructive:

“They’ve regrettably told the millions of Americans who are still unemployed, the Main Street small businesses that are the engines of economic growth, and our farmers and ranchers in the Heartland that they will sacrifice positive, bipartisan ideas on the altar of ideological politics.  Still, there are many days left in the 114th Congress and I will continue to invite my Democratic colleagues to abandon partisan games and instead join me and many others in doing the hard work of the American people.  I hope that the House will return to this bipartisan bill in the near future for the sake of the people who sent us to Washington to make a difference.” [Hensarling]

Let us parse.  First, H.R. 37 has NOTHING to do with “unemployed Americans,” Main Street businesses, farmers or ranchers in the “Heartland.”  Unless, of course, they happen to be investment bankers on the side.  Second, this isn’t any “partisan game,” it’s a question of whether or not the banks are going to be regulated.  That’s pretty much a policy dispute. And, third, we might ask: Who were the people who sent you to Washington? Because support for H.R. 37 or its substitute tells all concerned that the constituency being supported resides in Wall Street offices.  In this instance, those Main Streeters, Elm Streeters, and happy Rurals are being hauled out as props to screen the Financial Services Roundtable interests.

Here’s the list of Financial Services Roundtable members.  Does this look like Main Street, Elm Street, or the happy Rurals to you?  When did Wells Fargo last plow a field? Or Barclay’s run a grocery store? Or Citigroup manage a family owned construction company?  What we have here looks like the standard-garden-variety Republican ploy – talk about Main Street while looking out for the interests of Wall Street.

If you are keeping score – you can tell the orientation of your Representative in Congress by tracking bills like H.R. 37 or its substitute.  If your Representative is oriented toward the intersection of Main and Elm, he or she will vote NO; if he or she is oriented toward Wall Street the vote will be YES.  Or, more simply: A capitalist would vote “no,” a financialist would vote “yes.”

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Filed under Economy, financial regulation

Death and Resurrection: Attacks on Financial Regulation Reform

Avarice Dante

Watch enough television and a person could get the impression that the greatest threats to mankind are bloody minded terrorists and crashing aircraft.  However, the “If It Bleeds, It Leads” brand of modern journalism tends to distract us from some much more realistic threats to our well being.

The odds of being killed in a terrorist attack are approximately 1 in 20,000,000.  The odds that our financial and economic well being are in jeopardy are being created right now in a Congress which has thus far in its short existence catered to the Financialists – those “weary souls” who will never have enough gold (wealth) to relax.   Witness the attempt at unraveling the Dodd-Frank Act financial regulation reforms during the first week in the 114th Congress.  [Business Day, NYT]

The bill was called the “Promoting Job Creation and Reducing Small Business Burdens Act.” [H.R. 37]  Nothing could have been much further from the truth of the matter. The opponents of bank regulation are depending on a public which doesn’t know a “counter-party” from a “counter-pane.”  This bill was an attack on the imposition of the Volcker Rule, and would have allowed some private equity funds from having to register with the S.E.C.   There is nothing in the bill about “creating jobs” except the old hoary delusion that making bankers more wealthy will “trickle down” eventually – sometime after the Second Coming?

Nor are any “small businesses” being “burdened,” unless of course we mean wealth management, hedge, and other financial services corporations with a small number of employees and massive amounts of money under management.  We are not, repeat NOT, speaking here of Joe’s Garage, Maria’s Dress Shop, or Anderson’s Bodega and News-stand.  In addition to the two big blasts at the Dodd Frank Act reforms, H.R. 37 contained provisions for lots of other goodies the financialists would like to find in their 4th Circle.

There were changes in margin requirements, changes in the accounting treatment of affiliate transactions, the registration of holding companies, a registration threshold for savings and loan holding companies, a ‘brokerage simplification act,’ a registration exemption for merger and acquisition brokers, a repeal of indemnification requirements for SWAP repositories and clearinghouses, changes to benefit “emerging growth companies,” – an EGC is any company with less than $1 Billion in gross revenue in a given year, extended deadlines for dealing with collateralized loan obligations, and various provisions to make fewer required reports from the financial sector EGC’s to the regulators.   In short, nothing in the bill had anything to do with the garage, the dress shop, or the neighborhood bodega.  This was a bill BY the financial services industry, FOR the financial services industry, or as Minority Leader Pelosi called it, “An eleven bill Wall Street Wish List.”

The good news is that this bill was defeated in the House on January 7, 2014 [rc 9] – the bad news is that the defeat came because the Republican leadership went for expedited passage and Democrats who had previously supported some provisions bailed out on them leaving the leadership without the 282 votes necessary for passage.  [Bloomberg] And, there’s more bad news – next time the Republican leadership won’t make the same error, and the bill will come up in another form, this time requiring only a simple majority.

As the bills come back in resurrected form, perhaps a short glossary of Republican rhetoric is desirable:

Small Business – any private equity or wealth management firm with less than a BILLION dollars in annual revenue.

Job Creation – any bill which allows financial sector (Wall Street) banks to make more money; see “Trickle Down Hoax.”

Burdensome Regulation – any requirement that a private equity or other investment entity doesn’t want to follow, even if it means leaving the public (and investors) in the dark about financial transactions.

Simplification Act – provisions in a bill to make it easier for private equity or any investment/wealth management firm to conceal what it is doing from financial regulators – and from anyone else.

Improving Financing – provisions in a bill to let the Wall Street bankers revert to the old Casino format of complicated, convoluted, and “creative,” financing of the variety best known for crashing and burning in 2007 and 2008.

Encouraging Employee Ownership – a provision in a bill to — “to increase from $5,000,000 to $10,000,000 the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which the issuer is required under such section to deliver an additional disclosure to investors. The Commission shall index for inflation such aggregate sales price or amount every 5 years to reflect the change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, rounding to the nearest $1,000,000.”  (This is NOT a joke.)

Since the people who want the enactment of these provisions are not satisfied with “all the gold under the moon, or ever has been,” the specifics of H.R. 37 will be resurrected, re-introduced, and the Republicans will seek passage of every item on the Wall Street Wish List.

Voting in favor of the H.R. 37 Wall Street Wish List were Representatives Heck (R-NV3), Amodei (R-NV2), and Hardy (R-Bundy Ranch). Representative Titus voted against the roll back of the Dodd Frank financial regulations reforms.

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Filed under Amodei, Economy, financial regulation, Heck, Titus

The Shareholder Value Scam

 God Thinks of MoneyNothing will be better received by the economic elites than a theory that rationalizes and promotes their self interest, and few theories have done so as well as the myth of “Shareholder Value.”  Harold Meyerson summed the theory up succinctly:

“The idea that corporations exist to reward their shareholders arose not in a body of law but from the work of ideologically driven economists. In 1970,Milton Friedman wrote that business properly had but one goal: to maximize profits. The same year, Friedman’s University of Chicago colleague Eugene Fama argued that a corporation’s share price was always the accurate reflection of the enterprise’s worth, an idea that trickled down into the belief that the proper goal of a corporation was to boost its share value — particularly after most CEO salaries and bonuses became linked to that value.” [WaPo]

The musings (or rationalizations if you will) of Friedman and Fama were expanded by Michael Jensen and William Meckling in a 1976 Journal of Financial Economics article “Theory of the Firm: Managerial Behavior, Agency Cost, and Ownership Structure,” a long title for a short idea: Shareholder Value. [DSE]

Yesterday’s post took a few swings at the Shareholder Value mythology, but the subject deserves a closer look.

First, there is no requirement in law which requires the management of an enterprise to direct its focus toward Shareholder Value.  None, zip, zero. [HarvardLawF] So, why is the theory now treated as dogmatically as received wisdom? 

Let’s try one notion on for size – the theory is arithmetically convenient.  As a nation, we do love to count things. We’ll even count the number of times we’ve counted things.  A posted price for a share of common stock is easy to recognize and count.   It is what the stock market for the day says it is.  Arena Pharmaceuticals is selling for $5.12 today [YahooF] There are some sticky questions we might ask, such as will the study of its autoimmune drug yield an effective and profitable product?  If the price of ARNA today is $5.12 per share does that describe the value of the company?  The Friedman/Fama profit motif combined with the Shareholder Value Theory assumes that the price of the share x number of shares = the value of the company.  And, here’s where things break down.

According to the vaunted “efficient market” theory the answer is Yes! The share price is a measure of value — except when it isn’t.  On July 23, 2008 the closing price for Lehman Brothers was $16.05 for 33,685 in share volume.  Did that describe the value of the corporation? Or, should we look at the stock price in September 22, 2008 when Lehman Brothers was closing at $0.23?  [NASDAQ]  Apparently, one of the flaws in the arithmetically convenient adoption of stock price as a measure of corporate value is that if the corporation can’t properly value its holdings then the price and the value aren’t coterminous.  In English that would be: If the company can’t value its assets properly then why on God’s Green Earth should we believe the stock price is anything other than  guesswork on the part of some investors?

Since the Shareholder Value Theory, although flawed,  might be convenient it also appeals to another notion worth exploring – the theory holds appeal for those who have short term interest in market trading.  Under all the fancy mathematics and all but impenetrable jargon, the proponents of the Shareholder Value myth were alleging that since the price equated to the value of the firm, then using the stock price as a measuring tool meant one could evaluate the short term success of a company.  Lovely, but that misses a few marks.

Secondly, under the older “retain and reinvest” or the “stakeholders” models of corporate performance there were niches for thinking about long term corporate viability.  Was the company doing enough in terms of research and development? Was it investing in new plants and equipment? Was it retaining and retraining its labor force?   If “Engulf & Devour” acquired some firms using leveraged buyouts and hostile takeovers in the heat of the 20th century M&A boom, then what was to prevent the management from treating the newly acquired companies as little more than  paper in the portfolio? Share price moved the M&A, and share price would be the convenient measure of the “value” of the company.  What shareholder value was produced by, say, the Quaker Oats takeover of Snapple? Or America Online with Time Warner? Or Sprint and Nextel? [Investopedia]

Instead of “stakeholders,” management, labor, customers, etc. involved in the interests of the corporation, the financial engineers became the model for corporate management.  Thence, the financial engineers became beholden to the financial Auspex.  Roger Martin’s book, Fixing the Game, proposes two categories – the “real market,” and the “expectations market.” The ‘real’ market includes the world in which factories are built and staffed, goods and services are bought and sold, and revenue is earned and the bills are paid. The Expectations Market is another world.  In it the stock market via the analysts and rating services assess the real market activities of the firm and based on that analysis makes prognostications about how the company will perform in the future. Why would an executive go to all the trouble to improve real market performance in the long run when simply raising short term expectations will do nicely? Who loves this short term market perspective?

If you guessed Hedge Funds, take your seat at the head of the class.  And, do the hedge fund and private equity firms deliver on Shareholder Value?  Not quite:

“…the most generous conclusion one may reach from these empirical studies has to be that “activist” hedge funds create some short-term wealth for some shareholders as a result of investors who believe hedge fund propaganda (and some academic studies), jumping in the stock of targeted companies. In a minority of cases, activist hedge funds may bring some lasting value for shareholders but largely at the expense of workers and bond holders; thus, the impact of activist hedge funds seems to take the form of wealth transfer rather than wealth creation.” [IOGPP pdf]

Note the last part? “Take the form of wealth transfer rather than wealth creation.” What have some of the more critical articles of the current economic situation been saying all along?  That in the matrix of Shareholder Value and Financialism, intensified by corporate compensation schemes, and further abetted by hedge fund activism – we have transfers of wealth without the actual creation of a better economy for everyone.

Finally, about all that can be said of the Shareholder Value Scam is that it serves the purposes of those who have vested interests in stock market short-termism and volatility, who have an interest in transferring rather than creating wealth, and who have a predilection for espousing those theories which will make them feel better about the whole thing.

References and Recommended Reading:  R. Straub, “Shareholder Value – A Theory that changed the course of history – for the better or the worse,” Drucker Society Europe, June, 2012.  Jensen and Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics, October 1976. (pdf) Lynn Stout, “The Shareholder Value Myth,” Harvard Law School Forum, June 2012.  Yves Smith, “Maximize Shareholder Value” Myth, Naked Capitalism, May 2014. Diane E. Davis, “Political Power and Social Theory,” MIT Cambridge, 2005. (pdf)  Steve Denning, “The Origin of the World’s Dumbest Idea: Milton Friedman,” Forbes, June 2013.  Steve Denning, The Dumbest Idea in the World, Forbes, Novmber 2011.  Yvan Allaire, “Activist Hedge Funds: Creators of lasting wealth, What do the empirical studies really say? Institute for Governance of Private and Public Organizations, July 2014.

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Filed under Economy