The historical echoes of the mortgage bond scandal

By Felix Salmon
October 17, 2010
reviewed here, reminds us.

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What did Wall Street used to be like, before the Securities Act of 1933? Michael Perino’s new book on Ferdiand Pecora, which I reviewed here, reminds us. For instance, there was National City Bank’s Peru deal.

National City’s South American experts had reported that the government’s finances were “positively distressing”, with the treasury “flat on its back and gasping for breath” and the president surrounded by “rascals”. Yet, inevitably, National City decided to underwrite a series of bonds from Peru. Nowhere in the prospectus was there any indication of National City’s view on the country; meanwhile, National City’s ads stated that “when you buy a bond recommended by The National City Company, you may be sure that all the essential facts which justify the Company’s own confidence in that investment are readily available to you”.

Perino continues:

National City kept right on offering Peruvian bonds in 1927 and 1928, even though one of its own South American experts continued to conclude that he had “no great faith in any material betterment of Peru’s economic condition in the near future”. The political situation, he wrote, was “equally uncertain,” with “revolution” a distinct possibility. Would the public have purchased these bonds, Pecora asked, if that information had been included in the prospectus? “I doubt if they would,” Baker replied.

Pecora did something similar with a bond offering for the Brazilian state of Minas Gerais. National City used much of the proceeds to pay off a loan due to itself, without telling telling investors that it was using their money to exit the very credit they were buying into. And that’s not all:

How Minas Gerais would use the proceeds of the bond offering was not the only misrepresentation in the prospectus. Pecora put George Train, the man who originally urged National City to underwrite these bonds, on the stand. Train, it seemed, was willing to play fast and loose with other crucial facts in order to get the deal done. In 1927, analyzing Minas Gerais’s history of bond offerings in Europe, Train was amazed at the shoddy way the government had handled its obligations. The “laxness of the State authorities,” he wrote in an internal company memorandum, “borders on the fantastic”. His review of Minas Gerais’s history “showws the complete ignorance, carelessness and negligence of the former State officials in respect to external long-term borrowing.” It would, he wrote, “be hard to find anywhere a sadder confession of inefficiency and ineptitude than that displayed by various State officials.” Despite those conclusions, Train wrote in the prospectuses for the bond offerings, “Prudent and careful management of the State’s finances has been characteristic of successive administrations in Minas Gerais.”

I’m quoting Perino at length, here, because I’m getting a lot of pushback from various commenters to my assertion that pretty much every major investment bank in the world withheld material nonpublic information when they failed to pass on to investors the results of the due diligence tests that Clayton did on mortgage loan pools.

Kid Dynamite says that we’re not talking about material nonpublic information here. But of course we are: it’s information, it’s nonpublic, and it’s certainly material, since it resulted in the investment banks negotiating down the price of the loan pool in question.

The Securities Act came into law largely in reaction to exactly the kind of behavior that Pecora uncovered with the Peru and Minas Gerais bonds. The banks knew bad stuff about the bonds they were selling, but they didn’t pass on that information to investors. And so the Securities Act was written to put an end to such shenanigans.

The Clayton reports were much more than mere opinion, like the ratings agencies pretend to be. (And in any case, credit ratings are public information.) Clayton did detailed empirical research on the loan pools, and when the banks didn’t like what they saw, they used that information to their own advantage — by asking for a discount on the loans from the originator.

The whole point of the Securities Act was to ensure that information like that was passed on to investors. That’s why bond prospectuses are so long: they include every conceivable piece of information, and every conceivable risk factor, that might possibly be relevant to the price of the bond.

Yet the MBS prospectuses for the loan pools that Clayton examined didn’t include the fact that Clayton had done due diligence on them, didn’t say what Clayton’s results were, and certainly didn’t disclose that those results had allowed the underwriter to buy the loans from the originator at a discount.

If Ferdinand Pecora were alive today, he would recognize all this behavior — and be shaking his head at the way in which banks simply ignored the spirit of the laws which FDR put into place in the wake of the Pecora Commission.

Did the banks behavior violate the letter of the law? I think there’s a good case that they did; they certainly broke the law as it exists today. But let’s find out! Come on, prosecutors — file some suits, here, and see what happens. This crisis has yet to reach the stage at which people start going to jail. And we need to pass through that stage before it’s all over. So let’s get to it.


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Can’t wait for the securities litigation on this matter. When asked on the stand whether a prudent investor would find the default rate material, what would YOU say?

Posted by RZ0 | Report as abusive

against my better judgment, I need to comment on this, and set a few facts straight regarding material non-public information.

First and foremost, I’m under the impression that, contrary to Felix’s claims, the underlying loan data WAS available. This is an essential point. (please ignore the references to Abacus etc below – that’s off topic, and it’s not the point – the point is that the data about the loans composing the MBS pools was available) s/-205879-1.html

“Loan-level data about the mortgages pooled in those MBS was available to investors in Abacus and other such deals throughout the frothy heyday of CDOs, before the financial crisis struck full force in September 2008.

And that data would have provided investors with far more substantive information about the deal’s health than whether a hedge fund selected some of its loans. At least one technology vendor provided loan-level data for virtually all securitized mortgages. But instead most investors relied almost solely on the now discredited ratings from the ratings agencies, perhaps in part because they were bond investors unaccustomed to the nitty-gritty loan analysis traditionally performed by commercial bankers.

Those investors could have analyzed a wide range of metrics about the financial status of the borrowers and their loans, as well as the performance of the securities comprising those assets. So an investor in Abacus could have analyzed the real estate underlying each of the loans in JPMAC 2006-FRE1 M8 Midprime, a mortgage-backed security referenced by Abacus, as well as the underlying loans of the remaining 99 mortgage-backed securities in the CDO. The JPMAC security was serviced by JPMorgan and rated ‘BBB’ by Standard & Poor’s.

David Hurt, senior vice president of business development at Loan Performance, a unit of CoreLogic, says his firm has provided the relevant loan-level data and many of the tools to analyze it since before the housing bubble.”

So there goes any attempt to label any of this non-public. The information was NOT non-public. Felix, i think again you are confounding the loan information with Clayton’s INTERPRETATION of the loan information. The thoughts that sit in my head (or in this case, Clayton’s head) may be material – that doesn’t mean they have to be disclosed, as long as the information my thoughts are based on is available. This is not meant to be a semantics argument either.

The prospectus I looked at contains no information whatsoever about the issuer’s underwriting standards (except that they have a disclosure that a “SUBSTANTIAL” number of the loans did not meet the standards and required “Exceptions.”). Thus, how can it possibly be material that Clayton says x% of the loans don’t meet the underwriting standards? The reader doesn’t even know what the underlying standards ARE! The point of the prospectus is to provide the investor with data so that the investor can decide if HIS OWN underwriting standards are met! Get it? The MBS buyer is the one who is actually doing the “lending” here.

Posted by KidDynamite | Report as abusive

Felix is correct. The non-disclosure was a breach at least today, under the new rules, but maybe not pre-SOX. And investors said nothing. The RMBS market is a disaster in terms of investor rights, but you must defend your rights. Nobody read the PSAs.

Posted by rcwhalen | Report as abusive

I agree with Kid. Along with tour-de-force Yves Smith (not to mention the much-missed Tanta, queen of this topic), Felix is doing yeoman’s work on finding and explaining the structural facts and involved parties of the many heads of the mortgage mess hydra.

However, he would be much better served by talking to experienced lawyers in the arena, and developing his arguments with some legal guidance, if he wants to write as a journalist and not merely a provocateur. At least Barry Ritholtz trys to develop the general legal argument as well as the fact pattern.

I get it, the legal minutia is hard and writing about how the sky is falling is fun. But this stuff is legally complex, nuanced, and EXTREMLY fact specfic. And if you get it wrong (see Felix’s recent Rule 10b5-1 and Section 15(E) posts), then you lose credibility and your future arguments are dismissed as hyperbolic (c.f. some of Denninger).

Kid Dynamite has asked for a real example of the misrepresentation that everyone assumes was rampant.
I reiterate that request, if only to confirm the problems, not to wave them away.

I understand, and agree with, the widespread belief that SOMETHING had to have happened in the RMBS/CDO sales channels that was at least civilly actionable, if not criminally prosecutable. But where is it? Prove your point with EVIDENCE.

Those prospectuses were mostly full of disclaimers about this very point – what information was available, what the investor could depend on and what they couldn’t or should investigate themselves, what reps & warranties were made by who to whom, etc.

So find them, read them, dissect them, talk about them with securities lawyers, and then bring a well-grounded argument to the table about how a specific party violated well-settled legal obligations to another party.

This has the potential to be another financial catastrophe, but it could also wind up like the GS/Abacus noise – terrible optics, and maybe there should be more obligations on the MBS conduit creators, but when you look at the actual facts along with actual law, there might not be much there, there.

More journalism, and less uninformed opinions. But in any event, keep it up, please – this was a ‘attaboy’ pep talk, not a condemnation.

Posted by SteveHamlin | Report as abusive

These comments might be more pertinent to the book review but you know how it goes:

1. For those despairing that the finance industry will ever actually be brought to heel (Dodd-Frank – don’t make me laugh), I would point out that the Pecora commission was the fourth investigation into the industry not the first. I would also point out the SEC eventually created by Roosevelt (inter alia) was the second attempt at regulation after the initial bill was beaten by industry pressure in congress.

2. Frank Partnoy’s bio of Ivar Kreuger, The Match King, is a great look into how wall street operated “back in the day”. To understand just how big the forgotten Kreuger was I would compare him to a combination of Warren Buffett, Richard Branson and Bernie Madoff only bigger than any of them. Highly recommended.

Posted by fredmertz | Report as abusive

I can appreciate KD’s point, and could say that all the information that Clayton used was available. But let’s use an analogy here. Let’s say a big fast food chain Mickeys was buying beef from food company DeadBeefCo. DeadBeefCo used chemicals to process their beef, and Mickeys hired a consultant to find out if those chemcials were ok to be consumed. The consultant told Mickeys that some of those chemicals were very bad, but Mickeys bought the beef and sold burgers made with it anyway, because not all of the chemicals were bad.

People got sick and died from eating those burgers and lots of people sued Mickeys. Mickeys said anybody could have found out that DeadBeefCo used those chemicals in their beef, because DeadBeefCo mentions it in their SEC filings. Do you think that would keep Mickeys from successfully getting sued? I’m thinking no.

On the other hand, I don’t know what the buyers of these bonds were expecting. Nobody should have really needed anyone to tell them those bonds were garbage, because mortgages were being handed out like time bombs wrapped as candy. They were guaranteed to blow up.

So this is where my appreciation of some libertarian beliefs collides with my belief that a government can “form a more perfect union, establish justice, insure domestic tranquility” – in short, prevent stuff like this happening. I wouldn’t care so much about the buyers of the bonds getting burned if they didn’t burn the whole damn house down. So do you penalize them, or say “that wasn’t nice”, and foolishly expect they won’t do it again?

Posted by OnTheTimes | Report as abusive

OnTheTimes – let’s start at a slightly different point: DeadBeefCo uses chemicals to process their beef. If I hire a consultant to test the chemicals and find out that they are toxic, and then I short MCD stock – that is NOT trading on material non-public information, even though the information is material, and it seems to not be in the public realm – it’s publicly available – it’s called good research on my part. If, however, I had dinner with the DeadBeefCo or MCD CEO, and either of them tell me “hey – you wouldn’t believe the toxic crap we’re putting in our beef – it’s a matter of time before it kills someone” – THAT would clearly be inside information.

Now, if MCD does these tests, finds out the beef is toxic, and sells it to comsumers as NON-toxic, then of course they will get sued. But what if MCD sells it to consumers saying “these are the chemicals in the beef, we make no representation that they will be good for maintaining a healthy lifestyle”?

of course, this is there food differs from bonds. We all agree that individuals cannot be expected to know that the beef they are eating is bad for them, and we have the FDA regulate it for us. They don’t allow MCD to sell food under the disclaimer “we make no representation that this food won’t kill you.” securities are different though!

with bonds, it’s why the prospectus constantly avoids making representations as to how they think the loans will perform, and instead focuses on telling you what the loans LOOK LIKE – so you can decide for yourself! YOU decide if you want to loan money to these loans with these LTV ratios and FICO scores – and if you need more information, it IS available (as indicated in my link above)

then again, this is all kinda silly, because I’m not a lawyer (although as I mentioned already, the lawyers I talked to tell me Felix is wrong about the material non-public information angle)

Posted by KidDynamite | Report as abusive

Felix – forget the non-public part and focus on the “omission of material information” angle you touched on in an earlier post. That’s also an interesting one, and again, with the IANAL caveat, I’d say that the INFORMATION is the important stuff to disclose, and not a specific party’s interpretation of the information (ie: Clayton’s)

which brings up a question I have – maybe a legal eagle out there can answer it: Barclays just underwrote a secondary offering of MGM stock. Many big Wall Street firms cover MGM as a company. They all have research reports and opinions about MGM available to their clients (although perhaps not PUBLICLY available). Do you know how many of these research reports Barclays referenced in the prospectus? Of course you do – NONE. Are they not “material” information? Is Barclays’ failure to tell potential investors what JPM or GS thinks of MGM, and what JPM or GS expects MGM to earn over the next 4 years an omission of material fact? No – I don’t think it is. Now the legal-eagles can explain WHY it isn’t…

Posted by KidDynamite | Report as abusive

Hi Felix:

And in a tangentially related way, Perry Mehrling (Fischer Black and the Revolutionary Idea of Finance) has a new book on deck called The New Lombard Street:
How the Fed Became the Dealer of Last Resort.

It looks really good. tml

Posted by Teresa_Lo | Report as abusive

Being neither a journalist nor a lawyer, I can’t really speak to the legality of the points in dispute between Felix and KidD.

Yet whichever side is “right”, the whole matter makes me sick to my stomach. These bankers were buying and selling bonds that they knew were dreck, fully aware that they were playing a key part in supporting a destabilizing bubble, yet willing to do so because:

(1) It made them a big profit.
(2) It was more or less legal.
(3) If they didn’t, then somebody else would anyhow.

A society which is based on this kind of “ethics” would be rotten to the core. Isolated event? Or is this the “New American Ethos”?

Consider also the voices of the “peasantry”. Their trust in the system has been seriously damaged, leading to a rising wave of “entitlement” mentality as people are unwilling to make even the slightest personal sacrifice to support a corrupt system. A temporary shift? Or is this the “New American Ethos”?

And for that we all are poorer…

Posted by TFF | Report as abusive

KD: Maybe I’m missing something here, but isn’t any information that you need to pay money to have access to by definition “non-public”?

Is there some special legal definition of “public information” that’s different from common usage?

Posted by csissoko | Report as abusive

It is depressing to read KD defense of the banks. He sounds like a kid caught with his hand in the cookie jar trying his best to find some “legal” way to escape being punished. As Felix said in an earlier post, what Clayton reported is that a significant percentage of the loans did not meet the stated underwriting standards. That is a material fact and not an interpretation.

KD’s shorting the stock of Dead Beef example is more “my hand is really not is the cookie jar” misdirection. If you short a stock you as an individual are expressing your opinion based on whatever. The banks is this case are major institutions selling “bad product” that they know are bad without telling the buyer. No interpretations needed here.

But the sad part is that there are people like KD that see nothing wrong in this. People that have traveled so far from honesty and trust that it is impossible to engage them without lawyers and without looking under every rock and pebble for deceit.

The law of commerce is based on bedrock principals of fairness between parties. Without that you end up with KDs doing their best to find a crack in the rules that let’s them prove that black is white.

Posted by bdiddly | Report as abusive

I’ve begun to think on this topic from varying angles, including a defense of the major firms issuing the majority of private label MBS. What information could exist to disprove this simplified notion: Street firms just churned out the bonds as the investment managers are demanding it. Caveat emptor…all that.

I mean, seriously, what corporate executives would seek to expand or invest in a business model if there’s not an ongoing, & strongly held, belief that this would continue into 2007 & beyond ?

I’ve selected a Morgan Stanley annual report for exhibit A. Within this summarization for fiscal year 2006, includes the notes on an acquisition (Saxon Capital), and also notes the ongoing investment into residential mortgages. nual/2006/Letter-to-Shareholders-2006.pd f

Does this report prove anything…not exactly. But what entity would knowingly buy a noted non-prime mortgage lender / servicer without some prior convictions on the promise of acquiring that business? Dare I write….it’s a fee-generation machine at the height of this period. And if the origination volumes go down, this purchase looks foolish (I’ll check but assume this purchase was found lacking in “intangibles / goodwill” at a later date).

Posted by McGriffen | Report as abusive

csissoko wrote “KD: Maybe I’m missing something here, but isn’t any information that you need to pay money to have access to by definition “non-public”? Is there some special legal definition of “public information” that’s different from common usage?”

no – information that you need to pay money to analyze is definitely not non-public. so, YES – there is a different definition of public information. In the securities world, “public” information doesn’t mean information that Joe SixPack can find for free in 5 minutes online with Google. That’s just not how it works.

bdiddly – you can continue to try to assail my ethics, which are impeccable, but it’s only because you don’t understand the rules. Did Clayton’s analysis of the data that was, per my link above, available to other investors prove that information in the prospectus was false? If it did, that would be a big problem. I don’t think that’s what’s being alleged, and it certainly hasn’t been shown yet. I asked multiple times for someone to show me information that was misrepresented – no one has, of course.

I explained this already, more than once – the prospectus tells you 1) what the underlying loans look like and 2) that there are SUBSTANTIAL numbers of loans that didn’t meet the underwriting standards. IT”S IN THE PROSPECTUS I read. Clayton also told you that a substantial number of loans didn’t meet the underwriting standards.

anyway, Bdiddly, since you want to attack me, – please answer my question above about Barclays and MGM – why didn’t Barc include all the MGM research reports from The Street, with all their respective evaluations and projections, in the prospectus? Huh? They are “material” right? Any reasonable investor would want to read them, right? Do you think they committed securities fraud too? (hint: I am fairly certain that they did NOT!) My point is that the law doesn’t work the way you think it does or the way you want it to. And it’s not because I’m an evil guy.

Posted by KidDynamite | Report as abusive

KD: I think a clear distinction can be drawn between paying money for an analysis of raw data and paying money to access the data itself.

I can understand, of course, that the analysis of publicly available data is considered use of public information. But based on your first link, you seem to be claiming that raw data that is available only at a price is also considered “public information.” Do I have that right?

Posted by csissoko | Report as abusive

Let me clarify one thing here, since some goofballs apparently think that I’m advocating behavior that would clearly be considered a problem.

I am looking at a prospectus that, in one table, as a summary for the entire portfolio, has the following data (slightly adjusted, to maintain anonymity of the issue):

Scheduled Principal Balance: $1,000,000,000
Number of Mortgage Loans: 4,500
Average Scheduled Principal Balance: $225,000
Weighted Average Gross Coupon: 8.5%
Weighted Average Net Coupon: (2) 8.0%
Weighted Average Current FICO Score: 625
Weighted Average Original LTV Ratio: 77%
Weighted Average Combined Original LTV Ratio: 81%
Weighted Average Stated Remaining Term (months): 357
Weighted Average Seasoning (months): 2
Weighted Average Months to Roll: (3) 22
Weighted Average Gross Margin: (3) 6.00%
Weighted Average Initial Rate Cap: (3) 3.00%
Weighted Average Periodic Rate Cap: (3) 1.50%
Weighted Average Gross Maximum Lifetime Rate: (3) 15.50%

There are twenty more tables like that, with more granular distributional breakdowns by FICO, LTV, Zip code, months to rate reset, etc…

If this data is proven to be inaccurate – that is a big problem. It’s a problem regardless of if the issuer did it intentionally or not. It is my impression that it is not being alleged that the information is inaccurate. Clayton’s review resulted in the issuer altering the portfolio – but THESE are the accurate statistics for the portfolio.

If there’s inaccurate information being depicted in prospectuses, I’ll be the first to stand beside you all as you call for justice. (I even sent Felix a copy of some FHLB lawsuits that allege exactly that)

Posted by KidDynamite | Report as abusive

Question: Here’s the thing I don’t quite follow — how does the Bill Gates and nine bums analogy fit into this? E.g., a group consisting of Bill Gates and nine bums has a very high average net worth, yet of the group there’s only one guy I’d feel good about lending a million bucks to.

Are these weighted averages the info that you’re arguing is sufficient to allow the investors to evaluate the pool, KD? Or are you saying they have a lot more than that?

Because if all the investors have access to is the weighted averages of the loans, and the pools look fine, but then Clayton’s taping the investment banks on the shoulder and saying “Pssst, boss, these averages are allright n’ all, but you’ve got a Bill Gates and nine bums situation here, and you can full expect the default rate to be much higher than the averages would lead you to expect,” then that does seem like something that would need to be disclosed, at least to this layperson.

I mean, it’s one thing to stick in a caveat that says, “not all these loans may meet these standards” — it’s an average, after all, some loans worse than others — it seems to me another for it to be a case of “when we say ‘differ substantially,’ what we mean is ‘two ounces of gold dust tossed into a 50lb bucket of chicken sh*t.’”

Posted by Diablevert | Report as abusive

daiblevert – that’s a pretty interesting question. As I mentioned above, there are twenty (maybe twenty one) tables with granular breakdowns of the data, and the important point i think is that the data is WEIGHTED. I think that corrects for your Bill Gates and the 9 bums problem, since the Bill Gates portion comprises the bulk of the portfolio, and the weighted stats reflect that. Ie, if you have a $100MM loan portfolio, where $99MM is a loan to bill gates, and the other $1mm is a loan to the 9 different bums, the portfolio statistics are going to very much reflect the risk of the Bill Gates loan.

to your other question: there still appears to be some dispute about exactly what information was available to the investors. The link I included above says that investors had access to the loan level data. Felix is telling me that Clayton had access to more loan level data – I don’t know what “more” data he thinks they had, but I’d love to find out.

Posted by KidDynamite | Report as abusive

sorry diablevert – I think I gave you a stupid answer above. Obviously, weighted averages of things like net worth can be massively skewed in the BG + 9 bums scenario where you can have extreme data points. I don’t think that is a concern with FICO ,LTV and the other categories here – the skew you’d need to bastardize the data isn’t there.

Posted by KidDynamite | Report as abusive

KidD, I’m not certain, but isn’t it the other way around?

It doesn’t take a particularly high percentage of defaults to trash a mortgage portfolio. Wouldn’t a 25% total default rate wreak havoc? Yet when dealing with averages, you might be able to hide 25 junk mortgages in the middle of 75 (seemingly) solid ones.

The ultimate fallout has been worse than anybody would have expected, due to the recession, but the initial defaults that set off the avalanche were not THAT numerous. Were they?

Posted by TFF | Report as abusive

Ok, I am sorry if I don’t make much sense, but I have an absess tooth.

Kid the site you sent us to says that all the info was available to anyone who wanted to go looking as there was an electronic database. However that is untrue. many bonds info has no counties, some said literally ‘bogus’ on them and although they were supposed to return in 90 days to enter the data into Mers, it seems few did. there was also an electronic number assigned to each bond to do such a trace. many of the number are untraceable because they have incorrect data at the source… or as I said, no source to trace, as they were destroyed or forged.

That mess is exactly why we are returning to this argument, because what was obvious to those looking at it WAS that it was ‘bogus’ and being the firms who entered that data were subsidiaries of the big investment banks, it seems a lot of inside data was available to those who made up the prospectus… that it was worse then bad.

It seems as though PAulson was very well of this and having done some checking on his own with the data bases, knew that in Florida especially, any loans that had no numbers on it or counties, were probably destryes and weren’t elligible for loans. Sounds like he knew more then he was admitting.

So that site backs what we are saying all along. The Goldman and certainly the other sellers of this junk, did know exactly what to put into each prospectus, and kept a little senior goodies that clayton had shown to be good in there to appease the lax ratings agencies… but the investor thought he was getting a mix of risk.

So being Goldman had been shorting before, Paulson seems to have caught on and made his own little fortune not speculating that the CDOs were bad, but knowing.

So although you have ‘impeccable ethics’ Kid, I think that it is rather norm for the ethics of this time in America, in the financilal world. No one gave a crap about the homeowners or investors. Just the greed… the money.

Posted by hsvkitty | Report as abusive

SteveHamlin, Mr Salmon is lucky in having some of the top commentators and experts in the field reading him allowing the rest of us to benefit by second hand.

Given he promptly and prominently corrects any mistakes he makes, I think a bit of “throwing it out there” helps.

Posted by Danny_Black | Report as abusive

TFF – if you have a billion dollar portfolio, 25% NOTIONAL default would reek havoc – that’s the weighted default number. 25% nominal default might be meaningless – if that 25% in quantity added up to a small % of the portfolio.

All i meant is that unlike the Bill Gates + 9 bums paradox, you can’t have a FICO score of 1 million, or a loan to value of 50 Billion to really screw up the data.

Posted by KidDynamite | Report as abusive

csissoko – sorry – i missed your other comment last night: you wrote: “But based on your first link, you seem to be claiming that raw data that is available only at a price is also considered “public information.” Do I have that right?”

yes – that’s correct. although the link doesn’t say that the raw data was available only for a price – it says that the raw data itself might have been difficult to analyze, which is why a business developed for companies that had expertise in analyzing it – for a price of course.

Posted by KidDynamite | Report as abusive

KD, the following is not an attack, just some advice.

You are probably not well-positioned to rate your own ethics “impeccable.” Best leave superlatives to others.

Posted by mattski | Report as abusive

Diablevert, people in the trade call it “barbelling” – it sounds more dignified than “nine bums.” But yes, according to those in the business, pools were quite often constructed, deliberately and cynically, to possess aggregate statistics quite unrepresentative of the actual loans.

Posted by Greycap | Report as abusive

Analysts / managers could certainly sniff for the barbelling; more often than not, it showed in the FICO score distribution. To add onto Kid D’s comment, these tables weren’t just run-ons of previously propagated material. More often than not, the “investment classes offered” were broken out into groupings:

2. TABLE FOR LOANS (labeled Group 1)
3. TABLE FOR LOANS (labeled Group 2)

Group 1 loans were slated to a AAA-rated class slated for…wait for it…no guessing: Fannie Mae or Freddie (!!) Mostly it’s the UPB / loan balance that caused any loans falling into this category. Off the top, other categorical factors at play here but the conforming loan balance was a key metric.

Group 2 loans were slated for the other non-GSE investment groups (US, foreign). Much of the discussion here can be circled around much of the loans falling into Group 2.

On the default rate assumption: using a 25-35 Default Rate in months 40-72 for scenario analysis might, might have previously been applicable. Some of that stress would’ve derived from the roll rate tendencies on underlying ARM loans approaching reset (2 yr hybrid, 3yr hybrid).

However, on this discussion a 25 default (a 3month run rate is a better indicator) rate at months 18+ just wreaks absolute havoc on the loans & underlying structural features. Throw in a run rate on voluntary CPR of 5-10, when 15-20 had previously held & there you go.

Posted by McGriffen | Report as abusive

Thanks, KD for the response. I’m still thinking over the issue of what is public information. BTW here’s another link on the data available to MBS investors: curitization-dont-make-transparency-the- new-opaque/

Posted by csissoko | Report as abusive

kiddynamte: michael lewis’ ‘the big short’ is full of people from ratings agencies and others saying that they dont have access to loan-level detail. if the ratings agency manager types at his underlings in all caps that loan-level detail is not to be used, then how can you call it public, or imply that its easily obtainable?

Posted by decora | Report as abusive

because investors, of course, are not supposed to trust ratings agencies?

then doesn’t that throw into question every marketing material that pushes something based on it’s AAA rating? if you know that credit ratings are meaningless and you use them to advertise your product isnt that fraud?

Posted by decora | Report as abusive

The banking bailout was a blunder. The taxpayer gave banks billions of dollars yet they did little to stave off foreclosures. In the mean while they grab properties and sit on the cash they received from the treasury and the Fed. If they are threatened by insolvency again their influence in the Senate will be used to obtain more bailouts and lax regulation.

This fact alone really chaps my ass when I hear pundits claim the that those who lost their homes to foreclosure were somehow financially reckless. More people lost their homes to foreclosure after the financial industry was bailed out. Besides, how is losing one’s job to an economic downturn “financially reckless” on the part of the mortgagee?

Chase, Citibank, BOA, etc… are holdings of the private banks the form the Federal Reserve Board. The Treasury has been staffed by successive presidents with former employees of Wall Street, namely Goldman Sachs. The U.S. banking industry clearly is an Oligarchy which is strangling the economies ability to manufacture anything but paper profits. We have all seen how fast they can erode.

Two decades ago Britain made it illegal for corporations and organizations to contribute financially to any politician’s election fund. Only voters can contribute with strict limits and caps. How is it that the British people can get their government to respond to the will of the people and we cannot?

Posted by coyotle | Report as abusive