Opinion

Felix Salmon

from Barbara Kiviat:

Congress forces Bank of America to offer better service

Oct 19, 2010 19:03 UTC

Remember back when the big banks were telling us that re-regulating consumer finance with legislation such as the CARD Act and Dodd-Frank bill would severely disrupt the banks’ business models, and lead to horrible outcomes for ordinary Joes? Well, in Bank of America’s event-packed earnings call this morning, executives laid out how, exactly, the company’s consumer finance business has been forced to change in response to the new regulatory environment. From the press release:

As a result of the legislation and other changes in the environment, the company is changing the way its consumer bank does business, focusing on a relationship enhancement strategy designed to incent customers to bring more business and to make pricing more upfront and transparent. This change moves away from a dependence on penalty fees, which the industry had adopted over the years, and provides the customer with a better banking experience. These changes are expected to result in additional revenue.

So, let’s see. We’re getting 1) more transparent financial products; 2) better banking service; and 3) a boost to B of A’s bottom line. How could Congress have done this to us?!

Granted, the transition isn’t super-smooth. B of A would have reported a net profit today instead of a loss had it not been for a $10.4 billion “goodwill impairment” charge related to a new limit on how much the company is allowed to collect when people use debit cards at cash registers. (“Goodwill impairment” is a kind of made-up thing that you can read about here.)

And I’ll be the first to admit that “upfront and transparent” pricing might very well mean higher pricing, especially for people who are used to getting a free ride when it comes to financial services--like those of us who pay off our credit card balances each month, thereby borrowing at no cost. On CNBC this morning, B of A CEO Brian Moynihan was pretty darn clear: "Instead of charging penalty fees, we'll charge monthly fees.”

Yet, as I’ve long argued, there is nothing wrong with that. If my bank wants to charge me for a service that I am receiving—credit card usage, paper statements, a low-balance checking account—why would I be upset? Just clearly tell me what the price of the service is, and then I’ll make a decision about whether or not I want to buy it. Old-fashioned, I know, but still so beautiful. I understand that many people continue to feel the effects of the recession, and that the idea of paying more for anything right now is a painful one. But, in the long run, it only seems fair that people pay for the services they get.

UPDATE: Kevin Drum digs this post, invoking Hayek along the way. Then one of his commenters smartly breaks things down according to demand elasticity.

COMMENT

I think it is excellent that BofA will now provide up-front fees. As a former banking employee, I can attest that customers always want the fees clear and concise, and they want to know what they are paying for. Unfortunately though, I think BofA will lose many consumers because they will now see exactly how expensive it is to bank there, and I believe BofA will lose revenues because they relied on these “fine print” fees.

Posted by Blackbird1996 | Report as abusive

The BofA tail-risk discount

Felix Salmon
Oct 19, 2010 15:11 UTC

Here’s a chart of what tail risk looks like, in the stock market:

bac.tiff

The thick blue line is Bank of America stock, hitting a new 52-week low today after reporting losses of $7.3 billion in the third quarter. The thin blue line is financial stocks generally, which are doing much better than BofA. And the thin red line is the S&P 500, which is significantly higher than it was this time last year.

To judge by the headlines, BofA ought to be doing pretty well. Its earnings report today beat expectations, and yesterday it announced that it was going to start foreclosing on properties again, long before anybody expected it would do so. On top of that, it’s the biggest bank in the U.S., with a deposit base of $900 billion—that’s 11.71% of the total U.S. deposit base, making BofA the clear leader on that front and the only bank now to break the 10% cap. With the Federal Reserve throwing free money at the entire U.S. financial system in an attempt to keep the recovery going, and the yield curve sloping upwards in the right direction for easy banking-sector profits, these ought to be good times indeed for BofA.

So why is BofA’s stock in the doldrums, relatively speaking? The answer is tail risk. Part of that risk is regulatory: BofA is too big to fail, and will therefore be subject to extra regulatory scrutiny and higher capital requirements than smaller banks. On top of that, huge swathes of the post-Dodd-Frank regulatory architecture remain to be written in detail, and the risks to big banks on that front are all to the downside, given how deregulated they were up until now.

But the much larger part is mortgage-related: JP Morgan came out yesterday and said that banks could be forced to buy back as much as $120 billion in mortgage bonds from investors. And BofA bears the lion’s share of that risk, incorporating as it does not only Merrill Lynch but also Countrywide.

The mortgage mess hasn’t gone away, and BofA is going to trade at a discount unless and until it’s resolved. That doesn’t mean that the market is pricing in some kind of mortgage-related disaster. It’s just pricing in a very uncertain probability distribution of possible outcomes, some of which are very bad indeed. And since investors hate that kind of uncertainty, the share price is underperforming, and is likely to stay low for as long as the uncertainty persists.

COMMENT

goog

Posted by test1020 | Report as abusive

Varley’s flexible views on Basel

Felix Salmon
Oct 19, 2010 08:47 UTC

In the UK, it seems, the revolving door from big private banks into a grandee’s public-sector role doesn’t turn quite as smoothly as it does in the U.S. And so sometimes it needs a not-so-gentle shove:

John Varley, Barclays’ chief executive, has broken ranks with the rest of the global banking industry, arguing that the availability of credit should be unaffected by tough new capital rules for banks, which he regards as fair.

He praised both the “substance and timetable” of the Basel III proposals in an interview with the Financial Times, in comments that contrast starkly with other senior bankers…

Mr Varley’s stance is particularly surprising because Barclays is among the hardest hit of Europe’s banks by the Basel III changes to regulatory capital…

Mr Varley’s comments will fuel predictions that when he leaves Barclays, he will seek a significant role outside banking.

He has been linked, by those who know him, with possible roles at the Bank of England, in government or as chairman of a blue-chip company. To make the transition from lambasted banker to a role in public service or the broader corporate world Mr Varley needs a softer image, these people say.

There’s no doubt that if any bank will lend less as a result of Basel III, it’s Barclays: not only is it too big to fail, but it’s also more highly leveraged than most of its peers. Its risk-weighted assets are likely to rise substantially under Basel III rules and its capital commensurately.

Which means that Varley’s comments can be taken one of three ways.

Either Varley is right, in which case the Institute of International Finance and the banking lobby generally are wrong and are being unnecessarily alarmist.

Alternatively, Varley is wrong and is making these noises in a nakedly political attempt to ingratiate himself with public-sector technocrats.

Or nobody really knows what the truth is, least of all Varley himself and one’s view of Basel III is fundamentally a function of your job title, or what you’re hoping that your job title will be.

In any event, it would have been nice if Varley had made these noises back when he wasn’t a lame duck, when he actually had influence in the IIF and among banking-industry lobbyists. One thing you can be sure of: at this point, Varley’s views no longer carry any weight in the industry. As such, there’s frankly not much reason to appoint him to a senior position at the central bank.

COMMENT

Yes, but they wrote the book afterwards!!!

Posted by Eheyworth | Report as abusive

Client 9

Felix Salmon
Oct 19, 2010 07:13 UTC

The tag line of Client 9 , Alex Gibney’s new film about Eliot Spitzer, is “you don’t know the real story”. But the fact is that we do — or I did, at least.

Everybody knows that Spitzer made powerful enemies on Wall Street as attorney general; that he went on to become governor of New York; and that he then resigned after being outed as a client of a prostitution ring. Spitzer himself is clear that his downfall was his own fault; he doesn’t blame it on Ken Langone, Roger Stone or anybody else but himself.

Yes, the investigation of Spitzer was highly political and was more or less unprecedented on many levels. The Mann Act, for instance, was never before used to prosecute the clients of prostitutes — just as the Martin Act had never been used in the ways that Spitzer used it when going after the big investment banks.

Client 9 is one of those films where almost nobody is sympathetic; as a result it’s not exactly fun to watch. It’s a film of persecutors and plutocrats and prostitutes, starring people like sworn Spitzer enemy Hank Greenberg complaining that after AIG’s collapse, his stock in the company was “virtually worthless, about $100 million”.

Spitzer prided himself on playing the hardest of hardball politics, against the most powerful people he could find. That strategy took him all the way to the governorship of New York: there would have been no job to resign from if he hadn’t made powerful enemies along the way.

Maybe Spitzer’s problem was that he was never very good at cultivating powerful friends who could protect and support him — a skill that another executive horndog, Bill Clinton, has in spades. Maybe he never believed that the Bush administration’s prosecutors would go to such lengths to bring him down. Most likely he didn’t overthink his actions at all. Powerful men rarely do, when it comes to sex.

Spitzer’s now a public figure again, on CNN every night. I doubt he’ll ever again get elected to public office, but he would certainly love to be appointed to an important role in the executive branch at some point. He neither wants nor deserves our sympathy, which is why it’s a bit weird that Gibney takes such a sympathetic tone for much of his film.

Spitzer’s popularity was a function of the fact that he was hyperaggressive, super-determined to go after entrenched and powerful interests. He had successes on Wall Street and he had a major failure in Albany. It remains to be seen whether he’ll have a third opportunity to unleash his righteousness and how seriously anybody will take him if he does.

COMMENT

I think that his madam, Kristin Davis was probably the most articulate and relevant person in the NY Governor’s debate this week. I am seriously thinking of voting for her. The parties don’t seem to be putting people up that are any better for NY government.

Posted by ErnieD | Report as abusive

from Justin Fox:

Apple’s day of earnings glory, iPad disappointment

Oct 19, 2010 02:04 UTC

Apple's earnings announcement this afternoon was something of an epic event. First, the company reported making a staggering amount of money: $4.3 billion in profit for the quarter. Second, Steve Jobs got on the phone and was even more obstreperously entertaining than usual. Third, iPad sales for the quarter were a bit lower than hoped and Apple's stock price dropped 6% in after-hours trading.

That sort of sensitivity to the slightest bit of disappointment is to be expected when a company has been doing as well as Apple has for as long as Apple has. Everybody's looking for the moment when the company's spectacular growth trajectory over the past half decade finally plateaus. As somebody who bought Apple at $14 and sold at around $40 early in the 2000s (I don't own any Apple stock now, except indirectly through mutual funds), I'm certainly not the one to predict when that moment will arrive. But I doubt that the iPad disappointment is any kind of lasting setback.

Why's that? Because I want an iPad, I really do. And I will buy one soon. But Apple has trained me by now to wait for at least the second generation of any new product—it's inevitably so much better than the first. I'm going with the rumors that a new-look iPad will be out by Christmas. If and when that happens, I'll buy. For now, I'm waiting. I'm betting I'm not the only one.

COMMENT

All I want is a built-in webcam.
I agree with Mr Decade though, a new one by Christmas would be a stretch.

Posted by TinyTim1 | Report as abusive

from Barbara Kiviat:

Is culture to blame for poverty?

Oct 18, 2010 18:16 UTC

Hello, Reuters readers. Thank you, Felix, for inviting me and Justin to guest blog while you're away. I promise to make the most of my newfound form of procrastination.

Over the weekend, the NYT ran a piece about academics rediscovering the "culture of poverty." The story goes that for decades it was taboo to offer social, as opposed to economic, explanations about why particular people and neighborhoods were poor—unless, of course, you belonged to a certain camp of conservative critic. According to the Times:

The reticence was a legacy of the ugly battles that erupted after Daniel Patrick Moynihan, then an assistant labor secretary in the Johnson administration, introduced the idea of a "culture of poverty" to the public in a startling 1965 report. Although Moynihan didn’t coin the phrase (that distinction belongs to the anthropologist Oscar Lewis), his description of the urban black family as caught in an inescapable "tangle of pathology" of unmarried mothers and welfare dependency was seen as attributing self-perpetuating moral deficiencies to black people, as if blaming them for their own misfortune.

Now, it seems, culture is again fair play. Over the past few years, culture-informed explorations of poverty have been seeping into the research literature. High-profile examples include these Princeton/Brookings papers about unmarried parents and this special issue of The Annals of the American Academy of Political and Social Science (which led to a recent Congressional briefing). Nobel-winning economist George Akerlof goes down this path in his new book, Identity Economics: he and co-author Rachel Kranton argue that students decide how much to invest in their education (i.e., their earning potential) partly by whether they see themselves as fitting into the culture of the "nerd," the "jock" or the "burnout."

I'm all for understanding the nature of poverty, but the culture lens makes me nervous. Maybe that's because right after I read Identity Economics, I read The Trouble With Diversity, by Walter Benn Michaels, an English professor at the University of Illinois at Chicago. One of the main arguments of that book is that there is a lurking danger in turning a conversation about economics (poor people don't have money) into a conversation about culture (poor people have different values and make different life decisions). The big risk: since Americans are loathe to judge one culture as superior to another, we will come to accept poverty as a valid alternative. You're not poor because you can't get a job that pays enough to cover your bills (a failure of education, the free market, etc)—you're poor because you are part of a different culture, which, in diversity-committed America, we all have to respect.

The other thing that worries me about the culture frame is that so much rests on the categories we use to try to capture "culture." Akerlof's nerd-jock-burnout rubric is clear-cut and colorful. But is that where the truly useful information lies?

One of the best things I've ever read about the nature of poverty is Kathryn Edin and Laura Lein's 1997 book, Making Ends Meet. Edin and Lein, a sociologist and anthropologist, spent long periods of time interviewing poor single mothers—most of whom both received welfare checks and undertook some sort of paid work. When deciding the right balance between welfare and work, the mothers certainly took into account which paid better. But they also considered which would allow them to be better mothers by spending more time with their children, and which would provide a more predictable (even if lower) stream of income. Devotion to full-time motherhood definitely reads as a cultural value. But does the preference for income predictability?

If we look at poverty in terms of culture, we might be missing an important part of the puzzle. Let's not forget something else that Daniel Patrick Moynihan once said: “The reason people are poor is that they don’t have money.” Sometimes an economic problem is just an economic problem.

COMMENT

I think I’m understanding where people are coming from…

There are definitely individual choices that can help one achieve success in life and a modicum of financial stability. Yet to term those choices a “culture” is perhaps elevating it to another level? One, as you say, that is tinged with racism?

I firmly believe we should avoid describing “poverty” as something society imposes on people. We don’t live in a pure meritocracy, but there is sufficient mobility that nobody is defined by their birth. Focusing on the element that we cannot control is deleterious to efforts to improve those aspects we CAN control.

Posted by TFF | Report as abusive

from Justin Fox:

Why didn’t people in finance pay attention to Benoit Mandelbrot?

Oct 18, 2010 15:49 UTC

Mathematician Benoit Mandelbrot was not one of those great thinkers who was ignored in his own time. He won lots of prestigious prizes. He wrote acclaimed books. He even gave two TED talks.

But it's curious how little of the acclaim and attention Mandelbrot received over the years, and after his death last week, came from the world of finance. Mandelbrot was, believe it or not, one of the founding fathers of modern quantitative finance. In the early 1960s, he and scholars at Harvard, MIT, Chicago and a couple other places began to explore the meanings of random walks in stock prices. (I spent several years immersing myself in this history for a book; hence my obsessive interest. Here's an excerpt from it related to Mandelbrot.)

In the early days, Mandelbrot was very much one of the random walk gang. He considered Eugene Fama, then a grad student at the University of Chicago, to be his student and protégé. A 1965 article by Mandelbrot in the Chicago B-school's Journal of Business proved that a rational financial market would be an unpredictable one, providing an essential building block for what soon came to be known as the efficient market hypothesis.

Before long, though, Mandelbrot and the finance crowd drifted apart. It was partly just that Mandelbrot was a curious guy, and got interested in other sources of the fractal patterns that he saw in stock prices. But he also felt that "an ominous cloud" was developing in his relationship with the other random walkers. As long as quantitative finance was mostly exploratory in nature, Mandelbrot and the economists and finance professors got along fine. But as soon as the latter groups started trying to develop tools for understanding and managing risk in financial markets, there were tensions. The tool builders wanted to shoehorn market-price behavior into a bell-curve statistical model. That is, they wanted to believe that while price movements couldn't be predicted, price volatility could. Mandelbrot thought volatility was far harder to capture than that. As Paul Cootner, a random walker from MIT's Sloan School, wrote in 1964:

Mandelbrot, like Prime Minister Churchill before him, promises us not utopia but blood, sweat, toil and tears. If he is right, almost all of our statistical tools are obsolete . . . Surely, before consigning centuries of work to the ash pile, we should like to have some assurance that all our work is truly useless.

And so it went. For Mandelbrot, the crucial turning point came with the development—and widespread acceptance—of the Black-Scholes options pricing model in the early 1970s. Black-Scholes and the many financial risk models that have evolved from it (including Felix's friend the Gaussian copula) are all about volatility being measurable and predictable. "When Black-Scholes came out, I said, 'Well, it won’t last,'" he told me in 2005. "'I’ll come back when it’s gone.'"

After the 1987 stock market crash, brought on in part by portfolio insurance strategies built upon Black-Scholes, Mandelbrot began paying attention to finance again, and some financial practitioners actually began paying attention to him. So he made a partial comeback. But the reliance on risk-management systems based on the belief that price volatility can be easily measured and predicted has continued, and it has continued to lead the financial system to the brink of disaster every few years.

So why haven't finance academics and practitioners paid more attention to Mandelbrot's warnings? I think it's mainly that he didn't provide them a handy alternative to Black-Scholes. I can't pretend to fully understand the practical implications of his fractal view of markets (and yes, I've read his book for lay readers on the subject), but it does seem more useful as a critique than as a positive model of market behavior. You can't haul in big consulting fees or create giant new securitization markets with a critique. So the natural tendency of both scholars and bankers has been to hold on for dear life to the Black-Scholes approach to modeling market risk. They get paid well for doing so, after all.

Finally, to switch topics entirely: Thanks to Felix for inviting Barbara and me to procrastinate blog at his place for the next couple of weeks. It should be fun. And it won't normally be quite this wonky.

COMMENT

I spent a weekend with Mandelbrot at a small group +10 people Finance retreat in Texas in 2001. He and his wife were polite, thoughtful and very interesting people. One of the things I respected about him was that he never allowed his name to be put on some strategy etc. He didn’t sell out, although lots of groups would have liked the marketing cache.

He was very dignified and helpful to some of the mathematicians working with us. Ultimately fractals and related processes such as volatility are nice ways of measuring process outcomes, but they tell one nothing about input processes for controlling risk.

Critical instability in systems and power law related extreme outcomes are common. If anyone is interested in speaking about these things drop me a line http://www.gogerty.com

The flash crash was a large event from the HFT process. there have been 20 smaller crashes since then indicating the process is still unfolding and likely to exhibit a large outcome at some point in time, similar or greater than the flash crash of may 6, 2010.

Posted by Nick_Gogerty | Report as abusive

Getting the band back together

Felix Salmon
Oct 18, 2010 13:39 UTC

I’m a big fan of two-handed blogs: there aren’t very any of them, but the ones that there are tend to be fabulous. (Think 2 Blowhards, or About Last Night, or Ultimi Barbarorum, or, of course, Marginal Revolution.) Time.com’s Curious Capitalist blog started off as a one-hander, written by the great polymath Justin Fox (whose book, if you haven’t read it, can be bought here), but it really came into its own when Justin brought in Barbara Kiviat to co-blog with him.

The blog is still going strong, under the auspices of Stephen Gandel and his colleagues, but I miss the old days, and so it gives me an enormous amount of pleasure to be able to say that I’ve managed to persuade both Justin and Barbara to guest-blog here over the next couple of weeks while I swan around South Africa.

Neither of them really has time to do this: Barbara has a huge course load in her new life as a grad student, while Justin is in charge of a monster editorial operation not only at Harvard Business Review but also at its book-publishing arm as well. I’m hoping that, like most bloggers, they’ll take this opportunity to blog as a form of procrastination while putting off their real work.

Many thanks to Justin and Barbara for doing this! I can’t wait to see what they come up with.

COMMENT

Thanks, jpersonna! -Barbara!

Posted by BarbaraKiviat | Report as abusive

The mortgage bond scandal FAQ

Felix Salmon
Oct 18, 2010 08:14 UTC

I’m going to be spending the next couple of weeks in South Africa, which means I’ll be off the grid (on a plane) for all of Monday, and less-than-fully online thereafter. I’ve invited the old team from the Curious Capitalist—Justin Fox and Barbara Kiviat—to help out with some guest-blogging, which I’m very excited about. But in the meantime, here’s a FAQ on the mortgage bond scandal to keep you tided over, since there seems to be a lot of confusion out there.

I’m hearing a lot about foreclosuregate, MERS, moratoriums, bad title, etc. What does this have to do with that?

Nothing. This is an entirely separate, parallel, scandal. The main area overlap is that it gives investors in mortgage bonds one more colorable reason why they should be able to put back their bonds to the banks who issued them—over and above the fact that they have the right to do that if the mortgages weren’t properly transferred.

So this isn’t about legal title to mortgages. What is it about?

Just like the Goldman Abacus case, it’s fundamentally about investment banks’ lies of omission when it came to the investors who were buying bonds from them.

In that case, Goldman neglected to tell investors that John Paulson, who had helped select the bonds in a CDO, was also short the CDO. In this case, what’s the information that the investment banks neglected to tell investors?

The results of the due diligence tests that companies like Clayton and Allonhill performed on the loan pools the investment banks were buying.

Hang on, back up a minute here. Without waving your arms around like a demented spider monkey, can you explain what you’re talking about?

I can try. A key part of the mortgage securitization process was the way in which mortgage originators like Countrywide—lenders which lent you the money to buy your house—would then get their money back by taking those loans and selling them, in bulk, to investment banks like Lehman Brothers or Merrill Lynch. They’d put a large number of loans into a pool, circulate a document detailing the characteristics of each of the loans in the pool, and then sell the pool to the highest bidder.

But banks didn’t simply pay whatever they bid. Instead, after they won the auction to buy the loan pool, they would hire someone like Clayton to do due diligence on the loan pool, to make sure that what they were buying was what they had been told they were buying. “At the core of our service,” says Clayton, “is the capability to compare electronic file data against data retrieved from source documentation made available to Clayton (i.e. loan files).”

Now, it’s easy to be shocked by what Clayton found when it did its due diligence: it turns out that in many of these loan pools, the loans simply didn’t conform to the lenders’ own underwriting guidelines. But whether you or I find such things shocking is actually pretty much beside the point. The point is that the banks found the findings shocking—or at least they pretended to when they then turned around to the originator and demanded a discount on the price they were paying for the loan pool.

So that’s why the Clayton findings count as material information, right? They were directly responsible for lowering the price of the loan pool.

Right. The banks were willing to pay X for the loan pool based on the electronic file data supplied by the originators, but after having Clayton go in and test that electronic data against the original loan files, the banks were only willing to pay some sum less than X.

But isn’t Clayton’s research just like anybody else’s research—just an opinion about publicly-available information? Investment banks doing a secondary offering of shares don’t need to tell investors about other banks’ buy or sell ratings on those shares, even if those ratings affect the share price.

No, this is different. Because the loan files that Clayton had access to were not publicly available. And in any case, Clayton wasn’t being paid for its opinion. It was being paid to diligently go through a subset of the loan pool, one loan at a time, and check each loan against various underwriting standards. Clayton’s opinion didn’t matter to anyone. What mattered was the new information that Clayton dug up.

What do you expect, that the banks would put all the loan-level information into the bond prospectus? That would make it thousands of pages long! Didn’t John Hintze report back in May that, in the words of his headline, “The Loan Data Was There for All to See”? Anybody could have done the Clayton analysis, and in fact people like John Paulson and Michael Burry did do the Clayton analysis of loan-level data. They didn’t like what they saw, they shorted the bonds, and they made lots of money. So long as the information was public, there can’t be anything wrong here.

Yes, the investment banks, as well as companies like CoreLogic, did make some loan-level data available to investors. But that data, presented in easily-digestible spreadsheet form, was essentially the same as the electronic data that the banks were using to price the loan pool before they sent in Clayton. That data alone, it turns out, if looked at in the right way by someone like Paulson or Burry, was all you needed to short the bonds and make lots of money. But the original loan files which Clayton checked that data against? They were not publicly available, and for good reason: they included things like the borrowers’ names, salaries, social security numbers, and other private information.

Clayton’s report, then, was non-public information: it was the product of looking at private loan files, not semi-public spreadsheets. No one else—not Paulson, not Burry—could do what Clayton was doing, and so Clayton was adding a valuable layer of information to what was publicly known.

Now, it’s true that even when investors knew that Clayton had done these tests, they evinced precious little interest in seeing the results. All they really cared about was the credit rating. And even the ratings agencies weren’t interested in seeing Clayton’s results, which is scandalous in and of itself. But the securities laws don’t say that banks can withhold material non-public information if the investors don’t seem to care about it.

But even if the banks didn’t pass on Clayton’s reports to investors, couldn’t investors have got those reports from Clayton directly? If Clayton was running these tests for the banks, and if it was offering the same information to the ratings agencies, couldn’t anybody have simply bought the reports from Clayton? And if so, that hardly makes the information nonpublic, does it?

That’s a stretch. Investors weren’t even told that Clayton had done due diligence on the loan pool; they were barely informed that any kind of due diligence had been done at all. And even if they did somehow find out about the existence of the Clayton report, it’s not obvious that Clayton would or could have sold it to them. After all, it had been commissioned by the bank, which presumably therefore had control over who could see it and who could not.

And in any case, the investors in the Abacus deal ended up winning a lot of money from Goldman Sachs, even though they had exactly the same information about the contents of Abacus as John Paulson and Goldman Sachs did. What I’m talking about here looks as though it’s clearly worse than Abacus: the investors didn’t have the same information as Clayton and the investment banks had. The banks could have passed that information on, but they chose instead to keep it to themselves. Why? The obvious reason is that they feared that if they made the Clayton reports public, the investors might not pay as much for their bonds, or the ratings agencies might not give them the all-important triple-A rating.

Still, it seems that you’re seeking to punish banks for doing more work on these bonds than they needed to do. The banks were not required to do due diligence on these loan pools. If they didn’t want investors to know the results of the due diligence, they could have simply not done any due diligence at all, and then, according to you, there would have been no scandal. Instead, they spent their own money on hiring the likes of Clayton to double-check everything — and for that you want to punish them?

Yes. It’s great that the banks did the double-checking. But the whole point of double-checking is to make sure that nothing unexpected is lurking in the loan pool. When something unexpected did turn out to be lurking in the loan pool, the banks had an obligation to pass that information on to their buy-side customers. The banks put themselves in a situation where they found themselves in possession of material non-public information. That they did so voluntarily is beside the point; they still had an obligation to disclose it.

Material non-public information, eh? So you’re saying that banks violated Rule 10b5-1 of the Exchange Act?

Yes, but that’s not all. There’s also Section 17 of the Securities Act, which says that banks can’t withhold material facts when they offer securities to the public. And of course Section 15E(s)(4)(A) of the Exchange Act was specifically written to close any possible loophole and ensure that banks will never attempt such behavior again.

So we can expect a bunch of lawsuits around this issue?

From investors, certainly. And possibly from regulators and/or prosecutors too. They’ve been looking at the issue for a long time and so far haven’t taken any action, but times change. The public—left and right—is furious at the banks for seemingly being the sole sector of the economy to emerged unscathed from the crisis they caused. Regulators and prosecutors ultimately represent the public. And a lot of the detail surrounding Clayton’s reports only emerged quite recently, with the FCIC hearings in Sacramento on September 23. It’s possible there won’t be any prosecutions. But it’s equally possible that there will be.

COMMENT

@ Danny Black What I got from the article that said all the info that was available to anyone came in a series of data streams, each needing a particular reader to get the actual data, and then another program to amalgamate the data and make sense of it to get what you needed from the data. An investor would be looking at the loan status as much s possible.

If you read back to that discussion, you will find a person who replied saying that he worked for an investment firm and that is what they did all day, go through such data to make sense of it, so that means you might be wrong that they showed no interest. It seems people were looking at the dat in a different way.

In other words, the ratings company had a program that showed which servicers were acting quickly on foreclosure and rated them high and that was their primary reasonin gfor stamping AAA, so anyone who knew this and did the same now had inside info.

Did those who were going short also have that data because then they truly did have insider information, being the rating agencies provided info on how they rated so the bonds could be rated AAA when included the portfolios.

Did those who made the portfolios and shorted use the rating agents false rating system, their inside information on loan status at the source (being their subsidiaries were lenders) and possibly enhanced computers programs to garner that data from MERS as well, that made them go short on their own product they were selling?

It now seems the data in Mers was deeply flawed, being no one checked/cared to ensure the data going into it was correct or procedures followed. Who knew that? If the MERS data had no county name or mortgage number on it, who securitized it? Who was supposed to check to ensure that the data was entered, being the dispensation for electronic data had that stipulation?

There are so many loopholes that bank deregulation allowed to be opened again, this has been going on for 10 years. The Government, the courts, Wallstreet, the banks, the rating agencies and servicers all knew this was going on and used and abused it and perpetuated the problem in the name of greed until they were caught. Isn’t it time they paid the piper and that it stopped? Once it fizzles in the press, people go on with their business, as do banks. But that is the LAST thing you want to happen!

If the courts do revisit foreclosures I would think that 10 years of litigation might be a fair estimate. More then procedural fluff and document glitches will be holding up the court system if property laws are maintained.

Because the banks are bleeding and there is no way a second stimulus will be in the offing, it would seem the banks and the Government and perhaps even the courts will be happy to consider it a tempest in a teapot and will be looking for ways to make it fizzle.
BUT fraudulent documents are a valid reason to revisit a foreclosure and no court should turn them down, as there has been proven fraud at the origination, securitization and foreclosure levels.

It seems few Americans (unless they are being foreclosed upon) and few banks are that interested in the law or justice. I see a huge increase in Credit Union start ups in the future. Again I will praise our regulations on the banking system here in Canada in keeping the banks (fairly) honest.

Back to the topic at hand (I am sorry Felix, for interrupting your topic, but there is some melding in the issues involved) The SEC is reviewing the same data that was used by Clayton and hopefully we will know soon if Felix and others here are correct and what happened here was fraud. (unless it will again be swept under the carpet with fines and a few hands slapped)

Posted by hsvkitty | Report as abusive
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