My review of Michael Perino’s new book about Ferdinand Pecora, The Hellhound of Wall Street, is up now chez B&N. I liked the book a lot, and learned a lot from it, and ultimately came away saddened that history can’t and won’t repeat itself this time round. In 1933, Pecora was the hero of the financial crisis: the man who brought the banksters to book. Today, there’s no such hero. And while Dodd-Frank and Basel III are all well and good, they’re not remotely as far-reaching and revolutionary as the Securities Act, and the Exchange Act, and the creation of entities like the SEC and the FDIC.
Update: Thanks to Economics of Contempt. This turns out not to be the cut-and-dried breaking of the law that it looks like. Because it turns out that Section 15E(s)(4)(A) of the Exchange Act is very new: it was only inserted into the Act by Dodd-Frank (page 1,376, if you’re following along at home). So it wasn’t in force when these bonds were issued. You couldn’t do this kind of thing any more — it would be illegal. But Section 15E(s)(4)(A) isn’t enforceable retroactively.
I’ve been getting a lot of good feedback about my post yesterday on the way in which just about every major investment bank in the world might have huge legal risk surrounding the way that they built their mortgage bonds. The stock market in general might be relatively sanguine about the mortgage mess, but bank stocks are falling, and I suspect that the worst is yet to come. Certainly the tail risk to the banking industry as a whole is as high as it’s been since TARP was first unveiled.
Cullen Roche today revisits his advice from a year ago, which was published in New York Magazine, on how to buy toxic assets. He says that he “received a pretty substantial backlash from the article”, which is true: I wrote about it under the headline “Awful investing advice of the day, distressed-mortgages edition”. But now he’s defending himself:
Foreign aid is a much cheaper way of conducting a country’s foreign policy than the military — and in many cases it can be much more effective, too. The Obama administration is very keen on this: a recent roundtable discussion on its new Global Development Policy, for instance, featured not only secretary of state Hillary Clinton but defense secretary Bob Gates and treasury secretary Tim Geithner as well.
You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.