Felix Salmon

Foreclosure Fraud Price Tag: $20 Billion — HuffPo

“Don’t expect to make more money for taking risk, just know you have to take risk to make more money” — Falkenblog

Wherein Alex Dalmady (of Allen Stanford fame) manages to get out of Sino-Forest bonds at 72 cents on the dollar — Dalmady

When Gay Talese Met Frank Sinatra’s ‘Hairpiece Lady’ — Atlantic Wire

David Carr on Bill Keller: “I don’t care what he says about Twitter. I think he’s dead wrong.” — Baristanet

Astonishing photos of what $2.7 million will buy you in the London real-estate market — FindaProperty

Martin Wolf’s column last week was not an easy read. I did my best to turn it into English, only to run into an unexpected source of pushback: not only was I wrong, Martin Wolf was wrong as well.

Enter Olaf Storbeck, the International Economics Correspondent with Handelsblatt, Germany’s business daily. He has an explanation of why Martin and I are wrong, which approaches in reading difficulty Martin’s original column.

I spoke to Olaf today, and he sent me a bunch of links in German, but since I’m having enough difficulty getting my head around these issues in English, I’m not even going to attempt to read them. (But for the record, start here, and then try here and here; Mark Schieritz here, here, and here; Thomas Strobel here and here; and finally this.)

In English, there’s also this press release from the Bundesbank, which says very clearly that “TARGET2 balances” — the things that Martin and I were worrying about — “do not pose specific risks to individual central banks”.

And if all that isn’t enough to be getting on with, Olaf has many more links within his own post.

Am I convinced that Martin was wrong? No — because a lot of this argument hinges on the idea that there’s a bright line between fiscal policy and monetary policy, and my feeling is that the distinction tends to get very blurry indeed in a crisis. If a central bank lends unlimited amounts of money into the banking system to prevent it from collapse, or a finance ministry enters into a fiscal TARP-style operation with the same goal in mind, are they so very different?

But I’ll be the first to admit that I’m no expert on any of this, and that when I blogged Martin’s piece I didn’t know how controversial his position was, and that many if not most central bankers would consider him simply factually incorrect on many counts. I thought his piece was excellent as analysis; as argument, I’m not fully persuaded.

So if there’s a central-banking wonk out there who fancies adjudicating this dispute, I’m happy to put it up for arbitration. Wessel? Ip? Is Martin on to something here, or not?

Mick Weinstein has the sales brochure from the firm selling the domain name ETF.com for $9.5 million. It’s pretty thin stuff: apparently the domain got 108,140 visitors in 2010 doing very little of anything, and the sellers manage to value those visitors at $5.28 apiece, which makes the price seem almost reasonable. After all, a price of 18X trailing earnings is quite low, if there’s a lot of room for traffic and earnings growth, which there is. On the other hand, there’s no way that a random visitor to ETF.com is worth $5.28: the brochure assumes that every visitor to the site ends up clicking on one of the Google ads, which is ridiculous. If the current owners were being honest, they’d simply publish the amount of money that they’re currently making from ETF.com; I’m sure it’s less than half a million dollars a year.*

That said, we’re only at the beginning of the boom in ETFs, and I can easily see some big player in the space — BlackRock, perhaps — turning it into a glossy home for an asset class which already has over $1 trillion in assets under management. Let’s say the ETF.com domain gives you 0.5% more in the way of ETF flows than you would have without it, and let’s conservatively put the present value of future ETF inflows at $2 trillion. Then the domain would bring in an extra $10 billion of AUM; even at a razor-thin profit margin of 2 basis points, that’s $2 million a year in income. Which makes the $9.5 million price tag on ETF.com seem almost reasonable. And given that Fund.com sold for $10 million in 2008, there’s a clear precedent for deals at these eye-popping levels. Even in the ETF world, managing other people’s money can be extremely lucrative, given the enormous sums involved.

*Update: Weinstein leaves an important comment, explaining what the brochure means when they say the traffic “is valued at” a certain amount. The number isn’t the amount of money you’d receive by trying to monetize the traffic; instead, it’s the amount of money you’d need to buy that traffic, if you were using AdWords to drive traffic to your ETF site.

Weinstein also says that the SEC restricts the degree to which asset managers can run useful and interesting websites, which implies that some third party might be better off putting this deal together, and then doing a separate deal with a fund manager.

The right-hand column of page A3 of the NYT — the first thing you see when you turn the front page — has historically been home to slightly silly luxury-goods ads from high-end New York retailers. Today is no exception, with Tiffany at the top and Brooks Brothers in the middle. But there’s clearly money in e-retailing again, because the bottom slot has been bought by 1stdibs, which uses the space to advertise this “rare umbrella stand in the form of a collie dog by Piero Fornasetti”, yours for $4,600.

I couldn’t help but think of the famous $15,000 umbrella stand that Tyco CEO Dennis Kozlowski had in his Fifth Avenue apartment. Has there been massive price deflation in such things? As it happens, I had a meeting at Artnet this morning, which has a comprehensive database of auction results for such things, and they couldn’t find a single dog-shaped umbrella stand coming up for auction ever.

But then I found a description of the Kozlowski umbrella stand, and it’s definitely not a Fornasetti:

The stand is a sculpted terrier on its hind legs with a brass ring through its paws to hold umbrellas.

So there’s no chance that the umbrella stand on 1stdibs was formerly owned by a convicted felon. But we do now know that we’re about 31% of the way towards the point at which a universal touchstone of corporate greed and profligacy becomes a purchase so mainstream that it’s advertised in the Monday New York Times. Is this a sign of another bubble? And if so, is the bubble in dog-shaped umbrella stands, in online retailers, or in New York Times readers with thousands of dollars to drop on umbrella stands? Much as I’d be tickled by the first, I suspect the answer is some combination of the last two.

Jim Surowiecki has a good column on Elizabeth Warren this week, explaining that over the long term she and the CFPB, like most financial regulators, are likely to be good, not bad, for those they regulate.

Over the past century or so, new regulatory initiatives have inevitably been greeted with predictions of doom from the very businesses they eventually helped. Meatpackers hated the Meat Inspection Act of 1906, but it rescued the industry from the aftereffects of the publication of “The Jungle.” Wall Street said that the creation of the S.E.C. would demolish stock trading, but the commission helped make the U.S. the world’s most liquid and trusted stock market. And bankers thought that the F.D.I.C. would sabotage their industry, but it transformed it by effectively ending bank runs. History suggests that business doesn’t always know what’s good for it. And, at a time when Americans profoundly distrust the financial industry, a Warren-led C.F.P.B. could turn out to be the friend that the banks never knew they needed.

It hasn’t happened yet, but anybody going to a fintech conference will tell you there’s a very real chance that at some point in the next few years, the banking and consumer-finance industries really will be disintermediated and disrupted by new, smart, and transparent online competitors. The CFPB is set up to address the real problems of today — but in doing so it might well help the banks get onto a much firmer footing, competitively speaking, over the long term.

The problem with Warren, of course, is much more political than it is substantive: she stands for What Obama Wants, and therefore the Republicans will close ranks against her. The same thing, tragically, has happened with Peter Diamond, who has now formally withdrawn his nomination from the bully pulpit of the NYT op-ed page:

In April 2010, President Obama nominated me to be one of the seven governors of the Fed. He renominated me in September, and again in January, after Senate Republicans blocked a floor vote on my confirmation. When the Senate Banking Committee took up my nomination in July and again in November, three Republican senators voted for me each time. But the third time around, the Republicans on the committee voted in lockstep against my appointment, making it extremely unlikely that the opposition to a full Senate vote can be overcome. It is time for me to withdraw.

I blame the 2012 election — everything that any politician does for the next 17 months is going to be focused on the all-important question of who can win what on November 6, 2012, and how. Just check out the response to the news from Richard Shelby, Diamond’s fiercest opponent in the Senate:

It would be my hope that the President will not seek to pack the Fed with those who will use the institution to finance his profligate spending and agenda.”

This makes no sense at all, from an economics point of view. The budget is set by Treasury and Congress, not by the Fed. Joe Weisenthal thinks that Shelby is signalling here that he’s looking for a hawk rather than a dove, but that’s not really the case: Obama could probably renominate Volcker himself and not get him through.

Meanwhile, the job of setting US monetary policy has now become so political that Tyler Cowen actually welcomes Diamond’s withdrawal, saying that “what is needed is someone who can help push some fairly simple and already well-understood ideas through Congress,” and that an important criterion for any Fed-board nominee is that he or she be able to serve as the Fed’s ambassador to Ron Paul.

I disagree: Ron Paul is never going to be reasoned with, when it comes to the Fed. And for the next 17 months, all Republicans are going to act like Ron Paul, because doing so is in their political best interest.

This puts the White House into something of a bind. The right thing to do from a policy perspective is to get the likes of Warren and Diamond into important positions in the pantheon of bank regulation. Politically, however, that’s extremely difficult, if not impossible. So what’s the alternative? Is it even possible, at this point, for the Obama administration to nominate someone who the Republicans won’t automatically oppose on the grounds that he or she is an Obama nominee? And if it’s not possible, does the whole stalemate just become a shouting match? I’m not sure I can cope with a year and half of unproductive debate — but that seems much more likely, right now, than anybody actually achieving something substantive.

Homeowner forecloses on BofA — WFMY

Missing from the NYT’s Story Behind Behind the Story e-mail newsletter about Bin Laden: any mention of Brian Stelter or Twitter — Nieman Lab

Hipster overload: David Chang teams up with McSweeney’s to publish Lucky Peach magazine — McSweeney’s

David Sinsky has some extremely smart Groupon analysis over at the Yipit blog, using numbers from the company’s S-1 to throw into question just how good Groupon is at making ever-increasing amounts of money once it has entered a market.

That is, after all, the explicit rationale behind Groupon’s ever-increasing losses:

We spend a lot of money acquiring new subscribers because we can measure the return and believe in the long-term value of the marketplace we’re creating. In the past, we’ve made investments in growth that turned a healthy forecasted quarterly profit into a sizable loss. When we see opportunities to invest in long-term growth, expect that we will pursue them regardless of certain short-term consequences.

Groupon breaks out granular details for four cities in its S-1 — Chicago, its home; Boston, its second-oldest US market; Berlin; and London. The first is unique in many ways, while the last two were acquired when Groupon bought CityDeal, so Sinsky concentrates on Boston. And finds this:

These charts show quarterly revenue per subscriber, on the left — that’s people getting Groupon’s emails — and per customer, on the right, which is people who have actually bought coupons. Both are going down, which is worrisome.

The reason to worry about these trends is that as many people including Joshua Gans have said, the daily-deal space has very low barriers to entry and is highly competitive. As such, if Groupon has a “moat” — a comparative advantage over its competitors which is very difficult to overcome — it’s its sheer size.

Size confers many advantages, not least targeting. As Kaiser Fung notes, the more new customers and fewer existing customers that a Groupon reaches, the more profitable it’s likely to be for the merchant concerned. The best Groupons target a whole new audience for the merchant in question: the S-1 gives the example of a cruise line which was doing very well with its murder-mystery cruises but much less well with its romantic-dinner cruises. By offering a Groupon valid only for the romantic-dinner cruises, the company managed to broaden its customer base without losing revenues from its existing customers.

Benjamin Edelman says that for a Groupon to be highly profitable, it should be targeted at people who are “particularly unfamiliar with a participating merchant’s services.” And it stands to reason that Groupon, with the largest subscriber base and the most sophisticated targeting technology, should be better able to target Groupons at relatively narrow classes of people than any of its subscribers.

At the same time, because the best Groupons are aimed at people who are likely to become regular customers of the merchant in question and who are well-disposed towards trying it out, sophisticated targeting should increase Groupon’s conversion rate substantially. Rather than just send the same deal out to everybody in a city, Groupon should be able to show you only those offers you’re most likely to want, and thereby increase its conversion rate.

Sinsky says that doesn’t seem to have happened in practice: “As the average purchases per customer continues to decline,” he writes, “so will overall conversion rates on personalized deals.” The trend isn’t good: Groupon’s Boston customers are less engaged, and less profitable — even as Groupon’s costs for acquiring new customers continue to rise.

That said, Sinsky doesn’t think that what we’re seeing here is a failure of Groupon’s targeting per se. Instead, we’re seeing the effects of competition. Which is where Yipit’s own data comes in:

A year ago, according to Yipit data, there were 9 daily deal services in Boston offering 15 active deals. Today, Yipit Boston shows 23 separate services offering daily deals including new successful entrants like TravelZoo and Yelp. The 23 services are responsible for creating 91 active daily deals. Worse for Groupon, there’s no sign of this ending with Google and Facebook on the horizon. Plus, successful entrants like TravelZoo are still only running two deals a week.

Realistically, what we’re seeing is improvements in Groupon’s targeting technology failing to compensate for the rise in competition (which also increases Groupon’s customer-acquisition costs.) Anecdotally, targeting technology still has a long way to go: for one thing, Groupon still isn’t remotely local enough in cities where people spend most of their money within a mile or so of where they live, and where they often get offers for merchants on the other side of town. But it’s not even clear how Groupon is going to get the kind of highly granular data about its subscribers’ income, and profession, and exact location, and other things which would help it target offers. That’s where the likes of Facebook and Foursquare have a clear advantage.

So while Groupon is still the biggest of the deal sites, the jury’s still out on the degree to which its size is going to prove an unassailable advantage over the long term. In principle, a massive subscriber base could be a huge competitive advantage. But in practice, this could be one area where Groupon finds it hard to execute.

If you want to move a stock with a research report, you can hardly hope to do better than Muddy Waters did with its 39-page report claiming that Sino-Forest Corp is a Ponzi. The report came out on Thursday afternoon; after falling to $14.46 and then being suspended on the Toronto Stock Exchange, it reopened Friday at just $5.

Muddy Waters, of course, reckons Sino-Forest is still a massive short at this levels, with the stock being worthless. But the market clearly thinks highly of the firm’s report, all the same.

I’ve spent a good chunk of this evening reading the report, or trying to — it’s not easy going. Muddy Waters has obviously done a great deal of research into Sino-Forest, and seems to have found some extremely suspicious activity. But there’s large chunks of the report I have a lot of difficulty understanding, and if I was a market participant trying to understand what was going on here, I’d certainly welcome some journalistic help in explaining what exactly Muddy Waters is saying and how credible they are.

In the immediate aftermath of the report’s release, on Thursday afternoon, Alphaville put out a detailed 1,500-word blog post which was further honed and updated over at FT Tilt. The post did a good job of laying out the allegations, and even dug up a juicy new nugget: one of Sino-Forest’s board members is Simon Murray, the chairman of Glencore.

Today, however, the follow-up has been extremely disappointing. Sure, there are lots of basic market reports, saying that the report came out and the stock went down, and giving the formal reaction of the company. Those are necessary. And there’s been a good amount of gloating that the biggest loser here appears to be John Paulson. That’s predictable. But what I haven’t seen is any further insight into the allegations themselves.

Alphaville, again, has been ahead of the curve, giving granular details of Sino-Forest’s response. And some of that response even makes a certain amount of sense: Sino-Forest buys and sells forests in China, so I can see how, in theory, it could sell an entire standing forest without having to cut down or log a single tree. (One section of the Muddy Waters report goes into a lot of detail about how Sino-Forest couldn’t make nearly as much money as it claimed in Yunnan province, since it was physically impossible for that many trees to be felled and transported.)

But is it plausible that Sino-Forest sold a huge forest in Yunnan for $230 million? And if so, who bought it? More generally, how much credibility does the company have, and how compelling is Muddy Waters’s report? Anybody trying to answer such questions is on their own: the press hasn’t helped them at all.

John Hempton, with four short words (“I am in awe”), at least manages to make a clear judgment on whether he thinks Muddy Waters is right that Sino-Forest is a Ponzi. (He does, but he doesn’t go into any detail.) Meanwhile, Reuters has found at least one person who thinks that it isn’t:

Dundee Capital Markets analyst Richard Kelertas put Sino-Forest “under review” pending more information, but said he did not believe the Muddy Water charges.

“To the best of our knowledge we believe that the allegations cited in the short-seller’s ‘research report’ are false and without merit,” he said, noting his conclusions were based on several years of conversations with management.

I’d love to see a lot more detail here. If Kelertas thinks that the Muddy Waters allegations are false, he must have some kind of rebuttal to them — something which at the very least could help frame the debate or raise questions for Muddy Waters to answer. On the Toronto Stock Exchange today, volume in Sino-Forest exceeded $200 million, which means that there’s real money out there buying the stock at these levels.

What’s certain is that in the wake of all this, either Sino-Forest or Muddy Waters is going to lose all credibility: one of them is a multi-million-dollar fraud. Muddy Waters is short Sino-Forest, of course. If Sino-Forest turns out to be a slightly dodgy Chinese forestry company and not a Ponzi scheme, you can be sure that Muddy Waters has been covering its short all day and has banked a huge amount of money by putting out extremely misleading material. On the other hand, if Muddy Waters is right, then Sino-Forest is toast.

Because both companies are talking their book here, there’s a clear need for impartial adjudication, even if it’s just a quick-and-dirty first take on whether the allegations seem plausible. Reuters alone had five reporters, one writer, and one editor working on its report — between them they must have formulated some kind of idea of what’s going on here and whether it makes sense to take Muddy Waters at its word. Because while the market has spoken, it’s not always easy to understand exactly what it’s saying, or whether it’s making any sense. If market reporting is to serve any use at all, it’s to help provide that translation service.

There’s no need to look beyond the headlines this month: both the jobs report and the unemployment numbers for May are telling the same grim story. A pathetic 54,000 new jobs were created last month — that’s significantly below the pace needed just to keep up with population growth — and unemployment went up, to a gruesome 9.1%.

Statistically speaking, both of these numbers are flat. But flat is, obviously, not remotely good enough in an economy where all stimulus — both fiscal and monetary — is coming to an end and where the single most important indicator of whether we’re successfully recovering from the Great Recession is in the employment figures.

If you do want to go beyond the headlines, things look if anything even worse: the average duration of unemployment, for instance, just hit another new record at 39.7 weeks; a full 44% of all unemployed people have now been jobless for more than six months. And on top of that, it turns out that the government’s statisticians were overly optimistic for the past couple of months: the payrolls numbers for March and April were revised downwards by 39,000 jobs.

We can’t even kid ourselves that these numbers are tornado-related: the Labor Department explicitly says that it has found “no clear impact of the disasters on the national employment and unemployment data for May.”

The only tiny possible chink of light here is that these numbers are so bad that they might persuade bickering politicians on Capitol Hill to stop playing stupid games with the debt ceiling and start concentrating on important matters. Oh, who am I kidding: we’re in election season now. Nothing is going to happen, in terms of remotely important legislation, until 2013, for risk that Obama might be able to take credit for it.

Which means that we’re back in the hands of Ben Bernanke and the Federal Reserve Board. As QE2 comes to an end, that’s not a comforting thought.

Nate Silver on the relationship between unemployment & elections — NYT

The term “SecondMarket” is nowhere to be found in Groupon’s S-1. Why won’t they tell us how much it has traded for? — Edgar

I love the disclaimer at the bottom of this Blackstone blog post, especially since it doesn’t actually link to anything — Blackstone

It’s a big day in the world of regulatory investigations into sophisticated financial institutions: first we learned that the SEC is investigating SAC Capital to see whether it engaged in insider trading, and then the Manhattan district attorney general let it be known that he’s sending subpoenas out to Goldman Sachs in the wake of the Levin report.

The markets aren’t clear on how they’re expected to react to these kind of events. On the one hand, if you were running a major financial institution, discovering that you were being investigated by the SEC or any kind of attorney general would be likely to make you very cross. Think a tax audit, only so much worse — with the possibility not only of civil prosecution at the end of it, but even of criminal prosecution.

On the other hand, we’re living in a post-Dodd-Frank world now, where regulators can, should, and will be much more aggressive about policing the companies they’re regulating. Given that we live in a political democracy, it only stands to reason that the juiciest targets of such investigations are going to be the SACs and Goldmans of this world — the places which make unconscionable amounts of money doing things that nobody really understands.

It’s going to take a while for everybody to adjust to this new world — investors have no way of knowing what proportion of these investigations are likely to end in prosecutions or large settlements, while the financial companies themselves have no idea, really, how to behave in a world of regulation-by-investigation.

Over the medium term, we’re going to enter a dynamic equilibrium, where there’s a more or less constant number of investigations on the go at any given time, and a much lower number of prosecutions. But right now no one knows where either of those numbers are going to level out, and so there’s going to be a jittery adjustment process on the way to the new status quo. And part of that adjustment process, of course, is going to take the form of House Republicans trying to defang as many regulatory provisions of Dodd-Frank as they can. They should beware: if they succeed, that might just result in more investigations from the likes of Cyrus Vance — people over whom Congress has essentially zero control.

Many congratulations to Jill Abramson, the new executive editor of the NYT. And congratulations are in order too for Arthur Sulzberger, for orchestrating this necessary handover in a very smooth and professional manner.

Bill Keller had one main job when he became executive editor in 2003: to restore morale to a newsroom which had been hit hard by the Jayson Blair scandal and to eradicate the antagonism engendered by his predecessor, Howell Raines. Keller did that job very well, and now it’s time for someone with a different skillset.

While Keller’s job, in 2003, was largely inward-facing, Abramson’s job is going, perforce, to be much more outward-facing — an area where Keller has been weak. Rather than pick fights with Arianna Huffington or the Twittersphere more generally (spats which, in hindsight, look like the actions of a man losing the burdens of high executive office), Abramson will be expected to raise the reputation of the NYT among its most vocal and influential readers.

One way to do that will be to build more transparency and webby DNA into the newsroom as a whole. Yesterday, for instance, a lot of people — not just me — were were asking questions about the incredibly bizarre sourcing of the NYT’s story on Fabrice Tourre and his defense. A laptop found in the garbage, complete with emails which “continued streaming into the device”? The questions were obvious, and when asked those questions, the NYT retreated into an unhelpful shell, going into no helpful detail at all, and indeed confusing matters even further by saying that the laptop was not the source of any of the emails in the story after all. At one point, I was half convinced that the laptop wasn’t even Tourre’s, but had belonged instead to one of his lawyers.

In the end, the mystery had to get cleared up by the NYT’s named source, since the NYT itself clearly wasn’t going to explain anything. And the question of why the NYT even mentioned the source and the laptop, given that they didn’t quote any of the emails they received, remains wide open.

All of which is symptomatic of a newsroom and a culture which is reflexively opaque when it comes to sourcing and primary documents. I don’t expect the NYT to suddenly switch to the way I wrote about the NYT yesterday — out in the open, updating as new information emerged, incorporating and linking to the best reporting done not only in-house but by everybody else as well. That works some of the time, especially on blogs, but not so much for a newspaper of record where anything in the printed version, especially, has to be nailed down before it’s published.

On the other hand, more engagement and transparency about how the NYT does what it does can only be a good thing. When your public statements are lawyered-up, cryptic, and defensive, people are going to trust what you say much less than if you’re open and accessible.

I’m hopeful that, in Abramson, Sulzberger has found the right person to help the NYT evolve into a 21st-Century news organization. She’s good at encouraging those members of the newsroom who intuitively understand and use the power of social media. And she also has the respect of more old-school reporters who are mistrustful of new media realities and who need effective leadership on the part of the executive editor before they change the way they work.

The good news is that Abramson has the winds of inevitability behind her. Keller spent far too much time tacking against those winds and sailing into unnecessarily choppy waters as a result. If Abramson just opens up the NYT’s social sails and steers with a light hand on the tiller, the Grey Lady is more than capable of taking its rightful place as queen of the new journalistic seas.

It’s not an easy time to be a central banker. In both the eurozone and the US, unemployment is proving stubbornly immune to monetary policy. And on the regulatory side of things, the global nature of the banking system means that you need to get all major countries on the same page. Which is proving all but impossible, as the latest little spat between EU and US regulators proves.

The FT has all the details, starting with Peter Spiegel’s story yesterday that Michel Barnier, the European commissioner in charge of financial markets, had sent a strongly-worded letter to Tim Geithner, complaining that the US has historically been very slow on adopting Basel standards, and that its attempts to regulate bankers’ pay are toothless and ineffectual. All of this is true.

Today, the FT follows up with the US response, which concentrates on the fact that the US is ahead of Europe on matters such as central clearing and derivatives trading, and hinting that Europe is more likely to backslide on the Basel III timetable than America is. These, too, are reasonable points. Treasury also pushes back on the matter of banker pay, saying it has no real interest in prescribing how much people get paid, just how much risk they’re incentivized to take. That one makes less sense.

This ministerial-level Twitter fight doesn’t, ultimately, make anybody look good. One of the big successes of the Basel III process was that while there were serious disagreements along the way, the governments and central banks concerned were pretty good at keeping the discussions productive and confidential. But just as with Dodd-Frank, it seems, the real difficulty is going to be in implementation, and that’s where there’s a big risk of everything becoming very political.

In the short term, the biggest winners in any fight between regulatory authorities are always going to be the banks, who will happily arbitrage differing regional regulatory regimes and take advantage of their parents’ squabbles to stay out drinking all night. In the long term, however, even the banks would ultimately prefer a single global regulatory regime with clear ground rules and a level playing field — something which lets them concentrate on their main job, of banking, rather than expending enormous effort on lobbying and loopholes.

But with large fractures now emerging even within Europe, and with attention being focused on averting the meltdown of the entire euro project, the chances of a global regulatory consensus seem as far away as ever. Which means that although Basel III is a great idea in theory, the jury’s still out on whether it’s ever going to be consistently implemented in practice.

SAC Capital Said to Face Insider Trading Inquiry — NYT

Nancy Cohen has a spokesman! He seems to exonerate the NYT from charges of hacking Fab Tourre’s email (See Update 6) — Reuters

Bill Poole has signed on with the debt-limit crazies — NYT

John Carney doesn’t go far enough in his attack on what he calls the Home Ownership Mob. Whenever you see the Mortgage Bankers Association getting into bed with the Center for Responsible Lending, you know something funny is amiss, and in this case it’s their joint opposition to the bit of Dodd-Frank which says that if banks securitize mortgages, they have to keep a modest 5% slice on their own balance sheet.

So far so sensible, right? What can there possibly be to object to there? Well, it turns out that there’s an exemption to that rule. If the mortgages being securitized count as QRMs — that is, “qualified residential mortgages” — then the banks don’t need to keep 5% for themselves, and can go ahead and securitize the whole thing.

The Home Ownership Mob has taken QRM as a rallying cry, and has decided that far from being the exception to the rule, QRM is the new benchmark which all Americans should aspire to. They have a brochure, and a detailed presentation, showing that most mortgages will fail to qualify for the QRM exemption — which of course is exactly the point. But then they go much further: MBA president David Stevens says that failing to throw many more mortgages into the QRM bucket will “withhold credit from tens of thousands of qualified borrowers”.

But the fact is that Stevens hasn’t the foggiest notion whether or not that’s true. The rhetoric of the Home Ownership Mob is entirely based on the unexamined premise that if banks can sell off 100% of their loans, rather than just 95%, then the loan rates will be cheaper.

But there’s no good reason to believe that to be the case. Will banks be able to sell that last 5% of the loan for more than they can book it for on their own balance sheet? I can’t see why they would — and if they can’t, then QRM loans wouldn’t be any cheaper than any other loans. More to the point, investors, burned during the financial crisis by the originate-to-distribute business model, are going to require a risk premium on any securitized paper where the underwriting bank doesn’t retain at least 5%. For that reason, too, it seems reasonable to believe that QRM loans would if anything be more expensive than other loans, rather than cheaper.

And most importantly, we’re talking about 5% of the loan here. Let’s say that the Home Ownership Mob is right, and that banks will require a premium of say 15bp to hold loans on their own balance sheet rather than selling them off in the market. If the market rate is 4.9%, the bank is going to require 5.05% to keep its own bit of the loan in-house.

Now say you’re buying a typical $250,000 home, with 10% down, and you’re getting a standard 30-year fixed-rate mortgage. If the whole thing was sold off into the market, then the monthly payments on a $225,000 mortgage at 4.9% are $1,194.14. On the other hand, suppose that just 95% of the mortgage was sold off into the market at 4.9%, and the other 5% was retained in-house at 5.05%. In that case, you end up paying a whopping 4.9075% instead, overall. And your monthly mortgage payments soar to $1,195.16 — a whole dollar more! That’s more than twelve dollars a year!

That buck a month, of course, is money well spent: it reduces the amount of fraud and tail risk in the system, and forces banks to be honest about their underwriting. Meanwhile, the Home Ownership Mob is trying to return us all to the bad old days when banks felt no need to actually own any part of the mortgages they were underwriting.

It’s becoming very obvious that the QRM, far from being an attempt to push banks to improve their underwriting standards, is in fact going to act as a way for the banking lobby — helped by its friends at the Center for Responsible Lending — to try to get around the rules requiring them to hold on to one dollar of every twenty that they lend out. Let’s hope they fail.