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  • Moral Culpability. 0 comments
    Apr 18, 2010 9:19 PM | about stocks: WMIH

    During the Permanent Subcommittee of Investigations (PSI) hearings that occurred on April 13th and April 16th of 2010, Senator Levin doggishly stayed on his desired topic: Washington Mutual as a case study of the failures of banking sub-prime lending.  Peppered throughout the panel members testimonies were two common themes; it’s wrong to package up deals and pass the risk, the cost to others down the line and that Washington Mutual, even with two bank runs was still well capitalized when placed into receivership.

    I will certainly concede the first subject matter, it is absolutely wrong to package up debt, while making a profit and passing the risk, the true cost of the debt, onto investors down the line.  The persons or companies that engage in such practices should be held accountable and those practices should be stopped. On the same premise of admission, the same promise of self-examination - - it is equally true that the FDIC (Federal Deposit Insurance Corporation) should not be allowed to package up a deal, rewarding itself by protecting its own fund while passing the risk, the true cost of the debt, onto investors down the line. 

    The hearings added that both regulatory agencies failed to supervise WaMu’s activities and it’s easy to extrapolate that the FDIC was under more pressure than normal due to fee cutting in prior years.  The FDIC was in fear that WaMu would cost them, but that fear was internal not external, fear based on moral culpability;  

    The idea that we (our representatives) are attacking (and rightfully so) this concept that passing the buck to save your own skin or to make a profit is wrong, threaded in this notion is the righteous idea that if you have an opportunity or even an mandate to regulate these types of plays you should do so and with heavy hand, and that there is no room for “too big to fail”. 

    All noble concepts but look what is really happening; we’re passing massive legislation that benefits us in the here and now while it burdens future generations, the reform bill that’s about the pass is so watered down from its original vision that it is the opposite of true regulatory reform (to use Levin’s comment – where is the bite), and of course we all agree that “too big to fail” is true and requires attention, legislation even, yet our government is growing at at an alarming rate. 

    What they (the politicians) seem to be missing is that these problems are systemic but not only to the ‘systems’ being investigated by single committees but systemic to the entire US financial system – starting with legislation, congress, banks, etc.  Point in fact:  We don’t need a regulatory division to tell GS that it needs a tier ratio of 6.77 or what have you – that could and should be handled by legislation, by law, not some regulatory mandate that can be changed at a moment’s notice, I personally don’t think we need a regulatory agencies at all – sound and just laws of the land with stiff punishment would suffice through enforcement agencies.

    My point of course is that while we are troubled and admonishing the banks for securitizing the bad debt with good debt, making a profit, then letting the incurrence of default effect other parties, we are/have done no better if we let the FDIC do the exact same thing, except it didn’t make a profit, it protected itself from a loss of funds but the underlying doctrine of self preservation exists and caused harm.

    In addition, there was much conjecture of a Turf War between the Office of Thrift Supervision (OTS) and the FDIC.  To this, I would say absolutely there was and is a Turf War but to look at it in a restricted view of FDIC vs. OTS really misses the apex causes of the Turf War.  The problems between the FDIC and OTS, especially when Washington Mutual was involved, were only symptomatic of the Turf War that exists between New York Banks and “Other” banks.  While Mr. Dimon doesn’t believe there is a club;

    If you're allowed (JPM for example) to be in constant contact with policy makers at all hours of the day, calling Paulson on the phone, having meetings and others are not - then you're part of the "club".

    If you're allowed be in constant contact with the FDIC about banks (other than your own) and these contacts are via phone calls, daily and weekend emails and presentations at meetings while others are not - then you're part of the "club".

    If you're allowed to communicate to congressmen, effectively lobbying for the purchase/capture of a rival instituion and it doesn't raise concern for antitrust violations - then you're part of the "club".

    Going into the next set of PSI hearings we know that all ‘large’ banks were in the sub-prime mortgage game, we know that only ONE agency is accused of seizing a well capitalized bank.  It’s my understanding that the Stated Income, NINA loans and the like are not truly marketable anymore and that reform legislation is almost ready for a vote - so it appears that we’ve started to rectify the banks but what of the FDIC’s actions, its moral culpability?

    Stocks: WMIH
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