Crocodilian

Has President Obama's Mortgage Modification Plan Failed?

@BradJohnson
" If the government really wants to put a clamp on home foreclosures, they should make it more painful for borrowers when they foreclose. In my state, all that can happen when someone defaults is the bank takes the house. "
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Very few people are aware of the enormous state-to-state variation in rules surrounding foreclosures. Most of the states with the worst problem (but not all) are "non-recourse" states, meaning that the lender can't look to the borrower for anything more than the title to the property. California, Arizona & Florida are all non-recourse states and comprise a big part of the problem

The only full recourse state that ranks high in foreclosures is Nevada.

These rules are state rules-- whether or not it would be a good thing to create national rules, particularly when mortgages are sold into national markets which don't necessarily appropriately distinguish between the various states, is an open question.

Move Over Fed, California's Now Printing Its Own Money

The "Registered Warrants" are not currency. People may choose to treat them in lieu of currency, as I may choose to accept, say a deed as payment on a debt-- but no one has any obligation to do so.

That's the distinction that makes "money".

There's a term of art that should be added to this discussion "Legal tender". "Legal tender" means an instrument which by law CANNOT be refused as payment of a debt.

Banks and others might _choose_ to accept the registered warrants, but they have no obligation to-- and hence they are not "legal tender" or "money".

Revisiting the MBS Debate (Which We Should Already Be Past)

There's a lot of interesting argument here. Let's take the "initial premise fail" -- the question of whether the large MBS positions at ML etc, indicate that they were "eating their own dog food".

My impression is that author is correct in discounting that assertion. My interpretation of the large MBS inventories carried by the firms was that it was seen as part of the "MBS manufacturing process"-- that is, you buy up mortgages, slice them into tranches and mark them up, and sell them on, and get paid your bonuses.

My guess is that the banks got stuck with "slower-moving" inventory as the price of putting these deals together. That is, they didn't carry the inventory because they _wanted_ it, they carried it because these were the parts that they were having a hard time selling.

The End of the Credit Crisis

[correction] in the above post I'm referring to oil in early 2008, not gold as is stated.

The End of the Credit Crisis

@WillL
On Mar 02 07:09 AM WillL wrote:

> While I enjoyed the article and was grateful for a unique perspective,
> I agree with the tenuous sentiment on a "skyrocket"

> As far as I can tell, there is almost zero chance that shorting traders
> will drive a recovery in banking stock prices, though write ups would
> certainly improve the incredibly negative sentiment on bank stocks
> and could be the beginning of a longer term recovery.

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Just go back and look at the price action of oil in 2008-- we've seen enormous leverage and excesses in speculation come crashing down not six months ago, with the shorts getting bombed in the process.

Some portion of the financials' collapse has been genuine longs selling, but its only a portion. There's been mountains of speculative selling.

The commodities longs of early 2008 were, in many cases, the financials shorts of early 2009. Notice the similarity in the _pace_ of the movement in stocks. GE's stock graph over the last four months is, inverted, Gold's chart from April to July 2008.

So I'm going to say that the author has something here, and he's picked up something clever and logical. If you were a market-savvy economic team (which the Summers-Rubin crowd is), and you could put in place policies which have no cash cost, but which refloat the balance sheet, and the lending -- all using market appetites, you'd do that, right?

And the next sweet piece of the plan is that as this happens, you start nailing the shorts . . . who are not patient holders of anything. They stampede into a position to drive it down, and they stampede out. Take a look at when oil broke-- the speculative shorts came undone just as fast as they were put on.

No guarantees here, but kudos to author Trias for pointing out something quite ingenious.

Rethinking Subsidized Finance

"But in aggregate, has banking ever been a successful industry for capital providers?"

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It would depend on the unit of analysis. Banking is to the economy as airlines are to aircraft construction and aviation services-- a highly levered and disastrously volatile business, which supports much better businesses and useful services which enhance the public good. You want the former to run as well as it can, accepting that its a lousy business, so that the latter can function.

Think about the names of early American banks: "Farmers", "Merchants", "Corn" . . . these all reflect the very real businesses that require a bank to operate. Until recently, financial institutions tended to evolve out of other services to meet business demand (eg early paper currency were "goldsmith's certificates" -- paper reflecting gold on deposit at a goldsmith).

What has occurred with "financial innovation" is that bankers cooked up products no one actually asked for, and then marketed them to earn fees. The story of AIG Financial Products and JP Morgan -- who cooked up the idea of using AIG's balance sheet to earn a little extra by selling CDS -- is an egregious example.

We need banking, but we need banking that serves the business needs of their customers -- not their speculative appetites,

AND . . . this is a big "AND"

does NOT introduce systemic risk by writing an "implicit put" to the taxpayer (eg "you don't have to bail us out if this blows up, so long as you don't mind cratering the system")

AIG Bailout: Initial Cynicism Justified Now More than Ever

On Feb 25 02:24 PM endoftheworld wrote:

> This government can pride itself on the greatest ever re-distribution
> of wealth - from those that win and earn to those that risk &
> lose. This exemplifies the curious foundation for American society
> - capitalism when things are good, socialism when things are bad.
> And people wonder why we're hypocrites.

You might ask the question: Who is the Government bailing out when it "bails out AIG"?

They are clearly NOT bailing out AIG itself -- AIG shareholders will end up with zero.

The people who are being bailed out are AIG's counterparties on the derivatives contracts they wrote. So if, say, John Paulson bought a CDO on some toxic MBS security, underwritten by AIG-- and that MBS has collapsed . . . its payday for John Paulson.

Would be really interesting to know who who took the other side of the derivatives book that AIG wrote: they're getting 100 cents on the dollar of what AIG wrote, paid for by you and me.

AIG Bailout: Initial Cynicism Justified Now More than Ever

On Feb 25 11:58 AM FORMERclient wrote:
> Sell it
> NOW before it becomes worthless!!!!!

It actually _is_ worthless. I'm not sure why the stock trades for anything (44 cents, giving a market cap of $1 billion) , but the government explicitly owns %80, and are going to have to come up with tens of billions to keep it from going bankrupt.

There is no one who will buy the company-- Liddy has been trying to sell bits of the company since the fall, most recently, there were no takers for their Asian insurance unit-- see the WSJ story
" Any Takers for AIG's Asian Arm?
Auction of a Crown Jewel Generates Scant Interest; More Fed Headaches" (WSJ: 2/25/09)

AIG Bailout: Initial Cynicism Justified Now More than Ever

On Feb 25 11:35 AM ecliptix543 wrote:

> Absolutely brilliant. Why create a bad bank when we already have
> the largest and worst one in world history at our doorstep?!?!?<br/&g...

My point was that the AIG derivative book, and the AIG Insurance company don't belong together. AIG Insurance company is profitable, can have a future, and its operationally, legally, and functionally distinct from the derivatives book (AIG Financial Products)

The "Bad Bank" model, as it applies to AIG, means separating the derivatives from the insurance business.

Something very much like this will happen if, as rumored, they file for bankruptcy.

AIG Bailout: Initial Cynicism Justified Now More than Ever

We need a new term for AIG at this point. "Bailout" implies that there's something that might float, if you "bailed" enough water. This doesn't apply to AIG.

AIG appears to be an (historically) attractive insurance business, to which a ruinously (criminally?) bad set of bets were attached.

The "bad bet book" dwarfs the insurance company, to the extent that the insurance company doesn't really matter; of all the cases for a "bad bank" solution, AIG is among the most compelling.

U.S. Debt Watch: Paths to Repudiation

Its worth observing that this article has lots of words, lots of opinions, but no numbers. Not a single one. That's a remarkable achievement in an essay about a subject for which lots of numbers are available, and where no meaningful discussion is held without reference to data, ever.

When I read an essay about macroeconomic issues, I expect to find relevant _data_. "House of cards" isn't data. Its an assertion. Might be true, might not be. There's no data to support it, so how would anyone know?

In a basic macroeconomics class, an answer without reference to any facts might, charitably, get you a D.

"Show your work".

Cuomo Pitting Thain vs. Lewis: One of Them Will be in Big (Legal) Trouble

This is an interesting story. Ken Lewis tried to finesse his testimony in front of Congress. If I recall it correctly, he'd said

""My ... involvement was very limited," Lewis said. "[Merrill] had a separate board, separate compensation committee and we had no authority to tell them what to do; just urge them what to do. So we did urge."

The lawyerly question is "Is that enough to get him on perjury?" Normally, I'd say "no". But a B of A failure will be so massive, and the costs so huge, and the hatred so great . . . they might get him

Time to Buy Bank Stocks

On Feb 12 05:03 PM klarsolo wrote:

> Wouldn't preferred stock ETFs be a smarter bet than common stocks?
> At least you'd be ranked pari passu with the government TARP money
> and don't have to worry about additional dilution.

You got it. There are all kinds of preferreds, converts, and bonds which are ranked ahead of common, and which sport attractive yields. Common is probably the worst way to play a dodgy bank. Bank of America debt has to be paid, B of A, preferred stock still pays its dividends. . . and the common? Worth anything? Who knows . . .

Mortgage 'Cram Downs' Quickest Route to CDO, MBS Price Discovery

"I would even take it one step further. The government should create a temporary mortgage court that would rapidly arbitrate all delinquent mortgages based on standardized filings. Parties unsatisfied with the judge’s ruling would then be able to appeal in a regular bankruptcy proceeding."
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Again and again, I read suggestions about how complex issues should be resolved "rapidly". There can be nothing "rapid" about understanding the circumstances of a failed mortgage, and there's rarely enough money on the table to pay the lawyers, accountants, and appraisers who would be required to testify before such a Court.

A standardized filing _sounds_ good, but it can't reflect the non-standardized circumstances of the mortgage. Thinking about how we got into this mess, it started with "standardized" mortgages (eg FNMA and FRE conforming mortgages) and inadequate investigation by mortgage brokers . . . "just put numbers down in the boxes and send it on"

BofA's Merrill Purchase: Good for America, Bad for Them

On Feb 06 12:19 AM sr9web wrote:

> Don't blame this on Bush you numbnuts!

I thought people were blaming Lewis, not Bush. I certainly don't blame Bush for the fact that Lewis made a terrible call.

>
> Shorts are beating BAC into the ground with the plan of covering
> low, then going the other direction.

Huh? BAC has collapsed because they bought a sinkhole for far too much money. Compare BofA's purchase of Merrill with PNC's purchase of Nat City (occurred at the same time). PNC payed zero, and Ken Lewis, negotiating genius, paid $29 a share.

That's what's cratered the stock.

>
> If there's anything to blame here, it's that Lewis underestimated
> the market reaction to this deal.

No, its that Lewis failed to do due diligence on the Merril disaster area. Its not "market reaction" -- the market is simply reacting to the disastrous fundamentals of Merrill. Losing $15 billion is a big thing, actually.


>
> BAC is being sufficiently backstopped by the feds, it will not fail
> - but will instead, at some point, recover.

Um, and what will the common be worth?

>
> In the meantime, smart traders are making gains at the expense of
> other's emotional panic.

So far, the only gains have been on the short side. . . no one's lost a dime betting against Ken Lewis.

>
> Rather than gripe, why don't you look to trade this volatility?

This isn't "volatility" -- its a fundamental disaster in the company's finances. They've taken an extremely successful retail banking concept, and at the worst possible time, they've transformed themselves into Citibank, with their Merrill acquisition.

Leave aside Merrill's disastrous finances, their fleeing executives and just consider: In a perfect world, how exactly does a retail bank run out of Charlotte manage overpaid brokers and investment bankers who're part of a Wall Street culture?