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Mortgage Fraud: Greenspan Was Right, So Was Jesus.

In his “book” The Age of Turbulence which was written before the full horror of the financial catastrophe was even imagined, Alan Greenspan devoted just four pages to the subject of financial regulation.
 
His big point was that many regulations, often hastily conceived, need to be trimmed back and simplified over time. And that complexity in regulation that grows out of multiple agencies, and multiple initiatives is not a good idea.
 
He argued (in his book) that “less is more”, although he was at pains to remark that even though that was his philosophy, most of the time he was at the Fed, his position was “neutral” and he took care not to promote that idea over the “consensus” (i.e. Congress), rather he took a back-seat in the debate.
 
But he did say:
An area in which more rather than less government involvement is needed, in my judgement, is the rooting out of fraud. It is the bane of any market system. Fraud is a destroyer of the market process itself because market participants need to rely on the veracity of other market participants.
The news these days is about two instances of fraud in the mortgage market.
The first, masterfully (if somewhat emotionally) explained by Jeff Nielson (https://seekingalpha.com/article/229048-mortgage-title-fraud-a-national-catastrophe); details how “sloppy paperwork” might have cast doubt on the title of any home in USA whose mortgage was at some point in its history put into a loan pool. The outcome of that is hard to predict, but few would argue that the risks of a partial or even total freezing up of transactions in the already battered US housing market might not be a possible outcome.
So now “market participants” cannot trust the “veracity” of other market participants (is there a clear title or not?), that was arguably as a result of some sort of fraud, and the danger is that the “market process itself”, may be damaged, or destroyed.
 
The second piece of news, which I saw in Felix Salmon’s review (https://seekingalpha.com/article/229999-the-enormous-mortgage-bond-scandal), details how investment banks knowingly held-back or cleverly brushed-over information on the quality of loans in the pools they securitized, from the “buy-side”.  
 
Whether they kept that information away from the rating agencies, is not clear; probably not (the agencies might have been stupid (the foundation of their defence against litigation), but they were probably not moronically stupid).
The point there is that the rating agencies told investors (the buy-side) to “do their own due diligence”, knowing full-well that they did not have access to enough information to do that properly.
 
That by-the way is a good point for the prosecution, for anyone going after the rating agencies; it’s hard to prove malice of forethought against the defence “well I’m not very smart and I’m sorry but it was an accident”, but to put about the story that the “buy-side” could do their own due diligence, when any “expert in the field” would have had to know, that was impossible-because the information was not there, could easily be construed by a competent lawyer, as fraud.
 
The ramifications of that small little point are huge, much bigger that the potential downside of uncertainty over title of homes. That’s because there is currently about $15 trillion (at face) of “toxic” securitized debt, stuck in the gullet of America’s financial system (and about $4 trillion of that stuff stuck in the gullet of Europe’s financial system).
 
And the point is that no one knows how to value it properly, that’s why Hank Paulson did an about-face on TARP, and why PPIP died a death.
 
That’s because the information you need to value it (line by line data on every loan in the pool (not hard to get or process if you have a computer), is simply not made available to the “buy-side”.
 
And guess what? The only people who are buying that garbage these days, are the gamblers playing their hunches, plus of course the Federal Reserve which bought $1.25 trillion in QE1 (and one has the awful suspicion that they paid “face”), and is threatening to buy another $500 billion to $1 trillion in QE2.
 
In the old days, when times were good, the value of something that you didn’t understand was easy to figure out. It was simply the price you could sell it for, “to someone dumber than you”. What that says about the role of the Federal Reserve is that their mandate has grown from being the “lender of last resort”, to the “sucker of last resort”.
 
I confess I haven’t even attempted to properly read any of the massive volumes of regulation that are being bolted-onto the rotting piles of past regulation, as if a thick-enough layer can perhaps stop the stench.
 
But on the subject if “less is more” in regulation, one doesn’t have to look any further than the “Golden Rule” that is found as a foundation of every religion.
 
Here it is expressed by Jesus according to the book of Mathew (7:12).
Therefore all things whatsoever ye would that men should do to you, do ye even so to them: for this is the law and the prophets.
 
Mess with God’s Laws, at your peril.


Disclosure: "No Positions"