Wednesday, September 28, 2011

Will we ever see the day when certain Bank trust departments sue their TBTF bank parents?

Thousands, if not millions of times banks serve as corporate trustee for private family trusts, many times IRS 501-c-3's non-profits, foundations and endowments and local charities including schools, hospitals, colleges, and museums are beneficiaries of these trusts in ADDITION to family members and future unborn generations.

Given the trillions of wealth lost to the fraud wraught on financial markets by TBTF banks shouldn't these trustees act as trustees should and "pursue any and all claims"or is that asking too much? Or is it a little to close to home base?

Morgan Stanley's CEO John Mack may have been the one quoted but he was surely not alone when he said in 2003 the "Agency model is dead".

As we entered the 2000's Wall St's bonus machine was broken, almost irreparably as competition ate away year after year at their meal tickets - commissions, M&A (Mergers and aquisition advisory fees) and underwriting new issues were confronted with unrelenting powerful, only going one way (down, faster and faster) - price competition.

Commissions were taking a hit from the likes of Schwab, Etrade, and Fidelity. From another angle the advent of ECN's (online stock trading auctions, dark pools of "liquidity") were forcing commissions levied by the NYSE to go down, and regulators ordered penny - based pricing on stocks, so bid ask spreads narrowed; all acted to force commission rates down.

Hordes of new competitors hungry for a piece of M&A and stock and bond underwriting forced fees down and or fee - sharing there as well; at the end of the day bonus pools were evaporating.

It was clear and recognizable that new competitors, many aided by available faster, better cheaper technology were forcing Wall St's profits south - so what did the TBTF banks scheme up to do to restore their bonus checks?

Leverage an American institution - the "home mortgage" as its implicit and explicit dual leverage made for maximum bonus; and in the wake of 9/11 it was "patriotic"...
A scheme to approve any and all mortgage apps, turn them into Mortgage backed securities, sell some of them to investors like mutual funds, insurance companies and pension plans both here and overseas; but begin to horde trillions of them in a second set of books literally OFF balance sheet (and in some cases off shore).

The beauty of this scheme was that the "market" and price competition would not be involved. Yes, let me repeat "the market and price competition would NOT be involved" traders at the same TBTF banks could use their own computer models to assign value to the increasing MBS stored in the likes of "200 stories tall mortgage warehouses". It was a rare event indeed for any of these off balance sheet holdings to see the light of any true, arms-length market - based trade.

Even the Fed chairman was unaware...
Federal Reserve Chairman Ben Bernanke gave a speech to the NY Economic Club, in October 2007 he educated the assuredly august, learned and rapt audience that in the "old days" banks used to make a mortgage loan and hold it ON their books until it was paid off by the borrower, departing from that practice he said that today (2007) banks packaged mortgages into mortgage backed securities and sold them OFF TO (third party, arm's length) investors. [emphasis added]

Excerpt: At one time, most mortgages were originated by depository institutions and held on their balance sheets. Today, however, mortgages are often bundled together into mortgage-backed securities or structured credit products, rated by credit rating agencies, and then sold to investors.

However, as far as I can tell, there is no report, that anyone in that room raised their hand to correct the Fed Chairman. Why?

Because the same Fed chairman, a year later, would learn that his statement was incorrect. TBTF banks were NOT selling MBS off to investors; millions of mortgages were approved for one purpose, to create more MBS, while TBTF were cranking trillions of MBS out, they were NOT selling them off to investors, they were hiding them off balance sheet, misleading every mortgage borrower, every investor to replace what had been lost to fair, disclosed, free market - based price competition (some would call that capitalism) - THEIR MASSIVE BONUS CHECKS. The FDIC uses the word "concealed" here.

Excerpt: Further, many of the complex structures that concealed additional leverage and exposure, such as structured investment vehicles and other off-balance-sheet conduits have been largely consigned to the history books. Cash and liquid securities represent larger percentages of the balance sheet, while reliance on short term debt has declined.

In comparison, today Amazon released it's new tablet called "Fire" priced at $199 to compete with others most importantly Apple's more expensive iPad. See we benefit from lower and lower prices on new technology why? Because it's out there people use it, compare it, blog about it - in a word any and all information from manufacturers to users is "transparent". In the year 2011 I remain incredulous (but not surprised) at the opposite by TBTF banks and their paid foot soldier representatives lobbyists, media and think tanks. Applying their business model's opacity, I wonder if they would be comfortable paying thousands for a Commodore II pc and for how much memory?

Estimates of the amount of TBTF Bank support direct and indirect provided by the Fed and or US Treasury is about $2o Trillion including the recent QE programs. MBS issuance largely by the TBTF banks from 2001 to 2008 is $17 Trillion; is there any connection?

The damage to the economy for years was a false growth from cash out refinancings, borrowers were defrauded when they applied for loans and were universally approved for any and all types of and amounts of mortgages. Borrowers did NOT approve their own loans, ultimately in effective control (and pricing) of the MBS markets; TBTF banks approved EVERY loan.

We later know, only from limited emails that mortgages and MBS deals composed of these very same mortgages were called shit, crap and cows by any number of TBTF-produced and or related information; one even said it's 100% ALL DEALER RISK, NO MTM. Translated it means that MBS held by TBTF banks was "only TBTF bank risk, no mark to market (only marked to traders' internal computer models.)"

Perhaps when bank trust departments wake up from the train wreck, home movie they've been watching they will recognize a claim and pursue it as fiduciaries should; of course they can always resign as they ALL serve voluntarily and with pay (or is that the reason)?

Monday, September 26, 2011

Thank God for the Department of Transportation

Americans love cars, perhaps we are forced to, after all most of us drive every day. There have been many impressive improvements over the years. When it comes to the car we choose I believe comfort remains at or near the top of most everyone’s list. The part on the vehicle that makes a vehicle comfortable is (it’s time for the interactive part to begin so fill in the blank) ____________ the shock absorber. Imagine the opposite, how would you feel driving a car that was not comfortable, or worse a car without shock absorbers, or missing even one shock absorber? You’d be pretty miserable wouldn’t you?

Since Americans remain fascinated by their cars I hope it makes it a little easier to understand the housing bubble. How it occurred and why it is still so bad, over seven years from the peak of home ownership in 2004, five years after the peak in prices in 2006 and over three years after the Wall St bailouts in 2008 and the movie that Mr Bernanke saw the first time plays on today in his latest trifecta wager on QE.

The housing bubble was like a car that lost its shock absorbers,
Mortgage finance shock absorbers decline from 28% to 3%

Since the beginning of time, make that mortgage finance in the US in the 1930’s, borrowers nearly always had to put 20% down to qualify for a loan, after getting approved by the lender’s underwriting department. Lenders intermediated about 12 times over and above their total equity. That implies that lenders had about 8% equity stake in each mortgage loan. Adding up borrower’s down payment, known in bank underwriting parlance, as the initial loss absorbing cushion of 20% plus lender’s second loss absorbing cushion of 8% gives us a total of 28% loss absorbing cushion against any decline in the price of the home.

Total loss absorbing cushion shrank to 3% or less
When the music started playing in the 2000’s…certain lenders in arrangements with Too Big to Fail (TBTF) Banks let, I repeat let borrowers get loans with no down payment, so the first loss absorbing cushion was totally wiped out by, make that approved by, the lenders. Too big to fail banks issued almost $17 Trillion of MBS from 2001 to 2008. The TBTF banks having both nationwide and global sales teams, known as registered representatives, or as Goldman Sachs calls them “professionals” typically sold 100% of every deal off to third party investors, institutions like mutual funds, insurance companies and pension plans. However, TBTF banks started to amass trillions worth of these MBS for themselves, many concealed in a 2nd set of books. As a result of the hiding, although it was legal, nearly wiped out the 2nd loss absorbing cushion bringing it down from 8% as it had been for decades, to 3% or less.

Shock absorbers on a car are carefully engineered
Most of us drive on flat roads to and from work each day; however the engineers design the shock absorber to withstand pot holes or the occasional off road adventure. Shock absorbers play crucial safety functions when we put on the brakes or when we are going up and down hills.

When the housing market began to climb uphill, shock absorbers disappeared
As the housing market took off, rather than taking a breather it didn’t slow down, prices climbed faster and faster as home prices went up more than anyone had ever seen before, causing more and more first time home buyers to jump into the action. Many of these new home buyers were inexperienced, however, instead of requiring 20% down payments they were approved for loans with no money down, and worse, many lenders’ underwriting personnel approved every loan application; as in what’s become known as IBGYBG (I’ll be gone, you’ll be gone) passing problems whether big or small onto the next party.

As the car with no shocks, driven by new and inexperienced drivers approached the peak of the mountain, the lack of shock absorbers made for more than a bumpy ride…
The loss absorbing cushion of 20% down payments and banks 8% equity cushion fell by the wayside only after being approved by TBTF banks. Mortgage borrowers all across the country and institutional investors alike plummeted down the other side of the mountain with no shock absorbers, then the braking system became overwhelmed and it too gave out; as they are designed to work with the shock absorbers.

Banks’ Safety and Soundness regulations were blinded by the size of the bonus checks…
It’s clear that none of the TBTF banks’ prop traders or CEOs raised a hand and said it was too much or questioned the size of their bonus checks at the end of every year. No TBTF Banks' boards whether past or present, no regulator or official at the SEC, FDIC, OCC or OTS; no one on the FOMC, at the Federal Reserve Board appreciated that a car stripped of its shock absorbers makes for a bumpy, dangerous and when travelling up and back down a curvy mountain road often deadly experience. I wonder if any of the TBTF Bank CEO’s or the financial experts; Mr Bernanke, Mr Geithner, Mr Paulson, Mr Summers or Mr Rubin drive cars without shock absorbers? Thank God for them that the Department of Transportation is not part of the SEC, Department of Treasury and or the Federal Reserve Board and sees to it that automobiles are required to have shock absorbers; nothing fancy just basic safety equipment.

Thursday, September 22, 2011

Fed's QE3 "the Twist" still ignoring TBTF Banks 2008's multi Trillion $ difference between Legal title and Equitable title to Assets; aka LEVERAGE

The Fed's 2011 QE3 called "Twist" (is a re-incarnation of the 1960's Fed Twist so named because Chubby Checker's song was the hit of the day) is yet another failed and failing attempt by Mr Bernanke to rejuvenate and re-liquify TBTF bank's assets back to life. Like previous "programs" failures is like the Fed pushing on the proverbial string.

As we wrote in 2007:
"Cash infusions by operators, sponsors, market rescues, liquidity by the Federal Reserve bank through discount rate cuts, extended rollover provisions, open market operations band aid liquidity only; Fed action does not cure the credit (or credit worthiness) and or valuation issues surrounding these securities" never has and never will.

QE3 is yet another attempt to game, excuse me fix what's wrong on Wall St in the hopes it shows up in increased final demand; it's remotely possible in textbooks but unlikely.

Final demand, writ large, has been replaced by necessary versus nice for some time now; except for the lucky beneficiaries of Mr Bernanke's previous rescue attempts.

Not for nothing, but the Fed is somewhat conflicted in this endeavor as well - because it (QE3) is also supporting valuations for the $1Trillion of MBS it holds (renting) on its balance sheet too, acquired from the TBTF banks for 100 cents CASH on the dollar in 2008/9.

Although a persistent one, when will Mr Bernanke awake from his intellectual slumber and finally recognize that markets need to clear - sometimes at and in this case, distasteful prices. But there's no denying that the market now or will eventually know best; and then it likely won't be a string...