The True Causes Of The Debacle
A weekend topic on housing finance. The New York Post, “Jamie Dimon got Bear Stearns for a bargain price — and he says he’s still paying for it. Seven years after the financial crisis, the JPMorgan Chase boss now says he totally regrets buying the teetering Wall Street firm — at the urging of the government — for a steep discount. Roughly 70 percent of JPMorgan’s $19 billion of mortgage-related legal bills stems from the acquisition of Bear Stearns and another faltering firm, Washington Mutual, during the financial crisis, according to Dimon.”
“Dimon also said that another financial crisis was inevitable and floated his ideas for how it would play out. ‘The trigger to the next crisis will not be the same as the trigger to the last one — but there will be another crisis,’ he wrote. The next crisis would bring even more ‘volatile markets,’ he said, in part because stricter regulations would make banks less likely to lend and inject liquidity in times of trouble.”
“He said recent activity in the Treasury markets is a ‘warning shot across the bow.’ The government securities moved an alarming 40 basis points on Oct. 15 — ‘an event that is supposed to happen only once in every 3 billion years or so,’ he said.”
From Reason. “Eight years after the nation’s financial system began its rapid slide into calamity, we all know why. Greedy Wall Street operators, aided by the repeal of the 1933 Glass-Steagall Act and only feebly regulated by the Bush administration, ran wild in the pursuit of greater profits for the rich. Eventually many big banks failed and were bailed out by taxpayers. But in 2010, President Barack Obama and the Democratic Congress took bold action to create powerful new government regulatory machinery. Still, much more regulation is needed to forestall future damage.”
“This narrative of the economic debacle is heavily promoted in the mainstream media and by regulators. But in Hidden in Plain Sight, financial scholar Peter Wallison argues that the story is laughably false. Worse yet, he says, the true causes of the debacle have not been dealt with, and there is every reason to believe that the same thing can happen all over again.”
“During the early Reagan years he was general counsel of the Treasury Department, where he learned a lot about markets and regulation. Happily he was not a participant in any part of the 1997-2009 financial disaster that is the subject of this book. He was, however, a member of the largely misguided Financial Crisis Inquiry Commission of 2009-2010, and he dissented from that body’s final report.”
“Wallison sharply attacks the ‘false narrative’ of the financial crisis offered by activists, politicians, and regulators with a direct interest in sweeping new regulation. We would have done much better, he writes, ‘if the narrative about the financial crisis had properly located the problems in the reduction of mortgage underwriting standards brought on by the government’s housing policies and implemented largely through the affordable housing goals.’”
“Continuing belief in this false narrative, evidenced by the Dodd-Frank Act, the Financial Crisis Inquiry Commission’s myopic 2010 report, and proposed legislation in the most recent Congress, makes it likely that there will be another financial crisis in the future.”
From Reuters. “Reg AB II was one of many rules Congress ordered up in the 2010 Dodd-Frank Wall Street Reform Act to fill regulatory holes in the market for asset-backed securities. An unprecedented expansion of this multitrillion-dollar market, in which banks repackage mortgages and other assets into complex securities and sell them to investors, lay at the heart of the financial crisis.”
“But as the evolution of Reg AB II suggests, banks and their advocates have managed to preserve many of the industry’s pre-crisis practices by focusing lobbying efforts on obscure corners of the regulatory world, far from the glare of congressional debate or public scrutiny. Many of these agencies are staffed by appointees from the industry they regulate and return to it when their stints are over.”
“‘The banks have done an end run around all the disclosure efforts,’ said Thomas Adams, a securitization lawyer at Paykin Krieg & Adams LLP.”
“Thanks to the private-market loophole in the SEC’s Reg AB II, banks are selling a greater share of securitized debt than ever on private markets – largely off the radar of regulators and watchdogs. Residential mortgage-backed securities tendered on the private market jumped to 78 percent of all new offerings last year from 46 percent in 2013 and just 10 percent in 2007, according to data obtained by Thomson Reuters. The privately sold share for commercial mortgage-backed securities jumped to 83 percent from 37 percent in 2013.”
“With their access to off-balance-sheet entities largely preserved, the banks continue to hold vast sums of securitized loans offshore and off their books. Together, JPMorgan Chase & Co, Bank of America Corp, Citigroup, Wells Fargo & Co, Goldman Sachs Group Inc and Morgan Stanley hold nearly $3.3 trillion of securitized loans in off-balance-sheet entities.”
“It isn’t just the banks. As hedge funds and private equity funds have ramped up high-risk lending in recent years, their use of off-balance-sheet vehicles has ballooned. For example, KKR & Co LP’s reported exposure to loss from off-balance-sheet entities has risen tenfold since 2010.”
“Off-balance-sheet vehicles free banks to make more loans and build assets without having to add to capital reserves. In theory, if one of these vehicles fails because the underlying assets sour – as, for example, when large numbers of homeowners default on their mortgages – the bank does not have to bail it out. In practice, they often do – to preserve their reputations in a lucrative market, and because specific asset-backed securities often carry implicit or explicit guarantees that leave banks legally liable to make investors whole.”
“On August 27 last year, 52 months after the original draft proposal of Reg AB II was floated, the SEC adopted the final version. The 683-page rule detailed a raft of new disclosure requirements for asset-backed securities – but only for those registered with the SEC for general offer to the public. For the same securities sold on the private market, disclosure requirements remained scant. In the end, 2014 saw a bigger share than ever of asset-backed securities being sold on private markets, with little disclosure or regulatory oversight.”
