the fashionable thing to say was that if banks had only held their loans rather than securitizing them, they would have controlled credit risk better because they had skin in the game
I still believe this for a few reasons.
The essential problem IMO is that the securitization model helped obscure risk. It spread risk so far out that it was hard to see, hard to model. Thus, the "smart guys" thought they'd reduced risk, when all they really did was spread it around. everyone thought that they'd eliminated their own personal risk.
Thus, the banks lent money, thinking they offloaded it to the GSE's and the securitizers. The securitizers thought they offloaded risk by selling it to investors. The investors thought they offloaded risk by getting "insurance" and the insurers thought they offloaded risk becuase they hedged it, and then the hedgers thought they offloaded risk to the off-balance sheet vehicles of the bank.
wait a second, that's a circle. oops.
when a bank holds the loan on its own books the accounting and concept of the debt and risk is more concrete and quantifiable. it would not have "cured" our problem perhaps. but it would have markedly changed what we see today.
in some ways, it's the same philosophy behind paying in cash vs paying in credit cards. For many people, spending is more "real" when they have to pull cash out of their wallet. many studies document they spend more on plastic.
part of the problem that has risen is that you get a few fools, and then everybody chases those fools in the pursuit of profits.
So you had Countrywide being the biggest fool around making the dumbest loans imaginable. Gaining market share. Not to be outdone, Indymac soon followed.
so now the more "conservative" banks (like the Regionals) and also Fannie/Freddie for that matter are losing market share. So they "have" to reduce lending standards to improve market share. the goal is to be the "last ship afloat" then you can right the ship. but in this case, all the ships are capsized, and few are right-able.
it's a failure of our free-market system. The only way to prevent it is through sensible legislation/regulation. GASP! yep, I said it. Regulation. (of course there are many arguments about the lack of SENSIBLE regulation).
MBA's purchase index was unchanged in the Aug. 8 week at a very weak 315.2 that indicates very thin interest in home loans. Interest in refinancing is also very thin with the refinance index down 4.2 percent to 1,074.6. Stubbornly high mortgage rates are not helping to stimulate demand with 30-year fixed loans up 16 basis points in the week at 6.57 percent.
Tanta, let's separate out the commercial banks from the investment banks, since this blog entry discussing FDIC interventions.
Your quotation from the NYT article suggests that most commercial banks don't have much on their books by way of toxic mortgage garbage (because they didn't originate nearly as many this time, and because of those they did originate, most were sold to other parties).
And CR has noted that the commercial building boom this time has been much more muted than the 1980s or 1990s building boom.
That suggests to me that while we can expect more banking failures than in previous years, IndyMac, the entire purpose of which was to create a depositor base to finance toxic mortgage lending, was sui generis and will not at all be typical of commercial banks.
Greed birthed this mess. If you could make a deal, you got your commission. Same is true for the rating agencies, investment banks, hedgers, etc. These people might get fired now, but made out like bandits and ain't giving it back.
Why has the system failed? Maybe Mukasey explained this yesterday;-
Not every wrong, or even every violation of the law, is a crime, That attitude was bound to cause a serious hurt.
Well, greed is bringing China out of 3rd world poverty.
As I see it it's kind of like fire and electricity -- it's not so much an issue of getting rid of it because it's dangerous, but managing it so it doesn't kill everybody.
We don't seem to be doing a good job of the latter.
One way to look at this whole mess is in terms of bank deposits.
Once upon a time, Smallville Bank made loans using Smallville Bank deposits. The amount of money available for lending was inherently limited by the money in the community.
Well, it turns out that this model had problems. When hard economic times hit Smallville, both deposits and the borrowers' ability to pay took a hit. If Smallville made lumber and the lumber industry failed, so did Smallville Bank.
In the 1980's, Smallville Bank started selling their mortgages to Largeville Bank, and Largeville Bank sold their mortgages to Smallville Bank. The whipsaw effect of hard economic times in any one region was diluted by holding mortgages from another region.
However, the money available to loan in Smallville was still limited by the size of deposits at Smallville. Even though Smallville Bank held Largeville Bank's mortgages, the $ amount of mortgages it held was still limited by deposits.
With securitization of subprime loans and access to a global supply of money, all of the deposits in Smallville bank were available for loans that would be kept on Smallville Bank's (or another bank's) books.
You got it right, all these "mortage" types (guys, kids, gals) working out of their homes earning BIG comish just filling out some computer screens....what a joke....they all need to have most of it taken back and sent to the county jail; of course its all been spent....
Alan Greenspan recommends a new type of regulator
Mr. Greenspan has a point that is well taken, probably 80 years too late but better late than never. The average American takes comfort and security in the BIG LIE. The Big Lie is that the banks and financial institutions are well regulated, supervised and enforcement is quick and efficient when needed.
Congress, the Regulators, Treasury and the bureaucrats watched this crisis unfold day by day.
Even economist Roubini who in 2002 predicated is exactly what was to take place was ignored.
No one should have been surprised. In fact the Congress, regulators and Treasury were over whelmed. It was like a bank robbery gone bad.
That American image of a security blanket really became a noose around the neck of the economy. Our government, the bankers, the financial institutions are all intertwined in a spider web of power and money. They all feed and protect each other at the expense of their fellow citizens. We are beginning to understand that at this time the projected credit loss is 2 trillion dollars. The average equity loss to the average home owner is stated today as a 62% loss in value. Those among who have the lest to gain and the most to loose are victims of the federal regulatory system.
My experience and research is based on the Office of Thrift Supervision who by law regulates, supervises and enforces those regulations of Federally Chartered Savings Banks (FCSBs). At best this is a myth. The OTS does not have the knowledge, the manpower, the time, the expertise or the credibility to supervise the FCSBs. Most FCSBs are self regulated. The President appoints the Director of the OTS who only answers to Congress. Let me you a very limited idea of the OTS and its supervision of the FCSBs. There are very few federal regulations that deal with mortgage lending. There are no Federal Consumers Banking Regulations. It is designed this way by the powerful Congress. The wealthy and powerful banks will not permit any regulation to interrupt their multi billion dollar cash flow. The 2005 Bankruptcy act revised to reduce credit card loses is an example of the Banks power over Congress.
From the Bankers standpoint, the less regulations you have, the more control you have. These FCSBs conduct their lending operations with absolute impunity. The have no fear of consumer reprisal since there are no laws that permit that. The consumer cannot contest, object or question any thing including foreclosure within the federal regulatory system which is the same system that the FCSB lend their mortgage money. The Congress is well aware of this. The FCSBs really answer to no one. The mortgage banker makes his own rules, his own paper work and his own consumer enforcement. The FCSB operates on the Lynch Mob theory. Foreclosure the Mortgage and hang the Borrower. The borrower has no rights. The borrower cannot afford an attorney for the Legal Dance. This is where the borrowers attorneys and the banks attorney dance to the Courts band until the borrowers runs out of money.
The Banks blamed the homeowners and the Congress agreed. We know that because the 700 page housing bill just passed protected everyone but the homeowner. The analogy here is that the financial rape victim was blamed for the rape by the rapist.
. We need federal consumer banking regulations to level the playing field so the borrower can defend himself against an unethical bank. The consumer is like a smoke detector in a house. Smell smoke and the detector goes off. The consumer sensing something unethical can contest what his bank done through the federal regulatory system. By tracking those consumer complaints we may be able to stop the next crisis. Now the bank just hangs the consumer.
Yes Alan Greenspan we need a powerful regulator that is not tied to Congress, the Financial community or the Treasury Dept
Michael LittleBig
POB 16588, Rocky River Oh 44116-3065
You're only as strong as the weakest link has a corollary, if one link is strong, it can foretell danger ahead. If S&P, Moody's,and Fitch blew the whistle--game, set, match would have been over before the damage became life threatening. The fact that these incompetent bastards are getting off without any consequence shows us how perverted and greedy we have become.
I think that we saw massive fraud rings and systems developed under the securitization model. When the banks started having to keep the loans, the fraudsters loaded them up. I think they didn't want that junk and they are learning to control it but they got loaded down with lethal levels in the year or so it took them to catch up.
Price is still at the heart of every bubble. I know the focus here is finance and mortgages and these certainly were the enablers that let people pay too much for houses, but I'm still concerned that there seems to have been very little thought about how the price of something can run away - as houses did (and tech stocks and commodities) and there seems to be no signal of alarm, no mechanism of control. Housing at least does have an appraisal process - but it is based on comps and so it runs right along with the bubble and basically is therefore useless.
Although I agree with yearning to learn, I think there is another solution... Don't let the Banks and brokerage houses get so big that they develope "we are too big to fail" and "we are so big we must be right" attitudes. The financial giants that now dominate the system have negated the "survival of the fitness" check and balance that capitialism depends on. Break up Wells Fargo, US Bank, Chase, Salmon Brothers, etc...
So the government should have let Bear Stearns fail, not to mention Fannie and Freddie?
"If you let Bear Stearns fail you can have a run on the entire banking system. But there are ways to manage Bear or Fannie and Freddie in a fairer way. If public money is to be put at stake, first all the shareholders of these companies have to be wiped out. Management has to be wiped out, and the creditors of Bear should have taken a hit. Why did the Fed buy $29 billion of the most toxic securities, and essentially bail out JPMorgan Chase (JPM), which bought Bear Stearns?"
Because JPMorgan was a counter-party?
"Exactly. The government bailed out everyone. Even the unsecured creditors of Fannie and Freddie should have taken a hit. Sometimes it is necessary to use public money to rescue institutions, but you do it in a way in which you're not bailing out those who made the mistakes. In each one of these episodes the government bailed out the shareholders, the bondholders and to some degree, management."
They probably would have done a better job of managing risk, but that doesn't have to mean they would have done a good job. Once you buy into the meme that housing prices always go up, all sorts of safeguards start being ignored.
As NDD and Yearning to Learn have pointed out, Tanya, you're a little bit off target here.
The Post article makes it perfectly clear that we're talking about a relatively small percentage of banks. With the exception of IndyMac, which was created to garner deposits to fund mortgage lending, these banks share three things in common. They're very small, as banks go. They made a large number of loans outside the immediate geographic reach of their physical branches. And their portfolios were heavily weighted toward residential real estate.
The specific concern raised in the story - that the feds are waiting too long to intervene - has nothing to do with the question of 'skin in the game.' The facts actually seem to militate for a contrary conclusion - given the small number of banks, and their relative lack of resources and sophistication, keeping 'skin in the game' actually seems to have served as an effective deterrent. Otherwise, their larger and more sophisticated peers would be in similar trouble.
YtL: Thus, the banks lent money, thinking they offloaded it to the GSE's and the securitizers. The securitizers thought they offloaded risk by selling it to investors. The investors thought they offloaded risk by getting "insurance" and the insurers thought they offloaded risk becuase they hedged it, and then the hedgers thought they offloaded risk to the off-balance sheet vehicles of the bank.
Good Morning CR I love this site!
I second that!
the fashionable thing to say was that if banks had only held their loans rather than securitizing them, they would have controlled credit risk better because they had skin in the game
I still believe this for a few reasons.
The essential problem IMO is that the securitization model helped obscure risk. It spread risk so far out that it was hard to see, hard to model. Thus, the "smart guys" thought they'd reduced risk, when all they really did was spread it around. everyone thought that they'd eliminated their own personal risk.
Thus, the banks lent money, thinking they offloaded it to the GSE's and the securitizers. The securitizers thought they offloaded risk by selling it to investors. The investors thought they offloaded risk by getting "insurance" and the insurers thought they offloaded risk becuase they hedged it, and then the hedgers thought they offloaded risk to the off-balance sheet vehicles of the bank.
wait a second, that's a circle. oops.
when a bank holds the loan on its own books the accounting and concept of the debt and risk is more concrete and quantifiable. it would not have "cured" our problem perhaps. but it would have markedly changed what we see today.
in some ways, it's the same philosophy behind paying in cash vs paying in credit cards. For many people, spending is more "real" when they have to pull cash out of their wallet. many studies document they spend more on plastic.
i should say, spend more using plastic (compared to using dollars)
however, to combat my own argument.
part of the problem that has risen is that you get a few fools, and then everybody chases those fools in the pursuit of profits.
So you had Countrywide being the biggest fool around making the dumbest loans imaginable. Gaining market share. Not to be outdone, Indymac soon followed.
so now the more "conservative" banks (like the Regionals) and also Fannie/Freddie for that matter are losing market share. So they "have" to reduce lending standards to improve market share. the goal is to be the "last ship afloat" then you can right the ship. but in this case, all the ships are capsized, and few are right-able.
it's a failure of our free-market system. The only way to prevent it is through sensible legislation/regulation. GASP! yep, I said it. Regulation. (of course there are many arguments about the lack of SENSIBLE regulation).
MBA's purchase index was unchanged in the Aug. 8 week at a very weak 315.2 that indicates very thin interest in home loans. Interest in refinancing is also very thin with the refinance index down 4.2 percent to 1,074.6. Stubbornly high mortgage rates are not helping to stimulate demand with 30-year fixed loans up 16 basis points in the week at 6.57 percent.
Tanta, let's separate out the commercial banks from the investment banks, since this blog entry discussing FDIC interventions.
Your quotation from the NYT article suggests that most commercial banks don't have much on their books by way of toxic mortgage garbage (because they didn't originate nearly as many this time, and because of those they did originate, most were sold to other parties).
And CR has noted that the commercial building boom this time has been much more muted than the 1980s or 1990s building boom.
That suggests to me that while we can expect more banking failures than in previous years, IndyMac, the entire purpose of which was to create a depositor base to finance toxic mortgage lending, was sui generis and will not at all be typical of commercial banks.
Failure of a few more small ones, or just a big one could wipe out FDIC. Time for coffee...
Greed birthed this mess. If you could make a deal, you got your commission. Same is true for the rating agencies, investment banks, hedgers, etc. These people might get fired now, but made out like bandits and ain't giving it back.
Land of the Lost
Paulsen, Ben and Sheila
with some routine testamony
and the greatest f up ever known,
high on their power
they trashed our mighty banks
and plunged our wealth
a thousand times below
to the la-and of the lost
we are all Sleestacks now
Hell I thought this all had something to do with dancing.
Why has the system failed? Maybe Mukasey explained this yesterday;-
Not every wrong, or even every violation of the law, is a crime, That attitude was bound to cause a serious hurt.
Greed birthed this mess.
Well, greed is bringing China out of 3rd world poverty.
As I see it it's kind of like fire and electricity -- it's not so much an issue of getting rid of it because it's dangerous, but managing it so it doesn't kill everybody.
We don't seem to be doing a good job of the latter.
One way to look at this whole mess is in terms of bank deposits.
Once upon a time, Smallville Bank made loans using Smallville Bank deposits. The amount of money available for lending was inherently limited by the money in the community.
Well, it turns out that this model had problems. When hard economic times hit Smallville, both deposits and the borrowers' ability to pay took a hit. If Smallville made lumber and the lumber industry failed, so did Smallville Bank.
In the 1980's, Smallville Bank started selling their mortgages to Largeville Bank, and Largeville Bank sold their mortgages to Smallville Bank. The whipsaw effect of hard economic times in any one region was diluted by holding mortgages from another region.
However, the money available to loan in Smallville was still limited by the size of deposits at Smallville. Even though Smallville Bank held Largeville Bank's mortgages, the $ amount of mortgages it held was still limited by deposits.
With securitization of subprime loans and access to a global supply of money, all of the deposits in Smallville bank were available for loans that would be kept on Smallville Bank's (or another bank's) books.
MEL,
You got it right, all these "mortage" types (guys, kids, gals) working out of their homes earning BIG comish just filling out some computer screens....what a joke....they all need to have most of it taken back and sent to the county jail; of course its all been spent....
Alan Greenspan recommends a new type of regulator
Mr. Greenspan has a point that is well taken, probably 80 years too late but better late than never. The average American takes comfort and security in the BIG LIE. The Big Lie is that the banks and financial institutions are well regulated, supervised and enforcement is quick and efficient when needed.
Congress, the Regulators, Treasury and the bureaucrats watched this crisis unfold day by day.
Even economist Roubini who in 2002 predicated is exactly what was to take place was ignored.
No one should have been surprised. In fact the Congress, regulators and Treasury were over whelmed. It was like a bank robbery gone bad.
That American image of a security blanket really became a noose around the neck of the economy. Our government, the bankers, the financial institutions are all intertwined in a spider web of power and money. They all feed and protect each other at the expense of their fellow citizens. We are beginning to understand that at this time the projected credit loss is 2 trillion dollars. The average equity loss to the average home owner is stated today as a 62% loss in value. Those among who have the lest to gain and the most to loose are victims of the federal regulatory system.
My experience and research is based on the Office of Thrift Supervision who by law regulates, supervises and enforces those regulations of Federally Chartered Savings Banks (FCSBs). At best this is a myth. The OTS does not have the knowledge, the manpower, the time, the expertise or the credibility to supervise the FCSBs. Most FCSBs are self regulated. The President appoints the Director of the OTS who only answers to Congress. Let me you a very limited idea of the OTS and its supervision of the FCSBs. There are very few federal regulations that deal with mortgage lending. There are no Federal Consumers Banking Regulations. It is designed this way by the powerful Congress. The wealthy and powerful banks will not permit any regulation to interrupt their multi billion dollar cash flow. The 2005 Bankruptcy act revised to reduce credit card loses is an example of the Banks power over Congress.
From the Bankers standpoint, the less regulations you have, the more control you have. These FCSBs conduct their lending operations with absolute impunity. The have no fear of consumer reprisal since there are no laws that permit that. The consumer cannot contest, object or question any thing including foreclosure within the federal regulatory system which is the same system that the FCSB lend their mortgage money. The Congress is well aware of this. The FCSBs really answer to no one. The mortgage banker makes his own rules, his own paper work and his own consumer enforcement. The FCSB operates on the Lynch Mob theory. Foreclosure the Mortgage and hang the Borrower. The borrower has no rights. The borrower cannot afford an attorney for the Legal Dance. This is where the borrowers attorneys and the banks attorney dance to the Courts band until the borrowers runs out of money.
The Banks blamed the homeowners and the Congress agreed. We know that because the 700 page housing bill just passed protected everyone but the homeowner. The analogy here is that the financial rape victim was blamed for the rape by the rapist.
. We need federal consumer banking regulations to level the playing field so the borrower can defend himself against an unethical bank. The consumer is like a smoke detector in a house. Smell smoke and the detector goes off. The consumer sensing something unethical can contest what his bank done through the federal regulatory system. By tracking those consumer complaints we may be able to stop the next crisis. Now the bank just hangs the consumer.
Yes Alan Greenspan we need a powerful regulator that is not tied to Congress, the Financial community or the Treasury Dept
Michael LittleBig
POB 16588, Rocky River Oh 44116-3065
You're only as strong as the weakest link has a corollary, if one link is strong, it can foretell danger ahead. If S&P, Moody's,and Fitch blew the whistle--game, set, match would have been over before the damage became life threatening. The fact that these incompetent bastards are getting off without any consequence shows us how perverted and greedy we have become.
Chasing yields/returns with blinders on is a sure way to run right off the edge of the cliff and never see it coming.
There was blood on the saddle
and blood all around
and a great big puddle
of blood on the ground
Well, this should be interesting, since the reporter quoted is a known reader of this blog.
Anon 9;54,that was my fathers favorite song,where did you pick it up? he learned it cowboying in the 4 corners....
I agree with yearning to learn.
I think that we saw massive fraud rings and systems developed under the securitization model. When the banks started having to keep the loans, the fraudsters loaded them up. I think they didn't want that junk and they are learning to control it but they got loaded down with lethal levels in the year or so it took them to catch up.
Price is still at the heart of every bubble. I know the focus here is finance and mortgages and these certainly were the enablers that let people pay too much for houses, but I'm still concerned that there seems to have been very little thought about how the price of something can run away - as houses did (and tech stocks and commodities) and there seems to be no signal of alarm, no mechanism of control. Housing at least does have an appraisal process - but it is based on comps and so it runs right along with the bubble and basically is therefore useless.
Although I agree with yearning to learn, I think there is another solution... Don't let the Banks and brokerage houses get so big that they develope "we are too big to fail" and "we are so big we must be right" attitudes. The financial giants that now dominate the system have negated the "survival of the fitness" check and balance that capitialism depends on. Break up Wells Fargo, US Bank, Chase, Salmon Brothers, etc...
Roubini interview with Barron's:
So the government should have let Bear Stearns fail, not to mention Fannie and Freddie?
"If you let Bear Stearns fail you can have a run on the entire banking system. But there are ways to manage Bear or Fannie and Freddie in a fairer way. If public money is to be put at stake, first all the shareholders of these companies have to be wiped out. Management has to be wiped out, and the creditors of Bear should have taken a hit. Why did the Fed buy $29 billion of the most toxic securities, and essentially bail out JPMorgan Chase (JPM), which bought Bear Stearns?"
Because JPMorgan was a counter-party?
"Exactly. The government bailed out everyone. Even the unsecured creditors of Fannie and Freddie should have taken a hit. Sometimes it is necessary to use public money to rescue institutions, but you do it in a way in which you're not bailing out those who made the mistakes. In each one of these episodes the government bailed out the shareholders, the bondholders and to some degree, management."
[I guess it was a bit more complicated than that.]
Yeah, Ma, but EVERYBODY was doing it!
Any CEO would have been forcibly removed for not jumping on this bandwagon, just as forcibly as they're being removed now for having done it.
They probably would have done a better job of managing risk, but that doesn't have to mean they would have done a good job. Once you buy into the meme that housing prices always go up, all sorts of safeguards start being ignored.
As NDD and Yearning to Learn have pointed out, Tanya, you're a little bit off target here.
The Post article makes it perfectly clear that we're talking about a relatively small percentage of banks. With the exception of IndyMac, which was created to garner deposits to fund mortgage lending, these banks share three things in common. They're very small, as banks go. They made a large number of loans outside the immediate geographic reach of their physical branches. And their portfolios were heavily weighted toward residential real estate.
The specific concern raised in the story - that the feds are waiting too long to intervene - has nothing to do with the question of 'skin in the game.' The facts actually seem to militate for a contrary conclusion - given the small number of banks, and their relative lack of resources and sophistication, keeping 'skin in the game' actually seems to have served as an effective deterrent. Otherwise, their larger and more sophisticated peers would be in similar trouble.
YtL:
Thus, the banks lent money, thinking they offloaded it to the GSE's and the securitizers. The securitizers thought they offloaded risk by selling it to investors. The investors thought they offloaded risk by getting "insurance" and the insurers thought they offloaded risk becuase they hedged it, and then the hedgers thought they offloaded risk to the off-balance sheet vehicles of the bank.
wait a second, that's a circle. oops.
This was awesome YtL. It needed to be repreated.
Also, if the banks had to keep their own loans, they at least couldn't have made so many loans.
Foreclosure fallout: Houses go for a $1 in Detroit
Detnews.com | This article is no longer available online | detnews.com | The Detroit News
YtL,
Dead on, my friend, that was dead on. I particularly agree the part that Emma Anne quotes above.
I'm not wonky enough to work this out, but something tells me there was some sort of systemic misapplication of portfolio theory, here, wasn't there?