Like a ghoul in a low budget horror flick, the mortgage morass never dies. Just when you think it's dead, its eyes snap open. Then it smiles a fang-filled grimace and gets up to lurch again in search of victims. The latest resurrection of the beast is the foreclosure mess.
Recent news reports indicate that financial firms servicing mortgages have many times foreclosed on defaulting homeowners without really knowing if they had the legal right to foreclose. Mortgage records in some cases seem to have been evanescent. But, no matter, as key employees whose job it was to review mortgage files and determine that foreclosure was warranted apparently paid scant attention to the contents of the files anyway. One such employee reportedly signed off on thousands of foreclosures a month, perhaps spending only a minute or two per file. Let's guess that his nickname is Robopen.
Other news stories in recent months have reported courts balking at foreclosures when banks couldn't prove they owned the mortgages that were supposedly in default or that they truly had authority to proceed with the foreclosure. There have been allegations of document forgeries and other irregularities. Foreclosures by two major financial institutions--Ally Financial (formerly GMAC) and J.P. Morgan Chase--are grinding to a halt. Today's Washington Post reported that other banks may follow in applying the brakes to their foreclosures. Some state attorneys general are starting to investigate and members of Congress are making noise about compensation for homeowners improperly ejected from their homes.
This is seriously bad shhhhh . . . stuff. The news reports probably reveal only the tip of the iceberg. It's impossible right now to identify all the potential ramifications of this sewage spill. But what we can see already is really stinky.
Systemic risk. With the recently enacted Dodd-Frank legislation, systemic risk is all the rage. So why don't we start with it. There are trillions of dollars of mortgages still held by America's major financial institutions. If the recordkeeping of mortgage servicers is really bad, and numerous mortgages cannot be connected to a legal owner (i.e., a lender or investor who truly has title to the mortgage), a lot of bank writedowns may be necessary. If a bank can't prove it holds the mortgage it thought it held, it will likely have to write off the entire debt. And it will have to stop taking payments from the homeowner, since it can't legally take money it's not entitled to get. We aren't just talking about defaulting and defaulted mortgages. We're talking about all mortgages. A bank that can't document its legal right to a mortgage will have to write it down because you can't count as an asset something you don't own. And the bank can't take payments from a homeowner who doesn't legally owe it any money. The recordkeeping problem here could mean many billions of losses. Federal regulators concerned about bank capital levels just got another massive migraine.
A heroic effort to straighten out the recordkeeping problems might eventually link up a lot of orphaned mortgages with their true owners. But that will probably take months and years. By all indications, each mortgage's file will have to be manually reviewed and straightened out--and not by Robopen or his clones. Such labor intensive work, which likely will require lots of lawyer time, will blow up bank legal budgets nationwide. And, given the inadequacy of the records, lawsuits will sprout like mold in damp drywall. All the while, massive amounts of bank capital will be tied down in mortgages, because the banks won't be able to sell what they can't prove they own. And they may have to reimburse mortgage investors to whom they sold mortgages they didn't own in the first place. Future lending--for new home purchases or to support economic recovery--may recede from today's sputter to a trickle.
Investors, lawyer up and stop buying mortgages. Investors who hold mortgage-backed securities just found themselves living in a world of septic content. They may, or may not, own any mortgage interests. If banks can't be sure who owns which mortgages, they can't be sure what they sold to mortgage investors. The 2007-08 mortgage crisis was bad enough. But today's clouds over title to mortgages means the pricing of numerous mortgage-backed investments may have become hazy indeed.
Fannie Mae and Freddie Mac have been backing new mortgages, so investors in newly issued debt may be at less risk. But if the recordkeeping problems include recent mortgages, the U.S taxpayer (that would be you, dear reader) just got screwed. Oh well, chalk it up to life in a world of too-big-to-fail financial institutions.
Homeowners, to the ramparts. If you're struggling to pay the mortgage, and the mortgage servicing bank or firm is getting ugly, fight back. Fight back hard, because you don't want to be shoved out of your home by someone to whom you don't legally owe any money. Demand to see documentation proving their ownership of your mortgage. Hire a lawyer if you don't understand legal documents. If you're getting the runaround, call your Representative and Senators in Congress, and your state's attorney general. If you truly have defaulted, there may well have to be a settling of accounts eventually. But don't get bullied out of your home by someone who has no legal right to foreclose.
Buyers beware. If you're looking to buy a house, don't buy at a foreclosure auction, and don't touch any property that is a bank sale after a foreclosure. Also, if the property is now owned by ordinary individuals, think about avoiding it if it was foreclosed on in the past. There's no way to tell when the recordkeeping mess might have begun; if you want to be truly careful, don't buy anything that has ever been foreclosed on. You can usually tell if there's been a foreclosure by looking at the history of ownership of the home (often available online in county or city records). If a bank, other corporation, or corporate trustee, is listed as an owner, there's a good chance the property was foreclosed on. If you buy a property with a foreclosure in its history, the mortgage mess may mean that the previous owner who was forced out may actually still own the house and might be able to reclaim it from you. You would probably be able to recover money under your title insurance policy (be sure you have one of these, even if your lender also has one). But you'd be out of the house.
There are legal rules that would probably bar prior homeowners from trying to reclaim the house after a number of years, but you'd have to hire a lawyer in the state where the house is situated to find out how many years that would be. This isn't the short time period homeowners have after foreclosure to recover the home, but a longer period that homeowners would have to recover after being forced out due to the foreclosing lender's fraud. The law may not be entirely clear on this issue, which is why you might want to avoid homes that have ever been foreclosed on.
Sellers beware. Sellers may think that with foreclosures grinding to a halt, the flood of bank sales onto the market will abate and prices will rise. They shouldn't smile too quickly. The foreclosure mess will eventually be resolved and the defaulted properties put on the market. That overhang will keep buyers on the cautious side. Mortgage loans may become harder than ever to get, as mortgage investors from Fannie and Freddie to institutional investors everywhere step back from buying more problems until the current problems are fixed. Title insurance premiums could rise sharply. Higher costs mean fewer buyers. Closings could become more difficult, as title insurers verify two or three times over that the correct mortgagor and home equity lender, if there is one, are being paid off. The home(s) down the street whose foreclosures were just suspended may not be well-maintained, as neither a defaulting homeowner nor a bank that may or may not hold the mortgage have much incentive to keep the place up. Your neighborhood could go to weeds if no one is responsible for ownership. A vibrant real estate market can't exist without good recordkeeping.
Taxpayers. Need we say it? After the bailouts of 2008 and 2009, we all know who gets nailed in the end. Senior government officials will solemnly intone well-rehearsed proclamations about protecting the viability of the financial system, etc., etc., so on, and so forth. Then they'll foist the dog doo on you. Bank bonuses might again temporarily fluctuate, but rest assured that the wealthy and powerful won't truly bear the burdens.
Thursday, September 30, 2010
Tuesday, September 28, 2010
Congressional Action in the Lame Duck Session
The mid-term elections in five weeks are likely to produce political deadlock. The Republicans will probably win control of the House and perhaps the Senate. The Dems have the White House. From January 2011 through December 2012, not much is likely to happen in Washington (although you'll need earplugs to save your hearing from all the partisan yammering).
As things are, Congress isn't likely to do anything significant before the elections--it's easier for a candidate to make promises to voters than explain a vote in Congress. There will be one moment for action: the lame duck session that follows the elections. In the last two months of this year, the current 111th session of Congress will have its last hurrah. The Democratic-dominated body will have one final chance to push through legislation it favors. The President will probably sign anything that vaguely serves his agenda, since he's not likely to get his way with Congress again during the remainder of his first term.
A number of Democrats facing re-election contests are momentarily wavering on their party's agenda, such as continued Bush tax cuts for all but the wealthy. After the election, though, some may be lame duck legislators, with nothing to lose by voting their convictions instead of for their survival. Others may see a last chance to serve the needs of supporters.
The Republicans will be in a tight spot. If they block all Democratic initiatives, the Bush tax cuts end on December 31, 2010, and everyone in the U.S. gets a tax increase. The Republicans won't want be tagged with responsibility for that. You can bet the Dems will introduce in the lame duck session a bill continuing the Bush tax cuts for all but the wealthy. They will also introduce the annual fix for the alternative minimum tax (a tax-the-rich measure signed by Republican President Richard Nixon to make sure the wealthy didn't deduct their way to no taxes). The alternative minimum tax isn't adjusted automatically for inflation, so over time it has reached well down into the middle class. It has to be fixed every year so that it hits only the upper middle class (the alternative minimum tax now taxes many millions more than just the wealthy and is a key revenue raiser that no one, Democrat or Republican, has the guts to fix permanently because doing so would cost the government a shipload of money).
The Republicans will have to find a way not to block all tax relief, lest they betray their asserted principles. But they don't have the numbers in the 111th Congress to control legislation. Even though the Republicans squirmed and squealed noisily during the last two years, the Dems had their way with stimulus legislation, expansion of health insurance coverage, and financial regulatory reform. Neither party can afford to allow nothing to happen during the lame duck session. Alternative minimum tax relief is an annual Congressional ritual, and will be accompanied by one or more attempts to extend at least some of the Bush tax cuts. It's impossible to predict how things will turn out. But keep your eyes open because the upcoming lame duck session may be the most important legislative event of the next two years.
As things are, Congress isn't likely to do anything significant before the elections--it's easier for a candidate to make promises to voters than explain a vote in Congress. There will be one moment for action: the lame duck session that follows the elections. In the last two months of this year, the current 111th session of Congress will have its last hurrah. The Democratic-dominated body will have one final chance to push through legislation it favors. The President will probably sign anything that vaguely serves his agenda, since he's not likely to get his way with Congress again during the remainder of his first term.
A number of Democrats facing re-election contests are momentarily wavering on their party's agenda, such as continued Bush tax cuts for all but the wealthy. After the election, though, some may be lame duck legislators, with nothing to lose by voting their convictions instead of for their survival. Others may see a last chance to serve the needs of supporters.
The Republicans will be in a tight spot. If they block all Democratic initiatives, the Bush tax cuts end on December 31, 2010, and everyone in the U.S. gets a tax increase. The Republicans won't want be tagged with responsibility for that. You can bet the Dems will introduce in the lame duck session a bill continuing the Bush tax cuts for all but the wealthy. They will also introduce the annual fix for the alternative minimum tax (a tax-the-rich measure signed by Republican President Richard Nixon to make sure the wealthy didn't deduct their way to no taxes). The alternative minimum tax isn't adjusted automatically for inflation, so over time it has reached well down into the middle class. It has to be fixed every year so that it hits only the upper middle class (the alternative minimum tax now taxes many millions more than just the wealthy and is a key revenue raiser that no one, Democrat or Republican, has the guts to fix permanently because doing so would cost the government a shipload of money).
The Republicans will have to find a way not to block all tax relief, lest they betray their asserted principles. But they don't have the numbers in the 111th Congress to control legislation. Even though the Republicans squirmed and squealed noisily during the last two years, the Dems had their way with stimulus legislation, expansion of health insurance coverage, and financial regulatory reform. Neither party can afford to allow nothing to happen during the lame duck session. Alternative minimum tax relief is an annual Congressional ritual, and will be accompanied by one or more attempts to extend at least some of the Bush tax cuts. It's impossible to predict how things will turn out. But keep your eyes open because the upcoming lame duck session may be the most important legislative event of the next two years.
Sunday, September 26, 2010
Wall Street's Contribution to the Democrats
Business interests evidently are contributing more money to Republicans than they did in 2008. Cash flow to Democrats from people who might pay estate taxes has fallen sharply. But the financial markets have been kind to the Democrats. The stock market has bounced up nicely thus far in September, and bonds continue their improbable two-decade bull market. Gold is flirting with new highs on almost a daily basis. Silver has rallied. Oil has edged down, as it usually does following the end of the summer driving season. But it hasn't edged far. One can hardly find a financial investment that isn't doing okay or better than okay in September.
Republicans might claim that the cheery financial markets are the result of their resurgence. But good news has a thousand parents, and political incumbents generally get some credit when investors benefit. Most of today's boat rockers are middle or moderate income folks living outside the Beltway, who feel they are about to lose the little that they have after years or decades of work. There are about as many investment bankers among Tea Partiers as Zionists in Iran.
The middle of the road voters who will decide the outcome of the mid-term elections will think about their 401(k) accounts as well as their taxes. Five weeks remain until the mid-term elections. October has been an unpredictable month for the stock markets. There is certainly reason to wonder if the markets won't fall. Corporate earnings announcements, set to begin next week, aren't expected to glow. Banks may report lower earnings, from a drop in stock market trading volume. Tech companies earnings could stagnate, as consumer demand has drifted. Trade skirmishing is flaring up. The U.S. is jawboning China about the yuan, and China has slapped tariffs on American chicken parts. Japan is trying to weaken the yen in response to the weakening dollar (something that may affect China and its dollar-linked yuan more than America, since China is Japan's largest trading partner). The European debt crisis is rumbling again. Portuguese and Irish debt are losing favor, and Greece's likelihood of defaulting is growing (although no default appears imminent).
Nevertheless, the financial markets have spent the last four weeks looking at silver linings, not clouds. That's not likely to change, unless something big and bad breaks in October. Otherwise, the financial markets, still holding a 60% stock market gain since the March 2009 low, will give a nice gift to the Democrats.
Republicans might claim that the cheery financial markets are the result of their resurgence. But good news has a thousand parents, and political incumbents generally get some credit when investors benefit. Most of today's boat rockers are middle or moderate income folks living outside the Beltway, who feel they are about to lose the little that they have after years or decades of work. There are about as many investment bankers among Tea Partiers as Zionists in Iran.
The middle of the road voters who will decide the outcome of the mid-term elections will think about their 401(k) accounts as well as their taxes. Five weeks remain until the mid-term elections. October has been an unpredictable month for the stock markets. There is certainly reason to wonder if the markets won't fall. Corporate earnings announcements, set to begin next week, aren't expected to glow. Banks may report lower earnings, from a drop in stock market trading volume. Tech companies earnings could stagnate, as consumer demand has drifted. Trade skirmishing is flaring up. The U.S. is jawboning China about the yuan, and China has slapped tariffs on American chicken parts. Japan is trying to weaken the yen in response to the weakening dollar (something that may affect China and its dollar-linked yuan more than America, since China is Japan's largest trading partner). The European debt crisis is rumbling again. Portuguese and Irish debt are losing favor, and Greece's likelihood of defaulting is growing (although no default appears imminent).
Nevertheless, the financial markets have spent the last four weeks looking at silver linings, not clouds. That's not likely to change, unless something big and bad breaks in October. Otherwise, the financial markets, still holding a 60% stock market gain since the March 2009 low, will give a nice gift to the Democrats.
Thursday, September 23, 2010
Stopping Debt Collection Calls
A federal law called the Fair Debt Collection Practices Act limits the things debt collectors can say and do. A blog like this can't cover every situation that might come up, and we do not provide specific legal advice. But there reportedly are bad things happening in the world of debt collection. So here's an overview of some important aspects of the law.
If a debt collector calls and you want the calls to stop, write a letter to the collector telling him or her to stop calling, and mail it (preferably certified mail, return receipt requested so you have proof the collector received the letter). After that, the collector is required to stop calling you, except to state that he or she will stop calling you (that sounds weird, but the law allows it) or to say he or she will take legal action against you (it has to be a truthful threat to take action; a false threat is illegal). Debt collectors also have to stop calling you if you hire an attorney.
There are other limitations on debt collector calls. They can't call before 8:00 a.m. or after 9:00 p.m. (unless you agree to such calls; don't agree unless it's absolutely essential). They can't call you at work if they are told you're not allowed to take such calls at work. They have to stop calling you if you send them a letter disputing your obligation to pay a debt, or a letter asking for verification of the debt (i.e., proof of the debt). But they can start calling again after sending you written verification of the debt. If you want to stop all calls, send the letter discussed in the preceding paragraph telling the collector to stop calling. Or hire an attorney.
Debt collectors can contact third persons, like your family, neighbors and friends, to ask about your address, phone number and place of employment. The collector cannot discuss your debt with them. They don't have to say anything to the collector. Generally, the collector cannot call them more than once. If you hire an attorney, the collector is not allowed to contact your family, neighbors, friends and other third parties. The collector has to deal exclusively with your attorney.
Debt collectors cannot harass you or other people they call. They cannot make false statements or false threats to take legal action. They cannot threaten to have you arrested if you don't pay the debt.
If you think a debt collector has acted illegally, you can sue the collector. Seriously consider hiring an attorney if you want to sue. If you win, you're entitled to $1,000 and your attorneys fees and court costs. You can collect any damages you suffered as a result of illegal collector conduct, such as lost wages and medical bills. You can also complain to the government. Your state's attorney general's office, and the Federal Trade Commission (www.ftc.gov) are appropriate places to send complaints.
Remember that stopping a debt collector's calls does not affect whatever obligation you may have to pay the debt. You might still be sued and have your bank account and wages garnished. Misconduct by the debt collector also doesn't affect whatever your responsibility for the debt may be. If you legally owe the debt, even a successful lawsuit on your part against the collector does not change your obligations as a debtor.
If a debt collector calls and you want the calls to stop, write a letter to the collector telling him or her to stop calling, and mail it (preferably certified mail, return receipt requested so you have proof the collector received the letter). After that, the collector is required to stop calling you, except to state that he or she will stop calling you (that sounds weird, but the law allows it) or to say he or she will take legal action against you (it has to be a truthful threat to take action; a false threat is illegal). Debt collectors also have to stop calling you if you hire an attorney.
There are other limitations on debt collector calls. They can't call before 8:00 a.m. or after 9:00 p.m. (unless you agree to such calls; don't agree unless it's absolutely essential). They can't call you at work if they are told you're not allowed to take such calls at work. They have to stop calling you if you send them a letter disputing your obligation to pay a debt, or a letter asking for verification of the debt (i.e., proof of the debt). But they can start calling again after sending you written verification of the debt. If you want to stop all calls, send the letter discussed in the preceding paragraph telling the collector to stop calling. Or hire an attorney.
Debt collectors can contact third persons, like your family, neighbors and friends, to ask about your address, phone number and place of employment. The collector cannot discuss your debt with them. They don't have to say anything to the collector. Generally, the collector cannot call them more than once. If you hire an attorney, the collector is not allowed to contact your family, neighbors, friends and other third parties. The collector has to deal exclusively with your attorney.
Debt collectors cannot harass you or other people they call. They cannot make false statements or false threats to take legal action. They cannot threaten to have you arrested if you don't pay the debt.
If you think a debt collector has acted illegally, you can sue the collector. Seriously consider hiring an attorney if you want to sue. If you win, you're entitled to $1,000 and your attorneys fees and court costs. You can collect any damages you suffered as a result of illegal collector conduct, such as lost wages and medical bills. You can also complain to the government. Your state's attorney general's office, and the Federal Trade Commission (www.ftc.gov) are appropriate places to send complaints.
Remember that stopping a debt collector's calls does not affect whatever obligation you may have to pay the debt. You might still be sued and have your bank account and wages garnished. Misconduct by the debt collector also doesn't affect whatever your responsibility for the debt may be. If you legally owe the debt, even a successful lawsuit on your part against the collector does not change your obligations as a debtor.
Wednesday, September 22, 2010
Good News From the Forbes 400
In these populist times, the super-wealthy are hardly viewed positively. Many of them should not be. But the overall picture from this year's Forbes 400 (see http://www.forbes.com/wealth/forbes-400#p_3_s_arank_-1_) contains a measure of good news, especially when one looks at the top of the top: the Top 20. The wealthiest person in America is Bill Gates, a software guy, at $54 billion. The next wealthiest is Warren Buffet, an investments guy in Nebraska who's worth $45 billion. Third is Larry Ellison, worth $27 billion from working in the high tech industry. The wealthiest family in America, the Waltons, together worth about $84 billion, hold four places in the Top 20, primarily from their holdings in Walmart, a fairly well-known retailing company. Several other high tech people show up in the Top 20: Larry Page and Sergey Brin (of Google), Michael Dell (PCs), Steve Ballmer (computer software), Paul Allen (computer software), and Jeff Bezos (Internet retailing). Other people in the Top 20 provide news and data (Michael Bloomberg, who also dabbles in politics, and Anne Cox Chambers), or hold manufacturing and energy interests (Charles and David Koch).
It's heartening to note that only two of the Top 20, George Soros and John Paulson, are from Wall Street, and they're not part of the financial world's in-crowd. These two hedge fund guys may have made more money selling short than other ways. Many view them as renegades or outliers. But to their credit, neither of them has gotten a government bailout. They made their money the hard way, by taking a full measure of market risk and coming out smelling like roses. Wall Street's mainstream bankers, who float by these days on government-subsidized bonuses, don't begin to hold a candle to Soros and Paulson.
The good news is that a lot of wealth is still created through productive activities. This is essential for America's future. Wall Street dominates the business news, but the really, really wealthy for the most part didn't get there through financial shuffling and shenanigans. They made or provided useful things that other people wanted and needed. That's good for America's future. It's where government policies and private enterprise should be focused.
It's heartening to note that only two of the Top 20, George Soros and John Paulson, are from Wall Street, and they're not part of the financial world's in-crowd. These two hedge fund guys may have made more money selling short than other ways. Many view them as renegades or outliers. But to their credit, neither of them has gotten a government bailout. They made their money the hard way, by taking a full measure of market risk and coming out smelling like roses. Wall Street's mainstream bankers, who float by these days on government-subsidized bonuses, don't begin to hold a candle to Soros and Paulson.
The good news is that a lot of wealth is still created through productive activities. This is essential for America's future. Wall Street dominates the business news, but the really, really wealthy for the most part didn't get there through financial shuffling and shenanigans. They made or provided useful things that other people wanted and needed. That's good for America's future. It's where government policies and private enterprise should be focused.
Monday, September 20, 2010
The Good Elizabeth Warren Will Do For the Banking System
To listen to bank lobbyists, one would conclude that Elizabeth Warren, recently appointed an adviser on consumer protection to President Obama and Secretary of the Treasury Geithner, must be a really bad person incarnate. They were planning to pull out all the stops to prevent her confirmation by the Senate as the head of the new consumer protection bureau at the Federal Reserve. President Obama's appointment of her as an adviser does not require Senate confirmation.
What Warren and the new consumer protection bureau can, and hopefully will, do is stop the lunacy in the banking system. The baseline reason for today's economic problems isn't the federal deficit, or the tax system, or the exchange rate between the yuan and the dollar, or the Fed's printing of trillions of dollars, or the new health insurance legislation. The baseline problem is that the banking system made a shipload of really stupid, indefensibly idiotic mortgage loans. Bankers loaned money without verifying borrowers' income, assets, or employment, and paid scant heed to credit histories. All many borrowers really needed was a pulse and a signature. Bankers utterly disregarded lending standards and risk management, blithely assuming that the risks associated with the lending insanity would be passed to the investors that bought this toxic financial waste. Because of the way the mortgage market worked, higher compensation was paid to mortgage bankers and brokers for underwriting riskier loans than for 30-year fixed rate mortgages to people who had downpayments and might actually repay the loans.
The end result was the accumulation of almost incalculable amounts of systemic risk, risk that exploded and imposed trillions of dollars of losses on banks, homeowners, businesses, laid off workers, and taxpayers. Sure, some (although not all) of the borrowers who took out nutty loans had some idea of what they were getting into. But they knew of their individual risks--that the interest rate might rise, that there would be a balloon payment at some point in the future. What they didn't know--and what nailed many of them and all of the rest of us--was that the entire system was poised for a fall because the indescribably imbecilic lending had taken place on a large-scale, nationwide basis. Indeed, even the most knowledgeable federal banking regulators were either clueless, in denial, or both when it came to the systemic risk presented by the morons of mortgage lending. We're still paying the price for this disaster and will do so for years to come. The absence of consumer protection left us all without protection.
The new bureau shouldn't just impose ritualistic disclosure requirements. When borrowers arrive at the closing and find thousands of pages of documents to plow through, disclosure requirements amount to regulatory failure. The new bureau should substitute its judgment for the dysfunctional judgment of bankers (and borrowers, too, since some of them were complicit in taking out loans they realized were foolish but took anyway in order to gamble on the real estate market rising). There was a fundamental market failure in mortgage lending, and sound regulation can fix such failures. Imagine banking without federal deposit insurance if you question this notion.
Mortgage loans are already unavailable to many less creditworthy borrowers, and rightfully so. It does them--and we taxpayers--no good if the banking system accumulates a mountain of bad loans that strip defaulting homeowners of their savings, credit ratings, and pride, and taxpayers of funds badly needed for other priorities. With today's tight underwriting standards and the overall unwillingness of banks to lend, it's unlikely that the new consumer protection bureau can reduce the availability of credit a whole lot. What it may do--and this is probably what bankers fear the most--is that as the economy recovers the consumer protection bureau may prevent the banks from returning to the highly profitable insanity in which they reveled earlier this past decade. Amen, say the rest of us.
Consumer protection in this case isn't about a bunch of liberals on federal salaries singing, "If I Had A Hammer." It's about imposing and enforcing prudential consumer lending requirements on banks that protect us all. Not just borrowers with eighth grade educations, or workers whose native language isn't English, but also the most well-educated, well-read, and wealthy of Americans, because we all have a stake in the well-being of the financial system.
What Warren and the new consumer protection bureau can, and hopefully will, do is stop the lunacy in the banking system. The baseline reason for today's economic problems isn't the federal deficit, or the tax system, or the exchange rate between the yuan and the dollar, or the Fed's printing of trillions of dollars, or the new health insurance legislation. The baseline problem is that the banking system made a shipload of really stupid, indefensibly idiotic mortgage loans. Bankers loaned money without verifying borrowers' income, assets, or employment, and paid scant heed to credit histories. All many borrowers really needed was a pulse and a signature. Bankers utterly disregarded lending standards and risk management, blithely assuming that the risks associated with the lending insanity would be passed to the investors that bought this toxic financial waste. Because of the way the mortgage market worked, higher compensation was paid to mortgage bankers and brokers for underwriting riskier loans than for 30-year fixed rate mortgages to people who had downpayments and might actually repay the loans.
The end result was the accumulation of almost incalculable amounts of systemic risk, risk that exploded and imposed trillions of dollars of losses on banks, homeowners, businesses, laid off workers, and taxpayers. Sure, some (although not all) of the borrowers who took out nutty loans had some idea of what they were getting into. But they knew of their individual risks--that the interest rate might rise, that there would be a balloon payment at some point in the future. What they didn't know--and what nailed many of them and all of the rest of us--was that the entire system was poised for a fall because the indescribably imbecilic lending had taken place on a large-scale, nationwide basis. Indeed, even the most knowledgeable federal banking regulators were either clueless, in denial, or both when it came to the systemic risk presented by the morons of mortgage lending. We're still paying the price for this disaster and will do so for years to come. The absence of consumer protection left us all without protection.
The new bureau shouldn't just impose ritualistic disclosure requirements. When borrowers arrive at the closing and find thousands of pages of documents to plow through, disclosure requirements amount to regulatory failure. The new bureau should substitute its judgment for the dysfunctional judgment of bankers (and borrowers, too, since some of them were complicit in taking out loans they realized were foolish but took anyway in order to gamble on the real estate market rising). There was a fundamental market failure in mortgage lending, and sound regulation can fix such failures. Imagine banking without federal deposit insurance if you question this notion.
Mortgage loans are already unavailable to many less creditworthy borrowers, and rightfully so. It does them--and we taxpayers--no good if the banking system accumulates a mountain of bad loans that strip defaulting homeowners of their savings, credit ratings, and pride, and taxpayers of funds badly needed for other priorities. With today's tight underwriting standards and the overall unwillingness of banks to lend, it's unlikely that the new consumer protection bureau can reduce the availability of credit a whole lot. What it may do--and this is probably what bankers fear the most--is that as the economy recovers the consumer protection bureau may prevent the banks from returning to the highly profitable insanity in which they reveled earlier this past decade. Amen, say the rest of us.
Consumer protection in this case isn't about a bunch of liberals on federal salaries singing, "If I Had A Hammer." It's about imposing and enforcing prudential consumer lending requirements on banks that protect us all. Not just borrowers with eighth grade educations, or workers whose native language isn't English, but also the most well-educated, well-read, and wealthy of Americans, because we all have a stake in the well-being of the financial system.
Tuesday, September 14, 2010
Japan's Yen Intervention: A Trade Skirmish?
The Japanese central bank has unilaterally stepped into the currency markets and bought U.S. dollars in an effort to lower the value of the yen and push up the dollar. It appears to have increased the dollar by about 1%. In economic terms, this intervention is similar to a 1% across-the-board tariff on all U.S. goods imported into Japan. Conversely, it creates a 1% price cut on all Japanese goods imported into the U.S.
While American consumers wouldn't mind a 1% price cut, this intervention could export some of Japan's unemployment to the U.S. American workers making products that compete with now cheaper Japanese goods may face a greater risk of layoffs and reduced income.
The Japanese government apparently had hoped for international support for its intervention. It got none. Everyone's hurting and no one wants to take someone else's unemployment.
There was no public reaction from the U.S. government to the Japanese intervention. A 1% shift in currency valuations is small from a medium to long term perspective, and could easily shift back within a few days from now in today's volatile currency markets. The U.S Treasury has its hands full squabbling with the Chinese about the valuation of the yuan, and probably doesn't want to fight on two fronts simultaneously.
The yen is rising because it's becoming more valuable. One reason is that the Chinese government has been buying yen denominated assets in order to diversify away from the dollar. The Chinese are killing two birds because this diversification is also likely to weaken the dollar. Because the Chinese yuan is still essentially tied to the dollar, when the dollar sinks, so does the yuan. The Chinese tack allows them to maintain approximate parity with the dollar while gaining a trade advantage over the Japanese.
By intervening, the Japanese central bank is in effect riposting with a two birds with one stone tactic of its own. Pushing the dollar up also pushes up the yuan against the yen, thereby recovering some of the trade advantage the Chinese have gotten lately.
Next week, the Federal Reserve will meet again and perhaps give more guidance on the extent of the quantitative easing (read, printing of money) it has in mind for the foreseeable future. The more the Fed quantitatively eases, the lower the dollar will fall in the currency markets. The Japanese may perceive this as aimed at them, even though it isn't. They might respond with more intervention.
With economies around the world slowing and governments too leveraged for much more stimulus spending, currency manipulations are a deceptively cheap and easy way to improve a nation's prospects. The problem is that one nation's gains come at the expense of other nations. When they all start to maneuver their currencies around, they wittingly or unwittingly form a circular firing squad aiming inward. Things weren't pretty when that happened in the 1930s and they wouldn't be pretty if it happened again.
While American consumers wouldn't mind a 1% price cut, this intervention could export some of Japan's unemployment to the U.S. American workers making products that compete with now cheaper Japanese goods may face a greater risk of layoffs and reduced income.
The Japanese government apparently had hoped for international support for its intervention. It got none. Everyone's hurting and no one wants to take someone else's unemployment.
There was no public reaction from the U.S. government to the Japanese intervention. A 1% shift in currency valuations is small from a medium to long term perspective, and could easily shift back within a few days from now in today's volatile currency markets. The U.S Treasury has its hands full squabbling with the Chinese about the valuation of the yuan, and probably doesn't want to fight on two fronts simultaneously.
The yen is rising because it's becoming more valuable. One reason is that the Chinese government has been buying yen denominated assets in order to diversify away from the dollar. The Chinese are killing two birds because this diversification is also likely to weaken the dollar. Because the Chinese yuan is still essentially tied to the dollar, when the dollar sinks, so does the yuan. The Chinese tack allows them to maintain approximate parity with the dollar while gaining a trade advantage over the Japanese.
By intervening, the Japanese central bank is in effect riposting with a two birds with one stone tactic of its own. Pushing the dollar up also pushes up the yuan against the yen, thereby recovering some of the trade advantage the Chinese have gotten lately.
Next week, the Federal Reserve will meet again and perhaps give more guidance on the extent of the quantitative easing (read, printing of money) it has in mind for the foreseeable future. The more the Fed quantitatively eases, the lower the dollar will fall in the currency markets. The Japanese may perceive this as aimed at them, even though it isn't. They might respond with more intervention.
With economies around the world slowing and governments too leveraged for much more stimulus spending, currency manipulations are a deceptively cheap and easy way to improve a nation's prospects. The problem is that one nation's gains come at the expense of other nations. When they all start to maneuver their currencies around, they wittingly or unwittingly form a circular firing squad aiming inward. Things weren't pretty when that happened in the 1930s and they wouldn't be pretty if it happened again.
Sunday, September 12, 2010
Bank Capital Standards: Basel's Leaky Levee
An international gathering of bank regulators in Basel, Switzerland solemnly announced today an increase in bank capital requirements, to which they agreed in order to prevent another worldwide credit crisis like the one in 2008. Minimum capital requirements will triple. The definition of capital will be tightened up, so somewhat elusive assets won't be treated as a safety net. It's even possible that some national regulators may impose countercyclical capital buffer requirements (i.e., rules that would obligate banks to add to their capital in good times as a further buffer against bad times). Regulators worldwide are congratulating themselves on a job well done.
There is, however, a rosy tint to all the hoopla. The new rules, called Basel III, are just a nonbinding agreement among bank supervisors. Nothing is legally binding yet. The mighty dam against financial panic that the Basel Committee announced is not necessarily as sturdy as it might seem.
Implementation Schedule in the Slow Lane. The new rules have to be adopted through whatever regulatory or legislative means would be required in each member nation, and the members have until the beginning of 2013 to begin implementing the new rules. Capital requirements are supposed to double current requirements by the end of 2017, and more than triple by the end of 2019. That's nine years from now. A lot can happen in nine years. Nine years ago, in 2001, the stock market was on an inflation-adjusted basis higher than it is today and unemployment was a lot lower. In the intervening nine years, we would have a housing boom and bust, and a crippling credit crisis. Fortunes would be made in finance, while retirements for the rest of us would be deferred. Americans in 2020 may have a safer, sounder and more stable financial system. But we have to slog through years of same old, same old to get there. In the meantime, with the economy slowing and possibly headed for another recession, we could have yet another banking crisis before we have new bank capital standards in place. (In the past nine years, we've had two recessions, so one more in the next nine years is hardly unimaginable.)
Bank Lobbying and Political Contribution Budgets Boom. Because each member nation has to go through the process of legally adopting the new rules, bank lobbyists and bank-friendly politicians can reasonably anticipate improved cash inflows for the next few years. Banks have it real good at the moment--low capital standards, implicit and explicit government guarantees, gratifyingly generous government subsidies, and only a moderate amount of flak about exceptionally handsome executive compensation. The Basel III rules will lower profits, reduce incentives to use leverage, potentially reduce or eliminate dividends (at least for some years) and, worst of all, dampen banker bonuses. Banks will use all the political influence they have to delay and soften the rules. The preceding Basel II capital requirements, which didn't exactly cover themseves with glory given that the 2007-08 financial crisis happened on their watch and resulted in the largest bank bailouts ever, were announced in 2004, delayed in 2005, and are still in the process of being implemented. Now that the regulators have reached agreement on Basel III, look for the political scrambling to begin in earnest.
Outflanking Basel III. Because of the extraordinary costs of the bank bailouts and the continuing need for federal regulators to subsidize banks, it might not be altogether surprising if the Federal Reserve and other regulators implement Basel III largely as announced. Bankers will look to skin the cat in other ways. Accounting standards can be manipulated. In 2009, bankers called in political chits to get Congress to heap organic material on regulators until they agreed to loosen up accounting rules for mortgage-backed investments (held by banks in enormous amounts). The result was that so called "mark-to-market" accounting was made more of a discretionary judgment than a requirement. What self-interested banker (and is there any other kind?), comparing the losses that would result from marking mortgage-related assets to market, to the earnings that could result from overlooking the cruel dictates of the market, would not conclude that a liberal valuation of his bonus is preferable to a conservative valuation of the bank's assets? Rigorous capital standards don't accomplish much if accounting standards allow hinky assets to be swept under the carpet.
It's possible Basel III will ultimately produce a better financial world. But don't count on it. Keep your debt levels low, your saving rate high and your hand on your wallet.
There is, however, a rosy tint to all the hoopla. The new rules, called Basel III, are just a nonbinding agreement among bank supervisors. Nothing is legally binding yet. The mighty dam against financial panic that the Basel Committee announced is not necessarily as sturdy as it might seem.
Implementation Schedule in the Slow Lane. The new rules have to be adopted through whatever regulatory or legislative means would be required in each member nation, and the members have until the beginning of 2013 to begin implementing the new rules. Capital requirements are supposed to double current requirements by the end of 2017, and more than triple by the end of 2019. That's nine years from now. A lot can happen in nine years. Nine years ago, in 2001, the stock market was on an inflation-adjusted basis higher than it is today and unemployment was a lot lower. In the intervening nine years, we would have a housing boom and bust, and a crippling credit crisis. Fortunes would be made in finance, while retirements for the rest of us would be deferred. Americans in 2020 may have a safer, sounder and more stable financial system. But we have to slog through years of same old, same old to get there. In the meantime, with the economy slowing and possibly headed for another recession, we could have yet another banking crisis before we have new bank capital standards in place. (In the past nine years, we've had two recessions, so one more in the next nine years is hardly unimaginable.)
Bank Lobbying and Political Contribution Budgets Boom. Because each member nation has to go through the process of legally adopting the new rules, bank lobbyists and bank-friendly politicians can reasonably anticipate improved cash inflows for the next few years. Banks have it real good at the moment--low capital standards, implicit and explicit government guarantees, gratifyingly generous government subsidies, and only a moderate amount of flak about exceptionally handsome executive compensation. The Basel III rules will lower profits, reduce incentives to use leverage, potentially reduce or eliminate dividends (at least for some years) and, worst of all, dampen banker bonuses. Banks will use all the political influence they have to delay and soften the rules. The preceding Basel II capital requirements, which didn't exactly cover themseves with glory given that the 2007-08 financial crisis happened on their watch and resulted in the largest bank bailouts ever, were announced in 2004, delayed in 2005, and are still in the process of being implemented. Now that the regulators have reached agreement on Basel III, look for the political scrambling to begin in earnest.
Outflanking Basel III. Because of the extraordinary costs of the bank bailouts and the continuing need for federal regulators to subsidize banks, it might not be altogether surprising if the Federal Reserve and other regulators implement Basel III largely as announced. Bankers will look to skin the cat in other ways. Accounting standards can be manipulated. In 2009, bankers called in political chits to get Congress to heap organic material on regulators until they agreed to loosen up accounting rules for mortgage-backed investments (held by banks in enormous amounts). The result was that so called "mark-to-market" accounting was made more of a discretionary judgment than a requirement. What self-interested banker (and is there any other kind?), comparing the losses that would result from marking mortgage-related assets to market, to the earnings that could result from overlooking the cruel dictates of the market, would not conclude that a liberal valuation of his bonus is preferable to a conservative valuation of the bank's assets? Rigorous capital standards don't accomplish much if accounting standards allow hinky assets to be swept under the carpet.
It's possible Basel III will ultimately produce a better financial world. But don't count on it. Keep your debt levels low, your saving rate high and your hand on your wallet.
Wednesday, September 8, 2010
And If the Republicans Win This Fall, Then What?
The polls indicate the Republicans will do well in the fall mid-term elections, likely winning the House and perhaps the Senate as well. Let's assume that happens. Then what?
We will have a Democratic White House and a Congress partially or entirely controlled by Republicans. The government will largely be deadlocked. Even though the economy will still be a sick puppy, little will happen. But the blame for little happening will fall on both Democrats and Republicans. Once in power, the Republicans also have responsibility. If their only platform is to obstruct and criticize, they will have failed in their responsibilities. Voters don't put them in control just to whine and play gotcha politics. The electorate expects action.
Action would mean compromise and bipartisanship. In today's Tea Party-driven, hyper-partisan politics, compromise is the one thing that ain't gonna happen. All the more so since some of the soon-to-be elected Republicans are insurgents within their own party and can't reach agreement even with their own colleagues.
A political deadlock may well favor Barack Obama. As the chief executive, he can still pursue his goals through administration policies and executive orders. He will be prominently visible as the commander-in-chief and as the first among equals when dealing with foreign leaders. There remain plenty of problems and threats, foreign and domestic, that will give him frequent opportunities to look Presidential.
Congress will continue to look like a bunch of squabbling idiots, only with a Republican hue. It will become easier for the Democrats to take shots at the Republicans, since legislative control also means accountability. The Republican Party, a morass today with a controversial RNC chairman, no organized leadership structure, and lots of insurgents who each may take their own tacks whenever they feel like it, will struggle. Political advantage will shift toward the Democrats. Barack Obama may well be re-elected in 2012.
It's happened before. Ronald Reagan didn't do well in the 1982 mid-term elections but he was a two-term President. The Clintonian Democratic Party got clobbered in the 1994 mid-term elections, losing control of the House. But Bill Clinton was re-elected in 1996. The Republicans are about to get what they wish for. And they had better beware.
We will have a Democratic White House and a Congress partially or entirely controlled by Republicans. The government will largely be deadlocked. Even though the economy will still be a sick puppy, little will happen. But the blame for little happening will fall on both Democrats and Republicans. Once in power, the Republicans also have responsibility. If their only platform is to obstruct and criticize, they will have failed in their responsibilities. Voters don't put them in control just to whine and play gotcha politics. The electorate expects action.
Action would mean compromise and bipartisanship. In today's Tea Party-driven, hyper-partisan politics, compromise is the one thing that ain't gonna happen. All the more so since some of the soon-to-be elected Republicans are insurgents within their own party and can't reach agreement even with their own colleagues.
A political deadlock may well favor Barack Obama. As the chief executive, he can still pursue his goals through administration policies and executive orders. He will be prominently visible as the commander-in-chief and as the first among equals when dealing with foreign leaders. There remain plenty of problems and threats, foreign and domestic, that will give him frequent opportunities to look Presidential.
Congress will continue to look like a bunch of squabbling idiots, only with a Republican hue. It will become easier for the Democrats to take shots at the Republicans, since legislative control also means accountability. The Republican Party, a morass today with a controversial RNC chairman, no organized leadership structure, and lots of insurgents who each may take their own tacks whenever they feel like it, will struggle. Political advantage will shift toward the Democrats. Barack Obama may well be re-elected in 2012.
It's happened before. Ronald Reagan didn't do well in the 1982 mid-term elections but he was a two-term President. The Clintonian Democratic Party got clobbered in the 1994 mid-term elections, losing control of the House. But Bill Clinton was re-elected in 1996. The Republicans are about to get what they wish for. And they had better beware.
Tuesday, September 7, 2010
Will the Chinese Government Outdo the Federal Reserve?
As reported by the Wall Street Journal this past weekend (Sept. 4-5, 2010 edition, p. A10), the Chinese government is aiming to forestall a looming bubble in China's real estate markets. Since April, the government has been trying to cap the market, tightening credit standards and discouraging speculators. Prices flattened for a couple of months, but have started to rise again. Many urban Chinese, an all important political constituency, can no longer afford to buy. The government is set on pushing prices down.
The Chinese government is doing what the Federal Reserve has resolutely refused to do: pop an asset bubble. Indeed, Fed Chairmen and Governors have insisted there is no way to spot an asset bubble before it bursts. The Chinese government takes the opposite tack.
Even though the Communists in China are no longer Communist, ideology plays a role in their thinking. They switched over to capitalism when it became clear Communism wasn't working. Ever pragmatic, the Chinese government has used market forces as tools to speed up industrialization and growth. But it does not worship market forces, and is willing to second guess them when they start to produced undesired effects.
For the last 23 years, the Federal Reserve has been chaired by free market Republicans, and free market laissez faire thinking has dominated. The Fed has too readily viewed market forces as sacrosanct and not to be interfered with. That's puzzling, since market forces are simply one aspect of human activity. As a society, we have no problems regulating and second guessing all manner of human activity. Just get in your car and take a short spin. You'll encounter all kinds of rules, regulations, restrictions and prohibitions. If we see the logic of regulating the interactions of people as drivers, why not regulate their interactions in financial markets? Drivers aren't sacrosanct. Investors, speculators, lenders and other financial markets players shouldn't be, either.
The Chinese economy is growing around 10 or 11% a year right now, which is part of the reason for the real estate bubble there. The government hopes to knock home prices down, while slowing the economy to around 8% or 9%. If it can produce a Goldilocks effect--a real estate market and economy that are not too hot and not too cold--the Chinese government will have done what the Federal Reserve has insisted can't be done.
The Chinese government has studied Western economies and Western financial systems carefully, and applied many of the basic principles of free markets to China. China has prospered. The Chinese learned from the West, and now their economy is growing faster than Westen economies. It may not be a bad idea for the West to learn something from China: when investors and speculators go bonkers in the market--especially through the use of leverage--it's probably a good idea to rein them in.
The Chinese government is doing what the Federal Reserve has resolutely refused to do: pop an asset bubble. Indeed, Fed Chairmen and Governors have insisted there is no way to spot an asset bubble before it bursts. The Chinese government takes the opposite tack.
Even though the Communists in China are no longer Communist, ideology plays a role in their thinking. They switched over to capitalism when it became clear Communism wasn't working. Ever pragmatic, the Chinese government has used market forces as tools to speed up industrialization and growth. But it does not worship market forces, and is willing to second guess them when they start to produced undesired effects.
For the last 23 years, the Federal Reserve has been chaired by free market Republicans, and free market laissez faire thinking has dominated. The Fed has too readily viewed market forces as sacrosanct and not to be interfered with. That's puzzling, since market forces are simply one aspect of human activity. As a society, we have no problems regulating and second guessing all manner of human activity. Just get in your car and take a short spin. You'll encounter all kinds of rules, regulations, restrictions and prohibitions. If we see the logic of regulating the interactions of people as drivers, why not regulate their interactions in financial markets? Drivers aren't sacrosanct. Investors, speculators, lenders and other financial markets players shouldn't be, either.
The Chinese economy is growing around 10 or 11% a year right now, which is part of the reason for the real estate bubble there. The government hopes to knock home prices down, while slowing the economy to around 8% or 9%. If it can produce a Goldilocks effect--a real estate market and economy that are not too hot and not too cold--the Chinese government will have done what the Federal Reserve has insisted can't be done.
The Chinese government has studied Western economies and Western financial systems carefully, and applied many of the basic principles of free markets to China. China has prospered. The Chinese learned from the West, and now their economy is growing faster than Westen economies. It may not be a bad idea for the West to learn something from China: when investors and speculators go bonkers in the market--especially through the use of leverage--it's probably a good idea to rein them in.
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