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Who wants to be a bank?

March 28, 2010

Less than a year ago the “shadow banking” system was tried, convicted and placed on death row for its role in the credit crisis. It appears the president has issued a pardon.

“The Mortgage Bankers Association yesterday released a statement to a Senate subcommittee saying the system of turning loans into securities needs to be fixed and returned to its former glory. Securitization provides liquidity and disperses risk.”

“Fed’s Sack Defends Securitization, Says Financial System Requires Leverage”

I cannot comprehend this argument for leverage and securitization. DO We honestly think it’s a good idea to “disperse” risks away from banks onto investors? Banks employ highly paid risk managers, loan officers and high-tech software in order to analyze borrowers and efficiently extend credit to eligible consumers and businesses. So why the friggin hell would we want to transfer this responsibility to “investors” such as pension funds and govt municipalities as far away as Serbia? Thats like Bloomberg asking Curtis Sliwa and the guardian angels to police the city.

investors buy structured loans primarily for the attractive yield and will dump the crap into the market at the first sign of trouble. In order to avoid “Panic selling” – Investors would need to confidently value structured financial products. WE CAN NO LONGER COUNT ON THE RATING AGENCIES TO PROVIDE THIS SERVICE…

Here is a pitch for software co:
“there is a need for more granular information down to the borrower level which has driven market participants to build their own models using more detailed data from various sources and are closely tied to increased transparency in transactions. Investors need to analyze the data themselves, and we provide a platform that allows them to do that,” said Greg Munves, vice president at 1010data. “When dealing with large data sets like loan and borrower-level data, you need a platform that allows easy access and flexible analysis of all available information. This capability is crucial to the construction of more accurate, proprietary models. “Analyzing the universe of non-agency deals is a relatively large data problem unto itself, and now we’ve brought borrower credit data into the picture”

Sheet, with this software, who needs the banks?

I cant stand Paul “nobel prize” Krugman, but at least we agree on one thing:

“The banks don’t need to sell securitized debt to make loans — they could start lending out of all those excess reserves they currently hold,” Krugman

Your basic securitization:

Any stream of cash flows can be turned into a security.
A $50 monthly phone bill – That can be securitized.
Your kids $10 a week allowance – Can be a security.
But normally the biggest monthly expense? Mortgages. So lets take a $10mm 30 yr mortgage at 8%. THe bank can turn around and package your loan into a $10m MBS (mortgage-backed security) maturing in 30 years at say 7.5%. Banks dont package one mortgage into a security but at times hundreds. So if an investor buys one of these bonds how the hell are they going to be able to perform the required analysis on the underlying borrowers?? The answer is they dont.. If the yield is high enough you will have a demand for structured finance. Oh, and if there is insufficient demand, uncle sam will step in and guarantee the debt from default – protecting investors and alleviating the need for due diligence. (see Freddie and Fannie) So what happens to these bonds as the underlying borrowers default? If the debt is not guaranteed by the Govt, the bonds will decrease in value. The more structured the deal and less transparency on the underlying mortgages / borrowers and you have the ingredients for panic selling.

Loans should be issued and held by banks (the experts). Investors should not be expected / trusted to analyze the underlying assets in the securities. Securitized loans are subject to market risk, panicked selling and liquidity pressure so why is the govt making every attempt to re-start the shadow banking system? Perhaps it is because this allows anybody who buys a securitized loan to become a defacto bank. The Federal govt has purchased a shit load of securitized debt during the crisis allowing them to become one of the biggest banks in the world – with unlimited money to lend. That should scare the shit outa anybody.

5 Comments leave one →
  1. Giovanni's Deli permalink
    March 31, 2010 4:10 pm

    These might not be the best numbers to use, but they should be directionally and exponentially correct: FNM’s annual report said they did $823.6BB in biz acquisitions (MBS issuance and portfolio purchases) in 2009. If the 38.9% market share they claimed for Q4 held for the year, you’re looking at ~$2.2 trllion in volume. Current Fed Board of Governors data gives ~$1.3 trillion in cash assets for US commercial banks (I don’t think adding Savings Associations would change it much, and cash here is overstated as it includes vault/till cash and receivables/collections). That’s quite a hole, and it doesn’t even consider different risk weightings for agency MBS vs residential mortgages, etc. There’s a reason all that money is on the sidelines. And all this from somebody who wants to do away w/ too big to fail.

    I think essentially forcing banks to hold on to mortgages until maturity or prepay – this seems to be your prescription – is somehow a tad more ‘socialist’ (your second-most used word in conversation after ‘ehhhhhhhh’) than anything we’ve seen to date.

    I think you’re sort of mis-specifying the enemy by looking at what’s most proximate. Seems more fruitful to look not at the financial product structure, but the first link in the market structure that got us here.

    Mortgage brokers must die, really. At least in their 02-07 incarnations. They were effectively outsourced commissioned salespeople of the MBS slice-and-dice banks, with their separation introducing plausible deniability and allowing banks to express disbelief when originating brokers are eventually found to have been smoking crack and giving 120% LTV, no doc, stated income ITIN loans to the Trents of the world. Make the customer-facing organization (be it broker, correspondent or operating unit of a bank) put equity into the business they write. Could also do this via clawbacks at the individual level, or by putting deferred compensation in a sort of escrow account whose release is conditional on long term loan performance.

    Oh, and allow passage of meaningful consumer financial protection legislation, bank wankers (yeah, I’m looking at you, Frenchbag).

    Thanks though for this barely coherent rant. Viva shadow banking! Long MCO!

  2. debaseface permalink
    March 31, 2010 8:54 pm

    The mortgage mkt does not exist today without Freddie and Fannie who currently issue or guarantee 9 out of 10 mortgages – so the numbers you indicated may even be low… perhaps this cuntry should rely less on credit and try to save a few sheckels – or we required 20-30% down payment for a $600k ranch in L-town. (never going to happen – the govt allows you to use your tax credit, and only your tax credit as a down payment)
    But fine, the $1.3 trillion excess reserves may not be able to take up the slack (fractional reserve banking?) but it is reasonable for loan originators to keep some skin in game no? – say 5-10% and/or clawbacks etc.. I think you can agree.

    “Forcing banks to hold on to mortgages until maturity is somehow socialist.”

    Forcing the Fed to hold their MBS perhaps, but I dont get your argument really.

    The financial product structure is broken from the 1st to the last link – Mortgage brokers – investment banks – Rating agencies – Investors ( who sold the paper (en mass) the first time they heard the term “sub prime” on CNBC). The entire process needs to be scrapped and re-done. Somebody should tell that Dodd character to put it in the bill along with ‘meaningful consumer financial protection legislation’.. Some turd Republicans from TN will vote it down anyhow

    120% LTV?? FNR/FRE have been permitting refis of 125% LTV +

    Lesson learned eh?
    Thanks for replying to this barely coherent rant and not once using the word ‘conspiracy’
    I owe you a malt liquor.

  3. debaseface permalink
    March 31, 2010 8:59 pm

    “Forcing banks to hold on to mortgages until maturity is somehow socialist.”

    I see, the socialism is in “forcing”

    They can sell the debt to another bank, or buy credit protection, but not structure it into a mezzanine traunch and dump on on some turd.

  4. debaseface permalink
    April 7, 2010 9:44 pm

    The Washington Post-
    “The Securities and Exchange Commission (which doesn’t have the authority to tell lenders what kinds of loans to make) proposed that banks share the risk of losses when issuing asset-backed securities, which are created from bundles of loans and sold to investors. It also proposed far more disclosure about the loans making up those investments, whose contents are seldom reviewed by investors.

    The measures are designed to pressure firms to make better loans and to alleviate concerns that banks, looking to generate fees, bundled subprime and other risky mortgages into investments and sold them without considering whether the underlying loans would go bad. The SEC proposals come as the securitization market is roaring back”

    On its face, forcing banks to keep some “skin in the game” in order to keep em honest seems to make sense, but banks can simply buy Credit protection on the 5% and continue to package garbage and sell it yield craving retards (see Goldman Sachs).
    Clawbacks? Perhaps, but who sets the terms?

    At the end of the day the banks package this stuff up and sold it off in 2006 and the garbage ended up right back on their balance sheet anhow (or in a SIV as collateral) so there goes my argument I suppose..

    Hows about good old fashion loan standards and somebody to regulate em?

    “Comptroller of the Currency John Dugan, on the other hand, has suggested that a better approach would be for regulators to set minimum loan standards, such as verification of borrower incomes and a requirement that borrowers make meaningful down payments, for all mortgages. ”

    Hmmm, Perhaps some sorta consumer protection agency also?? You would fIgure Since the Govt has their hands in each and every new Mortgage nowadays (via FHA, Freddie and Fannie) they would maintain a new / higher standards for mortgage lending. Nope – cant let ‘prudent lending’ get in the way of propping up house prices. I’m going to continue to mull this the F over, but I’m certain my conclusion will have something to do with the fallacies of ZIRP. You allow the mkt to determine int rates and you stunt reckless lending and investing (folks wouldnt need to invest in risky assets for yld)

  5. tiefighter25 permalink
    April 17, 2010 8:04 pm

    Usury should still be a sin. Done, next.

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