Friday, October 15, 2010

Today's Best Reads

1--The law that was broken in the mortgage scandal, Felix Salmon, Reuters

Excerpt: This rule is not dense legalese at all. In fact Section 15E(s)(4)(A) is written in very plain English. Here it is in full (see page 231 of the PDF):

The issuer or underwriter of any asset-backed security shall make publicly available the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter.

I can’t for the life of me work out how every single mortgage bond that Clayton taste-tested didn’t violate this rule.

And in fact, the SEC has now proposed its own additional rule, which would mandate this kind of due diligence, and would also mandate that the issuer disclose the nature, findings and conclusions of any such taste test. (It's clear the banks broke the law by not disclosing what they knew about problem loans)

2--PIMCO's McCulley Discusses The Ticking $3 Trillion Shadow Banking Time Bomb, zero hedge

Excerpt: Paul McCulley--On August 9, 2007, game over. If you have to pick a day for the Minsky Moment, it was August 9. And, actually, it didn’t happen here in the United States. It happened in France, when Paribas Bank (BNP) said that it could not value the toxic mortgage assets in three of its off-balance sheet vehicles, and that, therefore, the liability holders, who thought they could get out at any time, were frozen. I remember the day like my son’s birthday. And that happens every year. Because the unraveling started on that day. In fact, it was later that month that I actually coined the term “Shadow Banking System” at the Fed’s annual symposium in Jackson Hole. (Must read for anyone who wants to understand what started the financial crisis)

3--Foreclosure crisis hits banks' stock prices, naked capitalism

Excerpt: But what has been striking the deeper we have dug into this morass is that on almost every matter of fact (as in how exactly did the banks handle the notes, which is the borrower IOU), the answers are coming in consistent with worse case scenarios. I continue to be gobsmacked at the flagrant disregard by large numbers of securitization industry participants for adherence to their own contracts and legal procedures necessary to protect their clients and ultimately, their organizations.

Ah, but I forget, a banker’s primary loyalty is to his own paycheck....

Wide-scale principal reductions may lead to “huge losses” for banks, said James Ellman, a former Merrill Lynch & Co. bank- stock portfolio manager who is now president of San Francisco- based hedge fund Seacliff Capital.

“You could potentially be talking about hundreds of billions of dollars in losses,” Ellman said. “Though it is a low probability, banks would have to go back to the capital markets for more capital.”

4--Robert Skidelsky on the Pointless Pain Caucus, Bradford DeLong, Grasping reality with both hands

Excerpt (from Robert Skidelsky) What macroeconomic theory do the budget hawks have to subscribe to, to believe that taking £100bn out of the economy in the next four years will produce recovery? And what do the budget doves need to believe to claim the cutters are wrong?...

Keynesians say is that when resources are unemployed, government borrowing is not deferred taxation: it brings resources into use that would otherwise be idle.... When the government borrows money for which there is no current business use, this increases people’s incomes and therefore the saving needed to finance the borrowing without interest rates having to rise... the “crowding out” argument is false.... The deficit is the stimulant the economy needs to start growing again: its withdrawal guarantees stagnation or worse.

5--The real danger from the foreclosure crisis, Washington's blog

Excerpt: Joshua Rosner - noted bond analyst, and Managing Director at independent research consultancy Graham Fisher & Co - told his clients Tuesday, that the impact from foreclosure gate on the securitized market could be huge.

[Rosner] said he believes the paperwork problems regarding foreclosed properties will ultimately be resolved, he wrote that "We have a larger and more significant concern, which, if proved out, could call into question the validity of nearly all securitizations."

Just four firms dominate the trustee market for mortgage-backed securities in which the mortgages aren't guaranteed by Uncle Sam: Deutsche Bank, U.S. Bancorp, Bank of New York Mellon, and HSBC serve as trustees for 70.5 percent of all such issuance since 2005, according to Asset-Backed Alert, an industry newsletter and data provider. An additional four firms -- Wells Fargo, Bank of America, JPMorgan Chase, and Citigroup -- control 29.1 percent, Asset-Backed Alert data show.

All told, these eight firms have served as trustees for 99.6 percent of all private-label mortgage-backed securities issued since 2005.

Were the document errors now cropping up in a handful of cases "to be found to have resulted from [the] widespread failure of issuers and trusts" to properly handle and transfer documents, "there would ... appear to be a strong legal basis for the calling into question [of] securitizations," Rosner wrote.

6--Consumer sentiment edges lower in October, Marketwatch

Excerpt: The preliminary Reuters-University of Michigan consumer sentiment index edged lower in October, falling to 67.9. Economists polled by MarketWatch expected the index to rise to 69.8 in October from 68.2 last month

7--Only the weak survive, Nouriel Roubini, Project Syndicate

Excerpt: The risk of global currency and trade wars is rising, with most economies now engaged in competitive devaluations. All are playing a game that some must lose.

Today’s tensions are rooted in paralysis on global rebalancing. Over-spending countries ... must save more and spend less on domestic demand. To maintain growth, they need a nominal and real depreciation of their currency to reduce their trade deficits. But over-saving countries – such as China, Japan, and Germany – that were running current-account surpluses are resisting their currencies’ nominal appreciation.

Currency wars eventually lead to trade wars, as the recent US congressional threat against China shows. ... If China, emerging markets, and other surplus countries prevent nominal currency appreciation via intervention – and prevent real appreciation via sterilization of such intervention – the only way deficit countries can achieve real depreciation is via deflation. That will lead to double-dip recession, even larger fiscal deficits, and runaway debt.

If nominal and real depreciation (appreciation) of the deficit (surplus) countries fails to occur, the deficit countries’ falling domestic demand and the surplus countries’ failure to reduce savings and increase consumption will lead to a global shortfall in aggregate demand in the face of a capacity glut. This will fuel more global deflation and private and public debt defaults in debtor countries, which will ultimately undermine creditor countries’ growth and wealth.

8--Currency Chaos, Jean Pisani Ferry, Project Syndicate

Excerpt: The IMF also reckons that the advanced countries must cut spending or increase taxes by nine percentage points of GDP on average over the current decade, in order to bring the public-debt ratio to 60% of GDP by 2030. Emerging countries, however, do not need any consolidation to keep their debt ratio at 40% of GDP.

Asymmetry of this magnitude requires a significant adjustment of relative prices. The relative price of the goods produced in the advanced countries (their real exchange rate) needs to depreciate vis-à-vis the emerging countries in order to compensate for the expected shortfall in internal demand.

In fact, this will happen whatever the exchange rate between currencies. The only difference is that, if exchange rates remain fixed, advanced countries will have to go through a protracted period of low inflation (or even deflation), which will make their debt burden even harder to bear, and emerging countries will have to enter an inflationary period as capital flows in, driving up reserves, increasing the money supply, and ultimately boosting the price level. For both sides, it is more desirable to let the adjustment take place through changes in nominal exchange rates, which would help contain deflation in the north and inflation in the south.

9--Saving Honduras, ADRIENNE PINE and DAVID VIVAR, Counterpunch

Excerpt: ...there is plenty of circumstantial evidence that certain individuals within State had direct knowledge of and involvement in the planning of the June 28, 2009 military coup that ousted president Manuel Zelaya, but that is largely beside the point. More importantly, the State Department's role has been fundamental in ensuring the continuance of the coup regime through the de facto governments of Micheletti and Pepe Lobo, governments that have been responsible for thousands of human rights violations against members of the vast resistance movement against the coup-a movement that has now collected one million three hundred thousand signatures for a sovereign declaration demanding a popular constituent assembly to rewrite the constitution and the unconditional return of former president Manuel Zelaya and the 100+ other political exiles. The State Department's support for the de facto governments has not wavered despite ongoing targeted extrajudicial assassinations of journalists, union leaders, intellectuals, LGBT activists, and others identified with the resistance movement, or the violent unprovoked police and military attack on an all-ages peaceful concert last month that resulted in the death of an elderly man, dozens of seriously injured concert attendees and band members.

The U.S. State has supported all this, but too often we confuse the State with the government. The State Department is but one very powerful part of what makes up the State, but it has not been working alone. Our U.S. neoliberal "democracy" is structured to protect the interests of corporations above all else: in criminal law, electoral spending, regulation, and privatization focused on turning desperate need into profit, the role of corporate power in determining state policy is paramount.

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