The Media is finally waking up.
"Efforts by lobbyists have delayed FASB decisions and kept key parts of the American financial system beyond the reach of regulators. Their victories included ensuring that over-the- counter derivatives stayed unregulated and persuading the Securities and Exchange Commission to let investment banks' broker-dealer units reduce capital requirements. That allowed them to increase borrowing and magnify profits. Bank watchdogs also didn't move to tighten mortgage-industry standards until after the collapse of the subprime market. "
The problem is, that very same media better pay attention, because what Congress is likely to do will make it worse, not better:
"Pushed by taxpayers angry about financing a bailout of Wall Street while their retirement accounts wither, Congress is likely to shake up bank and securities regulation, giving the Federal Reserve more power. "
That would be a huge mistake. In fact, it would likely be mistake #3 in terms of gravity when the book entitled "The History of The United States, From Birth To Destruction" is written, and will move up the date of that tome's appearance by decades. (As an aside, Mistake #1 was passage of the 17th Amendment, and Mistake #2 was repealing Glass-Steagall. You will find the root of insane government deficits in #1, and bubblenomics was enabled by #2.)
"That's ironic to Donald Young, an investor advocate and FASB board member from 2005 until June 30. He testified at the same Senate hearing on Sept. 18 that both the Fed and the SEC joined the banks they oversaw in resisting proposals for more disclosure of off-the-books assets. "
The Fed hasn't stopped with this nonsense either. In fact, just Friday, Bernanke (looking like he sat on an elephant phallus; one wonders if the terror in his eyes is a fear of being de-masked and exposed as a shill and conman par-excellence) delivered a speech in which he said:
"The ability of financial intermediaries to sell the mortgages they originate into the broader capital market by means of the securitization process serves two important purposes: First, it provides originators much wider sources of funding than they could obtain through conventional sources, such as retail deposits; second, it substantially reduces the originator's exposure to interest rate, credit, prepayment, and other risks associated with holding mortgages to maturity, thereby reducing the overall costs of providing mortgage credit."
Read the bolded part of that paragraph carefully.
The first part - "it substantially reduces the originator's exposure" - is true.
However, "thereby reducing the overall costs of providing mortgage credit." is false, and Ben knows it.
One cannot reduce the risks he elucidates by changing who bears them. As I have repeatedly pointed out in The Market Ticker it is not possible to create more value in a loan than there was originally. In fact, the value in a given loan declines every time someone touches it, because for each such interaction (sale, bundling, etc) there is slippage and cost and someone must bear that expense.
That is, a local bank that writes a mortgage and sits on it receives the maximum possible profit available from making that mortgage. Now it is true that any single mortgage may default, but if the bank writes 1,000 mortgages, holding all of them in its portfolio to maturity, then the maximum possible realized profit from that pool of loans, held as whole loans and never touched again, will be realized by that bank.
If that bank sells that whole loan to someone else, there are transactional costs involved and a new risk, slippage, is introduced. That is, there is a risk that the seller and buyer may over or underpay for the loan. In fact, it is a foregone conclusion that this must take place, because no buyer will buy unless he believes he is getting a good deal, and no seller will sell unless he likewise believes he is getting a good deal.
In other words one of the two parties to a transaction must always be wrong in terms of how they perceive value. This "skew" between true fair value and perceived value is why commerce works, at its core, but it means that every transaction that a good or service goes through dilutes its value in that someone always gets the short end of the deal.
The only way to make the "value" go up as the loan passes through various hands is for the buyer to get screwed, and the only way it can happen consistently (instead of the random "who got the best deal" outcome in a free, fair, and open market) is when that screwing is intentional and willful - that is when the sellers commit fraud.
Ben, being a banker, wants the maximum possible velocity of money, because every time a bank handles a particular $100 it takes a small bite out of it. By increasing the velocity of money banks make more of it, but everyone else gets poorer; the value of the deal once the bank has touched it has gone down as a consequence of the embedded costs that weren't there prior to the bank's involvement.
The fallacy in the argument rests on the premise that without "securitization" there would be insufficient money (in the form of deposits) to lend against. This is false; were there no securitization funds would have to be attracted for deposit, which means that interest rates for savers would have to increase. This would both slow the velocity of money and keep some of the profits from these transactions for ordinary citizens instead of screwing them at every turn.
Far more important, however, is that it's darn hard to hide the risks of a loan when it's a simple loan in your portfolio, and if you make a bad loan in that environment you (the person who made the decision) are the one who's going to eat it.
That is, a lack of securitization:
Enforces market discipline since losses are borne by the decision maker responsible for the loss.
Is a net benefit to ordinary members of the public as interest paid on savings must rise to attract sufficient deposit capital to fund the loans to be made; this encourages capital formation whereas encouraging everyone to live as deeply in debt as possible encourages capital destruction and malinvestment.
Makes fraud in lending unproductive since the costs associated with the fraud immediately blow back on the person committing it.
Were public policy to coincide with the maximum benefit for society as a whole we would be pushing to permanently shut down the securitization marketplace.
Ben continues to dissemble and push policies that are destructive to the common man and society as a whole because we let him and refuse to call him on the carpet when he makes statements that are demonstrably contrary to sound public policy and, instead, serve only to line the pockets of those who would rob from the body politic.
We have gone far beyond the slippage in valuations that has a legitimate root in fundamental disagreements between buyers and sellers, along with legitimate costs involved in transactions.
Indeed the entirety of the banking regulatory system is now focused on one and only one thing: guaranteeing that the pernicious and pervasive fraud embodied in the intentional gaming of valuations over the last 20 years continues, even if the only "sucker" left is the taxpayer forced to buy through the decisions of corrupt politicians and officials in our government!
To put it simply, the entirety of "bubble economics" or "bubblenomics" as I have dubbed it, requires one thing above all else - you must be able to lie about the value of your claimed 'assets' and get away with it.
You can only securitize mortgages if the buyer of those securities believes that their valuations are competitive, just as you can only sell any loan or other security into the market, no matter what it is, if the buyer believes he is getting good value for his money.
Over the last 20 years The Fed, FDIC, OTS, OCC and Congress have all conspired together with banks and other financial institutions in a loose confederation with one purpose above all others - to allow firms to literally invent valuations for their assets with no basis in or recourse to the real world of transactions.
By overvaluing these "assets" on purpose to a degree found only during Tulip Mania and Swampland Fever (Florida, 1920s) the gravy train of financial "engineering" and thus hundreds of billions of dollars in false profits have been skimmed off from consumers and now, via the TARP and other Fed-engineered and supported "rescues", we have money being extracted from taxpayers at gunpoint.
Why the taxpayer?
Because the private parties who were screwed over the last 20 years have woken up and aren't willing to be ripped off any more.
I use as Exhibit "A" Wachovia bank, who in their latest quarterly report claimed a balance sheet net asset position of $50 billion dollars as of September 30th.
Yet just a very short time later (literally two days later) the board of Wachovia approved a deal for Wells Fargo to buy the bank for $14.8 billion in Wells Fargo stock.
One of two things must be true, if logic holds and nobody has committed an offense against common sense (and what should be an offense against the law):
The board intentionally allowed Wells Fargo to purchase the firm, in violation of their fiduciary duty to shareholders and the firm itself, at a discount of about 70%.
The value of the firm's assets declined by that same 70% in the space of two days.
Of course neither of those things is true.
The truth is that Wachovia's balance sheet assets were worth nowhere near $50 billion as of September 30th, and have not been for a long time.
Nor is this an isolated incident. National City was in the last few days acquired by PNC Financial on October 24th for $5.2 billion in PNC stock. But on September 30th, according to its financial statements, the firm had its shareholder equity was $17.2 billion, net-net, on its balance sheet.
Both firms of course defend such treatment and in fact the entire banking system, including Ben Bernanke, believe that "fair value" accounting is to blame for much of our crisis.
But if, in fact, fair value accounting outrageously understates the value of assets, why is it that the boards of both National City and Wachovia accepted these deals and voted in favor of them?
Certainly the boards do not believe that their companies are worth what their balance sheet proclaims, or they would not have agreed to any such transaction.
In fact, agreeing to such a transaction if you believe that the firm is worth anywhere near what its balance sheet says, would be a violation of your fiduciary responsibility to the shareholders of the firm and expose the directors and officers to civil and possible criminal liability far in excess of any "E&O" insurance that might be held.
That is, these board members would be liable to the full extent of their personal wealth (no company maintains tens of billions in E&O insurance.)
That Bloomberg is finally reporting these facts is refreshing. That it has taken them over a year to do so, when I and others have been shouting loudly about blatantly-overstated "asset valuations" since last year, is outrageous.
Now consider this - Ben and Hank have conspired to put huge amounts of these so-called "assets" on The Fed (and Treasury's) balance sheet, directly and indirectly. About $5.3 trillion of them are either owned or guaranteed by Freddie and Fannie, which these two clowns both pushed to nationalize.
If these so-called "assets" have a similar haircut to the reported "values" from National City and Wachovia, then the taxpayer has already been soaked to the tune of about $4 trillion dollars, an amount that adds roughly forty percent to the outstanding float of national debt in the United States!
You cannot argue with these two transactions or with the factual "haircuts" represented against claimed asset valuations of these firms.
They're done. They're real. And they are what they are.
The sad reality is that as asset values rise in excess of wage and productivity growth the risk that you are overpaying for that asset also rises commensurately. Therefore, if we were to apply a true "risk-based weighting" to asset purchases and holdings by banks, as the bubble inflated in housing we would have had reserve requirements against these securities rise in direct proportion.
If wages, for example, are rising at 2% a year, but houses are going up in price at 10% a year, then the differential is 8%. A proper risk-based reserve model would thus require the reserves held against these assets to cover the entirety of the difference, and ratings to automatically be adjusted to reflect the enhanced risk that the "top" of a bubble cycle had been reached. As these risks are non-linear and in fact exponentially increase as you move away from median valuations, so should the reserve requirements rise until at two standard deviations above historical norms you would be required to hold 100% in reserve against such assets.
Such a system of quantitative reserve requirements would have prevented the housing bubble in the first place (and, if in place in the 1990s, the Internet Bubble before it), as it would not have permitted the bubble values to be perpetuated. As reserve requirements rose a natural damper would have prevented spiraling monetary velocity from taking hold and thus the "thirst" for these securities which promised the Holy Grail would not have materialized.
Between The Genesis Plan, forcing securitizers to keep 20-50% of all debt they securitize (and on-balance sheet, since off-sheet games are prohibited in The Genesis Plan), and an exponentially-escalating reserve requirement against held assets, topping at 100%, the perverse incentives to lie about asset valuations would be neutralized.
We now get to find out whether or not Congress and The American People will finally stand up and put a stop to this nonsense, ejecting everyone involved in "overseeing" these firms, from Ben Bernanke on down, from public life and their position of alleged authority, recovering from all of these "bad actors" what they can via clawbacks and other legal process.
We now get to find out whether Congress will force the disgorgement of Fannie and Freddie from the Federal Government before their "assets" can be valued based on reality, not fantasy, which will force the cut-off of foreign federal debt funding - an event that would guarantee an economic Depression and is likely to cause the political failure of the United States.
We also get to find out whether we the people will allow this pernicious and outrageous fraud to continue to drain taxpayer resources until our nation and her citizens are literally bankrupt, with the handful of bankers-cum-fraudsters having long since made off with the money in their Gulfstreams headed to the Cayman Islands.
It is impossible to argue with the facts as represented in these transactions nor can one argue with the fact that taxpayers are now the forced purchasers of these "assets" at grossly-inflated prices for the specific and sole purpose of keeping the "game" alive.
We now are down to debating whether we as Americans, along with Congress, are going to continue to stick our heads in the sand while our pockets are picked on a daily basis, or whether we will stop it before the flow-through consequences of these actions cause the implosion of the United States economy and political system.
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