Category Archives: Moral hazard

Daniel Alpert: Tinkerbell Economics – The Confidence Fairy, Pixie Dust and a Sleeping Dragon

By Daniel Alpert, the founding Managing Partner of Westwood Capital. Cross posted from EconoMonitor

While we may be hours away from a partial (and certainly a stopgap) agreement in the talks among the Greek government, the troika and private sector creditors, it is doubtful that a deal will emerge in a fully constructed fashion that will survive its application in the real economy.

It is likely that the only common view amongst participants in the various talks is a desire to try to avoid a disorderly default. Beyond that there is a severe disconnect fostered by parallel realities that seem unable to intersect. Accordingly, a deal that can hold up both in the streets of Greece and in the markets is both illusive and unlikely. Here’s why I think so.

Recently I have had opportunities to meet with and question senior members of the economics establishment within the German government and the broader German intelligentsia. Our meetings were held under Chatham House rules so I can’t name names, but – after several meetings with policy delegations from Germany over the past 60 days – I am prepared to sum up what appears to be the pretty-universally-held German policy position as follows (my apologies if the below evidences some degree of frustration – but these encounters leave me quite chagrined):

Michael Hudson: Banks Weren’t Meant to Be Like This

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College

A shorter version of this article in German will run in the Frankfurter Algemeine Zeitung on January 28. 2012

The inherently symbiotic relationship between banks and governments recently has been reversed. In medieval times, wealthy bankers lent to kings and princes as their major customers. But now it is the banks that are needy, relying on governments for funding – capped by the post-2008 bailouts to save them from going bankrupt from their bad private-sector loans and gambles.

Yet the banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. The process has gone furthest in the United States.

NY Fed President Dudley Crosses Swords With GSEs and Board of Governors on Housing/Mortgage Mess

A speech by New York Fed president William Dudley is a bit of a surprise, in that it acknowledges the severity of the deepening mortgage crisis and sets forth some specific policy proposals. I still find these recommendations frustrating, in that they are insufficient given the severity of the problem and also fail to come to grips with widespread servicer abuses (not just servicer driven foreclosures, but also what amounts to theft from investors, via schemes such as double charging fees to borrowers and investors, inflating principal balances, reporting REO as sold months later than the transaction closed, and getting kickbacks on third party charges). But they are more serious than other ideas from senior financial officials. Specifically, the Dudley advocates principal relief via a program of “earned principal reduction” which would allow for put options for all severely underwater borrowers who stay current on their mortgages for three years. But as we will discuss, this proposal is less meaningful than it sounds.

Is Management Getting Worse?

To some readers, the answer to the headline may seem obvious: Yes, American management is clearly worse than it was, say, thirty or fifty years ago, because short-termism is endemic among public companies, and short-termism leads to all sorts of bad outcomes, like underinvestment and accounting gaming.

But that analysis is simplistic. Short-termism simply shows that management has adopted good for them, bad for pretty much everyone else (save maybe their bankster allies) goals and are pursuing them aggressively.

A comment by John Kay of the Financial Times has the effect of raising much more fundamental questions about the caliber of top managers.

The Trouble with Principles: Or, How to Not Lose Friends and Alienate People When Learning Economics (#OccupyWallStreet, #OWS)

By Jake Romero, an economics student at Portland State University. You can reach him at jvc613 (at) gmail.com

Economics has always been something of a battleground, but in November a group of about seventy Harvard students opened a new front in the ongoing hostilities: its introductory pedagogy. In solidarity with the Occupy movement, the students staged a walkout of their principles course to protest what they called its “inherent bias.”

In his rebuttal in the New York Times, Greg Mankiw countered that his teaching is careful to avoid policy conclusions and that its subject matter falls squarely within the current mainstream of the discipline. Narrowly correct, he nonetheless profoundly missed the broader points that his students, to be fair, seemed unable to articulate fully.

How the Public Misses Out on How Fights Over Bank Regulations Affect Them

The public keeps losing and losing and losing to big finance because financiers have made an art form of using complexity, opacity, and leverage to cover their tracks.

The last example comes in an anodyne-seeming article in the Financial Times about collateralized loan obligations, or CLOs.

Bill Black: Dante’s Divine Comedy – Banksters Edition

Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives

Sixty Minutes’ December 11, 2011 interview of President Obama included a claim by Obama that, unfortunately, did not lead the interviewer to ask the obvious, essential follow-up questions.

I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal.

Obama did not explain what Wall Street behavior he found least ethical or what unethical Wall Street actions he believed was not illegal. It would have done the world (and Obama) a great service had he been asked these questions. He would not have given a coherent answer because his thinking on these issues has never been coherent. If he had to explain his position he, and the public, would recognize it was indefensible.

I offer the following scale of unethical banker behavior related to fraudulent mortgages and mortgage paper (principally collateralized debt obligations (CDOs)) that is illegal and deserved punishment. I write to prompt the rigorous analytical discussion that is essential to expose and end Obama and Bush’s “Presidential Amnesty for Contributors” (PAC) doctrine.

JP Morgan Hit by Ripple Effects of Rakoff Decisions Nixing SEC No Admission Settlements

The wisdom of Judge Rakoff’s tough and controversial decisions taking issue with the decades-long SEC practice of entering into settlements in which companies admit to no wrongdoing is becoming apparent. This is the essence of Rakoff’s beef, as represented in his latest ruling on this topic:

CME to Customers: Drop Dead

When I worked for Sumitomo Bank, I needed to buy a pricey book that catalogued the equipment in cotton spinning mills for a client (we’d been engaged to help him acquire a manufacturer, and he was interested only in certain types of machinery).

I sent one of the guys in my department to get the expense approved by the General Affairs department (no approval, no reimbursement). For convenience, we’ll call the person I sent A and the General Affairs fellow Mr. Noh.

Journey into a Libertarian Future: Part III – Regulation

By Andrew Dittmer, who recently finished his PhD in mathematics at Harvard and is currently continuing work on his thesis topic. He also taught mathematics at a local elementary school. Andrew enjoys explaining the recent history of the financial sector to a popular audience.

Simulposted at The Distributist Review

This is the third installment of a six-part interview. For the previous parts, see Part 1 and Part 2. Red indicates exact quotes from Hans-Hermann Hoppe’s 2001 book “Democracy: The God That Failed.”

Michael Olenick: Are Remotely-Processed Mortgage Assignments Another Smoking Gun?

By Michael Olenick, founder and CEO of Legalprise, and creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha)

Assignments of mortgages are the legal instruments that transfers ownership of a mortgage from one party to another. In a securitized mortgage, a trust holds thousands of mortgages on behalf of investors. The investors in the various bonds that get cash flows from a single trust expect the trust to be in a position to take advantage of the rights conferred by the mortgages when certain events occur, usually payoff or default.

I used my crowd-sourced online software, www.findthefraud.com, to help categorize 2,500 assignments in Palm Beach County, FL, which were recorded in late 2008 and early 2009. Palm Beach County, like any Florida county, is a high foreclosure state and, thanks to strong public records laws in Florida, serves as a good bellwether about bank business practices both in Florida and around the country.

Judge Rakoff Whacks SEC Yet Again, This Time Over Citi CDO Settlement

Judge Jed Rakoff’s latest ruing, nixing a $285 million settlement between the SEC and Citigroup over a billion dollar fund that came a cropper, has broader implications than simply embarrassing the securities regulator (which given the fallen standing of the agency, and low standards in Washington generally, is harder to do than it ought to be). Rakoff has effectively said judges have no business sanctioning settlements in which the accused party admits to nothing.