OK. Have you been reading the Wall Street Journal, Washington Post and New York Times for the last week and paying attention to the musical chairs of TBTF bankers and their crony regulators with their "nobody could have foreseen it" and "we're so sorry that we are responsible along with everybody else for what happened" stuff? It's getting almost nauseating, isn't it?
Here's just a few of the headlines from what you could have read over the last few days.
- Nasiripour, JPMorgan Chase Argues Against Mortgage Modifications, Citing Sanctity of Contracts, Huffington Post (Apr. 10, 2010).
You may recall that JPMorgan Chase was one of those TBTF banks that benefitted enormously from having the US provide liquidity, pick up AIG's contract obligations to swap counterparties (like JPMorgan Chase) that otherwise would have resulted in much below-par payout, get a US guarantee for its acquisition of Bear Stearns (see JPMorgan Chase to Acquire Bear Stearns, JPMorgan website (Mar. 16, 2008)--allowing JPMorgan Chase to claim it was "standing behind Bear Stearns" even though the Fed was funding $30 billion of its worst assets--and, oh, there are all those Bear Sterns employment contracts that weren't worth a thing to the former employees); and provide seized Washington Mutual assets at low cost aided by its "write down" of $31 billion in bad loans that left $30 billion in debt and preferred stockholders with little recovery and of course adding to the big bank's TBTF status (see WaMu is seized, sold off to JP Morgan, Wall St. J., Sept 26, 2008), all of which amounts to a substantial cost-of-funds advantage in JPMorgan Chase's competition with other banks that aren't TBTF! Oh, and its credit-card business frequently announces "new terms" in the unilateral contracts that get almost no consumer protection pushback.
While all "legal" and the firings and "modifications" are all within the terms of the unilaterally drawn contracts (unless you are a big shot, ordinary employment contracts and credit card contracts and, in crises these days are essentially nonnegotiable "deals" offered on the corporation's terms, with lots of outs for the corporation and few for the other side--something we would call "unconsciounable" if we had not lost all ability to understand the term), it doesn't sit well with tJPMorgan Chase's home lending executive's sanctimonious talk of sanctity of contract. For example, the way WaMu's senior lenders lost out (got their contracts cancelled, one might say) resulted directly from the actions of the JPMorgan CEO.
"Jamie Dimon [JPMorgan Chase CEO] ... could--and did--ask for pretty much anything he liked, including the right not to have to pay back any of WaMu's creditors. The result was that the bank wholesale-funding market went straight into crisis. ... A relatively consumer-friendly bank (WaMU) [was] forced ...to adopt the practices of a relatively consumer-unfriendly bank (Chase)--with predictable results. Chase is now telling former WaMu customers that even if they have directed the bank not to let their accounts go overdrawn, the bank can still push the account into overdrawn territory anyway, and, of course, 'will assess an inssuficient Funds Fee' for doing so." Salmon, Revisiting WaMu, Reuters, May 26, 2009.
That is just another version of the privatization of gains (liquidity, bad assets purchases, and cost-of-funds advantage all provided by the US taxpayer, with most of the loss to the taxpayer not conspiculously traceable and the cost-of-funds advantage to JPMorgan Chase pretty invisible except to those in the know) coupled with the socialization of losses (credit card borrowers who were hit with mushrooming fees and rates and bank-friendly terms; mortgage loan borrowers that were duped into higher-interest loans than their credit scores merited; borrowers who were cajoled into loans they shouldn't have taken out in the first place; and borrowers who are merely underwater because of the tsunami impact of the banks' subprime mortgage and credit default swap games--all told "no dice" on modification of the principal amount of the loan because "a contract is a contract"). The reason the TBTF banks won't voluntarily modify principals on mortgage loans is because they are determined not to take any losses they don't absolutely have to, yet they are at the same time increasing borrowing costs for ordinary Americans, adding to the usurious fees they charge, and paying close to zero interest on ordinary Americans' deposits while they continue their proprietary trading profit machine.
So what does Lowman (JPMorgan Chase Home lending CEO) say: "If we re-write the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future?" But note that many of these loans were done without considering the possibility that house prices could fall--at all, without getting proper paperwork, often with what most of us would consider fraud in lending. This is not "ordinary" lending times--as several of the books and even the cited article indicate, the bank on its side of those loans "did not coneduct any stress tests that showed house prices falling." So as usual, it wants a unilaterally advantageous contract. The bank pushed big loans on homeonwers who really couldn't afford to pay them (and would have to be able to refinance them to manage, in many cases) all without even considering the possibility of lower instead of higher house prices. But the borrower, it says, must bear all the cost of such a foolish assumption! And the big banks have fought even modification of mortgage loans in bankruptcy, indicating that they are unwilling to take those losses in ways that benefit borrowers even though every other type of loan can be modified in bankruptcy.
Relying on sanctity of contract as an absolute in this national crisis caused by the banks' own insatiable demand for fees from securitizations that required more and more "loan product" in the pipeline is, put simply, ridiculous. Congress should pass a bill permitting modification of home loans in bankruptcy, and requiring any bank that has benefited from any of the emergency liquidity or bailout measures to modify home loans for its own borrowers where it is a principal residence, the borrowers bought their home at inflated prices within some period (3 years?) of the peak of house prices, and the borrowers' home value, established based on recent home sales in the neighborhood is now less than some reasonably low percentage (60%?) of the remaining outstanding amount of the loan.
- Story & Dash, Lehman Channeled Risks through 'Alter Ego' Firm, NY Times, Apr. 13, 2010 at A1
Many of those who have worked on Wall Street (lawyer, accountant, investment banker) will recognize a common transaction in the story of Lehman and its circular flows of assets and borrowings through related special purpose entities. This is something that the banks and lawyers propose to their sophisticated clients all the time--ways to have your pie and eat it too, essentially. Sometimes it's done on the up and up but almost always it's done with the intent to make less transparent the actual economic substance of the corporation's financial statements or tax attributes.
The particular entities and transactions revealed here--based on internal Lehman documents and the reporters' interviews with former employees--depict a firm that obscured its financial condition in the months and years before its bankruptcy with "Hudson Castle" and "Fenway" and a commercial paper issuance by the Fenway SPE that was bought by Lehman and used as collateral for a loan from JPMorgan Chase. The diagram looks like a circular flow of cash and won't be different from many other diagrams for many deals done on Wall Street in the last decade. Much of those big lawyer and banker fees (leading to big bonuses) rest on these questionable transactions that represent layers of financings hard to penetrate by the outsider and making financial statements difficult to assess. Clearly, this is where accounting reforms should come in--not more accommodation to banks on their ability to manipulate numbers with level 3 mark to model proprietary valuations, but rather more honesty and openness--sunshine--on the real interrelationships and financing schemes being used.
- Joe Bel Bruno, Star Manager is Charged in Subprime SEC Action, Wall St. Journal, Apr. 8, 2010 at C1
James Kelso, once a star mutual-fund manager, was accused by the Securities and Exchange Commission of deliberately inflating the value of subprime securities in order to hide losses in his funds after the real-estate bubble burst." Id. He was, the SEC claims, using the "opaque pricing on thinly traded securities" to his advantage. That included telling outside brokers "not to provide price information on one collateralized debt obligation unless the figure was above a certain level" and persuading accountants to accept numerous "'price adjustments' in 2007 that hid the dropping value of wrong-way bets."
Assuming the SEC is correct in its charges, this is a particular instance of the problem with broker-dealers' mark-to-model accounting, which provides too much opportunity for manipulation of values.
- Jones, Banks Winning When Investors Sue, Wall St. J., Apr. 8, 2010, at C1
In the many lawsuits by investors against banks stemming from the financial crisis, the odds of the outcome so far are weighted in favor of the banks. That's because it is extremely hard to prove fraud when you don't have enough access to internal information and evidence and when the banks can claim they are just "victims" of the financial crisis who made serious mistakes but didn't commit fraud. One can't help wondering if judges who dismiss these cases are being overly influenced by the banks' assertions that nobody could foresee the crisis.
But remember--their VaR models are just computer models. Nobody ever suggested to banks that it was wise to rely on proprietary computer models without using common sense. Dimon's JPMorgan Chase didn't stress-test mortgage backed securities for falling house price: they were convinced they would forever rise! Yet the bank continued to sell them to investors, and to package and sell even more toxic CDOs backed by junk "mezzanine" tranche CDOs (that would go bust if there was a correlated 8% default) backed by subprime mortgages.... That's something you would only do if you are so taken with the money you can make short-term (fees, bonuses) that you don't give a damn about the harm you do long-term (in part because you are making so much in the short-term that it doesn't matter to you personally and in part because you are relying on an implicit federal guarantee to back up your losses). Could they have known? Sure. Should they have known? Absolutely.
The upshot of this--"frequently, the large Wall Street financial institutions have escaped accountability even though those institutions fueled the subprime-market collapse." Id. (quoting one of the plaintiff-side lawyers in the suits against banks).
And here are three books you should read to balance some of the poppycock that the banks are spouting to protect their proprietary trading, consumer-disregarding fee structures, and cheap funding from the Fed (that provides that moolah for their outsized compensation structures). I've excerpted just a choice piece from the blurbs or intros to whet your appetite.
- Yves Smith, Econned: how unenlightened self interest undermined democracy and corrupted capitalism (2010) (a review is forthcoming here)
Virtually from their outset, a loose and often inconsistent set of ideas called 'free markets' have been widely criticized, both inside and outside the economics profession. Nevertheless, these ideas became wildly popular and served as the basis for 30 years of policy, in particular the deregulation of financial services. One reasons...is that they serve the agendas of powerful interests. ...Yves Smith draws a direct connection between fundamentally flawed financial theories and a series of crises that culminated in the global meltdown of 2007 and 2008...[showing] that the pursuit of unenlightened self interest has produced a financial services industry that is a doomsday machine, systematically predatory, and now hugely powerful thanks to its control of vital financial strcuture.
- Michael Lewis, The Big Short (2010)
The real crash...had taken place over the previous year  in bizarre feeder markets where the sun doesn't shine and the SEC doesn't dare, or bother, to tread: bond and real estate derivate markets where geeks invent impenetrable securities to profit from the misery of lower-and middle-class Americans who can't pay their debts. The smart people who understood what was or might be happening were paralyzed by hope and fear; in any case, they weren't talking.
- Simon & Kwak, 13 Bankers (2010)
[blurb to be added]