Let me begin with this caveat: I'm a capitalist. I like making money. I don't see anything inherently wrong in the pursuit of profit. However, I do see something wrong with what has happened underneath the surface of the economy over the last 7-10 years. There has been a wave of corruption largely related to the mortgage market. Whether it's brokers who fail to disclose terms and conditions to borrowers, banks who fail to actually check credit, ratings agencies who do a poor job of analyzing collateral, fund mangers who do little to no due diligence, or regulators who have (at best) fallen asleep on the job it seems as though everyone dropped the ball this time around.
Yanping Cui, 57, says she invested in auction-rate bonds last December at the urging of a broker at UBS AG in Long Beach, California. The same month, UBS told one of the issuers of those securities, a New Hampshire student-loan agency, that the $330 billion market was in danger of failing.
That's exactly what happened in February, when mounting mortgage losses forced dealers who underwrote and managed the market for more than 20 years to stop acting as buyers of last resort. Cui was told she wouldn't get her money back until the market recovered.
"He said it's very safe and as liquid as possible,'' Cui said of the advice she received from UBS broker Brian Meehan. "I'm so angry. That's my bloody money.'' Meehan, now at Wells Fargo Investments in Newport Beach, declined to comment.
Cui is one of dozens of investors who say they were sold auction-rate securities as a low-risk alternative to cash at the same time underwriters, including UBS and Citigroup Inc., were telling issuers that demand was softening, bond documents and interviews with investors show.
The chronology shows that dealers ``knew they didn't have enough demand,'' said Christopher ``Kit'' Taylor, executive director of the Municipal Securities Rulemaking Board from 1978 to 2007, who now consults investor groups on financial markets and regulation. ``They were not telling the other side of the story.''
I want to caution: these are allegations that have yet to be proved in court. However, given the recent track record of business I am not holding out much hope.
And then there is this bit of news:
Countrywide Financial Corp., the mortgage lender that lost $2.5 billion amid rising defaults and foreclosures, was sued by California and Illinois for allegedly luring borrowers into risky loans they couldn't afford.
Countrywide and Chief Executive Officer Angelo Mozilo were named in suits, filed today, claiming the biggest U.S. home lender used deceptive practices such as low ``teaser'' rates to entice thousands of borrowers into adjustable-rate loans without adequately informing them that payments would balloon in later months.
The two lawsuits were filed the same day Countrywide's shareholders approved Bank of America Corp's $3 billion takeover offer, clearing the way for the lender's bailout. Washington Governor Christine Gregoire said that state will fine Countrywide $1 million and revoke its license for allegedly discriminating against minority borrowers.
``It's going to be increasingly expensive for BofA because they are taking on all of these lawsuits,'' said David Olson, president of Wholesale Access Mortgage Research, in Columbia, Maryland. Countrywide was ``too aggressive and they should be punished.''
Countrywide has been getting a ton of press lately for a lot of reasons -- none of them good.
Let me also add the following: at times like this it's easy to go too far -- that is regulate too much so that legitimate business can't get done. Being angry about what has happened is understandable and wanting to do something about it is laudable. However, it's also easy to go overboard We have to find the middle.
Here's an example. One of the big problems with the current situation is CDOs/CLOs (collateralized debt obligations and collateralized loan obligations). These are pools of mortgages and/or loans that are cut up in different ways to different investors. (Here is a link to Wikipedia for a general explanation.) These structures have been around for about 25 years in one form or another and in general have worked as advertised. But there has been some call for an outright banning of these structures. This is akin to throwing the baby out with the bathwater. Something has to be done to prevent the current situation from happening again. But that something can't be so extreme as to make it impossible to get any business done.
This whole process of re-regulation is going to take time. I would suggest to following. Congress takes a long look at the financial industry -- one that last at least a year. They call many witnesses and get many perspectives on what went wrong and how to fix it. Then they write a bill dealing with the re-regulation.