It's Time to Reregulate Business, Part III

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.

From Bloomberg:

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.

Comments

[Henry]

Hale,
So... you are a capitalist! (feeling a little insecure? How about patriot...are you wearing your flag pin?) Rest at ease. Once as a college student (way back) I listened to a Catholic Priest give a lecture in which he stated that we all know "Communism". It is the way we live in our family lives. (you take food from the fridge, you do not pay your parents rent...) So Hale, I do not know you, but I believe you are also Communist in the family sense. Not to mention that it is Socialism that provides you security from the evils of terrorism. The military provides security for all, even the homeless. Painful acknowledgement to the right, but we're all socialists. I hear that GM is a "steal"... now there is capitalism at its core!

[JBS]

I dispute the underlying contention that the wave of corruption is somehow limited to the mortgage market.

[nypoet22]

it's all well and good to allow people to make money, but not when they take it from places they have no right to take it from. since 2001, FOUR TRILLION of our dollars have been added to the national debt. we were robbed and we want the thieves arrested and our money returned.

[americaforme]

The average Joe is up to his elbows in sharks and alligators, all roads lead to one, and we're not talking the yellow brick road...Consumers are floundering, in a draconian,Typhon,of credit card debt...In a way the US Post Office has some of the fault, in allowing Banks to bombard American mail boxes, daily, to give unregulated, credit lines,in the thousands, to folks that couldn't pay it back in a million years. Banks in their greed, has caused this destruction of the average family. Stop the mailing of pre approved credit lines,via cards, and the everyone will recover...

[Merlin7]

Like clockwork, Republican presidential administrations run the nation's economy into the ditch, often leaving behind a recession for Democrats to overcome. It happened under Nixon-Ford, under Saint Reagan, under George Bush the Elder and now under George Bush the Revenge of the Morons.

Invariably out-of-control capitalists focus on short-term profit and ignore larger infrastructure needs, following the First Rule of Capitalism, which is Take The Money And Run. The upshot is that the U.S. is rapidly becoming a Second World country, falling behind Europe and parts of Asia and even Latin America in crucial criteria. Also, the U.S. has developed a "gangster class" with tremendous influence on Wall Street and in Congress that perpetuates this corrupt and inefficient system.

This must change soon, and we can't afford to wait a year of "study" before taking serious remedial steps. Unless our government and economy are overhauled soon, America's children will grow up in a nation that resembles the worst sections of Mexico -- poor, crime-ridden, full of jobless residents and heavily polluted.

[beingrepubwontmakeurich]

or worse - the NORTH AMERICAN UNION's children will grow up in a nation that includes the worst sections of Mexico, U.S. and Canada... and those sections will have gotten much much larger...

[JonathanDS2U]

Republicans have worked very hard to curtail regulation of big business, while disguising this movement with the slogan, "Less government", one of their most repeated. The cry for "less government" coming from a Republican should be sending chills down our spine, like a demand for a reduction in the police force in order to render all dark alleys a no-man's land.

[SeenItBefore]

The mortgage brokers acted out of greed. They offered loans with less collateral than your local "Godfather"... "One day I will ask for a favor in return".

"Well sir, we see that you are unemployed, have shitty credit, a series of repos and a pending bankruptcy. Also, no savings, a list of past dues as long as your arm, six kids and a pregnant wife. So here's what we're going to do. First we have approved you for a low-down payment, reverse mortgage, new construction ARM. Then we will fold in a second to cover the closing costs and a third to cover the down payment. Sadly, you were not the 6th person through the door, so the new car goes to the homeless crack head who will be down the street from you in his new home. All you have to do is sign here, here and here. What's that? O.K., then "X" here, here and here. Super, Angelia has your keys and a copy of the mortgaage. Thanks and remember, tell your friends!"
Now these people are asking for government( taxpayer) bailouts. On both sides of the table, the brokers and lending institutions pleading they had nothing to do with it, and the American public, claiming they were misled into believing poor credit and low incomes were not deterents to owning a house in Malibu.

[racom]

I almost totally agree, regulation is not only needed, it is essential for any market, or sector, to survive. My only point of question, why 'the last 7-10 years', why not since Reagan aggresively began the de-regulation from his first term? The ridiculous notion that markets will self regulate has been dead and buried for any and all that study the recent history of business growth vs greed.
We need a real progressive, not an Obama, to correct this situation. Otherwise kiss your behind goodbye, it all goes down the tube!

[bgregs]

You're right Bonddad! There is NOTHING wrong with making money, and in fact that is the ONLY purpose that a corporation has! However, there is something wrong with ONLY making money, and that's why the government has the authority, and in fact, the DUTY to regulate business! Without regulations companies will do everything in their power to ensure that they make the most profit in the shortest amount of time, and f*** the long view!! Since government doesn't have to be worried about profit, they are MUCH better able to take the long view, and are therefore able to not only regulate business, but to perform certain functions that perform worse with profit as the goal (health care, insurance in general, air traffic control, police, fire, road maintenance, road creation, schools, etc.....)

[Henry]

You don't need tons of yahoos testifying in front of a congressional committee. There is nothing that is going to work to satisfy everyone, but here are three:
1) The FED can no longer have a "funny money" monetary policy. Fed Funds rate must be 300 basis points above nominal inflation. No negative real interest rates (which are funny money)
2) Margin, margin, margin. Margin requirement to limit speculation. No naked shorts and 50% margin requirements. Change the Enron loophole and put an army of regulators keeping the ledgers "in line".
3) Whenever an institution sells its paper in the market, that institution has to guaranty the paper. This would stop the "funding banks" from funding the broker originated paper that passes on to securitizations.

It really is hard to imagine "conservatives" who want no limits on leverage. As devious George (our esteemed Joker in Chief) would put it "when you leverage, you are putting other peoples money at risk". It's high time to nail the fraudulent conservatives to the wall with their own credo(s).

[DavidHealy]

they don't need a year. they only need to reenact the regulatory laws (Glass Steagall et al) that kept us prosperous from 1945-1975 and then to enforce them with a vengeance.

[Konnie]

I am convinced that there needs to be a new law on the books similar to TREASON.

On top of whatever is being done illigally, there should be a law against doing something
that is currently legal only because some smarty pants figured out an end-run around the
current law and no one saw clearly what the results would be.

So I propose a law that would apply to anyone (and since corporations claim personhood -
that includes them) that would damage the economy or hurt the citizens of our country
physically, financially, or emotionally............intended or non-intended. So Enron would
have been charged, Countywide certainly would be charged..............Oil companies
could be charged with collusion in restricting the refining of gas to raise prices.
Commodity dealers driving up prices could be charged. you see where i am going
with this?

And the fines levied could be returned to the citizens in the form of a tax credit
on their annual forms...............