Proposed securitization rules

I see that the administration has come to some roughly similar conclusions as me, in regards to reducing incentives to willy-nilly securitize crappy loans. Have they achieved the appropriate balance between efficiency of capital, and systemic risk reduction and system redundancy?

According to reports, the administration intends to reduce the vile habit of bankers throwing crappy loans through to unsuspecting investors (imagine, investors EXPECTING banks to have performed some sort of reasonable underwriting in the first place).

It appears that the administration intends to force the underwriting firm to hold at least 5% of the securitized loans through to completion, and further disallow firms to immediately book securitization profits. Instead, they would book the profits as the loans matured and would have that securitization income reduced if the loans performed badly due to weak underwriting standards.

While this is not quite as good as the 15-25% loan book hold-back I felt would be prudent, this is certainly a large step forward.

The 5% hold-back still amounts to 20 to 1 leverage in effect, atop the normal leverage that banks enjoy. Given banks particularly important place in our economy, I am not sure that is prudent enough.

While this is not quite as good as the minimum 15-25% hold-back, it is a large step forward from existing standards - yet I am still left wondering whether this is not a half measure.

I'm therefore hopeful that FASB rules will further help to dampen the capital leveraging effect through some proposed rules, yet to be issued.

Now, of course, reforming executive pay remains a important topic which needs serious attention in order to also reduce further systemic risk.

This is something I have written about previously, and that my internet "colleague", Rick Konrad, at Value Discipline, is writing about in greater detail.

I encourage you to visit his blog, read some of his posts (1, 2, 3) on the matter, and to add your voice by sending your elected official a quick email (find your congressperson here, find your senator here) encouraging such reform.

Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!


JW

The Confused Capitalist

Stock Market Investment Planning

The following provides links to the Market Tremors series, which is an examination of the factors you should consider when preparing a plan to invest in stocks.

It was written in September 2008, a period of extraordinary volatility, as the credit crisis unfolded as Congress considered whether to grant Treasury`s request for $700 Billion in authority to purchase distressed loans from the banking sector.

1. Background
2. Process
3. Rationale
4. Emotions
5. Holdings
6. Market Exposure

I will provide this as a permanent link on the right hand side of my blog, under the heading of `Learn-Useful Stuff`.

Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

I hope you enjoyed the series and it proves useful in your investing.

JW

The Confused Capitalist

The Weird Answer to Excess Liquidity

The loose lending standards and the low rates of the past few years are collectively known as "excess liquidity". In traditional central bank fashion, this is to be generally avoided since the tail end of a long period of this brings nasty consequences.

The severity of these consequences is partially dependent upon the length of time the excess liquidity was available, plus the corresponding reaction of both the central banks, commercial banks, investors and the public reaction itself as the liquidity is drained off.

In the 1970s, the drain of excess liquidity meant markedly higher lending rates, as inflation began to soar in response to the excess liquidity. Lending rates, in most industialized countries, continued to rise, until inflation was defeated in one last hurrah, as the earliest part of the 1980s dawned. A decade long battle that ultimately required lending rates in the 15-20% range to defeat.

Now, it appears, the answer to excess liquidity is this: raise rates to something beginning to resemble normal long-term banking averages - and watch the banking system begin to wobble, wobble, wobble. When the time is ripe (or some critics argue, over-ripe), introduce the forebearer of excess liquidity (low central bank rates) to deal with the number of weakened banks. This will allow some of the (less) reckless banks to repair their balance sheets, the strong to get stronger (and thus buy out some weak competitors) and for, more generally, faith to be restored in the system.

So the answer to the 2000s excess liquidity situation is - more liquidity.

Weird, right?

Further explanation, here.

JW

The Confused Capitalist

Housing Market to Contine Its Wobble

Having been around the real estate industry in one capacity or another for nearly 30 years, reading just one story like this wherein Barclay's Capital estimates that over $300 Billion of US option ARM (adjustable rate mortgages) mortgages are still due to re-set, makes me aware that the housing market won't be out of its slump any time soon.

The "homeowner" (air quotes as they have no equity) will finally realize they can't afford a payment due to re-set typically 60-80% higher than currently. This will drive an unbelievable volume of homes onto the market.

Given the majority of these option ARMs don't re-set until 2010-2011, don't count on this housing market slump subsiding anytime soon.

Every housing rally for the next few years will inevitably prove to be a suckers rally, as more houses continue to pour onto the market under foreclosure - as the most financially desperate find the American Dream has collapsed on them.

I'll make one more wild-ass prediction - the housing market losses to date (around 18% nationally) will be roughly matched by a further loss of between 12% to 20% more. The roller-coaster hasn't reached the bottom yet folks - hang on - it'll likely take at least another 18 months before calls of "this is the market bottom" are likely to be close to being true.

Greenspan's legacy continues to be written.


JW

The Confused Capitalist

Bank Writedowns - Who has the money?

A recent posting over The Big Picture talked about the global bank writedowns being, to date, in excess of $500 Billion, and either half-way ($1 Trillion) or just one-quarter ($2 Trillion) finished.

My question to all you readers is simple: since the writedowns represent real dollars that have left the bank balance sheets and ended up elsewhere, where do you think most of it went?

• Effectively free or reduced rent by unqualified home buyers?
• Consumer goods purchases?
• Home flippers with excessive profits?
• Realtors (too many sales)?
• Home builders?
• Other?

What do you say?

JW

The Confused Capitalist