Posts Tagged ‘mortgage-backed-securities’

From Black Friday to Derivatives Saturday

November 28, 2015

Back in the crash of ’08, clueless underlings such as myself suddenly were made aware of a mysterious component of our financial system called “derivatives.”

What is a derivative? you may ask. Funny you should ask. I didn’t know either, and I still don’t. Although I have been trying to figure it out for seven years now, every time I think I know what a derivative is, I encounter acronymic terminology such as MBS, CDO, or SEC.

These slimmed-down nomenclatures should simplify things, but they do, in fact simplify nothing. Although everybody knows SEC stands for Southeastern Conference, which is the football conference where the best American football is played, and where my alma mater LSU exercises its right to excel in athletics, except when teams like Alabama or Florida are on the field.


But I digress. I was explaining to you what a derivative is and I mentioned some of the simplifying terminology.

For instance, as alluded to above: MBS.

Well some well-positioned bloggists of the worldwideweb identify an MBS as a Masters of Bullsh*t, which is attained through much blood sweat and tears and dedicated gamesmanship acquired at a venerable institution, such as Barnwell University or Cayman College. The MBS is attained through years and years of shoveling potentially useful data into HFT, which produces a yield from which its index is derived,  and lucrative assets which are then deposited into accounts on behalf of the bullish denizens of WallStreet. These rich deposits build up the notional value of our economy as a hole, thus enriching all of us, not only those who are forever horsing around on Wall Street, but also  you and me and all the folks on Main Street, Easy Street and Ventnor Avenue.

Somebody has to do it. I don’t mind doing my part, working with a shovel. Keeps me in shape.

Anyway, that’s not the MBS of which I spake. I’m talking about Mortgage Backed Securities. I think Uncle Freddie Mac and Aunt Fannie Mae gave these instruments as gifts back during the holidays of 2007, when life was oh simple then, before time had rewritten every line.

My understanding of a Mortgage Backed Security is that they’re something like an Arkansas RazorBack, which is probably why they didn’t work out so well for investors, although Arkansas is ranked third in the SEC west, behind Florida and–excuse my language–Ole Miss.

After that is my LSU Tigers, presently in fourth place of SEC west, but as always and forever will be, bound for greatness.

It’s quite complex to describe just how LSU could be in fourth place, because its position in the rankings is derived from the ratio of victories to losses, divided by the number of footballs passed beneath the legs of a center when he hikes the ball to the quarterback during any given play of the game.

Nevertheless, as I was saying before, a derivative is derived from the outcome, that is to say the, rear-end of a complex financial instrument.

Now I’m sure you’re wondering, as any serious investor is wondering, about the real question here, which is: how much is it worth?

One thing that my research has revealed, and one thing I can tell you with surety is this: The value of any particular derivative is derived from fluctuations in the value of the underlying asset.

Here’s an example: how much is my ticket to this season’s Sugar Bowl worth? Well, at this point it’s an open question, but let’s just say this: I’ll give you my ticket to the Sugar Bowl for your two tickets to the Orange Bowl.

Meanwhile, back at the ranch (Texas Aggies be forewarned), the guys who are shoveling out in the barn are asking what’s the real value of these derivatives. And as I explained before, you remember that the value of any particular derivative is derived from fluctuations in the value of the underlying ass-set. That should come out plain enough.

As for the collective value of all the derivatives, this figure is derived from its notional value, which is calculated based on the notion, as defined by the US Treasury, the Fed, the NYSE, and the AP sportswriters, that whatever goes around comes around, so therefore if the value of the aforesaid derivatives passes through enough piles of assets then when it comes out the other end nobody really knows what its worth, so that it can be revalued at the going rate.

This is unpredictable, of course, as the LTCM affair had indicated  back in the Glass-Steagall days, but it is bound to be worth, somehow somewhere when you least expect it, more than it was in January of 2009. So that’s progress, although the Progressives may not agree with me. I don’t pay much attention to all those freaks on the fringe anyway.

And you understand, of course, that all this has taken place after Cronkite passed from the scene.  Before that, it was pretty much everybody working together in America toward the same values and goals. But that was then and this is now. Derivatives happens.

I’m glad I could clear this up for you. As for the Sugar Bowl and the Orange Bowl,  may the best team win, as it frequently does, but sometimes not.


Glass Chimera

Bankers, Banksters, Bernanke, Black and Beethoven

November 8, 2015

How’s a fellow to make sense of it all? Who you gonna call? Who you gonna believe? What’s the world coming to? What’s it to ya? and Who’s in charge here?

I’ve been trying to figure out a few things about our financial system.


About a week ago I loaded Ben Bernanke’s book, Courage to Act, and have been reading what the former Chairman of the Federal Reserve has to say about those events of 2007-8 that brought this country to its money-grubbing knees.

Now about a quarter of the way through Bernanke’s explanation of things, I must say I like the guy. He has a personal mission to bring more transparency to that enigmatic institution known to us as the Federal Reserve. I think he really wants regular folks to understand our financial system and the function of the central bank which, having been founded by Congress in 1913, tries to keep a rein on the nation’s banking system so it doesn’t become a runaway horse.

Nevertheless, the System did morph into a kind of bucking bronco back in the fall of 2008. The crash and crisis of that time may have seemed quite sudden to many of us, but in fact the collapse of Wall Street et al during September-October of that year was the culmination of a bunch of misadventures and misdeeds that had begun a year or two or more before it all came crashing down.

I vividly remember, during that time seven years ago, sitting in my car in a parking lot, a few minutes before 8 am when I would enter my day-job, and hearing on the car-radio with dread or fascination about the demise of such formerly venerable institutions as Lehman Brothers, Washington Mutual, Bank of America, Wachovia, Countrywide, Golden West,  AIG, Fannie, Freddie, even General Motors, and then about how Hank Paulson and Wall Street and the Fed, Bernanke and the President and Congress would deal with the degenerating situation by instituting TARP which was rejected by our Representatives and Senators before it was passed and implemented a week later after Hank and Larry and Tim put the fear of god in the legislators’ minds or whatever it was they told them to convince them that they should loan the distressed banks $767 billion so the whole dam bailiwick wouldn’t fall apart and drag us into another Depression, or so they said.

The world was changing. Have you ever watched the world changing? It is an awesome thing, to see history being made.

What a time a time oh what a time it was. . . a time of innocence (lost), a time of confidences (lost forever), as Paul Simon once sang. Oh what a time it was. Eventually the dust settled and the country lapsed back into normalcy or something like it but not really.

Things were different after that. You know what I’m talking about. . . the Great Recession, everybody and their brother deleveraging, budgets tightening, layoffs and downsizing, fading into perpetual “jobless recovery” with wage deflation, rising unemployment, then descending unemployment but with more part-timing and less money. . . stock-crunchers and media fixated on monthly numbers from the Fed, the gov, BLS, etc, a languid economy generating fewer jobs, then a few more jobs, then leveling out and stabilizing and lapsing into destagulation and blah blah blah. . .

And it was about that time, or actually a year of three later by n’ by, that the Occupy Wall Street crowd came along.

My wife and I visited our son in Seattle during fall or early winter of 2011. I woke up one morning and strolled down Pike Street. I stopped at the Westlake Center and entered a Starbucks where I settled in for a while. I was observing through the large glass storefront, the Occupiers who had gathered across the street in Westlake Park.

After a while I noticed among all those protesters, many of whom were carrying signs (mostly say hooray for our side) . .here comes an especially noticeable fellow with a sign. He was tall, scruffy, with a long beard. He looked like the classic cartoon image of the street-corner doomsday prophet, and his sign said:

“Jail for Banksters”

Well that’s interesting.

Now, yesterday, November 7 2015, I recalled having seen that fellow and his sign, and I was thinking about what his sign said.

I had been reading Uncle Ben’s very informative book–his plainly-written, quite “transparent” explanation of what had happened back in ’08, when the low quality of vast numbers of subprime mortgage loans catapulted those same home-loans into default, and subsequently cast a ubiquitous monkey wrench into the vastly complex financial machinery of sliced/diced tranches of mortgage-backed-securities and collateralized debt obligations and credit default swaps, etc etc  and then wall street came crashing down and all the Fed’s horses and all the Treasury’s men couldn’t put humpty dumpty together again (not for a while anyway) and the world changed forever, or so it seemed at the time and for quite a long time after that, even until now.

Yesterday, I had made note of this sentence from Ben Bernanke’s book:

“As the chain from borrower to broker to originator to securitizer to investor grew longer , accountability for the quality of the underlying mortgages became more and more diffused.”

And I was wondering, if the accountability had become more and more diffused, then who was responsible for this mess?

My own personal answer to that question is: Human nature, collectively. Shit happens.

Not everyone sees it that way, though. Some folks feel the need to investigate, litigate, prosecute, execute, and. . . as the protester’s sign said, send the “banksters” to jail.

So here I was yesterday, having taken a break from reading Uncle Ben’s book, and I was fiddling around online when I landed upon an interview that Chris Martenson did with Bill Black.

Now Bill is well-informed fellow; he’s an academic like Ben Bernanke, but from a totally different perspective than Ben’s. Bill is a regulator, investigator, earth-shaker, litigator who is crowing that Eric Holder,  former Attorney General and head of the U.S. Department of Justice, should have prosecuted the banksters for their corruptive abuse of the system. In his interview with Chris that I listened to yesterday, Bill Black said:

“Every dollar by which you inflate an asset inflates capital by a dollar and creates an additional dollar you can steal. . . they lied and they lied to the extent of trillions of dollars. They lied and made stuff that was really in the trade, right. So the bankers are actually calling these things toxic in their internal memorandum. And they are simultaneously rated Triple A, which is supposed to mean that they are equivalent to United States Treasury and are “risk free” by which they mean credit risk.”

Furthermore, whistle-blowing Bill Black says that culpability for the crash also includes the Fed’s complicity, when Bill says:

“You say Bank of America has got 50 billion of these things. They sell them to Fannie/Freddie.

Next thing we know, Black Rock is in there with the Federal Reserve helping the Federal Reserve decide which tranches of MBS to go out and buy. And the Federal Reserve vacuums up 1.25 trillion or thereabouts of these mortgage backed security pieces of paper. Here is the question. What is the chance that the Fed preferentially or accidentally (but I am going to think preferentially) went out and vacuumed up some of the worst of these things so that they could die quietly on its balance sheet rather than do damage to bank balance sheets?

So Black is implying that Bernanke shares some of the blame for the Crash of ’08.

But in my reading of Uncle Ben’s version, I see a very smart man, an honest man, who was trying to do his job–that job to which he had been appointed by the President and approved by the Congress of the United States. He was striving, as best he could, trying to stop the nation’s calamitous slide into financial oblivion. Ben writes:

 “Just as the bank runs of the panic of 1907 amplified losses suffered by a handful of stock speculators into a national credit crisis and recession, the panic in the short-term funding markets that began in August 2007 would ultimately transform a ‘correction’ in the sublime mortgage market into a much greater crisis in the global financial system and global economy.”

From Chairman Ben Bernanke’s perspective, he was doing his job– using every tool in his Reserve tool-chest  to arrest to the “panic” that would eventually impose a “much greater crisis” in the global financial system and global economy.

You can’t blame a fellow for trying to do his job. And that’s how I make sense of it all. I try to do my job, while I see everyone else doing theirs, and that’s what makes the productive world go around.

Although, every now and then shit does happen. Then, as Schumpeter said. . . it is creative destruction, and somebody’s got to clean up the mess. Jobs for everybody, cleaning up the mess from places high and low. And then reconstructing it all, a vicious (or inevitable) cycle. It’s been going on for 10,000 years. But now with hi-tech, everything goes faster and faster, until it grinds again to a screeching halt and. . . can you hear it? The music of the ages.

Glass half-Full

October 3, 2012

Sheila Bair served as Director of Federal Deposit Insurance Corporation (FDIC) during the financially tumultuous years 2006 through 2011. She has written a book about her experience during that time of cataclysmic economic events. In Bull By The Horns, the former FDIC director gives an account of her strategy to assemble a group of financial heavy-hitters who had generated, securitized, and traded billions of dollars of low-quality home mortgages that were, in 2006-7, beginning to default in large numbers. In 2007, Sheila rounded up some subprime mortgage brokers, their money-lenders who had financed the mortgages, and representatives of the larger banks who serviced the loans after those loans had been tranched into complex Wall Street securities.

The escalating problem in 2007 centered on a large group of unqualified home-buyers who had bought into Adjustable Rate Mortgages. These mortgages began with a reasonably low interest rate with manageable monthly payments that were typically in effect for two years. But after those first two years of each mortgage, the interest rate had been contracted to balloon into a higher rate, which would enable the financiers to maintain an even greater profitable advantage. But the po’ folks who were trying to pay off their new houses could not handle their newly adjusted, higher monthly payments. This turned out to be the weakest link in a chain of financial dealings that later broke in September of 2008, thereby inflicting on our economy the so-called Great Recession.

This passage from chapter 6 of Sheila Bair’s book is somewhat long for a blog, but it helped me to understand what was happening behind the scenes during that time of mounting catastrophe, back in 2007. Sheila Bair writes:

“I decided that the best thing to do would be to get all stakeholders in a room together and try to hash out some type of agreement to start modifying subprime hybrid ARMs. Delinquencies on subprime hybrid ARMs were increasing quickly, and nearly half a trillion dollars’ worth of such loans were scheduled to reset (to the higher interest rate,ed.) in 2007 and 2008. The answer seemed obvious: eliminate the reset and simply extend the starter rate. In other words, convert the loan into a thirty-year fixed-rate mortgage, keeping the monthly payment the same as it had been during the starter period. We thought that investors–even Triple-A investors–should support such a step. We weren’t really proposing that their payments be reduced, just that they give up a payment increase that they had never had a realistic expectation of receiving. As previously discussed, hybrid ARMs were designed to force refinancings after two to three years, not to be paid at the higher rate for the life of the loan. Our data confirmed that the debt-to-income ratios on these loans were extremely high. Indeed, more than 90 percent of hybrid ARMs were  refinanced at the end of the starter period. The number of borrowers who continued paying after reset was miniscule.  Without some relief, subprime borrowers would default on a large scale, generating heavy losses for all bondholders, as well as the broader housing market.”

As you may surmise from the subsequent implosion of our financial system in the fall of 2008, Ms. Bair’s strategy of getting the mortgage players together to solve their problems hardly made a dent in the immensely complicated vortex of failing subprime mortgages. This foundational shifting sand of widespread defaults ultimately initiated a near-collapse of our financial resources and  the banks who administered those funds.

Ms. Bair’s attempt to guide the lenders and securitizers into corrective collaboration was a nice try, though. Surely it was a valiant effort by an exemplary, far-sighted public servant who is worthy of our respect. In the long run, however, her finger in the dyke of preventive regulation could not prevent the flood of insolvency that later debilitated our banks.

Reading her book, and particularly the above account, I was reminded of an old parable spoken long ago. In the gospel of Mark, chapter 16, we find these words from Jesus Christ:

“There was a rich man who had a manager, and this manager was reported to him as squandering his possessions.

And he called him and said to him, ‘What is this I hear about you? Give and accounting of your management, for you can no longer be manager.’

The manager said to himself, ‘What shall I do, since my boss is taking the management away from me? I am not strong enough to dig; I am ashamed to beg. I know what I shall do, so that when I am removed from the management people will welcome me into their homes.’

And he summoned each one of his boss’s debtors, and he began saying to the first, ‘How much do you owe my boss?’

And he said, ‘ A hundred measures of oil.’ And he said to him, ‘Take your bill, and sit down quickly and write fifty.’

Then he said to another, ‘And how much do you owe? And he said, ‘A hundred measures of wheat.’ He said to him, ‘Take your bill and write eighty.’

And his boss praised the unrighteous manager because he acted shrewdly; for the sons of this age are more shrewd in relation to their own kind than the sons of light.

” And I say to you, make friends for yourselves by means of the wealth of unrighteousness, so that when it fails, they will receive you into the eternal dwellings.’

Unfortunately, our modern money managers did not similarly cut the Mortgage Backed Securities losses before exponential toxicity invaded the entire financial system. But such calamity is the story of the human race. What else is new?

Glass Chimera

The wreck of ’97

February 7, 2012

Scene 1, Tuesday, Feb 5 2012: I’m listening to DRshow radio discussion about  the foreclosures debacle, and being informed, to whit…

Back in ’07, the decades-long  housing boom starting turning to bust. In the retractive credit  emergencies of ’08, a plethora of foreclosures broke out rather suddenly, like mushrooms on neglected suburban lawns. Since the big banks had been set up for many years to mostly just dish out loans, the sudden onslaught of foreclosures caught them bureaucratically unprepared.

Swamped with overwhelming unprofitable paperwork, the banks sought to simplify their numerous foreclosure processes. They cut corners and got sloppy in documentation. The big banks got together and devised a way to cut costs, most notably those expenses incurred through courthouse fees and title registrations; they instituted the Mortgage Electronic Registration System (MERS). Unfortunately, this newly-improvised MERS  greatly complicated the later questions surrounding actual ownership of each home.  According to Arly in Vermont, a caller on yesterday’s (Tuesday, Feb 7) Diane Rehm show, the MERS “broke the chain of title.” This later gave rise to mucho confusion. The banks had put MERS together in–remember this–1997.

About ten years later, as the sheer volume of mortgaged-backed-securities slicing and dicing jammed up our banking system, the loss of an easily identifiable thread of ownership for each foreclosed house became, cumulatively, a huge problem, a can of worms, as it were.

But Kathleen Day, of the Center for Responsible Lending, used a better metaphor to describe the situation. During Diane Rehm’s discussion, Kathleen referred to the foreclosure mess as a “train wreck.”  A few minutes later on the radio program Ed Pinto, of the American Enterprise Institute, also used the “train wreck” analogy in his description.

Scene 2, blast from the past…

All of which solved a problem about a phrase–the “wreck of ’97– I had written into a song  a few years ago. In composing Boomer’s Choice, I included a verse about each decade of our collective American experience, beginning with the 1950’s, then covering the ’60s, ’70s, ’80s. After the turn of the century, I was having motivation problems in the writing of a verse for the 90s. In fact, I dilly-dallied around and didn’t get to the 1990s verse until the mid-’00s. And when I  finally did write that last verse, I combined that decade with those first years of the ’00s. I don’t know why. But I tossed the phrase “wreck of ’97” into that last verse, perhaps flippantly, because I didn’t know why the image of a wreck in 1997 arrested my imagination. In fact, I have often wished that I had sung the metaphor as “wreck of ’07’ because 2007 is when the housing boom really jumped the tracks and ran off the rails.

But now I understand. The wreck of ’97  was the MERS contortion of ownership tracks that  later provoked a jumping off the financial rails– the  wreck of ’07!