When is it appropriate for a government agency to spell out the type of products that appear in the marketplace? The upcoming rulemakings on the CFPB seem destined to pit consumer advocates against banks, and the preference among lawmakers for either “suitability” or “choice” will probably provoke much of the contention.

Although the Dodd-Frank bill established the CFPB, much remains to be done to determine what it will mean. From its initial conceptualization, the CFPB has promised to revitalize the power of consumer disclosures.  Elizabeth Warren spoke at the Consumer Federation of America’s annual conference in Washington, DC this morning and she reiterated her faith in the power of disclosure to protect the public. At once excited but simultaneously weary, she made an effort to emphasize that she believes that most Americans will appreciate the results of the new bureau once they can see its benefits.

“Do you hear people saying that the Consumer Product Safety Commission should do less to protect the safety of infants in their (more…)

The Dodd-Frank bill requires lenders to retain a five percent risk-retention in loans sold to the secondary market.  It is an idea driven by the lessons that we learned from the financial crisis. Give banks a moral hazard by making them hold some skin in the game. It is hoped that they would then respond by not making unsustainable loans.

The bill gives regulators some time to decide how to implement that requirement. The Dodd-Frank bill does offer some guidance. The Merkley Amendment sets an expectation that lenders will hold a five percent stake in any ”qualified residential mortgage.”   A “QRM,” as it known, needs risk retention.  An exempted loan does not.

First Thoughts

This is a classic example of a rule that could have unexpected consequences. At first glance, it seems like common (more…)

When scores of bank lobbyists spend thousands of dollars, is it because they like Bojangles and Krispy Kreme, or is it for some other reason? If you are Mel Watt, and those lobbyists are representing auto dealers on the eve of a decision to potentially example car dealers from regulatory oversight, then the answer is:

Bo-Size it!

Mel Watt held his annual “Reception Featuring Krispy Kreme and Bojangles Fried Chicken” night at the DNC (more…)

How does a bill that offers a short-term extension of unemployment benefits, paid for raising taxes on hedge funds for ten years, end up adding $80 billion to the deficit?

The answer is that HB 4213 is full of giveaways. I know that they are calling it the Closing Tax Loopholes Act, but perhaps they should extend that title to include, “Thinking Up a Few New Ones, Too.”

Consider these elements of a bill that is supposed to help the poor make it through the recession, while simultaneously “eliminating loopholes.”

• Tax Breaks for NASCAR: Owners of race tracks (Bruton Smith and the other owners of NASCAR) can accelerate the depreciation schedule on their investments in race tracks to just seven years!

• Help for corporate farmers (i.e., Cargill): Relief for cottonseed and fish farm producers of not more than $42 million and $25 million, respectively.
• Happy Sheep: Special grants, from money held by the Treasury Department that was previously set aside from tarriffs, to wool manufacturers.
• Help for the oil industry: Small oil and energy firms will be able to take a special deduction of 15 percent of their gross income, even if that 15 percent is larger than their net income.
• Deductions of state sales taxes. Useful for itemizers.  See mortgage interest deduction.
• Provisions that penalize small businesses:  If passed, employees in some service-oriented S-Corporations with fewer than 3 workers will have to pay self-employment tax.

Perhaps the least palatable handout to the rich is the “active financing exception.” This language, inserted by Sen. Baucus and Sen. Hatch, extends for one more year a tax break that was temporarily established in 2007 and which only applies to American (more…)

This Goldman Sachs is a gift for anyone that wants to explain why we need a Consumer Financial Protection Agency Act Consumer Financial Protection Bureau.When one trader can pocket $179 million because he successfully schemed a way to make $20 billion for an “innovative” if fraudulent trade, it expresses so clearly how the “smart guys in the room” are working against the interests of the American public.

The ABACUS portfolio is a remarkable event because it is such an extreme manipulation by a financial institution of its own clients. The consumers that Goldman Sachs hurt come from all over the world – from sovereign wealth funds overseas to domestic mutual funds.  This is the real problem for Goldman, not the civil penalties.

In the deal, Goldman allowed John Paulson to hand-select a set of portfolios. Paulson picked MBS that he felt were most likely to fail. Those MBS, along with some municipal bonds and structured credit, were packed into a synthethic collateralized debt obligation. Goldman then sold credit-default swaps as insurance on that CDO.  If the CDO failed, owners of the credit-default swaps would be compensated. Paulson bought the swaps. For the deal to work, somebody had to be the rube. Goldman arranged for the rubes (their “clients”) to buy $2 billion of these CDOs.

Paulson made a cool billion on the trades.  He was asked to testify before Congress.  The supplicants did not criticize him.  Rather, they asked him how he was so smart.  Paulson agreed to tell them.  Then he gave $15 million to the Center for Responsible Lending.

The ratings agencies played their part. Moody’s rated the Abacus portfolio Baa2. That should give anyone pause, as in the end, Abacus only retained 3 cents of every dollar in its book value. Moreover, a tranch representing 24 percent of the value within Abacus was given a Aaa/AAA (Moody’s/S&P) rating.  Another 11 percent of Abacus was rated at or above “A.”

Goldman may face a civil penalty, but the firm has a lot more to worry about than the SEC. How is Goldman going to convince its clients that it is operating with integrity? What firm with a fiduciary obligation is ever going to look at a MBS offered by Goldman with the same confidence? The market can be fooled in the short-run, but not for long. Goldman lost $13 billion in market value after this news broke, and it is

Lewis Sachs, who helped manage Abacus, and John Paulson, who picked the securities and made $1billion. Sachs is now at Treasury. Paulson is now very rich. Neither is implicated in the SEC's lawsuit.

A few other details: The CDO did not include any option-ARMs. Wells Fargo was the largest servicer.

ACA’s Senior Management Team included representatives with backgrounds from JP Morgan Chase, Merrill Lynch, Deutsche Bank, GE Capital, Ambac and MBIA. The Collateral Committee and the Portfolio Strategy Committee, for instance, were led by a former Senior Managing Director from Merrill Lynch (Laura Schwartz.) This portfolio was just the work of a rogue trader.  All kinds of people had to be in on this fraud.

And here are some of the ways that Goldman Sachs characterized the portfolio in its representations to investors:

• “Asset selection and asset management premised on credit fundamentals and optimized for relative value.”
• “Investment decisions are credit driven and conducted by industry specialists.”
• “Every investment is approved by a heavily experienced investment committee.”

Oh, tell me another one!

(more…)