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…)

More and more, it seems like any changes to the Community Reinvestment Act that come out of a new CFPA will be limited to data collection requirements. That is a missed opportunity. Still, if updates to the CRA can repair the framework for data, that is still a plus.

Everyone knows that HMDA data could be better. It doesn’t really offer a means to separate the prime loans from those that are subprime. There is one clue: since 2004, the data has included information about interest rates. Even that data is limited, though. It isn’t sensitive to adjustable rates that reset. Moreover, the exotic loan terms that are the feature of so many subprime loans are also ignored. There is no indicator for a stated income product, or for a balloon, or for an unusual loan term. In general, if it isn’t a practice that was characteristic of the mortgage market in 1985, then it isn’t in HMDA.

This frustrates bankers and policy wonks alike. Bankers cringe when prime loans are indistinguishable from subprime.

I spoke with the head of the mortgage division at one of the larger banks in the country yesterday. I put the question to him. “If you could change one thing (more…)

It goes without says that passage of the Consumer Financial Protection Agency Act  (CFPA) could make or break some firms.

I have said that passage would imperil that payday lenders like Cash America or Advance America. Well, that may no longer be the case.  Senator Hagan’s amendment to put a cap on the number of loans that any borrower can take in one year has not found support.  This could spell an opportunity.  The payday lenders are off about percent in the last months, but now they are inching back up.  I think that this was an all-or-nothing scenario. Hagan’s amendment is made law and the payday industry is suddenly unprofitable.  Payday lenders fly under the CFPA radar, and it goes the other way.

That said, I think that there are some less obvious situations where the implications of the CFPA could matter.  I’m not going to write about how derivatives regulation could hit the big banks.  Far wiser minds have said plenty.

I think that auto parts suppliers and retail tire producers could be big winners. Credit is already tight, particularly for the kinds of loans that are packaged into asset-backed securities.  Add to that, not many people have the dollars to buy a new car.  Granted, Ford is showing some strength, but that remains an exceptional case.  The larger story, with auto loans, is much like the situation with home purchases.  People don’t have the cash to make a down payment.

People can’t put off spending money on their cars, forever. That means that more and more people are going to be fixing up their old cars. That is where the retail auto parts stores play. Consumers are going to need new tires.  You can only go so long on outdated tires. In fact, in many states, you cannot pass the annual inspection if you don’t have a properly functioning vehicle. Blinkers need to be running. Emissions standards have to be met.

Not all tire manufacturers are the same, though. It is going to pay off to do some homework, instead of just buying the first name brand that comes to mind. Some companies get a lot of their business through the new car manufacturers.  Others, not so much.

The other big “if” out there is the crisis in the gulf.  I think that the reinsurance markets are going to feel the impact of this disaster.  Any company with a lot of contracts in the Gulf could lose a lot of money. But, it stands to reason that firms will be able to get higher prices going forward on all reinsurance. Some firms are going to benefit, because they will be able to charge (more…)

Yesterday’s vote in the Senate on the CFPA should put a long shadow on the prospects of payday lending.

Senator Harry Reid pulled back the existing bill after 57 Senators voted in favor of one draft. Reid pulled it back because two Senators were withholding their support until the protections in the bill could be strengthened.  This creates an odd dynamic, where progressive concerns are holding up legislation that spells doom for some of the more predatory financial products out there. Payday lenders, who seem destined to become the fall guys for the sins of Goldman Sachs, will be severely constrained if the CFPA passes.

The holdups

Sen. Lincoln of Arkansas is concerned about derivatives, and she wants to see rules in place that would amend how they are traded. Lincoln wants an end to the trading of derivatives behind closed doors.  She’d go one step further and see to it that institutions trading in derivatives can’t gain access to the Federal Reserve’s discount window.

Sen. Maria Cantwell, working in concert with Sen. John McCain, have another proposal.  They would like to return to the rules laid out in Glass-Steagall. Gramm-Leach-Bliley rewrote how financial institutions are organized. It took away the firewalls that separated investment banks from commercial banks.  That was important.  It predicated the rise of money center banks like (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!

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