Update from the Heartland
No.521
5.12.11 – 11.12.11
Blog version: http://heartlandupdate.blogspot.com/
To all,
Whew! That was too close. Navy 27 – Army 21. The tenth consecutive victory. I offer my condolences to my honourable and courageous cousins – Greg, USMA ’74, Colonel U.S. Army (retired), and Sandy, USMA ’78, Lieutenant Colonel U.S. Army (retired). God bless you both for your service to this Grand Republic. But, that does not alter history – Go Navy, Beat Army.
The follow-up news items:
-- Almost five years after the terrible fire during restoration, the repair and renewal of the historic RMS Cutty Sark [285, 330, 355] progressed nearly to conclusion. The Queen is expected to officially open the ship for tourism at the end of next April. Congratulations to the recovery/restoration team and the British People for saving the historic ship for posterity.
A friend and regular contributor sent along this essay on the mortgage meltdown:
“Anatomy of a Train Wreck – Causes of the Mortgage Meltdown”
by Stan J. Liebowitz
The Independent Institute
Published: October 3, 2008
As would be expected in a comprehensive assessment of a complex issue, Liebowitz illuminates the major players from Congress and the law, to real estate speculators, the mortgage lending industry, and of course the investment bankers who packaged and sold contaminated mortgages as solid investments. He clearly places considerable emphasis on the enabling influence of “flexible underwriting standards.” It took me longer than usual to track down the genesis of that relaxation in the law. Depending upon how we perceive congressional action, we could stretch back to 1934, or perhaps 1968. Liebowitz leans toward 1977 and the Housing and Community Development Act of 1977 [PL 95-128; 91 Stat. 1111], well actually, the Act’s Title VIII – Community Reinvestment Act of 1977 (CRA) [91 Stat. 1147] – that placed emphasis on home ownership in low- and moderate-income neighborhoods. After CRA, Congress began to apply pressure on mortgage brokers and lenders to increase home ownership within the low end of the family income spectrum. However, as he notes, the so-called housing bubble began to form with the passage of the Housing and Community Development Act of 1992 [PL 102-550; 106 Stat. 3672] with several succeeding laws to further coax mortgage lenders to loosen their underwriting guidelines and expand homeownership among low income citizens and other racial groups. Those who questioned the loosening of underwriting standards, even for a noble cause of social equity, ran the risk of being labeled racist – such is our political environment. Liebowitz noted with data that the mortgage market softened and began to sour in the 3rd quarter of 2006. As noted in SEC v. Citigroup [520], the bankers began conniving schemes to pass their risk off to unsuspecting investors. As disgusting punctuation on this progressively degenerative process, Congress passed and President Bush signed into law the Housing and Economic Recovery Act of 2008 [PL 110–289; 122 Stat. 2654] that included Division A; Title I; Sec. 1129 (euphemistically titled:) Duty to Serve Underserved Markets [122 Stat. 2703], which stated: “each enterprise shall provide leadership to the market in developing loan products and flexible underwriting guidelines to facilitate a secondary market for mortgages for very low-, low-, and moderate-income families”; the bill was signed into law 30.July.2008, less than two months prior to the collapse and two years after the market began to deteriorate. Liebowitz concluded, “These ‘innovations’ [enabled by flexible guidelines], heralded as such by regulators, politicians, GSEs, and academics, are the true culprits responsible for the mortgage meltdown.” He went on to note, “The main driver of foreclosures was adjustable-rate loans, both prime and subprime,” largely due to over-extended speculators, rather than bona fide homeowners. I concluded from this review that we have a prime example of what can happen when a well-intentioned Congress attempts to strong-arm the marketplace beyond reasonable and responsible conduct, even for the noblest of causes.
News from the economic front:
-- Standard & Poor's Rating Services placed 15 euro-zone nations on negative credit watch, citing tightening credit conditions and disagreements among European policy makers on how to tackle the region's immediate and long-term economic challenges. Six of those 15 countries have S&P’s highest, triple-A rating: Germany, France, the Netherlands, Austria, Finland and Luxembourg. The decision to put the countries on negative credit watch means there is a 50% probability that their credit ratings may be downgraded within 90 days. Europe’s travails continue.
-- The Wall Street Journal reported some European central banks have started making contingency plans for the possibility that one or more countries might leave the euro zone, or the entire currency union might break apart entirely. Apparently, the central banks are considering how to resuscitate national currencies based on bank notes that haven’t been printed since the first euros went into circulation in January 2002. Given the stresses on the European Union, it would be irresponsible not to have contingency plans developed, tested and ready to execute, but the existence of such plans does not represent an expectation that the euro zone is headed for dissolution.
-- On Thursday, the European Central Bank cut its benchmark refinancing rate by 0.25% to a historic low of 1.0%, fully reversing its increases earlier this year.
-- Further signs of economic stress illuminate the horizon. The European Banking Authority (EBA) announced that European banks must come up with a total of €114.7B in new capital by next June, as a result of its latest stress test. The capital shortfalls are spread across more than 30 of 71 banks in 12 countries. The affected banks must raise the necessary capital by shedding assets, retaining profits, selling shares or other means. Individual banks must inform their national regulators by 20.January, about how they intend to come up with the funds.
-- The PRC’s National Bureau of Statistics reported the country’s Consumer Price Index (CPI) rose 4.2% in November from a year earlier, sharply slower than a 5.5% year-to-year rise in October.
-- The summit of European Union (EU) leaders failed to achieve consensus among 27 member-states to changes in the EU treaty, enabling tighter fiscal coordination within the EU, with leaders still deeply divided over key elements of their credit crisis strategy. The leaders apparently decided they would take steps to forge an agreement among at least 23 of the members to tighten rules on national fiscal policy. The UK and Hungary backed out, and Sweden and the Czech Republic essentially abstained. Many believe that an agreement that did not include all 27 EU countries would be fatally weak, even if all 17 members of the euro zone agreed.
-- As previously reported [515], the Chinese telecommunications-equipment maker Huawei Technologies has been providing services to Iranian government-controlled telecom operators, enabling Iranian police to use mobile network technology to trace and arrest dissidents. On Friday, Shenzhen-based Huawei company announced they will “voluntarily restrict its business development there by no longer seeking new customers and limiting its business activities with existing customers.” The company said it was making the move due to the “increasingly complex situation in Iran.”
The Blago Scandal [365]:
-- U.S. District Judge James Block Zagel of Illinois, Northern District, sentenced convicted felon and former governor of Illinois Rod Blagojevich to 14 years in federal prison. We do not know if he intends to appeal. We can only hope that he slips quietly into the dark night.
Comments and contributions from Update no.520:
Comment to the Blog:
“For the ‘how could they?’ aspect of both Citigroup and the SEC, I again heartily recommend Margaret Heffernan’s book Willful Blindness. I suspect that most of these people never understood even a fraction of the damage they did. I commend Judge Rakoff for getting their attention. I hope that more bankers pay the prices for their choices and I wish that the SEC regulators could receive their share of the prison time. The bankers in their greed and the regulators in their laxity have done far more damage to society than the potheads currently populating our prisons. TV shows including but not limited to 60 Minutes have the opportunity to play an important role in society by bringing awareness of this corruption to ordinary people, and I appreciate 60 Minutes for their leadership.
“Partly as a follow-up to last week’s discussion, I will point out that if you buy a dog, you are responsible for any damage it does to others’ persons or property. Why should banks be excused the damage done by politicians they own?
“We shall see what we shall see in Iran. As you pointed out, nobody was detained or harmed this time, which is a sign of miniscule progress. I hope that this time the US will support a response by the entire Westernized world rather than repeat our antics in Iraq and Afghanistan. Pakistan would be another good place to avoid getting stuck, but I’m afraid we’ve already made our bed there and must lie in it.
“I am glad you mention China regularly in your economic items. Many in the US seem to have forgotten China’s existence, and they are a major player in the world’s economy and politics.”
My response to the Blog:
I would not give those bankers the out of being ignorant. I think they knew precisely what they were doing, but in their voracious, insatiable appetite for massive profits, they saw such risks in rather benign terms, i.e., real estate value has always gone up, it will always go up, therefore minimal risk.
I am currently researching the legislative genesis of “flexible underwriting guidelines . . . for very low-, low-, and moderate-income families.” I hope to have more information in this week’s Update . . . if I can get ‘er done.
Last Sunday’s 60 Minutes program was very well done and quite descriptive. I highly recommend watching it via the URLs, if you didn’t see the original broadcast.
I am not so such your dog-politician analogy is appropriate. Nonetheless, point taken.
The fact that no one was injured or detained does not excuse or lessen the severity of the Iranian Basij violation of British sovereignty. I do not see the necessity of the U.S. taking unilateral action in Iran. I suspect Israel has an order of magnitude lower threshold of tolerance regarding the antics of the mad mullahs in Iran. We have debated the Iraq & Afghanistan; I do not see any rationale for altered positions.
Anyone who ignores the PRC does so at their peril. They are and will be for the foreseeable future a force to be reckoned.
My very best wishes to all. Take care of yourselves and each other.
Cheers,
Cap :-)
Whew! That was too close. Navy 27 – Army 21. The tenth consecutive victory. I offer my condolences to my honourable and courageous cousins – Greg, USMA ’74, Colonel U.S. Army (retired), and Sandy, USMA ’78, Lieutenant Colonel U.S. Army (retired). God bless you both for your service to this Grand Republic. But, that does not alter history – Go Navy, Beat Army.
The follow-up news items:
-- Almost five years after the terrible fire during restoration, the repair and renewal of the historic RMS Cutty Sark [285, 330, 355] progressed nearly to conclusion. The Queen is expected to officially open the ship for tourism at the end of next April. Congratulations to the recovery/restoration team and the British People for saving the historic ship for posterity.
A friend and regular contributor sent along this essay on the mortgage meltdown:
“Anatomy of a Train Wreck – Causes of the Mortgage Meltdown”
by Stan J. Liebowitz
The Independent Institute
Published: October 3, 2008
As would be expected in a comprehensive assessment of a complex issue, Liebowitz illuminates the major players from Congress and the law, to real estate speculators, the mortgage lending industry, and of course the investment bankers who packaged and sold contaminated mortgages as solid investments. He clearly places considerable emphasis on the enabling influence of “flexible underwriting standards.” It took me longer than usual to track down the genesis of that relaxation in the law. Depending upon how we perceive congressional action, we could stretch back to 1934, or perhaps 1968. Liebowitz leans toward 1977 and the Housing and Community Development Act of 1977 [PL 95-128; 91 Stat. 1111], well actually, the Act’s Title VIII – Community Reinvestment Act of 1977 (CRA) [91 Stat. 1147] – that placed emphasis on home ownership in low- and moderate-income neighborhoods. After CRA, Congress began to apply pressure on mortgage brokers and lenders to increase home ownership within the low end of the family income spectrum. However, as he notes, the so-called housing bubble began to form with the passage of the Housing and Community Development Act of 1992 [PL 102-550; 106 Stat. 3672] with several succeeding laws to further coax mortgage lenders to loosen their underwriting guidelines and expand homeownership among low income citizens and other racial groups. Those who questioned the loosening of underwriting standards, even for a noble cause of social equity, ran the risk of being labeled racist – such is our political environment. Liebowitz noted with data that the mortgage market softened and began to sour in the 3rd quarter of 2006. As noted in SEC v. Citigroup [520], the bankers began conniving schemes to pass their risk off to unsuspecting investors. As disgusting punctuation on this progressively degenerative process, Congress passed and President Bush signed into law the Housing and Economic Recovery Act of 2008 [PL 110–289; 122 Stat. 2654] that included Division A; Title I; Sec. 1129 (euphemistically titled:) Duty to Serve Underserved Markets [122 Stat. 2703], which stated: “each enterprise shall provide leadership to the market in developing loan products and flexible underwriting guidelines to facilitate a secondary market for mortgages for very low-, low-, and moderate-income families”; the bill was signed into law 30.July.2008, less than two months prior to the collapse and two years after the market began to deteriorate. Liebowitz concluded, “These ‘innovations’ [enabled by flexible guidelines], heralded as such by regulators, politicians, GSEs, and academics, are the true culprits responsible for the mortgage meltdown.” He went on to note, “The main driver of foreclosures was adjustable-rate loans, both prime and subprime,” largely due to over-extended speculators, rather than bona fide homeowners. I concluded from this review that we have a prime example of what can happen when a well-intentioned Congress attempts to strong-arm the marketplace beyond reasonable and responsible conduct, even for the noblest of causes.
News from the economic front:
-- Standard & Poor's Rating Services placed 15 euro-zone nations on negative credit watch, citing tightening credit conditions and disagreements among European policy makers on how to tackle the region's immediate and long-term economic challenges. Six of those 15 countries have S&P’s highest, triple-A rating: Germany, France, the Netherlands, Austria, Finland and Luxembourg. The decision to put the countries on negative credit watch means there is a 50% probability that their credit ratings may be downgraded within 90 days. Europe’s travails continue.
-- The Wall Street Journal reported some European central banks have started making contingency plans for the possibility that one or more countries might leave the euro zone, or the entire currency union might break apart entirely. Apparently, the central banks are considering how to resuscitate national currencies based on bank notes that haven’t been printed since the first euros went into circulation in January 2002. Given the stresses on the European Union, it would be irresponsible not to have contingency plans developed, tested and ready to execute, but the existence of such plans does not represent an expectation that the euro zone is headed for dissolution.
-- On Thursday, the European Central Bank cut its benchmark refinancing rate by 0.25% to a historic low of 1.0%, fully reversing its increases earlier this year.
-- Further signs of economic stress illuminate the horizon. The European Banking Authority (EBA) announced that European banks must come up with a total of €114.7B in new capital by next June, as a result of its latest stress test. The capital shortfalls are spread across more than 30 of 71 banks in 12 countries. The affected banks must raise the necessary capital by shedding assets, retaining profits, selling shares or other means. Individual banks must inform their national regulators by 20.January, about how they intend to come up with the funds.
-- The PRC’s National Bureau of Statistics reported the country’s Consumer Price Index (CPI) rose 4.2% in November from a year earlier, sharply slower than a 5.5% year-to-year rise in October.
-- The summit of European Union (EU) leaders failed to achieve consensus among 27 member-states to changes in the EU treaty, enabling tighter fiscal coordination within the EU, with leaders still deeply divided over key elements of their credit crisis strategy. The leaders apparently decided they would take steps to forge an agreement among at least 23 of the members to tighten rules on national fiscal policy. The UK and Hungary backed out, and Sweden and the Czech Republic essentially abstained. Many believe that an agreement that did not include all 27 EU countries would be fatally weak, even if all 17 members of the euro zone agreed.
-- As previously reported [515], the Chinese telecommunications-equipment maker Huawei Technologies has been providing services to Iranian government-controlled telecom operators, enabling Iranian police to use mobile network technology to trace and arrest dissidents. On Friday, Shenzhen-based Huawei company announced they will “voluntarily restrict its business development there by no longer seeking new customers and limiting its business activities with existing customers.” The company said it was making the move due to the “increasingly complex situation in Iran.”
The Blago Scandal [365]:
-- U.S. District Judge James Block Zagel of Illinois, Northern District, sentenced convicted felon and former governor of Illinois Rod Blagojevich to 14 years in federal prison. We do not know if he intends to appeal. We can only hope that he slips quietly into the dark night.
Comments and contributions from Update no.520:
Comment to the Blog:
“For the ‘how could they?’ aspect of both Citigroup and the SEC, I again heartily recommend Margaret Heffernan’s book Willful Blindness. I suspect that most of these people never understood even a fraction of the damage they did. I commend Judge Rakoff for getting their attention. I hope that more bankers pay the prices for their choices and I wish that the SEC regulators could receive their share of the prison time. The bankers in their greed and the regulators in their laxity have done far more damage to society than the potheads currently populating our prisons. TV shows including but not limited to 60 Minutes have the opportunity to play an important role in society by bringing awareness of this corruption to ordinary people, and I appreciate 60 Minutes for their leadership.
“Partly as a follow-up to last week’s discussion, I will point out that if you buy a dog, you are responsible for any damage it does to others’ persons or property. Why should banks be excused the damage done by politicians they own?
“We shall see what we shall see in Iran. As you pointed out, nobody was detained or harmed this time, which is a sign of miniscule progress. I hope that this time the US will support a response by the entire Westernized world rather than repeat our antics in Iraq and Afghanistan. Pakistan would be another good place to avoid getting stuck, but I’m afraid we’ve already made our bed there and must lie in it.
“I am glad you mention China regularly in your economic items. Many in the US seem to have forgotten China’s existence, and they are a major player in the world’s economy and politics.”
My response to the Blog:
I would not give those bankers the out of being ignorant. I think they knew precisely what they were doing, but in their voracious, insatiable appetite for massive profits, they saw such risks in rather benign terms, i.e., real estate value has always gone up, it will always go up, therefore minimal risk.
I am currently researching the legislative genesis of “flexible underwriting guidelines . . . for very low-, low-, and moderate-income families.” I hope to have more information in this week’s Update . . . if I can get ‘er done.
Last Sunday’s 60 Minutes program was very well done and quite descriptive. I highly recommend watching it via the URLs, if you didn’t see the original broadcast.
I am not so such your dog-politician analogy is appropriate. Nonetheless, point taken.
The fact that no one was injured or detained does not excuse or lessen the severity of the Iranian Basij violation of British sovereignty. I do not see the necessity of the U.S. taking unilateral action in Iran. I suspect Israel has an order of magnitude lower threshold of tolerance regarding the antics of the mad mullahs in Iran. We have debated the Iraq & Afghanistan; I do not see any rationale for altered positions.
Anyone who ignores the PRC does so at their peril. They are and will be for the foreseeable future a force to be reckoned.
My very best wishes to all. Take care of yourselves and each other.
Cheers,
Cap :-)
2 comments:
I’m glad your team won.
I think your source, Stan Liebowitz, has a bit of a misplaced focus. According to his professional web page http://www.utdallas.edu/~liebowit/ , Mr. or Dr. Liebowitz is a professor of economics at the University of Texas, but his listing of courses taught matches his list of available papers, which he describes as “articles relating to file-sharing and intellectual property issues, path dependence, network externalities, and the Justice Department investigation of Microsoft,” none of which deals with macro-level economics. The issue I have is that his analysis does not follow the big money. I would not excuse local bankers for selling mortgages to people who could never afford to pay and never claimed that ability. I would also never absolve Congress for passing laws damaging to all of us except the biggest bankers. However, those are effects, not causes. The cause is too-big-to-fail banks inventing increasingly complex, risky, and profitable financial instruments. That’s where the big profits from those mortgages went, and also the big-money bailout the bankers counted on to force the government to assume the risk. Of course, I have no issue with any of these parties replacing drug users and prostitutes in prisons.
My central source on economics lately is Simon Johnson, who has been the chief economist at the International Monetary Fund (IMF) and is currently a professor of economics at Sloan School of Management, a senior fellow at the Peterson Institute, and a member of the Congressional Budget Office’s (CBO) Panel of Economic Advisors. I recommend his book 13 Bankers and his blog Baseline Scenario.
I wonder whether Standard and Poor’s and their competitors have an appropriate place in rating sovereign debt. Beyond the fact that their measurement systems are geared to corporate offerings and fit poorly with the conditions of governments, an additional issue is their role in the economic collapse. Those junky mortgages we’re discussing were packaged and the packages received ratings from S & P and their brethren that convinced investors they were sound investments. Said ratings were based mostly on the fact that the people selling the packages being rated paid for the rating service in a competitive market; the ratings were as poor quality as the securities themselves. More candidates for beds in the Federal prison system.
I wonder what has slowed the Chinese economy. Perhaps their customers in the US and the EU are just not buying anything recently. Huawei, the Chinese telecom company serving the Iran government, shows good business sense in limiting their exposure to the drama of radical government.
I did not mean to excuse anyone in my comment from last week. The point of my comment was pretty much exactly what you said: the bankers saw terrible risks as benign. “Willful blindness” is a legal term which essentially means, “you’re liable whether or not you admit to knowing what you should have known.” The purpose of reading the book is to understand and to know what to guard against, both in one’s own conduct and in working with others. Willful blindness is an important force in people’s actions in general, not just on Wall Street, in Congress, or at your local mortgage lender.
Calvin,
Thx mate . . . always nice to win. Eventually, we will lose. An awesome rivalry among comrades.
I would encourage you to read the Liebowitz essay. He does not let the bankers off the hook, but they were not the root cause of the mortgage meltdown; the greedy bastards just sought to profit on whatever happened. We are in agreement on “too big to fail”; break up the big banks using the Sherman Antitrust Act [PL 51-190; 26 Stat. 209] to end the grip those banks have on the U.S., and return to the separations delineated in the Banking Act of 1933 [PL 73-066; 48 Stat. 162]. I just do not think we can lay the blame for the mortgage meltdown on the big banks.
I will look for Simon Johnson’s work.
Amen! All three primary rating agencies gave those mortgage-based securities their highest ratings, which certainly tainted their processes and judgment. The rating agencies were culpable as enablers of the meltdown.
Re: Huawei & Iran. I would like to think the Chinese felt the pressure of the world community. Who knows their reason? It is still a good sign.
Re: “Willful Blindness.” Indeed! Spot on! ‘Nuf said.
Cheers,
Cap
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