This is a very informative podcast below. Credit Default Swaps 101.
Many thanks to Dylan Ratigan and Chris Whalen for this!
Welcome to another episode of Greedy Bastards Antidote — a podcast series that zeroes in on “Greedy Bastardism” in our country, and highlights the people out there who are finding the “Antidotes.” Dylan will be talking to the heroes and the visionaries out there on the front lines of education, health care, the environment, trade, taxes, finance and government, all of whom are finding solutions to America’s biggest challenges — and doing it creatively and fearlessly.
This week, we’re focusing on the swaps market — not only to learn exactly what credit default swaps are, but why they’re one of the favorite financial products of Greedy Bastards. This is the one market that betrays every fundamental principal of American values — it is not transparent, it does not require collateral if you’re a AAA rated bank, and you can sell insurance globally on credit. This incentivizes clients to buy them by offering lower interest rates (and who doesn’t want that?)
The path of economic interest is strewn with casualties, what some analysts call collateral damage. In this issue, we look at the who is looking out for whom and ask the question of whether or not something other than the relatively narrow interests of central government and corporate management need to be taken into account in the greater scheme of restoring confidence in the financial system. — D.S.
First we send kudos to the Federal Reserve Board for approving the acquisition of a UT based industrial lender by Green Dot Corp, as reported by American Banker. It is long past time for the Fed to encourage the entry of new capital investment and management talent into the banking sector. “Green Dot’s dominant partner is Wal-Mart Stores Inc., which is also a shareholder and relies on Green Dot to help run its own prepaid cards,” American Banker’s Dean Anason reports.
Now federal regulators, however, face the near certainty that another large industrial corporation will challenge the non-bank moratorium that has been in effect, illegally, at the FDIC for many years. We repeat our call for Congress to repeal the ownership restrictions in the Bank Holding Company Act.
Federal Reserve Lending Revelations Intensify Criticism Of Central Bank’s Secrecy
In the midst of the global financial crisis in 2008, the Federal Reserve lent Goldman Sachs, Credit Suisse and Royal Bank of Scotland at least $30 billion each at interest rates as low as 0.01 percent with no public disclosure of the details, Bloomberg News reported on Thursday.
The latest revelations about the covert infusions of credit provided by the Fed to some of the world’s largest banks has amplified accusations that the central bank is a power unto itself, operating according to its own devices and in the interest of major financial institutions — and beyond accountability to taxpayers.
“It just points out that this was about secrecy to protect banks basically from embarrassment from transparency, which is not supposed to be what the Fed’s about,” said Dean Baker, co-director of the Center for Economic Policy and Research, in Washington.
“That is the fundamental problem with the Fed,” Baker added. “They’re supposed to be an agency of the government, not an agency of the banks. But reflexively, there they are protecting the banks, again and again and again.”
“If you don’t have the note today, you don’t have no game.”
News reports suggest that New York prosecutors are preparing fraud charges against a number of large investment banks for defrauding insurance companies with respect to mortgage loans. These allegations and many civil claims with precisely similar predicates illustrate one of the most important aspects of the subprime financial crisis, namely the construction and collapse of the non-bank financial sector.
But now we know that this was all nonsense. The creation of the ersatz housing title registry, Mortgage Electronic Registration Systems (MERS), by the banking and mortgage servicing industry was effectively an end-run around the clear legal standard set by Brandeis. In litigation and foreclosures, these make-believe standards for securitizing home loans are turning into dust in the hands of the banks and investors. Lenders who relied upon MERS to document their secured interest in a mortgage are increasingly at risk when the title is contested.
The Fed told us explicitly – many times – that it was taking “good collateral” to back up these loans and that it was quite confident it would not lose any money.
That, it turns out, was true.
What we were not told is that the “collateral” they took was so bad that it was in some cases valued at TEN CENTS on the dollar or less, and in each of these cases it leaves open the question as to where is that collateral now, having been returned to the bank, what is it actually worth, and how is it being carried on the books – because what we do know from the bank’s financial reporting is that it most-certainly was NOT written off.
There’s more than enough here in these tables to call for a massive forensic investigation into the accounting practices of each and every one of these institutions as the fact that FRBNY valued this “collateral” at such a tiny fraction of it’s claimed value by the submitting institution leads to an immediate question as to how one squares that valuation with the values reported by the banks in their quarterly and annual reports, and whether they were at the time, or are today, in point of fact, at anything approaching actual valuations, insolvent.
We the people deserve both answers AND HONEST ACCOUNTING.
We the undersigned write to you regarding the urgent need to develop national standards for originating, selling and servicing mortgage loans. The private residential mortgage securitization market is frozen as to new issuance. The housing market is suffering from a dearth of credit, which is causing a serious lack of confidence among potential homebuyers.
Widely reported servicer fraud, whether in the foreclosure process or in the systematic assessment of illegal fees against homeowners, is also a serious problem. It’s bad for investors, it’s bad for homeowners, and it’s ultimately bad for a sustainable residential mortgage securitization market and the U.S economy. Fraud is also a symptom of the disease affecting our broader financial system, namely the lack of accountability in the loan servicing industry and the resulting impairment of the value of securities sold to investors.
“Years before they can get clear title and actually sell em”
“You guys in the MEDIA have a real tough time…your looking for events, your trying to cover the news minute by minute…”
“THIS IS CANCER”
“There are a lot of investors out there who don’t know what they own… they may own unsecured loans….. trustees that were supposed to do things under state law (and didn’t)… even Fannie and Freddie have issues with this.”
“This is not minutia…this is the Letter of the Law”
“Most securities issues in the United States are governed by New York law”
“Dealer has to deliver to the trustee the notes, that evidence the obligation”
“Trustees have the least duties”
“You have to indemnify them”
Christopher Whalen, managing director of Institutional Risk Analytics, talks with Bloomberg’s Mark Crumpton about the impact of U.S. mortgage foreclosures on banks and the housing market and the outlook for the economy.
Whalen is author of the book “Inflated: How Money and Debt Built the American Dream.” (Source: Bloomberg)