“Skin In The Game”

by James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson, Berkshire Hathaway Home Services New Jersey Properties, Montclair Office

The Weasels of Wall Street have done it again.  That’s my stereotyping catch-all description of the financial industry, particularly, the banking industry.

You think that’s too broad?  That I’m tarring an entire industry with the same, heavy brush?  It reminds me of when Zero Mostel (in the original movie of “The Producers” – the non-musical one) is told he can’t shoot the actors in his show because “the actors are people.”  “Oh, yeah?” he barks, “D’ja ever eat with one?”

I think our friends in banking and money lending have, once again, attacked the buffet table of our patience.  They’re cutting into the line and scarfing up all the good stuff and the rest of us be damned.

Now that I’ve stretched that metaphor to its breaking point let me tell you what’s got me so amped up that I’m publishing 2 posts in the same month.

In December of 2013 I published a post called “Greed, Risk and the Pope”  (click on the title to read the post).  In that post I discussed the part of the Dodd–Frank Wall Street Reform and Consumer Protection Act which mandated that mortgage lenders retain some risk when they securitized and sold bundled mortgages.

After 4 years of wrangling the regulators who establish the details of this law announced, this week, that there would, essentially be no risk retention for mortgage lenders. Here’s a link to an article in The New York Times Business Section on October 23rd:

http://nyti.ms/1D2DEi7

What happened?  As the article points out, and as my December 2013 post predicted, there was intense pressure on regulators from an odd coalition of interest groups to water down the effect of the law.  Banking associations, builders, consumer groups and, wait for it….The National Association of REALTORS brought enormous lobbying efforts to bear to avoid the lenders from retaining a mere 5% of risk.

The last 2 times there was no risk retention in mortgage lending a financial collapse followed.  One was in the 1920s, with a raft of real estate securitization, which ended with The Great Depression and one was the sub-prime frenzy that ended with the housing collapse of 2008 and The Great Recession.  I’m no economist but isn’t there a lesson to be learned here?  After the country recovered from The Depression (thanks, solely, in my opinion, to World War 2), the mortgage market operated basically the same way until September 11, 2001.  In those years, banks and lenders held mortgages until they were repaid and also held the risk of default.  This led to 60-70 years of peaceful mortgaging.  When the government oversight of the financial industry was loosened (nay, abandoned) in the aftermath of the fears brought on by 9/11 and the financial industry was told to police itself, the surge of securitization started again.

Now, with the watering down of this part of Dodd-Frank, the banks are free, once more, to not care if any loan they originate is paid back – in other words, profit without risking capital.

The astounding fact is the government colluded in this potentially catastrophic compromise.  The federal regulators bought the argument that credit would be severely restricted if there was risk retention.  This is the same fear-based chestnut that lenders trot out whenever anything threatens their ability to do whatever they want.  As The Times article points out, the only thing that will prevent another disaster brought on by securitization is the wisdom of the investors who buy the securities (in the form of bonds) to distinguish the good from the bad.  The last time around those investors showed no such wisdom.

Let’s not forget, also, that the government, in the form of Fannie and Freddie guarantees the vast majority of mortgage loans so if securitized loans go bad the taxpayer is on the hook.

It did not take long for all of us to forget what happened in 2008.  The desire for more lending has fueled this groundswell of opposition to risk retention.  The new conventional wisdom seems to be we need more lending and we will bow to the banks in order to get it.   This seems to be particularly true at the National Association of REALTORS.  I have taken my profession’s trade organization to task in the past for being on the wrong side of important issues.  I have also watched in amazement as we REALTORS have become the toadies of the mortgage lenders.  It appears we’re croaking the same tune again.

If you can’t get enough of my opinions, take heart.  I have another (non-real estate) blog called “The World At Large by Jim Stefanile – Thoughts On Everything Else”.

This month’s post is “A Fateful Universe?” where I discuss the idea that “everything happens for a reason.”  I hope you can visit:   http://jimstefanilesotherblog.wordpress.com/2014/10/28/a-fateful-universe/

The Volcker Rule

by James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson, Prudential New Jersey Properties, Montclair, New Jersey

I don’t usually publish twice in the same month (I’m amazed that anyone reads this stuff once a month…) but, it seems, I can’t pick up the newspaper lately without another example of “banks gone wild”.

The latest example is the big banks’ reaction to the regulatory adoption of the so called “Volcker Rule”, named after former Federal Reserve Chairman Paul Volcker, which is part of the Dodd–Frank Wall Street Reform and Consumer Protection Act.  As this December’s other post explored regarding mortgage risk, this is another example of the financial industry trying to outwit any attempt to rein it in.  I thought it best to get my feelings about this issue off my chest this month so we won’t have month after month of this grimness and can get back to other real estate topics in 2014.

Paul Volcker

In short, the Volcker rule prohibits banks from proprietary trading which is the banks’ risky trading for their own gain.  Many of the toxic derivative trades that contributed to the Great Recession of 2008 were these type of trades as were the so-called “London whale trades” of 2012 where JP Morgan Chase lost 6 billion dollars as the result of a chancy proprietary trade.  The intent of the rule is to avoid this kind of precarious, speculative behavior on the part of the banks in order to prevent another financial meltdown.

Here are this week’s news articles, starting December 8th:

http://dealbook.nytimes.com/2013/12/08/near-a-vote-volcker-rule-is-weathering-new-attacks/

http://dealbook.nytimes.com/2013/12/09/regulators-set-to-approve-tougher-volcker-rule/

http://dealbook.nytimes.com/2013/12/10/long-and-arduous-process-to-ban-a-single-wall-street-activity/

http://www.nytimes.com/2013/12/13/business/little-sympathy-for-big-banks.html

See what I mean?  Those are the articles in just a 4 day period this week.  The financial industry has been abuzz with this rule this past week because the 5 regulatory agencies that had to agree on the rule’s implementation voted unanimously this week on its regulations which are even tougher than anticipated and represents a potential shift in the balance of power in financial reform as regulators gain more leverage over the largest banks whose risky behavior in behemoth trades can impact the overall economy.

As you might expect, the banks are yowling in pain and instructing their lawyers to scour the law and its rules for loopholes they can wriggle though.  Remember what Pope Francis said about the financial industry when I quoted him in my earlier December post: “… ideologies which defend the absolute autonomy of the marketplace and financial speculation.  Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control.”  And here the banks go again, trying desperately to avoid being reined in for the good of the country, just as they did when they successfully subverted the section of the Dodd Frank law dealing with retaining mortgage risk.

As usual, The PBS Newshour  did a good job of encapsulating the issue with a piece they ran this week which set up a debate between Dennis Kelleher, President of the financial watchdog group Better Markets and Wayne Abernathy, Executive Vice President of the American Bankers’ Association.  Judge for yourself who won the debate:

Here again, the banking industry is presenting the fear based argument of a loss of credit capital in support their position.  What we should be afraid of, rather, is the unregulated and unfettered ability of the largest banks to send us all down the rabbit hole again, affecting every aspect of our financial lives.  Remember the last 5 years when your home lost half its value and you couldn’t get a mortgage?  That was the loss of capital and credit the banks are, now, saying will be the result of government regulation.  That 2008 debacle was their fault, not the government’s.  In fact, as was pointed out in the Newshour piece, the government (that’s you and me, pal) had to bail them out.  Remember, Mr. and Mrs. and Ms. big banker, when your own greed and stupidity put you and the rest of us on our knees?  The banks are saying “trust us” to the possibility of that happening again.  I say, as Ronald Reagan said, “trust but verify” and that’s what the Volcker Rule regulation is all about in this case – government oversight of an industry that has proven itself cavalier and untrustworthy in pursuit of its own profit to the detriment of us all.

Perhaps, with the implementation of renewed government oversight, we can approach the new year with some confidence in a stable financial future for this country.  On that hopeful note please accept my best wishes for the holiday season and for a happy new year.