Views on improving the integrity of global capital markets
16 November 2010

Call 1-800-Bailout

Posted In: Systemic Risk

Beginning back in the 1980s, Dana Carvey played a character named Enid Strict, otherwise known as “The Church Lady,” on the comedy show “Saturday Night Live.” Enid is best remembered for her signature line, “Isn’t that special?” It is what comes to mind as we watch the next scene in the long-running saga of the subprime debacle.

 

It is more than a little disturbing that the Congressional Oversight Panel (COP) is now warning that the documentation process is so spurious it may be difficult to determine who owns what properties. It is bad enough that the loan files were defective, maybe even fraudulent, and that they were then packaged and sold anyway. Never mind that the audit firms and lawyers involved in “reviewing” these securitizations for truthful disclosures apparently really didn’t. And never mind that the issuers of these securities may be forced to take many of them back, at big losses. It is what the COP calls a “potentially” severe consequence that matters most. Namely, if we can’t sort out who actually owns the properties such that these troubled assets can be foreclosed, sold, and allowed to clear, the systemic consequences could be, well, severe. If only we could just “suspend the rules” as they often do in Congress and send all this compost right back to the institutions (the originators and securitizers) that created it.

 

That would be special.

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is managing director of the Standards and Financial Market Integrity division at CFA Institute, where he oversees all advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

1 thought on “Call 1-800-Bailout”

  1. Sheetal Radia, CFA says:

    From the subprime to the ridiculous (my personal views)This development is the most worrying in my view and highlights the next stage of the current crisis. I would suggest that CFAI take a stronger approach and make this more prominent as a potential risk to the financial system not only to our members but also the G20. Is this the wing tip of a black swan?CFAI needs to carry out some empirical research that examines the potential risks to the financial system to assess what may happen if investors in RMBS start demannding their money back; how will the Fed and SEC cope? will the new regulations have to be changed again?This latest development highlights the systemmic nature of the breakdown of checks and balances in the economic systemMy reasons for CFAI to take a more active approach on this issue are as follows -1) Ostrichitis – The less than serious attitudetaken by the banks and the Treasury to this issue; i.e when the subprime issue broke in 2007 it was downplayed as loss aversion kicked in and the effects of the compunding of leverage was ignored. It looks like this is deja vu all over again. The markets may have priced some of this in but we know that they are far from efficient and being preoccupied with the Eurozone and the Koreas, the foreclosure issue is just the type of issue that could blind side them.2) The potential liability on the banks that still remain and the impact on their ability to lend; essentially we are looking further reduction in the supply of capital to those that should receive it . For example the cop report states that if one investor confronts bank of America for $48Bln this would be the equivalent of 20% of shareholders equity. 3) Investors in RMBS may need to review their holodings especially those that were purchased when prices were heavily discounted.I enclose a link to the executive summary from the cop which makes for some unpleasant reading.http://cop.senate.gov/documents/cop-111610-report-executivesummary.pdf

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