Fuck its silent in here.......

[Oleg]

I filled out my absentee ballot last night.  Tell Oleg that I voted for Prop. 19.

I can hear you.  I'm sitting right here!

[Quality Start Machine]

always good to have a Plan B.

BONUS: Commenter named "PresidentJeffersonDavis". No way that's not awesome.

[Gilgamesh]

From an email to Andrew Sullivan's blog.

"At least there's one good thing to come out of this whole Juan Williams v. NPR mess: we've finally found a program that Republicans are willing to say they would cut."

[J. Walter Weatherman]

What did the investment banks know and when did they know it? (And does that open them up to risk of lawsuits?)

http://blogs.reuters.com/felix-salmon/2010/10/13/the-enormous-mortgage-bond-scandal/

But remember that Clayton had tested only a small portion of the loans in the pool. So Citi knew that if there were a bunch of bad loans among the loans that Clayton tested, there were bound to be even more bad loans among the loans that Clayton had not tested. And those loans it couldn't put back to the originator, because Citi didn't know exactly which loans they were.

If there had been any common sense in the investment banks, that would have been the end of the deal. But there wasn't. Rather than simply telling the originator that its loan pool wasn't good enough, the investment banks would instead renegotiate the amount of money they were paying for the pool.

This is where things get positively evil. The investment banks didn't mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business. They weren't going to hold on to the loans: they were just going to package them up and sell them on to some buy-side sucker.

In fact, the banks had an incentive to buy loans they knew were bad. Because when the loans proved to be bad, the banks could go back to the originator and get a discount on the amount of money they were paying for the pool. And the less money they paid for the pool, the more profit they could make when they turned it into mortgage bonds and sold it off to investors.

Now here's the scandal: the investors were never informed of the results of Clayton's test. The investment banks were perfectly happy to ask for a discount on the loans when they found out how badly-underwritten the loan pool was. But they didn't pass that discount on to investors, who were kept in the dark about that fact.

I talked to one underwriting bank — not Citi — which claimed that investors were told that the due diligence had been done: on page 48 of the prospectus, there's language about how the underwriter had done an "underwriting guideline review", although there's nothing specifically about hiring a company to re-underwrite a large chunk of the loans in the pool, and report back on whether they met the originator's standards.

In any case, it's clear that the banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool. That's a lie of omission, and if I was one of the investors in one of these pools, I'd be inclined to sue for my money back. Prosecutors, too, are reportedly looking at these deals, and I can't imagine they'll like what they find.

[J. Walter Weatherman]

http://blogs.reuters.com/felix-salmon/2010/10/18/the-mortgage-bond-scandal-faq/

So that's why the Clayton findings count as material information, right? They were directly responsible for lowering the price of the loan pool.

Right. The banks were willing to pay X for the loan pool based on the electronic file data supplied by the originators, but after having Clayton go in and test that electronic data against the original loan files, the banks were only willing to pay some sum less than X.

But isn't Clayton's research just like anybody else's research—just an opinion about publicly-available information? Investment banks doing a secondary offering of shares don't need to tell investors about other banks' buy or sell ratings on those shares, even if those ratings affect the share price.

No, this is different. Because the loan files that Clayton had access to were not publicly available. And in any case, Clayton wasn't being paid for its opinion. It was being paid to diligently go through a subset of the loan pool, one loan at a time, and check each loan against various underwriting standards. Clayton's opinion didn't matter to anyone. What mattered was the new information that Clayton dug up.

What do you expect, that the banks would put all the loan-level information into the bond prospectus? That would make it thousands of pages long! Didn't John Hintze report back in May that, in the words of his headline, "The Loan Data Was There for All to See"? Anybody could have done the Clayton analysis, and in fact people like John Paulson and Michael Burry did do the Clayton analysis of loan-level data. They didn't like what they saw, they shorted the bonds, and they made lots of money. So long as the information was public, there can't be anything wrong here.

Yes, the investment banks, as well as companies like CoreLogic, did make some loan-level data available to investors. But that data, presented in easily-digestible spreadsheet form, was essentially the same as the electronic data that the banks were using to price the loan pool before they sent in Clayton. That data alone, it turns out, if looked at in the right way by someone like Paulson or Burry, was all you needed to short the bonds and make lots of money. But the original loan files which Clayton checked that data against? They were not publicly available, and for good reason: they included things like the borrowers' names, salaries, social security numbers, and other private information.

Clayton's report, then, was non-public information: it was the product of looking at private loan files, not semi-public spreadsheets. No one else—not Paulson, not Burry—could do what Clayton was doing, and so Clayton was adding a valuable layer of information to what was publicly known.

Now, it's true that even when investors knew that Clayton had done these tests, they evinced precious little interest in seeing the results. All they really cared about was the credit rating. And even the ratings agencies weren't interested in seeing Clayton's results, which is scandalous in and of itself. But the securities laws don't say that banks can withhold material non-public information if the investors don't seem to care about it.

Still, it seems that you're seeking to punish banks for doing more work on these bonds than they needed to do. The banks were not required to do due diligence on these loan pools. If they didn't want investors to know the results of the due diligence, they could have simply not done any due diligence at all, and then, according to you, there would have been no scandal. Instead, they spent their own money on hiring the likes of Clayton to double-check everything — and for that you want to punish them?

Yes. It's great that the banks did the double-checking. But the whole point of double-checking is to make sure that nothing unexpected is lurking in the loan pool. When something unexpected did turn out to be lurking in the loan pool, the banks had an obligation to pass that information on to their buy-side customers. The banks put themselves in a situation where they found themselves in possession of material non-public information. That they did so voluntarily is beside the point; they still had an obligation to disclose it.

http://blogs.reuters.com/felix-salmon/2010/10/15/regulators-have-known-about-the-mortgage-bond-scandal-for-three-years/
http://blogs.reuters.com/felix-salmon/2010/10/17/the-historical-echoes-of-the-mortgage-bond-scandal/

[morpheus]

http://blogs.reuters.com/felix-salmon/2010/10/18/the-mortgage-bond-scandal-faq/

A bunch of bad shit that the investment banks did

http://blogs.reuters.com/felix-salmon/2010/10/15/regulators-have-known-about-the-mortgage-bond-scandal-for-three-years/
http://blogs.reuters.com/felix-salmon/2010/10/17/the-historical-echoes-of-the-mortgage-bond-scandal/

This is troubling to be sure... my problem with this is that investors generally counted on the rating agencies to do their jobs.  Salmon very briefly mentions this but he doesn't really do it justice.  Many, many, many investors simply looked and said "it's AAA-rated so it must be safe, otherwise how did it get to be AAA?"  I guarantee you that most bond investors who were reaching for yield by buying these things thought that the ratings provided them some kind of comfort that they wouldn't lose their shirts. 

I am not absolving the investment banks of their responsibility to disclose material information to the buyers of these bonds, only adding on to the guilt list.  Investors *really* depended on those credit ratings... it's hard to look at a credit rating now without a lot of skepticism, since the agencies have demonstrated a lack of ability to analyze credits. 

Anedcotally, some portfolios I was involved with pre-crisis (tangentially - these portfolios had components that were run by a certain set of fixed-income managers) were buying fixed-rate second mortgage bonds that were rated AAA.  They got written down to something like 20 cents on the dollar, a shocking loss for a AAA security.  Clearly the agencies that rated these didn't understand what they were doing, or screwed up.  Plain and simple.

[Oleg]

http://blogs.reuters.com/felix-salmon/2010/10/18/the-mortgage-bond-scandal-faq/

A bunch of bad shit that the investment banks did

http://blogs.reuters.com/felix-salmon/2010/10/15/regulators-have-known-about-the-mortgage-bond-scandal-for-three-years/
http://blogs.reuters.com/felix-salmon/2010/10/17/the-historical-echoes-of-the-mortgage-bond-scandal/

This is troubling to be sure... my problem with this is that investors generally counted on the rating agencies to do their jobs.  Salmon very briefly mentions this but he doesn't really do it justice.  Many, many, many investors simply looked and said "it's AAA-rated so it must be safe, otherwise how did it get to be AAA?"  I guarantee you that most bond investors who were reaching for yield by buying these things thought that the ratings provided them some kind of comfort that they wouldn't lose their shirts. 

I am not absolving the investment banks of their responsibility to disclose material information to the buyers of these bonds, only adding on to the guilt list.  Investors *really* depended on those credit ratings... it's hard to look at a credit rating now without a lot of skepticism, since the agencies have demonstrated a lack of ability to analyze credits. 

Anedcotally, some portfolios I was involved with pre-crisis (tangentially - these portfolios had components that were run by a certain set of fixed-income managers) were buying fixed-rate second mortgage bonds that were rated AAA.  They got written down to something like 20 cents on the dollar, a shocking loss for a AAA security.  Clearly the agencies that rated these didn't understand what they were doing, or screwed up.  Plain and simple.

So it was the credit agencys' faults for not finding out the information that the investor banks kept secret on purpose?

The reason those 2nd mortgages, which at their peak were going for 90-95 cents on the dollar, were fixed rate to begin with was to make them even that attractive to the investors.  Frankly, that should have been a red flag, except the investors, whether on purpose or not, were still playing by conventional mortgage security rules (max mortgage was usually never kept for more than 9 years, no more than 3% of loans were going to involve some sort of fraud, no more than 3% of loans were going to default in the first 3 months, etc).  The fact was, the investor banks were writing the underwriting guidelines, albeit indirectly, by telling us which loans they would buy and which they wouldn't.  We just simply adjusted our guidelines accordingly, sometime even on a monthly basis, depending on what the banks were buying.

I used to think that the investment bankers who were responsible for buying these loans were just greedy and negligent or incompetent.  Heck, they were just playing the numbers and there was no history of anything like this boom to reference when making these decisions.  Now, I know they knew what they were doing and did it anyway.

[morpheus]

http://blogs.reuters.com/felix-salmon/2010/10/18/the-mortgage-bond-scandal-faq/

A bunch of bad shit that the investment banks did

http://blogs.reuters.com/felix-salmon/2010/10/15/regulators-have-known-about-the-mortgage-bond-scandal-for-three-years/
http://blogs.reuters.com/felix-salmon/2010/10/17/the-historical-echoes-of-the-mortgage-bond-scandal/

This is troubling to be sure... my problem with this is that investors generally counted on the rating agencies to do their jobs.  Salmon very briefly mentions this but he doesn't really do it justice.  Many, many, many investors simply looked and said "it's AAA-rated so it must be safe, otherwise how did it get to be AAA?"  I guarantee you that most bond investors who were reaching for yield by buying these things thought that the ratings provided them some kind of comfort that they wouldn't lose their shirts. 

I am not absolving the investment banks of their responsibility to disclose material information to the buyers of these bonds, only adding on to the guilt list.  Investors *really* depended on those credit ratings... it's hard to look at a credit rating now without a lot of skepticism, since the agencies have demonstrated a lack of ability to analyze credits. 

Anedcotally, some portfolios I was involved with pre-crisis (tangentially - these portfolios had components that were run by a certain set of fixed-income managers) were buying fixed-rate second mortgage bonds that were rated AAA.  They got written down to something like 20 cents on the dollar, a shocking loss for a AAA security.  Clearly the agencies that rated these didn't understand what they were doing, or screwed up.  Plain and simple.

So it was the credit agencys' faults for not finding out the information that the investor banks kept secret on purpose?

The reason those 2nd mortgages, which at their peak were going for 90-95 cents on the dollar, were fixed rate to begin with was to make them even that attractive to the investors.  Frankly, that should have been a red flag, except the investors, whether on purpose or not, were still playing by conventional mortgage security rules (max mortgage was usually never kept for more than 9 years, no more than 3% of loans were going to involve some sort of fraud, no more than 3% of loans were going to default in the first 3 months, etc).  The fact was, the investor banks were writing the underwriting guidelines, albeit indirectly, by telling us which loans they would buy and which they wouldn't.  We just simply adjusted our guidelines accordingly, sometime even on a monthly basis, depending on what the banks were buying.

I used to think that the investment bankers who were responsible for buying these loans were just greedy and negligent or incompetent.  Heck, they were just playing the numbers and there was no history of anything like this boom to reference when making these decisions.  Now, I know they knew what they were doing and did it anyway.

No one said the investment banks were without guilt.  Just that there was enough to spread around.

[J. Walter Weatherman]

No one said the investment banks were without guilt.  Just that there was enough to spread around.

That.

Anyone looking for a single point of failure in this whole debacle is missing more than a few pieces of the puzzle.

[morpheus]

No one said the investment banks were without guilt.  Just that there was enough to spread around.

That.

Anyone looking for a single point of failure in this whole debacle is missing more than a few pieces of the puzzle.

I think Tank and I just agreed on something.  That, after RV and I agreed at least TWICE on things in this thread.  Is it time to shut it down yet?

[Oleg]

No one said the investment banks were without guilt.  Just that there was enough to spread around.

That.

Anyone looking for a single point of failure in this whole debacle is missing more than a few pieces of the puzzle.

I think Tank and I just agreed on something.  That, after RV and I agreed at least TWICE on things in this thread.  Is it time to shut it down yet?

If it makes a difference, I also agree.  I just put more of the blame ont he investment bankers than anyone else, and it's not really even close.

Having said that, the 25 year olds working for the sub-prime wholesale lenders who were driving 5-series beamers, maxing out their 401(k) contributions on their first commission check of the year, and doing blow in the bathrooms with rolled up hundos also get a bunch of the blame.

[J. Walter Weatherman]

No one said the investment banks were without guilt.  Just that there was enough to spread around.

That.

Anyone looking for a single point of failure in this whole debacle is missing more than a few pieces of the puzzle.

I think Tank and I just agreed on something.  That, after RV and I agreed at least TWICE on things in this thread.  Is it time to shut it down yet?

If it makes a difference, I also agree.  I just put more of the blame ont he investment bankers than anyone else, and it's not really even close.

Having said that, the 25 year olds working for the sub-prime wholesale lenders who were driving 5-series beamers, maxing out their 401(k) contributions on their first commission check of the year, and doing blow in the bathrooms with rolled up hundos also get a bunch of the blame.

I didn't know you ever drove a beemer, Boiler Room.

[Oleg]

No one said the investment banks were without guilt.  Just that there was enough to spread around.

That.

Anyone looking for a single point of failure in this whole debacle is missing more than a few pieces of the puzzle.

I think Tank and I just agreed on something.  That, after RV and I agreed at least TWICE on things in this thread.  Is it time to shut it down yet?

If it makes a difference, I also agree.  I just put more of the blame ont he investment bankers than anyone else, and it's not really even close.

Having said that, the 25 year olds working for the sub-prime wholesale lenders who were driving 5-series beamers, maxing out their 401(k) contributions on their first commission check of the year, and doing blow in the bathrooms with rolled up hundos also get a bunch of the blame.

I didn't know you ever drove a beemer, Boiler Room.

I also wasn't 25.

[R-V]

The lamestream media is reporting that the curbstomper outside the Kentucky senate debate was a Rand Paul supporter. Yeah right. I don't see any bootstraps on those high tops.

[Gilgamesh]

The lamestream media is reporting that the curbstomper outside the Kentucky senate debate was a Rand Paul supporter. Yeah right. I don't see any bootstraps on those high tops.

God bless America.