Archive for the ‘economy’ Category

What’s missing from this story

February 7, 2012

Banks Paying Cash to Homeowners to Avoid Foreclosures (via eschaton)

Losses for lenders are about 15 percent lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody’s. The deals accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, said CoreLogic Inc., a Santa Ana, California-based real estate information company.

Nowhere does anyone appear to mention the time value of money. As long as the real estate market is stagnant (or even falling) and the value of a house depends on things like maintenance and decorating, it makes enormous sense for a bank to take the money from a short sale now — and maybe even invest it in something that doesn’t go belly-up — rather than gamble that they will get a better price from a foreclosure sale a few years from now, or that the stones that are underwater householders will suddenly start bleeding green.

Say, for example, that the bank gets $200K out of a house now rather than the same $200K out of it in 18 months. That’s about $15K in profits that they could make (or $15K less interest they could pay whoever they’re borrowing from) even before the extra cost of the lawyers for foreclosure, the chance that the homeowner might walk away or even trash the place out, dropping the bank’s realized price substantially, or that the might fight the foreclosure and win because the bank doesn’t even properly hold the paper.

As long as the bank makes more money by getting a sale through now, it makes business sense for them to share that increment with the homeowner. So why haven’t banks been doing this all along? Some of them have — the article is reporting an increase in short sales from a quarter to a third of distressed transactions. But the answer, I think, is that the amount of money a bank is willing to offer a homeowner depends crucially on the power imbalances among the parties to the transaction. In previous years, at least according to reports, the power was mostly in the hands of mortgage-servicing companies, which made much more money by stringing out a loan and stringing out foreclosure. But servicers aren’t doing so hot, what with the criminal and civil liability for all those missing and falsified documents, so now the issue may be much more directly between the homeowner and the holder of the note.

Another possibility is that the economy is looking up enough that banks would like to have extra cash or borrowing capacity available on their balance sheets. That would be nice. But then again the bankers might be anticipating that prices will plummet further, and hoping to get out while they can…

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Better late than never

August 10, 2011

Confessions of a Financial Deregulator – J. Bradford DeLong – Project Syndicate

Depression-era restrictions on risk seemed less urgent, given the US Federal Reserve’s proven ability to build firewalls between financial distress and aggregate demand. New ways to borrow and to spread risk seemed to have little downside. More competition for investment-banking oligarchs from commercial bankers and insurance companies with deep pockets seemed likely to reduce the investment banking industry’s unconscionable profits.

It seemed worth trying. It wasn’t.

Analytically, we are still picking through the wreckage of this experiment. Why were the risk controls at highly-leveraged money-center universal banks so lousy? Why weren’t central banks and governments willing and able to step up and maintain the flow of aggregate demand as the financial crisis and its aftermath choked off private investment and consumption spending?

Technological genres and market illogic

March 19, 2011

Ages ago, when his name was still one to conjure with, I took a long walk with John Seely Brown to discuss the applicability of literary criticism to the success of inventions. My recent ex at the time had gotten a thesis and several books out of the  idea (going back to kierkegaard at least) that it was in many ways impossible for people schooled in 19th-century traditions to read modern writers, so I was primed for the discussion. What Brown’s researchers had found was that new gadgets were usable — at least at first — only insofar as they could be understood as a better/faster/smaller X, where X was a genre of technology that people already thought they understood.

That meant innovators had to think about how the things they were creating fit into existing ideas about the world (most obvious case: the desktop metaphor) and/or tell stories about the world that shifted people’s perceptions in ways that made new gizmos more comprehensible and acceptable — just as modernist writers have so often had side gigs as book reviewers and manifesto-promoters. And people who bought and tried to use the new tools had to learn — and sometimes privately revise– the stories they were told, until they had something that made sense.

The history of recent tech is littered with innovations that have stories, from blogs to “community” to android phones and e-book readers.  Some of the stories make sense, some of them don’t, or at least not yet.

So now let’s apply this to financial innovations. All the fancy mortgage instruments, for example, were billed as cheaper/more flexible/more accessible/longer/lower/wider/faster versions of existing mortgages, even when they were only barely related to same. (Really: the last time people were issuing loans with no verification of income stream and options to add the first few years’ payments to the loan balance was during the savings&loan scandal, and most of them ended up in jail.) But the story made for good sales.

And the fancy instruments the big boys played had their own set of stories as well. They were just well-analyzed aggregations of existing securities, or adaptations of well-understood methods of laying off risk (never mind that the last time the insurance industry had a crisis they found out that no one had a clue of who had laid off how much risk to whom, or how much had come right back to its original roost). And in a sort of bitch-slap version of the usual genre issues, if you thought that they were too complex and opaque for people to be trading safely, then you clearly didn’t have the analytical chops and were better off playing in the low-risk kiddie pool.

That last bit is important because of the way it intersects with Keynes’s dictum that the market can stay irrational longer than you can stay solvent. In this particular case, the irrationality consisted in believing the stories being told about all these opaque financial instruments. If you decided to trade in them (with the exception of a few very-deep-pocketed pessimists who took the short sides of transactions) you pretty much had to accept the models that everyone else was using, or else your valuations would be way off from everyone else’s, and you’d get clobbered in the day-to-day shifts. Playing that particular game involved accepting the shared consensual hallucination — buying into the MBS/CDO genre — so that your conversations, as expressed in bids and asks, would be mutually intelligible.

And once everyone was speaking the same language, they were all lost.

Unclear on the concept

December 6, 2010

Queens Woman Nearly Loses Home Over Bank Error – NYTimes.com

Because she had a dogged lawyer, who had the wit to get a New York Times columnist interested in her case, a terrible mistake was uncovered. As a result, an unjustified foreclosure may well be reversed.

In the column that contains these lines, Nocera documents repeated acceptance of payments under false information, repeated court filing of falsified documents, knowing dissemination of false information in financial transactions (oh, yeah, and the usual failure to perform proper service of documents in a lawsuit). This is a mistake?

Ever bleeping convicted bad-check signer and con artist in the country would be walking around with a clean record if they could just say “oops, my bad” the way Bank of America gets to do.

Why dying seniors should pile on the debt

November 17, 2010

This reporter is relying a little too much on financial-industry sources. Dying with debt isn’t a dirty little secret, it’s a financial strategy that’s been well known for 20 years or more.

Dying With Debt: A Dirty Little Retirement Secret – CNBC

And while many retirees who are being quietly buried under a mound of debt may think they’re protecting their kids by not burdening them with their financial problems, if they don’t pay off their debts before they die, it will eventually become their children’s burden.

Whatever that parent owes will be deducted from his or her estate before that estate is divided among the children and other beneficiaries.

This statement makes the enormous assumption that there’s an estate to divide, and that the parent hasn’t had the good sense to distribute their assets among their kids well before their death. Because the real dirty little secret is that unsecured debts of a dead person may be the responsibility of the estate, but they’re not the responsibility of anyone else. (Even though you will read stories of finance companies and debt collectors harassing children and cousins, telling them they have a moral responsibility to pay off what their dead familiy members used to owe.)

So if a parent dies with their house mortgaged and underwater, having given away the family bric-a-brac, tapped out the checking account and put their last 50 grand of expenses on their credit card, there isn’t a damn thing creditors can legally do to their kids. No burden at all. And that’s the outcome the people who pitched this article to the reporter are desperately trying to avoid.

Of course you have to get the timing right.

Perversely, once you recognize the probability that you’re going to leave a negligible or negative estate to your kids, there’s a strong incentive to make that negative number as large as possible, because the outcome will be the same for your heirs regardless.

Corporate bustouts have been around a long time

November 3, 2010

Looting – Akerlof, Romer

tags: banking akerlof looting bankruptcy economic underworld

Sure, some of the details have changed, and managers with an ownership stake have gotten in on the deal as well, but they really do lay it all out. If you can get the government to guarantee your debts (or a government-sanctioned rating agency to give them a AAA rating) sometimes/often running a business into the ground is way more profitable than doing things honestly — even more profitable than just running crazy risks in hope of making them pay off. The math is simple and fairly irrefutable, and the cases are nicely done.

I also hadn’t known (shows how uninformed I am) how fraudulent S&Ls and junk bonds tied together. Without which there wouldn’t have been much of the merger madness that destroyed corporate governance.

Felix Salmon belabors the obvious

November 3, 2010

Summers’s incentives | Analysis & Opinion |

Being captured is not some kind of intellectually dishonest overt bribe, where you truly believe A but profess to believe B because doing so makes you rich. It’s much more subtle than that, based partly in the wealth and success and sterling reputations of those (like your mentor Bob Rubin, perhaps) who believe B. And it’s a survivorship-bias thing, too: if you don’t believe B, you’ll never rise to the kind of position where your opinions matter as much as Larry’s do and did.

I’d go a little further and say that capture works best on people with both a general desire to do good and the right modicum of self-reflection. If the intellectual results you achieve appeal just a little to your sense of transgression and go (maybe more than) a little against your professed beliefs in equity and the general welfare, you can be sure that they’re really intellectually rigorous. Not like those people who let their desires for how the world should be distort their analysis of how the world actually is. Yeah, right.

I think that one of Krugman’s great successes, in part because he embraces the notion of being a liberal (even though he only barely is by last-century standards), is in calling out the cult of virtuous suffering (especially suffering by other people). That cult is composed not only of the closet and not-so-closet sadists who like the idea that others must suffer to expiate economic sins, but also of those who have been abused into internalizing the notion that a world in which (other) people don’t suffer is somehow wrong — unnatural, immoral, weak and headed for disaster or whatever. That second group can only believe that its ideas are correct and rigorous (ahem) when they involve suffering. Any solution that involves good things happening to good people is per se suspect.

Corporate bustouts have been around a long time

October 21, 2010

Looting – Akerlof, Romer

tags: banking akerlof looting bankruptcy economic underworld

Sure, some of the details have changed, and managers with an ownership stake have gotten in on the deal as well, but they really do lay it all out. If you can get the government to guarantee your debts (or a government-sanctioned rating agency to give them a AAA rating) sometimes/often running a business into the ground is way more profitable than doing things honestly — even more profitable than just running crazy risks in hope of making them pay off. The math is simple and fairly irrefutable, and the cases are nicely done.

I also hadn’t known (shows how uninformed I am) how fraudulent S&Ls and junk bonds tied together. Without which there wouldn’t have been much of the merger madness that destroyed corporate governance.

When is paying off debt not really savings?

August 31, 2010

A few days ago Ezra Klein was posting about tax cuts and the usual claim that poor people spend them while rich people don’t. He cited some studies that seemed to show that poorer people (not poor, mind you, nobody surveys them) were more likely to say that they were going to use tax-cut money to pay off debt rather than spend.

It struck me at the time that this was questionable, because for poorer household debt is one of the things that constrain consumption.  If you’re paying 20-plus percent on your outstanding balance, knocking that down by $500 means another $10 a month you can spend on food and gas. Or even more bluntly, if you’re pretty much at the limit of what you can carry on your cards, paying down $500 on your debt means not only immediately improved cash flow but also $500 that you can spend during the coming month or couple of years as your debt slides right back up to the limit. Either way, it’s not really savings as typically thought of, it’s debt management in the service of fairly immediate increased consumption.

In a macro sense, this would normally count as savings, because the money is available to lend out again, but the availability of money to lend at most financial institutions really isn’t particularly correlated with how much people are paying them back. So if it’s savings in that sense, it’s technical only.

What we would like to ask people about tax cuts (for purposes of stimulus) is not really whether they’re going to spend the money immediately versus paying off debt or putting it in savings/investment, it’s how it’s going to change their non-debt-service consumption. To statisticians, the interest you pay on loans is consumption just like food or gas or televisions — you’re paying for the use of someone else’s money. But for individuals, not so much.

I’ve got a better idea

September 23, 2009

thanks, Atrios

Bank of America Misses Congressional Deadline – DealBook Blog – NYTimes.com

The committee’s chairman, Representative Edolphus Towns of New York, is deciding whether to issue a subpoena to force compliance, but first he plans to meet with the bank’s chief strategy and marketing officer, Anne Finucane, on Tuesday.

Mr. Towns indicated that he planned to tell Ms. Finucane that the bank must comply with the request, and if it does not, a subpoena may be forthcoming.

How about just calling in the sergeant at arms and a backup of capitol police and telling the — wait, chief strategy and marketing officer?!? not the general counsel or the CEO or someone who actually has power to turn over the papers in question? — that the little anteroom over there is going to have a cot in it until the documents are turned over?

It was bad enough when the executive branch treated congressional requests having the force of law with contempt, but this is a bank that the federal government already owns. We the people could send the entire executive suite out on the street with the stroke of a pen. And they still couldn’t care less.

Let’s encourage the others.