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American Securitization Forum returns to Vegas, Baby!

22 Jan

Happy New Year and may 2012 not suck as much as 2011!

I’ve been on forced hiatus due to issues relating to a trip to Cuba, a woman named Carla and a small golden statue of significant religious value. I won’t bore you with the details.

Now that I’ve been released …err… returned to work, I’m on my way to the preeminent fixed income structured finance (FISF) conference; the American Securitization Forum (ASF). For those outside of the business, the FISF brought you such fine investment products as Collateralized Debt Obligations (CDOs), Subprime mortgage backed securities, Liar Loan mortgage securities, Commercial Mortgage Backed Securities (CMBS) and synthetic version of the same.

After the colossal market meltdown which lead to the bursting of the credit bubble and implosion of several small countries, the ASF held its 2010 conference in Washington DC as a sign of contrition and to let congress know we’ve learned our lesson and don’t need pesky laws regarding risk retention. In 2011, ASF ventured to Orlando because the business is family friendly and gave Rep. Garrett the forum to espouse his hatred for all things government especially the President, Fannie Mae, and Freddie Mac though he seemed to forget about FHA/VA loans. The time for slinking around is over and the ASF is back in its favorite city, Las Vegas!!

In a bit of delicious irony, the ASF chose to hold the convention in the opulent Aria Hotel. The Aria is located in the new City Center in Las Vegas. The construction of City Center was financed by a loan originated by a large investment bank with extremely loose underwriting standards (pro-forma underwritten and had interest only payments due). This large investment shop placed the loan into its own CMBS and made themselves a good deal of money.

The City Center loan failed as the construction project ran out of money. The equity owner was highly levered and had no interest in putting his own money into the work. The project stalled for months until a new partner came with a cash infusion for a significant ownership of the project. The ASF, having not learned its lesson, holds its conference in the very hotel which represented a shining example of how messed up the originate to securitize model had become.

BTW, the private residential mortgage backed securities continues to be stalled with two small deals in 2010 and the first deal of 2012 announced just before the convention.

Naked Bond Bear


A Case of Regulatory Capture: OTS deconstructed

30 Jul

The Office of Thrift Supervision: A case of Regulatory Capture

Created with fan fare and removed with disdain, the Office of Thrift Supervision ceased to exist after 22 years of existence. President George Bush Sr. signed the law which created the OTS  in the wake of the Savings and Loan disaster of the 80s and the failure of their previous regulator, the Federal Home Loan Bank Board (FHLB).  In typical congressional action, the OTS staff have been absorbed into the FDIC, OCC, Federal Reserve Board and FHFA.  Like OTS, FHLB didn’t actually go away until it was merged with the Office of Federal Housing Enterprise Oversight (OFHEO) to create Federal Housing Finance Agency (FHFA). The OTS represents how legislative good intentions and economic incentives led a regulator to become a slave to the industry.

Former OTS Building

Letters removed after 22 years

The Savings and Loan business model was to  fund on the short end of the curve (through CDs) and buy assets on the long end. As long as the curve doesn’t invert, they made great money. As long as members kept buying CDs and their long dated commercial loans kept paying, money grew on trees. Even the politicians were involved to make sure the business continued without government interference. Let’s not forget the Keating 5 (which included Deer-in-the-Headlights Senator John McCain). As students of financial history know, the curve inverted, commercial loans stopped paying and short end funding costs soared.

President Bush Sr said “never again will America allow any insured institution operate without enough money” when signed the law which created the OTS. (I guess Jr missed that speech.) Since the GOP doesn’t believe in requiring taxpayers to be taxed for anything (except military based activities), the OTS was funded by a tax on the very institutions they regulated based on the size of company’s assets. Hence, OTS could hire more examiners, have nicer office furniture, and increased regulatory prestige if they could grow their portfolio of regulatees. Initially, the first real leader of the OTS, T. Timothy Ryan (now running the Wall Street lobbying group SIFMA), shut down thrifts and OTS suffered as they lost “clients”.

In the mid 1990s, OTS management, especially OTS Director James Gilleran, made a concerted effort to market themselves as the easier softer regulator. He even brought a chainsaw to a Thrift industry event. Just imagine what their marketing must have been like:

“Capital requirements got you down? We will beat any other regulator’s requirements by 50 bps!”

“No interest rate or credit risk model capabilities? No problem! At the OTS you can use ours!

“Our regulators await your call! Free up capital for those BBB CDOs you want to buy NOW!”

Countrywide and others headed their call. In 2005, Countrywide switched their charter and became a Thrift. At the same time both EMC (a Bear Stearns mortgage originating sub) and Lehman Brothers’s mortgage unit also became Thrifts. OTS staff nearly doubled by the time the economic crisis hit. When Countrywide spun off IndyMac, guess which regulator they chose? OTS of course! Ka-Ching!

As early as 2003, mid level OTS examiners starting finding major issues with thrifts like IndyMac, Countrywide, EMC, AIG and WashingtonMutual and raised them to senior management. These earnest folk actually wanted to reign in these thrifts to protect them.  These examiners were no match for the Thrift lobbyists and incompetence of senior management.  Even the FDIC couldn’t get past OTS management to protect “their” thrifts.

At the end of the day, OTS was doomed from the start due to its mission and economic incentives. It’s a model for how not to set up a financial regulator. OTS’s failures are well known and thousands of pages of text have been written about it. Regulators are supposed to be the last line of defense when financial institution management goes off the deep end and OTS just furthered their insanity. OTS had lost its way.

In the same vein, assuming the Consumer Finance Protection Board ever gets off the ground (and in a twist of irony are moving into OTS’s old offices) they too will be captured by the industry (and the lobbyists) they are supposed to regulate if incentives are misaligned and independence isn’t protected. (Which may not be a bad thing if you a member of the Banking Lobby).

Further Reading on this topic:

Requiem For A Regulator


Senate Financial Crisis Report (161-242)

Rolling Stones Hyperbole vs. Goldman Sachs Reality

17 May

The May 26th Rolling Stone article “The People vs. Goldman Sachs” claims, in clever and entertaining prose, that Goldman execs should go to jail because they: 1) participated in “the most destructive crime spree in our history…”, 2) sold crappy CDOs to unwary clients, and 3) lied to congress.  I’d like to take this opportunity to add a little bit of what I like to call “reason” to each of these “claims.”

Lying to Congress 

Let’s start with simplest charge: Of course Goldman execs lied to Congress. Everyone lies to Congress. Congress lies to Congress. Who outside of Charlie Sheen wants to air dirty laundry in front of the whole world? Yes I believe Goldman lied but not in they way RS thinks they did. Yes, GS knew these bonds were crappy. Yes, they could have done a better job disclosing all the risks. But as a former CDO manager and investor, I know to review, research, and analyze CDOs independently of Rating Agencies.

Selling Crappy CDOs to Unwary clients

Goldman sold CDOs they knew to be crappy to investors who took the opposite side of the bet. Rating Agencies blessed these structures with AAAs. And why is this a crime? Isn’t the motto on the street “Buyer Beware”? The deals would perform or underperform based on the underlying bonds making up the CDOs. Is anyone claiming GS hid which bonds were included? No. Despite RS’s assertion GS knew these bonds were crap, this does not constitute a crime or a failure of disclosure. These bonds were not sold with a guarantee nor did Goldman ever say these bonds had no risk. Heck, even the rating agencies blessed these structures by allowing 75% of the cash flow to be rated AAA.

To further the car analogy favored by RS, imagine you want to buy a fleet of 100 cars from GS Rental Company. You also have at your disposal the repair (i.e performance) history of each and every car from a variety of third party vendors named Intex, Core Logic and Lewtan. However, you rely on Moody’s Auto Rating service to tell you that only 15 cars are likely to go bad in the worst case scenario. You decided to buy 75 cars with GS Rental company keeping the first two cars that go bad. Crime or out-and-out stupidity?

Further, doesn’t anyone remember all the other products investment banks have sold which blew up shortly after origination? I do. Ask me someday about 125% Mortgages, Manufactured Housing, Airplane Lease ABS, Tech Stocks, and so on. Investment banks only sell what investors are willing to buy. Same with the CDOs. Good salesmen know how to sell. GS has very, very good salesmen. Frankly, any investor who trusts a Wall Street salesman and doesn’t ask the tough questions should go work for a feel-good non-profit. Buying investment products you don’t understand should be a crime.

Crime Spree and Key Stone Cop Regulators

Lastly, cutting through RS’s massive hyperbole, I’m trying to figure out what constituted the biggest crime spree of all time. Fraudulent subprime mortgage backed securities issuers? CDO managers? Fraudulent mortgage originators? Fraudulent borrowers? Fraudulent Rating Agencies? Incompetent and toothless regulators? Lazy investors?

Every part of the business created the housing meltdown. Borrowers who over levered or lied to get access to housing  they couldn’t afford. Real estate agents over sold housing to drive up commissions. Home appraisers inflated valuations at the behest of mortgage brokers. Mortgage brokers, paid on commission, forged or instructed borrowers to lie to get access to as much money as possible. Loan officers, paid based on production, ignored problems in loan origination files. MBS issuers ignored prudent underwriting standards and due diligence with no regulatory oversight. Regulators didn’t have the authority to stop this train wreck nor the poltical backbone to do so. Rating Agencies relied on outdated models and Wall Street pressure. Investors didn’t do the work necessary to understand the risks.

This “crime spree” wasn’t a drive by a Moriarty-esque criminal mastermind but a Confederacy of Dunces.

RS says the “banks were closely monitored by a host of federal regulators, including the Office of the Comptroller of the Currency, the FDIC, and the Office of Thrift Supervision.” I call bullshit. The OTS actively sought more regulatees by stating to them “we are the kinder gentler regulator”. The biggest blow-ups were OTS governed (Washington Mutual, Bear Stearns, Lehman Brothers, Indy Mac, and Countrywide). The OCC wasn’t much better and the FDIC was busy laying off personnel because the world was going well. The Fed’s chief drug lord (Greenspan) was pushing housing as the great engine of the US economy.


I’m sick of Rolling Stone’s hyperbole. If GS had a $6B bet on the housing market then they were a little more than 1/2 a percent of the total investors in the market. They were small potatoes, and because they were small they survived the meltdown like cockroaches in a nuclear winter.

Treasury selling of MBS: Round 1 to the Obama Administration

21 Mar

Buy into Weakness, Sell into Strength

There is an old adage, which says “Those with the Gold Rules”. The US Gov’t has all the gold. After buying $1.5T of agency mortgage backed securities to keep mortgage rates low, the Treasury announced the orderly sales of MBS. The idea as listed in their press release is to unwind their position for a profit without upsetting the markets.  Keep in mind the independent Federal Reserve Bank isn’t selling,

What does the Treasury own:

February 2011    
Current Face of the Portfolio at the End of Month

Fannie Mae Freddie Mac  
4.0% 1,376,966,849 6,495,785,739  
4.5% 17,160,393,201 27,946,089,858  
5.0% 22,436,589,516 21,143,129,062  
5.5% 19,103,475,065 9,018,824,625  
6.0% 8,723,088,415 2,161,991,362  
6.5% 47,223,820 0  


Fannie Mae Freddie Mac  
4.0% 0 318,146,273  
4.5% 60,412,369 0  
5.0% 61,850,726 65,124,834  
5.5% 49,831,614 126,373,957  
6.0% 0 0  
6.5% 0 0  
Numbers represent the current face of the portfolio at the end of the month


The US Gov’t purchased (actually over purchased) the current coupon TBA to bring down mortgage rates in a feeble attempt to bring back the US housing market. This tactic didn’t help stop the bleeding though it did slow it down some. As they overbought production (TBA is a futures market and therefore originators can oversell causing trade fails) in the current coupon, the US Gov’t purchased premium coupons to help with the mortgage rates. Again the US Gov’t overbought real production, so then they bought some discount bonds and then stopped.

With all the unrest n the Middle East and nuclear catastrophe in Japan, Agency MBS bonds like Treasuries are rallying due to the flight to quality trade. The US Gov’t thinks they can have their cake (i.e. profits) and eat it too (i.e. political brownie points by lowering debt).  Additionally, they think they can sell $10B/week without dramatically driving up rates. Are they right? Are they crazy? Will Megan ever see her long lost brother who recently had the sex change operation in Sweden?

In the short term, MBS spreads will widen out with increased supply but not sharply.  The US Government isn’t crazy or stupid (though I do wonder about the strategy of telegraphing your moves). The MBS market is short supply partially due to the previous government overbuying and due to decreased availability of prime credit borrowers who haven’t refinanced in the last few years. The planned selling of $10B per month will be in the higher coupons. Selling in the higher coupons will produce the most profits.

The real question is will the US government sell 4.5% and 5% bonds at a loss or modest gain? The Administration will claim a political victory by 1) spending money to help the housing market when they needed it, 2) make a profit for the US taxpayer better than any private company, 3) demonstrate the need for a government presence in the mortgage market and 4) reduce US debt by $10B/month.

All of this is just the prelude to the main event: The soon to be released Dodd-Frank Act qualified residential mortgage and risk retention rules versus every political self-interest group in the mortgage business.





GSE Reform: No proof in the pudding

13 Feb

Worse than too-quick, unsatisfying sex

Last Friday the Obama Administration and the Department of Treasury released their long awaited and overdue plan for housing reform. They delivered a whole lot of nothing: No plan, No future of mortgage secondary market, No future mortgage buyer of last resort, and No substance. The kids at the Department of Treasury must have written this paper during their senior economics policy class at their Ivy League school. (At my alma mater they would have received a mid “C” for this crap if the professor were in a generous mood.)

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ASF 2001: Part 1 of 5: Renewal

13 Feb

Renewal, Regulation, Reticence, Republicans and Regurgitation

The ninth annual American Securitization Form at the modestly opulent J.W. Marriott Resort in Orlando Florida finished last week with more optimism than last year’s funeral dirge in Washington DC. Last year’s ASF conference participants nervously waited for the U.S. government to impose the new rules of the road for the securitization market. The securitization market was in the middle of its second year of limited securitization. To compound the lousy mood was the decision by ASF to hold the conference at the remote National Harbor in a southern Washington DC suburb.

Let’s not forget ASF membership participated significantly in the collapse of the US housing market and the overall economy. The originators, aggregators, servicers, sell side, buy side and CDO managers earned their money by the funding of mortgages riddled with fraud or to unqualified homeowners. Market participants earned the wrath of populist elected democrats. Bush’s ownership society programs helped to facilitate the problems. Last year, we were talking QE2 and Federal Reserve over purchasing of Agency MBS. Fannie Mae and Freddie Mac, in their second year of conservatorship, played a part in the administration’s effort to stem the wave of foreclosures to slow down home price depreciation.

Last year the conference was run by lawyers and this year it was run by deal people, therefore the parties were way better. Well not all the parties but at least the alcohol was flowing. The Naked Bond Bear crashed … err … attended several of the dealer parties for the benefit of you dear reader. Optimism for the functioning markets (Commercial Mortgage Backed Securities, Credit Cards, and Prime Autos) allowed JP Morgan to rent a pool table in its hospitality suite.

Renewal – sort of…

Many parts of the securitization markets are returning from tepid to low volumes (when compared to 2005-6).  Last year investment banks issued ~$8 billion of CMBS (not including $3.5B of Freddie Mac K-deals).  Citi expects CMBS issuance to be $12B in the first quarter of 2011. Seasoned CMBS senior tranches speads to swaps have tightened from a high of 1,200 in 2008 to 215. (These bonds were originated at a 1 mo LIBOR + 15-25). Auto ABS and Credit Card securitizations are growing at the same pace. According to Citibank’s research, $15B of consumer ABS were issued in 2010 while $9.8B will be issued by the end of February! Even CLOs are seeing a tremendous boost of liquidity, missing since July 2007. Every panel’s future looking statement on these asset classes were positive discussions of growth and renewal.

The missing asset in this massive group hug is the largest of the asset classes: residential mortgages. Only one private label RMBS originated in 2010 for a whopping $255 million by Redwood Trust and no RMBS are expected to be originated in 2011. One very optimistic research analyst predicted $20B of RMBS issuance in 2012.  Why are 95 percent of residential originations being securitized through Fannie Mae, Freddie Mac and Ginnie Mae? Why are banks originating jumbo mortgages (over $729k in high cost areas) only 25-37.5 basis points over agency loans? Why do the super bowl half time shows continue to deteriorate after the famous wardrobe malfunction? Three reasons: Regulatory uncertainty, investor reticence, and the juicy net interest margin returns on portfolio jumbo mortgages.

Next post will discuss the uncertain regulatory environment.

And someone is going to get punched in the face if one more 20-something Harvard-MBA junior trader says “This time pro-forma underwriting will be different”.

Commercial Real Estate Finance Counsel Conference Recap

31 Jan

From Datsun to Nissan

Last week, commercial real estate professionals (~1,200) around the nation gathered at the GW Marriott in DC to attend the CREFC (formerly known as CMSA) conference braving snow, horrendous local drivers, and no-touch strip clubs.  Like a spiritual retreat, attendees came to reflect upon the current status and inner child of the commercial real estate market including topics of CMBS V2.o, market liquidity, senior class investor rights, special servicer rights, and, everyone’s favorite boogeyman, government regulation…

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