More Corruption: Bear Stearns Falsified Information as Raters Shrugged

The Atlantic - Made up FICO scores? Twenty-minute speed ratings to AAA? If government prosecutors like New York Attorney General Andrew Cuomo want answers to why the mortgage-backed securities market was so screwed up, they should talk to Matt Van Leeuwen from Bear Stearn's servicing arm EMC.
Reports indicated on Thursday that Cuomo is pursuing a criminal investigation surrounding banks supplying bad information to rating agencies about the quality of the mortgages they signed off on. But so far he hasn't been able to prove where in the chain of blame the due diligence for the ratings broke down.
What Cuomo needs to establish is: whose shoulders does it fall on to verify the information lenders were selling to investment banks about the quality of their loans? And who was ultimately responsible for the due diligence on the loans that created toxic mortgage securities that were at heart of our financial crisis?


False Information and the Grey Area
Employed during the go-go years of 2004-2006, and speaking in an interview taped by BlueChip Films for a documentary in final production called Confidence Game, Van Leeuwen sheds some light onto the shenanigans going on during the mortgage boom that might surprise even Cuomo. As a former mortgage analyst at Dallas-based EMC mortgage, which was wholly owned by Bear Stearns, he had first-hand experience working with Bear's mortgage-backed securitization factory. EMC was the "third-party" firm Bear was using to vet the quality of loans that would purchase from banks like Countrywide and Wells Fargo.
Van Leeuwen says Bear traders pushed EMC analysts to get loan analysis done in only one to three days. That way, Bear could sell them off fast to eager investors and didn't have carry the cost of holding these loans on their books.

Derivatives Dividing Democrats

The Wall Street Journal - WASHINGTON—Ahead of a pivotal vote Monday on financial regulation, divisions are emerging among Senate Democrats over how best to strengthen oversight of the market for the exotic financial instruments known as derivatives.

All 59 members of the Democratic caucus are still expected to stand together Monday on whether to begin action on legislation overhauling regulation of the financial system. But the differences underscore the complexity of the coming debate, and will have to be resolved later this spring.

At issue is whether the derivatives oversight bill written by Senate Agriculture Chairman Blanche Lincoln (D., Ark.) will be folded into the broader regulatory overhaul. The Lincoln measure would beef up oversight and increase transparency of the market, and includes a proposal that could push Wall Street banks to spin off their derivatives trading operations.

"I want to make sure that without a doubt...I have a privileged ability to be able to be a part of this bill," Sen. Lincoln said in a statement forwarded Friday by her office.

Sen. Chris Dodd (D., Conn.), who is leading the broader overhaul effort, has pushed a competing proposal that would increase oversight but not push banks to spin off derivative operations. He's opened negotiations with Sen. Lincoln.

From Treasury, an Invitation to Financial Bloggers

The New York Times - The Treasury Department opened its doors to economic bloggers this month, and the meeting was productive in at least one respect: as John Jansen of the blog Across the Curve concluded, “After meeting them, I feel I cannot refer to them as Timothy Geithner and his minions” anymore.

Mr. Geithner, the Treasury secretary, was among the senior officials who talked with bloggers at an outreach session on Nov. 2. The two-hour round table was held on background, meaning that the bloggers could describe the sessions, but not attribute quotes to specific officials. Lengthy posts about financial system reforms — and the bloggers’ disagreements with the Treasury’s strategies — ensued.

New-media scribes have gradually made their way inside most governmental institutions over the years, but the meeting was the first for bloggers at the Treasury. Tyler Cowen, an economics professor at George Mason University who has written at the Marginal Revolution blog for six years, said it was the first time he had heard from any Treasury official.

U.S. Moves to Regulate Derivatives Trade

Federal regulators outlined plans to regulate the giant market for derivatives, a move aimed at avoiding a repeat of the turmoil created last year by certain financial institutions whose risk-taking in exotic financial instruments went largely unchecked.

Under a proposed raft of reforms, regulators could be given authority to force many standard over-the-counter derivatives to be traded on regulated exchanges and electronic-trading platforms. That would make it easier to see prices and make markets more transparent.

Firms with large derivative exposures or that trade more-complex derivatives would be subject to new reporting requirements. The proposal also calls for all standardized derivatives to go through clearinghouses that will guarantee trades and help cushion the impact of a collapse of a large financial institution.

The regulatory overhauls are in response to growing concerns of outsize risk and leverage among derivatives that trade directly between pairs of firms. Much trading in this market, estimated to total hundreds of trillions of dollars, now happens privately, and contracts are typically negotiated over the phone.http://online.wsj.com/article/SB124224226775916215.html

The Seeds of Credit Crisis Started at J.P. Morgan

Editor's Note: Interesting piece about a misunderstood subject - the rise of credit derivatives - sophisticated securities that allow the transfer of credit risk. Former WSJ alum Jesse Eisinger tells an interesting story of how these complicated financial securities got their start. - MT

by Jesse Eisinger - Portfolio Magazine - The roots of this year’s financial crisis go back to a small team of bankers at J.P. Morgan in New York. Now, their invention—credit derivatives—has helped bring down Wall Street and has left Morgan with its biggest exposure of all.

Credit derivatives aren’t, of course, solely to blame for the pandemic that has helped bring down Wall Street. They didn’t single-handedly force Bear Stearns and Lehman Brothers to bulk up on toxic debt, dooming them to collapse. But they made the financial world more complex and more opaque. Ultimately, they have exacerbated the market panic, as financial firms and regulators have belatedly come to grips with the enormity of the problems. Merrill Lynch ultimately capitulated to a sale because investors had no confidence that the firm had a handle on what its problems were. When the federal government took over A.I.G. in September, it was largely because of the insurance behemoth’s exposure to credit-default swaps, a type of derivative that flourished in the wake of Demchak and his team’s creations. By mid-September, Treasury Secretary Hank Paulson was forced into proposing the largest bailout in U.S. history. Securities and Exchange Commission chairman Christopher Cox (S.E.C. No Evil, October) called for regulating credit derivatives.http://www.portfolio.com/views/columns/wall-street/2008/10/15/Credit-Derivatives-Role-in-Crash

Suddenly, Europe Looks Pretty Smart

The New York Times - Paris — Is Europe no longer an economic museum?

In recent years, as Wall Street boomed, Americans often dismissed Europe as a place for languorous meals and vacations, not economic innovation.

London remained a financial hub, of course, but it was often treated dismissively — as a flashy aberration pumped up by petrodollars from Russia and the Gulf, an exception to the otherwise somnolent Continent.

That kind of thinking is now under challenge, because during the last 10 days Europeans have proved more nimble than Americans at getting to the root of the global financial crisis, whatever they may have lacked as innovators.

After initially dithering, Europe’s leaders came up with a financial bailout plan that has now set the pace for Washington, not the other way around, as had been customary for decades.

That was clear when the Treasury Department decided to depart from its own initial bailout plan — the one approved by Congress earlier this month — and invest up to $250 billion directly in the nation’s banks. The nuts and bolts of that approach had been laid out days earlier by European leaders as they tried to save their own financial system.

And that outcome left Gordon Brown, the British prime minister, and Nicolas Sarkozy, the French president, in something of a commanding position to claim the title of wise men. They are now speaking of creating a Bretton Woods agreement for the 21st century, while the leaders of the country that fathered the postwar financial system worked out at Bretton Woods, N.H., prefer to stay away from such big-picture talk.

In London, where Britain’s willingness to follow the United States into Iraq five years ago still evokes outrage, officials have been especially quick to point out they didn’t follow Washington’s lead this time.

“There’s no doubt that it was a British plan that was copied by the U.S.,” said Leon Brittan, who served as Home Secretary under Margaret Thatcher and was a top official at the European Commission. “It shows that the American conception of Europe as an economic basket case is outmoded and wrong.”

“Europe showed the capacity to respond to a crisis more quickly than the U.S.,” he added. “The U.S. went through agonies to come up with a plan.”http://www.nytimes.com/2008/10/19/weekinreview/19schwartz.html?partner=permalink&exprod=permalink

Families Strain to Pay Tuition

The New York Times - In difficult dinner-table conversations, college students and their parents are revisiting how to pay tuition as personal finances weaken and lenders get tough.

Diana and Ronnie Jacobs, of Salem, Ind., thought their family had a workable plan for college for her twin sons, using a combination of savings, income, scholarship aid and a relatively modest amount of borrowing. Then her husband lost his job at Colgate-Palmolive.

“It just seems like it’s really hard, because it is,” Ms. Jacobs, an information technology specialist, said of her financial situation. “I have two kids in college and I want to say ‘come home,’ but at the same time I want to provide them with a good education.

The Jacobs family may be a harbinger of what is to come. Ms. Jacobs pressed the schools’ financial offices for several thousand dollars more for each son’s final year of college, and each son increased his borrowing to the maximum amount through the federal loan program. So they at least will be able to finish at their respective colleges.

With the unemployment rate rising and a recession mentality gripping the country, financial aid administrators say they expect many more calls like the one from Ms. Jacobs. More families are applying for federal aid, and a recent survey found that an increasing portion of families expected to need student loans. College administrators worry that as fresh cracks appear in family finances, they will not have enough aid money to go around, given that their own endowment returns are disappointing, states are making cutbacks and fund-raising will become more difficult.

http://www.nytimes.com/2008/10/17/business/17student.html?partner=permalink&exprod=permalink