Why is the President's Working Group Oppossing the FDIC Reform Proposals on Residential Mortgage Securitization by Banks?

This week in The IRA we feature a
conversation with Bill
King, who along with his wife and business partner Mary works in the
world of
derivatives broadly defined via their Chicago-based firm, M. Ramsey King

Securities. We first started taking with Bill in the 1980s, during the
political wrangle - we won't call it a battle - over free trade with and

democracy in Mexico. That was about the time of the first
appearance of "Too Big to Fail" for the large banks following the
Mexican peso
meltdown. Un fuerte abrazo a nuestros amigos en Mexico!

But before we go to our feature, a few
comments on current
events. First and foremost we remind one and all about the impending
start
of the FDIC's rule make effort regarding the reform of bank
securitizations.
Last week, the FDIC approved an extension through September 30, 2010 of
the Safe Harbor Protection for Treatment by the FDIC as
Conservator or
Receiver of Financial Assets Transferred by an Insured Depository
Institution in
Connection With a Securitization or Participation.

We hear that the FDIC rule making
process could start as soon
as next month, but more likely will wait till the FDIC's board meeting
in May.
We also hear that the President's Working Group (PWG) on Financial
Services is
preparing a "white paper," in cooperation with the Federal Reserve Board
and the
Office of the Comptroller, to block the FDIC reform effort. This
campaign, which
apparently was orchestrated by the largest dealer banks, is intended to
derail
the new rules proposed by the FDIC mandating greater transparency and
disclosure
for bank sponsored residential mortgage securitization deals.

The PWG, in case you don't know, is an
informal group created
in 1988 by President Ronald Reagan that allows the executives of the
biggest
banks to influence public policy in Washington, but without going
through the
trouble of registering as lobbyists or other public disclosure.
Sometimes
referred to the "plunge protection team," the PWG is part of the
invisible
government of Washington," an agency which operates within the
government, but
at the behest of private interests.

Barry Ritholtz has a nice summary on
the PWG in his book,
Bailout Nation, and also in his Blog, "The Big Picture." As Barry
notes,
the PWG is every bit as incompetent as most other people in Washington,
but they
do have one special skill: pushing the banking industry's agenda in
Washington via informal "guidance" and white papers that are written by
and for
compliant regulators. The PWG essentially acts as a super-lobbying
channel
for the largest banks focused right at regulators. Only "team players"
need apply.

The Federal Reserve Bank of New York
and the OCC in Washington
are reportedly drafting the "guidance" on reform of bank securitizations
and at
the request of the PWG. No clue whether the White House is involved
directly yet
or if this is merely a Tim Geithner operation. These PWG white papers
are
never released to the public even though the Treasury acts as the de

facto public affairs organ for this corporate influence group.

We

called out former Wachovia Bank CEO and Goldman Sachs (GS)
banker Robert Steel on the subject of the PWG last year at the Chicago
Fed's international banking conference. He was unapologetic and more
than
a little offended, or so he claimed. The PWG acts with impunity in
Washington, in part because the members of Congress understand their
subordinate
role. We hear that Senator John Warner (D-VA) is now competing with
Judd Gregg (R-NH) to be the next "Senator from Wall Street" and
specifically
seems to be angling to join a private equity firm. Gregg's tastes seem
to
run more along the lines of a large OTC derivative dealer
bank.

The fact that the PWG is in league
with the Fed and Treasury
against the FDIC board is all you need to know about the politics of
reforming
private label mortgage securitization. If Barack Obama were really
interested in
reforming Washington, he would rescind President Reagan's executive
order and
disband the PWG for good. Allowing the big banks which participate in
the PWG to
lobby financial regulators and members of Congress without any public
disclosure
is a national scandal and makes a mockery of any claim by Barrack Obama
to be
changing the business of Washington.

We noted in our comment last Tuesday
in American
Banker, "Viewpoint: Stop Blocking FDIC Securitization Effort,"

that "the practical policy issue is the losses observed in failed banks
over the
past two years, averaging over 30% of total assets, versus just 11% on
average
in the S&L crisis. The common factor in failed banks with high loss
rates is
unsafe and unsound securitizations practices, thus the FDIC initiative
on
securitization."

It is very telling to us that the FDIC
is advocating greater
openness and transparency in bank sales of mortgage loans to
securitizations,
but the Fed and OCC are standing with the larger dealer banks that
arguably
caused the financial crisis in complex structured assets. Hopefully
these
federal agencies and the industry groups they seem to be allied with
will
realize that the FDIC's rule making process holds the potential to
revive
private label mortgage finance and that they can influence the outcome -
but
only if they participate constructively.

One mortgage market veteran who ran
risk for one of the largest
private conduits in the business put the situation succinctly last week:
"You
can argue against the FDIC securitization proposals, looking at them in a

bundle, as perhaps being overkill, but each piece of their proposal,
taken
separately, is pretty compelling. The other bank regulators and industry
groups
could easily negotiate a better, more streamlined deal that would help
the
market if they bothered to push back and participate constructively,
instead of
simply attacking the FDIC."

To read the rest of our rant on the possibility of zombie bank love between Barclays and Citigroup, and the interview with Bill King, click the link below:

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

-- Chris

Comments

[deadhead]

Thank you Chris...

i'm seeing some talk about FASB 157 reversion (though I personally think it won't happen)

Any thoughts from IRA on this...

article from today's wsj   http://online.wsj.com/article/SB20001424052748703457104575122000213857506.html

[BlackBeard]

Chris!! Please hit the media circuit with this material.  D. Ratigan would probably be interested.

[doublethink]

Who needs the PWG when you've got Chris Dodd?

http://www.reuters.com/article/idUSTRE62D1YI20100314

[blindfaith]

thank you. nice to know about the Presidents Working Group...the name makes it sound like a discussion group of moms and dads.

Look at my avatar...in underware on a steep treeless winding road with a sign post that has a big question mark on it.  What's next?

[reading]

Nice article Chris.  And nice job on cnb(s)...I could almost watch it for a bit.

One basic question for everyone/anyone:

Can someone do a basic outline of where all these crap assets have gone?  Are hey suddenly good now, have they disappeared?  Still sitting around right where we left them?  That is the one thing I can't get my mind around and I can't understand why no mainstream media ever discusses it.

[Rainman]

Denninger did a pretty good analysis on this today at Market Ticker. I suspect he is correct that pension funds are big holders of this crap....and a key motivation behind the extend/pretend schemes. 

[Pondmaster]

As FINRA only covers the banks - broker /dealers , a law / act is needed to reign in the banks themselves who have been end running around the FINRA rules , trading CDS MBS trash directly . And will do moreso with the Feds rev repo program ramp up .   

[merehuman]

Thank you.