Monday, November 14, 2011

Revisiting the Confidence of our Sophisticated Financial Wizards

I ran across this "old" testimony from a spokesperson for the "American Securitization Forum"(ASF) to congress in 2003(pdf).  The ASF is made up of mostly large financial firms involved in the securities market including the now infamous mortgage backed securities(MBS).  Much of the testimony included is a matter-of-fact history of the development of the secondary market for mortgages.  What made me laugh was reading their conclusion and message for congress.  Their message was basically, we are awesome.  We've 'innovated' this awesome new market to provide credit to everybody.  Anything you do to regulate predatory lending will ruin this awesome thing we created.

Securitization reflects innovation in the financial markets at its best. Pooling assets and using the cash flows to back securities allows originators to unlock the value of illiquid assets and provide consumers lower borrowing costs at the same time. MBS and ABS securities offer investors with an array of high quality fixed-income products with attractive yields. The popularity of this market among issuers and investors has grown dramatically since its inception 30 years ago to $6.6 trillion in outstanding MBS/ABS today.

The success of the securitization industry has helped many individuals with subprime credit histories obtain credit. Securitization allows more subprime loans to be made because it provides lenders an efficient way to manage credit risk. Efforts to curb “predatory” lending that inhibit the legitimate use of securitization by assigning liability to the purchaser of a loan or some other means, threaten the success of the beneficial subprime market. Secondary market purchasers of loans, traders of securitized bonds and investors are not in a position to control origination practices loan-by-loan. Regulation that seeks to place disproportionate responsibilities on the secondary market will only succeed in driving away the capital loan purchasers provide in the subprime market.

I urge Congress to move with great care as it addresses the problem of predatory lending. The secondary markets are a tremendous success story that has helped democratize credit in this country. Well intended, but overly restrictive, regulation in this area could easily do more harm than good. This is particularly the case when state and local governments craft disparate anti-predatory lending statutes that place different compliance burdens on the secondary market. For this reason, the ASF urges this committee to consider legislation to pre-empt the authority of state and local governments in the area of predatory lending and to construct a safe harbor from assignee liability for secondary market participants.

These guys were so high on their own awesomeness that not only did they want congress to leave them alone, they wanted congress to MAKE the states leave them alone too.  The lobbying firm had some success with this.

Then, of course, 2008 rolls around and those financial wizards found out they were full of crap.  The punchline to all of this is that the ASF then lobbied for TARP to bail them out(pdf).
SIFMA and ASF support the use of a Guarantee Program to cover assets with high illiquidity premiums relative to their expected losses. In such instances, the assets are unable to be sold at prices that are reasonable based on the quality of the asset. SIFMA and ASF believe that the Guarantee Program should be considered for use with a full spectrum of financial assets, including both securities and whole loans. Treasury may consider whether identifying frequently referenced assets (such as RMBS referenced in multiple CDO transactions) may present an opportunity to magnify the benefits of any purchase or guarantee program

So the same group that 5 years earlier was telling everyone to leave them alone because if we try to make them stop selling deceptive loans, we'd ruin all their awesomeness, then they get congress to bail them out when their "innovations" blow up in their face.  Then they wonder why everyone is so upset with them.
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