Thursday, February 26, 2009

Subprime Failure Was Not Fraud But “Willful Blindness”

I’ve written many posts regarding subprime lending, many under the title Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending.  In one of those posts, dated April 15, 2008, subtitled Self Inflicted, I stated the following.

The stage was set for the collapse of the subprime lending industry with the origination of the individual subprime loan underwritten to foolish; one could say incompetent; underwriting guidelines.  As more and more of these structurally deficient loans piled up in lenders’ servicing portfolios, to be mined again and again for any remaining equity subprime borrowers may have retained in their homes, the swiftness of the final collapse lacks any astonishment.  The subprime lending business model was fundamentally flawed and myopic.

I’ve also commented, on a number of occasions, regarding the allegations that fraud was the cause of the subprime lending failure, and stated the following in regards to this allegation.

While the FBI may find a few prosecutable mortgage lending fraud cases, what will mostly be brought to light by their investigations will be the foolishness of the underwriting guidelines utilized by the subprime lending industry, and the unethical, but not illegal, methods which were utilized to suck subprime borrowers in.

I once again take up this subject, after reading a piece at The Huffington Post written by William K. Black, Associate Professor, University of Missouri - Kansas City which is titled The Two Documents Everyone Should Read to Better Understand the Crisis.

The two documents Mr. Black refers to, and conveniently does not provide links to, are an S&P document of unknown title, and the other is a Fitch document, also of unknown title.

The gist of Mr. Black’s piece, arguing that fraud is the cause of the world wide financial market meltdown, is that individually originated subprime mortgage fraud was the catalyst for “widespread accounting fraud” in mortgage derivative markets, which were constructed around those individually originated, allegedly fraudulent, subprime mortgages.

To understand the crisis we have to focus on how the mortgage fraud epidemic produced widespread accounting fraud.

Let’s review some of what Mr. Black states to bolster his incorrect analysis.  First, Mr. Black’s preamble regarding the S&P document.

The first document everyone should read is by S&P, the largest of the rating agencies. The context of the document is that a professional credit rater has told his superiors that he needs to examine the mortgage loan files to evaluate the risk of a complex financial derivative whose risk and market value depend on the credit quality of the nonprime mortgages “underlying” the derivative. A senior manager sends a blistering reply with this forceful punctuation:

The “blistering reply.”

Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don’t have it and can’t provide it. [W]e MUST produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.

Mr. Black then immediately follows the “blistering reply” with this statement.

Fraud is the principal credit risk of nonprime mortgage lending.

This is blatantly incorrect.  The principal credit risk(s) of subprime (nonprime) mortgage lending are twofold.  First, does the borrower have the ability to repay the debt?  Second, what is the borrower’s history of credit use?  Does the borrower repay his debts, or does the borrower’s credit history consistently show that the borrower ignores his debt payments, of all types?  These are the principal risks of subprime lending, not fraud.

Mr. Black then states, to bolster his fraud argument, the following.

Unfortunately, “most investors” (the large commercial and investment banks that purchased nonprime loans and pooled them to create financial derivatives) did not review the loan files before purchasing nonprime loans and did not even require the lender to provide loan tapes.

The rating agencies never reviewed samples of loan files before giving AAA ratings to nonprime mortgage financial derivatives. The “AAA” rating is supposed to indicate that there is virtually no credit risk—the risk is equivalent to U.S. government bonds, which finance refers to as “risk-free.”

Were the credit agencies implicitly practicing fraud in not reviewing the subprime mortgage paper loan files (when pooling mortgages for sale into the secondary market, typically between 5% and 10% of the mortgages in the pool are audited) and assigning the derivatives derived therefrom “AAA” ratings?  No, they were not.  They were practicing, as Mr. Black himself alludes to, “willful blindness.”

Mr. Black’s argument for fraud as the cause of the financial market collapse then references the Fitch document, which is quoted as follows.

Fitch’s analysts conducted an independent analysis of these files with the benefit of the full origination and servicing files. The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.

[F]raud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to the loan funding. Fitch believes that this targeted sampling of files was sufficient to determine that inadequate underwriting controls and, therefore, fraud is a factor in the defaults and losses on recent vintage pools.

Note that this Fitch document initially states that “there was the appearance of fraud or misrepresentation” and then implicity states that “fraud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control, and fraud prevention tools…”

Once again, I state that fraud is not the culprit.  Fitch refers to the culprit, though, when it mentions “inadequate underwriting controls,” which simply means foolish underwriting guidelines, or lending to individuals who have a long history of not paying their debts and credit over extension, but lending them money anyways, and then crossing your fingers and hoping they make the new subprime mortgage payment when it comes due.

There is no doubt the collapse of the financial markets is the result of the collapse of the subprime lending industry, but the collapse of the subprime lending industry is not because of fraud.  The collapse of the subprime lending industry was the direct result of lending too much money to borrowers who could not afford to repay, even though the underwriting guidelines projected they could, and who had a long and detailed history of not repaying the debts they had contracted in the past.  The failure was not fraud, but “willful blindness” to the reality of the risk of lending to crappy borrowers.

Posted by John Venlet on 02/26 at 12:06 PM
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Wednesday, February 25, 2009

Practice Civil Disobedience

Reynolds links to a Bob Owens piece, posted by Pajamas Media, regarding new innovations in second amendment infringement.

First up, a bill being introduced by Kenneth Dunkin (D - 5th District - IL).

Illinois Bill Would Require Gun Owners to Buy $1M in Liability Insurance

Second up, a bill in Congress, H.R. 45, currently with no sponsors, under the innocuous name of Blair Holt’s Firearm Licensing and Record of Sale Act of 2009, which is being championed by one Bobby L. Rush (D - IL).

Both of these second amendment infringement attempts I deplore, but, even if they did become law, they would mean nothing, to me personally, nor would they deter me from owning a handgun.  I practice civil disobedience, and will continue to do so, in any area of my life I deem proper.

Posted by John Venlet on 02/25 at 04:05 PM
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Friday, February 20, 2009

Marijuana Use Decreases Risk of Injury

I noted some marijuana health benefits, published by Harvard, just the other day.  Well, here’s another another benefit of marijuana use that the drug “war” windmill tilters really do not want you to know.

The use of cannabis is not a contributing causal factor in injuries requiring hospitalization, and may even protect users against the likelihood of sustaining such injuries, according to the results of case-control study published online in the journal BMC Public Health…A prior case-control study conducted by the University of Missouri also reported an inverse relationship between marijuana use and injury risk, finding, “Self-reported marijuana use in the previous seven days was associated ... with a substantially decreased risk of injury.”

Marijuana May Be Protective Against Injury, Study Says


Posted by John Venlet on 02/20 at 03:35 PM
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Thursday, February 19, 2009

Does the Red Print Make the News More Compelling, All of a Sudden?

So, Drudge has two headlines up, right at this moment, in bright, bold red letters, one of which reads TRADER’S REVOLT: CNBC HOST CALLS FOR NEW ‘TEA PARTY’; CHICAGO FLOOR MOCKS OBAMA PLAN.

The second bright, bold red lettered headline reads VIDEO: ‘The government is promoting bad behavior… do we really want to subsidize the losers’ mortgages… This is America! How many of you people want to pay for your neighbor’s mortgage? President Obama are you listening? How about we all stop paying our mortgage! It’s a moral hazard’... MORE…

Oh, and the tea party call is old news.

Posted by John Venlet on 02/19 at 01:53 PM
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Get A Warrant, Secret Service

The atrocious idiocy and violoation of free speech rights displayed by the Oklahoma City police officer who pulled over a motorist for displaying a sign on his vehicle which read “Abort Obama, not the unborn,” confiscating said sign, which then instigated an investigation of the motorist by the Secret Service, is overshadowed by the audacity of the Secret Service requesting to walk through an individual’s private home, all nice and peaceful like, to ensure the individual is not part of any hate group, because of a mere five (5) words.

When individuals allow small incidents impinging on freedom of speech like this to remain uncritcized and unchallenged, they soon become commonplace, and we are left mute.

Posted by John Venlet on 02/19 at 11:57 AM
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Whom is Making a Monkey out of Whom?

It boggles the mind, a monkey seems to be dominating the news.

Posted by John Venlet on 02/19 at 10:37 AM
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Wednesday, February 18, 2009

Lack of Principles, Peter J. Wallison

Peter J. Wallison, who is the Arthur F. Burns fellow in financial-policy studies at the American Enterprise Institute, has this to say in The Corner about Obama’s $75 million dollar “lifeline.

The Obama loan-modification package is well-designed, and it makes sense to use Fannie Mae and Freddie Mac as the central players. They both have the expertise and staffing to handle a lot of the details, and they already own a large proportion of the mortgages and MBS that have to be refinanced. This principally includes the 10 million subprime and alt-A mortgages they hold or have guaranteed.

However, the program is ill-conceived if it is intended to renegotiate the 6 million mortgages the administration has suggested it will be necessary to address. There is very little chance that this can be done in the time required to prevent the gradual deteroration of both bank assets and the economy generally. What was necessary was a program that treated the problem on a wholesale rather than a retail basis. This could have been done by acquiring the loans at a discount from the banks (relieving the banks of the cost of foreclosure) and passing the discount (together with a lower interest rate) along to homeowners in the form of a reduction in mortgage principal. No time-consuming negotiation would have been required, and the homeowners would have had much lower monthly payments. In short, it’s a well-intended plan, but will fall short of a solution.

Hardly a principled statement, Mr. Wallison, when you consider that AEI’s Purpose and Organization Statement includes the following as integral to their purpose.

AEI’s purposes are to defend the principles and improve the institutions of American freedom and democratic capitalism—limited government, private enterprise, individual liberty and responsibility…

How, exactly, does Mr. Wallison’s statement support AEI’s stated purpose?

Posted by John Venlet on 02/18 at 07:41 PM
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A 213 Pound Fourth Amendment Victory

In this day and age, it is not unusual for rights to be subsumed by the State in order to support their various “wars,” and the “war” on drugs is a prime example of this.

Illegal search and seizures, in the name of the “war” on drugs are quite normal, complete with rather frequent dog killings, just take a stroll through Radley Balko’s site and you’ll find quite a tally of dead dogs.

Occasionally, though, a judge will stand up and provide a badly needed backhand to the State when they have overstepped their authority.

When a state trooper pulled over 64-year-old Robert Joseph Whitcomb’s minivan on a Nebraska highway last October, he found enough densely-packed marijuana hidden inside to equal the weight of a large man.

The 213-pound discovery would have been enough to send the Wyoming man, a convicted felon, back to prison.

But a seemingly innocuous police mistake in checking the wrong license plate database—the basis for stopping Whitcomb’s rented Toyota Sienna after a dispatcher reported an expired plate—was all the evidence a Lancaster County, Neb. judge needed to gut the state’s case against Whitcomb.

Good for that judge.

Lawyer: Release of Wyoming man who had 213 pounds of marijuana in van is important Fourth Amendment victory

Posted by John Venlet on 02/18 at 11:17 AM
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Tuesday, February 17, 2009

I’d Say the French Need to Re-evaluate What Is Most Vital

I mentioned the fact that a Brit and French submarine collided the other day.  The news created alot of handwringing hype, of course.

Today, Time has a piece posted, further analyizing this news, which really tells you nothing, but I did find one interesting quote within the Time piece, uttered by Jérome Erulin, a spokesman for the French Navy.

“France does not supply any information regarding the position of its nuclear arms or submarines carrying them because France considers its nuclear arsenal the most vital element in its defense capabilities,”...

I suppose, when you have no other clout in the world, the Frenchies’ nuclear arsenal would seem rather vital.

Posted by John Venlet on 02/17 at 02:33 PM
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There Will Be No “Wyatt’s Torch”

There will be no “Wyatt’s Torch” to mark the ignominiousness of this day.

Obama to sign stimulus bill today in Denver

Though there are men of principle, in this country, the swarms of looters, freeloaders, and my need is greater than your need destroyers have been elevated to stratopheric heights by the new messiah of redistribution, Barack Obama, while men of principle suffocate and struggle to remove the stake of socialism from their hearts.

Posted by John Venlet on 02/17 at 09:10 AM
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Monday, February 16, 2009

Cripple the Businesses that Keep America Great

Small businesses, with less than 100 employees, make up a large percentage of businesses here in the United States.  With big businesses having been run into the ground due to State interferences over the years, and the gradual nationalization of businesses of all types currently under way here in the United States, the federal government, and state and local governments, are diligently seeking ways to confiscate additional monies in order to turn all Americans into welfare recipients.

Here is the most current eggregious example of the greed rampant around us in government as the United States sinks further and further into socialist ideology.

Outrage brewing over proposed 1,900% beer tax hike

Posted by John Venlet on 02/16 at 04:16 PM
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Attention Holocaust Denying Bishop Richard Williamson

Here you go, holocaust denier Bishop Richard Williamson.  Holocaust-denying British bishop says he will ‘review the evidence’ - and orders a book about Auschwitz

Auschwitz plans put on display in Berlin

Posted by John Venlet on 02/16 at 09:22 AM
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Are You “Hiding in the Back?”

Bill H, at Free In Idaho, has a essay post up titled Uncomfortable Questions which is worth a read.  The conclusion of Bill’s post.

Can your spouse say the things you believe in?  If I asked them, would they tell me they’re afraid you really believe it?  Or would they tell me they’re proud of you because they know you do?  Do your kids know the difference between conservative and liberterian, progressive and fascist, free man and serf?

Are you eager to speak about liberty?  Or do you avoid letting folks know what you believe?

Did you know that what’s happening today was planned years ago and brought about by true believers?

Do you truly believe in anything?  Can anyone tell?  And how will you know when the line is crossed from “it’s not bad enough yet” to “it’s too late”?

More and more voices asking uncomfortable questions right now… no hiding in the back.

Posted by John Venlet on 02/16 at 08:45 AM
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Reach Out and Touch Someone

Pictured: The supergun that kills from a mile - and the camouflaged crackshots using it against the Taliban

The British-made L115A3 Long Range Rifle.

Posted by John Venlet on 02/16 at 08:21 AM
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Get the Hell out of the Way, Government

Did politicians rumble the trade? Did governments, or international forums or symposiums, provide the sharp instrument? Did academic research and expertise expose the dodgy product? Did statutory regulators apply the pin? No, the free market wised up and pricked this bubble. Politicians and finance ministers (if they had had the power) would have tried to keep it inflated. The market puffed itself up, and then, without intervention - despite intervention - the market let itself down. The speed with which this has happened has been awful, but however inconvenient for many or catastrophic for a few, correction is not a failure of the market, but a success.

The above quote is from a piece in The Spectator, written by Matthew Parris, titled O ye of little faith! This economic crisis is evidence that the market is working.


Via Samizdata.

Posted by John Venlet on 02/16 at 08:12 AM
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