Obama/Banks = Long Parliament / Charles I ?? | 45 comments (45 topical, editorial, 0 hidden)

Let me give you a couple of quotes. (Emphasis mine)

Role of the SPV
To understand the role of the SPV, we need to understand why a corporation would want to raise funds via securitization rather than simply issue corporate bonds. There are four principal reasons why a corporation may elect to raise funds via a securitization rather than a corporate bond. They are:
The potential for reducing funding costs
To diversify funding sources
To accelerate earnings for financial reporting purposes
For regulated entities, potential relief from capital requirements
We will only focus on the first of these reasons in order to see the critical role of the SPV in a securitization.²
----
²For a discussion of the other reasons, see W. Alexander Roever and Frank J. Fabozzi, "Primer on Securitization," Journal of Structured and Project Finance, Summer 2003, pp. 5-19.

(This is from Chapter 14 of Fabozzi's Bond Markets, Analysis, and Strategies)

Wikipedia: Frank J. Fabozzi

Frank J. Fabozzi is the Frederick Frank Adjunct Professor of Finance at Yale School of Management. He has taught at Yale University since 1994. Fabozzi, an investment management expert, is a Wall Street authority and editor of the Journal of Portfolio Management. He is a consultant to several financial institutions. He was inducted into the Fixed Income Analysts Society Hall of Fame in November 2002. He is also a Fellow at the Yale International Center for Finance.

Wikipedia: Special purpose entity

Often it is important that the SPE not be owned by the entity on whose behalf the SPE is being set up (the sponsor). For example, in the context of a loan securitisation, if the SPE securitisation vehicle were owned or controlled by the bank whose loans were to be secured, the SPE would be consolidated with the rest of the bank's group for regulatory, accounting, and bankruptcy purposes, which would defeat the point of the securitisation. Therefore many SPEs are set up as 'orphan' companies with their shares settled on charitable trust and with professional directors provided by an administration company to ensure there is no connection with the sponsor.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 08:43:06 AM EST
[ Parent ]

Re: Fraud (none / 0)

But was that illegal?

by Colman (colman at eurotrib.com) on Tue Mar 3rd, 2009 at 08:44:37 AM EST
[ Parent ]

Re: Fraud (none / 0)

It wasn't supposed to happen, was it? That's why banks are regulated.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 08:45:27 AM EST
[ Parent ]

Re: Fraud (none / 0)

But that's a failure of regulation, not a personal failing of "bankers", nor "clearly" a crime.

by Colman (colman at eurotrib.com) on Tue Mar 3rd, 2009 at 08:49:22 AM EST
[ Parent ]

Re: Fraud (4.00 / 2)

Because the regulators failed to stop an illegal practice it doesn't make it legal. It makes the regulators incompetent.

This is in the same league with accounting fraud. It is usually discovered after something bad like bankruptcy or embezzlement happens, and the forensic accountants go back and determine that, no, those accounts should never have been approved a few years back. The fact that they were doesn't remove the accounting fraud.

I am not a lawyer, a regulator or a forensic accountant, but to me, intentional skirting of banking regulation is clearly a crime.

I don't buy the personal failing of bankers angle. I don't believe in Sin. But if you follow the banking regulation and creative accounting thread you might eventually be able to point to a specific bank(er) and say "they made the decision to avoid regulation". Where does the buck stop when a bank decides to securitise for the purpose of avoiding regulatory capital requirements?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 08:55:28 AM EST
[ Parent ]

Re: Fraud (none / 1)

The problem is that they may very well be inside the letter of the law but outside its spirit.

by Colman (colman at eurotrib.com) on Tue Mar 3rd, 2009 at 09:09:06 AM EST
[ Parent ]

Re: Fraud (none / 0)

So Bankers are the wrong target? we should be looking at Lawyers who found a way for this to be done? and accountants who didn't do their job?

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Tue Mar 3rd, 2009 at 09:11:27 AM EST
[ Parent ]

Re: Fraud (4.00 / 2)

ceebs:

accountants who didn't do their job

Or did their job too well?

Anyway, the banks were in a curious position, as exemplified by the famous quote

But Mr. Prince used an interesting metaphor to describe his company's situation as a major provider of financing for leveraged buyouts. "As long as the music is playing, you've got to get up and dance," he told The Financial Times on Monday, adding, "We're still dancing."

When everyone else in the industry is doing something fishy but profitable (or profitable because fishy), you risk falling behind (in profits and share price) if you don't join in. If the insanity lasts too long, you will end up being the target of a hostile takeover by one of the more profitable "bad guys" (or "profitable because bad" guys).

However, in this case the argument doesn't really hold water. Spanish banks were still posting double-digit year-on-year profit increases even with the regulatory damper of not being able to take assets off the balance sheet, as described by Gillian Tett above. So, banking executives could always have made the decision not to get into certain business lines.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 09:19:14 AM EST
[ Parent ]

Re: Fraud (4.00 / 3)

Spanish banks were still posting double-digit year-on-year profit increases even with the regulatory damper of not being able to take assets off the balance sheet

So where was this money coming from? If they weren't having to resort to being highwaymen of the futures returns, is it a moralistic sleight of hand to disguise an indirect profit from other peoples schemes?

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Tue Mar 3rd, 2009 at 09:22:57 AM EST
[ Parent ]

Re: Fraud (none / 0)

That is a very good question. An easy answer might be that they were riding the real-estate bubble. But I am not sure that is the right answer.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 09:25:33 AM EST
[ Parent ]

Re: Fraud (none / 1)

if they were then where's the fallout from the current world economic situation?

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Tue Mar 3rd, 2009 at 09:28:58 AM EST
[ Parent ]

Re: Fraud (none / 0)

Have you seen how the banks in the IBEX35 index have been doing lately?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 09:30:09 AM EST
[ Parent ]

Re: Fraud (none / 0)

Well I havent been following them religiously, but I havent heard anything there that dosen't sound like "They're banks and banks are not worth supporting in the current climate"

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Tue Mar 3rd, 2009 at 09:36:11 AM EST
[ Parent ]

Re: Fraud (none / 0)

It's possible that the Spanish banks benefitted from an oligopoly where in the US and the UK there was fiercer competition...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Sun Mar 15th, 2009 at 06:35:30 AM EST
[ Parent ]

Re: Fraud (none / 0)

Now, does this mean the banks can claim "the banking regulator made me do it"?

FT.com: Spain's banks weather credit crisis (Gillian Tett, January 31 2008)

According to Mr Ortiz, several years ago a clutch of Spanish banks discretely approached the Spanish central bank and asked permission to do what other international banks were doing at the time - namely set up networks of SIVs.
However, Madrid took a dim view of this and demanded that Spanish banks post an 8 per cent capital charge against SIV assets. That essentially killled the business stone dead by removing incentives to create these creatures.
At the time, this stance provoked predictable grumbles from Spanish financiers. After all, back then almost every other Western regulator was encouraging its banks to get their assets off the balance sheet as fast as you can say "Basel I".

(my emphasis)

Either you take the view that there was fraud and then the regulators are guilty of collusion, or you take the view that there wasn't fraud because the regulators said so at the time, and then what you have is a case of criminal negligence on the part of the regulators.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 09:08:00 AM EST
[ Parent ]

Re: Fraud (none / 0)

I might be happy with criminal negligence for the regulators and the politicians running them, but then we'd have to propagate it out to the voters and the media and the eductation system and and and ...

by Colman (colman at eurotrib.com) on Tue Mar 3rd, 2009 at 09:10:13 AM EST
[ Parent ]

Re: Fraud (none / 1)

Sorry, Colman, the buck has to stop somewhere. You couldn't hang the entire German population at Nuremberg either.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 09:12:54 AM EST
[ Parent ]

Re: Fraud (none / 1)

But you could pretty much tear down the system, identify the underlying causes and build a new one.

Instead we'll lynch a few bankers and pretend the problem is solved.

Cunning.

by Colman (colman at eurotrib.com) on Tue Mar 3rd, 2009 at 09:16:22 AM EST
[ Parent ]

Re: Fraud (none / 1)

I believe J K Galbraith says something to that effect when he describes the hunt for scapegoats at the start of the Great Depression.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 09:20:38 AM EST
[ Parent ]

Re: Fraud (none / 0)

That was in The Great Crash 1929.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 09:32:12 AM EST
[ Parent ]

Re: Fraud (4.00 / 2)

Tear down the system and build a new one?

As in:

Gaianne:

seizing the banks as criminal enterprises--which they are--freezing their activities, and seizing their cash on hand to re-open a government-managed series of commercial banks so that farmers can take out loans to plant crops THIS YEAR

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Mar 4th, 2009 at 06:50:05 AM EST
[ Parent ]

Defitnitely illegal (4.00 / 5)

Go over to Cryptogon and read about his stint working for a "Wall Street Chop Shop." The sleazy mortgage company that imployed him knew that the loans were underwater (that the recipients had no ability to repay) at the time they made them. The well-known, respected, (and now slightly infamous) bank that bought them and repackaged them for reselling to suckers (like your pension plan) knew exactly what they were buying--they had bought the sleazy mortgage company in the first place for just this purpose. He gives more details on how this resembled Mafia racketteering in "We Americans Are Very Clever."

Definitely fraud. Certainly actionable. It is just that the DAs and the Department of Justice do not WANT to prosecute. They have already been turned.

The Fates are kind.

by Gaianne on Tue Mar 3rd, 2009 at 10:31:46 AM EST
[ Parent ]

Re: Defitnitely illegal (none / 1)

Yes, it was you that posted this link earlier. Actually, I didn't think it had been so recently as three months ago...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 10:46:31 AM EST
[ Parent ]

Thanks for digging up the actual links (none / 0)

Not my skill: hunting them down does not come easily for me.

I hate being redundant, but, of course, it was buried in a thread and easily missed. So I repost.

Thank you for finishing the repost for me.

The Fates are kind.

by Gaianne on Tue Mar 3rd, 2009 at 07:10:42 PM EST
[ Parent ]

Re: Thanks for digging up the actual links (none / 0)

It's good to repost, I do it all the time :-)

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Wed Mar 4th, 2009 at 06:59:32 AM EST
[ Parent ]

Re: Fraud (4.00 / 4)

SPVs were shown to be fraudulent as used by Enron. That should serve as the basis for a prima facie assumption of the possibility of fraud for any case in which they are used by a bank to avoid scrutiny. Such cases should be investigated with by prosecutors with subpoena power and with witnesses under oath. A large number of big banks would have some people under investigation. While I personally doubt that this would include Jerome, it is a common occurrence for the innocent to be tarred with the same brush as the guilty and for them to, at times, be put forward as the sacrificial goat by their superiors or otherwise inappropriately be targeted.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 3rd, 2009 at 11:52:43 AM EST
[ Parent ]

Re: Fraud (none / 0)

ARGeezer:

SPVs were shown to be fraudulent as used by Enron. That should serve as the basis for a prima facie assumption of the possibility of fraud for any case in which they are used by a bank to avoid scrutiny.

Thanks, that was in 2001. Early enough to make the case.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Mar 3rd, 2009 at 11:58:22 AM EST
[ Parent ]

Obama/Banks = Long Parliament / Charles I ?? | 45 comments (45 topical, 0 editorial, 0 hidden)

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