As is our tradition here at Crunched Credit, each year, about this time, we award our Golden Turkey Awards. Once again, I must say that we are blessed, blessed with so many worthy candidates. Our government, our courts, the regulatory estate both here and in Europe and around the world and the political class in general have once again vied with verve and imagination and breathtaking persistence to win a spot on our acclaimed list. For those of you who we must disappoint, please accept our heartfelt apologies. Yes, you screwed up and did stupid things breathtakingly well, just not as well as this year’s winners.
A thought as we begin: We wonder if perhaps much of this inanity we honor here is enabled by the fact that it hasn’t (maybe doesn’t) seem to matter much to the economy writ large. The Dow, after a mid-year swoon, is pushing back towards its highs, GDP in America continues to grind up, inflation is ridiculously low, salaries are increasing, disposable income is increasing and frankly, nothing awful has happened this year, at least here in the good old USA. At the same time, the world is on fire between an ascendant China, rogue Russia (and the rogues of Russia), complete madness of the Middle East and ISIS’ war of terrorism against the West, the free falling BRICS and the curiouser and curiouser lack of inflation in the world grown complacently incurious about a zero bound interest rate environment. To say the least, there is sure stuff to worry about. So in some weird way, we appreciate that the power of our world-girding economy and its ability to absorb all these real problems while licensing the inanity we celebrate here.
One hopes, however, that we haven’t entirely lost our minds and, when it matters adult leadership will reassert itself. When that day arrives, it may make this blog less fun, but I guess it would be a small price to pay. But we’re not holding our breath for another end of history moment any time soon.
But in the meantime, inanity rules. The folks out there have worked very hard to earn a place on our Golden Turkey’s list, and without further ado here is our list for 2015:
Arrest all the Usual Suspects Award.
It’s now been eight long years since the commencement of the financial crisis (or as they might say down south, the Late Unpleasantness) and, with a nod to Captain Renault, we are still arresting all the customary suspects. The playbook of every attorney general in the country has the same first chapter: “Sue Banks, become Governor.” Isn’t this trope getting a tad old? How long can the government continue to steal money from the banking sector on behalf of alleged victims, gathering headlines and lucre (which, of course, never actually goes to alleged victims) and blithely asserting that all this has something to do with the safety and soundness of our banking sector? Look, at the risk of exhausting the patience out of you, our loyal readers, who but Bernie Sanders and Elizabeth Warren actually thinks that in a grassy knoll sort of way, bank kingpins conspired in smoke-filled rooms to destroy the world’s economic system? Let’s be real. We bubbled baby! People bought securities without thinking of risk. Regular, average Americans bought houses they couldn’t afford. Government entities and investment banks loaned regular people money who had no money or jobs. Risk? What risk? From governments, to Moms and Pops, our credit cards heated to a white fury. Collective insanity, perhaps; conspiracy? Give me a break.
It’s So Hard To Pick A Winner Award
And now for a joint award. To the gnomes of Basel for all those small ball regulatory poison pills launched this past year, out of the misguided notion that anything that makes capital formation harder must be good. We hope to lift you from a life beavering in obscurity with this award. In just the past many months, the Basil gnomes published something called the Liquidity Coverage Rule (LCR), the High Volatility Commercial Real Estate Rule (HVCRE), the Simple Transparent and comparable Securitization Rule (STS) and, most doublespeak of all, the Fundamental Review of the Trading Book Framework Rule (FRTB). While it’s true that if you never get on an airplane, you’ll never be in a plane crash, it’s not a terribly useful observation. I’ve got to travel pretty regularly and the capital markets got to provide credit to our economy. Endlessly adding capital charges on top of capital charges has negative externalities. While deep capital reserves are surely good in one sense, adding capital and picking winners and losers by choosing which bank functions get lighter capital treatment and which get heavier capital treatment has a real cost. The LCR is informed by the suspicion that if things go castors up, banks will bail out legacy securitizations over which they have no contractual liability out of some sense of fellow traveling loyalty. (And it’s true! Securitization is an evil ploy, a trick played on the market economy by nefarious bankers. No, it’s true!) The STS rules go to elaborate lengths to make sure that only a tiny percentage of securitizations get really nifty capital treatment whereas, in the markets that really matter, including commercial real estate, the banks will be burdened by harsh capital treatment. The HVCRE rules will just about make it prohibitively expensive to fund acquisition, development and construction loans. Hey, who needs those? Lastly, the FRTB rules are likely to crush liquidity already under enormous pressure because of last year’s award winners like the Volcker Rule by adding large new capital charges to anything the banks hold for possible sale. What makes people do this? I guess the gnomes feel pretty good at cocktail parties boasting to the leaning forward gang and thumping their chests over all of this. Why don’t we just shut down the banks? Wouldn’t that make all this so much easier? This is a version of the same instinct that makes modern parents send their kids to school in helmets and elbow pads. The poor little dears may actually hurt themselves! Kids need to grow up; markets need to function. We need that leadership referred to above to stop this soon or it might actually begin to matter.
The Trigger Word Award
Oh my God! Someone said banks do good things! What? Capital formation is important! I need a safe room. That causes me to have repressed memories of when Coach wouldn’t give me the blue ribbon for participation! And, OMG, that’s probably a micro-aggression, too. Don’t they understand that saying nice things about banks makes me feel bad? It gets harder and harder to have an adult, intelligent conversation about how and to what extent the ongoing, grinding reformation of the international banking system will progress from here. Hard to have that conversation when you might get shouted down for expressing a view. And my God, don’t ask the New York Attorney General. He will undoubtedly launch an investigation into when you discovered that bankers were bad and how you decided to hide that from the American public. Climate change anyone?
The Macarena Award
Remember back in July when everyone was doing the Grexit? If you’re like most people, the Grexit was the hip summer fad of 2015 that has gone the way of the Macarena. Just as we have banished images of Bill Clinton doing the Macarena from our eyes, the world economy can now rest easy knowing that Greece continues to pretend to implement draconian austerity measures in exchange for an additional hundred billion dollars of debt (with absolutely no debt relief at all), right? As we discussed back in July, we don’t see kicking the can down the road as a solution. The world has again settled into a somnolent doze and simply refuses to think about Greece. However, it remains a real and growing cancer on the experiment which is the European community. In six months, or a year, or five years we will all be doing the Grexit again, and the only thing certain is that it will not end well. The problems in Greece and Europe are an underlying clash of cultures, philosophy, language and polities pasted together with treaties enforced often in the breach and wrapped in the Emperor’s Clothes of a common currency. Unless the Greeks can learn to be Germans or the Germans can learn to embrace the dolce vita, the problem will not go away. Europe cries, “I’m not dead yet,” but maybe indeed it’s time to load some portions of the European experiment onto the cart and haul it away.
Notwithstanding the heartfelt desires of most of the political class in Europe (at least in France and Germany), the Community part of the European Community is increasingly looking like a frayed, but comforting myth. The European ideal of a common currency, backed by a fiscally and politically unified Europe, is slipping away. Our continued fascination with this holy grail, demonstrates the great, human difficulty of letting go of such a grand, idealist vision. Let’s hope that when the Grexit makes its comeback or something else goes very wrong, Europe, and the world, will be able to handle it.
The Tower of Babel Award
The Federal Reserve has been fixing to raise interest rates pretty soon for a very long time. The Feds are beginning to look a lot like our feckless president and his periodic Red Lines. And how well did that work? And dear Lord, can’t you all just be quiet for a while? Every governor and senior staff member of the Fed just keeps nattering on. The result: the Fed’s losing its gravitas – it’s losing its capacity to provide believable adult supervision of the marketplace. Stop talking and find the courage to begin to increase interest rates in a process, (that may or may not) ultimately return us to a more normal interest rate environment. Uncertainties driven by markets are one thing, uncertainties driven by the babble of the Fed is something else entirely again. The uncertainly is damaging the market – please, get on with it already.
Rip van Winkle Award…or Winter is Coming
When the final risk retention rules were published on December 24, 2014 – (Christmas Eve!!! – who says our government does not have a sense of humor). The rule had a two year effective date. That’s 24 episodes of the Game of Thrones away. It seemed like so much time. Although we at Crunched Credit have been telling everyone who would listen that “Winter is coming” all along. Here’s the breaking news: The major banks can’t absorb the risk-based capital charges associated with risk-retention without capital markets-based lending becoming uneconomic. While the banks can utilize a B-piece buyer to hold the risk-retention piece, it appears the banks will remain on the hook for the parole of those B-piece buyers. Also, risk retention will require three to four times more capital than is currently available in the marketplace to buy the first lost pieces of securitizations, and there is not a business plan out there for which buying the entire risk retention piece is a viable option. Our banks may begin to withdraw from the origination business early third quarter next year if they don’t have certainty that there will be a viable securitization market in 2017. If we don’t get this right, we are gonna witness a slaughter that, spoiler alert, puts the Red Wedding to shame.
The Luddite Award
The creative destruction of economic progress seems such a great idea in an abstract sort of way, but God knows we hate it when it happens to us. So, perhaps this is all understandable. MERS is the Uber of CRE. MERS allows real estate title to be transferred like a bond on DTC, without the dusty, inefficient and mistake ridden process of physically recording deeds in state and county recording offices. And so, of course, our luddite-infused bureaucratic establishment have taken to filing class action suits against MERS arguing that the MERS system is preventing them from collecting fees supposedly required under state law. (Well, of course, that’s not what they actually argue, they pretend some nonsense about protecting the integrity of commercial real estate finance, but that’s what it’s really about.) State recording offices… now there’s a sympathetic plaintiff! In the past years we’ve seen victories for MERS against these recording offices in the Third, Fifth, Sixth, Seven and Eighth Circuits, as well as in multiple state supreme courts. Since we last wrote about them in August, MERS won another case, this time in California, affirming yet again that the system is a valid holder and assignor of mortgages. Progress I guess, but the price is high.
GSE Piñata
While opinions differ as to the role the GSE’s played in the late lamented financial crisis, it’s clear they were in the bar when the fight broke out. Moreover, there’s been a consensus for years that the model of the Twins may require some tweaking. From immediately after the crisis began to abate until quite recently there was a great deal of intellectual and scholarly energy put into the question of how to restructure or re-position the Twins. Conversations happened across business communities, inside government and think-tanks, including constituencies from the left to the right. All weighing in; all had some pretty good ideas, all better than the thing bequeathed to us as a historical accident that was how the GSEs ran before the crisis and continued to operate under the conservatorship. While it wasn’t clear where it all this should go, there was an overwhelming consensus that we should go somewhere. It’s not going to happen. Our political class has figured out two things. First, it’s fun and politically profitable to keep the Twins as political hostages, and second, the profits from Fannie and Freddie are terrific and the Treasury really enjoys them. So we go forward with the GSEs unreformed and when it all goes bad next time, we’ll deal with it… or not.
