Tuesday, May 22, 2012

Paul Volcker calls for the death of modern securitization

And I concur with Mr. Volcker. Many of the lawmakers are completely clueless of the game of securitization and how many of the mortgage loans today were never properly transferred into the securitization trust filed into SEC. And since banks get a special treatment of REMICS by the IRS, the requirements are that the securitization trust must be properly transferred i.e. a) originator b)sponsor c)depositor d) issuing entity. If not, there is potential implications of securities fraud and tax fraud and the removal of REMIC status for banks. Check this story from Housingwire where Senate Banking Committee meets with Volcker:

And speaking of a waste of taxpayer money, the committee spent a meeting earlier this month listening to Paul Volcker talk about too-big-to-fail bailouts, after coming to no conclusion on GSE reform.

Particularly jarring, the former Fed chairman argued that securitization as it is currently practiced is a speculative trade and therefore should be banned. The Volcker rule section of the Dodd-Frank Act restricts banks from proprietary trading.

Volcker said the problems all started when banks moved away from one-on-one customer service and began to engage in transaction-oriented businesses. The result is a "more complex, opaque and very complicated" financial system.

Sen. Bob Corker, R-Tenn., at one point posited, "The most dangerous thing a bank does is make a loan."

Volcker later indirectly disagreed by hinting highly liquid markets are not in the public's best interest. And he more or less called for the end of mortgage bond trading as we know it.

He argued that when banks originate a mortgage they should be "prepared to keep it for awhile." Of course, securitization moves these loans off the balance sheet. Regardless of whether that loan is bonded by Fannie Mae or Freddie Mac, "if you think you can trade it tomorrow at no loss, then it becomes speculative," Volcker said.

No comments: