The One Shoe That Didn’t Drop in The Financial Collapse- Commercial Mortgage-Backed Securities. #CRE

Heidi N. Moore was talking with a investor who specializes in buying distressed commercial mortgage-backed securities (CMBS) and I was reminded of something Warren Buffett said back in 2007:

“When people start dropping shoes you really don’t know whether they’re a one-legged guy or a centipede.”

The investor was saying that the commercial real estate (CRE) market has been under the same pressure as the housing market but the CRE market hasn’t crashed. Why hasn’t that shoe dropped… and why won’t it?

Banks avoided writing down commercial mortgages by renegotiating with their borrowers

The investor said that CRE was “rife with all the same corruption as the housing market: banks didn’t do their homework before signing loans, ratings agencies were overly generous in classifying weak loans as strong, but when it came [time] to mark down the value of the struggling commercial real-estate loans, many banks simply refused. They inflated the values of the loans to make their balance sheets look good.” [And therefore could keep all their bailout funds at work speculating in derivatives and jacking their bonuses instead of being set aside to cover losses.]

There are two other reasons that the CRE market and the CMBS tied to it didn’t crash: 0% interest rates, which means commercial borrowers weren’t punished with higher interest payments; and more importantly Read more

Our Big, Fat Cognitive Illusion PLUS free campaign template for always getting elected

Mark Dow’s Behavioral Macro blog has a great post illustrating some of our most persistent cognitive errors in real time.  The sad thing is that our cognitive errors tend to magnify under pressure which must have worked back when we were dodging saber-tooths out on the savanna but doesn’t help in our current culture which is built on the (mistaken) idea of rational actors doing what’s best for them. Here’s Mark:

Big, Fat Cognitive Illusion (and all of us are more Greek than we think)

Joe Wiesenthal at Business Insider put out a quick post this morning on the Pew Research Center study, “European Unity on the Rocks”, released today. It is an eye opening read.

To start with, it strongly supports the working hypothesis of many that the political forces now unleashed in Europe are centrifugal, not centripetal. This reality makes betting on solving the crisis through a deepening of the EU a longshot whose odds are getting longer by the day.

The main thing the report underscores to me, however, which is also jumps out from Wiesenthal’s post, is the extent to which human nature is gifted in self-deception, especially when under duress. But more on Europe below the fold. First, a word on behavior.

Starting about 15 years ago, I developed a strong interest in behavioral economics and evolutionary psychology. This came about when I started working in asset management and realized (1) how poorly economics was served by the assumption of ‘man as a rational maximizer’ and (2) how emotional and inefficient markets really were.

In the literature I ran into four takeaways time and time again. Specifically:

  1. We overestimate our abilities, our uniqueness, and our objectivity, even more so when under emotional strain. We have all seen the studies: 90% of people say they are above average drivers. Rarely do people think those around them work harder or better than they do. And so on…
  2. We systematically understate the role of ‘random’. We crave order, and we are willing to torture the facts to get there. But sometime things just happen, and sometimes problems don’t have solutions. No fundamental cause, no guilty party, no concrete answers. Moreover, on the up side, when random does break our way it’s appropriated as skill. The investment world is shockingly bad at separating outcome and process—yes, even those who drone on and on to prospects about their processes.
  3. People will find a way to believe what they are incented to believe. As the saying goes, “The most dangerous place to stand is in between someone and what they want to believe”. In my experience, it’s hard to overestimate the power of this statement. Starting with the conclusion and reverse-engineering the supporting arguments is central to the human condition and, surprisingly, serves and important role in our evolution.
  4. When presented with points 1, 2, and 3, almost everyone recognizes their validity, but believes at some level that he/she is exempt. The typical reaction is “Yeah, for sure, of course that’s how [other] people act”. It is always easier to see others’ mistakes than one’s own. And this is one of the reasons we have a very hard time changing our cognitive biases. All of us.

Now, back to the Europe and Greece.

Here’s the table that was screaming of self-deception: Read more

Six lessons on the financial crisis that help explain why we’re still in one.

Six lessons on crisis that help explain why we’re still in one:

  1. When you don’t reinvent institutions at a time of systemic failure, the problems they’re creating don’t just magically disappear.
  2. When you prop up (read: bail out) the institutions causing the crisis, instead of reinventing them, the crisis will deepen.
  3. When dysfunctional institutions prop one another up, prosperity’s a house of cards. Crisis becomes stagnation.
  4. When propping up failed institutions has drained your resources, you’ve turned a crisis into a catastrophe.
  5. The longer it takes you to see a crisis for what it truly is, the disproportionately worse it’s likely to get.
  6. When people who are prisoners of the

a post capitalism look at how to run the business of life

Read more

Black Swan Taleb: bad math and the misundersting of risk caused the financial meltdown

March 31, 2012 by · 1 Comment
Filed under: The Economy and Current Affairs 

This article argues that the crisis of 2007–2008 happened because of an explosive combination of agency problems, moral hazard, and “scientism”—the illusion that ostensibly scientific techniques would manage risks and predict rare events in spite of the stark empirical and theoretical realities that suggested otherwise.

Nassim Taleb on Value At Risk VAR

Conclusion: “The captain goes down with the ship; every captain and every ship.” Nobody should be in a position to Read more

NY AG Schneiderman and OWS finally convince Obama to go after banksters. Via TBP Blog

February 2, 2012 by · Leave a Comment
Filed under: The Economy and Current Affairs 

Elected attorney general in November 2010, Schneiderman discovered upon taking office that the Obama administration was avidly promoting a proposed settlement among five mega-lenders… In return.. the feds and the state AGs would grant the banks immunity for not just any further robo-signing misdeeds but for all illegal conduct that had led to the 2008 collapse… the banks would be free and clear of any state or federal prosecution for these offenses. Indeed, with no agency of government able to bring legal action, there would be no serious investigation of whether and how the banks broke the law.

“We have to get accountability,” Schneiderman told me this week. “We have to get substantial relief for homeowners and investors. And we have to get the story told clearly and factually, so the history doesn’t get rewritten. If you listen to the presidential debates, you hear the same supply-side and deregulatory nonsense that got us into this crisis. If we don’t uncover the facts and put them out there, it will happen again.

See the whole article here: The man who shaped Obama’s drive to hold banks accountable

Whodunit? Great books on the causes and solutions to the Financial Collapse

February 1, 2012 by · Leave a Comment
Filed under: The Economy and Current Affairs 

A year ago for Christmas I received a Kindle eReader (thank you Tammy!) and it has greatly accelerated my consumption of books. One of the subjects that I dove (continued to dive) into was the causes of the financial collapse. The conditions that contributed to our undoing, how we get out of our ongoing mess and the steps that should be taken to prevent a repeat are vitally important to our future as well as to our children and their children.

Learning from History

I have written about this myself since 2008 (see here and here for instance) and have read a number of books on the subject (see my Whodunit list down to the right on this page under Learning From History) that I thought covered fairly well the breadth of the subject and helped me refine my understanding. However I was humbled last night by a blog post on The Baseline Scenario that linked to Reading About the Financial Crisis: A 21-Book Review by Andrew Lo, a truly epic undertaking that is well worth reading on its own.

The causes are Read more

MA Supreme Court upholds rule of law in foreclosure case.

January 8, 2011 by · Leave a Comment
Filed under: The Economy and Current Affairs 

Yesterday’s decision by the MA Supreme Court upholding the basic premise that the true owner of piece of real estate is the last legitimate signer on the actual title to the property and that title must be presented to prove ownership before a foreclosure can take place has been widely decried in the financial press as a grave injustice to the bank’s right to unlimited profits no matter what they did to find themselves in such sorry shape..

“WHILE THE BANKS may HAVE FAILED TO SATISFY the letter of THE LAW….” is a typical lead in to a conclusion like “With this ruling, you’re left with the problem that people who didn’t pay their mortgages get to keep their houses BECAUSE OF PAPERWORK MISTAKES”. [Emphasis mine] Read more

The Bank Bailout Trap

December 4, 2008 by · Leave a Comment
Filed under: The Economy and Current Affairs 

We’ve cornered ourselves trying to bail out the “Too Big To Fail” banks. In trying to keep them alive in the name of saving the financial system we’ve been pumping them full of our childrens’ tax dollars to little effect and we wonder why they’re not really lending. The downward spiral of their balance sheets from both toxic assets and falling stock price continues but how to stop that spiral is being debated hotly in boardrooms, financial markets and congress.

What’s preventing a solution from emerging is the “Too Big To Fail” trap. Until we recognize that these banks have already failed and we are throwing good money after bad we will continue pouring money down a bottomless hole. It’s like lending ‘grocery money’ to a junkie. We can’t allow ourselves to be held hostage by a handful of big banks. Read more

“Those who fail to learn from history…

November 19, 2008 by · 1 Comment
Filed under: The Economy and Current Affairs 

…are doomed to repeat it”. Winston Churchill’s advice is very timely because it seems like 60 years is about as long as we can go before having to RE-learn the important lessons from The Depression.

The repeal of the The Banking Act of 1933 (AKA The Glass-Steagall Act) in 1999 was the beginning of the failure that ultimately led us to where we are now. One of the big lessons that the Crash and Depression taught us was that banks who took deposits and made loans should be separated from investment houses so that problems on Wall St. wouldn’t wipe out the whole financial system. When we unlearned the lesson in ’99 the banks and Wall St. had a heyday of buying each other up in a rush to create ‘financial super markets’. The idea was that once you came in to deposit your paycheck, they could sell you a few stocks, bonds, mutual funds and even some insurance.

Eventually we ended up with a couple of these huge financial institutions and the smaller regional players followed suite, merging and buying each other up to get big enough to stay competitive with the giants. Those from the Northwest may remember when Washington Mutual was a regional savings bank in the Puget Sound area and ran ads saying that they were your friendly local bank and would never do the bad things that the huge evil banks do. Read more

5 signs we’re not heading into Depression 2.0

October 17, 2008 by · Leave a Comment
Filed under: The Economy and Current Affairs 

In a series of emails with Vince Farrell, CIO of Soleill Securities we were discussing his comments on CNBC about the contrast between 1929 and now. His point was that the policy decisions being made now are the correct ones and that there are a number of protections in place, as a result of the depression, that will prevent this recession from becoming a depression.

Briefly here are Vince’s points that are both necessary steps to preventing depression and signs of hope for the future:

On World Trade-
Then: Smoot Hawley Tariffs enacted, result, world trade falls by two-thirds (66%!)
Now: During the last G7 meeting, members agree to “do no harm” in terms of protectionism. Read more