Rental Home Securitization

Rental homes are the latest in the long list of financial assets that are been securitized.  On one hand, having capital moving into the real estate market should help to reduce the backlog of foreclosed homes.  But on the other hand it is hard to ignore our past experience of securitization.   The spectre of house prices being bid up to a point that creates another bubble looms large.

Another concern, as indicated by the graphic in the article, is the high density of ownership by a single investor (in this case - Blackstone)

It seems as though Blackstone is trying to control the market in rental properties in some locales. There really can only be one reason for this - and that is to have sufficient market power to control the rental level in an urban region.

Money Power and Wall Street - a few thoughts

I caught the final episode of Money Power and Wall Street on Frontline last night (thanks to my DVR).  If you missed it you can watch it on the PBS website.

Overall, I thought it was pretty good.  The documentary showed that private derivatives - custom made for a client - make up the largest part of bank's profits.  In particular the documentary focused on interest rate swaps and the numerous municipalities (here and abroad) that had been caught out after buying one of these things.

I was actually pretty surprised at how naive some of the buyers of these swaps were.  Basically they were swapping a higher fixed rate for a lower variable rate.  This is fine as long as rates stay low, but of course when the financial markets collapsed, all rates (except the US government bond rate) went through the roof.  In my opinion, municipalities have no business swapping fixed payments for variable rates.  In effect they are saying, "hey - we'll take the interest rate risk in exchange for lower payments today".  That's not the job of local government.   Of course the slick sales force of the banks coupled with a little bit of bribery helped make the case for these products.

The complexity and vastness of the wall street machine also was pretty apparent and that this complexity makes it incredibly hard for regulators to keep up with new products and markets that are being developed all the time.  In addition, the global nature of the banking business means that many banks could just move part of their derivative shops to London to avoid the closer scrutiny of US regulators.

Going forward, it was clear that nothing has really changed.  The Dodd Frank Act is unlikely to change much behavior, and the incentives to make large amounts of money quickly will no doubt drive yet another generation of bankers to create ever more elaborate products to sell to unsuspecting customers.

Personally, I think we should reinstate Glass Steagall and separate out commercial banking (loan making etc) from investment banking.  I also think that we should impose increasing capital requirements on banks that increase with the size of the bank to make it costly to be too big to fail.  Finally, I think investment banks should go back to being organized as partnerships and not as corporations.  Under the partnership model, the partners were always on the hook for the risks taken by the bank.

I have zero confidence in any of these things happening however.

The Warning

InvestorCookbooks blog talks about the must see Frontline documentary "The Warning" which looks at how policy makers avoided calls to regulate the derivatives market.  I'll be adding it to my Netflix queue.

Bank of America - up to no good.

Bank of America apparently just shifted a huge block of Merrill Lynch derivatives to a bank unit funded by federally insured deposits.   In other words, moral hazard reared its ugly head again and B of A took advantage of the Governments deposit insurance program to placate some counter-parties.  Nice work B of A.

In unrelated news, I've transferred all my bill pay stuff from my previously bankrupt bank to the local credit union.  I'll be closing my bank account this week.

Finance Theater

This post is mostly for folks living in and around Raleigh - the Burning Coal Company is putting on the play "Enron" by Lucy Prebble.  The play has been well received in London and New York.  The play will run from September 8-25 at the Murphey School in Raleigh.   Check out their website for details.

I plan on going. As the Artistic Director of the theater company told me, the play is "Music, Dance and Derivatives".  Sounds like a fun night out.

Smart guys on wall street...

Q. What caused the financial meltdown?

A. Too many smart guys on wall street.

Or so says this entertaining article...


HT: My friend Robert