BY GINA CHON

The increasing role of non-banks in the U.S. mortgage market sparks memories of the 2008 financial crisis. As the likes of Citigroup, Bank of America and JPMorgan have cut home lending and servicing, specialists have stepped in, but they lack bank-like capital cushions. Government-owned Ginnie Mae, guarantor of $2 trillion in mortgage-backed securities, is particularly exposed, as are the mainly lower-income Americans it is supposed to help.

Ginnie Mae outsourced oversight to regulators like the Federal Reserve when banks were its main securities issuers and servicers. But a post-crisis crackdown caused them to shrink those businesses. In 2017, four of the top five issuers of Ginnie Mae-backed single-family MBS instruments were non-banks, with PennyMac Loan Services and Lakeview Loan Servicing in the two top spots.

Meanwhile, Ginnie Mae’s guarantee book has ballooned to almost five times its size in 2007, putting it in the same ballpark as government-sponsored Freddie Mac. But Ginnie Mae has only about 140 direct employees, compared to more than 6,100 workers at Freddie Mac.

That’s partly because Freddie Mac buys and owns mortgages as well as guaranteeing them, but the huge disparity in resources means Ginnie Mae, which supports mortgages for veterans, lower-income individuals and minority groups, can’t adequately police the non-banks whose borrowers’ performance it essentially guarantees. A September audit supported that finding.

Non-bank lenders and mortgage servicers often rely on the kind of short-term funding that proved so vulnerable during the crisis. Furthermore, non-banks are largely regulated by state watchdogs, which have varying standards.

U.S. Housing Secretary Ben Carson, who oversees Ginnie Mae, is positioned to sound the alarm but he is one of the less visible members of President Donald Trump’s cabinet and has little experience in mortgage finance. Lawmakers have not managed to comprehensively reform Fannie Mae and Freddie Mac, but at least they are currently on a tight leash. Ginnie Mae is essentially untouched, and its size and non-bank ecosystem rarely come up as concerns.

Michael Bright, Trump’s nominee to lead Ginnie Mae, told lawmakers at his confirmation hearing on Tuesday that rising interest rates made financial stress among non-bank mortgage lenders and servicers his biggest worry. He offers a rare and lonely warning that swaths of the home-loan market escaped post-2008 reform.

First published July 25, 2018

(Image: REUTERS/Mike Blake)

BY PETER THAL LARSEN

In September it will be a decade since Lehman Brothers collapsed. While many recall the Wall Street firm’s dramatic failure – and the global crisis it unleashed – few know how it began. A dazzling new production of “The Lehman Trilogy” examines that story through the eyes of its founding siblings and the dynasty they created. It’s America’s economic history distilled into a family drama.

The chronicle of a collapse foretold begins in September 1844 when Henry, the oldest Lehman, arrives in the United States from Bavaria. He settles in Montgomery, Alabama and opens a store selling clothing and farming tools, where he is joined by his two brothers. The immigrant ethos of self-reliance and hard work is strong. Financial innovation begins early. The brothers buy cotton from local farmers and sell it to factories in the north. “We’re middle men,” the youngest, Mayer, explains to his sceptical future father-in-law.

As the family’s wealth grows, traditions fade. When Henry dies, his brothers close the shop for a week to mourn. By the time Robert “Bobbie” Lehman, the last family member to run the firm, passes away more than a century later, his colleagues barely pause. Markets no longer have time for sentiment.

With assimilation comes financial abstraction. The brothers move to New York and trade commodities such as coffee, coal and iron but no longer handle the actual goods. Investigating an opportunity to finance a railroad, Emanuel Lehman is shocked that the business consists of nothing more than a line drawn on a map. His son Philip sees the potential profit: he’s interested in numbers with lots of “zeroes, zeroes, zeroes”.

The detachment from reality is complete when the firm embraces computerised trading. The giant panoramic screen behind the stage – which first displays Alabaman cotton fields and then the New York skyline – becomes a digital blur. The play does not attempt to explain how subprime mortgages were repackaged into the supposedly safe bonds that helped trigger Lehman’s demise in 2008. There’s no need: the scope for self-delusion is clear.

The history – adapted by Ben Power from Stefano Massini’s play – is punctuated by crises, most of which Lehman turns into opportunities. After a massive cotton fire, the brothers finance new crops. Following America’s destructive civil war, the firm secures state funding to start a bank. During the Wall Street crash of 1929, Lehman survives by bringing in partners from outside the family.

The story is told by three actors who are on stage for the play’s three hours. As well as portraying the brothers, they switch into a range of other characters – children, girlfriends, wives, business partners, rabbis – all the while dressed in the original black garb of the founders. This is funny but also serves as a constant reminder of the firm’s origins.

The action takes place in a large, rotating glass-and-steel box that is part corporate boardroom, part executive office. It’s filled with stacks of cardboard boxes like the ones Lehman’s employees used to carry their belongings after the bank collapsed. As the action unfolds in a single-room Alabama store, or the racecourse where Bobbie Lehman watches his horses, this backdrop is an intimation of the firm’s ultimate fate.

The play pays little attention to the firm’s modern history. It summarises the battle for control between banker Pete Peterson and trader Lewis Glucksman, both sons of immigrants, and suggests the latter’s victory over the former helped determine the bank’s course. Lehman’s sale to American Express and subsequent spinoff in 1994 barely warrants a mention. Dick Fuld, the firm’s final chief executive, only makes a brief appearance.

Director Sam Mendes achieves something more important, though, by forcing his audience to re-examine a familiar story through fresh eyes. “The Lehman Trilogy” reduces the complexities of finance to their human essence: ambition, inspiration, trust, greed, and hubris. The story will resonate when memories of Lehman’s failure are as faded as the pictures of the brothers who founded it.

First published July 20, 2018

(Image: REUTERS/Kevin Lamarque)

BY ANTONY CURRIE

The collapse of a Pasadena mortgage lender with 33 branches sounds like an odd choice for one of the seminal moments of 2008. Plenty of far bigger, more complex and consequential institutions hit the wall during that tumultuous year – from Lehman Brothers to AIG to Fannie Mae and Freddie Mac. IndyMac, which failed 10 years ago on Wednesday, wasn’t even the largest thrift or retail-bank downfall. And another 460 went under by the end of 2012. Yet its fate resonates in Donald Trump’s deregulatory era.

The most obvious reason is Treasury Secretary Steven Mnuchin. He gathered together the group of private-equity firms which six months later bought the bank’s assets out of conservatorship at the Federal Deposit Insurance Corp for around $1.3 billion. He also served as chairman and, initially, chief executive. Five years later, the investors sold it for $3.4 billion. That made the buyer, CIT, the first bank to cross the $50 billion asset threshold regulators had set to denote systemically important institutions. Mnuchin bagged over $100 million. That’s around a third of his current net worth, according to Forbes.

The other is Joseph Otting, who Mnuchin hired as chief executive of OneWest, IndyMac’s new name. He’s now a top U.S. bank regulator, serving as the comptroller of the currency. The 2009 deal with the FDIC became the template for other such sales. Current Commerce Secretary Wilbur Ross, for example, was one of the buyers of BankUnited, another lender that went bust a few months later.

IndyMac, though, offers a textbook case of why it’s not just the big banks which need alert regulators. It quickly grew to $32 billion in assets by selling risky mortgages and relied heavily on loans from the Federal Home Loan Banks and brokered deposits, both expensive. Throw in the worst watchdog of the lot – the now-shuttered Office of Thrift Supervision – and it couldn’t get much more chaotic.

Banks around this size, and even a bit bigger, are getting most of the regulatory relief from the White House and Congress. That’s understandable, to a degree: many of the post-crash rules targeted the mega-banks but snared their smaller cousins in bureaucracy.

But even the minnows can cause trouble. By the end of 2012, the failure of lenders that followed IndyMac into receivership had cost the FDIC more than $90 billion. That’s roughly what Washington spent on preferred stock to bail out Bank of America and Citigroup. Ensuring both types of calamities are avoided requires vigilant oversight across the entire banking industry.

First published July 11, 2018

(Image: REUTERS/Danny Moloshok)

BY ANTONY CURRIE

Ten years after it effectively failed, Bear Stearns is a useful lesson in healthy conflict. The Wall Street firm’s demise, like that of Lehman Brothers six months later, was a group effort by executives and watchdogs. So it is a cause for concern that post-crisis rules are being softened and regulators talk of forging a “partnership” with the banks they police.

The U.S. financial system has far more safeguards than it did as, under bridge-playing boss Jimmy Cayne, Bear crept toward its own undoing. Banks have to hold more liquidity and capital and have all but exited subprime lending, prop trading and constructing large swaths of overly complex securities. Pay can be clawed back, and big institutions face a comprehensive, and in their eyes overly opaque and pessimistic, annual stress test administered by the Federal Reserve.

That has fostered a degree of mutual suspicion between the two sides. So it should. Regulators are supposed to hunt for the bad news banks may be trying to hide. A decade ago, the relationship was getting too cozy. Christopher Cox, then chair of the Securities and Exchange Commission, told Congress a couple of weeks after Bear’s collapse that it had been well capitalized and “apparently fully liquid.” Yet later investigations by his agency and others revealed Bear’s executives had been worried about funding for months.

Where there was friction, it was sometimes in the wrong places. Officials from the SEC and the Fed covering Lehman seemed to spend more time battling each other than digging into the firm’s troubles, according to a bankruptcy court investigation. Worse, the Office of Thrift Supervision, which regulated Washington Mutual and IndyMac – both of which went bust – called its charges “customers.”

Some of that mentality is starting to return. Comptroller of the Currency Joseph Otting said last month that “there is more of a partnership with banks, as opposed to a dictatorship.” He came to the OCC after running OneWest, the successor to IndyMac. Meanwhile, Congress looks set to pass a bill rolling back some of the admittedly onerous restrictions on smaller banks in the 2010 Dodd-Frank Act.

The crisis is still fresh enough that the most obvious mistakes in letting banks run amok are unlikely to be repeated. But hubris is a real danger, and when banks and their regulators see eye to eye, it’s time to worry.

First published March 14, 2018

(Image: REUTERS/Kristina Cooke)

BY ROB COX

Just five minutes before Monday’s solar eclipse, hundreds of beachgoers along the Cape Cod National Seashore were donning special glasses and positioning empty cereal boxes with pinholes in them, tittering with anticipation to see the moon begin to blot out much of the sun. As a result, they missed something far more exciting some 10 yards offshore.

A hungry great white shark was attacking a harbor seal. It snatched the poor creature in its jaws and hurled it toward the shore, in between body-surfing and boogie-boarding youngsters. Those, like my son, who had been watching the water, saw the seal breach out of a foaming commotion of water and blood and yelled “Shark!”

But the majority of folks on Nauset Beach, including the lifeguards focused on the safety of swimmers, missed the great white itself. They only saw the dying seal with its blubbery entrails visible as it swam in hobbled fashion along the surf, leaving a thick trail of blood in the water. That was the end of the beach day as the authorities, now in great abundance, prohibited further swimming.

As yet another heralded 10-year anniversary of the great financial crisis approaches, the true-life tale of the shark in the eclipse presents an apt metaphor for what happened back in 2007. People on the beach straining their necks to peer thousands of miles into space missed the more important event just a few feet away.

In retrospect, of course, I should have been more attentive to the water than the sky. Anyone entering Nauset Beach will, aside from the advertisements for Liam’s clam shack, see the ominous signs warning about the preponderance of great whites, and flags hoisted high bearing the likeness of a shark. Nonetheless, the parking lot fills up on most summer days.

So it was with the global banking crisis. There were indications everywhere of a system going awry. A decade on, these are the things financial experts and pundits are returning to in a perverse form of celebration. Everyone, it seems, has their view about which of these events from early 2007 and into the first half of the following year foretold the calamities to come. But the truth is more complicated.

Though intellectually stimulating to revisit with hindsight, in isolation none really explained the whole picture in ways sufficient to avoid the inevitable attack. Those who experienced the crisis in the trenches of finance, journalism and public policy will continue a healthy debate for as long as they can remember what happened.

It’s worth recalling some of them since we are now in the 10-year anniversary cycle – but with the simple purpose of recognizing that only the sum total of events can provide a real lesson for future avoidance. And even that will be imperfect.

It’s widely accepted that the canary in the coal mine came in early February, 2007, when HSBC announced it was taking an extra $1.8 billion in provisions for mortgage loans provided to subprime U.S. borrowers. Mauro Guillén, director of the Lauder Institute at the University of Pennsylvania’s Wharton School, kicks off his timeline of the crisis with this event, which inspired a savvy Breakingviews piece questioning whether subprime would be “the first shoe to drop.”

Perhaps because HSBC had a few years earlier, and unusually, acquired a lender focused on less creditworthy customers, many saw it as an isolated case. They didn’t need to look much further for other warnings that the shark, to stretch the analogy, would soon devour the seal. New Century Financial, a subprime lender, was bleeding out for much of first quarter of the year, culminating in its April bankruptcy. Months later, two Bear Stearns hedge funds investing in ropey mortgage assets went bust.

By August that year it had started to become apparent that the problems were no longer isolated to a few buccaneering market participants. CNBC commentator Jim Cramer’s on-air rant that “the Fed is asleep” was followed by a notice to investors from BNP Paribas that it couldn’t value a bunch of mortgage-related assets in its portfolio due to a “complete evaporation of liquidity.” Within weeks, central banks were injecting money into the financial system.

At the annual Federal Reserve symposium in Jackson Hole, Wyoming that year – the decennial anniversary comes this weekend – central bankers appeared confident no systemic crisis was imminent. In a speech entitled “Housing, Housing Finance, and Monetary Policy,” then-Chairman Ben Bernanke said, “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”

Despite these jitters, investors remained calm, even complacent. From the week before HSBC burped to October of that year – when UBS, Merrill Lynch and Citigroup warned of some $20 billion of subprime losses – the S&P 500 Index rallied some 10 percent.

The complacency rolled on until troubled Bear Stearns was swallowed by JPMorgan in March of 2008. That’s an anniversary that will no doubt merit barrels of ink next year, as will the mother of all crisis celebrations with the 10-year mark of the September demise of Lehman Brothers and the bailout of both AIG and mortgage agencies Fannie Mae and Freddie Mac.

Each anniversary marks an opportunity not simply to remember what happened, but to recognize that no single event can really be said to have predicted, kicked off or ended the crisis. Like all collective delusions and manias of crowds, the failure of most investors, regulators, politicians, bankers and, yes, we journalists to identify the danger lurking just below the surface in 2007 only becomes evident by examining the full arc of what occurred.

And there is a further lesson, one that both the history of market bubbles and financial panics – as well as mid-eclipse shark attacks – will confirm: we will almost certainly be looking in the wrong direction when the next attack comes round.

First published Aug. 24, 2017

(Image:  REUTERS/David Gray)

BY ANTONY CURRIE

The 10th anniversary of the financial crisis could not come at a better time. Tuesday marks a decade to the day since HSBC fessed up to its subprime-mortgage problems, which were growing so rapidly it needed to set aside an extra $1.8 billion to cover losses. A day later New Century, one of the country’s biggest stand-alone home-loan providers at the time, admitted it would need to restate its 2006 results. Thus started a credit crunch-turned-global recession that cost the U.S. economy alone as much as $30 trillion.

That figure, an upper estimate from the Dallas Federal Reserve in 2013, should serve as a sanity check as the Trump administration, the Republican Party and banks crow about the chances of regulatory rollback. It’s a timely reminder that exuberance and loose standards can cause painful damage.

Doubtless some of the regulatory zeal in the aftermath of the worst financial crisis in generations needs toning down. Smaller banks, for example, have been hit unduly hard by new rules. The pre-2007 excesses, though, needed to be dealt with – from overly lax lending to conflicted credit ratings to skewed compensation incentives.

Those took root in the system after bankers chafing at the bit about older regulatory restraints like Glass-Steagall persuaded Congress and watchdogs to overturn them. Bankers then downplayed the risks and overemphasized the upside. So Wall Street executives in 2007 asserted subprime mortgages would wreak no havoc as they represented just a couple of percentage points of revenue. Within weeks, they were forced to admit they paid no attention to how great the losses could become.

A similar blinkered approach is starting to return as bankers, as well as investors in all sectors, concentrate on the benefits of Trump administration promises on tax cuts and regulatory reform. Meanwhile, they’re ignoring the potential impact of the president’s trade protectionism and broader America First policies.

The impact of the last decade’s financial crisis is long-lasting. It caused GDP losses that compounded each year from 2008 to 2015 and decreased business fixed investment by a fifth, according to a new analysis by Wells Fargo economists. The likes of Citi and BofA are still trying to offload unwanted pre-crash assets even though the Fed’s exceptionally accommodative monetary policy has boosted asset prices.

The U.S. economy may be growing slower than current pushers of deregulation would like. But it hasn’t lurched into its usual pattern of a recession every six or seven years. That should count as a victory worth remembering.

First published Feb. 7, 2017

(Image: REUTERS/Bobby Yip)