Banking Law

Paul Jackson, editor-in-chief of Housingwire.com and HousingWire Magazine, expressed his frustration yesterday with federal policy makers' apparent lack of comprehension of how the country's mortgage financing markets work. To me, their ignorance is par for the course. I long ago lost my sense of incredulity at the abysmal lack of understanding of many policy makers in Washington, D.C., which is why I'm the bitter, cynical crank who spews acid all over the pages of this blog today. Paul, being somewhat younger than I (a classification that applies to the vast majority of the world's population), is still able to be amazed at the fact that when it comes to D.C, what you need to know is how to acquire and retain political power, and any other knowledge gained is purely by osmosis and mostly superfluous (at least it is as far as the policy makers are concerned).

What especially irks Paul is the notion that issuers of mortgage-backed securities didn't have enough "skin in the game," and that, according to this line of thought, policy makers are proposing to require issuers to retain at least 5% of the risk on any asset-backed security and to forbid the issuer from hedging any portion of that risk. Paul alleges that this approach is 189 degrees "bass ackwards."

The first thing that should be coming to any market participant?s head when they hear about this so-called ?skin-in-the-game? rule is this: isn?t skin in the game what has literally crippled once-proud institutions like Citigroup Inc. (C: 3.122 -3.94%)? Isn?t skin in the game what put Lehman and Bear Stearns into history books as former Wall Street firms, too?



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[T]he problems at Citibank and elsewhere aren?t because the banks had too little skin in the game. It?s because they had too much.

Paul's also exasperated by the allegation that asset securitization itself is to blame for the mortgage market meltdown. He's worried that many folks who should know better are getting ready to "throw the baby out with the bath water."

Remarks such as this, from a June 15 Washington Post op-ed penned by Timothy Geithner and Lawrence Summers, should scare anyone involved in the securitization industry:

In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.

The fact that this dreck is coming from the head of Treasury (and from Lawrence Summers, too) scares the living snot out of me, because it demonstrates a fundamental misunderstanding of securitization. A lack of some much-needed oversight into structured finance by federal officials is now being used as an excuse by those same officials to toss cold water on the entire concept?

While Paul concedes the necessity to have a "healthy debate" about asset securitization and related issues, it's extremely difficult to have a debate of any kind, much less a "meaningful" debate, when one side's the equivalent of William F. Buckley, Jr. and the other the equivalent of a potted plant. When it comes to knowledge and intelligence, the debaters ought to at least have the intelligence level of a dull-normal member of the same genus, and preferably the same species.

I'm not optimistic, but, then again, I seldom am.