Financial regulation is all the buzz in Washington as the Health Care Reform legislation has been passed and signed. But, there are so many facets of financial regulation that need to be addressed, and there are hundreds of bank lobbyists running around Washington trying to influence new legislation and get the new and necessary legislation watered down as much as possible. The question is: will they succeed?
Today, I want to briefly discuss the source of one of the biggest problems as it relates to the mortgage market. The bubble in residential mortgages was inflated and kept going because of the process of securitization of mortgages. This process of securitization permitted financial institutions, banks and mortgage brokers, to convert mortgages into bonds that could be rated by the credit rating agencies and then sold around the world. The problem does not rest with the securitization of mortgages, but rather the fact that the underwriters of these mortgaged-backed bonds pay a fee to the credit rating agencies for the credit rating. This built-in conflict of interest has not been addressed, nor has the problem of the underwriters shopping a rating been curtailed. The present credit rating system is a failure, and until it is corrected there will be little demand for mortgage-backed bonds and thus a recovery to the housing market.
But, this is only one of many issues surrounding the way business is done on Wall Street and how banks, financial advisers, brokers and fund managers treat investors both individual and institutional. We are a long way from a strictly cash economy Dorothy, and yet we are all very much still in Kansas. Without stronger regulation of the banking system from the Federal Reserve Bank, the Treasury Department and the Office of the Comptroller of the Currency, we will all continue to suffer from the present recession. In the age of electronic banking, and a keystroke can move funds around the world in a matter of seconds, stronger financial regulation is imperative. Our domestic economy, GDP - Gross Domestic Product, will not resurrect itself without more transparency and accountability.
Stay tuned.
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4 comments:
Funny, I wrote something similar, just a little similar on my blog today after reading an article in the Times. I went to your site to get the link to post in mine when I saw what you wrote.
http://porschecorvettemusic.blogspot.com/2010/03/bank-bailouts-and-rich-get-richer.html
But isn't that artificial money? I understand they get their money back quicker and can turn that around into more mortgages. But what ever happened to the notion of a bank doing business with people? I don't want my mortgage sold to another institution. My mortgage was sold - and the new 'servicer' is no where near as open, friendly and accessible as the institution where I first established my mortgage. Of course, maybe the weren't REALLY friendly - they just acted that way in order to get my business - and beyond that - they don't care. Do you think that's it? Are we all just stupid?
Lou, I know that they sell mortgages even if they are not securitized and placed in a mortgage-backed bond. So, even if they did away with mortgage-backed bonds, banks still could sell your mortgage as I understand it. Tighter regulations with regards to how borrowers are treated can go a long way to make the experience more rewarding for the homeowner.
"Rest assured, though, that when the fight over financial re-regulation is complete, the next big battle between Wall Street and Washington will be over capital ratios and liquidity."
Quote from the Dealbook newsletter of the New York Times.
I saw this today.
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