SEC commissioner warns of financial crisis

SEC commissioner warns of financial crisis

 

Growth of private debt,wikimediaMuch of the country, and especially California, has yet to fully recover from the Great Recession, which officially ended in June 2009. But recent federal government actions may be leading us into another financial crisis.

That was the warning from Securities and Exchange Commissioner Daniel Gallagher at a panel discussion last week in San Francisco sponsored by the Pacific Research Institute, CalWatchdog.com’s parent think tank.

A prime cause of the financial meltdown in 2007-08 was subprime, low-down-payment mortgage lending to marginally qualified borrowers who defaulted when the housing market collapsed, sticking financial institutions with securities full of junk loans.

In the aftermath, lending requirements were tightened.

“In 2011, they proposed a 20 percent down payment, some high loan-to-value ratios, some things that otherwise would have been deemed just prudent lending standards,” said Gallagher. “I know they are the ones that apply to me and that I always comply with in the couple of mortgages that I’ve had.”

Another reform was the credit risk retention provision in the Dodd–Frank Wall Street Reform and Consumer Protection Act.

“It says that when you securitize asset-backed securities that, unless a carve-out applies, unless the exemption applies, you have to hold back 5 percent,” said Gallagher. “You have to have skin in the game if you’re the securitizer. And that will make you do more diligence. That will make you, unlike what we saw happen in the years leading up to the crisis, put better quality assets in [investment] vehicles.”

The tighter lending requirements have resulted in many low-income, credit-risky borrowers no longer being able to obtain mortgage loans. And that resulted in an outcry from the same groups that had pushed for easier lending practices before the subprime mortgage crisis.

“The push-back, bipartisan on the Hill, across the board from community activists, lobbyists for the home builders, was so intense that last year we re-proposed the rule,” Gallagher said.

The proposal was to re-define what comprises a “qualified residential mortgage” for the purposes of the credit risk retention provision.

“I don’t think the government should be mandating risk management, so let me take a step back and say [this] is folly,” said Gallagher. “But if you’re going to engage in it and you have to define QRM [qualified residential mortgage] and if it’s a carve-out from a risk management standard, you’d think you’d want to codify some prudent lending standards.”

Definition

The definition of a qualified residential mortgage was proposed to be the same as that of a “qualified mortgage,” as defined by one of the new Dodd-Frank regulatory agencies, the Consumer Financial Protection Bureau. That definition requires mortgage lenders to make a good faith effort to ensure borrowers can repay their loans, but it does not require a down payment.

“So basically we outsourced a definition to a group where it’s held by agencies overseen by one person, unaccountable to Congress, it’s within the Fed [Federal Reserve System],” said Gallagher. “And their definition says no money down. So our QRM that was made final today, the federal government has said you are making qualified mortgages even if there is zero down.

“In a 3-2 vote of the commission – you can guess where I came out – we were one of the six agencies that codified this rule. This is probably, of the nine 3-2 dissents I’ve had to endure in three years [on the SEC], this one hurts the most.

“Because I really do think this was the cause of the financial crisis. And the SEC is an agency that’s sort of on the edge of some of these systemic risk issues. This was our chance to play the hero and say, ‘No, no, no, we are not going to go along with this.’ The mandate says we all have to do this at once. If we don’t do it, then no one does it and we can never put something in the code of federal regulations that says a qualified mortgage can be a zero-dollar-down mortgage. And guess what? They succumbed to pressure. The president called them all in to the White House a month ago to impart upon them how important it was.”

Planned

That prompted panel moderator and former U.S. Rep. Chris Cox to joke, “The good news is that you can now just take out your cell phone and call 1-888-NODOWN.”

Gallagher laughed along with about 100 people at the Oct. 22 luncheon in the Omni Hotel in San Francisco. But he’s seriously concerned about the return to loose mortgage lending practices.

“At the same time we did this rule-making, and believe me it was planned this way, [it was] announced last week that Fannie [Mae] and Freddie [Mac] will now be loosening their standards to provide more credit,” Gallagher said. “They only control right now 80 percent of the mortgage market. When you add Ginnie Mae … you get to 99-plus percent of the mortgage markets. There is no private mortgage in the United States right now, and we codified it today.”

Former SEC Commissioner Paul Atkins agreed that it’s looking like mortgage crisis déjà vu: “So we are hurtling down again for a repeat of ’08, of course. Just like leading up to that, between Fannie and Freddie they held far and away the majority of the Alt-A and the subprime mortgages at the time. So that’s a repeat of it obviously.”

Potentially adding to economic turmoil is a long-delayed but inevitable interest-rate hike by the Federal Reserve. That would be a boon to small investors currently earning 0.5 percent interest or less on their savings accounts, but it threatens to roil the stock market and will explode federal debt payments.

“Like many, this year I had hoped to see the first interest rate rise,” said Gallagher. “What we saw when [Ben] Bernanke was still [Fed] chairman last summer, when [he] mentioned the potential for an interest rate rise at some point in the future, the markets dropped 700 points that day, big swoon, scared the heck out of the administration.

“That caused them to walk so far away from potentially raising rates in a prudent manner in the near term. Then, of course, Bernanke leaving and [new Chairman Janet] Yellen being much more dovish, I don’t expect [interest rate hikes] any time soon. They are indicating next summer.

“Until we get to that point, we will have this irrational activity in the markets where folks are seeking out yield, taking on risks that they might not understand, and a distortion in the markets that shouldn’t exist because the government shouldn’t be there.”

National debt

Cox noted that the artificially low interest rate has also caused a distortion in how the national debt (currently $17.9 trillion) is being perceived and handled.

“From a fiscal policy standpoint just looking at the federal government’s finances, even at today’s interest rates, interest on the debt is the number one entitlement program,” said Cox. “And it’s a lot of taxation. It represents almost the entirety of individual income taxes. We just take that money, light it on fire and it pays the interest carry on our currently extant debt, which has grown rather rapidly every year.

“If interest rates climb, then very quickly – it doesn’t take much – you find that at today’s level of spending you can account for the entirety of the federal budget with just interest on the debt. Within the parameters that we’ve experienced, you don’t have to go back to the ’70s to have those kind of rates to get you there. So [there’s] a lot of cost in raising those rates. The Fed is going to be looking at any way not to do that. But they don’t control interest rates entirely. The market still has account.”

The panel also focused on warnings about the potential over-reach of another Dodd-Frank agency, the Financial Stability Oversight Council. The panelists are concerned that FSOC regulations will hurt the competitiveness of the capital markets. Currently three companies are in its cross-hairs – AIG, GE Capital and Prudential Financial – with Met Life likely next in line.

14 comments

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  1. LetitCollapse
    LetitCollapse 28 October, 2014, 15:18

    “That prompted panel moderator and former U.S. Rep. Chris Cox to joke, “The good news is that you can now just take out your cell phone and call 1-888-NODOWN.”

    Yeah, you’re a real clown, aren’t you Cox??? You were one of the reasons for the global financial crash of 2008. And now you think it’s all a big joke? You oughta be ashamed of yourself. Do you have any idea how many people lost their jobs and were ruined financially due to your turning a blind eye to all the shennanigans on Wall Street when you were in charge of the SEC? MILLIONS! And now you crack jokes about ‘nodown’ home loans when the Bush administration was promoting $0 down subprime loans that NEVER had a chance of getting paid off? What a putz you are!!! 🙁

    Reply this comment
  2. T ted t t teddy
    T ted t t teddy 28 October, 2014, 15:30

    “Skin in the game”
    Lol
    They love to use that phrase like no one ever has !

    Hey collapso
    I am no Chris Cox fan but I will tell you he has accomplished more in his life so far than you could in ten pathetic lifetimes!

    Reply this comment
  3. Queeg
    Queeg 28 October, 2014, 19:25

    Chris is a paisley tie and penny loafer super model……nothing more nothing less.

    The reality…….he is someone who was asked to float to the top!

    Reply this comment
  4. LetitCollapse
    LetitCollapse 28 October, 2014, 19:33

    “I am no Chris Cox fan but I will tell you he has accomplished more in his life so far than you could in ten pathetic lifetimes!”

    You’re absolutely right. I would never climb that high in the ruling class echelon because I refuse to apply a liplock to anyone’s ass or sell my sould for personal gain or destroy the lives of others to curry favor with my sugar daddies. And that’s exactly what it takes. I’m very pleased where I am in life and with what I’ve accomplished. Based on your board opinions, I can only imagine the skullduggery you’ve accomplished!!! 😀

    Reply this comment
  5. Queeg
    Queeg 28 October, 2014, 21:00

    Queeg survives. He rubs shoulders with the working class and breaks bread with those concerned about the human condition.

    Thks for the insult Colapse…..you’re such a pleasnt voice on CWD.

    Reply this comment
  6. LetitCollapse
    LetitCollapse 28 October, 2014, 22:17

    God almighty. You don’t have to be a SEC commissioner to know we’re in big trouble! A fifth grader should know that this country is flirting with financial armageddon. $18T in debt. Still running $600B deficits 7 years after the meltdown. Still printing (QE) $2T a year to keep interest rates at 0% and the stock market in a ridiculous bubble that’s ready to pop. We live in a Alice in Wonderland economy with Darth Vader ready to crash the party at any moment. People with a large % of their net worth in the stock market are crazy as friggin’ loons!!! Might as well play Russian roulette for dollars. The next time the big ball drops it won’t crash 800 points. It’ll go into a freefall of minus 8,000 points or more! Mark my words! Nobody escapes!!! 😀

    Reply this comment
  7. Queeg
    Queeg 28 October, 2014, 23:45

    Could you let up on all the gloom and doom already?

    Reply this comment
  8. Bill - San Jose
    Bill - San Jose 29 October, 2014, 07:20

    “subprime, low-down-payment mortgage lending to marginally qualified borrowers who defaulted when the housing market collapsed, sticking financial institutions with securities full of junk loans”

    Thank you idiot leftists who set legislation in place to ease the lending restrictions and permitted those who should be renters to have the American Dream which was torn from them when something called the Real World showed up at the door.

    This isn’t debatable.

    Next topic about how government policies to “help” almost always ends up screwing everyone including those they “helped”.

    Reply this comment
  9. Bill - San Jose
    Bill - San Jose 29 October, 2014, 07:30

    I’ve seen large black communities in my home town in Ohio bulldozed due to the once renting families were given a chance to buy and lost their arses and had their neighborhoods bulldozed. This is fact for anyone who actually wants to discuss what happened. Dem policies are to blame.

    Let’s also not forget that it was the ankle grabber himself, Barney Fife/Frank and his blind Dem conga line friends that strongly opposed Bush and Cheney who attempted to ring the alarm bells back in 2007 about Fannie/Freddie.

    And corrupt liberal junkies like Mike Honda should be indicted for not accepting a white paper written by Jean Meadows regarding the coming crisis as she saw it back in 2004-5. He refused to meet with her on these matters. Let’s hope he goes the way of the dodo bird this election, even if he is being replaced by an Obamanite in Khanna.

    Facts cannot be joked away or excused when it comes to this particular issue. =)

    Reply this comment
  10. Ted
    Ted "Eddy Baby" Steele, Associate Prof. 29 October, 2014, 08:26

    Bill

    “ankle grabber” is a reference to what? Sexual preference?
    Whoa— this blog is reducing rapidly to either a nazi sentiment from about 1938 or a junior high chat room.
    Grow up Bill.

    Reply this comment
  11. Ulysses Uhaul
    Ulysses Uhaul 29 October, 2014, 10:02

    References to race and sexual preferences should be off limits on CWD and gender slams. Enough.

    Just because national leaders disparage no need for us to lower our bantings to such ugliness.

    I am deeply concerned about losing the American dream to riots, total polarization and one or the other becoming the “superior race” through cleansing actions…..jobs, life, religion, preference etc.

    Nazi Germany, Middle East, WW 2 Japan, Crusades, Pol Pot, Stalin are examples you would not want to experience.

    Reply this comment

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