page contents Mortgage News Digest: Government Regulators are High School Bullies - Picking on the Weakest Target

Thursday, June 16, 2011

Government Regulators are High School Bullies - Picking on the Weakest Target

Please enable images

Mortgage Brokers who are primarily small, independent, marginally capitalized businesses, have consistently been blamed for lack of transparency.  Even though the mortgage broker business model is singularly a sales function, with no ability to create products, dictate rates or approve loans, the government has chosen to blame the housing meltdown on this segment.  The punishment meted out by the regulators as a consequence have pushed the industry from a 68% (or 80% depending on whose numbers you believe) market share in 2007 to 6.9% market share in 2011.  The government regulators are no different from the high school bullies - they pick on the weakest victim.

On the other hand, it's business as usual at the powerful and well-capitalized investment houses that created the products that caused the meltdown. Unbelievably, these houses have even been granted favor and powers by being given bank charters to further their objectives.  Once again, they sit on the opposite side of their original trades, looking for distressed assets to purchase at a substantial discount.

Take a critical look at Goldman Sachs' defense of its marketing techniques.  DealBook says it "harmed the capital markets." "Instead of selling something — thereby decreasing the price or supply of it — and giving the market a signal that it was less desirable, Goldman did the opposite. The firm created more mortgage investments and gave the world the signal that there was more demand, for C.D.O.'s and for the mortgages that backed them." And the paper said, "By shorting C.D.O.'s, Goldman distorted the pricing of the underlying assets. The bank could have taken the securities it owned and sold them en masse in a fairly negotiated sale, though it likely would have gotten less for them than it was able to make by shorting the C.D.O.'s it created."

Investment banks which trade on their own account are, by definition, unable to fairly represent the interests of the public.  By the ethical standards of the investment industry, it is perfectly OK to buy an insurance policy on your neighbors house, with you as the beneficiary, even though you know it's burning to the ground.

The fact that none of the investment houses has been impacted by the new regulatory schemes is a clear example of the lip service being paid to enforcement.  Even the sweeping Dodd-Frank reforms do little to change the business structure.  Yet the government continues to find an easy target in the consumer lending world.  Let's regulate the unfettered regulators.  It's time for the principal to stop their bullying and make them tackle the real problem.

No comments:

Post a Comment