Thursday, March 13, 2008

Paulson Rues Mortgage Securitization He Led

Treasury Secretary Hank Paulson spoke at a press conference this morning on the mortgage meltdown. He addressed steps the Bush administration would take to address the problem, caused by a "dramatic weakening" of standards used by the U.S. mortgage industry to evaluate and make home loans.

"We will see changes at every step of the securitization process," Paulson said at a news conference this morning, as regulators tighten standards for the people who appraise houses, originate and fund mortgages, and package them into more complex financial products.

Let's turn back the clock to say 2004, a critical time according to the President's Working Group on Financial Markets. They said that the underwriting process used by finance companies to analyze home mortgages suffered a "breakdown" late that year. This led to a proliferation of questionable deals as those involved chased the profits of a boom in real estate. That boom went until mid-2007.

The President's Working Group noted "organizations responsible for packaging mortgages into larger investments -- from the rating agencies responsible for independently assessing the investments to the banks and financial companies that sold or bought them -- failed to properly analyze the risk involved and had insufficient knowledge about the underlying mortgage assets."

Treasury Chief Hank Paulson looks to be quite the hypocrite as Goldman Sachs sold boatloads of mortgage backed securities under his eight year tenure as CEO. They went one step further than most packagers, Goldman shorted their position, i.e., bet the ranch that prices of mortgage backed securities would fall. When President Bush appointed Hank to Secretary of the Treasury in May 2006, he ensured a hands on participant in the scandal would eventually lead its assessment. I guess that "intimate knowledge" of financial markets (of which President Bush spoke) was a bit too risque to share. However, Adrian Ash of Australia's The Daily Reckoning shed ample light on the Hank led firm's tawdry dealings:

In 2006, Goldman Sachs' mortgage-bond division - Alternative Mortgage Products (known as GSAMP for short) - issued 83 home-loan-backed bonds, valued at $44.5 billion. In the subprime sector, it grew its business by 59% from 2005, unloading some $12.9 billion on to unsuspecting, stupid and/or greedy investment fund managers who thought a bond under-pinned by home-buyers with no hope of repaying might be worth having.

According to Inside Mortgage Finance, that made GSAMP the 15th biggest issuer of subprime-backed bonds in 2006. And come the start of the third quarter this year, those securities were being downgraded by the credit ratings agencies faster than anyone else's.

Research from Citigroup, dated 22nd June, found that "portions of Goldman's GSAMP-issued bonds, which include subprime loans from a variety of lenders, have been downgraded a combined 69 times by Standard & Poor's and Moody's Investors Service in the year through June 15," as Reuters reported.

"Sixty of the GSAMP downgrades refer to classes from 2006 bonds," Citigroup added, and one of Goldman's 2006 crop - the GSAMP Trust 2006- S3 - may actually be "the worst deal...floated by a top-tier firm," reckons Allan Sloane in the Washington Post.

In spring 2006, "Goldman assembled 8,274 second-mortgage loans originated by Fremont Investment & Loan, Long Beach Mortgage, and assorted other players," explains Sloane after studying the public record. "More than one-third of the loans were in California, then a hot market. It was a run-of-the-mill deal [face-value $494 million], one of the 916 residential-mortgage-backed issues totaling $592 billion that were sold last year.

"The average equity [these] borrowers had in their homes was 0.71%...[meaning] the average loan-to-value of the issue's borrowers was 99.29%.

"It gets even hinkier," Sloane goes on. "Some 58% of the loans were no- documentation or low-documentation. This means that though 98% of the borrowers said they were occupying the homes they were borrowing on - 'owner-occupied' loans are considered less risky than loans to speculators - no one knows if that was true. And no one knows whether borrowers' incomes or assets bore any serious relationship to what they told the mortgage lenders."

Should we call Hank "Moses"? The man who led us in to the valley of the shadow of ruin is expected to lead us out? He reports to our nation's CEO who has his own track record in this regard:

In 2005, a Bankruptcy Bill flew through Congress which failed to address predatory lending practices, one component of the current debacle.

President George W. Bush said at the House's passage of the bill: "I commend the House for acting in bipartisan fashion to curb abuses of the bankruptcy system. These commonsense reforms will make the system stronger and better so that more Americans - especially lower-income Americans - have greater access to credit. I look forward to signing the bill into law.

Does anyone else wonder if our leaders actually know what they're doing? Or is one big con game? While the Bush team promises to tighten standards in one imploded area, they're relaxing them like crazy elsewhere. Can we expect future debacles in foreign listed companies on American exchanges and in non-FDA approved indications for drugs? Past Bush performance suggests we just might...