Mortgage Forgiveness and CEO Pay
After the mortgage crisis, JPMorgan Chase & Co. entered into various mortgage settlements for eye-popping headline amounts. But these amounts consisted mostly not of cash paid to the government, but of "consumer relief," in which JPMorgan could get credit for forgiving or modifying mortgages in order to help struggling homeowners. Yesterday David Dayen reported at The Nation that some of JPMorgan's consumer relief came through the odd but efficient expedient of forgiving other people's loans: JPMorgan would sell mortgages to someone else, then it would "forgive" the mortgage and claim credit for the settlement, and then the someone else would say, hey, what the heck, why do you get to forgive a mortgage that I own?
Now, this is bad. It's bad for the someone else who bought the mortgages: In this story, it's mostly a guy named Larry Schneider, who bought $156 million of JPMorgan mortgages for $200,000 (!), only to see JPMorgan drag its feet on the paperwork and forgive some of the mortgages that he'd already bought. (JPMorgan also collected some payments on those mortgages after it sold them, and told Schneider that it couldn't forward the payments "because of an internal accounting practice that was 'not reversible,'" which I may try out as an excuse for not paying my mortgage sometime.) It's bad for the homeowners: They got letters from JPMorgan saying that their mortgages were forgiven, but then later they found out that in fact their mortgages were not forgiven because JPMorgan didn't own them in the first place. (At least in some cases, when JPMorgan found out about the error, it bought back the mortgage and really did forgive it.) And it's bad for the justice of the mortgage settlement: If JPMorgan is getting credit for forgiving mortgages it didn't own, then it is not really being punished for its misdeeds, but putting the costs of them on innocent third parties.
But here is the thing about that last part: Everyone knew and agreed, from the very beginning, that the mortgage settlements would give JPMorgan (and each other settling bank) credit for forgiving mortgages it didn't own. It's right there in Exhibit D to JPMorgan's 2012 mortgage settlement, which lists a "menu" of options for JPMorgan to get credit for consumer relief. Writing down $1 of principal on loans that it owns gets it $1 of credit. Writing down principal "on investor loans" that JPMorgan services for others gets it $0.45 of credit. That means that if JPMorgan made a mortgage loan, packaged it into a securitization, sold that securitization to investors, and then -- as servicer of that loan -- decided to forgive the loan, it (1) could do that and (2) would get credit for consumer relief in its mortgage settlement. (Partial credit, but still.) JPMorgan's later settlement for mortgage-securities fraud included a consumer relief annex that gave it 50 percent credit for writing down loans serviced for others, which was pretty ironic, since that settlement was for defrauding mortgage-bond investors, but allowed JPMorgan to pay with those same investors' money.
And in fact that happened. The Financial Times noted in 2012 that "Of JPMorgan’s $3bn in forgiven mortgage debt, slightly less than half has come from investors’ holdings, a person familiar with the matter said." David Dayen himself wrote in 2012: "Yes, Banks Are Paying 'Penalties' in Foreclosure Fraud Settlement with Other People's Money."
Now, that's not what Dayen is writing about now. Nobody expected JPMorgan to sell loans, not service them, and write them down anyway. And that is worse: At least when JPMorgan modified loans that it serviced for investors, it really did modify those loans, whereas in the case of Schneider's loans it pretty much told homeowners that their mortgages had been forgiven without having any right to do so. But that background -- that JPMorgan was explicitly allowed to pay for its mortgage misdeeds with investors' money -- does I think provide an important perspective on the current issues. JPMorgan could get consumer-relief credit for forgiving loans it didn't own, legally, without needing to resort to any sort of subterfuge or gimmicks, which makes it extra weird that it seems to have resorted to those gimmicks anyway.
Here is a charming Harvard Business Review article titled "Why Is CEO Pay Rising? Maybe There Aren’t Enough Good CEOs." It's based on a survey of public-company directors, who almost unanimously agree that it's really hard to be a chief executive officer:
To better understand the size and quality of the labor market for CEO talent, we surveyed 113 nonexecutive directors of Fortune 250 companies. We found overwhelming evidence that directors believe that the CEO job is very difficult and that only a handful of executives are qualified to run companies in their industry.
Almost all directors in our study (98 percent) describe the CEO job at their company as extremely or very challenging. Practically none (2 percent) believe it is moderately, slightly, or not at all challenging.
It seems to me that there's something a bit circular about surveying directors about why they pay CEOs so much. The common complaint about executive pay is that CEOs and boards tend to be pretty chummy, that CEOs influence the choice of directors, that public-company directors tend to be chosen for their clubbability (and experience as public-company executives) rather than their focus on reining in executive compensation. I bet if you polled people on the street, you'd find a lot more than 2 percent of them who think that being a CEO is pretty easy! (My sense is that a large minority of Americans think that being the president is easy.) I ran an extremely unscientific poll of my Twitter followers and so far a slight majority have chosen one of "moderately, slightly, or not at all challenging"; 5 percent say "not at all." Put those people on some boards and maybe CEO pay will go down.
Now, obviously one possibility is that people who are qualified to serve on boards, and who do serve on boards, and who see up close the problems that CEOs deal with, know better than everyone else how hard the CEO job is. But the other possibility is that people who are inclined to respect CEOs are also the people who are likely to become public company directors, and their predisposition to admire CEOs leads them to pay their CEOs a lot.
Finra has an endowment.
Is there a weirder regulator than the Financial Industry Regulatory Authority? It is responsible for a lot of the regulation of the financial industry, but it is not a government agency. It's a private entity that is funded by the industry that it regulates, which creates the potential for all sorts of fascinating conflicts. There is the obvious one -- if the industry funds its regulator, it's easy for the regulator to become captured and to be too lenient to the industry -- but it's not the only one. Finra is funded not only by industry dues but also by fines, so it has offsetting incentives to assess a lot of fines. It's in Finra's interest to be a lenient regulator that also somehow collects a lot of fines.
Anyway also Finra for some reason has a $1.6 billion endowment?
Finra’s actively managed portfolio—unusual for regulators, which normally invest their cash in short-term securities—dates to a windfall that it reaped over several years starting in 2001 after its predecessor, the National Association of Securities Dealers, sold off its interest in the Nasdaq Stock Market.
That's from this Wall Street Journal article about how the investment returns on that endowment are kind of meh compared to other nonprofit endowments, which I guess is the right comparison set? (Compared to regulators who "normally invest their cash in short-term securities" I guess Finra is doing great?) I don't know, it doesn't bother me that much; if Finra is dissatisfied with the performance of its investment managers, it can always fine them.
I have long been tickled by the fact that "Fearless Girl," the bronze statue at Bowling Green that has been embraced as a feminist symbol, is an advertisement for a big Wall Street firm, State Street Global Advisors. I particularly like that the sculptor of "Charging Bull," the famous sculpture that she is facing down, hates "Fearless Girl." "There is something pleasing about the fact that the Charging Bull, a global symbol of rapacious financial capitalism, is a piece of guerrilla art installed without payment or permission," I once wrote, "while the Fearless Girl, an egalitarian symbol meant to challenge the bull's soulless greed, is a piece of corporate advertising commissioned by an asset-management company." The statues face each other across the park, quietly resonating with overtones of irony.
Here's another irony:
State Street Corp., parent company of the investment firm behind Wall Street’s iconic Fearless Girl statue, today agreed to pay a combined $5 million to more than 300 women and 15 black employees who were paid less than their white, male counterparts, according to a federal audit.
Oops! "State Street officially denies the claims," but is settling anyway. If you were a maximally cynical executive, and you wanted to get public recognition for being socially progressive, would you spend your money on paying women as much as you pay men, or on a statue in a park touting the power of women? If you pay women equally, they might notice, but you are unlikely to get a tenth of the press that one statue can buy.
People are worried that people aren't worried enough.
Honestly this section has just become a daily appreciation of Ben Eisen's work on low volatility meta-worries at the Wall Street Journal, and yesterday he outdid himself, suggesting that continuing low volatility might be caused by the opposite of a "Minsky moment":
That’s one way to explain the record low volatility in the stock and bond markets, said David Zervos, the chief market strategist at Jefferies. To illustrate the point, Mr. Zervos has coined a term for this period that’s best read backward: a “Yksnim” moment.
His theory, as outlined in the Journal’s Morning MoneyBeat newsletter Thursday, is that markets are braced for instability and investor expectations for big surprises are high. ...
In this environment, where so many are expecting a crash, how could complacency be building, he asks. Instead, that fear acts as a bulwark against the type of leverage that ends in a Minsky moment. It would fit into a strain of market analysis that suggests pessimism about the market rally is a key reason it will continue.
It's so lovely. Usually complacency leads to excess leverage, which leads to volatility when bad news breaks. But here constant low-grade panic has led to low leverage, which leads to muted volatility when the expected bad news breaks. And then this muted volatility is mistaken for complacency. You shouldn't be worried that people aren't worried enough, because the reason they don't seem worried enough is that they're so worried that they forget to be worried.
People are worried about unicorns.
I keep saying that private markets are the new public markets, and here is Axios saying that "Today's seed rounds are yesterday's Series A rounds, and pre-seed is the old seed." Which makes sense. As private markets grow and deepen, every stage becomes bigger, and so if you want to do a yesterday-sized fundraising you need to do it at an earlier stage today. Today's pre-seed is yesterday's seed, today's seed is yesterday's Series A, and today's $10 billion private fundraising from SoftBank is yesterday's ... well, $10 billion initial public offerings weren't all that common even yesterday, but the point is that there's a lot of private money these days.
On the other hand, The Information reports that "As SoftBank has been spraying money at tech companies in recent months, it has been negotiating unusually tough terms that sharply improve its chances of earning a big return." This is I suppose somewhat contrary to my hypothesis that $100 billion in new money from the SoftBank Vision Fund would shift the balance of power in Silicon Valley more in favor of founders. The more plentiful capital is, I reasoned, the easier it is for founders to raise capital, and the harder it is for capital providers to get into good deals, which should give founders the ability to negotiate for friendlier terms. But I suppose the capital provider with the $100 billion is somewhat immune to those pressures: There's a lot of money floating around Silicon Valley, but there are still only so many investors who can write $10 billion checks. SoftBank itself still has a lot of leverage, but the people competing with SoftBank for deals probably have less.
In other tech news, here is Jessica Pressler on Silicon Valley a cappella:
One of the truest things in life is that where there are nerds, there is a cappella. Thus, as Silicon Valley has taken over as the nerd capital of the world, the hills outside of San Francisco have come alive with the sound of unaccompanied vocal harmonies.
It is delightful but short, and I want endlessly more of it. I would love to read, for instance, about the very specific high-status humiliation of trying out for Googapella or the Vocal Network and not making it. (Does that happen?) Like, you went to Stanford, joined an a cappella group, invented a robot or whatever, graduated top of your class in computer science, got a prestigious job at Facebook, your life was set, but then you tried out for the Vocal Network and were stunned by a rejection. "The people we hire have been the best at everything everywhere they go for their entire lives, and they have trouble handling it when they get here and find that they are merely average, at a cappella," the group's manager might say. Do you think people ever leave big tech firms for small startups, not to change the world or to make more money, but just to be able to form their own a cappella groups?
People are worried about bond market liquidity.
A basic story about bond market liquidity is that banks are no longer as willing to provide liquidity as they used to be, because regulation and increased capital requirements have made it more expensive to be a bond market-maker, and because it is hard to pass those higher costs on to investors who have become used to cheap liquidity. But here is a paper, "Expected Issuance Fees and Market Liquidity," that suggests an alternate way to compensate dealers for providing liquidity:
We pose that investment banks have a dual role as primary dealer in the secondary market as well as competitor for lead manager in the primary market. Therefore, primary dealers have the incentive to increase liquidity due to competition for issuance fees. We find that the expected issuance fee is significantly related to market liquidity. Issuance fee driven liquidity is especially strong for countries with high funding needs, in periods of high uncertainty, and for bonds with low risk.
The authors look at Euro-area sovereign bonds, and find that countries that are likely to need to pay a lot of bond-issuance fees -- because they'll need to issue a lot of bonds, or because they'll pay high fees for those bonds -- tend to trade more liquidly than you'd otherwise expect, as dealer banks compete to trade their bonds in order to win lucrative issuance mandates. The same effect surely exists in corporate bonds too: Telling a frequent high-paying high-yield issuer "we are the number one trader of your bonds" is a lot more valuable than saying the same thing to a company that last issued a bond in 2010, and so you'd expect banks to compete to be able to say it.
How We Think About the Deficit Is Mostly Wrong. Treasury Road Map for Market Rules Is Said Ready for Release. New Federal Rule Clamps Down on Payday Loans. Trader Positions and Marketwide Liquidity Demand. When the Wachtell Memo Strikes. HSBC Traders Used Code Word to Trigger Front-Running, U.S. Says. Investment Adviser Charged in Multi-Million Dollar Options Trading Scheme. Trump Wants Puerto Rico Debt Handled in Court, Not Eliminated. Paulson’s Bet on Puerto Rican Hotels Hasn’t Gone So Well. Randal Quarles, Trump’s First Fed Nominee, Wins Senate Approval. Hudson Yards Wants to Be New York’s New Money Hub. Goldman Sachs Agrees on Lease for Frankfurt Office Tower Space. Ace Greenberg's son wrote an Off-Broadway play about him. "In many American cities, though, landing a job as a dog walker is tougher than earning entrance to an elite university." "We must be careful not to confuse a precise mathematical description of a game for the vagaries of reality itself." "Theoretical physicists have dispelled the idea we are living in a Matrix-style computer simulation, calculating that not all aspects of our reality can be simulated efficiently using computers."
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