Certified Forensic Loan Auditors, LLC

 
  Upcoming Classes

Search CFLA's Article Archive:

From One Collateral Shortage to the Next

swissinfo.ch | June 1, 2016

by Tracy Alloway

(Bloomberg) -- In 1863, with the U.S. still reeling from a bloody civil war, a plan was launched in Washington to simultaneously fund its military loans and strengthen the nascent American banking system. "We cannot maintain our nationality unless we establish a sound and stable financial system; and as the basis of it we must have a uniform national currency," Senator John Sherman urged at the time.

What followed was a program designed to replace the patchwork state rules that had for years allowed the country's banks to sell their own private notes secured by loans or state bonds. Under the National Bank Acts of 1863 and 1864, banks could issue “national bank notes” that would be backed by the government, by depositing certain issues of U.S. debt with the Treasury.

While the legislation helped fill federal coffers and became the basis for the Federal Reserve Act 40 years later, it arguably failed its second mandate as bank panics continued apace in the latter half of the 19th century. Instead of depositors demanding the return of private bank notes, they simply demanded national bank notes instead.

This nugget of U.S. financial history comes courtesy of a new working paper from the Basel, Switzerland-based Bank for International Settlements. Its authors, famed economists Gary Gorton and Tyler Muir, argue that the National Banking Era bears an uncanny resemblance to more recent regulatory efforts to strengthen the global financial system in the aftermath of the 2008 crisis.

At issue is the system's tendency to manufacture 'safe' securities in times when government-issued debt is in short supply. Prior to the financial crisis, for instance, Wall Street's securitization machine worked overtime to turn dodgy subprime home loans into triple-A rated securities. Not only did the resulting bonds satisfy the needs of a global 'savings glut' desperate for investable assets, but the convenience of the securitized wrapper had the added benefit of turning the debt into suitable collateral for interbank loans in the vast 'repo' market.

The story is told in the BIS chart below, in vivid black and white. It shows the steady decline of demand deposits backed by bank loans, and their subsequent replacement with privately-produced 'safe' securities such as highly-rated asset- and mortgage-backed securities (ABS and MBS), asset-backed commercial paper (ABCP), and other ingredients of Wall Street's alphabet soup. In the late 19th century the need for such securities was made more urgent by the mounting scarcity of U.S. government debt, the economists argue.

"The creation of privately-produced safe debt is in part a response to a scarcity of government-produced safe debt," they write. "The response to scarcity was not only increased private production of safe debt, but also increased mobility of the debt."

What happened next forms its own sizable chunk of U.S. financial history. The repo market seized up in 2008, as concerns over the quality of the collateral underpinning short-term loans mounted during the collapse of the housing bubble. That culminated in the failure of Lehman Brothers, and the wider financial crisis.

Since then, regulators have embarked on an effort to strengthen the banking system through new rules requiring institutions to hold vast war chests of high-quality assets through the liquidity coverage ratio, or LCR, as well as new margin requirements for centrally-cleared derivatives trades.

In that sense, the LCR and its associated rules bear more than a little resemblance to the National Banking Era of more than 150 years ago, Gorton and Muir argue. 

"It is likely that a system of immobile collateral that restricts certain forms of bank debt creation simply encourages other forms of bank debt to be created," they write. "This is consistent with the growth in deposits during the National Banking Era. There is a remarkably strong correlation between Treasury supply and deposits. These new forms of bank debt are dangerous because they are typically not well understood or acknowledged, as deposits were not well understood in the National Banking Era and as shadow money (repo, ABCP etc.) were not understood until the recent crisis." In an effort to shore up one pillar of the financial system, regulators may inadvertently encourage a rerun of the same sort of behavior that help contribute to the 2008 crisis. "New regulations do not address potential scarcities of safe debt. In fact, since the financial crisis, new regulations aim at returning to a financial system of immobile collateral."

The unanswered question here of course, is just what 'safe' securities might be produced by a financial system faced with yet another collateral shortage.

 

 

 

Order Cutting-Edge Services Now   Quiet Title Packages from Licensed Attorneys
     
CFLA Sponsored Attorney Links   CFLA Training Academy

 

 

Back to June 2016 Archive

 

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

SEE BELOW- http://www.certifiedforensicloanauditors.com

Call us toll free at 888-758-2352

Bookmark and Share
spacer
Facebook Like us on Facebook
Twitter Follow us on Twitter
YouTube View our YouTube Videos
LinkedIn Connect to us on Linkedin
 
BBB Logo

 

spacer

Contact us or view our Sample Documents & Audits by completing the form below.

  • Reload
  • Should be Empty:

 

DVD Sets Only $99

 

FREE Mortgage Fraud Analysis

 

Order Cutting-Edge Services Now

 

Quiet Title Packages from Licensed Attorneys

 

Affiliate Services

 

CFLA Sponsored Attorney Links

 

Take-Home Education Package

 

ALB Law Firm

 

Advocate Legal

 

The True News Network

 

Sutton Law Firm, P.L.L.C.

 

Rubenstein Business Law

 

Atighechi Law Group

 

Scunziano & Associates

 

Get Certified to Perform Mortgage Securitization Audits

 

CFLA Training Academy

 

Expert Witness Services

 

Cutting Edge Expert Securitization Reports

 

CFLA Credit Cards

 

Breaking News

 

Letters to the Editor

 

CFLA Weekly Newsletters

 

Code of Ethics

 

Testimonials

 

Instructional Videos

 

Job Opportunities

 

License Opportunities

 

MARS Rule

 

Product Samples

 

Resource Links

 

Servicer Information

 

Foreclosure Laws

 

REST Report

 

Quiet Title Packages from Licensed Attorneys

 

Advertise on CFLA

 

Advertising Space: Mortgage Securitization, Quiet Title

 

Certified Forensic Loan Auditors, LLC
13101 West Washington Blvd.
Suite 444
Los Angeles, CA 90066

Phone: 832-932-3951
Toll Free: 888-758-CFLA (2352)
Mobile Users: CLICK TO CALL
info@certifiedforensicloanauditors.com

   
 
CFLA IS NOT A LAW FIRM AND DOES NOT PROVIDE ANY LEGAL ADVICE. CFLA DOES NOT OFFER FORECLOSURE CONSULTING OR FORECLOSURE RELIEF
SERVICES. CFLA DOES NOT OFFER OR ASSIST WITH ANY LOAN MODIFICATION SERVICE. CFLA ALWAYS RECOMMENDS THAT CLIENTS RETAIN COMPETENT COUNSEL IN THEIR RESPECTIVE JURISDICTION. CFLA HAS A FREE PROGRAM TO REFER CFLA CLIENTS TO LAW FIRMS IN NEARLY EVERY STATE AND CFLA
DOES NOT CHARGE OR OBTAIN REFERRALS FEES FOR THESE SERVICES. SERVICES NOT OFFERED TO RESIDENTS OF THE STATE OF NEVADA.

 
Home About Us Privacy Policy Terms of Service Disclaimer SERVICES Careers Contact Us
 
COPYRIGHT © 2007-2016 Certified Forensic Loan Auditors ™ All rights reserved