October 29, 2011

Parking Lot Science Comes to Analysis of the EuroZone Crisis

Posted in Economics, Financial Markets, Social Commentary at 9:56 am by Doug Brockway

There’s a joke about a drunk who drops and loses his car keys in a parking lot.  He then goes and looks for the keys under a street lamp not because it’s near the where he lost them but because that’s where the light is.  The point being that one should look for keys, or data and answers, where the keys are likely to be not just where you can easily look… or easily frame an issue.

This story came to mind while I was examining a decision tree developed by STRATFOR, a private intelligence company that was distributed by the renowned investor and analyst John Mauldin‘s weekly e-mail letter.  The decision tree examines what are the real likely outcomes that the Eurozone, and the rest of us, will experience as they wrestle with the sovereign debt crisis currently centered on Greece and its debt.

This is a chilly, scary, and as far as I can tell accurate representation of what’s to come.  I truly wish I knew what, if anything, I can practically do about it as an individual for my own account.  But, in addition to that, it occurs to me that this image is but one side of the coin and could easily have been laid out from an entirely different perspective.  Instead of asking “What to do about Greece?” the creditor, what if we asked “What to do about Sovereign Debt Lenders?”  That image might look like this:

Take it as a given that the standard story line about feckless Greek legislators making unwise deals with lazy workers and outdated unions is true and the individual Greeks have been behaving badly as Michael Lewis’ Boomerang might suggest.  My personal guess is that the image is overwritten.  My deeper point is that the lenders are not the naïfs here.  It is the lenders who have the years and years of financial experience, deep data, analysis skills and resources, …. and lawyers.

The negotiations in Europe have been slowed by how much of a haircut the lenders will take on the debt.  50% was the target this time and deemed too much by the lending community.  Think it through. If the lender’s bets are not written off the tax payers must come up with the difference.  Whether you look askance at bailouts as the Tea Party does or at the riches of the 1% as Occupy Wall Street does you have to wonder why Step 1 isn’t to wipe out the feckless lenders.  Of anyone, they knew what they were doing.

February 19, 2011

‘Splain Yourself on Taxes

Posted in Economics, Financial Markets, Social Commentary tagged , , at 11:14 am by Doug Brockway

Inspired by some snarky-serious commentary by Paul Begala about the Conservatives’ positions on taxes I recently challenged a friend from Louisville to “’splain Kentucky and its ‘leaders.’”  As Begala pointed out some of the leaders in the US Senate and Congress on the Republicans’ side of the aisle who are most vocal about the wasteful spending in Congress hail from a state that, “according to the Conservative Tax Foundation ….received $1.51 back from Washington for every dollar it paid in federal taxes.”  Begala suggests we start by aligning tax payments with tax benefits.

My friend’s less than on-the-point response about Mitch McConnell, Rand Paul and Paul Rogers (head of the House Appropriations Committee) was that “they are bringing home the bacon and taking advantage of a broken system.  Nevertheless, we would all be better off with lower taxes and less pork.”

Well, as a tacit observation, the Republican leadership on the issue of spending and taxes is not nearly, not remotely as principled as it claims… and that, of course, puts it in the same boat as what the Democratic leadership does on the same issues most days.

So far most of the debate about how to reduce the deficit has the air of a farce.  I happened to catch a bit of Real Time With Bill Maher last night (that’s a strange show…).  Strangeness aside he had a fantastic visual aid: a plate of fried chicken (thigh and breast), mashed potatoes, and a very little bit of vegetables.  The pieces of chicken were labeled Social Security and either Medicare or Healthcare, I forget, but you get the idea.  The potatoes were labeled Defense.  The small bit that was vegetables was everything else.  He said that the plate is the budget and we’re trying to reduce it then, picking up one of those mini-cocktail corn cobs and said, “but we’re spending all our time arguing about this.”

We can’t seem to get to sensible conversations.  My father, who was a published economist and, like me, had the more proper, left-leaning politics….  wrote years ago, late ’80’s/early ’90’s, that Social Security should be means-tested and the retirement age of 65 was too fixed and too young.  There are plenty of people on the Left who understand and agree with this.  Similarly, there are likely many otherwise politically forlorn and twisted people, you know, Conservatives…. who understand that the US spending as much on Defense as the next 20 or so countries combined is nuts.  Secretary Gates seems to see that.

Instead we’re grousing about funds for NPR and protecting the US Army’s program to advertise by supporting NASCAR.

It’s like a business executive bringing rampant spending under control by working through the priorities in an obscure corner of the corporation that consumes less than 5% of the budget.

What’s going on in Wisconsin is a related and classic example of some good ideas and some reaching too far.  Most people I know think that public pensions are too rich, earned too early, and too burdensome for their benefits or for the public good.  Get a little deeper into it and you can see that unless something like bankruptcy can be engineered for US States they’re in a very hard place.  Its fairly clear to me that public workers of all stripes will have to accept significant adjustments simply to bring them closer into alignment with the general public (though reports are that the unions in Wisconsin that supported the new governor are exempted from his laws…).

Why any of that means that individuals shouldn’t be allowed to get together for their common good is beyond me.  I understand the argument about an implicit labor monopoly and it’s not too convincing in the face of the right to free assembly and the right to congress.  Does that make for dicey discussions and grey areas?  Sure.  But I don’t understand the move to restricting individual rights as appears to be the aim.

I wonder how long the new governor in Wisconsin actually thought about not reducing taxes, which he just did on February 1, in the face of his budget calamity or actually trying to recover from Wall St. the billions stolen via the sale of fraudulently designed CDO’s, based on clearly flawed sub-prime mortgages that were sold to his state pensions thus accelerating their default status.  OK, I understand the second idea has its practical challenges (even though it’s morally sound…) but it’s quite a bit myopic to grind so hard on state workers as if they are the sole cause or sole solution to his woes.

As a former colleague often said, “no fools, no fun.”

June 10, 2010

Present at the Creation of Mortgage Marketing 2.0

Posted in Facebook, Financial Markets, Marketing 2.0, Social Media tagged , , at 3:35 pm by Doug Brockway

The other day Rick Grant posted “Time for the Mortgage Industry to Get Social” in a well followed industry publication, HousingWire.  He thinks the industry is starting to “get” social media and he says he knows this because he can hear them kicking and screaming.

I’ve worked in and around a number of industries and have found none of them quite as seemingly insular as the mortgage industry.  Sometimes this is only a mirage.  The industry has turns and complications that are difficult to see and explain even by seasoned insiders.  Sometimes its just the personality of the beast.  In the early 1990’s when Fannie Mae introduced rules-based technology in Desktop Underwriter it was counter-cultural in a number of ways not the least being that no other industry was using that technology at massive scale yet.  In most cases, as with social media, the mortgage industry is a “late adopter” of technology.

A lot of the mortgage industry is B2B.  It involves the various required parties interacting to originate a loan, to package and sell it, to securitize it, to service and retire it.  Most people interact with the mortgage industry on a B2C basis when they search for a new mortgage, look to refinance, or (much to often lately) repair or retire a loan gone poorly.

This means that different parts of the mortgage process will predominately use different social media tools.  Loan brokers and originators will go to where individuals are.  Increasingly, that means tools like Facebook.  People working on professional interactions between parties within the industry will look elsewhere, most often professional networking tools like LinkedIn.

To see what’s going on today I did a quick survey of some mortgage key words in three places:  LinkedIn, Facebook and Twitter (getting counts on Twitter will take more staff work).  The result is:

Groups on LinkedIn Facebook and Twitter:

Category LinkedIn Facebook[1] Tweets[2]
Mortgage 1287 Over 500 Lots
Some of the underlying include….
REO 285 7 6
Mortgage Servicing 29 55 4
Mortgage Lending 88 Over 500 Lots
Mortgage Origination 9 54 0
Mortgage Underwriting 7 47 5
Mortgage Risk 9 109 Lots
Secondary Marketing 13 94[3] 0
Mortgage Marketing 40 309 Lots
Mortgage Technology 20 143 4
Mortgage Insurance 99 Over 500 Lots
Mortgage Fraud 12 23 Lots
Mortgage Banking 79 228 Lots
Mortgage Bank 34 Over 500 Lots
Mortgage Broker 56 Over 500 Lots

[1] Filtered for Business Groups

[2] This column is “lame”, not based on Lists or hash tags… needs revision

[3] Clearly NOT very mortgage related

Some of the above is piffle, SPAM.  Certainly LinkedIn groups, often started as vehicles to sell something, can be this way.  On the other hand, the right content, when it’s of interest, can take on a life of its own.  Today, “Mortgage Reform and Sacred Cows” generated 28 tweets and retweets in 1 hour, each of these being seen by all the followers of all the tweeters and each enabling a call to action on the part of a buyer.  Randomly checking the last three tweeters they have 1,249, 716, and 29 followers respectively.  Thousands of people saw this article today.  That’s coverage.

If you’re in the mortgage industry and you’re thinking about whether or not you might or could or should participate the answer is you must.  There IS a conversation going on, right now, about you and your competitors.  You must participate.  If you haven’t any experience in the subject then start by listening.  Join some LinkedIn groups (you can search them based on your interests), use the tools like Radian6 or Scoutlabs to monitor what’s being discussed.  Get a feel.

Very soon, participate.  Its “social” media and that means participate in the discussion.  You can’t dictate or dominate it with canned press release material.  Participate in the discussions as if you’re at a cocktail party, sipping on club soda, trying to know what others are saying and trying to make sure your points are heard and you are known.

The most important thing to get to is publishing content on the issues that your customers are interested in from their point of view.  NOT product pitches.  Instead,  useful, intelligent contributions to the discussions.  Do this and customers will follow your “calls to action” and click on your contact buttons.

Like anything else the basic stages are:  1) dip your toe in the water, 2) make a number of concurrent efforts, not experiments, but not too worried about “integration”, you need experience 3)  consolidate, integrate and expand.

Call if you need help.

May 26, 2010

Don’t SPOF me, Bro’!

Posted in Financial Markets, Foolishness, Social Commentary tagged , , , at 4:49 pm by Doug Brockway

A SPOF, or “single point of failure,” is a part of a system which, if it fails, will stop the entire system from working. They are undesirable in any system whose goal is high availability, be it a network, software application or other industrial system.

Sometimes high availability is desirable as every minute a system is down money is lost.  If an airline’s reservation system is down they still own the planes but they can’t sell the tickets.  Sometimes high availability is desirable because having the system fail also means significant additional costs.  The owners of Three Mile Island and BP both understand this all too well.

Some in management understand the dangers and the costs of SPOFs quite well.  This brings us to two stories about Edward Crosby “Ned” Johnson 3rd, the CEO of Fidelity Investments.  Johnson’s reputation (I’ve never met him) is that of a particularly hands-on, operationally knowledgeable person.  In the early 1980’s Fidelity used to have its main data centers in Boston.  Ned was told by the manager of a data center there that it was secure, that no one, not even Ned, could get unauthorized access.  The story goes that Ned climbed over the computer window desk and into the data center.  Having made his point security was upgraded and over the next few years the data centers were moved out of the city center.

Not too many years later Fidelity established a facility in the Dallas area, including a data center.  Mainframe computers of the time, and for the most part now, were cooled by the circulation of water through pipes inside the machines.  On a tour of his new data center Johnson is reputed to have asked to see the back-up to the water supply.  Having seen that he asked to see the back-up to the back-up.  There was none.  Ned asked how much water was involved.  Given a number he concluded it was about the volume one has in a reasonable swimming pool so a pool was constructed on-site, for employee and family use, attached by pipes to the back-up to the water supply.

I don’t have the data on the volumes of trades or dollars that Fidelity was managing to in those times.  Suffice it to say that as the dominant, the largest mutual fund company, trade and dollar volumes were, and remain, quite high.  Johnson knew the near term value of lost transactions and the long-term reputational risk and revenue risk if his customers came to believe Fidelity was not a reliable partner.

He likely used different words but his message to management was, “Don’t [SPOF] me, Bro’!”

Wouldst that the management of BP took the same view in the Gulf of Mexico.  As I write they are attempting the “top kill” method to stop the gushing oil leak that has plagued us for over a month.  They had a controller on the blow-out preventer fail and no plan to deal with it.  They were drilling five miles down “where no man has gone before” and no at-hand, tested solutions to outages that are reasonably expectable.  The now famous Minerals Management Service blithely gave BP authority to go ahead without the plans and reports that are designed to prevent or control for disasters.  One can only wonder what any of these people were thinking.

One thing is clear, they weren’t thinking “Don’t [SPOF] me, Bro’!”

Causal factor of unavailability
Lack of best practice change control
Lack of best practice monitoring of the relevant components
Lack of best practice requirements and procurement
Lack of best practice operations
Lack of best practice avoidance of network/system failures
Lack of best practice avoidance of internal application failures
Lack of best practice avoidance of external services that fail
Lack of best practice physical environment
Lack of best practice network/system redundancy
Lack of best practice technical solution of backup
Lack of best practice process solution of backup
Lack of best practice physical location
Lack of best practice infrastructure redundancy
Lack of best practice storage architecture redundancy

May 25, 2010

The Quality of Loans is not Strained

Posted in Financial Markets, Social Commentary tagged , , at 3:26 pm by Doug Brockway

I did something fairly “wonkish” today. I read a newly published document from Fannie Mae titled “Lender Letter LL-2010-03, An Introduction to Fannie Mae’s Loan Quality Initiative” (LQI). As stated in the document’s introduction:

“Historically, many issues related to compliance with Fannie Mae selling policies are not detected until after loans are delinquent or through the foreclosure process. Loan repurchase requests to lenders have increased in the past three years, highlighting the need for an improved approach for working with lenders to deliver loans that meet Fannie Mae’s underwriting and eligibility guidelines. Fannie Mae conducted an extensive analysis to determine the primary drivers of repurchase requests and is launching the Loan Quality Initiative (LQI) to identify and implement policy, process, and technology enhancements to improve the compliance with underwriting and eligibility guidelines and mitigate repurchase risk.”

For loan investors (Fannie in this case) and their counterparties (mostly mortgage bankers, conduits and securitizers) the big issue is so-called “repurchase risk.” If the information submitted to Fannie Mae for their approval of a loan is incorrect or inaccurate than in many cases the banker must buy back that loan from Fannie Mae.

Some important things to know:

  1. Most mortgage bankers take out loans from large institutions and use those borrowed dollars to fund loans at your closing. They then turn around and sell the loan, often to Fannie Mae, and generate the cash to do it again,
  2. The loans they must repurchase are by definition, by “reputation” tainted whether there is actual fraud or error. The inaccuracy in the loan application may be immaterial to actual risk but the repurchase must happen in any case
  3. Since the loans are tainted the mortgage bank won’t be able to sell them to a third party.
  4. Mortgage banks don’t have the cash lying around to buy whole loans so the repurchase cash comes out of profits.

Many mortgage bankers were caught in this squeeze when investors stopped buying sub-prime mortgages at all. According to Implode-o-meter, “since late 2006 383 major U.S. lending operations have “imploded.””

Now, many face the prospect of going out of business because the loans they wrote in recent years have problems. Sometimes the issue is outright fraud, sometimes a mis-calculation of a formula, sometimes a missing document. The reason for the LQI is to reduce this activity in the future and create a more stable system, and that’s a good thing. That will work itself out for investors and bankers, for Fannie Mae, Freddie Mac and the rest.

What I find “curious” is the nature of the holes that the Loan Quality Initiative is aiming to fix. Here’s some of the issues they’re tackling:

  • Confirmation of Borrower Identity and Occupancy
  • Validation of Qualified Parties, and Borrower Credit Profile
  • Confirmation of Borrower Occupancy
  • Identification of Property Unit Number
  • Loan Delivery Enhancements
  • Validation of Loan Eligibility at Delivery

Reading down the list, with these, and other updates Fannie will only fund loans to people who actually exist, they’ll only do it with brokers and banks who aren’t on lists of crooks and incompetents, if you say you’re going to live in a house they’ll really be sure,… really, if it’s a condo they’ll make the loan on the right condo in the building or complex, and the loan that they fund will actually be a qualifying loan.

All systems and procedures have error rates. After all of the LQI initiatives are in place we’ll probably still be concerned about borrower identity and the rest. Still and all, it’s a sobering list. In my interactions with the mortgage industry as a customer the rules and the controls were paramount. At your closing you sign and sign and sign, document after document.

We were told that the mortgage process was solid. It wasn’t. We were told that BP understood deep sea drilling. They don’t. Many people are evoking the name of George Bailey from “It’s a Beautiful Life” lately. I often feel a bit more like another Jimmy Stewart character, Elwood P. Dowd….

May 12, 2010

But its legal!

Posted in Financial Markets, Social Commentary tagged , , at 10:02 am by Doug Brockway

This came across the e-mail today in a newsletter I read.  Its about the dealings of Goldman Sachs and their ilk in the mortgage market:  “It didn’t help, of course, that the rating agencies gave AAA ratings to many securities that were not AAA – even Enron carried an investment-grade rating days before it collapsed.”….

To me this is where one crux, at least, lies.  The sellers of CDO’s and buyers of related swaps overtly engineered high risk bonds to fool rating agencies’ standards and models and then used market pressure to get rating agencies to put their once good name on what may be legal but on the street corner is fraud.  The sellers invested a lot of time, days and weeks, in each security to do this and buyers, stupidly, made their decisions in minutes, not enough time to uncover the fraud.

My nephew the trader says they’re all big boys and should have known.  In “The Big Short” Michael Lewis shows time and again that when a bond trader calls you up to sell you something your first question is “how are they trying to f#%k me?”  But, as the hot market of the early 2000’s turned to the bubble of ’05-’07 we lost all honor among thieves.

Even if you say that’s OK, that it was “understood” (and I can’t get myself there, but leave that alone for a while), having that game played, and those risks taken based on those lies with post-Glass Stegal “main street” deposits, your and my bank deposits, is beyond disreputable.  When people suggest that its “legal” I think that so were the actions of King John,… technically….