Mortgage fraud and growing worries
MODERN psychology has not, I think, fully come to grips with the death drive in financial emails. People know they are not supposed to mention illegal stuff in their e-mails and instant messages and chat rooms and recorded phone calls. You can tell because, when they mention the illegal stuff in those electronically preserved records, they regularly also mention the fact that they're not supposed to mention it. What are they thinking? If you say illegal stuff in an e-mail at a bank, there is a good chance that it will end up quoted in a multibillion-dollar settlement, but if the same e-mail also discusses how you shouldn't put the illegal stuff that you just put in writing, in writing, then your chances increase dramatically. Like this person:
In a May 31, 2006 email, the head of Morgan Stanley's team tasked with doing due diligence on the value of properties underlying the mortgage loans asked a colleague, "please do not mention the 'slightly higher risk tolerance' in these communications. We are running under the radar and do not want to document these types of things."
Where do you think the radar is? The radar is an e-mail search program that looks for phrases like "we are running under the radar." I have to believe that at some deep unconscious level this person wanted to get caught. Anyway, the point here is that Morgan Stanley sold some residential mortgagebacked securities with a, shall we say, "slightly higher risk tolerance" than it advertised, those bonds went bad, there was a financial crisis, eight years passed, and now Morgan Stanley has settled with theJustice Department for $2.6 billion, New York for $550 million and Illinois for $22.5 million. With previous settlements, "Morgan Stanley will have paid nearly $5 billion to members of the RMBS Working Group in connection with its sale of RMBS." Here are the Justice Departmentsettlement and statement of facts, though I assume that all of the funniest emails are quoted in New York Attorney General Eric Schneiderman'sannouncement.
I know I said I wouldn't make this a recurring section; it is too depressing. But just quickly: "People are worried about negative interest rates. Scott Mather at Pimco: They "may pose more risk to the financial system than commonly understood." Tyler Cowen: "They're a sign that economies are trying to solve their core problems on the cheap." And here are "Four Legal Questions the Fed Would Face If it Decided to Go Negative."
"People are worried about banks, which are apparently in a "doom loop."On the bright side, though, Jamie Dimon "spent $26.6 million to buy shares of his bank Thursday after they tumbled to the lowest price in more than two years," some hedge funds are buying European bank stocks, and Pimco "reckons investor concerns about banks are overblown" and is buying bank bonds.
"People are worried about oil. International Petroleum Week was a grim affair; Bloomberg's headline is "The Oil Industry Got Together and Agreed Things May Never Get Better." And here is a Bloomberg Businessweek cover story about the connection between oil prices and the stock market; don't miss the cover illustration of a man in a suit doing something to an oil barrel that you probably shouldn't do to an oil barrel. (There's a Valentine's Day theme generally; the last paragraph quotes Barry White.) Reader Matt Lorig e-mailed to ponder whether the rising oil/stocks correlation may be due to algorithms based on historical correlations -- "Like once the correlation between equities and oil makes it into the code of a number of firms, it becomes a self-fulfilling prophecy." Maybe? I think of the Nevsky Capital letter arguing that "In such a world dominated by index and algorithmic funds historically logical correlations between different asset classes can remain in place long after they have ceased to be logical." Or the correlation could be perfectly logical; it could just be a worry about credit contagion, for instance: "Struggling oil and gas companies are maxing out revolving credit lines typically used to cover short-term funding gaps, raising fresh concerns about banks' exposure to the decline in energy prices."
In real hedge funds, it's mostly pretty grim. "Hedge funds recorded net investor capital outflows for the first time since 2011 in the fourth quarter amid market volatility." "Shares of Och-Ziff Capital Management Group LLC, the publicly traded hedge fund led by Daniel Och, lost more than a quarter of their value Thursday and hit a record low after the firm said assets declined and legal costs are likely to continue even after U.S. authorities resolve an ongoing investigation."