Mort­gage fraud and grow­ing wor­ries

The Pak Banker - - OPINION - Matt Levine

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."

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