Kucinich Urges Treasury to Strengthen Re-remic Oversight

http://kucinich.house.gov/News/DocumentSingle.aspx?DocumentID=147688

"Washington, Oct 1 -

Congressman Dennis Kucinich (D-OH) today asked Treasury Secretary Timothy Geithner to address the potential threat to the financial system posed by resecuritization of existing residential mortgage backed securities, informally referred to as ‘re-remic.’ Congressman Kucinich recently brought the matter to the attention of the Securities and Exchange Commission and uncovered that only $50 million of a $664 billion market is overseen by the SEC.


The Re-remic process takes previously issued residential mortgage backed securities and collateralized debt obligations whose value has deteriorated considerably, and repackages them into larger, more complex financial instruments in an attempt to create investment-grade products once again. Investors and analysts alike have stated concerns that re-remics could be used to hide toxic assets and manipulate capital requirements. In the letter, Kucinich called on Secretary Geithner to create a stronger regulatory framework to ensure that financial institutions are not continuing practices that led the financial system to the brink of collapse in 2008.


The full text of the letter follows:


October 1, 2009


The Honorable Timothy Geithner
Secretary
United States Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220


Dear Secretary Geithner:


On August 26, I sent a letter to Securities and Exchange Commission (SEC) Chairman Mary Schapiro expressing my concerns about the increased popularity of the practice of resecuritization of real estate mortgage investment conduits, informally referred to as ‘re-remic.’ Chairman Schapiro’s response and subsequent conversations with her enlightened me to the reality of the situation: of the total $664 billion resecuritization market (approximate), only $50 million in transactions have been seen by the SEC. The vast majority of re-remic transactions are exempted and, consequently, outside the purview of the SEC.


On September 30, the Committee on Oversight and Government Reform held a hearing entitled, Credit Rating Agencies and the Next Financial Crisis. During the hearing, I brought up the subject of re-remic and the potential threat these new and more complex investment vehicles pose for the financial system. Because the majority of the transactions fall outside the SEC’s jurisdiction, credit rating agencies bear the responsibility of investigating the safety and integrity of these complex products.


At the hearing, Ilya Eric Kolchinsky, former Managing Director at Moody’s, remarked, “I recently saw a (re-remic) proposed that had, to my view, no discernable economic value. Substantial costs would be incurred, but to my knowledge, there would be no value you added. To me, that is a sign that somebody is playing a game with some regulation somewhere.” Additionally, credit rating agencies are already downgrading re-remic that was rated investment grade less than six months ago.


I would also call to your attention an article appearing in today’s Wall Street Journal that raises the same concerns I have.<1> Referring to the practice as “financial alchemy,” the article warns that the practice of re-remic may be used to game capital requirements and that credit rating agencies--the majority of which operate under an ‘issuer pays’ model--are complicit in the scheme because of the substantial fees that they can collect.


Considering the SEC’s limited jurisdiction in this area, I believe the U.S. Treasury has a responsibility and obligation to intervene and to address the potential threat that re-remic poses to the financial system. Indeed, your mission charges you with “ensuring the safety, soundness, and security of the U.S. and international financial systems.”


The Treasury already has the regulatory authority to address this situation. I request that Treasury reconsider the regulatory framework governing the resecuritization of real estate mortgage investment conduits. Promulgating new, stronger, and more stringent regulations will protect the financial system and ensure that financial institutions do not employ re-remic as a way to game capital requirements or conceal toxic, non-performing assets.


I also request your assurances that Treasury will take all steps necessary to eliminate any exposure of the American taxpayer to re-remic that may be present in any initiative undertaken to support the financial system and provide liquidity to financial markets. Finally, I urge you to resist any efforts to expand the definition of eligible assets in any program to include re-remic products.


Thank you for your prompt attention to this matter."


Sincerely,

Dennis J. Kucinich
Member of Congress

http://online.wsj.com/article/SB125434502953253695.html

"A new wave of financial alchemy is emerging on Wall Street as banks and insurers seek to make soured securities look better. Regulators are pushing back, saying the transactions don't have enough substance and stand to benefit bankers and ratings firms.

The deals come as Wall Street firms, buoyed by surging markets, are seeking to profit from the unwinding of the complicated securities that helped fuel the credit crisis. Regulators, meanwhile, are struggling to prevent a recurrence of the crisis.

The popular deals are known as "re-remic," which stands for resecuritization of real-estate mortgage investment conduits. The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.

The net result is financial firms' books look better and they need to hold less capital against those assets, even though they are the same assets they held before the transaction.

Some state insurance regulators worry that current ratings are flawed -- perhaps even too harsh -- for determining the capital that should back up residential-mortgage securities. But they are chafing at the re-remic strategy. That's partly because of the fees and partly because re-remics rely on ratings firms -- faulted for failing early on to identify problems with mortgage-backed bonds -- to rate the new securities.

At hearings Wednesday on Capitol Hill focused on the ratings firms, U.S. Rep. Dennis Kucinich (D-Ohio) raised concerns about the mounting number of re-remics, saying, "The credit-rating agencies could be setting us up for problems all over again."

......"

They are borrowing money using bad assets (unless Standard and Poors has fired 99% of its staff) then borrowing more money with that borrowed money as collateral.

The house of cards is stacking up again, and none of these fucks outside of Kucinich is doing anything about it!

They know it. They WANT it to crash again so they can get ANOTHER bailout.

THEY DON'T WANT ANY GOV'T MONEY GETTING BACK TO THE *PEOPLE*. THEY WANT TO TAKE EVERYTHING OF OURS AWAY AND ENSLAVE US AND OUR CHILDREN.

You might say they wouldn't be so evil I would ask you to LOOK AT WHAT THEY *DO*...

I remember reading about some of the "new products" being introduced on financial sites years ago. Several people said it would end badly when they realized what junk had been purchased by pension funds etc.

Geithner better do a better job this time.

:(

:kick: & R

the single issue most likely to directly effect every American citizen for generations to come, and they will not hear.

in one way I can see why they want to repackage the products, but if the residential and commercial real estate markets turn down we might be hearing more about these products. Then again I remember reading about the exploding market in derivatives before they became a problem.

:shrug:


Toxic CDOs Given Up for Dead Coming to Life With Pension Funds
July 8, 2008

http://www.bloomberg.com/apps/news?pid=20601109&sid=a0TGMrBy2PyE&refer=exclusive

"...Few Bonds

While CDOs are backed by more than a hundred bonds, Re- Remics typically combine fewer than a dozen, allowing holders to more easily analyze the debt.

Holders of mortgage bonds use Re-Remics to separate better- quality from riskier debt. That increases the chance the higher- ranked debt will retain its AAA rating, enhancing its value enough to boost the total worth of the mortgage pool, said Doug Dachille, chief executive officer of New York-based First Principles Capital Management LLC, which oversees $7 billion in fixed-income investments...


...$370 Billion

Commercial banks and savings-and-loans held more than $370 billion of non-agency mortgage bonds on March 31, according to Federal Deposit Insurance Corp. data. Much of that can only be sold at fire-sale prices after record subprime-mortgage defaults and home-price declines sparked losses on the underlying loans.

``This is an attempt to shake things up,'' said Scott Kirby, who manages about $20 billion of structured-finance securities at Ameriprise Financial Inc.'s RiverSource Investments LLC in Minneapolis. ``There's a lot of paper floating around that's having difficulty finding a home.''

CDOs, once the fastest-growing part of the debt markets, tumbled to zero cents on the dollar and credit ratings on some AAA pieces were cut to junk levels..."



http://siliconinvestor.advfn.com/subject.aspx?subjectid=21259&LastNum=29383&NumMsgs=40

"...Banks are using RE-REMICS to protect against losses on residential-mortgage securities during the worst housing slump since the Great Depression.

About $27 billion of home-loan bond RE-REMICS have been issued this year, up from $17 billion for all 2008, according to a June 12 report by Bank of America Merrill Lynch. Re-REMIC stands for “resecuritizations of real estate mortgage investment conduits,” the formal name of mortgage bonds.

‘Make Magic’

The strategy is increasingly being used for commercial mortgage debt. Standard & Poor’s said on June 26 that it may lower the rankings on $235.2 billion of bonds backed by loans on properties such as office buildings and shopping malls.

Banks have issued about $2 billion of the debt in the last three weeks, according to Barclays Capital. That compares with $5.8 billion of similar offerings in all of 2008, Credit Suisse Group data show..."


http://siliconinvestor.advfn.com/subject.aspx?subjectid=54034&LastNum=104685&NumMsgs=40

"...Kaufman said he's optimistic about the recent string of deals because, unlike during the real estate boom, investors in these new bonds know what they're buying.

"We're back to financial engineering, absolutely," he said. "But I think it's being done at least differently than it was before the meltdown."

The sweetener at the heart of the deal is a guarantee: Investors who buy into the really risky pool agree to also take some of the risk away from those who buy into the safer pool. The safe investors get paid first. The risk-taking investors lose money first.

That's how the safe stack of bonds gets it AAA rating, which is crucial to the deal. That rating lets banks sell to pension funds, insurance companies and other investors that are required to hold only top-rated investments..."

http://kucinich.house.gov/News/DocumentSingle.aspx?DocumentID=146964

September 29, 2009


The Honorable Barack Obama
President of the United States
The White House
Washington, D.C. 20500


"Dear Mr. President:


In recent weeks, data coming out of the Census Bureau have revealed a disturbing trend of increasing economic insecurity throughout this nation. An article in today’s Cleveland Plain Dealer titled, “Ranks of the near-poor grow in NE Ohio, census data show” confirms what I have witnessed and what my constituents have been telling me for over a year: they feel they are being pulled toward the economic precipice. The foreclosure crisis has drained any equity in homes, jobs are precarious and can be lost at any time, and dollars that pay for less and less have to be stretched further and further.


As we approach the one-year anniversary of the bailout, it has become abundantly clear that our communities are not enjoying the fruits of the recovery that Wall Street has enjoyed. As the $787 billion stimulus continues to trickle out to states and localities, banks enjoy the enormous flow of billions of dollars in financial support from the bailout as well as trillions of dollars of spending and liabilities from the numerous initiatives of the Federal Reserve.


I believe the angst expressed throughout the country at health care public meetings over the summer reflects a larger, underlying concern about economic security. The private sector simply is not providing the jobs and economic opportunities for my constituents. The government must fill that gap. Our communities desperately need a massive jobs program focused on rebuilding our country’s infrastructure. I urge you to do more to reinforce the economic security of American families like those in Cleveland who find themselves being pulled closer to poverty. I urge you to sponsor a massive, WPA-style program to put millions of Americans back to work to revive our economy.


I commit to work with you towards this end. I further invite you to tour my Cleveland-area district with me to see first-hand the physical reality of poverty that the Census information reveals."


Sincerely,

Dennis J. Kucinich
Member of Congress

they are being questioned.

What we call an "economy" is too often speculation --

unless we reestablish the New Deal regulations/laws on capitalism/corporations --

and why haven't we done that already?????????????????

in the value of these products.

First time I read about derivatives was back in 2000 or so, but we know it just continued until the collapse in 2007. Best to keep an eye on this IMO.

:)

Looking back this sentence jumped out at me because of these new products being restructured from less attractive products.

http://contraryinvestor.com/moarchive2000/mo120700.htm

2000...

"...Behind The Curtain...In spite of being able to gain a brief peak into the world of US banking system derivative activities, a clear assessment of default risk cannot be made. Not only potential default risk, but more importantly, actual historical default experience. In the wonderful world of creative accounting, there is no disclosure mandate for derivative contracts that have been "restructured", have been rewritten as loans, and those accounted for on a "non-accrual" basis. Don't you just love bank accounting?


FWIW came across this as well from 2005 talking about the real estate market...and we know what happened. They have a free monthly article that I try to read and comprehend.

:)

http://contraryinvestor.com/2005archives/moapril05.htm

"...As you know, there are a number of pundits out there who have characterized the US economy as one big hedge fund. We won't go that far. But the fact that the structured finance markets are heavily driving credit availability for and ultimately prices of probably the single most important asset class in the US doesn't exactly warm our hearts. One last comment. The last time we saw the year over year change in OFHEO home price data at as high a growth rate level as was experienced as we ended 2004 was back in 1979. As you may recall, 1979 can be characterized as a period where there was no structured finance market. There was no derivatives market. My how times have changed. Could anyone even have imagined in 1979 that in 25 short years the US banking system singularly would be exposed to almost $88 trillion in notional value of derivatives contracts? Quite humbly, we think not. But what do we know? We still think folks should actually put down payments on homes they purchase. Sheesh!

The Weight Of The Evidence...We thought we'd leave you with one last chart concerning household asset class perspective. For now, residential real estate is about twice as meaningful to households in terms of size as a percentage of total net worth relative to equities. Never in modern US financial history has residential real estate meant so much to so many. And, as you know, never has the US residential real estate market been so dependent on large pools of speculative capital found in the asset backed and mortgage backed securities markets. Lastly, never have these speculative pools of capital been so dependent on the derivatives markets for the ability to continue to "create" liquidity. C'mon, US residential real estate is definitely not a house of cards. It's a house of paper. Seconds anyone?"

don't know if they actually mentioned the figures on derivatives . ..

I think the GNP is something like 14 TRILLION? Evidently the hedge/derivative thing

is something like $500 TRILLION PLUS!!!

Thinking about that is a good way to get a headache --

Didn't have time to actually study what you posted and hope I'm not too far off!

the first article is from 2000 about the rise of derivatives and the second from 2005 about the real estate bubble. Not sure what the current figures are, just wanted to point out it was being discussed way back when. Who could have known?

:hi:

:evilgrin: