Capital: A Means to an End
For ICCR members who began sounding the alarm about the dangerous risk-taking of “too big to fail” banks a decade before the crisis, 2011 will be remembered as the year their alarm was heard. In many ways, ICCR members’ work with top U.S. banks and the rating and regulating agencies of our global financial system has remained unchanged over the course of their 35 plus years of engagement: our focus has and will continue to be expanding access to capital and ensuring that the markets are fulfilling their original purpose of serving the common good.
But the “occupy” movement is clear evidence of a fundamental shift in the public consciousness around corporate power and the need to keep it in check. After a protracted and deep recession that has left millions struggling with unemployment and foreclosure and that is certain to reduce the opportunities of future generations, there is little public tolerance now for the gaming mentality and excessive compensation packages that have long dominated Wall Street for the benefit of so few at the expense of so many.
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A corporate capitalism such as ours that seems increasingly interested in enriching senior executives, and thwarting risk-curbing regulation all in the name of promoting business must be called to account by its owners: and that would be us. At a time when confidence in political assemblies, especially the US Congress, is at an all-time low, only a responsible citizenry can remind government of its responsibilities. Viewed this way, the 99 percent are exercising their rights as active owners of our democracy and their grievances can be seen as legitimate "shareholder proposals".
Watch "A Different Take on Derivatives from a Different Source"
Repurchase Markets
Seeing the potential risks of highly leveraged and little understood derivatives trades, ICCR members began raising the alarm with financial institutions in dialogues and through shareholder resolutions well in advance of the 2008 crisis.
Now members are concerned about another type of trade they believe, if not thoroughly understood and appropriately regulated, could be equally dangerous to market stability. A repurchase agreement, also known as a repo, is a contract to sell a security with an advance agreement to buy it back at a pre-specified later date. Treasury bonds and other government agency securities are the most common “collateral” in repo trades because they are considered “bullet proof”. Generally, repo traders use these markets to provide the liquidity they need to fund other speculative instruments. Repo markets involve voluminous flows of credit and even higher volumes of securities transactions to collateralize those flows. Without question, repo markets are very useful as they provide a key source of credit to the U.S. financial system and are especially critical in financing participation in U.S. Treasury and agency securities markets. But because of the interdependence these contracts create between major financial firms and hence, the risk of contagion in the event of default, repo markets are akin to the derivatives markets pre-Dodd-Frank, with all their inherent volatility and risk.
Read this handy guide to the Dodd-Frank legislation
Case in point: In October 2011, the major derivatives brokerage firm MF Global filed for bankruptcy when it used the repo market to finance its investment in sovereign debt securities. These repo transactions were not reported on MF Global’s balance sheet in its quarterly financial statement to its investors… with disastrous consequences. As concerned investors who foresaw the dangers of the derivatives markets well in advance of the 2008 crisis, we have filed resolutions with several banks asking for greater transparency around their participation in the repurchase markets.
Learn how the repo market works:
Foreclosures
Of all the repercussions of the 2008 financial crisis, perhaps none is felt as keenly as the loss experienced by millions of foreclosed upon homeowners. Regardless of who is to blame for the housing bubble and subsequent subprime mortgage crisis, the toll on our nation’s economy, the fabric of our communities and the health and well-being of so many American families has been immeasurable.
Almost immediately after the crash, accounts of widespread irregularities in foreclosure practices at large banks began to surface in the press. Revelations of “robo-signings” -- the execution of mortgage-related documents including foreclosures without proper authorization or verification of their validity -- began to emerge and with them, a rash of lawsuits by virtually every State Attorney General. Moreover, a federal interagency review completed in April of last year concluded that 14 of the largest mortgage servicers had foreclosure process issues so severe that it had “an adverse effect on the functioning of the mortgage markets” and posed “significant risk to the safety and soundness of mortgage activities.” And according to a 9/16/11 article in Bloomberg, Faulty mortgages and foreclosure abuses have cost the nation’s five largest home lenders at least $65.7 billion and new claims may push the industry-wide total to twice that amount.
Last year, calls for an independent review of mortgage lending practices received almost 40% shareholder support, a clear indication that investors view this issue as having an impact on the value of their shares.
Experts have testified to Congress that perverse financial incentives are a root cause of the problems because they discourage servicers from acting in the best interests of mortgage investors, as is required, resulting in a) wrongful and unnecessary foreclosures and b) costly mortgage repurchases from investors due to breaches of representations and warranties.
What ICCR members are asking is that banks do their due diligence and find reasonable alternatives to foreclosures rather than move immediately to take losses off their books. In the long run, we believe prudence around foreclosures is in both homeowners’ and the companies’ best interest.
