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Home Publications Blogs Beat the Press Gretchen Morgenson Is Right: Bankers Have No Shame

Gretchen Morgenson Is Right: Bankers Have No Shame

Sunday, 31 July 2011 21:22

Following the collapse of the housing bubble and the resulting financial meltdown, there was widespread agreement that securitzers should be forced to keep "skin in the game," meaning a stake in the mortgages they issued. Dodd-Frank included a requirement to this effect.

While many were arguing for a 10 or even 20 percent stake, the rules that came out from regulators is that they have to keep just 5 percent. Furthermore, the regulators exempted traditional 20-percent-down mortgages that have low risk of the fault. Banks need keep no skin in the game on those.

Naturally the banks are acting like this 5 percent stake will be the end of the world. They are yelling that this will exclude large numbers of people from the market. If bankers could do arithmetic (the evidence suggests otherwise), then they would know that this claim is absurd on its face.

The bank will still be getting a return on the 5 percent stake. They will just get a slightly lower return than if they could sell it. Let's assume that the return on this 5 percent stake is 40 basis points less than if they could sell it. That comes to 2 basis points or 0.02 percentage points for the mortgage as a whole. Is this going to result in large numbers of people being frozen out of the housing market?

Give me a break, this is garbage and Gretchen Morgensen was right to call them on it.

Comments (4)Add Comment
Another Evidence
written by JL, July 31, 2011 11:04

To show that to be good in grabbing all the money (good at being greedy), one needs to be shameless, short-memory on your own failures, and has no integrity.
Greenspan Skin Requires a Penalty Discount to Be in the Game
written by izzatzo, July 31, 2011 11:12
...widespread agreement that securitzers should be forced to keep "skin in the game,"...

Greenspan is way ahead of the pack on this one, declaring during the financial crisis that more skin in the game was the solution to the fatal flaw that caused it.

Just because he now asserts the reverse - that requiring more skin in the game causes a waste of resources - doesn't mean he doesn't believe it anymore.

It just means the skin in question has a pale yellow cowardly color that reduces its earning potential by 2 basis points.
written by skeptonomist, August 01, 2011 9:04
Yes, people will be frozen out - that's the whole idea. Cutting down the risk to the system means that home buyers who are likely to default will be excluded. In addition to buyers who are at risk because of low income, this will also include speculators (flippers), who buy homes with a negligible down payment, counting on an increase in price.

And cutting down bank and other lender income is also the idea, or should be.
Federal Reserve provided secret loans to US and foreign banks totaling $16.1 trillion
written by Scott ffolliott, August 01, 2011 11:55
"According to the Government Accountability Office's audit of the Federal Reserve released by Senator Bernie Sanders, the Federal Reserve provided secret loans to US and foreign banks totaling $16.1 trillion, a sum larger than US Gross Domestic Product (GDP). " Paul Craig Roberts

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.