April 8th, 2013

Mumble negotiable instruments mumble

As I was thinking about wisselruiterij and wechselruiterij [edited: whoops! wechselreiterei? I think?] and bills of accommodation and multiply endorsed checks and other negotiable instruments of varying degrees of reputability, I thought, mortgages!

Just to be clear: mortgages are _not_ negotiable instruments, altho they can be assigned if you do it correctly. So you would think, how could mortgages (or the Promissory Notes associated with them) be thought of in connection with those things I mentioned above? Well, they got securitized and assigned repeatedly in ways that violated the Commercial Code's rules about how the assignment is to be done (legible signatures! Just for starters), and they _behaved_ as if the parties involved (not the poor schmuck who signed the mortgage, mind you, but everyone else from the mortgage broker who sold it to them on up through the investors who bought a hot slice because it was guaranteed later one) all believed it was a negotiable instrument.

So which is it? Is it a negotiable instrument (which is how the financial system treated it as) or not (which the law oh so clearly says)?

It is Not, but the debate about whether it is or is not is interesting and important.

The argument in _favor_ of it being a negotiable instrument (beyond the "everyone else is doing it, mom! argument which I think we all can recognize as a steaming pile of #2, hopefully not human) is that the chain of assignation (<-- almost certainly not the correct term, but wouldn't it be cool if it was!?!) is so unclear for so many properties that if you don't let people who _say_ they hold the note foreclose on it than no one can ever foreclose again on that property and homeowners will strategically default (viz. stop making payments) because they'll know the holder of the note has no recourse. And then no one will ever write a mortgage again because, mess!

That's _actually_ worth thinking about, because it is not "everyone else is doing it, mom!", it's something infinitely worse: "My bad money has driven the good money away so you _have_ to accept the bad money."

So what are the alternatives?

Well, there are a ton of places to intervene. The simplest is to apply MASSIVE pressure on the note holders to negotiate with the people who owe on the mortgage: either figure out a short sale, or refinance and record it correctly or whatever. The problem throughout the boom were lenders who blew through all the things that were supposed to catch the debris when things went bad on the loan: the mortgage didn't get registered wherever deeds and liens are supposed to be registered (some of the state offices got famously backed up) and sometimes it was assigned multiple times without any notification showing up at the registry (lots of reason to believe a lot of these assignments didn't even _try_). The thinking in the industry was some form of, everyone else is doing it/it'll be such a mess they'll never clean it up/chicken won't be coming home to my roost, etc.

When teetering edifices of credit or debt instruments have collapsed in the past, however, English and American law has never actually accepted this sort of explanation. We _did_ clean it up, legislatively, judicially, administratively or otherwise (please find me a counterexample! Please!). Usually, in the course of cleaning up the mess, new rules and regulations are promulgated, some designed to make things more efficient, some to make sure everyone actually documents everything in an effort to limit fraud and/or make it forensically detectable after the fact.

Which is why I'm fairly certain I can be forgiven for temporarily thinking mortgages! when thinking about bills riding around on horses. Some of those mortgages _were_ riding around on horses, and some of those mortgages were complete with straw buyers and multiple assignments -- just like the Livesey bills.

And I will leave for the next post mumble guarantors mumble.

Mumble guarantors mumble

"Double your money, I guarantee it!"

There are a variety of responses to such an offer. You can try to get it in writing, to address the risks associated with enforcing a verbal contract and while writing things down is always a really good idea, the really great part of writing things down is not that you've improved your odds in court which is never where you want to be (unless, I suppose, you are being paid to be there as someone's lawyer, or the bailiff or judge or person recording it or whatever, in which case you have a Job and that is presumably Good). The great part of writing things down is that it forces everyone to actually think about the details of what they are agreeing to. When the writing-things-down part is turned into pages and pages of small type which you cannot adjust to reflect verbal negotiations, things have probably already started to breakdown, unless you are buying a Known Quantity from a Trusted Seller, in which case, who really cares?

Problems can arise if we get a little careless with the multiple pages of small type that everyone ignores, especially if we unwittingly wander in Less-Well-Known Quantity territory, and, worse, with an Unknown Seller.

For example, we are all accustomed to putting our money in banks (for suitable definitions of "we", "all" and "banks"), and we expect that we will get our money back, even if something awful happens and the bank goes under. When we weren't so sure about this, we were much more likely to go take all our money out of the bank (believe it or not, doing that is "demanding" our "loan" be paid back immediately -- deposits are loans, and other than time deposits like CDs, they are callable) which increased the fragility of the banking system. In order to keep things nice and orderly and predictable, we removed that piece of uncertainty from the minds of depositors, aka, lenders.

Alas, when lenders quit worrying about capacity to repay, they may loan unwisely in search of high interest rates or some other benefit promised by the person who wants to borrow the money/bank which wants you to deposit money in it. There's a moral hazard/tradeoff.

Iceland and Cyprus are very, very different places, but in both cases, the national guarantor of banking deposits was too small to fulfill on its commitments. That is, anyone depositing money in Icelandic or Cypriot banks was relying upon a guarantee from someone who lacked the capacity to deliver.

"Honey, I'd love to give you double your money, but I got nothin'." *shows empty pockets*

Should people who were putting money in Icelandic and Cypriot banks have thought of this ahead of time? That's a great question. If individual depositors in a bank are thinking about whether the deposit guarantee is valid or not, then individual depositors may become another weak element in a chain, another part of the flood for the exits when a financial system experiences a shock or displacement or wtf. We Do Not Want That. It's so bad, that you can't really do _anything_ if ordinary depositors are prone to runs.

Iceland's native depositors were "made good", however, British and Dutch depositors were repeatedly excluded from legislation (and these weren't tax evaders -- these were people using an online bank because it was convenient and cool). In the end, the British and Dutch governments made their people good, and then took the whole thing to bankruptcy court to get first in line for payment and they will get almost all if not actually all of the money back. Thus, the ripple across the complacency of individual depositors was prevented from becoming something destabilizingly disastrous.

Cyprus' legislature, oddly, attempted to protect its external depositors at the expense of its internal depositors. I suspect they did this because they needed to be seen to make the gesture, however, it's possible they Really Are That Sold Out. In the end, the German taxpayers and other citizens of the EU will be paying the cost of making Cypriot depositors below a certain level whole, and amounts above that level will lose about half of what they had. Of course, without a bailout, things would have likely been much, much worse for Cypriot depositors of all sorts.

The chattering classes really went out and worked the "don't scare the depositors" meme for a few days, and then they split in two, with some saying, "it's all good you can quit worrying" and the rest going, "oooh, capital controls. They are horrible". And there was the usual, unseemly, European Monetary Union was/is a bad idea!

But operationally, the European Union is, with all deliberate speed, doing what it should be doing. It is going, hey, we cannot leave it to the member states to provide deposit insurance AND allow national banks to grow their balance sheets with wholesale funding.

Honestly, it is at this point we should all find employees of Moody's and shake our fingers at them. _They_ are the ones who rated these banks as safe to give job lots of money to at low interest rates, which is what enabled them to grow such a ridiculously large banking system in the first place. Because the legislatures of Iceland and Cyprus, however shockingly incompetent they may be (both in letting this happen in the first place, and then refusing to cooperate in their own salvation, stoking the flames of public anger instead), are democratically elected, it does seem wrong to just root them out and replace them with a technocratic body.

But you can sort of see how people might be tempted, while at the same time recognizing what a terrible idea that is.

So here we are, in a world filled with paranoia and blame, but also in a world in which people are _leaving their money in banks_, because they believe they'll be able to get that money later, if they need it. They're even okay with that in Cyprus. This is a necessary thing, because no edifice of debt, whether stable and of high quality or teetering and filled with fraud, can be built on anything other than the balance sheet typically made up of the savings and working money of ordinary human beings doing ordinary things.

Don't worry about the guarantor of the money in your bank, as long as your bank is in your country and they have a deposit guarantee and your deposit is within the limits of that guarantee. You have better things to do with your time and energy and other resources, like worrying about your job or your kids or your car.

But think long and hard before relying upon the deposit guarantee of a country other than your own, especially when you're putting your money there for reasons that do not bear scrutiny.