New products - watch your operational risk management

It looks like some banks thought operational return was the only criteria. I understand there may have been more than one risk professional over-ruled by other department's desires to get new products with fat fees to market.

Perhaps an anonymous survey of risk personnel to see how many 'expressed reservations' that these new packaged products could come back to bite their institution, and were subsequently ignored.

Similarly the rash of refinancing during rate movements generated fabulous fees. In some cases the mortgagees were swapping to another brand backed by the same institution.

It was clear the products weren't adding value in the traditional sense, they merely facilitated off-loading risk and generating added fees. The bail-outs have merely taught banks that they could get away with it.

Perhaps there was a time when banks considered the value a transaction added, and not just to their immediate coffers. We've seen plenty of lip service to environmental ethics in recent FI marketing, however the old-fashioned business ethics were discarded with the old ties.

The 'Plan' governments have put forward mentions having regard for outcomes across borders and the like, but so long as the rules remain disjointed there will problems in a global economy. If uniform rules come out of this crisis we will all be much better off.

None of this gets us out of the current mess.

Some plans have been suggested which perhaps show an opportunity to do so without taxpayers footing the full bill. It's obvious the real estate market will collapse and that depression is inevitable if governments try to use traditional tools, no matter how forcefully or well intended.

Two veteran investment managers, Thomas H. Patrick, co-founder of New Vernon Capital, and Mac Taylor, a principal of the Verum Capital Group have suggested an alternative along the line of my own initial thoughts.

Mr. Patrick told the NY Times.“Our proposal is based upon the fundamental principle that the only way to ameliorate the problem is to somehow improve the underlying collateral. It rewards those homeowners who have paid their mortgages and have demonstrated financial responsibility.”

Their plan is is targeted at the pools of mortgagees at risk of  interest rate resets and issue new loans with fixed interest rates, currently 6.14 percent, and 30-year terms. Under this plan, Fannie Mae and Freddie Mac would issue debt to pay off the outstanding principal on the loans and then guarantee the new ones.

Investors who own the underlying interests in the mortgages would be fully repaid and the securitizations would be closed out.

Provided a complete collapse was averted, taxpayers would be not as bad off as under the current plan and homeowners would stay in their homes.

The Patrick-Taylor plan would provide about $385 billion infusion without a bail-out and would require banks to buy the $400 billion in delinquent securitized loans at full value, and carry whatever losses they incurred. It is likely to be less than under the current plan and  certainly less than the $1.1 trillion in mortgages outstanding.

Governments let the real estate and share dealing con-men run amok.

I have long though that encouraging speculation in ones own home  is both a bad investment and inviting disaster, especially if the interest rate is close to speculative.

I could never escape the economics that although I might enjoy increases in value, the better home I coveted up the street would have increased even more so. Better to invest my money in creating real wealth through adding value and using the profits to buy the better house. I have watched a generation gamble on the roof over their heads with the net result that they just owe more on whatever house they are in, expressed as a percentage of their income.

Spending borrowed money 'jazzing up' one's house merely adds to your pride initially. and then comes the fall when you have to pay it back. Better to invest your money in some enterprise that adds value, and can provide a return without the necessity to make yourself homeless to cash in. Of course that leaves out  google and the other lunatics out there who expect shareholders to be happy without a dividend. The only way you can get a return is to sell your shares? Way to go google contribute to the hot-air overheated market, and your shareholders are forced to time their sales with your hot air blasts which periodically pump up the share price? Didn't they use Her Majesty for the last or was it the "Will Googles Schmidt help out Obama and save the world?" rumour? Let's have the CEO of a one-trick-pony whose company relies on rampant speculation, spying on consumers and citizens and selling their data or providing it to non-democratic despot's and whose shareholders don't even receive dividends?

There's obviously one born every minute. Let's hope Obama isn't one of them.

Risk management is almost impossible in this environment.