Friday, June 10, 2011

Irony or Hypocrisy?

Mendacity perhaps.

Through the Pension Benefits Guarantee Corporation (PBGC) the Government joined a lawsuit over pension management. The lawsuit claims Morgan Stanley advisers concentrated too much of a particular plan's fixed-income investments in mortgage-backed securities (MBSs). It alleges that Morgan Stanley "irresponsibly" put about 50% of the plan's fixed-income side in mortgage-backed securities, and between 9% and 12.6% in a "particularly risky" subclass of the securities.

The suit alleges that Morgan Stanley made this asset allocation even as it became aware of "rapid and dramatic deterioration" in the mortgage-backed securities market in 2007 and 2008. Does that mean the same asset allocation was OK in other years?

The PBGC contends that those levels exceeded the plan's investment guidelines. In court pleadings last year, Morgan Stanley said that representatives of St. Vincent, who established the pension, "authorized and were aware of" the specific investments that were made.

Yet, the same Government is after Goldman for allegedly shorting housing. Goldman contends the Government misrepresented a hedge.

Consistence at its best: long you’re bad, short you’re bad. Oh yeah; they’re different issues. What’s common is that the Government wants to make money from both. Now, who know what the real facts are? But, something smells fishy. Banks make money investing other people’s money. Not every investment makes a profit.

Remember that while not the same players, this is the same Government that chartered and guaranteed GSEs like Fannie Mae and Freddie Mac that could only invest in mortgages. Gee, a little long MBSs me thinks. It’s the same Government that placed GSE’s bonds high in the hierarchy of Banks’ regulatory capital structure.

Regarding the “particularly risky” subclass, it is the same Government that at the behest of HUD’s Secretary, Andrew Cuomo, got Fannie and Freddie to promise to buy $2 trillion of “affordable” mortgages (affordable being Government speak for low down payment and subprime). That puts HUD in the same role vis a vis the GSEs as Morgan Stanley played for St. Vincent.

It’s the same Government that decided that banks operating under the Community Reinvestment Act (CRA) could meet their obligations by buying up CRA loans (CRA loans often being those same affordable loans) or MBS built from CRA loans. It’s the same Government that let the GSEs operate with lower capital requirements than other financial institutions, and lowered the GSE’s Surplus Capital Requirements in 2008. For icing on the cake, some of the same players were involved.

People who live in glass houses shouldn’t throw rocks; is Government exempt from the glass house wisdom?

Funny thing about bubbles is they suck everyone in. You, me, governments, banks, pensions, you name it.

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