January 13th, 2012
by Derek Miller and Jeff Miller
President Obama surprised many with an arcane political maneuver called a "recess appointment." There is a political imbroglio over this decision, which helps to maintain full employment for pundits!
Here at "A Dash" we wonder whether this has any implications for stocks. At the Wall Street All-Stars site where I have been contributing, one of our readers suggested that the Cordray appointment was good news for big banks. The hypothesis is that there might be a global settlement that would lift a cloud from the banks and allow them to trade on their strong fundamentals.
Veteran investors know that this approach has been important in asbestos, financial reporting, and tobacco. It is worth consideration. Meanwhile, there was a competing alternative -- the rumor of a secret Obama plan.
This is a great topic, but I did not have time to do the research and write it up (although I might have made a trade). Fortunately, the University of Illinois is on break, so I am able to call upon the talents of one of their Poli Sci students -- one who has helped us before.
Here is Derek Miller's analysis, with a few comments from Dad in the conclusion.
President Obama’s appointment of Richard Cordray (pictured above) to the top job at the Consumer Financial protection bureau has sparked significant controversy in Washington. While Republicans claim their pro-forma sessions technically keep the Senate ‘in session,’ White House lawyers (under President Bush) have determined that this does not prevent the president from making recess appointments. Based on this interpretation, it is likely that Richard Cordray will remain as the CFPB Director. Therefore, his history as Attorney General of Ohio and his probable agenda in the near future are of intense interest.
Cordray takes the helm of the CFPB with an aggressive agenda, seeking to target “nonbank” financial companies like money transfer agencies, credit bureaus and private mortgage lenders. In a January 5 article of the New York Times, Cordray was quoted to have said:
“Many subprime loans during the housing bubble were made by nonbank mortgage brokers. Since most of these businesses are not used to any federal oversight, our new supervision program may be a challenge for them. But we must establish clear standards of conduct so that all financial providers play by the rules.
Clearly, mortgage companies are sure to be a target of intense focus for the CFPB under Richard Cordray. Indeed, the CFPB was explicitly designed by the Dodd-Frank legislation to “monitor mortgage originators and servicers, which were instrumental in the financial crisis by providing subprime mortgages to individuals and families who were not able to afford them.”
In a recent Residential Mortgage Litigation & Regulatory Enforcement Conference, Indiana Attorney General Greg Zoeller commended Richard Cordray as “an excellent person to run the CFPB.” In fact, thirty-seven attorneys general sent a letter to the Senate in October of 2011 to urge them to confirm Cordray. This suggests an environment conducive to a global settlement, as there is widespread demand for clear regulatory guidelines on a federal level.
Global Settlement Potential
As a matter of fact, when Cordray was first selected to run the CFPB by the Obama Administration, it was speculated that the bureau would “have a role in getting to a final settlement and particularly in enforcing the mortgage servicers, over which it has primary oversight.”
CNBC real estate reporter Diana Olick elaborates on this theme by citing Edward Mills, a policy analyst from FBR, who notes the advantage Cordray could have as a former Attorney General. “As a former AG, he could use that to his advantage in the ongoing negotiations with the AGs…Beyond a settlement, what we would be looking for are updated disclosure documents that are easier for consumers to understand and a definition of what is a ‘qualified mortgage’ – which sets in place new consumer protections on all mortgages.”
In the video below, Larry Kudlow speculates that the appointment of Cordray is the Obama Administration's first step towards an election year bailout of the mortgage market.
Regardless of what you make of Kudlow's prediction, it is clear that Cordray’s background as an Attorney General – in particular given his statements on the mortgage crisis and the manner in which he has gone about prosecuting cases – highly suggest that his appointment as the Director of the CFPB is a step closer to a global settlement to the mortgage crisis.
[Thanks, Derek -- back to Jeff]
I saw an interview on CNBC this afternoon where the interviewers started with the political angle and the opposition of the big banks. When Cordray swatted away those challenges, citing recent conversations with Jamie Dimon and others, the questions quickly shifted to whether he was favoring big banks.
The exact causal path and reasons are still open to investigation, but the big mortgage-lending banks have shown relative strength this week.
Obvious candidates for this thesis include JP Morgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC) for starters.
We have been very cautious, underweighting financials, but we own JPM.
About the Author
Jeff Miller has been a partner in New Arc Investments since 1997, managing investment partnerships and individual accounts. He has worked for market makers at the Chicago Board Options Exchange, where he found anomalies in the standard option pricing models and developed new forecasting techniques. Jeff is a Public Policy analyst and formerly taught advanced research methods at the University of Wisconsin. He analyzed many issues related to state tax policy and provided quantitative modeling which helped inform state and local officials in Wisconsin for more than a decade. Jeff writes at his blog, A Dash of Insight.