Dow at 16,000, government up and running and the first Single-Family Rental deal now safely in investors’ hands – we are in pretty good shape. As is our tradition here at, we present to you our nod to the stories and happenings that struck us as amusing or important. (Or both). (Or neither).

Sometimes, Even the Government Can’t Ignore Reality Award:

Of all the Dodd-Frank rules, the one that flew perhaps most directly into the face of reality was the Volcker Rule. Oh sure, the Volcker Rule had the benefit of being a terrific idea at 50,000 feet – with your glasses off and squinting into the sun – but it was never going to work. In fact, no one could ever articulate how it could work, and now as it gets closer to the point when it is supposed to be implemented (actually, well later than the time it was supposed to be implemented), even the government agencies responsible for implementing it are getting cold feet. Thank goodness. There is simply no way – let me repeat that – there is simply no way, to distinguish between the behavior which the Volcker Rule identifies as bad and the ongoing operational conduct of an international bank doing its day job of making markets. If it’s implemented, it will do far more bad than good. Of course, the regulatory community, with its customary sunny optimism, is still insisting the Rule will be finalized by year-end. With any luck, this Rule will continue to march only half the distance to the goal line. By the way, does anyone remember how proprietary trading really was the core cause of the financial crisis of 2008? No? That is because it had nothing to do with it. Some realities apparently are still easy to ignore.

The Insanity of Cherryland Award:

The ubiquity of GPS systems as a standard feature in automobiles has resulted in no one knowing how to get anywhere. You turn on your GPS system and your brain entirely stops working. Well, at least in my case it does. I am passingly concerned that I would follow my GPS over a cliff. The Cherryland case and its progeny capture the "Well I know it doesn’t make any sense, but that’s what I’m supposed to do" award for the suspension of any notion of common sense in jurisprudence. For those of you who have blissfully managed to forget this case, a court, confronted with a clearly non-recourse loan, concluded that some loose language in the borrower’s SPE covenants about maintaining solvency resulted in recourse liability. The loan was non-recourse only so long as the SPE could pay it back, right? Remember "Catch 22". You could only see Major Major when he was not in. The court decided that a plain, albeit nonsensical, reading of the loan agreement and the bad boy guarantee made the loan into a recourse loan. Now this can be fixed, and it will be fixed going forward, but why must we let automaton-like jurisprudence lead us to such dumb outcomes?

I’m Here from the Government, and I’m Here to Help You Award:

Certainly a spot on our Golden Turkey Awards must go to the general state of governmental dysfunction. Putting aside the whys and wherefores, the acrimony between the two halves of the US body politic, which have been broadly staring at each other for years across a no-man’s land that would put to shame any World War I battlefield, has caused our civil society to reach such a state of dysfunction and uncertainty that core structural aspects of our economy have begun not to work. This economy, which should be running like a racehorse, is plodding along in a dismal, anxious and annoyed sort of way. Every purported fix seems to make the problem worse because, frankly, the changing of the rules is itself the problem. This economy can’t function at anywhere near its potential with new rules being barfed up by governments at the current startlingly high rate. It can’t function where half the body politic wants to tax and coddle the population, embracing a French-like command economy, and the other half wants to reduce the size of government and rejoin the 18th century. Dear Lord, we’d better get back to the middle pretty soon.

Gravity is Just a Theory Award:

Throughout the world, an item of received wisdom is that paying bankers a considerable element of their compensation as variable pay was a driver of the financial sector’s near fatal love affair with excess risk. But hold on for a second. Broadly, don’t we generally like performance? Isn’t a high performance culture crucial for successful enterprises, both large and small? Isn’t that which drives our economy? And variable pay is a really good driver of performance. When an employee has to justify what he or she did during the course of the year, it focuses the mind most wonderfully, as Dr. Johnson would have said, on doing the job right. It strikes me as an entirely nutty theory that somehow paying bankers less variable pay will produce more prudent bankers. And banks need to attract and retain talent in a very competitive marketplace – so what do they do? They increase non-variable pay. What’s that do? It burdens the banks with very high compensation costs regardless of the performance of the bank or its team. And how does that make sense from a safety and soundness perspective, which is what we ought to be really concerned about? Secondly, various polities around the world are approaching this in different ways. The US has one view, the UK another, and the EC – oh boy – another. So, starting next year, banks subject to the jurisdiction of the European Community will limit bonuses to two times base pay. And they will impose those restrictions all over the world for banks domiciled within the EC. Anyone care to guess what’s going to happen here? How dumb is a flight of quality away from a bank based on this misdirected regulatory scheme? Never let it be said that a politician would let reality intrude into a good theory.

The ECB’s New Risk Assessment Initiative:

The Let’s Pretend Award: With fits and starts and with many contrary voices trying to be heard, the European Community continues to slog toward a goal of enhanced economic integration on the theory that it is a precondition to the promised land of more political integration. The baby step du jour is giving the ECB some level of supervisory authority over the 100 largest banks in Europe. Exactly what that authority is and whether the ECB’s powers will extend beyond jawboning these national champions is not exactly clear. But the ECB, quite prudently, said that before they embraced, and hence own, this mess, they wanted to go rummage through the balance sheets of these banks and assess the quality of their assets and their respective capital positions. Now, call me a cynic, but if history is a guide, the ECB is going to look at the assets and look at the markets at which those assets are carried, talk to banks and governments alike and conclude that they are just fine, thank you. And don’t forget the poster child for “let’s pretend”, the ECB, has already agreed that sovereign debt has no risk. None! Would you hire an analyst who thought that sovereign debt had no risk?

Zero Bound Interest Rates – Economic Crack Cocaine Award:

The various polities around the world have been busily debasing their currency and pouring liquidity into their respective markets in an effort to avoid … something bad. While one could have a robust debate about whether the early stages of quantitative easing and the shock value thereof helped stabilize economies back in 2008, we never weaned ourselves off of that drug as the economies around the world began to grow (albeit slowly). Who knows what happens long term in a zero bound interest rate environment? The answer? No one. Never been done. We are figuratively out there with 15th century European mariners staring at maps that say "Here be Dragons." One certainty in this analytic quagmire: we are at the point akin to where a junkie gets no high from his drugs but understands that withdrawal will be horrible. We’re not getting much from our zero bound interest rate environment right now in terms of growth, but boy oh boy is it going to be ugly going cold turkey. Unfortunately, sometime in the next several years, we are going to find out. My bet is that it won’t be a happy time.

Happy Thanksgiving from CrunchedCredit!

By: Richard Jones

Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Rick Jones Rick Jones

Richard D. Jones (“Rick”), Rick Jones is a capital markets and securitization practitioner highly rated by both Chambers, USA  and Legal 500.

A leader in the industry, a recipient of both the CREFC Founders Award and the Distinguished Service Award from the…

Richard D. Jones (“Rick”), Rick Jones is a capital markets and securitization practitioner highly rated by both Chambers, USA  and Legal 500.

A leader in the industry, a recipient of both the CREFC Founders Award and the Distinguished Service Award from the Mortgage Bankers Association (MBA) for his leadership.  Rick publishes widely and speaks on a wide range of issues effecting the capital markets and mortgage finance.  He is a past president of the CRE Finance Council; a founder of the Commercial Real Estate Institute (CRI); a member and past governor of the American College of Real Estate Lawyers and a former chair of its Capital Markets Committee; and a member of the Commercial Mortgage Board of Governors (COMBOG) of the MBA. Mr. Jones is a member of the Real Estate Roundtable, serving on its Capital and Credit Policy Advisory Committee. He also serves as the chairman of CRE Finance Council’s PAC.