RBS Settlement Highlights Need for Transparency Label Initiative
The Statement of Facts released as part of the $4.9 billion RBS subprime mortgage-backed securities settlement with the US Department of Justice makes a compelling case for the Transparency Label Initiative.
The securities involved in the settlement do not qualify for a label from the Initiative. Qualifying for a label requires a security provides the disclosure investors need to know what they own. These securities do not come close to meeting this requirement.
Regular readers know securities without a label fall into the “opacity as an asset class” category of investments. Investors recognize buying or selling these opaque securities is simply blindly betting and they should only do so if the potential return merits the risk of losing 100% of their investment. Blindly betting isn’t appropriate for most investors including non-profits, endowments, charities or financial institutions. A point made in the Statement of Facts by who took the losses.
The Initiative also recognizes blind betting does and will continue to occur. After all, we all like a good story. When it does occur, the Initiative’s labels can be used by investors to limit how much of their investment portfolio is exposed to blind betting.
With that background on the Initiative, let’s return to the Statement of Facts. This statement might be best summed up by its final paragraph:
Throughout the Deals (and over the course of 2005 to 2008), RBS’s executives showed little regard for their misconduct and, internally, made light of it. For example, after RBS’s Head Trader received an e-mail from a friend stating “[I’m] sure your parents never imagine[d] they’d raise a son who [would] destroy the housing market in the richest nation on the planet,” the Head Trader answered, “I take exception to the word ‘destroy.’ I am more comfortable with ‘severely damage.’”
I have written extensively in Transparency Games and on this blog about bankers misbehaving behind a veil of opacity. Yet this quote joking about severely damaging the US housing market still had the capacity to take my breath away. It is clear this individual thought he was immune from any personal consequences from engaging in bad behavior.
The sad truth is this person was right. Lead by the Committee to Save the Banks, bankers weren’t punished after the acute phase of the Great Financial Crisis hit in the fall of 2008. Instead, they effectively had their bonuses guaranteed by each countries’ taxpayers.
According to the Statement of Facts,
RBS, through its executives at its United States subsidiaries (“RBS Executives”), underwrote RMBS backed by home mortgages with a high risk of default, and then made false and misleading representations to sell those RMBS to investors.
The three most important words in investing are Trust, but Verify. By design, investors could not verify the story RBS told about the value of these securities. Hence the reason these securities could not receive a label from the Transparency Label Initiative.
Naturally, the story RBS told concealed the risk of the securities. As a result,
RBS earned hundreds of millions of dollars in underwriting fees and ensured that it received repayment of billions of dollars it had lent to mortgage lenders of the faulty loans underlying the RMBS, while simultaneously pushing the risk of these loans and billions of dollars in subsequent losses onto investors across the globe.
And then there were the investors who have no business investing in opaque securities and most benefit from only investing where the Transparency Label Initiative’s label is present. These
Investors who lost money in the Deals include, for example, non-profits, administrators of retirement funds, investment management companies that were investing on behalf of individuals and groups (including a retirement fund for a Midwest-based congregation of nuns that lost over 96% of its investment in OPT5), and financial institutions.
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