WTF is happening in Cyprus?!

This is crossposted from mathbabe.org. Opinions expressed are those of Cathy O’Neil.

One thing I kept track of while I was away was the ongoing, intensely interesting situation in Cyprus. For those of you who have been following it just as closely, this will not be new, and please correct me if you think I’ve gotten something wrong.

Background

Cyprus banks have recently gotten deeply in trouble, partly because of their heavy investment in Greek government bonds which as you remember were semi-defaulted on in spite of them being “risk-weighted” at zero, and partly because of an enormous amount of Russian money they hold (Russian businessmen enjoy lowering their taxes by funneling their money to Cyprus), which created a severely bloated financial sector.

To be fair, just having deposits of rich Russian businessmen doesn’t make you fragile. But it’s just not done in banking, I guess, to simply hold on to money – you have to invest it somewhere, and they invested poorly.

To get an idea of how bloated the finance sector is and how badly the banks were hurting, if the Cyprus government was to give them the money they need, it would be 70% of GDP, and they’re already about 90% of GDP in debt. Even so, that’s only 17.2 billion Euros, or a bit more than twice Steven Cohen’s personal fortune ($10 billion) even after his firm, SAC Capital Advisors, settled with the SEC for insider trading “without admitting nor denying wrongdoing”.

What are the options?

  • Do we ask the government of Cyprus to prop up the failing banks? Then it (the government) would be underwater and people would stop investing in its bonds and we’d need a bailout of the government. In other words, we’d just be handing the hot potato to the people.
  • Does the EU or IMF loan money to government to give to the banks?
  • Or to banks directly? Either way this would feel wrong to the northern European taxpayers, who would be essentially bailing out a bunch of Russian businessmen. Europeans are suffering from bailout fatigue, and German elections are coming up, making this even stronger.
  • Or do we make the banks deal with their solvency issues themselves? After all, their shareholders, bond holders, and depositors all represent money they have which they can theoretically keep.
  • Or some combination? Actually, all plans below are combo plans, whereby the banks make themselves solvent and then, after that, the EU/IMF team kicks in a few billion euros. Whether it will be enough money after the ricochet effects of the plan is not at all clear.

Plan #1: anti-FDIC insurance.

The plan as of more than a week ago was to take money from all the accounts as well as bond holders and shareholders. This included even the so-called insured deposits of accounts below 100,000 Euros.

So normal people, who thought their money was insured, would be paying 6.7% of their savings into a so-called “bail-in” fund, and people with more money in their accounts would be paying 9.9%.

This was across-the-board, by the way, for all Cyprus banks, independent of how much trouble a given bank was in. The banks closed down before this was announced so people couldn’t grab their money.

Compare that to the US version of a bailout from 2008, when shareholders got partially screwed, bondholders were left whole, deposits were untouched, but taxpayers were on the hook (and still are).

Plan #1 was baldfaced: it was saying to the average person in Cyprus, “Hey we fucked up the banks, can we take your money to fix it?”. It was incredible that anyone thought it would work. The ramifications of such an anti-FDIC insurance would be immediate and contagious, namely everyone in any related country would immediately start pulling their money out of banks. Why keep your money in an institution where you’re surely losing 7% when you can hide your money in a suitcase with only a small chance of it getting stolen?

Reaction by public: Hell No

Needless to say, the people in Cyprus didn’t like the plan. In fact, they strongly objected to directly paying for the mistakes of rich bankers and to protect Russians. They protested loudly and the Cypriotic politicians heard them, and voted down plan #1.

Plan #2

Since plan #1 failed, how about we just take money from uninsured depositors? Oh, and also make it bank-specific. So the banks that are in bigger poo-poo would seize more of their deposits than the banks that were in less poo-poo. That makes sense, and seems to be the current plan.

Problems with the current plan

There are a few problems with the new plan. But mostly they are what I’d call transition costs versus long-term problems. Easy for me to say, since I don’t live in Cyprus.

Rich people moving their money

First, rich people everywhere will no longer park lots of money in uninsured accounts in weak banks. Rich people have lots of options, though, so don’t feel too bad for them. They will instead put their money into lots of little accounts in lots of places, each of which will be insured. If this means they distribute their money over more banks, this is good for the banking system because it diversifies the capital and we’d end up with lots of biggish banks instead of a few enormous banks.

I’m not sure what the technical rules are, though. Say I’m stinking rich. Can I open 15 Bank of America accounts, each with $250K and so FDIC-insured? If I can’t do that for my local Bank of America branch, can I use Bank of America subsidiaries? Are the rules the same in the US and Europe? These rules are all of a sudden more important.

This is a transition cost, and within a few months all of the rich people will have their accounts insured or hidden.

Job losses

Second, there will be severe job losses in the bloated finance sector in Cyprus. Right now there are protests by workers from Laiki Bank, which is the worst off Cyprus bank, because they’re poised to lose their jobs. Again, it’s easy for me to say since I don’t live in Cyprus, but that’s what happens when you have an industry that’s too big – at some point it gets smaller and people lose jobs. I was around when the same thing happened to fisherman off the coast of New England, and it wasn’t pretty.

Again, though, it’s transitional. At some point the number of people working in banks in Cyprus will be reasonable. The question is whether they will have found another industry to replace finance.

Capital controls

Screen Shot 2013-03-28 at 8.22.22 AM

The banks re-opened today, and of course people are standing in line to get cash, but things generally seem calm.

The big problem for businesses in Cyprus is that various “temporary” capital controls (which just means limits on taking money out of the country and on taking money from your bank) have been put into place that may lead to long-term problems.

Update (hat tip commenter badmax): many Russians already took their money out before the capital controls were imposed.

Euros don’t flow into and out of Cyprus effortlessly anymore, so the so-called monetary union has been broken. Depending on how quickly those rules are removed, and how quickly Cyprus comes up with other things to do, this could be a huge problem for the country.

Take-aways

  • What’s become blatantly clear by following this process is that there is no actual process. Things are being made up as they go along by a bunch of economists and finance ministers. A lot of faith in their abilities was lost permanently when they hatched plan #1 which was so obviously stupid.
  • Going back to that stupid plan, whereby normal depositors were supposed to pay for the mistakes of banks at the expense of their insured deposits. It was so bald-faced that the citizens rebelled, and politicians listened. So just to be clear, there has been actual input by average people in this process. The economists and finance ministers have lost face and the people have found a voice.
  • This is not to say that the Cyprus people are sitting pretty. They are not, and by some estimates the economy of Cyprus is poised to contract by 20%. This may lead to more bailouts or Cyprus leaving the Eurozone for good.

March 17th meeting topics and announcements

Hey guys,
Holy crap a lot has happened in the past week. We can’t possibly talk about all the juicy details, but you know we’ll try!!
We’re meeting tomorrow, as usual, at Columbia University in Room 409/410/411 (whichever is open to us) of the International Affairs Building at 118th and Amsterdam (go into the building on 118th and go up the half-staircase directly in front of you past the elevators, and turn left twice into a side hallway). If you don’t know how we roll, details can be found here.
Let’s meet early tomorrow, at 2:00 in Room 409, to discuss May Day plans.
Announcements:
  1. Strike Debt is in the news.
  2. Occupy the NRA is having a protest on Monday.
  3. Dallas Fed President Richard Fisher is still our hero: watch him call the TBTF situation “crony capitalism”.
Annotated topics for tomorrow:
  1. SAC and the $614 million insider trading penalty. Can we do a complete top-down cost-benefit analysis of fraud on Wall Street now? Just how profitable is criminality when we think about it as a business plan?
  2. Cyprus is being bailed out by its people. They’re removing money out of savings accounts, kind of like a negative FDIC guarantee. That might encourage people to remove their money from banks. More likely it will encourage rich people to put their money in Switzerland.
  3. Expand Social Security instead of contracting it, says Barro twiceThe 401K experiment in the US is over, and people are removing money from their 401K’s in huge numbers. Are we finally hearing sanity emerge?
  4. JP Morgan’s whale loss is bolstering calls to end TBTF. They blamed bad VaR models and insufficient risk limits but since they manipulated both, fixing them won’t help. It’s also useful to think about fear of losing money versus greed in the context of the whale loss.
  5. The CFPB is looking into private college loan practices. Liz Warren is saying like it is on Republican attempts to defang the agency.
Please send me other topics. See you all tomorrow!
Love,
Cathy
p.s. it will be St. Patrick’s day tomorrow. I expect people to be dressed and to behave accordingly.

 

Is mathematics a vehicle for control fraud?

This is crossposted from mathbabe.org. The opinions expressed are those of Cathy O’Neil.

Bill Black

A couple of nights I ago I attended this event at Columbia on the topic of “Rent-Seeking, Instability and Fraud: Challenges for Financial Reform”.

The event was great, albeit depressing – I particularly loved Bill Black‘s concept of control fraud, which I’ll talk more about in a moment, as well as Lynn Turner‘s polite description of the devastation caused by the financial crisis.

To be honest, our conclusion wasn’t a surprise: there is a lack of political will in Congress or elsewhere to fix the problems, even the low-hanging obvious criminal frauds. There aren’t enough actual police to take on the job of dealing with the number of criminals that currently hide in the system (I believe the statistic was that there are about 1,000,000 people in law enforcement in this country, and 2,500 are devoted to white-collar crime), and the people at the top of the regulatory agencies have been carefully chosen to not actually do anything (or let their underlings do anything).

Even so, it was interesting to hear about this stuff through the eyes of a criminologist who has been around the block (Black was the guy who put away a bunch of fraudulent bankers after the S&L crisis) and knows a thing or two about prosecuting crimes. He talked about the concept of control fraud, and how pervasive control fraud is in the current financial system.

Control Fraud

Control fraud, as I understood him to describe it, is the process by which a seemingly legitimate institution or process is corrupted by a fraudulent institution to maintain the patina of legitimacy.

Once you say it that way, you recognize it everywhere, and you realize how dirty it is, since outsiders to the system can’t tell what’s going on – hey, didn’t you have overseers? Didn’t they say everything was checking out ok? What the hell happened?

So for example, financial firms like Bank of America used control fraud in the heart of the housing bubble via their ridiculous accounting methods. As one of the speakers mentioned, the accounting firm in charge of vetting BofA’s books issued the same exact accounting description for many years in the row (literally copy and paste) even as BofA was accumulating massive quantities of risky mortgage-backed securities (update: I’ve been told it’s called an “Auditors Report” and it has required language. But surely not all the words are required? Otherwise how could it be called a report?). In other words, the accounting firm had been corrupted in order to aid and abet the fraud.

“Financial Innovation”

To get an idea of the repetitive nature and near-inevitability of control fraud, read this essay by Black, which is very much along the lines of his presentation on Tuesday. My favorite passage is this, when he addresses how our regulatory system “forgot about” control fraud during the deregulation boom of the 1990’s:

On January 17, 1996, OTS’ Notice of Proposed Rulemaking proposed to eliminate its rule requiring effective underwriting on the grounds that such rules were peripheral to bank safety.

“The OTS believes that regulations should be reserved for core safety and soundness requirements. Details on prudent operating practices should be relegated to guidance.

Otherwise, regulated entities can find themselves unable to respond to market innovations because they are trapped in a rigid regulatory framework developed in accordance with conditions prevailing at an earlier time.”

This passage is delusional. Underwriting is the core function of a mortgage lender. Not underwriting mortgage loans is not an “innovation” – it is a “marker” of accounting control fraud. The OTS press release dismissed the agency’s most important and useful rule as an archaic relic of a failed philosophy.

Here’s where I bring mathematics into the mix. My experience in finance, first as a quant at D.E. Shaw, and then as a quantitative risk modeler at Riskmetrics, convinced me that mathematics itself is a vehicle for control fraud, albeit in two totally different ways.

Complexity

In the context of hedge funds and hard-core trading algorithms, here’s how it works. New-fangled complex derivatives, starting with credit default swaps and moving on to CDO’s, MBS’s, and CDO+’s, got fronted as “innovation” by a bunch of economists who didn’t really know how markets work but worked at fancy places and claimed to have mathematical models which proved their point. They pushed for deregulation based on the theory that the derivatives represented “a better way to spread risk.”

Then the Ph.D.’s who were clever enough to understand how to actually price these instruments swooped in and made asstons of money. Those are the hedge funds, which I see as kind of amoral scavengers on the financial system.

At the same time, wanting a piece of the action, academics invented associated useless but impressive mathematical theories which culminated in mathematics classes throughout the country that teach “theory of finance”. These classes, which seemed scientific, and the associated economists described above, formed the “legitimacy” of this particular control fraud: it’s math, you wouldn’t understand it. But don’t you trust math? You do? Then allow us to move on with rocking our particular corner of the financial world, thanks.

Risk

I also worked in quantitative risk, which as I see it is a major conduit of mathematical control fraud.

First, we have people putting forward “risk estimates” that have larger errorbars then the underlying values. In other words, if we were honest about how much we can actually anticipate price changes in mortgage backed securities in times of panic, then we’d say something like, “search me! I got nothing.” However, as we know, it’s hard to say “I don’t know” and it’s even harder to accept that answer when there’s money on the line. And I don’t apologize for caring about “times of panic” because, after all, that’s why we care about risk in the first place. It’s easy to predict risk in quiet times, I don’t give anyone credit for that.

Never mind errorbars, though- the truth is, I saw worse than ignorance in my time in risk. What I actually saw was a rubberstamping of “third part risk assessment” reports. I saw the risk industry for what it is, namely a poor beggar at the feet of their macho big-boys-of-finance clients. It wasn’t just my firm either. I’ve recently heard of clients bullying their third party risk companies into allowing them to replace whatever their risk numbers were by their own. And that’s even assuming that they care what the risk reports say.

Conclusion

Overall, I’m thinking this time is a bit different, but only in the details, not in the process. We’ve had control fraud for a long long time, but now we have an added tool in the arsenal in the form of mathematics (and complexity). And I realize it’s not a standard example, because I’m claiming that the institution that perpetuated this particular control fraud wasn’t a specific institution like Bank of America, but rather then entire financial system. So far it’s just an idea I’m playing with, what do you think?

Break up the megabanks already

Crossposted from mathbabe.org. Opinions expressed are those of Cathy O’Neil.

For the past few months at Occupy we’ve been focusing more and more on having a single message and goal. That has been to break up the big banks.

What’s great about this goal is that it’s a non-partisan issue; there is growing consensus (among non-bankers) from the left and the right that the current situation is outrageous and untenable. What’s not great, of course, is that the situation is so easy to spot because it’s so heinous.

Yesterday another voice joined the Break-Up-The-Big-Banks chorus in the form of an editorial at Bloomberg (hat tip Hannah Appel). They wrote a persuasive piece on breaking up the big banks based on simple arithmetic involving bank profits and taxpayer subsidy. Even the title fits that description: “Why Should Taxpayers Give Big Banks $83 Billion a Year?”. Here’s an excerpt from the editorial (emphasis mine):

…Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.

Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers — Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz — put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.

Big Difference

Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.

The top five banks — JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. – – account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

Next time someone tells me I want to take money out of rich people’s pockets (and that makes me a free market hater), I’m going to remind them that every time I pay taxes, 3 cents out of every dollar (that I know of) goes directly to the banks for no good reason whatsoever except the fact that they have the lobbyists to support this system. They’re bullies, and I hate bullies.

So no, I’m not suggesting we take honestly earned money out of the pockets of those who deserve it, I’m suggesting we stop stuffing insiders’ pockets with our money. Big difference.

But it’s not just money I object to – it’s future liability. There’s now an established track record of discovered criminal acts that don’t get anyone at the big banks in trouble. We are setting ourselves up for an even bigger bailout of some form soon, one that we taxpayers really may not be able to afford.

I think of the too-big-to-fail problem as like having an alcoholic brother-in-law who not only sleeps on your couch every night but also knows the PIN code on your ATM card. The money is irksome, no doubt, but what if that guy fell asleep smoking a cigarette and me and my kids die in the resulting fiery inferno? And it’s not that I think all addicts could be magically cured, but I don’t want them to have access to my personal stuff. Get them out of my house.

So can we break up the megabanks already? I’d really like to stop worrying about them because I have better things to do.

Pictures from yesterday’s HSBC protest

Crossposted on mathbabe.org. The opinions expressed are those of Cathy O’Neil.

Here’s a picture from yesterday (thanks Pam!):

HSBC_protest

This was near the end when some people had already left. We met on the steps of the NYPL as above but in between we went across the street and marched in front of HSBC, which was barricaded by the police. Indeed there were as many police, or more, as protesters. We chanted things like, “Stop and Frisk HSBC!” or “The banks got bailed out, we got sold out” but my favorite chant was a song Nick and Manny made up during the event:

Bankers and drug lords sittin’ in a tree

K-I-S-S-I-N-G

First comes love, then comes prrofit,

Then comes a settlement from the Justice De-partment!

Here’s a pic from the marching part with an appropriate Valentine’s Day theme (note the barricades behind the protesters):

HSBC_killed_love_pic

And here’s me with my sandwich board. The front (note the long line of police motorcycles behind me):

CATHY_HSBC_PROTEST

And the back:

Cathy_HSBC_back

Also check out Taibbi’s HSBC article from yesterday.

Occupy HSBC: Valentine’s Day protest at noon

Crossposted from mathbabe.org. Opinions that of Cathy O’Neil.

Protest with #OWS Alternative Banking Group

I’m writing to invite you to a protest against mega-bank HSBC at noon on Valentine’s Day (Thursday) starting on the steps of the New York Public Library at 42nd and 5th. Details are here but it’s the big green box on the map on the Fifth Avenue side:

Screen Shot 2013-02-11 at 7.13.43 AM

 

Why are we protesting?

Like you, I’m sure, I’d like nothing more than to stop worrying about shit that goes on in our country’s banks.

We have better things to do with out time than to get annoyed over enormous bonuses being given to idiots for their repeated failures. We’re frankly exhausted from the outrage.

I mean, the average person doesn’t have a job where they get an $11 million bonus instead of a $22 million dollar bonus when they royally screw up. Outside the surreal realm of international banking, the normal response to screw-ups on that level is to get fired.

You might expect a company that has been caught criminally screwing minorities out of fair contracts might be at risk of being closed down, but in this day and age you’d know that big banks, or TIBACO (too interconnected, big, and complex to oversee) institutions, as we in Alt Banking like to call them, are immune to such action.

There’s a clear evolving standard of treatment in the banking sector when it comes to criminal activity:

  • the powers that be (SEC, DOJ, etc.) make a huge production over the severity of the fine,
  • which is large in dollar amounts but
  • usually represents about 10% of the overall profit the given banks made during their exploit.
  • Nobody ever goes to jail, and
  • the shareholders pay the fine, not the perpetrators.
  • The perps get somewhat diminished bonuses. At worst.

The bottomline: we have an entire class of citizens that are immune to the laws because they are considered too important to our financial stability.

scarface_customer_criminal

 

But why HSBC?

HSBC is a perfect example of this. An outrageous example.

HSBC didn’t get a bailout in 2008 like many other banks, even though they were ranked #2 in subprime mortgage lending. But that’s not because they didn’t lose money – in fact they lost $6 billion but somehow kept afloat.

And now we know why.

Namely, they were money-laundering, earning asstons by  facilitating drugs and terrorism. This was blood money, make no mistake, and it went directly into the pockets of HSBC bankers in the form of bonuses.

When this years-long criminal mafia activity was discovered, nothing much happened beyond a fine, as per usual. Well, to be honest, they were fined $1.9 billion dollars, which is a lot of money, but is only 5 weeks of earnings for the mammoth institution – depending on the way you look at it, HSBC is the 2nd largest bank in the world.

dirty_money_HSBC

 

Too big to jail

And that’s when “Too big to fail” became “Too big to jail.” Even the New York Times was outraged. From their editorial page:

Federal and state authorities have chosen not to indict HSBC, the London-based bank, on charges of vast and prolonged money laundering, for fear that criminal prosecution would topple the bank and, in the process, endanger the financial system. They also have not charged any top HSBC banker in the case, though it boggles the mind that a bank could launder money as HSBC did without anyone in a position of authority making culpable decisions.

Clearly, the government has bought into the notion that too big to fail is too big to jail. When prosecutors choose not to prosecute to the full extent of the law in a case as egregious as this, the law itself is diminished. The deterrence that comes from the threat of criminal prosecution is weakened, if not lost.

HSBC_AD

 

National Threat

You may recall that there was an extensive FBI investigation of OWS before Zuccotti Park was even occupied.

As the Village Voice said, “apparently non-violent demonstration against corrupt banking is subject to more criminal scrutiny than actual corrupt banking.”

Question for you: which is the bigger national security threat back then, OWS or HSBC?

drug_lord_bank_of_choice_HSBC

 

We demand

HSBC needs its license revoked, and there need to be prosecutions. Those who are guilty need to be punished or else we have an official invitation to criminal acts by bankers. We simply can’t live in a country which rewards this kind of behavior.

Mind you, this isn’t just about HSBC. This is about all the megabanks. Citi or BoA are exempt from prosecution, too. Our message needs to be “break up the megabanks”.

I’ll end with what Matt Taibbi had to say about the HSBC settlement:

On the other hand, if you are an important person, and you work for a big international bank, you won’t be prosecuted even if you launder nine billion dollars. Even if you actively collude with the people at the very top of the international narcotics trade, your punishment will be far smaller than that of the person at the very bottom of the world drug pyramid. You will be treated with more deference and sympathy than a junkie passing out on a subway car in Manhattan (using two seats of a subway car is a common prosecutable offense in this city). An international drug trafficker is a criminal and usually a murderer; the drug addict walking the street is one of his victims. But thanks to Breuer, we’re now in the business, officially, of jailing the victims and enabling the criminals.

Join us on Valentine’s Day at noon on the steps of the New York Public Library and help us Occupy HSBC. Please redistribute widely!

cherub

Bank of America admits defeat as servicer of mortgages – good news or bad?

The views expressed herein are those of Cathy O’Neil, and they do not necessarily represent the consensus view of the #OWS Alternative Banking group.

Bank of America just sold a bunch of its servicing contracts to Nationstar holdings. Basically this is admission of defeat from Bank of America that it is incapable of acting as a services of mortgages.

On the one hand, it’s about time, and it might be tempting to think of this as encouraging news for people in mortgage messes – at least now the incentives for Bank of America won’t be directly against working out a lower principal, right?

Well… I asked a friend (and fellow occupier) who knows this market really well and here’s his response, which I’m blogging with permission:

The news is probably best for BofA shareholders.  BofA resolved a ton of liability for a relatively low price and is exiting an area where BofA is pretty incompetent that has caused them nothing but pain.

Seems like the Administration will also try to spin it as good news, though in truth BofA stuck Fannie with lots of bad loans and is paying only for a small portion of them, meaning taxpayers will bear most of the losses.

For borrowers – I don’t think the BofA settlement with Fannie will have much direct impact – it’s about breached rep and warrants, meaning the borrowers have probalby already defaulted and aren’t likely to be helped one way or the other.  Also, for the borrowers whose servicing is being transferred – servicing transfers are terrible and so many will experience screw-ups and some will probably end up in foreclosure as a result (a few eggs have to broken etc.).  There is no evidence that Nationstar or the other servicer are any better at servicing than BofA and Nationstar is effectively doubling with this servicing acquisition so borrowers there will probably be reporting similar problems in about a year.

Overall, the market is probably better off having BofA play a smaller role in the housing market, since they are so bad at it.  They are making moves to shrink themselves, which means they will be somewhat less zombie-like.  If concentration in the mortgage market goes down, the TBTF factor is smaller, which is a good thing.

Historically, however (using Citi as an example), BofA will shrink their zombie mortgage business right as housing is starting to recover.  Once the recovery is peaking, BofA will decide they have to be back in it and will flood the market with their mortgages right when the smarter lenders are scaling back, resulting in BofA ending up with another round of bad mortgages, which will lead to another bailout and/or zombie stage.