Monday, October 10, 2011

Investment Banker Turned Rabbi Reflects on Occupy Wall Street

In the last 3 weeks, I have been to downtown to see the Occupy Wall Street protest twice to see what it was all about. I have seen countless friends and colleagues write and post about it and how it moved them. I watched an inspirational video of the large Kol Nidre service across the street from the protest.

However, while I can certainly appreciate people's frustration and the actions taken to make a better world, having worked on Wall Street as an investment banker for 2 years something felt very wrong. The tone of the signs, the messages of many videos online I felt vilified me and many of my former colleagues. The protests don't single out specific practices on Wall Street, but that the entire industry is an oligarchical tyranny ruining America. I thought back to my years on the Street and tried to think about what I did day in and day out for 2 years, was it really evil? Was it greed? Was it destructive to society at large?

Even though it is been 10 years since I left Wall Street and entered a profession that forces me to think often about moral issues, I concluded the answer to those questions was a resounding No.

And so, I want to write about what I did on Wall Street as an open letter for those supporting OWS to elicit a response as to what was wrong with what I did and if nothing why vilify lots of good people?

So, here is what I did on Wall Street and I'll let others comment if it was wrong, immoral or greedy?

I advised those in the mortgage servicing industry on hedge positions, mergers and acquisitions and valuations.

To explain in more detail what that means, I want to briefly explain a bit of history of the mortgage servicing industry and what the tasks I was performing accomplished and how it benefited the greater society.

When a bank makes a mortgage loan, they sell the loan in the secondary mortgage market to investors like Fannie Mae, Freddie Mac, etc. They also sell the right to service the loan to a servicing company. The servicing company does all the work for the loan going forward. They send the bills, collect the mortgage payment, they pay the taxes and insurance on the property, pass the payment onto the investor. They are responsible for foreclosures, collecting late fees, etc. In exchange, they get paid a service fee (usually between .25% and .75%) and keep any ancillary fees.

Servicing used to be done by small mom and pop shops operating in small suburban offices employing clerical middle class office employees.

That was until the mid-90s when the Financial Accounting Standards Board changed the accounting regulations for mortgage servicing in 1995 and 1996 with FAS 122 and FAS 125. What those regulations said was the mortgage servicers needed to account for the market value of their servicing rights. Here is what that basically means -- they need to list as their assets the value of the right to service their loans and if that value goes up or down they need to change the value on their books and recognize the gain or loss as income or a loss. But here's what happens, when interest rates go down, there is an incentive for people to refinance and pay off their old loan. If the loan is paid off, there is no more servicing right. What the new accounting law meant was that every time interest rates went down, services would have to show that they lost money even if people never actually paid off their loan.

Most mom and pop shops couldn't deal with it. They kept reporting losses as interest rates fell and were going out of business. Here entered the big commercial banks who had the sophistication to deal with this risk. They would buy offsetting financial instruments whose value go up when interest rates fell. Hence they hedged the risk of the value of their servicing rights declining.

My firm was hired by these commercial banks to advise them on which financial products to buy to hedge those risks. My job -- to crunch the numbers on the servicing rights and the hedges.

Furthermore, the accounting rules later mandated that companies prove the value of their hedges correlated to the actual value of servicing rights. My firm would help companies demonstrate this.

If we hadn't done this, servicers would go out of business. If there is no mortgage servicing, there would be no mortgages -- and people couldn't buy homes.

Still, mortgage servicing was still a losing business given all new accounting rules, and only a few companies felt they could go into it by building large economies of scale and hence there was a lot of mergers between servicing companies.

Again, we were hired to advise a fair price to either buy or sell a mortgage servicing company so that the buyer or seller would be paying or getting the appropriate price.

For me, this was an honest job. I went to work on time, tried to give the best advice to the firm's clients that was accurate, convincing and honest. For my work, I received a flat salary which while I am not allowed to disclose, I will say was a very middle class salary and not something that would even come close to what OWS calls the 1%. If the firm did well, we the employees who worked hard by providing good advice to our clients got to share in the firm's success with an annual bonus.

So, I ask those supporting OWS, what was wrong with my job?

I realize I only described one niche of what happens on Wall Street but I could talk about the value provided by many other good hard working people on the Street as well.

I can also now write how the services we provided lived up the highest of American values, and as a Rabbi Jewish values as well.


* Note -- some of the accounting rules mentioned in this post have been changed in the 10 years since I left investment banking.