Thursday, September 1, 2011

Proposed deal between banks and NY regulator highlights Wall Street's information advantage

In its discussion of the proposed deal between the NY and the banks over mortgage servicing, the Wall Street Journal article highlighted Wall Street's informational advantage.

Specifically, the article lays out Wall Street's motive for purchasing mortgage loan servicers.  The motive was to access information that was not available to other market participants and use this data in their trading strategies.

As this blog has pointed out on several occasions, the data that was available from mortgage loan servicers was the current information on the performance of the loans.  This data was the equivalent of having tomorrow's news today given the fact that other market participants only received this data later in a once per month report.

Goldman bought Litton, a major servicer of subprime loans, in 2007 as house prices were tanking in a bid to gather data on the mortgage market and build a subprime portfolio. 
Goldman at that time was making bearish bets on the mortgage market and creating securities for investors who wanted to make bearish bets. 
But the market downturn meant the subprime business never turned into the profit center Goldman expected, and the firm decided last year to try to sell Litton.
Actually, Goldman made quite a bit of money in its trading strategies based off of the information it obtained from its investments in the mortgage origination and servicing areas.

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