Opinion

Felix Salmon

Canadian banking: The year in headlines

Felix Salmon
Dec 21, 2010 15:37 UTC

January 14: Cash-rich Canada banks shy away from acquisitions

September 15: Canada banks eye growth as capital shackles drop

December 17: Canada’s BMO buying U.S. M&I bank for $4.1 billion

December 21: TD Bank to buy Chrysler Financial for $6.3 billion

COMMENT

Bank regulations and sound banking practices are what keep our banks solvent but not sure this is the time to be doing this kind of acquisition.

I see the name Cerberus and run, myself, but being it is a separate entity to the auto industry, perhaps it has merit. I wonder what the carrot was to buy?

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Bad investment of the day, life-insurance edition

Felix Salmon
Dec 21, 2010 15:16 UTC

You’ve heard of robo-signers. Now meet the robo-doctor:

Dr. Cassidy said Life Partners paid him a monthly retainer of $15,000, plus $500 for every policy bought by Life Partners clients. That translates to $270,000 annual pay for part-time work that has brought him more than $1.3 million since 2002, Life Partners confirmed.

Dr. Cassidy, who declined to be interviewed, testified that he reviewed case histories three days a week for Life Partners and it sent him 100 to 200 cases weekly. That translates to 33 to 66 per working day.

At life-expectancy firm Fasano Associates, doctors review an average of six a day, said Michael Fasano, president. “These are complex medical histories of older people,” he said. Mr. Pardo said Dr. Cassidy is under no time pressure.

Dr Cassidy’s job is to come up with life-expectancy numbers for his boss, Mr Pardo, who then uses them to sell life-insurance policies at enormous markups to third parties:

In late 2005, a policy on the life of an 80-year-old California woman was available for purchase. Life Partners acquired the $1 million policy on behalf of its clients, paying $300,000, according to company filings in Texas.

It brokered the policy to the clients the same day for more than $492,000 plus five years of future premiums, an additional $58,000.

This spread is lower than typical. Mr. Pardo agreed with Journal estimates that on average, Life Partners sells a policy for about 2.4 times what the owner is paid.

Life-insurance settlements are a genuine asset class, but you certainly don’t want to buy one from Life Partners. As ever, the more liquid the investment, the less likely you are to be ripped off. One good question to ask is how much you could sell your investment for tomorrow if you bought it today. But as far as I know, there’s no secondary market in these things which is remotely accessible to individual investors, which is a big warning sign. As is the fact that the asset class seems to be plagued by scams.

The big warning sign at Life Parners is that Cassidy’s life-expectancy estimates were so low — generally in the 2-4 year range. Which makes the business look more like viatical settlements, where you buy insurance on the terminally ill.

I also wonder whether Cassidy has any actuarial training; the WSJ says only that he’s “a cancer specialist in Reno”. Most people intuitively underestimate the life expectancy of the elderly. Which is one reason why selling life insurance tends to be a better business than buying it.

COMMENT

Don’t forget that every one of us taxpayers now is invested in this junk. AIG used $8 million+ of life settlements to repay part of its loan from the US Treasury. Our pal, Geithner, seems to have no inkling of the huge risk or the many faces of fraud involved–including at AIG.

So now we taxpayers are invested in the deaths of our fellow citizens.

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Counterparties

Felix Salmon
Dec 21, 2010 05:32 UTC

“Heathrow’s snow team has been working for months to ensure the UK’s hub airport will once again be prepared for the onset of winter” — Google Cache of now removed press release

In praise of scientific error — Scientific American

Do you have “ideas on the importance of inclusive growth”? Do you want to go to Davos this year? Then go to YouTube — YouTube

COMMENT

and blue collar, white collar!

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How HAMP modifications are escalated

Felix Salmon
Dec 21, 2010 05:27 UTC

After publishing my post this morning about the way disputes are resolved in HAMP, I went back and forth with Treasury a few times. And it turns out that there’s much more to it than the Homeownership Preservation Foundation — although finding out exactly how it all works is basically impossible unless you know someone at Treasury. Transparent this is not.

As far as I can make out, HPF runs something called the HOPE Hotline. The hotline then passes callers through to counselors who are not HPF employees, but rather employees of counseling organizations, all operating under the rubric of MHA Help. The counselors often work together with the homeowner when dealing with the servicer.

If MHA Help gets nowhere with the servicer, the case can be escalated one more level to something called the HAMP Solution Center, or HSC. You don’t need to be MHA Help to escalate to HSC: government offices can do it too and sometimes other third parties acting on behalf of the homeowner.

Here’s where things start getting a bit surreal, though. According to a 24-page MHA Supplemental Directive from November, an Escalated Case is just given back to the servicer to be decided all over again — essentially, it’s escalated all the way back to the very entity which was being complained about in the first place. The servicer is required, under MHA rules, to have lots of ducks in a row when it makes the decision on the escalated case and it needs to make its decision within 25 days. But it’s still up to the servicer to make the decision. And once the servicer has made that decision, the escalated case is considered resolved.

Which helps to put this chart in context:

hsc.tiff

The chart comes from this document and shows the amount of time that servicers actually take to resolve an escalated case. None of the privately-owned servicers (GMAC is state-owned) seem to be able to hit the 25-day requirement, with BofA being particularly bad. And the crazy thing is that these are all cases that the servicers have already made a decision on.  If they were remotely competent, they should just be able to revisit their existing paperwork and check to see that the decision made sense.

Effective February 1, it’s going to get a bit tougher for servicers: they’re going to have to provide the escalations staff with information relevant to the case at hand, like the numbers they’re using for debt and income and the correspondence they’ve received from the the borrower. Expect the numbers in the chart to start rising at that point.

But for the time being, the only check on the servicers is coming from Treasury’s compliance agents — who happen to be a group within Freddie Mac called “Making Home Affordable-Compliance” or MHA-C. The next compliance report is being released on Wednesday; the last one is here. (See slide 11.) MHA-C doesn’t look at every escalated case; instead it looks at a sample of 100 cases and does a “second look review”. Sometimes it agrees with the servicer’s decision, sometimes it disagrees and sometimes it can’t make up its mind:

2lr.tiff

Wells Fargo stands out here as being particularly bad, although the bank conspicuous by its absence is Bank of America. We’ll see how they do when the new report comes out; they got a pass on this one because they were too busy engaging in “other compliance activities” to do the second look reviews there.

As far as I can make out, the only time that an impartial third party will ever arbitrate a loan-mod decision is if you’re lucky enough to be picked as one of the sample of 100 in the MHA-C review. In that case, if MHA-C disagrees with the servicer, the servicer basically has to go back and do it again, until MHA-C is satisfied; in the meantime, it can’t foreclose on the property.

But the overwhelming majority of homeowners looking for a loan modification will never come anywhere near an MHA-C review. Indeed, more than 29,000 homeowners have been stuck in their “trial” modification programs for over a year, even though the trials aren’t supposed to last for more than three months.

The whole thing is a mess, and it’s incredibly opaque: there’s no website explaining how it all works in plain English, with the aim of guiding people through the escalation process. But with Treasury seemingly happy to let the servicers make all the decisions, and even staff the board of the main helpline, it’s hardly a surprise that the HAMP process has been so very frustrating for so many people.

COMMENT

14401, I don’t know how that is possible. When you go to the closing, the bank’s lawyer hands you two copies of a stack of forms. You are required to initial every page of the one stack (and sign several of the more significant agreements). The other stack is handed to you to take home.

If anybody isn’t give that second stack, they should request a copy before they start signing. That’s what copiers are for.

Not sure whether a loan modification requires a settlement statement. It is (by definition) a modification of an existing agreement, not a stand-alone transaction. Four pages might suffice.

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A fiscally-unified plan for European defaults

Felix Salmon
Dec 20, 2010 22:13 UTC

There are basically two ways that the European crisis might end up resolving itself. Either the peripheral countries start defaulting, or else the eurozone becomes a fiscal union as well as monetary union. Both are politically unacceptable, of course. And George Soros, in a lucid column today, reckons that both might be in the cards:

The lack of a common treasury is now in the process of being remedied, first by a rescue package for Greece, then by creating a temporary emergency facility, and – the financial authorities being a little bit pregnant – eventually by establishing some permanent institution…

Structural changes may not be sufficient to provide the eurozone countries in need of rescue an escape route from their predicament. Additional measures, such as “haircuts” for holders of sovereign debt, may be needed.

Soros’s solution to the crisis involves recapitalizing the banks, and bringing them under a single European regulator. I like that idea—Europe’s banks have been far too leveraged for far too long, and Europe’s member states will always look forgivingly on their domestic institutions, setting off a regulatory race to the bottom. If a tough regulator can turn the banking systems in countries like Ireland and Spain into something strong and credible, that will help enormously in terms of reducing tail risk in the eurozone. And once that has happened, as Soros says, the banks should even be able to absorb a modest default from Greece or Portugal, and maybe even finance those countries’ recoveries.

When politics meets economics, politics always wins. Eurozone countries will only default when it’s in their political interest to do so; until then, some European institution or other will always be there, in extremis, to bail them out and provide the extra few billions needed to plug whatever budget gaps might be temporarily ineradicable. If you’re going to implement a fiscal union out of necessity that way, you might at least make a virtue of it by imposing a common set of banking standards at the same time.

COMMENT

When a soverign defaults there are always tricky questions about who gets what.

Think of our social security trust fund. The only “assets” held in that inpenatrable lock-box are non-transferable treasury bonds. I’m sure that there are similar accounting schemes in the weaker EU states. Will the goverments give their pensioners a haircut?

I think Warren Buffett was wise to move away from the Muni insurance business… voters in countries hopelessly in over their heads will always vote to export pain if that is possible.

I’m with you Felix… the world needs more equity and less debt.

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Beef of the day: Wallison vs Nocera

Felix Salmon
Dec 20, 2010 19:06 UTC

On Saturday, Joe Nocera aimed a well-deserved broadside at Peter Wallison, one of the Republican commissioners seemingly doing their best to scupper the work of the Financial Crisis Inquiry Commission. He said that Wallison’s theory of the genesis of the financial crisis is “not, as they say, reality-based,” and noted Wallison’s idiosyncratic defense of his position:

Mr. Wallison said he had seen documents, not yet made public, as part of his work with the financial crisis commission that would prove that he’s right and I’m wrong. Well, we’ll see.

This is silly: if Wallison had smoking-gun documents proving Frannie’s culpability in the crisis, I’m pretty sure we’d've seen them by now. Nocera and his co-author, Bethany McLean, have done a lot of digging into Frannie, and for the time being I’ll trust Nocera that such documents simply don’t exist.

But Wallison isn’t giving up, and has responded today with a blog post entitled “Joe Nocera’s Hypocritical Attack.” He adduces no hypocrisy in what Nocera writes. But he does repeat that he has a super-secret stash of documents which will back up his case:

The primer that I and three of my Republican colleagues signed sought to outline the major issues that we thought the Commission should address. It was not a reply to or a dissent from the report of the Democratic majority, which is still a work in progress. It was issued on December 15 because that was the date on which, under the law that established the Commission, its report was supposed to be issued, and the primer was released in recognition of this statutory deadline…

In our conversation as he was writing this article, he told me that his reporting “has shown that Fannie Mae and Freddie Mac simply followed Wall Street” into buying subprime and other risky loans. I told him this was wrong—that as part of the Commission’s work I have seen internal documents from Fannie and Freddie that show this particular mantra of the left to be a myth. For a reporter, that would have been a signal to hold his fire—a warning that there were facts out there of which he was unaware. I was telling him he should wait and see what I might write in connection with the Commission’s report.

This isn’t even internally consistent. If Wallison wanted to release his report in time for the December 15 deadline, why wait until January, long after that deadline passes, to reveal these facts? More to the point, Nocera has researched the financial crisis in detail—to the point of publishing an entire book about it—and has a job, as a newspaper columnist, where he’s meant to publish his opinions on the causes of the crisis. There’s no way that he should hold off on doing so just because a Republican hack like Wallison hints that he might have new information.

Indeed, Wallison’s language here shows just how weak his smoking gun is likely to prove: note that he talks about “what I might write in connection with the Commission’s report.” The word “might” is weaselly enough; the word “I” is the biggest giveaway, however — since if there really were compelling new information here, “we” would surely be writing it up in the main body of the report, instead of shoving it off into a Wallison-penned addendum.

Still, it’ll be interesting to keep an eye on Wallison’s blog after the FCIC report is published. Maybe then he’ll come clean, and point out exactly what information he thinks will change Nocera’s mind.

COMMENT

Merry Christmas all.

I agree that Wallison has taken or implied fundamentally the wrong attitude toward public debate. As I said in my blog, “If Nocera were writing about the causes of the outbreak of the American Revolution in 1775 it might be the case that there are still as yet unknown documents somewhere. That is not a signal to ‘hold one’s fire.’ Indeed, it should be an incentive to fire away — it may help in smoking out the new stuff.”

For my more complete discussion:

http://cfaille.blogspot.com/2010/12/fann ie-freddie-joey-and-petey.html

Thanks.

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How the mortgage industry polices HAMP

Felix Salmon
Dec 20, 2010 16:47 UTC

American Banker’s Kate Berry uncovers a stunning factoid today: the nonprofit Homeownership Preservation Foundation, the official body charged with resolving disputes over HAMP modifications, was founded by ResCap and to this day is run by GMAC and other finance officials from within the mortgage industry.

No one involved even bothers to dispute the conflict of interest, one of many that have plagued the Treasury Department’s Home Affordable Modification Program, or Hamp.

“Because we’re supported by the industry, are we really working for the homeowner?” asked Bruce Paradis, the foundation’s chairman, who retired as CEO of ResCap in 2007…

The group has trained 200 counselors specifically to deal with complaints from borrowers who have been denied modifications. The foundation’s 888-number is now listed on every denial notice sent to borrowers turned down for Hamp…

The group does not track the outcome of its calls, so there is no way to know whether borrowers were inappropriately denied a modification or how many disputes with servicers were ultimately resolved in favor of the borrower…

Some industry experts have questioned why a nonprofit affiliated with servicers is receiving government funding to resolve disputes between borrowers and the same servicers who are denying modifications.

The only problem I have with this story is the degree to which HPF actually does what Berry says it does. Yes, HPF employs hundreds of counselors, and it tries to warn homeowners about loan-mod scams. But what I can’t find on the HPF website is anything about being an “ombudsman”, in the words of the American Banker headline, or having any official power to resolve disputes with lenders in favor of the borrower.

Either way, there’s a big problem here. If HPF doesn’t have dispute-resolution authority, someone should, and it’s not clear who that might be. And if HPF does have that authority, it’s not prominently advertising the fact — and it shouldn’t be governed by people within the lending industry. That would seem to be obvious, to everybody except Treasury, anyway.

Update: Kate Berry calls with more detail. Basically, calling what HPF does “dispute resolution” is a bit of a stretch — essentially all they can do is counsel homeowners whose requests for a loan modification have been denied, and attempt to get those borrowers onto the phone with the servicer to hear exactly why they were denied. Those attempts are not always successful.

The problem here is twofold. A lot of the blame must be laid at the feet of Treasury, which has failed to create any kind of dispute resolution process for HAMP. And then a bit more blame should accrue to HPF, which has failed to lobby Treasury to get the powers it needs to really stand up for homeowners against incompetent servicers.

It seems clear that Treasury gave this contract to HPF because they weren’t anti-servicer. But it also seems clear that so long as servicers are in charge of doing loan mods, and are providing what little policing there is themselves, HAMP is going to have no real enforcement mechanism.

COMMENT

Are surgeons getting kickbacks from Medtronic?

Felix Salmon
Dec 20, 2010 16:00 UTC

The WSJ puts a lot of time and effort into its leders—those long, exhaustively-reported front-page exclusives about topics which might not be breaking news but which are still very important. So why is it that when a story is based on information found online, the WSJ still can’t seem to link to it? Today’s leder is a good one, about possible waste in the world of spinal surgery. But it could definitely do with a few hyperlinks:

Medtronic began releasing information about its payments to surgeons on its website in June, after coming under intense scrutiny from Sen. Charles Grassley (R., Iowa)…

Medtronic’s website shows that the company paid Dr. Vaccaro $1.28 million in royalties in the first three quarters of 2010…

Dr. Foley has had royalty-bearing agreements with Medtronic since 1996. The company paid him more than $27 million from 2001 to 2006, according to internal Medtronic documents reviewed by the Journal. On its website, the company discloses paying him another $13 million in royalties in the first three quarters of this year alone.

The failure to link to Medtronic’s website is part of what makes this story more confusing than it needs to be. There’s also a cryptic reference to a court ruling which is preventing the WSJ from printing everything it knows:

The Journal mined hospitals’ Medicare claims to see what proportion of fusions performed fall in this category. Due to a three-decade-old court ruling guarding the confidentiality of physician information, the paper is barred from disclosing what it found regarding the five Norton surgeons.

Critics of the court ruling and of the privacy policies of the federal Medicare program argue that making such information public would help taxpayers understand where their money is going, and potentially deter abusive or wasteful practices.

A couple of hyperlinks would be great here, too: which court ruling, exactly, are we talking about? And which critics? I’m sure their criticism is online, under their real names—so why not link to that criticism, rather than wave vaguely at it before moving on to something else?

The bigger problem is that the WSJ makes it very hard to separate two different stories. The first story is that Medicare is paying lots of money—$2.24 billion in 2008—for spinal surgeries, many of which might not be necessary or even desirable. The second story is that Medtronic is paying lots of money to a select group of surgeons who perform a lot of such surgeries.

The first story is reasonably clear, although it would have been helpful to compare Medicare with private-sector insurers: if everybody’s happily paying for these surgeries, then the problem doesn’t really lie with Medicare. The second story, however, is murkier. The WSJ is aggressive chasing it:

Corporate whistleblowers and congressional critics contend such arrangements—which are common in orthopedic surgery—amount to kickbacks to stoke sales of medical devices.

The official statements from both surgeons and Medtronic make the kickback allegations seem a bit of a stretch. But look how the WSJ follows those statements with an explicit reprise of the kickback theme:

Dr. Foley responded in an email that he doesn’t receive any royalties from Medtronic on devices he has contributed to when they are implanted in patients by himself, members of his practice or hospitals where he has admitting privileges.

Brian Henry, a spokesman for Medtronic, says the company applies that policy to all its collaborating surgeons, thereby eliminating the temptation for them to do more surgeries to earn more royalty income.

Two former Medtronic employees have alleged in separate whistleblower lawsuits that the royalty agreements are intended to disguise the fact that the payments the company makes to surgeons are really kickbacks for using Medtronic devices.

The paper says it “reviewed” a copy of one of the lawsuits—again, this is something it would be great for them to have posted. And more generally, it would be great to see some mathematics on the alleged kickbacks: how do the payments to surgeons compare to the profits that Medtronic makes from their work? Are the payments linked in any way to the number of surgeries they perform? What proportion of spinal surgeons get these payments? Is there evidence that surgeons getting paid by Medtronic use more Medtronic devices than their colleagues?

My gut feeling here is that Medtronic is quite deliberately paying large amounts of money to key spinal surgeons, who as a result become well-disposed towards the company and the kind of of surgery which involves its products. In turn, their enthusiasm spreads across their hospitals and their region as a whole, since these surgeons are senior, respected physicians who are emulated by their peers.

But that kind of thing is a kickback only in the most conceptual way: if the surgeons help to make a certain procedure more popular among their peers, then they’ll eventually get larger royalty checks. What I’m not seeing is any evidence that if certain surgeons funnel money to Medtronic by using Medtronic products in their operations, then some of that money ends up getting kicked back to them.

My larger problem with the WSJ story is that by concentrating on kickbacks and Medicare, it downplays the bigger picture—that surgeons around the country are getting paid millions of dollars by Medtronic and performing lots of unnecessary surgeries, with the cost coming out of everybody’s rapidly-rising health-insurance premiums. If there’s a scandal here, it would seem to be one endemic to the healthcare industry. I don’t understand why the WSJ would narrow its focus so specifically onto Medicare.

(Cross-posted at CJR)

COMMENT

If this is true, then what’s the big deal to a guy like Grassley? Isn’t it the free market taking care of health care? A system that needs no fixing?

I am not surprised that an arrangement like this would happen, where the interests of patients and taxpayers do not line up with those of the doctors and the medical equipment providers. My only question is which campaign contributor/future employer is Senator Grassley fronting for when he “investigates” this issue?

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Cuomo’s parting shot

Felix Salmon
Dec 20, 2010 13:51 UTC

Andrew Cuomo has decided, reports the WSJ, to file civil fraud charges against Ernst & Young in the waning days of his tenure as New York’s attorney general — news which has been received with delight by Yves Smith, on the grounds that it might strengthen a criminal case against Dick Fuld.

But what does this mean for E&Y, and for David Einhorn’s theory, as recounted to Andrew Ross Sorkin, that the government has held back on crisis-related prosecutions because of “an embedded belief that they did the wrong thing with Enron and with Arthur Andersen — the criminal prosecution, particularly of Andersen”?

One way of looking at the news is that Cuomo is stepping up where federal prosecutors fear to tread, and is filing the suit now precisely because he knows that if he doesn’t, the chances are that E&Y will suffer no consequences at all for the way that it signed off on Lehman’s books.

On the other hand, a civil fraud suit is not a criminal prosecution. Even if E&Y fights the charges and loses, it probably won’t find itself on the receiving end of the kind of criminal charges which brought down Andersen. Still, I’m sure that Cuomo’s office is doing nothing to downplay the contingent existential threat here, in its negotiations with E&Y.

So what happens once Cuomo moves to Albany? Will the U.S. attorney general, Eric Holder, pick up where he left off? It’s probably more likely that Cuomo’s successor, Eric Schneiderman, will take note of the way in which both Cuomo and his predecessor, Eliot Spitzer, used Wall Street prosecutions to boost their public profile in their quest to become governor. But in general, Cuomo seems to be by far the most zealous prosecutor out there. Without him, the number of crisis-related fraud charges is likely to dwindle sharply.

COMMENT

From experience…when the actions the government took caused the fall of ANDERSEN, many Partners and employees found other opportunities. However, the triage included those who “could not soldier on” because of age or health or previously retired.

Tragically, except for the individuals’ retirement funds that belonged to the individuals, the retirement funds administered by ANDERSEN were included in the windup of the residual organization.

The irony of the events…the Supreme Court of the U.S. overturned the decision against ANDERSEN. Now…the reputation of ANDERSEN must be restored.

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