SEC should get tougher with BofA

Aug 11, 2009 21:23 UTC

In the Bank of America Merrill Lynch bonus imbroglio, the SEC has proposed a settlement in which, once again, the defendants neither admit nor deny wrongdoing.

Once again, the corporation would pick up the fine while responsible individuals escape uninjured. And once again, the public would be left wondering what actually happened. This isn’t justice, nor will it deter fraud.

These were the frustrations expressed by Judge Jed Rakoff in court yesterday. He refused to approve the settlement because he wants to know the truth: Who was responsible for misleading shareholders, and how did they settle on a fine of $33 million?

He told both sides to return to court with more details in two weeks. For the public’s sake, it’s a good thing he did.

In this case, it isn’t just shareholder’s money at stake. It’s taxpayers’. Our bail-out cash saved the bank, and we deserve to know what went on.

What the judge can accomplish isn’t clear. But the simple exercise of forcing the SEC to provide more details of its case would be very valuable.

The SEC’s eagerness to settle without naming names is particularly frustrating. It insists Bank of America, not executives, misled shareholders about Merrill bonuses by deliberately omitting relevant documents from its public filings.

But corporations don’t mislead, people do. And if shareholders were injured, why are they the ones paying the $33 million fine?

“It’s very easy to plea-bargain with shareholders’ money,” says Columbia law professor John Coffee. It’s a shame when the SEC allows them to.

A big problem is that the SEC needs to rethink its definition of success. A drive-by settlement that collects a token payment for fraudulent behavior which the other side neither admits nor denies accomplishes nothing.

Except, perhaps, leaving Bank of America CEO Ken Lewis and colleagues off the hook. They’d obviously prefer the matter went away, not least because more disclosure will provide fodder for private lawyers targeting their bank.

But as Georgetown law professor Donald Langevoort put it to me: “If people remain wealthy after they have engineered a fraud because of the way a settlement is structured, then neither justice nor deterrence is accomplished.”

To be fair, the SEC needs a much bigger litigation budget to go after the likes of Bank of America. But even so it has to be more willing to go to the mat in important cases like this, where it isn’t just shareholders’ money at stake. It’s ours.

COMMENT

The perpetrators should be held personally responsible for their misconduct. They have demonstrated that their word is worthless. BAC shareholders were induced by their fraudulent misrepresentation to vote for the merger. I want my vote back!
These self-interested people should be barred from serving in public companies because they are unethical. They ostensibly read then signed the documents. They remained silent and failed to correct the error to our detriment. It is their job to look out for our interests. For that they are well-paid.
Let them be accountable. The current settlement offer penaliizes the shareholders (decreased dividend) and customers (increased fees and interest). This is unacceptable because we did nothing wrong.
Thank you.

Posted by Pat Fox | Report as abusive

Afternoon Links 8-11

Aug 11, 2009 21:03 UTC

Food among the ruins of Detroit (Guernica)  Previously I linked to an article noting Detroit no longer has a single major grocery store within city limits.  Keeping that in mind we have this very interesting article.  One tidbit: “There is such a dire shortage of protein in the city that Glemie Dean Beasley, a seventy-year-old retired truck driver, is able to augment his Social Security by selling raccoon carcasses (twelve dollars a piece, serves a family of four) from animals he has treed and shot at undisclosed hunting grounds around the city.”

American graduates finding jobs in China (NYT)

The continuing threat of troubled assets (Congressional Oversight Panel)  More good work from Elizabeth Warren’s group.

China rising, rent-seeking version (Baseline Scenario)  This post from Simon is a bit scattershot, but his description of rent-seeking as it relates to American finance is well worth the read…

Madoff aide DiPascali pleads guilty (Reuters)  Apparently DiPascali told the judge that Madoff hadn’t made any trades for his accounts going as far back as the late ’80s.  We knew he hadn’t made trades in a long time.  But 20 years?  Wow.

Tough times in porn industry (LA Times)  Free content isn’t just killing newspapers…

The final days of Merrill Lynch (The Atlantic)  A decent piece.  Nothing really new that I saw.  But it tells the whole story, and how Paulson and Bernanke forced Lewis to go through with the deal.

Frustrated Russian throws cup at Mona Lisa (Reuters)

Zillow: U.S. Underwater mortgages may reach 30% (Bloomberg)

Fo drizzle? (imgur)

Best fake punt ever…

Judge Rakoff wants facts! Notes from yesterday’s hearing

Aug 11, 2009 00:54 UTC

Hopped over to courtroom 14-B at 500 Pearl Street yesterday afternoon where I saw Judge Jed Rakoff hammer SEC and Bank of America lawyers over the proposed settlement regarding Merrill Lynch bonuses.

The news is that Rakoff refused to approve the settlement.  He ordered the lawyers to get to the bottom of the “who/what/where” of the case, saying the settlement “seems to be lacking in transparency.”  He’s asked them to file briefs answering those questions on the 24th, and then responses on September 9th.

The hearing itself was very interesting.  Rakoff was clearly very skeptical of the arguments presented by both legal teams, which seemed rather unimpressive.

The judge wondered immediately why, given the “serious questions” raised in its complaint, the SEC wasn’t going after more facts.  If BofA and Merrill conspired to lie to shareholders about bonuses that had been agreed to when the merger was signed, then why isn’t the SEC trying to figure out who is responsible?  “Was it some sort of ghost?  Who made the decision not to disclose [the bonuses]?” said Rakoff.

David Rosenfeld, lead lawyer for the SEC, meekly replied that they haven’t made any allegations against specific individuals.  This clearly didn’t satisfy Rakoff who argued that to make the complaint, they “must have determined who physically committed these acts.”

[By the way, Rosenfeld struck a few of us in the gallery as badly prepared.  He seemed to stumble a lot, and the judge and court reporter repeatedly told him to speak up.  He wasn't familiar with specifics so frequently had to defer to another SEC lawyer.  Even though the hearing revolved around BofA's proxy filing, Rosenfeld and his team didn't have a copy of the document with them.]

So who led the merger negotiations when the discussion of bonuses came up?  The SEC offered two names: Greg Curl for BofA and Greg Fleming for Merrill.  Of which the SEC says it has only spoken to one: Fleming.

Were details of those negotiations circulated to top management?  Yes, Merill CEO John Thain and BofA CEO Ken Lewis were aware of them according to the SEC’s lawyers.

But according to BofA’s lawyer, Cleary Gottlieb’s Lewis Liman, they apparently weren’t aware of what was in “the disclosure schedule,” the document where bonus details were laid out.  That schedule was supposed to be attached to the SEC filing detailing the merger.  Conveniently, it wasn’t.  And of course that’s nobody’s fault.

Oddly, given Liman’s insistence that the proxy was very thorough, Rakoff didn’t ask him why the disclosure schedule wasn’t attached.

Rakoff also asked the SEC lawyers why the settlement is so puny.  A $33m fine for $3.6 billion worth of misconduct?  “Why isn’t this a grossly unfair amount?” he asked.  SEC lawyer David Rosenfeld seemed badly prepared for this question.  He cited the Wachovia/First Union case, saying that $37 million settlement was the right precedent.  Again the judge was skeptical, noting it revolved around $500 million worth of misconduct.  Here you have $3.6 billion.

More to the point, perhaps, Rakoff asked why the settlement is being collected from the corporation and “not from individuals responsible for orchestrating the misleading [SEC filing]?”  Rosenfeld mumbled something about the degree of misconduct, the need for deterrence and finding the closest precedent to justify the structure of the settlement.  As for going after specific individuals, Rosenfeld says he can’t.  The executives are all hiding behind attorney-client privilege.  The judge was not impressed with this excuse, noting that if BofA execs are asserting they relied on advice of counsel, which they seem to be, then they have to waive privilege.

Liman offered some pretty pathetic arguments of his own…

  • People shouldn’t have been surprised by the Merrill bonuses because the company had already accrued $12 billion for that purpose through Q3.

What do you do with this?  Merrill may have had an accounting entry saying they owed their people bonus money, but Merrill wouldn’t have lasted long enough to PAY the bonuses had it not been for bailouts.

  • He argued that $3.6 billion wasn’t a lot of money.  After all it worked out to an average of $91k per recipient.

“I’m glad you think $91k isn’t a lot of money,” retorted the judge.  And in any case, as NY Atty General Cuomo reported two weeks ago, nearly 700 Merrill employees got bonuses north of $1 million.  149 got more than $3 million.

  • Liman also trotted out the cliché about bonuses being necessary for “retention.”  To this Rakoff responded with the obvious: “how many banks were hiring people when the bonuses were paid?”
  • My least favorite defense argument was about the structure of TARP.  Since it came in the form of preferred stock, which has a fixed dividend, Liman argued its value wasn’t impacted by expenses like bonuses.

Liman forgets that besides preferred, TARP investments included warrants, essentially options to buy common stock.  Of course the common is impacted by expenses.

And how is the value of preferred stock not impacted when $3.6 billion is subtracted from the balance sheet?  That’s a lot less cushion protecting preferred stockholders in bankruptcy.  Not exactly a far-fetched scenario only a few months back.

  • Last Liman argued that no one could have been misled by the bonuses because they weren’t a surprise.  He waved his hands in the air suggesting it would be impossible to find anyone, anywhere in the press who didn’t expect Merrill employees to get incentive comp.  This is Wall Street(!) he protested.

Indeed it is.

COMMENT

I have read 8-10 articles on this court hearing and this is the best so far. I can’t help but wonder why the media gives the hearing and questioning such incomplete coverage? I hope that Judge Rakoff continues his common sense approach in a couple of weeks.

Posted by Fireman1979 | Report as abusive

Lunchtime Links 8-10

Aug 10, 2009 18:04 UTC

Spitzer vs. Blodget: The interview (Tech Ticker)  There are six videos.  See the bottom of this post for links to the other five.

Krugman’s “mission accomplished” moment (NYT)  I’ve take some liberties titling this link.  In the column, PK takes a bit of a victory lap, claiming we averted a Second Great Depression thanks to fiscal and monetary stimulus.  Once again, no discussion about the long-run negative consequences of not dealing with debt.  Thanks to these policies, we’ve put ourselves squarely on the Japanese path: a couple decades of stagnation, financed with stimulus and money printing, that may very well end more violently than if we’d just dealt with the problem late last year.

Deficit grew $181 billion in July (The Hill)  Krugman’s entire argument is based on the assumption of receptive bond markets.  Great, they’re still receptive.  And they may be for some time.  But is that a good thing?  Aren’t we just turning ourselves into California?

Banks make $38 billion from overdraft fees (FT)  On the one hand, banks need to recapitalize themselves and a big way to do that is by earning cash and keeping it on the balance sheet.  Arguing that banks should cap these fees because they’ve received bailout money seems a dangerous way of getting the government involved in banking.  We want the government OUT of banking.  We want banks to live or die on their own.  On the other hand, there’s a good argument to be made that overdraft fees are usurious.  They hammer the poor in a way similar to payday lending.   Is this just another case where the financially illiterate are being robbed blind?  A Consumer Financial Products Agency might have something to say on the matter…   (By the way, others including Felix have been on this story for a while.)

Cuomo orders dealers to stop deceptive cash for clunkers ads (oag.state.ny)

Freddie: TBW losses could be “significant” (CR)  “TBW accounted for approximately 5.2% and 2.7% of our single-family mortgage purchase volume activity for full-year 2008 and the six months ended June 30, 2009, respectively.” That’s a lot of mortgages folks.

Knob Creek embraces failure (failuremag)

Great resume (todayilaughed)  The details suggest this guy would be a good hire…

Cash strapped Cuba says toilet paper running short (Reuters)

squirrel

COMMENT

“Mission accomplished moment” sums it up pretty well . . . except that this mission is going to be a hell of a lot more expensive . . .

Posted by Apt604 | Report as abusive

Rosenberg: “Welcome to the era of consumer frugality”

Aug 10, 2009 16:16 UTC

Gluskin Sheff’s David Rosenberg on last week’s consumer credit figures.

U.S. consumer credit outstanding fell $10 billion in June, the fifth decline in a row during which the debt balance has shrunk $60 billion or 5.5% at an annual rate.  Both figures are unprecedented.  As the chart below shows, the YoY trend, at -2.8%, is also running at its steepest contractionary rate in over five decades.  Welcome to the new paradigm of savings, asset liquidation and debt repayment [in] the era of consumer frugality. After 20 years of living beyond their means, American consumers will be spending the next several years living below their means, and no, this will not be the end of the world, but it will put a firm ceiling on overall demand growth for some time to come.

Here’s the chart to which he refers (click to enlarge in new window):

rosenberg-consumer-credit-growth

The chart depicts the growth of consumer credit.  Not the total level.  Consumer credit isn’t actually contracting unless the line goes below 0%.  And this excludes mortgage debt.

The data on consumer credit is here.

So is consumer credit too high?  I suspect it most certainly is.  But to make that normative judgment, you have to compare credit to something like disposable income or household net worth.  I’m working on putting that data together.

Lunchtime Links 8-9

Aug 9, 2009 16:41 UTC

MUST READ — Paulson’s calls to Goldman tested ethics (NYT)  Grethchen Morgenson got copies of Hank Paulson’s call schedule via a Freedom of Information Act request.  Paulson swears he had nothing to do with the Fed’s rescue of AIG and the $13 billion worth of bailout money that Goldman received for contracts it had with AIG, but he made absolutely sure to seek an “ethics waiver” to speak with Goldman CEO Blankfein on Sept 16th, the day AIG was bailed out.  “At the height of the financial crisis, Mr. Paulson spoke far more often with Mr. Blankfein than any other executive, according to entries in his calendars.” 24 times between Sept 16th and Sept 21st.  And that’s just on his office phone.  It doesn’t include calls Paulson might have made from his cell or home phones.

Shares in RBS plunge as bank warns of tough years to come (Independent, ht I-o-M)  Europe’s largest bank by assets warned that the next five years are going to be ugly:  “Even if the economy starts to turn up the headwinds will be formidable,” [the company's CEO] warned. “The green shoots are short in duration and you need to be cautious about interpreting them. Even if growth returns, unemployment will rise for some time afterwards and [loan] impairments will rise. It will take five years for this bank to be in the state that we want it to be in.”

Deficit climbs to $1.3 trillion (AFP)  That’s through the first 10 months of the fiscal year ending October 1st.  It’s $880 billion higher than last year’s deficit at the same time.  By the way, despite his calls to “get the deficit under control” Tim Geithner formally requested Congress raise the debt ceiling above $12.1 trillion, saying we should breach that level in October.

“GS Sustain” (Goldman Sachs)  Check out “The Economics of Climate Change” feature on Goldman’s home page.  Click through to “read the research,” and there’s a video full of investor jargon about what “sustainability” means for Goldman.  Of course there’s no mention of the hundreds of billions to be made trading carbon under the proposed cap & trade system…

Russian debt cheaper to insure against default than California debt (Bloomberg)  Wow.  Money is pouring back into the markets, taking all sorts of risks that probably shouldn’t be taken.  Call it the ’01-’04 redux.  As Greenspan dropped rates to 1%, portfolio managers had to take bigger risks to squeeze out higher returns.  That’s a big reason the world blew up in ’07/’08.

Deleveraging the U.S. economy (Comstock Partners, ht NC)  Some very helpful charts at the top of this post.  More evidence that deleveraging has only just begun.

Video helps clear convict of abuse after 21 years (MSNBC)  The witch hunt ’80s prosecutions of suspected child molesters continue to unravel.  This episode was one of the worst examples of prosecutorial misconduct in American history…

Ex-employees claim Blackwater pimped out young girls (RawStory)  Skip the article and watch the video at the bottom.  Keith Olbermann reports on the sworn declarations of former Blackwater employees.

Daylight savings exacerbates global warming (IMGUR)  I can’t believe the Arkansas Democrat Gazette, a real newspaper, would actually publish a letter to the editor like this.  I notice too that they misspelled “warming” in the headline…

Must have for every office (inquisitr)

Personal WTF moment:  Has anyone else seen the new Scientology commercials?  I saw two on TBS yesterday.

Wait for it…

Cat vs. pillow.  Cat loses….

COMMENT

GOOD NEWS!!! There is finally a great new movie out about market manipulation, the SEC, and short selling called: “Stock Shock.” For those of us that want to understand some of the inner workings of the market, it is a must-see. Very easy to understand and entertaining. Amazon has it or stockshockmovie.com has a trailer.

Behind Freddie’s “profit,” rising NPAs

Aug 8, 2009 15:38 UTC

Late yesterday Freddie Mac surprised markets by reporting a profit and by not requesting additional bailout money from Treasury.  Before we celebrate, however, let’s consider a few revealing footnotes from the company’s quarterly filing.  But first, some key financial ratios.

As you can see, non-performing assets are still rising quickly.  (Click table to enlarge in new window)

slide11

As for the filing footnotes, we see that Freddie’s profit line got a big assist from FASB’s new fair value accounting rules:

Q2:

… the company recognized $10.5 billion in total other-than-temporary impairments of AFS securities. Included in this amount were $2.2 billion of credit-related impairments recognized in earnings …. Also included in total other-than-temporary impairments were $8.3 billion of non-credit related impairments that were recognized in accumulated other comprehensive income (loss) (AOCI).

Q1:

During the first quarter of 2009, prior to its … adoption of the new accounting standard, the company recorded $7.1 billion of security impairments on its AFS securities in earnings, reflecting both credit-related and non-credit-related impairments.

Overall, accounting changes increased equity $5.1 billion according to Freddie..  Higher equity equals higher net worth.  As long as the company maintains positive net worth, Treasury doesn’t have to provide more bailout funds.  Freddie’s total bailout to date, by the way, is $51.7 billion.

What FASB giveth, it can also taketh.  Revisions to other accounting rules will require Fred to bring off balance sheet assets back onto the balance sheet:

Upon the adoption of SFAS 166 and SFAS 167 [on 1/1/10], we will be required to consolidate [off balance sheet assets] in our financial statements, which could have a significant impact on our net worth. Such consolidation could also significantly increase our required level of capital under existing capital rules …

I doubt the significant impact is going to be positive.  And remember, whenever Freddie’s net worth goes negative, that triggers another bailout payment from Treasury.

As for any talk that Fan and Fred will be wound down over time, that’s certainly not in the near future.  You can see in the table above that the company’s portfolio of mortgages is not shrinking.*

—-

*Including non-Freddie securities, the total mortgage portfolio would have shrunk 0.3% Q2 vs. Q1.

COMMENT

Rolfe: I enjoy reading your postings!
I thought Fannie and Freedie have balance sheets and guarantee Agency RMBS securities. What constituits their off balance sheets assets? Also, because they are in Conservativeship, are the taxpayers also ultimately on the hook for the Agencies off balance sheet assets/liabilities?
Thanks

Posted by Rich | Report as abusive

Beware the government’s job figures

Aug 8, 2009 06:05 UTC

In a phone conversation yesterday, John Williams at Shadow Government Statistics warned me not to read too much good news from the better-than-expected jobs figure.  The government’s seasonal adjustments aren’t, well, adjusting properly.  They’re still keying off “typical” fluctuations in employment.  But of course today’s economic climate is anything but typical.  Yesterday the official unemployment rate ticked down a tenth of a percent to 9.4%, but according to Williams it should have ticked up a tenth of a percent to 9.6%.

There are big seasonal changes in employment that the Bureau of Labor Statistics corrects for in order to reduce the volatility of the unemployment rate.  For instance, each year employment spikes ahead of the holidays as companies add workers, and then drops as those workers are let go.

July usually sees a regular pattern of planned automobile production line shutdowns to accommodate retooling for the new model year, but recent disruptions to the auto industry have changed pattern this year. Without the usual pattern of shutdowns, the government’s computers nonetheless responded by creating the usual offsetting boost in jobs, not only in the auto industry, but in supporting industries as well. The auto industry itself was alone among durable goods manufacturing industries in showing a reported, seasonally-adjusted monthly gain in July, up by 28,000 jobs.

Besides bad seasonal adjustments, Williams has problems with the so-called “birth-death” model, which “adds a fairly consistent upside bias to payroll levels each year, currently averaging 76,000 jobs per month.”  The genesis of the birth-death model was after the early ’80s recession, when employment figures didn’t catch jobs being added by new small businesses.  However, when a company like Taylor Bean & Whitaker stops reporting its stats, say because all employees were fired en masse, BLS assumes the company is still in business.  (For how long, I’m not sure)  The bottom line is that, in recessions, you’re losing more jobs from failing businesses than you’re gaining from emerging ones.  Hence the upward bias of the model during recessions.

But according to Williams the biggest problem with the official unemployment rate—”U-3″ in BLS parlance—is that it excludes both the underemployed and workers who have become “discouraged” and stopped looking for work:

During the Clinton Administration, “discouraged workers” — those who had given up looking for a job because there were no jobs to be had — were redefined so as to be counted only if they had been “discouraged” for less than a year.  This time qualification defined away the long-term discouraged workers.

Add all the underemployed and the disappeared and you have Williams “alternate” measure, which pegs unemployment at 20.6%, not 9.4%.

For more of Williams work, I recommend a subscription to SGS.

And for more on the unemployment rate, check out this helpful post from EconomPic Data.

COMMENT

http://www.shadowstats.com/alternate_dat a is correct. Plus, the recent stock market rally, is being funded by the Fed. Those who are saying the worst is over, are lairs. O had a chance to make real change, but he sold out to Goldman. Nothing has changed, and things are just going to get worst. Save your money. An economy based on buying things we don’t need, is doomed to fail.

Posted by Rick | Report as abusive

Bank Failure Friday

Aug 7, 2009 23:07 UTC

Looks like Corus will survive the night.  So far there have been three failures.

#70

  • Failed Bank:  First State Bank, Sarasota FL
  • Acquiring Bank:  Stearns Bank National Assoc., St. Could MN
  • Vitals: As of 5/31/09, assets of $463 million, deposits of $387 million
  • DIF Damage: $116 million

#71

  • Failed Bank:  Community National Bank of Sarasota County, Venice FL
  • Acquiring Bank:  Stearns Bank National Assoc., St. Could MN
  • Vitals: As of 6/30/09, assets of $97 million, deposits of $93 million
  • DIF Damage: $24 million

#72

  • Failed Bank:  Community First Bank, Prineville OR
  • Acquiring Bank:  Home Federal Bank, Nampa ID
  • Vitals: As of 7/5/09, assets of $209 million, deposits of $182 million
  • DIF Damage: $45 million

Also, in an 8-k filing with the SEC, Colonial released some details about FBI raids this week.  “Colonial is the target of a federal criminal investigation relating to the Company’s mortgage warehouse lending division and related alleged accounting irregularities.”  Also, the SEC subpoenaed documents related to loan loss reserve accounting.

Fed: Stop the presses

Aug 7, 2009 20:55 UTC

On Thursday, the Bank of England said that it would run its printing press a bit faster while the European Central Bank hinted that theirs might slow down sooner than expected.

In the United States, the Federal Reserve’s printing press is running low on ink, and Ben Bernanke has his own choice to make: Buy a new cartridge or shut the thing down. He should shut it down.

In particular, I’m referring to the Fed chairman’s commitment to print $300 billion to buy Treasury bonds by the end of September.

So far the Fed has purchased $243 billion since the program began in March. He’s on schedule to hit the $300 billion mark next month, right on schedule. The question is whether he should buy more.  (Click table to enlarge in new window)

slide1

With some signs pointing to a recovery, the conventional wisdom is that the Fed can let the program expire. That’s right, but for the wrong reasons.

The problem with quantitative easing, and with all programs fiscal and monetary intended to artificially support asset prices, is that they badly distort markets, preventing them from grappling with the underlying problem of leverage.

They also send false signals to market participants that it’s safe to take risk.

Leverage is still at record highs. To take just one measure, according to the Fed’s first quarter flow of funds report, total credit market debt to GDP stood at 376 percent. (Click chart to enlarge in new window, ht Comstock Partners)

picture-1

We’ve run up more debt that we can possibly pay. As any overextended borrower can tell you, the way to deal with excessive debt is to pay it down, or declare bankruptcy.

But quantitative easing encourages people to take on more debt.

Take homes, for instance. Mortgage rates are tied to Treasury rates, which are held artificially low thanks to the Fed. Low mortgage rates lead to higher house prices and higher house prices provide collateral to take on more debt.

But when the Fed’s artificial support is removed, prices will continue their march downward and borrowers will find they can’t pay off their last loan.

Every time we hit a recession, the Fed’s solution is to hit the gas, encouraging folks to go deeper into debt. For a time, credit expansion provides the illusion of economic expansion. Until, that is, inflation fears force the Fed to hit the brakes.

We’re addicted to debt. But instead of trying to kick the habit, we invent ever more creative ways to find our next fix.

Once upon a time, low interest rates were enough. Not anymore. So the Fed devised a dangerous combination of zero interest rates and quantitative easing.

Before we were snorting the junk. Now we’re injecting it. And the high is causing market participants to take more dangerous risks than they should.

People jumping back into the housing market are in for a rude awakening as prices continue to fall and their equity evaporates. If house prices trend back up, it won’t be because people can pay more, it will be because credit markets have loosened up again and they can borrow more.

Then we’re back where we started, but with an even larger pile of unpayable debt.

The economy won’t be on a sound footing until debt levels fall, and that won’t happen as long as the Fed stands in the way. It should let its three quantitative easing programs expire on schedule, and make a firm commitment that they’re not coming back.

COMMENT

As an ape, I watch with interest as you humans choose paths of self destruction. It appears that the despots have succeeded in spoiling you with their circuses and horses. I wait anxiously to clean up the mess that will be left when you finally finish destroying each other. I’d like to thank everyone who has made this opportunity possible. Most importantly… Shakespeare, The Founding Fathers, Kings everywhere, and all the gullible, stupid sheep that have so easily followed them into the abyss.

-Bye bye!

Posted by Cornelius | Report as abusive

Fannie gets another $11 billion bailout

Aug 7, 2009 16:45 UTC

Al Yoon reporting on the ever-expanding bailout of Fannie Mae….  (Reuters)

Fannie Mae … on Thursday reported a $14.8 billion quarterly net loss …. [I]ts regulator requested $10.7 billion from the Treasury to erase a deficit in its net worth, bringing total draws under a senior preferred stock purchase program to $45.9 billion.

Fannie has now burned through a quarter of the $200 billion bailout commitment made by Treasury.  My colleague Agnes Crane has more, including details of how Fannie’s losses were drastically reduced by the new fair value accounting rules that went into effect earlier this year.

COMMENT

Great work!

Posted by Charlie Lefaux | Report as abusive

Lunchtime Links 8-6

Aug 6, 2009 19:03 UTC

More homeowners upside down on mortgages (CR)  According to a Deutsche Bank report published yesterday, 16 million homeowners owe more on their mortgage than their home is worth.  And the figure will go to 25 million by 2011 as house prices keep falling.  These folks don’t actually own anything, since their home equity is negative.  What they own is a pile of debt that is owed to the bank, which itself owns ALL of the home’s value.  This is bad news for bank balance sheets, which will be seeing write-downs on bad loans for a while.

Board Meeting Handout (FASB)  This appears to be the outline of the new fair value rules FASB is kicking around internally.  Just to warn you, it’s pretty wonky.  Currently trying to make heads/tails of it in order to calculate potential impact on bank balance sheets.  If there are any accountants, analysts reading the blog please take a look and let me know your thoughts.

U.S. considers remaking mortgage giants (WaPo)  Plans aren’t fully formed, but the idea is to split Fannie/Freddie into good/bad banks, shoveling bad mortgages into the bad bank where the losses will be funded with tax dollars.  It’s early innings yet, but any proposal that doesn’t see the companies eventually privatized would be pretty unfortunate.

Killer app for clunkers spurs market (WSJ)  Clunkers have to be killed when they’re traded for cash.  Here’s how that’s done.

One dead in ear-cleaning salon attack (Reuters)

Paul Romer on “charter cities.”  Incubating development … (ht Kedrosky)

Why the death of a lender matters

Aug 6, 2009 01:54 UTC

Earlier this evening, Reuters’ Jon Stempel reported that Taylor, Bean & Whitaker has ceased lending.  That makes TBW #351 on the Mortgage Lender Implode-o-Meter.  Questions swirl about what happened.  One possibility seems to be that the company just couldn’t manage its own growth.  As other lenders disappeared and TBW’s FHA business exploded, it’s possible they just didn’t have sufficient internal controls to insure loans met FHA underwriting standards.  When the company failed to file its annual financials with the government, things started to unravel.

It’s not clear how problems at Colonial Bank may have impacted the situation.  TBW was basically dependent on Colonial for all its funding.  The company tried to buy Colonial, injecting $300m of capital in order to make the latter eligible for $550m of TARP funds.  That would have kept the gravy train going.  But the deal fell apart late last week when Colonial reported dismal results while issuing a going concern warning.

Why should you care?  Because TBW is pretty big.  It was the third largest originator of FHA mortgages in the market.  Recently the company was doing $100m-$150m of loans a day, according to a source.  It takes time for loan applications to be approved and funded.  45-60 days I’m told.

If TBW was doing, say, 500 home loans a day, as many as 30,000 transactions may be imperiled by the company’s failure.  A lot of paperwork will have to be re-filed, new appraisals will have to be ordered, etc.  The housing market won’t fall apart by any means, but this will certainly cause a fair amount of indigestion.  And a lot of mortgage brokers that were dependent on TBW to purchase the loans they originated are now in deep trouble.

BofA could be a big winner here.  Apparently they’re going to end up taking on TBW’s serving duties.

COMMENT

I begged TB&W to sell my mortgage because their escrow division is /was so horrible. I was without insurance on a rental property for EIGHT months and they told no one. The money was in the account they just didn’t pay the bill on time so the ins. co cancelled the policy. The risk to me was incredible! Any company that is run like that shouldn’t to be in business. Good riddence to them!!

Posted by Ron Otis | Report as abusive

Lunchtime Links 8-5

Aug 5, 2009 14:21 UTC

MUST READThe debt-inflation myth, debunked by UBS (Alphaville, ht Yves)  Tracy Alloway has a GREAT piece today debunking the idea that we can “inflate our way out of debt.”  As I’ve argued previously, this assumes debt doesn’t have to be rolled over.  But of course is does, especially when you’re operating with deficits as high as our own.  The consequence of higher inflation, then, is that lenders demand higher interest rates on new debt.  As legacy debt is inflated away, new debt issuance is MUCH more expensive.

Taylor Bean suspended from making FHA loans (WSJ)  Funny business going on at the nation’s third-largest FHA lender.  Taylor Bean was one of the two targets of the Neil Barofsky’s raids earlier this week.  The other was big bank Colonial.   Taylor is dependent on Colonial for its warehouse line of credit.  With Colonial is on the ropes, Taylor investors put together a quick $300m to keep them afloat, and make them eligible to receive government money.  This is just another way lenders are scamming taxpayers and the government to get bailout funding to support home loans.  Dirty business.  Read the last three paragraphs of this article.

New York seeks millions of back taxes from Lehman (NYT)  This article has some good detail regarding the bankruptcy process, but the actual news is old.  My colleague Matt Goldstein reported it June 29th.

Post office considers closings, consolidations (AP)  The headline number is 1,000 POs may be on the chopping block.  Seems big, but consider that there are nearly 33,000.  The post office has been struggling for years due to e-mail and, lately, onlinebillpay.  The PO wants to make adjustments to its pension plan and reduce mail delivery to five days per week.

Clunker-nomics (David Kotok)  It’s all been said, but Kotok says it rather articulately.

SEC memo says Guaranty Bank to be seized, not sold (GoingConcern, ht AK)  Teri Buhl has an OTS source that claims Guaranty will cost the deposit insurance fund “at least” $5.3 billion and, even more stunning, that it’s too late to find a buyer, that FDIC will be forced to wind them down.  I wonder if that’s actually going to happen, as a reader commented to me: “I can’t believe they can’t even find someone to take the branches and deposits.  Sure, they can wind down stupid Frontier Bank of Greely, Co with all of what, 3 branches or whatever, GFG is a much different story.  It’d have to be the largest wind down since the S/L problem.  It’d look terrible in the press, too.  I’d still guess they’ll strong arm someone into taking over the branches/non brokered deposits, even if the acquirer pays basically nothing.” Still, it’s a great story from Teri.  Lots to chew on for future bank failure Fridays…

Alumna sues college b/c she can’t land a job (CNN)  She wants a refund on $72,000 in tuition.

Marines ban Twitter, Facebook, MySpace (Wired)

Obama’s birthday cake delivery (BBC)  Sociologist Max Weber might have much to say about Obama’s charisma.  Me?  I’d prefer a guy who wasn’t afraid to say no once in awhile.  As in, no we can’t deliver more free lunches financed by government borrowing.

Finally the spleen gets some respect (NYT)  Scientists have finally discovered why we have a spleen: “The parallel in military terms is a standing army….You don’t want to have to recruit an entire fighting force from the ground up every time you need it.”

One person’s first experience with a store-bought pizza…aka “Pizza Fail”

pizzafail

COMMENT

Regarding the debt/inflation question – debt may have to be rolled over at higher costs, but what’s the alternative? Is the gov gonna stand by and watch as total collapse ensues? Run balanced budgets by raising taxes and slashing services? Seems unlikely. Has that ever worked to solve a problem near this size? I’m honestly asking, don’t know.

The scale of our debt seems too big to be solved by traditional means. Maybe they can postpone the day of reckoning another 5-10 years, but it seems inevitable. Also, wouldn’t a dollar collapse have the same basic effect as QE-based inflation?

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