Category: Finance

The Fed Speaks

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They won’t be stopping the stimulus, but the short version is that they will continue to keep their foot on accelerator, but maybe not quite so much:

The Federal Reserve, increasingly confident in the durability of economic growth, expects to start pulling back later this year from its efforts to stimulate the economy, the Fed chairman, Ben S. Bernanke, said on Wednesday.

 Mr. Bernanke, offering new details, said the central bank intends to scale down gradually its monthly purchases of Treasury securities and mortgage-backed bonds beginning later this year and ending when the unemployment rate hits 7 percent, which the Fed expects to happen by the middle of next year.

 The central bank would then take several more years to unwind the rest of its extraordinary stimulus campaign, slowly raising short-term interest rates from essentially zero to more normal levels after the jobless rate has fallen to 6.5 percent or lower.

 He emphasized, however, that the timing of the retreat depends on the health of the economy; if growth falters, the central bank would slow, or even reverse, the process. The expectations of Fed officials for the next several years, published Wednesday, are more optimistic than the consensus of private forecasters.

 Pulling back “would basically say that we’ve had a relatively decent economic outcome in terms of sustained improvement in growth and unemployment,” Mr. Bernanke said. “If things are worse, we will do more. If things are better, we will do less.”

I would prefer that they target a higher inflation rate until unemployment falls before 6%, but who listens to me.

Here is No Surprise

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In a lawsuit, Bank of America* has been accused of giving bonuses to staff for foreclosing on people:

Bank of America Corp. (BAC), the second-biggest U.S. lender, rewarded staff with cash bonuses and gift cards for meeting quotas tied to sending distressed homeowners into foreclosure, former employees said in court documents.

 Mortgage workers falsified records and were told to delay U.S. loan-assistance applications by requesting paperwork that the Charlotte, North Carolina-based bank had already received, according to statements from ex-employees filed last week in federal court in Boston. The lender improperly disqualified applicants to the Home Affordable Modification Program, or HAMP, according to a May 23 statement from Simone Gordon, a loss-mitigation specialist who left the company in 2012.

 “We were regularly drilled that it was our job to maximize fees for the bank by fostering and extending delay of the HAMP modification process by any means we could,” Gordon said. Managers instructed staff to “delay modifications by telling homeowners who called in that their documents were ‘under review,’ when in fact, there had been no review,” she said.

Bank of America, which has spent more than $45 billion to settle claims tied to its 2008 takeover of Countrywide Financial Corp., is being sued by homeowners who didn’t receive permanent loan modifications after making payments under trial programs, according to court papers. Statements from seven former loan employees were included in a filing last week as part of plaintiffs’ attempt to gain class-action status. The lender has denied the allegations.

(Emphasis mine)

Seriously, why we haven’t put banksters in jail, particularly, the former CEO of Countrywide, Angelo Mozilo, who created the mess that BoA is trying to sweep under the carpet?

Also, why did the Obama administration set up HAMP as a Petri dish for mortgage servicer abuses?†

*Full disclosure, it is my bank.
†Actually, we know why. Geithner‡ wanted to let the banksters to cheat homeowners so as to protect the bank.
‡Laying it all at Geithner’s feet is not completely fair, because as I often say, the Cossacks work for the Czar.

Quote of the Day

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From the always informative Charlie Savage:

You think any of these guys looked at what happened in 2008 and thought, “Boy, those guys really were crooks and bought the country a helluva catastrophe. We should learn from them and not do that ourselves.” Nope, I guarantee you the first thoughts among the people who thought up this scam for the insurance companies was, “Holy crap, look at the dough those guys made!” And I guarantee you those same people all got raises. The upper levels of American capitalism is so rotten with amorality, so utterly devoid of any conventional sense of ethics, let alone social responsibility, that it hardly seems worth pointing it out any more. Congratulations to America’s graduate schools of business. You have bred three generations of vampires to feed on the rest of us. It’s as though every medical school in the country adopted the basic approach to thoracic surgery of Sweeney Todd and married it to the economic philosophy of Bialystock And Bloom.

He is talking about the insurance industry, which has recently been discovered to have been using complex accounting tricks to boost their apparent assets and revenue.

If the Banksters had been sent to a “federal pound me in the ass prison,” these insurance executives would have thought twice before engaging in accounting fraud.

And While We Are On the Subject of Obama and Subverting Regulation………

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Gary Gensler surprised everyone when, as head of the CFTC, he actually enforced sensible rules.

So it it comes no surprise that Obama is firing him and replacing him with a corporate drone from the Vampire Squid:

Obama is no longer bothering to pretend that he is anything other than a stooge for banks and other big money interests.

 The president is effectively dismissing Gary Gensler, the ex-Goldman partner who headed the Commodities Futures Trading Commission. Gensler used his post at a secondary financial regulator to push for reforms. It was his office that blew the Libor scandal wide open by taking referrals from British regulators seriously (by contrast, Geithner, who heard about widespread, deliberate mismarking in 2008, passed the buck to the Bank of England). Gensler has also been making himself unpopular by taking the view that swap dealers, which includes foreign branches of US banks and parties that conduct business with US parties, must comply with Dodd Frank. ………

 Shahien Nasiripour at the Huffington Post describes how Gensler is being ousted for his position on swaps regulation, which was coming to a head in international meetings starting June 20, with a July 12 deadline looming. The industry was pushing for the usual “race to the bottom” approach, since the Dodd Frank provisions are more stringent than overseas requirments (the spin, of course, was that Gensler was acting unilaterally, as opposed to implementing what Congress mandated). Gensler faces varying degrees of resistance from three of his four fellow commissioners. International regulators were apparently also unhappy with Gensler’s tough stand, to the point where they were complaining to Treasury Secretary Jack Lew.

 Even if Obama fails in fast-tracking his chosen replacement, Amanda Renteria, Gensler’s lame-duck status will considerably weaken his ability to arm-twist the fence-sitters among his colleagues.

 And Renteria is a simply pathetic choice. Oh, she’s got a very appealing personal story, having worked her way up from a very disadvantaged background, a child of migrant workers who made her way to Stanford and later Harvard Business School. But there’s nothing in her background that qualifies her to act either as a senior regulator or as the head of a large operation (the CFTC has over 400 employees). This leap in responsibilities is tantamount to taking a promising law firm associate and making them the head of a large law practice. You’d never do that if you cared about the health of the firm. A move like this looks an awful lot like an effort not just to sideline Gensler’s push on swaps regulation, but to render the CFTC incompetent over time.

 Renteria’s knowledge of finance appears to consist of having worked right after college for a few years at Goldman. ………

And to this we add the bonus story that Barack Obama has nominated Walmart’s biggest fan to head his council of economic advisors:

On June 10, 2013, President Obama announced his intention to nominate Jason Furman to become the next chairman of the Council of Economic Advisers. This is a big-time, highly influential post. So what kind of economist is Furman?

One who thinks Walmart is the best thing since sliced bread.

For Furman, Walmart is nothing short of a miracle for America’s poor and working-class folks. For him, progressives should be cheering the firm: he even wrote a 16-page paper titled, “Wal-Mart: A Progressive Success Story,” which was posted on the Center for American Progress website. ………

In Furman’s view, “the US productivity miracle and the emergence of Wal-Mart-style retailing are virtually synonymous.”

For the man who will have President Obama’s ear on vital matters like jobs, the evidence of whether Walmart’s wages and benefits are substandard is “murky.” And he doesn’t much care for those who question Walmart’s approach: In the 2006 dialogue with Ehrenreich on Slate, he upbraided activists who had pushed the firm to increase wages and offer better benefits:………

To complete the finger in the eye, the American Enterprise Institute has issued effusive praise on the choice.

I’m not surprised.  I’m disappointed, but not surprised.

Obama loves hippie punching.

It’s Bank Failure Friday!!!

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And here they are, ordered, and numbered for the year so far.

  1. 1st Commerce Bank, North Las Vegas, NV  <= This is a Thursday closing.
  2. Mountain National Bank, Sevierville, TN

Full FDIC list

Since I’ve started following this, I think that there have been 4 non Friday closings (not counting Friday holidays) over the last 4 years, and 2 of these have been in the past month.

Hmmmm…….

So, here is the graph pr0n with last years numbers for comparison (FDIC only):

This Has Disaster Written All Over It

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You’ve doubtless heard about the rebound in housing prices.

Well, it turns out that it’s a flood of Wall Street money behind much of this.

This is completely insane. You cannot manage single family rental housing from

The last time the housing market was this hot in Phoenix and Las Vegas, the buyers pushing up prices were mostly small time. Nowadays, they are big time — Wall Street big.

Large investment firms have spent billions of dollars over the last year buying homes in some of the nation’s most depressed markets. The influx has been so great, and the resulting price gains so big, that ordinary buyers are feeling squeezed out. Some are already wondering if prices will slump anew if the big money stops flowing.

“The growth is being propelled by institutional money,” said Suzanne Mistretta, an analyst at Fitch Ratings. “The question is how much the change in prices really reflects market demand, rather than one-off market shifts that may not be around in a couple years.”

Wall Street played a central role in the last housing boom by supplying easy — and, in retrospect, risky — mortgage financing. Now, investment companies like the Blackstone Group have swooped in, buying thousands of houses in the same areas where the financial crisis hit hardest.

Blackstone, which helped define a period of Wall Street hyperwealth, has bought some 26,000 homes in nine states. Colony Capital, a Los Angeles-based investment firm, is spending $250 million each month and already owns 10,000 properties. With little fanfare, these and other financial companies have become significant landlords on Main Street. Most of the firms are renting out the homes, with the possibility of unloading them at a profit when prices rise far enough.

………

The story, though, often looks more complicated on the ground. Joe Cusumano, a real estate agent in Riverside County, Calif., said that in recent months 90 percent of his business had been for companies like Invitation Homes, a Blackstone subsidiary. Home values in Riverside County have risen by 15 percent in the last year, according to CoreLogic.

But Mr. Cusumano said he wondered if faraway investors would properly maintain the homes they buy. He said that Invitation Homes had been willing to put money into the properties, but he was not so sure about the other players. He also worries what will happen when these investors start selling, as they inevitably will.

The first question is not whether the big investors will keep up tens of thousands of properties. It’s whether they can manage tens of thousands of single family homes.

I have dealt with a single family home managed by a local property management firm. It was a complete clusterF%$#.

If they honestly think that they can manage single family homes for properties they are nuts.

Or maybe they are just lying.  They are banksters, after all.

Read This

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This is a devastating take-down of the culture of high finance. What’s more, it does so from a sociological and anthropological perspective, as opposed to a conventional economics analysis, which suits my temperament better:

The excessive pay can be interpreted as a sign of unfair or inefficient markets. It is that, but I think the deeper cause is not so much economic as sociological. Financiers have persuaded the broader society that they are modern aristocrats. Pampered lives are part of the package. They go along with an unthinking sense of entitlement and a mix of self-righteousness and self-centredness, with just a hint of condescending tolerance for limited criticism.

Of course, today’s financial aristocracy is different from traditional nobility. The contemporary titles (partner, managing director) and privileges (first-rate education, political influence) are not exactly hereditary, and long hours on the job have replaced a life of leisure. But I believe the commonalities are more significant.

………

In my view, the sociological analysis provides more insight into the industry’s condition than the more common argument about “heads I win, tails you lose” incentives. I rarely meet financiers who would admit to being reckless or wasteful. What I observe is sublime and blind self-confidence.

Living largely with other members of their caste, they rarely have doubts. To them, more finance is always better than less and higher margins always better than lower. They welcome the development of more complicated financial products; they don’t worry much about the effect of these products on the rest of the economy.

Read the whole thing.

I think that his analysis is spot on, though his last ‘graph is a bit too optimistic for my taste.

All You Need to Know About Barack Obama is that His Crucial Mentor is Penny Pritzker

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Without Penny Pritzker, the scion of the Hyatt hotel chain, Barack Obama would have never achieved anything in politics. She was the first, and arguably the most enthusiastic, big money donor to fund the political career of that guy with the funny name.

The most recent news is that she had to modify the financial disclosure forms that she filed when she was submitted as commerce secretary, because she understated her pay from her consulting by at least $80 million.

What makes this even worse is that these wages were pay to offshore funds to avoid taxes:

And also like many of the plutocrats in America Pritzker has a lot of tax abnormalities involving offshore accounts. But now Prtizker is under fire for providing a false financial disclosure statement which she has since amended.

Chicago billionaire Penny Pritzker inadvertently understated a portion of her income by at least $80 million in a disclosure form required for her nomination to be U.S. Commerce secretary and has amended the document.
Forms released online last night by the Office of Government Ethics show that Pritzker earned additional income for consulting work on hundreds of trusts, including family trusts, beyond what she disclosed last week. The omission, discovered by Pritzker’s financial advisers, was due to a clerical error, said Susan Anderson, the nominee’s spokeswoman

Not surprisingly Pritzker makes a nice chunk of change “consulting” with other 1%ers.

Documents released last week show Pritzker received $32.2 million for a decade’s worth of consulting on the restructuring of domestic trusts. The filings released yesterday show she earned at least $80 million for that work, according to Bloomberg’s compilation of the data. The revised total is in addition to the amount reported last week, according to Anderson.

Pritzker, whose family founded Hyatt Hotels Corp, is scheduled to testify on her nomination before the Senate Commerce Committee tomorrow. She disclosed last week that she earned $54 million in consulting fees last year for a similar restructuring of trusts based in the Bahamas, also over 10 years. The Bahamas’ income wasn’t changed in the amended disclosure document.

Just what we need in a Commerce Secretary, someone who knows how to help companies offshore their profits to avoid tax liabilities.

Also, she has a long history of avoiding taxes through arcane instruments and offshoring for her own benefit.

We also have the the fact that she profited at taxpayer expense when she ran Superior Bank into the ground by aggressively pursuing subprime loans.  (Also here)

Also, as head of Hyatt, she has a long history of being virulently anti labor union, (also here.) as well as being a big supporter of Rahm Emanuel’s plans to privatize public education.

And finally there are the longstanding family ties between the family fortune and organized crime.

The reason that this is important is not because of her nomination.  The Commerce Secretary’s job has traditionally been the aggressive support of what is now called “the 1%”.

Her relationship to Barack Obama is important because it defines his entire political career.

It’s why we are not seeing a pursuit of the banksters, and we are seeing a pursuit of a “grand bargain” on Social Security, Medicaid, and Medicare, which will have grandma eating cat food.*

*In the interest of health, I would suggest that people eat dog food, and not cat food. Cats because they are one of the few true carnivores, do not need the complex carbohydrates and fats that people, and dogs do. As such, dog food is better for you than cat food because it provides carbs and essential fatty acids. A dog can go blind if it is fed on cat food, but a cat lives just fine on dog food. The phenomenon is known as rabbit starvation.

It’s Bank Failure Friday!!! (on Saturday)

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And here they are, ordered, and numbered for the year so far.

  1. Central Arizona Bank, Scottsdale, AZ

Full FDIC list

This closing was odd, because it occurred on Tuesday, May 14. The last time we had a bank closing not on a Friday, it was Park Avenue bank in 2010, and it was closed because of fraud.

In this case, it appears that there may be some issues with the bank holding company, Capitol Bankcorp, which has been shedding subsidiaries for the past few years and this might be an issue of cross guaranty issues:

After controlling more than 50 banks at its peak, Capitol Bancorp has reduced its subsidiary count to 12 banks through intra-company mergers and divestitures to outside parties. Primarily, the mergers and sales are designed to raise capital or avert a failure. A failure of any one bank subsidiary could trigger the failure of all banking subsidiaries. Through statute referred to as Cross-Guaranty, the FDIC can demand reimbursement for the cost of a failure against any of Capitol Bancorp’s still open banking subsidiaries. To facilitate the divestitures, the FDIC has issued at least 16 Cross-Guaranty waivers. Some observers may question the cost effectiveness of issuing the waivers.

And here are the credit union closings:

  1. First Kingdom Community Federal Credit Union, Selma, AL

Full NCUA list

The 2nd quarter is showing a lot more activity than the 1st quarter did.

So, here is the graph pr0n with last years numbers for comparison (FDIC only):

This is a Feature, Not a Bug

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At Salon, David Dayen observes that it, “Turns out much-hyped settlement still allows banks to steal homes,’ even after the much hyped mortgage settlement.

This is not an oversight.  The Obama administration has aggressively allowed banks to cheat customers an investors since day one.

Basically, they see this as a way of making sure that the banks appear solvent.

See my writings on HAMP. Here is one quote:

Warren asked Geithner repeatedly about HAMP. After several evasions, Geithner said about the banks, “We estimate that they can handle ten million foreclosures, over time… this program will help foam the runway for them.”

By “them”, he means the banks.

By foaming the runway, he means that it allows them to delay writing down bad loans, and continue to extract payments and fees by cheating the public.

The suggestion that this is anything but deliberate policy is simply naive.

It’s Bank Failure Friday!!!

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And here they are, ordered, and numbered for the year so far.

  1. Pisgah Community Bank, Ashville, NC
  2. Sunrise Bank,Valdosta, GA

Full FDIC list

And here are the credit union closings:

  1. Lynrocten Federal Credit Union, Lynchburg, VA

Full NCUA list

Something odd is going on.  In the past 3 weeks, the number of banks failures have more than doubled. 

So, here is the graph pr0n with last years numbers for comparison (FDIC only):

I Was Not Expecting This

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After she quickly signed onto the mortgage deal, I had pretty much written off California AG Kamala Harris as doing anything useful in consumer protection.

I may have been premature in my judgement:

California Attorney General Kamala Harris is on a roll. There’s been a fair bit of media coverage about abusive debt collection practices, particularly in credit cards, but at least until Harris filed a suit on Thursday against bank miscreant JP Morgan (hat tip Deontos), surprisingly little action.

 Because the amounts are usually much smaller than in mortgages, banks have incentives to play fast and loose if they think they can wring some extra blood out of the turnip of an overextended consumer. But the result often goes well beyond just improperly submitting information to the court. JP Morgan and other banks have been accused of trying to collect on debt where they have the amounts wrong, where the debt was discharged in bankruptcy, or where the consumer was never notified an action was underway. And when the debt is sold to debt collectors, the same problems with inaccuracy of information, invalidity of the debt, and abuse of the legal system multiply.

………

Harris mentions over 100,000 dubious lawsuits filed between January 2008 and April 2011 and contends that the illegal conduct extends from “pre-lawsuit correspondence” to the validation and papering up of debt sold to third parties.

 The interesting bit is how the suit is framed. The defendants are the JP Morgan holding company plus two business units, as well as an unnamed “DOES 1 through 100, inclusive” where the AG intends to obtain their names and capacities. This raises the specter that she intends not only to sue other firms (such as the law firms that were Chase’s arms and legs) but individuals at Chase and its agents. And this is where it gets fun (click to enlarge):

Each defendant for each violation. We have 100,000+ violations at Chase, with at least three entities involved, each a separate defendant. And if she can get the individuals who were supervising the robosigning operations (better yet, the C level execs ultimately responsible) and the complicit law firms, she might bankrupt some well placed people. This could be extremely entertaining.

Well, it could be entertaining for a few months, but I’m not getting my hopes up.

Still, this is more than I expected from Harris when she rushed to sign onto the mortgage sellout.

This is Perhaps the Most Egregious Example of Control Fraud This Far

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Gretchen Morgenson of the New York Times relates to us the tale of CommonWealth REIT, which has a long history of aggressive acquisitions at excessive prices.

Their profits have suffered, and their share price has suffered.

In fact the only thing that seems to get a decent return on investment is the management company that the founders set up to conduct their operations.

They make lots of fees, and they get a fee for every misguided acquisition:

The annals of business history abound with stories of entrenched corporate executives building fortifications to maintain their plush status quo. But recent maneuvers by the board of the CommonWealth real estate investment trust put the company in a class by itself. CommonWealth REIT owns office buildings in and around major metropolitan areas in the United States. Founded in 1986 and based in Newton, Mass., CommonWealth, like many REITs, is not taxed on its income, which it distributes to shareholders. Its hefty payouts — 4.75 percent based on its share price of $21.04 — have made it a favorite among individual investors looking for income.

But CommonWealth, with $7.8 billion in buildings from Hoboken to San Diego, is unlike most other real estate investment trusts in one crucial way: its structure creates a significant conflict of interest. What sets CommonWealth apart is that it employs an outside management company, known as REIT Management and Research, to run the company’s operations and acquire properties. Many REITs were set up this way in the 1980s because they were small, but external managers are an anomaly among today’s much larger REITs.

To make matters more interesting, the outside management company is run by Barry M. Portnoy, CommonWealth’s founder, and his son Adam. Both father and son, moreover, serve on CommonWealth’s five-member board.

REIT Management and Research is paid an advisory fee based on the size of CommonWealth’s assets, rather than on how the investments perform. This is a stark incentive to simply expand the company through acquisitions and, in fact, since March 2010 CommonWealth has issued 88 million new shares to acquire new properties. The number of new shares is almost triple the stock outstanding before the sales. Such issuance dilutes existing shareholders’ stake because it increases the number of investors that share in the company’s income and payouts.

The incentive structure also encourages the management company to pay top dollar for properties. As noted in a recent report from Green Street Advisors, a research firm specializing in REIT analysis, “Selling equity and buying assets, without management rigorously asking ‘At what price?,’ can bleed shareholder value over the long term.”

Sure enough, since 2005, CommonWealth has underperformed the index of commercial office building REITs. In 2012, CommonWealth’s shares fell 7 percent. It cut its dividend last fall.

But because the assets have increased, the management company run by the Portnoys has been raking it in, earning $118 million in advisory fees in the last three years.

This might not be a concern if CommonWealth’s outside managers owned a sizable investment in its shares, aligning themselves with the company’s owners. They do not; the management firm’s executives and trustees on the board own 0.33 percent of CommonWealth stock.

The founders have adopted a series of increasingly extreme poison pills to stay in control.

Ms. Morgenson casts this as a shareholder rights fight, but I think that it is more than that.

This is management, who have almost no equity stake, are simply looting the company.

Fed Stays Course

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So their quantitative easing program continues unabated:

The Federal Reserve said Wednesday that its economic stimulus campaign would press forward at the same pace it has maintained since December, putting to rest for now any suggestion that it was leaning toward doing less.

The Fed emphasized that it was ready to increase or decrease its efforts to spur growth and reduce unemployment as necessary, a more balanced position than it took earlier in the year, reflecting the reality that a strong winter has once again yielded to a disappointing spring.

It was the first time that the Fed had explicitly mentioned the possibility of doing more in a policy statement, although officials, including the Fed’s chairman, Ben S. Bernanke, have made the point repeatedly in public remarks.

………

The Fed maintained a relatively sunny economic outlook in its statement, released after a two-day meeting of its policy-making committee. It said that the economy was expanding at a “moderate pace” and that the labor market had shown “some improvement.” It added, however, that federal spending cuts were “restraining economic growth,” an implicit critique of the rest of the government.

That language was stronger than the Fed had used in previous assessments of the economic impact of fiscal policy. Fed officials have repeatedly expressed frustration that fiscal policy is working at cross-purposes with their own monetary policy. The statement also noted that the pace of inflation had slackened, a potential sign of economic weakness. Bringing the annual rate of inflation closer to its target of 2 percent has been a primary goal of the Fed’s four-year-old stimulus campaign, but the statement expressed little concern about the recent deceleration to a pace of only about half that level.

Yeah, calling out the entire deficit fetish in DC is a good thing too.

I still think that Bernanke’s mental exercise, dropping massive quantities of cash from helicopters, is the way to go.

It’s Bank Failure Friday!!!

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Daym!!!  It;s been a busy week for bank regulators:

  1. First Federal Bank, Lexington, KY
  2. Heritage Bank of North Florida, Orange Park, FL
  3. Chipola Community Bank, Marianna, FL

Full FDIC list

And here are the credit union closings:

  1. Shiloh of Alexandria Federal Credit Union,

Full NCUA list

We went from 9 total failures for the year to 13.  That’s a big bump 

So, here is the graph pr0n with last years numbers for comparison (FDIC only):

Whiny Bitch of the Day

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Ambrose Evans-Pritchard is mad as hell about the Eu’s proposed financial transaction tax.

Oh the horror of a tax of one tenth of 1% on stock trades, and one one-hundredth of 1% on derivatives will destroy all life as we know it on the planet.

His argument is that it will crush the speculative arbitrage that is the meat and potatoes for Wall Street and the City of London, causing a shrinkage of the financial industry.

He says that it “has the character of a pogrom.”

Well, I got your “pogrom” right here.

Randall Munroe accurately reflects my feelings on this in this cartoon:

Excess financialization of our economy is not productive, nor is it symbiotic.  It is a parasitic drain on society, and a source of instability.

It needs to be ended.