Category: Finance

Well, Here’s a Shocker

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It turns out that most of Timothy “I am not a Banker” Geitner’s friends that he has brought into the Treasury department have made millions working for the banks that wrecked out economy:

Some of Treasury Secretary Timothy Geithner’s closest aides, none of whom faced Senate confirmation, earned millions of dollars a year working for Goldman Sachs Group Inc., Citigroup Inc. and other Wall Street firms, according to financial disclosure forms.

When you have people overseeing the current system who personally profit from it, fundamental change is not in the offing.

Bank of America/Merrill Lynch Smoking gun

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So, Bank of America has agreed to turn over email records to NY AG Andrew Cuomo, because there is no court in the world that will allow them to use the “I was following my lawyer’s advice” defense without them actually turning over that advice, and we find a smoking gun:

“Unfortunately it’s screw the shareholders!!” Charles K. Gifford wrote to a fellow director in an e-mail exchange that took place during the call.

“No trail,” Thomas May, that director, reminded him, an apparent reference to the inadvisability of leaving an e-mail thread of their conversation.

(emphasis mine)

It’s called “putting lipstick on a pig,” and it is illegal.

Unfortunately for the senior management at BoA, while it was pretty tough to document, today, in the age of casual and conversational email, you can get caught pretty easily, as Mr. May remembered, but Mr. Gifford forgot, and so, in the words of everyone’s favorite robot, “We’re boned!”

Even without the whole, “going to jail” thing, there is a shareholder suit, and this will be used, so it’s not a pretty picture.

About the only defense that they have left is the “Hank Paulson and Ben Bernanke made me do it defense,” and I rather expect to be hearing that soon.

Economics Update (a Day Late)

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Unemployment Numbers, Actual v. Seasonably Adjusted


Philly Fed Graph Pr0n Courtesy Calculated Risk


NY Fed Graph Pr0n Courtesy The Bonddad Blog

So, Seasonally adjusted first time unemployment claims fell to 514,000, the lowest level since January, the 4 week moving average fell by 9K to 531,500, and continuing claims fell 75K to 5.99 million, the first time that the number has been below 6 million in 6 months.

Well, sort of anyway. As Brad Delong notes, the non-seasonally adjusted number actually went up:

Unemployment Insurance claims rose from 452,000 last week to 504,000 this week, but the seasonal adjustment factor fell from +72,000 to +10,000, leaving seasonally-adjusted claims falling from 524,000 to 514,000.

Considering the strangeness of the times that we are currently going through, this does mean that the SA numbers have a bit of flakiness.

Still these numbers, as well as the New York and Philadelphia Federal Reserve activity indices are definitely trending better.

The reason that I think that this is a pause, rather than a recovery, is because the underlying problems remain unresolved, with foreclosures hitting an all time high in the 3rd quarter.

About 1 out of 136 homes got a foreclosure notice in the past quarter.

That along with the fact that the CPI numbers are showing that “Owners’ Equivalent Rent” is falling, which implies that home prices have even farther to fall before the rent/own ratio is back to where it should be imply to me that the real estate crash is still on the down slope.

Additionally, it’s clear that consumers are still stretched, with Capital One credit card defaults rising in September.

30 year fixed mortgage rates remain below 5%, though they are up a bit this week.

In energy, oil is now at a 2009 high, and in currency, the
dollar rose against the Yen, but fell against the Pound Sterling and Euro.

Signs of the Apocalypse

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Alan “Bubbles” Greenspan is saying that regulators should consider breaking up the large banks:

Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system, Greenspan told the Council on Foreign Relations in New York.

“If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”

I would note that Greenspan’s mentor, Ayn Rand, saw the breakup of Standard Oil as evil, with the wealth of the “prime movers” being confiscated by the “parasites,” “looters,” and “moochers”, to use her terms (from the Wiki on Atlas Shrugged, I read Virtue of Selfishness, and that ‘s quite enough Rand for me…It was worse than reading Emanuel kant)

This Could Destroy Mortgage Securitization as We Know It

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I guess that I am over a week late to this game, but there has been a very significant case in Kansas that could completely reshape the fact of mortgage securitization.

Basically, the Kansas Supreme Court has ruled that the Mortgage Electronic Registration System (MERS), which is basically an electronic yellow pages for securitized mortgages, has no standing in foreclosure cases.

Considering that MERS records about ½ of the mortgages in the US, this is a very big deal.

While the precedent only applies to Kansas, it’s a state court after all, it is likely that their decision might influence other courts in other state:

The development of “electronic” mortgages managed by MERS went hand in hand with the “securitization” of mortgage loans – chopping them into pieces and selling them off to investors. In the heyday of mortgage securitizations, before investors got wise to their risks, lenders would slice up loans, bundle them into “financial products” called “collateralized debt obligations” (CDOs), ostensibly insure them against default by wrapping them in derivatives called “credit default swaps,” and sell them to pension funds, municipal funds, foreign investment funds, and so forth. There were many secured parties, and the pieces kept changing hands; but MERS supposedly kept track of all these changes electronically. MERS would register and record mortgage loans in its name, and it would bring foreclosure actions in its name. MERS not only facilitated the rapid turnover of mortgages and mortgage-backed securities, but it has served as a sort of “corporate shield” that protects investors from claims by borrowers concerning predatory lending practices.

….

The real parties in interest concealed behind MERS have been made so faceless, however, that there is now no party with standing to foreclose. The Kansas Supreme Court stated that MERS’ relationship “is more akin to that of a straw man than to a party possessing all the rights given a buyer.”

What this means is that the original lender, who sold the loan and transferred the title, has no standing, and that MERS has no standing, since they are not the title holder, and that the owner cannot actually be determined, since it has been abstracted into a sort miasma of Mortgage backed securities.

So in many cases, no one has standing to foreclose on the house, at least not in Kansas. (insert Toto joke here).

Matt Tiabbi, in his always amusing style describes this as, “Waking up to discover the mortgage market was a giant criminal enterprise.”

Barry Ritholtz notes another feature of MERS, that, “MERS also acts as a shield, making it all but impossible for many borrowers to deal directly with whoever happens to be holding their mortgage at the moment, which is why, to a large degree that I think it exists, so that you can f%$# over the homeowner, and they have no one to sue, so this is not a bug, it’s a feature, only, with the prices of homes falling, it’s become a bug.

While MERS does technically save some transaction costs by ignoring about 500 years of property laws by not requiring the physical transfer of a title, the real advantage here is that it means that the investors have become completely insulated from, and completely passive to, the realities of the underlying mortgage.

As Karl Denninger summarizes it rather pithily:

They [MERS] may as well have said “we have decided that we can abrogate state law with impunity.” Oh wait – they did, didn’t they?

Sorry folks, life doesn’t work that way.

If state law requires an unbroken chain of recorded assignments in order to document ownership of a mortgage and thus standing to foreclose, MERS cannot override this state law by fiat.

Can this be fixed on a case by case basis? Absolutely.

If you were someone who recorded and researched titles to property, given enough time and effort, could track down the paperwork (which is all electronic and does not exist), and then get the original paperwork, or a certified copy (like they do with so-called “original” birth certificates), and then get each and every person to whom the title was assigned over the life of the loan, you should be able to do it, except, or course, this information is not there is a coherent way, because it was considered to be inconvenient to keep.

But remember, this is what you would need to do each and every time that someone defaulted on a mortgage.

You are probably looking at something in the low 5 figure dollar range, and probably something in excess of 90 days, just to find out who has standing, which makes the foreclosure even more ruinously expensive.

Federal Reserve Will Continue to Pump More Money Into the Equity Bubble

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According to accounts of the minutes, not only are they not looking at winging down their sh$%pile for cash program, but there are a number of members who want the program expanded. (See also here and here)

Unfortunately, boosting stock prices by giving money to banks for worthless assets does not get people back to work, and it could be argued that it creates the illusion of a recovery that makes banking reform that much more difficult.

Economics Update

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Retail Sales, Courtesy Calculated Risk


DJIA Since Late 1998

As much as I think that the crossing of arbitrary numbers is bullsh#@, and I think that covering the daily swings of the market is bullsh#@, and I think that the Dow Jones is perhaps an even bigger load of bullsh#@, the fact that the DJIA topped 10,000 today is the obvious lede in today’s economics news.

The Dow closed at 10015.86, the highest number in over a year.

It should also be noted this makes the return on the Dow Jones Industrial Average over the past 10 years roughly 0%.

I still think that this is a dead cat bounce, fueled largely by the Federal Reserve printing money and laundering it into the stock market through the banks.

It appears that the Federal Reserve is similarly dubious about the meaning of the recent rally, as the newly released FOMC Minutes make notes about “Considerable Uncertainty” about the strength of the recovery, once the stimulus package wraps up.

When one looks at things like falling retail sales in September with the expiration of “cash for clunkers”, (though the number did beat expectations) and US business inventories falling in August, there is little sign that all this money doing anything but creating an equities bubble.

In real estate, we are seeing mortgage applications fall again as rates for the 30 year fixed mortgage head back above 5%.

The energy and currency markets are ecstatic about breaking the 10K barrier, which drove oil above $75/bbl for the first time in almost exactly a year, and because people are optimistic, and hence no longer looking for a safe haven, the Dollar weakened to $1.4924:€1.0000, the lowest number in 14 months.

I’m not an Economist, but ….

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I have to agree with Dean Baker when he excoriates New York Times reporter Andrew Ross Sorkin for this bit of crap:

That Treasury bills were trading for less than 1 percent interest, as if they were no better than cash, as if the full faith of the government had suddenly become meaningless.

When you have people who lend you money, and they ask for less interest from you, which is the position of the government when they sell Treasuries, it means that they have more faith in you, not less.

The issue was not that people stopped trusting the government as Sorkin implies, it is that people are desperate for Government debt, because the lost faith in everything else.

I’ve done a quick google, and it appears that he’s also one of the idiots who took the thoroughly debunked $70/hour pay rate propaganda GM workers, which included the costs of those workers who were already retired, and ran with it.

I Googled Mr. Sorkin, so see if this was perhaps yet another innumerate journalist covering finance, and while I know when he earned his degree (BS, in 1999), and where he earned his degree (Cornell University), I cannot determine what he earned his degree in, and hence the degree to which is actually able to count.

My guess is that he got it in pastry baking.

Economics Update

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Well, if you are a small business that relies on CIT for your credit, you have a problem, because the company’s CEO is resigning as a likely prelude to bankruptcy.

There are over a million small and medium sized businesses that rely on CIT for their credit.

Additionally, the meltdown among the monoliners continues apace, with Fitch downgrading Assured Guaranty from AA+ to AA, which, given the fact that their business is basically renting out their credit rating, they are pretty close to “toast” status.

Meanwhile, on the other side of the pond, investor confidence in Germany has fallen for the first time in 3 months, down to 56 September’s 57.7 and well below the forecast of 58.8.

Meanwhile, we are seeing increased demand for Treasuries because foreign investors think that they have become cheap with the falling dollar, and investors are expecting a rebound in the dollar when the Federal Reserve finally does tighten monetary policy.

It appears that this optimism also pushed the price of oil to $74.15/bbl.

Whiskey Tango Foxtrot?

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So, let me get this straight, the latest foreclosure prevention program from the Treasury involves evicting people from their homes:

HAFA already holds the support of Fannie, according to a VP at the agency, Eric Schuppenhauer, who believes the new program allows borrowers in imminent default to “make a graceful exit” from their home. HAFA will keep the stigma associated with foreclosure away from the borrowers, he added, and help keep communities intact.

Maggiano adds that HAFA will offer financial incentives to both servicers and borrowers, and associated secondary investors, in order to facilitate a short sale or deed in lieu of the property.

So, this is sensible policy, while giving bankruptcy judges the power to cram down mortgages, like the do for almost every other sort of debt is evil socialism, or maybe a bad hair day, or something bad.

Huh?

H/t Atrios

Economics Update (a Day Late)

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Foreclosures hitting high end homes


Hotel Pulse Index


Baltic Dry Index, a Measure of Shipping Demand, Courtesy Barry Ritholtz

You know, there are very few guaranteed money makers, but one is owning baseball club, and the Chicago Cubs have just filed for bankruptcy, which says something about the state of the economy.

I know that this is really an artifact of Sam Zell’s completely idiotic business model, which seemed to be:

  1. Collect Underpants
  2. ?
  3. Profit

Except, of course, Zell was collecting short term loans, rather than underpants.

Of course, it’s not only big debtors like Zell who are getting into trouble. You are seeing foreclosures increasing among more expensive homes, which gives the lie to the constant refrain from many in the right wing that it’s all the fault of those n*gg*rs irresponsible borrowers.

It’s going to get worse, and it’s likely to create another crisis if Wells-Fargo’s numbers on Option ARMs carry across the industry, which are unbelievably grim:

“Several of our investors have questioned the current loss severity in light of negative amortization and home price decline,” researchers wrote in the report. “Our analysis suggests that option ARM loss severity will likely range between 60% and 70% provided home prices have stabilized.”

So 60+% of the option ARM are expected to go bad, even if house prices are not falling any further.

We are also seeing a continued drop in hotel activity, which implies that both consumer and corporate travel remain moribund.

The bottom piece of chart pr0n is the Baltic Dry Index, basically an index of shipping costs, though it is also a very good proxy for shipping demand, and this appears to indicate that the need for shipping, and hence the level of international trade, is still well off.

We are some seeing some interesting activity in US Treasuries now, with bonds rising, and their yields thus falling, on the expectation that the Fed will print more money and that inflation will remain low, but Treasury Inflation Protected Securities (TIPS) are also showing signs of expanded demand, which implies that at least part of the bond market is betting on increased inflation in the relatively near term.

We have some good news, in that the recession appears to be well and truly over…..In New Zealand, with retail sales jumping there.

This would explain why both the $NZ and the $Aus rose significantly yesterday….Well, that and the fact Australia’s central bank raised rates last week.

The US dollar was otherwise mixed, weaker vs. the Euro, but up vs. the Pound Sterling and Yen.

Oil rose yesterday too, as a result of a combination of cold weather in the US and optimism about the economy.

Update on Fed/Bloomberg Case

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The case, which the Federal Reserve appealed, is about whether or not the central bank should release the names of non-banks that have borrowed from it.

The Fed wants the names kept secret, and lost in the lower court, and now Bloomberg wants the names released pending appeal:

Details about the borrowers and their collateral are “central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression,” attorneys for Bloomberg said in the suit.

The Freedom of Information Act obliges federal agencies to make government documents available to the public. The Bloomberg suit didn’t seek money damages.

The interesting bit here is that the Fed is appealing on the basis of damage, which means that they appear to be ceding their prior claim that they aren’t really a part of the government, and hence are subject to FOIA requests.

Economics Update (Catching Up)

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Unemployment Claims, Courtesy Calculated Risk


Consumer Credit, Courtesy of EconomPic


Office Vacancies, Courtesy Calculated Risk


Office Investment, Courtesy Calculated Risk


Strip Mall Vacancies, Courtesy Calculated Risk

So, we have some news on the unemployment front, with new unemployment claims falling to 521,000, a 33,000 drop, with the 4 week moving average falling 9K to 539,750, and continuing claims falling by 72K to 6.04 million.

We also have some good news from Australia has become the first G-20 central bank to raise its benchmark rate, by 25 basis points (¼%) to 3.25%.

My guess is that the Reserve Bank of Australia’s (RBA) is premature in this action, as is generally the case with first movers coming out of a recession, but it means that the next central bank will likely be correct, or at least less wrong, as the second movers, such as the European Central Bank and the Bank of England, who both kept their rates unchanged, generally are in such things.

Still, 3¼% is pretty damn low by historical standards.

It could be that Australia’s rate hike may force other central banks’ hands though, as their rate increase appears to have pushed prices down, and yields up, on US Treasuries.

We also saw retail sales rising for the first time in over a year in September, and the Institute for Supply Management has released its Non Manufacturing Index, which rose to 40.9, up from 48.4 in August, and the first time that it has been above 50, meaning expansion, as opposed to that whole 2nd derivative is positive thing, for the first time in 11 months.

So, it appears that there is some sort of recovery in the works, assuming that something else bad does not happen, like US apartment vacancy rates hitting a 23-year high and rents falling, consumer credit continuing to contract, CRE taking a hit as office vacancies go up as rents go down, along with strip mall vacancies hitting a 17 year high, and wholesale inventories falling in August.

Much of what worries me is real estate, though it has to be said that mortgage applications have risen as the rate for a 30 year fixed mortgage has fallen to 4.87%(!).

It does appear that the good economic news, along with the Australian rate hike, has had an impact on currencies and energy, with oil rising above $71/bbl, and the dollar falling on both an increased risk appetite, and downward pressure from the Aussie rate hike.

As to how much is optimism, and how much is the rate hike, the fact that gold hit a new high, and gold is typically seen as a hedge against uncertainty leaves me inclined to lean toward the pessimistic view, but then again I always lean toward the pessimistic view.

Be Afraid, Be Very Very Afraid

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Something that it tossed off rather blithely in this article is the fact that under a tax and trade system*, will generate a market of more than $2 trillion, “within five years of trading (starting)”.

When you look at what trading has done to the price of oil, i.e. created increased transaction costs and increased price volatility, and you realize that the US Gross Domestic Product (GDP) is just $13 trillion a year, this looks like another Wall Street “Masters of the Universe” engineered disaster in the making.

I’m waiting for the CDS (Carbon Default Swap) market to blow up the markets, and I wonder how I hedge myself to profit from it when it happens.

*That is what it really is, after all. It’s taxes which are bought and sold to allow Goldman Sachs to generate fees for trading these permits. Cap and trade is used in order to make it sound like it isn’t a tax, but it’s a tax, only a lot of the proceeds go to Ivy League classmates of Ivy League politicians as sales commissions.