Category: regulation

FDIC Warns Banks on Equity Lines of Credit and REOs

No Comments

It appears that the FDIC is taking exception some bank policies that are becoming more frequent, blanket suspension of home equity lines of credit (HELOC), and management of real estate owned (REO) properties.

In the first, the FDIC is saying that, “under Regulation Z [of the truth in lending laws], lenders can reduce an applicable credit limit only in the event of “significant decline” to the value of an individual property (a “material change” in the borrower’s financial condition — such as the loss of a job — qualifies as well),” so it must be handled on a case by case basis

In the second, the FDIC has issued instructions on proper management of REO properties, because, “some banks are choosing not to pay taxes on certain low-value REO properties in hard-hit neighborhoods, in the hopes that local municipalities will take the property to a tax sale rather than force the lender to carry the property on its books.”

Neither of these notes suggest that housing is heading for a recovery.

UBS Experience the Joys of Email

No Comments

Specifically, regulators in Massachusetts have obtained emails showing that UBS was pushing auction rate securities even as it believed that the market was in trouble.

They were aggressively selling these to individual consumers, even while their corporate clients were bailing, because they did not want to be left hold the bag.

It’s called, “putting lipstick on a pig”:

This e-mail was released as part of a civil suit brought against UBS by William Galvin, secretary of the Commonwealth of Massachusetts. He says UBS misled investors by saying that auction-rate securities were as safe as cash in order to keep these arcane bonds off their own books. Among the other e-mails uncovered:

From Joel P. Aresco, chief risk officer for the Americas, Nov. 15: “What measures are being taken to reduce this exposure? [to auction rate securities”

From David Shulman, Dec. 11: “I am pushing every angle here to move product.”

I hope that someone is going to go to jail over this.

The Coming Mortgage Litigation Tsunami

No Comments

I believe that I’ve covered it before in passing, but this is, I believe, the first court case in which a court has canceled a loan for deceptive practices.

They plaintiffs thought that they had gotten a loan that was fixed for the first 5 years, but rates went up after the first year:

The Andrews filed the case seeking class action status; and in early 2007, U.S. District Judge Lynn Adelman ruled that the bank had violated the Truth in Lending Act, or TILA, and that thousands of other Chevy Chase borrowers could join them as plaintiffs.

The judge transformed the case from a run-of-the-mill class action to a potential nightmare for the U.S. banking industry by also finding that the borrowers could force the bank to cancel, or rescind, their loans. That decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals, which is expected to rule any day.

The lawsuits filed by attorneys general in California, Florida, and Illinois use much the same theory.

It’s based on the 1968 Truth in Lending Act, which requires clear disclosures of terms, and allows for, “rescission, or termination, of a loan and the return of all interest and fees when a lender is found in violation.”

Needless to say, the banks are freaking, though I would ask why any ethical mortgage banker would have anything to fear.

This one’s going to the Supreme Court, where I expect them to rule in a 5-4 split, that only little people have to follow the law.

What I Mean by “Pushing on a String”

No Comments


Rich Toscano, talking about mortgage rates, gives us this little bit of chart fun:

If you take a look, you will notice that the 30 year fixed and 1 year ARM rates change very little relative to the Federal Funds rate as charged set by the Federal Reserve.

It comes down to the fact that the lenders are interested in how interest rates effect them, and even if the rates are low today, they may be higher tomorrow.

If interest rates are 9%, and you have a 30 year fixed mortgage at 6%, you will not be a happy camper.

Thus, you don’t cut all that much when the Fed sets rates really low, because you have to look forward many years.

The 1 year ARM is a bit more amenable to the interest rate cuts, but only a little, since they typically have a limit to how much the rates will go up over time, and you can end up behind the same 8-ball.

This is why the drastic rates cuts instituted by Bernanke aren’t working. People do not believe this to be a long term sustainable solution, so they are not willing to issue cheaper loans.

Hence the term pushing on a string.

Shorter Financial Industry Response

No Comments

So, it appears that the financial services industry is now objecting to pricing assets on their balance sheets at market value, because it makes their balance sheets look pretty sick.

Let’s be clear on this: these companies bought a bunch of highly complex financial instruments, ones that they themselves did not understand, and now no one is willing to buy this toxic waste at anything even remotely near to face value.

Stephen Schwarzman, the co-founder of the Blackstone Group, thinks that the accounting rule, FAS 157, which requires that you place your investments on the books at fair market value, is too high a standard, and that,”the rule is accentuating and amplifying potential losses.”

What is amplifying the rule is traders and senior executives dealing in pixie dust, because they got a commission for doing so.

Note that SOME companies have been doing mark to market for a long time:

But Goldman Sachs proved why FAS 157 works: Goldman has been marking its books to market for years, and as a result, its risk officers were able to hold back its go-go traders from making bad bets when everyone else was throwing their chips last year into the subprime game.

Will no one rid me of these turbulent brokers?

Deleveraging: Defined as Getting Out of Debt Before Creditors Realize that You Are Broke

No Comments

The major banks are deleveraging, reducing their debt to asset ratio.

They are worried that in the event or a run, they could go into Bear Stearns style meltdown, and that if Congress of the SEC start increasing margin requirements, that they will be caught flat-footed.

Additionally, the leverage that they retain is being moved to longer term loans, which insulates them from a panic, at the cost of higher interest rates.

We still have a way to go down as this all unwinds, but one consequence will be higher interest rates, as the availability of money decreases, and supply and demand drives the price higher.

Quis Custodiet Ipsos Custodes?*

No Comments

Stanford University’s law and business schools just completed a review of the various corporate governance rating firms, “which include the Corporate Library and RiskMetrics Group’s ISS Governance Services”, and conclude that their ratings on corporate governance have little to do with whether a company is actually well run.

This is not surprising. When we look at the credit rating firms such as S&P, Moody’s, etc. we see a very similar pattern.

A private ratings agency is always at risk from conflicts of interest.

*Most commonly translated from the Latin as “Who Watches the Watchmen”.

Unbelievably F&%$ing Bad Ideas: London Stock Exchange Edition

No Comments

So it appears the bright young (but evil) men from Lehman have been talking to the bright young (but evil) men from the London Stock Exchange, and they will be working together to make our world a worse place:

London Stock Exchange Group said Thursday that it would create a pan-European trading system in partnership with Lehman Brothers, as the exchange sought to regain its leading role in the region.

The deal creates a system for so-called dark liquidity pool trading. The exchange, known as the LSE, said the trading facility, to be named Baikal, would be open to other investors and was expected to begin operating in the first quarter of 2009. Lehman, based in New York, operates its own dark pool network. It is bringing sophisticated trading technology and an established customer base to the table.

……..

Dark liquidity pools are off-market trading networks where large orders can be executed anonymously, without divulging prices to public exchanges. Off-market trading has always existed in the form of over-the-counter transactions, but the technology now exists to bring investors together electronically in anonymity. Dark liquidity in European equities is growing rapidly, according to the LSE, and currently accounts for around €12 billion, or nearly $19 billion, in daily trading value.

…….

…..

David Shrimpton, head of equity market development at the London Stock Exchange, said that the LSE was hoping to bring other investors aboard as partners, and the response to the announcement had been “very positive.”

He said it might be possible for a quite a few trading systems to co-exist. “You’ve got 50 broker dark pools in the U.S.,” he added, “and they share about 10 percent of the market.”

…..

Yep. There’s a recommendation. Let’s get into a new anonymous and unregulated type of exchange pioneered by the Americans, whose toxic financial products currently threaten to poison the world financial systems.

Evil, unregulated, dangerous, and will likely be disasterous.

Another Banking Disaster Looming on the Horizon

No Comments

It turns out that a lot of banks, particularly smaller ones, look likely to get hammered by construction loans that allow developers to delay making payments.

They are called interest reserve loans, and they may be one of the next bubbles to pop:“

In essence, the banks pay themselves until the loan becomes due or the property generates cash flow.”

That’s a scary quote, and what it means is that a loan can continue to be reported as a “performing” loan, even though payments are not being made and the underlying property is not selling.

Sounds awfully familiar. A financial instrument predicated on the idea that property prices always go up, and never go down.

The good news is that the small banks seem to be a bit more proactive in recognizing and addressing the problem:

More banks are starting to change how they use interest reserves. Integrity Bank has stopped using interest reserves on loans used only for purchasing land without immediate plans for construction and loans on projects that have been delayed or abandoned. David Edwards, who joined Integrity in December as chief credit officer as part of a management shake-up at the bank late last year, said: “There is nothing wrong with the use of interest reserves. It depends on whether the borrower has hard cash [put up front], and whether the project is active or not.”

Towne Bank, of Mesa, Ariz., has eliminated funding interest reserves. “Realistically, you never know whether a borrower can keep the loan current if you are the one who’s making the payment,” Patrick Patrick, who became chief executive of the bank in February.

HomeTown Bank, also ordered to change interest-reserves practices early this year, now is part of SunTrust Banks Inc., of Atlanta. A spokesman declined to comment.

Fed Holds Rates Steady

No Comments

I think that I was right, no rate change, but the words accompanying the decision are a bit more hawkish on inflation.

FRB: Press Release–FOMC statement–June 25, 2008

Release Date: June 25, 2008
For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

My Prediction on Fed Rate Setting

No Comments

Even if inflation were not an issue, and it is, they would not cut rates, because they have already cut them so far that the market is no longer effected by this.

The economic news lately has been awful, so they won’t raise rates.

Thus, they will do nothing, though my guess is that their statement will be more hawkish on inflation.

We will know in about 14 hours.

Energy and Speculation…A Problem….Not So Much

No Comments

Well, we have analysts saying that oil and gas are have had twice their price doubled by speculation, but I think that this is a load of crap. I agree with Paul Krugman, that the effects are smaller than that. If you were to argue that there were a 5% effect on the price over the short term, I would buy that, but 50% is way out of ling.

Krugman had a nice picture on the relationship between oil futures, contracts for later delivery, and spot prices, where the oil is delivered immediately:
Simply put, there would be more of a spread if there were more of a speculative effect.

That being said, market volatility, which aggressive speculation exacerbates, does a lot of damage otherwise, so I do support some of the measures that the Congressis considering in order to reign in excessive speculation.

That being said, at its core, we have demand for raw materials outstripping supply. That’s why we are seeing things like a 96% jump in iron ore prices, a market in which there are no futures contracts.

Monoliner MBIA Playing Chicken With Regulators

No Comments

Yves Smith notes that monoliner bond insurer MBIA, after raising over a billion dollars through an equity offering, is refusing to transfer the proceeds from its holding company to its insurance subsidiary.

It appears that they are doing this because senior executives are paid by the holding company, and not the insurers.

One wonders then, why regulators, in this case Eric Dinallo, the New York State insurance commissioner, aren’t doing something about this, and the answer is blackmail:

The risks associated with the vast, unregulated market for credit default swaps played a crucial role in the bailout of Bear Stearns. Now these financial instruments are taking center stage in another Wall Street drama: whether regulators will let MBIA, the big bond insurance company, renege on a promise to shore up a crucial unit with $900 million in capital.

MBIA has written $137 billion in swaps, which are privately traded insurance contracts that let people bet on companies’ financial health. Most of these contracts stipulate that if MBIA’s bond insurance unit becomes insolvent or is taken over by state regulators, buyers can demand payment immediately.

But if that were to happen, MBIA would have far less money to pay policyholders and owners of municipal bonds backed by the company. So the swaps give MBIA significant leverage over Eric R. Dinallo, the commissioner of the New York State insurance department, who wanted the company to bolster its insurance unit with the $900 million in cash.

As the old saying goes, “If you owe the bank $1000, the bank owns you. But if you owe the bank $1,000,000, you own the bank.”

I’m thinking that perhaps a better solution for New York State regulators might be to find a way to arrest senior management at MBIA, as it appears that their capital raising was clearly fraudulent.

Public Ownership of Our Communications Infrastructure: It Just Works Better.

No Comments

Harold Feld, a specialist in telco and spectrum issues with an eye toward public access, points me to an interesting bit of information, that while the UK, with its largely free market (by Europe’s standards) broadband market place lags behind the rest of Europe, the town of Nuenen, population 7500, provides its residents with 100mbs connectivity, with triple play access (internet, phone, TV) for €39/month (about $60), on a municipally owned network.

What’s more:

If a community-funded ISP sounds like a wacky European socialist plot, consider this: OnsNet generated an operating profit of about €1 million on revenues of €4 million in the past financial year – and that’s after a massive upgrade in which it wired the entire community with dual-fibre capability. What has your ISP done for you lately?

Faster, better, and cheaper than what you can get in the UK, where they require that the last mile wiring and internet service must be separate, which in turn is faster, better and cheaper than what you can get in the US, where the only rule is maximize the next quarter’s profits.

The idea that an unregulated market in broadband to the home creates innovation is simply wrong. We have had nearly 20 years of this policy now, starting with ISDN, and the US has the worst broadband service in the industrialized world.

The goal of a company is to make a profit, and the easiest way for incumbents to make profit is to create barriers to entry, not by providing better of cheaper service.

Tanker, Oh Tanker

No Comments

The G.A.O. has ruled against the Air Force on Boeing’s protest, which probably means a rebid.

I’m kind of surprised. After Boeing bribed the Pentagon acquisition officer, I figured that they would have handled this better.

I also figure that when you chose the plane that is:

  • Already flying.
  • Just as cheap.
  • Offloads more gas further away from base.
  • Has a contracting team with a better record of being on time and on budget.

That it’s tough to screw up the process.

Needless to say, Boeing is doing a happy dance about all of this.

The GAO language is fairly strong, which means that a recompete is almost certain.

If Obama’s folks have any guts, they will have proxies demagogue the hell out of this against McCain, who killed the original corrupt deal.

Ireland Rejects EU Treaty

No Comments

They voted it down in a referendum.

There have been a couple of problems with the EU efforts to streamline how they operate:

  • There appears to be an organizational insulate many senior career bureaucrats from “political interference”, which means insulating their decisions from democracy, which was seen as a negative by the Irish voters because it is a negative.
  • The voters are looking at a 250+ page document, and they have no confidence that anyone can understand what it means.

If the EU comes back with a document where decision making rests in the hands of elected representatives, and one that is short enough to understand, they will likely get approval.

The US constitution is under 10 pages. There is no reason for a governing document to be that long.

Merrill Lynch Chief Executive John Thain Can Kiss My Shiny Metal Ass

No Comments

It appears that Thain really wants continued access to the Federal reserve discount window, what I have called the sh%$pile for cash program, to continue in perpetuity, but is aghast at the thought that continued access might be predicated on greater regulation of investment banking as an industry.

You want the taxpayers on the hook for your mistakes, but you want the government out of your hair so that you can make those mistakes.

You sound an awful lot like those farmers who want the government off their back, and in the next breath ask for their subsidy check.

It makes one wonder how much a Harvard MBA is really worth.