More fun with creative accounting…

Some excerpts below:

A letter written by Barney Farnak head of the Financial Services Committee to the 4 largest banks contained the following two paragraphs.

Many investors in first-lien mortgages have indicated that they are willing to accept the fact of significant losses on those investments in order to move on and use their money for other purposes, rather than having it locked in underwater mortgages with a high and growing likelihood of foreclosure. With the interests of homeowners and investors aligned in this way, it should follow that large numbers of principal-reduction modifications could be made relatively quickly. That is not happening. According to investors, Administration officials, and other experts I have consulted, holders of second-lien mortgages are now a principal obstacle to many modifications. The problem of second-lien mortgages standing in the way of successful principal reduction modifications has reached a critical stage and requires immediate attention from your institutions.

Large numbers of these second liens have no real economic value – the first liens are well underwater, and the prospect for any real return on the seconds is negligible. Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep borrowers in their homes.

Read the paragraphs from Barney Frank’s letter again. In order to write down the first principal of a mortgage, the second needs to be destroyed. However the second mortgages are on the books of the largest banks, and they are on their books for a high value even though they are worthless.

I’m going to isolate the four largest banks Frank questioned about second-liens, along with their losses as they’ve legally sworn to being accurate during the stress test:

Again, this is data as reported to the government by the major banks during the stress test of 2009. So what’s going on here? The four major banks have about $477 billion in junior liens, either in the form of a second mortgage or a home equity line of credit. If you go to the Fed Funds data online, you’d see that there’s about a trillion dollars of 2nd/Juniors out there, so the four major players have about half the market.

The four major players each report that they expect to have a 13-14% loss on these items under an “adverse scenario”, with Citi reporting a 20% loss under an adverse scenario. That means of the $477bn, $68.4 bn is junk that’ll never be collected on. This, combined with all the other expected losses (see the link to the stress test for the rest), meant that the four biggest players needed around $53bn to be raised.

Notice how Frank’s letter, and pretty much anyone you’d speak to who isn’t working for the four largest banks, assume that second liens in the country aren’t worth 86% of their value (for a 14% loss). You see in Frank’s letter “no economic value.” Huh. Well, that’s a problem.

Principal Writedowns and the Fake Stress Test

Source: Seeking Alpha | Mike Konczal March 09, 2010

Stocks managed modest gains into the final hour on little real news. The one-year anniversary of the stocks markets rally from 12 year lows occurs this week. From the peak set in October of 2007 the Dow fell 54.4%, the S&P 500 shed 57.7% and the NASDAQ plunged 55.8% hitting their lows in March of last year. Since that time the DOW has surged 63.3%, the S&P 500 jumped 70.8% while the NASDAQ has rocketed 83.8% so at least on a percentage basis it appears that all is right in the world again.

Looked at from a Dollar perspective using a theoretical $100,000 portfolio and the previously mentioned percentages and the picture becomes a lot less dramatic as the DOW turned $100,000 into $74,464, the S&P 500 reduced the same $100,000 to $72,248 while the NASDAQ with an 80+% gain reduced $100,000 to $81,239. All of which serves to illustrate the validity of Warren Buffet’s 2 rules of investing; Rule #1 Don’t lose money; Rule #2 Don’t forget about Rule #1, as losses cut deeper on the way down, simple mathematical fact.

Unlike us and most other nations, perhaps all, that currently have a banking crises the good people of Iceland told their government and the banksters to take a hike when it comes to the citizens tax money being used to pay for their losses. Each citizen was looking at a bill equivalent to $16,400. Despite an overwhelming 93% majority of Icelanders voting down the latest settlement with the banksters the government is actually working on settlement #3 of all things.

At least the citizenry of Iceland has the courage to tell the banksters where to get off. The Argentinians did the same several years back, the mainstream media predicted it would be the end of the world and financial Armageddon for Argentina, yet they came out of the crises quite well after a relatively short period of struggle.

Perverting capitalism in a manner that socializes losses whilst profits remain private is contrary to Adam Smith’s dream, smacks of socialism or worse and is downright un-American. Perhaps we need to follow the example set by the good people of Iceland, demand accountability and inform the banksters that if they require government assistance it can be found at their local unemployment office.

Our huge socialist experiment attempting to prevent true price discovery and by implication real affordability through taxpayer funded market manipulation in an attempt to save the banksters from their own folly continues….

Some excerpts below.

House Financial Services Committee Chairman Barney Frank wrote, “To save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages.”

The problem is prices. Home prices have fallen so far in the hardest hit areas, the areas where the bulk of the troubled loans are, that banks would have to write down principal 30 to 50 percent to put borrowers back in the green. Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they’d all be insolvent.

I stole that shell game idea from housing consultant Howard Glaser: “We’re spending tens of billions of dollars on a tax credit to get people to purchase homes, we’re spending federal money to keep them in their homes through the modification program, and now we’re going to pay them to move out of their homes. This is not a sustainable system for the housing market. It’s a shell game. Bernie Madoff could have created this system,” Glaser told me today.

As for the borrowers, the rental market is ripe. Rent rates are low, vacancies are high, and the hit to personal credit isn’t going to matter as much a few years from now when banks are desperate once again sell mortgages.

Mortgage Principal Writedown Won’t Save Housing

Source: Diana Olick | CNBC
Monday, 8 Mar 2010

Stocks enter the final hour about even. Another 4-banks went to the receivers Friday bringing the total for 2010 to 26. Consumer Credit snapped a string of 12 consecutive declines to increase 5 billion in January as consumers spent more on non-revolving purchases like cars. Credit card or revolving debt continued to slip.

The FDIC holds a growing asset collection from all of the bank closures and the process of liquidating these assets in the open market is likely to promote further bank losses and write downs as it will provide for price discovery of impaired assets, a.k.a. toxic assets. Of course the banks are less than happy that their regulator would expose them to further losses, then again when you play games with asset value accounting and avoid mark to market and instead mark to fantasy or the banks opinion of what something is worth, what did they expect. It should be noted that various regulators not only encouraged but also promoted the use of creative accounting by the banks.

Which brings us to the looming crises with mortgage modifications, a program that just isn’t working. Still the need to cure the related bad debts remains hence the growing push to facilitate short sales. Hopefully this strategy will meet with more success as if all parties can agree, the big problem is junior, primarily second, lien holders as they frequently get nothing in a short sale. Nonetheless the primary lender and mortgage holder usually suffer lower loss rates and other negative consequences, primarily credit score related for the borrower and asset value preservation for the lender, with a successful short sale as compared to an actual foreclosure.

California recently revised its job loss figures for 2009 increasing the total by 338,400 to a little less than a million. Reading between the lines and that means the original number was roughly 600,000 but grew to nearly a million meaning that the job loss figures statewide were revised upward by some 50%. I complain about the BLS and there shoddy national jobs reporting, perhaps I should be quiet as California’s data is just plain terrible and it is no wonder the budget is such a disaster. As 50% more people than originally figured, didn’t earn money or pay taxes in 2009 and that is a lot of aggregate economic activity. Which serves to highlight growing problems with the reliability and accuracy of economic data as the fudging of numbers has become extensive.

There has been substantial debate on the Fed’s role in the current credit bust, some claim it is simply regulatory imprudence, essentially weak rules that allowed this fiasco to develop. Others figure it was a failure to regulate or enforce existing regulations, commonly known as nonfeasance or a failure to do ones job effectively. Clearly at this juncture it was a failure to enforce existing regulations or nonfeasance because the job just was not done effectively, there were plenty of regulations.

Which brings me back to California’s 50% upward revision to 2009 employment losses and growing problems with other economic data sets. Revisions to the numbers are to be expected and required in the interest of accuracy and reporting but when the methodology is retuning data that is grossly inaccurate as shown through substantial revision or considerable anecdotal data suggesting otherwise. It is either deliberate policy to further an agenda or nonfeasance in the data collection process, analysis or reporting.

As always Elizabeth Warren does a great job of explaining things in plain English, touching on the Fed’s failure to regulate thereby allowing the bubble to grow and collapse. The usury nature of bank lending agreements and related “revenue enhancers” and the problems faced by the commercial real estate sector and legacy toxic asset issues facing the banks amongst other subjects.

Charlie Rose Interviews Elizabeth Warren TARP Special Investigator

Source:
Charlie Rose | Elizabeth Warren

Stocks added nice gains for the week on generally positive news, since Monday the DOW is up about 200 points or 2% while the NASDAQ has gained some 70 points or 3%. February’s employment report while another loss at –36,000 jobs was better than expectations as the unemployment rate remained unchanged at 9.7%. That said the workweek fell to 33.1 hours as average earning increased .2%. This report while better than expected is another example of less bad but not good data, primarily because it takes job creation of about 150,000 new positions each month just to keep up with demographic trends.

The ECRI Future Inflation Gauge fell in February to 101.4 a 10th straight gain as the smoothed annualized growth rate slipped to 31.3%. That said inflation remains muted and related data suggests that on balance deflation remains much more of a concern than inflation. The ECRI Weekly Leading Index continues to fall as the smoothed annualized growth rate dropped 1.2 points to 13.7, the top line number increased to 129.8.

A last round of TALF lending brought a 6-month high in loan activity totaling 4.1 billion as borrowers rushed to pledge, their polite term is non standard, in reality it is impaired ABS issues as loan collateral because the financial sector remains loaded up with toxic assets. Consumer credit data is released at noon and of course its bank failure Friday I’ll have that info and more Monday.

Stocks enter the final hour with small gains. Productivity took another big jump in the 4th quarter of 2009, increasing 6.9% on a revised basis, the 3rd consecutive large gain. Despite another big drop in unit labor costs, they fell 5.9%, compensation gained just .6% so most of the productivity gain accrued to the corporations or business owners through increased profits. On a real or inflation adjusted basis compensation fell 2.8% during 2009. For all of 2009 productivity increased 5.8% and this represents the biggest gain in 7-years. The 4.7% decline in unit labor costs last year is the largest on record going back to 1948.

The ICSC retail sales report for February increased for a 3rd consecutive month with a nice gain of 3.7%, which made for great headlines. Consumers continue to focus on staples, buying essential items like food, clothing and fuel. That said this report, like a number of others benefits substantially from a very weak comparison, namely early 2009 at the height of the panic over the economic crises.

Tomorrow will be a busy day as we have the February employment report and another report on consumer credit. Expectations are for additional job losses before the Census hiring kicks in for March. Weekly initial claims for unemployment benefits fell to 469,000 last week while the 4-week moving average slipped to 470,750. In fact the 4-week moving average having bottomed just after the beginning of the year has been climbing since casting real doubt as to the legitimacy of the recovery. On the subject of recovery absent employment growth any economy some 70% dependent on consumer spending, that would be ours, is facing an uphill battle for recovery when Consumer Credit continues to fall and should post yet another decline as debt levels remain painfully high and consumers continue to repair their balance sheets.

While off their highs for the day stocks enter the final hour with modest losses despite positive news. The February ISM Services Index advanced to 53 beating expectations and expanding for 4 months out of the last 6. New orders increased for a 6th straight month at 55, business activity advanced for a 3rd straight month at 54.8, all together a decent report that suggests weak economic expansion. The Challenger report on announced layoffs resumed its decline in February as it fell to 42,090 announced losses a 3.5 year low. The actual employment report will be out Friday expectations are for another loss of about 50,000.

The old joke “of course you can trust the government, go ask an Indian” has become painfully relevant again, perhaps it always was. It was bad enough that the banks were given 700 billion in taxpayer funds no strings attached or questions asked as to what they were actually going to do with it, following the economic and financial sector implosion they engineered compliments of their own greed and stupidity.

Stories of back door deals, coercion, illegal behavior, willful concealment of relevant information and other shenanigans involving various shotgun marriages and bailouts of the likes of Countrywide Finance, B of A, Merrill Lynch, AIG and well most large financial institutions at taxpayer expense. Along with considerable malfeasance by the NY Fed under now Treasury Secretary Timothy Geithner, the story of Harry Markopolis who on 4 separate occasions told the SEC to take a hard look at Bernard Madoff’s now infamous 85 billion Dollar Ponzi scheme and one wonders, gee what’s going to happen next.

Compliments of the case Murry v. Geithner the discovery and subpoena process is revealing more ugly details as the days go by. Geithner’s creation of a special “Trust” as NY Fed President to hold 77.9% of AIG’s common equity is one, as the Federal Reserve forbids equity ownership. But this pales in comparison to the following. The use of a so-called independent trust to circumvent Federal Reserve rules on equity ownership by then NY Fed President Timothy Geithner to conceal unlawful ownership, if done with prior knowledge by Mr. Geithner apparently qualifies the transaction as criminal money laundering under Title 18.

The banks and their executives have demonstrated on many occasions that they are either criminals or criminal enterprises. Abe Lincoln quoted long ago, “show me a man’s friends and I’ll show you the man”. As such it should come as no surprise that the Fed is willing to, shall we say, cut corners as there is a revolving door between the criminal enterprises that make up a good portion of the nations financial sector and the Treasury and Federal Reserve, the latter formed outside the purview of the government or its citizenry compliments of a clandestine meeting on Jekyll Island way back in 1913 and despite the Federal part of its name has no actual relation to the Federal Government. Which probably has a lot to do with the fact that they have never been audited despite having control of the nations money supply.

As appalled as I am by our “splendid little wars” and the squandering of our Tax Dollars upon them I’m beginning to question just what bothers me the most from a moral and ethical perspective, wasting Tax Dollars on illegal wars or giving Tax Dollars to the banksters, and I’ll tell you, it’s a tough call.

If you would like to read more about Mr. Geithners “ahem” lack of judgment, follow the link below.

Secretary Geithner’s Got Some Explaining to Do

Stocks moved higher in choppy trade and enter the final hour with small gains. Benefiting from Toyota’s recent troubles GM and Ford posted sales gains in February as Ford surpassed GM in sales for the first time in nearly 12 years. Still auto sales remain weak and the comparison from a year ago at 9.143 million units annualized made it an easy number to improve upon.

Based on recent GDP data the argument that the recession is “officially” over is both a strong and popular one. The NBER or National Bureau of Economic Research is the outfit that officially designates when recessions start and end. The said the NBER likes to look at personal income less transfer payments, manufacturing, trade all on a real or adjusted for inflation basis and of course employment.

Income is still falling everything else has either turned the corner or stabilized. But the question is weather or not the recession is actually over. My take is that stimulus has indeed “ended” the recession, you can fix just about anything if you throw enough money at it. Absent stimulus of course and the recession will return with a vengeance and this level of stimulus is most certainly not sustainable.

Like the HAMP program that is being micro-managed to death and constantly modified in an attempt to make it work, so to is the FHFA program for mortgage modification as well or HARP. The bottom line with modification is a redefault rate of 50+%, the latest figures are closer to 70%. While the combination of creative financing to cash flow an investment that was actually a home enabling the buyer to purchase much more property than they could afford combined with falling prices and a lack of documentation on both sides has produced a toxic stew that really has no solution other than foreclosure and or bankruptcy because the underlying assumptions have proven to be incorrect as there is a substantial difference between a home buyer and a real estate consumer.

Good old Goldman Sachs, winning the hearts and minds of good folks everywhere and making obscene profits in true robber baron style.

Once again McClatchy Newspapers does a fine job. excerpts below

When financial titan Goldman Sachs joined some of its Wall Street rivals in late 2005 in secretly packaging a new breed of offshore securities, it gave prospective investors little hint that many of the deals were so risky that they could end up losing hundreds of millions of dollars on them.

In some of these transactions, investors not only bought shaky securities backed by residential mortgages, but also took on the role of insurers by agreeing to pay Goldman and others massive sums if risky home loans nose-dived in value — as Goldman was effectively betting they would.

Before the subprime crisis, the U.S. financial system had used securities for 40 years to help Americans finance their houses, cars and college educations, said Gary Kopff, a financial services consultant and the president of Everest Management Inc. in Washington. The offshore deals, he lamented, “became the biggest contributors to the trillions of dollars of losses” in 2008’s global meltdown.

While Goldman wasn’t alone in the offshore deal making, it was the only big Wall Street investment bank to exit the subprime mortgage market safely, and it played a pivotal role, hedging its bets earlier and with more parties than any of its rivals did.

McClatchy reported on Nov. 1 that in 2006 and 2007, Goldman peddled more than $40 billion in U.S.-registered securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting. Many of those bets were made in the Caymans deals.

Many of Goldman’s winning bets with other large U.S. banks raised the price tags of 2008’s government bailouts of Citigroup, Bank of America, Morgan Stanley and others by sums that no one has yet determined because the contracts are private, according to people familiar with some of the transactions.

However, one billion-dollar transaction that Goldman assembled in early 2006 is illustrative. It called for the firm to receive as much as $720 million from Merrill Lynch and other investors if defaults surged in a pool of dicey U.S. residential mortgages, according to documents in a court dispute among the parties.

Securities experts said that deal is headed for a crash that’s likely to cause serious losses for Merrill Lynch, which Bank of America acquired a year ago in a $50 billion government-arranged rescue.

Taxpayers got hit for tens of billions of dollars in the Caymans deals because Goldman and others bought up to $80 billion in insurance from American International Group on the risky home mortgage securities underlying the deals.

AIG, rescued in September 2008 with $182 billion from U.S. taxpayers, later paid $62 billion to settle those credit-default swap contracts. The special inspector general who’s tracking the use of federal bailout money has reported that beginning in 2004, Goldman itself bought $22 billion in insurance from AIG for dozens of pools of unregistered securities backed by dicey types of home loans.

When the federal government saved nearly bankrupt AIG, Goldman got $13.9 billion of the bailout money, and it still holds more than $8 billion in protection from AIG.

Goldman’s offshore deals deepened global financial crisis

Source:
Greg Gordon
McClatchy Newspapers
Goldman’s offshore deals deepened global financial crisis