The Fourteenth Banker Blog

October 27, 2010

Electoral Nothingness

Filed under: Running Commentary — thefourteenthbanker @ 4:27 PM

As we move towards another Tuesday, election day, it is astounding that so few that stand for office “get it”. Get what, you ask? Get that our tired alliances no longer serve us. Politicians on both sides of the aisle, and those rolling in it, still genuflect to the all-powerful elites, the corporations, the money men, the public employee unions; the prophets of empire, militarism, moral superiority, fears of moral corruption; those allied to Keynes, Friedman or the new Austrians. Most of these races are actually about…. nothing. Two politicians in most cases racing for the bottom, running negative ads smearing the other, standing for nothing other than power accumulation, when it is power accumulation itself that is the problem.

In this recent post, Barry Ritholtz says it is Us versus the Corporations.n

This may not be a brilliant insight, but it is surely an overlooked one. It is now an Individual vs. Corporate debate – and the Humans are losing.


• Many of the regulations that govern energy and banking sector were written by Corporations;

• The biggest influence on legislative votes is often Corporate Lobbying;

• Corporate ability to extend copyright far beyond what original protections amounts to a taking of public works for private corporate usage;

• PAC and campaign finance by Corporations has supplanted individual donations to elections;

• The individuals’ right to seek redress in court has been under attack for decades, limiting their options.

• DRM and content protection undercuts the individual’s ability to use purchased content as they see fit;

• Patent protections are continually weakened. Deep pocketed corporations can usurp inventions almost at will;

• The Supreme Court has ruled that Corporations have Free Speech rights equivalent to people; (So much for original intent!)

None of these are Democrat/Republican conflicts, but rather, are corporate vs. individual issues.

For those of you who are stuck in the old Left/Right debate, you are missing the bigger picture. Consider this about the Bailouts: It was a right-winger who bailed out all of the big banks, Fannie Mae, and AIG in the first place; then his left winger successor continued to pour more money into the fire pit.

We are fighting the wrong battles. Both parties have spent money indiscriminately. Neither party is willing to sunset programs or laws that no longer serve a purpose because every program and every law has a constituent. Few are willing to say that killing two civilians for every enemy combatant is not patriotic and does not increase our security, or that 50 eyes for one eye is not justice in any moral system. Few are willing to put civil servants, private citizens, and uninjured veterans on the same retirement and health care programs.

I would add that political machines are on the side of the Corporation persons and not the Human persons.

Bill Black and Randall Wray make a case in two parts that could begin to rectify these power imbalances. At least someone is willing to speak up.

Part One

Part Two

Breaking the backs of entrenched power structures is unruly but it is not a zero sum game. From the ashes of these giants would emerge new young enterprises that would fill any void in the financial markets. What are the people getting from hanging onto these tenuous existing wealth and power structures? Very little. We are in the proverbial monkey trap. Our tiny little fists cannot get out of the trap because we won’t let go of what we think we have. Let it go.


October 25, 2010


Filed under: Running Commentary — thefourteenthbanker @ 7:24 AM

I am copying this entire post from Baseline Scenario.

Food and Finance

By James Kwak

I just read Michael Pollan’s book, In Defense of Food, and what struck me was the parallels between the evolution of food and the evolution of finance since the 1970s. This will only confirm my critics’ belief that I see the same thing everywhere, but bear with me for a minute.

Pollan’s account, grossly simplified, goes something like this. The dominant ideology of food in the United States is nutritionism: the idea that food should be thought of in terms of its component nutrients. Food science is devoted to identifying the nutrients in food that make us healthy or unhealthy, and encouraging us to consume more of the former and less of the latter. This is good for nutritional “science,” since you can write papers about omega-3 fatty acids, while it’s very hard to write papers about broccoli.

It’s especially good for the food industry, because nutritionism justifies even more intensive processing of food. Instead of making bread out of flour, yeast, water, and salt, Sara Lee makes “Soft & Smooth Whole Grain White Bread” out of “enriched bleached flour” (seven ingredients), water, “whole grains” (three ingredients), high fructose corn syrup, whey, wheat gluten, yeast, cellulose, honey, calcium sulfate, vegetable oil, salt, butter, dough conditioners (up to seven ingredients), guar gum, calcium propionate, distilled vinegar, yeast nutrients (three ingredients), corn starch, natural flavor [?], betacarotene, vitamin D3, soy lecithin, and soy flour (pp. 151-52). They add a modest amount of whole grains so they can call it “whole grain” bread, and then they add the sweeteners and the dough conditioners to make it taste more like Wonder Bread. Because processed foods sell at higher margins, we have an enormous food industry pushing highly processed food at us, very cheaply (because it’s mainly made out of highly-subsidized corn and soy), which despite its health claims (or perhaps because of them) is almost certainly bad for us, and bad for the environment as well. This has been abetted by the government, albeit perhaps reluctantly, which now allows labels like this on corn oil (pp. 155-56):

“Very limited and preliminary scientific evidence suggests that eating about one tablespoon (16 grams) of corn oil daily may reduce the risk of heart disease due to the unsaturated fat content in corn oil.”

With this fine print disclaimer:

“FDA concludes that there is little scientific evidence supporting this claim. To achieve this possible benefit, corn oil is to replace a similar amount of saturated fat and not increase the total number of calories you eat in a day.”

Unfortunately, nutritionism is pretty much bogus science. The major claim of nutritionism over the past thirty years–that fat is bad for you–turns out not to have any foundation at all.*

What does this all have to do with finance? Roughly speaking, read academic finance for nutritionism; the financial sector for the food industry; subprime loans, reverse convertibles, and CDOs for highly processed food claiming to improve your health but actually killing you; current disclosure laws for the FDA-approved health claims on corn oil; thirty-year fixed-rate mortgages and index funds for the neglected, unsubsidized, unadvertised fruits and vegetables in the produce section; the OCC and OTS for the FDA; and the long-term increase in obesity and diabetes for the long-term increase in household debt.

In both cases, you have an industry that earns profits by convincing people to do things that are not in their long-term interests; that, in the process, creates negative externalities for the rest of society; and that has cowed regulators into submission, if not outright cheerleading. In both cases, the industry defends itself from critics by saying that it is simply providing what customers want, and hence any new constraints (even, say, accurate organic labeling laws) constitute a paternalistic intrusion into people’s economic freedom. And in both cases, the industry claims that if it isn’t allowed to continue on its current course, the economy as a whole will suffer. (After all, our corn- and soy-based diet is what enables the industry to provide huge numbers of calories at low cost.)

One big difference is that when it comes to the food system, there is a fair amount you can do to protect yourself and your family from its unhealthy effects (if you have the money). With the financial system, it’s a bit harder.

* It’s a bit more complicated than that, so before you take this as advice, read Part I, Chapter 5.

So naturally I agree with this assessment. What you see is not what you get. The question is how do we make finance wholesome?  I rather like Bill Black’s idea for a starter but it mainly serves to deconstruct, not to construct.


October 22, 2010

Seeking Radical Solutions

Filed under: Running Commentary — thefourteenthbanker @ 12:22 PM

In this country we have real problems that need real solutions. They are too many to enumerate here but I will make a few generalities.

  • The middle class is under immense pressure. There has been no real wage growth for a decade or more. The second earner in most families in the workforce, is yet the real standard of living has not moved appreciably except that perhaps we have bigger houses, which is not necessarily a good thing in the long run.
  • We continue in the shadow of a boom bust cycle with unemployment and underemployment running somewhere in the 16-20% range.
  • Interest rates are at all time lows and yet the Fed can only think to stimulate the economy by further purchases of financial assets.
  • Markets are no longer trustworthy. In the stock market, program trading dominates volume. I heard recently that 70% of trade positions are held for an average of 11 seconds. These trading algorithms are in a cut throat competition to trade on information a fraction of a second before other computers. The retail investor is at the mercy of these traders and has lost confidence that the markets are fair. The bond markets are not fair either. The junk that makes up Commercial and Mortgage Backed Securities is subject to all kinds of risks. Rates are suppressed by the Fed and a rebound would burn bond investors. The rating agencies can’t be trusted. There is little retirement security. Low rates on bank deposits are suppressing income for savers.
  • The United States, state, and local governments are in a pickle and are looking to reduce spending, which will further suppress aggregate demand at a time when the economy is weak.
  • We are stuck in expensive foreign wars that appear to be endless.
  • The global economy favors developing nations and emerging markets. Labor cost differentials are suppressing middle class employment in the United States.
  • The nation is divided politically. Neither major party has much leeway to even implement their preferred policies.
  • Small business is struggling while economic power becomes more concentrated in the hands of mega corporations and the super wealthy.
  • The Fed’s efforts to stimulate policy by creating inflation appear to be creating inflation in the cost of living for families but not in the value of their assets. Food and energy costs are on the rise, yet the government excludes these from their core inflation measures. Health care costs continue to be out of control and the population is aging.

So does anyone have any ideas? Here is one. Let’s create a wave of entrepreneurship that begins to rectify some of these imbalances. How can we do that? There is tremendous talent and knowledge locked up in our biggest corporations, those that are prospering while giving paltry wage increases, passing more health care costs back to their employees, moving many jobs to other nations, paying massive bonuses to executives. Why should the people support this?

A little over a century ago, the foundations of corporate power were laid with a series of legal decisions that weakened the position of the skilled employee vis a vis the corporation. This paper by Duke University professor Catherine Fisk examines these legal decisions. Here is the Abstract:

A legal ideology emerged in the 1870s that celebrated contract as the body of law with the particular purpose of facilitating the formation of productive exchanges that would enrich the parties to the contract and, therefore, society as a whole. Across the spectrum of intellectual property, courts used the legal fiction of implied contract, and a version of it particularly emphasizing liberty of contract, to shift control of workplace knowledge from skilled employees to firms while suggesting that the emergence of hierarchical control and loss of entrepreneurial opportunity for creative workers was consistent with the free labor ideology that dominated American thinking on the subject of work.

Today, corporations own virtually all intellectual property. They choose to develop and market some products and ideas, and others lie fallow for lack of attention and frankly motivation among increasingly disenfranchised corporate workers. The lack of any wave of major new innovation that can carry employment and personal income levels higher is exacerbating all the problems listed above. The government’s efforts to solve economic problems only serve to entrench existing corporate interests. They pass stimulus efforts through the financial markets, supporting “systemically important” institutions by shielding them from the consequences of their actions and pumping up the value of assets that are primarily institutionally and corporately held. All this is supposed to trickle down to the benefit of the employees. I can tell you, it is a trickle.

This suggestion is radical. The whole legal basis of company/labor relations would be challenged. But is not a shaking up of the status quo what is needed in order to get change of any magnitude? Well intentioned as they may be, are efforts to make change without actually hurting entrenched interests having any material effect? Take the health care bill. By building a coalition of the existing entrenched interests, the bill does little to affect cost. Cost is the problem my friends. If you want stimulus, cut health care costs back to 10% of GNP! That means some companies go under. So what? The prosperity that would result would dwarf these effects. But, then no campaign contributions, no?

Here is an issue for the Tea Party. Free the worker! Free market for intellectual capital! Decentralization of power! Pro Small Business!

Perhaps some of this intellectual capital would be used to revolutionize our health care. Perhaps some would be used for experimentation with new agricultural techniques. Perhaps some would be used in the energy business. The only problem is that the tables would be turned on the poor corporations, with their rising stock prices and billion-dollar war chests.

Anyone have any other ideas?

Of course, to get these businesses going we would need banks with decentralized judgment based decision-making. Good luck with that.

October 21, 2010

Petty “Truthiness” Issues at Bank of America

Filed under: Running Commentary — thefourteenthbanker @ 2:40 PM

Bank of America is in the news these days for humongous foreclosure fraud issues, mortgage securitization fraud allegations, etc.  Perhaps as revealing to me is that they refuse to be truthful and transparent in even the most mundane matters.  B of A put out two information releases this week and neither one made sense to me. The big one was the earnings release in which they announced a write off of $10.4 Billion (with a “B”) in Goodwill. Goodwill is an accounting concept which attempts to capture “value” related to some sort of acquisition or transaction that cannot be properly assigned somewhere else. For example, if you buy a business for $1 million and the actual assets of the business (real estate, equipment, inventory, etc.) are only worth $700,000, the other $300,000 still has to be put on your financial statements and if it represents the intangible value of the business as a going concern, it can be booked as goodwill.

So back to this earnings release. What Bank of America said is:

We recorded a goodwill impairment charge. The $10.4 Billion non-cash charge does not impact regulatory capital ratios or liquidity. The charge is the result of recent legislation and expected impact on debit card business. Future debit card profitability is diminished.

So I wonder, how do you have $10.4 Billion in an asset account for “future debit card profitability”. I could not answer this question from their financial statements. But, the answer must be one of these two things. They either bought a business and paid way too much for it or, they have been booking future income from debit cards all in one lump sum when a revenue stream from debit cards is somehow “acquired”. In either case, they should not be downplaying it as basically nothing and should admit that it is a $10 Billion mistake or misrepresentation. In fact, if they had been transparent and explained how the goodwill came to be there in the first place, I would not have put the word “misrepresentation” into this post. But when you dissemble that is what you get. Neither the Merrill nor the Countrywide acquisitions should have resulted in a humongous booking of future debit card revenue, so I suspect there is funny bookkeeping going on. Probably legal, but still misleading.

The second petty truthiness issue has to do with this press release. Bank of America is announcing the hiring of 1000 Small Business Bankers. This should be a good thing. We need more effort on Small Business. So why do they have to let their marketing people put number into the release which misrepresents what Bank of America is doing in Small Business? What they said in their press release is that:

In the first half of 2010, Bank of America has provided $45.4 billion in credit to small and medium-sized companies and is expected to meet or exceed its pledge to increase lending to those businesses by $5 billion in 2010.

In Bank of America’s actual financial statements they break out Small Business Lending totals. In December, 2008 they had a total of $19.1 billion outstanding. In December, 2009 it had shrunk to $17.5 billion. In their earnings report for September, 1010 it had shrunk to $15.2 billion. Since these figures represent the gross loans outstanding, the $45.4 billion in supposed credit extended in the first half of the year really tells you that the vast majority of their lending is to medium-sized businesses, which are probably those with over $25 million in sales, and that they are hiding the small business credit production numbers in this big number. They are losing ground in small business lending. A further little snippet in the fine print says that “commercial credit extensions include a significant number of credit renewals”. In other words, they have told us nothing! These production number include credit renewals, which are not new loans at all.

Transparency? Apparently that is against policy. Come on guys, just tell us the truth and what you intend to do about it.

October 17, 2010

How Do We Judge the Homeowner?

Filed under: Running Commentary — thefourteenthbanker @ 8:21 AM

In the rush to foreclosure, the banks and even government officials have been taking the position that the borrower/homeowners are fully to blame for the situations they find themselves in and that the paperwork technicalities just need to be worked out in order for there to be a just outcome, which is to say, a foreclosure.

Industry executives note that few, if any, borrowers in the foreclosure process dispute the fact that they’re not paying their mortgages. “We’re not evicting people who deserve to stay in their house,” James Dimon, J.P. Morgan chief executive, told analysts Wednesday.

Okay. This seems simple enough. The contract between the bank and the borrower says that the borrower will make their payments and that if they don’t, the bank can foreclose. Assuming the bank did everything right, it can.

We live under the free market paradigm and that is simple free market and contract law cause and effect.

But, what if the borrower was defrauded in either a legal sense or a moral sense at the inception of the contract? That may not make the contract unenforceable, but does it make the enforcement inequitable? Does it erode this moral high ground that lenders are claiming?

Perhaps we need to be more discriminating here.  Some time ago I posted on asymmetrical information in regard to one type of transaction. But suppose that there was asymmetrical information at the time the mortgage was originated? According to Dealbroker, Jamie decided on October 2006 to get J.P. Morgan out of Subprime. According to the article, the JPM team decided that quality control had slipped at the originator level. What might this mean? I suspect “quality control” is a euphemism for rampant fraud. So lets just say that October, 2006 is “Day Zero”

It used to be said that a business person needed a good banker, a good accountant, and a good lawyer. (Now it might be said that a banker needs a good lawyer)  Implied in this is that there is a professional relationship and that the customer depends on the advice of these professionals. Bankers have until recently seen themselves as professionals. In the less heady days of local banking, the President and senior officers of the bank made the loan decisions. One of them generally had a relationship with the borrower. They knew the borrower and had their interest in mind along with the interest of the bank. There was a certain implied fairness at work. The judgement of the banker often accrued to the benefit of the borrower. If the banker though something was a bad deal, they said so. If they thought the borrower was making a bad investment either in general or in relation to their specific circumstances (knowledge, skills, income, liquidity, time horizons…) they would tell them that.

The mechanistic finance models took that away.

So is there any difference in the way we should look at someone who purchased a house on Day Zero minus One versus Day Zero plus One?  Perhaps before Day Zero, the general conditions in the market were that everyone was wrong. Everyone thought prices would continue to rise. Everyone thought the rising prices would mitigate the imprudent loan processes and structures, the no-doc loans, the 97% loans or 120% home equity loans. At Day Zero plus One, that changed. The caution light should have come on and the relationship of the professional banker to the client should have included caveats about the investments that were being made. This is idealistic, I admit.

But, someone should investigate when JP Morgan and every other bank changed their policies in regard to loan to value, income verification, product recommendations to customers, instructions to bankers, incentives to bankers, etc. If banks knew in the Executive suite or the research department that the fundamentals were turning ugly, and still kept making loans and shoving them into government guarantee programs or selling them to investors, then there is no moral high ground. The information asymmetry was used to make more money. In a moral sensibility, the contract should be looked at what it was, a gamble by both parties. If at this point in time the stupidity of the lender has allowed the contract to become unenforceable, then that is the lender’s problem. Too bad, so sad.

Now, none of this absolves the borrower of responsibility for their decision. It just puts the borrower and the lender on a level moral ground and perhaps they find themselves on level legal grounds. If that is the case, the lenders should get off their high horse and negotiate modifications that share the losses between two equally culpable parties.

October 14, 2010

What Did They Know? When Did They Know It?

Filed under: Running Commentary — thefourteenthbanker @ 8:36 PM

The markets finally woke up to the mortgage fraud debacle. JP Morgan, a day after beating earnings expectations, is off 4.18% for the high water mark of 48 hours ago. Bank of America is off 11.9% and Wells Fargo is off 5.9%.

Even CNBC is acknowledging the fears that are sweeping the marketplace. Today they reported that there are fears that earnings could be impacted more than expected, perhaps way more than expected.

With perhaps a tiny bit of understatement, David Fabor states that:

It appears the mortgage content of many of those pools—created when the banks were dominating the mortgage securitization market in 2005, 2006 and 2007—may have been misrepresented.


Yet perhaps most interesting is admission by JPM that they ceased using MERS on some transactions two years ago. One wonders why? The answer from spokesman Tom Kelly was vague,

So I asked Kelly why they dropped MERS. First he said, “In truth some courts won’t accept MERS for foreclosures.” But then he said it was “a matter of policy.” I’m sure they don’t want to come right out and say, well, we’re not exactly sure MERS is all that legal.

Oh, and something I noticed in the earnings … JP Morgan upped its reserves for “litigation and repurchase.” Repurchase refers to when the bank is forced to buy back loans (called “putbacks”) from the investor or security due to some problem with the origination. They have the biggest reserves of all the banks, according to experts.

This is not a new crisis. This is a continuation of the crisis that surfaced three years ago but began years before that. The many individual stories of homeowners who were wrongly evicted, or had their homes broken into, or had false documents created and presented to the courts are all pointers to the rot, the toxicity of the assets in question.

So the questions above are addressed both to the CEOs of the major banks and to the primary architects and defenders of the bailouts. See, despite all the assurances by Geithner and Bernanke, all is not well with the bailout. Instead, the government and the mega banks are in collusion to deceive the broad public, the investing community, (which keeps getting smaller) and international private and public economic players. It appears JP Morgan has known that all is not well but has been acting as if it were.

This post addresses much more thoroughly what I alluded to a few days ago. The Fed owns this crap and that puts the government in bed with the bankers. I will just pull out one section.

The free-market, let the banks do what they do mentality was what allowed them to create a $14 trillion mountain of securities backed by precarious mortgages to begin with. Don’t look at what they’re doing, that might hurt the boom. Don’t ask them for anything in return for bailouts — that might clog the system. Don’t stop them from churning foreclosed properties — that might stop the recovery.

But the real reason for Geithner’s reluctance about a foreclosure moratorium is that he’s scared stiff about those securities – because even if he won’t admit it, he knows that the bailout wasn’t just about TARP and Bernanke isn’t just an economic savior.

The government owns or is backing trillions of dollars worth of assets predicated on the same or similar suspicious loans that defaulted during the 2008 crisis period, which they did nothing to stop (or force banks to restructure).

I believe the intent of Geithner has been to deceive for political purposes and to protect the markets, which is really to protect the existing wealth distribution and power structure.

It is time for an investigation of banks, the executive branch, and the Fed to answer the questions, what did they know and when did they know it?

October 10, 2010

Foreclosure Fraud Parody

Filed under: Running Commentary — thefourteenthbanker @ 6:33 PM

Hat tip Z/H

Auto Repairs and The Financial Crisis

Filed under: Running Commentary — thefourteenthbanker @ 2:26 PM

The other day my vehicle was making a rubbing/grinding noise that was noticeable on low-speed turns. From prior experience, I knew it was probably wheel bearings, power steering, cv boots, axles or some such. As you can tell, I did not know much, just what I had paid for in previous experiences with similar symptoms.

I received a recommendation for a local auto service place and decided to try them out. After leaving the car with them a few hours, the actual mechanic called me back. Note, it was not a “service advisor” or the intake person. The mechanic told me that the power steering fluid was a little low but he could not detect a leak. He said he topped off the fluid and suggested we just drive the car awhile and see if there is some very slow leak that is undetectable. He also told me that the last person to change the power steering fluid might have just left it a little low. When he paused, my response was “that’s it?”  Yes. I asked if he inspected the front end and he said that he had and there was a cracked CV boot but no wear as yet. He did not recommend changing it because I could drive it awhile and repair the whole thing later, including the axle, for about the same money.

Then he put the business owner on and I asked him how much it would be. “Nothing”, he said. No service fee, no charge for time, no charge for fluid. I told him he had a customer for life.

The business itself appeared to be quite successful. While not on a main street, there were two nice new buildings and plenty of apparent work, which could only come from word of mouth. This place had zero street visibility.

As I was pondering this later, it occurred to me that the staff must not be under “metrics” and “goals”. Rather, they had an innate desire to provide a quality customer experience and to do the right thing for the client. They had a faith that if they did so, they would have a loyal customer that would come back to them when a real repair needed to be done. Do you know what, they are right. I will only go to a new car dealership in the future for a complex problem that only they have the diagnostics to fix, after these guys tell me then cannot handle it. And I trust that they will tell me that if it is the case.

I did a quick internet search and quickly found a site that discussed metrics for Service Advisors. The terminology that began to jump out at me reminds me of that we find at large banks and corporations of every stripe. There are lots of metrics and the article discusses how if you compare individuals on the metrics the measures go up. Apparently in the auto repair business, metrics are such things as:

  • Average up-sell per advisor
  • Additional recommendations per Repair Order
  • Additional average Customer Pay per Repair Order
  • Warranty to Customer Pay conversion

Customer declining of these additional up-sells are seen as a problem, so the industry has developed tools and techniques to overcome objections. They have found that if the advisor walks the customer through each recommended repair and “prioritizes” its importance, the customer pays for more repairs. They can use printed reports to help with this. The Recommended Action Plan can itemize all the suggested work and highlights in color (presumably red), those that are most urgent.

Now I have had some experience with this process. I use a variety of places to service my auto based on convenience. If I am out at one office and there is a quick lube next door and I need an oil change, I will just get it done. I may even flush the radiator, rotate the tires, or do something else. Once at a new car dealership, a service advisor gave me this long list of work that he recommended and I asked where did he get this from? He told me that it was basically the list of everything that had to be done at certain intervals. If for example, my car had 80,000 miles on it, he might recommend a timing belt, even though I had someone else change the timing belt six months before. If I was not paying attention or did not remember what I had done, which is more likely the older one gets, I might just authorize the work. It had nothing to do with the condition of the vehicle.

I am not against using metrics. They are important tools for accountability and to compare performance. But they go horribly awry when the metrics are wrong, there is little subjectivity, the compensation is tied to the metrics, the interests of the employee and the firm are elevated above the customer’s interest, the numbers are easily gamed by ethical lapse or cheating, etc. There are also many important work products that cannot be captured by metrics. I would love to see a metric in an auto shop that measures what my mechanic did. We could call it, “Sending The Customer Home Without Charging Them Anything. It might actually be the most important metric of all.

What does this have to do with the financial crisis? There are two competing models here. One model is about extraction and consumption. Extract as much as you can so you can consume as much as you can. The other model is about preservation and investment. My new mechanic believes in preserving my money and investing in the relationship. In so doing, he also preserves his time, does not wear out his equipment, and perhaps provides faster service to other customers. With the time he is not spending doing unnecessary repairs on my vehicle, perhaps he is working on another vehicle, helping his spouse, or playing with his kids. There is a benefit to both of us that cannot be measured in currency.

The current mortgage foreclosure crisis is a result of “extract and consume” thinking. How many tales are there of borrowers that bought more house than they could afford on false “stated income”. The mortgage originators must have been hitting some great metrics and getting big payouts. What about the lenders that made so many loans they did not have time to process the paperwork afterwards. Great metrics. Big payouts. What about the investment bankers that packaged these deals up and sold them to unwitting investors? Great metrics. Huge millions in payouts. What about the banks that loaded up on this stuff, many of them knowing the shortcomings but also knowing that they could get short-term results and that hopefully home prices would rise forever and everything would be fine? Great metrics and fantastic bonuses. What about the Federal Reserve that now owns much of this crap? Oh, never mind.


October 9, 2010

Mortgages 101

Filed under: Running Commentary — thefourteenthbanker @ 2:56 AM

Here is a good primer with graphics on the basics of mortgages and Residential Mortgage Backed Securities (RMBS)


October 7, 2010

CNBC Article Wants Banks to Skate on Foreclosure Mess

Filed under: Running Commentary — thefourteenthbanker @ 1:38 PM

CNBC has this article up this morning decrying the politics of foreclosure. Yes, it is political. But look at the nonsense of his argument.

Yes, the process is flawed because the banks clearly aren’t equipped to handle the numbers.

Yes, there may be some loans that could have been saved, but the vast majority can’t.

Still lawmakers want to freeze all foreclosures to make sure all of them are fair because, as Speaker Pelosi writes, “People in our districts are hurting.”

The question is, how much would a foreclosure freeze hurt the greater housing market?

What do these questions have to do with it? Either there is a legal process and the banks spend the money to follow it, or they bear the consequences. That is free market capitalism. So far, no one has proposed a new law or regulation. They are just asking the banks to follow the laws that were in place when these mortgages were originated and sliced and diced into securitized assets. If it now costs more to process the risks that were in those portfolios, the folks that made the bets should pay the costs. Simple and elegant.

I asked some mortgage mavens and got the following responses:

Josh Rosner, Graham-Fisher: With REO sales being a large part of supply we would see home prices artificially and unsustainably rise, foreclosure volumes paint a false picture of stability and investors in MBS would be further harmed as their losses grow. Once the moratorium ended prices would fall and foreclosures would skyrocket. But, it would paint a prettier picture than reality heading into mid-term elections.  14 here. This is nonsense. Nothing much will change before the mid term elections. Red Herring.

Guy Cecala, Inside Mortgage Finance: Instead of having a ton of mortgage borrowers who haven’t made any payments in at least a year, we would have a ton who haven’t made a payment in a year-and-half. Keep in mind we will have new problem loans entering the system throughout any moratorium whether we acknowledge them or not. Do we seriously believe that a foreclosure moratorium can change the outcome of potentially 5 million or more homeowners losing their homes over the next two years? Ultimately, if we don’t do something to handle distressed properties more efficiently (and faster), the housing market is going to remain stuck in limbo with no recovery in sight.  14 here. So we trample legal rights to process distressed assets efficiently? That is a slippery slope.

Janet Tavakoli, Tavakoli Structured Finance: Banks are vulnerable to lawsuits from investors in the [securitization] trusts. This problem could cost the banks significantly more money, which could mean TARP II.

Is this really so bad that we will need TARP II?  That seems like fear mongering. The lawsuits will drag out for years and will not cause a sudden collapse of banks unless people figure out the banks are not solvent anyway, in which case we need to clear the banking market the way they suggest we clear the real estate market. Then we can capitalize a new banking sector. If $700 Billion were put into capitalizing new banks, we would not need to old banks at all. Let them wind down.




October 6, 2010

Mortgage Mess Battle Lines Being Drawn

Filed under: Running Commentary — thefourteenthbanker @ 10:52 AM

Two new posts today articulate where the battle lines are beginning to take shape in the Mortgage Foreclosure Fraud mess. Because few mortgages are held on bank balance sheets, having been sold into Mortgage Trusts which support Mortgage Backed securities (MBS), there are parties who may find themselves at cross purposes. Then again, mortgage investor coalitions may try to hang together, lest they all hand separately. Regardless of the extent to which groups of investors do or do not become antagonistic, individual renegades will doubtlessly stir the pot.

So this Zero Hedge post points out, while referencing the WSJ, that three of the parties involved in the typical deal form a sort of triangle. I guess this is like a love triangle, after the lovin’? They are connected to one another but also opposed to one another. The mortgages are held in a Mortgage Trust. Cash flow from the Trust is paid out to the various classes of bondholders. There are always Senior bondholders and Junior bondholders. Much of the paper referred to as “toxic” is that held by Junior bondholders. They take the first loss. With the declines in real estate values and large numbers of defaults, the first losses are quite large and may in some cases be 100% for some Junior classes. But, while the Mortgage Trust still lives, the loan Servicer must advance moneys to make the interest payments on the bonds. So the longer the Trust is alive, the more payments the Junior bondholders get. The Senior bondholders don’t like this. In seeking their recovery, they would like the Trust to unwind as quickly as possible and the recoveries to be credited to them. They do not want to trade time for cash flow, because some of that cash flow goes to other creditor classes. Because these classes are at cross purposes, the likelihood of litigation is very high.

To wit: junior bondholders will rejoice as they will receive payments for the duration of the halt/moratorium (these would and should cease upon an act of foreclosure), while senior bondholders will suffer, as the deficiency money will come out of the total “reserve” in the pooling and servicing agreement set up by the servicers. As for the servicers themselves, they should be “reimbursed by funds in the trust for all costs related to litigation and extra processing of foreclosures, provided they follow standard industry practices.” In other words, it will now become “every man, sorry, banker for themselves” as each party attempts to preserve as much capital as possible given the new development: juniors will push for an indefinite foreclosure halt, seniors will seek an immediate resumption of the status quo, while the servicers stand to get stuck with billion dollar legal and deficiency fees if it is found that “standard industry practices” were not followed. Alas, it would appears that the servicers have by far the weakest case, and the impact to the banks, whose sloppy standards brought this whole situation on, will be in the tens if not billions of dollars. Oh, and suddenly both junior and senior classes will be embroiled in very vicious, painful, and extended litigation with the servicers. Lots of litigation.

As you can see, the litigation will doubtlessly be directed at the loan servicers who created this next generation of destruction. If it can be proven that the loan servicers did not follow the proper servicing procedures, they will be liable for damages. We are talking billions of dollars in damages.

Naked Capitalism raises additional issues around the jockeying that is taking place. The servicers are mostly large banks and Ally Financial. Three of these have suspended foreclosures while the do document reviews to determine the extent of the problem, and to buy time for lawyers and lobbyists to cast about for solutions like the Ringwraiths.

Per Naked Cap:

Yves here. This development reveals how this battle is likely to play out. Now that judges in some states are starting to take these dubious, potentially fraudulent measures seriously, the next line of attack is to get the more bought and paid for Federal government to intercede on behalf of the banks. As the e-mail by the Ohio Secretary shows, this is a state versus Federal rights issue. And the problem is that these solutions will be depicted as “efficient,” just as securitizations and other “innovations” were.

And while efficiency in theory is a good thing, it must always be kept secondary to the overall integrity of the system, otherwise, you run the risk of breakdown. Using dubious arguments to overturn well settled law to get the banking industry out of a monster mess it created is a Faustian bargain. It makes it abundantly clear what is really at stake here, which is the rule of law. Banks that were quick to defend unjustifiable pay deals by invoking “sanctity of contract” have no inhibition about ignoring their own contracts to pad their bottom line, and ultimately, the wallets of top executives.

Rather than deal with the considerable consequences of these abuses, the banks are prepared to bulldoze well settled state laws to give them an easy way out. And I’m not basing my view on this story alone; I had a conversation yesterday with a Congressional staffer who matter-of-factly said (but with little understanding of the underlying issues) that Congress would intervene on behalf of the industry, via its authority over national banks.

The “document reviews” are being done internally and any report on the findings should be taken with several grains of salt. The interest of the banks is to minimize their culpability.

A referee will be needed to sort this out. Perhaps Sheriff Elizabeth Warren will step into the gap.

October 3, 2010

Too Big Too Care

Filed under: Running Commentary — thefourteenthbanker @ 9:03 AM

Here is a new but unsurprising development in the foreclosure fraud mess. We already knew legal documents are being fabricated. Now we have evidence of a price sheet outlining the cost of these fabrication services.

I would imagine the shredders are getting cranked up as the rats work to destroy evidence that they knew of the elements of this fraud.

Obviously they knew. Many, many bank employees and managers knew. Attorneys General of at least two states have halted foreclosures. These foreclosure freezes may not be voluntary for long. Judges are waking up. The American people will not stand for a legal bailout. After skating past TARP I and the credit market meltdown, it is hard to see how banks, trustees, and servicers are going to get past this one. The dollars involved are staggering. How can the RMBS market not take a hit? When it does, how can those who made the decisions to do business in this manner not bear the brunt of the cost? All that “risk” that was so profitably offloaded to investors may be coming back, morphed into other forms. Would that not be justice served?

Shareholders are impotent. This is a matter that shareholder oversight might have helped with if shareholders were engaged and empowered. The shareholder rights movement has been neutered by corporate lobbies. Shareholders need to be able to elect Board Members over the objections of management. This fiasco and it’s consequences needs to provide impetus for a revisiting of the governance issues. For management, no matter how many “get out of jail, free” cards are issued, has proven itself unable to govern these “Too Big Too Care” institutions. Some of these employees, I have no doubt, objected vigorously to these practices. Some are no longer with these banks. Run out. Others were marginalized or intimidated. It is time for these to come forward and help usher in a new age of responsible enterprise.

It is time to end Too Big Too Care.

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