The New Robber Barons Page 28

  After the largest bank bailout in world history, we have a national epidemic of foreclosure fraud. In cases where foreclosures are being delayed, banks are walking away from abandoned homes and sticking local taxpayers with the bill to clean up the mess they left behind.

  Yet, as Arianna Huffington points out in her latest book, banks continue to find ways to get Americans to subsidize problems that the banks themselves were chiefly responsible for creating. Consumers struggle to keep up with payments as the unemployment rate rises along with food and energy prices, and loan resets kick in:

  When they don't, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties--all of which makes it less likely consumers will be able to pay off mounting debts. Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream Pp. 77 & 78.

  GSAMP: Garbage Sold at Mythical Prices

  In 2007, the state of Ohio kicked the California-based New Century mortgage lending carpetbaggers out of the state and barred New Century from doing business after despicable practices. A complaint of alleged fraud on the part of Goldman Sachs detailed its close relationships with Countrywide, New Century, and Fremont. The complaint showed Goldman knew of "an accelerating meltdown for subprime lenders such as New Century and Fremont." Despite known serious loan problems, Goldman continued to securitize the loans and sell them in packages of residential mortgage backed securities.

  Suspect deals like GSAMP-2006 S3; $494 million of securities bought by institutional investors in April 2006 were created and distributed by Goldman Sachs Alternative Mortgage Products (GSAMP).

  Fortune's Allan Sloan and Doris Burke followed the deal as its value slid ever downward as well as the fudgy way the deal's deteriorating value seemed to be overstated by the trustee's report:

  More than a third of the loans were on homes in California, then a superhot market, now a frigid one. Defaults and rating downgrades began almost immediately. In July 2008, the last piece of the issue originally rated below AAA defaulted -- it stopped making interest payments. Now every month's report by the issue's trustee, Deutsche Bank, shows that the old AAAs -- now rated D by S&P and Ca by Moody's [junk ratings] -- continue to rot out.

  As of Oct. 26, date of the most recent available trustee's report, only $79.6 million of mortgages were left, supporting $159.9 million of bonds...But even worse, those mortgages aren't worth anything like their $79.6 million of face value, according to ABSNet Loan HomeVal...As of Sept. 26 -- a slightly different date from what we're using above -- ABSNet valued the remaining mortgages in our issue at a tad above 20% their face value. Now, watch this math. If the mortgages are worth 20% of their face value and each dollar of mortgages supports more than $2 of bonds, it means that the remaining bonds are worth maybe 10% of face value.

  "Junk mortgages: It just gets worse, " by Allan Sloan and Doris Burke, Fortune, December 1, 2009.

  "Countrywide Broke the Law"

  In above mentioned complaint against Goldman Sachs, allegations of suspect practices from mortgage lenders, including Countrywide, now owned by Bank of America, were revealed. According to a former Countrywide employee:

  "approximately 90% of all reduced documentation loans [also known as "liars' loans] sold out of a Chicago office had inflated incomes, and one of Countrywide's [mortgage brokerage arms] routinely doubled the amount of the potential borrower's income...so that borrowers could qualify for loans they could not afford."

  When Countrywide's employees received documents verifying income that showed the borrower couldn't afford the mortgage and didn't qualify for a loan, they simply ignored it and "the loan was re-submitted as a stated income loan with an inflated income figure so as to facilitate the approval of the loan." In other words, the former Countrywide employee said that brokers, not borrowers, engaged in massive fraud to push loans through the system and earn commissions.

  Illinois Attorney General Lisa Madigan told First Business Morning News: "Countrywide broke the law, homeowners did not."

  Pump and Dump

  The same banks that supplied money -- and in some cases now own -- suspect mortgage lenders also packaged up and sold those loans to investors. These banks also own or owned "servicers" that are supposed to act as stewards for investors. But if servicers cannot recover foreclosure costs combined with the costs of maintaining and reselling the house, they often abandon the property. After pumping up appraisals and falsifying borrowers' income on applications, banks are walking away. Once again, American taxpayers will foot the bill:

  In Chicago, the mortgage servicers and trustees most often associated with the [abandoned] properties are Bank of America, with 314 properties; Wells Fargo (234), U.S. Bank (185), Deutsche Bank (178), and JPMorgan Chase (165). "More banks walking away from homes, adding to housing crisis," by Mary Ellen Podmolik, Chicago Tribune, January 13, 2011. (Source of data on homes apparently abandoned in the foreclosure process is a new local study by the Woodstock Institute.)

  Despite evidence of widespread interconnected mortgage lending, securitization, and foreclosure wrong-doing and fraud, there are no meaningful felony indictments.

  2011: The Year 60 Minutes Misled Americans About Municipal Bonds

  December 20, 2011

  In previous posts, I've mentioned serious fiscal problems that need to be addressed at state and local levels. This varies by region and some issues are potentially solvable.

  I live in Illinois, which is ground zero for fraud, corruption, underfunded pension funds and general fiscal mismanagement. It's an example of one of the worst fiscal messes in the United States. This year Illinois hiked personal income taxes from 3% to 5%, and increased corporate taxes. We'll be slammed with hidden tax increases in utilities, purchases, and more. When now Mayor Rahm Emanuel left his post as White House Chief of Staff to run his election, the Chicago mayoral race centered partly around steps, including budget cuts, needed to solve Chicago's serious fiscal issues: See "Third World America: Drowning in Debt and Choking on Lies," Huffington Post, June 24, 2011, and 'Fast-Tracking to Anarchy;" August 25, 2010.

  On December 19, 2010, I was (at first) happy to see 60 Minutes highlight fiscal problems of states and municipalities. It explained how Illinois was late on payments to service suppliers, and it's a huge problem for people doing business with the state. The state's pension fund is underfunded and although 60 Minutes didn't mention it, state pension funds are the prey of Wall Street cronies that stuff them with losses and then propose fee-loaded leveraged financial products that are bets to make up the shortfall. Then 60 Minutes went completely off the rails by suggesting that these problems would lead to widespread defaults on municipal bonds in 2011. You can still view the segment, "State Budgets: Day of Reckoning," on the CBS web site.

  A "Performance"

  Instead of focusing on the implication of these problems to public services including police protection, fire departments, city maintenance, and city jobs (among other things), 60 Minutes let a pundit claim these problems translate into near-term massive municipal bond defaults. Meredith Whitney, the pundit, had written a report, "Tragedy of the Commons," which supposedly backed her claims.

  Contrary to 60 Minutes's assertion, Meredith Whitney, a banking analyst, did not have a great track record. Gullible reporters had given her great PR for an October 31, 2007, call on Citigroup that had been correctly made many months earlier in her presence by my friend Jim Rogers, a legendary investor. They appeared on television together, and at the time she refuted Rogers. I was later bemused to see that either she or her PR flacks apparently took credit for my early warnings about serious problems at AIG. (See: "Reporting v. PR: Meredith Whitney and AIG," TSF, March 23, 2009.)

  Whitney was quoted as claiming: "Clients are not pleased with my call and I have had several death threats." A 2008 Fortune cover story reported she had received "one death threat." (Perhaps clients were displeased that her ignoring Rogers had a
lready cost them thirteen points and even then she didn't directly tell people to bail out.) With characteristic humor Rogers quipped: "Gosh, I have never received a death threat ever for saying I was short a stock or that a company would be going bankrupt. What have I been doing wrong?"

  Whitney told 60 Minutes: "You could see 50 sizable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults....It'll be something to worry about within the next 12 months."

  A Wild Guess

  Subsequently, Whitney wouldn't justify her analysis saying "Quantifying is a guesstimate at this point." ("Whitney Municipal-Bond Apocalypse Short on Specifics," by Max Abelson and Michael McDonald, Bloomberg News, Feb 1, 2011.) 60 Minutes admitted it had never reviewed her much-touted report. The report never mentioned sizable defaults, only that there "invariably" would be defaults. Bloomberg also reported that 60 Minutes was wrong about her "untarnished' track record. Since she started her company in 2009, about two-thirds of her stock picks underperformed market indexes. A 2008 Fortune cover story ranked Whitney 1,205th out of 1,919 equity analysts the previous year, based on stock picks.

  Whitney told Bloomberg's reporters: "A lot of this is, you know it, but can you prove it? There are fifth-derivative dimensions that I don't think I need to spell out to my clients." As a derivatives expert I can attest that this is gibberish. But I want to hear her explanation of "fifth-derivative dimensions," because I adore a good belly laugh.

  Genuine Research via Bloomberg

  Bloomberg is also the financial news service that has done great early work on fraud and related municipal bond defaults, because that's a worthy story. Municipal credit issues are granular and the severity of the problem -- or non-problem -- depends on the specific situation.

  In September 2005, Bloomberg broke a story about Jefferson County's hair raising problems, "The Banks that Fleeced Alabama," by Martin Z. Braun, Darrell Preston and Liz Willen. According to the article, "taxpayers blame the $160 million in fees JPMorgan Chase and other banks have charged to arrange the county's financing--in deals that were never put out to bid." This year, Jefferson County filed for bankruptcy.

  As the year wore on, Meredith Whitney waffled and by May she told a Bloomberg radio host: "In the cycle of this municipal downturn, I stand by it. But we never had a specific estimate for that." Fortunately, Joe Mysak, a Bloomberg print reporter, exposed that for the nonsense it was. Whitney had indeed given a one-year time frame on 60 Minutes and had called for hundreds of millions of dollars in defaults with 50 to 100 or more sizable defaults. ("Meredith Whitney Trips Over Her Muni Default Tale," May 19, 2011.)

  A Stellar Performance

  Whitney's prediction of "hundreds of billions" of defaults was way off the mark. Even with Jefferson County's $943 million filing, defaults for 2011 were down from 2010. Bonds that dipped into reserves to make payments totaled only $24.6 billion according to Richard Lehmann, publisher of the Distressed Debt Securities Newsletter. Defaults defined as bonds that missed payments are down to only $2.1 billion from $2.8 billion in 2010. In 2011, municipal bonds had stellar performance as an asset class returning more than 10% of potentially tax exempt returns. They beat the S&P, treasuries, corporate bonds and most commodities. ("Whitney's Armageddon Belied by '11 Returns," by Martin Z. Bruan, Bloomberg News, December 16, 2011).

  CNBC Schools 60 Minutes

  As for the actual analysis in Meredith Whitney's "Tragedy of the Commons" report, it seems that it had serious flaws, at least when it came to Nevada.

  Nevada State Treasurer Kate Marshall appeared on CNBC to debunk Whitney's claim that Nevada's municipal bonds were troubled. Marshall challenged Whitney's analytics saying (among other things) that Whitney apparently misinterpreted a PEW report on pension plan liabilities. Nevada only represented 1/16th of the plan, and state employees pick up half the tab. Marshall then explained why Nevada's municipal bond claims paying ability is much better than it would appear to the casual observer. The economy was still tough, but Nevada managed in anticipation of the ongoing crunch. Property tax revenues dropped, but sales tax revenues were up, gambling revenue was up, and business modified tax revenues were up. Her cash position in June 2011 was much better than 2010.

  CHAPTER 13

  The Eurozone

  Wall Street’s Advice to the IMF: Control Your Alleged Rapists! (satire)

  May 22, 2011

  We are outraged by your lack of empathy for your victims! We're not talking about the targets of your sexual advances, of course. We mean us.

  You're supposed to be bailing out trading partners, bankers in weak foreign countries bankrupted by bailouts. Remember, you pigs are supposed to be financially raping the citizens of the PIIGS (Portugal, Italy, Ireland, Greece and Spain). We'll get back to that shortly, but first we have to address some housekeeping.

  Jeopardizing Our Health

  Condoms aren't foolproof, and HIV doesn't care how much you paid for a hooker in Thailand. It has come to our attention that you have allegedly been customers of our New York based suppliers of prostitutes, and we're furious.

  We need you to stick to the job. Moreover, if you had just listened to our advice to Joran van der Sloot, you wouldn't be caught allegedly doing anything in the wrong place at the wrong time.

  Targets Can Shoot Back

  As for the handling of your internal matters, it was a nice touch to call newly resigned IMF head and alleged sex offender Dominique Strauss-Kahn's 2008 affair with a subordinate a "serious breach of judgment" and impose no real consequences. It was a great move to reportedly decline investigations and consequences for other managers involved in suspect activities. It's well known that a permissive atmosphere enables harassment (and more) and dismays the targets who perceive they will get no support. This is exactly the kind of thing we do all the time, but you have to save all this good stuff for your next high profile job in finance or politics.

  Until now, your internal targets felt so intimidated you were able to sweep all this under the rug. You can't count on that anymore with all the new publicity you've brought on yourselves.

  Targets have caught on that they have nothing to lose and at least can gain back the self-esteem you've tried to destroy. Targets' careers are already embattled, so it is in their interest to take action, and they're not going to apologize for standing up for themselves.

  Moreover, it's a snap to see through the flaws in the IMF's new "policy." You say that when it comes to intimate relationships, you will investigate if there is evidence of harassment. Obviously, the complainer will have to produce the evidence. But how has letting you handle things worked out so far for targets?

  Targets will never buy that nonsense now. They'll tell you to stuff it and act independently. Targets have a right to treat this as a matter of personal safety. When it comes to the topic of their personal safety, you have nothing to add.

  The IMF Can't Even Negotiate "Consensual Sex"

  Even when sexual relations between your bosses and subordinates apparently begin as consensual, the IMF inspires targets to rebel. According to the New York Times: "One woman is said to have slept with her supervisor, who then gave her poor performance reviews to pressure her into continuing with the relationship."

  We must point out that if you want someone to continue a sexual relationship, tell them their performance was great. In the battle of the sexes, he declared thermonuclear warfare!

  Remember Whom You're Supposed to Be Screwing

  This may sound as if we've developed a conscience, but don't worry, we haven't. The truth is that we need you do as we say and not as we do for a change.

  We need you to keep bailing out weak countries like Ireland. Many of Ireland's bankers fled the country, and the people of Ireland are drowning in their debt.

  We love the way the IMF forced a loan on the Irish to pay off the government debt that was forced on them to pay off the bankers' debts. To get the bailout loan, the Irish government had to sl
ash spending, lay off tens of thousands of public workers, lower wages, increase taxes, and cut health care budgets. The bankers got away with financial murder, and the citizens are paying for it, just the way we like it.

  Instead of letting banks fail or restructuring banks, we need you to do the same thing to Greece and possibly other countries, too. The Greeks are already protesting: "We're not Ireland!" Your recent scandals may encourage them to get even more insistent and come up with an alternative of their own.

  We do lots of business with these foreign banks and governments. So stop spending so much energy trying to screw each other and spend it screwing the citizens of countries with governments that need bailouts because they bailed out bankers.

  Clean up your act, so that we don't have to clean up ours!

  Euro Endgame

  June 1, 2011

  The European Central Bank (ECB) is facing a dilemma similar to that faced by major U.S. banks in the 1980's with defaulted loans to Latin America. The PIIGS (Portugal, Ireland, Italy, Greece and Spain) collectively require debt write-downs that exceed banks' capital and reserves, and the tantrums of Jean Claude Trichet, President of the ECB, won't change that fact.