The New Robber Barons Page 36

  Now that's certainly progress, but it's not good enough. Do you realize we're talking about a 75% reduction, which is a big deal, but we had 450 people murdered. That's not okay, that's not okay. And again Father forgive me, I looked at my Blackberry in church, but while we were sitting here, there was another murder in the City of Chicago. It's not okay, and I'm not willing to accept that it's okay. And I'm setting the bar higher than anybody ever sets the bar for me. I set it higher than anybody sets it.

  And I had a conversation with Father Pfleger, and I told him my vision, and he basically articulated it. But I want to tell you, we used to react to crime, then we used to prevent crime. That's what we're doing now; that's how we reduce crime. Nobody's ever cured crime. Nobody's ever cured it. The police cannot arrest their way out of crime. It's got to be done on a different level. It's got to be done in recognition of the moral authority of the community to change the behavior of criminals.

  Wow, there must be something about this pulpit here, 'cause I'm feelin' strong. I usually, I, I, [sic] should never mix politics and faith, but since, since the Father mentioned it, I want to talk just one thing, and then I promise you I'm giving up the microphone. It's, it's the last time I get invited to speak.

  You know I'm going to take a risk here, and I'm gonna give you somethin'. This is definitely the right audience. Father Pfleger talked about gun control, and I wanna, I wanna give a little test here. And this is sensitive. You know, because everybody's afraid of race. Have you noticed that? Everybody's afraid of race.

  I'm not afraid of race. I was born and raised in the Bronx, NY, and when I was growin' up, the three biggest problems were gangs, guns, and drugs. Does that sound familiar?

  So how, how much have we failed as a society to address this?

  I'm 52 years old. I'm 52 years old, and today in 2011, we're talking about gangs and guns and drugs and what we're going to do to fix it. Okay? A big component of this has to do with race.

  Everybody's afraid of race. I'm not afraid of race. So here's what I want to tell you. See, let's see if we can make a connection here. Slavery. Segregation. Black codes. Jim Crow. What, what did they all have in common? Anybody getting' scared?

  Government sponsored racism. [Long pause.]

  I told ya I wasn't afraid. I told ya I wasn't afraid.

  Now I want you to connect one more dot on that chain of the African American history in this country, and tell me if I'm crazy.

  Federal gun laws that facilitate the flow of illegal firearms, into our urban centers across this country, that are killing our black and brown children. [Long pause.]

  The NRA does not like me, and I'm okay with that. We've got to get the gun debate back to center, and it's got to come with the recognition of who's paying the price for the gun manufacturers being rich and living in gated communities.

  I, on December 23 in Newark, I was coming from a Christmas Party when we had two back-to-back events. We had five kids who were shot, two of 'em succumbed to their wounds, and then we had two more men who were shot back-to-back within five minutes of each other. I was on my way to one, when I went to the other, and I was walking through shell casings, bullets, spent bullets in the street. They were gettin' stuck in my shoes and I said "You know what? Sumpin's wrong. Somethin's wrong, and I went from one scene to the next, and by the time I got home, probably about 10:30, 11:00 that night, snapped on the TV to relax for a few minutes, and what was on TV? Sarah Palin's Alaska. And she was caribou hunting, and talking about the right to bear arms.

  Why wasn't she at the crime scene with me?

  I'm gonna need some help. Because people don't want to hear this. Okay? And this is what I'm talking about changing the face of the way we do police in this country starting right here in Chicago. It's with the recognition of what is going on, and a plan to address it.

  I couldn't be happier. I feel like I'm in a perfect place, the perfect time, with the right people around me.

  Thank you very much everybody. This is gonna be great experience.

  Why Some Housing Prices Are Still Falling and Subprime Loans Are Still Sliding

  June 27, 2011

  In October 2007, CNBC's Diana Olick called me about Countrywide's so-called plan to modify mortgage loans scheduled to reset to higher rates. Subprime borrowers with a strong payment history would be able to refinance and possibly get prime FHA loans. Current paying borrowers with credit issues would be offered Fannie Mae or Freddie Mac loans under a new expanded program.

  Mortgage Loans with Less than Zero Value

  Mortgage modification programs, including HAMP, were abysmal failures. At the time I told Olick that mortgage servicers were selling loans for 3-6 cents on the dollar and they were happy to dump them:

  "They work 13-hour days trying to salvage what they can, doing anything to avoid reporting a delinquency or foreclosure. They disclosed disturbing information unavailable even on trustee reports. The servicer asserted the rating agencies are incorrect in their optimism; recovery rates of 60% are unattainable. My average recovery rate assumption of 30% is also currently unattainable."

  If loans couldn't be sold to a sucker, banks and their servicers walked away. Mortgage securitization complicated matters, and often homes are left vacant and not foreclosed upon. Looters strip vacant properties of pipes, fixtures, and anything of salvage value. The loans within the securitizations are worthless.

  Why do banks and trustees pretend the loans have value? If banks and lenders foreclosed, it would be revealed that the cost to maintain the property before resale and the legal costs relative to the value of the property meant that they had negative equity.

  At first this was a problem for loans with low loan balances, but as property values dropped, even loans with higher balances had the same problem. The problem spread, and it hasn't yet stopped spreading.

  Triple Tragedy: Meltdown, Spreading Contagion, and Crime

  This tragedy is echoed by similar problems in Ohio, Michigan and other subprime targets on the West Coast, Nevada, and in the South. Although some examples aren't as stark or depressing, the general idea of plummeting property values and vacant properties infecting a neighborhood and its surrounding areas still stands. Affected states have to carry the burden of these paralyzed limbs, and banks and their cronies that perpetrated this mess just walk away. This video, first reported by the Chicago Tribune is a stunning local example. Click here for video.

  Since 2007, Chicago's Englewood and West Englewood areas slid into a sinkhole. Homes that once housed lower middle class and middle class families stand empty. Those with the means to move have fled. Those without the means have stayed while the prairie reclaims a large part of the south side of Chicago. More and more homes have been boarded up. Grass has grown so high in some formerly residential areas it obscures all but the tallest humans. Crime soared. Property values in surrounding neighborhoods are plummeting as the wasteland spreads to their doorsteps.

  "Countrywide Broke the Law"

  It would be easy to turn away from this and blame the borrowers. Some of the borrowers were absentee landlords who knew what they were doing. Some borrowers overreached. But in many cases, people were victimized by predatory lenders. For example, a complaint of alleged fraud against Goldman Sachs, includes allegations of fraudulent practices by Countrywide, now owned by Bank of America. A former Countrywide employee stated that approximately 90% of all "liars' loans, loans that allowed reduced documentation about borrowers' income and assets, sold out of a Chicago office had inflated incomes.

  The borrowers weren't inflating the income. Countrywide routinely doubled the amount of the potential borrower's income to qualify borrowers for loans they couldn't afford so that Countrywide and its mortgage brokers could continue to earn fees and commissions. Prior to a settlement in which Countrywide paid a paltry $8 billion--the damage done is much greater-- to eleven states, Illinois Attorney General Lisa Madigan stated: "Countrywide broke the law, homeowners did not."

 
Fed's August 2007 Back Door Bail Out of Countrywide

  In August 2007, investors shunned Countrywide's asset backed commercial paper (ABCP) backed by its mortgage loans and demanded much higher interest rates. In the ensuing panic, Countrywide wanted to borrow around $11.5 billion from banks on its credit card-like revolving credit lines, but the banks balked. The banks asked the Fed for concessions, and the Fed agreed.

  The Fed deal appeared to have been leaked. On Thursday, August 16, 2007, the Dow fell more than 340 points when it appeared Countrywide was about to go under, but rebounded to close down only 15 points. The next morning the Fed announced its new bank lending concessions.

  The Fed bailed out Countrywide and its affiliated banks through its back door. The Fed agreed to let banks borrow against private label mortgage loans with phony "AAA" ratings, cut the banks' discount rate from 6.25%* to 5.75%, and extended "overnight" borrowings to 30 days.

  BofA, Wells Fargo, U.S. Bank, Deutsche Bank, and JPMorgan Cut and Run

  Banks that supplied money -- and in some cases now own -- suspect mortgage lenders also packaged up and sold those loans to investors. They own or owned mortgage "servicers" that cannot recover foreclosure costs combined with the costs of maintaining and reselling the house. After pumping up appraisals and falsifying borrowers' income on applications, banks are walking away and sticking taxpayers with the bill.

  According to the Woodstock Institute, the mortgage servicers and trustees linked to abandoned properties in Chicago are Bank of America, Wells Fargo, U.S. Bank, Deutsche Bank, and JPMorgan Chase.

  Despite evidence of widespread interconnected mortgage lending, securitization, and foreclosure wrong-doing and fraud, there are no meaningful felony indictments of senior executives at mortgage lenders or of senior executives of banks bailed out by taxpayers.

  *Corrected typo from 6.75% to 6.25%. The events surrounding episode and other bailouts are covered in detail my book on the financial crisis and the resulting economic stagflation: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street.

  Investing: Bad News, Good News, and What’s Next

  August 22, 2011

  The manic depressive market wildly swings up and down on each new news story: The Fed is meeting at Jackson Hole on August 27 possibly to discuss QE3 (or not), and that news may pump up the stock market. But China's banks seem to be using Enron's accounting manual, Europe's banks need liquidity and are loaded with bad debt, and U.S. banks only temporarily TARPed over trouble. Gaddafi's regime in Libya appears over, but Libya's oil output may not fully recover for years. Venezuela wants banks to open their vaults and send back its gold, but Wells Fargo says gold is a bubble. Pundits say gold is a barbarous relic, but exchanges and banks are now using gold as money. The U.S. is headed for hyperinflation with skyrocketing stock prices, but on the other hand, we seem to be deflating like Japan and doomed to a deflating stock market for another decade. Whom do you trust and what should you do?

  No one knows where the stock market or U.S. Treasury bonds are headed tomorrow, but in my opinion, here are some fundamentals to consider.

  The Bad News Isn't Going Away

  Until we have real global financial reform and restrain the banks, we won't have sustained growth. The stock market hasn't hit bottom. There's a crisis of confidence in banks and all currencies. We haven't taken effective steps to tackle the U.S. deficit through productivity. We haven't examined spending to eliminate fraud and waste, and we haven't addressed our need for more tax revenues by eliminating the Bush tax cuts (for starters).

  Savers are punished by "stranguflation:" negative real returns on "safe" assets, declining housing prices, and rising costs of food, energy and health care. The Fed touts the falling cost of I-Pads, but how often do you buy one of those, and how often do you eat?

  Good News (for Now)

  The USD is still the world's reserve currency. Even though we devalued the USD, there has been a global flight to U.S. Treasuries pushing down our borrowing costs (yields). No one in the global financial community feels the U.S. has done its best to correct our problems, but severe problems in Europe, China's inflation, and Middle East unrest has money running to the U.S. Since we've devalued the dollar, we appear to be a bargain for foreign investors, even though they are terrified by our money printing presses and the potential for inflating commodity prices in the long run.

  How did I play this? My own portfolio is currently more than 20% gold with some silver, and I bought out-of-the-money call options on the VIX when it was in the teens with maturities of 4-6 months. This is "short" stock market strategy, one could have also done well buying puts on the S&P a few months ago. In the first big stock market downdraft in August, I sold the options when the VIX hit the high 30's, and I'll buy more options again if the VIX falls again. Many investors are not comfortable with options, and this strategy isn't appropriate for everyone. The rest of my portfolio is chiefly in cash or deep value opportunities.

  What Happens Next?

  No one knows for sure, and anyone who tells you he or she does is selling snake oil. The situation is fluid. We tried to reflate our deflating economy. Our massive dollar devaluation may encourage investment, because it's protectionist. It reduces our cost of labor, among a few other "benefits." The problem is that the Fed has printed money, and we haven't done anything to position the U.S. for greater productivity. We're trying to inflate our way out of a problem without investing in productivity. This is a very dangerous way of attacking this problem. Even more "stimulus" would just be an attempt to inflate our way out of our long-standing deep recession. That's the foolish and unsuccessful strategy we've adopted so far. That could lead to runaway budget deficits (our deficit already looks intractable) and bring us to double-digit inflation. Even the European flight to US Treasuries may not save us from a deeper recession in that scenario.

  If we don't overreact -- and we may have already overreacted -- our dollar devaluation results in our foreign trade situation first getting worse (as it has now) before it gets better. Now is the time (actually, we should have started years ago) to spend capital to increase U.S. productivity. The dollar's plunge relative to other currencies will eventually make us more competitive. This will be good for blue chip companies, in particular those that own real assets and manufacture items. The Fed and Washington may do anything, however, so one must watch the news.

  What does this mean for the U.S. stock market? In my opinion, it is currently not good value and feels like the 1970s when we experienced a recession followed by inflation. One should consider staying mostly in cash and expect stocks become cheaper. One might miss an interim rally, especially if the Fed announces QE3 (more "stimulus" and money printing) or more bank bailouts, but that is like using Kleenex laced with sneezing powder. We will see stock prices even lower than they are today. The old paradigm dictated that stocks were a buy when P/E ratios were 13 or less (and many are well above that), dividends at 4%, and book values at 1.3 or less. (This excludes oil companies, which tend to trade at lower P/E ratios in general.) I believe we'll see much better deals in coming months. In 1978/79 P/E ratios sank below 7 for blue chip companies.

  Should one buy U.S. Treasuries with long maturities? The long end of the bond market doesn't reward investors due to the potential of rising interest rates. If interest rates spike to double digits, then one can reassess the situation.

  Long term investors should consider buying commodities or companies that own physical commodities. We're running out of key commodities especially related to agriculture and fertilizer. Washington's brand of the latter isn't the type we need.

  CHAPTER 16

  China: Our Debt, Her Debt

  China Defaults, Currency Basket Threatens Dollar

  October 6, 2009

  Robert Fisk exposed revived discussions by the Gulf States, China, France, Japan, Brazil, and Russia to replace the dollar as the benchmark oil trading currency with a basket of currencies including gold within 10 years.
This proposal is not new and discussions have been ongoing for decades. But other extraordinary moves in the capital markets suggest we should take this threat to the dollar’s position very seriously. For example, China has $2.3 trillion in currency reserves (about 70% in dollars), and China knows how to get its way.

  In November 2008, Chinese banks said they would no longer play by our rules. Top tier banks (Bank of China and Industrial and Commercial Bank of China) reneged on derivatives contracts. They failed to come up with billions in collateral on dollar/yen FX trades, which were out of the money after the yen’s October appreciation. This should have been headline news in every financial newspaper, but it wasn’t.

  Chinese banks defaulted. They may have been partially motivated by U.S. malfeasance in the capital markets that caused losses in Asia. The U.S. squandered its credibility and our cover-ups have done nothing to restore it.

  Most credit support annex agreements would say that closing out these trades would be an event of default, and then the cross default on all the trades would kick in with the same counterparty. But the credit of the Chinese banks was better than many of their counterparties. Everyone was forced to renegotiate contracts with the Chinese banks.