The Mortgage Insider

“Since my last report, this employee has reached rock bottom and has started to dig.” – Unknown employee review

This month, I wanted to respond to several readers’ requests that I do some follow up on earlier stories that I’ve run. I’m guessing the phrase, “Read’em and weep!” may be a bit melodramatic here. But I’ll let you decide …

As I write, the Dodd-Frank Bill, otherwise known as the Financial Regulation Reform Bill, has been signed into law. I wrote about it two months ago when this bill came out of the Senate and was about 1,100 pages. The final product turned out to be over 2,300 pages long, and likewise still hasn’t been read by any lawmaker in Washington. The headlines say this law will end “too big too fail,” and prevent future government bailouts from ever happening again, but I doubt it. What it does do is grant unprecedented power to the Federal Reserve. It allows the Fed to seize control of any company it deems as representing a “systemic” risk to the economy. As a consequence of issuing that decree, the Fed may then regulate the size and range of activities that company may engage in. And the answer to your next question is “Yes, those powers can be exercised over any kind of company—bank or otherwise.”

Naturally, there are no specific guidelines in this law related to when this kind of seizure might be appropriate. And the process of seizure will look eerily like the “nationalization” of private companies by Venezuela as of late. However, given the fact that the Federal Reserve is actually a privately owned bank, the term “nationalization” would be inaccurate to say. We’ll just have to coin a new term for when the largest bank in the country decides to take over another company and run it as its own. Maybe we could call it “Doddamization”! Nevermind the Fed’s gross incompetence as a bank regulator, and the unique role it played in precipitating this financial collapse. This endowment of economic omnipotence is for our own good, and will protect future generations. Yeah, right! Regardless of which side of the aisle your politics fall on, the real question here should be this: How can a regulator that so thoroughly demonstrated their inadequacy as such, be logically expected to perform any differently in the future?

Next, the Dodd Frank Bill also has something new for the FDIC to do. In a likewise baffling perversion of reason, the FDIC will take the place of a Federal Bankruptcy court when a large financial firm’s failure “would imperil financial stability.” This will no doubt follow the Fed seizure and subsequent mismanagement period, I’m guessing? And outside the peruse of any bankruptcy court, the FDIC can then take over the failing firm, sell off its assets, and impose losses on shareholders and creditors as it sees fit. I know I may sound like a broken record here, but given the similar failure of the FDIC to perform as a regulator of banks, what makes anyone believe they would be superior to a bankruptcy court in these instances? Federal Bankruptcy courts do, unfortunately, have hordes of experience liquidating large complex companies over the last few decades. In fact, owing to the anticipated ineptitude of the FDIC in this role, the new law requires large financial firms to draft “living wills” to map out how they can be safely wound down. Yep, there was real genius at work here, folks!

Three months ago, I also reported on the SEC filing a civil fraud case against Goldman Sachs. I told you I was certain it would end up in settlement, with no admission of guilt on Goldman’s part, and I guessed that a fine would be levied between $50 million and $100 million. Well, Goldman must have stolen a lot more than we all thought, because the fine just announced was $550 million. That tells you their take must have been north of $5 billion, on the collective subprime con game they’ve been running. So this is nothing more than a very expensive parking ticket to Goldman.

Many more months ago than that, I told you about AIG and how they sold a kind of insurance called “credit defaults swaps,” that ended up bankrupting them. I explained that the difference with this kind of insurance is that the policy holder doesn’t have to have a financial interest in the asset being insured. So this would be like an insurance company selling insurance on your car, to everyone living in Denver. It’s great to be the insurance agent when all the premium checks come in each month—but a nightmare when you get a ding on your car. Now they have to pay claims to everyone in Denver worth far more that the car ever was. And in AIG’s case, this collective “car” was totaled. Yes, I know this violates all kinds of insurance rules and points to obvious fraud on many levels. And apparently AIG decided so, too! This week they agreed to pay out another $725 million to three Ohio State pension funds, to settle pending fraud charges there. You may recall they settled with the SEC and the state of New York a couple years back for $1.6 billion.

Now check my math here, but I think that just added up to $2.8 billion in fraud settlements paid out between AIG and Goldman, in just the last two paragraphs. So tell me how it is that there is that much fraud that needs to be settled, but no one going to jail for the crime of fraud at either firm? In fact, both the SEC and Federal prosecutors just announced this last week that they were dropping all charges against Joe Cassano, the former head of AIG’s special products division. I guess they all just figured we wouldn’t notice or care. And is it just me, but how is a new law that requires the Federal Reserve, The Treasury Department, or the FDIC to take over a huge failing company any different than a government bailout in its effect? I mean, whose money do you think they are going to do that with? If I didn’t trust all our representatives in Washington so much, I’d say we just passed a law that mandates bailouts rather than prevents them. And, gee whiz, I can’t imagine what the unintended consequence of something stupid like that might be …

Thirty-year fixed rates are at 4.25 percent as I am typing. Fifteen-year fixed rates are under 4 percent. So take advantage now and refinance or purchase whatever you need to, and get these rates locked in. Once they’re gone, it may be the last time we will see rates this low in our lifetimes!

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I have had more than a few readers ask me to explain why getting a loan is so tough in this environment. With rates at historic lows for the time being, and seemingly the worst of the financial crisis behind us, there seems to be a widening disconnect between banks and the consumers they are supposed to serve. For my own part, I can certainly validate that in my 23 years of lending, I have never seen anything more dysfunctional than this. I started in the S&L crisis of the late 1980s, so lending was very conservative then, too. But that point in history looks like a period of great romance by comparison.

Part of the issue is, no doubt, due to the depth of this financial collapse compared to the S&L crisis. However, there is a fundamental structural difference in banking that I believe is the culprit behind the current insanity. And that structural difference is compliments of our old friend the Gramm-Leach-Bliley Act of 1999 (GLB). For those of you who follow my column, you’ve already heard the sordid tale of how this law was written and paid for by Citi Group and Travelers, as a function of making their merger in 1998 legal. You also will remember that, by repealing the Glass-Steagall Act of 1932, GLB allowed banks to conglomerate with insurance companies, hedge funds, and investment banks all under one roof. Never mind that these sorts of conglomerations were exactly what led to the first Great Depression, and the subsequent passage of Glass Steagall in the first place. The part of this new equation that is the source of the current breakdown in lending is something called “proprietary trading.”

You see, before GLB was passed, commercial banks that held consumer deposits in checking and savings accounts, etc. had very little choice in what ways they could make money. So for the most part, banks made loans to people like you and me, at a rate higher than they paid out. That was simple and worked for everyone involved, but I guess it just wasn’t sexy enough. However, with the removal of Glass Steagall prohibitions against just such behavior, banks now are able to play the stock markets with our deposits in hopes of getting bigger returns. As I write, the four largest banks, Wells Fargo, Chase, Citi, and Bank of America control 40 percent (or more) of the deposit base in the U.S. and about 60 percent of all mortgages originated. Yet every one of these institutions has its own trading desk, hedge fund, and private equity firm under its roof. So is it any wonder then that, despite the obvious demand, lending to small businesses was down $100 billion in the last half of 2009, or that mortgage lending to consumers was off an estimated 17 percent the first quarter of 2010? How much fun is it to make boring consumer loans at low rates, when you can engage in statistical or derivative arbitrage?

Enter our would-be hero Paul Volcker and the “Volcker Rule.” You may remember his name, as he was the Federal Reserve chairman appointed by Jimmy Carter at the very end of his administration. He was hired to clean up the economic mess Carter’s prior appointees had made, which had resulted in mortgage rates in excess of 15 percent, among other things. While I would rather we just reinstate Glass-Steagall altogether, the Volcker Rule would get most of the work done. Under his proposal, banks that continue to engage in this kind of speculative activity would lose their government backing. In essence, the FDIC would withdraw their insurance for consumer deposits at those institutions. Given the role this speculation played in causing our current recession, you would think this would fly through the legislative process, right? Well, not so much. These same large institutions are spreading a lot of “free speech” around currently, and their teams of lobbyists look like the Publisher’s House Sweepstakes vans as they line up with oversize checks for every senator and congressman they can find.

My advice for you then is simple. Write or call our representatives and let them know how much you like banks playing roulette with your hard-earned savings! In the meantime, while the process is arduous, it does still work. If you have a fixed rate over 5.75 percent, you should be refinancing to a lower rate and/or a shorter term. Once these rates are gone, it will be years before we see them again—maybe decades.

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This last month, the Senate passed its version of financial reform in much the same way it approached health care reform. Yep, you guessed it … here’s another 1,500 pages of unintended consequences that no one in the Senate has actually read. Well, that’s not entirely true. I’m sure the “too big to fail” lobbyists, who likely had their legal teams draft this version of financial reform for Senator Dodd, know exactly what is in it. What, you think that sounds too cynical? Well, you must have missed a little story MSNBC broke on April 20th. According to NBC Deputy Political Director, Mark Murray’s lead-in, “After criticizing Republican leaders yesterday for having a secret, closed-door meeting with Wall Street executives, (D) Senate Majority Leader Harry Reid today faced his own questions about a fundraiser he attended this year hosted by the president of Goldman Sachs.”[1]   

It turns out that Reid pocketed $37,000 from this exclusive, one-night-only political “pole dance.” Hey, this guy still has the legs of an 18-year-old! On the other hand, the bad news for the rest of us is that there is little doubt his feigned outrage over (R) Mitch McConnell’s earlier meeting with Wall Street execs was likewise justified. The truth is, there are at least five financial lobbyists for every representative in both the Senate and Congress. And they have poured over $285 million[2] into the personal campaign funds of key representatives on both sides of the aisle already. That’s how you know we are all going to get the representation we deserve, right? And now that the Senate and House versions need to be reconciled in conference, you can bet the mother of all lobbyists’ bachelor parties is about to begin. I know, I can’t wait to see what all our strumpets in Congress will be wearing to that gala affair!

Another glaring similarity to health care reform is the extent of the takeover, by the Federal government, of yet another sector of our economy. The summary of the bill that is available at the Library of Congress site[3] contains so many new Federal agencies that I lost count. Among the few I know you’ll be most excited to learn about are vast new powers for the Federal Reserve Bank. For those of you who don’t know, the Federal Reserve Bank isn’t even a part of our government. It is a privately owned bank with shareholders like any other large bank. The only difference is that we are not allowed to know who those shareholders are, or how the Fed spends the money of ours that it is allowed to print. Gee, I can’t imagine why anyone would what to abolish this arrangement. How about you? So the Fed gets a new Bureau of Consumer Financial Protection added. Yes, I know what you’re thinking. Given the extraordinary role they played in creating the financial meltdown we find ourselves in, how does granting it vast new oversight powers make any sense at all? The end result is the Fed would have final approval of any new credit product, loan program, or mortgage program offered in the U.S. They are also charged with guarding against abuses by mortgage companies and credit card issuers. So, who is going to protect us from them?

Timmy Geithner, likewise, gets rewarded for his stellar job as Treasury Secretary. The Treasury gets the shiny new “Financial Stability Oversight Council” that is, of course, designed to oversee risk in the financial market, promote discipline, and respond to threats of financial meltdown. Okay, I’m speechless here. This much irony makes my ears bleed. The Treasury also gets a new Office of Insurance Management to oversee “all aspects of the insurance industry.” Wow, can’t wait to see that one either! And if the new “Liquidation Panel” in the U.S. Bankruptcy court authorizes it, the Treasury gets to decide when a financial institution is placed into receivership with the FDIC. Okay, I think you get the idea here.

And let’s not forget the SEC. You might think that now would be a good time to finally regulate the “over the counter” derivatives market. Well, kind of sort of … The SEC and the Commodity Futures Trading Commission (CFTC) will oversee large swap trader reporting and certain categories of swaps only. No, I’m sorry there is nothing here to prevent another AIG situation from forming. The SEC also gets two more agencies: the new Investor Advisory Committee and the Office of the Investor Advocate. These institutions will have final say on what kind of things your investment advisor and financial planner can offer you as a consumer.

So, children, what did we just learn? Apparently, if a combination of gross political malfeasance and systemic financial fraud brought us this second Great Recession, then the cure is an even larger dose of political malfeasance paid for by the same financial crooks! “Then what should I do,” you ask? Well, the experts, in the form of Fed Chair Bernanke and Treasury Secretary Timmy Geithner, have assured us repeatedly that no inflation is likely anytime in the near future. Consequently, you can be certain substantial inflation and higher rates are just around the corner. What are you waiting for? Get your financial house in order. Lock in these low rates while you still have a chance.

 [2]               http://www.reuters.com/article/idUSN2323889820100523?type=marketsNews

[3]           http://thomas.loc.gov/cgibin/bdquery/z?d111:SN03217:@@@D&summ2=m&

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Well, we finally have ourselves a high profile case filed by the SEC against Goldman Sachs. Lord knows it couldn’t have happened to a more deserving company! As those of you who follow my column know, I have said many times that we won’t get a real recovery going until we clean house and put the crooks who are responsible for all of this in jail. So I should be happy, right? Well … yes and no.

I am, in fact, happy and encouraged that the SEC finally got around to bringing any kind of charges against one of the worst apples in this whole debacle. If you didn’t catch the financial news recently, the charges stem from an approximately $1 billion dollar CDO (collateralized debt obligation or bond offering) full of sub-prime loans that Goldman helped put together. The individual loans for this pool were handpicked by (John) Paulson and Company—a large U.S. hedge fund company. So Paulson and Company wanted to get rid of a huge chuck of sub-prime loans, AND then turn around and “short” the offering. This is a fancy way of saying Paulson wanted to bet against the pool of loans performing as agreed. So you can guess the quality of loans selected, given this stated intention. And if you want to pull off something this slimy, who better to call than Goldman Sachs, right? So Goldman Sachs liked the idea and brought in another company named ACA Capital Management. ACA was retained to resell the bond offering to other institutional investors. In reality, this is akin to selling a bomb disguised as an “asset” to investors. You make money on the sale of the bomb, then you light the fuse and run out and get insurance on the fire it will create. You with me so far?

I say that this CDO was a bomb because the collapse of the sub-prime market started in 2006, and this offering was pushed out in 2007. So anyone in the mortgage business knew sub-prime was in a complete freefall at that time. But more importantly, it is likewise apparent that Goldman’s then 29-year-old bond salesman, Fabrice Tourre, knew that this CDO was full of the worst hand-picked batch of sub-prime loans Paulson and Company could find. He is the lone Goldman employee named in the suit, likely because of e-mails he sent internally which stated among other things, “More and more leverage in the system … The whole building is about to collapse anytime now … Only potential survivor, the fabulous Fab (what he called himself) … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!”1

So let’s review. Goldman earned the fees for putting this CDO together, but didn’t want to get its hands too dirty. They bring in ACA to do the re-sale to investors, but ACA is somehow led to believe that Paulson will be a “buyer” of the CDO offering once the packaging is done. Goldman, of course, now claims it has no idea where ACA could have gotten that idea. ACA is likewise never told that Paulson handpicked the sub-prime loans going into this CDO in the first place. The CDO offering is completed and resold by ACA. Paulson and Company then buys hordes of credit default swaps (insurance against the fire it specifically designed to happen) and subsequently makes over a $1 billion dollars.

“OK, but you aren’t happy. Then why?” you ask. Well, for one thing, this is a civil suit, not a criminal one. And we all know how this will end up, right? Goldman will eventually settle for a $50 to $100 million fine without ever having to admit guilt. That sounds like a lot of money, but it pales in comparison to the money they likely made on their own credit default positions, taken out against this same CDO. So no one will go to jail and they will all get to keep the bulk of their ill gotten gains. No one will lose their securities license, except maybe the fabulous Fab. And all the really big questions will go unanswered … questions like, why would Moody’s and Standard & Poors rate this pile of dung AAA? There is no doubt this con game couldn’t have been pulled off without a bond rating shill to stamp it AAA. And since they aided and abetted this financial fraud, why aren’t they named? Why isn’t Paulson and Company named in the suit? They came up with the idea for this flim flam after all, and made $1 billion helping to pull it off. How many CDOs like this did Goldman put together? Did they use a strategy like this with AIG that we, as tax payers, picked up the tab for? How much did Lloyd Blankfein know about these kinds of practices? He was the CEO of Goldman at the time, and you can’t imagine he’d let a 29-year-old who calls himself “the fabulous Fab” loose with a $1 billion deal all on his own. For that matter what did Hank Paulson know? He only left Goldman the year before to become Treasury Secretary. And so on and so on …

Then, of course, there is the timing of the charges, coincidentally announced the same day President Obama announced his tour to promote financial reform. Plus, it sure didn’t hurt to shift everyone’s attention to Goldman, and away from the Lehman Repo 105 scandal involving our friend Timmy Geithner either. Maybe I’m just cynical, but I don’t believe anything in politics is coincidental anymore. How about you? Hopefully the “too big to fail” banks will be done drafting the financial reform legislation for Senator Dodd in time for next month’s column. I can’t wait to see what regulations they come up with to prevent themselves from doing this to us again!

1 http://dealbook.blogs.nytimes.com/2010/04/20/the-importance-of-fabrice-tourre/?src=busln

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Yes, you read the title correctly. And it’s quite an accusation to make, right? Did you ever think you would one day read such a headline? I can tell you that it makes me absolutely ill to have to share this story. But at the end of the day, there is no other conclusion I believe one can draw. See what you think …

I first became aware of this story on March 16th, in an article by Andrew Sorkin of The New York Times. The travesty his article highlighted flowed from a report issued by a bank examiner named Anton Valukas. Mr. Valukas was the bank examiner hired by the court to investigate the bankruptcy filing of Lehman Brothers, and his report has stirred nothing but controversy since its release on March 11th. A wonderfully annotated version of volume 3 of that report, titled “Repo 105,” is likewise available at The New York Times Web site.

So what is “Repo 105” and why is it so egregious, you ask? Well it turns out, “Repo 105” was an internal catch phrase used at Lehman to describe a particular type of accounting fraud. The way it worked was pretty straight forward. Just before Lehman had to report quarterly results in 2007 and 2008, executives at Lehman would move as much as $50 billion of toxic assets off of their balance sheet. They achieved this by using a standard “repurchase and resale” transaction. Under this type of agreement, a company can obtain short-term financing by providing financial securities as collateral for a loan. In a typical re-purchase agreement, the borrower “sells” assets (collateral) to the lender, but with a pre-arranged agreement to buy those assets back (repay the loan) at a slightly higher price a few days later. The inflated price is paid to cover the interest charged on the loan. But under standard accounting practices, this kind of transaction is always rightfully characterized as a loan or liability, because of this mandatory “buy back” of the assets in question. However in Lehman’s case, they committed fraud with the clear intent to deceive investors. Instead, Lehman recorded these transactions as regular sales, but purposefully failed to report the offsetting and associated liability to re-purchase those toxic assets.

And how do you know this method violates all legally recognized accounting practices? According to Mr. Valukas’ report, Lehman had engaged in this kind of behavior as far back as 2001. But like any sleazy, lying, investment bank would, it had shopped around for a supporting legal opinion. It was revealed in the records examined by Mr. Valukas that Lehman could find no law firm in the entire country to sign off on this practice. (Meaning everyone knew it was illegal here in the U.S.) The only law firm Lehman could find to help launder its books was U.K. global legal giant Linklaters LLP. Linklaters’ only demand—besides huge sums of cash—was that all Repo 105 transactions run through their London channels.

And it doesn’t stop there. Lehman took it a further step. The money they borrowed was used to pay down other debts, thereby further distorting their balance sheet so as to appear solvent. According to Mr. Valukas’ report, “Lehman used the cash from the Repo 105 transaction to pay down other liabilities, thereby reducing both the total liabilities and the total assets reported on its balance sheet and lowering its leverage ratios … Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these transactions had on the firm’s publicly reported net leverage ratio. According to former (Lehman) Financial Controller Martin Kelly, a careful review of Lehman’s Forms 10-K and 10-Q would not reveal Lehman’s use of Repo 105 transactions.”

Are you with me so far? So, Lehman issues its quarterly report to the general public and the investor community, based upon this slight of hand. Then they literally re-borrow the debt they had just paid off, re-purchased the toxic assets, and put them back on their balance sheets … all done mere days after the quarterly report was released. And they repeated this practice each quarter.

Oh my God, right? I know you’re shocked to learn that one or all of these “too big to fail” banks were involved in “materially misrepresenting” their financial position to the general public. However, I saved the biggest one-two punch for last. And you’re just going to love this …

In March 2008, and before Lehman filed the largest bankruptcy in U.S. history that September, the SEC and the Federal Reserve Bank of New York (FRBNY) began onsite daily monitoring of Lehman. And the answer to your next question is: “Yes!” That’s the same FRBNY run at the time by Timothy Geithner (our current Treasury Secretary), and the same Sheila Bair-run SEC. So it turns out Timmy and Sheila actually had offices set up inside Lehman’s headquarters, in a supposed effort to prevent another collapse, and in obvious response to the near collapse of Bear Sterns just the week before. In fact, the SEC and the NY Fed sent similar SWAT teams into the home offices of Goldman Sachs, Merrill Lynch, Morgan Stanley, and several others. So what did the Feds do when they learned about these “material misrepresentations” being conducted openly in Lehman’s books? Well, they “blessed” those misrepresentations, of course! In fact, the FRBNY actually provided some of these very Repo 105-type loans to Lehman. Valukas’ report actually reveals that Lehman packaged all its toxic assets into a single “investment” (pool of bad loans) called “Freedom CLO.” Then in a series of transactions with Timmy’s NY Fed, it shifted Freedom CLO back and forth off its balance sheet in exchange for cash. What, you didn’t expect Timmy to provide such a valuable service for free, did you?

But it gets even better. Ready? There was even a Bernie Madoff-esque whistleblower! Mr. Valukas’ report also reveals that a lower-level Lehman executive named Matthew Lee sent a letter to management in June of 2008. Mr. Lee had suddenly sprouted a conscience after being told of his imminent layoff. Nonetheless, he sent a letter specifically raising a whole host of questions about this fraudulent practice, a full three months before the collapse … all while the NY Fed and the SEC oversaw and/or participated in every Repo 105 transaction.

And now maybe you can finally understand why the Federal Reserve wants nothing to do with any audit of its books—and why it’s absolutely imperative we demand nothing less.

So what’s my advice? Well, I think you can see the financial turmoil that may come with Mr. Geithner’s now imminent (?) departure. On the other hand, you can imagine the turmoil not removing him will likewise cause, as these kinds of similar stories continue to break. Lord knows Lehman wasn’t even the Fed’s favorite lap poodle. They were, after all, allowed to “fail.” Imagine what Bernanke, Geithner, and the Fed did for its “to big to fail friends!” In the end, if you need a loan of any kind, for any reason, I urge you to take action now rather than later. Waiting will only cost you more in the future.

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I’m sure you’ve heard the old saying, “It’s good to be king!” Well, it must be true. I just wasn’t aware we lived in a monarchy, or should I say “financial oligarchy.” Unfortunately after I finished this story, it was the only logical conclusion I could draw. To be honest, I can’t take credit for breaking this story either. I received an e-mail from another friend of mine in the business. After I saw the attached video, I was so dumbfounded that I initially thought it had to be a hoax. So I started to search for back-up from other news sites and sources. Sure enough, it appears that this is absolutely true. See what you think …

The initial video report I received was from a mortgage industry pundit named ThinkBigWorkSmall.com[1]. Their exposure of this story had become so viral on the Internet that it provoked an actual response from the FDIC on their site[2] just last week. The scary thing is, the FDIC release is purposely worded to discredit the source, deny the story entirely, and not directly address any of the relevant facts. Of course, that merely further convinced me of the story’s accuracy. You’ll see why in a minute. But let’s start at the beginning.

IndyMac Bank was one of the largest sub-prime lenders, and the seventh largest mortgage originator in the country overall just before its collapse. When it went out of business in July 2008, it was the fourth largest bank failure in U.S. history. For those of you who didn’t know, IndyMac was founded in 1985 by another well-known crook named Angelo Mozilo, “… as a means of collateralizing Countrywide Financial loans too big to be sold to Freddie Mac and Fannie Mae.[3]” In 1997, Angelo spun IndyMac off from Countrywide for a huge profit, as you would expect. And IndyMac proceeded for the next decade to make and securitize loans with little or no verification of income or assets, to consumers with questionable credit. But the story of IndyMac’s failure wouldn’t be complete without mentioning a couple of relevant facts. First, the securitization of these loans could not have been accomplished without being aided and abetted by the AAA rating the bond rating companies sold them for a large fee. And more importantly, IndyMac likely would have been shut down much earlier had it not been for one Darrel Dochow of the OTS (Office of Thrift Supervision—who by definition should have been “supervising” IndyMac all along). You may remember that name from the S&L crisis of the 1980s. Back then, he overrode federal bank examiner’s recommendations to seize Lincoln Savings and Loan, before that bank’s spectacular collapse. Yep you guessed it, being an utter failure as a regulator in the 1980s actually earned him a series of promotions.
 

Unfortunately for us, Mr. Dochow’s ineptitude was apparently only exceeded by his utter disregard for the law. I say that because of a little “back dating” scandal involving IndyMac. It turns out he allowed them to back date an $18 million contribution two months after the fact, so they would appear to meet capital requirements in the March 2008 quarter.[4] Well, it turns out that, based upon a subsequent audit, there never was any documentation for this $18 million either. In fact, he allowed four other banks to do the same thing, all of which subsequently failed. In June of 2008 and a month before IndyMac’s collapse, Senator Charles Schumer (D-NY and member of the Senate Banking Committee) blew the whistle in a series of open letters to regulators, including the OTS. He expressed his concern for IndyMac’s dire financial condition. While that caused a huge run on the bank and hastened IndyMac’s failure, it turned out he was merely beating an already dead carcass. However, that didn’t stop the director of the OTS and Mr. Dochow’s then boss, John Reich, from responding to Senator Schumer’s concerns. Mr. Reich’s response was, of course, to discredit the source, deny the story entirely, all the while failing to address the relevant facts directly. So now maybe you understand my problem with the FDIC’s current response?

Anyway, Mr. Reich was forced to finally demote Mr. Dochow when this back dating scandal broke in the news. You read that right, he wasn’t fired for this infraction and he retired with a full pension in February of 2009. Thankfully, Mr. Reich likewise resigned in disgrace in February of 2009, amidst a Treasury Department investigation into “OTS failures and misconduct.”

Now fast forward a month to March of last year. The FDIC sold IndyMac’s $20.7 billion in loans and other assets to OneWest Bank for $16 billion.[5] That’s not a bad deal—especially when you consider the FDIC financed $9 billion of that on very favorable terms. But you’re going to love the punch line. Guess who runs OneWest Bank? That would be none other than Steven Mnuchin, former executive VP at Goldman Sachs. In fact, OneWest was only formed one month before the sale and was funded in large part by George Soros. Soros is, of course, the billionaire hedge fund manager convicted of insider trading, and one of the largest individual contributors to President Obama’s 2008 campaign. I know what you’re thinking, “Doesn’t being convicted of insider trading disqualify you from running a hedge fund? Shouldn’t he be in prison or something?” The answer is, “Not if you have friends like these!” The FDIC’s rebuttal indicates that the sale of IndyMac was “competitively bid.” But if OneWest was only formed a month before the sale, wouldn’t it have been nice if they listed at least a couple of these “other” bidders?

So what kind of sweetheart deal did OneWest get? Well OneWest (Soros and Mnuchin) paid no more than 70 cents on the dollar for the mortgage loans it “owns and services.” The fact is, it only “owns” 7 percent of all the loans it services. The other 93 percent of those loans are owned by outside investors. That turns out to be lucky for us because the deal the FDIC gave OneWest was a little something my people call a loss-share agreement. Under the terms of that agreement, the FDIC will reimburse OneWest 80 to 95 percent of the losses on those loans, but only after those losses reach $2.5 billion.

That doesn’t sound like much of a sweetheart deal? Well, the 80 to 95 percent reimbursements are based upon the “original loan balance” and not what OneWest paid for the loans. So in essence, it guarantees OneWest a 10 to 25 percent profit on any loans it forecloses. The $2.5 billion benchmark is, for all practical purposes, just an incentive to foreclose those loans as fast as possible. I mean if you were offered a profit of somewhere between $250 to $625 million from the government once you foreclosed $2.5 billion in loans, what would you do?

Interestingly enough, the FDIC thinks it is important for you to know that this deal only applies to the 7 percent of the loans owned by Soros and Mnuchin. And you should also be aware it hasn’t paid a dime out on this loss-share agreement … yet. Gee, I know I’m feeling relieved. Finally the FDIC wants to assure you that it monitors OneWest’s compliance of the Home Affordable Modification Program. Mmm … they must mean the same way they monitored IndyMac all those years leading up to the collapse. All I know is that they don’t offer evidence of a single loan modified by OneWest anywhere on their site. And after I Googled “OneWest loan modifications” … well, let’s just say evidence is hard to come by.

The Fed has started to tighten interest rates, and the hen house is obviously full of foxes. Do any kind of financing you need to get done now. Sooner or later those hens will have to come home to roost!

[2] http://www.fdic.gov/news/news/press/2010/onewest_lossshare.html

[3] http://en.wikipedia.org/wiki/OneWest_Bank

[4] http://articles.latimes.com/2009/feb/21/business/fi-dochow21

[5] http://articles.latimes.com/2009/mar/20/business/fi-indymac20

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The Fox is in the Hen House 

Once again I find myself writing you, from the front lines of the economic crisis. I keep hoping there will be something to report that will cheer you up, but instead I find something that makes me shake my head in disgust. Since the start of this, I have consistently maintained this Great Recession we are in the middle of, is really a “credibility” crisis of epic proportions. Not only do we need to get rid of the whole notion of “too big too fail”, but we still need to clear the toxic assets off of the big bank’s balance sheets. We likewise need to see the systemic fraud that brought us all here prosecuted, in order to restore this lost credibility. So my question is this. How can we do any of that, if the guy running the Treasury Department is part of the problem?

That’s right. Treasury Secretary Timothy Geithner testified yesterday, before the House Oversight & Government Reform Committee. “So this is big news why?” you ask. Well it turns out Mr. Geithner has more problems than his well publicized lack of Turbo Tax skills. “Timmy”, as he prefers to be called, was the head of the Federal Reserve Bank of NY (FRBNY) before accepting his current post at the Treasury. In that role, he worked directly under Fed Chairman Ben Bernanke, and in conjunction with then Treasury Secretary Hank Paulson. Hank Paulson was of course coincidentally, the former CEO of Goldman Sachs. So when the first bailouts were being handed out by Paulson, it turns out Goldman Sachs received 100 cents on the dollar, for its book of toxic assets. You may recall they were the only bank to get this sweetheart deal from the government. But don’t let that get your blood pressure up. You need to keep in mind the fact that according to Goldman’s current CEO, Lloyd Blankfein, Goldman Sachs does do God’s work here on earth.[1] So that’s got to make you feel a lot better knowing…right?

 But here’s where our story gets fun. You see, Goldman Sachs was also the counterparty to AIG on about $13 billion dollars worth of “credit default swaps” (CDS). That’s a fancy way of saying Goldman had insurance policies with AIG, which AIG obviously couldn’t pay out on. Now wait…I know what you’re thinking. You should never mind that issuing insurance policies without the capital to make good on them, is in fact the very definition of fraud. And never mind that Paulson as CEO of Goldman Sachs made all of these bets with AIG’s financial products unit, and then ended up in the Treasury Department guaranteeing those same bets back to Goldman. That just “sounds” like a colossal conflict of interest. You really shouldn’t be so cynical. “Well just don’t tell me they got 100 cents on the dollar again for these worthless swaps”, I hear you say. Well OK, you got me there…maybe your cynicism is warranted after all.

 So I guess by now, I don’t have to tell you which bank Paulson sent our money through, to achieve this noble affect. Yep. It was none other than the FRBNY, under then NY Fed governor Timmy Geithner. However in his testimony, Timmy swears up and down that he didn’t really know what was happening at the FRBNY. And more importantly he claims he didn’t have any hand in these AIG bailout funds, or their immediate transfer to Goldman and several other foreign banks. And finally, Timmy claims no hand in the subsequent cover up of these transfers, documented in a series of emails between AIG and the FRBNY. Those emails of course, direct AIG specifically not to release any information to the SEC, this committee, or any other Federal investigation for that matter. So that makes perfect sense right? As head of the Federal Reserve Bank, in the epicenter of the meltdown, why would he have any interest in this sort of thing? It was just the largest financial collapse in US history, next to the Great Depression after all.

 Well with leaders like this in charge of “fixing” this mess, I am sure you are as confident as I am that nothing more could possibly go wrong. But just in case you need to get a home loan, to purchase a place or consolidate your debt, you might want to get that done sooner rather than later. I’m just saying…

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The Forecast Calls for Debt

 Well, first I want to wish all of you a very Merry Christmas and a Happy New Year. It has been a pleasure and privilege to serve this community for the last 23 years, and we are all truly blessed to live in this undiscovered mountain paradise!

 That said, it is also the time of year when I like to look ahead and give you some of my economic forecasts for next year. That also means it might be worth taking a look back to see what predictions I made and how accurate I was. Since a lot of my forecasts for next year are carryovers from last year, let’s walk through the track record, shall we?

 Last year, I told you we were in a financial “credibility crisis.” I said we needed to have complete transparency of these “too big to fail” (TBF) banks’ true financial balance sheets made public—including their offshore and previously off-balance sheet items. I also said that we needed to see large numbers of criminal prosecutions for the fraud which has enveloped the financial system and caused this mess. And I predicted that the credit markets would remain predominantly frozen until these two things were done.

 So how’d I do? Well, so far we have done neither. In fact, all of the remedies applied so far have done nothing but reward the very same frauds who created this Great Recession. To be fair, I had a decent year of production, as did my industry in general. “So doesn’t that mean banks have opened up” you ask? “Well … not so much,” is the real answer.

 Last year the Federal Reserve (the guys who print our money), provided a budget of $1.3 trillion just to buy mortgages. Over the course of 2009, they provided over 90 percent of the funding for all mortgages nationwide. However, that program expires in March 2010 and is not expected to be renewed. Similar programs were instituted to fund student loans, cars loans, and such. In other words, the government might as well have been lending the money directly to the public. However, that wouldn’t have allowed them to stuff even more of our money into the TBF banks’ back pockets. And what about those credit card letters we’ve all been getting? Nationwide these banks have reduced available credit to consumers by an estimated $2 trillion this year. Does that sound like progress to you? Nope, that still sounds pretty frozen up to me.

 Next year, I see more of the same from these TBF banks. The “Toxic Asset Auction” we were promised last July never materialized. The banks refused to participate and sell or settle their derivative’s exposures—and the Treasury and FDIC failed to get these toxic assets off of the banks’ balance sheets as promised.

 Now, $3 trillion dollars later, the government is starting to run low on bullets. The annual budget deficit has more than quadrupled in the last 12 months, and the national debt will reach nearly $14.5 trillion by the end of 2010. That is approximately 100 percent of our annual GDP, which is a higher percentage than during WWII! Unfortunately, I don’t see any end to this current spending spree in 2010. There was over $11 trillion in emergency government funds set aside for this calamity in 2009. That leaves at least $8 trillion to go—and have you ever seen a politician who didn’t spend more than was budgeted? In fact, you may have noticed Congress is actually attempting to raise the nation’s “debt ceiling” another $1.5 trillion as I write. So it doesn’t take a degree in astrophysics to predict the government will continue printing and spending money at the same furious pace for most of next year.

 I, likewise, predicted the failure of HAMP (the Home Affordable Modification Program). Early this year re-defaults were running in excess of 36 percent. By the third quarter, that number was up to 62 percent. Apparently it is so bad now that the Administration has refused to release that data, as of last month. That is a real worry since they have pushed the TBF banks into enrolling over 650,000 consumers into this program. Perhaps I should upgrade that to “complete and utter” failure?

 Lastly, I posited that we were being told a fairytale—a fairytale that says all this government spending has somehow mitigated the problem, when in fact, it may only be postponing the inevitable and making matters worse. By worse, I meant that we would still have to go through the same pain, but for a longer period of time than we should have. And by using this failed methodology for a second time in history (see New Deal for details), I was worried that we would devalue our currency to the point of grave concern.

 So how did that prediction work out? Mmm … the dollar is down another 6 percent on the year (13 percent since March), and a whopping 38 percent since 2001. In fact, the dollar is now the “carry trade” currency of choice internationally—something that used to be the domain of countries like Mexico and Argentina. Now go ahead and imagine what will happen when they finally stop printing and spending our money. Does anyone really believe that consumer spending will have recovered by then?

 Okay, so what does all this add up to for Colorado? Well, the good news is that our unemployment rate is 6.9 percent and down from a peak of over 8 percent. That’s much better than the 10 percent national figure. Further, Denver’s housing market appears to have put in a bottom, as far as prices goes. The mountain communities should likewise stabilize late in 2010, though remain sluggish. The second wave of stimulus moneys will be spent on “shovel ready” projects, and that, along with all the other government spending, will artificially keep GDP in positive territory again for 2010.

 But by mid-year, I expect a few new problems to appear. Several states will need Federal bail-outs after tax receipts disappoint in April. Likewise, I expect some of the TARP banks to need additional bail-outs. We may even see some who have repaid TARP come back begging, as losses mount on commercial and consumer defaults nationwide. Using the tactics currently being employed and barring any substantial change in direction from the Administration, the dollar will continue to slide. That will force foreign investors, at some point next year, to demand higher yields on our Treasury debt. At the same time, the Federal Reserve will likely have to begin raising rates and start withdrawing its liquidity programs. And 2010 should see a spate of new taxes appear, both on the state and federal levels.

 Higher taxes and any inflation will create a drag on consumer spending, which will not have recovered unless we see a real employment turnaround. However, I don’t see how companies nationwide will begin rehiring when there is so much legislative uncertainty. If you run a company, you have health care costs up in the air, with cap and trade, inflation, and higher taxes looming. And political will in the face of overwhelming debt will eventually curtail government spending by the end of the year. Finally, financial reform looks like it is designed to merely coddle the TBF banks. So lending will remain predominantly frozen again next year. That leaves consumers spending in the tank without government spending to replace it any longer. Nationwide, folks are already working to pay off their consumer debt, as rates and fees go up ahead of the new credit card laws. At this time, I don’t see any way that a double-dip recession can be avoided in 2011.

 I really hate being the bearer of this kind of news. I do believe the economy will heal eventually. Demand worldwide will return, and we have great companies in this country. Colorado has a lower unemployment rate because we have a diverse economic base and a highly educated work force. Our state budget deficit has been greatly mitigated by the effect of TABOR (Taxpayer’s Bill of Rights). And, relatively speaking, we should see the eventual recovery here ahead of almost anywhere else in the nation. Until then, I suggest you get your financial house in order and prepare to weather the higher interest rate environment that is surely coming. A refinance to consolidate all your debt may make very good sense. Ask your CPA and then get going. If you are a buyer, you won’t get a better opportunity than right now. The current combination of rates, home prices, and tax incentives will likely not be seen again in our lifetimes.

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The market had been expecting jobless claims in November to be in excess of 130,000. Instead the jobs report released Friday showed only 11,000 newly unemployed. In addition, the national unemployment rates actually fell to 10%, from 10.2% last month. Keep in mind that this news came a day after the Jobs Growth Summit. With what will undoubtedly be more spending on job creation from that process, and the second phase of stimulus money ($200B+) starting next month, unemployment appears poised to turn substantially positive sometime in the first quarter of 2010.

While one can debate the result once all this stimulus is withdrawn, it seems to me that next year should finally show some similar and substantial turnaround in housing. The Denver market has already shown strong signs of stabilizing over the last few months. And I think next summer will show solid gains in home sales here, over 2009.

That leaves the rate environment ahead. Any recovery perceived will mean rates drift higher. Presure is already forming for the Federal Reserve to raise rates starting in the first quarter of 2010. With tax credits for buyers, interest rates and home prices where they are now, I truly think this is the best buying time for consumers we’ll see.

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