Category: political capitalists

Paulson’s gift to the bears

It’s official: The U.S. economy is headed for its worst recession in three decades. Henry Paulson’s scheme to keep Fannie Mae and Freddie Mac on government life support and bail out its creditors (i.e. Wall Street, Big Banks, and Bill Gross at PIMCO) removes any doubt. The only question remaining: Will this downturn rival the Big Kahuna of the 1930s?

Paulson was interviewed today on Bloomberg. Here is the money quote:

“No one likes to put the taxpayer into situations like this. No one does; I certainly don’t. Government intervention is not something I came down here wanting to espouse, but it sure is better than the alternative.”

The alternative, of course, is that Paulson’s friends are actually forced to take huge losses on their reckless, ill-fated loans to Fannie and Freddie. Unthinkable! Paulson assures the naïve interviewer that the taxpayer will come before the shareholder, forgetting to mention the shareholder has already been wiped out, putting the taxpayer last in line behind the creditors. Under Hanky Pank’s scheme, the taxpayer is simply the bagholder of last resort. Paulson was obviously a quick study under former Goldman Sachs CEO and Treasury Secretary, “Mr. Bailout” himself, Robert Rubin.

The initial reaction of the stock market was to celebrate with a 300 point rally in the DJIA. Our guess is the euphoria will fade quickly as investors realize bailout money does not grow on trees, and the cash will either be taxed, borrowed or printed. The only question: How much will the final tab run?

The more pressing concern, however, is the economy. This economy needs to break its addiction to cheap credit, remove the waste of the previous credit binge, shed its political parasites (e.g., friends of Hank), and rebuild on a solid foundation. Every intervention prolongs the process and deepens the malaise. A wholesale government takeover of the mortgage market virtually guarantees the economy will be mired in deep recession for years.

The only winners (besides whiners like Bill Gross)? Those who are short the market.

Note to self: Move those inflation hedges from the attic to the front hall closet.

Super SIV to the rescue

The three amigos, (Citibank, JP Morgan and Bank of America), have agreed to support Treasury Secretary Paulson’s Super SIV fund by the end of 2007. Details to follow but it seems the $75 billion fund will purchase any type of SIV collateral.

The fund could start operating before next year, the person that the newspaper cited said, and the banks could be asking financial institutions to contribute as soon as Friday.
The fund could restore some liquidity to the market for asset-backed securities by establishing a buyer, even if no SIV uses it, the newspaper said. The proposed still must obtain the approval of credit-rating agencies.

Can a $75 billion fund stop the bleeding in the $320 billion SIV market?

The average net asset value of SIVs rated by Fitch fell to 73 on Sept. 28 from more than 100 in July. A 0.5 percent drop in value of assets is equivalent to a 7 percent decline in the so- called NAV, Fitch said.
Once an SIV’S net asset value falls below 50, a clause is typically triggered requiring the fund to liquidate.

My Comments: The rapid decline of SIV net asset values since the credit crunch began in July may put most of this asset experiment in liquidation mode just in time for Christmas. Of course, Bernanke assured the markets last week he would offer 90% financing to the banks participating in this Super SIV. Can Bennie and the Jets prevent the unwind of insolvent structured finance “securities”?

Music stops for Chuck Prince

Back in July of this year Citigroup CEO Chuck Prince made the following statement regarding the LBO craze:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Chuck has tangoed his way out of the building. Where is the love?

Just a few weeks ago, board members including Robert Rubin, the influential chairman of Citigroup’s executive committee, expressed support for Mr. Prince and said that his job wasn’t in jeopardy. “I think Chuck’s going to be here for a lot of years,” Mr. Rubin said in an interview last month.

My Comments: One by one the banking sector leaves the denial stage. Prince beat Bear’s Jimmy Cayne to the door yet more will follow this group before long. Moving closer to the panic stage.

Mozilo goes from housing hero to SEC probe

As MSNBC reported, Countrywide Financial’s not exactly press-shy CEO Angelo Mozilo is under investigation by the SEC for allegedly abusing a trading rule that allows executives to buy and sell their own stock without violating insider trading laws:

Mozilo sold some $130 million in Countrywide stock in the first half of the year through a prearranged 10b5-1 trading plan. The plans, popular among corporate executives, allow a company insider to set up a program in advance for such transactions and proceed with them even if he or she comes into possession of significant nonpublic information.

“We are making sure that a rule designed to help executives with a legitimate purpose is not being used for illegitimate purposes,” Linda Thomsen, the SEC’s enforcement director, said.

The action was encouraged by North Carolina state Treasurer Richard Moore, a slick politician with presidential hair who loves to be in front of a camera:

North Carolina state Treasurer Richard Moore last week asked the agency to investigate Mozilo’s stock sales. Moore raised questions about changes made to Mozilo’s plan in the months before the company’s stock plunged, allowing Mozilo to significantly increase his sales of Countrywide shares.

Moore, the trustee of a pension fund that holds about 500,000 shares of Countrywide stock worth some $8.6 million, said in a letter to SEC Chairman Christopher Cox that he was “shocked” to learn Mozilo “apparently manipulated his trading plans to cash in” as the crisis involving high-risk mortgages was heating up.

“As one of many investors who have felt the painful losses in Countrywide stock, I am outraged at his manipulation of the system and this abuse of shareholders,” wrote Moore, a Democrat who is running for governor. “The timing of these sales and the changes to the trading plans raise serious questions about whether this is mere coincidence.”

Not only does Moore try to deflect blame for owning Mozilo’s brown smelly bag, he fashions himself and the SEC as the white knights riding to the rescue of the investor class:

Word of the SEC’s inquiry “is good news for investors and sends a clear message that the questions raised are serious,” Moore said in an e-mailed statement Wednesday.

My comments:

  1. Mozilo didn’t just slip off the Titanic this year. He’s sold over $400 million of his own stock over the past several years – all disclosed. Shame on Moore and the people running the NC pension fund for falling asleep at the switch.
  2. When Mozilo was a poster-child for “expanding homeownership, ” the political class and the financial media loved him. Now that his stock has been more than cut in half and the country’s largest mortgage lender is looking more like another Enron, the finger pointing is beginning.
  3. The entire political class is obviously guilty here: the Greenspan Fed for fomenting a housing bubble for the ages, the ill-conceived public policy of expanding “homeownership,” politicians running public pension money, and SEC bureaucrats claiming they can protect investors.

Paulson to the bat phone

Returning from New York this past weekend I opened the Wall Street Journal on Monday to discover yet one more chapter in the structured finance shell game. Evidently Treasury Secretary Henry Paulson picked up the bat phone to several of the largest US banks, begging them to work together in order to facilitate an orderly unwind of numerous off balance sheet structured investment vehicles (SIVs). The proposed Super SIV will try to float one year capital notes with proceeds earmarked for the purchase of SIV assets originally created by Citigroup. Thus Citi avoids two problems, an increase in reserve requirements from assets returning to their balance sheet and ongoing reputational risk.

At this point, the rational investor is throwing up his hands, and why not?

“I have never seen Treasury play this kind of role,” said John Makin, a visiting scholar with the conservative American Enterprise Institute in Washington and a principal with hedge fund Caxton Associates LLC. The banks made “riskier investments that didn’t work out. They should now put it back on their balance sheet.”

Paulson and Co have their hands full lately as trust and confidence in structured finance have been waning. Apprehension and/or the inability to mark securities to market have sent a shock wave through the credit markets. More recently we witnessed the following acts of desperation:

  • Increased injections of liquidity by the Fed
  • Broadening the collateral accepted (to include asset-backed commercial paper) and terms (from 7 to 30 days) of the repo market
  • 100 basis point cut (two separate actions) in the discount rate and 50 basis points to fed funds
  • Encouraging use of the discount window (formerly stigmatized) because banks no longer trust collateral being posted when lending to each other
  • Proposed Super SIV whereby roughly 20% of the total SIV market is re-tranched

Clearly the credit markets are faced with unprecedented circumstances due to countless players and massive leverage. Unlike LTCM which required a NY Fed bailout, the credit markets today have grown incredibly opaque while derivative exposure has gone parabolic.

It’s obvious the SIV assets won’t be priced at market rates because there’s not much of a market to begin with (and why the super SIV exists in the first place). But where exactly do they get priced? To whose benefit? And by which standard?

Unlike the Bernanke induced rally two months ago, Paulson seems to be striking out in spades. The banking index is probing 52 week lows while Citigroup has dropped over 6% in 3 days.

This latest scheme, to which the ex-Goldman Treasury Secretary gives his blessing, attempts to put off the structured finance day of reckoning even further. Could the Super-duper SIV create the inevitable mark-to-market across most aspects of the securitization world leading to a run on the bank? Note to Hank: Beware the law of unintended consequences.

Homeowner preservation assistance

We’re the government and we’re here to help! So says the state of Pennsylvania who created a mortgage refinance product deemed REAL, Refinance to an Affordable Loan. The program has been adopted by 67 lenders including Countrywide Financial Corp., Sovereign Bank, GMAC Financial Services and JPMorgan Chase. Borrowers generally must not make more than $120,000, among other conditions. The state will lend up to 100 percent of the mortgage.

Joining the forbearance party was none other than Angelo Mozilo and his ARM’s dealers at Countrywide. According to the Countrywide announcement over 35,000 “homeowners” have received assistance by contacting the mortgage retention center.

In addition to direct outreach, Countrywide’s efforts include working with non-profit and community groups across the country to create grassroots efforts to contact and counsel distressed borrowers, particularly in communities that are experiencing unusually high foreclosures. “There is an unprecedented effort among lenders, investors, community groups and the industry to work together to help homeowners,” said Bailey. “No one benefits from foreclosure, and counseling and intermediary support from these groups can be fundamental to the success of our borrowers.

Of course this press release by Moodys may have something to do with the press releases above:

Lenders did little to help subprime borrowers with adjustable-rate mortgages stay in their homes, even as it became clear many homeowners would struggle to keep up with their payments, a study released on Friday shows.
Moody’s Investors Service said banks eased borrowing terms on just 1 percent of subprime mortgages with interest rates that reset higher in January, April and July. It said that “only recently” have servicers begun to modify more loans to help homeowners avoid foreclosures, “despite much industry dialogue and heavy press attention” on the problem.

My comments: We’ve seen this movie before. During the 1930s numerous state and local governments intervened with forbearance programs which inevitably failed for obvious reasons. This grand experiment will also fail as wages continue to decline, adjusted for inflation while the financial obligations ratio hits an all time high.

Mr. Mozilo goes to Washington

Yesterday some of the country’s largest mortgage lenders went hat in hand to DC to chat with Treasury Secretary Hank Paulson. The parade was made up of Countrywide CEO Angelo Mozilo and high level execs from Wells Fargo, Citi Mortgage, JP Morgan Chase, and HSBC. As CNBC’s Diane Olick blogged, there was some turf defending and finger pointing amid the “let’s do what’s right” love-fest…

Hank Paulson:

Unlike periods of financial turbulence I’ve witnessed over many years, this turbulence wasn’t precipitated by problems in the real economy. This came about as a result of some bad lending practices

Angelo Mozilo:

Real estate values have clearly caused most of the problem.

After the meeting, Mozilo did what he does best – shmooze with the press. We parsed the interview and offer our own interpretation…

I don’t think there’s anybody doing more than Countrywide in terms of trying to help these people stay in their homes where that’s possible. So we just continue to work as diligently as we can to make certain every step is taken to preserve the integrity of homeownership. And we’ll continue doing that, and working with the government and any agency we can to make sure that we continue to do the right thing, and we get as much help as we can from the agencies – from Fannie, from Freddie, from FHA… I think everybody wants to do the right thing, and everybody’s on the same page.

Translation: We all just want to save our bacon, even if it comes at taxpayer expense. Bringing the American dream to the less fortunate is the best way to cover our scam. Reporters, especially, fall for this all the time.

Countrywide’s doing fine. And we’re gonna continue to grow…

Translation: We’re in deep doo doo.

It’s always been a prejudicial problem. You know, it’s a risk-based process that we have in this country. But my concern really is that with constraints now being placed on lending, particularly subprime, is the gap is going to widen dramatically between the have and have-nots. That’s my deep concern.

Translation: I have no problem playing the class envy card. Most are too ignorant of economics to realize there’s no free lunch when it comes to buying a home.

In terms of increasing the Fannie/Freddie limits, increasing the FHA loan amounts, getting the cap off Fannie and Freddie… I’m for that because we need liquidity in the marketplace… And the government has to play that role right now, in creating liquidity, so I’m in support of it.

Translation: We have a $209 billion “distressed” loan portfolio against a mere $14 billion in equity and would love to have the GSEs take some of it off our hands.

I think when you have increasing values as we had – tremendous values similar to the tech boom – everybody wanted to own a piece of real estate to get into the game. And so the rapid increase in values was the problem, and with that came some lending practices that certainly, in retrospect, were not acceptable. And now you have those values receding and… now all the sins of the past are being exposed as a result of receding real estate values. We’ve got to get real estate values at least stabilized in order to keep these people in homes so they can finance themselves out of the problems that they have.

Translation: I’m tossing you a crumb of truth here, so listen up. After the Fed dropped interest rates through the floor earlier this decade, they inadvertently ignited a housing boom. Everyone and his brother thought real estate always went up and we simply let them place that bet on massive margin. Our bad. I’d love to tap the leveraged speculator on the shoulder and get him to bring his equity up, but it’s too late for that – you can’t get blood from a turnip. So now we’re left holding the bag and our lenders are tapping us on the shoulder. We’re basically screwed, and the only thing that can save us is a new bull market in real estate.

Today, Countrywide issued a press release that admitted mortgage loan fundings for August dropped 17% from a year earlier. David Sambol, President and Chief Operating Officer, was stoic and reassuring:

Looking forward, the Company expects that it will be a long-term beneficiary of the current conditions and corrections in the mortgage industry, and we are confident that the actions which we have taken in response to the current environment will position us for profitable future growth and success.

My comment: How does anyone in his right mind believe any of the spin coming out of Countrywide these days?

The trouble with lending to the poor

An op-ed titled, “A Wall Street Trader Draws Some Subprime Lessons: Michael Lewis,” appeared on Bloomberg today:

So right after the Bear Stearns funds blew up, I had a thought: This is what happens when you lend money to poor people.

Don’t get me wrong: I have nothing personally against the poor. To my knowledge, I have nothing personally to do with the poor at all. It’s not personal when a guy cuts your grass: that’s business. He does what you say, you pay him. But you don’t pay him in advance: That would be finance. And finance is one thing you should never engage in with the poor.

After the subprime debacle, a small, but growing minority is questioning the wisdom of two decades of public policy promoting home ownership for low-income families. In an August 22 WSJ op-ed titled, “Payback,” Holman W. Jenkins, Jr. recalls how a number of these bad seeds were planted during the Clinton administration:

Everybody talks about moral hazard. A wisp of memory came to mind last week. Then-Fannie Mae chief Franklin Raines visited The Journal years ago and entertained himself by mocking editorial writers who assume that establishing that a policy is economically inefficient is enough to establish that it’s unwise.

He yukked it up quite a bit, in fact, noting that voters are perfectly entitled to assert values other than those of the market, namely that homeownership is a social blessing and should be encouraged with subsidies. And so we’ve done with tax subsidies, lending subsidies and a concerted set of policies by Bill Clinton’s HUD to move low-income people out of rental units and into homes they own. His goal, which was achieved, was to lift the homeownership rate from 64.2% to 67.5% of households.

This brings to mind an interview of Raines that appeared in the June 30, 2003 issue of BusinessWeek:

What Fannie Mae does is important to the country and to home buyers. And we do it, I think, very well.

(Btw, the interview is a classic with such quotes as “We are compulsive about managing risk,” right before fessing up to an accounting mess that cost over a billion dollars to clean up, three years of financial statements not provided investors, and eventually Franklin Raines his job. Don’t shed any tears for Raines: For his troubles he made nearly $100 million in 8 years of running the ship at Fannie Mae.)

In “Payback,” Jenkins goes on to cite a study questioning the wisdom of a policy that ignores basic economics:

A home financed by a mortgage is not just an asset. It’s also a liability. We owe thanks to Carolina Katz Reid, then a graduate student at University of Washington, for a 2004 study of what she dubbed the “low income homeownership boom.” She considered a simple question — “whether or not low-income households benefit from owning a home.” Her discoveries are bracing:

Of low-income households from a nationally representative sample who became homeowners between 1977 and 1993, fully 36% returned to renting in two years, and 53% in five years. Suggesting their sojourn among the homeowning was not a happy one, few returned to homeownership in later years.

Even among those who held on to their homes for 10 years, the average price-appreciation gain was 30% — less than if their money had been invested in Treasury bills. This meager capital gain was about half that enjoyed by middle-income homeowners.

A typical low-income household might spend half the family income on mortgage costs, leaving less money for a rainy day or investing in education. Their less-marketable homes apparently also tended to tie them down, making them less likely to relocate for a job. Ms. Reid’s counterintuitive discovery was that higher-income households were “twice as likely to move long distance if they’re unemployed.”

Almost needless to add, the great squarer of circles for middle-income homeowners, the mortgage-interest deduction, won’t turn a house into a paying proposition for those with little income to shelter.

His conclusion:

Bottom line: Homeownership likely has had an exceedingly poor payoff for millions of low-income purchasers, perhaps even blighting the prospects of what might otherwise be upwardly mobile families.

Yet in the political realm, bad ideas never seem to die, but instead are embraced and expanded by future politicians. President Bush took ownership of the “American dream” concept with the euphemism “ownership society.” And when that dream turned to nightmare, he pandered to the peasants with bailouts and an increased role for Fannie Mae and Freddie Mac. As Jenkins wrote in a September 5 WSJ op-ed:

You’ll know Washington is doing for housing what it did for New Orleans (subsidizing uneconomic decisions) if it now heeds countless pleas to expand the mandate of Fannie Mae and Freddie Mac to refloat the housing market and refinance underwater loans. Their lending already has grown much faster than the economy, much faster than housing demand, channeling a current $1.5 trillion in artificially cheapened capital into the housing market.

The underlying problem in the housing market is that, after two decades of easy credit funnelled into the home, prices are too high for the expanded pool of homeowners to afford. More of the same – promoting home ownership at any cost for those least able to afford it – can only exacerbate the current mess.

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