Thursday, July 31, 2008

Smells Like Enron (Lehman Brothers)

Lehman Brothers, a sort of Wall Street cousin to Bear Stearns (read: should have collapsed a long time ago), is showing that it finds Enron style solutions to financial inconveniences a usefull way to stave off pending disaster.

The company spun off a hedge fund staffed by "former" Lehman executives. R3 Capital Partners is a group that was essentially established to "buy" Lehman's risky investments, taking them off of Lehman's balance sheets.

Lehman is going out of its way to deny that it has any "ability to exercise significant influence'' (Lehman Spokewoman Keri Cohen) over R3. But the evdidence shows otherwise:

1. R3's employees maintain their restriced Lehman stock as if they were still Lehman employees.
From Naked Capitalism
"the former employee charged, based on information provided by several people at Lehman, that the R3 employees' restricted stock was still vesting on its original schedule, as if they were still on the firms' payroll. If true, this is both highly unusual and costly."

2. Lehman assets could account for nearly half of the fund's investment base. According to Lehman's own advisor Felix G Rohatyn in an interview with Andrew Sorkin of The New York Times, money like that does buy influence:
“The big difference is the political element,” he said. Mr. Buffett is seeking the best return when he invests; that’s his only goal, Mr. Rohatyn said. For Dubai and China, whether the investment returns 10 percent or 20 percent — or perhaps much less — is almost beside the point, he suggests. What they really want is influence on the world stage, despite their insistence otherwise."

Yes the article and the quote are discussing a different idea, but Rohatyn's point is that money buys influence. But given this quote an admitted 48% holding by Lehman in R3, could Rohatyn deny that Lehman has influence in R3?

3. Lehman is R3's Landlord.

The Empire Strikes Again
R3 allows Lehman to hide the truth from investors, creating and funding it's own buyer for potentially failing assets. This is very much like Enron's Chewco created to hide debt off balance sheets and inflate profits. Chewco was named after Chewbacca, a Star Wars character, I have to say "R3" sounds similarly named considering the star droids R2D2 and C3PO.

[Naked Capitalism and Bloomberg News]

A Guaranteed Way to Save the Markets and the Economy

MarketWatch's David Weidner takes an amusing look at some of the recent actions government has taken to prop up our faltering economy.

[MarketWatch via The BigPicture]

Further Reading: Bloomberg

Wednesday, July 30, 2008

Further Evidence of Blatant Fraud on Wall Street

Karl Denninger today rants about Merrill Lynch's recent declaration on their earnings call that they had evaluated some of their securities at $11 Billion. And today they're declaring the value to be $6.7 Billion.

The consequences of these types of action are further market erosion as confidence is blown away. To have misstated value to this amount is incredible. The markets are already facing a confidence crisis with the federal government doing everything to the point of offering government guarantees and loans to keep these companies afloat.

Making misleading statements like this violate SEC regulations. The problem is regulators have been effectively missing in action these last few years, which has lead us, at least partially into this economic mess in the first place.

The question now is will things like this continue to go unchecked? Or will regulators step in and deal with these issues so we can save some small bit of market confidence?

Further Reading:New York Times

Tuesday, July 29, 2008

Chinese Spying Out in the Open (In the Name of Security)

Senator Sam Brownback (R-KS) today has called out China for it's big brother approach to the coming Olympic Games.

Brownback said that China's Public Security Bureau has communicated with hotels, warning them of "severe retaliation" if they refuse to install government monitoring equipment. This is apparently directed at monitoring the internet use of guests.

All visitors should be aware that they have no reasonable expectation of privacy in public or private locations. All hotel rooms and offices are considered to be subject to on-site or remote technical monitoring at all times.
Of course the U.S. Government doesn't have the inconvenience of having to go to those hotels, they can now go directly to AT&T and Verizon. And yes while Brownback was a critic, he voted for H.R. 6304 the FISA "compromise" bill.

Further Reading:[Associated Press] [Catholic News Agency]

Popular Senator Ted Stevens Indicted

Looking out as a citizen, the political landscape can seem incredibly corrupt. Personally I know that speaking out can feel very futile. The amount of money and influence proliferating politics is overwhelming. Yes a vote still means something, but when put up against large corporate money a constituent can be left feeling very small.

In Washington D.C. today a federal grand jury returned an indictment related to false statements Steven's made on his financial disclosure forms. More than $250,000 in gifts are a part of the charges.

Sen. Stevens has been under investigation for his relationship with VECO Corporation, an Alaska oil pipeline company recently purchased by CH2M HILL. According to the Justice Department's Release former VECO executives have pleaded guilty to providing more than $400,000 in corrupt payments to Alaskan public officials.

The senator is wildly popular, he's brought a lot of money into his state, MarketWatch points out that he's the longest-serving Republican Senator in the party's history representing Alaska for some 40 years. Some months ago when I first heard the story it was on PBS's NOW there was some doubt as to whether or not such an indictment would ever be produced.
"Certainly, Sen. Ted Stevens is involved somehow, but whether he will actually be charged with anything remains to be seen."
Stevens announced he will step down from his ranking positions in the Senate for the time being and maintains his innocence. He is up for re-election this year.

While I don't see this as any end to the frustration, for those of us concerned about the rampant corruption, this indictment provides a glimmer of hope that perhaps these actions will not go unchecked, and warnings will not go completely unheeded.

Update: The Crypt blog reports that The Senate Ethics Committee has been under fire for not taking up an investigation on Senator Stevens, with this latest indictment the Department of Justice has allowed for the ethics committee to not take up the issue as they "defer investigation into matters where there is an active and ongoing criminal investigation."

Saturday, July 12, 2008

Are Bailout Concerns "moralist and purist?"

Tanta at calculated risk yesterday posted this

there are more than a few people who are more interested in getting a front-row ticket to a morality play than working through a financial crisis with the least (further) damage to the banking system. ...I for one would rather try debating with a pragmatist than a purist or a moralist.

Tanta's post completely and openly insults and alienates the Calculated Risk Readers.

I see a growing frustration with the state of our (The U.S.) political, financial, and legal landscape. I see large numbers of people looking for outlets.  Calculated Risk represents one of those outlets.  

The frustration is with corporate malfeasance, and the seemingly (or blatantly )

corrupt government policy that goes to support it.  I'm not the only one decrying the growing legal corruption and moral hazard that this privatized gain, socialized losses program breads.

What's wrong, Why are people angry?

  • Prudent market investors get screwed. Dropping market confidence.
  • For prudent real estate investors there's no clear strategy.  The markets are much less discernible.
  • Tax payer is forced to hand over money to corrupt or inept institutions
  • Risky, careless and sometimes illegal behavior is rewarded.
  • This type of policy stability through inept and failing institution.
  • By not shutting down some of these institutions new institutions don't have a space to come in and rebuild.

There are alternative ways to "work through a financial crisis."  The $29 billion dollar bailout to Bear Stearns and JP Morgan/Chase went to support inept management, this was not a necessary part of the takeover. Why is Alan Schwartz allowed to break the law, and walk away with his corporate bonuses? How many investors who correctly identified the problems with Bear Sterns lost money when the CDS's (Credit Default Swaps) they purchased ended up worthless?

In my opinion there is a growing perception that large corporate money gets the attention of policy makers at a detriment to the individual.  There appears to be a growing disconnect between policy makers, and their constituents.

Yes a lot of people are angry about helping to cover the salaries of Angelo Mozilo, Jamie Dimon, Alan Schwartz, or James Cayne.  It's not OK to reward criminal behavior that further degrades the markets and the economy. An orderly collapse may be the best solution, but an orderly collaps does not have to be a "bailout" for James Cayne.

Gawking or not, many of us, your readers, are "pragmatic."  Tanta, your characterization of "moralists and purists" might as well have said "cranks and crackpots."

Update: Mish's Post today is a great example of the concern I am talking about.

Lawrence Yun Sounds a Bit Confused

Does it matter if the government takes over Fannie and Freddie?

I do not have enough information to evaluate fully. Right now, I do not think it matters over the short term. The long-term impact could be the "inefficiency" of a non-profit organization running a mortgage business - and somewhat higher cost of mortgages.

Lawrence Yun, Chief Economist for the National Association of Realtors 7/10/08

What? Excuse me?

Lawrence seems to of have gone off track.  The basis for the commentary is that there are concerns that Fannie Mae and Freddie Mac ARE running inefficiently currently, as for profit companies.  The classic neoliberal assessment of a potential government takeover of a failed for profit institution to betrays your bias and at the same time almost invalidates it.

Friday, July 11, 2008

4-8 Billion down 48 to 52 billion to go

That's how much money may be left in the FDIC's account after it finishes paying for Indymac's mistakes.  At an estimated $32 billion in assets this is the second largest bank failure in U.S. history, but not the last you'll see of things like this for some time.  Matt at ActiveRain claims there are another 2 billion in uninsured deposits.

Yves at naked capitalism points out that while this is the second biggest, the biggest Continental Illinois for $40 billion in 1984, was during a time when the rest of the banking system was in better shape than it is now.

Continental Illinois' wikipedia entry claims Continental failed, in part because of the bad loans it took on when it purchased Penn Square Bank of of Oklahoma. It wasn't until 1994 that the federal government was able to find a buyer for Continental Illinois.

Bank of America recently swallowed up Countrywide financial.  I'm honestly not sure why.  It might have something to do with the $300,000,000,000 bailout to banks promised by H.R. 3221.  Otherwise the Countrywide deal looks like it could land bank of America in the same boat as Continental Illinois.

 The bank that finally purchased Continental Illinois from the government...Bank of America.

Thursday, July 10, 2008

Corporate Handouts Live On.

Assisting Bank of America in its purchase of CountryWide Financial, Christopher Dodd (D-CT)has almost succeeded opening up the government purse to handout $300,000,000,000 of tax payer money to unscrupulous and inept banks and their investors.

The bailout law is was put into H.R. 3221 by Senator Dodd, and was authored by it's main beneficiary Bank of America. Dodd has been well supported by these two consituents with below market mortgages and campaign contributions.

While Bank of America's proposal included notes to be sure the law was not "percieved as a bailout"(pdf link), Dodd worked to couch this as the "Hope for Homeowners Act" and senators pointed out the potential problems our cities and counties would face with the costs of foreclosures going forward.

Why not just hand the money off to the cities directly?

Unless congress can come to see that it's OK to let bad businesses fail. We'll make it harder for us to create new and better solutions and institutions to carry us out of this hole.

"Don't Dump Bad Loans On Us."

Speaking out against H.R. 3221 FHA Commissioner Brian Montgomery accused congress of trying to "dump bad loans" on his
"Some want to dump bad loans on us, many that never should have been made in the first place."
Speaking at a conference hosed by the FDIC, Montgomery voiced concerns about how congress's $300,000,000,000 bank bailout as "in effect federalizing the mortgage market."

Bloomberg via L.A. Land

We're Number One! U.S. Leader for Illegal Drug Use.

A Word Health Organization survey of 17 countries released this month ranks the U.S. highest for cocaine and marijuana use.

Some tidbits:
  • Americans were four times more likely to report using cocaine in their lifetime.
  • "Countries with stringent user-level drug policies did not have lower levels of use than countries with liberal ones."
  • People with higher incomes were more likely to use drugs.

That last one is pretty interesting considering the public image that's been put on drug use.

Why This Housing Bust Is Worst Ever The American Dream Ends: Tech Ticker, Yahoo! Finance

Barbara Corcoran sits down with Yahoo Tech Ticker discussion the state of the housing market.

Tech Ticker, Yahoo! Finance via Calculated Risk

The Definition of Insanity is...

I’ve been writing who ever I could for days trying to raise awareness about H.R. 3221 and it’s 300,000,000,000 bank bailout plan, and while I haven’t received a response, someone I asked to get involved in my lobbying efforts has. Here is an excerpt from a response from Senator Maria Cantwell’s (D WA) office.
“Each foreclosure can impose damages up to $80,000 to the surrounding community, including the loss of property taxes, the damage done to the prices of neighboring properties, and the cost of foreclosure related services performed by the government.
While I understand your frustrations with what appears to be a "bailout," I believe that we must closely evaluate every proposal and consider the best path forward that will stabilize our nation's faltering economy. The housing market is an integral component of our economy's health. Without action, over three million homes are likely to be foreclosed upon in the coming years, and approximately two million families affected. With such grave financial consequences, the coming foreclosure emergency must be addressed head-on, and Congress must take appropriate action.”
Mrs. Cantwell is right to be concerned about the affects of these foreclosures, but her response to the situation is misguided.

In a previous post I pointed out the evidence of moral hazard, investors, thinking the government won’t let these larger institutions fail, are doubling down on bad bets. This will exacerbate the problems we are facing.

We need money to go toward the smarter investments, not those that the government is backstopping because they are falling apart.

These interventions create market confusion and destabilize the currency. Prudent investors are left hanging. Markets need capital infusion, in order for that infusion to occur investors have to be able to discern what it is they might invest in.

In an April speech to congress Dean Baker laid out how H.R. 3221 will prolong a housing decline,and hurt homeowners. Homeowners end up in a worse position because they are unlikely to accumulate equity under the program and they end up paying more than they could pay otherwise. It makes home ownership less affordable, new buyers will less able to enter the market.

...doing the same thing over and over again expecting a different result.

Mrs. Cantwell expresses a concern about the problems cities are having with these foreclosures, I would submit to her that the money is better spent being sent directly to the cities. Doing a simple calculation with her own numbers shows that tax payers could save over $60,000,000. But that isn’t even necessary, shut down these institutions, and bring in smarter investment.

These banking institutions have already shown that they are incapable and inept. They are almost insolvent, don’t bail them out, shut them down. After shutting them down, repackage these mortgages into transparent securities so that new investment can make better decisions and infuse capital back into the system.

Allow these banks to die so that better entities can learn from their mistakes and help grow the economy again.

It’s transparency and confidence that we are missing. These problems will not be resolve by allowing more of the same behavior, with the same institutions.

Wednesday, July 9, 2008

HUD Secretary Speaks out on H.R. 3221

Further evidence that H.R. 3221 is a bank bailout does little to help homeowners, HUD secretary Steve Preston argues that taxpayers will be absorbing "preventable and foreseeable losses."

Preston argues that FHA needs to be able to implement risk based pricing.  This is interesting considering the mortgages this bill was written for actually fall outside the guidelines that would normally have had FHA backing.  What this risk based pricing would ultimately show however is that almost none of these loans are worth taking on for any investor.

The fact is here the banking industry made a risky bet, and they came back to congress, specifically Christopher Dodd, to bail them out, the potential cost to taxpayers?  $300,000,000,000.

Ron Paul is Up

Checking in on Ron Paul's investment portfolio

Taking data from his financial disclosure last year, Tim Iacono shows us that Ron Paul would be up $295,000 this year had he not made any changes to his portfolio.

Not too bad.

Evidence of Moral Hazard from Bank Bailouts

"The bailout of Bear Stearns Cos. arranged by the Federal Reserve in March shows the government won't allow the companies to fail, Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina."

Recent action, like the Fed bailout of Bear Stearns, and currently the "Hope for Homeowners Act" are creating an environment that insulates investors from risky behavior.  By preventing them from facing the consequences of their investments they are more likely to take riskier bets.  This moral hazard threatens to harm the economy and worsen a decline.

Congress must not pass the "Hope for Homeowners Act" (section 257 of H.R. 3221) By backing these loans with GNMA it is  a 300 billion dollar bailout for banks, just like the $29 Billion dollar Bear Stearns/ JPMorgan Chase bailout facilitated by the Fed.

Tuesday, July 8, 2008

Hope For Bankers Act

It's no secret that H.R. 3221 is about to move on to the president for signing.    What's less understood is that a section entitled "Hope for Homeowners Act of 2008" was written by Bank of America.  The effect of the bill is to offload from lenders some $300,000,000,000 of some of the worst performing loans to taxpayers.

Senator Dodd (D CT) introduced the bill stating there would be no investor bailout, but a reading of the bill shows clearly that's what it is.

Dodd has been in the limelight  more recently for improprieties related to preferential treatment he received from one of the main beneficiaries of this bill  Countrywide Financial.  Furthermore the bill, was written by the other main beneficiary, Bank of America Corp.

This bill threatens to extend a housing crisis and the economic recession in that it harms prudent investors and prevents those less prudent from bearing the full consequences of their actions.

The section of the bill that provides for the bailout, and Bank of America internal documents can be found here.

Senators Kit Bond (R MO)and Jim DeMint (R S.C.) seem to be the only ones raising any concern about the bailout portion of the bill.

Rep. John A. Boehner, R-Ohio, the House minority leader, called on Rep. Barney Frank, D-Mass., to hold a hearing investigating allegations that Dodd and Sen. Kent Conrad, D-N.D., got preferential mortgages at the behest of Countrywide Financial Corp. CEO Angelo Mozilo. Countrywide, a leading subprime lender that has been blamed for helping to cause the mortgage meltdown, is among those that could benefit from the housing rescue.

"Democrats who receive sweetheart deals from their campaign contributors shouldn't be pushing legislation forcing taxpayers to bankroll a $300 billion bailout of scam artists and speculators, and the American people have every right to demand answers if they do," Boehner said in a statement.