FedUpUSA

Archive for December 17th, 2009

I’m tired of the repeated bull-crap from the media and various carny barkers about "moral obligations" to meet your payments on underwater property.

Why is it that you have a moral or ethical obligation to BANKS to do this, when THOSE VERY SAME DAMN BANKS ARE WALKING AWAY IN THE SAME FASHION I ADVOCATE?

Dec. 17 (Bloomberg) — Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.

“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”

Right.

Exactly as you do when you strategically default on your mortgage, giving the property back to the bank to get out of your loan obligation.

Why is Morgan Stanley doing this?

The Morgan Stanley buildings may have lost as much as 50 percent since the purchase, he estimated.

As a consequence of being "upside down" they are walking away.

This isn’t the first one Morgan Stanley has walked off on either:

Morgan Stanley last month agreed to hand over Crescent to Barclays, ending the firm’s obligation on a $2 billion loan after taking almost $1 billion in losses.

When Morgan Stanley acquired it, Crescent owned 54 office buildings in cities including Dallas, Houston, Denver, Miami and Las Vegas. It also owned the Canyon Ranch spa and resort, residential developments in Scottsdale, Arizona; Vail Valley, Colorado; and Lake Tahoe, California.

Got it?

BANKS – the very same BANKS that people claim you have a MORAL AND ETHICAL OBLIGATION TO PAY EVEN IF YOU ARE UPSIDE DOWN – are walking away (by "negotiation" – as in "do it or we’ll default and you’ll get even less!") from properties EVEN WHILE THE CARNIVAL BARKERS IN THE PRESS ARGUE IT IS IMMORAL FOR YOU TO DO SO.

In a word: BULLSHIT.

This is exactly the same thing – a "strategic default", which people define as:

"strategic default," walking away from their mortgages not out of necessity but because they believe it is in their best financial interests.

Morgan Stanley CAN pay, they are simply choosing not to, because the property has fallen in value.

This is exactly identical to you choosing not to pay because YOUR HOUSE has fallen in value.

George Brenkert, a professor of business ethics at Georgetown University, says borrowers who can pay — and weren’t deceived by the lender about the nature of the loan — have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments, he says.

Really?

I called Mr. Brenkert and spoke with him for a while this afternoon, and pointed out the above – that the asymmetry of position here is untenable and is in fact a big part of why we’re in this mess.

Let’s be clear: Those arguing for this from the banking and regulatory industry know how you stop people from "Strategically Defaulting" – don’t give people loans that make such an option attractive!

If we had only 20% down 30 year fully-amortizing fixed-rate loans in the mortgage business nobody in their right mind would strategically default, because they would lose their 20% and even if prices declined they would likely (with amortization) be either ahead or darn close to it – that is they’d lose actual money.

But on the business side of things we allow companies to set up separate LLCs and then trade on the "parent" credit even though there is no recourse to the parent.  This allows firms like Morgan (or the builder down here near me that has a bunch of these shell LLCs) to build and buy huge amounts of real estate – yet when something goes wrong they have tremendous leverage on a short sale, put-back or simple walk-off: if the lender doesn’t like it they’ll bankrupt the "container" LLC and the lender will get nothing.

Consumers, of course, can’t do that.  Try to set up a LLC and then use it as a vehicle to buy a house without a personal guarantee associated with the loan. 

Forget it.

Try to get a small business loan with only the business as the collateral – no personal guarantee. 

Forget it.

It is therefore my contention – and on this point Mr. Brenkert agreed – that the rules must be consistent for everyone, and if big business can strategically default on their obligations for profit (rather than for hardship) then consumers should be able to do so as well.

Therefore, until the law is changed to prohibit the use of said "Strategic" legal containers and the resulting option of business interests – including the banks that are complaining now – to practice selective default when it suits them I stand by my original view:

Strategic Default, in today’s economic, legal and ethical environment, is perfectly within the rights of consumers and they should exercise that right when it makes economic sense, after consultation with both legal and accounting professionals.

John McCain may be searching for redemption here….

Dec. 16 (Bloomberg) — U.S. Senators John McCain and Maria Cantwell proposed reinstating the Depression-era Glass-Steagall Act that split commercial and investment banking to rein in Wall Street firms in response to the financial crisis.

“Under our proposal, too-big-to-fail banks would be forced to return to the business of conventional banking, leaving the task of risk taking or management to others,” McCain, an Arizona Republican, said at a Washington news conference. A former bank regulator said splitting up companies is “crazy.”

I will reiterate what I said back in the summer and fall of 2008: I am absolutely convinced that McCain’s endorsement of the TARP bailout bill, and his refusal to stand up and take a strong position in favor of the common man, is why he lost the election.

Reinstating Glass-Steagall would be a near-total reversal of his previous position.  It would be recognition of the facts: Banks that are allowed to gamble in the financial markets inherently are gambling with the sovereign credit of The United States, and inevitably transfer their losses to the taxpayer while keeping ALL of the profits for their overpriced staff and executives.

This is often said to be of “benefit” to the public because these banks are public companies.  This is a flat lie: Goldman typically bonuses out roughly half of their gross profits, with only a minuscule piece being paid in dividends to shareholders.  Other banks have similar compensation policies.

There is no “free market” way to prevent such distribution.  You can only prevent it by prohibiting lending and/or depository institutions from speculating in any form or fashion in the markets.

For those firms that wish to speculate they should be free to – with their own funds (that of their shareholders or bondholders) but they must be accountable to the last penny for each dollar at risk, and unable to transfer that risk to the taxpayer.

Wall Street will, of course, fight any such law tooth and nail, because speculating with other people’s money and being able to force the taxpayer to eat all risks of loss is the time-honored fashion by which these institutions steal hundreds of billions of dollars from taxpayers each and every year.

This has ratcheted up the government’s obligations to the point that there is a very real risk the government may be unable to meet its obligations.  That, of course, would be an unmitigated disaster and quite literally could result in the end of our Republic.

The truth is right here:

“We cruise along for 80 years without a major calamity infecting the entire financial system and then less than eight years after the repeal of Glass-Steagall we have a financial meltdown in this country,” Camden Fine, president of the Washington-based trade group for about 5,000 smaller U.S. banks, said in a telephone interview. “That’s no accident.”

Exactly. 

NOW CUT THAT CRAP OUT.

If John McCain has finally thrown his “trusted economic advisor” Phil Gramm (of Gramm-Leach-Bliley fame, which repealed the last pieces of Glass-Steagall, and who proclaimed that we were in a “mental recession” during the campaign) over the side of the boat with cement shoes attached it is long overdue.  If he truly is willing to get behind and press this bill through the Senate and raise hell – in public if necessary – to get it passed, I will take back all the ugly things I said about him during the 2008 campaign, and should he run in 2012, I would be likely to vote for him as well.

John McCain can demonstrate he’s serious about REAL financial reform and not just bloviating by joining – and rallying others to join - a block on Bernanke’s confirmation for a second term.

Hmmmm… now this story is interesting….

Though the four are not in all the same businesses, they were caught in one of the same traps: They sold mortgage guarantees — in some cases to each other. Now when homeowners default, as they are doing in record numbers, these companies are covering the losses. Essentially, taxpayer money to these companies is being used partly to protect banks and other investors who own the mortgages.

Uh….. is someone writing circular credit-default swaps?

Maybe a few someones?

Maybe we’re not getting the full story on the losses?

Like the big banks, these four companies would no doubt prefer to be free of government assistance, which comes with pay and other restrictions on their executives. But they appear at risk of getting onto a debt merry-go-round, where they have to draw new money from the government just to keep up with their existing government debts.

Hand, meet job.  Or is it something a bit more dark and sleazy?

Those capital commitments from the Treasury do not capture the full scale of government assistance to the companies. The government has also bought mortgage-backed securities and guaranteed corporate bonds, while the Federal Reserve Bank of New York has made an emergency loan.

Right.  In the case of Fannie and Freddie, about one trillion worth of “purchases” by The Fed, which I have argued repeatedly (most recently right here) are illegal.

For its mortgage guarantee unit, A.I.G. used some Treasury money to reinsure $7 billion of obligations through a Vermont subsidiary. The terms call for the unit, United Guaranty of Greensboro, N.C., to pay the claims that it can afford and send the rest to the Vermont affiliate.

Little is known about the Vermont unit because the state does not require that type of company to file annual reports. If the Vermont company needs additional money, it presumably could turn to A.I.G., which can draw more from the Treasury.

Oh, and some of it is off-balance-sheet too.

Why that’s just…. lovely…. watch your step!

Told ‘ya so.

Citibank slammed the door:

Citigroup sold 5.4 billion shares at $3.15 apiece, less than the $3.25 the government paid when it acquired a one-third stake in the New York-based bank in September. The bank said Treasury won’t sell any of its shares for at least 90 days.

And, I might add, a solid 10% or so below the closing price, and worse, way down from the somewhat-over $5 price just a few weeks ago.

Like 40% down.

I said a few days ago that:

Gee, you think this might have something to do with the equity and tarp exit right now nonsense?

Yep.

Now here’s the truly-bad news. 

All of the big TARPed banks, and all the other banks, better hope they have enough capital, because they are not going to come back to the public markets for more.

Dick Bove was absolutely ballistic last evening on Fast Money, bloviating about lawsuits and such.  Good.  It’s about damn time that people got pissed off at the outright looting of not only the taxpayers but the shareholders that these institutions have engaged in.

Let me be clear on my opinion: 

I DO NOT BELIEVE THE BANKS HAVE ANYWHERE NEAR ENOUGH CAPITAL GIVEN THE HIDDEN LOSSES THEY ARE CARRYING ON AND OFF THEIR BALANCE SHEETS THROUGH THE LEGALIZED ACCOUNTING FRAUD THAT FASB HAS PERMITTED SINCE MARCH OF THIS YEAR. 

THIS BOGUS ACCOUNTING WILL DETONATE IN THESE BANKS FACES WHEN THE CASH FLOW BECOMES INSUFFICIENT TO MAINTAIN THE CHARADE, AT WHICH POINT THE PRESSURE VESSEL WILL CRACK AND THE BANK WILL LOOK LIKE THIS: 

Congress is not going to allow a second bailout.

The equity markets will not buy the stock for a second bailout.

THERE IS NOWHERE TO GO FOR ANOTHER BAILOUT.

Better let that one sink in, folks, and then hope that I’m wrong about capital adequacy, because if I’m not, the fuse on this sucker has been lit, it’s both waterproof and impossible to cut, and I have no idea what the time delay is on it.

I keep trying to warn people…..

LONDON, Dec 16 (Reuters) – Standard & Poor’s on Wednesday put about 1.46 trillion euros ($2.127 trillion) worth of covered bonds on credit watch negative or developing, based on new criteria for rating such securities.

$2.12 trillion worth of covered bonds?!

What is a covered bond again?

Covered bonds, usually rated triple-A, are regarded as low risk because they are backed by mortgage assets or loans that remain on the issuing bank’s balance sheet, but the credit crisis prompted S&P to revisit the way it rated them because of concerns over what would happen in a bank default.

Oh, mortgages and loans eh?

“AAA” eh?

Is this sort of “AAA” the same sort that our subprime MBS got?

So let’s see.  Instead of selling the loans we keep them and then sell bonds against them, thereby “covering” them with the “asset.”  This works great until the underlying collateral quality goes to hell and the borrower defaults, at which point the bondholder has recourse against the issuing bank!

When that issuing bank is geared at 60:1 (as some in Europe are) guess what happens?

This is the definition of “AAA” right?  A bank that is geared up 30, 40, 50, 60:1 – and that’s the ultimate recourse on the bond? 

How do you say “debt pyramiding” – an act that every competent underwriter or credit analyst knows is a serious risk?  But no!  We should rate this eurotrash “AAA” so we can find suckers, er, “investors”, who will soak up this trash and make even more risky lending possible!

I think we need a new rating: TOP – for “Triple Ocular Penetration” (thanks to the forum but I can’t find the person’s login to credit him or her properly :-> ) – and we should definitely assign these “covered bonds” this new rating.

Oh and these crafty bankers would never get themselves into a duration mismatch problem would they?  You know, sell short-term bonds against 20 or 30 year loan obligations – thereby putting them at risk of a rollover problem (where rates have spiked in the interim), making them instantly underwater (and remember, they’re levered 30, 40, 50 or 60:1 over there – with no transparency – too!)

The bonds have relatively short maturities, but the pool of underlying mortgages backing them are usually 25-30 years. This raised concerns that in a default the mortgages would not raise enough to repay the bonds.

Oh, they did do that.  Geez these bankers are really smart!

“Heh sonny, hold this thing for me while I pull the pin out…. and RUN!”

All the pumpers and media shills tried to tell us that the problems were behind us, and the economy and banking system would all be ok….. let’s see, we have the PIIGS problem, we have Dubai, and now we have over $2 trillion of supposedly-”AAA” bonds that not only are the epitome of debt pyramiding but they’ve got duration mismatch problems – into an almost-certainly rising-rate environment – as well!

What could possibly go wrong?

From Bloomberg, Citigroup Stock Sale Discount Prompts Treasury to Delay Disposal of Stake :

Dec. 17 (Bloomberg) — Citigroup Inc.,
the last of the four largest U.S. banks to seek funds to exit a
taxpayer bailout, raised $17 billion by selling stock for a price so
low that the U.S. delayed plans to shrink its one-third stake in the
lender.

Citigroup sold 5.4 billion shares at
$3.15 apiece, less than the $3.25 the government paid when it acquired
its stake in September. The New York-based bank said the Treasury won’t
sell any of its shares for at least 90 days.

Investors demanded a bigger discount from Citigroup than Bank of America Corp. or Wells Fargo & Co.,
which together raised more than $31 billion this month to exit the
Troubled Asset Relief Program. Wells Fargo, which trumped Citigroup’s
bid to buy Wachovia Corp. last year, leapfrogged its rival by
completing a $12.25 billion share sale Dec. 15. JPMorgan Chase &
Co. repaid $25 billion in June.

“The market cast its vote and they’re low down on the ballot,” said Douglas Ciocca,
a managing director at Renaissance Financial Corp. in Leawood, Kansas.
“Citigroup needs to show steps to reinstall the quality of the brand.”

With
the sale, Citigroup’s common shares outstanding increased to 28.3
billion. That’s up from 22.9 billion as of Sept. 30 and 5 billion at
the end of 2007.

“More shares outstanding means less value per share,” said Edward Najarian,
an analyst at International Strategy and Investment Group in New York,
who has a “hold” rating on the shares. “The whole structure of their
deal to pay back TARP wasn’t very good for common shareholders and that
is being reflected in the pricing.”

I think
one of the most important points are being missed. Most of these banks
swore that they didn’t need TARP. Despite this, in order to return it,
they must go back out to the capital markets. Why do you have to hit
the market to return a loan that you said you didn’t need, unless you
needed it? This obvious lie has went unchallenged.

It gets
worse. Citi is diluting the hell out of it shareholders, as well as all
of the other TARP banks that are selling shares. Some may even be
taking on debt. They are doing this primarily to gain the freedom to
declare bonuses at higher rates despite uncertain credit condition
surrounding the toxic assets that caused the problem in the first
place. Why in the world would any lender or shareholder agree to
dilution and/or higher debt service “primarily” to pay higher bonuses
to employees in the highest compensated (as a percent of net revenue)
industry in the world???

Imagine if you ran this business, you
have rocky times during a recession with revenues in nearly all aspects
of your business down save the blatant risk taking of trading, and you
go to your bank and say I need a big loan so I can pay myself a $20
million bonus increase.
Do you think Citibank would give you this
loan? They expect it from their shareholders. The same goes for
Goldman, JPM, BAC, etc.

Also from Bloomberg: Weak Banks Should Face Curbs on Bonuses, Dividends, Basel Regulator Says

Dec. 17 (Bloomberg) — Global regulators urged national
authorities to limit bonus and dividend payments by banks with
weakened capital safety nets as part of proposals to reduce
risks to the financial system.

Banks should increase the quality of the capital they hold
to cope with losses, the Basel Committee on Banking Supervision
said in a report on bank capital and liquidity published today.
Banks with depleted capital buffers shouldn’t use predictions of
recovery to justify generous dividends to investors and
employees, the committee said.

Global regulators have been wrestling with plans to
increase supervision of banks following the worst economic
crisis since World War II. The Group of 20 Nations agreed in
April that banks should be required to hold more and better
quality capital to reduce risks to the financial system.

“It’s not acceptable for banks which have depleted their
capital buffers to try and use the distribution of capital as a
way to signal their financial strength,” the committee’s
statement said. “The proposed framework will reduce the
discretion of banks which have depleted their capital buffers to
further reduce them through generous distributions of
earnings.”

It’s amazing that this even needs to be said.