FedUpUSA

Archive for December 22nd, 2009

From Tom Petruno: Financial-meltdown commission sets first hearings

The panel set up by Congress to tell us why the financial-system meltdown happened — i.e., who and what to blame — will hold its first hearings Jan. 13 and 14 in Washington.
…
Congress is expecting a final report from the 10-member, bipartisan commission by Dec. 15, 2010.

Maybe they will take suggestions and questions.

My first suggestion is they start by interviewing – in private – the field examiners at the Fed, FDIC, OCC and OTS. There is no need to publicly embarrass any examiner. The various Inspector General reports on bank failures would provide a starting point (see Eric Dash’s article in the NY Times: Post-Mortems Reveal Obvious Risk at Banks).

Ask the examiners what they saw and when – according to the Inspector General’s reports, the field examiners were warning about lending problems in 2002 and 2003.

Follow the trail. Did this information generate warnings inside the organizations? If so, why wasn’t action taken? Was the action blocked by political appointees? And how would the proposed regulatory reform lead to a better outcome?

And a quote from Eric Dash’s article:

“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank examiner for the Office of the Comptroller of the Currency. “At the height of the economic boom, to take an aggressive supervisory approach and tell people to stop lending is hard to do.”

If the lending was risky, telling them to stop was the regulators job. How does reform fix this?

The good news is Brooksley Born is on the commission, and I think she will do an excellent job.

Here is their website (under construction)

In a study that confirms what anyone with common sense already knew, Banks with political ties got bailouts.

U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday.

Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan’s Ross School of Business.

Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds.

Political influence was most helpful for poorly performing banks, the study found.

Banks with an executive who sat on the board of a Federal Reserve Bank were 31 percent more likely to get bailouts through TARP’s Capital Purchase Program, the study showed. Banks with ties to a finance committee member were 26 percent more likely to get capital purchase program funds.

President Obama said in October that despite the bailout, there was still too little credit flowing to small businesses.

Appearances Are Deceiving

The reason there appears to be “too little credit flowing to small businesses” is simple.

1. Banks are undercapitalized
2. Demand for loans is down
3. What demand does exist is from questionable risks

For details on those points please see Fictional Reserve Lending And The Myth Of Excess Reserves.

Politicians For Sale

Some of the comments to the article hit the nail on the head.

In response to a statement in the article “The banking industry has long been criticized for using political influence to obtain bailouts.” here is this gem of a comment:

How about, “The politicians have long been criticized for granting political favors in exchange for campaign contributions.”

If the politicians weren’t for sale, they couldn’t be bought.

Indeed, politicians are for sale and the results prove it, in spades, with disastrous consequences.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html  to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Can people become so broken that truths of how they are being screwed do not “set them free” but instead further demoralize them? Has such a demoralization happened in the United States?

Do some totalitarians actually want us to hear how we have been screwed because they know that humiliating passivity in the face of obvious oppression will demoralize us even further?

What forces have created a demoralized, passive, dis-couraged U.S. population?

Can anything be done to turn this around?

Can people become so broken that truths of how they are being screwed do not “set them free” but instead further demoralize them?

Yes. It is called the “abuse syndrome.” How do abusive pimps, spouses, bosses, corporations, and governments stay in control? They shove lies, emotional and physical abuses, and injustices in their victims’ faces, and when victims are afraid to exit from these relationships, they get weaker. So the abuser then makes their victims eat even more lies, abuses, and injustices, resulting in victims even weaker as they remain in these relationships.

Does knowing the truth of their abuse set people free when they are deep in these abuse syndromes?
In the United States, 47 million people are without health insurance, and many millions more are underinsured or a job layoff away from losing their coverage. But despite the current sellout by their elected officials to the insurance industry, there is no outpouring of millions of U.S. citizens on the streets of Washington, D.C., protesting this betrayal.

Polls show that the majority of Americans oppose U.S. wars in Afghanistan and Iraq as well as the taxpayer bailout of the financial industry, yet only a handful of U.S. citizens have protested these circumstances.
LINK HERE

New Taxes for New Hampshire Small Businesses
LINK HERE

Prepare for the Great Depression.
Survival Seeds

I feel like being particularly irascible today, so here you have our future in just a few short moments…

Why?  This:

Click that image and follow along.  You’ve seen this graph before, but I have taken the liberty of moving the Federal Government’s debt to the top for reasons that will shortly become apparent.

In the latter part of 2007, continuing into 2008, credit outstanding in the broad economy began to contract.  This has not happened before – indeed, it had not happened on a broad basis since The Depression.

It is this that made this recession different from the other recessions – and market movers - that we have experienced during our lifetimes.

Ben Bernanke is claimed to be the world’s “best-learned” scholar on The Depression.  He knows full well that in all modern monetary systems all money is in fact debt.  Therefore, the actual money in the system – not the “Ms”, but that which does and can circulate – is represented in the above chart.

Now remember: The definition of  “inflation” in the monetary sense is the growth of money beyond the growth in goods and services.  Deflation is the opposite.

Bernanke wrote a famous speech in which he opined that The Federal Reserve was capable of preventing “it” from happening here (Deflation.)  This, by the way, was during the depths of the 2000-2003 Nasdaq Market Implosion – when many people were worried about “deflation.”

Bernanke asserted:

 Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Really?

Certainly Ben didn’t forget that very few paper dollars are actually in circulation, did he?  Indeed, virtually all “money” in circulation is nothing more or less than credit – blind promises to pay from future production the principal and interest that has been borrowed!

Realize this folks: The dollar bills in your wallet were borrowed into existence.  Treasury sold debt (Bonds) against which The Fed issued paper currency!

So do we have inflation or deflation here?

Well Ben certainly asserted in 2002 that he could prevent “it”, and prevent “it” he did.  Credit outstanding went from some $30 trillion when he gave that speech to $53 trillion at its peak (!)  That ain’t deflation folks – indeed, it is massive, pernicious and ridiculous inflation.

But the other assertion that Bernanke made – that The Fed has control over this – is only indirectly true.  That is, The Fed can “credibly threaten” to print money like a madman and shower it from Helicopters, hopefully (for them) stimulating borrowing in the private sector.  Since all money is in fact debt this is indeed the creation of inflation!

But what Bernanke couldn’t control is where the money went.  In this case it “went” right into housing along with commercial real estate, blowing prices all out of proportion with reality.

Now, faced with another crash, Bernanke tried to do the same thing.  How is it working out?

Look at that chart again. 

At no time in the 2000-2003 “deflation scare” did credit outstanding even credibly threaten to go negative.

But this time it did – in early 2008, ex-Federal Government borrowing.

Now you understand why The Federal Government, which is allegedly “separate” from The Federal Reserve, is in fact nothing more than Bernanke’s handmaiden (and vice-versa.)  The Federal Government did exactly as they were TOLD, and tried to “stimulate” private credit demand with various “borrow and spend” stimulus projects.

This prevented the deflation that was occurring from being recognized in the economy from the end of 2007 through the summer of 2009.

But last quarter, Bernanke and The Government lost their fight and total outstanding credit actually declined – including The Federal Government.

Further attempts to “stimulate” private borrowing are doomed.  Debtors are defaulting left and right, with Bank America (along with others) rumored to be planning to dump as many as six times as many foreclosures into the market as were processed in 2009 once the year turns over.  Arrow Trucking appears to have collapsed as of this afternoon, prime jumbo loan delinquencies are skyrocketing and the FHA portfolio remains mired in trash with well over 20% of their loans delinquent or in foreclosure.

The claims that Bernanke “averted a second Depression” are outrageously false.  There was no “Depression” in 1929 and plenty of market callers in ’29 and ’30 claimed that “the worst was behind us.”

Dead wrong, and for the same reason – lending collapsed as willing and able borrowers were simply nowhere to be found.

If anything Bernanke has made the situation markedly worse with his “quantitative easing” programs, in that he has created a circumstance where banks can make plenty of money by engaging in “risk-free” trades by borrowing at zero and buying Treasuries!  This of course beats lending to some small (or large!) business who might go under and not repay his or her debts.

The opportunity to avoid the now-inevitable was in 2003 and perhaps in 2004.  The SEC could have told Paulson to pound sand on the leverage limit removal.  Bernanke could have backed not extraordinary easy policy by Greenspan, but rather a removal of excess liquidity and a zero credit expansion policy – forcing malinvestment out of the economy – until GDP began to grow on its own without credit system pumping.

Now it’s too late – the borrowing capacity of both business and consumers has hit the wall.  There simply isn’t the ability to “buy more, pay later” given the actual earnings output of actors in the economy – yet that is the prescription that is required to continue to produce and consume beyond our means.

Forget it folks.

As after the ’29 crash the “reprieve” will prove transitory, not durable.  Employment, credit numbers and freight all say “unsustainable bounce” and the GDP release this morning underlined that in big bold black sharpie – if you were paying attention.

The Stock Market may not be for now, but the bond market sure as hell is:

That’s the 30 year bond yield and the pattern you’re looking at is known in technical parlance as an “Inverted Head and Shoulders.”  It is complete, it is a multi-year pattern, and it projects a 30-year bond yield to around 6.7-7.0%.   Not tomorrow, not immediately, but the probability of this target being reached went up dramatically when the pattern confirmed this morning.  It is negated conditionally (but not decisively) by a fall under 3.9% in the 30 year bond yield, and voided if the yield should fall below by a fall in the 30 year bond rate to below the head, or 2.5%.

So long as 3.9% holds one must expect a 6.7% long bond yield, and so long as 2.5% holds (way down from here!) one must be wary of a 6.7% long bond yield.

The impact of this sort of move on home values will be catastrophic.  A move from today’s rates to the 7s will instantaneously subtract a further 25% from the value of every house in this nation.  It will do similar things to commercial property values.  In addition such a move would likely more than double government borrowing costs, shutting off government “borrow and spend” attempts almost immediately.

If this chart is correct the next part of what is to come is going to be the “big suck” part of our economic future, and last many years – perhaps as long as a decade.  Just as George Bush declared “Mission Accomplished” only to have our military coming in withering attack in the coming months and years those who gave Bernanke a “victory lap” (and re-nomination) will be shown to be just dead flat wrong in the months and years ahead – not to mention those who have “jumped aboard” the claimed “economic recovery” by buying either market assets or worse, real estate.

That’s not a knife you caught if you were playing in the real estate market of late.  It’s this:

Good luck.

Looks like Darth Vader was clangin’ the opening bell at the NYSE with an entourage of stormtroopers as reinforcements. And all I can think about is Byrne’s rant about Sith Lords and naked shorts. Video via the AP:

One of the holdups on getting a loan modification is if the loan is securitized. For details please see Underwater, Securitized, and Screwed by the “Pass the Trash” Strategy.

A second snag is the Home Affordable Refinance Program (HARP) can only help borrowers who meet the following conditions.

• The loan sits with the GSEs
• The owner haven’t been more than 30-days late on the mortgage payment in the last 12 months
• The first mortgage does not exceed 125% of the current market value of your home

A third problem is getting reluctant second lien holders (e.g home equity lenders) to cooperate in a modification. Second lien holders are typically wiped in a modification.

Bankruptcy Escape Hatch

To overcome these obstacles, some seek bankruptcy. Please consider Underwater Oregon homeowners find an escape hatch.

More than two years into Oregon’s historic residential real estate crash, an unusual opportunity presents itself to struggling homeowners.

An increasing number of Oregonians qualify to use a rarely utilized bankruptcy court maneuver to reduce, or even eliminate, their second-mortgage or home-equity debt.

To be eligible, homeowners must owe more on their first mortgage than their house is worth. That’s an increasingly large segment of the population. Recent studies indicate that 20 to 25 percent of Americans are “underwater” on their home mortgages.

The strategy works like this: Homeowners must first file Chapter 13 bankruptcy and file a motion asserting their home’s value has diminished to the point that it’s worth less than they owe on the first mortgage. If the motion prevails and the lender doesn’t challenge, the court will then cancel the lien the second-mortgage lender holds on the home. The lender’s secured debt is converted to unsecured debt, which most often is eliminated in full in the bankruptcy process.

And the strategy raises issues of morality, for lack of a better word. Many of these homeowners took out second mortgages to buy ski boats, trendy kitchen upgrades and other luxury purchases. Should they get off without repaying the loans? Oregon has at least six banks on the edge of closure after the mortgage crisis of the past year, and this could add to their risk.

Still, with Oregon’s foreclosures running at unprecedented levels and the federal government’s mortgage modification program proving a cumbersome disappointment, the “second lien strip” strategy could give some over-leveraged homeowners a new path to recovery.

“This is really important, and no one knows about it,” said Eric Olsen, a Salem bankruptcy lawyer whose firm has been among the most active in employing the second-lien strip. “I talk to real estate brokers, bankers, even attorneys, it’s just not known that you can get rid of your second mortgage.”

The second-lien strip is just another lump of coal for the country’s struggling financial sector, which already faces significant loan problems on multiple fronts.

U.S. lenders are sitting on nearly $1 trillion in second-mortgage and home equity loans. A maneuver that allows underwater homeowners to walk away from those loans with impunity will only add to the industry’s woes.

In any case, some of these second-mortgage lenders have done little to generate sympathy. They made ill-advised loans and some are now making it difficult for struggling borrowers to escape foreclosure.

One of the reasons the Obama administration’s Making Home Affordable mortgage modification program has not worked as well as hoped is because of uncooperative second-mortgage lenders. Both first- and second-mortgage lenders must sign off before a customer can get a loan modification.

“They’re holding these modifications hostage,” Cecala said. “These second mortgages and home equity loans may be worthless on paper. But the lenders still have clout.”

Tom Hooper, a Portland creditors’ attorney who represents banks, pointed out that even if a second-mortgage lender successfully contests a homeowner’s valuation, the homeowner could just give up and walk away from the home, tossing the keys to the lenders.

Then, in the event of foreclosure, the first-mortgage lender, not the second, gets the home or the sale proceeds when the home is auctioned.

“Winning could mean you’re losing anyway,” Hooper said.

My advice remains the same. Before Walking Away (Filing Bankruptcy, etc) Consult An Attorney, and make sure they know the laws and procedures for your state.

Without endorsing Eric Olsen, he can be located at Olsen, Olsen & Daines Attorneys at Law, Oregon and Washington Bankruptcy Attorneys.

I have no relationship with that firm, nor do I know anything about them, I merely located them from the article. My intent is to help people understand their rights and to do what is in their best financial interest.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html  to learn more about wealth management and capital preservation strategies of Sitka Pacific.