Archive for March 12th, 2010
By Dawn Kopecki
March 12 (Bloomberg) — More than 250,000 of the 1 million borrowers who have received trial loan modifications through the Obama administration’s chief foreclosure prevention plan have either dropped out or been removed from the program through February, the Treasury Department said.
Bank of America Corp., JPMorgan Chase & Co. and the lenders in the Home Affordable Modification Program successfully converted 168,708 trial plans into permanent loan modifications, up from 116,297 through the end of January, the Treasury said today in a report. More than 666,000 borrowers were in trial repayment plans, Treasury said.
The program, announced more than a year ago, is short of the 3 million to 4 million at-risk homeowners Obama targeted. About 2.82 million U.S. homeowners lost their properties to foreclosure last year and 4.5 million filings are expected in 2010, RealtyTrac Inc. said last month.
With results like these, makes you wonder exactly who this program was supposed to help.
FDIC Sells Failed Banks' Toxic Crap Back To Soon-To-Be-Failed Banks At 50% Haircut With Explicit Taxpayer Guarantee
Submitted by Tyler Durden
The FDIC has just announced that it has closed the sale of $1.8 billion of Notes backed by RMBS “from seven failed bank receiverships.” The value of the actual aggregate balance: $3.6 billion. And somehow banks still keep their RMBS books marked at par. Furthermore, “the timely payment of principal and interest due on the notes are guaranteed by the FDIC, and that guaranty is backed by the full faith and credit of the United States. Sure enough, smelling this insane deal, the vultures came out to snack on the taxpayer’s corpse: “The transaction was met with robust investor demand, with over 70 investors participating across fixed and floating rate series. The investors included banks, investment funds, insurance funds and pension funds. All investors were qualified institutional buyers.” Just how many of these “banks, investment funds, insurance funds and pension funds” are viable to begin with, courtesy of the FDIC’s permission for every failed bank to continue existing is an amusing question, and Zero Hedge will attempt to get an itemized list of the participating buyers.
Some more details on the transaction:
The $1.81 billion of notes is backed by 103 non-agency residential mortgage-backed securities. The aggregate unpaid balance of the 103 securities was approximately $3.6 billion at the time of the sale. The FDIC retained an equity interest in each series. The transaction features two series of senior notes, each backed by a separate pool of RMBS. The larger series of approximately $1.3 billion, is based on option ARMS and has a floating rate tied to the one-month LIBOR. The smaller series of $480 million is based mostly on fixed-rate RMBS and pays a fixed rate. Both series priced at rates comparable to Ginnie Mae collateralized mortgage obligations.
And just in case you thought that the FDIC had finished funnelling taxpayer money from one failed bank to another soon to be failed bank, you are about to be disappointed. FTMFW:
The timely payment of principal and interest due on the notes are guaranteed by the FDIC, and that guaranty is backed by the full faith and credit of the United States.
Hilarious, the use of proceeds will go to refilling a little of the at least technically insolvent Deposit Insurance Fund, which at last check was negative $X billion (we forget, but it was a big number), implyinh that the FDIC’s job as deposit guarantor is now moot, and all Sheila Bair’s organization does is to move money from taxpayers to banks. Thank you Sheila.
As for the underwriter: it was Repo 105 counterparty extraordinaire, Barclays Capital, which served as “sole bookrunner, structuring agent and financial advisor.” Makes one wonder whether the FDIC is using not Repo 105 but Repo 100,000,005 in its existing arrangements with banks. Certainly, don’t hope to find before the US goes bankrupt.
And yes, this is a notable event in the FDIC’s history as the bankrupt organization slowly moves to irrelevancy.
This offering marks the first issuance of notes by the FDIC since the early 1990s and the first issuance by the FDIC of FDIC guaranteed debt backed by the full faith and credit of the U.S..
Here is a summary of the transaction, and below is a chart summarizing how taxpayers got raped once again.
Posted by Karl Denninger
In conjunction with what I wrote on this morning, the potential for massive hidden losses in our banks, I keep getting the following sort of anecdotal reports, all in relationship to the banking giants.
“My property foreclosed in <bubble state> and <Big Bank X> had written a $200,000 HELOC, which was drawn down. The first lender foreclosed and is holding the property in inventory (it is not listed.)
<Big Bank X> reported the account as charged off in my credit report, but has a notation that “debtor has an arrangement to make partial payments.”
I have not even spoken with <Big Bank X>.
Then there’s stuff like this from the forum:
“My home in CA was purchased for $685k in May 2006. Because of 14 months of unemployment, a mortgage payment hasn’t been made in months. Mortgage holder just had the property appraised and the value came in at $319k. After the appraisal was completed, I was told by the mortgage holder not to worry about foreclosure proceedings beginning. I’ve also been told by the mortgage holder that they have “many” internal plans for modifying loans and that they would continue to work with me until we found a suitable “solution” enabling payments to resume.”
That’s the general gist of these emails. Another said that they were “offered” payments on a massively-delinquent first that were well under 1% on an interest-only basis. Like under $100/month on a loan that should have even an I/O payment of several times that amount.
The obvious question is whether these “charged off” and “How about you pay us $50/month, which is a tiny fraction of even an I/O payment” loans are being manipulated so that they can be considered performing assets on these bank balance sheets.
And if that is the case, then the obvious next question is how many of these loans are there, and what sort of material misstatement does this all add up to when one looks at these balance sheets as a whole?
If I had received one or two of these sorts of anecdotes over the last year or so I wouldn’t be so alarmed. But that’s not what’s happened. Instead, I’ve received a bunch of these over the last few months and I suspect I’ll get even more now that I’m “outing” that I’m getting these emails on a regular basis.
Unfortunately I can’t verify any of this since I can’t pull someone’s credit - but why would borrowers send me these sorts of claims if they weren’t true?
If they are true then the obvious question is whether the sort of “Repo 105″ deal Lehman was running is just a tiny bit of the balance sheet fraud that is going on in these big banks?
Folks, this sort of thing makes no sense. Reporting payments that aren’t being made to credit bureaus in the “comments” field (while showing “charged off”) has no probative value for the bank – unless it’s to please an auditor or government official who is questioning whether that loan is in some way “performing” and/or has some sort of recovery value, thereby supporting an intentionally-false mark!
Folks, this whole cesspool stinks like dead fish, and the disclosure of what Lehman was up to makes clear that the banks believe they can pretty much do whatever they want when it comes to balance sheets and get away with it – provided they can find someone will will give them an opinion that its legal (even if the “someone” isn’t in the US!)
Posted by Karl Denninger
The Lehman Report on which I wrote last night regarding deeply troubling issues surrounding the Lehman Bankruptcy, has laid bare some very ugly facts relating to our financial system, corporate governance, and our government’s active complicity not only in the Lehman collapse, but in ongoing balance sheet shenanigans and the current investment picture.
The conclusions I am forced to reach, after much reflection and sleeping on this article overnight, are not pretty.
They compel me to advise that, in my opinion, the market is now trading both technically and on a fundamental basis, exactly as the Nasdaq was in 1999.
I recognize this is a serious charge and has implications that are most unpleasant, in that it implies a probable detonation ahead at some time in the next year – one that will not only destroy all of the gains made since March of last year but go beyond that – indeed, perhaps as far as the banner on The Market Ticker has for the major indices.
The technicals of the last month leave no doubt what’s going on – the market is moving in a parabolic upward fashion, exactly as was the case for the Nasdaq in ’99, and indeed, we are approaching the sort of gains in the broad market that Nasdaq saw in 1999.
For those who need a refresher, here it is:
Now let’s look at the S&P 500 since the March lows:
And if you need a refresher on what happened to the Nasdaq after it topped in early 2000, here’s that unfortunate reality:
Not only did the entire ramp in 1999 disappear, more than another 50% was lost beyond that.
The seriousness of this cannot be overstated. Anyone who bought into the start of the decline in 2000 was wiped out by doubling into a decline that took a literal 85% off the NDX from the peak. Worse, today, nearly a decade later, we remain more than 50% below the peak valuation that the NDX reached.
The Nasdaq is not alone in this behavior. The Nikkei 225 reached 38.957 in 1989. Today it trades around 10,000 – a nearly 75% loss from it’s all-time highs, and despite 20 years it has not healed.
An analytical look at history says that when markets rise on fraudulent accounting and false claims - that is, the booking of asset values that is fictional, the claim of profits that were never really made, the hiding of losses off-balance sheet – the losses, when they come, are not recovered for a generation or more.
When this happens to individual companies, they go bankrupt.
When it happens on a broad basis in a market index, the result is utter destruction.
Such happened in the 1930s as well. The DOW’s high of 1929 was not recovered until more than 20 years later, and due to FDR’s devaluation of the currency it was another decade before, on a purchasing-power basis, your original values were seen again.
So the seminal question for this alleged recovery has been whether or not the recovery is real – that is, whether the asset class at the core of the original problem, the banking system, now has clean balance sheets and it can be reasonably assumed that what is reported in terms of assets, liabilities and earnings is in fact real.
If you cannot be reasonably certain of this then you simply cannot, as an investor, be in this market. The reason for this is clear on its face – we will, at some point in the not-distant future, have a point where the insolvency of these institutions rises to public consciousness.
When (not if) that happens the market will collapse.
This is not conjecture.
It has occurred in each case through history where markets have been pumped through fraudulent balance sheets and similar game-playing, and when it happens the typical losses are in the 75-80% range. Those losses are maintained even a decade or more later.
Now let’s examine the evidence on whether the core of the reason for the collapse – bogus accounting that led to the failure of Bear Stearns and Lehman Brothers – is in fact resolved and no longer present.
Tim Geithner and the Obama Administration understand this risk. That much was made clear last year when they ran their so-called “Stress Tests.” The market understood this too, in that the promulgation of those “results” was a large part of the underpinning for the rally in the markets that has followed.
Is that reliance reasonable?
The evidence says it is not.
As was made clear in the article I wrote last night, Lehman failed multiple stress tests internally, and yet they were repeated with ever-looser standards until an internally-conducted test passed – at which point Tim Geithner’s NY Fed proclaimed them healthy:
After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress?testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.
Unfortunately the precise same practice took place with all of the other major institutions when Geithner ran the famous “stress tests” that were hung out in front of investors to “bring them confidence.”
It was physically impossible for The Federal Reserve to actually perform the testing on its own – so instead, they provided metrics to the firms and asked them to run them.
This is the precise same process that was used to produce a “passing” grade by Lehman after the Bear Stearns failure and that process was administered by the same person who was responsible for the false Lehman outcome.
Now add to this that Diane Olick of CNBC has confirmed what I’ve been saying since the crisis began: If the banks really accounted for all the losses in the home loan market, they’d all be insolvent.
Wait a second. If the “stress tests” were valid, then the capital raises that were done were sufficient and none of the banks are insolvent.
Indeed, Diane Olick called this exactly as I have:
That’s why the Obama Administration has created this kind of shell game in the first place.
Further, the fact that these loans have no economic value isn’t just mine. It’s also Barney Frank’s, who is the lead guy in Congress on the House Financial Services Committee. He said:
Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: “Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans.”
Accounting rules that Congress caused FASB to modify by literally pointing a gun at them.
I’m sorry folks, but the weight of the evidence is overwhelming on this point.
Whatever gains you think you’re chasing in the stock market at this point in time, you’re doing so against a risk of an 85% loss. The idea that Government can prevent this sort of collapse if it initiates is fanciful – remember that in the summer of 2008 the common belief was that we’d never see a crash right in front of an election, as “they” would not allow it to happen. If you bought into that belief, you lost half your money.
The risk here is even more severe. If, in point of fact, those “Stress Tests” provided false confidence (and I believe the evidence is strong that they have) then it is simply a matter of when the market comes to realize that these losses in the large banks are still present but being hidden.
If we apply the FDIC’s own metrics to the expected losses from such a revelation that would “immediately appear” we get a number between $2 and $3.5 trillion that would have to be paid to depositors of the failed institutions - equal to somewhere around one full year’s Federal Budget and dramatically exceeding what the FDIC and Treasury could cover – by more than 10 times.
The consequence of such an event would be literally catastrophic. Having squandered over $3 trillion in the last two years in new borrowing by The Federal Government to prop up the economy (instead of clearing this bad debt through resolving the bankrupt financial institutions) it is highly unlikely that The Government would be able to, on short notice, raise another $3 trillion.
I’m out of all long positional trades as of this morning and will not be back in them until this issue is resolved. Even if there is a potential 10 or 20% advance that I will miss by doing so, the downside risk of 85% is so extreme and the facts that we now have available strongly suggest that not only are all the large banks insolvent but that the government has been and is complicit in covering it up – not just temporarily, but as an ongoing practice, just as occurred with Lehman.
I’m sure many will call me crazy for this analysis.
We will see if you still think so in a year or two.