Archive for June 28th, 2011
Bank Of America To Pay $8.5 Billion To Settle Mortgage (Mis)Representation Suit With BlackRock, Pimco, New York Fed Et Al
Bank of America may be about to part with more money than it has earned since 2008 in what will soon be the biggest financial settlement in the industry to date According to the WSJ, the Charlotte, NC-based bank is preparing to pay $8.5 billion to settle mortgage (mis)representation claims (aka the Mortgage putback issue) brought on by such high profile figures as BlackRock, Pimco, MetLife and, of course, the Federal Reserve, previously discussed on Zero Hedge. “A deal would end a nine-month fight with a group of 22 investors that hold more than $56 billion in mortgage-backed securities at the center of the dispute, including giant money manager BlackRock Inc., insurer MetLife Inc. and the Federal Reserve Bank of New York.” Keep in mind that this is actually not good news for the bank, contrary to what the company’s stock is doing after hours, as this still keeps the company exposed to a multitude of other rep and warranty litigation (which will now be largely underreserved), not to mention fraudclosure issues, which are totally unrelated, and which will plague the bank for years and years. Lastly, BAC is largley underreserved (see below) for a settlement of this size which means its Tier 1 capital ratio will likely be impacted due to a major outflow of cash.
From the WSJ:
The deal could embolden mutual-fund managers, insurance companies and investment partnerships to go after similar settlements with other major U.S. banks, arguing that billions in loans scooped up before the U.S. housing collapse didn’t meet sellers’ promises or were improperly managed. Most vulnerable would be Wells Fargo & Co and J.P. Morgan Chase & Co., which along with Bank of America collect loan payments on about half of all outstanding U.S. mortgages.
The dispute between Bank of America and the mortgage investors began last fall when they alleged that securities they bought before the financial crisis from Countrywide Financial Corp. were composed of loans that didn’t meet sellers’ promises about the quality of the borrowers or the collateral.
While it is still very much unclear what the terms of the settlement are, one thing is certain: BofA acquisition of Countrywide for $4 billion is rapidly becoming the worst purchase in the history of M&A. Luckily, Angelo “Agent Orange” Mozillo, has a permanent get out of jail card. One wonders just what dirty secrets old Angelo know about the housing market (or regulators’ sexual lifestyles) that not one regulatory agency or DA office is willing to go after him?
And, as often happens, we were quite correct when we speculated back in January that Bank of America is woefully underreserved for this development:
Can You Spell U-N-D-E-R-R-E-S-E-R-V-E-D? If Not, Here Is A Visualization Aid
Following today’s news of an imminent lawsuit to be filed against Bank of America by such entities as the New York Fed (which, by the way, it had to do, and not voluntarily, but merely as a function of its fiduciary duty to taxpayers through its Maiden Lane holdings, managed, conveniently enough, by Bank of America minority holding BlackRock) everyone promptly has taken a quick look back at the bank’s earnings presentation, and especially one little piece of data: the putback reserve. Taking a quick look a page 23 on the pdf we read: “3Q10 reps and warranties provision of $872M is $376M lower than 2Q10, as the current quarter included an increase in expected repurchases from GSEs while 2Q10 included additional provision for monolines.” So how does this stack up relative to the $47 billion in putback demands by such legal “dilettantes” as Bill Gross, Bill Dudley and Larry Fink? We have created the chart below to assist in that particular question. We are also confident that with each passing day we will have to add to the red-shaded area as more and more putback lawsuits come out of the woodwork. And as to where the deficiency amount will have to be funded from? Think cold, hard cash. The same cash that until recently would have been on the “sidelines.”
President Barack Obama and Republicans are narrowing the debate on a deficit-cutting plan to a reduction of $1 trillion to $2 trillion, though whether that would settle the issue through the 2012 presidential election remains in doubt, according to budget and debt experts.
White House press secretary Jay Carney insisted yesterday that a “significant” deal is still possible, even as Republicans and Democrats show little signs of compromise on entitlements and taxes, and Republicans remain firm in their demand for spending cuts in excess of the debt-limit increase.
The problem, at its core, is this:
Which has produced this:
Now let’s take just one second and look at what all this means. Take Excel, open it, and enter the following:
First column, 14, second 53, third (=B1*.04) and fourth (=C1/A1). Set the last column to display a percentage.
The first column is GDP (trillions), the second (total systemic) debt in trillions. Both are factual figures from the Fed’s Z1 and the BEA’s GDP series. The third is a guessed blended interest rate on that debt (rather conservative and probably too low by at least a percent or two) and the forth is the percentage of GDP that must be spent on debt service.
Now multiply the the first column in the second row by 4% (1.04), the second by 7.42% (debt increase percentage, 1.0742), and carry the third and fourth down. The first is a “forward guess” on GDP and is probably too optimistic. The latter is not a guess – it is the actual compounded debt increase since 1990 forward (if we go from 1953 forward it’s 8.57%, which is even worse!)
Then copy and extend that table down 100 years.
The first few rows look like this:
|GDP||Debt||Interest||% Of GDP|
Notice that the percentage of debt service (in terms of GDP) increases every single year.
Now I want you to take the 100 years of data and insert a graph on the first three columns.
It looks like this:
The absurdity of believing that the United States can have $60,000 trillion (that’s 60 quadrillion) of debt outstanding in 100 years is, well, beyond stupid. That’s more than one thousand times as much debt as is outstanding right now.
But the real “you’re screwed” is in the two bottom curves and is hard to see. Let’s remove the debt number and make it easier, reducing it to just the first 60 years (you know, by 2070?)
Uh, yeah. Or, if you prefer:
By the way, it’s not possible to pay more than 100% of GDP in debt service, since there is only 100% to pay with. Further, you can’t pay 100%, since there are other things you need to buy, like for instance food, fuel, housing, etc.
If you don’t believe this is inevitable so long as deficits continue to be present in the economy, irrespective of the interest rate, go ahead and play with the spreadsheet. Set the interest rate to any positive number and choose a GDP growth rate of your choice. So long as the total systemic debt growth rate is larger than the GDP growth rate this outcome will always occur, with the only question being “how long before it does?”
The same, incidentally, is true so long as the government’s debt growth rate exceeds that of GDP - any government that maintains such a policy will eventually blow up.
This is the fundamental characteristic of exponents – any two compound (exponential) functions where one is larger than the other will always run away from one another. If one must service (at some percentage over zero) the larger function with the smaller bankruptcy is inevitable if you maintain the compounding of the debt (the larger.)
Since nobody ever intentionally loans out capital at a loss debt will always grow faster than GDP in a free market economy during economic expansion. The practice of increasing government deficits to “mitigate” recession is simply an attempt to prevent the fundamental mathematics from asserting themselves and blowing up those who lent out too much money to people who can’t pay from going under. That process, called “creative destruction”, detonates both the imprudent borrowers and the lenders who lent them the money.
That process is necessary in order to clear the economy of excessive debt and halt the compounding of economic damage!
It is not mathematically possible to prevent the contraction that must come; one can only defer the damage, and that deferral must mathematically result in further compounding of the ultimate pain that must be accepted and worked through the economy!
You cannot change fundamental mathematical FACTS.
Today our government is borrowing and spending about 12% of GDP. If the government stops doing that then GDP must contract by (at least) that same 12%. If the government raises taxes instead then the same contraction occurs since the tax revenues must come out of your pocket, and you can’t spend money that is taxed away.
GDP is defined as ”GDP = C + I + G + (x – i)”, where “C” is consumption, “I” is net investment, “G” is government spending, “x” is exports and ”i” is imports. Again, arithmetic – not complex mathematics, arithmetic. Reduce either “G” (government spending) or some combination of “C” and “I” (increase taxes) and GDP contracts by the same amount. Period.
It really is this simple folks. We have played this game for thirty years and in fact have not had a single positive quarter where GDP has increased greater than total systemic debt since 1980.
(Rate of GDP increase compared to debt increase; numbers over “0″ are positive economic growth adjusted for total systemic debt, under “0″ are internal economic deterioration as debt is increasing faster than output.)
All the last three years (and the deficits from 2001-2007, incidentally) have done is attempt to paper over the rot that both Democrat and Republican have foisted off on the economy in every single quarter since 1980. Most of Congress and their staff appear to be ignorant of these fundamental facts of arithmetic - not out of stupidity, but simply because they don’t understand it and nobody has ever explained it and challenged them to go verify these basic mathematical relationships for themselves.
Ben Bernanke, Jamie Dimon and the rest of the banksters certainly do understand these fundamental facts, and the former, at least, has an absolute duty to bring this up in public with Congress. It is very apparent that he has failed to do so, and that the entire banking industry is using Congressional (and Presidential) ignorance of these facts to pilfer the Public Treasury – and the private economy.
Nonetheless it is impossible for this strategy to succeed for the broader economy. All this strategy can do is allow more plunder of the economy - for a little while - by the banksters.
We must stop this madness, right here and now, despite the fact that doing so will cause great and immediate economic pain. That means no more government debt and it means accepting both the bankruptcy of those lenders and borrowers who are over-levered and the corresponding economic contraction that must, mathematically, come with this adjustment.
There is no alternative; the longer this charade continues the worse the compounded damage.
Here’s a quick recap.
On a calm spring afternoon eleven years ago, Sunny Sheu’s lunch was interrupted by a knock on his front door. It was Tower Insurance agent, there to inspect the home for its new owners.
The Queens resident had been victim of a complex scam that started with a forged power of attorney and led to a mortgage with Centex Home Equity. The story ended with his death from blunt force trauma to the head almost one year ago today.
Sheu refinanced his house in his brother’s name in 2000. Sheu’s mortgage broker, Roman Chiu then forged Shue’s brother’s signature on a power of attorney and received a mortgage from Centex for Sheu’s home.
After alerting the police, the bank that held the mortgage, and the title insurer, Sheu gathered together the forged paperwork, and the parties responsible were arrested and sent to jail.
Sheu assumed that would be the end of it, but Centex–the issuer of the bogus mortgage–ignored the police reports as well as the evidence and foreclosed on the house.
The foreclosure sale occurred January 28, 2005.
“Centex bought the property for $1,000 from Amy Cheng, the fraudster,” Sheu said to Black Star. “That was not even her real name. How can you buy property from someone who does not exist?”
Finally, the case was assigned to Justice Joseph Golia in the State Supreme Court of Queens. Although extensive documentation had been enough to send the forgers to jail, Judge Golia said the assertion that the fraud occurred was “misleading and disingenuous at best.”
Following this ruling, Sheu began his own investigation. He found a list of Golia’s properties and went to the OCA Ethics Department to check the list against the judge’s financial disclosure forms.
According to Sheu, he found major discrepancies, including a $1 million beach home on Breezy Point Long Island. Judge Golia did not return phone calls from Black Star seeking comment on this matter. He also did not return a call from Business Insider.
Sheu’s allegations were enough to get the director of the OCA Ethics Department Janice Howard to ask Golia for an amended financial disclosure statement. A last chance to come clean.
When Sheu went to pick up his copy of the amended statement, he brought a friend with a video camera. When he saw the paper lacked all the property conflicts Sheu had found, he’s recorded saying: “Now I’ve got him! I’ve got enough evidence to put Golia in Jail.”
Understanding the seriousness of the allegations, Sheu finally recorded a video stating that if any harm came to him, investigators should look to Judge Golia. We have embedded that video below.
According to Sheu’s death certificate, three days later that he was found dead from a severe blow to the skull. The death has been ruled an accident by the medical examiner and no investigation has been conducted.
Further questions were raised by Black Star News:
Sheu’s associates also question why NYPD officers removed Sheu’s body from the Queens hospital, at 5 AM, hours after his death, and transferred it to the Medical Examiner, who was provided with a letter stating that “no criminality” was involved, all without even a cursory investigation.
At the same time, the precinct involved in the removal, the 109, insisted that Sheu had suffered “no head trauma”, a position contradicted by the Medical Examiner, who concluded that Sheu died of “blunt force trauma to the head with skull fractures and brain injuries”.
Darkening the story further is the improper treatment of Mr. Sheu’s body by the New York Queens Hospital and their false statements regarding his injuries. (The role of the New York Hospital of Queens in the disposition of Sheu’s body will be elucidated in part two of this series.)
Add the epilogue of the NYPD’s refusal to release relevant documents requested by this newspaper under the Freedom of Information Act (FOIA)- and all the components of a deeply disturbing mystery are in place.
What happened to Shue and the antagonism between him and Judge Golia may never be fully known, but Black Star’s report raises serious questions about the judge’s ruling and Shue’s death.
There is “no plan B” for Greece to avoid default, European Union Economic and Monetary Commissioner Olli Rehn said.
“This week Greece faces a critical juncture,” Rehn said in a statement issued today in Brussels. “Both the future of the country and financial stability in Europe are at stake. I fully respect the prerogatives and the sovereignty of the Greek Parliament in the ongoing debate. And I trust that the Greek political leaders are fully aware of the responsibility that lies on their shoulders to avoid default.”
The person who lends money to an organization that has no prayer in hell of paying and is well-aware of this fact, should they open their eyes, before they make the loan, has no right to complain when the inevitable default occurs.
It’s always amusing to watch people whine, bitch and moan when the inevitable result of foolishness manifests, but self-inflicted pain is worthy of bemusement much as it is when someone hits their hand with a hammer. Sure, you feel their pain, but there’s a snicker in there too – even if you’re decent enough not to express it.
Greece should not “endorse” any “revised” program. The fact of the matter is that the debt has been trading on an “as-defaulted” basis for months now, and the banks have attempted to take advantage of this by buying up this crap and now intend to try to convert it at “par”, pocketing an immediate and unearned capital gain exactly as banks here did when they gamed PPIP.
The Greek government should tell them to go pound sand; certainly the people are telling them that this is exactly what they expect parliament to do.
We’ll see if they listen, and if not, if the people enforce their will.
We all know the mainstream consensus is wrong, but what about the non-mainstream consensus? Maybe it’s equally misguided.
There are a variety of consensus views floating around the Mainstream Media and the blogosphere. The two sets of consensus don’t align on much, as might be expected: the financial MSM is still spouting the Federal Reserve/Wall Street’s “happy story” about how the recovery is weak but muddling forward with “uneven growth” (i.e. someone else got laid off, you still have a job) but corporate profits (the only metric of “growth” that counts) will still be rising forever (as usual).
The financial blogosphere consensus is more or less that the fiscal-stimulus/Fed-goosed “recovery” is obviously rolling over here, and since inflation and fear are baked in, gold will continue its steady climb towards $3,000 an ounce and beyond. Oil, meanwhile, is poised to rise as suppliers either lose production to depletion or ratchet production down to support prices.
We all know about confirmation bias, the tendency to seek evidence which supports our views after they have hardened into conviction.
Seasoned traders practice the opposite: they actively seek out arguments against their current views. If these “Devil’s Advocate” arguments are more compelling than their current convictions, then they change their minds and their trading positions (or at least slap on a nice thick hedge).
Which leads me to play Devil’s Advocate: what if both consensus camps are wrong?
Again, this is a thought experiment which traders go through to avoid confirmation bias.
1. What if the economy rolls over hard? The Fed and mainstream economists are expecting a “soft patch” based on “mixed data,” i.e. the top 20% are still “consuming” while everyone below the top 20% whithers on the vine.
Expect a hard rollover to show up all over the place in July and August data: container shipments, gasoline consumption, retails sales, auto sales, Christmas orders, tax collections, etc.
2. If the dollar rises substantially, then corporate profits will tank. Much of the big jump in corporate profits came not from actual net but from overseas sales converted into a weakening dollar.
Zero Hedge presented an excellent technical case by John Noyce for the dollar rising as the euro falls to 1.15 or lower: The Charts That Matter Next Week.
Recall that the DXY dollar index is essentially a see-saw, with the USD on one end and the euro on the other, and the other currencies adjusting to the primary trend in the see-saw.
Does anyone seriously expect the euro to rise from here? Based on what? A rescue of Greece by Alpha Centaurians bearing quatloos?
3. Gold is looking kinda heavy here (technical pun intended). Gold is in a long-term uptrend, but it has occasionally swooned for long chunks of time without threatening the long-term trendline.
We might ask: what happened in 2008 when the whole bogus fraud-ridden scheme of leverage, debt, propaganda and risk-trades imploded? Both oil and gold also tanked as debtors with margin calls or equivalent scurried out to unload whatever assets still retained some value, with a preference for selling those which retained the most value, i.e. gold and oil.
If all the world has done is push the cleansing that started in 2008 forward three years, then December 2008 is a pretty good model of what to expect going forward as the exact same forces will eventually unleash their creative destruction again, only this time with greater force and at higher levels of non-linearity.
Depending on what you look at technically, there are some major divergences popping up in gold’s chart as MACD, RSI and other indicators have been sagging even as price held on until recently.
4. Oil and gasoline are also looking toppy. The consensus is watching the shaky supply situation and seeing all sorts of reasons for supply to decline, but if the global economy rolls over hard, then demand could fall faster than supply, pushing prices off a cliff.
One feature of the “oil curse” is that the oil exporters have no other revenue stream to fund their regimes and welfare states. Saudi Arabia has enough other investments in the West to weather a downturn, but the rapid rise in the cost of extraction, population and welfare has pushed up the fiscal pain point even for the Saudis.
Iran and other exporters have a wafer-thin fiscal break-even point: if oil slumps to $50/barrel, the Iranian government budget is in serious shortfall.
As I noted in Oil: One Last Head-Fake? (May 9, 2008), despite brave talk to the contrary, exporters have no choice politically but to pump and sell every barrel they can, as oil revenue is the foundation of the government’s spending and legitimacy.
As demand crashes in a global rollover, oil plummets below fiscal break-even for exporters, who must then pump even more to keep revenues from destroying their domestic legitimacy and power base.
Supply won’t drop as fast as demand, and that will push prices down hard at the margin, where prices are set. And as the U.S. dollar shoots up, then oil will cost a lot more in weaker currencies. That will further suppress demand and thus price.
Those two dynamics will reinforce each other in positive feedback loops, pushing prices down lower than the consensus thinks possible.
“Impossible”? Where have we heard that before? Lehman going belly-up was impossible, as I recall, and so was the housing bubble bursting, to name but two previously “impossible” financial events.
Confirmation bias has its own positive feedback called the herd instinct. When the herd reaches a consensus, it’s hard not to follow along with what is “obvious.”
Sometimes what’s obvious isn’t “obvious” at all.
Linda Green’s name may appear on two million mortgage assignments, yet she has never been deposed. While there are a few depositions of robo-signers from document mills, in many cases, the document mills seek AND RECEIVE protective orders – arguing that such discovery is burdensome and meant only to harass. If you are a foreclosure defense attorney or a pro se homeowner fighting foreclosure, please send your experiences with this issue for an investigative report on Fraud Digest to firstname.lastname@example.org.