FedUpUSA

Archive for February 21st, 2012

The stupid, the stupid, make it stop!

The $25 billion mortgage settlement negotiated on Feb. 9 by the administration and 49 state attorneys general with five big banks has been greeted with considerable political suspicion. Conservatives see a shakedown and liberals dismiss it as too little. The biggest loser is the rule of law.

True.  If we had the rule of law then there would be 100,000+ felony counts working their way through the courts on the admitted acts of perjury, and hundreds of thousands more for various acts of fraud along the way from origination to alleged “conveyances” that never happened to banks making credit bids at property auctions when they are not the real party at interest, which is flatly illegal (you can’t bid an interest you don’t have — check your state laws on this.)

But in this case the attorneys general do not seem to have done any meaningful investigation. Instead of interviewing witnesses and reviewing documents, they treated the case as an opportunity for photo-ops and high-level negotiations. The settlement terms have little to do with the allegations.

Really?  You did read the report out of California, right?  80+% of the foreclosures have indications of fraud and nearly half of the so-called resales of homes (where title changes hands) appears to have had a grantor that didn’t have an interest in the title itself (read: the transfer was in fact a transfer of nothing, as the seller had no interest to convey!)

Only a small number of the robo-signed documents seem to have involved borrowers capable of paying their mortgages. The vast majority of the money changing hands has nothing to do with robo-signing or unnecessary fees.

Immaterial.  The Rule of Law is first and foremost all about due process.  The reason criminal laws, including perjury laws, result in charges of “The People v. Scumbag” (and not “Joe v. Jane” as with a lawsuit) is because it is The Rule of Law and thus the people who are damaged when a crime is committed.

We therefore prosecute in the name of the people, not in the name of the aggrieved.  If you’re aggrieved personally you sue.  But when society is aggrieved by a breach of the peace, which is what forgery and perjury (“robosigning”) is, you’re supposed to wind up with a prosecution out of it — not a lawsuit.

The biggest problem with the so-called “mortgage settlement” is that most of it won’t come from the parties who did the harm at all — it will instead come from the taxpayer.  By twisting the language in HAMP and HARP, existing Treasury programs, these programs will wind up funding most of the “individual” mortgage relief.  By allowing banks to choose which loans to write down, they will choose those in which they have an indirect pecuniary interest.

Let me explain the latter, since Mr. Skeel, who claims the title “Professor”, didn’t bother mentioning this (we can have the debate over whether that was intentional or out of his lack of understanding later.)

Banks have a few hundred billion of second lines — HELOCs and “Silent Seconds” — on their books.  The huge majority of dollar volume of these loans during the bubble were in the sand states — Florida, California, Arizona and Nevada.  All four have had monstrous drops in house values, as all four were the land of froth and bubble.  These bubble valuations were driven by fraudulent underwriting and resale of the firsts (as admitted under oath before the FCIC) along with various other misdeeds, including appraisal tampering that goes back to the early part of the decade (and which generated a petition from appraisers at that time — which was ignored.)  The banks made a crapload of bogus “profits” by churning these firsts into alleged trusts (“mortgage backed securities”), many of which on even cursory investigation did not comply with either their own PSAs (the legal documents governing their formation and operation) and in many cases appear to have violated NY and Deleware Trust Law (where nearly all of them are sited for legal reasons.)  There is enough material there for hundreds of thousands of felony criminal charges — well, there was anyway before the Statute of Limitations began to run, and soon it will be too late for all of them to be brought.

No, that delay was not an accident.  Indeed, it’s my position that all of this arm-waving has been for the explicit purpose of delaying justice until said time has expired, at which point it becomes justice denied.

But the seconds were never securitized; nearly all of those are in fact on bank balance sheets.  They are, almost to an individual bank, being held at valuations in the mid to high 90% of face value range.  This is farcical in that a second line has no recovery in the case of foreclosure until and unless the first is entirely satisfied, and with somewhere around half of the homes in these states with notes from that time being underwater and a large percentage delinquent, the odds of these loans performing “as agreed” is vanishingly small.

This problem, incidentally, is one of the reasons that getting approval for a short sale is often nearly impossible.  The second holder has to approve the sale but has zero incentive to do so, as the sale forces recognition of what has up until now been an intentionally hidden loss.  This “mark to myth” game is part and parcel of what came out of the early 2009 Kanjorski hearing.  Indeed, but for that hearing and the arm-twisted FASB rule changes one could make a quite-cogent argument that these balance sheet games amount to bank fraud — by the bank itself.

So if you’re a bank, told to write down $5 billion worth of mortgages (your “share” of the total) and given discretion as to which ones you write down, on which loans do you “write down” the principal?

You write down those on which you hold a second, because it increases the value of the second in actual terms on a dollar-for-dollar basis!

Note that this does not change the balance sheet numbers, since you’re already claiming that these loans are good when they are not.  But it does help to “rescue” your bad paper.  This would be a circle-jerk and of no consequence if the funds for the write-downs were coming from the banks.  But they’re not — they are instead largely coming from Treasury, that is you and I as a taxpayers, via HAMP and HARP.

The bad news is that the paper holders will take it in the back door again.  Not so much by defaults, but rather by prepays into a world where the only replacement paper yields half of what they were getting before.  Since the major holders in the US of this paper are pension funds and insurance companies, all we’re doing here when you analyze this on a macro-level balance-sheet basis is creating a detonation in pension funding a few years out.  I’ve been talking about that too for a while, but once again nobody wants to hear it, and I’m sure in five or ten years when all these pension funds blow sky high we’ll be told once again “nobody could have seen it coming.”

Welcome to Washington where the spin machine is that the banks will “pay a penalty for their bad conduct” when in fact you, dear reader, will get it up the back door once again in that you will be forced to pay for someone else’s bad conduct – twice.

Supposedly €130 billion and allegedly will get debt-to-GDP to 120% by 2020.

Not gonna happen folks.  This is basically the same deal originally talked about last year and the problem is that it doesn’t account for the contraction in GDP when the deficit spending ends, nor the impact on tax receipts.

This may get them through the March date (they’ll just suck down the funds and prevent a blowup on the imminent roll) but this is entirely insufficient as there are still the issues surrounding the banks and the pass-through effects are not accounted for.

More as I learn it, but my first blush is that while the reflexive move is northbound on the Euro and the incipient dump in the futures was arrested, people need to think this one though before breaking out the party hats.

The Fly In The Greek Ointment

As the U.S. dollar strengthens against other currencies, the phantom corporate profits  generated by a devaluing dollar will vanish.

One of the dirty little secrets of the stock market rally is that the rising corporate profits that powered it are largely phantom profits.  Why are they phantom? Because they are artifacts of currency devaluation, not an increase in efficiency or production of goods and services.

Though few domestic observers make mention of it, the large, global U.S.-based corporations  are now dependent on non-U.S. sales for about 40% of their revenues (50% and up for many companies) and virtually all their profit growth. Overseas sales are made in the local currency: the euro, yen, renminbi, Australian dollar, Canadian dollar and so on, and the profits are stated in U.S. dollars on corporate profit and loss statements.

In 2002, 1 euro of profit earned by a U.S. global corporation equaled $1 in profit when converted to U.S. dollars. That same 1 euro profit swelled to $1.60 in 2008 as the U.S. dollar depreciated against the euro.  That $ .60 of profit was phantom, an artifact of the depreciating dollar; it did not result from a higher production of goods and services or greater efficiencies.

This is why profits earned in non-U.S. markets have risen so dramatically even as domestically earned profits have stagnated.The U.S. dollar has declined dramatically against the currencies of our major trading partners, boosting phantom profits across the board when the non-U.S. profits are converted to U.S. dollars on corporate profit and loss statements.

The Federal Reserve has actively pursued a policy of devaluing the dollar, supposedly  in the hopes of expanding exports as it became cheaper to buy goods and services denominated in U.S. dollars.  While exports have nudged up as the dollar lost value, the truly significant result of this policy was boosting foreign exchange-generated profits of global U.S.  corporations.

Now that the Federal Reserve has lowered interest rates to zero, trying to depreciate the dollar further is like pushing on a string.Short of direct foreign exchange (forex) intervention–buying other currencies in bulk and selling dollars to flood the market  with USD–there is little the Fed can do to manipulate the $2 trillion-a-day foreign exchange markets.

The strengthening dollar is putting these vast phantom profits at risk.Were the U.S. dollar to return to its 2002 relative value in other currencies, virtually all the phantom (forex-generated) corporate profits that have justified the stock market rally  will vanish.

Though very few consider it possible, much less likely, the U.S. dollar could actually rise significantly as other currencies price in the currently understated risk to their economies.  Were that to happen, U.S. corporate profits earned in other currencies would actually decline, even if revenues remained constant.

If the global economy is indeed sliding into recession, then maintaining revenues will be a challenge.  More likely, sales will drop and so will profits as the dollar  reverses and overseas profits plummet when converted to dollars.

In other words, if the dollar continues strengthening against other currencies, say good-bye to rising corporate profits–and the stock market rally based on ever-expanding corporate profits. Is it any wonder that the Powers That Be look upon a strengthening dollar (recall a rising dollar increases the purchasing power of all who hold it, i.e. U.S. residents and those holding dollar-denominated bonds) with fear and loathing? Alas, the Federal Reserve is not all-powerful in forex markets, despite its gargantuan hubris and absurdly inflated reputation.

Charles Hugh Smith – Of Two Minds