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Archive for the ‘Editorial’ Category

I was wondering how long this was going to take….

NEW YORK, Dec 29 (Reuters) – Morgan Stanley has been sued by a Virgin Islands pension fund that accused the Wall Street bank of defrauding investors by marketing $1.2 billion of risky mortgage-related notes that it expected to fail.

The lawsuit filed Dec. 24 in Manhattan federal court said
Morgan Stanley collaborated with credit rating agencies Moody’s Investors Service and Standard & Poor’s to obtain “triple-A” ratings for notes marketed in 2007 as part of a collateralized debt obligation (CDO) known as Libertas.

According to the complaint, the CDO was backed by low-quality assets, including securities issued by subprime lenders New Century Financial Corp, which quickly went bankrupt, and Option One Mortgage Corp, then owned by H&R Block Inc.

That’s the allegation…. and frankly, my stunner is that it has taken this long for these sorts of lawsuits to show up.

The complaint makes the specific allegation that

 ”Morgan Stanley was betting the entire investment it was
promoting would fail,” according to the complaint, which was
made available on Tuesday. “The firm achieved its objective.”

Oh, who else was doing this sort of thing?  That would be most of the investment banks, right?

The interesting part of this filing from my perspective is that they didn’t sue the raters as well.  I’m quite surprised, actually, as one of the places that looks particularly fertile to me in these suits is an argument of collusive conduct between the ratings agencies and issuers.

Why? 

Because if such a case was able to be proved up it would open the floodgates for treble damages via a potential Racketeering suit.  The underlying fraud, if proved, would served as the predicate felony necessary to sustain such a claim.

We’re not getting that sort of reaction – yet – but I’m quite surprised.

Among the allegations in the suit are this:

The Dec. 24 complaint said Morgan Stanley knew securities in the Libertas CDO were suffering a dramatic rise in delinquencies, but provided a misleading “risk factor” in a prospectus that rising delinquencies “may” hurt values in the $1 trillion residential mortgage-backed securities market.

It called this representation “analogous to Captain Smith’s telling passengers of the Titanic that some ships have ‘recently sunk’ in the Atlantic and therefore ‘our ship may sink,’ without mentioning the facts that his ship struck an iceberg, had a hole in it, and was filling with water.”

Now that puts the basic premise of the case in a format that everyone can understand.

But what this and similar cases filed thus far seem not to bring up is the fact that the only way these deals made sense (for the issuing bank) was if they were improperly “rated” in the first place!

I go back to the fundamental mathematics of lending and business, as I have repeatedly explained over the last two years and change.  That is, the more people that touch a deal the less money there is available in that deal for the end purchaser.  What this means is that the maximum risk-adjusted return exists when one person loans another money – the more complex the deal gets than that, the less total return the end buyer of the debt, all-in, can obtain – UNLESS SOMEONE CHEATS.

But remember – no matter how you slice this whole deal up only 200 basis points of profit is in there over treasuries to make. You can change who eats the losses and how much the various “fingers in the pie” get to siphon off, but you can’t change the total amount of profit available.

OR CAN YOU?

Wall Street figured out that YOU CAN IF YOU ARE WILLING TO CHEAT.

All you have to do is find someone who will run your “deal” through a computer program and “grade” the quality of its debt. If you can find someone who will claim that the total risk of the deal is lower than it actually is, you make out like a bandit, because instead of 200 basis points of actual profit you suddenly “find” another 50 or 100!

That’s the essence of all this “financial engineering.”

The problem with suing on this basis is that it’s somewhat difficult to explain to a jury how this all worked.  If the jurors eyes glaze over you lose, you see.

I’ll make this offer – I’m willing to bet I can spend a half-hour on the phone with any of these attorneys and explain the fundamental scam in these “deals” in sufficiently-clear language that anyone of ordinary competence in the general public can understand it.

That should allow them, in turn, to do so to a jury.

And I won’t even charge for my time.

Call me folks.  Seriously.

I have written about “strategic defaults” many times in The Ticker, with the most recent being right here:

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.

This is now showing up in the “mainstream media” – specifically Newsweek:

Um, do any of these people read the Wall Street Journal? Strategic defaults are the American way, and I’m not talking about strapped middle-class borrowers who prefer spending money on vacations to staying current on their payments. Deep-pocketed companies, billionaires, and institutions that can afford to stay current on payments strategically default all the time.

Ding ding ding ding ding.  Give Daniel Gross a cigar!

Let’s cut the crap – again – this Christmas, and restate the obvious:

1. Your legal obligations are within the four corners of the document(s) you sign.  No more, no less.
2. If you, after consulting with legal and accounting advisors, determine that it is in your best interest all in to strategically default on your debts, whether that default be on your mortgage, your credit cards, your HELOC or anything else, YOU SHOULD DO SO.

    

3. You have exactly ZERO ethical or moral obligation to NOT exercise each and every legal option available to you, including bankruptcy, suits for quiet title where “lenders” improperly transacted in some fashion or the exploitation of the very fact that lending was done “unsecured” either in fact or in the letter of the agreement.

Yes, there may be consequences.  In some states wages can be garnished to varying degrees, as just one example.  Lenders do have recourse to one degree or another when you make this decision.  It is not so simple as to say “walk away, there’s no risk and no cost”, because there is both risk and cost.

But the argument that one has a moral or ethical obligation – that there is some “stigma” associated with default – it absolute baloney.

Years ago there was stigma – a man’s word was his bond.  But that is gone now, and it is not you, the consumer who made it thus.  It is in fact the very people who lent you that money who made it so – who proffered documents to you written in 4 point type that were impossible for anyone with less than a PhD to understand (and sometimes even then), that contained intentional tricks and less-than-honest inducements, and who themselves were in fact stuffing bogus loans into securities that they then peddled out to the masses!

Janet Tavakoli has once again opined on this in relationship to Goldman Sachs, which was, as you’re no doubt aware, one of the firms that packaged up HELOC and other “household debt” to be sold off.  Here is what she said in that column:

The answer is that they sold a lot of “hot air” disguised as valuable securities. Goldman claims this was prudent risk management. In reality, Goldman created products that it knew or should have known were overrated and overpriced.

If Wall Street had not manufactured value-destroying securities and related credit derivatives, the money supply for bad loans would have been choked off years earlier. Instead, Wall Street was chiefly responsible for the “financial innovation” that did massive damage to the U.S. economy.

Got it?

You got that “loan” because these institutions provided it to you knowing full well that you could not pay.

That is, they didn’t loan you money expecting you to pay them back, they lent you money knowing you couldn’t pay, sold off loans they knew were bad to other people AND THEN BET AGAINST YOU PAYING!

I will counsel in these pages that you should pay your debts if and only if and when:

• Those who made intentionally unsound loans are indicted, prosecuted and imprisoned for their willfully-fraudulent lending.
• Those who packaged up these loans by stuffing bad loans into paper then sold and resold by others in an orgy of intentional misdirection and fraud are all forced to eat their own cooking, instead of the taxpayer bailing them out.
• The laws are changed so that the practice of both intentionally-unsound lending and strategic default is handled identically for both “big corporations and rich folks” as well as for the ordinary working stiff who is trying to hold his head above water.

In other words I will change my tune if and only if and when those who destroyed the social contract of a man’s word being good on its face change THEIR tune.  Until that time it is my assertion that you are not only within your rights to deal with them as they deal with you BUT YOU HAVE A MORAL AND ETHICAL OBLIGATION TO DO SO AS IT IS THE ONLY MEANS AVAILABLE TO THE COMMON MAN SHORT OF UNLAWFUL VIOLENCE TO STOP THE SCAMS!

Let me be clear: There is no argument to be made whatsoever in the current environment for a “moral or ethical obligation” to pay your debts.  Those debts were incurred in an environment where asset prices (which you used that debt to finance) were fraudulently inflated in “value” through the intentional concealment and bogus “underwriting” and packaging noted above.

This bogus underwriting as I and others have noted was not an accident, it was a means of looting the public both explicitly at the time and then later via taxpayer bailouts – these so-called “profits” were bonused and paid out via dividends and rising stock prices when in fact the “earnings” that led to same were a phantom, an artifice and a fraud!

You and I – ordinary Americans – did not make it thus.  We did not create these value-destroying “assets”, we did not pollute allegedly good paper with loans we knew could not be paid, and we did not glibly sell assets to people in one part of our personal financial operations, claiming they were “money good”, while shorting them in another.

The ENTIRETY of the fraud-laced economy is holding together by one and only one singular thread at the present time: the fraudulently-peddled LIE that you have an obligation to deal at some sort of ethically or morally superior level with a band of brigands, scam artists and fraudsters.

YOUR fleecing will end ONLY when you, the ordinary American, decided you will NOT deal “honorably” with a den of vipers, but instead deal with them exactly as they have dealt with you, and your attitude will change ONLY when theirs does and they make recompense for their past sins.

YOU, America, decide how long you want these firms to screw you on a literal daily basis. 

YOU can stop it tomorrow.  If every American decided to default – on purpose – on their credit cards and mortgages, each and every one of these institutions who has screwed you for the last two decades would be rendered insolvent in less than one month’s time.

YOU have the power America.

Will you use it or continue to cower in the corner before those who, as I have written about for the last two and a half years, have exploited your gullibility and “ethics” to force you into near-literal slavery?

THAT is the question facing you this Christmas.

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.

I have long maintained that the EU Zone is an absolute train wreck – that their banks have less transparency and more leverage than ours, and have recognized less of their total losses.

As such they are literally dancing with jugs of nitroglycerine.

Well, now Bloomberg pipes up with this:

Dec. 17 (Bloomberg) — European Central Bank officials are moving closer to forcing banks to provide more information about the collateral they give the ECB in return for loans.

What? 

You mean the ECB doesn’t have full information about the paper they took in as collateral for loans?  What could they possibly want to know?

Under the terms of the collateral consultation, officials want banks to provide information about individual loans such as the value of the property backing a mortgage, details on cash flow and whether the borrower is in arrears, the people said.

WHAT?!

You have to be kidding me.  The ECB is holding paper as collateral where they don’t even know if the borrower is making the payments – that is, whether THE LOAN HAS DEFAULTED OR NOT?

The ECB has already tightened the rules for asset-backed securities it accepts as the central bank moves toward unwinding its emergency liquidity measures. The ECB said Nov. 20 it wants to ensure “high credit standards” are met and aims to restore “the proper functioning of the ABS market.”

Like hell.

I warned you all several times about this crap.  Now it’s leaking into the mainstream media…… which means that beyond the walls of the ECB it is now common knowledge.

How long before you see this?

PS: There’s more where this Ticker came from – this one is a tease for tomorrow….. To those who said the Euro Zone would be ok, I have only one phrase for you: “I told you so!”  

Off Bloomberg:

Dec. 9 (Bloomberg) — Former Bank of England policy maker Willem Buiter said Greece may be the first major country in the European Union to default on its debts since the aftermath of World War II.

“It’s five minutes to midnight for Greece,” Buiter, who will join Citigroup Inc. as its chief economist next month, said in a Bloomberg Television interview today. “We could see our first EU 15 sovereign default since Germany had it in 1948.”

Was your first hint the unsustainable social spending, the ramping debt-to-GDP ratio, or an intractable government that has refused to put forward any sort of reasonable austerity measures?

Next question: How is the US any different or, for that matter, Great Britain?

Calling Captain Obvious on Line 1!