The fact is that Bank Of America has written down a significant amount of so called “A” paper debt. Contrary to popular belief, “A paper” is not significantly better in quality than subprime, given that A paper clients over the past decades relied on deficit spending and credit availability as much if not more so than the subprime demographic. A paper clients just like their subprime client counterparts rely on maintaining their debt payments with the acquisition of more debt. The only difference is that A paper clients often had Real Estate debt that was linked to more expensive housing. Why would that make a difference? Since banks such as Bank Of America were greatly mismanaged and heavily leveraged, they could not afford to foreclose on the expensive properties since the A paper loans were greater in value and not covered under the Insurance of the Federal Housing Administration. WTF Finance reported in the past how this is exactly the reason why upper income housing has not deflated in value as much as it should have – the Jumbo loan RE market was heavily manipulated as financial institutions such as Bank of America opted not to foreclose and instead legally cooked their books with the help of changes in accounting regulations.
Without the changes from mark to market accounting regulation to mark to whatever bubble value you want to mark it to, Bank of America would have been exposed as the insolvent company it truly is – it would have been “Bear Stearned”. Those changes in accounting regulation in late February of 2009 allowed Bank of America and other financial institutions to report phantom profits due to their creative Enron-like accounting gimmicks that were made possible with the implementation of anti-free market accounting regulations by the U.S. Government. While the naïve and clueless believed that the financial conditions of US companies improved, readers of WTF Finance were educated that the stock market rally of 2009 was merely an illusion of a fundamental recovery, only made possible and ignited by those accounting changes.
Finally last month, Bank Of America was downgraded by S&P and also by Fitch. Needless to say, both downgrades aren’t realistic enough as both credit rating agencies still give too positive of a rating for Bank of America and other financial institutions. Bloomberg reports:
“Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.”
Bank of America sure has friends in high places as the quasi-private Federal Reserve would like to relieve Bank of America of its bad business decisions and contracts, namely the trillions of bad paper that Bank of America has written down and still holds in the form of toxic derivatives.
If it weren’t for the anti-free market policies Bank of America and other financial companies could not engage in nonsensical business practices without having to face serious consequences for the irresponsible business decisions that they made. Only in a manipulated environment can a financial institution write bad business, reward its executives and employees with unmerited bonuses while passing the losses onto others.
Without the changes in accounting regulation to the “Enron Accounting Standard” in March 2009, Bank of America would have been exposed as the insolvent institution it is. The record profits that Bank of America reported starting with the 1Q 2009 were solely made possible with accounting gimmicks. These phantom profits allowed Bank of America to issue more shares as the financial and economic clueless wrongfully believed that the finances of Bank of America et al. improved fundamentally. With the next round of financial bailouts in the form of derivative purchases by the Federal Reserve, the story of Prank of America will continue…
Fannie Mae, the Government Sponsored Enterprise that guarantees home mortgages, is seeking its next round of government bailout funds. Fannie Mae reported its financial earnings statement on August 5, 2011, reporting a loss of $2.9 billion for its second quarter. In the first quater of 2011 Fannie Mae lost $6.3 billion.
“Our net loss and total comprehensive loss for the second quarter of 2011 were both $2.9 billion. In comparison, we recognized a total comprehensive loss of $6.3 billion in the first quarter of 2011, consisting of a net loss of $6.5 billion and other comprehensive income of $181 million. We recognized total comprehensive income of $447 million in the second quarter of 2010, consisting of a net loss of $1.2 billion and other comprehensive income of $1.7 billion (primarily driven by a reduction in our unrealized losses due to significantly improved fair value of available-for-sale securities).”
The government loan gurantees through Fannie Mae and Freddie Mac greatly contributed to the artificial low interest rates which were a significant contributing variable that made the housing bubble possible. These reported losses are greatly understated as Fannie Mae and the financial industry in general are allowed to use Enron type accounting evaluations since the change away from mark to market accounting in Spring 2009. Without marking its assets up to bubble values the losses of Fannie Mae would be multiples greater.
According to Reuters, Fannie Mae asked the Government for an additional $5.1 billion in bailout funds. The additional bailouts is needed as Fannie Mae continues with non-sense business practices in order to price fix Real Estate values, provide bailouts to individuals and banks, while continuing to provide artificial cheap financing to borrowers that wouldn’t qualify without the Government as guarantor. This socialized credit subsidy has been supported by the majority of Democrats and Republicans while free market proponents warned of the costly consequences.
Stephen McDow, a Laguna Beach, CA man wrongfully received $110,000 deposited in his bank account, KCAL 9 reported. It was none other than the IRS who wrongfully deposited those funds into the man’s bank account. It was another person’s tax refund that was wrongfully deposited in his account after the senior citizen provided the IRS with the wrong bank account information.
The Laguna Beach resident used the funds to pay down his debts, including his mortgage and student loans. Once contacted by the IRS McDow admitted to having received $110,000 and that he used $65,000 to pay down his real estate loan on a family Maryland home and his car loans.
Prosecutor Lockart stated that the bank account error was due to Citibank re-assigning the account number to McDow after the account has been closed in 2004. The 67 year Los Angeles women provided the IRS with an old account number on her efiling for her federal taxes. If that is true it’s none other than the filers mistake.
“He said look I screwed up, I spent it on my student loan and I spent it on my home mortgage. It doesn’t sound like that this man exercised criminal intent anywhere along the way” tax attorney Jerry Unis, who is not associated with this case, said.
McDow’s family informed the media that Stephen McDow offered to return the unspent funds while making monthly payments on the remaining balance but that the offer was declined. Stephen McDow now faces grand theft charges by the OC District attorney for having stolen money that he did not steal. Stephen McDow is currently in jail being held on $110,000 bail while facing up to four years for a crime he did not commit.
Money is used on a daily basis for economic transactions. But what is money and where does money come from? Those are two very simple questions yet most people do not know the answers.
Money facilitates economic transactions as it allows people to use a common accepted form of perceived value to settle purchases and debts. It is much more convenient to use a currency for the purchase of goods and services than it is to find somebody that is willing to barter something you have in exchange for what you need from them. It certainly makes sense that money adds convenience to economic transactions. But this still didn’t answer the question of what money is and where money comes from.
To find the answers to those questions and to learn more about the history of money you can watch this animated and very informative documentary called Money As Debt.
Under the Freedom and Information Act, Bloomberg reporter Mark Pittman initiated a lawsuit against the quasi-private Federal Reserve to release the details of its financial activities following the Lehman Collapse. Last summer Manhattan Chief U.S. District Judge Loretta Preska ruled against the Federal Reserve as the central bank “improperly withheld agency records” following Bloomberg’s request under the Information Act.
Ben Bernanke and other Federal Reserve officials voiced concern that public knowledge about the Fed discount window lending activity could create panic and reduce their efficiency as a lender of last resort. Former Federal Reserve vice chairman Donald Kohn stated:
“Having these names made public, or the threat of having them made public, could well impair the efficacy of a key central bank function in a crisis — to provide liquidity to avoid fire sales of assets — because banks will be reluctant to borrow.”
Since banks draw from the last resort lender in times of financial distress knowledge about the lending activity could result in loss of confidence in the financial institutions that borrow from the Fed’s discount window. Bernanke sees this as a potentially negative event as people could panic and withdraw their funds from those struggling institutions. WTF Finance makes the case that greater transparency would allow for better decision making as people could come to their own conclusion of whether it is financially safe to do business with a certain bank or whether they should withdraw their savings. Investors should also have the right to that information as this critical last resort activity could have a potentially serious impact on the performance of their holdings.
The Fed released the 29,000 pages of financial activity but given its operational secrecy who is to say that this information is accurate and reflects the lending activity that truly took place during the crisis? Bloomberg reporter Mark Pittman who initiated this lawsuit unfortunately is no longer with us as he passed away during this legal battle.
The main stream media continues to report the profitability of the bailouts. Tim Massad, assistant secretary at the U.S. Treasury Department was interviewed on CNBC. The assistant to Treasury Secretary Geithner oversees the Financial Stability and TARP. In this interview he made the case that the US turned the interventionist bailout programs into profitable ventures.
“From now on every further dollar we recover represents additional gain to the taxpayer, so that’s a great result. The main purpose of this program obviously was not to try to make a profit, we’re not an investment fund, the main purpose was to stabilize the system, it succeeded at doing that but it’s great news for the taxpayer that it will also end up making a profit.”
As WTF Finance previously reported Fannie and Freddie are continuing to distort real estate dynamics with the non-sense government guarantees on home loans. This artificial lending environment not only makes credit cheap but creates additional artificial demand for real estate while the foreclosure prevention programs artificially reduce supply of housing. This intervention not only bails out the irresponsible homeowners but also the many banks that can write up previously taken losses since the changes in accounting regulations away from mark to market.
Sure, these bailout programs turned profitable in absolute dollar terms but that doesn’t take into account the trillions of dollars that the Federal Reserve created in order to manipulate the markets to price fix real estate, the credit markets and the value of the US Dollar. Assistant Treasury Secretary Massad further states:
“The cost will be limited to the amount we spend to help people modify their mortgages, stay in their homes, and avoid foreclosure.”
Secretary Massad does acknowledge that this profit number does not include the interventionist programs by the Treasury, the Fed’s MBS and bond purchase program, the cost of the FDIC intervention, etc. However, he does state that a study will be released that takes those programs into account and it is estimated that these programs will also eventually turn a “slight” profit.
This sure puts a positive spin on all the anti-free market interventionist programs that the Government and Federal Reserve put in place. As long as one continues to debase the currency we can turn every bailout profitable as long as we use absolute dollar terms to come to that conclusion. Adjusted for inflation and taking all interventionist programs into account it is absolutely ignorant to state that this deal was in the best interest of the taxpayer, US Dollar and America. There’s a reason the United States currently operates with a multi-trillion dollar yearly budget deficit. Misleading the public into believing that this bailout was profitable is about as misleading as the statement that the Federal Reserve has been protecting the value of the US Dollar since 1913…
With all this positive spin on the bailouts WTF Finance believes that the stage has been set for the next round of bailout programs and the Federal Reserves’ Quantitative Easing 3 looms on the horizon. Sure, these programs turned “profitable” but the ultimate price will be paid through the collapse of the currency bubble as the current US GDP Bubble comes at the cost of the debasing of the currency which will ultimately lead to massive inflation.
The Federal Deposit Insurance Corporation (FDIC) sued three former executives of Washington Mutual, the bank that failed and was taken over by the FDIC in 2008. Assets of WaMu were sold Chase at favorable terms as liabilities were retained by the Government. The bank failure of Washington Mutual marked the biggest bank failure in U.S. history to date.
The FDIC accuses former CEO Kerry Killinger, former COO Stephen Rotella and former president of the home loan’s division David Schneider of gross negligence in making billions of dollars in questionable home loans. The case being made is based on the excessive lending and loose qualification standards leading up to the housing bubble bursting.
Among the many complaints against WaMu, the FDIC cites option ARMs, negative amortization loans, subprime lending, home equity loans and high loan to value products as the reasons for its high risk lending portfolio collapsing. While WTF Finance agrees that some of these factors contributed to and perpetuated the housing bubble, we disagree that this was exclusively a WaMu issue.
With GSE guarantees, banks did not have to worry about the creditworthiness of borrowers as those loans were guaranteed by the Government putting the burden on taxpayers. With FHA consistently increasing the mortgage guarantee limits, banks were not incentivized to perform their due diligence. If a mortgage is guaranteed, and the deposits which are leveraged in order to issue that mortgage are also guaranteed, what possible motive would there be to be diligent with issuing credit?
This frivolous lawsuit seeking damages of around $900 million will be settled out of court like Bank of America and Citi et al. before it. When will the FDIC get around to suing the Government for gross negligence for putting the taxpayers on the hook to cover trillions of dollars in home loans that are now non-performing underwater “assets” waiting to be written down? When will the FDIC conduct an internal investigation for its lack of business sense as this government “insurance” program is on lifeline through a credit line issued by the Treasury?
WTF Finance reported how the proposed solutions for dismantling Fannie Mae and Freddie Mac involve more Government. The two Government Sponsored Enterprises guaranteed trillions of mortgage debt and were bailed out by the U.S Government while continuing to guarantee non-sense loans making up most of the lending environment post-Real Estate bubble implosion.
In August 2010 the U.S. Department of Housing and Urban Development (HUD) announced a new program that would be implemented to help the responsible homeowners that did not fall behind on their mortgage. The NY Times now reports how a significant number of lenders have signed up for this program.
“Six months after the Federal Housing Administration announced an $11 billion refinancing initiative for these “underwater” borrowers, nearly two dozen lenders have agreed to take part in a new loan modification program.
To qualify, homeowners must be current on their monthly mortgage payments and not already have an F.H.A. loan. The size of the new primary loan cannot be more than 97.75 percent of the current value of the property; refinanced loans for homeowners whose properties carry second liens cannot exceed 15 percent of the property value.”
“The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values. Originally announced in March, these changes and other programs that have been put in place will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.”
According to the NY Times article participating banks in the FHA Short Refi Program include: Wells Fargo, Ally Financial (formerly known as GMAC), Wall Street Mortgage Bankers of Lake Success, NY; 1st Alliance Lending of East Hartford, CT.; Nationstar Mortgage of Lewisville, TX.; E Mortgage Management of Haddon Township, NJ.; and Glacier Bank of Kalispell, MT. 23 more lenders have signed up for the program according to HUD that estimates that approximately 500,000 to 1.5 million homeowners can benefit from the program.
This program illustrates that the Government has absolutely no plans or intention to exit the credit markets and reduce its guarantees on home loans. This week Treasury Secretary Geithner stated before the House Committee on Financial Services that he wants to reform and reduce the role of Government involvement in the credit market and allow for the private lending to make up a majority of real estate lending.
“The Administration is committed to a system in which the private market – subject to strong oversight and strong consumer and investor protections – is the primary source of mortgage credit.”
WTF Finance would like to point out that these promises are merely promises to please international investors and provide them with misplaced confidence that the United States is addressing the root of our economic problems and therefore can balance its budget in the future. This HUD program is an expansion of FHA guarantees. The U.S. is not serious about changing its involvement in the credit markets as it otherwise would not have continued to guarantee non-sense loans that no private entity would have made. To give banks the option to take a modest 10% loss on their non-guaranteed underwater mortgages in exchange for Government guarantees on future losses that could far exceed the 10% write down is all but a sign that the Government is willing to exit the credit markets. This is an insurance policy whereas the banks don’t pay the FHA any insurance premium.
The smaller banks that are accepting to take the 10% write downs are making themselves more attractive to a future takeover from a large financial institution as their loan portfolio is now guaranteed.
The US stock market peaked in October 2007 with the Dow reaching a high of close to 14,200. Government guaranteed mortgages and a loose monetary policy by the Federal Reserve fueled the real estate bubble. Artificial low interest rates and excessive credit creation by the quasi-private Central bank lead to much malinvestment and speculation. The appreciation of property values not only made sellers of real estate rich but allowed those that refinanced to live a lifestyle they otherwise couldn’t afford.
Many Americans that had a modest salary enjoyed the financial irresponsible spending that was made possible through home equity loans. Others enjoyed the temporary high salaries that were made possible by the increased consumer spending and those employed within the Real Estate sector benefitted from the high transaction volume.
US equities only traded at their artificial high levels as a direct result of the housing and credit bubble. The increased economic activity allowed for massive consumer spending which resulted in record earnings for companies pushing the Dow Jones Industrial Average and NASDAQ to unsustainable record highs. With the beginning of the Real Estate collapse that started with subprime defaults and by no means was isolated to the lower income demographic the consumer spending came to a quick halt as individuals were limited to a level of spending they could afford.
With banks having been exposed for the nearly insolvent institutions they are, consumer spending limited without easy access to credit, and a significant rise in home loan defaults the DOW reached a low near 6500 in February of 2009. The Federal Reserve and the President’s Working Group on Financial Markets pumped trillions of dollars into the market to prevent a further down trend in equities.
In March 2009 the accounting rules were changed eliminating mark to market accounting rules and replacing it with a “mark to bubble” system that allowed financial institutions to take the previously written down losses and mark them up to a value of their choice. The sudden increase in value was translated to gains and the financial institutions reported record phantom profits since that accounting change. Nobody in their right mind can seriously believe that the financial companies that were on the verge of collapse could turn to record profitability within a few months.
Fundamentally nothing has changed with the U.S. Economy since the Real Estate bubble and the US Economy were exposed for what they are. This recovery has only been made possible through unprecedented market interference and bailouts which include:
Changes in accounting regulation, eliminating mark to market and implementing the Enron accounting system
Injection of trillions of dollars of newly created “capital” by the Federal Reserve
Artificial low short term rates that allows financial institutions to borrow money at nearly free terms in order to trade equities and bonds
Foreclosure Bailouts and Loan Modifications that allowed many Americans to live mortgage and rent free for several years
Avoiding foreclosure allows the banks to keep their non-performing loans on their balance sheets without having to realize those losses. The hidden losses remain artificially marked up on the balance sheets while contributing to the profitability of the institution’s quarterly statement.
With a majority of Americans free of mortgage obligations for several years the US Economy appeared to have recovered as sales of consumer goods rapidly increased. Many stocks are trading higher now than they did at the peak of the Real Estate bubble in 2006. Given that fundamentally the US Economy is fueled by similar unsustainable variables that allow Americans to continue living beyond their means it is naïve to expect a continuation of this bull market. Many companies reduced their American workforce in response to the market decline in 2006 through 2009. Since consumer spending returned to bubble levels they are more profitable now than in the past as they book similar or greater revenue with fewer overhead costs. While a reduction in workforce was a viable option for companies to address the slowing economy and deal with unprofitability, WTF Finance warns that US companies will no longer have that option in the upcoming downturn.
WTF Finance especially warns foreign investors as they not only are exposed to the equities that benefitted from the re-inflation of the bubble but also the value of the US Dollar. As we’ve reported in our article “Geithner Criticizes China” the biggest foreign holder of US Treasuries is becoming increasingly concerned about its US currency holdings as they are rightfully worried about future inflation and the potential default of the United States. WTF Finance shared the “Historic Lessons Of Inflation” and also explained why official CPI data is not a true reflection of inflation in our past articles.
WTF Finance does not suggest to panic sell into market weakness but does recommend selling equities that primarily depend on the true economic health of the American consumer. A rebound of US equities could be a last chance to cash out of your positions before the unsustainable fake US Economy is exposed for what it is.
Merscorp Inc., the company of the electronic mortgage-registration system replaced its leadership last week after a breakout of recent controversies over the legalities of its business practices in the foreclosure process.
The privately held company designed the MERS electronic registry to track servicing rights and ownership of mortgage loans that originated in the United States. MERS added value to lenders and consumers as it asserted to be the owner or the owner’s nominee of the mortgage security which was recorded at the county recorder’s office and often resold on the secondary market. By asserting ownership over the mortgage security it reduced the need to file assignments when the mortgage securities were resold and in the process saved both lender and consumer recording fees. The MERS system also added a valuable tracking resource that allowed one to find the current owner of the note to a mortgage and the servicing entity. The MERS platform also facilitated the bundling and selling of mortgage pools.
Since MERS was created to facilitate the transactions of mortgage notes and to serve as an acting agent the MERS entity initiated the foreclosure process on the defaulted home loans for the various lenders it services. Therein lies the problem as many home owners in default received the help of lawyers that advised them to contest the foreclosure since MERS wasn’t the actual holder of the note. WTF Finance finds it amazing how the borrowers that often lied on the loan documents overstating their incomes are now the ones halting foreclosures on technicalities, despite being at fault for having defaulted on their agreed loan obligation.
“The Court recognizes that an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States. However, the Court must resolve the instant matter by applying the laws as they exist today. It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices. MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law.”
WTF Finance agrees with the court that being involved in 50% of all residential mortgages should not exclude MERS from having to comply with the law. However, MERS does not foreclose on homeowners that aren’t delinquent; it is foreclosing on those that defaulted on their contractual obligation to pay their monthly mortgage payment. We strongly feel that politicians and homeowners are using this technicality to allow the defaulted homeowners to continue living mortgage free in a property they cannot afford in order to keep the U.S. economy artificially propped up.
As already mentioned in our article “The Non-Foreclosure Crisis”, delaying foreclosures through various means is artificially lowering the supply side of the housing market. This is direct price fixing to support Real Estate values above their fundamental values. By not foreclosing and allowing the homeowner in default to continue living mortgage and rent free as has been the case for many months already, the homeowner is able to keep spending elsewhere which is necessary to stimulate the artificial U.S. Economy. This is a major reason why many stocks are trading near their record highs as the consumer consumes at rate that would be impossible if they had to make those monthly housing payments. These events reflect the same economic outcome as the housing bubble since people in both instances could live beyond their means. In this case homeowners can avoid having to make a monthly mortgage payment for years whereas home equity loans gave the homeowner the ability to magically increase descritianary spending just a few years earlier.
Given that MERS has been in business since the 1990s WTF Finance finds it interesting how now the legality of such an institution comes into question. The timing of these foreclosure delays hint at an ulterior motive as real estate values are supported, supply is artificially reduced and controlled, and the continuation of excessive consumerism delays the inevitable collapse of the U.S. Economy.