gated ghetto

Hemet's Willowalk tract was family-friendly. Then the recession hit.

"living in a gated community is absurd when drug busts are a regular occurrence."

http://www.latimes.com/business/la-fi-hemet30-2010mar30,0,4976165,full.story

Wells Fargo most exposed to home equity hit: CreditSights

http://www.marketwatch.com/story/wells-most-exposed-to-home-equity-creditsights-2010-03-30?siteid=yhoof

Bill Black: To Rob a Country, Own a Bank (video)

Voltron says: If you don't know who Bill Black is, check out my previous post.

Key Points:

• There are probably at least half a million cases of mortgage fraud a year
• 80% of the fraud is committed by the mortgage companies
• "There are so many shoes yet to drop it is going to be like being in Imelda Marcos' closet during an earthquake"
• The US has descended into crony capitalism like Indonesia under Suharto
• The proposed financial regulations won't work
• There are 1/6th as many FBI investigators as during the S&L crisis when today's problems may be 30 times larger
• "The next big one will be even worse"

Video here: http://www.newdeal20.org/2010/03/30/bill-black-not-dead-yet-9279/

U.S. housing market shifts from liar loans to hard cash

"We've had this huge pendulum swing - from liar loans, no-doc loans and no-income loans - to no loans at all," NAR spokesman Walter Molony said. "We've gone to the opposite extreme."

http://www.theglobeandmail.com/report-on-business/economy/us-housing-market-shifts-from-liar-loans-to-hard-cash/article1516368/

Mortgage program comes with a catch

Excerpt:

The federal $75 million Making Home Affordable program is supposed to keep some of the 5 million Americans on the verge of foreclosure from losing their homes.

That's if the loans they want to refinance are backed by the federal mortgage companies Fannie Mae and Freddie Mac. And if they don't have a second mortgage or private mortgage insurance that can hinder refinancing. And if the cost of refinancing is worth the lower interest rates. And if lenders have been able to update their computer systems to work with the program.

And, it turns out, if homeowners don't mind watching their credit scores drop by as much as 100 points.

...The government should make it clearer to interested homeowners that their credit scores could take a hit simply by applying, even if they never miss a payment.

http://hamptonroads.com/2010/03/mortgage-program-comes-catch

Behavioral Finance

Confessions of a Value Investor- A Few Lessons in Behavioral Finance

California to offer $10,000 tax credit to homebuyers

http://www.mcclatchydc.com/2010/03/24/91023/california-to-offer-10000-tax.html

Bloggers and Short sellers do what the SEC won't

Voltron says: Epilog to MBIA, Lehman and Crazy Eddie. The story of the collapse is not a story about numbers, it's about people.

Excerpt:

Ackman’s bet was spectacularly contrarian. He was wagering on the collapse of a company [MBIA] that the rating companies had awarded their highest AAA rating and that everyone else was counting on.

...Ackman told the receptionist [at MBIA] they were there for the meeting with [CEO] Jay Brown. She pointed Ackman toward a closed conference room door just behind the reception desk. Opening it, he found Brown seated at a conference table with a dozen other men. The conversation in the room came to an abrupt halt.

“I’m Bill Ackman. I’m here to--”

“Wrong meeting,” one man said as he jumped up to close the door. Ackman returned to the reception area, convinced he’d just interrupted a tired and frazzled-looking Brown in a meeting with his crisis-management team. The Gotham group was shown to another conference room and told to wait.

Fifteen minutes later, Brown joined them with MBIA’s general counsel, Ram Wertheim, whose first question to the Gotham group was whether it planned to record the meeting. Ackman told him no, then asked Wertheim whether he and Brown planned on recording. They did not, Wertheim said.

Brown got to the point. He had been in the insurance industry for years, and no one had ever questioned his reputation, Ackman remembers Brown saying.

‘Friends in High Places’

“No one has ever gone to my regulators without my permission.”

Ackman asked Brown whether he disputed any of the assertions Ackman had made about MBIA. Brown was aware of the issues in Ackman’s report from questions he had received from a Wall Street equity analyst with whom Ackman had shared his findings.

“This isn’t about the facts; it’s about process,” Ackman recalls Brown saying. “You’re a young guy, early in your career. You should think long and hard before issuing the report. We are the largest guarantor of New York state and New York City bonds. In fact, we’re the largest guarantor of municipal debt in the country. Let’s put it this way: We have friends in high places.”

In a follow-up letter to Ackman after the meeting, Wertheim reminded Gotham what was at stake.

“MBIA is a regulated insurance company that operates in a regulated environment and acts in a fiduciary capacity for the benefit of our many constituencies. ... MBIA’s credibility and reputation in the market, and its AAA ratings, are critical to our continued ability to service these constituencies.”

In the meeting, Brown compared Gotham to Enron Corp., which had been accused of manipulating the California electricity market. Was Gotham seeking to manipulate perceptions about a regulated insurance company by taking positions in the unregulated CDS market? Brown also asked Ackman how long Gotham planned to hold its CDS position on MBIA.

Ackman explained that for the hedge fund to make money on its CDS position, it was going to have to be correct in its criticism of MBIA. Ackman told Brown that the CDS market was not liquid enough for Gotham to easily trade in and out of such a huge position.

Wertheim asked to see a copy of Gotham’s report before it was published so MBIA could check Gotham’s facts. Ackman countered that it was considered inappropriate for analysts to give advance copies of research reports to companies but again offered to discuss any findings at the meeting.

The meeting ended abruptly. As the men filed out of the room, Ackman reached out to shake Brown’s hand.

“I don’t think so,” Brown said, refusing to extend his hand.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLmOb9zzVZ9A


Excerpt:

When hedge fund manager David Einhorn told an audience of investors in 2002 that he recommended shorting Allied, the SEC investigated him before they bothered to probe the company. The lukewarm probe the SEC wound up doing didn’t even include a visit to Allied headquarters two blocks from the SEC. Ultimately, the SEC’s documents on Allied were mysteriously deleted from the agency’s computers, the new Kotz report says.

In a classic SEC farce, the agency has acknowledged the shorts’ important role in balancing the boundless swamp of financial hype by slapping new curbs on them on Feb. 24.

No less an expert on white-collar crime than onetime jailbird Sam Antar, whose Web page says he masterminded “one of the largest securities frauds of its time” when he was chief financial officer of Crazy Eddie Inc. in the 1980s, says the way to counter market hype is to make it easier to research short- sale ideas and sue fraudsters. And trust me, Antar should know.

“There is nothing worse for a criminal to deal with than an adversary with a profit motive,” he told me in a telephone interview.

Bloggers are doing their part to fill in where the regulators fail, too. Blogger Barry Ritholtz said on June 3, 2008, that it was time to sell Lehman Brothers at $30.61. Less than four months later, and after interminable carrying on by Lehman and others about short sellers telling unfair tales, the firm filed for bankruptcy.

http://www.bloomberg.com/apps/news?pid=20601039&sid=aL7vxobpVgYo

Housing Double-Dip

Voltron says: Second straight drop in California year-over-year sales. Double-dip is happening right on cue. See "the only chart that matters" on the right side of the blog. I like that chart so much because it is not a chart of the past trying to predict the future, it is a chart of what is actually already scheduled to happen in the future (mortgage resets).

http://www.businessinsider.com/california-housing-is-double-dipping-right-now-2010-3

Greece looks in the mirror

Voltron says: During the Greek bond crisis when the government blamed the speculators, it was so trite that I didn't bother blogging about it even though they took the unprecedented step of order their intelligence agency to root out the speculators. Well, they found out who the speculators were. This is too good. I'm not making this up . . . it was themselves . . . state-owned Hellenic Post Bank. They were betting against themselves. That's like Pete Rose betting against the Reds (I'm showing my age).

http://www.zerohedge.com/article/biggest-greek-cds-speculator-has-been-uncovered-culprit-greek-state-controlled-hellenic-post

Wells Fargo's Wachovia Unit Confirms Laundering Settlement

Voltron says: Back in December I posted an entry about how drug cartel money saved the banks. I'm not making this $h!t up.

Excerpt:

Wachovia Bank NA, a unit of Wells Fargo & Co. (WFC), confirmed it will pay $160 million to settle a federal investigation into whether the bank's lax controls enabled Mexican exchange houses to launder drug money.

Voltron says: It seems like the government will only prosecute companies after they fail.

http://online.wsj.com/article/BT-CO-20100317-712770.html?mod=WSJ_latestheadlines

Money Multiplier is negative

Voltron says: The "money multiplier" has gone negative. That is, each additional dollar borrowed and spent by the government actually lowers GDP.



http://economicedge.blogspot.com/2010/03/most-important-chart-of-century.html

Bond volatility is low.

Voltron says: The "MOVE" index is to the bond market what the VIX (volatility index) is to stocks. It measures how much people are willing to pay for "insurance" on bonds. The current level of 80 indicates extreme complacency. The market tends to get "surprised" when it is complacent. It can take a year or two for something to trigger a panic.



http://www.businessinsider.com/the-move-index-bonds-2010-3

Wells Fargo makes stupid loans

Voltron says: Taken from a Wells Fargo ad:

Wells Fargo is one of the few lenders that will refinance a vehicle for more than its current value. That means access to cash over and above the value of the new cash out refinance auto loan. Use the available cash however you choose. For example: holiday expenses, summer landscaping . . .

see for yourself:

http://auto-loans.wellsfargo.com/debt-consolidation/vehicle-cash-out-refinance.html

hat tip to Karl Denninger

60 Minutes on Michael Lewis' new book The Big Short (video)

Hat Tip to Rich:

http://seekingalpha.com/article/193958-michael-lewis-on-wall-street-s-delusion

Voltron says: I'm boycotting the book until I can get it on my amazon kindle.

Wells Fargo sold on strength

WSJ: Wells Fargo & Co. topped the list for Selling on Strength, which tracks stocks that rose in price but had the largest outflow of money.

Voltron says: I bought some 2012 $15 puts. The VIX is low, so options are pretty cheap right now.

http://online.wsj.com/article/SB10001424052748703580904575132081884080788.html?ru=yahoo&mod=yahoo_hs

Former Soviet Union to blame for housing bubble: Greenspan

I can no longer sit back and allow Communist infiltration, Communist indoctrination, Communist subversion and the international Communist conspiracy to sap and impurify all of our precious bodily fluids. (Col Ripper from the Stanley Kubrick film Dr. Strangelove)

Voltron says: Sir Alan Greenspan has become completely disconnected from reality.

The fall of the Soviet Union led to hundreds of millions of workers entering the global marketplace, he said in a paper to be presented to a Brookings Institution conference. This new market-based workforce, Mr. Greenspan said, helped push up growth in the developing world. This in turn fuelled a global savings glut that drove down long-term interest rates, leading to an "unsustainable boom" in house prices, he said.

Voltron says: Wow . . . just . . . . wow

A better approach, he said, would be higher capital buffers. "Capital and liquidity, in my experience, address almost all of the financial regulatory structure shortcomings exposed by the onset of crisis," Mr. Greenspan said. "Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning."

Voltron says: Translation: we don't need regulation, we just need cash so we can paper over the fraud.


http://www.financialpost.com/story.html?id=2698103

Stephen Roach, Chairman of Morgan Stanley Asia says "We should take out the baseball bat on Paul Krugman"

More Gems: "America does not have a China problem. America has a savings problem. America has the biggest savings shortfall of any leading country in modern history, When you don't have savings you have to run current account deficits to import surplus savings from abroad and run massive trade deficits to attract the capital... Isn't it the height of hypocrisy that America can articulate a particular position in its currency but the Chinese are not allowed to do that."

Wells Fargo option activity

Excerpt:

It looks like one investor purchased 28,000 put options at the deeply out-of-the-money April $23 strike for a premium of $0.08 per contract . . . the put action could also be the work of extremely bearish players looking to amass profits should Wells Fargo's shares decline substantially ahead of April expiration.

http://www.forbes.com/2010/03/17/owens-corning-markets-wells-fargo.html

Daily Show: In Dodd We Trust

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
In Dodd We Trust
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Reform

Wells Fargo is top mortgage lender

Voltron says: Congratulations to Wells Fargo for being the top mortgage lender for the second year in a row! The title holder for the previous four years was Countrywide which exploded in a spectacular blaze of glory that lit up the night sky. Good luck Wells Fargo!

http://www.thetruthaboutmortgage.com/top-mortgage-lender-in-2009-is-wells-fargo/

DoD provides house put option for military PCS movers

Hat tip to Rich:

if you have PCSed and own a home that's rent doesn't provide positive cash flow military service members are [may be] eligible for the HAP program. You can walk away, and get 90% of the original value back with no credit hit.

http://hap.usace.army.mil/

Voltron says: It also saves your security clearance.

The banks are insolvent

Excerpts:

Home prices have fallen so far in the hardest hit areas, the areas where the bulk of the troubled loans are, that banks would have to write down principal 30 to 50 percent to put borrowers back in the green. Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they'd all be insolvent.

...housing consultant Howard Glaser: "We're spending tens of billions of dollars on a tax credit to get people to purchase homes, we're spending federal money to keep them in their homes through the modification program, and now we're going to pay them to move out of their homes. This is not a sustainable system for the housing market. It's a shell game. Bernie Madoff could have created this system,"

http://www.cnbc.com/id/35768105/

Flipping and Flopping

The FBI recently added short sale flipping, dubbed "flopping" by some mortgage fraud experts, to its list of recognized real estate fraud.

Voltron says: Flopping relies on the use of "Broker Price Opinions" or BPOs to lowball the short sale price. They can then do a "classic" flip using a typically inflated appraisal.  None of this would be possible if the banks would use rent to establish the value of the house. 

http://www.heraldtribune.com/article/20091115/ARTICLE/911151083

Frank: "second liens have no real economic value"

Excerpt from a letter from Rep Barney Frank (Chairman of the House Financial Services Committee) to the CEOs of Bank of America, JP Morgan Chase, Citigroup and Wells Fargo (emphasis mine):

...holders of second-lien mortgages are now a principal obstacle to many [loan] modifications. The problem of second-lien mortgages standing in the way of successful principal reduction modifications has reached a critical stage and requires immediate attention from your institutions.

Large numbers of these second liens have no real economic value - the first liens are well underwater, and the prospect for any real return on the seconds is negligible. 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, which would allow willing first lien holders to reduce principal and keep borrowers in their homes.

From a proposal from the Mortgage Investors Coalition (never hear of 'em) to Congress:

A systemic program to modify second lien mortgages called 2MP does exist but Treasury has stalled on implementation because the banks that hold them can’t afford it, six buyside investors said. The sources all said implementation of the program, called 2MP, would result in “catastrophic” losses for the nation’s four largest banks

[earlier in the letter...] The four banks in question collectively own more than USD 400bn of the USD 1trn in second lien mortgages outstanding. BofA holds USD 149bn, Citi holds USD 54bn, JP Morgan holds USD 101bn and Wells Fargo holds USD 115bn, according to fourth quarter 2009 10Q filings with the Securities & Exchange Commission.

Voltron says: Wells Fargo's entire market cap is only 153bn and it's book value is about 104bn, so if the 115bn in second liens has "no real economic value", they are pretty much broke.

The current Treasury Dept HAFA program is offering second lien holders only 3% not to exceed $3,000 with 2/3 of that to be paid by the first lien holder and 1/3 paid by the taxpayer. That's peanuts.

http://www.zerohedge.com/article/barney-frank-asks-top-four-banks-write-down-second-lien-mortgages-claims-have-no-economic-va

http://www.ft.com/cms/s/2/0fa0618c-2b0b-11df-93d8-00144feabdc0,dwp_uuid=e8477cc4-c820-11db-b0dc-000b5df10621.html

http://www.calculatedriskblog.com/2010/03/more-short-sales-and-2nd-liens.html

MUST READ: Betting on the Blind Side

Voltron says: Vanity Fair has published a lengthy excerpt from The Big Short, a new book by Michael Lewis (author of "The Blind Side", "Liar's Poker" and "Moneyball") about “a medical resident with only one eye, an awkward social manner, and $145,000 in student loans" named Michael Burry (turns out he's an x-in-law of a friend of mine, KxB) who started his own hedge fund, Scion Capital, in 2001 and by 2005 was the first person to attempt to profit from the demise of the housing bubble through very high powered side bets (Credit Default Swaps on Collateralized Debt Obligations) a full year before anyone else. It's a fascinating human story.

http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004

"unusual cash management arrangements" at GMAC

Excerpt:

GMAC commingled cash flows from multiple bonds in a single custodial account, Moody's said in a statement. This allowed GMAC to use cash from loans in one bond for principal and interest payments on another, it said.

...This could give rise to competing claims in a bankruptcy proceeding, the rater said.

Voltron says: yes, we bailed them out.

http://www.reuters.com/article/idUSN0416567720100304

Like Button

Voltron says: I added a "Like" button to the blog format. I will use the (binary) feedback to tailor future posts and to create a permanent "Voltron's Greatest Hits" section in the sidebar. If you have the time please "Like" your favorite posts from the past as well.

Economists in fantasyland

Voltron says: In my forecast (sidebar) I have been saying for a while that "The economy is fake and is dominated by fraud and criminal activity." What do I mean? I'm sure you remember this exchange from "Back to School"

Thornton Melon: Oh, you left out a bunch of stuff.

Dr. Phillip Barbay: Oh really? Like what for instance?

Thornton Melon: First of all you're going to have to grease the local politicians for the sudden zoning problems that always come up. Then there's the kickbacks to the carpenters, and if you plan on using any cement in this building I'm sure the teamsters would like to have a little chat with ya, and that'll cost ya. Oh and don't forget a little something for the building inspectors. Then there's long term costs such as waste disposal. I don't know if you're familiar with who runs that business but I assure you it's not the boyscouts.

Dr. Phillip Barbay: That will be quite enough, Mr. Melon! Maybe bribes, kickbacks and Mafia payoffs are how YOU do business! But they are NOT part of the legitimate business world! And they are certainly not part of anything I am doing in this class. Do I make myself clear, Mr. Melon!

...now, not withstanding Mr. Mellon's input. The next question for us is where to build our factory?

Thornton Melon: how 'bout fantasyland?

Here's a chart that shows the percent of GDP for different countries that is part of the "underground economy"

Comparison with regular economy

Country	Size of shadow economy in percent of GDP, average over 1990-93[24]
Developing economies
Africa
Nigeria and Egypt	68-76%
Tunisia and Morocco	39-45%
Central and South America
Guatemala, Mexico, Peru and Panama	40-60%
Chile, Costa Rica, Venezuela, Brazil, Paraguay and Colombia	25-35%
Asia
Thailand	70%
Philippines, Sri Lanka and Malaysia	38-50%
Hong Kong and Singapore	13%
Transition economies
Central Europe
Hungary, Bulgaria and Poland	20-28%
Romania, Slovakia and Czech Republic	7-16%
Former Soviet Union
Georgia, Azerbaijan, Ukraine and Belarus	28-43%
Russia, Lithuania, Latvia and Estonia	20-27%
Developed economies
Greece, Italy, Spain, Portugal and Belgium	24-30%
Sweden, Norway, Denmark, Ireland, France, The Netherlands, Germany and Great Britain	13-23%
Japan, United States, Austria and Switzerland	8-10%

Voltron says: What meaning does economic analysis have when, as mainstream economists do, you exclude the "dark matter"? There is a lot of hidden money sloshing around. As I previously reported, During the height of the crisis, banks desperate for cash took in an estimated $352 Billion in illicit drug money. So what "saved" the economy? The stimulus package or the drug money? What happens when it runs out? How will you see it coming?

http://jia.sipa.columbia.edu/pdf/farrell_capstone_final.pdf

Stiglitz, Nobel Prize-Winning Economist, Says Federal Reserve System 'Corrupt'

http://www.huffingtonpost.com/2010/03/03/stiglitz-nobel-prize-winn_n_484943.html

Wells Fargo hush money

Voltron says: Compensation for the top Wells Fargo executives is up 200-300% and is paid in all cash (no company stock).

http://www.invesguard.com/?p=113

China Didn't Buy IMF Gold

Voltron says: China did not want to spend it US dollar reserves for fear that the dollar would go down in value as a result. What is the point of having money if you can never spend it?

http://www.businessinsider.com/china-in-the-end-didnt-buy-gold-from-the-imf-because-it-has-better-ways-to-use-its-money-2010-3

Collapse Of The U.S. Dollar Paper Standard?

You Know Bailout Speculators Are Right Because The German Government Is Now Trying To Silence Them

Voltron says: This is absurd. Germany expects speculators to sit on their hands. I expect governments to trade capriciously and institute ad hoc new rules in order to shake out speculators. If you use too much leverage, you'll get shaken out.

Gov't punishes Greek bond buyers:
http://www.businessinsider.com/germany-hunting-down-debt-speculators-positioned-to-profit-from-any-bailout-2010-3

Gov't punishes Greek bond sellers:
http://www.businessinsider.com/you-know-the-euro-is-toast-because-now-even-the-us-is-cracking-down-on-its-speculators-2010-3

Exchanging your ticket on the Titanic for a ride on the Hindenburg

http://www.forbes.com/2010/03/02/dollar-euro-debt-personal-finance-pento-commodities_print.html

The Measuring Stick Illusion

http://www.safehaven.com/article-15952.htm