Faithful readers, I know the blog has become more polemic in tone over the last few months. We are in the stage of the cycle, as Warren Buffet put it, the tide has gone out and we are seeing who isn’t wearing a swimming suit.
Worse, as the powers that be are desperately throwing funds at banks and investors in a doomed effort to return to the status quo ante, the money is certain to enrich industry incumbents (even if they think they are being treated badly by suffering a lifestyle hit) and much less likely to restore the financial system to a semblance of health. And the net result is that a lot of taxpayer money is going to folks who helped create the problem, or were less than innocent bystanders.
Unfortunately, there is a proud tradition in finance of bad actors finding profitable employment doing more or less what they did that created a train wreck. Drexel sold S&Ls a lot of the junk that brought them to ruin (and “sold” doesn’t even begin to describe it. A regulator told me that Lincoln Savings would get a daily fax from Drexel of what it had bought, and then when the regulators came a calling, Lincoln realized it was supposed to have filed demonstrating that it had done due diligence on the investments. It hired Arthur Andersen to create the phony paper trail). And the principals of LTCM, having nearly brought the financial system to its knees, started another hedge fund.
Now admittedly, the authorities did bring down Michael Milken, who in a plea bargain agreed to be barred from the securities industry permanently. But many of his lieutenants had profitable post-Drexel careers. And while the Enron collapse did lead to a much larger number of executives being investigated and prosecuted, it was not a financial intermediary in the traditional sense and almost serves as the exception that proves the rule. As we have noted repeatedly, we’ve seen no investigation of Lehman, where the public financial appear to have greatly overstated the true condition of the firm.
That is a long-winded way of saying there is much to be genuinely unhappy about. And as much as I do not want to seem fixated on how the public is being had, this is too important to let go by. If we allow ourselves to become inured to this sort of thing, it will further lower the barriers to this sort of behavior.
And while I recognize, unlike the Milken/Enron examples, the Countrywide conduct (so far) falls short of being criminal, it is certainly of questionable morality. We’ve had enough examples of the costs of buccaneer capitalism that it’s time we start demanding something better.
From the New York Times:
Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis….
Stanford L. Kurland, Countrywide’s former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect….
As hundreds of billions of dollars flow from Washington to jump-start the nation’s staggering banks, automakers and other industries, a new economy is emerging of businesses that hope to make money from the various government programs that make up the largest economic rescue in history…
And there is PennyMac, led by Mr. Kurland, 56, once the soft-spoken No. 2 to Angelo R. Mozilo, the perpetually tanned former chief executive of Countrywide …
Mr. Kurland has raised hundreds of millions of dollars from big players like BlackRock, the investment manager, to finance his start-up. Having sold off close to $200 million in stock before leaving Countrywide, he has also put up some of his own cash….
“It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it,” said Margot Saunders, a lawyer with the National Consumer Law Center, which for years has sought to place limits on what it calls abusive lending practices by Countrywide and other companies….
Mr. Kurland acknowledges pushing Countrywide into the type of higher-risk loans that have since, in large numbers, gone into default. But he said that he always insisted that the loans go only to borrowers who could afford to repay them. He also said that Countrywide’s riskiest lending took place after he left the company, in late 2006, after what he said was an internal conflict with Mr. Mozilo and other executives, whom he blames for loosening loan standards…
But lawsuits against Countrywide raise questions about Mr. Kurland’s portrayal of his role. They accuse him of being at the center of a culture shift at Countrywide that started in 2003, as the company popularized a type of loan that often came with low “teaser” interest rates and that, for some, became unaffordable when the low rate expired.
The lawsuits, including one filed by New York State’s comptroller, say Mr. Kurland was well aware of the risks, and even misled Countrywide’s investors about the precariousness of the company’s portfolio, which grew to $463 billion in loans, from $62 billion, three times faster than the market nationwide, during the final six years of his tenure.
“Kurland is seeking to capitalize on a situation that was a product of his own creation,” said Blair A. Nicholas, a lawyer representing retired Arkansas teachers who are also suing Mr. Kurland and other former Countrywide executives. “It is tragic and ironic. But then again, greed is a growth industry.”
It’s funny how standards vary. If a company with a great technology was seeking funding, and there was outstanding litigation against the principals alleging misconduct, most VCs would pass on the deal. But if you are in the money game, as opposed to the building real businesses game, character might be viewed as an impediment to success.
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For some people, for some reason, it may be easy to be comfortably numb and ignore this feeling of free fall, where our society has disconnected from “Life, liberty, and the pursuit of happiness “ however, I think we all have a real-life duty to be united in our anger and to be American Patriots — versus allowing this financial terrorism to divide and conquer us — wiping out our future!
I appreciate reading what Yves is offering here and her focus in staying with this disgusting topic — day-in-day-out, because it is important for all of us to take names and stay on top of the details — because the guilty should not go unpunished!
Meanwhile, I’m trying to stay calm with tunes and not explode: Gillian Welch – The Way It Will Be
What the govt needs is to hear from 300 million copies of this guy
http://www.youtube.com/watch?v=4HjbA_nsjcg
in reply to doc holiday, i see no purpose to stay calm. clam will get you run over.
good work Yves as always. You explain things very well for non-finance people.
The word is not “polemic.” The word is “shrill.” Consider it a badge of honor, because over and over and over, the shrill ones have been proved right.
My sister worked at Countrywide through its boom years and into its collapse. She saw it all and says that the majority of Countrywide management should be in a federal penitentiary, preferrably a Super-Max prison. She was appalled and disgusted with what she witnessed. She says its not much better under BofA managagement either.
“Greed is Good!”
Same as it ever was…
Yves wrote:
the Countrywide conduct (so far) falls short of being criminal
Since when is mortgage fraud not a crime? Do you disagree that Countrywide engaged in billions of dollars of mortgage fraud?
It’s an old story. What is capital if not the accumulated crime and sacrifice of centuries, plus interest.
“It’s funny how standards vary. If a company with a great technology was seeking funding, and there was outstanding litigation against the principals alleging misconduct, most VCs would pass on the deal. But if you are in the money game, as opposed to the building real businesses game, character might be viewed as an impediment to success”
Well said!!
How do you stop this is another matter altogether..
Wait til doc holiday reads the fine print in the proposed unionizing bill……..maybe that will push him over the edge.
Yves, are we in a bar fight, or in a fight for our lives?
Since, what was illegal was legalized, then we are in a bar fight, right, a disagreement of opinion?
As you know, if we fight “as for our lives” in a bar fight, we are likely to end up in jail ourselves.
Click “brushes9” above to read a review of Janet Tavakoli.
I like the last sentence: “The financial crisis is no Black Swan, but rather a natural consequence of financiers and regulators turning their backs on sound principles of the type that have served Buffett…” -Reviewer
I always cringe when I read the name Blackskunk, but it triggered some ideas.
The following example of restructuring a pool of bad investment vehicles popped up, along with an example of why the idea of good-bank, bad-bank and nationalization are sound and logical concepts that should be in the works today. Sorry for the following wall of text, but this pursuit of justice concept demands thinking of structures that are logical, versus the on-the-fly retarded garbage made up by Treasury and idiots like Bernanke:
FYI: FLORIDA HOUSE CONSULTANTS ISSUE REPORT, RECOMMENDATIONS ON STATE BOARD OF ADMINISTRATION’S LOCAL INVESTMENT POOL March 24, 2008
Why a New Pool We strongly feel the business, legal and accounting basis for splitting the Pool into Funds A and B, the two “reserve” transfers and the suspension of redemptions is very problematic and will hamper the ability to attract new funds to the Pool. We have referred these items to the SBA’s forensic accountants for further examination and to address their impact on the Pool’s June 30, 2008 independent audit. Accordingly, we recommend that a new pool in the form of a new trust be created by the Legislature and the current Pool, both Funds A and B, be allowed to self-liquidate.
This recommendation is explicitly conditioned upon the implementation of the risk and control safeguard we find missing in the Pool’s current operation. Restoring confidence in the current Pool will be difficult because of past events, related adverse press, missing control and risk safeguards, the threat of management establishing additional “reserves” from earned interest to cover expected losses, and litigation risk, withits attendant cost and possible interference with the operation of the current Pool. The major business, litigation and accounting questions these issues will raise in the Pool’s year-end audit are:
… and then, this doc goes on, with a laundry list of ideas, worth looking at perhaps.
> Update (February 4, 2009): Florida Investment Pool Fails to Attract Investors After Freeze
Florida's LGIP has eliminated two-thirds of its bad debt, replaced managers, increased oversight and secured a AAAm rating from S&P, the highest for a money fund. Even so, half the 132 respondents to a questionnaire from Federated Investors Inc. last March, when it was hired as an investment adviser, said they lacked confidence in the fund.
"Once you violate public trust, it's very hard to recover," said Chris Blackwood, administrator of the Surplus Asset Fund Trust in Orlando, another pool for local governments.
The state fund still has about 800 accounts, with clients in all of Florida's 67 counties. It charged $3.6 million in fees last fiscal year through deductions from interest payments.
‘People Watching'
MaryEllen Elia, head of Hillsborough County Public Schools in Tampa, kept $573 million on deposit throughout the pool's difficulties.
"Tell me where you should put your money to be safe," she said. "There's a lot of people watching over the fund now."
The LGIP was reorganized under a plan from New York-based BlackRock Inc., the biggest publicly traded U.S. money manager, in which the best-quality securities were set aside as Fund A. Withdrawals were limited throughout 2008.
Some $2 billion of illiquid and defaulted debt was put into "Fund B" and closed to withdrawals. As Fund B securities paid interest and matured, proceeds were deposited into Fund A. About $1.4 billion was transferred in 2008 and, on Dec. 23, clients got full access to Fund A for the first time since the freeze.
"We did it in a year, which is pretty good given the market conditions," said Dennis MacKee, a spokesman for the State Board of Administration, which oversees the fund. "It won't be a perfect world until Fund B is eliminated."
>> Sorry if this seems off topic, but bad banks, bad businesses and bad deals have to be managed through the act of separation, just like the accounting crooks and financial terrorists at Enron were separated from the play money in Bermuda — who many here, will recall, didn't get cash infusion from taxpayers or TARP donations. We all obviously should demand that Obama grow some real-live working testicles and stop focusing on playing at trying to be a synthetic wannabe sexy Vogue cover model
I want a leader in The White House that demands accountability and not some fake-ass PR-hunting playboy that is clueless about the current financial armageddon!!!!! LET ME MAKE THAT PERFECTLY FRIGGN CLEAR!!!
** Re: fine print in the proposed unionizing bill ..> Dont push me punk!
I’m trying to space out…. Ok, , ok, I’ll do it.
And as much as I do not want to seem fixated on how the public is being had, this is too important to let go by. If we allow ourselves to become inured to this sort of thing, it will further lower the barriers to this sort of behavior.
Precisely. If fundamental reform isn’t realized during this fiasco, we won’t make it another 20 years.
Brazen bloodsuckers, widow robbers, and pension busters Mozilo Countrywide, Liddy and Greenberg AIG, Ken Lewis BofA, John Thain Merrill, Hank Paulson Goldman Sachs, and the hundreds of the Wall Street mobsters need to be arrested and charged with the greatest financial crimes in U.S. history. Time for a RICO prosecution and also include Hank Paulson Treasury Secretary, Ben Bernanke Federal Reserve, SEC chairman Cox, as co-conspirators aiding and abetting the Wall Street criminal enterprise.
My God, it is outrageous! Prosecutors, take off the kid gloves! Time for the iron fist of justice!
Ahhhh
> “We’ve got to isolate bad assets,” Brown told reporters. “A bad bank anywhere can affect a good bank anywhere.”
The new regulatory framework may stop short of re- instating the Glass-Steagall Act of 1933, which separated commercial and investment banking and was repealed in 1999 by the Gramm-Leach-Bliley Act. Still, banks may separate their business lines in order to avoid strong regulatory scrutiny, analysts said.
FDIC Chairman Sheila Bair said regulators must construct a sound capital framework that will prevent a repeat of the credit crisis. She was critical of the Basel II model, which allows banks to deploy their capital on the basis of risk models.
Wrong Assumptions
The approach “assumes banks’ internal, quantitative risk estimates are reliable,” Bair told a banking conference in Washington on March 2. “To say the assumptions turned out to be wrong would be an understatement.”
Bernanke said he understands why taxpayers are angry. “It isn’t fair that money is going to big corporations,” he said. “We need to think very hard as a country how we make sure this doesn’t happen again.”
>> These are all sound bites that can go in the next Disney movie with Britney Spears and animated 3-D CGI, which will allow the script to be fabricated into a pea and shell game where Harry Houdini will walk on water and then vanish:
For the benefit of Mr. Kite
There will be a show tonight on trampoline
The Hendersons will all be there
Late of Pablo Fanques Fair-what a scene
Over men and horses hoops and garters
Lastly through a hogshead of real fire!
In this way Mr. K. will challenge the world!
The celebrated Mr. K.
It's ALL ** FUC-ING ** PR-HYPE & Smoke & MIRRORS ** BULLSHIT ** by career >>политика << that are lobbying for lobby cash — and these coke-snorting whores, hookers and crooks are all just blowing smoke up our collective skirts!
I'm not gonna take it anymore — BUT you all are!
RICO prosecution is shovel ready.
I think you mean политики unless there’s only one ;)
I have recently discovered this blog and really appreciate the insightful observations and trenchant analysis.
Yves, you are not too polemical at all. It’s good to see true anger coming from someone with your knowledge and experience.
I understand enough about what’s going on to feel the same anger, but I don’t have your resume or experience and I’m grateful that you are taking the position on all this that you are, and making it public.
It helps me, emotionally, when I see your commentary. It helps me realize that there are lots of people who understand this tawdry business and all the underhanded and unethical self-enrichment going on.
A system this corrupt, where financial intermediaries effectively debase the currency to enrich themselves and impoverish the people is unsustainable and will produce a society of anarchy and violence, in the extreme. It is not a foundation for true democracy and will lead, unchecked, to a Mad Max future of gated communities, rampant private security guards and anarchy and crime for everyone else. We would eventually become a failed state. (I don’t believe it will come to that, but that is the logical extreme of the pattern at hand).
Keep it up, please. You are an articulate and very effective voice for reason and ethics, a true patriot.
The system needs a massive re-design and I fear that the power structure is so in-bed with the financial parasites that they are closed off to what’s truly good for the nation as a republic and democracy.
The NY Times, as always does a piss poor job and leaves much unsaid. PennyMac appeared in tandem with BlackRock’s first MaidenLane deal with the Fed in March of 2008. BlackRock for all intents and purposes is now an arm of the Treasury and on all sides of the deal: ie it purchases toxic waste with tax dollars via MaidenLane, then “values and manages” the waste by selling it on the cheap to a “private” investment entity it funded that does the munificient work of “re-negotiating” the mortgages with attendant propaganda (happy homeowner stories) all the while making a killing at taxpayer expense.
Grassley, old dog that he is detailed what’s going on:
” Maiden Lane I, accepted residential and commercial owns, as well as derivatives, including credit default swaps from Bear Stearns in connection with its purchase of JP Morgan. In similar deals related to AIG rescue Maiden Lane II hold residential mortgage backed securities, while Maiden Lane III holds a collateral date obligation purchased from the credit default swap counterparties.
It would seem that the fed’s investment in these SPVs is based on the valuation of assets, which was conducted in all three cases by Black Rock Financial, who also I understand, now manages these assets.”
See:
http://www.washingtonpost.com/wp-srv/politics/documents/transcript_geithner_012109.html
See also:
http://www.ny.frb.org/newsevents/news/markets/2008/rp080324b.html
The only conclusion is the “privatization” of the Treasury is here.
@doc holiday re Benefit of Mr Kite:
Eddie Izzard does a great rendition of this song in the wonderful movie Across the Universe, which I enjoyed very much
How fortunate boomers like myself are, to have lived in such interesting times
When I say boomers like myself “have lived in such interesting times”, I don’t mean to suggest that it was only the the days of our youth that were interesting –
I mean the ’60s were interesting times, the ensuing decades were interesting in their own ways, and these latter days are so very interesting that I wake up early wondering what’s going to happen today
@dd
Not that I disagree with your thesis, but in this case PennyMac is purchasing loans directly from the FDIC, from their seizure of First National Bank of Az. The Bear junk in Maiden Lane is likely so esoteric to prevent even identifying those loans that could “cure” the securities through modification.
Though I would prefer it if a fox-in-the-henhouse type like Kurland were not at the helm, this type vehicle seems like the best way to move forward. Though I wonder if the stories’ troubled borrower is actually “helped” by having her rate cut to 3% while keeping her principal at $590k. She’s likely underwater forever, but does she merit a principal reduction due to her recklessness? Doesn’t that drive down all other values in the area? Wouldn’t that happen anyway were she foreclosed? Might she stop paying anyway when she realizes this? Or has to move?
It all hurts my head….
Gordon Gekko is alive and well. http://www.americanrhetoric.com/MovieSpeeches/moviespeechwallstreet.html
God, this sounds like Tom Basmajian all over again… Thanks, Yves… I’ve got to go take a shower now after reading this. I hope this “Kurland funk” comes off without having to resort to Brillo pads… I’m not sure my retinas can handle much more scrubbing…
It needs to be understood that the majority of borrowers knew what they were getting into. The objective was to get into the house. CW and others crafted programs to meet demand. Every lender/investor had printed guidelines. If HSBC didn’t permit a certain borrower characteristic, maybe Aurora/Lehman would. Brokers used the lender whose guidelines got the deal closed. And everything was disclosed to the borrower at origination and again at closing. There were some deals CW wouldn’t do; I know because I tried. Fingers can be pointed in many directions. The reason CW et al are being pointed at is because they made so much $$$ and so far are still walking around free, unbeaten, unshot, smiling.
We need better looking политики!!
I ♥ Prime minister Julia Timoshenko!!
A year ago I caught “The Smartest Guys in the Room” on PBS, a well-documented chronicle of Enron. It resonated enough that I bought a copy.
I wonder how much different the current cast of characters really are.
Lots of people are profiting from the mortgage mess. What do you suppose the readership of this blog would be if everything were hunky-dory?
JohnnyD: “It needs to be understood that the majority of borrowers knew what they were getting into.”
If that’s true, then it’s at least as true that the banks knew what they were getting into. Banks have been writing mortgages for a long, long time, and should be more knowledgeable about that and about the vicissitudes of the real estate market than the average home buyer.
Does this make irresponsible home buyers innocent? Of course not. But of the three groups involved in this mess, the home buyers, the banks and the politicians/regulators, the home buyers are the least culpable.
As for the latter two groups, the banks (bank executives) deserve plenty of condemnation. Realistically though, given the long and sordid history of banking crises, the politicians/regulators are the only ones with the power to keep history from repeating itself too often.
This is what people do. This is what people have always done. You only need a few unscrupulous to take advantage of every situation and thus “ruin it for everyone.” This is why free markets always break down. There are too many unscrupulous to police, and in the end, the skewed distribution of the gains is not palatable to the “vast majority of losers.”
@MS
“…does she merit a principal reduction due to her recklessness?”
She merits a principal reduction due to the recklessness of the financial institutions that failed in their due diligence responsibilities.
Creditors are responsible for due diligence and the prime issue is repayment ability. Creditors have infinite ability to verify all debtor information and to determine re-payment ability. The system is so skewed in the creditor’s favor that it is debtors who are subject to criminal penalties for false information.
Due diligence also is required in packaging loans into trust vehicles and the sales of the issued certificate securities. Ratings agencies do not mitigate the underlying due diligence required by the trust creator that receives investor funds for purchased loans. Note that trust creators were typically the major lending institutions or related entities. Institutions that structured and sold these trust products also have a due diligence responsibility for verifying issuer representations. Notice too that these institutions created private trading markets side-stepping regulated markets on the theory of “sophisticated investors” that subjected everyday investors to huge undisclosed risks in bond and money market funds.
Notice the failure of due diligence by major financial institutions at every point in the chain. If the major financial institutions conducted due diligence there would be far fewer “reckless” borrowers, and failed CDO (or ABS, CPS) tranches; lower investor losses and no threat of financial meltdown.
As for PennyMac and what it buys: it is yet another opaque institution in the increasingly opaque financial markets; along with an opaque Fed that is tight lipped about its Maiden Lanes. None of this bodes well for the regulated markets. Everyday investors are right to shun markets until a modicum transparency is re-established.
A great blog Yves, even seen from UK perspective.
I wonder about the bit “restore the financial system to semblance of health”. A bit depressing to realise the most the financial system ever achieved was a semblance of health. It never actually was healthy?
America is insolvent: its businesses, its treasury, its banking system, its people. Right now, the kleptocrats are jocky-ing for their positions in the post-collapse world of next year.
JohnnyD said March 4, 2009 10:59 AM …
It needs to be understood that the majority of borrowers knew what they were getting into
And you get this empirical proof from where Johnny? Because I don’t know how many stories I’ve heard about people not understanding that they were signing off on a 2/28 ARM instead of a 30 yr fixed. And once you’re at the closing table it may very well be too late to bail on the deal. The number of people that I’ve heard from who, by closing date, had nowhere else to live if they didn’t close on the property… ONE thing that could help this, and something that to this day baffles me, is if borrowers were able to review the loan docs a day or three BEFORE closing date. I have yet to see any other industry, other than maybe auto financing, that does business in this manner.
What “needs to be understood” is that the majority of homeowners wouldn’t have been able to purchase homes if lender underwriting had done due diligence to begin with. Did some homeowners play with numbers? Absolutely. Did some brokers doctor applications and make them fit into underwriting guidelines? They sure did. And they made a bundle in commissions doing it. I doubt that legitimate underwriting could have caught all of the bogus apps.
So sure, there will always be people trying to game the system from all angles. But the vast majority of the current implosion that the United States mortgage/banking/housing industry is looking at was NOT the fault of John and Jane Q. Public wanting to own their own home. They’ve always existed. They’ve always wanted their own home. Problem here is that someone told them that they could have it and got it for them without any regard for whether or not they would be able to KEEP it. Their only concern was generating fees and commissions off of the John/Jane Public loans. In other words, “Greed is good.” … Mmm…Maybe not so much now…
Yves said:
“… character might be viewed as an impediment to success.”
C.S. Lewis commented on this some years ago:
“We laugh at honor, and are shocked to find traitors in our midst.”
Under the heading of “laughing at honor,” the oath of a much-maligned and ridiculed organization is (as best I can remember) as follows:
“On my honor, I will do my best, to do my duty to God and my country, to obey the Scout law, to help other people at all times, to keep myself physically strong, mentally awake, and morally straight.”
I was 11 years old when I first took the Boy Scout Oath. I’m 52 and only now realize how very difficult it is to live up to such an oath. I’m ashamed to admit that I have failed to do so.
Note the first 3 words of the oath. ON MY HONOR. This means that I am accountable to myself. Without self accountability, or Honor, there is no shame. (Hence my self-assessment.)
I haven’t thought about this oath for a long time and I’m rather pleased that I can still feel shame because, alas, I live in a culture of shamelessness. In other words, a culture that laughs at honor.
The immediate problem is our broken economy. The deeper issue is cultural and will take much, much longer to address.
This is just sick. I guess if torture and a big “insurance” company selling trillions of dollars of worthless insurance are OK then crap like this can come along for the ride. The ride right down the crapper.
Wow! Thanks Anon at 11:39am.
Ukrainian Prime minister Julia Timoshenko is a
sympatichnaya lady
and she appears to be lowering tariffs on transportation.
What more can you want in a Prime Minister!