Monthly Archives: October 2013

“The evidence against Fan and Fred is voluminous, but the feds want to whitewash Washington’s role in the panic.”

 “The premise of the allegations..is that while it may appear that Fan and Fred were recklessly gambling on the housing market for years before the crisis, they were duped by Morgan and other banks into buying risky mortgage-backed securities that they did not understand. This is the little Orphan Fannie defense.”

 “Even the partisan Financial Crisis Inquiry Commission, created by the 2009 Pelosi Congress and chaired by a former state Democratic party chairman, didn’t try to sell that line.”

 “But we do already know that Fan and Fred were in constant communication with issuers and were informed in detail what exactly they were buying. In its 2005 annual report, Freddie Mac told investors, ‘We manage institutional credit risk on non-Freddie Mac mortgage related securities by only purchasing securities that meet our investment guidelines and performing ongoing analysis to evaluate the creditworthiness of the issuers and servicers of these securities and the bond insurers that guarantee them.’ The company added that as part of its rigorous reviews ‘we may perform additional analysis, including on-site visits, verification of loan documentation, review of underwriting or servicing processes and similar due diligence measures.’”

 “The evidence against Fan and Fred is so voluminous we could go on listing it for days, but the feds want everyone to forget all that as they try to whitewash Washington’s role in the panic. They present the duo as victims to extort $5 billion from Morgan, which never needed a bailout, to make up for the $188 billion taxpayer bailout that Fan and Fred required.”

Little Orphan Fannie Mae

Washington rewrites financial-crisis history to punish J.P. Morgan.

Updated Oct. 27, 2013 7:00 p.m. ET
The government assault on J.P. Morgan Chase is an injustice for many reasons, but the case has now reached tragicomic heights with the bank’s agreement on Friday to pay $5.1 billion for supposedly conning Fannie Mae and Freddie Mac. So the government-favored mortgage giants that did as much as anyone to foment the housing bubble and bust are now presented as victims.The premise of the allegations settled on Friday is that while it may appear that Fan and Fred were recklessly gambling on the housing market for years before the crisis, they were duped by Morgan and other banks into buying risky mortgage-backed securities that they did not understand. This is the Little Orphan Fannie defense.

Even the partisan Financial Crisis Inquiry Commission, created by the 2009 Pelosi Congress and chaired by a former state Democratic Party chairman, didn’t try to sell that line. As much as the Democratic majority on the panel wanted to absolve Washington of its role in creating the crisis, it had to give the two government-created mortgage monsters their due. The committee’s report dubbed Fannie and Freddie the “kings of leverage” and described all of the ways they avoided oversight while relaxing underwriting standards and raising their bets on subprime mortgages.

The two companies, which profited from an implicit government guarantee, owned or guaranteed $5 trillion of mortgage assets. Sometimes they bought home loans and bundled them into securities for sale to other investors, and sometimes they bought securities that others had assembled. They were the biggest buyers of subprime bundles during the housing boom, and their lust for those bundles fed the subprime machines at Countrywide (later bought by Bank of America) and Washington Mutual (bought at federal request by J.P. Morgan).

After it all fell apart, the only debate was whether the twin disasters at Fan and Fred were primarily the result of federal “affordable housing goals” or executives’ desire for bigger profits and bonuses. Being Democrats, the commission majority settled on greed as the principal problem at Fan and Fred, but nobody concluded that they were victims.

The commission learned from John Kerr, an examiner with the Federal Housing Finance Agency (FHFA), that Fannie was “the worst-run financial institution” he had seen in 30 years as a bank regulator. Austin Kelly, an official at FHFA’s predecessor agency, said regulators couldn’t trust Fannie’s numbers because their “processes were a bowl of spaghetti.”

And you should hear what people were saying inside these firms. Former Fannie Mae Chief Risk Officer Enrico Dallavecchia wrote in a 2007 email to the company’s COO that Fannie “was not even close to having proper controls processes for credit, market and operational risk.” He added that “people don’t care about the [risk] function or they don’t get it.”

Over at Freddie, former CEO Richard Syron acknowledged in an interview with the commission that one of the reasons he fired longtime chief risk officer David Andrukonis in 2005 was that Mr. Andrukonis opposed relaxing Freddie’s loan underwriting standards. According to civil charges filed by the Securities and Exchange Commission, around the end of 2004 Mr. Syron rejected the advice of Freddie credit risk officers who had urged him to stop Freddie from guaranteeing so-called NINA loans, which required no verification of borrower income or assets.

Adding to the absurdity of the FHFA suit, even Fannie and Freddie don’t claim they were innocent. The two companies have agreed to a deferred prosecution agreement in which they don’t deny misleading investors about the size of their investments in subprime mortgages and liar loans.

The SEC is still suing former senior executives at both companies for securities fraud. The cases may not come to trial until 2015, which is convenient for the government as it pursues the Fan-and-Fred-as-victims case with Morgan and other banks. You never know what a trial might tell us about how the companies decided to buy mortgage-backed securities sold by banks.

But we do already know that Fan and Fred were in constant communication with issuers and were informed in detail what exactly they were buying. In its 2005 annual report, Freddie told investors: “We manage institutional credit risk on non-Freddie Mac mortgage-related securities by only purchasing securities that meet our investment guidelines and performing ongoing analysis to evaluate the creditworthiness of the issuers and servicers of these securities and the bond insurers that guarantee them.”

The company added that as part of its rigorous reviews “we may perform additional analysis, including on-site visits, verification of loan documentation, review of underwriting or servicing processes and similar due diligence measures.”

The evidence against Fan and Fred is so voluminous we could go on listing it for days, but the feds want everyone to forget all that as they try to whitewash Washington’s role in the panic. They present the duo as victims to extort $5 billion from Morgan, which never needed a bailout, to make up for the $188 billion taxpayer bailout that Fan and Fred required. Little Orphan Fannie is one more political disguise for the bandits of the Beltway.

The Fed’s Low-Rate Policies Prompt Investors to Make Dicier Tech Bets; Just Like They Did in The Dot-Com and Housing Bubbles/Busts

Key Excerpts from WSJ article: “Silicon Valley: Feel the Froth”

 “But the current surge is accelerating, aided by some little-appreciated factors. Big companies are scarcely growing, and interest rates remain near zero, boosting zeal for investment opportunities in companies with high-growth potential.”

 “One reason why they have opened up (the capital markets for tech companies with no revenues and/or profits) is the minimal interest rates on low-risk investments orchestrated by the Federal Reserve, which are prodding investors to place dicier bets in search of bigger returns.”

TECHNOLOGY

Silicon Valley: Feel the Froth

Tech Valuations Stir Memories of 1999, but There Are Some Differences

By ROLFE WINKLER and MATT JARZEMSKY
Updated Oct. 27, 2013 7:56 p.m. ET

Twitter Inc. plans to go public at a value of $11 billion, without turning a profit. Venture capitalists just valued Pinterest Inc., which generates no revenue, at nearly $4 billion, and an even younger, revenue-deprived company, Snapchat Inc., is angling for a similar price tag.

It isn’t quite 1999, when dot-com companies with scant revenue made initial public offerings and tripled in price on their first days of trading. When that bubble popped in 2000, scores of companies went bust, and millions of small investors suffered losses.

Now, shares of Internet companies are soaring again, and signs of pre-2000 exuberance can be seen in Silicon Valley and the nearby area. Home prices in San Francisco and surrounding counties rose more than 15% in the past year. Office rents in San Francisco are 23% above their 2008 peak.

As Twitter prepares to go public with an $11 valuation, shares of Internet companies are soaring again and signs of pre-2000 exuberance can be seen in Silicon Valley and the nearby area. Matt Jarzemsky reports. Photo: Getty Images.

“It’s gotten pretty frothy,” says Daniel Cole, a senior portfolio manager at Manulife Asset Management who has invested in highflying IPOs, including for Rocket Fuel Inc. The Redwood City, Calif., online-advertising company sold shares to the public last month at $29 each. They traded at $61.72 a share Friday, giving Rocket Fuel a market valuation of $2 billion, without having recorded a profit.

Technology and finance veterans say this time is different—and it is. Companies going public are more mature, the leadership teams more seasoned, the business models more proven. Social networks such as Twitter and Pinterest are drafting off the success of Facebook Inc.,which sports a market value of $126.5 billion, or about 70 times next year’s expected earnings.

But the current surge is accelerating, aided by some little-appreciated factors. Big companies are scarcely growing, and interest rates remain near zero, boosting zeal for investment opportunities in companies with high-growth potential. Moreover, a federal law enacted last year will allow startups to raise money from smaller investors, opening a vast new pool of potential funding.

“People are reaching for growth,” says Kenneth Turek, who manages the $850 million Neuberger Berman Mid-Cap Growth Fund, and has passed on this year’s tech IPOs.

Even some executives benefiting from the rally question its underpinnings. Tesla Motors Inc. Chief Executive Elon Musk on Thursday said the electric-car maker’s stock price, which has quintupled this year, “is more than we have any right to deserve.” Tesla, which has reported one profitable quarter since going public in 2010, is valued at $20.6 billion, seven times its expected 2014 sales, according to S&P Capital IQ.

Netflix Inc. Chief Executive Reed Hastings this month told investors in a letter that the video service’s stock was benefiting from “euphoria” driven by “momentum” investors. Netflix shares have tripled this year.

By most measures, today’s tech-stock mania falls well short of the dot-com era. Many of the companies going public have substantial revenue. When Pets.com Inc. completed an IPO in early 2000, it had recorded lifetime sales of about $6 million. Less than 11 months later, the company had dissolved.

This year, shares of newly public technology companies are being valued at 5.6 times sales, estimates University of Florida professor Jay Ritter, who tracks IPOs. That is well short of the median of 26.5 times sales in 1999. Shares of this year’s tech IPOs have risen an average of 26% on their first day of trading. In 1999 the average was 87%.

The average tech company to go public this year is 13 years old, compared with four years old for the IPO class in 1999. Tech’s presence in the IPO universe has receded, too. One-fourth of this year’s IPOs have been for tech firms, Mr. Ritter’s data show. In 1999, more than three-fourths were in the tech sector.

“The big difference now, is companies like LinkedIn, Twitter, Facebook have demonstrated an ability to generate sales, and with the exception of Twitter, profits,” Mr. Ritter says. In the dot-com days, “there were all sorts of companies going public that were essentially startups.”

But investor enthusiasm is filtering down to younger, less-proven companies today, too. Pinterest, an electronic-scrapbook service that began testing ads this month, said Wednesday that it had raised $225 million from venture-capital firms. Pinterest didn’t need the money; the company said it hadn’t spent any of the $200 million it raised in February when it was valued at $2.5 billion.

The new investment values the three-year-old company at $3.8 billion, a 52% jump in eight months.

Snapchat, a two-year-old mobile-messaging service popular with teens, is considering raising up to $200 million at a valuation exceeding $3 billion, people briefed on the matter said Friday. That would be more than triple the valuation that venture firms placed on Snapchat in June, when it raised $60 million.

Backers like these revenue-deficient companies for their potential.

Pinterest has 43 million active users in the U.S., according to market-researcher comScore, many of whom are looking for items to buy. Snapchat is just now sketching the outline of its business model.

Dozens of other startups are also in the pipeline, hoping to capitalize on the investor fervor.

“As entrepreneurs, we’ve seen that when the sun is shining, make hay,” says Kevin Hartz, chief executive and co-founder of online-ticketing startup Eventbrite Inc. “For a number of years the capital markets were suppressed, and now they’re opening up.” Eventbrite raised $60 million privately in April, valuing the company at roughly $600 million to $700 million, people familiar with the company said at the time.

One reason why they have opened up is the minimal interest rates on low-risk investments orchestrated by the Federal Reserve, which are prodding investors to place dicier bets in search of bigger returns.

That suggests that the tech surge is vulnerable to higher rates, says Jonathan Tepper, chief executive of research firm Variant Perception. The tech-heavy Nasdaq Composite Index fell 5% in a week after Fed Chairman Ben Bernanke in June indicated that the central bank might reduce bond purchases, which would likely push rates higher. When the Fed started raising interest rates in late 1999, the Nasdaq bubble popped the following March.

Another factor: Last year’s Jumpstart Our Business Startups Act soon will make it easier for less-wealthy individual investors to back startups. Already, the law has made it easier for financiers to pool money from individuals.

Some people worry that the looser rules may end up hurting small investors. Lynn Turner, a former chief accountant for the Securities and Exchange Commission, says the most-successful venture capitalists back winners only about 20% of the time.

As less-sophisticated investors jump into backing embryonic companies, “the odds aren’t in those people’s favor,” he says. A lot of those companies will fail, “then all of a sudden all you have is a piece of paper to stick on the wall.”

—Telis Demos contributed to this article.

Write to Rolfe Winkler at rolfe.winkler@wsj.com and Matt Jarzemsky at matthew.jarzemsky@wsj.com

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Does JP Morgan Have a Special Exemption from the SEC in Complying with Securities Disclosure Laws Too?

“Take a look at the excerpt I have provided below from a recent NY Times article. How is it possible that JP Morgan provided profitability estimates to shareholders when they acquired Bear Stearns and Washington Mutual back in 2008, and yet have provided no disclosures to shareholders regarding the actual profitability of these acquisitions since? Shareholders can’t judge the success of these acquisitions and JP Morgan’s acquisition prowess, without this information. Also, without this information, how can shareholders really understand whether JP Morgan’s overall earnings growth in the past several years has come from core business activities or non-recurring purchase accounting from deals made during the global financial crisis? We already know that firms like JP Morgan and Goldman Sachs have become ‘Too Big to Fail’,  are they also ‘Too Big to Disclose’? Mike Perry, former Chairman and CEO, IndyMac Bank

 “Little suggests that JP Morgan bought Bear Stearns and Washington Mutual against its will. It was avidly watching both in 2008, hoping to snatch them up at low prices…And when JP Morgan actually did the deals, the bank told its shareholders that it had looked closely at both firms…..The big question is whether Bear Stearns and Washington Mutual have produced profits to offset the proportion of the litigation expenses that stem from both entities. JP Morgan stopped saying how much it expected each entity to make soon after it bought them. But if JP Morgan’s early profit estimates are used, Bear Stearns and Washington Mutual may have contributed $16 billion in net income since the end of 2008. JP Morgan also used acquisition accounting in such a way that would have softened the future blow from both deals. For instance, at the time of the deal JP Morgan estimated the future losses embedded in Washington Mutual’s operations and assets. It then wrote down Washington Mutual’s assets by more than $30 billion to reflect perceived losses. The exercise was advantageous: it meant JP Morgan itself would not have to bear the losses after it had subsumed Washington Mutual. While the accounting move benefited JP Morgan, its legal liabilities were another matter. In corporate America, it is common for acquiring companies to assume the legal liabilities of any entities they acquire. Acquirers can write deal terms in such a way that certain legal risks are removed. It appears JP Morgan did not take adequate steps to do this.” Excerpt from October 22, 2013, NY Times article, “Considering the Fairness of JP Morgan’s Deal”

Does Goldman Sachs Have a Special Exemption from the SEC In Complying with the Securities Disclosure Laws?

“…this serves as another reminder that investors have little visibility into how Goldman actually makes its money. Analysts tried repeatedly on Thursday’s call to get Mr. Schwartz to go into more detail on what exactly went wrong, with little success…Absent a clear sense of what is driving the business, it is hard to justify a valuation for Goldman significantly above its tangible book value.” Excerpt from WSJ article, “Goldman: From Great Expectations to Hard Times”, October 17, 2013

“One competitor calls Goldman a ‘black box,’ providing less detail on strategy and how it actually makes money than its competitors. That this is still true is a failure of everyone who attempts to explain it….” Excerpt from LA Times article, “Goldman Sachs mystique remains”, October 20, 2013.

http://online.wsj.com/news/articles/SB10001424052702304384104579141660901992436

 

HEARD ON THE STREET

Goldman: From Great Expectations to Hard Times

Third-Quarter Results at Goldman Sachs Had Jaws Dropping All Around Wall Street Due to a Big Stumble in Its Core, Fixed-Income Business

By 
DAVID REILLY
 
 
Oct. 17, 2013 3:12 p.m. ET

Heading into bank-results season, investors figured someone would trip up on uncertainty around interest rates and the Federal Reserve’s mid-September taper turnabout.

They just didn’t figure it would be Goldman Sachs. Or that the result would be so bad.

 

Goldman said Thursday that it saw a year-over-year revenue fall of 20% in the third quarter, due largely to a 44% plunge in the fixed-income, currency and commodities business. That was well in excess of declines posted for similar operations at J.P. Morgan ChaseCitigroup andBank of America.

These results rightly prompt a resumption of questions about how much of the challenges facing Wall Street are structural rather than cyclical and whether firms such as Goldman are doing enough to adapt.

Granted, Goldman’s net income of $1.4 billion was roughly flat with the prior year. But this was due to gains in the investing-and-lending division and a seemingly sharp cut to compensation expense, Goldman’s largest. This was down 36% from the prior year, while the bank’s ratio of compensation to revenue fell to about 35%. It has typically been around 44%.

Even so, this wasn’t enough to keep Goldman’s return on equity above 10%—its theoretical cost of capital—for the quarter. This came in at 8.1%, showing that while Goldman has operational flexibility, it is willing to bend only so far.

Consider that the compensation ratio at J.P. Morgan’s corporate and investment bank dropped to 28% in the third quarter. And, on an absolute-dollar basis, that Goldman’s compensation expense of about $2.38 billion was higher than $2.33 billion at J.P. Morgan’s operation.

Meanwhile, J.P. Morgan reported a return on equity for its investment-bank unit of 16%. Such a difference understandably leads investors to again question whether Goldman is fairly dividing the spoils between employees and shareholders.

In 2012, Goldman acknowledged this tension by cutting its compensation ratio for the year to 38%. Absent a significant pickup in fourth-quarter results, it may have to take even more drastic action in 2013.

The third-quarter results gave investors other reasons for pause. Finance chief Harvey Schwartz said the steep revenue drop in fixed income was due to a variety of factors, including “difficulty managing inventory” in the bank’s currencies business. This suggests Goldman, as a market maker, wasn’t positioned properly for exchange-rate volatility, possibly around emerging-market currencies.

Such missteps can occur. Yet this serves as another reminder that investors have little visibility into how Goldman actually makes its money. Analysts tried repeatedly on Thursday’s call to get Mr. Schwartz to go into more detail on what exactly went wrong, with little success.

Absent a clear sense of what is driving the business, it is hard to justify a valuation for Goldman significantly above its tangible book value. Indeed, the stock has traded at only a slight premium to this for more than two years and is currently at about 1.1 times.

Adding insult to injury, Mr. Schwartz said reduced trading activity during the quarter was the result of “normal client risk management” given interest-rate uncertainty and Washington’s looming budget battle. In that sense, he said, “all the behavior was very predictable.”

All the more reason to wonder why Goldman got it so wrong.

Write to David Reilly at david.reilly@wsj.com

 

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FDIC Chair Gruenberg Stunningly Admits That Prior to the Financial Crisis They Had No Plans To Address a Big Bank Failure!

“In what can only be described as a stunning revelation, the current head of the Federal Deposit Insurance Corp., Martin Gruenberg, said in a speech on Oct. 13 that ‘prior to the recent crisis, the major national authorities here and abroad did not envision that these large, systemically important financial institutions (SIFIs) could fail, and thus little thought was devoted to their resolution.’….First, problems with big banks are not new. Six of the top 50 banks in the country in 1980 failed during the banking crisis of the 1980s and early 1990s. At least another 11 of the top 50 banks experienced high-profile problems that eventually led to their sale….In a country that has seen 3,000 banks fail over the past 30 years and more than 12,000 over the past century, it is not difficult to imagine future bank failures.” Richard J. Parsons, author “Broke: America’s Banking System”

“And the FDIC sued me for being a negligent banker? I served on the Federal Reserve System’s Thrift Institutions Advisory Council in 2008; serving on this committee until just after IndyMac Bank’s seizure in July, 2008. (Ironically, the FDIC itself recommended me to serve on this committee during the very time in 2007 that they later claimed using disclosures from SEC filings available at that time, that I was a negligent banker!!!). During this time, current FDIC Chairwoman Sheila Bair met with our committee and I recall that one of the other members asked her if she planned to offer ‘open bank’ assistance to institutions they insured. She responded bluntly, ‘No. We only have a few troubled institutions and they are small (relative to our insurance fund). We will close them down.’ The point being, she and her agency had absolutely no clue that the global financial crisis was soon to be upon us (Bear Stearns failed just weeks later) and that it would jeopardize the entire U.S. and global banking system; Ben Bernanke testified before the FCIC that 13 of the 14 largest financial institutions in the U.S. were in imminent danger of failing in the Fall of 2008. Under Bair and her predecessors, the FDIC insurance fund had not collected deposit insurance premiums from the banking system for a decade through 2006, even though the fund was undercapitalized relative to prior U.S. banking crises and the growth in deposits in the banking system. As a result, the FDIC insurance fund became insolvent during the financial crisis. And it would have been a lot worse for the FDIC without TARP; a program that Bair has strongly and hypocritically criticized to this day. If TARP had not happened, the FDIC insurance fund’s insolvency would easily have grown to be hundreds of billions, if not more. The FDIC approved IndyMac Bank’s non-diversified, nonconforming, mortgage banking business model for deposit insurance in 2000. They seized IndyMac Bank in 2008 and because they were ill-equipped to manage it and chose not to draw on their line of credit with the U.S. Treasury, they fire-sold IndyMac Bank’s assets at the bottom of the market in early 2009, when even Ms. Bair said at the time ‘markets for assets are irrational’. In my opinion, the FDIC has had a long-standing practice of blaming honest and capable bankers during crises, rather than taking responsibility for their own decisions.” Mike Perry, former Chairman and CEO IndyMac Bank

(Please Note: I was personally sued in a civil lawsuit by the FDIC-R in July 2011 for $600 million and accused of being a negligent banker, because I alone didn’t foresee the housing and mortgage market meltdown and global financial crisis coming. Neither did the FDIC or just about anyone else. The FDIC-R expected me to be omniscient and cut IndyMac’s mortgage lending volumes in about a six month period in 2007 by an additional $10 billion more than I was already doing. I settled this matter by personally paying the FDIC-R $1 million, an amount that was neither a fine nor penalty, and I denied the FDIC-R’s allegations in the settlement agreement. The FDIC-R acknowledged in writing in the settlement agreement that they never alleged that my actions caused the bank to fail or the insurance fund to suffer a loss. For more details of the FDIC-R’s legal matter against me see the FDIC tab on this blog and/or Statements #35 and Statement #39, dated January 9, 2013 and February 4, 2013, respectively.)

http://online.wsj.com/news/articles/SB10001424052702303680404579140101524572892?mod=wsj_streaming_stream

OPINION

Sending a Bad Message to Big Banks

The feds’ hypocrisy about J.P. Morgan’s takeover of Bear Stearns will make other banks wary in the next crisis.

By

RICHARD J. PARSONS
Oct. 20, 2013 8:04 p.m. ET
In what can only be described as a stunning revelation, the current head of the Federal Deposit Insurance Corp., Martin Gruenberg, said in a speech on Oct. 13 that “prior to the recent crisis, the major national authorities here and abroad did not envision that these large, systemically important financial institutions (SIFIs) could fail, and thus little thought was devoted to their resolution.”That statement, with its astonishing lack of historical perspective, should be kept in mind when considering the news that emerged over the weekend of a deal in the works for J.P. Morgan Chase to pay a staggering $13 billion penalty to resolve various civil investigations into its conduct over the past several years. A sizeable part of the settlement reportedly would involve penalizing J.P. Morgan Chase for the actions of Bear Stearns—a failing bank that the government persuaded J.P. Morgan to take over in 2008—in the mortgage-backed securities business. Such a penalty would be set a terrible precedent and send a dangerous signal to the financial system.What makes Mr. Gruenberg’s statement so surprising?First, problems with big banks are not new. Six of the top 50 banks in the country in 1980 failed during the banking crisis of the 1980s and early 1990s. At least another 11 of the top 50 banks experienced high-profile problems that eventually led to their sale.

In his 1986 book, “Bailout,” former FDIC Chairman Irvine Sprague identified Continental Bank as “too big to fail,” writing that “scores of large and small institutions—perhaps hundreds—would have been in serious jeopardy if Continental could not have met its commitments.”

Second, the FDIC has had a long-standing practice of turning to strong, bigger banks to step in when their weaker, smaller sisters failed or hemorrhaged capital. Sprague described the need to find “well-managed” banks “approximately twice as large as the bank to be acquired.” As big banks failed, even bigger banks were needed to step in and run the failed bank.

Bank of America, where I once worked, played a significant role in stabilizing the banking system when it acquired two large failed Texas banks in 1988. Over the next seven years, it acquired other banks on the brink of failure. In all cases—and at risk to its own shareholders—Bank of America took immediate action to infuse capital and management into these other ailing institutions.

What Bank of America did in 1988 was no different from what Wells Fargo and J.P. Morgan Chase did 20 years later. At the height of the most recent financial crisis, federal bank supervisors asked them to buy Wachovia, Washington Mutual and Bear Stearns. Largely because of these transactions, by year-end 2008 Wells’s assets had grown 127% over the prior year while J.P. Morgan Chase’s grew 39%.

The third point to be kept in mind about the FDIC chairman’s assertion: Thirty of what were the 50 largest banks in the country in 1980 are now part of Bank of America, Wells Fargo and J.P. Morgan Chase. These three banks are large in part because of their willingness and consistent ability to help bank supervisors calm local and global financial markets—to become part of the solution when the financial system was in danger.

Fourth, and most important: If it is true that J.P. Morgan Chase must pay penalties for mistakes made by Bear Stearns—a firm that Washington encouraged them to take over—then it is likely federal policy makers have actually increased systemic risk to the financial system. In a country that has seen 3,000 banks fail over the past 30 years and more than 12,000 over the past century, it is not difficult to imagine future bank failures.

The FDIC chairman said “little thought was given” to resolving the big-bank crisis, and now equally little thought seems to have been given to the pursuit of J.P. Morgan Chase over Bear Stearns. Once the government proves itself to be an unreliable “partner” in resolving failed institutions, it will find fewer banks willing to step in next time there is systemic risk to the banking system.

Mr. Parsons, a former Bank of America executive vice president, is the author of “Broke: America’s Banking System” (RMA, 2013).

Copyright 2013 Dow Jones & Company, Inc. All Rights ReservedThis copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visitwww.djreprints.com

“In a post Dodd-Frank world, banks are public utilities and no CEO can afford to resist government’s demands.”

“The truth is that he (Lanny Breuer, the former head of the Justice Department Criminal Division) didn’t indict bankers because the 2008 crisis wasn’t the result of bank fraud, despite liberal mythologizing. It was a classic credit panic caused by bad government policy coinciding with the rational exuberance of bankers who were responding to the incentives for excessive risk-taking that government created.” Excerpt from WSJ OpEd “The Morgan Shakedown”, October 21, 2013

http://online.wsj.com/article/SB10001424052702303448104579147881111406764.html

 

REVIEW & OUTLOOK

The Morgan Shakedown

A landmark that shows how much politicians now control U.S. finance.

Updated Oct. 20, 2013 10:51 p.m. ET
The tentative $13 billion settlement that the Justice Department appears to be extracting from J.P. Morgan Chase needs to be understood as a watershed moment in American capitalism. Federal law enforcers are confiscating roughly half of a company’s annual earnings for no other reason than because they can and because they want to appease their left-wing populist allies.

The settlement isn’t final and many details weren’t available on the weekend, but we know enough for Americans to be dismayed. The bulk of the settlement is related to mortgage-backed securities issued before the 2008 financial panic. But those securities weren’t simply a Morgan product. They were largely issued by Bear Stearns and Washington Mutual, both of which the federal government asked J.P. Morgan to take over to help ease the crisis.

A sign outside the headquarters of JP Morgan Chase & Co in New York, September 19, 2013. Reuters

So first the feds asked the bank to do the country a favor without giving it a chance for proper due diligence. The Treasury needed quick decisions, and Morgan CEO Jamie Dimon made them in good faith. But five years later the feds are punishing the bank for having done them the favor. As Richard Parsons notes nearby, this is not going to make another CEO eager to help the Treasury in the next crisis. But more pointedly, where is the justice in such ex post facto punishment?

Then there’s the fact that $4 billion of the settlement is earmarked to settle charges against the bank by Fannie Mae and Freddie Mac. We are supposed to believe that the bank misled the two mortgage giants about the quality of the mortgage securities they were issuing. But everyone knows that Fan and Fred had as their explicit policy the purchase of securities for liar loans and subprime mortgages to further their affordable-housing goals. Those goals went far to create the crisis, but now these wards of the state are portraying themselves as victims.

The news reports add that another $4 billion in the settlement will go for consumer relief, and that it is up to the feds how this will be distributed. But remember that most of the charges being settled relate to Morgan’s sale of mortgage securities. Even if you believe those charges, which we don’t, the victims would be the institutional buyers of those securities.

To make the victims whole, the government would have to distribute the settlement proceeds to those buyers, who aren’t mom and pop. If instead the feds pass out the money to consumers or their favorite advocacy groups, the fact that this is a political shakedown and wealth-redistribution scheme becomes even clearer. Perhaps the Administration will have the checks arrive in swing Congressional districts right before the 2014 election.

The tentative settlement doesn’t even include the criminal probe the feds are still conducting against the bank or even how much wrongdoing Morgan will admit. You would think $13 billion, the largest such settlement against a U.S. company, would be enough. But the political left isn’t satisfied these days with cash, though it will take what it can get.

But like medieval justice, the left wants perp walks, if not heads on pikes. The assumption is that if there aren’t indictments, then prosecutors must be going easy on the bankers. Poor Lanny Breuer, the former head of the Justice Department Criminal Division, was vilified for not indicting enough bankers, as if he didn’t try.

The truth is that he didn’t indict bankers because the 2008 crisis wasn’t the result of bank fraud, despite liberal mythologizing. It was a classic credit panic caused by bad government policy coinciding with the rational exuberance of bankers who were responding to the incentives for excessive risk-taking that government created.

We’d like to see Mr. Dimon fight the charges, but the political reality is that he and his bank don’t have much choice. His board is eager to move on, and the government will only turn the screws harder if he resists. In a post Dodd-Frank world, banks are public utilities and no CEO can afford to resist the government’s demands.

The real lesson of the Morgan settlement isn’t that justice has finally been done to the perpetrators of the crisis. That would require arresting Barney Frank and those in Congress who blocked the reform of Fannie and Freddie, plus the Federal Reserve governors who created so much easy credit.

The lesson is how government has used the crisis to exert political control over even the most powerful private financial companies. The real lords of American finance are Attorney General Eric Holder, Treasury chief Jack Lew and their boss in the White House.

Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved

 

“I’m glad I’m able to be the person who can afford to stand up to them. I don’t want anything from the SEC; except them to act like American citizens and treat other American citizens the way they deserve to be treated.” Mark Cuban

“The YouTube video below of Mark Cuban outside the courthouse after his victory over the SEC is a must watch. It especially resonates with me.  In my case, I had to spend several years of my life defending the matter. In the end, every SEC allegation, except one, was dismissed on summary judgment as a matter of undisputed fact and the law. A single negligence disclosure allegation remained against me, where the facts needed to be heard at trial.  The insurers were improperly denying me further insurance coverage for my legal expenses so I settled that remaining negligence claim.  In doing so, I neither admitted nor denied a single negligence disclosure allegation, paid an $80,000 fine, and agreed to an injunction to not violate the securities laws in the future (I remain eligible to serve as an officer and/or director of any public company). The court rulings in my case speak for themselves. I agree with every word Mr. Cuban says about the SEC.” Mike Perry, Former Chairman and CEO, IndyMac Bank

Transcript

Reporter: …people are going to be suspicious…

Mark Cuban: That’s why you have to look at the facts.  If you go through, and you read it, you’ll see that…look, they could have called me…I bought the shares March 2nd, they could have called me to tell me about this any time.  They didn’t.  Right?  If you go back and read the testimony they talk about wanting to tie my hands.  Right?  They did. Right?  There’s just so much to it, right?  But the bottom line is they could have handled it 101 different ways, they could have handled it honestly and they didn’t.  Right?  This was a company with something to hide.

Reporter: Would they have hanged on to this case if it hadn’t of been Mark Cuban?

Mark Cuban: You’ll have to ask them.

Reporter: This has been hanging over your head for nine years.  Describe the moment when you started hearing that you were not being found liable in this case.  The relief.

Mark Cuban: You know…it never was like that.  Right?  Guilty or innocent, this…I mean obviously I wanted to win, but at the same time…like I said, I didn’t win anything.  Right?  The fact that someone, Janet Folina  and Christian Schultz can sit up there and just tell lies and lies, and deceit…it’s just wrong.  I…there was no point in time where I sat there and listened to it and felt ‘you know what, winning will feel good.’  That’s just not the way things should be.  And, you know, you talk about Mary Schapiro…wait, is it White or Schapiro now?  Mary Jo White, the new head of the SEC, talking about a broken window policy?  She needs to think things through.  Because one of the problems we saw here in the trial that the SEC has is, there’s no ‘bright line’ rules.  You guys have got to ask what insider trading is.  You’ve got to ask…any securities rule.

You can’t just call up the SEC and say ‘I want clarification on this, tell me.’  Right?  That won’t do it.  Right?  They regulate through litigation.  And that’s its own problem.  So for Mary Jo White to sit out there ‘oh we’re going to have a broken window policy, well we’ll go after little offenders,’ little offenders?  If you’re going to bust a window, you can call the cops and ask is it illegal to bust a window.  There’s no little guy around here who’s going to be able to call the SEC and say ‘look, I have a problem, I need a question answered.  Am I allowed to do this?’  They’ll ignore you.  And those are the exact little people that Mary Jo White said she is going to pick on to send her message.  Right?

So, hopefully, hopefully the start of this (sic) is that people will start paying attention to how the SEC does business.  I’m the luckiest guy in the world.  I’m glad this happened to me.  I’m glad I’m able to be the person who can afford to stand up to them.  I’m glad I don’t need anything from them.  I don’t want anything from the SEC…except them to act like American citizens and treat other American citizens the way they deserve to be treated.  Because this was a horrific example of government does work.  Let me re-phrase that.  There’s a lot of great people in government, I don’t want to generalize.  I don’t want to generalize about the SEC.  I’m sure there’s a lot of good people.

There were people on their side saying ‘look, it’s only business, it’s not personal.’ Janet Folina is like ‘hey, this is only business, I’m just here to litigate,’ Dwayne was like ‘hey, tell your friend Charlie that it wasn’t personal, it’s just business.’  It’s personal!  When you put someone on the stand and accuse them of being a liar, it’s personal.  Right?  When you take all these years of my life, and try to prove a point, it’s personal.  And to try and play off like this is just your job?  Again, I don’t want to say that’s the way all the SEC works, but the people who were in this case could have said something, and didn’t say anything, and that’s just wrong.

Reporter: The fact that some of the evidence, a lot of the evidence, was stuff that you had turned over yourself voluntarily, and then they used it against you (Cuban nodding).  How do you react to that?

Mark Cuban: So what?  The facts are the facts, right?  I had nothing to hide.  I didn’t have anything to hide in 2004, I have nothing to hide today.  That’s why I turned it all over, that’s why I voluntarily spoke to everyone.  I had no issues, I had nothing to hide.  I mean…if anything…literally mamma.com, inside…the execs at mamma.com insider traded.  It’s all on the record, and they wouldn’t let us enter…they wouldn’t let us use it.  Right?  They ignored them.  Mamma.com pulled an amazing fraud, amazing…horrific fraud, on the pipe investors.  They misled them.  You heard David Goldman in there talk about their business falling off a cliff, or words to that effect.  They didn’t go after mamma.com, because it wasn’t a big name.  You know, it’s just…again, I don’t want to generalize to the SEC, I’m sure they have a lot of great people, the government has a lot of great people who serve this country, but what Janet Folina  and Christian Schultz did…that was their choice.  Their choice of words.  When they called people that are upstanding citizens liars.  When they mischaracterize the facts.  When they did everything to hide the facts, and not bring out the facts.  That’s just wrong.  And someone’s got to stand up and do that…and like I sad, when this started I won’t be bullied.  I don’t care if this is the United States Government.  And I don’t (sic) win anything today, I just got started today.

Reporter: You said before that you could afford to stand up to a bully.  A lot of people are wondering, to make that point, did you spend more on this legal team than you would have been fined?

Mark Cuban: Oh, far more.  Not even close.

(laughter – ‘it was well worth it’ from the crowd)

Reporter: I saw you on the phone inside.  Who’d you call and what’d you say?  What was your first call?

Mark Cuban: Family.

Reporter: Can you tell us what you said?

Mark Cuban: Nope.

Reporter: Is this political at all, in any way?

Mark Cuban: I don’t think so.  Because, you know, it was brought in 2006 by a lady named Linda Thompson, who works at Davis and Polk, and if you hire her, in my opinion, you get everything you deserve.  Um…and, who knows what her motivation was.  There’s literally pictures of her…there’s…they had pictures of me, when the SEC was discussing the case, they had pictures of me from that old show I did ‘The Benefactor?’  Like one of the promotional pictures was me holding a big stack of money?  And literally, they passed it around and said, ‘this is all I need to know, this says everything.’

Reporter: Were you at all surprised that about 3 ½ hours without lunch, for this jury about this particular situation?

Mark Cuban: I had no idea what to expect there.

Reporter: Will this change the way you trade?

Mark Cuban: No.  I never did anything wrong in the first place.  I have great brokers, I mean I’ll follow…look I am so squeaky clean for reasons…I know I’m going to be a target, right?  I mean, we started to cross the street, I’m like ‘nope, that’s jay walking, let’s walk back up and go over.’  You know, it’s just, I recognize that when I do things, people pay attention.  For better or worse, that’s been my choice, and that’s where I am.  But, like I said, I…you know…you can bully me, and it’s up to me to deal with it…Part of my hope is that this obviously will go on the record, this will be online for ever more, and so when Janet Folina goes to have someone else on the stand, they’ll know what to expect.  That she’s going to try to bully them, that she’s going to try to mislead them, she’s going to mischaracterize information, she’s going to mis-quote information, and hopefully they’ll be ready for it.  And when Christian gets out there, hopefully next time he’ll know what he’s talking about.  (shrugs)  And he won’t post on Facebook.

Anything else?

Reporter: How ‘bout those Mavs?

Mark Cuban: How ‘bout the Mavs!  I’ve got a game to watch.

India’s New Central Bank Head Warns the Fed to Pay More Attention to the Global Consequences of Their Actions

“Raghuram Rajan recently became the head of India’s Central Bank. Mr. Rajan is a former Chief Economist of the IMF and in 2003 was the inaugural winner of the Fisher Black Prize given by the American Financial Association to the best financial economist under forty. I summarized Prof. Rajan’s fabulous book ‘Fault Lines…’ about the true root-causes of the financial crisis on this blog on January 29, 2013: Statement 38. It should be noted that when Prof. Rajan warned central bankers about global financial imbalances, in a 2005 speech at the Fed’s annual Jackson Hole retreat, they dismissed his warnings.

Our well-intended central bank (the Fed) in pursuing its conflicting dual mandate, has been conducting subjective monetary policy for decades; distorting free and fair markets and causing asset bubbles and busts (and economic turmoil) in the U.S. and around the globe. As I have said before, if the Fed has the power through monetary policies to ‘save us’ from another Great Depression (as they have professed to have), then it follows that when they err and/or these subjective policies have negative unintended consequences (e.g. market distortions and asset bubbles and busts), they must also have the power to precipitate a major economic catastrophe (which they deny). Think about this; just tune into CNBC or any business network, its ‘all Fed news all the time’; with everyone waiting for our ‘central government money planners’ to issue their edicts from on high. That’s not how a free market economy is supposed to work. When are we going to wake up and see this truth and reign in the Fed’s discretionary activities? After all, they are just a small group of human beings with fancy pedigrees who didn’t foresee the 2008 global financial crisis and even now, don’t seem to be able to forecast with any precision GDP and unemployment; even just a few quarters out.” Mike Perry, Former Chairman and CEO IndyMac Bank

http://online.wsj.com/news/articles/SB10001424052702304330904579133530766149484

India’s Central Banker Lobbies Fed

New Chairman Warns Over Consequences of Policies He Says Hurt Developing Economies Like His

By SHEFALI ANAND and JON HILSENRATH
Oct. 13, 2013 2:25 p.m. ET

Mr. Rajan correctly predicted a global financial bubble in 2005. Reuters

WASHINGTON—India’s new central bank governor, Raghuram Rajan, is waging a vigorous two-front war.

At home, Mr. Rajan is trying to repair the damage inflicted on his country’s decelerating economy after investors this summer retreated from emerging markets in anticipation of an end to easy-money policies in the U.S.

Abroad, he is campaigning to persuade the U.S. Federal Reserve and other central banks that they need to pay more attention to the consequences of their actions for the developing world and do more to mitigate the fallout.

This past week, he brought his fight here to Washington, where the International Monetary Fund was holding its annual meeting.

Agence France-Presse/Getty Images

“If you want stronger global demand, you really need to think about international arrangements to deal with these issues,” Mr. Rajan said in an interview on the sidelines of the meetings. He urged a process by which the central banks of advanced nations give greater weight to the global spillover effects of their policies.

In May, mere mention by the Fed of an eventual shift sparked a global emerging-market selloff. In the three months that followed, India’s currency lost nearly a quarter of its value. Stocks dived.

Countries from Indonesia to South Africa, Brazil and Turkey also got slammed, as investors, betting that returns in the U.S. would rise, pulled their money out.

“The volatility” that capital flows cause “on the way in as well as on the way out…is a cost. And we should weigh these things,” Mr. Rajan said.

As lawmakers in Washington strive to overcome differences to avoid a U.S. debt default—another event that could have global repercussions—Mr. Rajan said publicly this weekend that India wasn’t selling its U.S. assets.

Unlike many other international critics of advanced nations’ policies, the 50-year-old Mr. Rajan has solid establishment credentials. The Massachusetts Institute of Technology-trained economist served as chief economist of the Washington-based IMF and taught at the University of Chicago.

And he has been right before about the unintended consequences of Fed policy.

Famously, in 2005 he warned a roomful of Fed officials in Jackson Hole, Wyo., that the world risked a dangerous financial bubble.

In January, Mr. Rajan, at the time an adviser to India’s finance minister, warned his counterparts at a meeting in New Delhi of officials from the Group of 20 industrial and developing nations that they should wake up to the dangers posed to emerging markets by an end to easy-money policies in the U.S.

The response, two senior Indian officials present at the meeting said, was a collective shrug. Representatives of advanced economies said, in effect, why worry about something that wasn’t going to happen soon.

Since this summer’s drastic emerging-markets pullback, more developing countries have become vocal about their concerns.

Mr. Rajan said if the developed world—which for years flooded the globe with liquidity in an effort to revive growth in its own flagging economies—doesn’t pay adequate attention to the impact of its policies on developing countries, it could end up sowing the seeds of another crisis.

“Are we in a world where we continue to blow up bubbles elsewhere?” Mr. Rajan said.

He has raised this topic in several forums around the world this year, including at the June annual meeting of the Bank for International Settlements, an international organization of central banks. The event was attended by more than 200 central bank and government officials from around the world.

“Emerging economies’ perspective in general is that this has been a challenge, and [Mr. Rajan] has been certainly channeling those concerns,” said Jean Boivin, a senior official at Canada’s finance ministry, who co-chaired some of the G-20 working-group meetings this year.

The question is: Has anyone been listening?

“I think the U.S. has been, to some extent, sensitive to the criticism,” India’s finance minister, Palaniappan Chidambaram, said in an interview. “In September, when it was widely expected that the taper will begin, they put the taper on hold. And I think they have acknowledged that it was necessary on their part to communicate their intentions.”

Still, many central bankers from industrial countries say it is up to emerging markets to fend for themselves.

Developing economies “have considerable control over how this works out and what the stability conditions are inside their own countries,” Donald Kohn, a former Fed vice chairman who now is a member of the Bank of England’s Financial Policy Committee, said at a meeting of central bank officials in Jackson Hole in August.

The standard response from advanced countries has been that emerging markets should respond to the capital outflow by letting their currencies adjust. But this isn’t always practical advice, Mr. Rajan said, since it can lead to a sharper-than-warranted depreciation as, he said, happened in India in the summer.

“You’re using special tools because you’re saying the economy doesn’t work as advertised,” said Mr. Rajan. “Then you’re telling us” to follow a textbook response, he said.

Back home in India, Mr. Rajan and others are trying to take steps to soften the blow when the Fed really does start tightening in earnest. There are serious problems to tackle. In India, inflation has inched up, partly because of the depreciation of the rupee, which makes imported goods more expensive.

In a surprise move, Mr. Rajan raised the benchmark interest rate by a quarter percentage point to 7.5% in late September, in a bid to keep price rises in check. “You have to focus on bringing inflation under control” to provide greater stability to the rupee, Mr. Rajan said.

Mr. Rajan has lowered the rate on an emergency liquidity facility, which to some extent blunts the impact of the higher benchmark interest rate.

But there will be pressure on Mr. Rajan to think about more than just inflation at a time when India’s growth has slowed sharply. Some economists expect gross domestic product to grow less than 5% in the financial year that ends March 31, the slowest pace in more than a decade.

“He pissed off a lot of people” by raising rates, said a former official of the Reserve Bank of India. The official added that the central bank faces pressure both from the government and business to keep rates low.

Mr. Rajan said that despite the currency depreciation and economic weaknesses, India has more than enough reserves to pay its foreign debt and has taken steps to resolve long-term structural problems. “It’s not a crisis,” said Mr. Rajan.

However, for the world at large, he said, the potential for growth might not be as high as previously thought, since a lot of it was driven by cheap credit in recent years. “Take off the easy money and true growth may be lower,” Mr. Rajan said.

—Nirmala Menon contributed to this article.

Write to Shefali Anand at shefali.anand@wsj.com and Jon Hilsenrath at jon.hilsenrath@wsj.com

“(Federal) Student loans are the new subprime; were talking about hundreds of billions of (government) losses…”, Jim Rickards

“We felt other consumer lending such as credit cards, auto loans, and student loans (which, by the way, is the most abusive consumer lending product in America, issued to kids with no assessment of their ability to repay and they can’t be discharged in bankruptcy), were riskier and required huge scale and specialized expertise.” Mike Perry, excerpt from Statement #33, January 2, 2013

 “I do agree with Mr. Pinto that 40% of FHA’s loans in 2012 were subprime; it’s an objective fact. A recent WSJ article also noted that 33% of all student loans (another government-dominated market) were originally or have become subprime as of March 31, 2012. The idea that government-guaranteed student loans, albeit unintentionally, might have caused recent American college graduates to become subprime borrowers (because the government let them borrow too much for their education and they can’t find a decent paying job in this economy) doesn’t seem possible, does it? And yet, the CFPB will have to exempt government student loans from “The Ability to Repay” rules too, because a college student’s future employment and income are highly uncertain. I believe that’s why the government doesn’t let students discharge these loans in bankruptcy; I guess they want to hold these young adults accountable for their educational and borrowing decisions? I am not sure that’s entirely right or fair, but that’s what is happening.” Mike Perry, excerpt from Statement #42, February 26, 2013

This Is The Next Sub-Prime Crisis: Jim Rickards

By Lauren Lyster | Daily Ticker – Thu, Oct 3, 2013 8:34 AM EDT

http://finance.yahoo.com/blogs/daily-ticker/next-sub-prime-crisis-jim-rickards-123457426.html

Interviewer: Let’s move on, let’s talk about student loans.

Jim Rickards: Sure

Interviewer: Because some new information came out showing that 1 in 7 borrowers defaulted on their federal student loans.  This is for the 3 years through September 30th, 2012,

Jim Rickards: Right

Interviewer: It’s an increase over the last time they found these numbers.  You call student loans the next sub-prime crisis.  Substantiate that.

Jim Rickards: Student loans are the new sub-prime.  In 2007, just before the crisis began, there were about $1 trillion of sub-prime, what you would call Alt A or loosely underwritten…you know…they are weak mortgages.  So the combined mortgages, ah, you know low doc, no doc, no home equity, no questions asked, that was about $1 trillion.  Today, we have about $1 trillion in student loans.  Now I want to be clear I’m talking about the government market, there is a private market where it’s well underwritten, well guaranteed, etc., that’s sort of a slice, but the vast majority of this is poorly underwritten, there is a lot of adverse selection, these default rates are going to go up.  But they’re vintages, you should expect them to go up further if they’re at 7%, expect to see that to go to 14, kind of push its way to 20.  We’re talking about hundreds of billions of dollars of losses right now off budget that are going to go on budget when the government has to pick up the tab.

Interview: But, the government is on the hook,

Jim Rickards: Right.

Inteviewer: so the government can print its own money, the government always figures out a way to deal with these things, so what would be the fallout and you actually think that the student lending by the government is in some way their attempt to help prop the economy up…

Jim Rickards: Absolutely, look it’s not like there’s a smoking gun memo from the White House or the Treasury, but the fact is the Treasury is shoveling money out the door telling, you know, anyone between the age of 17 and 30, come and get it.  And we all know students have a high propensity to spend if they have a little money, they’re not going to buy gold or open a brokerage account, most of them are going to buy beer…Ah, but the students, the students are like ATMs.  The Treasury’s shoveling money to the students, the students are just writing checks to the schools, in many cases the Treasury will send the money directly to the school.  So it’s going to you know unionized faculty, unionized administrators, you know very extravagant facilities at the universities, it’s another way of priming the pump and getting the economy going, off budget, ahh…so it’s just sort of a back door way.  That’s why I say it’s the new sub-prime.

Inteviewer: Ok, I gotta go but where does it end, though, because government is on the hook, so what does it matter if the default rate increases.

Jim Rickards: Because then the budget deficit will…I mean we’ve got a shut down government right now because people can’t agree on spending priorities.  This will make it worse, this will increase budget deficits, this will increase debt to GDP ratio, put us on the road to Greece.

Inteviewer: On the road to Greece, alright, well we’ll leave it there, that cliff hanger.  Thanks so much Jim Rickards, it’s always a pleasure.

Jim Rickards: Thanks a lot.

Federal Judge Rules HUD/FHA Violated Reverse Mortgage Statute by Improperly Directing Lenders to Foreclose on Elderly Widows!!!

“I couldn’t resist that title, but it’s absolutely true. And isn’t it more than a little hypocritical that in recent times, some parts of the government are blaming and penalizing mortgage lenders, contending that they aren’t doing enough to prevent foreclosures, while other parts of the government (HUD/FHA) are telling mortgage lenders that they must foreclose on elderly widows that can’t afford to pay off their deceased spouse’s reverse mortgage? Okay, aside from that hypocrisy, what really are the facts? HUD sought to enforce what they and their lawyers believed were their contractual rights regarding their FHA reverse mortgage program, in order to avoid potential losses to the FHA insurance fund that could easily be tens if not hundreds of millions of dollars or more (and at a time when the FHA insurance fund is insolvent and for the first time in its history just drew $1.7 billion from the U.S. Treasury). The Federal judge in this case ruled that HUD’s interpretation of the reverse mortgage statute was incorrect and that the statute did in fact protect surviving spouses (who were not borrowers) from foreclosure. I am not sure about the law in this matter, and while I know HUD and the government have taken pains to unfairly and inappropriately blame private mortgage lenders for just about everything, I don’t see how HUD could have done more and certainly I don’t think they acted inappropriately here? I am sure FHA’s reverse mortgage loan program and borrower loan documents were developed and reviewed by HUD’s lawyers to ensure they complied with the statute and thoroughly disclosed that when all borrowing spouse’s passed, the mortgage was required to be paid in full (generally through sale of the home) or FHA would take possession of the property, through foreclosure if necessary. Some married seniors chose to put only the eldest spouse as the borrower on the reverse mortgage, so that they would receive a greater financial benefit (either upfront, lump-sum cash or in a bigger monthly annuity). I don’t know for sure if it was made clear to non-borrowing spouse (generally the younger one) that they would have to pay off the mortgage, sell the home, or face foreclosure if their borrowing spouse pre-deceased them? I am betting it was made clear in most cases, but it sure as heck was made clear, in writing, to the borrowing spouse in loan documents they signed (and the non-borrowing spouse, if they were on title, probably had to sign something acknowledging that a lien was placed on the home and I am sure most benefited from the cash they received from the loan). Also, spouses are generally legally liable for each other’s financial decisions and actions and importantly, I believe the borrowing spouse was morally obligated to communicate with and explain the key terms of this reverse mortgage to his/her non-borrowing spouse (and in fact I bet did so, in most cases). With that said, assume for a moment, that instead of the government being ‘in the wrong here’, it was a private mortgage lender who after having been advised by counsel, wrongfully asserted what they thought were their contractual rights and foreclosed on these elderly widows (to avoid losses and protect their shareholders’ interests). And after-the-fact, they had received this ruling; that they were wrong and had violated a statute. What would have happened? “Page One” story, I bet. “Evil Mortgage Lender”, I bet. And likely there would be class-action lawsuits and calls for major government fines/sanctions and even criminal investigations. That’s the double standard we have today; government mistakes are overlooked, while private sector mistakes are distorted into major events.” Mike Perry, former Chairman and CEO , IndyMac Bank

Here is what I wrote about this double standard back on January 29, 2013:

“I believe that we (all of us) have allowed a double standard to develop in America, where citizens in the private sector are held to a higher standard of conduct and accountability than citizens in the public sector. And I believe it is getting worse over time (as the government expands) and it is eroding our individual rights and liberties and hurting the private sector’s ability and desire to take risks and innovate (succeeding sometimes, but more often failing and then trying again); the keys to a dynamic and vibrant economy. It is my view that Americans operating in the government sector (especially those in power, but even those who are not), must be held to a higher standard of duty and care than American’s operating in the private sector. Yet clearly today it is the opposite. Nearly all of our civil laws and regulations and the entire civil enforcement apparatus of the government is aligned against the private sector and private individuals. Nothing, other than our mostly disinterested and uninformed electorate, holds the government and its key officials to account for their conduct and mistakes. Why is it that because you seek to make your career in the “for- profit” sector (and help create jobs and taxpayers), some people think it is not possible to “do good” at the same time? And if something does go wrong (in an unprecedented financial crisis, say), it’s even worse. Your conduct and motives are immediately called into question and your reputation is unfairly besmirched. And years of your professional life are taken away being investigated by the government and sued (there are even calls in the press and among certain politicians for criminal prosecutions, without any knowledge of specific wrongdoing). However, if you are a government official and you are mistaken or fail, nothing happens.” Michael Perry, Excerpt from Statement #38, January 29, 2013

http://online.wsj.com/article/SB10001424052702303643304579109772523469400.html

The Wall Street Journal
U.S. NEWS
Updated October 1, 2013, 7:40 p.m. ET

Federal Reverse-Mortgage Program Takes a Hit in Ruling

Some Elderly Homeowners Improperly Faced Foreclosure After Their Spouses Died, Judge Says

By
NICK TIMIRAOS

A federal court rejected the Obama administration’s interpretation of a law governing a popular mortgage program for senior citizens that had led some homeowners to face foreclosure after a spouse died.The decision, handed down Monday, threatens to increase potential losses for the federally insured reverse-mortgage program, which allows homeowners 62 years or older to borrow money against the value of their homes. When the borrower moves or dies, the lender that originated the reverse mortgage takes possession of the home and sells it, and the proceeds are used to repay the loan.AARP filed suit two years ago to challenge the Department of Housing and Urban Development, which oversees the program. The seniors’ organization said HUD had violated federal law by requiring surviving spouses who weren’t on the mortgage to pay off the loan in full or face foreclosure.Nearly 600,000 borrowers have federally insured reverse mortgages through the Federal Housing Administration, which is part of HUD. Borrowers must have substantial equity in their houses and can receive either a lump sum or monthly payments from lenders. Lenders use actuarial tables to determine how much money borrowers are eligible to receive, with younger borrowers getting smaller monthly payments because they are expected to live longer.

Consumer advocates allege that brokers sometimes encourage only the older spouse to put his or her name on the mortgage in order to receive larger payments. HUD’s policy “encouraged more reverse mortgages to be made for larger amounts of money,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

It isn’t clear how many homeowners have reverse mortgages where only one member of a couple has his or her name on a loan, though lawyers representing two homeowner plaintiffs in the case say there are hundreds of such borrowers. Peter Bell, president of the National Reverse Mortgage Lenders Association, said he wasn’t aware of evidence suggesting a widespread problem. “I’d rather not comment on it since I don’t know,” he said.

In the case decided Monday, Robert Bennett, a retired cook at the United States Naval Academy, had challenged his eviction from the Annapolis, Md., house that he and his wife bought in 1981. In December 2008, Mr. Bennett, then 66, and his wife, then 76, took out a reverse mortgage, according to court filings. Mrs. Bennett died the next month, and Mr. Bennett later learned that he wasn’t on the loan and that the mortgage needed to be repaid, although the $295,000 loan exceeded the value of his property, which was appraised for around $200,000 in 2011.

In the decision, U.S. District Judge Ellen Huvelle sided with Mr. Bennett and a Brooklyn, N.Y., widow who found herself in a similar position. The judge didn’t specify damages in her ruling and instead directed HUD to fashion “appropriate relief.”

“The message was loud and clear. This reverse-mortgage statue is supposed to protect spouses from foreclosure,” said Craig Briskin, a lawyer with Mehri & Skalet PLLC in Washington, who had represented the plaintiffs.

The FHA could face larger losses as a result of the decision, because younger spouses who weren’t on the loans will be able to live in the homes and receive any monthly payments that aredue.

In a 2011 motion to dismiss the lawsuit, HUD lawyers had argued that allowing surviving spouses to stay in homes when loans were based solely on the age of the elder spouse would “eviscerate” the “actuarial balance of the program.”

“The FHA fund will certainly take a hit from this,” said Jean Constantine-Davis, a senior attorney for AARP Foundation Litigation, who also represented the plaintiffs.

The FHA last week said that it would receive a $1.7 billion infusion this week from the Treasury because the agency has burned through its reserves. The bulk of those losses are in the reverse-mortgage program, officials have said.

A HUD official said Tuesday the agency wasn’t yet able to estimate the impact of the ruling or determine appropriate relief because of staff furloughs tied to the government shutdown on Tuesday. “We will be unable to respond until funding is restored and these staff return,” the official said.

The ruling could also prompt HUD to revise its rules to require that actuarial calculations be made based on the age of the youngest spouse, potentially reducing lending volumes. “Fewer people are going to do reverse mortgages,” said Mr. Rheingold.

Write to Nick Timiraos at nick.timiraos@wsj.com

A version of this article appeared October 2, 2013, on page A3 in the U.S. edition of The Wall Street Journal, with the headline: Reverse-Mortgage Program Takes a Hit.

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