Monthly Archives: February 2014

“It is very hard to make the judgment now that the financial system as a whole or the banking system as a whole is undercapitalized. Based on everything we know today, if you look at very pessimistic estimates of the scale of losses across the financial system, on average relative to capital, they do not justify that concern.”, Timothy F. Geithner, President of New York Federal Reserve and Vice Chairman Federal Reserve Board of Governors, FOMC Minutes, March 18, 2008

“The problems in the mortgage and housing markets have been highly unusual and clearly some banking organizations have failed to manage their exposures well and have suffered losses as a result. But in general these losses should not threaten their viability.”, Donald L. Kohn, Vice Chairman of the Federal Reserve Board of Governors, testimony to Senate Banking Committee, March, 2008

“Despite their perch on top of the entire banking and financial system, and access to industry and macroeconomic data and scores of economists and other experts, I don’t fault them for being wrong. Nearly everyone was wrong, including me and Ben Bernanke. The difference is that Ben Bernanke was reappointed as Chairman of the Federal Reserve and Tim Geithner was promoted to U.S. Treasury Secretary. And because I was in the private for-profit sector, I was personally, civilly sued for over $1 billion and wrongly accused of banking negligence (because I didn’t foresee the crisis coming in early 2007, according to the FDIC!!!) and securities fraud. I have now largely fought my way through all of this meritless litigation, but it has unfairly taken a huge financial, reputational, and emotional toll on me and my family over these past five plus years. In my opinion, that’s not how America is supposed to work.”, Mike Perry, former Chairman and CEO, IndyMac Bank


A New Light on Regulators in the Dark

FEB. 22, 2014

Fair Game


In the five years that have elapsed since the direst days of the financial crisis, we’ve learned much about how the nation’s high-level banking regulators worked to keep the debacle from turning into a full-blown economic Depression. Tales of these herculean efforts have emerged in books by some of the major players, and in the exhaustive testimony they’ve presented before congressional inquisitors and others trying to determine what went wrong and why.

Still, there is more to learn.

That’s the message in the transcripts released last Friday by the Federal Reserve Board, detailing the 2008 meetings of its powerful Federal Open Market Committee. This treasure trove — almost 2,000 pages of conversation and dialogue by the committee members and other Fed officials — sheds light on the rescue of Bear Stearns, the bankruptcy filing of Lehman Brothers and the bailout of the American International Group.

My initial takeaway from these voluminous transcripts is that they paint a disturbing picture of a central bank that was in the dark about each looming disaster throughout 2008. That meant that the nation’s top bank regulators were unprepared to deal with the consequences of each new event.

Consider comments about the strength of the United States banking system made at the meeting on March 18, 2008. This sit-down occurred just days after the collapse of Bear Stearns and the sale of its assets to JPMorgan Chase, in a deal brokered by the Federal Reserve Bank of New York.

While most of the discussion at this meeting covered the possibility that the country had already slipped into a recession and that inflation might rear its head, the topic of whether the nation’s banks were adequately capitalized did come up. That these institutions were inadequately capitalized was already obvious to some regulators, but that was not the view of Timothy F. Geithner, who was then the president of the New York Fed and vice chairman of the Fed’s Board of Governors.

“It is very hard to make the judgment now that the financial system as a whole or the banking system as a whole is undercapitalized,” Mr. Geithner said, adding that “some people are out there saying that.”

He continued: “Based on everything we know today, if you look at very pessimistic estimates of the scale of losses across the financial system, on average relative to capital, they do not justify that concern.”

To Mr. Geithner, the nattering naysayers raising alarms about the financial system’s soundness were a bigger problem than the one that they were trying to draw attention to. “There is nothing more dangerous in what we’re facing now,” he said, “than for people who are knowledgeable about this stuff to feed these broad concerns about our credibility and about the basic core strength of the financial system.”

On Friday, Mr. Geithner did not return an email requesting comment.

To be sure, Mr. Geithner was not alone in this view. Just two weeks earlier Donald L. Kohn, another Fed vice chairman, told the Senate Banking Committee: “The problems in the mortgage and housing markets have been highly unusual and clearly some banking organizations have failed to manage their exposures well and have suffered losses as a result. But in general these losses should not threaten their viability.”

Wanna bet?

Equally distressing, as the credit storm gathered strength after the Bear Stearns collapse, the minutes show little comprehension of the perils posed by two other teetering financial giants: Fannie Mae and Freddie Mac. This is odd, given that the declining financial position of these mortgage finance heavyweights — they guaranteed or issued $5 trillion in mortgages — was known at the time. Yet the companies were barely mentioned at the meetings before the one that occurred on Aug. 5. Just a month later, the companies had to be taken over by taxpayers.

Also missing from much of the discussion early in 2008 was the recognition that government rescues of reckless financial firms created moral hazard.

The March 18 meeting came just two days after the Bear Stearns rescue. But almost no concerns were raised at the meeting that by aiding this brokerage firm, other firms would assume that the government would also come to their rescue.

The Bear Stearns rescue, after all, cemented the notion that the taxpayer would be there to bail out aggressive financiers. And yet there was only one passing reference to this policy peril. It came from Frederic S. Mishkin, a governor who left the Fed later that year.

Outlining his bearish views on the economy and deteriorating credit markets, Mr. Mishkin noted another cost associated with the deepening financial problems.

“One result,” he said, “is that we’ve just expanded the safety net to a much wider set of institutions, and we are in a brave new world here, and it is very disturbing.”

And that was it. Nothing more about this crucial issue was said at that meeting.

Six months later, amid Lehman’s failure, they did start to talk about moral hazard.

In public statements since that time, the Fed has maintained that the government didn’t have the tools to save Lehman. These documents appear to tell a different story.

Some comments made at the Sept. 16 meeting, directly after Lehman filed for bankruptcy, indicate that letting Lehman fail was more of a policy decision than a passive one.

For example, James Bullard, president of the St. Louis Fed, noted the positive message that the decision sent to the market. “By denying funding to Lehman suitors,” Mr. Bullard said, “the Fed has begun to re-establish the idea that markets should not expect help at each difficult juncture.”

Jeffrey M. Lacker, president of the Richmond Fed, echoed this view. “What we did with Lehman I obviously think is good,” he said. “It has had an effect on market participants’ assessment of the likelihood of other firms getting support.”

But he added that the Fed’s public stance on Lehman’s failure was confusing the markets.

“All the language around not supporting Lehman was of a one-off nature,” he said. “ So I’m not sure about the extent to which we’ve diminished uncertainty about the likelihood of support going forward, and I think that such uncertainty is likely to exacerbate financial volatility in the months ahead until we can make more progress on articulating a reasonably principled policy on when we’re going to intervene and when we’re not, or at least enhancing clarity about that.”

Mr. Lacker was right to wonder. Later that day, the government rescued the American International Group, the beleaguered insurance company, and its big-bank counterparties.

A version of this article appears in print on February 23, 2014, on page BU1 of the New York edition with the headline: A New Light on Regulators in the Dark. 

“Although Mossberg was not alone when he was appointed lead plaintiff in this action, finding him an adequate class representative in the face of the information the Court now has before it would render the PSLRA’s protections and Rule 23’s requirements toothless…”, Judge George H. Wu, United States District Court Judge, November 14, 2011 (in granting (!!!!) Lead Plaintiff’s Motion for Class Certification, Sven Mossberg vs. IndyMac Financial, Inc. and Michael Perry)

“Judge Wu’s own ruling combined with Mr. Mossberg’s sworn deposition makes clear that this complaint against me is entirely “lawyer-driven litigation by a manufactured plaintiff”. Again, Judge Wu is ignoring the PSRLA law. Why?”, Mike Perry’s Comment to His Defense Attorneys at the Time

“Attached below is an email I sent my attorneys with a draft blog posting I wanted to make at the time discussing the Tripp/Mossberg private securities class-action litigation against me. Because the litigation (which settled, see private litigation tab on my blog for a further discussion) was ongoing at the time, my attorneys objected to my posting it. However, as promised, I am now making this available in the hope that others may read this and work to substantially improve the private securities laws. I think this email speaks for itself; it alone makes a strong case as to the frivolous nature of many private class-action securities lawsuits and how plaintiff’s attorneys exploit our dysfunctional American legal system.”, Mike Perry, former Chairman and CEO, IndyMac Bank 

From: Michael Perry 

Sent: Thursday, November 17, 2011 2:08 PM
Subject: FW:


Here it is……I did it pretty quickly, but this is what I want to say. mike

11/17/2011 – Judge Wu Certifies Tripp Securities Class Action Suit Against M. Perry

I have added three documents as attachments at the bottom of this summary: “Plaintiff Mossberg’s Deposition”, “Perry’s Opposition to Tripp Class Certification”, and “Judge Wu’s Ruling Approving Tripp Class Certification”.

From Wikipedia:

“The Private Securities Reform Litigation Act (PSRLA), passed by Congress in 1995 as part of its “Contract with America”, was designed to limit frivolous securities lawsuits. Prior to the PLSRA, there was a very low barrier to initiate litigation, which encouraged the filing of suits which were weak or entirely frivolous. Defending against these suits could prove extremely costly, even where the charges were unfounded, and as a result, defendants often found it cheaper to settle than to fight and win. To reduce the number of purportedly frivolous lawsuits that survive motions to dismiss, the PSLRA raised the pleading standards (the specifity and strength of the factual allegations that must be alleged in the plaintiff’s complaint) in three specific ways: 1) A requirement that false statements be plead  “with particularity”, 2) A requirement that the pleading create a “strong inference” of Scienter, and 3) a requirement that the plaintiff prove loss causation.”

I believe, that this ruling and other decisions that Judge Wu has made in this case essentially ignores the law and eviscerates my protections as a defendant under the Private Securities Litigation Reform Act of 1995. Let me address just a few facts:

  1. I am the sole person named in this securities class action lawsuit and yet I did not prepare any of our securities filing documents and was only one of many experts who reviewed them. Scores of Indymac managers, directors, outside lawyers, and independent auditors prepared and/or reviewed all of these public disclosures.
  2. NOT ONE of these individuals, many of who provided me with formal written SOX certifications each quarter, ever expressed any concerns about the alleged securities disclosure violations in the Tripp complaint.
  3. The SEC’s allegations against me, do not include ANY common allegations with Tripp. Tripp is all about loan underwriting disclosures and the SEC had not made a single allegation in their complaint against me about loan underwriting or any lending activities. Also, several senior managers, who reported to me were responsible for loan underwriting and their written SOX certifications do not include any concerns or issues about our loan underwriting disclosures.
  4. Indymac was largely owned by institutional shareholders. Not one of them has joined this lawsuit against me. In fact judge Wu, in his ruling, noted the following:
  5. I had no motive to make false or misleading statements about our underwriting. I bought stock in both 2007 and 2008 and had not sold a single share since 2005.
  6. The witnesses cited in the complaint are entirely “anonymous” and the plaintiff’s have refused (to-date) our request to seek out their identities, so we can take their testimony.

Judge Wu knows all of this and yet he somehow ruled that the plaintiff’s had met their burden of a “strong inference” of Scienter. Scienter is a legal term (similar to intent or recklessness), but under the PSLRA, “this requirement is supposed to allow a defendant to obtain a dismissal of a cases where the plaintiff merely points to a false statement and declares that the defendant “must have known” that the statement was falls, based upon his position in the company” (Wikipedia).  The bottom line is the plaintiff’s haven’t even proved that a statement I or Indymac made was false, let alone Scienter. The plaintiff’s have generally alleged the following: “Indymac had unexpected loan and credit losses, Indymac’s stock declined, Indymac failed, and by the way the Treasury’s Office of Inspector General issued a critical report on Indymac’s loan underwriting and we have some anonymous witnesses who the plaintiff’s won’t identify, but they had some underwriting concerns too”. That was enough for Judge Wu, but he is wrong, that is not enough to meet “strong inference of Scienter” standard under the PSLRA law.

On the subject of “loss causation”, Judge Wu gave the plaintiff’s five tries (granting my motion to dismiss five times, but each time, over several years, allowing the plaintiff’s to amend their complaint and change the dates of the class period three times and their allegations significantly), before he finally denied my sixth motion to dismiss saying that the plaintiff’s had finally, in his opinion, properly alleged “loss causation”.

So the only thing we were left with before spending millions to go to trial  (and win, which we will do if we go to trial), was to fight class certification.

I can tell you that in reading Mr. Mossberg’s deposition, the following was clear to me:

  1. He is a “straw man” plaintiff, in violation of the PSLRA law. In fact, Judge Wu said the following in his ruling: “Although Mossberg was not alone when he was appointed lead plaintiff in this action, finding him an adequate class representative in the face of the information the Court now has before it would render the PSLRA’s protections and Rule 23’s requirements somewhat toothless…”
  2. Mr. Mossberg testified that he did not recall EVER reading any of Indymac’s public disclosures or hearing me or anyone else discuss the company.
  3. Mr. Mossberg testified that he made his decisions to purchase Indymac stock solely at the recommendation of an independent financial advisors newsletter, to which he had subscribed for many years.
  4. Mr. Mossberg testified that he bought 1,000 shares in December, 2007; increasing his total ownership of Indymac by 1/3rd many months after he alleges “the truth of my securities fraud was revealed” on March 1, 2007.
  5. Mr. Mossberg made clear that he and his attorneys do not expect this matter to go to trial; they expect a settlement. Based on Mr. Mossberg’s age and health and statements, it is clear that if we were to go to trial, you could see Mr. Mossberg “drop out”. Judge Wu basically in his ruling says the plaintiff doesn’t matter, in clear violation of the PSLRA law.

Read Mr. Mossberg’s deposition and the other class certification documents attached and tell me with a straight face that Mr. Mossberg  meets the following legal citing, from Judge Wu’s ruling: “Any lingering uncertainty, with respect to the adequacy standard in securities fraud class actions, has been conclusively resolved by the PSLRA’s requirement that securities class actions be managed by active, able class representatives who are informed and can demonstrate they are directing the litigation. In this way, the PSLRA raises the standard (plaintiff) adequacy threshold.”

Judge Wu, himself then goes on to say, “In any event this discussion effectively is beside the point here, as the general or standard Rule 23 analysis is enough to raise an eyebrow at the proposition that Mossberg should be named class representative in this action.”

So, how did Judge Wu certify this class action lawsuit against me, with Mr. Mossberg as the lead plaintiff? He certainly did not follow the law under the PSLRA. His own words and citings in his ruling clearly show that he erred and ignored the law.

Judge Wu has made it clear in his ruling that he really doesn’t care who the plaintiff is:  ”On the other hand, even if Mossberg’s counsel affirmatively elected not to take advantage of the opportunity the Court now presents it with to procure another representative or co-representative, it would not be an extraordinary surprise to learn that the Ninth Circuit gave them yet another opportunity, if it saw fit to disagree with this Court’s adequacy analysis.”… direct violation of the law under the PSLRA. If the plaintiff does not matter or can be replaced years into a case, they are clearly a “straw man” plaintiff who would not be able to meet the PSLRA requirement to be “directing the case”. How can you “direct a case” that you have not been involved in for more than four years????

It is clear to me that Judge Wu doesn’t agree with or believe in or is choosing not to enforce the PSLRA’s heightened pleading requirements for plaintiffs. Why? I don’t know, but this statement in his ruling is particularly galling and to me shows bias: “Finally, where, as here, “recovery on an individual basis would be dwarfed by the cost of litigating on an individual basis, this factor, weighs in favor of class certification”.  What about me? I am an individual too. I didn’t sue anyone, they sued me. What about the millions it is going to cost me to defend myself, as a result of Judge Wu’s incorrect rulings on Scienter and on Class Certification?

Here is what a knowledgeable friend who reviewed his matter wrote to me.

“What a crock!  Dredge up an 88 year old guy in New Jersey as your front man??!!  These lawyers have no down side other than the investment of their own time. We need stronger rules re: bringing frivolous suits and wasting taxpayer money. If your case gets thrown out and is shown to be without merit, you (should have to) pay a hefty fee to more than cover court costs and reimburse all costs incurred by the defendant. This ability to consume others’ resources without any notable risks is a big flaw in our system.”

I could not agree more.

The 9th Circuit and Congress, help…..Federal Judges like Wu are ignoring the law under the Private Securities Litigation Reform Act of 1995. This has major repercussions for businesses and our economy, because these frivolous securities lawsuits cost a lot of time and money and frankly discourage leadership and capital formation which are key to economic growth.  Think about it. If you follow closely what is happening to me and others like me, as a result of losing our firms in this unprecedented financial crisis, you would be crazy to aspire to take your company public or  lead a public company. Businesses fail….that is part of capitalism…..a healthy part, it should not be seen as a financial bonanza for frivolous litigation.

Finally, Judge Wu said the following is his ruling: “The lion’s share of any trial in this matter will no doubt center on questions….the common questions….of the truth or falsity of Perry’s and Indymac’s statements, scienter, and loss causation.”

In failing to do his job properly, Judge Wu has put me in the difficult position of deciding to spend millions to defend myself against these completely meritless allegations or settle, because I have other important meritless litigation to fight and limited time and resources to do so. That being said, I am leaning towards seeing this matter through to a win in court, no matter what the cost to me personally. People think the mortgage markets were screwed up; if they only knew how our legal system truly works.

Here are a few other comments from Judge Wu’s ruling and my response:

Judge Wu:

“The trial court must conduct a “rigorous analysis” to determine whether the party seeking certification has met the prerequisites of Rule 23 of the Federal Rules of Civil Procedure”.

M. Perry:

Judge Wu’s own comments from his ruling clearly show he did not meet the prerequisites of Rule 23.

Judge Wu:

“Mossberg has informed the Court that co-named plaintiff, Wayman Tripp, will be unable to continue to serve as a representative of the class due to illness.”

M. Perry:

This goes to my view expressed above that Judge Wu has not followed the PSRLA law requiring the plaintiffs to “direct the case”, as opposed to their attorneys. Mr. Tripp was the co-defendant and has Alzheimers, how could he have been co-directing the case? Also, Mr. Mossberg testified under oath that he and Mr. Tripp had never met or discussed the case. So clearly, this is evidence of a case “directed by plaintiffs’ attorneys, with “straw man” plaintiffs.

Judge Wu:

“Under the PSLRA a plaintiff must proffer a sworn certification indicating, among other things, that he , she or it is not acting at the behest of counsel and has reviewed the complaint and authorized its filing.”

M. Perry:

Mr. Mossberg testified under oath that he did no such thing. He testified that he did not review any of his attorney’s legal documents in advance of their filing (and therefore could not have authorized their filing) . He testified that he received them after they were filed. Doesn’t this show Judge Wu that Mr. Mossberg lied under oath….either in his sworn certification or his deposition?

Judge Wu:

“This entails some measure of involvement or vigor on the class representative’s part, perhaps especially in the securities litigation arena.”

M. Perry:

From Mr. Mossberg’s testimony the only thing he seems to vigorously pursue is where is the closest bathroom!

Judge Wu citing from “Cooper”:

“The class representatives are familiar with the facts and theories of this case. Each of the class representatives has declared to the Court that they have supervised and monitored the progress of the litigation, including the reviewing of quarterly updates from the class counsel and supervising subordinates who collected discovery materials. The class representatives have given their depositions in this case demonstrating their knowledge of the issues involved in the case….given the extensive holdings of the class representatives, and the importance of the funds under their management, the class representatives are extremely likely to pursue this suit with vigor.”

M. Perry:

That is the type of Plaintiff that is supposed to pursue securities litigation cases and Judge Wu knows it. Under the PSLRA, the largest shareholders; generally institutions are supposed to take the lead. It is should be suspicious to Wu that they did not….not one of them.  Here is what Wu has allowed with Mr. Mossberg (and I sure even this involved a lot of coaching on the plaintiff attorney’s part):

Judge Wu:

“He relatively accurately summarized the allegations in the lawsuit. He knows the name of the judge handling this case. He knows the Ninth Circuit has been asked to review one of the Court’s decisions thus far, knows there have been mediation/settlement efforts, has met with his attorneys in person twice, spoken with them on the phone numerous times, and has received materials from and sent materials to his attorneys, by way of mail, on at least several occasions, has an at-least-somewhat-reasonable explanation of “what it means to be a class representative”, he believes he can fulfill those duties and that he has done so to this point, is familiar with the course of the pleading versions filed in the case, is familiar with at least some of the key documents filed in this case, and has on occasion, when necessary , asked his attorneys questions about some of those documents.”

M. Perry:

Just contrast Judge Wu’s list above (which is embarrassingly like my youngest daughter’s report card….when she was in 1st grade!!!) with “Cooper”.  It seems biased against me and for the plaintiffs that he goes to such lengths to defend Mossberg’s qualifications.

Judge Wu (additional citing from “Cooper”):

“(t)he class representatives in this case do not have troubling traits that suggest this is a lawyer-driven litigation by a manufactured plaintiff out to make a quick buck.”

M. Perry:

Judge Wu’s own ruling combined with Mr. Mossberg’s sworn deposition makes clear that this complaint against me is entirely “lawyer-driven litigation by a manufactured plaintiff”. Again, Judge Wu is ignoring the PSRLA law. Why?

Judge Wu:

“There is no question that an ideal class representative would be much more engaged than Mossberg has been here. In fact, one might call this borderline.”

M. Perry:

If Mossberg is not well below the borderline (and clearly many of Judge Wu’s highly inconsistent statements in this order show he is), I don’t know who is.

Judge Wu:

“The Court cannot expect Mossberg (or, frankly, any class representative) to sit at home typing up pleadings, briefs, and other relevant documents, asking only that his lawyers sign them as officers of the Court.”

M. Perry:

To me, this statement is so far from the truth and irrelevant that to me again it shows bias on the part of Judge Wu. Just follow the law here Judge Wu and plaintiffs. Mr. Mossberg has not directed this case in any way. He is a “straw man”. He testified under oath that he never reviewed any of his attorneys filings before they were made, never made a suggestion for even an edit, and he could not recall making a single suggestion about the case to his attorneys….other again, that he could not travel long distances without being near a restroom.

Judge Wu: 

“..the Court may not find Mossberg to be an adequate representative on his own. In the end, however, a rejection of Mossberg as a class representative would not necessarily mean an end to this case. The Court would allow Mossberg’s counsel to look for other suitable representatives or co-representatives (perhaps even Claude Reese, the only applicant to become lead plaintiff at the beginning of this action other than Tripp and Mossberg).”

M. Perry:

Clearly, Judge Wu knows that Mossberg is not qualified. He keeps bringing it up in his own ruling. I don’t understand how if he properly ruled under the PSRLA that Mossberg was out that the case would not be dismissed. How can a new plaintiff meet the “qualification” requirements to have directed the case? By allowing a new plaintiff to come it four years into this case, isn’t he saying the plaintiff does not matter, in violation of the PSLRA? And step back for a moment, Indymac was mostly owned by large institutional shareholders. Not one institution was willing to be a plaintiff. Not one. And four years into this case, one co-plaintiff stepped down due to Alzheimers leaving Mossberg who is clearly unqualified and Judge Wu says, “Why don’t you go back and get that one other guy from several years ago who wanted to be the lead plaintiff”? That sure seems biased to me, doesn’t it?

Sent: Thursday, November 17, 2011 2:26 PM
To: Michael Perry
Subject: judge wu

I pulled this off a judge rating site regarding Wu.  Well written so not just some pissed off slacker.  It’s somewhat consistent with other comments:

Civil Litigation – Private

Comment #: 10032
Rating:3.8 wu-stars
He maintains a friendly courtroom demeanor with an excellent clerk, but he is otherwise a disaster. He micromanages to a degree that his calendar is always overfull with return hearings. As a result, he is never prepared for argument, and has rarely read any of the papers. He wings everything, including criminal sentencing, which is a disgrace. He makes up for this by invariably sentencing for less than the proposed term, for the most peculiar reasons. In civil cases, he is the most plaintiff-favorable judge in the District Court, perhaps because he is naturally indecisive, and so reasons that he’ll not be overturned by keeping the case alive. He is very intelligent, and has the ability to be very, very much better than he presently is. He is a great disappointment


Plaintiff Mossberg’s Deposition

Perry’s Opposition to Tripp Class Certification

Judge Wu’s Ruling Approving Tripp Class Certification

“Tapping this data (land availability “elasticity scores”), economists Atif Mian at Princeton University and Amir Sufi at the University of Chicago’s Booth School of Business have shown that more constrained areas saw bigger booms in the housing bubble—but also bigger busts on the way down.”, Wall Street Journal, February 27, 2014

“Again, the truth is emerging. The U.S. housing bubble and bust was caused by many factors: Interest rates being manipulated too low for too long by the Fed; indirectly fueling artificially low mortgage rates through the structuring/tranching of variable-rate CMO debt (from fixed rate mortgages/MBS, because of prepayments) and also causing investors to chase riskier assets for yield. A flood of foreign capital investment into U.S. Treasuries, GSE debt and MBS, and then in search of yield, into riskier, private mortgage backed-securities, driving rates down and demand up, further. The government’s well-intended push to significantly expand homeownership opportunities (As the Chairman of Fannie Mae Frank Raines said to our advisory committee, “The mortgage industry has had a 99% success/1% failure model. Why not go to a 95% success/5% failure industry model, if we can expand U.S. home ownership dramatically.”). And the Clinton era $500,000 capital gains tax break for homeowners (every two years), which piled on to all of the above and I believe in hindsight encouraged a group of Americans to speculate on single family homes. And now we have a huge and important point being made here; a basic supply and demand problem. While the U.S. housing market is massive, only a small percentage of existing homes come on the market in any given year (existing supply) and new construction (additional new supply) is severely restricted in many major regional markets as a result of land constraints. The home price appreciation and depreciation data since 2006, support this article’s thesis: that the U.S. housing bubble and bust was exacerbated in regional markets by the relative inelasticity in the supply of land for housing development. The truth is emerging. Let’s briefly review. Pre-crisis, similar housing bubbles occurred in many developed countries (and burst around the same time as the U.S.), that never had a private mortgage and/or MBS market like the U.S.. This clearly disapproves the majority view of The Financial Crisis Commission and mainstream press (plaintiff’s attorneys and short sellers) thesis that U.S. mortgage lenders were the primary cause of the housing bubble. And today, housing bubbles in diverse places around the world like Norway, Canada, and China, do the same. And think about the recent rise in U.S. home prices since the U.S. bubble burst; 21% since hitting bottom in 2012. That increase, which few predicted in magnitude and speed (far outstripping economic and income growth during that time), has occurred despite there being virtually no private mortgage and MBS market in the U.S. and at a time that the Federal Reserve is touting its monetary policies and QE as the reason that stocks, bonds, and real estate prices have risen. In my opinion, given all these facts, it defies logic that pre-crisis U.S. private mortgage lenders would still continue to be blamed for being the primary cause of the unsustainable U.S. housing bubble.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Excerpts from February 27, 2014 WSJ article: “Place Bets Carefully on Homebuilders”:

“The crucial difference between housing markets in places such as San Jose, Calif., and Austin, Texas—more important than considerations like quality of life—is the availability of land, according to Massachusetts Institute of Technology economist Albert Saiz.”

“Mr. Saiz gave each metro area an “elasticity score”—the higher the number, the easier it is to put up a home. San Jose scored 0.76, ranking it the 10th most constrained among the 100 largest areas by population.”

“Mr. Saiz found the scores correlate with other constraints, such as zoning and taxes. Since he did his analysis, the scores have likely changed only a little, if at all, as they reflect land-use fundamentals.”

“Tapping this data, economists Atif Mian at Princeton University and Amir Sufi at the University of Chicago’s Booth School of Business have shown that more constrained areas saw bigger booms in the housing bubble—but also bigger busts on the way down.”

“While house prices in constrained areas have bounced around more than in less-restricted areas, they also have done better over the long haul. Consider two gauges of home prices, one made up of the 10 most elastic areas in 20 separate S&P/Case-Shiller metropolitan home-price indexes, the other of the 10 least-flexible areas. The latter is more volatile but up 65% since January 2000. The former is up 39%.”

“Constrained builders, conversely, must navigate markets where securing land can be tricky and there can be sudden price declines. But when prices rise, they can do very well, making them more suited for investors with a broadly bullish view on U.S. property.”

“With house prices supported to some extent by ultralow interest rates—and the vagaries of Federal Reserve tapering—buying America’s builders is especially fraught with uncertainty.”


Place Bets Carefully on Home Builders



Updated Feb. 27, 2014 5:40 a.m. ET

Home buyers know that location is all. But it also is critical to investing in builders.

After hitting a 14-year low, loans are starting to flow back in the home construction industry. But investors eyeing the home-builders need to know that more than ever, it really is all about location, location, location. Heard on the Street’s Justin Lahart discusses on MoneyBeat. Photo: Getty Images.

Digging into where these companies stake out their ground offers a way of playing house-price trends, whether investors feel bullish or fear that rising interest rates will undermine prices. While exchange-traded funds often make it tempting to simply bet the sector, investors should recognize that exposure to different housing markets make, say, Toll Brothers a very different company from D.R. Horton.

So home builders shouldn’t be lumped together. Yet they often are, with multiples of book value and earnings clustered around the sector median for most members of Standard & Poor’s broad index of home-builder stocks.

The crucial difference between housing markets in places such as San Jose, Calif., and Austin, Texas—more important than considerations like quality of life—is the availability of land, according to Massachusetts Institute of Technology economist Albert Saiz. For a 2010 paper in the Quarterly Journal of Economics, he used satellite-based data to determine the amount of land available for development in 269 U.S. metropolitan areas, covering roughly three-quarters of the population. The more hills and other impediments an area has, the less land can be developed.

Mr. Saiz gave each metro area an “elasticity score”—the higher the number, the easier it is to put up a home. San Jose scored 0.76, ranking it the 10th most constrained among the 100 largest areas by population. Austin, scoring 3.0, ranked a decidedly easier 88th. The range for all 100 was 0.6 to 5.5. Mr. Saiz found the scores correlate with other constraints, such as zoning and taxes. Since he did his analysis, the scores have likely changed only a little, if at all, as they reflect land-use fundamentals.

Tapping this data, economists Atif Mian at Princeton University and Amir Sufi at the University of Chicago’s Booth School of Business have shown that more constrained areas saw bigger booms in the housing bubble—but also bigger busts on the way down.

So home builders’ fortunes—and risks—are tied to where they sell houses. Those heavily concentrated in more constrained areas suffered for it. Among them: one-time stock market darling WCI Communities, a Florida-based builder that filed for bankruptcy protection in 2008.

While house prices in constrained areas have bounced around more than in less-restricted areas, they also have done better over the long haul. Consider two gauges of home prices, one made up of the 10 most elastic areas in 20 separate S&P/Case-Shiller metropolitan home-price indexes, the other of the 10 least-flexible areas. The latter is more volatile but up 65% since January 2000. The former is up 39%.

Getting a precise bead on the builders’ exposures to different cities isn’t possible and constraints can differ markedly even within cities. The delineations of the metro areas Mr. Saiz used are slightly different than what the Census Bureau now uses. But data on communities where the builders sell homes serve as a useful proxy.

To analyze this, The Wall Street Journal paired Deutsche Bank’s community counts for 15 listed builders with Mr. Saiz’s scores. Each metro area in which a builder operates is weighted: If it has 10 communities in the Dallas area and five around Miami, Dallas matters twice as much. The small fraction of communities not within the areas Mr. Saiz analyzed is excluded.

TRI Pointe Homes scores lowest at 0.9, indicating it is weighted toward more constrained areas. The California builder has moved to broaden its portfolio, agreeing late last year to buy Weyerhaeuser‘s home-building business. Still, at the time, TRI noted that business had ownership or control of “approximately 27,000 lots primarily located in high-growth, lot-constrained markets.” Other builders with low scores include Toll and M.D.C. Holdings.

At the other end of the spectrum is LGI Homes, scoring 2.2, with its large number of communities in Texas. The likes of LGI—along with Horton and Ryland Group, which also score highly—should offer investors relative insulation if house prices crack. In periods of growth, they should generate steady profits as they buy land, build on it and sell. Their biggest risk may be that they operate in markets where barriers to entry are lower.

Constrained builders, conversely, must navigate markets where securing land can be tricky and there can be sudden price declines. But when prices rise, they can do very well, making them more suited for investors with a broadly bullish view on U.S. property.

With house prices supported to some extent by ultralow interest rates—and the vagaries of Federal Reserve tapering—buying America’s builders is especially fraught with uncertainty. Rather than being all over the map, investors can, and should, pick their spot.

Write to Justin Lahart at


“From 1997 to 2013, there were 3,200 private securities class-action lawsuits, costing $75 billion (in settlements). There are only about 5,400 U.S. publicly-traded companies on the NYSE Euronext, NASDAQ, and NYSE Amex!!! Based on my experience, I believe that most of these suits are the real fraud; designed to “extort” public companies, by exploiting our dysfunctional civil legal system.”, Mike Perry, Former Chairman and CEO, IndyMac Bank

“By the way, I would bet that nearly 100% of these bogus lawsuits were settled (that’s why the table in the article only says “settlements” vs. “judgments won”), without their merits ever being heard by a court of law. In other words, the plaintiffs never proved a single allegation in a court of law and the defendants essentially paid “extortion” money so they could get the frivolous litigation behind them and move on with their business. Also, why don’t you hardly ever see a shareholder of merit; someone who owns 1%, 2%, 5%, or 10% of the company being the lead plaintiff in these suits? They are supposed to lead securities lawsuits under an amendment to the law (that was supposed to help reduce frivolous securities suits, but hasn’t). I think I know why. These institutional investors know most of these cases are without merit and don’t want their good name associated with them.”, Mike Perry



Securities Class Action: Will It Become Endangered Species?

Top Court Takes Up Legal Theory Underpinning Most Big Securities Lawsuits 

Feb. 26, 2014 7:43 p.m. ET

The Supreme Court is taking up the contested legal theory that underpins most big securities class-action lawsuits in a case that could reshape the balance of power between companies and the lawyers who sue them.

The suits can take many forms: a claim against a drug maker for tricking investors about the chances of bringing a new pill to market, for instance, or an allegation against a tech firm for lying about its sales figures. But they almost always rely on a single legal doctrine called “fraud on the market.”

In essence, the doctrine lets aggrieved investors join forces in court without ever having to show a direct connection between each shareholder’s losses and the alleged fraud. Instead, the courts generally assume that shareholders suffer harm whenever they buy stock in a company that is cooking its books.

The fraud-on-the-market theory led to a surge in securities lawsuits after a divided Supreme Court enshrined it in 1988.

If a majority of the high court’s justices agree to strike it down in its entirety—an outcome that many legal experts think possible—it “would be a potentially devastating hit to securities class actions,” said Blair Nicholas, a plaintiffs’ securities lawyer at Bernstein Litowitz Berger & Grossmann LLP.

Between 1997 and 2013, more than 3,200 securities class actions were filed, yielding over $75 billion in settlements and billions in fees for plaintiffs’ and defense lawyers, according to Cornerstone Research, a litigation-consulting firm.

The case, which will be heard next Wednesday, comes as the Supreme Court’s conservative wing is showing an increasing willingness to rein in large lawsuits against companies such as Comcast Corp. and Wal-Mart Stores Inc.

The Supreme Court cleared the way for class actions to take off with its 4-2 ruling in a 1988 case called Basic v. Levinson, which first embraced the fraud-on-the-market concept.

The doctrine is based on an economic theory that at any given moment, a company’s stock price reflects all available relevant information. If some of that information is fraudulent, the court reasoned, it can safely be assumed that it has been baked into the price as well.

Thus, investors can be injured by simply buying a fraudulently inflated stock even if they weren’t paying attention to the company’s news releases or securities filings.

The ruling was controversial from the start. The late Justice Byron White, one of the 1988 dissenters, said the court had made an ill-advised foray into “economic theorization” that would sow confusion in the courts.

Four justices on the current bench have publicly expressed reservations about it, including Justice Samuel Alito, who wrote that the doctrine may rest “on a faulty economic premise.”

Business interests and some academic legal experts worry the theory has spawned excessive and expensive litigation. They also argue that such suits are fundamentally unfair because the system makes it so easy for plaintiffs to form a class and acquire negotiating leverage.

Plaintiffs’ lawyers view private securities class actions as instrumental in deterring corporate deception and promoting market confidence. They contend that private suits do a better job of compensating duped investors than government regulators, who they say can’t police the markets alone.

The case now before the court involves a 12-year-old lawsuit regarding investors who bought shares in Halliburton HAL +0.53% between 1999 and 2001.

The plaintiffs accuse the oil-field services company of misleading investors about its accounting of cost overruns, exaggerating the benefits of its 1998 merger with Dresser Industries, and concealing its exposure to asbestos liabilities. They allege that when the real information was disclosed, Halliburton’s stock price took a dive. Halliburton, which denies it made any misrepresentations, disputes that there was any price impact.

Lawyers for Halliburton told the justices in a filing that the Basic ruling betrayed a “simplistic understanding of market efficiency” that is “at war with economic reality.”

In their own brief, lawyers for the lead plaintiff said Halliburton is asking the court “to do something it has not done in decades: reverse a settled statutory precedent in a field that Congress has closely superintended.”

The suit was spearheaded at one point by a pioneer of the securities class-action suit, William Lerach, who was expelled as co-lead plaintiffs’ counsel in 2007 after he became embroiled in a kickback scandal. The lead plaintiff in the Supreme Court case is a charitable fund that makes grants to programs of the Archdiocese of Milwaukee and to social-service groups.

Plaintiffs’ lawyers and shareholder groups warn that scrapping the theory could make it impractical for all but the largest institutional investors to pursue claims on their own. Mr. Nicholas said the litigation expenses alone—such as filing and discovery costs—would overwhelm the damages that a typical “retail” investor might stand to recover, draining any incentive to go to court.

In a friend-of-the-court filing, U.S. attorneys representing the Securities and Exchange Commission and the Justice Department said that discarding the fraud-on-the-market doctrine would “diminish the compensatory and deterrent effect of the private remedy.”

The court has the option to preserve the doctrine, but in a more limited form. One way would be to give an accused company the chance early on to knock down claims that an alleged fraud had anything to do with swings in a stock price. The Fifth U.S. Circuit Court of Appeals ruled last year that Halliburton isn’t owed that opportunity.

If the Supreme Court reverses its 1988 ruling, plaintiffs’ lawyers say they expect that Congress would consider restoring the “fraud-on-the-market” doctrine by passing a new law, said Nicholas Porritt, a partner at Levi & Korsinsky LLP who represents plaintiffs in securities class-action litigation.

Write to Jacob Gershman at

“The stock price is withering. Investors and analysts are feeling burned….if Mr. Zuckerberg has a revolution up his sleeve, let’s see it. Otherwise, he should settle the lawsuits, expect large staff turnover, and get on with running a business whose scope, prospects, and share price are limited by the limited prospects of advertising on Facebook.” Holman W. Jenkins, WSJ, August 18, 2012

“Before Facebook went public last Wednesday, they were a fabulous company led by a visionary leader. Zuckerberg (Facebook) has been a public company for just 4  business days and he has already been sued for securities fraud by private class action plaintiffs and CNBC and other pundits are calling for Zuckerberg to return from his honeymoon and defend the company. The well respected CFO is being partially blamed. The Securities and Exchange Commission has announced an investigation. The Financial Industry Regulatory Authority pledged a probe. Think about it…you and your CFO did nothing wrong, other than build a fabulous, worldwide company from scratch that is now worth (even after the 20% decline) over $80 billion and employs lots of Americans…An IPO of a new company, without a fully established business model and with tremendous uncertainty about its future prospects…the initial valuation should be a BIG guess and investors who invest should know that it is a VERY speculative matter…The SEC should say that they have no business investigating unless there is some evidence of securities fraud, because they would expect these offerings of companies like Facebook, to go up or down by 100% or more in the short-run as the market settles on its current views of a proper valuation.”, Excerpts from Mike Perry E-Mail to his SEC defense attorneys entitled: “Relevant Thoughts on Facebook IPO”, May 23, 2012

And while Mr. Jenkins’ August 18, 2012 OpEd was highly critical (and very wrong to-date) of Facebook and CEO Zuckerberg, his comments also make clear how ridiculous/frivolous any securities fraud allegations were at the time:

“Mr. Zuckerberg made it clear to potential investors what they were getting into.”

“No, Mr. Zuckerberg never actually told investors his company was worth $100 billion. You never heard him say the valuation was justified, and you never heard him say it wasn’t.”

“Facebook investors were clearly up for a speculative IPO.”

“Today, Facebook’s stock price is nearly $70 a share, not quite doubling its IPO price of $38, in less than two years. And its market value is a whopping $177 billion. So those private, class action securities fraud lawsuits that were filed just days after Facebook’s IPO, based on the billions in paper stock losses at that time, have been exposed as more of the same: ridiculous and frivolous. And I imagine the announced (just after the IPO) SEC investigation has also been suspended, without any findings or action. And why would the SEC investigate Facebook, when they had just weeks earlier reviewed and approved their S-1 filing to go public? I read a recent Bloomberg BusinessWeek article (below) about Facebook’s 10-year anniversary and all the exciting and important initiatives on their and Mr. Zuckerberg’s plate. Mr. Zuckerberg probably doesn’t understand or care because of the stocks rise (neither do most public company CEO’s until it is too late), but all I could think of as I read the article was how unfair it was for the government to expect Mr. Zuckerberg, or any U.S. public company CEO, to provide a SOX certification with each key SEC filing (10-K’s and 10-Q’s). Before I was investigated and sued by the SEC alleging that I had committed securities disclosure fraud (see the SEC tab for a further discussion of this matter), I thought my SOX certifications were as the language of the certifications says: “Based on my knowledge”. I don’t recall giving the meaning of words “Based on my knowledge” much thought, but it provided me comfort because I logically assumed that this language meant that I would not be held liable for securities fraud, unless I created (or instructed someone to create) a materially misleading disclosure, I omitted a material disclosure or instructed someone to omit a material disclosure (or I knew that someone else did any of the above). I can tell you from first-hand experience, that is not how the SEC enforcement staff interprets the “Based on my knowledge” qualifier in the SOX certification. The SEC enforcement staff believes that if a CEO is aware of a material item or issue and it is disclosed in a misleading manner or omitted; whether or not the CEO was involved or even aware, the CEO has committed securities disclosure fraud. This is a huge and important difference that I don’t think many public company CEOs and CFOs, general counsels (and outside counsels), and boards are aware. It raises the bar for CEOs dramatically, because most CEOs are aware at some point of every material item or issue (or they aren’t doing their jobs, right?). So, if you follow the SEC’s logic here, then the CEO is liable for the work of every single person involved in drafting and reviewing material SEC disclosures. (Never mind that “material” is a completely subjective issue and that hindsight is used by the SEC and private plaintiffs to the detriment of the company, CEO, and CFO.) There is no way for a CEO to meet the SEC enforcement division’s “knowledge standard” without a CEO reading each SEC filing for which they provide a SOX certification from cover to cover to make sure that ALL material items/issues of which they are aware (pretty much everything) is properly disclosed. That is neither fair nor realistic and it makes the securities disclosure laws completely arbitrary and abusive. (Can you imagine Warren Buffett or any public CEO doing this? I can’t.) Let me expand on this important point. According to the OMB, the 10-K alone takes on average nearly 2,000 man hours to prepare each year (see email below). There is no realistic way that a CEO can read the annual 10-K, quarterly 10-Q’s, a proxy, and various 8-K’s cover to cover, recall every material item/issue, and vouch those into the company’s filings to ensure they are properly disclosed. These documents are prepared by a “village” of financial, legal, and SEC disclosure experts: the CFO, controller, chief accounting officer, general counsel, and other experts and reviewed by outside counsel, the independent audit committee of the board, and the independent auditors. For many of these individuals or groups, preparing and reviewing these documents are their most important and time consuming responsibility. Yet only the CEO and CFO are required to provide a SOX certification. Public company CEOs should not have to provide SOX certifications (given their significant other responsibilities) just because the CEO’s of a few big public companies were crooks (WorldCom, Enron, etc.). It’s unfair and wrong. Think about it. The President role is now the “sweet spot”, as that arbitrary title means that they don’t provide a SOX certification to the SEC. And why in the world does the CFO have to provide a SOX certification and the General Counsel does not? Does it have to do with the fact that lawyers lead the SEC (and business leaders and accountants do not)? In the long run, I believe it will hurt the competitiveness of U.S. public markets (relative to foreign markets), particularly for IPOs. It also means that U.S. public company CEOs are unnecessarily and unrealistically burdened with major disclosure and compliance responsibilities and therefore spend less time on strategy, innovation, and execution. That eventually has to be a negative for shareholders, employees, and our economy. And finally, it’s wrong that the Courts, Congress, and the SEC have not truly reigned in hardly any of these frivolous private class actions securities disclosure lawsuits. My now informed view, is that most of them involve unsubstantiated and/or fraudulent claims.”, Mike Perry, former Chairman and CEO, IndyMac Bank

In Mr. Jenkins’ August 18th Wall Street Journal OpEd entitled “Facebook Faceplant”, he also said the following:

“Should Mark Zuckerberg have made it clearer to IPO investors he didn’t intent to run it to justify the implausible $100 billion market cap the IPO was about to give it? Go ahead: Buy the shares at $38, but don’t assume my job is to justify the unearthly valuation you’re assuming for my company. Holman Jenkins, Jr. wonders whether Facebook CEO Mark Zuckerberg should pass the baton to a more experienced manager.”

“Right off, let’s acknowledge that Facebook’s initial unrealistic valuation is the real source of Mr. Zuckerberg’s trouble. The share price has halved since the IPO three months ago.”

“But such an IPO perhaps makes it morally incumbent on management at least to have an idea how the valuation can be realized.”

“Some also profess to see a link between Facebook’s plummeting share prices and waning user enthusiasm for the site.”

“Though it would require chutzpah, perhaps the solutions is to buy back the company and take it private. Mr. Zuckerberg’s ideas of ownership and control certainly are more suited to a privately held company.”

“Facebook Turns 10: The Mark Zuckerberg Interview”, Bloomberg BusinessWeek, January 30, 2014

Mike Perry E-Mail to his SEC defense attorneys entitled: “SEC…OMB Burden of Mandatory Disclosures”, August 22, 2012

“Facebook Faceplant”, Holman W. Jenkins, Jr., Wall Street Journal, August 18, 2012

Mike Perry E-Mail to his SEC defense attorneys entitled: “Relevant Thoughts on Facebook IPO”, May 23, 2012

“Mr. Perkins first came to widespread attention a few weeks ago by comparing anti-tech demonstrators to Nazis. We might be heading, he said, to a new Kristallnacht, when Hitler Youth and stormtroopers were unleashed against Jews and their businesses. He quickly disavowed the analogy, but not the reasoning behind it.”, David Streitfeld, New York Times

I think Mr. Perkins might have been on to something important here. Here is an excerpt from Nobel Laureate F.A. Hayek’s 1941 classic, “The Road to Serfdom”:

“It seems to be almost a law of human nature that it is easier for people to agree on a negative program…on the hatred of an enemy, on the envy of those better off…than on any positive task. The enemy, whether he be internal like the “Jew” or the “kulak”, or external, seems to be an indispensable requisite in the armory of a totalitarian leader. In Germany and Austria the Jew had come to be regarded as the representative of capitalism because a traditional dislike of large classes of the population for commercial pursuits had left these more readily accessible to a group that was practically excluded from the more highly esteemed occupations. It is the old story of the alien race’s being admitted only to the less respected trades and then being hated still more for practicing them. The fact that German anti-Semitism and anticapitalism spring from the same root is of great importance for the understanding of what has happened there, but this is rarely grasped by foreign observers.”

Here are a few more relevant excerpts from F.A. Hayek’s “Road to Serfdom”:

“The general endeavor to achieve security by restrictive measures, tolerated or supported by the state, has in the course of time produced the progressive transformation of society….a transformation in which, as in so many other ways Germany has led and other countries have followed. This development has been hastened by another effect of socialist teaching, the deliberate disparagement of all activities involving economic risk and the moral opprobrium cast on the gains which make risks worth taking but which only few can win. We cannot blame our young men when they prefer safe, salaried positions to the risk of enterprise after they have heard from their earliest youth the former described as the superior, more unselfish and disinterested occupation. The younger generation of today has grown up in a world in which in school and press the spirit of commercial enterprise has been represented as disreputable and the making of profit immoral, where to employ a hundred people is represented as exploitation but to command the same number as honorable.

It was that a larger part of the civil life of Germany than of any other country was deliberately organized from the top, that so large a proportion of her people did not regard themselves as independent but as appointed functionaries, which gave her social structure its peculiar character. Germany had, as the Germans themselves boasted, for long been a Beamtenstaat in which not only in the civil service proper but in almost all spheres of life income and status were assigned and guaranteed by some authority.

While it is doubtful whether the spirit of freedom can anywhere be extirpated by force, it is not certain that any people would successfully withstand the process by which it was slowly smothered in Germany. Where distinction and rank are achieved almost exclusively by becoming a salaried servant of the state, where to do one’s assigned duty is regarded as more laudable than to choose one’s own field of usefulness, where all pursuits that do not give a recognized place in the official hierarchy or claim to a fixed income are regarded as inferior and even somewhat disreputable, it is too much to expect that many will long prefer freedom to security. And where the alternative to security in a dependent position is a most precarious position, in which one is despised alike for success or failure, only few will resist the temptation of safety at the price of freedom.

Once things have gone so far, liberty indeed becomes almost a mockery, since it can be purchased only by the sacrifice of most of the good things of this earth.”

FEBRUARY 14, 2014, 11:32 AM

Tom Perkins, Defender of the 1% Once Again


Mr. Perkins at the Commonwealth Club in San Francisco on Thursday night.

Like many semifamous people, Tom Perkins has publicly wondered how he will be remembered. As the venture capitalist who helped start Silicon Valley? As the extremely rich guy who built the most awesome sailing yacht of the era? Or even — although this is a long shot — as the author of the supremely trashy novel “Sex and the Single Zillionaire?”

Well, how about as the champion of America’s newest oppressed minority, the beleaguered billionaires of Silicon Valley?

Mr. Perkins came Thursday night to the Commonwealth Club in San Francisco to defend the tech elite against the forces that would bring them down. His appearance was titled “The War on the 1 Percent.” Three police officers stood watch, just in case the crowd decided to take the battle into its own hands.

View image on Twitter

The 82-year-old venture capitalist, whose ex-wife, the novelist Danielle Steel, was also at the event, was prepared with a list of villains: Bloated government entitlements. Teachers’ unions. The War on Poverty. President Obama and “ObamaCare.” High taxes. And old-fashioned jealousy.

Leave the tech companies alone, he insisted. Activists should not block their commuter shuttles or expect anything from them. Google may be able to cheat death — at least, it is funding a venture with that goal — but inequality is beyond it.

“We started Google,” Mr. Perkins said, a reference to Kleiner Perkins being an early backer of the search company. “If they want buses, fine with me. Is Google responsible for the rising rents in San Francisco? Indirectly, yes. What can they do about it? Nothing.”

He later returned to the company during a brief press conference. “The founders of Google have made so much money” he said, “I think there’s an envy.” His advice for Google: “You just ignore the protesters.” Which is pretty much what Google is doing. (The protesters were city residents who were annoyed that tech companies were using city bus stops for their buses; the city and the companies have since agreed to a small fee.)

The hurriedly arranged event was sold out, which was not true of forthcoming appearances by Sen. Barbara Boxer, His Serene Highness Prince Albert II of Monaco or even Amy Chua, the Tiger Mom. Politics, royalty and how to raise kids might be big draws elsewhere, but in the Bay Area the tech community has a way of sucking the air out of all other topics.

Particularly now. There is a mood of rising dissent against Silicon Valley, whose workers are blamed for making San Francisco unaffordable for everyone else. Mr. Perkins first came to widespread attention a few weeks ago by comparing anti-tech demonstrators to Nazis. We might be heading, he said, to a new Kristallnacht, when Hitler Youth and stormtroopers were unleashed against Jews and their businesses.

He quickly disavowed the analogy, but not the reasoning behind it. In other words, he did not mean that protesters would be literally beating up everyone wearing Google Glass and carting off Larry Page and Sergey Brin to internment camps. Just that they would like to.

“I’m not sorry I did it,” he said Thursday night. For one thing, he noted, it got everyone’s attention.

Mr. Perkins’ interlocutor, Adam Lashinsky, soon had the frustrated look of a man trying to swim in a vat of molasses. Mr. Lashinsky pointed out, for instance, that it was ridiculous to equate powerless Jews in the Third Reich with extremely powerful tech overlords in present-day America.

“No, I think the parallel holds,” Mr. Perkins said calmly. For one thing, “If you pay 75 percent of your life’s earnings to the government you are being persecuted.”

He had a better plan: “You don’t get to vote unless you pay a dollar in taxes. later he added, “A million in taxes, you get a million votes.” He said he was kidding about that last part, kind of. But he was serious that things started to go wrong 50 years ago with President Johnson’s War on Poverty, which somehow led to the teachers going out of control. He said that in the entire country last year, only 14 teachers “were fired for incompetence.” (For Mr. Perkins’ views on taxes, follow this link to DealBook, )

Demonstrators do not need to storm the gates of Silicon Valley. With spokesmen like Mr. Perkins, the tech community will alienate the entire country in no time.

“Dr. Friston has proposed that our brains are prediction-generating machines. Our brains, Dr. Friston argues, generate predictions about what is going to happen next, using past experiences as a guide.”, New York Times, February, 2014

“I think that’s exactly right. This is why the FDIC and other plaintiff’s (with the benefit of hindsight mind you) were wrong and unfair in alleging that I should have known that the unprecedented 2007/2008 financial crisis was coming and taken different actions than I did. As I have said before, housing prices in the U.S. had not declined nationwide in my lifetime or even my parents’ lifetimes. The last time housing prices had declined nationwide was during the Great Depression (and no one realistically expected a Great Depression). Goldman Sach’s CFO in August 2007, said that “they were seeing things that were 25-standard deviation moves, several days in a row”. That sounds far-fetched to me, but a 4-Sigma event (4 standard deviations) occurs only once in 126 years. And Nobel economist Krugman, in hindsight, has called the financial crisis a once-in-three generation event. I think that sounds about right. How in the world was I supposed to predict the unpredictable and radically change IndyMac’s business model in advance when almost no one saw it coming?”, Mike Perry, former Chairman and CEO, IndyMac Bank


Phantom Melodies Yield Real Clues to Brain’s Workings

FEB. 13, 2014
Carl Zimmer

The sheet music of a 66-year-old woman’s musical hallucinations. Researchers reported that her daily hallucination sequences were each two to four bars in length, with each being repeated for periods lasting tens of minutes. Sukhbinder Kumar

In 2011, a 66-year-old retired math teacher walked into a London neurological clinic hoping to get some answers. A few years earlier, she explained to the doctors, she had heard someone playing a piano outside her house. But then she realized there was no piano.

The phantom piano played longer and longer melodies, like passages fromRachmaninov’s Piano Concerto number 2 in C minor, her doctors recount in a recent study in the journal Cortex. By the time the woman — to whom the doctors refer only by her first name, Sylvia — came to the clinic, the music had become her nearly constant companion. Sylvia hoped the doctors could explain to her what was going on.

Sylvia was experiencing a mysterious condition known as musical hallucinations. These are not pop songs that get stuck in your head. A musical hallucination can convince people there is a marching band in the next room, or a full church choir. Nor are musical hallucinations the symptoms of psychosis. People with musical hallucinations usually are psychologically normal — except for the songs they are sure someone is playing.

The doctors invited Sylvia to volunteer for a study to better understand the condition. She agreed, and the research turned out to be an important step forward in understanding musical hallucinations. The scientists were able to compare her brain activity when she was experiencing hallucinations that were both quiet and loud — something that had never been done before. By comparing the two states, they found important clues to how the brain generates these illusions.

If a broader study supports the initial findings, it could do more than help scientists understand how the brain falls prey to these phantom tunes. It may also shed light on how our minds make sense of the world.

“I think this is a sweet paper and an important one,” said Oliver Sacks, a neurologist whose books include “Hallucinations” and “Musicophilia.” “It’s a new way of looking at things.”

Dr. Sacks added that the conclusions of the study could only be preliminary, because it was based on a single person. But the same method may work on other people with musical hallucinations. “I think it’s a very good protocol,” Dr. Sacks said.

The study was based on a simple idea. Sometimes people with musical hallucinations say that hearing real music can quiet the imaginary tunes. Researchers had already found that they could use a similar method to mask tinnitus, in which people have a nagging ringing in the ears.

“The idea came to us, why not try masking music hallucination?” saidSukhbinder Kumar, a staff scientist at Newcastle University and one of the study’s co-authors.

It turned out that Sylvia found that music by Bach sometimes eased her hallucinations. When Dr. Kumar and his colleagues measured the effect in their lab, they found a consistent pattern: once the Bach stopped, Sylvia had several seconds of total relief from the hallucinations. Then the hallucinatory piano gradually returned, reaching full strength about a minute and a half after the Bach ended.

Dr. Kumar and his colleagues wondered what they would see if they measured her brain activity as her hallucinations rebounded. Brain scans in the past have only yielded murky clues about musical hallucinations, for a variety of reasons.

One problem has to do with how the studies have been designed. Scientists compare a group of people with normal hearing with another group of people who experience musical hallucinations to see if there are any significant differences in their brain activity. All the variations in each group may blur the evidence for how the hallucinations arise. Sylvia, by contrast, offered Dr. Kumar and his colleagues an opportunity to essentially switch hallucinations on and off in a single brain.

For their experiment, Sylvia put on earphones and sat with her head in a scanner that detects the magnetic field produced by the brain. On the day of the study, she was hearing selections from Gilbert and Sullivan’s “H.M.S. Pinafore.”

Every few minutes the scientists would switch to Bach for 30 seconds, to tamp down the hallucination. When the real music stopped, Sylvia pressed numbers on a keyboard to rate the strength of her hallucinations while the scanner recorded her brain activity.

Dr. Kumar and his colleagues later pored over the data. They compared Sylvia’s brain activity when the hallucinations were strongest with when they were at their weakest. They found that a few regions consistently produced stronger brain waves when the hallucinations were louder.

It turned out that they are regions that we all use when we listen to music. One region becomes active when we perceive pitch, for example. Another region becomes active when we recall a piece of music.

Dr. Kumar argues that these results support a theory developed by Karl Friston of the Wellcome Trust Center for Neuroimaging. (Dr. Friston is a co-author of the new study.) Dr. Friston has proposed that our brains are prediction-generating machines.

Our brains, Dr. Friston argues, generate predictions about what is going to happen next, using past experiences as a guide. When we hear a sound, for example — particularly music — our brains guess at what it is and predict what it will sound like in the next instant. If the prediction is wrong — if we mistook a teakettle for an opera singer — our brains quickly recognize that we are hearing something else and make a new prediction to minimize the error.

Scientists have long known that people with musical hallucinations often have at least some hearing loss. Sylvia, for example, needed hearing aids after getting a viral infection two decades ago.

Dr. Kumar’s theory could explain why some people with hearing loss develop musical hallucinations. With fewer auditory signals entering the brain, their error detection becomes weaker. If the music-processing brain regions make faulty predictions, those predictions only grow stronger until they feel like reality. “There is nothing from the senses to constrain them,” Dr. Kumar said.

Dr. Kumar and his colleagues are now using their experimental method on more people with musical hallucinations.

If the theory holds up in further research, it could explain why real music provides temporary relief for musical hallucinations: the incoming sounds reveal the brain’s prediction errors. And it may also explain why people are prone to hallucinate music, and not other familiar sounds.

“Music is more predictable,” said Dr. Kumar. “That makes it more likely as a phenomenon for hallucinations.”

A version of this article appears in print on February 18, 2014, on page D6 of the New York edition with the headline: Phantom Melodies Yield Real Clues.

“Securities laws require material information — that is, information that might affect an investor’s view of a company — to be disclosed. That the government would deny a company’s shareholders all its profits certainly seems material, but the existence of this policy cannot be found in the financial filings of Fannie Mae.”, Gretchen Morgensen, New York Times, February 15, 2014

“What a screw up by the government. Let’s set the record straight right now. If the government had not bailed out Fannie Mae and Freddie Mac in 2008 to the tune of $189.5 billion and then implicitly backed their new MBS securities issuance (which is what’s generating the new revenue/profits), these firms would have filed for bankruptcy protection and the preferred and common stockholders would have never seen a dime given their credit/guarantee losses and their huge leverage. (And by the way, the bailout really benefited those institutions and investors who owned Fannie and Freddie MBS and unsecured debt. They were paid 100 cents on the dollar; even more, because the Fed’s monetary policy actions, including QE caused MBS prices to trade above par.) These speculators in Fannie and Freddie’s preferred and common stock are shrewdly exploiting the government for the incompetent (“Unethical” if it was a private sector entity.) legal structure they used in their takeover and Fannie and Freddie’s poor (“Fraudulent” if it was a private sector entity.) securities disclosures while under government conservatorship. Ironically, the government and others have derided the private financial sector for “hiding” their full risks and true leverage from shareholders and regulators, by the use of highly technical, GAAP-accounting compliant, off-balance sheet securitizations and other structures. And yet the only reason that the government placed Fannie and Freddie into conservatorship (versus receivership and full nationalization, like IndyMac Bank) and allowed a 20% private common stock ownership to exist (and the common and preferred stocks to continue to trade, albeit on the pink sheets), was to avoid putting $4.9 trillion of their debt on the government’s balance sheet. In other words, the U.S. government itself utilized a similar strategy to avoid showing its true liabilities. (The same by the way can be said of the U.S. banking system’s federally insured deposit liabilities, when the FDIC was insolvent and even now when it is undercapitalized, but that is a story for another day.) Why doesn’t the government just stop guaranteeing any new MBS in Fannie and Freddie and direct all those new, monopoly profits to a 100% government-owned entity for the benefit of taxpayers? That’s what they should have done in 2008, then these speculators would have never invested, because there would have been no “loophole”/error to exploit.”, Mike Perry, former Chairman and CEO, IndyMac Bank


The Untouchable Profits of Fannie Mae and Freddie Mac

FEB. 15, 2014
Fair Game

Would you buy stock in a company that barred you from sharing in its future earnings? Of course not. Participating in the upside is what stock ownership is all about.

And yet, as of December 2010, holders of Fannie Mae and Freddie Maccommon stock were subject to such a restriction by the United States government. They didn’t know it at the time, though, because the policy was not disclosed.

This month, an internal United States Treasury memo that outlined this restriction came up at a forum in Washington.

The memo was addressed to Timothy F. Geithner, then the Treasury secretary, from Jeffrey A. Goldstein, then the under secretary for domestic finance. In discussing Fannie and Freddie, the beleaguered government-sponsored enterprises rescued by taxpayers in September 2008, the memo referred to “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.”

The memo, which was produced in a lawsuit filed by Fannie and Freddie shareholders, was dated Dec. 20, 2010. Securities laws require material information — that is, information that might affect an investor’s view of a company — to be disclosed. That the government would deny a company’s shareholders all its profits certainly seems material, but the existence of this policy cannot be found in the financial filings of Fannie Mae. Neither have the Treasury’s discussions about the future of the two finance giants mentioned the administration’s commitment to shut common stockholders out of future earnings. Freddie Mac’s filings do refer, albeit incompletely, to the administration’s stance, noting that the Treasury “has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment.” Note that this reference does not say all earnings.

Lewis D. Lowenfels, a securities law expert in New York, found this statement insufficient. “If there is disclosure regarding future Fannie and Freddie earnings and the administration has a commitment that existing Fannie and Freddie common equity holders will never receive any future positive earnings,” he said, “this commitment would be material to investors and should be disclosed.”

When the memo was written, plenty of people held these stocks. Regulatory filings show that 18,000 investors held 1.1 billion shares of Fannie Mae common stock, while just over 2,100 investors held 650 million Freddie Mac shares.

Back in 2010 and 2011, of course, common stockholders of Fannie and Freddie had little hope of making much money. During those days of rampant mortgage defaults and losses, investors were warned about the uncertainty of their companies’ prospects. Fannie and Freddie shareholders were repeatedly told that the preferred and common stock would have value only if anything remained after taxpayers were fully repaid for the rescue. With the amount of that rescue peaking at $189.5 billion, that was a very big “if.” On the day the Treasury memo was written, the price of Fannie Mae shares closed at 34 cents.

But the companies staged a turnaround; in mid-2012, they began earning billions. With interest rates low and banks not lending, Fannie and Freddie became the only mortgage game in town. By Sept. 30 of last year, the companies had returned $185 billion to the Treasury.

Failing to disclose the administration’s hard line on the companies’ shareholders is disturbing for another reason. In bailing out Fannie and Freddie, the Treasury received warrants — optionlike securities that rise in value when the shares underlying them do. When investors, hoping for a housing recovery, flocked to the shares and pushed them higher, the value of the warrants increased. Fannie’s common stock now trades at $3.06 a share.

Given Treasury’s interest in a rising stock price, depriving common equity holders of future earnings was especially important for investors to know, Mr. Lowenfels said.

A spokesman for the Treasury declined to comment. Mr. Geithner did not respond to an email, and Mr. Goldstein, now a managing director at Hellman & Friedman, a private equity firm, did not return a phone call. (After the deadline for publication of this column had passed, spokespeople for the Treasury Department and Mr. Geithner offered comments.)

All of this has come to a boil because Fannie and Freddie have become so profitable. Yet because of a change in the repayment process dictated by the Treasury in 2012, the $189.5 billion debt technically remains outstanding. The profits generated by Fannie and Freddie have instead gone to the general treasury.

I have been critical of these companies, but this change in the bailout terms seems punitive, especially when considering how other bailout recipients were treated. And it has led to lawsuits against the government from Fannie and Freddie shareholders, including insurance companies, a mutual fund and a hedge fund. The plaintiffs contend that the government’s 2012 decision to take all the companies’ profit — just as it was starting to balloon — was illegal under the 2008 law that rescued them.

After all, back in 2008, the companies were not put into receivership, the equivalent of bankruptcy. Rather, they were placed under the care of a conservator — the Federal Housing Finance Agency. That conservator was supposed to put the companies “in a sound and solvent condition” and “preserve and conserve the assets and property” of each entity.

Siphoning off the entities’ profits is the opposite of conserving their assets and property, the plaintiffs contend. And they point to a 2009 Treasury memo stating that the conservatorship of Fannie and Freddie “preserves the status and claims” of preferred and common shareholders. One of those claims is surely having access to future earnings.

A spokeswoman for the Federal Housing Finance Agency declined to comment, citing the litigation. A spokesmen for Fannie declined to comment as well. A Freddie Mac official did not elaborate beyond pointing to the language in its filings.

Perry Capital, a hedge fund, is one of the plaintiffs suing the government. Its lawsuit seeks no damages, but asks that the government follow the 2008 law. The 2010 memo was produced by the Treasury in response to this lawsuit.

Do the Treasury’s actions amount to a backdoor nationalization of the companies? A full-fledged takeover would have required Treasury to put all the companies’ obligations — $4.9 trillion at the time — on the government’s balance sheet. A nonstarter.

Furthermore, nationalization would have required the government to provide compensation to shareholders for what it took. Now the government gets the benefits of the companies’ profits while avoiding any compensation payments.

“People disagree about what should happen to the G.S.E.’s,” said Matthew D. McGill, a lawyer at Gibson, Dunn & Crutcher in Washington who represents Perry Capital. “But if the plan is to wind them down, Congress provided a means to do that in the 2008 law — it’s called receivership, and it provides a host of procedural protections to claimants. What the Treasury cannot do is abuse its conservatorship powers to nationalize the companies and then, when it deems convenient, wind them down without the protections enacted by Congress.”

A version of this article appears in print on February 16, 2014, on page BU1 of the New York edition with the headline: The Untouchable Profits.

“Profits are at a record high as a share of G.D.P., yet corporations aren’t reinvesting their returns in their businesses. Instead, they’re buying back shares, or accumulating huge piles of cash. This is exactly what you’d expect to see if a lot of those record profits represent monopoly rents.”, Paul Krugman, NY Times, February 17, 2014

“It’s time, in other words, to go back to worrying about monopoly power, which we should have been doing all along.”, Paul Krugman

“Every once in awhile Krugman hits the nail on the head. Whether it is “Too Big to Fail” Banks, major corporations that feed off of government contracts, or the NFL, NBA, and MLB; crony capitalism is wrong and hurts America and its economy. However, Krugman is a hypocrite because he hates private-sector monopoly power, which reduces competition and innovation, but he is fine with centralized collectivism of well-intended government and government labor unions (35% of government workers are in a labor union, more than five times the rate of the private sector) which also hurt/restrict competition, hurt our economy, and make America weaker. If you believe in free market competition as the basis for economic order (versus collectivism, which always leads to restrictions/barriers, the elimination of choice, centralized control, and then totalitarianism, according to Nobel economist F.A. Hayek), then you have to believe in it for everyone; not just everyone but yourself and those like you.” , Mike Perry, former Chairman and CEO, IndyMac Bank

The Opinion Pages| Op-Ed Columnist

Barons of Broadband

Paul Krugman

Last week’s big business news was the announcement that Comcast, a gigantic provider of cable TV and high-speed Internet service, has reached a deal to acquire Time Warner Cable, which is merely huge. If regulators approve the deal, Comcast will be an overwhelmingly dominant player in the business, with around 30 million subscribers.

So let me ask two questions about the proposed deal. First, why would we even think about letting it go through? Second, when and why did we stop worrying about monopoly power?

On the first question, broadband Internet and cable TV are already highly concentrated industries, with a handful of corporations accounting for most of the customers. Once upon a time antitrust authorities, looking at this situation, would probably have been trying to cut Comcast down to size. Letting it expand would have been unthinkable.

Comcast’s chief executive says not to worry: “It will not reduce competition in any relevant market because our companies do not overlap or compete with each other. In fact, we do not operate in any of the same ZIP codes.” This is, however, transparently disingenuous. The big concern about making Comcast even bigger isn’t reduced competition for customers in local markets — for one thing, there’s hardly any effective competition at that level anyway. It is that Comcast would have even more power than it already does to dictate terms to the providers of content for its digital pipes — and that its ability to drive tough deals upstream would make it even harder for potential downstream rivals to challenge its local monopolies.

The point is that Comcast perfectly fits the old notion of monopolists as robber barons, so-called by analogy with medieval warlords who perched in their castles overlooking the Rhine, extracting tolls from all who passed. The Time Warner deal would in effect let Comcast strengthen its fortifications, which has to be a bad idea.

Interestingly, one cliché seems to be missing from the boilerplate arguments being deployed on behalf of this deal: I haven’t seen anyone arguing that the deal would promote innovation. Maybe that’s because anyone trying to make that argument would be met with snorts of derision. In fact, a number of experts — like Susan Crawford of Benjamin N. Cardozo School of Law, whose recent book “Captive Audience” bears directly on this case — have argued that the power of giant telecommunication companies has stifled innovation, putting the United States increasingly behind other advanced countries.

And there are good reasons to believe that this isn’t a story about just telecommunications, that monopoly power has become a significant drag on the U.S. economy as a whole.

There used to be a bipartisan consensus in favor of tough antitrust enforcement. During the Reagan years, however, antitrust policy went into eclipse, and ever since measures of monopoly power, like the extent to which sales in any given industry are concentrated in the hands of a few big companies, have been rising fast.

At first, arguments against policing monopoly power pointed to the alleged benefits of mergers in terms of economic efficiency. Later, it became common to assert that the world had changed in ways that made all those old-fashioned concerns about monopoly irrelevant. Aren’t we living in an era of global competition? Doesn’t the creative destruction of new technology constantly tear down old industry giants and create new ones?

The truth, however, is that many goods and especially services aren’t subject to international competition: New Jersey families can’t subscribe to Korean broadband. Meanwhile, creative destruction has been oversold: Microsoft may be an empire in decline, but it’s still enormously profitable thanks to the monopoly position it established decades ago.

Moreover, there’s good reason to believe that monopoly is itself a barrier to innovation. Ms. Crawford argues persuasively that the unchecked power of telecom giants has removed incentives for progress: why upgrade your network or provide better services when your customers have nowhere to go?

And the same phenomenon may be playing an important role in holding back the economy as a whole. One puzzle about recent U.S. experience has been the disconnect between profits and investment. Profits are at a record high as a share of G.D.P., yet corporations aren’t reinvesting their returns in their businesses. Instead, they’re buying back shares, or accumulating huge piles of cash. This is exactly what you’d expect to see if a lot of those record profits represent monopoly rents.

It’s time, in other words, to go back to worrying about monopoly power, which we should have been doing all along. And the first step on the road back from our grand detour on this issue is obvious: Say no to Comcast.

Correction: February 17, 2014

An earlier version of this column misstated the target of a deal announced by Comcast. It plans to acquire Time Warner Cable (not Time Warner, from which Time Warner Cable was spun off in 2009).

“The Lira has lost as much as a third of its value against the dollar, since the Federal Reserve in Washington began making noises last May about cutting back on its stimulus program, prompting investors to move their money from risky emerging markets…”, Wall Street Journal, February 9, 2014

“Whatever the outcome, Turkey is largely at the mercy of foreign investors and policies made in Washington. No one is more aware of that than the currency traders at the Grand Bazaar.(Currency trader Osman Atac) could recite the calendar of upcoming U.S. economic data releases and talk at length on the likely direction of Fed policy as Janet L. Yellen takes over as chairman from Ben S. Bernanke.”, WSJ

“As I have said before, its “all Fed, all the time”, on business news shows and periodicals. I, and many others, don’t think that is prudent. I think it’s pretty scary that the U.S. and even the world’s financial and economic activity seems to revolve around and depend upon on the combined knowledge and decisions of 12 largely unaccountable individuals at one central bank, the U.S. Federal Reserve. This institution’s leaders have admitted that they have had poor foresight of major economic events. The hindsight evidence shows that their economic forecasts are constantly and materially wrong. And do you really believe the Fed’s denials, when they say they didn’t have a major role in causing the U.S. housing bubble/bust and the 2008 financial crisis? I don’t. They are touting their role post-crisis in raising U.S. housing, mortgage securities, and stock prices and clearly their monetary actions are the source of asset bubbles and busts around the world (like the subject of the attached article on Turkey).”, Mike Perry, former Chairman and CEO, IndyMac Bank


Turkey Struggles to Protect Its Lira

FEB. 9, 2014


Traders bartering in a Grand Bazaar alley in Istanbul. Since May, the lira has lost a third of its value against the dollar, and the consequences of a further decline would be serious. Guy Martin for The New York Times

ISTANBUL — It was late afternoon in Istanbul. But seven time zones away, on Wall Street, the opening bell was ringing.

Seconds later, in a dingy alley of Istanbul’s vast Grand Bazaar, several dozen men with cellphones pressed to their ears began gesturing and shouting loudly.

They were currency traders, who every day buy and sell tens of millions of dollars, euros and Turkish liras in a narrow space that is sheltered by a sagging blue-striped canopy and furnished with an old refrigerator and a few plastic stools.

The traders had been noisily plying their craft since early morning. But when they learned from the television screens inside the nearby gold shops that the Dow Jones industrial average had opened higher in New York, the trading turned even more tumultuous. The dealers locked in or unwound their bets on which direction the dollar would head in relation to the Turkish lira.

The frenzy was a demonstration of how the value of Turkey’s money — which has broad implications for the national economy — is determined largely by events beyond the country’s control. And lately the lira has been alarmingly weak.

The currency has lost as much as a third of its value against the dollar, since the Federal Reserve in Washington began making noises last May about cutting back on its stimulus program, prompting investors to move their money from risky emerging markets to the United States in anticipation of higher interest rates there. More recently, the steady exit of foreign money has been more of a stampede, with about half the lira’s decline occurring since mid-December, as political turmoil engulfed the government of Prime Minister Recep Tayyip Erdogan and violence raged in neighboring Syria and Iraq.

Investors’ jitters about Turkey might grow after weekend clashes between the riot police and demonstrators protesting a new law that would allow the government to block web pages without a court order.

The lira’s plunge has endangered the Turkish economy, which is heavily dependent on dollar- and euro-pegged transactions and loans for the country’s everyday business. The decline has raised fears of a fresh financial crisis on the edge of Europe. On Friday the ratings agency Standard & Poor’s lowered Turkey’s credit rating to “negative,” down from “stable.”

The currency trading in the Grand Bazaar represents but a sliver of Turkey’s multibillion-dollar foreign exchange market, in which most trades are conducted anonymously on electronic exchanges. Here in the bazaar, the trading is done mainly on behalf of money-changing shops.

No cash changes hands in the impromptu exchange. The sums are transferred among the traders’ clients later.

But lately this narrow alleyway has become a microcosm of Turkish macroeconomics. While traders and some financial analysts say that Turkey is not in an economic crisis — not yet, anyway — there is a rough sense of uncertainty about the financial future.

Osman Atac, a 52-year-old currency trader known as Billiard Osman for his prowess with a pool cue, conceded that this slump in the lira was different — sharper and deeper — than others he had seen in the quarter century since he switched from selling used cars to trading money in an alley.

“We earned in ’94, we earned in 2001,” said Mr. Atac, referring to past global currency upheavals, when the lira plummeted but traders profited by arbitraging the exchange rates. But the steady, inexorable decline this time has provided fewer sharp swings that would give the traders opportunities for arbitrage.

“In this turbulence,” Mr. Atac said, “no one is making any money.”

Mr. Atac, clutching the battered Nokia cellphone he uses to keep in touch with his customers, said he thought the lira would not get any weaker than the record of 2.39 to the dollar it hit on Jan. 27. That is a sentiment shared widely in Turkey.

So far, Mr. Atac has been right. The lira has recovered somewhat since the low point, strengthening Monday to about 2.21 to the dollar, a 23 percent decline since May.

But the consequences of a further decline would be serious. Turkish companies have borrowed $130 billion in foreign currencies, according to the International Monetary Fund. Such loans offered lower interest rates, but came with a higher risk that is now materializing. When the lira goes down, it becomes more expensive for a Turkish company to make its payments on a dollar loan. If the lira weakens further, hundreds of companies could go bust.

“The depreciation of the lira has already eaten into revenues and profits,” said Sinan Ulgen, chairman of the Center for Economic and Foreign Policy Studies, known by its Turkish initials EDAM, a research organization in Istanbul. “The next steps will be to force them toward a process of bankruptcy.”

A steep rise in official interest rates, imposed by the Turkish central bank the week before last in an effort to halt the lira’s decline, is likely to choke the easy credit that has fueled a boom in consumer spending.

“At the present time what we are looking at is not a meltdown but a sharp slowdown in growth,” said Adam Slater, a senior economist at Oxford Economics in Oxford, England. But he added, “It’s a moving target.”

Turkey might seem to offer disturbing parallels to countries like Ireland or Spain at the beginning of the euro zone crisis four years ago. As in those countries, Turkish developers funneled foreign capital into construction projects, covering the dry hills surrounding Istanbul with endless tracts of high-rise apartments, office buildings and shopping centers connected by crowded freeways.

But many Turks insist there is no property bubble like the one that devastated Ireland and Spain.

Baris Dumankaya, vice chairman of a construction company that bears his family name, pointed out that half of Turkey’s 81 million people are younger than 30, which he says should ensure steady demand for housing. Banks require high down payments, which means that prices would have a long way to fall before homeowners owed more than their properties were worth, Mr. Dumankaya said. Inflation, at more than 7 percent and rising, also makes declines in real estate prices less likely.

Nor does Turkey have the government debt and deficit problems that crippled the Greek economy and continue to threaten Italy’s.

Mr. Dumankaya, whose family has been in the construction business for half a century, agreed that the flood of easy money attracted people into the industry who had little experience and might be overextended. Sales of apartments in newly constructed buildings have slowed slightly, he said, and banks have become choosier about lending.

The plunge of the lira has already exposed the Turkish economy’s dependence on short-term foreign investment. Most foreign capital is invested in Turkish stocks and bonds rather than longer-term projects.

All it takes is a phone call or a few clicks of a mouse for short-term investors to move their money elsewhere, and that is what foreign investors have been doing, not only in pulling money out of Turkey but from countries like Russia, Argentina and South Africa, whose currencies have also fallen as a result.

Mehmet Kutman, chief executive of Global Investment Holdings, a private equity firm in Istanbul that invests in assets like port facilities for cruise and cargo ships, said he thought the lira could still fall 5 to 10 percent further.

“The good thing is that it will stop excess leverage,” Mr. Kutman said, referring to the country’s high level of private debt.

Whatever the outcome, Turkey is largely at the mercy of foreign investors and policies made in Washington. No one is more aware of that than the currency traders at the Grand Bazaar.

Mr. Atac, the trader, looked like an ordinary shopkeeper in his wool cap, long wool coat and fleece-lined snow boots to protect against the cold paving stones. But though his education stopped at high school, he is well versed in his chosen field. He could recite the calendar of upcoming U.S. economic data releases and talk at length on the likely direction of Fed policy as Janet L. Yellen takes over as chairman from Ben S. Bernanke.

“Yellen was Bernanke’s strongest supporter and is going to stick with his plan,” Mr. Atac said.

Yet, in an ominous sign, some of the traders in the bazaar had already burned up their capital and gone bankrupt as the lira plunged, Mr. Atac said.

Whether that proves to be a metaphor for the Turkish economy will be revealed in coming months.

A version of this article appears in print on February 11, 2014, on page B1 of the New York edition with the headline: Lira’s Value in Turkey Is Buffeted Externally.