Monthly Archives: August 2014

“The Fed’s loose policies have pushed up stock, bond and real estate prices – which is, in fact, the point of a low-rate policy. There is legitimate debate about how overvalued assets may be. But low rates, by fostering investments with borrowed money, invariably create the conditions for bubbles.”, New York Times Editorial Board, August 24, 2014

“Both the liberal New York Times and conservative Wall Street Journal Editorial Boards agree about the Fed’s primary role in driving all types of asset prices to unsustainable levels!!! (Beyond the quote above, I am not agreeing with the rest of this OpEd.) I and many others believe the Fed’s low rate policies pre-crisis were a major cause of the unsustainable U.S. housing bubble and financial crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank

SundayReview | Editorial

Why Interest Rates Need to Stay Low

By THE EDITORIAL BOARD

A sharp debate within the Federal Reserve over when to raise interest rates was publicly aired last week at the annual central bankers’ conference in Jackson Hole, Wyo. On one side is a small yet vocal minority of Fed officials who want to head off inflation by raising rates sooner rather than later. On the other is a majority that thinks a near-term rate hike would stifle growth and, with it, any chance of restoring health to the labor market. That group includes Janet Yellen, the Fed’s chairwoman, and most members of the Fed’s policy committee.

The economic evidence indisputably favors Ms. Yellen, who has indicated that rate increases should not begin until sometime next year, at the earliest. It will take until then to be able to say with confidence whether recent improvements in growth and hiring are sustainable. For now, the prospects for both are mixed at best, with the preponderance of evidence — including the Fed’s own analysis — indicating that growth this year will average out around a still-sluggish 2.3 percent. That is too slow to reliably boost the number and quality of jobs and, as such, too slow to justify raising rates.

It is also unknown whether growth and hiring, if and when they fully recover, will spark inflation. For that to occur, wage increases would have to be substantial enough to push up prices, meaning annual raises in excess of 3.5 percent given present rates of inflation and productivity growth. Wage increases of that magnitude are not in the cards, and neither is any hint of worrisome inflation. Since the economic recovery began in mid-2009, hourly wages have risen by a mere 1.9 percent a year on average.

Against that backdrop, arguing in favor of a near-term rate increase is to argue for subpar wage growth and for continuing a status quo in which economic gains flow largely into profits rather than wages. Ms. Yellen and her supporters are right to rebut that stance in both word and deed.

The debate over interest rates does not stop there. Another argument in favor of near-term rate increases is that the Fed’s prolonged low-rate policy is inflating asset bubbles that could burst with harmful consequences. Unlike the inflation argument, for which there is no evidence, concern about bubbles is justified.

The Fed’s loose policies have pushed up stock, bond and real estate prices — which is, in fact, the point of a low-rate policy. There is legitimate debate about how overvalued assets may be. But low rates, by fostering investments with borrowed money, invariably create the conditions for bubbles.

The answer, however, is not to raise rates, slowing the entire economy in order to tame the markets. The answer, laid out in recent remarks by Ms. Yellen and Stanley Fischer, the Fed vice chairman, is to use bank regulation and financial oversight to ensure that institutions and investors do not use low rates as a springboard for speculating.

That requires identifying and stopping reckless lending of the sort that has surfaced in subprime auto loans and unaffordable student loans. And it requires vigilance for signs of systemic risk in the complex activities that make institutions interdependent. Here the Fed is still too lax, as in its recent indulgence of too-big-too-fail banks that have failed to meet regulatory demands intended to reduce risks and prevent bailouts.

There is no guarantee that keeping rates low for a “considerable period,” as the Fed leadership has pledged, will propel the economy forward. But it is all but certain the economy will backslide if rates are raised too soon. That’s because the economy’s critical underpinning — good jobs at good pay — has not yet been restored, and until it is, monetary support from the Fed and fiscal support from Congress are needed. Fiscal support has been withdrawn and reversed in recent years, a misguided move that has needlessly depressed growth and represents a failure of both policy and politics. Raising rates too soon would be a policy error on a par with that debacle, a mistake that the economy can ill afford.

“I’m becoming increasingly uneasy,” Scott Grundfor…(Mr. Grundfor’s company also restores and consults on classic cars.) “I’ve firmly believed at least 50 percent of the dramatic rise in car values can be attributed to the printing of money and the manipulation of interest rates by central banks.”…

…In that regard, cars can be seen as the latest in a parade of assets whose values have soared since the Federal Reserve began its aggressive easy-money policy to combat the effects of the 2008 financial crisis. That means prices could drop, perhaps precipitously, when the Fed begins to tighten.”, James  B. Stewart, New York Times, August 30, 2014

Business Day

With $38 Million Ferrari, Classic Car Market Revs Up

At the Bonhams Quail Lodge auction, nine Ferrari models set records, as did several Maseratis. Credit Keith Petersen

By JAMES B. STEWART

Last year, two Manhattan condominiums sold for over $90 million and a Francis Bacon painting went for $142.4 million. Now comes the $38.1 million car.

That’s the price of a 1962 Ferrari 250 GTO Berlinetta that sold this month at the Bonhams Quail Lodge auction in Carmel, Calif. The price was 28 percent higher than the previous record of $29.7 million, set by a Mercedes-Benz racecar last summer. Another Ferrari 250 GTO is believed to have sold for $52 million in a private transaction.

While the Ferraris are rare — just 32 were built by hand between 1962 and 1964 — the price for the 250 GTO was hardly the only record during this month’s annual week of prominent car auctions on the Monterey Peninsula. The auctions are timed to coincide with the Pebble Beach Concours d’Elegance, where rare classic cars are positioned on the 18th fairway of the Pebble Beach Golf Links like fashion models on a runway.

At the Bonhams Quail Lodge auction, nine Ferrari models set records, as did a Rolls-Royce once owned by Elvis Presley, and several Maseratis. Even a 1962 Austin Mini sold for a record $181,500. The week’s sales total hit $400 million, a 28 percent increase from a year ago.

A 1985 Alfa Romeo Spyder Veloce convertible sold for $13,750, the least expensive lot at auction. Credit Bonhams

“Without exception, we’re seeing every segment of the market, and nearly every model, hitting new all-time highs,” McKeel Hagerty told me this week. Mr. Hagerty is chief executive of Hagerty Insurance, which specializes in insuring collectible cars and produces a price index that, to car collectors, is the equivalent of the Dow Jones industrial average.

Hagerty’s Blue Chip Index of 25 classic cars rose 34.5 percent over the last year, far outpacing major stock and bond averages.

“A lot of people are asking, ‘Is this the next great asset class?’ ” said Evan Beard, who leads Deloitte’s United States art and finance group.

But when even a Mini sells for six figures, a lot of people are also asking if the car market is in the middle of a bubble. If so, it wouldn’t be the first time. The market soared in the late 1980s, especially for Ferraris and Jaguars, then crashed.

“I’m becoming increasingly uneasy,” Scott Grundfor recently wrote in his newsletter for car collectors. (Mr. Grundfor’s company also restores and consults on classic cars.) “I’ve firmly believed at least 50 percent of the dramatic rise in car values can be attributed to the printing of money and the manipulation of interest rates by central banks.”

In that regard, cars can be seen as the latest in a parade of assets whose values have soared since the Federal Reserve began its aggressive easy-money policy to combat the effects of the 2008 financial crisis. That means prices could drop, perhaps precipitously, when the Fed begins to tighten.

“I’d like to see a leveling off” of prices, said Keith Martin, a car collector and founder of Sports Car Market magazine. “This can’t go on forever.”

But others dispute the idea that classic cars are in a bubble. Mr. Hagerty, for one, said he saw none of the leverage or uninformed speculative buying that characterized the surge in prices during the late 1980s. Mr. Martin, too, said he saw few signs of excess. “The people who are buying are very discreet,” he said. “You don’t see any of the exuberant buying that you see at the art auctions.”

Mr. Hagerty said he believed the $38 million realized by the Ferrari was “a rational number. We don’t know yet who the buyer was, but I think whoever it is showed discipline and restraint. That Ferrari is from the glory days. It’s beautifully designed, handcrafted and rare. You could race it or drive it. It was one of the last models before racecars started to look like science projects.”

Photo

A 1962 Ferrari 250 GTO Berlinetta sold for $38.1 million at the Bonhams Quail Lodge auction in Carmel, Calif., this month. Credit Tom Wood/Bonhams

It also had a coveted provenance, coming from the collection of Fabrizio Violati, the heir to an Italian mineral water and agriculture fortune, who bought the car in 1965 for about $4,000 and drove and maintained it until his death in 2010.

The fashion designer Ralph Lauren also owns a Ferrari 250 GTO Berlinetta, along with a major collection of classic cars, lending a celebrity imprimatur not just to that model, but also to the idea of cars as works of art. His collection is the subject of a lavish coffee table book, “Speed, Style, and Beauty,” and his cars were displayed at the Musée des Arts Décoratifs in Paris in 2011.

“The $38 million raised eyebrows, but it’s less than a third the price of the most expensive painting,” said Eric Y. Minoff, a car specialist at Bonhams, which also sells fine art. “And cars are also usable objects. A few collectors keep them locked up in climate-controlled garages, but most drive them.”

But comparing cars to fine art as an asset class may be premature, Mr. Beard said. “Art is at least a generation or two ahead, and I’m not sure vintage cars will ever get there,” he said. “Cars aren’t a pillar of Western culture. They’re a consumer utility good. Their history is only a little over 100 years, compared to centuries for art.” He added that, in contrast to art, they’re difficult to transport, store and maintain. “No one would have considered cars as an investment until 20 years or so ago.”

While multimillion-dollar sales of Ferraris and other post-World War II European sports cars have grabbed headlines, most classic cars sell for relatively modest sums, and often for less than the cost of a new car. Even at this month’s high-end Quail Ridge sale, a 1985 Alfa Romeo Spyder Veloce convertible sold for $13,750, the least expensive lot.

Cars that appeal to aging American baby boomers have also fared well, especially so-called muscle cars of the 1960s and 1970s, like the Ford Mustang (Ford is celebrating the Mustang’s 50th anniversary this year), Chevrolet Camaro and Plymouth Barracuda. Hagerty’s muscle car price index jumped 16 percent in the first four months of this year, the most for any four-month period.

Curiously, there’s also been a recent surge of interest in the once-reviled 1960s-era Chevy Corvair, especially the convertible Monza models. Though Ralph Nader later denounced the car as unsafe, the innovative rear-engine Corvair was hailed at the time as “the sexiest-looking American car” by Car and Driver.

“It’s a very friendly and accessible hobby,” Mr. Minoff of Bonhams said of car collecting. “You can get a very nice car for $15,000, or if you show up with a million dollars, you can spend that, too.” He owns a 1968 Porsche 911, and said Porsche 911s from the mid-1980s could sell for as little as $15,000.

Mr. Hagerty said he offered would-be car collectors this advice: “First, sit in the car. Italian sports cars were designed for men who were 5’8” and weighed 140 pounds. Second, don’t spend your 401(k) money. And third, make sure you know what you’re buying. If you think you can make a killing in antique cars, you probably think you can time the stock market.”

Mr. Beard of Deloitte said that he advised clients not to include such exotic assets in their investment portfolios, but that some did anyway. “It’s a passion,” he said. “They get an emotional return. So we try to understand the risk profile.”

Mr. Minoff agreed that car collecting should be viewed as a hobby. “There’s a huge number of people who have lost money,” he said. “The goal should be to have fun.” Still, compared with new cars, “It’s a pretty good value proposition. You can buy a 1970 Mercedes 280SL for $60-80,000, drive it a few years, and it will still be worth $80,000. New cars are a terrible investment. They depreciate at an astronomical rate.”

A version of this article appears in print on August 30, 2014, on page B1 of the New York edition with the headline: A Soaring Market for Classic Cars.

“During his career, Mr. Staubach had six major concussions, but he says he hasn’t felt any lasting effects. While other former players have claimed problems like dementia and depression after their careers were over, he doesn’t fault the NFL for any issues…

…”I just don’t believe our doctors knew that my concussion could cause dementia someday,” he says. “The game itself is a brutal game, with big guys hitting each other, so if you play the game, you take the risk.”, Alexandra Wolfe, “Roger Staubach, America’s Quarterback”, Wall Street Journal, August 30, 2014

Weekend Confidential

Roger Staubach, America’s Quarterback

The former quarterback on the Cowboys, his famed pass and his success in the real-estate game

By Alexandra Wolfe

Roger Staubach Justin Clemons for The Wall Street Journal; Grooming by Shelly Cervantes

“This year is our year,” says former Dallas Cowboys quarterback Roger Staubach. The legendary football player turned real-estate mogul is sitting far from the field in a glass-enclosed conference room overlooking the Dallas skyline. He’s a few feet from his corner office at real-estate company Jones Lang LaSalle, where he is executive chairman of the Americas region. Although he’s hopeful about the Cowboys’ prospects, he adds, “I said that last year.”

Whether they win or lose, to Mr. Staubach, the Cowboys will always be “America’s Team.” And at age 72, he says he sometimes still gets called “America’s Quarterback.” The Cowboys earned their nickname in 1978, when the National Football League released a film of the same name about the team. The previous year, the Cowboys had earned the highest television ratings and sold the most merchandise of any team in the NFL. Mr. Staubach, who played from 1969 to 1979, still remembers a Philadelphia Eagles player knocking the wind out of him and saying, “Take that, America’s quarterback!”

During Mr. Staubach’s tenure, the team reached the Super Bowl five times, winning twice. But the Cowboys haven’t made it to a Super Bowl since 1996 after the 1995 season. “We had a great ’90s with the Troy Aikman phenomenon, but since then, we’re struggling,” he says. “Now we’re getting Tony [Romo], but Tony needs a defense.” Last year, the team’s defense was ranked last in the league.

The sport has changed dramatically since his days on the field, Mr. Staubach says. For one, a lot more money is in the game. “TV was not what it is today, and that’s driven up revenues more than anything,” he explains. Now, the NFL takes in about $5 billion a year from TV and media deals. Through a collective bargaining agreement with the league’s owners, players get a certain percentage of that revenue.

Players also pass the ball more than they used to. “Now you really have to get someone out of college who can throw,” says Mr. Staubach. “You have to run in the NFL, but they throw the ball probably 30% more than we did.”

He is no stranger to passes, of course: The term “Hail Mary pass” became popular after he threw a 50-yard winning touchdown to wide receiver Drew Pearson in the final minute of a 1975 playoff game against the Minnesota Vikings. A reporter later asked what he was thinking, and he replied, “I just closed my eyes and said a Hail Mary.” The next day, headlines read, “Hail Mary Pass Wins Game.” Mr. Staubach takes out his key chain and points to a figurine hanging off it. “I’ve got the Blessed Virgin here,” he says. “We’re good buddies.”

During his career, Mr. Staubach had six major concussions, but he says he hasn’t felt any lasting effects. While other former players have claimed problems like dementia and depression after their careers were over, he doesn’t fault the NFL for any issues. “I just don’t believe our doctors knew that my concussion could cause dementia someday,” he says. “The game itself is a brutal game, with big guys hitting each other, so if you play the game, you take the risk.”

Still, Mr. Staubach says he was concerned when his son—one of five children with his wife of almost 40 years—played football in grade school. His son later switched to baseball. Now one of his 15 grandchildren is starting to get into the game. He remembers his mother watching him play, holding a rosary in her hand. “She squeezed it so tight that she had marks all over her hands,” he says. “She just hated me playing football.”

Growing up in Cincinnati, Mr. Staubach first played quarterback his senior year in high school, then continued in college at the U.S. Naval Academy. Despite being pursued by a handful of schools that were part of the Big Ten Conference, he decided to go Navy because “it was kind of romantic.” He says he doesn’t want to talk about his former team’s 12-year winning streak in the annual Army vs. Navy football game because he feels bad about it. “We should have lost two years ago, since they outplayed us, but we came back in the second half, had a drive at the end of the game and they had an unfortunate fumble.” What accounts for Navy’s success? “We’ve got some secrets I can’t talk about,” he says with a laugh.

Mr. Staubach attributes some of his success in business to the skills he learned at the Naval Academy and on the field. He started working in real estate in the off-season while he was a rookie player. He didn’t know how long his sports career would last, so he took a job at a real-estate company to make sure he could support his children.

In 1977, he started his own real-estate firm, which primarily helped corporations locate facilities. Because it was a service company and not a development company, Mr. Staubach says he was able to weather the housing bust in Dallas better than many developers because his clients still needed services—if only to move to smaller offices amid downsizing.

In 2008, Mr. Staubach sold his company to Jones Lang LaSalle for $613 million. By that time, he had expanded his firm to 68 offices and 1,800 people around the country.

Now, as executive chairman, Mr. Staubach doesn’t have an operational role, but he helps bring in new business and makes appearances at company events. He has no plans to retire soon. He is also a frequent sports announcer on TV and wakes up early to exercise six days a week. “I actually am a little fanatic about keeping track of it,” he says. “My goal is to exercise just over six hours a week, and that includes 4½ hours of cardio on the machines.” He used to run regularly, but to preserve his knees, he now uses the elliptical machine and recumbent bike.

Every now and then, he even plays a little football. His family has an annual Thanksgiving flag football game, and last year he played against former player and coach Doug Williams for a charity event at the Naval Academy.

“It’s still fun not to embarrass myself when I play flag football,” he says. “I can still throw decently for an old guy.”

“September and October of 2008 was the worst financial crisis in global history, including the Great Depression. Of the 13 most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.” Former Federal Reserve Chairman Ben Bernanke (From a document filed with the U.S. Court of Federal Claims, August 22, 2014.)

August 26, 2014, 4:03 PM ET

Bernanke: 2008 Meltdown Was Worse Than Great Depression

ByPedro Nicolaci da Costa

Former Federal Reserve Chairman Ben Bernanke, a prominent student of the Great Depression, contends that the 2008 financial crisis was actually worse than its 1930s counterpart.

Mr. Bernanke is quoted making the statement in a document filed on Aug. 22 with the U.S. Court of Federal Claims as part of a lawsuit linked to the 2008 government bailout of insurance giant American International Group Inc.

“September and October of 2008 was the worst financial crisis in global history, including the Great Depression,” Mr. Bernanke is quoted as saying in the document filed with the court. Of the 13 “most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”

Former Treasury Secretary Timothy Geithner is quoted in the document offering a similarly apocalyptic assessment. From Sept. 6 through Sept. 22, the economy was essentially “in free fall,” he said.

Starr International Co., a company run by AIG’s former chief executive, Maurice “Hank” Greenberg, sued the U.S. government in 2011, seeking billions of dollars in damages over AIG’s rescue. Starr’s suit alleges that parts of the government’s $182 billion bailout and sale of AIG assets were unconstitutional.

Asked why he thought it was essential for the government to rescue AIG, Bernanke said, “AIG’s demise would be a catastrophe” and “could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income, and jobs.”

Also, the  former Fed chief felt comfortable that the overall business was viable despite the troubles of the so-called financial products division.

“It was our assessment that they had plenty of collateral to repay our loan,” Mr. Bernanke said.

The Fed sold the last of its AIG assets in August 2012.

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“After three years of procedure, the sole surviving allegation is that through inadvertency or inattention I may have failed to intervene to block the arbitration that brought to an end the long-standing Tapie litigation,” Christine Lagarde, head of the IMF and former French Finance Minister

“I don’t know Ms. Lagarde and don’t know for sure whether she is innocent of this allegation, but I would bet that she is. The allegation makes no sense to me. As I understand it, they are alleging that it was improper for her to refer a State legal matter to arbitration (because the outcome of that arbitration cost the State several hundred million dollars)? This is what happens in Europe all the time, because the laws and regulations are statutory-based rather than common law-based. French law (like U.S. statutory law) is voluminous, complicated and unclear, and that allows arbitrary enforcement/justice. Largely unaccountable French government investigators/prosecutors (who are trying to make a name for themselves or who may be wrong-headed zealots) continually investigate and prosecute mostly out-of-power politicians and business executives for violating some arcane or arbitrary law or regulation. Do we really want this type liberty-stifling legal system in the U.S.? The U.S. statutory legal and regulatory system is heading that direction and fast. These days, U.S. Federal bureaucracies (e.g. the SEC, FDIC, CFPB, the Federal Reserve, etc.) have awesome, arbitrary, and largely unaccountable power and use it to aggressively pursue businesses and business people primarily through coerced civil settlements (that sidestep the courts, because of the time, cost, and reputational issues of litigating). Even the recent criminal indictment of Texas Governor Rick Perry sure makes it seem like we are losing our common sense and historical common law legal system (the objective “Rule of Law”), in favor of a European-style statutory legal system. This is a system that destroys individual liberty and stifles economic activity. If our politicians and judiciary read Noble Laureate Hayek and understood his thoughts on how important the Rule of Law is for liberty and economic activity, we might have some hope of stopping (and reversing) the erosion of our common law system with a European-style statutory system. Unfortunately, I don’t see that happening anytime soon. If someone like Ms. Lagarde: well-educated, smart and well-intended, can find themselves unwittingly in violation of (or at least investigated for) some arcane or unclear legal code that is pretty scary for France and the average French citizen. Hayek would say it happened because France abandoned (or never really had because of Napoleonic law) The Rule of Law to seek “retroactive”, arbitrary justice. He would argue this is how governments become totalitarian and government officials become tyrants to their fellow citizens.”, Mike Perry, former Chairman and CEO, IndyMac Bank

“If, however, the law is to enable authorities to direct economic life, it must give them powers to make and enforce decisions in circumstances which cannot be foreseen and on principles which cannot be stated in generic form. The consequence is that, as planning extends, the delegation of legislative powers to diverse boards and authorities becomes increasingly common…Constantly the broadest powers are conferred on new authorities which, without being bound by fixed rules, have almost unlimited discretion in regulating this or that activity of the people.”, Nobel Laureate, F.A. Hayek, “The Road to Serfdom”

Europe News

IMF Head Is Targeted in French Probe

By William Horobin

PARIS—A French court put Christine Lagarde, head of the International Monetary Fund, under formal investigation for negligence in a corruption probe dating back to her days as France’s finance minister.

Ms. Lagarde confirmed the court’s decision in a statement Wednesday and said the move was “without merit.” She added that she had instructed her lawyer to appeal.

The investigation is a political embarrassment and risks being a distraction for Ms. Lagarde while she marshals world leaders to repair their economies. Christopher Baker, one of her lawyers, said the probe wouldn’t deter her. “She has no intention of resigning,” he said.

Ms. Lagarde hasn’t formally been charged. Under French law, being placed under formal investigation, is synonymous with a preliminary charge for negligence, which carries maximum penalties of €15,000 ($19,800) and one year in prison. When magistrates wrap up their probe, they can press charges and send her to trial or drop the case.

Ms. Lagarde, who has repeatedly denied any wrongdoing, said she was heading back to Washington on Wednesday. An IMF spokesman said that she planned to brief the fund’s board upon her return and declined to comment further.

The decision by the Cour de Justice de la République, a court set up to examine alleged wrongdoings by government ministers while in office, was a surprise since magistrates had decided in May 2013—after a nearly 10-month preliminary probe—not to regard Ms. Lagarde as a suspect.

The court is looking into the role Ms. Lagarde played in the resolution of a two-decade-old melodrama known in France as “L’Affaire Tapie.” The affair has pitted Bernard Tapie, a French entrepreneur and former politician, against the French state.

The court is focusing on Ms. Lagarde’s decision, soon after she became finance minister in 2007, to refer the dispute to an arbitration panel. In 2008, the panel awarded Mr. Tapie more than €400 million ($527 million) in compensation.

The court initially looked into whether Ms. Lagarde had abused her authority in referring the dispute to arbitration, rather than allowing it to continue in the courts. In May 2013, though, magistrates said Ms. Lagarde was only a material witness in the probe. That status was upheld again in March of this year.

It isn’t clear what led the court to change Ms. Lagarde’s status to suspect from witness.

“After three years of procedure, the sole surviving allegation is that through inadvertency or inattention I may have failed to intervene to block the arbitration that brought to an end the long-standing Tapie litigation,” Ms. Lagarde said in her statement on Wednesday.

 

“I. Bank of America acknowledges the facts set out in the Statement of Facts set forth in Annex 1, attached hereto and hereby incorporated…21. Miscellaneous C. The Parties acknowledge that this Agreement is made without any trial or adjudication or finding of any issue of fact or law, and is not a final order of any court or governmental authority.” Excerpts from BofA’s August 20, 2014, Settlement Agreement

Definition of “Acknowledge” From The Merriam-Webster Dictionary: 1: to admit as true 2: to admit the authority of 3: to express thanks for; also: to report receipt of 4: to recognize as valid.

“I read the BofA settlement agreement with the government and also asked a colleague to do the same and neither of us could find an admission of liability or wrongdoing by Bank of America anywhere in the document? Also (and I think this jives with “no admission of liability or wrongdoing”), I think you would have to assume that Bank of America did not admit to (the truth of) the Statement of Facts set forth in Annex 1, because the settlement document says clearly in 21.C that “this Agreement is made without any trial or adjudication or finding of any issue of fact or law”? I think based on that, you would have to assume that the word “acknowledges” in I. of the agreement means Bank of America “reports the receipt of” Annex 1 (otherwise the government could have demanded a stronger word than “acknowledges” or had them sign Annex 1)? By the way, I did quickly skim through the 30-page Statement of Facts set forth in Annex 1. In my opinion, based my long industry experience, as the settlement agreement so clearly states in 21.C., no facts were determined. In layman’s terms, I believe Annex 1 is filled with biased individual anecdotes, hearsay, inconsistencies, and misleading information, when it should be based on serious, empirical analysis based on adequate data (statistically-valid samples), as this settlement involves the activities of tens of thousands of bank employees and contractors, tens of millions of borrowers, and hundreds of billions in mortgage loan originations and securitizations.”, Mike Perry, former Chairman and CEO, IndyMac Bank

BofA Settlement Agreement

Annex 1 – Statement of Facts

“The point is that when you see people clinging to a view of the world in the teeth of the evidence, failing to reconsider their beliefs…you have to suspect that there are ulterior motives involved…Well, when economic myths persist, the explanation usually lies in politics – and, in particular, in class interests. There is not a shred of evidence…”, Paul Krugman, New York Times

“I think the same can be said about the wrong mainstream view that greedy and reckless U.S. bankers and mortgages lenders were the primary cause of the housing bubble and financial crisis. (This posting is not about Mr. Krugman’s contention below. In 2002, in one of his columns, he told the Fed they needed to create a housing bubble to get us out of the recession caused by the dotcom bubble bursting and said Greenspan was confident he could do it. Krugman doesn’t worry about inflation or debt holders…because as he points out below and believes….only wealthier Americans hold debt investments and will be hurt. I doubt only the wealthy will be hurt. But I have no doubt that the Fed’s loose monetary policies, both pre and post crisis, are a major cause of unsustainable asset bubbles/busts and financial instability in the U.S. and around the world…even though they may not currently be causing traditional measures of consumer price inflation to rise.), Mike Perry, former Chairman and CEO, IndyMac Bank

The Opinion Pages | OP-ED COLUMNIST

Hawks Crying Wolf

AUG. 21, 2014

Paul Krugman

According to a recent report in The Times, there is dissent at the Fed: “An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly” from its easy-money policies, which they warn run the risk of causing inflation. And this debate, we are told, is likely to dominate the big economic symposium currently underway in Jackson Hole, Wyo.

That may well be the case. But there’s something you should know: That “vocal minority” has been warning about soaring inflation more or less nonstop for six years. And the persistence of that obsession seems, to me, to be a more interesting and important story than the fact that the usual suspects are saying the usual things.

Before I try to explain the inflation obsession, let’s talk about how striking that obsession really is.

The Times article singles out for special mention Charles Plosser of the Philadelphia Fed, who is, indeed, warning about inflation risks. But you should know that he warned about the danger of rising inflation in 2008. He warned about it in 2009. He did the same in 201020112012 and 2013. He was wrong each time, but, undaunted, he’s now doing it again.

And this record isn’t unusual. With very few exceptions, officials and economists who issued dire warnings about inflation years ago are still issuing more or less identical warnings today. Narayana Kocherlakota, president of the Minneapolis Fed, is the only prominent counterexample I can think of.

Now, everyone who has been in the economics business any length of time,myself very much included, has made some incorrect predictions. If you haven’t, you’re playing it too safe. The inflation hawks, however, show no sign of learning from their mistakes. Where is the soul-searching, the attempt to understand how they could have been so wrong?

The point is that when you see people clinging to a view of the world in the teeth of the evidence, failing to reconsider their beliefs despite repeated prediction failures, you have to suspect that there are ulterior motives involved. So the interesting question is: What is it about crying “Inflation!” that makes it so appealing that people keep doing it despite having been wrong again and again?

Well, when economic myths persist, the explanation usually lies in politics — and, in particular, in class interests. There is not a shred of evidence that cutting tax rates on the wealthy boosts the economy, but there’s no mystery about why leading Republicans like Representative Paul Ryan keep claiming that lower taxes on the rich are the secret to growth. Claims that we face an imminent fiscal crisis, that America will turn into Greece any day now, similarly serve a useful purpose for those seeking to dismantle social programs.

At first sight, claims that easy money will cause disaster even in a depressed economy seem different, because the class interests are far less clear. Yes, low interest rates mean low long-term returns for bondholders (who are generally wealthy), but they also mean short-term capital gains for those same bondholders.

But while easy money may in principle have mixed effects on the fortunes (literally) of the wealthy, in practice demands for tighter money despite high unemployment always come from the right. Eight decades ago, Friedrich Hayek warned against any attempt to mitigate the Great Depression via “the creation of artificial demand”; three years ago, Mr. Ryan all but accused Ben Bernanke, the Fed chairman at the time, of seeking to “debase” the dollar. Inflation obsession is as closely associated with conservative politics as demands for lower taxes on capital gains.

It’s less clear why. But faith in the inability of government to do anything positive is a central tenet of the conservative creed. Carving out an exception for monetary policy — “Government is always the problem, not the solution, unless we’re talking about the Fed cutting interest rates to fight unemployment” — may just be too subtle a distinction to draw in an era when Republican politicians draw their economic ideas from Ayn Rand novels.

Which brings me back to the Fed, and the question of when to end easy-money policies.

Even monetary doves like Janet Yellen, the Fed chairwoman, generally acknowledge that there will come a time to take the pedal off the metal. And maybe that time isn’t far off — official unemployment has fallen sharply, although wages are still going nowhere and inflation is still subdued.

But the last people you want to ask about appropriate policy are people who have been warning about inflation year after year. Not only have they been consistently wrong, they’ve staked out a position that, whether they know it or not, is essentially political rather than based on analysis. They should be listened to politely — good manners are always a virtue — then ignored.

A version of this op-ed appears in print on August 22, 2014, on page A23 of the New York edition with the headline: Hawks Crying Wolf

“Attitudes have been changing, and the more than 2,000 apartments at the Barbican estate (London) are now in hot demand. A three-bedroom, 1,200-square-foot apartment is on the market for $3 million, up from $1.8 million two years ago, according to real-estate agency Frank Harris and Co…

Mr. (Robert) Doe bought his three-bedroom, 32nd-floor apartment with wraparound balcony and city views for $1 million in 2003. It’s now for sale for three times that price.”, Jenny Gross, Wall Street Journal

“Did those evil U.S. mortgage lenders head over to London and inflate that housing market too? I think not.”, Mike Perry, former Chairman and CEO, IndyMac Bank

WHO LIVES HERE

London’s ‘Ugly’ Barbican Complex Gains a New Following

Long regarded as an eyesore, the residential development is attracting fans and price premiums.

By 

JENNY GROSS

Aug. 20, 2014 11:52 a.m. ET

It has topped polls of the city’s greatest eyesores, yet the Barbican estate is now in hot demand. Dylan Thomas for The Wall Street Journal

The 40-acre former low-income housing project has, among other things, private gardens, a lake, a library, restaurants and an organic-foods shop. Gareth Gardner

Daniel Hewitt

The Barbican, a central London housing and arts complex, has topped polls of the city’s greatest eyesores. The 40-acre former low-income housing project is made up of gray slabs of concrete, high pedestrian walkways that wrap around soaring buildings and tall, fortresslike walls.

Yuen-Wei Chew, a 50-year-old financial consultant who lives in the complex, said that when he moved into the Barbican in 1994, it was viewed as a dreary, undesirable place to live. He says tourists have walked up and asked him: “How do you live here? It’s so ugly.”

Attitudes have been changing, and the more than 2,000 apartments at the Barbican estate are now in hot demand. A three-bedroom, 1,200-square-foot apartment is on the market for $3 million, up from $1.8 million two years ago, according to real-estate agency Frank Harris and Co. That’s a premium compared with the rest of London, where the average asking price for a three-bedroom is $2.2 million, according to U.K. online property advertising siteZoopla.

The Barbican’s residents include some of the city’s top architects, academics and bankers, who moved there partly for its prime location in the financial district. Mr. Chew’s commute is a four-minute walk.

The New York Philharmonic at the complex’s multiarts and conference venue, one of Europe’s largest. Chris Lee

Another part of the appeal, residents say, is that living at the Barbican feels more akin to life in a village than in the heart of a major metropolis. In addition to three towers, low-rises and houses, the Barbican also has private gardens, a lake, a library, restaurants, an organic-foods shop and one of Europe’s largest multiarts and conference venues. Residents have formed several social groups, including a painting club, a Tuesday tea club and a few gardening clubs. The buildings are essentially walled off from the bustling city center, and on summer days, the complex’s private lawn is dotted with people relaxing on picnic blankets.

Resident Tracey Wiles, seen here with Sienna, 8, Kade, 4, Ennis, 15, and husband Ken Mackay, says she loves the Barbican’s sense of community. Dylan Thomas for The Wall Street Journal

In 2005 Tracey Wiles and her husband Ken Mackay, both architects, converted an administration office into a five-bedroom, three-bathroom apartment. Ms. Wiles said she loves the sense of community at the Barbican. If she’s entertaining at her house or has an engagement, her children can go to the playground or other green spaces in the complex and be looked after by her friends whose children are also playing outside.

Robert Doe, a 52-year-old accountant, said he’s met people from all walks of life through clubs, his tennis group and even in the elevator. Mr. Doe bought his three-bedroom, 32nd-floor apartment with wraparound balcony and city views for $1 million in 2003. It’s now for sale for three times that price. Mr. Doe said he is selling the apartment because he and his wife, who is semiretired, want to live in the countryside.

Living at the Barbican comes with some quirks. It’s listed with English Heritage, a government agency charged with preserving buildings and objects of historic interest, so there are restrictions on renovations for some of the original apartments. Residents are cautioned not to play music so loud that neighbors can hear it—a sensitive issue, as the apartments are linked by outdoor walkways—and they’re supposed to have carpets on their floors to soften sound. Residents of lower floors are encouraged to keep flower boxes on their balconies—though apparent slippage on this rule spurred the cover story “Where have all the flowers gone?” in the most recent issue of Barbican Life magazine.

The Barbican was originally built as a housing project, one of many that cropped up in London in the 1950s and 1960s to replace the millions of homes destroyed in the war. Its three architects, Peter Chamberlin, Geoffry Powell and Christof Bon, aimed to create a complex that would reflect the history of the area, which harks back to London’s earliest days and was also devastated by bombing during World War II.

Designed in the Brutalist architectural style that had its heyday in the 1960s and 1970s, the complex’s high walls were inspired by a Roman fortress. Barbican architecture tours, given several times a week, give visitors a glimpse into the complex’s history. In 200 A.D., Romans began to construct a wall around London to protect it from Anglo-Saxon invaders. (Pieces of the wall can still be seen in the Barbican today.)

Beginning in 1980, tenants living in projects like the Barbican gained the right to buy their houses and apartments from the local council at a discount and sell them at a profit to private buyers. Today, 95% of the Barbican apartments are owned privately; the other 5% are rented.

The increase of prices at the Barbican comes at a time when property values are booming across London. Tina Evans, group director at Frank Harris and Co., said values at the Barbican may also be increasing because restaurants and residential buildings are popping up in an area that used to be empty on weekends. Apartments at the Barbican were once mainly used as pied-à-terres, but now more residents are choosing to live there full time, she said.

Over the years, critics have lambasted the Barbican’s confusing layout, saying its network of high walkways is hard for visitors to navigate. But Mr. Chew, the financial consultant, said the nooks and crannies are one of the features he most enjoys.

“I’ve had moments when I’ve had to read something or I’ve wanted to sit on a bench to think something through, when you know your home is too distracting,” he said. “It’s really lovely and peaceful.”

Write to Jenny Gross at jenny.gross@wsj.com

Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved

“In 2008, the Treasury lured private investors into Fannie and Freddie, at an extremely risky moment, with the promise of a return if the entities returned to profitability. Once they started to generate a profit, the Treasury, with the stroke of a pen, changed the rules of the game and decided that all profits should go to the government’s coffers…

…Such a theft of private property sends the wrong message to potential investors. If the government can turn around and deny companies the right to benefit from the risk they took, then who will invest in housing finance? This sends a terrible message to investors throughout the entire economy at a time when we are trying to move beyond a weak recovery.”, Ken Blackwell, Director Coalition for Mortgage Security

LETTERS

Treasury Abuses the Rule of Law With Fannie, Freddie

The legal question with the Treasure, Fannie and Freddie involves the rule of law and the willingness to honor contracts.

Aug. 21, 2014 5:34 p.m. ET

Regarding the article “White Flag for Frannie Investors” (Heard on the Street, Aug. 12), the title should be “Time for the U.S. Government to Surrender.” I disagree with the thrust of the article, which is that the decline in the last quarter’s payout from Fannie Mae and Freddie Mac has shrunk the difference between the 10% dividend payable under the 2008 Senior Preferred Stock Purchase Agreement and the larger sums owing under the dividend sweep required by the 2012 Third Amendment.

First, one quarter doesn’t resolve the valuation issue. It is the long-term prospects that determine how much money is at stake. Second, if that financial difference turns out to be as small as the article suggests, the government has no need to put forward a blizzard of dubious objections to excuse the Federal Housing Finance Agency from its clear statutory mandate, as conservator, to facilitate the orderly resumption of private market funding or capital market access for Fannie and Freddie. The government should surrender not because the stakes are low, but because it is wrong on the merits. The legal question involves the rule of law and the willingness to honor contracts. Get that right and the money can take care of itself.

Richard A. Epstein

Chicago

The writer is a law professor who has advised several institutional investors on the Fannie-Freddie litigation.

In 2008, the Treasury lured private investors into Fannie and Freddie, at an extremely risky moment, with the promise of a return if the entities returned to profitability. Once they started to generate a profit, the Treasury, with the stroke of a pen, changed the rules of the game and decided that all profits should go to the government’s coffers. Such a theft of private property sends the wrong message to potential investors. If the government can turn around and deny companies the right to benefit from the risk they took, then who will invest in housing finance? This sends a terrible message to investors throughout the entire economy at a time when we are trying to move beyond a weak recovery.

The debate shouldn’t be about the size of those profits, but about the very principles at stake which underline our economy—protection of property rights, keeping our word to investors and not changing the rules in the middle of the game.

Ken Blackwell

Director

Coalition for Mortgage Security

Cincinnati

“Please also don’t look for an analysis of how and why the fine was calculated because it doesn’t seem to exist. For all we can tell the lawyers made it up…

…The BofA extortion continues the Administration’s second-term campaign to appease its populist left by punishing banks one by one. The left is upset that Mr. Holder couldn’t find enough bankers to indict for actual crimes, despite five years of tireless effort. Maybe that’s because they didn’t commit any crimes. Instead like everyone else, bankers were swept away in a classic financial mania that super-easy Federal Reserve policy, Fannie and Freddie guarantees, and affordable housing policies did so much to promote…… But we are banking in a time of cholera, and so Mr. Holder has been demanding that CEOs bow down and write big checks. In a Dodd-Frank world in which all banks are public utilities, no CEO can afford to disagree publicly with the government, much less resist a settlement. See J.P. Morgan CEO Jamie Dimon for details. So pay up, and hear the politicians roar.”, “Banking in a Time of Cholera”, Wall Street Journal

 

REVIEW & OUTLOOK

Banking in a Time of Cholera

Bank of America pays $16.65 billion for doing the feds a favor.

Aug. 21, 2014 7:34 p.m. ET

America fancies itself a nation of laws, but you can forgive Bank of America shareholders if they have some doubts this week. They might be better off under the prehistoric appeasement the natives practiced in ” King Kong. ” Maybe during every full moon they should roll out into the street someone who worked at its Countrywide Financial unit as a legal sacrifice to the giant beast known as the U.S. government. The monster could grab the poor sap in its paw, beat its chest, and retreat back into the jungle.

As a matter of justice, such a system makes no less sense than the arbitrary, invented $16.65 billion settlement that the Justice Department imposed on BofA on Thursday. “The largest such settlement on record,” bragged Attorney General Eric Holder, as if justice is measured by dollars paid.

The better way to understand this settlement is as Bank of America’s punishment for having been foolish enough to buy Countrywide and Merrill Lynch during the financial panic. On Thursday Justice issued a 30-page “statement of facts” concerning BofA’s alleged sins when issuing flawed mortgage-backed securities. But only a page and a quarter concerned mortgage securities issued by Bank of America before its acquisitions of the two flawed firms. The rest concerned Countrywide and Merrill.

To put that in monetary terms, from 2004-2008 Bank of America, Merrill and Countrywide issued some $965 billion in mortgage securities. Nearly three-fourths of those were from Countrywide, the subprime mortgage factory that was the intimate business partner of Fannie Mae and Freddie Mac. The government mortgage giants were only too happy to buy or guarantee the subprime loans that Countrywide churned out because it helped them meet their political “affordable housing” goals.

Of that $965 billion in mortgage securities, about $245 billion have either defaulted or qualified as seriously delinquent. But only some $9 billion, or 4%, of those bad securities were issued by Bank of America itself. The rest were issued by Countrywide and Merrill before BofA acquired them.

The irony is that during the crisis the feds were delighted that a bank with reservoirs of private capital was willing to rescue the two firms from bankruptcy. As we’ve previously documented (“No Good Rescue Goes Unpunished,” Aug. 8), BofA spared the Treasury or Federal Reserve from having to intervene and perhaps write a big taxpayer check. In the case of Merrill, Treasury Secretary Hank Paulson threatened to fire then-CEO Ken Lewis when he later tried to back out of the deal.

For that public service, BofA will now be relieved of about nine months of its net income. The message for rational CEOs is that, come the next crisis, steer as far as possible from Treasury invitations to buy a failing company. The real purchase price will be what you pay at the time plus whatever the feds decide you should pay down the road if the politics of retribution demands it.

The Justice Department claims only $5 billion of the fine is a formal “civil penalty” and $7 billion will go to unspecified “consumer relief.” The latter requires special legal conjuring because the victims who were harmed by the alleged BofA fraud are the investors who bought the securities. Yet the relief will presumably go to the very mortgage borrowers whose failure to stay current on their loans caused the losses to those investors.

Please also don’t look for an analysis of how and why the fine was calculated because it doesn’t seem to exist. For all we can tell the lawyers made it up. That includes the $300 million that will be divided among the six states that are parties to the settlement. No doubt it’s merely a coincidence that all six—California, New York, Illinois, Delaware, Maryland and Kentucky—have Democratic attorneys general.

The BofA extortion continues the Administration’s second-term campaign to appease its populist left by punishing banks one by one. The left is upset that Mr. Holder couldn’t find enough bankers to indict for actual crimes, despite five years of tireless effort. Maybe that’s because they didn’t commit any crimes. Instead like everyone else, bankers were swept away in a classic financial mania that super-easy Federal Reserve policy, Fannie and Freddie guarantees, and affordable housing policies did so much to promote. Bankers were bad risk managers, like their regulators.

But we are banking in a time of cholera, and so Mr. Holder has been demanding that CEOs bow down and write big checks. In a Dodd-Frank world in which all banks are public utilities, no CEO can afford to disagree publicly with the government, much less resist a settlement. See J.P. Morgan CEO Jamie Dimon for details. So pay up, and hear the politicians roar.

Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved