The Narrative Has Shifted: Take Advantage of it

Your allegations of intentional misdeeds, fabricated documents and forgeries have new life now that the SEC is hot on the trail of the wrongdoers in a very public way. As the news sinks in more and more Judges, lawyers and experts and forensic analysts will see their role more as a commitment to justice than just helping out a homeowner in distress.

It just didn’t make sense that anyone would loan money in a deal where they knew there would be no payback. My allegations rang hollow to many people, who felt that despite the many distractions and defects contained in the paperwork behind the foreclosure glut, it was the borrowers who made the financial crisis happen. Now we see more and more people taking another look.

For those of us who serve the judicial branch of government, it is no longer a dance to delay the inevitable. It is, as it has always been, a confrontation with giant corporations whose reach into the corridors of powers enabled them to suck the life out of an ailing economy.

No society has ever persisted without a vibrant growing middle class. It will be a very long time before we succeed in reversing the damage wreaked by Goldman Sachs and other investment banking houses who acted without any sense of conscience, morality or even compliance with laws that society passed to enable their existence. But now, we have a chance. Let’s not waste this opportunity. Don’t let the pretender lenders get control of the narrative again.

The reality is that many, perhaps most loans were created according to specifications set by Wall Street, not by industry underwriting standards. The reality is that people were hired to lie and cheat and deceive homeowners into investing their homes into this salacious scheme. The reality is that the appraisals were false, and were given greater credibility by the reasonable borrower assumption that no lender would lend money on a bad deal where the property value was intentionally overstated, and that lenders would and did strive to comply with the requirements of the Truth in Lending Law, where the responsibility for appraisal verification, income verification, quality, viability, and affordability are BY LAW the responsibility of the Lender. Little did these hapless homeowners know, TILA was a joke to these players.

So now reality sets in. securities that were rated investment grade were junk and are worth far less than their sale price. Homes that were rated as high value were really still the same value as the market had shown before the flood of money and bird dogs looking for signatures on documents, even if the signatures were forged and even if the borrower was dead.

The finance system depends upon confidence. Confidence is based upon belief in the market values and practices in the marketplace. There is only one correction that is viable now. It is the simple recognition that neither the securities nor the properties they were based upon, had any new “value added.” It is the simple recognition that we had to accept when the NASDAQ that flew near 5,000 is really worth only 2,000, long after the boom and bust of that era. Any attempt to saddle the homeowners, the taxpayers or the investors with anything other than the reality of fair market value will undermine our financial system, and ultimately our future and the future of generations to come.

Mortgage Meltdown Casualty: Trust between banks — Time for Truth

Another casualty of the Mortgage Meltdown induced paranoia that is sweeping the credit and money markets: Banks no longer trust the indexes which they have relied upon for decades. In other words, they don’t trust each other. And they don’t trust the people who report on what is happening out in the financial marketplace. The simple fact is that they do NOT know how much they are paying or how much they are going to pay, or the actual trend lines in inter-bank lending. This basically slips the rug out of the entire credit infrastructure. 

What this means to the average Joe or Jane is that it adds uncertainty to an already chaotic marketplace. Uncertainty produces fear and fear produces increased risk aversion. Bottom Line: Interest rates are going up no matter what the central banks do. Loans will be harder to get. Asset values will decline because of the difficulty in obtaining financing that is usually associated with the purchase of those assets — like housing and mortgages. 

In terms of policy, it means that decision-makers in government and the private sector need to be honest and straightforward in their reporting of data.

Making lemons appear to be lemonade is going to further erode trust and confidence in the financial systems.


Pointing out sectors that have upticks does nothing to restore confidence in the overall system. Everyone understands that the failure here was systemic, not economic. Failure to address that issue will simply produce declining confidence in the markets until people start believing what they are told. They won’t believe it unless they can confirm it. And we all have access now to information that will confirm or deny the spin or reports that government and private sector leaders publish.

Time to fess up boys!!!!

N.Y. Libor alternate tries to avoid London’s pitfalls
Still, upcoming interest rate is unlikely to show bank risks have improved
SAN FRANCISCO (MarketWatch) — A New York-based measure of how much it costs banks to borrow money will try to circumvent problems dogging Libor, the London benchmark that sets rates for everything from adjustable-rate mortgages to interest rate futures.
Successful avoidance of some pitfalls that have undermined bankers’ trust in Libor, however, is unlikely to prevent ICAP Plc’s New York Funding Rate from mimicking at least one of its London counterparts’ key traits. That is, a gap with other interest rates that suggests borrowing conditions for the world’s largest banks are still quite stressed.
“At this point, the U.S. index won’t make much difference, but it may be a good idea six months from now,” said Brendan Brown, head of research at Mitsubishi (UFJ) Securities International, in London.
Bankers point to a raft of other indicators, from currency forward rates to swap spreads, to show that bank borrowing costs are still high even while other measures of credit risk have fallen. That discrepancy has been a source of nagging worry for investors and economists looking for proof that the worse of the credit crisis has truly passed.
In fact, an interest rate that side-steps some of the problems that have recently undermined investors’ trust in Libor may even show banks are paying higher rates than shows up in Libor.
A month ago, Libor made its steepest five-day advance since August after concerns emerged that some banks had been underreporting their rates, out of fear they would be penalized if outsiders knew how much they were paying for funding.
Icap (UK:IAPnewschartprofile) , a London-based inter-dealer broker that specializes in handling over-the-counter transactions like currencies and interest rates, is trying to discourage banks from fibbing about their borrowing costs by making its survey of 40 global banks anonymous.
Plus, rather than ask banks for the rate at which they can borrow short-term, unsecured loans — as the British Bankers Association does — ICAP will ask banks for their estimates of what the going rate is for the average bank.
There’s some urgency among banks, borrowers and the Federal Reserve to know just how costly it is for banks to tap the money market for their borrowings.
These funds are one of the main ways U.S. and overseas banks get capital for their own lending activities. If their costs are running high, they are likely to lend less, a headache for consumers and businesses that rely on flush conditions at banks to fund new mortgages, new auto loans, student loans, acquisitions and expansions.
And if the new measure does show Libor has been printing lower than the true cost of interbank borrowings, a lot of consumers and businesses with loans tied to Libor could get a nasty shock. It’s been estimated that loans and derivative contracts totaling roughly $150 trillion (more than $20,000 for every person on earth) are indexed or tied to Libor in some way.
In fact, the universe of financial instruments tied to Libor is so huge that some bankers are nervous that any efforts to tweak the way Libor is collected could make a bigger mess.
Libor “is extremely important,” said Terry Belton, head of fixed income strategy at J.P. Morgan Chase. “We would probably create more problems by changing it in a material way than we would solve,” he said.
Libor rises…
ICAP’s efforts to publish a new bank lending rate follows an unusual period where Libor as well as other bank lending rates have frequently topped central bank policy rates, meaning banks are paying more to borrow because of heightened credit and liquidity risk
The difference, or spread, between the three-month U.S.-dollar Libor and the effective federal funds rate rose to more than 80 basis points on Wednesday. Usually, dollar-denominated Libor tracks closely with the fed funds rate. See earlier story on Libor’s rise.
By other measures, costs for banks’ borrowing needs have also been rising. The spread between three-month Libor and overnight index swaps has been climbing since February. What’s known among credit analysts as the BOR-OIS spread gives a view of Libor that strips out expectations that central banks will raise or lower rates.
These spreads “are all signs that there is stress in the market,” said Eoin O’Callaghan, market economist for BNP Paribas in London.
Such signs of stress are worrisome for the Fed, which has $462 billion in special lending programs to financial institutions as it tries to get money flowing in frozen pockets of the credit market.
Notwithstanding efforts by the Fed and other central banks to “meet panic demands for liquidity” by making more funds available to financial institutions, still “many markets are not functioning normally,” noted Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, in a speech Tuesday.
In contrast to rates that reflecting bank costs, indexes that track perceived credit risk and rates paid by corporations have been tumbling. Markit’s index of high-grade, North American credit default swaps has fallen about 27% since late-March. The spread between safe-haven 10-yield Treasury notes and bonds issued by companies with Baa ratings, which indicate riskier but still investment-grade companies, has also narrowed since mid-March.
… But not by enough?
Amid these concerns, other measures of short-term borrowing, such as the over-the-counter market to buy currencies like euros or sterling for future delivery, also suggest Libor just may not be high enough.
The British Bankers Association gets the Libor “fix” by polling global banks including Citigroup’s Citibank (C

and Lloyds TSB Group (UK:LLOYnewschartprofile) every day on what they are paying for funds.

The group says it doubts its Libor panel banks are contributing to deliberate distortions of the rate. Still, it has brought forward a review of how the rate gets calculated. See related story. And banks may be paying more for their loans than Libor suggests for purely innocent reasons.
It’s just not that liquid a market, bankers note.
Plus, the massive and surprise losses resulting from the U.S. housing market collapse have created a lot of variation among financial institutions when they try to borrow money. Banks that are light on funding or carry poor credit are likely to pay a far higher rate in the forward currency market, for instance, than the Libor panel would reflect.
“This is a problem that is temporary in nature and reflects the dislocation in the financing market,” J.P. Morgan Chase’s Belton said. He predicts that as central banks inject more money into the financial system “and as things there improve, we’ll move back to a world where all banks in panel have similar financing rates.”
Banks are likely paying more to borrow money, whether that’s reflected in Libor or another indicator, simply because supply has dried up. Banks, mutual funds and corporations that lend in the bank borrowing market are keeping more cash to themselves.
“Confidence in and between banks has been dented significantly after the Bear Stearns Cos. (BSC

) episode. Investors and banks are reluctant to lend cash to banks, effectively wondering who the next casualty will be,” said economists at Societe Generale in a report.

In mid-March, Bear Stearns came close to collapse, causing fears of a run on Wall Street.
“Also, money market funds, which are liquidity providers, continue to fear redemptions and invest at very low maturities,” they noted.
New York fixing
Since the NYFR will be based on a survey, rather than actual transactions, there still will be no way of telling if banks are giving an honest assessment of borrowing costs.
“There’s not really an ultimate check on whether the rates banks are reporting are the right rates,” said Brown of Mitsubishi Securities.
One thing that will change, however, is the time zone.
The British Bankers Association gets the so-called fixing of rates at 11 a.m. London time, or about 6 a.m. New York time. That’s about three hours before banks in the United States can start borrowing money in U.S. dollars, so may not accurately reflect the price of costs facing banks trying to tap these dollar markets.
ICAP’s planned NYFR rate instead will query banks at 9:30 a.m. New York time.
ICAP’s planned rate will also attempt to give a better view of what’s going on in the market for dollar-based bank borrowing than one of its current measures, eurodollar deposits. It gets this data from bid-ask spreads ICAP users provide for these deposits and supplies it to the Fed, which publishes the bid rate daily on its H. 15 statistical release. Go to the Fed’s Web site.
As the financial markets have convulsed, those eurodollar deposit rates have increasingly reflected a wider bid-ask spread, perhaps skewing the published rate.
“Since August, and especially since Bear Stearns, our desk has been setting that range very wide to reflect that trading is a lot messier,” said Lou Crandall, chief economist at Wrightson ICAP, the New York research arm of ICAP.
“It made us look for a more objective way to say where rates are trading,” he said.
NYFR is designed to give a clearer snapshot of bank borrowing costs. But it’s not designed to become the next Libor, which is the benchmark for so many loans and derivatives, Crandall stressed.
“This is designed to supplement Libor, not replace it,” Crandall said. “The series we had been publishing was no longer adequate for that purpose.” End of Story
Laura Mandaro is a reporter for MarketWatch in San Francisco.

Mortgage Meltdown: J Pierpont Morgan, Where Are You Now?

Bear Stearns Deal and What it Means

In the absence of someone filing the leadership vacuum now, we must use the rules of civil procedure to slow down the foreclosures, evictions and bankruptcies. We need breathing room if we are to avoid a depression, or if one is coming anyway, to at least keep it as shallow and short as possible.

The sale of Bear Stearns at $2 per share, when it was selling recently at $170 is not merely a number, or the story of one historically important company gone bad. It is the story of an industry gone bad, without any current footing, none in sight, and a complete vacuum of leadership. $2 was a gift and the money coming from the Federal Reserve is also a gift. The fact remains that these bailouts, mergers and emergency capital infusions are still part of the problem and not the solution. For 3 years, everyone has had their heads stuck in the sand pretending that nothing bad was happening. 

The issue is trust, confidence, and competence. And those issues have spread from just the public viewing the financial markets to each of the players viewing each other. As JP Morgan, the person, knew, character and trust were the key components of any successful economy and the foundation of well-functioning financial markets. JP Morgan may exist as a company, but there is no JP Morgan who can leverage the power of his person-hood against a rising tide of distrust, ankle-biting and outright fear and panic. The fact that the media is only referring to a run on Bear Stearns generically only stokes the fires of distrust, and at best sweeps deep structural problem under a carpet with no room left to hide the debris.

It was good that SOME agreement was reached with respect to Bear Stearns, but what are we going to do with the rest of the companies that are going to go under? Right now the answer is nobody knows and possibly nothing at all. We are in free fall which is otherwise known as a crash. The only hope is leadership and consensus. That there is no apparent credible leader with the power of J Pierpont Morgan, is an indication that there will be no consensus. Morgan averted a similar crisis 100 years ago — but only because he was respected, he kept his focus on the good of the country, and he exercised enormous influence over government and industry.

The leader must be someone who is known, trusted, and who has the interest of the country at heart. He or she must be competent and knowledgeable in financial instruments, and down to earth enough to understand that the agreement reaches everyone affected, not merely the financial players. Besides Warren Buffett, I don’t know anyone who can come close to that definition. And I don’t know for sure if he is actually up to the task. 

In the absence of someone filing the leadership vacuum now, we must use the rules of civil procedure to slow down the foreclosures, evictions and bankruptcies. We need breathing room if we are to avoid a depression, or if one is coming anyway, to at least keep it as shallow and short as possible. 

Or we can wait for political and legislative and judicial solutions later. If we do that, we are certainly looking at another 18 months of downward spiral. With that kind of timeframe, the dollar will lose at least another 40% of its value, oil will easily surpass $200 per barrel, at least another 25% of existing financial institutions will “go away”, the economy will slip into actual decline, joblessness will increase geometrically and inflation will not be less than 15% per month. 

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