Thursday, November 29, 2012

Today's links

1--Another victory for Goldman, Bloomberg

Disclosure of those documents would have undermined the protection of the public interest so far as concerns the economic policy of the EU and Greece,” the European Union General Court in Luxembourg said today, rejecting a challenge by Bloomberg News. The news organization initially sought the documents in August 2010.

Today’s ruling by three judges denies European taxpayers, on the hook for the cost of Greece’s 240 billion-euro ($311.5 billion) bailout, the opportunity to see whether EU officials knew of irregularities in Greece’s public accounts before they became public in 2009.

The decision underscores the lack of accountability at the ECB as it expands its powers to become the region’s lender of last resort and chief banking regulator. The central bank, which puts greater limits on its disclosures about its decision making than its British and U.S. equivalents, is under pressure from policy makers including governing council member Erkki Liikanen to boost transparency. ECB President Mario Draghi last month defended the Frankfurt-based bank, telling reporters it was already a “very transparent” institution.
 
2--Subprime Students: How Wall Street Profits from the College Loan Mess , policy shop

Five years after Wall Street crashed the economy by irresponsibly securitizing and peddling mortgage debt, the financial industry is coming under growing scrutiny for its shady involvement in student loan debt.

For a host of reasons, including a major decline in public dollars for higher education, going to college today means borrowing—and all that borrowing has resulted in a growing and heavy hand for Wall Street in the lending, packaging, buying, servicing and collection of student loans. Now, with $1 trillion of student loans currently outstanding, it’s becoming increasingly clear that many of the same problems found in the subprime mortgage market—rapacious and predatory lending practices, sloppy and inefficient customer service and aggressive debt collection practices—are also cropping up in the student loan industrial complex.

This similarity is especially striking in the market for private student loans—which currently make up $150 billion of the $1 trillion of existing student loans.

As detailed in a July 2012 report by the Consumer Financial Protection Bureau and Department of Education, private student loans mushroomed over the last decade, fueled by the very same forces that drove subprime mortgages through the roof: Wall Street’s seemingly endless appetite for new ways to make profit. In this case, investor demand for student loan asset backed securities (SLABS) resulted in private student lenders—primarily Sallie Mae, Citi, Wells Fargo and the other big banks—to relax lending standards and aggressively begin marketing these loans directly to students.

Unlike federal student loans, private loans have higher and fluctuating interest rates and come without any flexibility for tailoring payments based on income. Before the SLABS binge, most private student loans were actually made in connection with the college financial aid office, which helped ensure students weren’t taken for a ride, or weren’t borrowing more than they needed to. Between 2005 and 2007, the percentage of loans to students made without any school involvement grew from 40 percent to over 70 percent. And the volume of private student loans mushroomed from less than $5 billion in 2001 to over $20 billion in 2008. The market shrunk back to $6 billion after the financial crisis as lenders tightened standards.

And just like the subprime mortgage market, not all students were aggressively targeted by these rapacious lenders. The largest percentage of private loans taken out in 2008 were by students at for-profit colleges. In 2008, just 14 percent of all undergrads took out a private loan while 42 percent of students at for-profit colleges took them out. And as we now know, these loans are sinking borrowers—with absolutely no ability to discharge these loans by filing bankruptcy.

The latest student loan default rates issued by the Department of Education show that the three-year default rates for those who started repayment between October 2008 and September 2009 was 13 percent nationally—an average masking sharp differences depending on the type of school the borrower attended. For-profit institutions had the highest average with nearly 1 out of 4 borrowers in default, compared with 11 percent from public institutions and 7.5 percent at private, non-profit institutions.
All these statistics mean that close to 6 million borrowers are in default (almost 1 in 6 borrowers) to the tune of a combined $76 billion, more than the combined annual tuition for all students attending public two- and four-year colleges.
And for the borrower who can’t make payments, the student loan industrial complex is not a good place to be. And it’s costly for taxpayers: the Department of Education paid $1.4 billion last year to debt collectors and guaranty agencies to chase down borrowers who weren’t paying their loans. And here’s where Wall Street grabs another slice of the debt-for-diploma system pie. As reported in the New York Times, of the $1.4 billion paid out last year, about $355 million went to 23 private debt collectors. The remaining $1.06 billion was paid to the guarantee agencies to collect on defaulted loans made under the old federal loan system, which they in turn often outsource to private collectors.
But wait, there's more: It turns out that two of the nation’s biggest banks own debt collection agencies that have contracts with the Department of Education to collect on federal student debt that’s gone bad: NCO Group, owned by One Equity Partners, the private equity arm of JP Morgan Chase and Allied Interstate, owned by Citi Venture Capital International, the private equity arm of Citigroup. Both of these debt collection agencies are distinctive in that according to a comprehensive report by the National Consumer Law Center, they have received the most complaints filed with the Better Business Bureau in a 3-year period. At the same time, NCOs performance in recovering past-due loans has made it one of the top performers for the DOE.

The new cop on the beat—the Consumer Financial Protection Bureau—is now going to be providing federal oversight of the nation’s largest debt collectors, which is welcome news. The Department of Education could also play an important role in rewarding good behavior by their debt collectors. As NCLC recommends in its report, they could incentivize humane treatment of debtors by penalizing agencies for large numbers of complaints filed against them and reward agencies with few complaints.

Over the last two decades, our nation—in a major shift from its historical roots—slowly privatized and financialized the responsibility of paying for college. The result is a system in which the entire pipeline of student loans—now the largest source of “aid” for most students—is fueled, serviced and collected by Wall Street.

The student loan industrial complex invites a more profound question: given the billions in profit generated by federal and private student loans, along with the billions in administrative costs absorbed by tax payers, is debt the most efficient and equitable way to provide access to higher education?

3---LDP leader Abe: BOJ must ease until inflation hits 3 percent, Reuters

The central bank has boosted its asset-buying programme four times this year and last week twinned the latest stimulus with an unprecedented joint statement with the government pledging continued efforts to end deflation.
Abe's comments raised the stakes in politicians' efforts to commit the central bank to even more aggressive steps.
He said that if his party returned to power he would consider revising a law guaranteeing the BOJ's independence to allow the government more say in shaping central bank policy....

Latest data showed Japan's core consumer prices fell for the fifth straight month in September, factory output suffered its biggest fall since last year's earthquake while the government's index of leading indicators fell to a level suggesting the start of a recession.
Some market players also speculate that the central bank will ease again this year, possibly in December, to help the struggling economy with a strong yen.

4---New home sales stagnant, cast shadow on housing, Reuters

New U.S. single-family home sales fell slightly in October and sales for the prior month were revised sharply lower, casting a faint shadow over one of the brighter spots in the U.S. economy.
The Commerce Department said on Wednesday sales dropped 0.3 percent last month to a 368,000-unit annual rate, while September's sales pace was revised to 369,000 from 389,000.
The housing sector has been a point of relative strength this year in an economy beset by flagging business confidence and cooling demand from abroad.
A report last week showed a surprisingly sharp gain in home resales in October, while data this week showed prices for single-family homes have risen continuously since February....

Weakness in business spending has been restraining growth, but housing has helped offset that. Consumer confidence has also been more bullish.
Wednesday's home sales report showed the median sales price for a new home in October was 5.7 percent higher than a year earlier, but the pace of year-over-year price gains slowed for a second straight month.

Some of this could potentially be Hurricane Sandy," said Megan McGrath, an analyst at MKM Partners in Stamford, Connecticut.
However, the Commerce Department said the storm did not affect data collection at all and its impact on sales was likely "minimal."

Economists polled by Reuters had forecast sales rising to a 390,000-unit rate last month from September's previously reported 389,000-unit rate.
To provide support for the housing market, the Fed has kept interest rates at rock-bottom levels since 2008. In September, it launched an open-ended program to buy mortgage-backed securities, driving mortgage rates to record lows.
In a third report, the Mortgage Bankers Association said applications for home purchase loans rose 2.6 percent last week to their highest level of the year.

5--How to game the system with FHA loans for maximum advantage, oc housing

And I can tell you from firsthand experience (I work in Loss Mitigation) that your assertions have been, and continue to be, dead on with regards to modifications and their abject failure. Banks never intended to help anyone, they are using loss mitigation as a way to restrain supply of foreclosed homes from the market, and squeeze blood from a stone. Anecdotally I can tell you (I do short sales myself) that 85% of the people who submit for a short sale, have been through MULTIPLE attempts at modifying their mortgage. They want to game the system, and the banks are happy to let them play their game, because being left to hold the bag is the greater of two evils. Were the banks in any position to liquidate the potential foreclosures without crashing the market, these people would have been out on their ass years ago....

FHA loans as a tool to maximize return on investment

There is a strong secondary incentive to put the minimum down when buying real estate. When you calculate return on investment, the denominator is your investment. The smaller this number is, the higher the return. A 3.5% down payment provides six times the return of a 20% down payment. It;s not the great deal zero-down speculators had going during the bubble, but it’s not bad...

Perspective says:
There are additional benefits to going with an FHA. There are many programs to help you if your income declines, including forbearance. There’s also a streamline refi that allows a quick refi with no appraisal or income checks. The MI is expensive on a 30-year loan (1.25% soon to be 1.35%), but worth the cost if you’re a marginal buyer maximizing your purchasing power and stretching your budget (and therefore can reasonably anticipate using many FHA homeowner aids).

6---New Financial Overseer Looks for Advice in All the Wrong Places, propublica

The Office of Financial Research is a great idea. And as I grasped it, I felt a minor sense of horror, as when you see a precious ring slip off a finger in slow motion and go down the drain while you are powerless to stop it.
The office is looking as if it will be a tool of the financial services industry, instead of a check on it. Its main role is to serve the Financial Stability Oversight Council, providing the systemic risk overseer with data and analysis of where the nukes are buried.
But the Office of Financial Research was hobbled from the get-go by a poor design. It is housed in the Treasury Department, while ostensibly being independent of it. It has a small budget. And it has to report to the very regulators it is supposed to report on.
This month, it announced its advisory committee [1]. Thirty big names charged with giving the fledgling operation direction and gravitas. But these same people have also compromised it.
By my count, 19 of the 30 committee members work directly in financial services or for private sector entities that are dependent on the industry. There are academics, but many of them have lucrative ties to the financial services industry

7--Armageddon 2.0, Bulletin of Atomic Scientists

8---Wells Fargo Peddling Down Payment Assistance Crack, Bay Area Real Estate Trends

9--Don't Believe the Near-Term Housing Data.....we've not reached a bottom of the market yet, Reason Foundation

For instance, the same Case-Shiller index saw increases from May 2009 to May 2010, only to resume its previous free fall with a vengeance. This period too was hailed as the bottoming out of the housing market. But the optimists failed to account for the effects of the First-Time Homebuyers Tax Credit that gave up to $8,000 to households as incentive to buy a home, pulling demand from the future into the present. Once that credit expired in mid-2010, prices began to fall again past the previous low.
This time around the cause of the uptick is that there were fewer foreclosures being processed over the past year which, thanks in part to the robo-signing scandal, has effectively taken existing housing supply off the market. But millions of these delinquent properties will be going through foreclosure and be coming on the market at some point, reversing the price trend currently enjoyed....

Eventually those foreclosures in the system will have to work their way through the pipeline adding to the supply of housing and putting downward pressure on prices.
The housing supply problem could get even worse if investors decide to dump the homes they've been buying up into this market of rising prices. In 2011, 27 percent of all home sales were to investors rather than families looking to live in the homes. These investors will be looking at the surge in housing prices and trying to time the best place to sell and turn a profit. If they decide to dump all these properties at once it could put serious downward pressure on prices in certain areas and add to that potential foreclosure hurricane. Alternatively, they could slowly sell these properties over time like foreclosures slowly dripping into the market, adding to that perpetual downward pressure on housing prices.

10--Austerity without end, WSWS  (Today's "must read")

The media has largely ignored the main message from Monday’s meeting of euro zone finance ministers: that the Greek people confront years, if not decades, of austerity.

In comparison, the issues headlined by the media—whether Greek debt falls below 120 percent of gross domestic product (GDP) in 2020 or in 2022; whether lending rates are lowered or a debt haircut is imposed—were of a marginal and largely hypothetical nature. They boiled down to the question of how many food scraps one allows the victim, in order to exploit him as long as possible, before he eventually dies.

Despite their differences on a number of issues, the assembled finance ministers, IMF head Christine Lagarde and European Central Bank President Mario Draghi all agreed that Greece should be bled to the bone. If everything goes according to their plans, Greece will begin to produce a large budget surplus, every cent of which will go directly into the vaults of the international banks. Given the social devastation already caused by three years of austerity, it takes little imagination to grasp that this means the complete ruination of the country.

Greece is being subjected to a social experiment unlike anything known in Western countries since the Second World War. Comparable devastation is associated only with bloody military dictators such as Chile’s Pinochet or what took place following the collapse of the Soviet Union, i.e., the looting and destruction of an entire economy at the hands of criminal oligarchs.

Greece serves as a model for all of Europe, and, indeed, for the whole world. Having been bailed out with trillions from the public purse after plunging the world into crisis in 2008, the banks are insisting that these funds be recouped through massive cuts in wages and social conditions.

“Financial discipline” has become a demi-god, worshiped by all the mainstream parties. They have created their own mechanisms—the debt brake in Europe, the fiscal cliff in the US—to wipe out all of the past social gains of the working class. The profits of the banks and the assets of the rich are sacrosanct, while the social rights of hundreds of millions are trodden underfoot.

Capitalism reappears as described by Karl Marx: a brutal class society based on the exploitation of workers by the owners of capital, resulting in the enrichment of a few and impoverishment of the vast majority...

the social gains and democratic rights of the working class in Greece and Europe can be defended only on the basis of a revolutionary perspective for the overthrow of the capitalist system and the reorganization of society on a socialist basis.

11---New Home Sales Disappoint - Could It Be 'Cliff Concerns?', CNBC

After a slew of positive readings on the nation’s housing recovery, sales of newly built homes in October were a big disappointment.

Despite the big public builders reporting big jumps in new orders and builder confidence positively leaping to the highest level since 2006, sales just didn’t compute, and even September’s numbers were revised down.

“The recovery in new home sales is looking a little weaker than we were previously led to believe,” writes Paul Diggle of Capital Economics....
 
All signs are pointing to big gains in the housing market for 2013. Those expectations, however, must be tempered with a dash of perspective yet again. Peter Boockvar of Miller Tabak maps it out well:
“While the housing industry is recovering, new home sales have trended between 360k and 370k for the last 6 months, still 73 percent below the bubblicious peak in July '05 and not too far above the trough seen in 1982 and still below the bottom seen in the 1991 recession. On one hand, there is plenty of room for continued improvement but on the other, the healing process will take a lot of time and will likely be in fits and starts as recoveries from the aftermath of bubbles typically are.”
 
12--International Capital Flows Slow Down, conversable economist
 
I'm not sure why it's happening or what it means, but some OECD reports are showing that international investment flows are slowing down in late 2012, whether one looks at international merger and acquisition activity or at flows of foreign direct investment.

For example, the OECD Investment News for September 2012, written by Michael Gestrin, is titled "Global investment dries up in 2012." The main focus of the report is on international merger and acquisition activity, and Gestrin writes:
 
After two years of steady gains, international investment is again falling sharply. After breaking $1 trillion in 2011, international mergers and acquisitions (IM&A) are projected to reach $675 billion in 2012, a 34% decline from 2011(figure 1) ... At the same time as IM&A has been declining, firms have also been increasingly divesting themselves of international assets. As a result, net IM&A (the difference between IM&A and international divestment) has dropped to $317 billion, its lowest level since 2004 ..."

"IM&A has declined more sharply than overall M&A activity. This is reflected in the projected drop in the share of IM&A in total M&A from 35% in 2011 to 29% in 2012 (figure 2). IM&A is declining three times faster than domestic M&A, suggesting that concerns and uncertainties specific to the international investment climate are behind the recent slide in IM&A,
 
 
With regard to the inflation safeguard, I have previously discussed how the 3 percent threshold is a symmetric and reasonable treatment of our 2 percent target. This is consistent with the usual fluctuations in inflation and the range of uncertainty over its forecasts. But I am aware that the 3 percent threshold makes many people anxious.

That's disappointing. If Mr Evans were failing to earn himself any hearing within the FOMC, I could understand a change in tack. But he seems to be winning the argument. Why compromise on principal while negotiations over appropriate thresholds are ongoing? I find this shift confusing and frustrating. Unemployment at 7.9% more than three years after the end of recession makes an awful lot of people anxious, as well. If a 3% threshold is, in Mr Evans' view, a reasonable and appropriate threshold, then stick to that.

14--The Growing Burden of Payroll Taxes, NYT

Payroll taxes and corporate income taxes accounted for an equal share of federal tax revenue in 1969. By 2009, payroll taxes generated more than six times as much revenue. We’ve become reliant on payroll taxes, and a goal of a tax overhaul should be to reform and reduce them, permanently.

First, some background. The share of federal tax revenues coming from payroll taxes has doubled since the 1970s, to about two-fifths of revenue. The payroll tax, underwriting social insurance programs, nearly surpassed the individual income tax as the single largest source of federal tax revenue in 2009.

15--The New Tyros of the Eurozone, Dean Baker, Counterpunch

The eurozone crisis countries still have not developed a workable strategy for countering the policies being imposed by the troika — the European Central Bank (ECB), the IMF and the European Union. Their main problem is not profligate government spending, as fans of data everywhere have long known; the problem is an imbalance in relative prices between the crisis countries and Germany and other northern countries.

This imbalance is causing the crisis countries to run chronic trade deficits. Prior to the collapse of housing bubbles in the peripheral countries, this deficit was financed primarily through massive lending to the private sector in the crisis countries by banks in the northern countries. Since the collapse, the trade deficit has been largely financed with official lending to peripheral country governments. However the core problem is the trade deficit, not government borrowing in the crisis countries.
Prior to the
creation of the euro, this problem of competitiveness would be easily addressed by a fall in the value of the currencies of the peripheral countries relative to the currencies of the core countries. However with the single currency, this is not an option.

16--G SAX global coup d'etat, smirking chimp

For years, tinfoil hat crazies who’ve bookmarked Glenn Beck's websites and often appear as “experts” on Fox so-called News have warned us about a one-world government (here, here, and here). The latest threat, according to them, is Agenda 21 and the creation of a Soviet-style world authority that will confiscate private party everywhere, redistribute wealth to developing nations, and force us all to live by new global laws that sacrifice our national sovereignty. It’s totalitarian governments and not transnational corporations that we should be afraid of, they warn.
But when the tinfoil hat is removed, you can see that a sort of one-world government has already been established in a far more subtle form, through the rise of Goldman Sachs and their colleagues in the Wall Street elite.
A million questions arise when looking at what’s happening around the world. But many of these questions can be answered, once it’s acknowledged that Goldman Sachs alumni have executed a global coup d’etat...

In this post-crash world, where agents of Goldman Sachs have infiltrated key positions of power all around the world, we must all fundamentally re-understand how we view the global economy and just how much effect our democratic institutions have on this economy.

We no longer have an economy geared to benefit working people around the world; we have an economy that’s geared to exploit working people for Goldman Sachs' profits. Trader Alessio Rastani told the BBC in September before Goldman’s Lucas Papademos was installed as Greece’s Prime Minister, “We don't really care about having a fixed economy, having a fixed situation, our job is to make money from it…Personally, I've been dreaming of this moment for three years. I go to bed every night and I dream of another recession.” Rastani continued, “When the market crashes... if you know what to do, if you have the right plan set up, you can make a lot of money from this.”
And as we’ve seen over the last decade, Goldman Sachs knows exactly what to do. They’ve had the right plan set-up, and it's nothing short of a global coup d’etat.

As Rastani bluntly told the BBC, “This is not a time right now for wishful thinking that governments are going to sort things out. The governments don't rule the world, Goldman Sachs rules the world.”

17---Modified mortgages re-enter shadow inventory – By next month the housing crisis will have cost 5,000,000 Americans their homes via foreclosures. Distressed inventory still above 5,000,000., Dr Housing Bubble

 Since 2006 the housing crisis has cost nearly 5,000,000 Americans their homes while another 10,000,000 have faced the prospect of foreclosure. This is an incredibly high figure considering that nationwide, roughly 50 million households carry a mortgage on their property.....You still have over 5,300,000 mortgages in the foreclosure pipeline....

Rising home values make it easier for banks to unload these properties via short sales and other mechanisms. Given that the entire market was turned upside down because of 5 million completed foreclosure, the 5,300,000 homes in the foreclosure pipeline is still a big concern and the fact that nearly 100,000 are being put back into this bucket each month is concerning. The current momentum is clearing out properties but as we had mentioned, prices in areas like Arizona are actually turning investors away.

(From Sober Look)  “This could be a cause for concern. However, banks have some leeway in when they actually take charge-offs during the year, so it is worth taking a look at a more up to date delinquency data. JPMorgan recently published the October delinquency results. Indeed there was an increase in delinquencies, mostly in October (there seems to be some delay in reporting delinquencies that the Fed picked up in Q3, particularly by Bank of America). But delinquencies seem to the heaviest in sub-prime mortgages. Is this another wave of subprime defaults?”...

A modified mortgage is yanked out of the shadow inventory pipeline. From data from the OCC and other figures from HAMP, re-defaults on modified loans are very high. It might take one or two years to re-default but the success rate is poor. In other words, was the shadow inventory figure temporarily depressed because of these weak modifications?..

Something is definitely going on recently because charge-off rates have spiked recently and the housing market is moving up:

So how many mortgages have been modified? Since 2008 it looks like over 2.5 million...
In other words, you have a solid number of modified homes re-entering the shadow inventory figures. With investor demand and short sales, the figure is moving lower.

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