Thursday, October 23, 2014

Today's Links

Today's quote:  Melvin Udall:  Sell crazy someplace else, we're all stocked up here." (Jack Nicholson, "As Good As It Gets")




Quote: “What everyone wants to believe is that when things reach a tipping point and go from being merely crappy for the masses to dangerous and socially destabilizing, that we’re somehow going to know about that shift ahead of time. Any student of history knows that’s not the way it happens. Revolutions, like bankruptcies, come gradually, and then suddenly. One day, somebody sets himself on fire, then thousands of people are in the streets, and before you know it, the country is burning. And then there’s no time for us to get to the airport and jump on our Gulfstream Vs and fly to New Zealand. That’s the way it always happens. If inequality keeps rising as it has been, eventually it will happen. We will not be able to predict when, and it will be terrible—for everybody. But especially for us.” Nick Hanauer




1--The Fraud "Recipe" That Shaped the Crisis, William Black, op ed news



The Three Epidemics
The first epidemic was appraisal fraud. The second was "liar's" loans. These were the two epidemics of loan origination fraud led by the officers that controlled the home lenders. Because there is no fraud exorcist, once loans are fraudulently originated they can only be sold to the secondary market through fraudulent "representations and warranties." The officers that controlled the lenders that originated massive numbers of fraudulent loans made these fraudulent "reps and warranties."...


The Appraisal Fraud Epidemic
The Financial Crisis Inquiry Commission (FCIC) report should be read closely.
From 2000 to 2007, a coalition of appraisal organizations " delivered to Washington officials a public petition; signed by 11,000 appraisers". [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] "blacklisting honest appraisers" and instead assigning business only to appraisers who would hit the desired price targets (FCIC 2011:18)....
  1. Grow extremely rapidly by
  2. Making (buying) massive amounts of bad loans at premium nominal yield, while
  3. Employing extreme leverage, and
  4. Providing only trivial allowances for loan and lease losses (ALLL)
The Recipe Guarantees Three "Sure Things"
  1. The lender (buyer) will promptly report record (albeit fictional) profits
  2. The senior officers will promptly be made wealthy by modern executive compensation
  3. The firm will eventually suffer catastrophic losses
The title of George Akerlof and Paul Romer's 1993 explains the resulting "agency" problem -- "Looting: The Economic Underworld of Bankruptcy for Profit." The firm will suffer terrible losses, but the controlling officers can walk away wealthy.
The recipe is well known to bankers. Jamie Dimon, JPMorgan's CEO, almost stated the fraud recipe correctly in his March 30, 2012 letter to shareholders:
"Low-quality revenue is easy to produce, particularly in financial services. Poorly underwritten loans represent income today and losses tomorrow."...
The Second Loan Origination Fraud Epidemic: "Liar's" Loans


2--- How Quantitative Easing Contributed to the Nation’s Inequality Problem, NYT


Ms. Yellen’s speech seemed heartfelt. Yet, she has endorsed the Fed’s policies, started by her two immediate predecessors, Alan Greenspan and Ben S. Bernanke, that drove down interest rates to historically low levels – policies that have actually exacerbated the problem that she says she wants to correct.


She is failing to appreciate how Mr. Bernanke’s extraordinary quantitative easing program, started in the wake of the financial crisis, has only widened the gulf between the haves and have-nots. If she does understand, she certainly made no mention of it in her speech in Boston. Indeed, there was no mention whatsoever of the Fed’s easy monetary policies at all, let alone how they have helped to cause income inequality.


3--Big finance wins again: -U.S. Regulators Approve Eased Mortgage Lending Rules, NYT


Comments line:

gmshedd

Backwoods, PA Yesterday
So, now that we've eliminated all of the tighter mortgage lending and securitizing requirements that were imposed after the last bust, exactly how are we safer from the next bust?


ebmem

Memphis, TN Yesterday
It is wonderful that the government, unable to learn from its mistakes, decides to repeat them. The real estate and banking industry have clearly made some really big contributions to the Democrats.

It is no favor to people without a down payment to let them buy a house they can't afford. A small glitch in their income stream causes them to lose their home.

jla

usa Yesterday
"regulators identified a solid down payment as something that significantly reduced the likelihood of default on a mortgage."

Here we go again...another 7-year economic cycle comes to an end in an orgy of financial shenanigans. NINJA (no income, no job) mortgages are just around the corner. Why must we endure this financial spectacle time and time again? It's because a corrupt and entrenched lobbying infrastructure demands it, that's why

article:
Soon after the housing bust, federal regulators working on repairing the mortgage market thought it was sound policy to have borrowers make sizable down payments on their new homes.
On Tuesday, the regulators completed that overhaul, but they left out any requirement for borrowers to make a down payment. The new regulations aim to strengthen the vast market for bonds that are backed with mortgages and other loans. The market is not back on its feet, despite low interest rates. But the regulators said that the new rules could set the stage for more lending.

“Finalizing this rule represents a major step forward to providing greater certainty to the housing finance market and paves the way for increased participation by the private sector,” said Melvin L. Watt, director of the Federal Housing Finance Agency, one of the regulators that adopted the rule. “Lenders have wanted and needed to know what the new rules of the road are and this rule defines them.”

The regulators left out the down payment requirement after a firestorm of criticism from bankers and consumer advocates. They asserted that such a measure could restrain the flow of housing credit, particularly to borrowers who would have to save for many years to afford a down payment.
But some financial experts are disappointed with the new rules. They contend that, over time, the exclusion of a down payment requirement could once again allow banks to stoke dangerous risks in the financial system — and then evade the pain when the losses pile up.....

The overhaul has its roots in the years leading up to the financial crisis of 2008. Banks and Wall Street firms packaged billions of dollars of shoddy mortgages and sold them to bond investors, who later suffered huge losses when the loans went bad. To guard against that happening again, the Dodd-Frank Act of 2010 required banks to hold on to a slice of the loans they sold. As a starting point, the new rules require banks to hold onto 5 percent of the loans they sell. But there are exemptions in the so-called risk retention rule that may enable the banks to hold less or nothing.....

In the first draft of the rule, issued in 2011, regulators identified a solid down payment as something that significantly reduced the likelihood of default on a mortgage. Citing data to support their case, the regulators proposed that the exempt mortgages needed to have a down payment of at least 20 percent of the purchase price of the house.
In the following months, however, housing advocacy groups, mortgage bankers and even some bond investors called upon the regulators to get rid of the 20 percent down payment feature. Instead, they wanted the overhaul to simply apply another new set of home loan requirements — called “qualified mortgage” rules — that do not demand any down payments.


4---Bond funds stock up on Treasuries in prep for market shock, NYT


Corporate bond funds typically invest in a range of debt that includes mortgage-backed securities, U.S. Treasuries and bonds backed by student loans, credit cards and auto loans. Some corporate junk bond funds have guidelines that allow them to buy individual stocks. The move to buy Treasuries, which are more easily traded than most corporate bonds, show that managers anticipate market turmoil that could lead to redemption demands from investors.....


Michael Salm, co-head of about $60 billion in fixed-income assets at Putnam Investments, said slumping energy prices could also increase the rate of corporate defaults among junk-rated energy companies. He also said he sees subtle deterioration on the balance sheets of corporations outside the financial sector.  ....


Some corporations have been issuing new debt to repurchase more of their own stock, which is viewed as a negative for bondholders....


One trouble is that it's become harder than ever to buy and sell corporate bonds in the secondary market as new regulations and capital requirements since the financial crisis forced Wall Street banks to slash their inventories. That has left a vacuum in matching buyers and sellers, and bond managers say they don't want to get caught holding too much of it in a rout.
"Everyone sees the lack of liquidity as a potential risk in the corporate bond market," said Sumit Desai, the lead analyst for corporate credit funds at research firm Morningstar Inc. "But there hasn't been a major event to test the market."


The value of corporate bonds held by U.S. mutual funds has more than doubled since 2007 to about $1.7 trillion. Corporate bond issuance during the first nine months of 2014, driven by rock bottom interest rates, was $954 billion, compared with $1.08 trillion in the year-ago period, according to the Financial Industry Regulatory Authority.


5---The Signals From the High-Yield Bond Market, NYT
The benchmark BofA Merrill Lynch U.S. High Yield Master II index


“High yield is the first sign you have that something could be wrong,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies, an investment consultant. “It doesn’t have to give rise to a 2008 type of collapse, but it tells you there is excess liquidity in the system.”
Credit has been cheap and easy to obtain, he said, “but at some point a switch goes off, and people say it can’t go on forever.” He acknowledged that “it’s difficult to say what causes the turning point” but cautioned that the recent rise in yields could signal its arrival.

Tad Rivelle, fixed-income chief investment officer at the fund management company TCW, noted that there was more at stake than just the direction of bond prices.
“The credit cycle is actually the driver of the overall business cycle,” he said. “The durability of the economic expansion, such as it is, is largely dependent on the capital markets and the willingness of the junk bond market to continue to finance more marginal borrowers and more marginal deals. For clues for how late we are in the cycle, look no further than the high-yield market.”
If yields continue to rise, corporate activity is expected to feel the impact. Rising rates reflect a reduced supply of credit

6--Debate rages on quantitative easing’s effect on inequality, FT

These criticisms were fuelled by Bank of England research showing that QE boosted asset prices and household financial wealth, which is “heavily skewed with the top 5 per cent of households holding 40 per cent of these assets”.
When the study was published in 2012, the leftwing website “Left Foot Forward” wrote that QE had “made the rich richer [and] widened inequalities that already existed.”


7---Has the junk bond bubble deflated?, cnbc


8---Don't look toot close: This Is How Caterpillar Just Blew Away Q3 Earnings, zero hedge


in the new normal, if you can't grow, you just buy your way to growth. On margin.


...a stretch of declining global retail sales




... and since the start of 2013:



Unbelievable.


9---The Berlin Wall: Another Cold War Myth, counterpunch


A Response to Economic Sabotage...


It should be noted that in 1999, USA Today reported: “When the Berlin Wall crumbled [1989], East Germans imagined a life of freedom where consumer goods were abundant and hardships would fade. Ten years later, a remarkable 51% say they were happier with communism.”  


10---To keep markets afloat, however, as Bloomberg notes, $200 billion a quarter in QE from the central bankers is needed. The Fed is almost out, China has mostly withdrawn, Japan has too many domestic problems to look out the window, and the ECB can do just $15 billion a month. Confused? You won’t be .. after next week’s episode of .. the Eurosoap....NC


11---QE Timeline, Cal risk
With QE3 expected to end next week, by request, here is an updated timeline of QE (and Twist operations):

November 25, 2008: Press Release: $100 Billion GSE direct obligations, $500 billion in MBS

December 16, 2008 FOMC Statement: Evaluating benefits of purchasing longer-term Treasury Securities

January 28, 2009: FOMC Statement: FOMC Stands Ready to expand program.

March 18, 2009: FOMC Statement: Expand MBS program to $1.25 trillion, buy up to $300 billion of longer-term Treasury securities

March 31, 2010: QE1 purchases were completed at the end of Q1 2010.

August 27, 2010: Fed Chairman Ben Bernanke hints at QE2: Analysis: Bernanke paves the way for QE2

November 3, 2010: FOMC Statement: $600 Billion QE2 announced.

June 30, 2011: QE2 purchases were completed at the end of Q2 2011.
September 21, 2011: "Operation Twist" announced. "The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less."

June 20, 2012: "Operation Twist" extended. "The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities."

August 31, 2012: Fed Chairman Ben Bernanke hints at QE3: Analysis: Bernanke Clears the way for QE3 in September

September 13, 2012: FOMC Statement: $40 Billion per month QE3 announced.

December 12, 2012: FOMC Statement: Announced completion of "Operation Twist", expanded QE3 to $85 Billion per month.

May 22, 2013: In Testimony to Congress, The Economic Outlook, Fed Chairman Ben Bernanke said “If we see continued improvement and we have confidence that that is going to be sustained, then in the next few meetings, we could take a step down in our pace of purchases.” (aka "Taper Tantrum").

June 19, 2013: In Chairman Bernanke’s Press Conference, Bernanke said "If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year."

December 18, 2013: FOMC Statement: Announced "tapering" of QE3. Note: QE3 tapered $10 billion per month at each meeting of 2014.

October 29, 2013: FOMC expected to complete QE3 (next week).


12---Will the big banks ever clean up their act?, by Mark Thoma: Federal Reserve Bank of New York President William Dudley delivered a stern warning to the largest banks in a speech earlier this week. Either clean up your illegal and unethical behavior through "cultural change" from within, he said, or be broken into smaller, more manageable pieces.In his conclusion, the warning was direct and explicit:
"...if those of you here today as stewards of these large financial institutions do not do your part in pushing forcefully for change across the industry, then bad behavior will undoubtedly persist. If that were to occur, the inevitable conclusion will be reached that your firms are too big and complex to manage effectively. In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively. It is up to you to address this cultural and ethical challenge


13---Low Down Payments Are Coming Back, WSJ


14--Wall Street execs, "Neither honest or moral", WSOP


Wall Street banking executives, who elect two-thirds of the Board of Directors of the New York Fed and have frequently served on its Board, have structured the institution to be its sycophant. Consider the fact that Jamie Dimon, CEO of JPMorgan Chase, sat on the Board of the New York Fed from 2007 through 2012 as the regulator failed to follow through on three separate staff recommendations that JPMorgan’s Chief Investment Office undergo a thorough investigation, as reported this week by the Federal Reserve System’s Inspector General.
JPMorgan’s Chief Investment Office in 2012 finally owned up to losing $6.2 billion of bank depositors’ money in wild bets on exotic derivatives in London.


A Wall Street regulator, like the New York Fed, which has staff positions called “relationship managers” that are considered senior to, and can bully and intimidate, their bank examiner colleagues, is in no position to be lecturing Wall Street on its culture. Indeed, the culture on Wall Street of “it’s legal if you can get away with it,” grew out of its cozy, crony relationships with its regulators like the New York Fed, an enshrined revolving door at the SEC, self-regulatory bodies delivering hand slaps and its own private justice system to keep its secrets shielded from the public’s view...


“Since 2008, fines imposed on the nation’s largest banks have far exceeded $100 billion. The pattern of bad behavior did not end with the financial crisis, but continued despite the considerable public sector intervention that was necessary to stabilize the financial system. As a consequence, the financial industry has largely lost the public trust. To illustrate, a 2012 Harris poll found that 42 percent of people responded either ‘somewhat’ or ‘a lot’ to the statement that Wall Street ‘harms the country’; furthermore, 68 percent disagreed with the statement: ‘In general, people on Wall Street are as honest and moral as other people.


This summer, venture capitalist, Nick Hanauer, worried aloud to his fellow plutocrats in Politico Magazine about when public anger might spill over into pitchforks. Hanauer writes:
“What everyone wants to believe is that when things reach a tipping point and go from being merely crappy for the masses to dangerous and socially destabilizing, that we’re somehow going to know about that shift ahead of time. Any student of history knows that’s not the way it happens. Revolutions, like bankruptcies, come gradually, and then suddenly. One day, somebody sets himself on fire, then thousands of people are in the streets, and before you know it, the country is burning. And then there’s no time for us to get to the airport and jump on our Gulfstream Vs and fly to New Zealand. That’s the way it always happens. If inequality keeps rising as it has been, eventually it will happen. We will not be able to predict when, and it will be terrible—for everybody. But especially for us.”



The Saudi business tycoon, who is a member of the Saudi royal family, told CNN on Monday that “some extremists in Saudi Arabia” provided financial support for the terrorists


18--The US-led coalition has reportedly launched four airstrikes on an oil field in eastern Syria.
19--Survey: US war on Isil "not working" press tv


The new national survey by the Pew Research Center, conducted Oct. 15-20, has found that nearly 6 in 10 Americans, 59 percent, say the US-led campaign against ISIL is not working.
Moreover, only 30 percent of Americans believe the US and its allies have a “clear goal” in launching military action in Iraq and Syria.


20--Obama administration considers sending more “advisers” to Iraq, wsws


21---Blackwater mercenaries convicted for role in 2007 Iraq massacre, wsws


Former Blackwater sniper Nicholas Slatten was convicted of first degree murder. Evan Liberty, Paul Slough and Dustin Heard were all found guilty of voluntary manslaughter and using a machine gun to carry out a violent crime. The convictions carry minimum sentences of 30 years in prison for Liberty, Slough and Heard and a potential life sentence for Slatten.
The decision is subject to appeal, which could take a year or more, and the verdicts could be overturned in the process.


After 28 days of deliberation following an 11-week trial, the jury in a federal district court in Washington decisively rejected the defense team’s arguments that the mercenaries had fired on the crowd in self-defense. This story had already been thoroughly debunked by an Iraqi government study and independent investigations by reporters at the New York Times and Washington Post .
On September 16, 2007, the security contractors opened up with machine guns and grenade launchers into stopped traffic, before turning their sights on crowds of civilians seeking to flee the scene. The Blackwater forces suffered virtually no damage during the incident...


Meanwhile, Blackwater, since renamed Xi and now Academi, remains a favored instrument of US foreign policy, with hundreds of its private gunmen serving as shock troops for the US-backed regime in Kiev in its terror war against the civilian population of east Ukraine. Supported by US intelligence, Blackwater operators have played a leadership role in the operations of neo-Nazi Right Sector militias and fascistic forces responsible for ongoing atrocities


22--Israeli Defense Minister Predicts The End Of Artificial ME States, moon of alabama
Moshe Ya'alon predicts the end of his country:
Israel's Defense Minister Moshe Ya'alon is known for his blunt manner, and in an interview with NPR, he says that a future map of the Middle East will look very different that the one that exists today.
...
"We have to distinguish between countries like Egypt, with their history. Egypt will stay Egypt," Ya'alon, who is on a visit to Washington, tells Morning Edition's Steve Inskeep. In contrast, Ya'alon says, "Libya was a new creation, a Western creation as a result of World War I. Syria, Iraq, the same — artificial nation-states — and what we see now is a collapse of this Western idea."
Which country in the Middle East is the most artificial? Which one was created as the result of a World War and is solely a "western" idea?
It seems to me that Ya'alon lacks the self awareness to detect the irony in what he said.


23---Saudi Arabia steps up beheadings; some see political message, Reuters


Saudi Arabia beheaded 26 people in August, more than in the first seven months of the year combined. The total for the year now stands at 59, compared to 69 for all of last year, according to Human Rights Watch. ...


In the most extreme version of the Saudi death penalty, known by the Arabic word for "crucifixion" and reserved for crimes that outrage Saudi society, the corpse is publicly hanged in a harness from a metal gibbet as a warning to others.
An online film dated April 2012 on the LiveLeaks website shows a man being executed and then "crucified" in this manner, reportedly for robbing a house and killing its occupants. A group of five men suffered this fate in May last year in the southern province of Jizan for a series of robberies.
 

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