nicholasdejong.com

Polar ice loss quickens, raising seas BBC

With hacking, music can take control of your car ITWorld

Minister: China pollution remains ‘very serious’ PhysOrg

Twitter ordered to give WikiLeaks data to US AlterNet (hat tip reader furzy mouse). Be sure to read to the end for yet another example of craven Obama behavior.

A Message Received From a Friend In Japan Jesse

Hidden energy crisis in the Middle East Asia Times

French intelligence on Libya John Hempton. Score one for Hempton. I was grumbling yesterday that the US was shifting its position based on no to crap intelligence yet the French were recognizing the rebels. He has the missing link.

How Icelandic bank’s clients filled Tory coffers Guardian

Bond king’s Lear-like Treasuries renunciation Financial Times

Why mortgage lending slumped by a quarter and house prices may fall by a fifth Telegraph

Awesome: Wisconsin Firefighters Shut Down Bank That Funded Walker AlterNer (hat tip reader furzy mouse)

States Test Mortgage Principal Write-Downs BusinessWeek

What Does Anonymous Have on Bank of America? Gawker. The leak is supposedly Monday at http://hbgary.anonleaks.ch/

Republicans Parrot Big Banks: Foreclosure Fraud Settlement Is Just A ‘Shakedown’ Pat Garofalo, ThinkProgress (hat tip reader furzy mouse)

Proposed Servicer Settlement Met With Resistance DS News. Look at all the clever excuses!

Antidote du jour:

We have yet another example of media cravenness. You would assume that when official positions presented in the media contradict each other, it would represent an obvious opportunity for reporting, and an intrepid young journalist would take up the task. But since the job of US news outlets is increasingly to distribute propaganda, they manage not to notice.

We’ve had a stenography masquerading as reporting on the results of the recent Foreclosure Task Force “review” of servicer practices. After looking at 2800 severely delinquent loans, it found only some operational shortcomings and no unjustified foreclosures. Given that all that this cross agency effort did was to have tea and cookies with the servicers while reviewing their documents, as opposed to doing any validation of their data, this means the “exam” was a garbage in, garbage out exercise.

Similarly, today the Fed made the similarly ludicrous statement that there were “no wrongful foreclosures” based on a review of a mere 500 loan files. Given that there are 14 major servicers, that means it looked at 36 files on average per servicer. Heck of a job, Brownie!

Aside from the fact that there have been numerous reports of colossal errors that should be impossible in a system with any integrity (homes with no mortgages or where the mortgage had been paid off, where borrowers had been given letters that they had been approved for permanent HAMP mods being foreclosed upon), there are also numerous accounts of servicer-driven foreclosures. As Karl Denninger noted:

We have myriad reports of homeowners who are told to intentionally default by servicers, a clear act of bad faith. We have documented instances of banks breaking into homes that are occupied, an apparent serious state felony. We have documented instances of banks playing games with forced-placed insurance, escrow accounts and similar acts leading to foreclosure.

But the most telling contradiction of the banking regulators’ “nothing to see here” stance is the Administration’s aggressive pursuit of servicing abuses against active duty soldiers. When a Congressional hearing focused on how JP Morgan illegally foreclosed on soldiers, the bank went into overdrive to do damage control. As David Dayen reported:

The big bank went out of their way to fix the problem yesterday, knowing that abusing service members could get you in big trouble in this country, and lead to further scrutiny of their abusive practices. Calling these violations a “painful aberration” on a track record of honoring military families, JPM CEO Jamie Dimon announced:

• New pricing. Under the Servicemembers Civil Relief Act, servicers are required to cap mortgage interest rates for active duty personnel at 6%. JPM will lower that cap to 4%.

• Military modification program. JPM will go beyond HAMP requirements for all personnel who served on active duty going back to 9/11. If the borrower has a second lien with them, they will reduce the interest rate on it to 1%.

• No foreclosures. JPM will not foreclose on any active duty military personnel overseas. Anyone who was wrongly foreclosed upon previously will not only get their home back, but JPM will forgive all remaining home debt. They promise to do that in the future with any other wrongful foreclosure of a military family.

• Donations. JPM will donate 1,000 homes to military and veterans, through a non-profit partner, over the next five years.

• Jobs. They will commit to hiring 100,000 military and veterans over the next ten years. They will also offer a Technology Education certificate for veterans to take free to get technology training for future careers.

• Advisory Council. They’ll form an Advisory Council to determine other ways to help military families. They’re also opening a bunch of Homeownership Centers near military bases to assist families.

Needless to say, this is a PR gambit to the nth degree. But look how incredibly scared JPM is that anyone will look past the abuse of military families. They are going out of their way to burnish and repair their public image on this one, and the goal is to whitewash the fact that they were merely engaging in standard servicer practices of abusing homeowners and illegally foreclosing.

To underscore Dayen’s point, servicers are factories with highly routinized, bad procedures. If you see one abuse reported more than a time or two in the media, like force placed insurance or fee pyramiding, it is not a mistake. It’s policy.

Not surprisingly, JP Morgan appears to have company in the “grinding up servicemen for fun and profit” school of banking. And while the Administration has bent over backwards to protect servicers by disputing any suggestion that they’ve made unwarranted foreclosures, they’ve been fast to saddle up the Department of Justice to investigate over the very same issue,20 probably impermissible foreclosures at Saxon, a servicer owned by Morgan Stanley, because it involved active duty personnel. From the New York Times:

The Justice Department is investigating allegations that a mortgage subsidiary of Morgan Stanley foreclosed on almost two dozen military families from 2006 to 2008 in violation of a longstanding law aimed at preventing such action.

A department spokeswoman confirmed on Friday that the Morgan Stanley unit, Saxon Mortgage Services, is one of several mortgage and lending companies being investigated by its civil rights division. The inquiry is focused on possible violations of a federal law that bars lenders from foreclosing on active-duty service members without a court hearing.

Mark Lake, a Morgan Stanley spokesman, declined on Friday to comment on the investigation. However, in the fine print of a recent regulatory filing, Morgan Stanley disclosed that it was “responding to subpoenas and requests for information” from various government and regulatory agencies concerning, among other issues, its “compliance with the Servicemembers Civil Relief Act,” the law that governs the actions creditors can take against service members on active duty.

This two-tier approach is intriguing: aggressive pursuit of abuses when members of the armed forces are the victims, flat-out denials for the rest of us. Dave Dayen thinks it’s politics, but I wonder if something deeper is at work. The Pentagon has been aggressive in blocking other forms of exploitation of soldiers, such as locating payday lenders near military bases (the Pentagon sought and won interest rate ceiling. My 2007 post on that tussle was “The Pentagon as Financial Regulator.” Maybe that’s an idea we need to entertain more seriously. It seems to be the only body with the authority and firepower to take on the mortgage industrial complex.

Update: It’s possible that a meltdown may already have occurred at one nuclear power plant. As AP wrote 4 minutes ago:

An official with Japan’s nuclear safety commission says that a meltdown at nuclear power plant affected by the country’s massive earthquake is possible.

Ryohei Shiomi said Saturday that officials were checking whether a meltdown had taken place at the Fukushima Dai-ichi power plant, which had lost cooling ability in the aftermath of Friday’s powerful earthquake.

Volcanoes have reportedly erupted in Japan, Indonesia, and Kamchatka Russia today, presumably due to the massive Japanese earthquake. There have been no reports of damage from the eruptions.

In addition, there are problems at three Japanese nuclear power plants.

The Fukushima plant is leaking radiation, and a nuclear expert says that things are getting worse, and “Fukushima has 24 hours to avoid a core meltdown scenario”.

MSNBC reports:

“The situation is still several stages away from Three Mile Island when the reactor container ceased to function as it should,” said Tomoko Murakami, leader of the nuclear energy group at Japan’s Institute of Energy Economics

Two other Japanese nuclear reactors are now in trouble as well.

As MSNBC notes:

Coolant systems failed at three quake-stricken Japanese nuclear reactors Saturday, sending radiation seeping outside one and temperatures rising out of control at two others.

Radiation surged to around 1,000 times the normal level in the control room of the No. 1 reactor of the Fukushima Daichi plant, Japan’s Nuclear and Industrial Safety Agency said. Radiation — it was not clear how much — had also seeped outside, prompting widening of an evacuation area to a six-mile radius from a two-mile radius around the plant. Earlier, 3,000 people had been urged to leave their homes.

Tokyo Electric Power Co. said Saturday that the temperatures of its No.1 and No.2 reactors at its Fukushima Daini nuclear power station were rising, and it had lost control over pressure in the reactors.

***

About an hour after the plant shut down, however, the emergency diesel generators stopped, leaving the units with no power for important cooling functions.

***

Hours after the evacuation order, the government announced that the plant will release slightly radioactive vapor from the unit to lower the pressure in an effort to protect it from a possible meltdown.

And see this.

Good luck to the Japanese scientists bravely trying to avert catastrophe. As MSNBC notes:

Japan has a “tremendous amount of technical capability and resources” to respond to the issue ….

UPDATE: It is now up to 5 nuclear reactors.

By Edward Harrison

If you want an accurate explanation of quantitative easing, here it is. I am going to describe the basic mechanics and the transmission mechanism to the rest of the economy. To the degree there is official documentation on the mechanics, I will refer to it here in order to use the Fed’s own voice in describing QE. Let’s start with the mechanics.

In March of 2010, the Fed described QE this way in a paper written by Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack on the New York Fed’s website:

Since December 2008, the Federal Reserve’s traditional policy instrument, the target federal funds rate, has been effectively at its lower bound of zero. In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substantial quantities of assets with medium and long maturities. In this paper, we explain how these purchases were implemented and discuss the mechanisms through which they can affect the economy.

So quantitative easing is simply large scale asset purchases (LSAP) by the central bank. The central bank is permitted by law to purchase a wide range of assets including but not limited to Treasury securities, mortgage-backed securities, or municipal bonds (see Blanchflower: The Fed Should Buy Munis And Monetize State Debt). Before the first round of quantitative easing, the Federal Reserve’s asset base consisted mostly of Treasury securities. However, as bond market liquidity dried up, the Fed stepped in and purchased a panoply of assets in the first round of quantitative easing including many mortgage-backed securities.

Brian Sack remarked in December 2009:

The Fed is currently in the process of purchasing nearly $1.75 trillion of Treasury, agency, and agency mortgage-backed securities through the LSAP programs. We have already completed our purchases of Treasury securities, totaling $300 billion. And our purchases of agency securities and mortgage-backed securities (MBS) are well advanced. Indeed, we have completed purchases of $155 billion of agency debt securities to date, out of a target level of $175 billion, and of just over $1 trillion of MBS, out of a target level of $1.25 trillion.

The second round of quantitative easing was concentrated on purchases of Treasury securities. While the Fed had about $800 billion in assets in mid-2007, the first round of QE swelled this to $2.25 trillion by December 2009. The Fed’s asset base is now moving toward $3 trillion.

In the March 2010 paper, the NY Fed goes on to say:

We present evidence that the purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities, including securities that were not included in the purchase programs. These reductions in interest rates primarily reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.

But this is a subjective conclusion. The purpose of the paper is to provide the intellectual underpinnings to defend the Fed’s large scale asset purchases. Therefore, one should view the mechanics presented as objective and the conclusions as subjective. For example, In Sack’s December 2009 speech, he said:

The LSAPs were not aimed at supplying liquidity to financial institutions or at reducing systemic risk. Instead, they were intended to support economic activity by keeping longer-term private interest rates lower than they would otherwise be.

A primary channel through which this effect takes place is by narrowing the risk premiums on the assets being purchased. By purchasing a particular asset, the Fed reduces the amount of the security that the private sector holds, displacing some investors and reducing the holdings of others. In order for investors to be willing to make those adjustments, the expected return on the security has to fall. Put differently, the purchases bid up the price of the asset and hence lower its yield. These effects would be expected to spill over into other assets that are similar in nature, to the extent that investors are willing to substitute between the assets. These patterns describe what researchers often refer to as the portfolio balance channel. [EMPHASIS ADDED]

Sack is telling us that the Fed did not intend to perform a lender of last resort role, a legitimate Fed function. Rather, the Fed’s intention was to artificially supress risk premia to support economic activity. This is important to remember.

The money used to purchase these assets is created specifically for the transactions. That is to say the money did not previously exist before the transactions. This fact is what is behind the view that the Fed is ‘printing money’, a term Ben Bernanke, the Fed Chair also used when describing QE in 2009 (see Jon Stewart: The Big Bank Theory).

The Fed uses permanent open market operations (POMO) to conduct its large scale asset purchases. The Fed explains POMO this way:

The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).

On March 18, 2009, the FOMC announced a longer-dated Treasury purchase program with a different operating goal, to help improve conditions in private credit markets.

On August 10, 2010, the FOMC directed the Open Market Trading Desk at the Federal Reserve Bank of New York to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

On November 3, 2010, the FOMC decided to expand the Federal Reserve’s holdings of securities in the SOMA to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Note, August 2010 was when the Fed started QE2. November 2010 was when QE2 was first announced as the Fed decided to expand its balance sheet.

That’s the mechanics.

How QE actually works is the more subjective part of quantitative easing. Brian Sack told us in 2009 that the Fed was not performing its role as lender of last resort but rather it was ‘manipulating’ risk premia in order to lower long term interest rates to boost the real economy. I use the term ‘manipulate’ rather deliberately as I believe QE introduces a distortion into the markets by making price signals difficult to read for investors and businesses alike. The Fed is attempting to lower interest rates artificially. By that, I mean it is not saying that risk premia are elevated because of liquidity since Mr. Sack has already told us it is not performing a lender of last resort role. The Fed is trying to supress risk premia dictated by market forces through its own activity.

Now, in fairness to the Fed, this is exactly what it does with short-term interest rates by setting the Fed Funds rate. However, with short-term rates at zero percent and the economy still not firing on all cylinders, the Fed is telling us short-term rates at zero percent is not enough stimulus. It wants long-term interest rates to be lower than the market-determined rate as well. Clearly, this is a massive attempt at central planning and is, thus, likely to have unintended consequences like excess leverage and speculation.

You can read Ben Bernanke’s views on the QE2 transmission mechanism in my post "The government has a printing press to produce U.S. dollars at essentially no cost". I take a benign approach to Bernanke’s comments there. However, Marshall is less flattering in "Amateur Hour at the Federal Reserve". But, go back to QE1 and read Marshall’s piece "Bernanke doesn’t understand the basic economics of central banking" from December 2009. I think this got to the heart of the matter when Marshall told us loans create reserves and warned that QE would have nearly no impact on lending – which proved true.

The loan desk of commercial banks have no interaction with the reserve operations of the monetary system as part of their daily tasks. They just take applications from credit worthy customers who seek loans and assess them accordingly and then approve or reject the loans. In approving a loan they instantly create a deposit (a zero net financial asset transaction).

Bernanke often speaks as if he believes reserves create loans. I prefer Janet Yellen, the Fed Vice Chair, and the way she recently explained how QE is transmitted to the real economy. She writes:

Some General Observations

It is important to recognize at the outset that conventional and unconventional monetary policy actions bear many similarities. Forward guidance concerning the path of the federal funds rate, for example, is explicitly intended to influence market expectations concerning the future trajectory of shorter-term interest rates and thereby affect longer-term interest rates. That said, standard monetary policy actions also typically alter not just current short-term rates, but the anticipated path of short-term rates as well, influencing longer-term rates through the identical channel. In fact, central bankers have long recognized that this “expectations channel” operates most effectively when the public understands how policymakers expect economic conditions and monetary policy to evolve over time, and how the central bank would respond to any changes in the outlook.

The transmission channels through which longer-term securities purchases and conventional monetary policy affect economic conditions are also quite similar, though not identical. In particular, central bank purchases of longer-term securities work through a portfolio balance channel to depress term premiums and longer-term interest rates. The theoretical rationale for the view that longer-term yields should be directly linked to the outstanding quantity of longer-term assets in the hands of the public dates back at least to the 1950s.(2)

Each of these policy tools tends to generate spillovers to other financial markets, such as boosting stock prices and putting moderate downward pressure on the foreign exchange value of the dollar. My reading of the evidence, which I will briefly review, is that both unconventional policy tools–the use of forward guidance and the purchases of longer-term securities–have proven effective in easing financial conditions and hence have helped mitigate the constraint associated with the zero lower bound on the federal funds rate.

-Unconventional Monetary Policy and Central Bank Communications

What she is discussing is something called the expectations theory of interest rates.

It works like this:

long-term interest rates can be expressed as a series of short-term interest rates, such that if you know long-term rates, you can calculate expected future short-term interest rates. This is important because it tells you what people believe the Federal Reserve is likely to do with interest rates in the future.

-MMT: Market discipline for fiscal imprudence and the term structure of interest rates

The Fed telegraphs how short-term rates will or will not be affected by the real economy and expectations shift accordingly. Therefore, to the degree the Fed is successful in getting long-term interest rates to move, it is because it has adjusted those expectations. That’s how it works.

The reason this is true is market arbitrage. Any market participant could go out into the market and purchases zero coupon treasury strips as an arbitrage against long-term Treasury yield mispricing if long-term rates did not reflect the path of future expected short rates. Let me repeat that: if long-term rates don’t reflect the expected path of short-term rates, you have a sure fire arbitrage opportunity. If the Fed is destined to keep rates at zero percent for the next five years and I am sure of it, but the yield on five-year Treasuries don’t reflect this, all I have to do to make money is buy the five-year and sell Treasury strips and leverage that trade up in the Repo market. Isn’t that what some investment banks are doing right now – ploughing their POMO acquired money into a leveraged bet on Treasuries? That is exactly what happened after the first jobless recovery in 1992-1994 before Greenspan caused a huge bear market in Treasuries by raising rates.

Look, quantitative easing is an asset swap. The Fed creates electronic credits and swaps them with existing financial assets. If the Fed is buying government paper, it is essentially trading one government liability for another, swapping a demand deposit electronic credit for a longer-dated government liability.

From the government’s perspective, there is no functional difference between any of its obligations like bank notes, electronic credits, or treasury bills and bonds. As the Ten pound note says, “I promise to pay the bearer on demand the sum of [fill in the blank sum][fill in the blank fiat currency].

-If the U.S. stopped issuing treasuries, would it go broke?

So QE2 Is Equivalent to Issuing Treasury Bills. In actual fact, all QE2 does is drain the real economy of interest income by swapping an interest-bearing government liability for a non-interest bearing government liability. This decreases aggregate demand in the economy. So the real economy effects of QE are to slightly lower aggregate demand. This is offset by changing interest rate expectations, which alter private portfolio preferences and risk premia, leading to credit growth, leverage and speculation, forces which should pump up the real economy. The Fed had intended to lower interest rates via the lowered risk premia. To date, the Fed has lowered risk premia. But this has also provided the tender for speculation and leverage. Moreover, the Fed has also raised inflation expectations to boot, causing interest rates to rise and working at cross-purposes with the lowered risk premia. Thus, QE2 has only been successful insofar as it has increased business credit and raised asset prices. In my view, QE2 has been a bust as it adds volatility to the system and will have negative unintended consequences down the line.

Big Data mining: Who owns your social network data? InfoWorld

Calm Man Successfully Buys TV And Denies Walmart Receipt Checkers Consumerist (hat tip reader Skippy). I have to confess that (aside from the shopping at WalMart part) this is the sort of thing I would do, except perhaps with less sangfroid.

Japan’s earthquake Financial Times. Updated frequently, liveblog style

Watch NHK in English for more earthquake news (hat tip Clusterstock)

US offical says Libya ‘regime will prevail’ Financial Times and U.S. Escalates Pressure on Libya Amid Mixed Signals New York Times. Let’s see…two weeks ago, the story was no one knew what was happening in Libya because Gaddafi had done a pretty good job of an information blackout and Western assumptions about that part of the world were looking very dated. Then the story was he only had a few thousand of troops that were loyal to him, he had lost major cities in the east and was in the process of losing Tripoli. Gaddafi then starts blowing up oil infrastructure and gets Tripoli back and the US starts sounding less committed to supporting the rebels (unlike France, it has not recognized the rebel government). Do I have the trajectory roughly right?

What will Saudi Arabia do? Jim Hamilton

A crisis mechanism for the euro: The European Stability Mechanism VoxEU

Share the sacrifice Heather Digby Parton The Hill

Americans in Poll Show Scant Confidence as Plurality See Decline Bloomberg. Notice the number of quotes where the experts basically say the economic data showing recovery are right, the stupid people are just too damned moody. And the analysts seem puzzled at the gloom juxtaposed with the resumption of an old habit, retail therapy. Haven’t they heard of hyperbolic discounting?

Battle Of The Banking Policy Heavyweights Simon Johnson

AOL cuts 20% of workforce Financial Times

BofA under fire over staff home-loss subsidies Financial Times. Readers should know by now I am no fan of BofA, but this furore seems misplaced. This sort of subsidy has been part of corporate life since the 1960s, if not earlier, and was not limited to executives. If it has now been curtailed at most companies to the C-level types, that’s a different matter.

Families Slice Debt to Lowest in 6 Years Wall Street Journal. The Journal uses this to argue they can spend more. Have they forgotten what the asset side the balance sheet of homeowners looks like? While it does get to that in the piece, it airbrushes out that most experts see the trajectory for housing prices in most markets as down, at least for 2011.

Carrington and the Problems of Mortgage Debt Servicing Mike Konczal

The Folks Who Run Our Economy Believe in the Easter Bunny Marcy Wheeler

Lehman Failed Lending to Itself in Alchemy Eluding Dodd-Frank Bloomberg

Antidote du jour:

I’m still pretty gobsmacked in reading the bits of testimony presented in the financial media’s accounts of the first day of testimony in the SEC’s insider trading case against hedge fund manager Raj Rajaratnam.

I’m struck by how simple it seemed in retrospect for Rajaratnam to suborn McKinsey partner Anil Kumar. Kumar had been pitching Rajaratnam’s fund as a prospective client, since the hedgie claimed to have a budget of $100 million a year to spend on research. But Rajaratnam was cool to Kumar’s proposals. After a charity event, Rajaratnam turned the tables and started wooing Kumar, telling him he was smart, underpaid, and he really just wanted his insights, not the firm’s.

Now partners can in fact bill clients on an unlevered basis (at least in my day), meaning a price that led to a similar level of profit as when working with a normal team with everyone’s cost suitably marked up. They didn’t for practical reasons, namely, it would quickly lead to a burn rate that clients would deem unacceptable. I was brought in by McKinsey to work on a client project a few years after I had left the firm, in the early 1990s when the topic came up. The number then was $20,000 a day. Given how much the firm’s rates increased in the 1990s, I’d guesstimate it would be easily double that by 2004.

So it was pretty apparent what this was really about when Rajaratnam suggested paying Kumar $500,000 a year in via an offshore account .

But here are the parts that indicate a complete lack of a sufficiently criminal mind on behalf of the McKinsey partner. He exchanged information with Rajaratnam on a regular phone line of some sort, I presume his cell phone or perhaps one of his land lines.

I’m far from technology savvy, but I know there are ways to conduct phone calls so that they do not go through any telco central office switch (you set up a computer to be the switch). You and your compatriots need dedicated cell phones to access the private switch. You still run the risk of having your signal intercepted (something which plagues the English royal family). Or as insider trader Dennis Levine did in the 1980s, you use a pay phone (a pain, and you’d presumably need to keep using different ones, which might not be that hard for a jet setting McKinsey type).

But this is the part that strikes me as really barmy:

Mr. Rajaratnam later told Mr. Kumar that he should get someone outside the U.S. to sign the consulting agreement on his behalf with Galleon and had him set up an account with Galleon under Mr. Kumar’s housekeeper’s name in order to reinvest the money with Galleon, Mr. Kumar said. The structure was so McKinsey didn’t know about the payments, Mr. Kumar said.

So Kumar has an agreement, not in his name, and “his” money is in Galleon hands.

That money was in no real sense ever his money. The SEC can seize it, but what ability did Kumar have to get at it? Even if he had been smart about he did negotiate the offshore agreement (UK is very tough; failure to honor contracts that have clear payment and withdrawal arrangements can be argued to be an admission that the company is “trading insolvent”, which makes the directors personally liable) did he have any practical ability to enforce it? His “payment” was just round tripped back to Galleon, he remained dependent on Rajaratnam’s continued good will if he were ever to access a dime. Hence by having control of Kumars account, the hedgie had leverage to keep extracting more from him, independent of continued “payments”.

It may prove a tad ironic if Rajaratnam’s having picked such a mark was what led to his downfall.

I hate shooting the messenger even when he lets us know that he is a tad invested in the information he is conveying, but sometimes it is warranted. Floyd Norris now tells us that maybe it wasn’t such a good idea to have been so generous to the banks during the crisis. He cites the usual reasons: the recovery is shallow, the officialdom missed the opportunity created by the crisis to restructure the financial system, sparing bondholders created moral hazard, and we are now stuck with banks in the driver’s seat. His lament, as the headline accurately summarizes, is “Crisis Is Over, But Where’s The Fix?”

The problem is that his account is larded with a rationalization of the decisions made at the time to treat major financial firms with soft gloves:

At the time, rescuing seemed more important than reforming. The world economy was breaking down because of a lack of financing. Trade flows collapsed, and companies and individuals stopped spending. It seemed clear that halting the slide was critical…

A surprising citadel of that second-guessing is at the International Monetary Fund, where researchers this week concluded that the rescues “only treated the symptoms of the global financial meltdown.”

“Second guessing” is simply misleading. It gives the inaccurate impression that decisions made at the time are now being questioned with the benefit of hindsight. But in fact, those decisions were criticized loudly at the time by a vocal minority, including yours truly.

Even during the last window of opportunity to bring the banking industry to heel, in early 2009, when the financiers were still chastened, quite a few people, including Paul Krugman, were calling for nationalization of the sickest banks, which would have been Citigroup and Bank of America. A next best step, as many including Nouriel Roubini, advocated, was wiping out the stock and bondholders. They were the providers of risk capital; no one held a gun to their heads to buy those investments. Yes, this measure have hit smaller banks that had been encouraged by regulators to buy bank preferred stock, but that seemed a too convenient excuse for not taking on the managements of the biggest of the TARP banks).

There were all sorts of alternative approaches discussed as the crisis ground on. September and October 2008 were so gut-wrenching that it’s often forgotten that there were four acute phases, starting in August 2007. The Bagehot rule was invoked repeatedly as a guiding principle (lend freely, at penalty rates, against good collateral) and ignored. The Fed went from being behind the curve to over-reactive, as “75 was the new 25″, meaning the Fed was making sharp policy rate cute when markets got wobbly. A small minority became concerned when the Fed dropped the Fed funds rate below 2%, since it risked entering liquidity trap land with successive reductions (and indeed that is where we seem to be). Well before September 2008, there was ample discussion in econ policy circles of the Swedish response to its early 1990s banking crisis, which included throwing management of troubled institutions out, putting in new teams with clear objectives for their institutions but latitude in how to reach those goals, and setting up a vehicle to manage and work out troubled assets. The IMF even got serious about the question, but because its report on 124 banking crises was issued at the end of September 2008, things were moving too fast for it to get any consideration. Its main finding:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance….

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery. Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.

So no one can credibly pretend that plenty of authorities were opposed to bailouts (as opposed to resolutions and restructurings). Yet the revisionist history is that there was unanimity on what to do, and any alternative was not feasible. We live, after all, in the best of all possible worlds, even if it does not look so hot at this particular juncture.

But the sellout and its consequences were obvious to anyone who had been paying attention. Simon Johnson’s article, “The Quiet Coup“, hit the newsstands a mere two months after the Obama administration officially threw its lot in with the bankers with the announcement of the stress test charade in March 2009.

Where were members of the economics elite in calling for a proper post mortem? Why wasn’t evey major bank who took bailout money or accessed emergency facilities made, as UBS was, to conduct an investigation and report to regulators and shareholders? Why wasn’t there a push for international cooperation and data sharing on post crisis forensics? Keeping the bankers under the microscope could have at least contained their hubris; continued focus on managerial failures and looting would have given air cover that would have resulted in less limp-wristed reforms.

As we summed up a year ago:

The case for bold action was sound. The history of financial crises showed that the least costly approach is to resolve mortally wounded organizations, install new management, set strict guidelines, and separate out the bad loans and investments in order to restructure and sell them…

This juncture [the early days of the Obama administration] was a crucial window of opportunity. The financial services industry had become systematically predatory. Its victims now extended well beyond precarious, clueless, and sometimes undisciplined consumers who took on too much debt via credit cards with gotcha features that successfully enticed into a treadmill of chronic debt, or now infamous subprime and option-ARM mortgages.

Over twenty years of malfeasance, from the savings and loan crisis (where fraud was a leading cause of bank failures) to a catastrophic set of blow-ups in over the counter derivatives in 1994, which produced total losses of $1.5 trillion, the biggest wipeout since the 1929 crash, through a 1990s subprime meltdown, dot com chicanery, Enron and other accounting scandals, and now the global financial crisis, the industry each time had been able to beat neuter meaningful reform. But this time, the scale of the damage was so great that it extended beyond investors to hapless bystanders, ordinary citizens who were also paying via their taxes and job losses. And unlike the past, where news of financial blow-ups was largely confined to the business section, the public could not miss the scale of the damage and how it came about, and was outraged.

The widespread, vocal opposition to the TARP was evidence that a once complacent populace had been roused. Reform, if proposed with energy and confidence, wasn’t a risk; not only was it badly needed, it was just what voters wanted.

But incoming president Obama failed to act. Whether he failed to see the opportunity, didn’t understand it, or was simply not interested is moot. Rather than bring vested banking interests to heel, the Obama administration instead chose to reconstitute, as much as possible, the very same industry whose reckless pursuit of profit had thrown the world economy off the cliff. There would be no Nixon goes to China moment from the architects of the policies that created the crisis, namely Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and Director of the National Economic Council Larry Summers.

Defenders of the administration no doubt will content that the public was not ready for measures like the putting large banks like Citigroup into receivership. Even if that were true (and the current widespread outrage against banks says otherwise), that view assumes that the executive branch is a mere spectator, when it has the most powerful bully pulpit in the nation. Other leaders have taken unpopular moves and still maintained public support.

Obama’s repudiation of his campaign promise of change, by turning his back on meaningful reform of the financial services industry, in turn locked his Administration into a course of action. The new administration would have no choice other that working fist in glove with the banksters, supporting and amplifying their own, well established, propaganda efforts.

Thus Obama’s incentives are to come up with “solutions” that paper over problems, avoid meaningful conflict with the industry, minimize complaints, and restore the old practice of using leverage and investment gains to cover up stagnation in worker incomes. Potemkin reforms dovetail with the financial service industry’s goal of forestalling any measures that would interfere with its looting. So the only problem with this picture was how to fool the now-impoverished public into thinking a program of Mussolini-style corporatism represented progress.

Apologists for the Bush and Obama administrations’ conduct during the crisis, whether they recognize it or not, have been and continue to be part of this propaganda program.

When a smaller earthquake struck near Tokyo a couple of days ago, I wondered if worse was on the way soon.

Japan has been overdue for a major earthquake, given their historical frequency. Perversely, there was much more worry about the impact of a major quake on Japan when it was an economic force to be reckoned with (perhaps a subconscious wish to cut the seemingly unbeatable Japanese down to size?). While the horrific death count that resulted from the last great quake in 1923, led the Japanese to impose vastly tougher building codes and continue to improve upon earthquake-related technology, events like this too often have a nasty way of defeating careful planning. But this tremblor, which registered a formidable magnitude 8.8, was off the northern coast, but still has produced serious disruptions in Tokyo. There are no good reports of the damage yet. From the New York Times:

The quake that struck 2:46 p.m. was followed by a series of aftershocks, including a 7.4-magnitude one about 30 minutes later. The U.S. Geological Survey upgraded the strength of the first quake to a magnitude 8.8.

The meteorological agency issued a tsunami warning for the entire Pacific coast of Japan. National broadcaster NHK was warning those near the coast to get to safer ground.

The Pacific Tsunami Warning Center in Hawaii said a tsunami warning was in effect for Japan, Russia, Marcus Island and the Northern Marianas. A tsunami watch has been issued for Guam, Taiwan, the Philippines, Indonesia and the U.S. state of Hawaii.

The quake struck at a depth of six miles (10 kilometers), about 80 miles (125 kilometers) off the eastern coast, the agency said. The area is 240 miles (380 kilometers) northeast of Tokyo.

In downtown Tokyo, large buildings shook violently and workers poured into the street for safety. TV footage showed a large building on fire and bellowing smoke in the Odaiba district of Tokyo.

In central Tokyo, trains were stopped and passengers walked along the tracks to platforms.

Footage on NHK from their Sendai office showed employees stumbling around and books and papers crashing from desks.

Several quakes had hit the same region in recent days, including a 7.3 magnitude one on Wednesday.

Thirty minutes after the quake, tall buildings were still swaying in Tokyo and mobile phone networks were not working.

The buildings are designed to sway but it must be really disturbing to see them move that much.

From the Wall Street Journal:

A powerful earthquake, measured at 8.8 magnitude, struck Japan Friday afternoon, causing damage in Tokyo and sparking warnings of a 6-meter-high tsunami along the country’s northeastern coast.

The yen, Tokyo stocks and Japanese government bond yields fell, with the benchmark Nikkei Stock Average closing 1.7% lower and the dollar rising to around 83.20 yen from 82.80 yen.

Television reported smoke rising from a Tokyo port building, and fire in the capital’s waterfront Odaiba district.

The tsunami watch was in effect for Indonesia, the Philippines, Taiwan, Hawaii, Russia and the Marianas.

The magnitude was revised upward from 7.9 magnitude by the U.S. Geological Survey.

Public broadcaster NHK showed cars, trucks, houses and buildings being swept away by tsunami in Onahama city in Fukushima prefecture.

I hope all reader in Japan and their loved ones are safe.

Update 3:15 AM: I’m watching BBC live. The studio in Tokyo is still getting aftershocks. They showed footage of a massive refinery fire in Chiba prefecture, east of Tokyo. Hundreds of thousand of people are stranded as subway and trains service has been suspended.

Tsunami map (hat tip Richard Smith):

Update 3:25 AM Wow, Wikipedia already has an entry.

Update 4:00 AM:

Japan’s earthquake Financial Times. Updated frequently, liveblog style

Watch NHK in English for more earthquake news (hat tip Clusterstock)

…So the UK press aren’t allowed to call him a banker (!), or mention his infidelity with a married colleague.

However, since MP John Hemming mentioned the case under parliamentary privilege, you can get part of the story from the Telegraph:

He said: “In a secret hearing this week Fred Goodwin has obtained a super-injunction preventing him being identified as a banker.

“Will the government have a debate or a statement on freedom of speech and whether there’s one rule for the rich like Fred Goodwin and one rule for the poor?”

Leader of the House Sir George Young said a forthcoming Westminster Hall debate would explore freedom of speech, adding: “I will raise with the appropriate minister the issue he has just raised.”

The terms of the injunction are so strict that the Daily Telegraph cannot reveal the nature of the information that Sir Fred Goodwin is attempting to protect.

…and deduce the rest from this, which used to be online at the Daily Mail, but has, um, been taken down:

A senior executive at a bank bailed out by taxpayers has taken out a gagging order to prevent a newspaper from revealing his affair with a colleague.

The High Court privacy ruling is likely to fuel public anger surrounding controversial decisions which allow the rich and famous to silence reporting and criticism of scandals.

In what will be seen as another blow to free speech, judge Mr Justice Richard Henriques sided with the married banker.

His decision is the latest in a string of similar court orders taken out to cover up scandals.

They are frequently used by stars and Premiership footballers on multi-million pound salaries, with the money to ‘buy’ them.

The banker, who is paid a substantial six figure sum, began the illicit affair before the credit crunch erupted and plunged the country into recession, The Sun reported.

He was present when the Government was forced to inject almost £1trillion into propping up the banks.

Now thousands are losing their jobs amid swingeing cuts.

One bank insider told the paper: ‘Given what was going on at the time they got together, I’m surprised either of them had the time or the energy.’

In the words of Prime Minister Winston Churchill, informed that an MP had been caught sodomizing a Guardsman under a tree, on the coldest night of the decade:

Makes you proud to be British

Hardy and underrated British sexual appetite may be a source of quiet pride; British press freedom, less so.  More on superinjunctions, which used to be called gag orders, here.

Cross-posted from The Disciplined Investor

There are several factors that are influencing the markets today. Yes, there is still a great deal of worry about the upcoming “Day of Rage” that will be occurring tomorrow. But beyond this, the media has been making it a point lately to state that the current markets are under pressure due to the high price of crude (now trading at $102)

Yet, with Crude down by more than 2%, why are sellers stepping in (with big volume) and taking down markets?

There are a couple of answers to that question.

1) The underlying unrest in the Middle East is not providing any relief to investors. Investors/Markets hate uncertainty and we are in a period of political unrest and confusion about the outcome.

2) Spain was downgraded last night. Conflicting stories about the health of Spanish banks have been surfacing lately, but with Greece looking worse by the day and now this downgrade, fears about the EuroZone have risen.

3) Initial Claims ticked up. Most analysts have had a pretty rosy outlook for the employment situation in the U.S. and this restatement from last week and the increase this week was a ‘surprise”.

4) One of the economic reports that is really weighing on markets is the Import/Export numbers released last night from China. The drop off in exports is startling.

Of course this is what was being pushed by Team Geithner as they were on a non-stop rant about how undervalued the Yuan was. The rising Yuan and the general slowdown of conditions has been the overriding concern as China has been credited as the center of the global recovery.

Unfortunately, the rising Yuan was not able to keep pace with what was expected for imports. The slowdown in that measure also created jitters about the sustainability of the Global Recovery.

5) Japan’s GDP came in worse than expected. While analysts were looking for a drop of 1.1%, it came in worse at -1.3%. Even though Japan’s Finance Ministers have continues to keep up their rhetoric about coming out of a slump, the proof is in the pudding. Negative GDP is not welcome here….

6) Markets are tired. All of the defending of the 1,300 mark on the S&P 500 and the buy-on-the dip is getting long in the tooth. Markets need a breather and the news and conflicts are just what was needed to slow the bullish fever. Still, we know that Bernanke is not going to be letting up on POMO anytime soon, so there is a floor for markets for the time being… (That assumes that Saudi Arabia and the other conflicts in the Middle East do not escalate.)

Delusional Economics is an Australian economic practitioner unhappy with the current dumbed-down, vested interest economic reporting the Australian public is force fed on a daily basis. He takes pleasure in re-reporting the news with “bad” parts removed, and a bit of contrarian balance thrown in.

Cross-posted from Macrobusiness, the Australian economics blog

From the morning links

Explosive growth of unemployment recorded in Greece, with a total number of unemployed is at 733,645, according to data from the Greek Statistical Authority (ELSTAT) that were released Wednesday.

The percentage of registered unemployed reached 14.8% in December 2010 an increase of one percentage point compared with November.

The number of the employed workforce in the country fell to 4.23 million from 4.3 million the same period. Record low unemployment, record the ages of 15 -24 which rose 39% from 28.9% compared with December 2009.

Based on the geographical breakdown of the population, residents of the Ionian islands hardest hit as unemployment reached 23.1% due to the dramatic drop in tourist traffic.

It is significant that the region of Attica, the official jobless rate rose to 14%.

The new employment figures are in contrast to the moderate estimates of the government and the IMF experts are talking about “restraint” in unemployment to 14.5% in 2011 and increased slightly to 15% next year.

I am sorry but  “IMF expert” is a oxymoron.  This outcome was completely inevitable. Let us remember exactly what the Greeks  signed up for under the illusion of a rapid prosperous outcome.

Greece will not restructure its debt and will not need more cuts to achieve fiscal targets set in the emergency funding programme it agreed with the European Union and the IMF, its finance minister told a Sunday paper.

The debt-laden country has been offered a 110 billion euro ($134 billion) bailout to avoid defaulting on its debt and in return promised to cut the deficit by 11 percentage points of GDP and bring it below the EU’s cap of 3 percent by 2013.

Markets fear the drastic belt-tightening to secure the deal may plunge the economy into deeper recession and threaten its meeting fiscal targets, prolonging the country’s debt crisis.

“Greece will not need additional measures, especially ‘painful’ measures. I see only one option ahead, delivering on our targets with consistency,” Finance Minister George Papaconstantinou told Sunday’s Eleftherotypia newspaper.

Greece’s economy, which makes up about 2.5 percent of the euro zone, is expected to stay in recession for a second year in 2010 after a 2 percent slump in 2009.

The Bank of Greece projects the economic downturn will deepen, with GDP seen contracting by 4 percent this year, as tax increases and cuts in wages and pensions take a toll.

“The recession will be deepest in 2010 and thereafter there will be a gradual recovery,” the minister told the paper. “I remain optimistic and believe we will recover fast.”

So with 15% of the willing labour force sitting around twiddling its thumbs please explain how the country is supposedly going to recover ? Bring on Moody’s

Moody’s Investors Service cut Greece’s sovereign-debt rating Monday by three notches to B1, infuriating the Greek government and temporarily denting the euro amid renewed worries about the ability of Greece and other debt-loaded euro-zone governments to avoid default.

The ratings agency, which also assigned a negative outlook to Greece’s ratings, highlighted the government’s difficulties with revenue collection and noted a risk that Athens might not meet the criteria for continued support from the International Monetary Fund and the European Union after 2013.

Difficulties with revenue collection? Translation: you can’t tax unemployed people.

That could result in a voluntary restructuring of existing debt, the ratings agency said. Last June, Moody’s cut Greece’s rating from A3 to junk status at BA1.

The decision to deliver a further multinotch cut Monday reflected concerns that the “fiscal consolidation measures and structural reforms that are needed to stabilize the country’s debt metrics remain very ambitious and are subject to significant implementation risks, despite the progress that has been made to date,” Moody’s said.

Seriously I actually laughed out loud when I read that.  What progress ? The Greeks are trying to implement the strict austerity regime as requested by the IMF and the EU. Moody’s are now punishing the Greeks for implementing that exact plan because guess what, the outcome doesn’t fit the deluded perception of what should be happening. It is a tag team of stupidity.

Here is the Greek past and predicted current account deficits chart.

and here is what I said would happen back in May 2010.

… if you think you can cut your GDP by 11% and suddenly your economy will be all roses you are utterly delusional.

If Greece cannot improve its current account balance ( which is nearly impossible given that it threw away control of its exchange rate when it joined the EU), then simple maths states that Greeces’ private entities need to reduce their current net saving position by 11% of GDP over the next three years. Realistically this means , more unemployment and probably debt deflation.

Just to make it clear, it is impossible for Greece to have deleveraging of both the public sector and the domestic private sector at the same time, because it does not run a trade surplus. The only way they could turn their trade balance around is to suddenly start producing a revolutionary new product the world must have, or for the Euro to fall much further so their export goods become cheaper to non-Euro countries. Given we can’t think of any up and coming Greek products ( although we hear they have a lot of uranium ) and given that a fair percentage of their trade is intra-European and their currency is tied to other bigger countries that have stated they will do “anything” to keep the Euro high then this seems impossible.

History is also against them in regards to deleveraging of the private sector. People usually want to spend money ( ie. lower savings , take on debt ) at times when the economy is good and/or their is a speculative bubble that urges them to move their money from cash savings. I think it is pretty fair to say that Greece is not going to suddenly see a tech/housing boom anytime in the near future and it is obviously that its economy is not good.

Also note that as unemployment rises ( one of the inevitable outcomes of this policy position ) then the government will need to provide the private sector with more unemployment and other benefits, this works against the exact thing they are trying to achieve ( less govt spending ).

The only conclusions that we can see is if Greece actually attempts to reach its imposed IMF targets then either private sector have to spend savings and take on debt, as we said above not something people usually do when the economy is in the cr*pper, or nominal private income will deflate.

It is therefore quite possible that they are heading for a “debt deflation” cycle because as the private sector attempt to pay down debt they are indirectly lowering their nominal income which leads to even more indebtedness.

But that is not the worst of it. As I explained in my recent post on Europes continuing mess, Greece was always going to be in trouble as soon as there was an economic downturn in Europe because they are trapped between the domestic policies of Germany and the inflexibility of the monetary system they signed up to when they joined the Euro.  The austerity package is failing, but it is only failing to fix the symptoms.  Without currency deflation the only possible outcome is lower wages for the Greeks, which will inevitably lead to default on loans, the exact thing the Germans and French are attempting to stop happening.

However I have to ask exactly what the EU are hoping to achieve. Let us for a minute pretend that the Austerity package does work without the collapse of the Euro banks and the Greeks accept the fact that they need to move onto a lower pay structure. Once the debt is cleared away Greece will suddenly appear as modern stable well educated economy with a low wage base that is extremely attractive to international companies. Under these conditions they may even become a net exporter into Europe.

Does anyone think that this will be acceptable to the French or the Germans ?

We commented earlier this week on bank defenses of their foreclosure practices:

I’ll spare you several paragraphs of the “but they were deadbeats and no one was hurt by robo-signing and all our foreclosures were warranted.” Well, if you normally operate as judge, jury, and executioner, and it’s too costly for borrowers to counteract predatory servicing, in your little self-referencing world, everything will look hunky-dory and challenges to your authority will be deemed to be improper and unwarranted.

As we have indicated repeatedly. lawyers fighting foreclosure estimate that 50% to 70% of the cases they represent are ones where the borrower is in foreclosure as a result of bank fee pyramiding and other improper fees (note there is sample bias here; contrary to bank spin, most borrower attorneys fight foreclosures when they think the case has merit). But they just about never argue in court on those grounds; the cost of hiring an expert witness and doing the forensics on full details of the banks’ overcharges is too costly.

But of course, the Fed is throwing its authority behind the banking industry spin that all foreclosures are warranted. From Shahien Nasirpour of the Huffington Post:

A months-long investigation into abusive mortgage practices by the Federal Reserve found no wrongful foreclosures, members of the Fed’s Consumer Advisory Council said Thursday.

During a public meeting attended by Fed chairman Ben Bernanke and other regulators, consumer advocates on the panel criticized federal bank regulators for narrowly defining what constitutes a “wrongful foreclosure.” At least one member of the panel voiced concerns that the public would not take the Fed’s findings of improper practices seriously, since the wide-ranging review did not find a single homeowner who was wrongfully foreclosed upon….

Kirsten Keefe, a member of the Fed consumer panel and an attorney at the Empire Justice Center in Albany, New York, said the Fed’s report defined “wrongful foreclosures” as repossessions of borrowers’ homes who were not significantly behind on their payments….

But Keefe, who represents troubled borrowers, argued that the definition should be expanded to include foreclosures in which the wrong party brought the foreclosure action or cases that involve significant errors in foreclosure documents, like an inflated past-due amount, for example. Other consumer advocates at Thursday’s public meeting appeared to agree.

FYI, the Fed apparently has not released the actual document, no doubt to save itself well warranted ridicule.

The more this sort of whitewashing of abuses goes on, the closer the US gets to its Egypt moment.

The level of complaints about servicer screw ups in the HAMP program and more recent horror stories from borrowers not seeking loan modifications confirms something we’ve noted on this blog: that servicers fee structures aren’t set up for them to handle the workload associated with high volumes of foreclosures. Accordingly they devised processes like robosigning, which are legally impermissible, as a way to contain costs. Many of the abuses still have not gotten the attention they deserve. For instance, the most widely used foreclosure platform for the industry, that of Lender Processing Services, does not have a field in its software to allow a foreclosure of a person in a Chapter 13 bankruptcy to be processed differently. This results in impermissible charges. For instance, when a Chapter 13 debtor is in a bankruptcy plan and sending his payments to the Chapter 13 trustee, who in turn disburses them to various creditors, there is no such thing as a late payment. But if the old borrower due date was the 10th of the month and the trustee sends checks on the 15th, the bank will record a late fee. Then when the borrower emerges from Chapter 13 which means he is current on all the debt under the bankruptcy plans, the bank will send him a bill for what is typically several thousand dollars of fees. The borrower who is still under a lot of financial stress (Ch. 13 plans by design soak up all of a borrower’s income) then has to spend money he does not have to go to court to get the charges removed.

We also pointed in previous posts to signs that foreclosure filings had fallen markedly versus year prior levels. From Bloomberg:

U.S. foreclosure filings fell last month to the lowest level in three years as lenders under legal scrutiny struggled to process a backlog of defaults and put new systems in place for home seizures, RealtyTrac Inc. said.

A total of 225,101 U.S. properties received notices of default, auction or repossession, down 14 percent from January and 27 percent from February 2010, the Irvine, California-based data seller said today in a statement. The number was the lowest since February 2008, and the year-over-year decrease was the biggest since the company began keeping records in 2005…

“It’s clearly taking the lenders and servicers longer than anyone had anticipated,” Rick Sharga, RealtyTrac’s senior vice president, said in an e-mail. “Beyond that, the industry itself is in a state of dysfunction.”….A glut of resubmitted paperwork is “taxing the resources” of loan servicers, and judges are demanding greater scrutiny in states where courts oversee foreclosures, Sharga said….

In Florida, a judicial state that’s been among the hardest- hit by the crisis, total foreclosure filings plunged 65 percent from a year earlier. It still ranked second for total filings.

The Florida slowdown may also reflect the fact that the state attorney general is investigating the state’s major foreclosure mills. One of the very biggest, the Law Offices of David Stern, announced this week that it was closing at the end of March.

Mike Konczal also highlighted a very illuminating chart from a paper by Diane Thompson of the National Consumer Law Center, Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior, which shows how payments to servicers influence their behavior in foreclosures:

Kangaroo bounce mechanics snapped BBC. The article explains why this is worth studying.

How the penis lost its spikes Nature (hat tip Richard Smith)

Recent Earthquakes in Central US (hat tip reader bob). You tell me…

Text messages to replace stamps in Sweden The Local

Dalai Lama ‘Retiring’ The Diplomat (hat tip reader furzy mouse)

Interrogator in the Assange case friend with woman accusing Wikileaks founder Expressen (hat tip Clusterstock)

US farmers fear the return of the Dust Bowl Telegraph (hat tip reader furzy mouse)

Southeastern States Mired in the ‘Diabetes Belt’: CDC Report Business Week

Libya’s main oil terminal ablaze after raid Financial Times

CIVIL WAR LIVE: Qaddafi Attacks Ras Lanuf By Air, Land And Sea Clusterstock

Japan must develop nuclear weapons, warns Tokyo mayor Independent (hat tip reader furzy mouse). Before you get too concerned, Ishihara is a long-standing extremist. He was co-author of the 1980s “The Japan That Can Say No” which was translated and made the rounds in the West, and his own “I Still Say No” which was apparently pretty cranky, a best seller in Japan (like the first book), yet no one here seemed aware of the fact that it existed.

McKinsey model springs a leak John Gapper, Financial Times

Unexpected Trade Deficit in China; Chinese Importers Caught in a Squeeze; Global Macro Picture Weakens Michael Shedlock. China has this interesting way of reporting trade deficits shortly before the Treasury is required to opine (April and October) on whether China is a currency manipulator.

Just in time for the summit, eurozone bond yields achieve new records EuroIntelligence

King helps the case for banking reform Financial Times (hat tip Richard Smith). This row has gotten zippo attention in the US.

Updated: Wisconsin GOP Rams Through Union-Busting Measure; Thousands Storm Capitol AlterNet (hat tip reader furzy mouse)

Pulitzer Prize Winner Seymour Hersh And The Men Who Want Him Committed WhoWhatWhy (hat tip reader furzy mouse). This is an article from February but still worth reading.

House prices, gold, and long-term investing MacroBusiness

“The Free-Banking vs. Central-Banking Debate” Mark Thoma

Antidote du jour (hat tip Tracy Alloway):

The folks at ForeclosureFraud were kind enough to pass along an archival document that I thought readers would enjoy.

This Moody’s report illustrates what the prospect of higher fees for securitization-related ratings did to rating agencies’ quality of analysis.

Moody’s MERS Report 1999

The arrogance of the MERS position (the Moody’s document is basically MERS dictation) is evident:

The recording system has been set up to provide notice of security interests, but not necessarily the identity of the secured parties…..

There will probably be an adjustment period during which the courts and the foreclosure attorneys will need to get familiar with MERS and learn how to deal with issues concerning foreclosure by a nominee that the foreclosure statues did not contemplate.

This makes for entertaining reading, in a sick sort of way. You’ll see again and again the notion that the law and the courts should give way to MERS. That’s consistent with what Gretchen Morgenson reported over the weekend, namely, that no review was made of the legality of MERS in any of the 50 states. The assumption was that MERS could simply be imposed.

I’d normally go through this document in more detail but it is a fairly short piece and I’d rather have readers read the original. It is a vivid example of the danger of uncritical acceptance of supposedly expert opinion.

After claiming repeatedly in the media that the fight to end public worker bargaining rights was all about the budget, Governor Walker stripped the collective bargaining provisions out of the budget (which required the participation of at least one Democrat to have a big enough quorum to satisfy Constitutional requirements for fiscal votes) and the Wisconsin legislature passed it separately.

Details from David Dayen:

If you’ve been following along in my last post, you know the news: the Wisconsin State Senate rushed through and passed a bill that strips collective bargaining rights from most public employees. The vote in the State Senate, entirely composed of Republicans, was 18-1; only moderate Dale Schultz voted no. The budget repair bill was split at the last minute, cleaving the “non-fiscal” anti-union piece from the fiscal components of the bill. The non-fiscal piece did not require a quorum, so the Senate was able to pass it.

This may not pass muster constitutionally in Wisconsin. Here is the germane language:

Vote on fiscal bills; quorum. SECTION 8. On the passage in either house of the legislature of any law which imposes, continues or renews a tax, or creates a debt or charge, or makes, continues or renews an appropriation of public or trust money, or releases, discharges or commutes a claim or demand of the state, the question shall be taken by yeas and nays, which shall be duly entered on the journal; and three−fifths of all the members elected to such house shall in all such cases be required to constitute a quorum therein

The language may seem ambiguous (claim of rather than claim on?). But there is likely to be precedent, and if not, the Court would look to the debates at the time the constitution was passed, to resolve the question of intent. It is very likely that the concerns expressed then would extend to both sides of the fiscal equation, that is, tax collection and disbursements, which would thus include obligations like employee contracts.

And Walker said repeatedly that the collective bargaining matter was fiscal. In modern contracts, you often have language in the agreement to exclude the headings from any interpretation. The Constitution would not have such language. So the “fiscal” in the heading would be included in any effort to parse the meaning.

But since the Supreme Court has a Republican majority, that would seem to cast a pall over challenges. But Supreme Court elections are on April 5, and the unions have a lot of support in the state. This bill passage (getting it through the Assembly is guaranteed) is subject to legal challenges not only on Constitutional but also on the basis of violating legislative procedures. And there is talk of a general strike, something which if you had asked me two months ago, I would have deemed to be pretty much impossible in America. They may be permissible if spontaneous, as in bottom up rather than called by union leadership.

Some details of the official version from the Washington Post:

Republicans in the Wisconsin Senate voted Wednesday night to strip nearly all collective bargaining rights from public workers after discovering a way to bypass the chamber’s missing Democrats….

The Senate requires a quorum to take up any measures that spend money. But Republicans on Wednesday split from the legislation the proposal to curtail union rights, which spends no money, and a special conference committee of state lawmakers approved the bill a short time later.

The lone Democrat present on the conference committee, Rep. Tony Barca, shouted that the surprise meeting was a violation of the state’s open meetings law but Republicans voted over his objections. The Senate then convened within minutes and passed it without discussion or debate.

Spectators in the gallery screamed “You are cowards.”

Before the sudden votes, Democratic Sens. Bob Jauch said if Republicans “chose to ram this bill through in this fashion, it will be to their political peril. They’re changing the rules. They will inflame a very frustrated public.”

Richard Koo’s book The Holy Grail of Economics is the definitive work on what he calls “balance sheet recessions”. He explain, among other things, why QE2 is not likely to be successful.

Elephants know how to co-operate BBC

What Pi Sounds Like College Humor

Identifying ‘Anonymous’ Email Authors ScienceDaily (hat tip reader furzy mouse)

Sexy Ruses to Stop Forgetting to Remember Maureen Dowd, New York Times

New UN Report on How to Feed the World’s Hungry: Ditch Corporate-Controlled Agriculture AlterNet (hat tip reader furzy mouse)

The sorry state of health of US medicine EurekaAlert (hat tip reader Paul S)

Libyan central bank chief surfaces Financial Times. This is comical in a Graham Greene-ish way, and the poor FT has to play it straight. The head of the central bank has been missing in action, but he’s come up for air in Istanbul, saying it’s easier to do his job there. But he’s still really hard to reach. Must be that Turkish phone system.

LIBYA LIVE: Qaddafi Freaks Out Over “No Fly”, Major Refinery Shut Down In Az Zawiyah Clusterstock

U.S. Sees Stalemate Emerging in Libya Wall Street Journal

Bad day for tough words Macro Business. Ugly Australian housing market data.

Europe will work Nomura. The subject of Martin Wolf’s column today, which is firewalled, and a lot of you might prefer reading the source document anyhow.

Speculators Gone Wild? Tim Duy (hat tip reader Amit)

Europe Blinks on Bank Tests Wall Street Journal. I should post on this, but the bank stress tests are such obvious rubbish, particularly the Euro version, that I have trouble imaging anyone really cares.

Elite takes sides as Gupta fights SEC charges Financial Times

It’s pretty obvious how China can achieve its top economic priority of price stability Rebecca Wilder, Angry Bear

S.E.C. Chairwoman Under Fire Over Ethics Issues New York Times

Video: Sen. Scott Brown (R-MA) Begs David Koch for Money Think Progress (hat tip reader furzy mouse)

Towards a Theory of Corporate and Financial Sector Solidarity Mike Konczal

America Fights Back Against Foreclosure Dylan Ratigan

New CoreLogic Data Shows 23 Percent of Borrowers Underwater with $750 Billion Dollars of Negative Equity

By the Numbers: A Revealing Look at the Mortgage Mod Meltdown ProPublica

Minimal Work To Indict For Securities Fraud In Real Estate Mortgage-Backed Securities masaccio, FireDogLake. I’ve been swamped and hence have been remiss in keeping up with other blogs. This is a step by step on what it would take do launch some criminal indictments against bank executives. Bottom line: this is VERY straightforward. Circulate widely.

Antidote du jour:

In a move not noticed much three weeks ago, Bank of America announced that it was segregating its crappy mortgages into a “bad bank”. It got more attention today by virtue of being discussed long form in an investor conference call (see related stories at Bloomberg and Housing Wire).

The use of a “bad bank” is strongly associatied with failed institutions. Some of the big Texas banks that went bust in the 1980s (Texas Commerce Bank and First Interstate) used “good bank/bad bank” structures to hive off the dud assets to investors at the best attainable price, and preserve the value of the performing assets. The Resolution Trust Corporation, the workout vehicle in the savings and loan crisis, was effectively a really big bad bank. The FDIC is (and I presume was) able to sell branches and deposits pretty readily; the remaining bad loans and unsellable branch operations reached such a level that the FDIC was forced to go hat in hand to Congress and get funding while it worked out the dreck. A similar structure was used in in the wake of the banking crisis in Sweden in the early 1990s.

I am told by mortgage maven Rosner and others that this move is not meant as a legal separation, but a mere financial reporting measure, so that BofA can declare, “See, we do have this toxic waste over here, but we are chipping away at it and we’ll have that resolved in some not infinite time frame” (the current talk is 36 months) “and look at how the rest of the bank looks pretty good!.”

So I may be accused of being cynical, but I read more into it than that. One distinction I like to make is between “stated truth” and “operative truth”. If a woman of a certain age starts working out, she might truthfully say to her buddies (”stated truth”): “I used to do a lot of sports when I was young, I’ve gotten out of the habit. I started exercising over the holidays, and it made me feel SO good I’ve now decided to stick with it.” The operative truth instead is, “I notice my husband eyeing younger women way too much. I have gotten a little porky. If I don’t get some semblance of the beautiful body of my youth back, he could stray.”

As we all know, shareholder presentations are a realm where stated truths are used routinely to mask operative truths. So the question is: can we infer the operative truths behind the BofA move?

What is striking is the tension between Bank of America saying that this is a measure designed provide more transparency to investors and put dedicated resources on a festering problem to get it resolved versus the specific and loaded terminology they used to describe it, “good bank/bad bank”. Normally, you’d assume that an investor presentation by a big public would be a deliberate affairs. But as Chris Whalen said to me by phone, “I wouldn’t assume that the people at Bank of America are being any more logical than they have ever been. They are just making this up as they go along.”

It is important to stress that this is not a mere accounting separation, it’s an operational split. I encourage readers to look at the investor presentation (click here as an alternative to the embedded version). In particular, note page 6. It shows the creation of a dedicated management team for what was described to investors as a new division. Most of them were probably part of the old Countrywide servicing unit. But the head, Laughlin, is new, and I would assume that at least Ellison and Schloessmann were at BofA corporate but already working close to full time on Countrywide matters.

Bank of America Bad Bank Presentation

But the weird part is, per Whalen, this is NOT a legal separation. However (putting on my M&A hat, and Whalen did not disagree) normally the big obstacle to companies hiving off divisions is the lack of a stand-alone management team. Note that that does not impede a sale, but selling a legal vehicle with revenues, staff, but a less than full management structure means you are basically selling a bunch of assets (which includes some management people and maybe some systems) rather than a business. It can only go to buyers who can provide the missing operational parts. Stand alone entities are vastly more saleable and command higher prices. And my belief (readers welcome to correct me) is having achieved operational segregation (in particular a stand alone management team, good stand alone operational reporting and financial controls), making a legal separation would not be that hard.

Thus the use of “good bank/bad bank” lingo, given what Whalen and others see as serial improvisation on behalf of BoA, may amount to a Freudian slip. The bank is probably enough in denial to believe that their putback and other losses really are well under $10 billion (we agree with them on putbacks, we’ve written repeatedly that we think those cases are overblown, but we think there are other chain of title issues that they have not treated seriously that will add up to much more in the way of legal liability and operational costs).

Having a separate operational unit means in a worst case scenario, BofA might be able to amputate this business in classic “bad bank” form. So whether by design or accident, the coded message in the choice of “bad bank” is: “If those crazy hedgies who say our liability is $70 billion are right, so what? They can all go pound sand.”

But could it really hive off ugly legal liabilities? Even though that may be what the BofA people would like to tell those nasty hedgies, the Charlotte bank stopped running the old Countrywide as a separate, bankruptcy remote entity not long after the deal was closed. So it would now seem hard to limit the legal liability to what would amount to a reconstituted Countrywide (but as we discuss later, with some help from their friends, who knows what might be possible…)

But let’s say those crazy hedgies are right in the dollar amount of liability, even if for the wrong reasons. BofA would be in serious trouble.

I’ve been completely skeptical of the resolution provisions of Dodd Frank for a simple reason: I’ve assumed, as in the financial crisis just past, and the big recent ones (the LTCM meltdown of 1998, the 1994-5 derivatives wipeout, which produced more losses than the 1987 crash) that they would center on the dealing operations of the major dealer banks (you may not have realized it, but the US rescue of Mexico was really a bailout of US banks that had written a boatload of derivatives on various Mexican exposures).

In our modern world, where major dealers have globe-ringing trading operations, there are two insurmountable obstacles to a tidy resolution of a major dealer. Any “resolution” will be subject to the laws of the multiple nations in which it operates. Dodd Frank does not have any authority outside the US. In addition, no counterparty wants to have his positions frozen while the courts are sorting out who gets what. If any major dealer is believed to be in serious trouble, no sensible counterparty will want to be exposed. And an untested resolution regime is not very reassuring. The run on Bear Stearns took a mere ten days. The authorities will be forced to bail out a major dealer if it starts to founder. And the banks know that all too well.

However, there is one place Dodd Frank resolution procedures might work, and that is on a strictly domestic non-trading operation. As former White House counsel Boyden Gray discussed disapprovingly in the Washington Post last year:

The Treasury can petition federal district courts to seize not only banks that enjoy government support but any non-bank financial institution that the government thinks is in danger of default and could, in turn, pose a risk to U.S. financial stability. If the entity resists seizure, the petition proceedings go secret, with a federal district judge given 24 hours to decide “on a strictly confidential basis” whether to allow receivership.

There is no stay pending judicial review. That review is in any event limited to the question of the entity’s soundness – not whether a default would pose a risk to financial stability or otherwise violate the statute.

The court can eliminate all judicial review simply by doing nothing for 24 hours, after which the petition is granted automatically and liquidation proceeds. Anyone who “recklessly discloses” information about the government’s seizure or the pending court proceedings faces criminal fines and five years’ imprisonment. As for judicial review of the liquidation itself, the statute says that “no court shall have jurisdiction over” many rights with respect to the seized entity’s assets (thus apparently eliminating many actions that would otherwise be permitted to seek compensation in the federal Court of Claims).

Gray described the process as a “star chamber” and further warned:

This means the U.S. Treasury and Federal Deposit Insurance Corp. are acting as a sometimes secret legislative appropriator, executive and judiciary all in one. Although there is little direct precedent, it is hard to believe that the Supreme Court would not throw out parts of this scheme as violations of either the Article III judicial powers, due process or even the First Amendment, assuming the justices do not find all of it a violation of the basic constitutional structure….Dodd-Frank strips the courts of the right to make statutory and constitutional determinations in critical circumstances, a throwback to the very first draft of the Troubled Assets Relief Program from the Treasury Department, which would have permitted no judicial review at all.

The problem is that the idea of Supreme Court intervention would wind up being theoretical. As former federal district court clerk Hans Bider of the Washington Examiner noted, district courts are incapable of actin on anything in 24 hours, so the inaction means the seizure by the Star Chamber will be deemed to have been approved. And the odds that anyone will be fast footed enough to run to the Supreme Court and get an injunction is unlikely (and may be a jurisdictional non-starter, given that matter would still be in the hands of the district court, even though it is clear that it will not rule in time). Once the Star Chamber has made the bank seizure, that hoary old saying will apply: possession in nine-tenths of the law.

Boyen’s concern was a repeat and probable escalation of the controversial actions during the bailouts, in particular the sort of favoritism we saw in the the AIG rescue, with creditors like Goldman and Merrill being paid 100% on credit default swap exposures that were clearly worth a lot less.

But I see another way this could operate. Let’s say the Lilliputians really do continue winning against the banks, and in particular Bank of America, in the courts. Their litigation losses and projected litigation liabilities mount at a faster pace (and that could happen even more quickly if investors decide to sue).

The FSOC tells Bank of America to put the legacy assets in a separate legal entity. Using its Star Chamber powers, it seizes the bank (either the entire bank, immediately spinning out the rest, or just the bad bank, the niceties of how you’d execute this maneuver are above my pay grade).

The powers that be then by fiat treat all the mortgage-related claims as liabilities of the bad bank. That bank has very little in the way of assets, so those creditors get paid a fraction of the value of their claims. Since this mechanism is beyond legal review, the creditors would be stuck with a fait accompli. They’d have no way of getting recoveries from other bank assets (the notion being that every penny paid in dividends and bonuses since the Countrywide acquisition really belonged to the bank’s creditors and claimants, so recoveries from the bank as a whole are fully warranted).

You can assume any scheme like this would be subject to Constitutional challenge. The creditors would no doubt argue that they had valid claims against the good bank, ergo the regulations surrounding the resolution would not apply (this risk might argue for resolving the whole bank and spinning the good bank assets, and probably the publicly traded liabilities out).

Is this way of screwing those who win in court as a result of foreclosure fraud possible? This scenario no doubt sounds like a stretch. But if you had told anyone in June of 2007 the events of the next two years, particularly the extent and ad-hoc-ness of the bailouts, they would have said you were nuts. And I would not underestimate the creativity of the powers that be in preserving the privileges of the banking classes at the expense of the rest of us.

Aha, the level of financial innovation spurred by super low interest rates is starting to have that “I love the smell of napalm in the morning” feel to it.

The Financial Times reports that there is a frenzy to create synthetic junk bonds, ostensibly to satisfy the desire of yield-hungry investors. Any time you see a lot of long money flowing into synthetic assets rather than real economy uses, it’s a sign that Keynes’ casino is open for business (”When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”)

The author compare this development to that of the asset backed securities CDO market, one of our betes noirs which blew up spectacularly in the crisis. There are some similarities and differences.

The amusing bit is that the article focuses on the demand from the longs and conveniently fails to mention that the people who want to short this market have to be at least as active. In fact, demand for synthetic assets almost always starts with the short side. That means the structures are devised to suit their needs. As Satyajit Das wrote to us:

It is exactly the same structure as a synthetic CDO – a la Magnetar. The smart money is shorting corporate and high yield credit – they just can’t see how the Ponzi scheme can carry on for much longer. I differ in that I think everyone is underestimating how long the governments can keep the illusion going.

So your outrage is well justified. The more things change the more they stay the same.

Despite the reference to Magnetar (a Chicago based hedge fund that devised an extremely large and destructive subprime short program that played a large role in extending the subprime mania, see here and here for more background; we broke the story of the impact of its Constellation program in ECONNED), these synthetic junk bonds do not have as much embedded leverage, and hence may not be as prone to catastrophic fails, as subprime CDOs, where the real risk was largely the so-called “cliff risk” or “waterfall risk” of BBB subprime bonds. Subprime (technically “mezzanine”) CDOs consisted nearly entirely of the risk of BBB subprime bonds. If the underlying loan pool of a particular bond had losses of less than 6% (the exact number varied by pool, but this is a good representative number), the CDO would be money good. If the losses increased to 9% of the pool, it was worth zero. So a not-very-large change in losses would have a very big change in outcomes.

But you can achieve the same nasty outcomes via leverage. In the old collateralized obligation market (the CLO is confusingly another type of CDO), investors would do correlation trades (going long one tranche and short another) and would borrow against the trade to enhance returns. So don’t assume the overall activity is less risky because the instruments aren’t as intrinsically dodgy.

Further detail from the Financial Times:

The move into junk bond derivatives also reflects the plunge in yields on actual bonds to record lows. “With the Federal Reserve providing liquidity, default rates low and yields falling, the synthetic market is a way to increase returns,” said a derivatives trader at another US bank. “Investors are looking to take credit risk.”

The derivatives are sold as “tranches” that represent different slices of default risk in an index of high-yield bonds compiled by Markit called “CDX”.

The exact level of activity is hard to pin down. The Depository Trust & Clearing Corp, which compiles credit derivative data, says the net notional exposure in all credit default swap tranches on February 25 was $5.9bn, up from $5.4bn four weeks earlier. It does not make public how much of this is in junk bond or other tranches.

There are differences between the current junk bond derivatives and the pre-crisis mortgage structures, dealers said. Banks’ pre-crisis off-balance- sheet investment vehicles are now defunct, limiting the investor base. Second, the tranches are linked to one, standardised index, rather than tailor-made.

I’m not keen about an index based on a small number of names of story paper, but I don’t have a vote in these matters.

Das has not seen a term sheet for these particular instruments but his inquires today suggest that they are credit linked notes. The investor pays up the money is put into cash deposits or some security (high grade) and simultaneously the dealer sells protection on CDX index (which as the Financial Times indicates is a high yield index like the famous ABX). See his note below for details.

Satyajit Das Credit Linked Note Primer