Mystery Economic Theater 2010

[ewmayer]

Thank goodness he had the common sense - or smelling the rotting fish, the survival instinct - to do the right thing here:

Obama Plans to Veto Foreclosure Bill: As slipshod bookkeeping by some big mortgage lenders continued to rattle the housing market on Thursday, another major lender indicated it would suspend sales of foreclosed homes and White House officials said President Obama would not sign a bill that critics suggested could facilitate foreclosure fraud.

White House officials said Thursday that President Obama would not sign a little-noted measure that suddenly gained attention amid questions about some big lenders’ slipshod bookkeeping on home foreclosures, Jackie Calmes of The New York Times reports from Washington.

The president’s pocket veto — rejecting a bill by withholding his signature while Congress is away — effectively kills the measure since lawmakers, who are out of town until after the Nov. 2 midterm elections, are not in position to override his decision with a two-thirds vote of the House and Senate.
...
Critics, particularly consumer groups, said the measure for interstate notarizations would have made it even easier for banks and other lenders to rush the foreclosure process. JPMorgan Chase, Bank of America and GMAC Mortgage have stopped foreclosures in nearly half the states, pending investigations into the process.

A fourth major lender, PNC Financial Services Group, has also suspended sales of foreclosed homes for 30 days, according to a memo from a title insurer, Commerce Title, that works closely with the bank.

PNC is alerting title insurance companies that it is postponing the closings effective immediately, according to the memo. “We have been given notice from PNC Legal that there is a moratorium going into effect” on residential foreclosures, the memo from Commerce Title said.

A PNC spokesman, Frederick Solomon, declined to comment beyond saying that the lender was reviewing its mortgage servicing procedures.

PNC, which is based in Pittsburgh, became one of the country’s largest lenders with the acquisition of Ohio-based National City Corporation two years ago. National City, an aggressive lender during the housing boom, collapsed during the financial crisis.

Given the outcry over the far-reaching foreclosure crisis, Congressional aides said lawmakers were unlikely to take umbrage at Mr. Obama’s decision to let the notary measure expire. The White House, in announcing the pocket veto, indicated that it could work with Congress later on some alternative.

My Comment: In related news, Florida congressman Alana Grayson sent a letter yesterday to the newly-established federal Financial Stability Oversight Council, demanding a foreclosure moratorium and warning of the systemic risk to the banking system (gee, that sounds familiar) inherent in their mass-scammery now seeing the light of day:

"So far, banks are claiming that the many forged documents uncovered by courts and attorneys represent a simple 'technical problem' with foreclosure processes. This is not true. What is happening is fraud to cover up fraud... The banks didn't keep good records, and there is good reason to believe in many if not virtually all cases during this period, failed to transfer the notes, which is the borrower IOUs in accordance with the requirements of their own pooling and servicing agreements. As a result, the notes may be put out of eligibility for the trust under New York law, which governs these securitizations. Potential cures for the note may, according to certain legal experts, be contrary to IRS rules governing REMICs. As a result, loan servicers and trusts simply lack standing to foreclose. The remedy has been foreclosure fraud, including the widespread fabrication of documents. There are now trillions of dollars of securitizations of these loans in the hands of investors. The trusts holding these loans are in a legal gray area, as the mortgage titles were never officially transferred to the trusts... The liability here for the major banks is potentially enormous, and can lead to a systemic risk."

Mish also has piece on this today, which quotes securitization expert Janet Tavakoli describing the robo-mortgage-industry as "... a massive, widespread, interconnected Ponzi scheme with various types of concurrent fraud". And Denninger has some excellent commentary on the whole issue, noting how seriously the states - and let`s admit that they may also sense a budget-boosting mega-fine opportunity here - take such matters:

The immediate action that must be taken is to force all payments into court escrow - that is, a court-held suspense account - until it is sorted out who actually owns what.

Freezing foreclosures doesn't fix it - if you're not paying, then you're not paying. But at the same time if the trust doesn't actually own the paper they have no right to the money! The solution to these problems is known and already available under the law - it's a court-ordered suspense account held by the clerk for all payments and trustee sales until the courts figure out who owns what.

The proper remedy under the law for institutions that tendered assets into a trust that they knew or had reason to know did not meet the qualifications for that trust is for the transaction to be unwound - for the bank to be forced to refund the full face value of the mortgage and repurchase it. For those assets that were never conveyed the solution is likewise for the bank that was supposed to convey it to repurchase the asset.

This resolves the problems with chain of title at the same time it resolves the problems with the REMICs.

But, at the same time, it sticks the banks that performed the securitizations (all big financial institutions) with these non-performing loans - that is, the financial liability for their actions.

Once the above is sorted out let those who have actual ownership of these notes and can prove it come to the court and prove up their ownership under strict standards of proof, claiming their funds.

Then those who wish to foreclose, forebear or renegotiate are free to do so as they wish - and they are also required to recognize the losses that came from the bad lending practices.

With more than $1 trillion in outstanding non-agency REMICs of this sort, and another $5 trillion or so at Fannie and Freddie, if half - a reasonable estimate of those that might be compromised - are forcibly unwound and the bad loans are recognized at their recovery or renegotiated value then we're going to need that Dodd-Frank resolution authority- for all the major banks.

This, incidentally, is exactly what Institutional Risk Analytics was basically saying the other day.

We have to force these resolutions folks. These REMICs must go through all their paper and prove up its provenance in each and every case. If they are either holding empty boxes or bad notes that did not meet the claimed credit quality they must be forced back onto the issuers, because it is both manifestly unjust to allow the major financial institutions to get away with screwing your pension funds, insurance companies (e.g. annuities, etc) and similar, and we must resolve the title issues that are now being exposed as massive and pervasive across the country.

Private property rights have as their highest expression the ownership of real estate. It is for this reason that states have historically taken very seriously the recordation of titles, assignments and a proper chain of ownership proof in these matters. What the banks have done - intentionally - is severely damage that sacred trust and personal property ownership right, and they must not be allowed to get away with it. This same scam was run during the 1920s with the Florida "swampland" fiascos and it took YEARS to sort it out. We must start now.

My Comment: On a related-but-lighter note, Jon Stewart of The Daily Show manages to find some humor in the foreclosure-signing scandal.

In Other Financial-Scammery News:

Ex-trader Kerviel sentenced to 3 years in jail: PARIS (Reuters) - Former Societe Generale trader Jerome Kerviel was sentenced to 5 years in prison, with 2 suspended, by a Paris court on Tuesday for his role in a trading scandal and ordered to reimburse the French bank 4.9 billion euros ($6.8 billion).

My Comment: Maybe they can take it out of his weekly allowance...

[ewmayer]

p.s.: Here is a link to a related Janet Tavakoli interview with a Washington Post reporter, in which she calls the mortgage-securitization-paperwork racket "the biggest fraud in the history of the capital markets." And it was government-aided and abetted all the way. Recall that as early as 2004, just as the Fed-ZIRP-enabled housing bubble was really getting rolling in tandem with the Wall Street mortgage-securitization frenzy, the FBI warned the government of mounting evidence of "an epidemic of mortgage fraud." Nothing was done, even though the top regulators here - the SEC and the Fed - are required by law to look into such matters. As Ms. Tavakoli notes:

"When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one."

[ewmayer]

From the UK Telegraph today (hat tip ZeroHedge) ... this explains the positive economic news which drove the markets higher today:

[Fusion_power]

High Frequency Trading is in the news again today. It seems a few - very few - people are paying a little attention. I don't expect this link to last very long so read it while it is fresh. Don't expect any mind bending revelations, but it is a decent "how it works in layman's terms" description. There is not nearly enough verbiage concerning the risk to the market. Things like circuit breakers are NOT going to remove the risk.

http://www.cbsnews.com/stories/2010/...n6936075.shtml

"What's the point of buying and selling a stock that you hold for three minutes?" Kroft asked.

"Same objective that all other participants have in the market, is to make money. You buy low, sell high, that's how you make money," Narang said.

"And the computer will know when to buy and when to sell?" Kroft asked.

"Sure, the computer is monitoring real-time data and it knows what to do with that data and how to make decisions based on that," Narang replied.

What Narang and other high frequency traders tell their computers to do is to make a profit of a penny or less, 40 million times day.

They scan the different exchanges, trying to anticipate which direction individual stocks are likely to move in the next fraction of a second based on current market conditions and statistical analysis of past performance. But the computers have no real understanding of who these companies are and what they do.

DarJones

[R.D. Silverman]

Originally Posted by Fusion_power

High Frequency Trading is in the news again today. It seems a few - very few - people are paying a little attention. I don't expect this link to last very long so read it while it is fresh. Don't expect any mind bending revelations, but it is a decent "how it works in layman's terms" description. There is not nearly enough verbiage concerning the risk to the market. Things like circuit breakers are NOT going to remove the risk.

http://www.cbsnews.com/stories/2010/...n6936075.shtml



DarJones

One very simple solution (which of course will never get by Congress):

Require a minimum holding time of perhaps a few hours....

Or just ban the practice outright....

[R.D. Silverman]

Originally Posted by Fusion_power

High Frequency Trading is in the news again today. It seems a few - very few - people are paying a little attention. I don't expect this link to last very long so read it while it is fresh. Don't expect any mind bending revelations, but it is a decent "how it works in layman's terms" description. There is not nearly enough verbiage concerning the risk to the market. Things like circuit breakers are NOT going to remove the risk.

http://www.cbsnews.com/stories/2010/...n6936075.shtml



DarJones

From the referenced article:

"Actually, high frequency traders are getting the same market information that Saluzzi gets. They are just getting it a little bit sooner - it's only a few fractions of a second sooner, but if you are running supercomputers, Saluzzi says, it can be an eternity. "

By insider trader laws, this is ILLEGAL. One is not allowed to make a trade
based on any information unless the information is available to EVERYONE.

For example: suppose I have insider information about an announcement
that my company is about to make. I, of course, can't act on it. But
I can act on it once it it announced to the public. But if (say) it is
announced at 10AM, I can't trade at say 10:01 AM. I must wait until the
information disperses through the public. This is part of the statute. It
is black letter law.

Therefore these high frequency trades are CLEARLY violating the law,
since they do not wait sufficient time for the public to read and
absorb the information upon which they are acting.

[ewmayer]

Originally Posted by R.D. Silverman

From the referenced article:

"Actually, high frequency traders are getting the same market information that Saluzzi gets. They are just getting it a little bit sooner - it's only a few fractions of a second sooner, but if you are running supercomputers, Saluzzi says, it can be an eternity. "

By insider trader laws, this is ILLEGAL. One is not allowed to make a trade
based on any information unless the information is available to EVERYONE.

Oh, but it *is* available to everyone ... just not at the same time. But you too can have the advance-look access the HFTs enjoy - you just need to pay the relevant exchange a couple million per year. Stop being such a cheapskate, Bob. :)

For example: suppose I have insider information about an announcement
that my company is about to make. I, of course, can't act on it. But
I can act on it once it it announced to the public. But if (say) it is
announced at 10AM, I can't trade at say 10:01 AM. I must wait until the
information disperses through the public. This is part of the statute. It
is black letter law.

Ah, here you mke the grave mistake of assuming we are still a nation of laws. That is only true for the little people.

Therefore these high frequency trades are CLEARLY violating the law,
since they do not wait sufficient time for the public to read and
absorb the information upon which they are acting.

BTW, you may be interested to know that none other but the U.S. Congress has exempted itself from those odious insider-trading laws. For example, the WSJ has a recent article about this longstanding loophole:

Congressional Staffers Gain From Trading in Stocks

WASHINGTON—Chris Miller nearly doubled his $3,500 stock investment in a renewable-energy firm in 2008. It was a perfectly legal bet, but he's no ordinary investor.

Mr. Miller is the top energy-policy adviser to Nevada Democrat and Senate Majority Leader Harry Reid, who helped pass legislation that wound up benefiting the firm.

Jim Manley, a spokesman for Mr. Reid's office, initially defended Mr. Miller's purchase of shares in the company, Energy Conversion Devices Inc. He said the aide had no influence over tax incentives for renewable-energy firms, and that other factors boosted the stock.

But on Sunday, Mr. Manley added: "Mr. Miller showed poor judgment and Senator Reid has made it very clear to Chris and all his staff that their actions must not only follow the law, but must meet the higher standards the public has a right to expect from elected officials and their staffs."

Mr. Miller isn't the only Congressional staffer making such stock bets. At least 72 aides on both sides of the aisle traded shares of companies that their bosses help oversee, according to a Wall Street Journal analysis of more than 3,000 disclosure forms covering trading activity by Capitol Hill staffers for 2008 and 2009.

The Journal analysis showed that an aide to a Republican member of the Senate Banking Committee bought Bank of America Corp. stock before results of last year's government stress tests eased investor concerns about the health of the banking industry. A top aide to the House Speaker profited by trading shares of Freddie Mac and Fannie Mae in a brokerage account with her husband two days before the government authorized emergency funding for the companies. Another aide to Republican lawmakers interested in energy issues, among other things, profited by trading in several renewable-energy firms.

The aides identified by the Journal say they didn't profit by making trades based on any information gathered in the halls of Congress. Even if they had done so, it would be legal, because insider-trading laws don't apply to Congress.

A few lawmakers proposed a bill that would prevent members and employees of Congress from trading securities based on nonpublic information they obtain. The legislation has languished since 2006.

"Congressional staff are often privy to inside information, and an unscrupulous person could profit off that knowledge," says Vincent Morris, a spokesman for Rep. Louise Slaughter (D., N.Y.), a leading backer of the "Stop Trading on Congressional Knowledge Act," or STOCK Act. "The public should be outraged there is no law specifically banning this."

When the bill was introduced nearly five years ago, just 14 other lawmakers endorsed it. The current version of the bill has fared worse: Only nine lawmakers support it. There is no companion legislation in the Senate.

Congressional aides have ringside seats on the making of laws that affect American business. Receiving salaries up to roughly $170,000 a year, they can glean information about policies and government action before the public. They have access to information about hearings or legislation that can move stocks and markets.

The current Congressional disclosure rules on stock trading stem from a scandal involving Robert Baker, a senior Senate aide, in the early 1960s. Mr. Baker was accused of using his Senate office for personal gain, partly involving the operation of a network of vending machines. He was eventually convicted of income-tax evasion and spent 16 months in prison.

The scandal led to a Senate rule in 1968 that required lawmakers and aides to disclose information about their finances. The House of Representatives imposed similar requirements about the same time.

The rules require all members of Congress and about 1,700 of the highest-paid congressional aides to disclose information once a year on their finances, such as their assets, debts, spouse's employment and other sources of income they earn, including capital gains from trading securities. Some 15,000 lower-paid Congressional staffers aren't covered by the disclosure rule.

Unlike many Executive Branch employees, lawmakers and aides don't have restrictions on their stock holdings and ownership interests in companies they oversee. Congressional rules say that requiring employees to do so could "insulate a legislator from the personal and economic interests that his or her constituency, or society in general, has in governmental decisions and policy."

An analysis of financial-disclosure forms for 2008 and 2009 compiled by the website LegiStorm shows that several hundred congressional aides bought or sold stocks. At least 72 traded the stocks of companies their bosses write laws for.

The disclosure only requires dollar ranges for stock holdings and capital gains, so it is impossible to calculate from them precisely how much aides make trading stock in dollar terms. (Some aides opted to give precise numbers to the Journal.) Still, because the disclosure forms specify the days when shares were bought and sold, the Journal was able to calculate the minimum profits that aides made in percentage terms.

The calculation involved taking the high price on the day the stock was purchased and the low price on the day it was sold. If an aide bought the stock below that daily high or sold it above that daily low, the actual profit would have been bigger than the Journal calculation.

The Journal's analysis comes at a time of close government involvement in U.S. business. Much of the trading was in industries dependent on government help, such as the financial-services and renewable-energy industries.

A number of aides invested in financial stocks. Karen Brown, an aide to Sen. Mike Crapo (R., Idaho), a Senate Banking Committee member, traded Bank of America stock on seven occasions in 2009, according to filings. She bought a total of between $3,003 and $45,000 of the bank's shares in three trades on April 17 and April 27 and sold between $51,002 and $115,000 in September. Her minimum gain during that period would have been 43%.

At the time of the purchases, Bank of America was discussing with the government the findings of "stress tests" used to gauge the safety of U.S. banks. On May 7, 2009, BofA shares surged when the stress-test results were made public, easing investor fears.

After it was contacted by the Journal, Mr. Crapo's office said the trades were made by Mrs. Brown's husband, "independent of any direction from Mrs. Brown." The office said Mrs. Brown has since filed an amended financial-disclosure form.

Susan Wheeler, a spokeswoman for Mr. Crapo, said: "There is no relation between Senator Crapo's service on the Banking Committee and any decisions made by Mr. Brown regarding the trades in question."

A spokeswoman for Mr. Crapo's office declined to specify the precise purchase and sale prices of the stock.

On Oct. 23, 2009, Mrs. Brown's form indicates two additional purchases of BoA for a total of between $65,002 and $150,000.

[ewmayer]

Been amusing the past weeks watching the steady pumping of the equity markets - one could almost hear the secret marching orders given to Brian Sack, head of the NYFED's prop-trading desk: "Must pump the DJIA above 11,000 ahead of the elections, so as to have some positive fake-economic data to point to."

Last Friday the month-long ramp job finally achieved the magical "psychologically important" level, the next ,000-ending level in the almighty Dow. So today, some folks who are obviously not getting with the program actually had the temerity to try to sell some of their overpriced shares near the close, which briefly threatened to once again drive the almighty Dow below the magical "psychologically important" 11,000 level. Can't be having that, folks:

[Mathew]

As of October1, there have been 130 US bank failures.

In all of 2009 there were 140.

Speaking of October, it is a very well represented month when it comes to largest percentage and point changes in the DJIA.

[Batalov]

No one wants to talk about rope in the house of...?

[ewmayer]

Karl Denninger posts and discusses highlights of a legal analysis by Christopher Lewis Peterson of the University of Utah College of Law, of the shell company at the heart of the coupled mortgage=securitization and illegal-foreclosure scandal raging in the U.S. and now generally referred to (in the tradition of most post-Nixon-and-Watergate-Hotel-breakin political scandals in the U.S.) as "Foreclosuregate":

Two Faces: Demystifying the Mortgage Electronic Registration System's Land Title Theory

Abstract:
Hundreds of thousands of home foreclosure lawsuits have focused judicial scrutiny on the Mortgage Electronic Registration System (“MERS”). This Article updates and expands upon an earlier piece by exploring the implications of state Supreme Court decisions holding that MERS is not a mortgagee in security agreements that list it as such. In particular this Article looks at: (1) the consequences on land title records of recording mortgages in the name of a purported mortgagee that is not actually mortgagee as a matter of law; (2) whether a security agreement that fails to name an actual mortgagee can successfully convey a property interest; and (3) whether county governments may be entitled to reimbursement of recording fees avoided through the use of false statements associated with the MERS system. This Article concludes with a discussion of steps needed to rebuild trustworthy real property ownership records.

A few selected highlights - underline/boldface mine:

In the mid-1990s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore.11 This decision was driven by securitization—a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street. Securitization, also sometimes called structured finance, usually required several successive mortgage assignments to different companies. To avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country—that way, the mortgage bankers would never have to record assignments since the same company would always “own” all the mortgages.12

They incorporated the shell company in Delaware and called it Mortgage Electronic Registration Systems, Inc.13

Even though not a single state legislature or appellate court had authorized this change in the real property recording, investors interested in subprime and exotic mortgage backed securities were still willing to buy mortgages recorded through this new proxy system.14
...
Acting on the impulse to maximize profits by avoiding payment of fees to county governments much of the national residential mortgage market shifted to the new proxy recording system in only a few years. Now about 60% of the nation’s residential mortgages are recorded in the name of MERS, Inc. rather than the bank, trust, or company that actually has a meaningful economic interest in the repayment of the debt.15 For the first time in the nation’s history, there is no longer an authoritative, public record of who owns land in each county.
...
Both the MERS-as-an-agent and the MERS-as-an-actual mortgagee theories have significant legal problems. If MERS is merely an agent of the actual lender, it is extremely unclear that it has the authority to list itself as a mortgagee or deed of trust beneficiary under state land title recording acts. These statutes do not have provisions authorizing financial institutions to use the name of a shell company, nominee, or some other form of an agent instead of the actual owner of the interest in the land. After all the point of these statutes is to provide a transparent, reliable, record of actual—as opposed to nominal—land ownership.

Conversely, if MERS is actually a mortgagee, then while it may have authority to record mortgages in its own name, both MERS and financial institutions investing in MERS-recorded mortgages run afoul of longstanding precedent on the inseparability of promissory notes and mortgages.
...
As a practical matter, the incoherence of MERS’ legal position is exacerbated by a corporate structure that is so unorthodox as to arguably be considered fraudulent. Because MERSCORP is a company of relatively modest size, it does not have the personnel to deal with legal problems created by its purported ownership of millions of home mortgages. To accommodate the massive amount of paperwork and litigation involved with its business model, MERSCORP simply farms out the MERS, Inc. identity to employees of mortgage servicers, originators, debt collectors, and foreclosure law firms.22 Instead, MERS invites financial companies to enter names of their own employees into a MERS webpage which then automatically regurgitates boilerplate “corporate resolutions” that purport to name the employees of other companies as “certifying officers” of MERS.23 These certifying officers also take job titles from MERS stylizing themselves as either assistant secretaries or vice presidents of the MERS, rather than the company that actually employs them. These employees of the servicers, debt collectors, and law firms sign documents pretending to be vice presidents or assistant secretaries of MERS, Inc. even though neither MERSCORP, Inc. nor MERS, Inc. pays any compensation or provides benefits to them. Astonishingly, MERS “vice presidents” are simply paralegals, customer service representatives, and foreclosure attorneys employed by other companies. MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each.24 Ironically, MERS, Inc.—a company that pretends to own 60% of the nation’s residential mortgages—does not have any of its own employees but still purports to have “thousands” of assistant secretaries and vice presidents.25

My Comment: I am not a lawyer, but my spidey sense tells me - and the above analysis confirms - that Wall Street and the mortgage industry are in deep doo-doo when it comes to legal standing here. No wonder they tried so hard last week to get a legal get-out-of-jail-free bill passed with a few "friendly" legislators who were more than happy to bend U.S. congressional-procedure rules to the breaking point and slip through a long-languishing 2005 bill (which had been conceived to tackle this very issue, but in open debate) in the dead of night as it were. As the article I linked last week about said bill (HR 3808) noted, even the bill's original sponsor was surprised to see it "pass".