FedUpUSA

In a Message to Democrats, Wall St. Sends Cash to GOP

If the Democratic Party has a stronghold on Wall Street, it is JPMorgan Chase [JPM  37.81    -0.49  (-1.28%)   ] .

Its chief executive, Jamie Dimon, is a friend of President Obama’s from Chicago, a frequent White House guest and a big Democratic donor. Its vice chairman, William M. Daley, a former Clinton administration cabinet official and Obama transition adviser, comes from Chicago’s Democratic dynasty.

But this year Chase’s political action committee is sending the Democrats a pointed message. While it has contributed to some individual Democrats and state organizations, it has rebuffed solicitations from the national Democratic House and Senate campaign committees. Instead, it gave $30,000 to their Republican counterparts.

The shift reflects the hard political edge to the industry’s campaign to thwart Mr. Obama’s proposals for tighter financial regulations.

Just two years after Mr. Obama helped his party pull in record Wall Street contributions — $89 million from the securities and investment business, according to the nonpartisan Center for Responsive Politics — some of his biggest supporters, like Mr. Dimon, have become the industry’s chief lobbyists against his regulatory agenda.

Republicans are rushing to capitalize on what they call Wall Street’s “buyer’s remorse” with the Democrats. And industry executives and lobbyists are warning Democrats that if Mr. Obama keeps attacking Wall Street “fat cats,” they may fight back by withholding their cash.

“If the president doesn’t become a little more balanced and centrist in his approach, then he will likely lose that support,” said Kelly S. King, the chairman and chief executive of BB&T [BBT  27.46    -0.05  (-0.18%)   ] . Mr. King is a board member of the Financial Services Roundtable, which lobbies for the biggest banks, and last month he helped represent the industry at a private dinner at the Treasury Department.

“I understand the public outcry,” he continued. “We have a 17 percent real unemployment rate, people are hurting, and they want to see punishment. But the political rhetoric just incites more animosity and gets people riled up.”

A spokesman for JPMorgan Chase declined to comment on its political action committee’s contributions or relations with the Democrats. But many Wall Street lobbyists and executives said they, too, were rethinking their giving.

“The expectation in Washington is that ‘We can kick you around, and you are still going to give us money,’ ” said a top official at a major Wall Street firm, speaking on the condition of anonymity for fear of alienating the White House. “We are not going to play that game anymore.”

Wall Street fund-raisers for the Democrats say they are feeling under attack from all sides. The president is lashing out at their “arrogance and greed.” Republican friends are saying “I told you so.” And contributors are wishing they had their money back.

“I am a big fan of the president,” said Thomas R. Nides, a prominent Democrat who is also a Morgan Stanley [MS  27.04    -0.22  (-0.81%)   ] executive and chairman of a major Wall Street trade group, the Securities and Financial Markets Association. “But even if you are a big fan, when you are the piñata at the party, it doesn’t really feel good.”

Roger C. Altman, a former Clinton administration Treasury official who founded the Wall Street boutique Evercore Partners, called the Wall Street backlash against Mr. Obama “a constant topic of conversation.” Many bankers, he said, failed to appreciate the “white hot anger” at Wall Street for the financial crisis. (Mr. Altman said he personally supported “the substance” of the president’s recent proposals, though he questioned their feasibility and declined to comment at all on what he called “the rhetoric.”)

Mr. Obama’s fight with Wall Street began last year with his proposals for greater oversight of compensation and a consumer financial protection commission. It escalated with verbal attacks this year on what he called Wall Street’s “obscene bonuses.” And it reached a new level in his calls for policies Wall Street finds even more infuriating: a “financial crisis responsibility” tax aimed only at the biggest banks, and a restriction on “proprietary trading” that banks do with their own money for their own profit.

“If the president wanted to turn every Democrat on Wall Street into a Republican,” one industry lobbyist said, “he is doing everything right.”

Though Wall Street has long been a major source of Democratic campaign money (alongside Hollywood and Silicon Valley), Mr. Obama built unusually direct ties to his contributors there. He is the first president since Richard M. Nixon whose campaign relied solely on private donations, not public financing.

Wall Street lobbyists say the financial industry’s big Democratic donors help ensure that their arguments reach the ears of the president and Congress. White House visitors’ logs show dozens of meetings with big Wall Street fund-raisers, including Gary D. Cohn, a president of Goldman Sachs; Mr. Dimon of JPMorgan Chase; and Robert Wolf, the chief of the American division of the Swiss bank UBS, who has also played golf, had lunch and watched July 4 fireworks with the president.

Lobbyists say they routinely brief top executives on policy talking points before they meet with the president or others in the administration. Mr. Wolf, in particular, also serves on the Presidential Economic Recovery Advisory Board led by the former Federal Reserve Chairman Paul A. Volcker.

Mr. Wolf was the only Wall Street executive on the panel and became the board’s leading opponent of what became known as the Volcker rule against so-called proprietary trading, according to participants. Such trading did nothing to cause the crisis, Mr. Wolf argued, as the industry lobbyists do now. (The panel concluded that the crisis established a precedent for government rescue that could enable big banks to speculate for their own gain while taxpayers took the biggest risks.)

Mr. Wolf and Mr. Dimon, who was in Washington last week for meetings on Capitol Hill and lunch with the president, have both pressed the industry’s arguments against other proposed regulations and the bank tax as well — saying the rules could cramp needed lending and send business abroad, according to lobbyists.

Both men are said to remain personally supportive of the president. But UBS’s political action committee has shifted its contributions, according to the Center for Responsive Politics. After dividing its money evenly between the parties for 2008, it has given about 56 percent to Republicans this cycle.

Most of its biggest contributions, of $10,000 each, went to five Republican opponents of Mr. Obama’s regulatory proposals, including Senator Richard C. Shelby of Alabama, the ranking minority member of the Banking Committee.

The Democratic campaign committees declined to comment on Wall Street money. But their Republican rivals are actively courting it.

Senator John Cornyn of Texas, chairman of the National Republican Senatorial Committee, said he visited New York about twice a month to try to tap into Wall Street’s “buyers’ remorse.”

“I just don’t know how long you can expect people to contribute money to a political party whose main plank of their platform is to punish you,” Mr. Cornyn said.

Ken Lewis: If I’m Going Down, Hank Paulson and Ben Bernanke Are Coming Down With Me

No WAY is Bank of America CEO Ken Lewis going to be the only one to answer for the acquisition of crappy Merrill Lynch and its crappy bonuses, “a person close to Lewis’s defense team” (who may or may not be Ken Lewis himself) tells Charlie Gasparino today on the Daily Beast. NO WAY will he be a scapegoat, alone, for the people who twisted his arm to go through with the Merrill deal by telling him he would be fired if he didn’t. “If this thing goes to trial you can expect both Paulson and Bernanke to be on the witness list.” If he’s going down, he’s bringing them down, too. Bringing them down to Chinatown. Order in the court!

By Rocky Vega

02/06/10 Stockholm, Sweden – Despite the lack of any sustainable, long-term financing solution — and record debt levels — it seems one of the only thing Democrats and Republicans can consistently agree upon is more and more spending… whether through taxes or debt.

As Jesse Felder astutely points out, it’s a really unfortunate case of the pot calling the kettle black.

The Daily Reckoning

By Bill Bonner

02/02/10 Baltimore, Maryland – What a marvelous recovery! But there are so many unresolved mysteries! GDP growth over 5%…but, mysteriously, no jobs…and no rally in the housing market.

And now, to compound the mystery, Mr. Obama has come forward with a $3.8 trillion budget.

The markets like it. Stocks rose 118 points on the Dow yesterday. Gold went up $21. Investors see more hot money on its way…a Vesuvius of it…

The amount of the budget itself is staggering. That’s a lot of money. But even more staggering is the glaring omission: the Obama administration is planning to spend $1.6 trillion it doesn’t have. And that’s on top of the $1.35 trillion it didn’t have, but nevertheless spent, last year. Where is all this money coming from? Another mystery…

Let’s see…put those two deficits together and you’ve got a budget hole as big as the Milky Way… Nearly $3 trillion, or more than 20% of GDP.

Another thing that is mysterious about this galaxy of debt is that it comes just as the economy is supposed to be recovering. If you thought the economy were recovering, why would you risk such a huge, record-shattering deficit?

Nothing quite adds up. The GDP is expanding at a healthy pace – according to the numbers handed out by the feds. But people have few jobs and little income.

“Wage and benefit growth hits historic low,” reports The Wall Street Journal.

Employers aren’t employing. Workers aren’t working. And houses are no longer throwing off cash. That leaves more and more people with empty pockets.

Apparently, not even the feds themselves believe the economy is really out of the ditch. We are already rolling along on the recovery road – supposedly. Still, the feds send out the most expensive tow truck in history!

And now The Financial Times draws the obvious conclusion:

“US Deflation No Longer Seen as a Risk.”

You wanna bet?

The world’s number one economy is running huge deficits. But the world’s number two economy is running even bigger ones. Not much bigger…but slightly bigger.

In Japan, deficits are a bit larger than tax receipts. In America, they are a bit smaller. In both cases they are enormous…and growing.

For all its colossal deficits, Japan has not bought its way out of depression…or out of deflation either. Au contraire, the more it spends fighting deflation the further prices fall.

How could this be? Another mystery. How could government be so inept as to shoot itself in the foot whenever it pulls a trigger? How could it be so near-sighted as to aim for one thing and hit the thing it was meant to protect? How could it be so lame-brained as to do exactly the wrong thing at exactly the wrong time?

We can’t answer those questions…at least, not this minute.

So, let’s turn to the evidence. There it is in yesterday’s news report from Bloomberg:

“Consumer prices in Japan in record fall.”

And there you have another mystery, don’t you? Japan inflates the money supply with its zero rates over more than a decade…and its Godzilla budget deficits. And what happens? Its economy sinks and its consumer prices go down!

And so here comes the US of A following the Japanese lead…in the sincerest form of flattery…

Will it not get the same results?

We don’t know. But we wouldn’t be surprised.

We have a lot more to say about this…

…about how the economic theories behind these moves are corrupt, linear and superficial (if not downright stupid)…

…and about how the real driving force behind these deficits is politics, not economics. Economists are just useful idiots. The politicians are using them to grab more money and power for themselves and their friends…

…but let’s go directly to the denouement of this mystery story. Here’s what is really going on:

First, the GDP growth story is one part statistical noise, one part counterfeit, and one part damned lie. We’re in a depression. It will take years to resolve itself.

That’s why unemployment remains high…and why there will be no recovery in housing prices. They may go up. They may go down. They won’t ever get back to the bubble highs of 2006 – not in real terms. Not in our lifetimes.

Second, the mystery of the $1.8 trillion deficit – it too is a mixture of mendacity, audacity, and intellectual laxity. In short, the feds are spending so much money for one reason only: because they think they can get away with it.

Can they?

Of course not…not really. Here’s what is going to happen…

The reality of the non-recovery is going to catch up with this market. Stocks were down in January. Most likely, they’ll sink for the rest of the year too.

The economy will slide as the de-leveraging process continues. It won’t be straight down. But by fits and starts, the mistakes will be corrected…

…but that brings us back to this $3.8 trillion government budget. Its purpose, in large part, is to prevent the corrections from occurring. The feds will try to turn the US into Zombieland, just like the Japanese feds did. You’ll see massive federal spending taking up some of the slack from the private sector – but essentially wasting money on useless projects. And you’ll see major zombie corporations – GM…AIG…etc – propped up with taxpayer’s money.

Speaking of AIG, special agent Neil Barofsky is on the case. He’s ‘probing’ 25 cases of possible fraud involving TARP funds. The AIG bailout is one of them. The original price tag for saving Goldman’s speculative positions with AIG was $85 billion. The whole tab later came to $182 billion.

The flatfoot Barofsky wants to know where the money went. To tell you the truth, we’re curious too – although we doubt there will be any surprises.

But back on our beat…how the mysteries get resolved…

…we know why the economy is winding down…and we know why the feds are running such huge deficits…

…but big deficits aren’t pushing up prices in Tokyo; they’re having the opposite effect. They’re pushing them down. Does that mean US deficits will get the same results – the economy and prices lower instead of higher?

We don’t know…but our guess is that ‘yes’ is the right answer.

The Daily Reckoning

You Had Better Cage The Monster CONgress (AIG/GS/CDS)

Posted by Karl Denninger

I’ve been writing about this now over a year in regard to the mess that became of AIG, their “financial products” unit, and what I believe is culpability not only of certain financial parties but more importantly our regulators of these firms.

Now The NY Times has published a new article that makes clear that my clarion call for major changes in these areas of the market were not only spot-on, but are even more necessary today than they were back then.

A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world’s biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.

A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.

Read that carefully.  The NY Times is making this sound like AIG had insured losses against securities Goldman was holding.  That’s what insurance is, right?

Here’s the problem: Goldman didn’t own the securities.

In addition to offering to cancel its own contracts, Goldman offered to buy all of the insurance A.I.G. had written for several other banks at severely distressed prices, according to three people briefed on the discussions.

Negotiating with Goldman to void the A.I.G. insurance was especially difficult, Federal Reserve Board documents show, because the firm did not own the underlying bonds. As a result, Goldman had little incentive to compromise.

Now do you see the outrage in these so-called “protection devices”?

They aren’t.  They were raw bets.  Very highly-leveraged gambling instruments that had a very low cost at origination – a cost all out of proportion to their eventual potential return.

We do not let “just anyone” buy insurance.  You must have an insurable interest.  That is, I can’t buy fire insurance on your house.  If I could, I might – and so might 20 of my best friends.  We might even target those homes we think might have fires.  We could even bribe the folks doing a controlled burn nearby to be a little less careful than they ordinarily would.  Or, in the extreme case, one of us might just set a fire on purpose!

None of this is allowed in the insurance marketplace because it creates too many incentives for people to set fires and otherwise cause calamities, whether through outright unlawful conduct or helping along “a series of unfortunate events.”

In the regulated options, futures and stock markets we have controls on this sort of thing as well.  To short a stock (legally) you have to be able to borrow it.  That is, someone who owns it must lend it to you first (perhaps in exchange for money.)  As more people short the cache of people willing to lend out that stock for free will evaporate, and you’ll have to start paying up for the privilege of borrowing it.  This is a natural check and balance on placing negative bets via shorting.

Buying PUTs or transacting in the futures market has costs too.  Those regulated markets have defined margin requirements and they are enforced – nightly.  The cost of buying a PUT includes something for the guy who sells it to you, as he is going to hedge his bet by being short the stock.  Thus, as the number of PUT buyers increases the premium demanded rises – precipitously so as the demand for those PUTs goes up.  Finally, buying a PUT doesn’t come with the right to demand anything more from the seller – his margin requirements are enforced by the exchange and you don’t get to hold the money. 

These OTC CDS contracts had another insidious feature: They apparently included a clause that not only would a downgrade of the security trigger margin requirements but so would a downgrade of AIG. 

The terms, described by several A.I.G. trading partners, stated that A.I.G. would post payments under two or three circumstances: if mortgage bonds were downgraded, if they were deemed to have lost value, or if A.I.G.’s own credit rating was downgraded.

The perversity of incentives here is that if you can demand that your counterparty hand over more and more “margin” to you it is possible to actually force a downgrade by your actions and thus cause even more margin to have to be posted!  This, of course, harms the firm’s liquidity and makes a further downgrade more likely. 

Rinse and repeat to destruction – which, incidentally, is exactly what happened.

This is dramatically different than the regulated markets, where valuations are determined by the market, not by one of the parties at interest and the margin requirement is fixed by the deficiency (if any) against the final strike price and the market’s price – the person who happens to be short gets no benefit (or harm) due to his or her credit rating.  If you’re underwater, you post margin.  If not, you don’t, but in neither case does the person on the other side of the trade get to hold the margin funds!  He gets your money only when he closes his position or the option expires (if it’s in the money.)

These “synthetics” (such as the Abacus CDOs) are an outrage on their face.  These are not created from the purchase of actual physical asset (e.g. a mortgage security) but rather by someone writing a credit-default swap against a reference.  These are then bundled up and sold.  When a credit-default swap is then written against a synthetic CDO it is equivalent to writing a gambling contract on a gambling contract as nobody in the chain owns an actual physical asset (such as a loan)!

The simple fact of the matter is that “naked” CDS exposures need to be prohibited right now.  They never should have been allowed and not a damn thing has changed.  Purely synthetic instruments need to be traded on an exchange in each and every case as a means of preventing chicanery, where margin can be enforced transparently on a nightly basis by a neutral third party in the middle of all transactions – the nominal buyer for every seller, and seller for every buyer.  This third party (the exchange), having no skin in the game either way, will not permit the abuses that are too easily committed when you have over-the-counter transactions of this type.

The article referenced makes a decent case that AIG didn’t fall off the cliff, it was pushed.  There are even allegations raised of collusive conduct which, if true, add an even more serious angle to this entire story.

But at the end of the day the problem boils down to the same basic facts I have been harping on since the beginning:

• Writing “insurance” on something the purchaser doesn’t own isn’t insurance, it’s a gambling contract.

• When such gambling contracts stack up to a great degree there are huge incentives for someone to commit financial arson.  Whether they did or did not is a matter for debate, but that the incentives exist to structure deals in a way that are easily detonated so you can profit from them as exposure increases is not open to debate.  Such incentive does absolutely exist – and we must eradicate it.

• To prevent fraud and gaming of the system, such contracts must be on a regulated exchange where each buyer and seller deals with a neutral third party (the exchange itself) that is responsible for nightly margining, trade reporting, open interest and bid/offer maintenance.  These facts must be exposed at all times to the public so that the market operates in a transparent fashion and neither side of the transaction can be “pushed”.

• The exposure of these contracts on said exchange will also prevent disasters like AIG from occurring, as the fact that they are short “X” will become instantly visible to everyone, including their regulators.  The precise exposure they are taking on will thus be known at all times.

• We must bar backstopped entities (such as banks and insurance companies) from trading in or creating synthetic instruments such as this in the first place.  These are not hedges as by definition there are no actual hard assets behind them.  The argument that they are created to fill a demand from the market is true but irrelevant – the fact remains that with no actual hard asset acquisition behind them they serve no fundamental credit intermediation purpose which is the purview of banks and insurance companies – they are, instead, pure speculative instruments.  Let the hedge funds, operating without any sort of financial backstop, create these all they want – and trade them on a regulated exchange – but keep the banks and insurance companies out of it.

We have not neutered this monster in the slightest.  Indeed, the latest rabble in the market with regard to Greece, Spain and Portugal is, not surprisingly, about (once again) credit default swaps blowing out.

And again I ask – who wrote those CDS naked on these nations to people who didn’t actually hold underlying positions in the bonds without them being traded on a central exchange, and why, after 2008 and 2009, do we still let that crap go on?

Next in line for a bailout: Social Security

By Allan Sloan

NEW YORK (Fortune) — Don’t look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.

A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.

Instead of helping to finance the rest of the government, as it has done for decades, our nation’s biggest social program needs help from the Treasury to keep benefit checks from bouncing — in other words, a taxpayer bailout.

No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.

The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).

This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30.

Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn’t provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance.

Social Security hasn’t been cash-negative since the early 1980s, when it came so close to running out of money that it was making plans to stop sending out benefit checks. That led to the famous Greenspan Commission report, which recommended trimming benefits and raising taxes, which Congress did. Those actions produced hefty cash surpluses, which until this year have helped finance the rest of the government.

But even then, it was clear the surpluses would be temporary. Now, years earlier than projected, Social Security is adding to the government’s borrowing needs, even though the program still shows a surplus on paper.

If you go to the aforementioned pages in the CBO update and consult the tables on them, you see that the budget office projects smaller cash deficits (about $19 billion annually) for fiscal 2011 and 2012. Then the program approaches break-even for a while before the deficits resume.

Social Security currently provides more than half the income for a majority of retirees. Given the declines in stock prices and home values that have whacked millions of people, the program seems likely to become more important in the future as a source of retirement income, rather than less important.

It would have been a lot simpler to fix the system years ago, when we could have used Social Security’s cash surpluses to buy non-Treasury securities, such as government-backed mortgage bonds or high-grade corporates that would have helped cover future cash shortfalls. Now it’s too late.

Even though an economic recovery might produce some small, fleeting cash surpluses, Social Security’s days of being flush are over.

To be sure — three of the most dangerous words in journalism — the current Social Security cash deficits aren’t all that big, given that Social Security is a $700 billion program this year, and that the government expects to borrow about $1.5 trillion in fiscal 2010 to cover its other obligations, about the same as it borrowed in fiscal 2009.

But this year’s Social Security cash shortfall is a watershed event. Until this year, Social Security was a problem for the future. Now it’s a problem for the present. 

Who Remembers This…..

Posted by Karl Denninger

Or if you prefer….

To those who think that “it’s all going to be ok” let me point out a few things I’ve said repeatedly since this entire mess began and The Ticker began publication.

• We’re screwed – they’re screwed worse.  Greece anyone?  Oops – it’s not just Greece, it’s also Spain and Portugal, and now we’re seeing failed bond auctions.  Ka-Boom!
• China will save us.  Oh really?  Why is it that China’s government is talking about bailing out their own banks?  What could possibly go wrong with average home prices in parts of China exceeding 80x average incomes?
• We fixed nothing with all the screwing around.  All we did is let the clowns steal more money.  There has been no cleaning out of the fraudulent securities.  Some have been transferred to your tax account – that is, you will be forced to pay for them in the future.  But even more remain out there.  Fannie/Freddie anyone?  FHA defaults?  CDOs, RMBS and others that continue to come under pressure and suffer downgrades?  Second mortgages (HELOCs and similar) that are functionally if not mathematically worthless?  Who’s taken account of all these and written them off?  Nobody.  “Extend and pretend” only works until the cash flow dries up.  Then you’re doubly-screwed because the value of what you hold has declined further.
• The economy is not improving.  No jobs, no economy.  We shipped all our good jobs overseas in the quest for $30 DVD players.  We got ‘em – but we lost the ability to employ people in other than asset-stripping jobs for more than $50,000 a year.  We refused to address the currency and import/export imbalances and still are, despite all the jawboning.
• The book cooking continues.  CISCO comes out with “great” earnings but hidden in there is the fact that they’re writing their own financing – and holding it off-book.  Banks are still carrying HELOCs behind underwater firsts at or near PAR, even when the first is non-performing.  Those loans have a literal zero recovery value.  What could possibly go wrong with hiding asset quality (or lack thereof) off balance sheet where nobody can see it?  Nobody remembers Lucent?  Enron?  It wasn’t THAT long ago.  Will it get CISCO or these banks?  I have no clue but this much I do know – nobody ever hides good news, they sing from the rafters.  You judge what’s going on here.
• We did not neuter the CDS monster and it is now threatening to stomp on more churches.  They’re blowing out again – this time on sovereigns.  Greece, Spain, Portugal.  Don’t worry, they’ll be back on banks too, perhaps on Britain, and what’s next?  The US, probably.  We had the opportunity to flat-out declare these things illegal gambling contracts and tear ‘em up.  Yeah, it would have led to massive lawsuits.  And?  These damn things are toxic, they’re an inherently fraudulent scheme in that nobody is being forced to hold margin against their exposure (and thus they cannot be paid as agreed) and they’re a big cause of the mess snowballing, since they provide huge leverage and that can burn you just as badly as it “helps.”  I’ve been warning for a good long time on this, but nobody wanted to listen.  Now we’re seeing Round #2 over in Europe.  This is not over.
• We have foolishly tried to prevent home prices from contracting and in doing so have fueled even more trouble.  Now we’ve got people intentionally defaulting – following precisely the paths that banks are taking with places like the offices in California and the huge apartment complex in New York!  If it’s good enough for them, it damn sure is good enough for me!  And why not?  Are there consequences?  Sure, in some cases you can get nailed with a deficiency judgment and your credit will be trashed in all cases.  But the banks are partly responsible for this push-back as well – many of them have gone so far as to push on debtors to raid 401k or IRA accounts, which is outrageous – those assets are protected in a bankruptcy.  That sort of pressure ought to be felonious (and prosecuted as extortion) - but of course it’s not – if you’re a debt collector.
• We claim that auto sales are “strong” but in fact they’re down huge from where they were through 2006.  There’s no “great” market there.  We’re doing what – 10.5 million units?  That’s a number last seen in the 1980s but we have how many more million people in the US today?  Truth: Auto sales are off 40% or more from the last decade’s numbers – not just the “hayday” of 2006.
• We claim that the economy is “recovering” but consumers remain tapped out and continue to shed debt.  Instead of addressing this and dealing with the fact that we built too much capacity into the economy (all predicated on “pulled forward demand”) we instead are trying to reinflate a popped bubble and are peddling false hope.  This in turn has led small businesspeople (especially) to make very bad decisions for which they will likely pay – instead of an orderly wind-up of their operations many have doubled down and will, in the next year or two, be financially destroyed.  Responsibility for this false hope rests solidly on the shoulders of the ToutMedia and government “pumpers.”

• We have in fact pulled forward the disasters in Medicare and Social Security.  The Massachusetts Senate election didn’t cause the selloff in the market because suddenly “health care wasn’t going to be reformed.” However, the federal budget now has a smoking hole in it where the fraudulent so-called “reform” was formerly going to provide hundreds of billions of dollars in additional tax money that was going to be literally stolen under the pretense of “health care” for the people later that was NEVER going to be delivered.  Social Security and Medicare are now both either in or close to going cash-flow negative.  These programs have been used for 20 years to lie about federal budgetary holes and now that chicken has come home to roost.  We don’t have the money, we can’t tax the money into existence and we can’t pay.  We must have an honest discussion with the people of this nation regarding entitlements – the two-thirds of the budget that is currently “untouchable” – but we still refuse to do so.  I thought we had another 5-10 years before this bomb blew up in our face.  I was wrong – it’s here and now.  This is going to be one of the most-difficult issues to face and solve – even more so than locking up all the fraudsters on Wall Street.  But this is a can that cannot be kicked any more.  (There’s an extensive Ticker in the pipe on this very subject – watch for it.)

Might this selloff that we’re into now be ”a blip”?  Maybe.  But it doesn’t change the trajectory, nor does it change the fact that we didn’t get the sorts of valuations and metrics that come with durable Bear Market bottoms in early 2009.  As such we are vulnerable to not only a dive back down to those levels but materially below them if we do not deal with the underlying problems, and to date, there is no indication that our government or industry will do so.

Keep playing the Pax Americana theme folks.  Reality is coming and it’s a clue-by-four aimed straight at your heads.

Rising FHA Default Rate Foreshadows a Crush of Foreclosures

Washington Post Staff Writer
Tuesday, February 2, 2010

Agency officials said they have cracked down on poorly performing lenders and announced higher qualifying fees for borrowers. On Monday, the agency projected that the fees should generate $5.8 billion in fiscal 2011, up from $2 billion this year. That would fatten the FHA’s cash cushion, used to cover unexpected losses.

Beleaguered books

For now, just about every major measure of the agency’s financial health is worsening.

The FHA does not make loans but insures lenders against losses. And claims have already spiked. The agency had to pay out on 47 percent more loans in October and November than in the corresponding period a year earlier, according to an FHA report.

The number of loans in foreclosure, including those that have not yet been billed to the agency, has also increased. They were up 26 percent in the last quarter from a year earlier.

FHA Commissioner David H. Stevens, who joined the agency in July, flagged his agency’s troubles with the 2007 and 2008 loans in October, when he told a House panel that “rogue players on the margin” immediately migrated to the world of FHA lending after the subprime mortgage market collapsed.

Their aggressive lending tactics attracted borrowers with unusually poor credit profiles to the FHA. “That clearly impacted the books of business in 2007 and 2008, and that performance data is showing up very clearly in today’s balance sheet,” Stevens said at the time.

Plunging home prices have exacerbated matters by leaving some FHA borrowers unable to sell or refinance their homes because they owe more than their homes are worth. Yet with unemployment running high, many borrowers can’t afford to keep up their payments.

Adding to the trouble was a now-defunct FHA program that enabled sellers to cover the down payments of buyers. This meant many borrowers had no skin in the game and were more likely to walk away at early signs of trouble. The program resulted in excessive defaults before it was ended in late 2008, and it is projected to cost FHA an additional $10.5 billion in losses, Stevens said.

For all these reasons, the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 — the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.

Better borrowers

But agency officials said they have reasons to be optimistic.

The FHA-backed loans made in 2009 tended to go to borrowers with higher credit scores than in previous years. These borrowers turned to the FHA when the mortgage market collapsed and other lending sources dried up. By then, reputable lenders doing business with the agency were already imposing tougher restrictions on FHA borrowers, further boosting the credit profile of those loans. The average credit score of an FHA borrower is now 690, up from 630 only two years ago, agency officials said.

These higher-quality loans are expected to result in lower losses, so the agency should make money on loans issued this year and over the next few years, according to an independent audit designed to gauge the agency’s health.

The audit, released in November, found that the cash the FHA set aside to pay for unexpected losses had dipped to historic lows, well below the level required by law. As of Sept. 30, those reserves were estimated at $3.6 billion, down from nearly $13 billion a year earlier. The most recent figure represents 0.53 percent of the value of all FHA single-family-home loans — far lower than the 2 percent required by Congress.

But Ann Schnare, a former Freddie Mac official, said the situation could be even worse. She said the audit underestimates future losses because it does not take into account all loans that are now overdue, only those that the FHA has paid claims on.

Stevens said his agency has pored over its data to analyze risk and is taking steps to shore up its financial health. “You have a limited set of options under these circumstances: Raise fees [for borrowers] or make policy changes,” Stevens said in an interview. “We’ve done both.”

The agency banned 268 lenders from making FHA loans last year, more than double the total terminated in the previous eight years. The FHA suspended six other firms. Among them were some of the largest FHA lenders — Taylor, Bean & Whitaker and Lend America, both of which shut their doors soon thereafter.

The agency also proposed a rule that would require banks to hold up to $2.5 million in capital that they can use to repay the agency for losses if they were involved in fraud. Banks are now required to hold only $250,000.

Borrowers are also facing tougher scrutiny from the agency. People taking out FHA loans will have to pay higher upfront fees, perhaps as early as this spring. Those with especially weak credit scores will also have to put down at least 10 percent instead of the usual 3.5 percent down payment. The amount of money sellers can kick in toward closing costs and other fees will also be limited.