FedUpUSA

Archive for the ‘Bank of America’ Category

Oh, So The “Recovery” Is About Delinquency?

Posted by Karl Denninger

I’ve said for a long time that one of the reasons our consumer spending numbers have been “reasonably good” the last six months or so – and have been improving – is that people haven’t been paying their mortgages.

Now comes Bank of America about to tell Congress the same thing:

Bank of America’s top mortgage executive, testifying today before Congress, will release sobering details of home-loan delinquencies, including that “hundreds of thousands of customers” haven’t made a payment in more than a year.

And, to put a number on it…

Almost 500,000 struggling loan customers have not supplied information or taken other basic steps to qualify for mortgage help. About half of them have not made a payment for more than a year, or owe more than 50 percent of the value of their homes.

That’s because those 500,000 lied about their income, assets or both when they applied for the loan originally, and that deception would be discovered.

But this also means that some 250,000 of those customers have not made a payment in a year.

If we presume that these people have average mortgage payments of $1,000 a month (and this number is probably low), this amounts to $250 million monthly that is being spent in the economy but would otherwise go to mortgage payments.

Anecdotes bear these sorts of numbers out – so-called “struggling” homeowners who, despite being delinquent on their mortgage and in fact not having paid in over a year, are spending upwards of $1,500 monthly in places like Best Buy, hairdressers and tony clothing stores.

The essential conundrum is this: Eventually, one way or another, these families will have to start making payments toward housing again.  They may make those payments via their mortgage or they may be evicted and become renters but the money currently being blown on frivolities that is “propping up the economy” and leading to “strong consumer sales” is showing up there only because people are literally getting a free ride on their shelter costs.

The perversions at play here are outrageous – not only are these “homeowners” living effectively for free (and since most mortgages have escrow accounts for property taxes, those aren’t being paid either!) but in addition the banks, by not foreclosing, are holding defaulted loan paper on their books at dramatically above recovery value, thereby presenting a false view of their financial health.

Yes, the retail sales numbers this morning were good. 

But how those numbers are being generated is important.

If they’re generated off personal income, then they’re good and indicate improvement in the economy.  But if they’re being generated by people not paying their debts, and the evidence is that this is exactly where the money is coming from, then we’ve got a problem, because just as with the false economic signals sent by monstrous deficit spending this too is a false signal that will be responded to by the market with ultimately disastrous results.

The largest challenge in trying to formulate a clear view of the future is eliminating these distortions.  The “mainstream media” simply ignores these facts, pretending they don’t exist, and then looks at the raw data to draw their conclusions.  This is dangerous, even suicidal when attempting to formulate an economic view for yourself or your business, however, as these distortions are real and at some point they will disappear.

We have a new bubble ladies and gentlemen, and this one is the alleged “consumer recovery” coupled with the alleged “banking system recovery.”

Both are bogus, yet both are also intertwined; banks not foreclosing for more than a year, allowing people to live free in a house, gives the consumer faux spending power and at the same time enables the bank to claim “assets values” that in fact don’t exist. 

As with all such deceptions and the economic bubbles they produce  this game will continue until either the outright fraud is stopped by regulators or a cash flow shortfall forces recognition of the deception.

The damage when this unwinds, if it is not contained now by regulatory force, is going to be horrific.   A concurrent collapse in consumer spending and bank balance sheets will lead us directly into the vortex of another financial crisis, and with The Government having shot its wad bailing out everyone in sight and with a severely-impaired balance sheet itself, there will be no effective policy response available to stop it.

Two Top Banks Likely To Be Spared From Federal Taxes

By CHRISTINA REXRODE
MCCLATCHY NEWSPAPERS

CHARLOTTE, N.C. — This tax season will be kind to Bank of America and Wells Fargo: It appears that neither bank will have to pay federal income taxes for 2009.

Bank of America probably won’t pay federal taxes because it lost money in the U.S. for the year. Wells Fargo was profitable, but can write down its tax bill because of losses at Wachovia, which it rescued from a near collapse.

The idea of the country’s No. 1 and No. 4 banks not paying federal income taxes may be anathema to millions of Americans who are grumbling as they fill out their own tax forms this month. But tax experts say the banks’ situation is hardly unique.

“Oh, yeah, this happens all the time,” said Robert Willens, an expert on tax accounting who runs a New York firm with the same name. “Especially now, with companies suffering such severe losses.”

Bob McIntyre, at Citizens for Tax Justice, said he opposes the government giving corporations such a break.

“If you go out and try to make money and you don’t do it, why should the government pay you for your losses?” McIntyre said. “It’s as simple as that.”

For 2009, Bank of America netted a $2.3 billion benefit related to income taxes, according to its annual report: It had a benefit of $3.6 billion from the federal government, and an expense of $1.3 billion that it paid to different state and foreign governments.

It’s not unusual for a company’s debt to the federal government to vary widely from its debt to state governments, as appears to be the case with Bank of America, said Douglas Shackelford, a tax professor at University of North Carolina-Chapel Hill.

Confidential returns

The federal government often offers more tax deductions than the states; for example, Bank of America wrote down its federal taxable income with credits from low-income housing and losses on foreign subsidiary stock.

Company tax returns aren’t public, so it’s difficult to say for certain how much a company pays to, or receives from, tax coffers in any year.

The bank’s $3.6 billion current federal tax benefit for 2009 came in a year when it lost $1 billion in the U.S., according to its latest annual report. For the previous year, when the bank had profits of $3.3 billion in the U.S., it listed a current federal tax expense of $5.1 billion.

Wells Fargo was profitable in 2009, with $8 billion in earnings applicable to common shareholders. But its tax payments were reduced because of Wachovia’s losses.

Wells netted an overall tax benefit of $4.1 billion in 2009. It got a benefit worth nearly $4 billion from the federal government, and another worth $334 million from state governments. It had an expense of $164 million in foreign taxes. Wells did record an overall income tax expense of $5.3 billion, but that was offset by the tax benefits of the Wachovia losses.

The topic of corporate tax breaks has gained buzz recently because of a provision in the 2009 stimulus bill, which allows companies to “carry back” their losses for 2008 and 2009 to the previous five years, instead of just the previous two years. Homebuilders and other industries that suffered big losses in 2008 and 2009, but made a lot of money in the years before that, stand to gain billions in refunds. However, the stimulus bill provision does not apply for Bank of America and Wells Fargo, because companies that received TARP loans are ineligible.

‘Arbitrary’ time period

UNC’s Shackelford said the argument for carrybacks stems from the belief that it’s “arbitrary” that taxes are collected on an annual basis.

“There’s no reason we couldn’t collect them on a monthly basis or a two-year basis. Then your losses and gains would be offset over the period,” he said. “The carryback enables you to not be penalized because your losses got bunched in a different year from your gains.”

Help from Congress

The stimulus bill provision, he said, was helped by business lobbying. “There’s an awful lot of companies that paid a lot of taxes in the 2004 period, then they lost a lot of money, and they went to their legislators and said, ‘Please help us,’?” Shackelford said.

McIntyre, at Citizens for Tax Justice, co-authored a report in 2004 related to carrybacks, after the Bush administration expanded many corporate tax breaks. The report examined 275 of the country’s largest companies and found that nearly one-third paid no federal income taxes in at least one year from 2001 to 2003. The companies overall were profitable in those years, but took advantage of tax breaks.

“If you or I lose money in the stock market, we don’t get to carry back our losses to any significant degree,” said McIntyre. His group works on closing tax breaks for corporations.

“Getting a refund from the past, that’s just weird,” he added.

Dodd’s Chief Counsel Bought Financial Stocks During 2008 Crisis

By Robert Schmidt

March 18 (Bloomberg) — Senate Banking Committee Chairman Christopher Dodd’s chief counsel in 2008 traded stock in Morgan Stanley, Wells Fargo & Co., American International Group Inc. and other rescued companies as the panel considered legislation to address the credit crisis, according to her financial disclosure form filed with the Senate.

Amy Friend, 51, who is now leading the panel’s effort to write a bill overhauling Wall Street regulations, bought $1,000- to-$15,000 stakes in four banks, weeks after Dodd hired her in January 2008, the form shows. She also owned shares of Fannie Mae, Freddie Mac, AIG and other insurance firms, according to the disclosure document, which she signed on June 5, 2009.

The transactions, permissible under Senate rules, included buying $1,000 to $15,000 of Federal Home Loan Bank bonds and Fannie Mae debt in June and July, 2008. On July 30 of that year, then-President George W. Bush signed into law a Dodd-sponsored bill setting out new regulations for the housing finance agencies and allowing the Treasury Department to give them cash injections.

“This looks very bad,” said Melanie Sloan, the executive director for Citizens for Responsibility and Ethics in Washington and a former Democratic congressional aide. “At the very least it’s inappropriate and it gives the appearance of wrongdoing, even if there is none.”

Ethics Committee

Dodd, a Connecticut Democrat, defended his chief counsel. “Amy Friend is one of the fiercest public advocates on Capitol Hill today,” Dodd said in an e-mailed statement. “Her integrity is second to none.”

Friend, who declined to comment, informed her supervisor of her holdings, and consulted the Senate Ethics Committee when she was hired, Kirstin Brost, the Senate Banking Committee spokeswoman, said.

Friend lists the investments as jointly owned with her husband. She continues to hold financial securities, Brost said. Friend’s disclosure form for 2009 is due in May.

Sloan and other ethics specialists say Friend’s stock ownership and trading reflect the leeway lawmakers and congressional staff have with their investments. Unlike Treasury Department employees or bank examiners at independent regulatory agencies who aren’t allowed to hold shares of companies they oversee, U.S. lawmakers and their staff are free to invest with few restrictions.

Still, Friend’s counterparts on the banking panel’s Republican side and on the House Financial Services Committee didn’t own financial instruments, according to their 2008 disclosures.

‘Squishy’ Rules

The rules “are kind of squishy intentionally,” said Kenneth Gross, a partner at the Skadden, Arps, Slate, Meagher & Flom LLP law firm in Washington who counsels people on ethics regulations. “Congress has permitted the holding and trading of securities virtually unfettered.”

Senate rule 37 states that no lawmaker or employee “shall knowingly use his official position to introduce or aid the progress or passage of legislation, a principal purpose of which is to further only his pecuniary interest.”

In additional guidance, the Senate Ethics Manual notes that the restriction is “narrow” and says that if the legislation has broad impact, a prohibition wouldn’t apply.

The rules require staff that have “substantial holdings” that could be directly affected by a committee’s work to divest, unless they are given a waiver by the Senate Ethics Committee.

The ethics panel has told congressional staff that a fair definition of “substantial” would be any single holding equal to 3 percent to 5 percent of total liquid assets. Friend’s combined financial investments constituted less than 2 percent of her liquid assets, below the ethics guidance, Brost said.

‘Not Unethical’

John Hasnas, who teaches ethics as an associate professor at Georgetown University’s McDonough School of Business in Washington, said that while her actions may not look good politically, “the fact that it may appear unethical to others doesn’t mean what you did was wrong.”

“If the rules say that she is allowed to do it and the only problem is that it gives the appearance of impropriety, in my opinion she has not behaved unethically,” Hasnas said in a telephone interview.

It is impossible to tell the exact amount of Friend’s purchases and sales from the ethics records, which require her to value investments only in broad ranges.

She listed each of her financial stocks as being worth $1,000 to $15,000. They included: AIG, Bank of America Corp., Bank of New York Mellon Corp., Discover Financial Services, Freddie Mac, Fannie Mae, Federated Investors Inc., M&T Bank Corp., Wells Fargo, MetLife Inc. and MGIC Investment Corp., a mortgage insurer.

Company Stocks

Friend’s portfolio included stocks of more than 100 companies, many non-financial, ranging from Coca-Cola Co. to Target Corp. to Xerox Corp. She also owned mutual funds, municipal bonds and Treasury bills.

Friend was an attorney at the Office of the Comptroller of the Currency before joining the banking committee. She also teaches a spinning class at a Northern Virginia gym in her spare time, earning $1,200 in 2008.

Friend’s first year working for the panel included the near-collapse of Bear Stearns Cos., the bankruptcy of Lehman Brothers Holdings Inc., the government bailouts of AIG, Fannie Mae and Freddie Mac, and passage of the $700 billion financial rescue law.

The committee also considered the Housing and Economic Recovery Act, which provided foreclosure assistance to struggling homeowners, created a more powerful regulator for the home loan banks and Fannie Mae and Freddie Mac, and gave the Treasury emergency authority to bail out the housing-finance giants.

Fannie Mae Shares

On July 23, as lawmakers neared agreement on the bill, shares of Fannie Mae rose 12 percent to close at $15 in New York Stock Exchange composite trading. Friend’s own Fannie Mae stock holdings would have increased in value as well, though not enough to cover steady declines since she acquired the shares on January 23, when they closed at $34.78

Friend also made five purchases of Federal Home Loan Bank Board bonds in 2008, each valued at $1,000 to $15,000, according to the form. Two were in January, one in February, one in March and one in June of that year. Friend valued her total holdings of the bonds at $50,000 to $100,000, according to the form.

She also purchased Fannie Mae debt on July 1, two weeks before the bill, sponsored by Dodd and Senator Richard Shelby of Alabama, the senior Republican on the banking committee, passed the Senate.

Bank of America

Some of Friend’s trades listed in the disclosure statement were stock purchases — all in 2008 — and may not have been profitable. For example, when she bought Bank of America on Feb. 20, its closing share price was $42.97. She acquired additional shares on May 27, when the closing price was $34.17. It was $17.03 a share at yesterday’s close.

Friend purchased AIG on Aug. 12 when its closing share price was $457. About a month later, the firm received an $85 billion loan from the Federal Reserve, the first of several bailouts. AIG shares closed yesterday at $33.61 a share.

Very few of the trades in Friend’s portfolio were sales. She did unload $1,000 to $15,000 of Morgan Stanley shares on Sept. 22, several days after then-Treasury Secretary Henry Paulson asked Congress to pass the Troubled Asset Relief Program designed to remove toxic debt from banks’ books.

–Editors: Brendan Murray, Paula Dwyer

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Bank Of America To Stop Charging 31,200% Interest

Posted by Karl Denninger

No, that’s not a misprint.

Let’s say you went to Starbucks and bought a $5 Latte.  You swiped your debit card and didn’t have the $5 in your account.

Bank of America would charge you a roughly $30 overdraft fee, amounting to 600% of your purchase for a loan of that $5 for as little as one day.  That’s bad enough.

Let’s assume you paid that overdraft fee (and the $5) in one week.  There are 52 weeks in a year and the bad news is that when computing the annual percentage rate you must divide the interest charged by the percentage of a year you held the money to get the APR.  Thus, 31,200% interest on an “annualized” basis, assuming you pay it in one week (it’s 218,400% if you pay it off the next morning!)

The bank will soon stop doing this, and in fact is mandated to do so without getting permission first for each transaction, as of June 1st.

The question that should be asked is why we should have to wait until June 19th for new accounts, or August 1st for existing accounts, never mind why this sort of outrageous behavior has been permitted in the first place.

Guido on the corner typically will charge you something obscene like 500% interest over the course of a year.

The banksters put Guido to shame.

How much do the banksters make off this?  Some $1.77 billion annually, at last count.  None of which, I might add, will be refunded to their customers.

The banking industry has claimed that changes like this will “restrict credit” to lower-income customers, who allegedly “need” that credit. 

I will simply observe that nobody “needs” a 31,200% interest rate loan except the bank that has been given license to rob the public blind – literally.

If you were wondering who the Congress and Fed work for, it clearly is not you.

The open question, and one that I cannot seem to find a reasonable answer to, is why we, the people, continue to allow both a Congress and Federal Reserve to sit in control of our government and financial system when they permit and endorse actions that constitute financial rape of such an egregious nature that absolutely everyone can understand it.